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WALES, DEVOLUTION, BREXIT AND ENVIRONMENTAL LAW:

The constitutional clash between the governments of the United Kingdom, Scotland and Wales over Brexit legislation may be heading for resolution in the Supreme Court unless continuing negotiations between the governments are successful, according to announcements by the UK government on 17 April 2018.

The immediate cause is the passage in March 2018 by the Parliaments in Cardiff and Edinburgh of their own “Continuity” legislation, which may or may not be within the legislative competence of each devolved Parliament, but which certainly clashes with the intended framework of the UK government’s European Union (Withdrawal) Bill. The UK government has said that it will challenge these Bills in the Supreme Court, unless agreement is reached in negotiations which may result in this devolved legislation being withdrawn.

Threatened litigation in the Supreme Court brings to a head two conflicting trends, first the strong measures to devolve really significant further powers to Wales and Scotland; and secondly, the destination of powers being repatriated to the UK from Brussels after Brexit.

The governments of Wales and Scotland argue that these powers should be returned directly to them where they relate to devolved areas. The UK government had intended that such powers should first be returned to the UK government, with a view to their being re-allocated to the devolved parliaments in devolved areas, but with restrictions and limitations that would ensure that in key areas, the UK remains a single market, with consistent rules, rather than risking fragmentation which will make future trade agreements even more complicated than at present.

Responsibility for legislation on the environment was one of the first matters to be transferred to the legislative competence of the Welsh Assembly under the original devolution legislation in 1998.  Environmental legislation in Wales continues to develop with significant differences from the rest of the United Kingdom and England. However, environmental laws in Wales raise many of the same questions on fundamental issues, such as how they are to be enforced effectively, once Brexit happens and the European Commission and Court of Justice of the European Union are no longer available as part of the enforcement picture.

Original devolution settlement and development of environmental law in Wales

Responsibility for legislation on the environment, and also, very importantly for Wales, the related areas of agriculture, fisheries and food, was part of the original devolution settlement of powers on the then Welsh Assembly under the original Government of Wales Act 1998.

Devolution of further powers has continued at some pace, and the trend is for remaining restrictions on the exercise of relevant powers, for example over water supplies from Wales to areas of England, to be removed, or re-cast in favour of jurisdiction in Cardiff. In the Government of Wales Act 2006, ‘Assembly Measures’ included agriculture, fisheries, food and rural development and the environment.

Following the 2011 referendum and the Silk Commission Report, the National Assembly for Wales was given further financial powers under the Wales Act 2014,  which will see it able to exercise income-tax varying powers from 2019.

The second part of the Silk Commission Report dealt with proposed changes to the Assembly’s legislative powers, and resulted in the Wales Act 2017. The fundamental change introduced by the Wales Act 2017, which came fully into force on 1 April 2018, was the move to a “reserved powers’ model. In other words, and more like the Scottish Parliament, the National Assembly for Wales can now legislate in any area which is not specifically reserved to the UK Parliament. This is a change of great constitutional significance, and represents a major shift in the balance of power between London and Cardiff.

Meanwhile, the environment has remained squarely within the National Assembly’s remit, and it has begun to enact a series of specifically Welsh pieces of legislation relating to the environment and associated topics. These include, most notably the Planning (Wales) Act 2015, the Well-Being of Future Generations (Wales) Act 2015 and the Environment (Wales) Act 2016, which sets out a framework for Natural Resources Wales and for Sustainable Natural Resource Management.

European Union (Withdrawal) Bill

The UK government published the European Union (Withdrawal) Bill in 2017, and it began its tortuous process through Parliament, supported by a government with a wafer-thin majority when combined with the votes of the DUP. The express aims of the Bill include the repeal of the European Communities Act 1972, as the basis for all European Union law in the UK, and the withdrawal of the UK from the jurisdiction of the Court of Justice of the European Union, with all European Union law being brought into UK law as an interim measure.

It soon became clear that there were at least two major fault lines in this flagship Bill from the Brexit legislative programme. First, in seeking to transfer to ‘UK law’ the entire acquis communautaire or body of European Union law, the Bill took very wide and very controversial powers to correct “deficiencies” in EU law transferred in this way. These now famous ‘Henry VIII clauses’ allowing Ministers very wide scope to make changes to legislation through regulations, (see clauses 7, 9 and 17 of the Bill), have set up a clash between Parliament and the executive over whether this is a fair and proportionate use of delegated powers, or an unacceptable way or circumventing Parliamentary oversight.

Secondly, the European Union (Withdrawal) Bill runs straight into the headwinds of devolution, by seeking to enact very wide and equally controversial restrictions on the way in which devolved Parliaments can amend “retained EU law”. The way in which these clauses were drafted may have been legally effective but politically provocative. In any event, they were not welcomed by the First Ministers of Wales and Scotland Carwyn Jones and Nicola Sturgeon. They made a joint statement on 13 July 2017 describing the European Union (Withdrawal) Bill as a “naked power grab” by the Westminster government, which they could not support as it stood. Perhaps ironically, this statement was issued from Brussels, where the two leaders were paying their own visit to the EU chief negotiator Michel Barnier.

Welsh and Scottish “Continuity” Bills

Initially, the UK government’s negotiations with the EU were supposed to be informed by a committee involving representatives of all the devolved administrations, with close coordination throughout. However, there were many complaints of a lack of real consultation, and complaints by some of those close to the process of a breakdown in trust in what has been, by any measure, a fractious and continually controversial negotiating process.

This distrust resulted in both the National Assembly for Wales and the Scottish Parliament tabling and then enacting, on 21 March 2018, their own “Continuity” Bills, which give them powers to enact and amend ‘returning’ EU legislation in devolved areas in their own Parliaments in the absence of agreement with the UK Parliament about how this will be done under its European Union (Withdrawal) Bill.

