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SYSTEMS THINKING, CORPORATE SOCIAL RESPONSIBILITY (CSR) AND CREATING SHARED VALUE (CSV) FOR THE ENERGY INDUSTRY IN THE TWENTY FIRST CENTURY: PART I

In this first article I look at what is meant by “radical engagement” with society, and also the relevance of Systems Thinking to CSR, and the energy industry.

John Browne, former CEO of BP, estimates the risk for a company having the wrong relationship with society, of neglecting those aspects of their activity that go beyond narrowly legal requirements at about 30 per cent. He advocates a policy of “radical engagement” as the basis for how companies should engage with society, using four main principles:

  • Businesses do well when they have a good understanding of the world around them, and of their place in the world;
  • Businesses need to understand better how to communicate their total contribution to society – activities that make a social contribution should be construed as being part of a company’s central purpose;
  • CSR and sustainability should be “part of the performance contract of a business and evaluated as such”;
  • In an interconnected world it is important not to engage or communicate only when you have to. Business engagement with society should be radical, not grudging and episodic.

One of the issues that has changed in corporate policy making is the notion that profit should be an “outcome”, rather than the goal of commercial life.

The question of “purpose” and “meaning,” and the role of “value” are at the heart of Fritjof Capra’s systems approach. Capra’s work has been heavily influenced by the insights of quantum science, in particular the work of Werner Heisenberg, author of “Physics and Philosophy.” Interviewed about the influence of Heisenberg on his work, Capra said:

“…the exploration of the atomic and subatomic world brought them in contact with a strange and unexpected reality. In their struggle to grasp this new reality, they became painfully aware that their basic concepts and language, indeed their whole way of thinking were inadequate to describe atomic phenomena. The problems were not merely intellectual, but amounted to an intense emotional, and one could even say, existential crisis. It took them a long to overcome this crisis, but in the end they were rewarded with deep insights into the nature of matter and its relation to the human mind.”

Capra’s systems thinking originates in this intellectual crisis of the 1920s. Out of that crisis came the realization that there are no fundamental constituents of matter. Instead everything is a web of connection and interrelationship. Solutions to the world’s current multiple crises cannot be isolated. They must be interconnected.

Capra says:

“The problem of energy cannot be solved by finding cheaper sources of energy. If we had hydrogen fusion right now, or some new energy source that was cheap and safe, all our other problems would only get worse. If you fuel a system that is out of balance, you have just the same system but on steroids. We would damage the rainforests, deplete the ecosphere, pollute the air and increase health problems. In other words, the energy problem is also a health problem and a food problem and a water problem.”

John Browne believes that energy companies must engage radically with society. He believes that profit should be an outcome, rather than the goal of corporate decision making. The systems thinking of Frithjof Capra has much to say in relation to debate about meaning, and purpose. Furthermore, it advocates an approach to strategy that considers energy issues within a wider context than the industry itself.

In my second article I will look at the connection between ecology and systems thinking, and why it is that systems thinkers believe that the illusion of perpetual growth is at the heart of the global crisis of affairs. I will examine the possibility that society needs to transform its understanding about growth from one that is quantitative to one that is qualitative.

By Mark Jenkins

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article is not intended to constitute legal advice and Prospect Law and Prospect Advisory accepts no responsibility for loss or damage incurred as a result of reliance on its content. Specific legal advice should be taken in relation to any issues or concerns of readers which are raised by this article.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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WHOLESALE ENERGY PRICES: MARCH – APRIL 2017:

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Brent fell 10% amid lingering concern about over-supplied oil markets and US output climbing to 9.25 million a day, its highest level since August 2015. Meanwhile, last year’s production accord struck between OPEC, Russia and other non-OPEC nations, which had initially intended to eliminate a 300 million barrel stockpile over a global five-year average (three days of worldwide production), has succeeded in lifting prices and keeping them above $50/bl. However, the price impact has been muted otherwise.

The inventories picture is mixed and reports are also contradictory. Refinery supplies are still rising although offshore inventories are reported to be falling; a sign perhaps that the production cuts agreed last year are taking longer to feed through than ministers bargained. If OPEC and non-OPEC ministers, meeting behind-the-scenes now, do agree to significant further cuts in time for the next Vienna meeting on May 25th then crude could break out of its current $45 to $55/bl price range and head back above $60 or $70/bl. However, the market will first want to see evidence of agreed cuts showing up in refinery inventories before any new price range is established.

Natural Gas

The forward year OTC gas contract fell back 15% over the two month period in the absence of any significant supply issues. However, gas prices will be sensitive to any further heightening of tension in the Korean Peninsula. Although Geo-political risks affect all energy commodities, gas stands to be affected most, perhaps, in light of threats to shipping and the disruption of diverted spot and contracted LNG cargoes destined for European terminals, as well as its link to the Rotterdam oil market.

For the time being, gas prices are also being held back by the declining price of coal, which recently traded below $65/tonne. The falling carbon price has also taken its toll with the EU-ETS contract trading below €4.50/tonne at one stage in April, its lowest level since last summer. Traders have commented on a ‘loss of direction’ in the market, drifting away from supply-specific fundamentals. If so, this could signify gas prices shadowing the crude and petroleum products markets in weeks ahead.

Electricity

Last month saw the first day in which UK coal plants producing zero electricity; a timely reminder of the increasing reliance on renewables, new-build nuclear and interconnector projects in order to fill the impending generation gap as the last of the coal and ageing Advanced Gas-cooled Reactors are taken offline.

