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United Kingdom Government Confirms Change to Sustainability Criteria for Biomass

by Caroline Lindsey

The Department of Energy and Climate Change (DECC) in the United Kingdom published its response to its “Consultation on proposals to enhance the sustainability criteria for the use of biomass feedstocks under the Renewables Obligation (RO)” on 22 August 2013 (the Response). The original consultation was published on 7 September 2012.

In the Response, the UK Government confirms that it will proceed with its proposals to revise the content and significance of the sustainability criteria applicable to the use of solid biomass and biogas feedstocks for electricity generation under the Renewables Obligation (RO). The RO is currently the principal regime for incentivising the development of large-scale renewable electricity generation in the United Kingdom. Eligible electricity generators receive renewables obligation certificates (ROCs) for each megawatt hour (MWh) of renewable source electricity that they generate. Biomass qualifies as renewable source electricity, subject to some conditions.

Changes to the criteria

The sustainability criteria associated with the RO is broadly divided into greenhouse gas (GHG) lifecycle criteria, land use criteria and profiling criteria. There will be changes to all of the criteria, but the significant changes relate to the first two criteria, and will take effect from 1 April 2014.

In general terms, the GHG lifecycle criteria are designed to ensure that each delivery of biomass results in a minimum GHG emissions saving, when compared to the use of fossil fuel. The savings are measured in kilograms (kg) of carbon dioxide equivalent (CO2eq) per MWh over the lifecycle of the consignment (sometimes referred to as “field or forest to flame”). The UK Government has confirmed that all generating plants using solid biomass and / or biogas (including dedicated, co-firing or converted plants and new and existing plants) will be on the same GHG emissions trajectory from 1 April 2020 (200 kg CO2eq per MWh). In the meantime, new dedicated biomass power will be placed on an accelerated GHG emissions trajectory (240kg CO2eq per MWh). All other biomass power will remain on the standard GHG emissions trajectory (285kg CO2eq per MWh) until 1 April 2020.

Changes to the land use criteria will also be introduced. In particular, generating plants using feedstocks which are virgin wood or made from virgin wood will need to meet new sustainable forest management criteria based on the UK Government’s timber procurement policy principles.

The land use criteria set out in the European Union (EU) Renewable Energy Directive 2009 (RED) will continue to apply to the use of all other solid biomass and biogas, with some specific variations for energy crops. As is the current position, the land use criteria will not apply to the use of biomass waste or feedstocks wholly derived from waste, animal manure or slurry.

The new sustainability criteria will be fixed until 1 April 2027, except if the EU mandates or recommends specific changes to the sustainability criteria for solid biomass, biogas or bioliquids, or if changes are otherwise required by EU or international regulation.

Making compliance mandatory

Currently, whilst generators using [...]

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Possible UK Power Shortages Raise Concerns

by Thomas Morgan and David McDonnell 

A warning from the UK’s energy regulator, Ofgem, on 27 June 2013, that the ‘buffer’ capacity of spare electricity on the UK’s national power grid could drop to as little as 2% of national supplies by 2015, has raised concerns in relation to the possibility of widespread disruptions in service. This spare capacity currently stands at about 4%.

The warning was linked to an extensive Electricity Capacity Assessment Report, also published by Ofgem that same day. Revised studies have indicated that power supplies will shrink considerably by 2015, as electricity demand in the United Kingdom is not decreasing in the manner previously foreseen by successive governments. This is due to a variety of factors, among them, the low uptake by residential households of environmentally friendly incentives and energy-efficient practices.

Ofgem recommends the implementation of far-reaching market changes proposed by the Department of Energy and Climate Change (DECC). Among other things, DECC stated in a report, also published on 27 June 2013, that the UK electricity sector will require approximately £110 billion of capital investment in the next decade to modernise its infrastructure. This would create opportunities for investment which a range of market players are likely to monitor with interest.