There is considerable uncertainty as to whether these “Continuity” Bills are within the legislative competence of the National Assembly for Wales and the Scottish Parliament respectively. The Scottish Bill was actually accompanied by a formal statement from the Presiding Officer of the Scottish Parliament  expressing his view that the Bill was not within the legislative competence of that parliament.

Supreme Court Challenge?

Building upon those doubts, UK government Ministers announced on 17 April 2018 that they would refer the two  “Continuity” Bills to the Supreme Court for a legal view on whether they were properly within the devolved legislative competence of the two Parliaments in Wales and Scotland. However, both Welsh and UK government Ministers have given some indications that negotiations may result in this further case before the Supreme Court being withdrawn.

Future developments: what is at issue

Following Brexit, there are some signs that the Welsh government will embark on a major codification of Welsh law, and this could result in a Welsh Environmental Code. The UK Parliament, meanwhile, can realistically expect to be busy for years to come with the enactment and re-enactment of environmental legislation, which will be competing for Parliamentary time with every other sort of legislation affected by Brexit.

What these debates have shown and underlined, is the very large extent to which powers have been devolved over the environment, and many very important related subjects in Wales, including agriculture, fisheries, food, forestry, most forms of energy, rural development and so on. All major businesses in Wales are affected by devolution and have to accommodate the new legal and legislative realities, from Horizon Nuclear Power in Anglesey,  Airbus’ wing manufacturing plant in North Wales, to BAE Systems in South Wales. Devolution is also going to be a major issue for every piece of Brexit legislation, from control and allocation of fisheries quotas and the  proposed Fisheries Bill, to the devolved administrations’ policies on a customs union, to the vexed question of the Irish border with Northern Ireland, and the impact this could have on the whole Withdrawal Agreement.

What is also becoming clear is that with devolved power comes much more devolved responsibility, and environmental law is a case in point.  If there will no longer be recourse to the European Commission and the Court of Justice for the European Union for issues of enforcement of EU law after Brexit, the question of what will replace that form of enforcement is not simply a question for the Westminster Parliament, but also for the Senedd in Cardiff. It will have to decide how the Welsh Government itself will be held to account if it fails or refuses to enforce environmental law; whether to continue to rely upon criminal law or to extend the use of civil and administrative law; how to hold regulators to account; which legal principles to include in environmental laws and how to apply them. Enforcement of environmental law is a major topic in itself, and will be the subject of a future article in this series.

There will also be a pressing need, once the UK and devolved administrations have had their arguments, negotiations or perhaps their day in court, to make a reality of the “common frameworks” to which each of them is committed. It is not going to help make any part of the UK an attractive place in which to do business if environmental laws are uncoordinated and strikingly different across the UK, not would that help promote trade with the EU or other countries.

William Wilson, Prospect Law Ltd

William Wilson is a specialist environmental, regulatory and nuclear lawyer with over 25 years experience in government, private practice and consultancy. He worked as a senior lawyer at the UK Department of the Environment/DETR/Defra, and helped to build up the environmental and nuclear practices at another major law firm, as well as running his own environmental policy consultancies. William has experience of all aspects of environmental law, including water, waste, air quality and industrial emissions, REACH and chemicals regulation, environmental protection, environmental permitting, litigation, legislative drafting, managing primary legislation, negotiating EU Directives and drafting secondary legislation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd 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 or assistance with a particular query please in the first instance contact the department paralegal Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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OIL & GAS: VOLATILITY – ATTENTION TO DETAIL – THE KEY TO SUSTAINABILITY, PART I

In the following series of articles Alex Bakhshov will examine the challenges that come with negotiating key legal and contractual terms and managing legal risks across infrastructure operations comprising major oil and gas projects (Projects) in developing oil and gas markets and in turn a means through which to mitigate the impact of inflated barrel production costs (Barrel Price) by Independent Oil Companies (IOC), Oil Field Service Providers (OFP) and other market participants seeking to make strategic decisions relating to foreign direct investment (FDI).

Introduction:

Alex Bakhshov will seek to contrast the contractual challenges for both IOC’s and OFP’s delivering goods and services in those markets, providing examples where relevant of how savings were made in respect of Barrel Price.

In the first three of this series of introductory articles, Alex will seek to identify the key challenges faced by market participants seeking to invest in developing markets, focusing on the common barriers and determinants for FDI.  Each Project and jurisdiction presents its own challenges and further guidance will be addressed in subsequent articles dealing separately with each of the key contractual terms and legal risks identified in the third article of this introductory series.

Having attained over ten years of experience of working on Projects in markets as diverse as Latin America, Middle East and North Africa (MENA), sub-Saharan Africa (SSA) and Asia Pacific during a period of oil price volatility, Alex hopes to demonstrate the benefits of giving careful consideration to legal as well as fiscal risks at the inception of a Project.

Need for Internal Controls & Corporate Governance

Controls for legal risk factors should also be implemented at the outset, adopting a collaborative approach with domestic policy makers (Regulators) and local content requirements (LCR) as it can contribute to ensuring effective crisis management in the event of dispute, political upheaval or environmental catastrophe. Additionally, for listed companies, a joined up approach should be adopted as part of the internal controls for the purposes of governance, reporting requirements and greater transparency for capital market participants – this should also ensure corporate level engagement and ownership and thus confidence for third party investors and other market participants.

