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EU Developments

Regulated Bidding for Emissions Allowances Under Phase Three of the EU Emissions Trading Scheme

by McDermott Will & Emery | Mar 22, 2012 | Environmental, EU Developments

The UK’s Financial Services Authority (FSA) published a Consultation Paper (Consultation) on March 15, 2012 detailing its proposals for authorization and supervision of firms intending to bid for emission allowances under Phase Three of the European Union Emissions Trading Scheme (EU ETS). Phase Three covers the period of 2013-2020 and marks the final phase of the EU’s strategic commitment to a 20 percent reduction in carbon emissions from the levels in the 1990s.

The purpose of the Consultation is to set out the circumstances in which bidding for emissions allowances becomes subject to FSA regulation following amendments to current regulations. It offers a preliminary guide for firms looking to bid for emissions allowances with a view to allowing as much time as possible for applications for permission to be processed. The first auctions are not expected until autumn 2012, however the European Commission (EC) may choose to commence auctions on its central platform as early as June 2012.

The UK (alongside Germany and Poland) has opted to host a national platform for EU ETS auctions. This right is enabled under the Regulated Auction Platform Regulations 2011, which creates in the national platform a Regulated Auction Platform and in turn, a new body subject to FSA supervision. Bidders will have the choice of two types of emission product available for auction: a two-day spot and a five-day future. The choice of emission product will play a role in determining whether or not a firm will be subject to FSA regulation. Amongst others, investment firms and credit institutions are most likely to require FSA authorization to undertake auctioning activities.

Changes to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 will establish bidding as a new regulated activity, therefore, firms will still be required to make a further application to the FSA even if they currently have permission to carry out existing FSA regulated activities. It is not, however, anticipated that any variation of a firm’s existing permissions would be unduly complex. This would be the case unless the FSA considers that the proposed bidding activities will pose any material risk to the firm’s business, since the FSA is of the view that the newly created bidding activity is similar to certain existing regulated activities.

The FSA invites comments by April 19, 2012 with the intention to finalize the proposals set out in the Consultation through rules which are due to be published in late May 2012. A policy statement and feedback on any responses will be published shortly thereafter.

Italian Senate Approves Draft Revision of Restrictions to PV Plants on Agricultural Ground

by McDermott Will & Emery | Mar 16, 2012 | EU Developments, Renewables

by Carsten Steinhauer

On March 1, 2012, the Italian Senate approved the draft text which will transpose into law Decree no. 1/2012, the Liberalisation Decree. The draft text still needs to be approved by the Italian Chamber of Deputies. The approval must be granted by March 24, 2012 at the latest. Once the text is approved, it will then be published in the Official Gazette before entering into force. If not approved by March 24, 2012, the Liberalisation Decree will lose its efficacy as of the date of its publication (January 24, 2012).

The draft text provides a number of modifications to the original version of Article 65 of the Liberalisation Decree, which initially introduced the ending of the feed-in tariff (FIT) for newly-installed ground-mounted photovoltaic (PV) plants on agricultural land.

Although the ending of the FIT for ground-mounted PV plants on agricultural land has been confirmed, two categories of PV plants will continue to be able to avail of the FIT:

PV plants located in areas owned or leased by the Italian military; and
PV plants that were authorized previously, and will commence operations within 180 days of the entry into force of the amended Decree being transposed into law.

However, these two categories of plants remain subject to the restrictions that were introduced by the Renewables Decree, dated March 28, 2011, namely that PV plants located on agricultural land must not exceed 1 megawatt (MW), nor cover more than 10 percent of the available land, and must be at least 2 kilometers (km) from PV plants located on land belonging to the same owner. It is not entirely clear if the restrictions will apply to both types of PV plants benefitting from the exemption: if interpreting the provision literally, the restrictions should apply in both cases. However, it would appear that the legislatures’ intention was different. In both circumstances, the restrictions do not apply if the land has been abandoned for at least five years.

As expected, the retrospective cut of the FIT for previously-authorized PV plants benefiting from a safe harbor provision under the Renewables Decree has been abolished. Instead, the safe harbor has been extended by a further 60 days to compensate for the uncertainty during the period between the enactment of the Liberalisation Decree and the amended text coming into force. However, the revised text also abolishes the increase of the FIT for PV plants located on greenhouses, as introduced by the Liberalisation Decree.

In summary, by applying Article 65 of the Liberalisation Decree, as amended, ground-mounted PV plants located on agricultural land will be entitled to the FIT as outlined below.