DECC has also emphasised the need for a ‘Capacity Market’ – essentially an insurance policy against the possibility of future blackouts – which would work by providing financial incentives to generators to keep a certain percentage of energy capacity in reserve to cope with spikes in demand.

The British government has been quick to retort to concerns of service disruption, downplaying the risk of blackouts to domestic consumers and, while it is unlikely that blackouts reminiscent of those experienced in the United Kingdom in the 1970s will be relived, the very publication of a formal warning from Ofgem highlights the potential significance of the concern.




Transatlantic Derivatives Consensus: Landmark Step for EC/US Cooperation

by Simone Goligorsky and David McDonnell

On 11 July 2013, the European Commission (EC) and the United States Commodity Futures Trading Commission (CFTC) announced a high-level joint understanding, known as the “Path Forward”, which details the shared future vision on the cross-border regulation of over-the-counter (OTC) derivatives (click here for the full announcement). This is a welcome announcement, given the concerns that many market participants had regarding the possibility of certain derivative transactions being subject to regulation on both sides of the Atlantic. The Path Forward has been produced as part of the package that was developed in order to promote the transparency of OTC derivatives markets and to lower the risks associated with them. 

At the core of the Path Forward is the objective of avoiding what was viewed by some market participants as the ‘double treatment’ of derivatives, whereby the derivatives would have been subject to the simultaneous application of both European and US legislative requirements, potentially leading to inconsistency, conflicts of law, and legal uncertainty. Considering the level of similarity between the European and US regimes, the EC and CFTC have agreed that such a duplicative approach may be, to the greatest extent possible, avoided. 

Instead, the EC and CFTC will, where appropriate, defer to the regulatory requirements in either Europe or the United States, as applicable. For example, under the European Market Infrastructure Regulation (EMIR), the EC has adopted risk mitigation rules that have a high-degree of similarity to the CFTC’s business conduct standards. Important action has been taken on bilateral, uncleared swaps, so that the regulatory rules in both jurisdictions will be viewed as comparable and as comprehensive as one another. The net result is that market participants are likely to now benefit from these equivalence rules.

In addition to the progress made to date, the EC, CFTC, and the European Securities and Markets Authority (ESMA) will continue to work together, and with other global regulators, on the harmonisation of international rules on posted margins for uncleared swaps, with a view to implementing a uniform system across as many jurisdictions as possible. 

It is worth noting that while the Path Forward heralds a significant step for enhanced cross-border regulation, market stability, and confidence, it was relatively light on concrete details. As such, market participants subject to European regulations, as well as US counterparties governed by Dodd-Frank, should continue to monitor collaboration between both regulatory authorities closely.

 



On Heels of European Raids, Energy Companies Face U.S. Class Actions

by Megan Morley

White Oaks Fund LP, an Illinois private placement fund, filed a class action suit last week against BP PLC, Royal Dutch Shell PLC and Statoil ASA in the Southern District of New York.  White Oaks Fund v. BP PLC, et al., case number 1:13-cv-04553.  The complaint alleges that the energy companies colluded to distort the price of crude oil by supplying false pricing information to Platts, a publisher of benchmark prices in the energy industry, in violation of the Sherman and Commodity Exchange Acts.  Plaintiffs claim that defendant companies are sophisticated market participants who knew that the incorrect information they provided to Platts would impact crude oil futures and derivative contracts prices traded in the U.S.

This action follows at least six civil litigations that have been filed against BP, Shell and Statoil after the European Commission (EC) and Norwegian Competition Authority raided the companies in May.  The London offices of Platts were also searched.  After the surprise raids, the EC has stated that it is investigating concerns that the companies conspired to manipulate benchmark rates for various oil and biofuel products and that the companies excluded other energy firms from the benchmarking process as part of the scheme.  In addition, at least one U.S. Senator has requested that the U.S. Department of Justice look into whether any of the alleged illegal behavior occurred in the U.S.

The private actions filed against these energy companies in the U.S. on the heels of an investigation by the European Commission are not uncommon.  Any company that transacts business in the U.S. and undergoes a raid or investigation by a foreign competition authority should prepare to face these civil litigations and defend itself against similar allegations.