The importance of having robust internal controls and a rigorous interface for corporate governance in developing countries cannot be stressed enough where the Project requires engagement with LCR’s. Issues hampering development of the private sector of some developing countries frequently include the absence of a comprehensive credit reporting system, which “compromises banks’ ability to distinguish good from poor performers and makes them reluctant to lend in the absence of collateral” per World Bank’s biannual ‘Mozambique Economic Update’ report dated July 2017. The Report also states “Similarly, equity finance is constrained by a corporate governance regime that provides few incentives for firms to make financial information and audited reports of their activities available. As a result, investors are hesitant to invest because they cannot assess the viability of firms seeking finance.”

Financial Controls:

For listed companies, financial controls in some developing countries are essential for compliance with anti bribery legislation, which in many cases now imposes strict liability on corporations as well as partners, agents, suppliers and indeed throughout the supply chain irrespective of whether the company itself has fallen foul of the anti-bribery legislation.  Under regulations, for example, large and EU-listed, UK-registered oil and gas companies must report their payments to governments worldwide annually for financial years starting from January 2015, country-by-country and Project by Project. At times of oil price volatility when profit margins are threatened, the pressure to cut capital expenditure can impact the risk of non- compliance with anti–bribery regulations  – robust controls and governance can ensure that this risk is mitigated. Risks of anti-corruption non-compliance and exposure are a significant barrier to FDI.

Foreign Direct Investment (FDI):

FDI may include mergers and acquisitions, the building of new facilities and the expansion of existing production capacity. FDI usually involves control or participation in management, joint venture, management expertise and technology transfers. It excludes investment through purchase of securities or foreign portfolio investment, a passive investment in the securities of another country such as shares and bonds.

There are three main types of FDI contracts in the upstream oil and gas sector:

  1. concessions or licenses;
  2. production sharing contracts or agreements (PSCs or PSAs); and
  3. risk-service contracts.

Although legal risks are often addressed upfront through ‘stabilization clauses’, these, though advisable, provide limited comfort.  Preference should be given to pursuing a collaborative strategy with Regulators to help support the roll out of infrastructure, as well as active pursuit of a joint strategy for transfer of knowledge and technology. This approach will not only mitigate Barrel Price and thus profitability but also promote an environment for sustainable business growth. Any meaningful engagement with the Regulator in this regard early in the assessment process can also help support a competitive bid.

Large proven reserves, relatively modest Barrel Prices and attractive concessions for FDI can mean that, in periods of oil price volatility, market participants can reap benefits by focusing their resources in developing markets.

FDI Investment in the Oil Sector:

With high oil and gas dependent economies, many developing countries have historically provided opportunities for IOCs to spearhead oil exploration and production activities, and to acquire interests in fields with unexplored economic potential. As an example, the oil and gas sector has been the largest beneficiary of FDI in most oil exporting Arab countries. In Oman for instance, around 50 per cent of FDI is invested in the oil sector.

As manufacturing and service export bases remain limited in many of these countries, specialization and entrances in a specific segment of the global production chain could also benefit from FDI, while also improving export quality, sophistication and accelerating technology and knowledge transfers, specifically in the form of FDI. Improving the climate for FDI in non-oil industries may involve lowering entry requirements, creating investment promotion intermediaries, and streamlining tax structures. (See International Monetary Fund, Economic Diversification in Oil-Exporting Arab Countries (2016) 7-8 available here)

The common determinants for FDI in oil and gas markets and by implication components of the Barrel Price are chiefly fiscal in nature, such as oil price volatility, infrastructure reliability, political uncertainty (e.g. risks of expropriation and ownership) and openness of the economy such as foreign exchange controls and tax laws; this can have an impact on expatriation of profits and transactional costs and in many cases the oil executive will typically be interested in the proven reserves and the fiscal terms as against the prevailing and forecast oil price as the basis for making a decision relating to FDI.

In the next article in this series, a particularly challenging jurisdiction, sub- Saharan Africa, shall be explored to illustrate some of the issues experienced by the international investment community and how they have responded to the barriers to FDI.

Alex Bakhshov is a commercial barrister that specialises in project and infrastructure work, having attained experience of major projects in Africa, Asia, the North Sea, South America and Australia. Alex has advised on mergers and acquisitions, joint ventures, construction, regulatory, contracting and procurement strategies, and possesses significant experience in construction, the marine sector, shipyard disputes, shipping (both wet and dry) and offshore Oil & Gas projects in the North Sea, West Africa and Brazil.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd 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 or assistance with a particular query please in the first instance contact the department paralegal Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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BREXIT, EURATOM AND NUCLEAR LIABILITIES: PROSPECT LAW AT THE WM SYMPOSIA 2018 IN PHOENIX, ARIZONA, PART I

The following series of articles is written further to Jonathan Leech’s attendance at the Waste Management Symposia 2018 in Phoenix, Arizona, on 22nd March, and examines the UK’s impending exit from EURATOM and responsibility for international nuclear safeguards.

See link to Jonathan Leech’s presenter profileList of exhibitors and Conference Program

Introduction

The outcome of the UK referendum on withdrawal from the European Union resulted in UK Government confirmation that the UK must also withdraw from the European Atomic Energy Community (Euratom). The UK will automatically exit Euratom on 29 March 2019 unless Euratom members agree an extension, or the UK remains a member under some agreed transitional arrangement. As at the date of the Waste Management Symposia, half of the 2-year period for agreeing terms of exit and putting in place replacement arrangements had passed. This paper describes the position as at December 2017. There will of course be further developments before the Symposia.

Whether Euratom exit was a necessary consequence of withdrawal from the EU is now a matter for academic legal debate only. Certainly, there are good arguments that Euratom exit was not an automatic and immediate consequence of Brexit. Those arguments would have given the UK Government a choice, at least in relation to the timing of Euratom exit. Whether for reasons of legal necessity or political expediency, inclusion of additional notice relating to Euratom withdrawal within the UK’s Article 50 notice on 29 March 2017 has ensured that the same 2-year timetable applies to both EU and Euratom withdrawal.