Each of these alternatives carry uncertainties in respect of capacity available on the day and construction timescale. Further, the trend towards decentralised grids and the ‘off shoring’ of capacity (i.e. interconnectors) could increase burdens on the balancing system and, as a consequence, the suppliers’ average risk-premium added within long-term power contracts as more producers and traders become adverse to contracting forward. Conceivably this will worsen the current liquidity problems further, with reports of senior traders and trading directors now retreating from forward trading altogether and contenting themselves with the prompt markets only. This would leave industrial prices ever more prone to sudden price corrections, if we assume that forward prices then become more likely to take their cue from the prompt market as a result of little activity in the relevant forward market.

While the election date has sapped chances of any early energy policy announcement, there was little in the market to console fossil-fuel generator or storage investors either, with spark spreads drifting below 4% and weakening intra-day/Red Zone spreads compromising commercial cases for battery storage. However, relevant policy announcements are believed possible a few months after the summer recess, potentially in October or sooner.

By Dominic Whittome

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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R V RECYCLED MATERIALS SUPPLIES LTD [2017] EWCA CRIM 58: IMPLICATIONS FOR THE REGULATION OF POLLUTING FACILITIES

The recent Court of Appeal decision in R v Recycled Materials Supplies Ltd [2017] EWCA C rim 58 deals with the question of which authority is the appropriate regulator for regulated facilities under the Environmental Permitting (England and Wales) Regulations (EPR).  The 2010 version of the Regulations with amendments was in force at the time of the offences but there are no material differences for present purposes in the current 2016 Regulations.

Generally the regulator is the Environment Agency (EA) in relation to facilities in England and the Natural Resources Body for Wales (NRBW) for facilities in Wales.  These authorities oversee the most heavily polluting facilities, including waste operations.

On the other hand, local authorities are the designated regulators for certain facilities considered to be less polluting, including ‘Part B activities’ which are controlled for air pollution purposes only.  Although the EPR set out rules for determining which body is the appropriate regulator, the position is sometimes less than crystal clear in practice as demonstrated by the Recycled Materials supplies (RMS) case.

Background:

The facts are simple. RMS operates a facility for recycling construction and demolition waste which is crushed and recovered to produce aggregates.  The waste includes brick, tiles and concrete which are not segregated from other materials.  RMS was granted an environmental permit (EP) by the EA to cover the waste operations on their site.  However, the London Borough of Newham (LBN) separately issued a more limited EP for the crushing, grinding and screening of brick, tiles and concrete by means of mobile plant.  Those activities are Part B activities and therefore should fall under local authority control to deal with air pollution.

RMS was prosecuted by LBN for failing to comply with a condition of their EP requiring vehicles transporting aggregates to be fully enclosed.  RMS’s conviction by the Crown Court was overturned by the Court of Appeal on the ground that dual regulation, although possible in some cases, was unlawful in the present circumstances.  The court pointed out that regulatory functions in respect of regulated facilities including waste operations and waste mobile plant are allocated to the EA (or NRBW) under regulations 32(1) and (1A) of the EPR unless they are specifically allocated to local authorities under regulation 32(2), which includes:

  ‘… (b) … Part B mobile plant but not in respect of any of the following regulated facilities carried on ….by means of mobile plant –

(i)         a waste operation (unless it is a Part B activity)  …’

The Court of Appeal accepted that this wording indicates that a waste operation may also be a Part B activity.  However, the local authority would only have the function of issuing an EP if the activity on RMS’s site was a ‘Part B mobile plant which was ‘by the tortuous route of double exceptions’ carrying on a Part B activity. However, the crushing, grinding and screening of brick, tiles and concrete were never carried out as separate activities but always as an integral part of the waste operation on RMS’s site.  For that reason the activity could not be considered a Part B activity and the plant if it was mobile was ‘waste mobile plant’ which is regulated by the EA and not ‘Part B mobile plant’.  Under those circumstances, the EA alone had jurisdiction and the LBN EP was therefore invalid.  It followed that RMS had not committed an offence by failing to comply with a condition in an invalid EP.

The Court of Appeal stated that a defendant prosecuted for breach of a permit condition can challenge the validity of an EP in the course of a criminal trial.  However, they added (without ruling on the point) that there was some force in the argument that any challenge to a permit condition may have to be made through the appeal process set out in the EPR – an appeal to the Secretary of State (DEFRA) in England or the Welsh Ministers in Wales.  Such appeals have to be made within 6 months of the grant of the EP, so it may be too late to wait until the permit holder is prosecuted for failure to comply with a condition.

This case illustrates a number of important points:

  1. If there is more than one EP governing the same activity on a site, one of them may be invalid. Dual regulation is generally frowned on.  An exception contemplated by the EPR is the operation of mobile plant on the site of another regulated facility.  In the event of inconsistency between the requirements of the two permits, the requirements of the EP for the latter prevail.
  2. If any condition of an EP is unduly onerous to the permit holder an appeal should be made promptly. Otherwise, it may be too late to challenge it.
  3. Although not relevant in the present case, the court noted that there is a power for the Secretary of State (or the Welsh Ministers) to make a direction under regulation 33 of the EPR that the regulatory functions of the EA/NRBW shall be exercised by the local authority or vice versa.Such a direction can apply to a single facility or a class of facilities.  The power to make directions has been used where the experience of the ‘other’ regulator is more appropriate to a particular facility.