Increased Fracking on the Horizon in UK Gas Sector?

 by Charlotte Doerr

The United Kingdom has seen significant steps forward on the shale gas exploitation front.  In light of recent discoveries of substantial reserves in the north-west of England, the ongoing debate on hydraulic fracturing (fracking) has once again come to the fore.  With recent studies from the British Geological Survey estimating that the capacity of the yet-untapped reserves of shale gas could climb to 170 trillion cubic feet (tcf), this is a significant discovery for the United Kingdom and could have important ramifications for the country’s energy supply and policy for many years to come.  The sheer size of these reserves is put sharply into context when viewed alongside the remaining gas reserves in the UK North Sea, judged to be as little as 7 tcf.

The UK’s decision to lift a temporary moratorium on fracking in May 2013, which had been in place since the previous year after shale gas exploration resulted in two minor earthquakes, now paves the way for a flurry of preliminary activity.  Some commentators predict that full-scale exploration will get underway in 2015.

Comments from the UK Chancellor of the Exchequer, George Osborne, that the government would “make the tax and planning changes which will put Britain at the forefront of exploiting shale gas,” suggest that fracking in this sector could become more widespread, as the government relaxes restrictions over the practice.  Supporters have pointed to increased job creation, substantial tax revenues, and reduced reliance on imported energy.  However, critics have been quick to highlight the environmental concerns linked to fracking, such as water contamination and seismic risk.

Everything must be read in light of a governmental Energy and Climate Change Committee inquiry that concluded in April 2013 that any firm determination on the end-result for consumer energy prices based on these gas discoveries is still premature.  Therefore, much work remains to be done and substantial political wrangling will likely follow, before a clear path appears for the UK’s future direction on revitalizing its domestic gas industry.




Italy: Government Extends Scope of Application of “Robin Hood Tax”

by Carsten Steinhauer

Law Decree no. 69 of 21 June 2013 (theDecree), published in the Official Gazette on 21 June 2013  would expand significantly the application of the “Robin Hood Tax” on electricity production companies, including renewable energy companies (solar, wind and biomass) originally exempt from the tax, by lowering the turnover and taxable income thresholds.

The “Robin Hood Tax” was originally introduced by Section 81, Paragraph 16 of Law Decree no. 112 of 2008, converted by Law no. 133 of 2008.  It provided for a 6.5 per cent increase of the corporate income tax rate (IRES) payable by electricity production companies other than renewables with annual gross revenues exceeding Euro 25 million.

Earlier, Law Decree no. 138 of 2011, converted by Law no. 148 of 14 September 2011, eliminated the exemption for renewable energy companies and reduced the annual gross revenue threshold to Euro 10 million, provided the electricity production company had a taxable income of Euro 1 million.

The new Decree further reduces the gross revenue and taxable income thresholds so that the “Robin Hood Tax” would apply to any energy production company, including renewable energy companies, with:

  • gross revenues in the preceding year of more than Euro 3 million
  • taxable income for the same year of more than Euro 300,000

The additional tax only applies to legal entities that are organised as corporations and are therefore taxable pursuant to Article 73 of the Consolidated Income Tax Code, but does not apply to special purpose vehicles (SPVs) that are organised as limited partnerships.

If confirmed by the Italian Parliament, these changes will increase the IRES for a great number of renewable energy production companies that initially had been exempt from the “Robin Hood Tax.”   In order to become definite, the Decree—which was enacted by the Italian Government—must be converted into law by the Italian Parliament.  The timeline for conversion is 60 days, i.e., 20 August 2013, and the Italian Parliament is entitled to make amendments to the Decree.  Provided that the Italian Parliament confirms the current wording of Section 5, Paragraph 1 of the Decree, renewable energy companies that exceed the new turnover and income thresholds in 2014 will have to pay the increased IRES of 34 per cent, instead of 27.5 per cent.