The Business, Energy and Industrial Strategy Committee report published on 13 December 2017 concludes that leaving Euratom “is a wholly unwanted and potentially unintended consequence of our leaving the European Union” Exit from Euratom will create binary questions of acceptability of nuclear trade and collaboration with the UK, reflecting current reliance on the UK’s status as a Euratom member. This in turn risks disruption of international nuclear cooperation and trade, including provision of resources and know-how in support of the UK waste and decommissioning effort, new build programme and international movement of waste for treatment. The task now is to minimise potential adverse impacts of departure.

Significance of Euratom

Since the UK’s accession to Euratom in 1973 (alongside accession to the EEC, as it then was), 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:
(a) promotion of research;
(b) establishing and policing uniform safety standards;
(c) facilitating investment;
(d) ensuring a regular supply of ores and fuels (via the Euratom Supply Agency);
(e) safeguards;
(f) exercising rights of ownership over “special fissile materials”;
(g) creation of a nuclear common market; and
(h) establishing relations with other countries and international organisation to foster progress in nuclear energy.

Of these areas, safeguards and international relations (in the form of nuclear co-operation agreements) are likely to place the greatest strain on the exit timetable and are considered further below. The UK is reliant on its status as a Euratom member in establishing and implementing acceptable safeguarding requirements; ensuring inclusion of the UK within the scope of existing Euratom nuclear cooperation agreements; and as a basis for current UK bilateral nuclear cooperation agreements.

In terms of safety and security, Euratom is generally not the originator of regulatory standards and requirements. Instead Euratom regulations and directives aim to give consistent effect to international legal frameworks governing nuclear safety and security, including the Joint Convention on the Safety of Spent Fuel Management and the Safety of Radioactive Waste Management, the Convention on the Early Notification of a Nuclear Accident, the Convention on Assistance in the Case of a Nuclear Accident or Radiological Emergency, the Convention on the Physical Protection of Nuclear Material, and the IAEA Action Plan on Nuclear Safety. That international framework of nuclear law will continue to apply to the UK. Withdrawal from Euratom is therefore unlikely to result in significant changes to UK regulatory standards.

UK Euratom exit: status of negotiations

The joint EU and UK report on progress during phase 1 of Brexit negotiations published on 8 December 2017 includes a summary of the position reached on nuclear specific Euratom issues:

“both Parties have agreed principles for addressing the key separation issues relating to the UK’s withdrawal from Euratom. This includes agreement that the UK will be responsible for international nuclear safeguards in the UK and is committed to a future regime that provides coverage and effectiveness equivalent to existing Euratom arrangements. Both sides have also agreed the principles of ownership for special fissile material (save for material held in the UK by EU27 entities) and responsibility for spent fuel and radioactive waste.”

This summary leaves significant scope for clarification and development. Despite the Government’s Safeguards Bill that is intended to provide the basis for a domestic safeguards regime, there is no clear indication as to how the UK’s responsibility for international nuclear safeguards post Euratom exit will be met. Also, commitment to “a future regime that provides coverage and effectiveness equivalent to existing Euratom arrangements” may imply that creation of such a regime is an objective for the future rather than something to have in place on Euratom exit. Reference to “existing” arrangements also suggest that the UK may not maintain equivalence with any future Euratom developments.

Government has also confirmed that bilateral negotiations with the IAEA on a future Voluntary Offer Safeguards Agreement are underway, and that this will be in place by March 2019. The UK’s current Voluntary Offer Safeguards Agreement under the Non-Proliferation Treaty is predicated on Euratom membership.

Jonathan Leech is a solicitor specialising in project and infrastructure work, with particular emphasis on the energy, nuclear and utility sectors. His work includes advising on legal and contracting strategies and regulatory issues associated with major nuclear development, decommissioning, waste and reprocessing projects, energy infrastructure and other utility and infrastructure related projects.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd 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 Jonathan Leech on 020 7947 5354 or by email on: jrl@prospectlaw.co.uk.

For a PDF of this blog click here

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THE IMPLICATIONS OF BRENT LONDON BOROUGH COUNCIL v SANJAY SHAH & OTHERS

Prospect have won a landmark ruling on the availability of confiscation proceedings brought under the Proceeds of Crime Act 2002 to convictions for offences involving rogue landlords running overcrowded, unsafe and insanitary Houses in Multiple Occupation under sections 95(2) and 234(3) of the Housing Act 2004.

The attached article by Edmund Robb examines the implications of this ruling in the context of the availability of confiscation pursuant to the Proceeds of Crime Act 2002 in relation to various criminal offences under the Housing Act 2004

Copyright © 2018 by Prospect Law Ltd

All rights reserved. No part of this article may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of Prospect Law Ltd.

Edmund Robb (er@prospectlaw.co.uk) is a public law specialist barrister at Prospect Law with wide experience of planning, environmental and local government case work at public inquiries and at all levels in the Courts.

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WHAT DIRECTION WILL THE DECARBONISING OF THE TRANSPORT SECTOR TAKE?

Investec Conference on Decarbonising the Transport Sector

On 10 November 2017 Investec hosted a conference on trends and technologies for the decarbonisation of the transport sector.  Four excellent presentations by Professor Nigel Brandon of Imperial College London, Professor Katsuhiko Hirose of the Toyota Motor Corporation, Professor Neville Jackson of Ricardo plc and Dr Robert Trezona of IP Group plc were followed by a stimulating Q&A session.