By Andrew Waite

Andrew Waite is a solicitor and specialist in environmental law, advising on regulatory and liability issues for a broad range of industries.  He defends prosecutions for breaches of environmental legislation, deals with regulatory appeals and civil litigation and advises on environmental issues relating to projects and transactions.  He deals with all the main areas of environmental law including waste, energy, nuclear, contaminated land, pollution controls, environmental permitting, water rights, flooding, climate change and nature conservation.

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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PREPARING FOR ACCIDENTS, SPILLS AND DISASTER IN THE UK: PART II

Incidents which cause environmental harm or injury and illness to workers or neighbours can have significant consequences for the companies responsible. Preventing those incidents must, therefore, be a priority, but if they happen they must be managed so as to minimise physical and environmental damage, liabilities and the risk of an adverse regulatory and media response. This new series of articles summarises key issues for companies operating in the UK, with Part II covering dealing with the regulators and investigating officers’ powers to take statements from witnesses

Dealing with the Regulators:

Regulators have wide statutory powers which are most likely to be exercised after an incident.  Employees should understand regulators’ powers and know how to react to regulatory officers, since obstructing a regulatory officer or failing to co-operate without reasonable excuse is usually a criminal offence.  Employees should request evidence of the officer’s identity and authority to investigate, and clarification about which statutory powers are being exercised.

The regulatory officer usually has the power to:

  • enter premises at reasonable times except in an emergency (with a police constable if serious obstruction is anticipated);
  • examine and investigate the premises or anything on the premises;
  • direct that all or part of the premises be left undisturbed for the purposes of the examination or investigation;
  • dismantle or test any article or substance which has caused the incident or is likely to cause harm (but not so as to damage or destroy it unless necessary); and
  • take away any such article or substance for the purposes of examination and presentation as evidence. If working with the police, the regulator also can ask them to obtain a search warrant.  A Justice of the Peace can issue a search warrant if he or she is satisfied that an indictable offence (i.e. an offence triable in the Crown Court) has been committed and there is material on the premises which is likely to be of substantial value in investigating the offence.

Statements

Investigating officers usually have statutory powers to obtain statements from witnesses.  These powers include requiring any person to give any information relevant to the examination or investigation and to sign a declaration of truth of the answers given.  Usually, the employee can nominate another person to be present, which should generally be the company’s lawyer or the “incident manager”.  Generally, no answer given pursuant to such a requirement can be used as evidence against the person giving it in any proceedings, although it can be used as evidence against the employer or another employee.

The investigating officer can also require the production of records which are required to be kept or which the officer needs to see for the purpose of the investigation.  It is important to know what “records” the regulator can request be produced.  Under the Environment Act 1995, for example, this may extend to test results but not to commentary in a report by consultants.  Records protected by legal professional privilege generally do not have to be produced.

Regulators also have powers to obtain some information from individuals without protection against self-incrimination.  Examples include notices to obtain information served under section 71 of the Environmental Protection Act 1990 (possible waste offences) and regulation 60 of the Environmental Permitting (England and Wales) Regulations 2010 (investigations of regulated facilities).  Recipients of such a notice are obliged to provide the information requested even though it may be used in evidence against them in the event of prosecution.  Failure to do so without a reasonable excuse is a criminal offence.

Regulators investigating a possible criminal offence generally request an interview under caution with a senior representative of the company under the Police and Criminal Evidence Act 1984 (PACE) procedures.  Interviews conducted under PACE are taped and can be used in evidence against the interviewee, the company or other employees, directors and managers.  Attendance at a PACE interview is not compulsory.  However, failure to attend risks an adverse inference being drawn from failure to mention something known to the potential interviewee which is later relied on at a trial, or a heavier sentence if the failure to attend is brought to the court’s attention during sentencing.

On the other hand, the company representative who agrees to attend a PACE interview may not have all the relevant information to answer questions, or may inadvertently say something in the interview which provides ammunition to the prosecution.  The alternative is to offer to provide written responses under caution.  This procedure avoids the disadvantages mentioned above and enables the company to set out its version of events in the best light possible.  Some regulators agree to the written response procedure.  Others decline it on the grounds that it does not allow for the same flexibility that a verbal interview would and it allows for the creation of credible but false evidence.  Therefore, it is probably better for the company’s representative to attend the interview, answer any factual questions she or he can answer, and offer to provide other requested information in writing after the interview.  If the regulator objects, the interviewee can rely on the right to silence.  Under those circumstances, it is unlikely that any adverse inference could be drawn.

Prior to attending a PACE interview, it is advisable to ask the regulator for a list of questions or, if that is not forthcoming, a list of the areas to be covered in the interview and the proposed line of questioning.  Regulators are not obligated to provide this information in advance, but sufficient information must be provided to enable the company to understand the nature and circumstances of the offence so that questions can be answered honestly.

Regulators sometimes seek voluntary statements from employees which are subsequently typed up and presented to the employee as a witness statement to be read and signed.  Such a statement is admissible in evidence against the employee who signs it as well as against the company and other employees.

It is obviously beneficial for management and the workforce to know what to do when a regulatory officer calls.  Whenever possible, the officer should be asked to wait for the company’s appropriate “incident manager” and, if the delay will not be too long, the company’s lawyer.  A substitute should be available if the usual incident manager is not available.  Other employees should avoid contact with the regulatory officer if possible and, if approached, direct the officer to the incident manager.  If the officer formally (under a statutory power) requires an employee to give information, the employee should require a suitable person to be present (preferably a lawyer or, in default, the incident manager) and should not answer any questions until then.