It is worth noting that the compatibility of the “Robin Hood Tax” with the Italian Constitution has been challenged and an action is currently pending before the Constitutional Court.  In particular, the “Robin Hood Tax” would seem to be in breach of the principles of equality and contribution pursuant to economic capabilities.  The Constitutional Court has not yet scheduled a date for the hearing so that it is impossible to foresee when a decision will be made.




REMIT Set to be Enforced in the UK

by Prajakt Samant and Simone Goligorsky

If the UK Government meets the implementation deadline of 28 June 2013, then the United Kingdom will be one of the first EU Member States to implement the EU regulation on wholesale market integrity and transparency (REMIT). Market participants should ensure that all compliance procedures and trading functions are kept fully up to date with the stricter market abuse regime.

To read the full article, click here.




EU State Aid Investigation into German Renewable Energy Law

by Martina Maier and Philipp Werner

The European Commission (Commission) is likely to open a formal EU State aid investigation into the German Renewable Energy Source Act. According to the Commission, the Act may have given unlawful advantages to renewable energy producers and energy-intensive companies (those producing chemicals or steel) in Germany. Producers and companies that benefited from the Act are therefore exposed to the risk of the alleged benefit being recovered, which is likely to amount to a figure in at least the tens of billions of Euros.

The European Commission is currently examining whether or not the German Renewable Energy Source Act infringes EU State aid law. The Commission is expected to reach a decision on whether or not to open a formal investigation procedure in autumn 2013, following its summer break.

The German Renewable Energy Source Act aims to support renewable energy by fixing the tariffs that electricity providers, such as E.ON, RWE, Vattenfall or EnBW, must pay for energy from renewable sources, e.g., solar panels or wind turbines. These tariffs are higher than those for energy from traditional sources. The Act also exempts energy-intensive companies, e.g., those producing chemicals or steel, from the EEG surcharge that electricity providers are entitled to charge their customers. These higher tariffs and the EEG exemption could be in breach of EU State aid law and are currently the subjects of a Commission examination.

Should the Commission come to the conclusion that they do infringe EU State aid law, it can order Germany to recover the advantages from the companies that benefitted from these rules. The potential State aid involved is likely to amount in total to a double-digit billion Euro figure.

In a separate but similar case, in March 2013 the Commission opened an in-depth investigation into the exemption of large electricity consumers from network charges in Germany, dating back to 2011. This exemption was financed by the final electricity consumers, who, since 2012, must pay a special surcharge. A German court, recently declared this exemption and the surcharge as unconstitutional and the legal provisions will be changed. The Commission may, however, still conclude that, up until the German court ruling, large electricity customers were benefitting from State aid. It could therefore order Germany to recover the past benefit from these customers, which is estimated at around Euro 300 million for 2012.

These investigations by the Commission expose renewable energy producers, energy-intensive companies and large electricity consumers in Germany to the significant risk of the recovery of the alleged benefit. Such companies are therefore strongly advised to co-operate with the Commission during this examination phase and if a full investigation is launched.




Italy: Euro 6.7 billion Cap for Photovoltaic Incentives Reached

by Carsten Steinhauer and Riccardo Narducci

On June 6, 2013, the Italian Authority for Electricity and Gas (AEEG) announced that the overall annual expense cap of €6.7 billion for incentive payments payable to photovoltaic (PV) plants in Italy has been reached.

As a consequence, the latest feed-in tariff (FiT) regulation—the Conto Energia V—will cease to apply on July 6, 2013, i.e., 30 days from the AEEG’s announcement.  PV plants that connected to the grid and started operations before July  6 will remain entitled to the currently applicable FiTs, as long as the relevant application is filed with the Gestore dei Servizi Energetici (GSE) before July 6.  Any application received after July 6 will be rejected.

The July 6 deadline also relates to PV plants installed on public land or public buildings that, pursuant to Section 1, Paragraph 425 of Legislative Decree no. 3584/2012 (the Stability Decree 2013), were entitled to an extension of the FiTs under the Conto Energia IV  (see our Hot Topic from January 3, 2013).