Professor Brandon explained that he believed that a wide range of both battery and hydrogen fuel cell electric vehicles offered routes to achieve significant levels of decarbonisation in the transport sector. Both battery and hydrogen fuel cell electric vehicles require the decarbonisation of electricity and/or the development of hydrogen. As such he believed that the provision of low carbon fuels for transport will become increasingly connected to other parts of the energy system, including power and heat.

Professor Hirose began his presentation by noting that increases in wealth were linked to transport and that as GDP per capita rises so did the desire for mobility. He also noted the potential role that hydrogen could play in the transport sector. In this context he explained that Toyota continues to invest and develop its hydrogen fuel cell technology for cars and is undertaking work for its use in heavy duty applications at the Ports of Long Beach and Los Angeles. Hydrogen appears to offer the best solution for higher energy requirements e.g. range, and therefore is a better alternative to batteries for haulage trucks travelling long distances, similarly for automobiles if range and short refuelling times are desired characteristics. During the Q&A Professor Hirose confirmed that did not foresee a “zero-sum” game with one winning technology dominating all others in the transport sector. Instead he anticipated different viable technologies would emerge and co-exist.

Professor Neville Jackson’s presentation emphasised that legislation was being used by a number of different countries to develop Zero Emission Vehicles (ZEV) in order to tackle air pollution.  Professor Jackson referenced the limitations of batteries, particularly with regards to energy density, and that as a result he considered low carbon liquid fuels would have a role to play. Electric vehicles are still expensive and battery costs may only fall to below US$100/kWh by 2030. Shared car ownership policies may therefore be an important factor in making electric vehicles cost competitive.

Dr Trezona used his presentation to offer a start-up investor perspective on the low carbon transport technology sector. The automotive sector was generally not a good market for start-ups but green policy and digital tools had improved the investment environment. He flagged that there was no ‘wonder technology’ that would dramatically change the overall learning rate for (hardware) systems. That said he believed that there were plenty of smaller opportunities for start-up businesses that developed technology that solved real market problems in the transport sector.  Dr Trezona also confirmed that hydrogen is back and that he envisaged that it would play some role in the transport sector.

Hydrogen’s potential contribution to decarbonisation efforts in the UK was largely dismissed by the influential late Professor Mackay author of “Sustainable Energy-Without the Hot Air” published in 2008.  The fact that all four speakers now thought hydrogen may have some role to play perhaps illustrates how much thinking on decarbonisation has changed in a relatively short space of time.   There also appeared to be no real appetite for developing CCS projects to capture the carbon produced when manufacturing hydrogen. This may be due to the prohibitive development costs and the UK Government’s current position on funding CCS. It was also noted that there was presently very little investment in the alternative technology to CCS, producing hydrogen by electrolysis. This suggests that something is going to have to change if hydrogen is indeed to become part of the solution to decarbonisation in the transport sector.

Tim Malloch trained at Macfarlanes and subsequently moved to Freshfields Bruckhaus Deringer, where he advised on corporate transactions and finance projects. After 7 years at Freshfields and a sabbatical spent abroad, Tim joined ClientEarth, an award-winning legal NGO, and devised a litigation strategy that helped persuade the UK Government to abandon its plans to build a new generation of coal power stations.  Tim returned to private practice in 2010 and has advised on a wide range of high-value commercial disputes.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd 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 Tim Malloch on 020 7947 5354 or by email on: tmm@prospectlaw.co.uk.

For a PDF of this blog click here

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OFGEM’S CONSULTATION ON THE PROPOSED DEFINITION OF ENERGY STORAGE

Introduction

Ofgem are consulting on the legal definition of “energy storage” and the introduction of a new condition in the electricity distribution licence designed to ensure that distribution system operators, also known as distribution network operators or DNOs, cannot operate energy storage assets (https://www.ofgem.gov.uk/publications-and-updates/clarifying-regulatory-framework-electricity-storage-licensing). The Ofgem consultations both close on 27 November 2017.

The UK has eight distribution network operators (DNOs). They operate the regional networks that deliver electricity to consumers after it has been transmitted on the UK’s national high voltage transmission network. As natural monopoly service providers, DNOs are arguably well placed to develop energy storage facilities.  Indeed, several DNOs are already actively developing energy storage projects, including Western Power Distribution and UK Power Networks.                                          (http://innovation.ukpowernetworks.co.uk/innovation/en/Projects/tier-2-projects/Smarter-Network-Storage-(SNS)/Smarter%20Network%20Storage%20FAQs.pdf).

Proposed change to EU law

Ofgem’s position appears to be influenced by proposed changes to EU law. The European Commission’s recast of the Electricity Directive recognises the need for consumers to actively participate in electricity markets, including storage, it provides:

“The electricity market of the next decade will be characterised by more variable and decentralised electricity production, an increased interdependence between Member States and new technological opportunities for consumers to reduce their bills and actively participate in electricity markets through demand response, self-consumption or storage.

The present electricity market design initiative thus aims to adapt the current market rules to new market realities, by allowing electricity to move freely to where it is most needed when it is most needed via undistorted price signals, whilst empowering consumers, reaping maximum benefits for society from cross-border competition and providing the right signals and incentives to drive the necessary investments to decarbonise our energy system. It will also give priority to energy efficiency solutions, and contribute to the goal of becoming a world leader in energy production from renewable energy sources, thus contributing to the Union’s target to create jobs, growth and attract investments”. 