As soon as possible the in-house legal team or external lawyers should be asked to attend to monitor the investigation and take a note of everything the officer does and all items removed.  The lawyer should also be present at any interview, whether mandatory or voluntary, to provide advice and to record all questions and answers.  If the employee’s position may prejudice that of the company or vice versa, the employee should have separate legal representation.

In any event, it must be remembered that the regulatory officer (whether statutory powers are used or not) is attending in a formal capacity and is seeking evidence.  Any comment made may be used as evidence against the company.  It is therefore important to be both co-operative with any regulatory investigation and ensure that anything said is factually correct.

Incident Management Plan

An incident needs to be managed properly to minimise impacts on health and safety and on the environment; comply with all applicable legal requirements; satisfy the requirements of the regulatory authorities and demonstrate that the company is maintaining a co-operative approach; minimise liabilities (for example, to employees and neighbours); and manage any adverse public relations and media attention.  For that reason a management plan should be established to:

  • identify members of the incident team;
  • (set out the key emergency actions which are to be taken;
  • establish the company’s response procedures both internally and for dealing with the regulators, neighbours, the press and other third parties; and
  • undertake an internal investigation as soon as possible after the incident. Steps should be taken to gain legal professional privilege for the investigation report if so desired.

While “prevention is better than cure”, many companies will at some point face an EHS incident and should therefore plan ahead to ensure the best possible outcome.

By Andrew Waite

This article was first published in Natural Resources & Environment  (the American Bar Association’s Environment Magazine) Spring Issue 2017.

Andrew Waite is a solicitor and specialist in environmental law, advising on regulatory and liability issues for a broad range of industries.  He defends prosecutions for breaches of environmental legislation, deals with regulatory appeals and civil litigation and advises on environmental issues relating to projects and transactions.  He deals with all the main areas of environmental law including waste, energy, nuclear, contaminated land, pollution controls, environmental permitting, water rights, flooding, climate change and nature conservation.

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article is not intended to constitute legal advice and Prospect Law and Prospect Advisory accepts no responsibility for loss or damage incurred as a result of reliance on its content. Specific legal advice should be taken in relation to any issues or concerns of readers which are raised by this article. 

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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PREPARING FOR ACCIDENTS, SPILLS AND DISASTER IN THE UK: PART I

Incidents which cause environmental harm or injury and illness to workers or neighbours can have significant consequences for the companies responsible.  Preventing those incidents must, therefore, be a priority, but if they happen they must be managed so as to minimise physical and environmental damage, liabilities and the risk of an adverse regulatory and media response. This new series of articles summarises key issues for companies operating in the UK, with the first part focusing on prevention and the immediate incident response.

Prevention:

To prevent incidents, management needs to understand the legal obligations affecting their operations including requirements for environmental permits and licences, prohibitions and restrictions on pollution, duties to avoid unduly disturbing neighbours, and duties to protect employees and others.  At the operational level that involves familiarity with permit and licence conditions, as well as procedures which implement both those conditions and general environmental and health and safety (EHS) laws.  That task can seem daunting, and in response, many companies produce bulky EHS manuals with detailed instructions on how to deal with every eventuality.  The problem is that few people have the time to read them.

Brief, clear written instructions on how to avoid EHS incidents are more likely to be effective.  However, clear written instructions alone are rarely sufficient: busy workers may overlook them.  “Tool box” talks are an invaluable way of ensuring that employees know how to: protect the environment, promote health and safety and minimise the company’s risk of liability.  Examples of points to cover in a toolbox talk include which liquid substances should or should not be poured into particular drains and sewers; and what to do and who to report to if equipment or plant is found to be defective, corroded, dangerous or likely to result in unlawful emissions.  A toolbox talk also could cover simple operational procedures to ensure compliance with permit conditions and other legal requirements, and good housekeeping “rules”.  Bold and simple notices may also serve as useful reminders.

Incident response:

If an incident has adverse EHS consequences, the first priority is to minimise its consequences. Also, a decision must be made whether to notify the relevant regulatory authority, and how to deal with regulatory officers if they carry out an investigation. Those issues are likely to affect the regulatory outcome.  Many EHS incidents are strict liability criminal offences (no negligence or intent has to be proved), but the extent of culpability as well as the company’s behaviour after the incident has a profound effect on the authority’s approach (particularly the decision on whether to prosecute) and on the amount of any fine imposed by the courts.  Recent guidance from the courts in the UK, as well as official sentencing guidelines, have markedly increased the normal range of fines with the intention that the punishment should be real.

There is no uniform answer as to whether and when to contact the regulatory authority.  Each case depends on the circumstances including legal and permit requirements.  Generally, except in the most minor incidents, it is safer to report the matter to the local officer of the regulator by e-mail (to ensure that there is a record) and by telephone as soon as possible after the incident.  The initial report should be brief and factual, explaining what has happened and the steps being taken to deal with it.  The incident manager should send it.  Above all, the notification should not accept blame on the part of the company.

Part II will cover dealing with the regulators and investigating officers’ powers to take statements from witnesses.

By Andrew Waite

This article was first published in Natural Resources & Environment  (the American Bar Association’s Environment Magazine) Spring Issue 2017.

Andrew Waite is a solicitor and specialist in environmental law, advising on regulatory and liability issues for a broad range of industries.  He defends prosecutions for breaches of environmental legislation, deals with regulatory appeals and civil litigation and advises on environmental issues relating to projects and transactions.  He deals with all the main areas of environmental law including waste, energy, nuclear, contaminated land, pollution controls, environmental permitting, water rights, flooding, climate change and nature conservation.