Exceptions

Notwithstanding the Euro 6.7 billion cap being reached, certain PV projects are exempted from the 6 July deadline:

  1. PV plants that are included in the first or second GSE register under Conto Energia V remain entitled to the Conto Energia V FiT and can apply to the GSE even after July 6, 2013, provided they start operations within one year of the publication of the register.
  2. Special extensions also apply to PV plants that are located in certain Municipalities in the regions of Emilia Romagna and Lombardy, which were struck by earthquakes on May 20 and May 29 2012:

a)  Roof top PV plants that started operating prior to the earthquakes remain entitled to the applicable FiT rate, even if they have to be rebuilt.

b) PV plants that were authorized on or before 30 September 2012, but had not started operating before the earthquakes, remain entitled to the FiT provided by the Conto Energia IV for the first semester 2012, provided they start operations before December 31 2013.

c) PV plants located on agricultural land are only entitled to the extension in b) above if the projects were authorised on or before March 25, 2012.  They must still conform with the limits set forth under Article 10, Sections 4 and 5 of Legislative Decree no. 28/2011.

Finally, it is worth noting that the 6 July deadline does not apply to PV plants that applied for incentives or to be included in the registers but were rejected unlawfully.  In these cases, where the applicant wins the appeal against the GSE, they will benefit from the FiT and the timelines provided under the Regulations as they were in force at the time of application.  




European Parliament Endorses EMIR Technical Standards

by Simone Goligorsky

On February 7, 2013, it was announced that the Economic and Monetary Affairs (ECON) Committee of the European Parliament (EP) was withdrawing its objection to the technical standards (TS) for the regulation on over-the-counter derivatives, central counterparties and trade repositories, commonly known as the European Markets Infrastructure Regulation (EMIR). 

The TS supplement the level 1 text of EMIR, which came into force in August 2012.  It is the TS that define who exactly will be affected by EMIR, and how. 

Following the endorsement of the TS in December 2012 by the European Commission (EC), after they were published by the European Securities and Markets Authority in September 2012, the TS were undergoing the last review prior to their publication in the Official Journal of the European Union.  Many market participants expected the EP’s review to a procedural, rubber-stamping exercise. 

However, on January 24, 2013, it was confirmed that the ECON Committee was to publish a motion for a resolution to reject certain TS.  One of the reasons given for mooting the rejection was the view that the EC had gone beyond its remit for the TS, set out for it in the level 1 text of EMIR, when drafting the TS.

The TS in question related to matters including, inter alia:

  1. The clearing threshold for non-financial counterparties, particularly the condition that if the clearing threshold for one asset class was exceeded by a counterparty, then the counterparty would be automatically held to have exceeded the threshold for all asset classes; and
  2. The requirement for timely confirmations, in particular how this obligation would affect smaller, non-financial counterparties.

If the TS had been rejected, then the EC would have been required to put forward new TS.  This may have, in turn, have delayed the publication of the TS, and ultimately, the coming into force of EMIR. 

However, on February 7, 2013, the EP withdrew the resolution calling for the rejection of the draft TS.  The withdrawal of the objection was based on certain assurances given by the EC, including the assurance that the EC would publish frequent ‘questions and answer’ booklets to cover any matters over which there arose legal uncertainty.

EMIR has been tabled as the US equivalent of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank).  As currently drafted, market participants undertaking activities in both the US and European markets may be subject to both Dodd Frank and EMIR, requiring, them, for example, to report trades to both European and US regulators. 

To avoid market participants having to report to two sets of regulators, European regulators are meeting with their US counterparts over the course of Q1 and Q2 2013, to advise the United States that EMIR should be accepted as being as strict as Dodd Frank.  If accepted, market participants complying with EMIR would be deemed to comply with Dodd Frank, and vice versa.

As the publication of the TS will not be delayed as much as initially thought, EMIR’s [...]

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