Entitlement to FIT for Ground-Mounted PV Plants on Agricultural Land

Agricultural land belonging to the Italian military

Any other agricultural land

Irrespective of date of authorization or grid connection

Authorization before the entry into force of [...]

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Non-EU Countries Oppose Inclusion of Emissions from Airlines in EU ETS

by McDermott Will & Emery | Mar 8, 2012 | Environmental, EU Developments

by Prajakt Samant and Simone Goligorsky

Following the preliminary court ruling that all aviation emissions are to be regulated under the European Union (EU) Emissions Trading Scheme (ETS), several non-EU countries have convened to oppose the inclusion of their airlines in the EU ETS. In a meeting held in Moscow at the end of February, a reported 26 countries, all members of the United Nation’s International Civil Aviation Organization (ICAO), met to discuss possible countermeasures to the EU ETS.

The countries, which include the U.S., China, India and Russia, stated that if non-EU based operators are forced to participate in the EU ETS, then they may consider adopting one or more of the following measures:

Prohibiting national airlines from participating in the EU ETS;
Lodging an official complaint with the ICAO;
Requiring EU airlines to submit data, including flight details, thereby adversely affecting entities operating in Europe;
Suspending current and future talks with EU airlines regarding possible new routes; and
Recovering the cost of the EU ETS by imposing levies and charges on EU airlines.

The countries also requested a review of the Bilateral Air Services Agreements, including the Open Skies agreement. Following the meeting in February, delegates of the opposing nations issued a declaration stating that the “inclusion of international civil aviation in the EU ETS leads to serious market distortions and unfair competition.”

Separately, Russia has stated that it would consider imposing fees on European carriers undertaking flight routes over Siberia, or capping the number of flights over Siberia. This measure would come despite Russia having previously agreed to ease the restrictions, as part of its World Trade Organization accession.

A spokesman for the U.S. State Department stated that he hopes that the European law will be revised before coming into force, thereby exempting non-EU airlines. Instead, he is of the view that it would be prudent to adopt a scheme that would be more globally suitable. Policy makers in the EU have stated that they would be amenable to such this approach, as long as the global program adopted ensured that all airlines using EU airports paid for carbon credits.

Further meetings of the non-EU countries opposed to the inclusion are scheduled for the months.

European Market Abuse Regulation Extended to the Commodities Sector

by McDermott Will & Emery | Mar 5, 2012 | EU Developments, Power Markets

by Thomas Morgan

The Market Abuse Directive (MAD) was adopted by the European Parliament and the European Council in early 2003, introducing a framework to combat market abuse in the European Union (EU). On June 2, 2010, the European Commission (EC) announced that MAD would be updated and strengthened, with one of the key objectives being to enhance the regulation of commodity and commodity derivatives markets to deal with insider dealing and market manipulation. On October 20, 2011, the EC published its provisional drafts of the amended MAD and a new Market Abuse Regulation (MAR). MAR sets out rules and administrative sanctions in relation to insider dealing and market manipulation (market abuse), while the amended MAD introduces criminal sanctions. The amended MAD and MAR are referred to jointly as MAD II.

In its current form MAD II broadens:

the application of the legislation to include financial instruments traded on organised and multilateral trading facilities and any traded over-the-counter (OTC), including spot commodity markets and emissions allowances.
the market abuse ban to cover attempted insider trading and attempted market manipulation.
the insider dealing restriction to cover amending or cancelling an order, even if this is done to avoid trading on the basis of inside information.
the market manipulation prohibition to cover all behaviour, not just entering into orders or transactions, and some high frequency and algorithmic trading strategies.
the scope of the legislation by phasing out the defence of behaviour being accepted market practice.

The MAD II package of proposals, like the complementary Markets in Financial Investments Directive proposals published on the same day, will now undergo negotiation by the EC, the European Council and the European Parliament before becoming law. One of the main discussion points during these negotiations will be the definition of “inside information.” Market participants want the definition to align with the definition of inside information in the regulation on wholesale energy market integrity and transparency (REMIT), thereby ensuring that inside information concerning physical products that are covered by REMIT and inside information concerning commodity derivatives covered by MAD II are regulated in the same way. It is not yet known whether the current definition will be amended accordingly.

The final form of MAD II is unlikely to enter into force before the end of 2012, but commodities businesses need to start preparing by reviewing all policies and procedures connected to their trading practices. The implementation of procedures to detect incidents of potential market abuse, and policies for reporting and co-operating with regulators, will serve to minimise corporate and individual sanctions.