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

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WRITTEN STATEMENT TO PARLIAMENT OF ENERGY SECRETARY GREG CLARK, 27TH MARCH

In a Written Statement to Parliament issued today, 27 March, the Energy Secretary Greg Clark has made the following announcement in relation to the management and decommissioning of twelve nuclear reactor sites in the UK.

1. Termination of NDA contract with Cavendish Fluor Partnership (CFP)

The contract with CFP was for the management and decommissioning of 12 redundant Magnox nuclear power sites. The NDA ran a £6.1 billion tender process in 2012 which resulted in a 14 year contract being awarded to CFP. However, in the statement issued today the Government said it had become clear that “there is a significant mismatch between the work that was specified in the contact as tendered in 2012 and awarded in 2014, and the work that actually needs to be done.”

The statement continues to say that the scale of the additional work “is such that the NDA Board considers that it would amount to a material change to the specification on which bidders were invited in 2012 to tender”.

The NDA is consequently exercising its right to terminate on 2 years’ notice.

The Government in the statement emphasised that the termination “is no reflection on the performance of Cavendish Nuclear or Fluor” and that they will continue to manage the sites for another 2.5 years, during which time the NDA will establish arrangements for a replacement contracting structure to be put in place.

2. Settlement of Outstanding Litigation

In the same statement the Government announced that the NDA has settled outstanding litigation claims against it by Energy Solutions and Bechtel in relation to the 2014 Magnox award. NDA has withdrawn its appeal against the judgment of the High Court of 29 July 2016. The settlements were made without admission of liability on either side, but it was clear the statement said “that this 2012 tender process, which was for a value of up to £6.1 billion, was flawed”.

Because of the amount of the settlement payments and the costs (£76.5 million to Energy Solutions and £8.5m of costs, and $14.8m to Bechtel plus costs of around £462,000) there will be an inquiry into the conduct of the 2012 procurement process and the reasons why the 2014 contract proved unsustainable.

The inquiry will be led by Steve Holliday, the former Chief Executive of National Grid.

We will update on this situation as it develops.

For any immediate enquiries please contact Jonathan Leach on 020 7947 5354 or by email on jrl@prospectlaw.co.uk

Prospect Law provides legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law.

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HINKLEY POINT C AND THE ESPOO CONVENTION: THE CURRENT POSITION

We discussed in a previous blog the findings of the Implementation Committee of the Convention of the Environmental Impact Assessment in a Transboundary Context (Espoo Convention), who had investigated complaints from some countries alleging that an accident at Hinkley Point C  would have the potential to cause serious pollution across Europe, and that the UK had failed to properly consider the possible impact of such an incident.

Background

The committee informed the UK Government of their “profound suspicion” that the UK had fallen foul of the Convention, which has been in force since 1997. The UK has long argued that as the Hinkley Point C Project is unlikely to create a “significant transboundary environmental impact”, there was no need for discussions with European neighbours. However, the Implementation Committee last year recommended that the UK:

  • Endorse the committee’s view that the UK is in ‘non-compliance’ with the convention in relation to the planning of the Hinkley Point C project.
  • Engage in discussions with those parties likely to be affected by the Hinkley Point C NPP, including those “that cannot exclude a significant adverse transboundary impact from the activity at HPC”.
  • Report back to the Committee on the progress of any such discussions.
  • Send notifications to all parties that could potentially be affected by an incident at any other Nuclear Power Plant they may plan, bearing in mind the worst possible scenario.

Updated Situation

On 17 February this year, the UK Government indicated its intention to address the Committee’s findings. It had written to all parties to the Convention last December asking whether they considered that a notification under the Convention was “useful” at the current stage of development of HPC.

The UK also indicated that it would in future notify the Parties for all future nuclear power plant development applications, which goes further than the recommendations of the Committee. It is understood that Norway, the Netherlands and Germany have indicated they would find this “useful”.

At the 20-22 February meeting of the Committee, they expressed concern that continuation of development at HPC might influence the views of the parties to the Convention contacted by the UK in December.  They seemed to be worried that this might affect the outcome of any transboundary EIA procedure and render its results irrelevant.

The Committee has said it will ask the UK to consider refraining from carrying out works at the proposed activity until it established whether notification was “useful” and that if a potentially affected party requests it be notified, the UK should suspend HPC development until the EIA procedure is finalised.

In the meantime, the Friends of the Irish Environment has written to the Irish Minister of Communications, Climate Action and Environment complaining that its representations to the Irish Government on the above findings of the Implementation Committee had been ignored and that they should raise the matter with the UK at the upcoming UK-Ireland Contact Group on Radiological Matters. The UK Supreme Court had already rejected a challenge from An Taisce, the Irish National Trust.

Impact on Progress of Development of HPC

So is it foreseeable that the UK will consider asking EDF to suspend its construction activities?

From EDF’s point of view, project delay would be intolerable as the site would have to be suitably prepared, workers laid off and there would surely be breaches of contract with suppliers.

Also, would suspension serve any “useful” purpose in any case?

EDF has said that it’s EIA, prepared for the UK’s Planning Inspectorate, had addressed the transboundary impact issue and the Inspectorate, in granting permission, had concluded that there was no likelihood of significant transboundary effects. The Department of Business, Energy and Industrial Strategy has strengthened this point by saying that the Environment Agency and Office for Nuclear Regulation have also independently assessed the environmental impact of HPC.