In terms of specific detail, Article 36 of the recast for the Electricity Directive proposes a general prohibition on DNOs owning, operating or managing energy storage facilities:

Article 36
Ownership of storage facilities
  1. Distribution system operators shall not be allowed to own, develop, manage or operate energy storage facilities.
  2. By way of derogation from paragraph 1, Member States may allow distribution system operators to own, develop, manage or operate storage facilities only if the following conditions are fulfilled:
(a) other parties, following an open and transparent tendering procedure, have not expressed their interest to own, develop, manage or operate storage facilities;
(b) such facilities are necessary for the distribution system operators to fulfil its obligations under this regulation for the efficient, reliable and secure operation of the distribution system; and
(c) the regulatory authority has assessed the necessity of such derogation taking into account the conditions under points (a) and (b) of this paragraph and has granted its approval.
  1. Articles 35 and Article 56 shall apply to distribution system operators engaged in ownership, development, operation or management of energy storage facilities.
  2. Regulatory authorities shall perform at regular intervals or at least every five years a public consultation in order to re-assess the potential interest of market parties to invest, develop, operate or manage energy storage facilities. In case the public consultation indicates that third parties are able to own, develop, operate or manage such facilities, Member States shall ensure that distribution system operators’ activities in this regard are phased-out. (http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52016PC0864&from=EN)

The prohibition on DNOs owning energy storage in paragraph 1 of the proposed Article 36 is subject to a derogation in paragraph 2 that provides that DNOs can own, develop, manage and operate energy storage facilities if they are needed to ensure that a distribution network is efficient, reliable and operates securely. Paragraph 2(c) provides that it is for the regulatory authority of a Member State to assess the necessity of a derogation.

DNOs as neutral market facilitators and the new reality of the UK’s energy market

The rationale for the proposed prohibition in Article 36 is that DNOs should act as neutral market facilitators. A white paper published by the Agency for the Cooperation of Energy Regulators (ACER) on 15 May 2017 explains the decision to adopt this policy position:

“European Energy Regulators advocate that DSOs must act as neutral market facilitators performing regulated core activities and not activities that can efficiently and practicably be left to a competitive market. This approach is important because:

  • Competitive markets are generally better than regulated markets in delivering outcomes that provide best value for money for consumers;
  • When DSOs get involved in competitive activities – such as storage – there is a risk that they would favour their service over potentially cheaper services (e.g. storage over demand-side response), thereby raising costs and deterring investment and innovation;
  • DSOs could unfairly favour different types of consumers if they are direct market participants for these services; and
  • Confidence in the neutrality of DSOs is a key element of the market.”

In contrast, 10:10, a UK registered charity that focuses on tackling climate change at community level, has argued against the UK adopting a general prohibition on DNOs owning energy storage facilities:

“If [DNOs] are not permitted to own and operate their own storage assets, this is likely to increase costs for end users as a consequence of increased transaction costs between network and storage operators. Network companies should be allowed to judge where and when to procure storage from a third party, and when and where to own it themselves.”

A recent survey by Energyst, the energy magazine, has also noted National Grid’s need for more firms to help it balance the power system (https://theenergyst.com/20-firms-outline-what-is-stopping-them-providing-demand-side-response/). According to Energyst:

“With some 35GW of renewables on the system, more than a third of it solar PV, summer may become as much of a challenge as winter. That equates to a year-round revenue opportunity from National Grid alone. Yet relatively few firms provide balancing services via their onsite generation or ability to shift loads. Why?

According to The Energyst’s reader surveys, this is for a few key reasons, mainly fear of technical failure and/or incompatible processes and insufficient financial reward. But lack of understanding and the fact that the most UK firms have not been approached by either aggregators or energy suppliers regarding DSR are also factors…

…But these early survey findings suggest there remains a need for better communication and cost effective technology solutions if DSR is genuinely going to trickle down from large power users to the broader market.”

The problem with DNOs acting merely as neutral market facilitators is that a lot of energy storage is likely to be needed in the UK (http://fes.nationalgrid.com/media/1253/final-fes-2017-updated-interactive-pdf-44-amended.pdf – see pages 104-105).

Energyst’s research suggests that there may not be sufficient interest from third parties to provide energy storage. 10:10 have put forward the argument that DNOs would be well placed to provide storage at the lowest cost. If this is correct, a complete prohibition on DNOs owning energy storage facilities would not reflect the “new reality” of the UK’s energy market and would also overlook the derogation in paragraph 2 of the proposed Article 36.

Conclusion: Are DNO energy storage targets a potential solution?

Notwithstanding Brexit, Ofgem seem to want to follow the EU’s proposed position on this issue.

A potential solution would be for the UK to set individual targets challenging each DNO to procure a certain level of energy storage facilities. Should a DNO be unable to meet its target through an open and transparent tendering process, then it should need to develop, own, manage and operate the balance to ensure that it has an efficient, reliable and secure distribution system.

It should be possible for the UK to draft a regulatory solution that is compatible with the derogation set out in paragraph 2 of Article 36 of the proposed Electricity Directive.  However, whether or not this solution would satisfy Professor Helm’s desire to remove all regulatory interventions from the UK energy market is another question.

Tim Malloch, 03 November 2017

About the Author

Tim Malloch trained at Macfarlanes and subsequently moved to Freshfields Bruckhaus Deringer, where he advised on corporate transactions and finance projects. After 7 years at Freshfields and a sabbatical spent abroad, Tim joined ClientEarth, an award-winning legal NGO, and devised a litigation strategy that helped persuade the UK Government to abandon its plans to build a new generation of coal power stations.  Tim returned to private practice in 2010 and has advised on a wide range of high-value commercial disputes.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd 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 Tim Malloch on 020 7947 5354 or by email on: tmm@prospectlaw.co.uk.