Trialogue Discussions Lead to Agreement on Final Text of EMIR

by McDermott Will & Emery | Feb 10, 2012 | EU Developments

by Prajakt Samant

On February 9, 2012, following a series of trialogue discussions between the European Commission (EC), the European Parliament (EP) and the Council of Ministers (CM), the final text for the European Market Infrastructure Regulation (EMIR) was agreed. The agreed text will now be voted on by the EP and the CM, although these votes are unlikely to lead to any changes of the text. The final text of EMIR has not yet been published, but this is due to be circulated in the coming days.

The agreement follows several weeks of trialogue discussions and non-agreement on several points in the regulation, particularly on issues concerning central counterparties, frontloading of contracts and intragroup transactions. Had an agreement not been reached by mid-February, it was likely that the text would have been subject to a second reading, leading to further delays in the publication of the final text.

The European Securities and Markets Authority (ESMA), along with the European Banking Authority (EBA), must now start drafting the technical standards which will be included in the text of EMIR. The original deadline for the publication of these standards had been June 30, 2012, however, as a result of the delays in agreeing the final text, this deadline has been pushed back to September 30, 2012.

By pushing back the deadline, ESMA and the EBA will be given sufficient time to seek the views of market participants on the levels of technical standards that should be adopted. A public consultation on these standards is due to be launched around the end of February or beginning of March 2012, to which all market participants are strongly encouraged to contribute. The technical standards concern matters including, inter alia, the clearing and reporting thresholds to be imposed on non-financial counterparties and the publication, by trade repositories, of aggregate positions by class of derivatives.

With the deadline of the publication of technical standards being pushed back to the end of September, the 27 Member States of the European Union and market participants will then have less than three months to ensure that they have in place all the adequate systems to ensure full compliance with the regulation. EMIR is due to come into force at the end of 2012, thus meeting the deadline set by the Group of 20 Summit in Pittsburgh in 2009. There has not yet been any formal indication that this implementation date will be pushed back, despite the delays in agreeing the final text.

European Commission Blocks Proposed Merger Between NYSE Euronext and Deutsche Börse

by McDermott Will & Emery | Feb 9, 2012 | EU Developments

by Prajakt Samant

The European Commission (EC) has blocked the proposed merger between Deutsche Börse and NYSE Euronext. The decision follows the EC’s announcement that such a merger could cause a ‘near-monopoly’ in the European financial derivatives markets, by creating the world’s largest equity and derivatives exchange operator.

The merger would have seen the uniting of Eurex (of Deutsche Börse) and Liffe (of NYSE Euronext), and would have resulted in the merged entity controlling more than 90 percent of European exchanged-traded derivatives. Michel Barnier, the European Commissioner for Internal Market and Services, was in favour of the merger, arguing that it would create a European champion in the global financial market.

In taking its decision, the EC had to establish what the relevant market was. The parties argued that the relevant market included exchange traded derivatives, as well as over-the-counter (OTC) and off-exchange traded derivatives. By seeking to widen the scope of the market, the parties hoped to demonstrate that the proposed merger would not occupy a dominant position in the market and would therefore not be deemed to be anti-competitive.

However, the EC found that the relevant market included exchange-traded derivatives only, with OTC and off-exchange derivatives forming a separate market, as the products had different characteristics and fulfilled different customer demands. This conclusion was reached on the following grounds:

Exchange-traded derivatives are fully standardised liquid products whereas OTC derivatives allow for the customisation of their legal and economic terms and conditions.
Exchange-traded derivatives are usually traded in small sizes (around EUR 100,000 per trade) whilst the average trade size for OTC derivatives is much larger (around EUR 200,000 per trade).
By definition, OTC trades cannot be undertaken on exchange.
Certain customers will only trade on exchange as they either cannot, or will not, trade OTC. This could be for risk management reasons, or not having the required mandatory or operational set-up to trade OTC.

The EC’s decision does not follow the decision that was taken by several other regulators. Approval for the merger had been granted in Germany, Luxembourg and in the U.S. by the Committee on Foreign Investment in the United States, the Department of Justice and the Securities and Exchange Commission.

It is not yet known whether the EC’s decision will be subject to appeal, although such an appeal, if pursued, could last several years. The remedies offered by the two parties, including the sale of Liffe’s European single stock equity derivatives products where these compete with Eurex, were deemed to be insufficient by the EC, particularly as they did not extend to existing competing products.

Impact of the MiFID II Proposals on Commodities Businesses

by McDermott Will & Emery | Feb 3, 2012 | EU Developments

by Thomas Morgan

The Markets in Financial Instruments Directive (MiFID) came into force in November 2007 and aimed to enhance investor protection, improve cross-border market access and promote financial market competition across the European Union (EU). In December 2010 the European Commission (EC) published an expansive review of MiFID. The EC unveiled its package of legislative proposals revising MiFID in October 2011. These proposals are more comprehensive than initially expected.