With the current confusion about matters nuclear surrounding BREXIT and BREXATOM, further complications from the requirements of the Espoo Convention would appear to be far from “useful”.

The ability of overseas governments to bring two separate lines of attack against the EIA procedure in the HPC case arises from a dispute procedure in the Espoo Convention which is quite distinct from enforcement action in the national (and EU) courts to deal with alleged infringements of the EU EIA Directive which implements the Convention.

Under both the Convention and the Directive, proposals for nuclear power plants which are likely to have significant trans-frontier impacts must be notified by the project host country to other countries likely to be affected.  The onus of deciding whether the notification duty applies rests initially on the project host country whose courts (with possible references to the CJEU) must adjudicate on whether any such decisions have been lawfully made.

However, the Espoo Convention provides for a country which considers that it would be affected by significant trans-frontier boundary effects of a nuclear power plant in another country to trigger discussions with the project host country (in the absence of a notification) and ultimately to submit the question of whether there is likely to be a significant adverse transboundary impact to an inquiry commission.

The possibility (and in the case of HPC, reality) of conflicting decisions is unfortunate.  As indicated above, the UK Government has sensibly decided to avoid such conflicts in the future by pre-notifying other countries of proposals for nuclear power plants irrespective of their likely impacts.  However, it is strongly arguable that the Espoo Convention was not intended to encourage disputes to be carried on under its aegis after the matter has been conclusively settled in the national courts of the host party where overseas governments and their citizens have the right to be represented.

We will continue to monitor the situation and report our findings through this blog.

Edward de la Billiere is a Solicitor and co-founder of Prospect Law. He was educated at Newcastle University and trained at the leading Middle East firm Trowers and Hamlins, working in both their London and Dubai offices, predominantly in the oil sector. On qualification, Edward moved to Magnox Electric, which was taken over by the nuclear operator BNFL. He has retained a strong interest in energy related projects and has advised recently in respect of energy and waste projects for corporate, local authority and private clients across the UK and internationally.

Andrew Waite is a solicitor and specialist in environmental law, advising on regulatory and liability issues for a broad range of industries. He defends prosecutions for breaches of environmental legislation, deals with regulatory appeals and civil litigation and advises on environmental issues relating to projects and transactions. He deals with all the main areas of environmental law including waste, energy, nuclear, contaminated land, pollution controls, environmental permitting, water rights, flooding, climate change and nature conservation.

Prospect Law provides legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

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WHOLESALE ENERGY PRICES: JANUARY – FEBRUARY 2017: PART II: ELECTRICITY

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Electricity 

Baseload prices finished the period down 7% as weak demand and firm supplies across the board of generation took hold. Storage is becoming an increasingly key feature in the market. It is thought that the perceived ‘low’ £22.50/kW clearing price in the last Frequency Response/capacity market auctions may be leading to a future ‘Mexican stand-off’ between storage investors and National Grid Transmission, with developers wary of investing in ventures offering only them quite modest returns but significant exposure to the market risk once their auction contracts expire, in 4 years or even less in some cases.

However, the Grid will broaden the range of different Frequency Response services which developers can bid for. This wider choice of contract terms could help underpin the storage market from now on. Last year’s low clearing price may have been partly the result of lower-than-normal bidding by developers. Having been given their batteries by the manufacturer at a concession, some may have bid low, keen to bank any positive margin to ensure they would at least break-even.

If price sweeteners are a one-off event, for that reason too we could see storage auction prices firmer next time around, even if it is modest. So talk in some industry circles of sustained sub-£20/kW prices look wide off the mark perhaps. Looking further ahead, significant demand growth is anticipated for electricity storage across Europe according to virtually all government and industry forecasts made on the subject.

On the power generation front, the lack of investment in peak capacity will only intensify demand for load-shaping tools, batteries and demand-side response in the future. With new-build nuclear plans reported to be stalling, NuGen’s 3,800MW Anglesey reactor of recent concern, the UK’s generation margin could tighten further over the next 10 years.

While it is true that Whitehall secured significant capacity in its ‘T4’ capacity market auctions last year, centrally planned economies and markets come at a cost. On which question, the current strike price for the 3,200 MW Hinkley Point power station has passed £105/MWh on account of inflation, as agreed when the deal was struck at the outset when it stood at £92.50/MWh. Comparable CFD strike prices can be expected for the other new-build reactor due over the next ten years and a benchmark may gradually become established.

Meanwhile the spark spread is still falling, down 2% over the two month period. This low margin is a continuing disincentive for developers to build new gas-fired plants or to prolong the UK’s remaining coal stations. Grid batteries and Demand Side Response may help in the future. However, storage is only good for short bursts and cannot cover for prolonged outages.

The commercial incentives to build un-subsidised plants will stay weak unless UK energy policy shows signs of change. One future key plant scheduled, the 1,500 MW gas station at Trafford, has been delayed again amid financing issues, so significant that it has even had to surrender its capacity market concession.

The bright spot perhaps has been the steady development of interconnectors, which may redress some of the imbalance as existing nuclear reactors and other plants are retired over the coming years. These include a second 1 GW cable to France and a second Norwegian 1.5 GW link interconnector to bring hydro electricity to the UK market and double-up Statnett’s North Sea Link project. Landsnet’s IceLink cable will bring 1.5 GW of geo-thermal electricity from Iceland and further 1 GW cables are planned to Holland and Belgium.