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CONSULTING INTERNATIONALLY: 10 TIPS FOR SUCCESS

East Isn’t East Anymore

Just like their engineering counterparts in the aerospace, automotive and advanced manufacturing sectors, innovative British nuclear companies are increasingly looking towards new overseas markets in order to sell their hard-earned consulting expertise. Look closely at the financial accounts of Britain’s biggest FTSE professional service firms and you will see that most large consulting practices quietly earn over half of their revenues abroad. Indeed the UK market is generally too small to support multinational firms alone. Even smaller domestic nuclear SMEs are eyeing foreign markets, as much for post BREXIT survival as for growth. Sooner rather than later nuclear professionals tend to find themselves working in foreign lands. This modern-day nuclear Gold Rush lies in Eastern Europe, the Middle East and South East Asia, where civil nuclear electricity programmes are needed to power their rapidly growing industrial economies.

How to Compete and Win

British firms have a reputation for high quality. But also high cost. The simple fact is that local professional labour is often much cheaper in Eastern and Asian countries with their budget priced nuclear power programmes. How can British firms compete? The answer lies in offering a mix of technical expertise, outstanding customer service and – most importantly – a finely tuned sense of cultural awareness upon which to build effective business relationships. In short, knowing your customer is key. And this means stepping outside of your cultural comfort zone, by looking at things from a different viewpoint. Travel does indeed broaden the mind.

My experience of working overseas as a nuclear consultant has been overwhelmingly positive. Here are 10 quick tips for fame and hopefully fortune for those nuclear experts brave enough to venture abroad with their laptops.

Rules of Thumb for Working Internationally 

Tip # 1.  Walk in their shoes. The major difference between doing business in the East and the West is that personal relationships matter much more in the East than tender submissions. All other things being equal, clients would sooner do business with a trusted friend. In fact even if things are not quite equal, clients will still prefer to work with a friend rather than gamble on a cheaper but unknown alternative. Always try to see problems from the other person’s point of view – not your own. Put yourself in the client’s shoes. Understand the wider foreign context and the internal pressures that they may be facing. What motivates them? What does success look like for them? What outcomes really matter and what are less important? How can you genuinely help improve your client’s situation? Take the time to get to know your client deeply. The answers may surprise you.

Tip # 2.  Deals are based on trust, not contract documents. Contracts tend to be regarded as the minimum level of performance. Foreign clients will usually expect you to deliver more than what the contract says. Going above and beyond without complaint is the norm for expat Brits. Besides, it is very difficult to legally enforce contracts in foreign jurisdictions. Nuclear energy projects are invariably closely linked to State governments, who can tie you up in red tape delaying payments indefinitely when displeased by under-performance. Getting paid mostly depends on whether the client thinks you have done a good job. Don’t get hung up on legal details in contracts. Arguing over small points sends the customer the wrong signal, that you don’t trust them. And trust is essential for doing business overseas.

Tip # 3.  Be polite and courteous in all circumstances. The British have a reputation for politeness, courtesy, integrity and honesty. Live up to it. Overseas clients will respect and admire your Britishness, even in difficult situations. Your softer people handling skills will ultimately determine how successful you become overseas. A willingness to help is always a big plus.

Tip # 4.  Avoid the hard sell. Hard sell is really a form of grovelling. Brashness hints at desperation which is never attractive for buyers of professional consulting services. They will wonder why you are quite so desperate. Professionals never grovel. So don’t hard sell under any circumstances, even if you lose to competitors sometimes. The customer may eventually come back to you when they realise why that cut-price deal they bought was so cheap or the consulting solutions didn’t work. Also, confrontational management styles rarely work in consultancy business situations. Collaborative diplomacy and people skills are the way to get things done abroad.

Tip # 5.  Ask questions rather than give opinions. Gently asking your future client questions will give you much deeper insight into the underlying problems and issues that your client is really trying to solve. These may not be immediately apparent from a translated contract scope or tender document. For example, technical consultancy on the chemical composition of steel in nuclear transport flasks might reflect wider systemic difficulties with the regulatory safety case for spent fuel dry cask storage. The client’s real problem might be running out of spent fuel storage capacity, not chemical analysis of steels. But if you don’t ask “why?” you may never know. Avoid silo mentality. Try to experience a wide range of different technical and situational challenges. Develop crossover skills. Nuclear power projects are never undertaken in isolation. Many different people and skills must be brought together as a team. Understanding your client’s project in this way will lead to new business opportunities.

Tip # 6.  Negotiate with patience. Foreign business deals usually require several rounds of downward negotiation to agree a final “best price”. But beware the technical scope will always remain fixed and in any case the consultant will be expected to exceed the contracted delivery terms. I have watched senior Arab officials quite literally throw a consulting proposal out of the room in feigned anger, but then minutes later be utterly charming when the price was halved for the same scope. Keep calm and carry on. Negotiate with patience.

Tip # 7.  Don’t worry about IP. The British are above all else good innovators. Conventional wisdom has it that Eastern countries will steal your nuclear intellectual property in a heartbeat. British companies focus far too much corporate effort on vain attempts to protect their IP through complex commercial and legal contracts. For most practical purposes enforcing these in a foreign jurisdiction is impossible. You might win in Court but the process will take years and bankrupt you. Instead nuclear consulting companies should not worry too much about IP. Firstly because this misunderstands Eastern buyers. They want the very latest nuclear technology for their money, not older recycled background IP. In any case the raison d’être for using a high value British consultant is precisely to generate valuable foreground IP for the client. This should be part of the consultant’s value proposition and helps justify high consulting fees. Secondly, IP should be less of a worry because the added value that nuclear consultants bring to nuclear projects is largely in their heads – it is the expert ability of British consultants to solve complex nuclear problems facing a client here and now – and this can’t be copied. That is why British consultants are highly valued problem solvers. Although they do talk about the weather too much, which always puzzles foreigners.