The amended text of MiFID and the new Markets in Financial Instruments Regulation (MiFIR), together are referred to as MiFID II. The proposals extend the scope of the original legislation in terms of the types of instruments and businesses affected. The prospective legislation subjects EU commodity market participants to significant compliance challenges and increased scrutiny of their energy trading businesses.

Commodities businesses will be some of the most heavily impacted by the introduction of MiFID II. In its current form, MiFID II will:

Extend regulations to commodities and commodity derivatives trading, by removing or narrowing current exemptions, notably in relation to commodity firms who are currently exempt from MiFID when dealing on their own account in financial instruments.
Extend regulations to Organised Trading Facilities (OFTs). The definition of OTFs is broad, capturing organised trading platforms that are not currently regulated under existing categories.
Introduce new safeguards for algorithmic and high frequency trading.
Increase the transparency of trading activities by imposing position reporting obligations on trading venues. Such information must be available to the regulator upon request and, upon exceeding certain thresholds, to the public each week.
Allow stronger supervision of commodity derivatives markets. The proposals give national regulators and the European Securities and Markets Authority (ESMA) greater powers to monitor trading activity and allow them to ban specific products, services or practices to support liquidity and prevent market abuse.
Give power to ESMA to move standardised over-the-counter (OTC) derivatives contracts to exchange-traded platforms and/or clearing through central counterparties.

The EC estimates one-off compliance costs of MiFID II across all sectors to be in the region of €512 to €732 million, in addition to ongoing costs ranging from €312 to €586 million. Firms should ensure that any synergies in processes required by MiFID II and other regulatory legislation coming into force are identified to minimise cumulative implementation costs.

The MiFID II package of proposals is currently under negotiation by the EC, European Council and European Parliament. This means there is still an opportunity for firms to present the concerns and objections of their businesses to regulators and law makers before the text is finalised. There is no published timetable for these negotiations, although it is unlikely that such negotiations will be concluded before the text of the European Market Infrastructure Regulation is finalised.

Italian Government Stops Incentives for Ground-Mounted PV plants on Agricultural Lands

by McDermott Will & Emery | Jan 26, 2012 | EU Developments, Project Development and Finance, Renewables

by Carsten Steinhauer

As part of the liberalisation package adopted on 20 January 2012, the Italian Government has decided to stop incentives for ground-mounted photovoltaic (PV) plants on agricultural land.

The previous Government had already introduced limitations to photovoltaic plants located on agricultural land by limiting the incentives to only those not exceeding 1 MWp and on the condition that they did not cover more than 10 per cent of the available land. An exception was made where the land had been abandoned for at least five years. These limitations were set out in paragraphs four, five and six of Article 10 of legislative decree no. 28 of 3 March 2011 (the Renewables Decree), which have now been abolished.

The current Government has now decided to eliminate incentives for all ground-mounted photovoltaic plants on agricultural land. Article 65 of the Liberalisation-Decree (the Decree) provides that the new rules will apply to all new installations, except those for which the request for authorisation was filed before the entry into force of the Decree and provided that operations start within one year from the entry into force of the Decree. The PV plants that do not fall under the application of Article 65 shall, in any case, comply with the limitations under paragraphs four, five and six of Article 10 of legislative decree no. 28 of 3 March 2011.

In turn, the Government has increased incentives for photovoltaic plants installed in greenhouses, by providing that they will receive the full tariff for rooftop PV plants instead of the currently applicable rate, an amount between the tariffs awarded for rooftop and the tariffs for ground-mounted facilities.

The Decree has now entered into force following its publication in the Official Gazette. Parliament has 60 days, as of the publication, to approve and convert the Decree into law. During such period, Parliament may introduce further amendments. It remains to be seen whether Parliament will approve the increase of the incentives for greenhouse PV plants.

Italian Register for Large PV Plants Closed for 2012

by McDermott Will & Emery | Jan 26, 2012 | EU Developments, Project Development and Finance, Renewables

by Carsten Steinhauer

On January 20, 2012, Gestore dei Servizi Energetici (GSE), the publicly-owned company that promotes renewable energy sources in Italy, announced that the budget for the second half of 2012 for large solar photovoltaic (PV) plants has already been used up by excessive demand in 2011. Consequently, there will be no registration procedure for the second half of 2012, and large PV solar plants that have not been registered previously with the GSE will only be eligible for the 2013 feed-in tariff.