However, as the UK market experience with the Gas Interconnector flagged up almost a decade ago, the mere presence of a subsea pipeline is no guarantee of supply when it is needed most. Volumes will no doubt eventually arrive, although at prices which the power market will determine.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk.

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WHOLESALE ENERGY PRICES: JANUARY – FEBRUARY 2017: PART I: CRUDE OIL & NATURAL GAS

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Oil prices finished 2% down as the market remained pensive about the upcoming OPEC summit in April.

Although ‘OPEC Alliance’ countries (producers co-operating with latest output cuts) will not be attending the Vienna talks in a formal capacity, behind-the-scenes dialogue has been ongoing all the while.

With Iranian and Russian ministries having met up in January to discuss Russia extending its production cuts into next year and Saudi Arabia sending their foreign minister to Iraq (which was included in its latest production agreement) with a view to including Iraq in possible future production ceilings yet to be agreed.

Traders have been pointing out that there is no evidence to show that last November’s accord between OPEC and OPEC Alliance countries made any impact. Although it is true enough that crude prices have flat-lined since November (having jumped in the weeks running up to the accord), conversely there is also no sign the accord has not worked. The agreed cuts were modest, the first in over nine years and also the first of their kind in that they included several non-OPEC producers.

OPEC ministers are possibly playing a long game, with modest but universally-orchestrated limits in output, to be increased methodically rather than in any way likely to destabilise the market, and we would need to wait and see if and what OPEC ministers decide on in April before one can second-guess the success or otherwise of last November’s accord. The pace of oil price recovery has, however, been muted. This may or may not be connected to the delays to the public listing of Saudi Aramco, ostensibly due to ‘complexities in the structure’ of the company flotation plan.

The mooted delay (up to 18 months) may reinforce scepticism about the expected speed of any oil price recovery, if this reflects the kingdom’s pessimism of the accord holding together. The value of the share offering is estimated at over £2 trillion and clearly very sensitive to prevailing oil prices. If market estimates are correct, the new company is valued at 20 times the capitalisation of the next largest oil major, ExxonMobil. It is conceivable that there have been worries that the oil market might not recover in time and these may have played a factor in the delay, although that itself is pure speculation. The Vienna meeting April could though be a turning point, in either direction.

With this week being CERA Week in Houston, perhaps we can expect the annual splash of shale stories over the next few days.  While shale drilling should place a price ceiling on any sustained oil price recovery, as pointed out in past issues of Energy Highlights, shale plays are generally short-term and expensive. Oil prices could comfortably ratchet up to $75/bbl or beyond before shale and higher-cost conventional oil output starts to kicks-in. Either way, the oil market will never loose its capacity to take people by surprise.

Natural Gas

The forward-year gas contract finished the first two months of the year off 10%, closing below 45p per therm. This reflects the view held by most traders of a fundamentally well-supplied market with a spate of further LNG export projects set to come online this year and next, many landing at European terminals.

Notable supplies include projects in Australia and South East Asia, although shale gas from the Americas will have a role will to play too. The UK market recently saw shale gas imports from the Peruvian jungle due for landing at Milford Haven shortly before going to press, and this healthy looking forward supply-picture has been helped along by Japan.

The country has gradually been releasing more and more gas on to the world spot market: the LNG contracts it had bought up in the immediate aftermath of Fukushima. This may have contributed to (or certainly given the impression of) an ‘LNG glut’.

The demand-side also paints a weak picture, with limited demand-call from generators and industry. However, there are some bullish signs on the horizon too. Geo-politics have recently turned adverse, with under-the-radar conflict areas in Russian-Ukraine and even the South China Sea among the potential supply-area worries.

However, any sustained uplift in gas prices is perhaps most likely to occur as a result of an indexation and long-term contracts issue. Indexation to crude prices still has the propensity to push prices up, with much of the piped and LNG sold across Europe still covered by these clauses. Within these contracts, even where oil and petroleum product indices may have seen their price-impact reduced or possibly removed altogether over the last 20 years, these price escalators indices have in most cases simply been substituted for producer price indices, which have recently been rising faster than oil prices themselves.

In fact, over the last five months alone, UK producer prices have been rising at annualised rates well over 10% according to estimates provided by industry trade associations. These will ultimately soon be reflected in official government statistics and will later directly influence gas contract prices, where the indexation effects can be lagged for six to nine months or, in unusual cases, even longer.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk.

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BREXIT WHITE PAPER CONFUSES EURATOM DEBATE

The 2008 EU Amendment Act is not a justifiable legal basis for the UK government’s belief that Brexit must also mean an exit from Euratom, write Jonathan Leech and Rupert Cowen of Prospect Law.

The government’s white paper on the UK’s “exit from and new partnership with” the European Union published last week confirms its position that “When we invoke Article 50, we will be leaving Euratom as well as the EU”.” In support of this, the document asserts that the European Union (Amendment) Act 2008 “makes clear that, in UK law, references to the EU include Euratom”.  This is presumably an assertion that references to the EU in the Referendum Act, the referendum question and the withdrawal bill automatically include Euratom – something both the Leave and Remain campaigns omitted to mention.

The 2008 EU Amendment Act tells us that “A reference to the EU in an Act or an instrument made under an Act includes … a reference to [Euratom].” The white paper overlooks the point that the 2008 Act does not apply to Article 50 of the Treaty on European Union – which is of course neither an Act nor an instrument made under an Act. This is significant, because there is a good legal argument that triggering Article 50 of the Treaty on European Union will have no legal effect on the UK’s membership of Euratom, and that to exit Euratom the government will need to trigger equivalent exit provisions in the Euratom Treaty. This would mean, absent that separate trigger, legally the UK remains in Euratom.