Tip # 8.  Be sensitive to wage disparities. Large disparities between expat and local wages can cause tensions on projects. Even quite senior nuclear officials can earn relatively low incomes by Western standards. While running a nuclear training course for some energy executives in South East Asia, I once complained about the high cost of my household gas bill. “Ian, that is more than my monthly income” my client gently chided me. I was mortified. Developing countries build civil nuclear energy programmes because they need them to boost their economy. By the same token these countries are not always rich. Beware of the social effects of wage disparities and always treat your clients with dignity and respect. They will do the same for you.

Tip # 9.  Reach out to Commonwealth Countries. It is generally easier working in foreign countries that have a strong cultural association with Britain or were once part of the British Commonwealth. For example, Australia, Hong Kong, India, Malaysia, Singapore, New Zealand and some Middle Eastern States are all undeniably foreign but have inherited some aspects of Britishness. Vietnam was once closely linked to France and retains its Western European cultural and architectural feel. Doing business in these countries is much easier than places with zero British heritage.

Tip # 10.  Remember how lucky you are. Working abroad is a privilege. Think about your colleagues stuck in a City office, as you watch the sun slowly rise over the Arabian Desert at Barakah or fly low over the green jungle of Vietnam into DaLat. I’ve done both and they definitely beat life sat in an open plan corporate office near the M6.

About The Author

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

Ian Jackson is a nuclear energy consultant at Prospect Advisory with 30 years’ experience working in both the public and private nuclear sectors. He has worked from Manchester to Vietnam, and everywhere in between. Ian joined Prospect Advisory from the UK National Nuclear Laboratory where he led international business development. Prior to that, Ian was an Associate Fellow at the Royal Institute of International Affairs, Chatham House, London.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd 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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UK GENERATORS: EMBEDDED BENEFITS SUBSIDIES TO BE CUT FOR <100Mw OPERATORS

OFGEM has announced cuts to embedded benefits payable to operators of diesel, biomass and wind generators of under 100Mw, who are seen as key to keeping the grid balanced. The generators often provide back-up power for peak winter demand.

The changes are set to be introduced over 3 years from 2018.

Given the significant impact of this decision we have been approached by clients wishing to judicially review the decision. For further information, or if your business is affected and you wish to discuss your situation, please call Jonathan Green on jng@prospectlaw.co.uk or 020 7947 5354.

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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 III

The Relationship between CSR and CSV, and Ways in which these can add value to Corporate Decision Making

In this third article I look at the relationship between CSR and CSV, and consider ways in which CSV can add value to corporate decision making by energy companies. In my previous article I considered ways in which energy companies can create shared value, move from quantitative to qualitative growth and reorder their relationship with the environment to one based on regenerative activity, rather than the maximisation of profits.

Corporate Shared Value approaches acknowledge trade-offs between short-term profitability and social or environmental goals, focusing on the opportunities for competitive advantage from building social value propositions into corporate strategy.

CSV approaches differ from CSR ones in that, while they share the same basis of doing well by doing good, CSR is about responsibility and CSV is about creating value. CSV creates income by being a better capitalist, rather than being a good corporate citizen.

Professor Michael Porter has said:

“Extractives companies are major sources of income and economic growth. Oil and gas and mining operators, suppliers and related supporting industries represent an estimated five per cent of global gross domestic product. Three of the world’s ten largest companies are extractives companies. Although companies in this sector have a decidedly mixed record on social and environmental issues, they have helped create more vibrant economic development, new businesses, new jobs and opportunities for professional growth, reductions in the disease burden and more effective government. Close to four million people are employed by mining companies alone. ”

Reserves are often found in remote areas with limited economic activity and major societal needs. Operations require massive inflows of capital that often dwarf local economies. Companies and suppliers inevitably have multiple points of interaction with local communities, and yet the huge economic output of the extractives sectors has not always translated into improved social and environmental outcomes for the countries and communities where these companies operate. Nigeria is emblematic of this missed opportunity. Despite the presence of major oil companies in Nigeria since the early 20th century, the country still ranks among the bottom 20 per cent of countries in the HDI and its GDO per capita was 180th in the world in 2013.

Billions of dollars are being lost by extractives companies as a result of community strife, despite extensive community relations programmes.

“The norm is to respond to conflicts by focusing on the visible causes of tension – protects, permit delays, negative media coverage, and demands from local influences – so called on technical risk. Companies spend hundreds of millions on social investment projects even though research shows little correlation between the amount of money spent and the success of company-community relations. Investments based on community wish lists and attempts to placate the loudest voices in a community have led to ever shifting community requests, unilateral projects that have little impact, prioritizing image over outcomes, and missed opportunities for business and community alignment. Companies track dollars disbursed rather than societal outcomes.”

Aligning the business interests of extractives companies with community needs and priorities is the only real solution for companies and communities alike.

Extractives companies need to approach communities in a manner based on shared value. Shared value cannot substitute for shoddy operational performance, environmental damage or poor ethics. However, it offers a shift in purpose for these companies in the places where the resources are extracted.

In this way new businesses are produced, together with more vibrant economic development, new opportunities for professional growth, reductions in the disease burden and more effective government to facilitate the long term development of the community in which the company operates.

Shared value is the next competitive advantage. Competition in extractives will increasingly be determined by the ability to integrate economic and social factors.

In this blog I have looked at ways in which corporates are increasingly formulating their strategy in terms of the creation of shared value, rather than corporate social responsibility. I have also examined the relevance of CSV to business development strategies for the energy sector, especially in terms of mitigating the effects of community strife. In my next article I will consider ways in which CSR/CSV dynamics can affect corporate decision making in the energy sector, looking in particular at the example of Eni and how this company has approached the challenges of climate change.

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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