The Fourth Italian Feed-In Tariffs system (the so called “Fourth Conto Energia”) established the following budgets for large solar PV plants between June 2011 and December 2012:

1/06/2011 – 31/12/2011 1st Half 2012 2nd Half 2012

TOTAL

Feed-in Premium Budget 300M 150M 130M 580M Indicative Cumulative Nominal Power 1.200MW 770MW 720MW 2.690MW

In order to ensure the fair distribution of the budgets for 2011–2012, the Fourth Conto Energia introduced a procedure of registration, and subsequent ranking by the GSE of the registered plants for each of the three periods, based on certain priority criteria.

The Fourth Conto Energia affirmed that the budget for the second half of 2012 will be reduced by the excess amount awarded to large PV plants that began operating between June 1 and August, 31, 2011, or registered with the GSE between September 2011 and December 2011. Accordingly, the budget for the second half of 2012 has been reduced to zero, and the GSE will not start the procedure for new registrations.

As a consequence of this development, PV projects that are defined as “large PV plants” that have not obtained a favorable ranking in one of the GSE registers in 2011, or in the first half of 2012, will now only be eligible for the 2013 feed-in tariff. In fact, the GSE has clarified that those PV plants that started operations in 2012 without being ranked in a GSE register will be deemed to have started operations on January 1, 2013, and will therefore obtain the 2013 feed-in tariff for the 20 years starting January 1, 2013.

Unlike the 2012 feed-in premium, the 2013 feed-in tariff will already include the price for the sale of electricity. For, instance, the all-inclusive feed-in tariff for PV plants with nominal peak power above 1 MW will be as follows:

PV Plants Installed on Buildings

Other PV Plants

1000<P<5000 kWp

0.227 /kWh

0.205 /kWh

P>5000 kWp

0.218 /kWh

0.199 /kWh

“Small PV plants” (i.e. <1000 kWp on rooftops / ground mounted <200 kWp using net-metering system / placed on buildings or areas owned by the public sector) are not subject to the budget restrictions and will be eligible for the incentive.

UK Government Takes Further Steps Towards Increasing Nuclear Energy Capabilities

by McDermott Will & Emery | Jan 25, 2012 | Environmental, EU Developments, Renewables

by Charlotte Doerr

The 2008 Nuclear White Paper issued by the UK Government’s Department for Business, Innovation and Skills, (which, at the time, was known as the Department of Business Enterprise & Regulatory Reform), stated that nuclear energy, in addition to other low-carbon sources, would play an increasingly important role in the future energy mix of the country. The current UK Government has remained committed to the development of new build nuclear projects; notwithstanding the Fukushima disaster in March 2011, which caused other European countries to revisit – and in some cases abandon – their support for nuclear energy.

On December 8, 2011, the UK Government continued its drive towards encouraging investment in new nuclear plants in the UK. The Department of Energy and Climate Change (DECC) introduced statutory guidance on the price of disposal of nuclear waste paid by new nuclear operators and on the content of new nuclear operators’ plans for decommissioning old plants. The statutory guidance, issued pursuant to the Energy Act 2008 (the Act), was (i) the ‘Funded Decommissioning Programme Guidance for New Nuclear Power Stations’ (FDP Guidance) and (ii) the ‘Waste Transfer Pricing Methodology for the Disposal of Higher Activity Waste from new Nuclear Power Stations’ (Waste Transfer Pricing Methodology). The Waste Transfer Pricing Methodology prescribes the method for determining the price to be paid by new nuclear operators for the disposal of intermediate level waste and spent fuel at the UK Government’s proposed geological disposal facility. The application of the method will be set out in a contract between new nuclear operators and the UK Government.

The Act requires all new nuclear operators to have in place an approved funded decommissioning programme (FDP) prior to commencing construction. The FDP Guidance provides that a FDP must be ‘realistic and clearly defined’ with a ‘robust’ estimate of decommissioning and waste disposal and management costs (some of which will be included in the aforementioned waste transfer price). Likewise, funds for the future clean-up must be set aside in a structure administered independently of the operator and the UK Government. A potential operator has the freedom to choose the nature and form of the structure, provided that the funds are insolvency proof and managed in a transparent manner.

The Guidance represents one of a number of steps being taken by the UK Government to facilitate and prepare for the introduction of new nuclear power in the UK. The indicative timeline issued by the Office for Nuclear Development identifies additional milestones to be met before the first nuclear power plant in the UK since 1995 becomes operational (currently expected in 2018), including proposals to reform the UK electricity market, designed, amongst other things, to support investment in new nuclear and other low carbon energy sources.

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