The white paper also states that “The Euratom Treaty imports Article 50 into its provisions.”  This is correct – to a point. The Euratom Treaty applies a version of Article 50, re-written to refer to Euratom and the Euratom Treaty in place of references to the EU. Again, this supports existence of a separate Euratom exit process that is similar to but is not part of a single EU Article 50 process. This is an important distinction.  It gives the government a choice, at least in relation to its approach to the timing of Euratom exit – a choice that it would be unwise to ignore.

The legal meaning of the withdrawal bill is also critical. The bill is the government’s response to Supreme Court confirmation that parliamentary authority is required before Article 50 can be triggered. It is highly likely that the government also needs parliamentary authority to trigger exit from Euratom.

Clause 1 is very specific. “The Prime Minister may notify, under Article 50(2) of the Treaty on European Union …”  There is nothing in the 2008 Act to suggest that reference to the Treaty on European Union automatically includes reference to the Euratom Treaty. Arguably the bill as drafted does not therefore give authority to trigger exit under the Euratom Treaty. It would have been preferable to include separate authority for Euratom exit, both to avoid this element of doubt and to provide a clear basis for the government to take additional time before triggering Euratom exit should the government conclude that this is in the national interest.

In addition to securing parliamentary approval for a Euratom exit, the government will need to be confident that, once triggered, the two-year Euratom exit timetable is sufficient to put in place replacement arrangements to avoid a damaging hiatus for the UK nuclear industry. This is likely to require a good deal of preparatory work before starting the 2-year countdown.

Since the UK accession to Euratom in 1973 the regulation and international acceptability of the UK nuclear industry have been closely entwined with Euratom. The Euratom Treaty sets out eight areas of activity: promotion of research, establishing and policing uniform safety standards, facilitating investment, ensuring a regular supply or ores and fuels (via the Euratom Supply Agency), applying safeguards, exercising rights of ownership over ‘special fissile materials’, creation of a nuclear common market and establishing relations with other countries and international organisation to foster progress in nuclear energy. Of these areas, safeguards and international relations are likely to place the greatest strain on the exit timetable.  Withdrawal also creates vast uncertainty for the future of UK fusion research.

Safeguards are essential to international nuclear commerce – verifying for an international audience that nuclear material is where it should be and is used only for its intended purpose.  International safeguards are administered by the International Atomic Energy Agency (IAEA) under the Non-Proliferation Treaty (NPT), which requires that non-nuclear-weapon states accept comprehensive safeguards on all nuclear material.  Similar arrangements are in place to safeguard civil nuclear material in nuclear weapon states (including the UK). Currently the UK satisfies its safeguarding obligations via Euratom, with Euratom inspectors carrying out inspections of UK plant and inventories and submitting reports to the IAEA.

Nuclear trade between the UK and other Euratom members relies on common Euratom safeguarding arrangements. Nuclear trade between the UK and other countries relies on either Euratom nuclear cooperation agreements, or bilateral nuclear cooperation agreements predicated on UK continued participation in Euratom safeguards.

Of the circa 50 bilateral nuclear cooperation agreements the UK has entered into since 1956 (when the European Atomic Energy Community came into being), over 30 specifically recite and rely upon UK participation in Euratom safeguards. Without demonstrably adequate safeguards key countries will simply cease trade with the UK in nuclear materials, technology and know-how. For example, absence of a Section 123 Agreement with the US would prevent supply of key components for both the Hitachi-GE ABWR and Westinghouse AP1000 reactors. Absence of a nuclear cooperation agreement with Australia would cut off a key source of uranium imports. Perhaps more crucial would be maintaining supplies of medical isotopes.

If the government continues to assert that Euratom and EU exit timetables must align then it will have two years to:

  • design, resource and implement new UK safeguarding arrangements in line with accepted international standards;
  • replace current safeguarding commitments under the NPT (which are also predicated on Euratom membership);
  • identify and plan negotiation of replacement nuclear cooperation agreements with every country with which the UK has ongoing nuclear trade; and
  • ensure it has the resources to conduct all of those negotiations, and be confident that those negotiations will be concluded successfully before Euratom exit takes effect.

Disentanglement from the Euratom Supply Agency and Euratom ownership arrangement for special fissile materials (including enriched uranium and plutonium) should, hopefully, prove to be predominantly an administrative task, provided that the UK can satisfy continuing Euratom members as to its safeguarding arrangements.

Turning to fusion research, the UK based Joint European Torus experimental fusion facility is dependent on Euratom funding. If the facility is to continue, the UK government will need to negotiate a new basis for UK involvement in the project and new funding arrangements, whether as a “third country”, “associated country” or on some other basis. Exiting Euratom also calls into question UK involvement in the International Thermonuclear Experimental Reactor, in the initial stages of construction in France.  In both cases, in addition to protecting UK involvement in ongoing research, UK interests in intellectual property used or created in those projects will require careful consideration if the UK is not to be disadvantaged in future exploitation of fusion technology.

This article was originally published in World Nuclear News on 9th February: http://www.world-nuclear-news.org/V-Brexit-white-paper-confuses-Euratom-debate-08021702.html 

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article is not intended to constitute legal advice and Prospect Law and Prospect Advisory accepts no responsibility for loss or damage incurred as a result of reliance on its content. Specific legal advice should be taken in relation to any issues or concerns of readers which are raised by this article.  

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