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

In this article I look at the connection between ecological and systems thinking, and why it is that the illusion of perpetual growth is at the heart of the global crisis of affairs. Systems thinking argues for a transition from growth that is quantitative to growth that is qualitative.

To read Part I, please click here

Capra believes that mankind needs to relearn ecological thinking, which he defines as “the science of the relationship between the members of the Earth’s household.” Capra says that biological networks are in the realm of matter and that social networks are in the realm of meaning, which leads to non material outcomes like culture and values. Capra believes that mankind is currently shifting from a machine view of life to one based on networks. In Capra’s systems thinking there is a concept of spontaneous emergence of new order. For this to happen there need to be networks of communication and an openness to outside influence.

Fundamentally, Capra believes that the essential dilemma of our times is the illusion of perpetual growth. He says that the pursuit of this goal is the root cause of the current crisis of global affairs:

 “At the heart of corporate structure is the mandate to maximize returns for shareholders, even if this means sacrificing the well being of employees, the prosperity of local communities and the protection of the planet….the driving force of the systemic crisis is global capitalism-itself a network of financial flows, designed without an ethical framework. It promotes limitless growth and excess consumption, because these fuel profits. Underlying this system is not only economic growth but also corporate growth.”

Capra argues for a shift from quantitative to qualitative growth:

“Qualitative growth enhances the quality of life through regenerative activity- through cooperatives and other forms of ownership focused on supporting life, rather than on maximizing profits.”

This shift from quantitative to qualitative growth is at the heart of current thinking about how to create shared value. Companies can create shared value opportunities in three ways.

First, through the re-conception of products and markets in order to meet social needs while better serving existing markets, accessing new ones and lowering costs through innovation.

Secondly, through the improvement of the quality, quantity, cost and reliability in inputs and distribution while simultaneously acting as a steward for essential natural resources, and driving economic and social development.

Thirdly, by enabling local cluster development in order to ensure reliable local suppliers, a functioning infrastructure of roads and telecommunications, access to talent and an effective and predictable legal system.

In this article I have 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 maximization of profits. In Blog 3 I will look at the relationship between Corporate Social Responsibility (CSR) and Creating Social Value (CSV),  and consider how CSV can add value to corporate decision making by energy companies.

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.

For a PDF of this blog click here

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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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GOING NUCLEAR IN SOUTH AUSTRALIA?

The South Australian government supports continued investigation as to whether a used nuclear fuel disposal facility should be established. The only path forward they say is the restoration of bipartisanship and broad social consent, secured through a state-wide referendum. Edward de la Billiere looks at the latest developments in the debate.

In reaction to a declining economy, in 2015 the Labour government of South Australia (SA) set up a Royal Commission to examine the feasibility of expanding its nuclear fuel cycle activities from the existing uranium mining and export endeavours to something much more. After extensive consultations, the Royal Commission reported in May 2016 focusing on four areas of potential development: further radioactive minerals mining, nuclear energy implementation, uranium enrichment and fuel leasing, and offering the world a high-level waste and spent nuclear fuel disposal solution. Of these, the multi-national disposal facility was seen as the most promising option and so the government set about testing public reaction to the idea through establishing a Citizens’ Jury – not an uncommon feature in SA.

The Jury gave the government its opinion on 6 November with a resounding two-thirds rejection of the proposal. The other third wanted further dialogue. At first sight, that may seem to be the end of the proposed development, but in the government’s official response to the Commission’s recommendations published on Monday this week, SA Premier Jay Weatherill appears to have left the door ajar for further discussion.

So, what lay behind the Jury’s negative response? Proposing such an idea in the first place was a risk for the government to take, but originally they had opposition support and established a cross-party parliamentary committee to consider the recommendations. Some feel that the question asked of the 300 Jurors was poorly framed and invited a negative response: “Under what circumstances, if any, could South Australia pursue the opportunity to store and dispose of nuclear waste from other countries?”

Against this background, a two-day conference – ANFC16 – held in Adelaide this week brought together the Chairman of the Royal Commission, politicians from both sides in the SA parliament, representatives from Aboriginal communities, nuclear specialists, nuclear regulators, activists, academics, the nuclear industry, lawyers, ecomodernists, professional associations and the international waste management community, to discuss the situation. Several protesters also demonstrated outside the conference on occasion.

The conference was opened with a traditional welcome to the country by a representative of the Kaurna people. In turn, many of the Australian speakers acknowledged that the meeting was taking place on the traditional land of the Kaurna people and paid their respect to Elders past and present.

So, let’s take a look at some of the issues discussed.

The Royal Commission Process – It was thought by some that the Royal Commission was the wrong vehicle in any case to look at the issues and that in it was biased in favour of nuclear at the outset.

The Citizens’ Jury – Several commentators thought that if the question to the Jury had been along the lines of “do you think that South Australia should do its bit to help world poverty in considering allowing the introduction of nuclear power in many countries through offering waste disposal facilities?”, might have elicited a less negative response. One of the main concerns of the Jury was the underlying economic case presented, saying the authors were biased; the counter was that the report was peer reviewed and was only intended as a scoping study in any case, not a definitive answer. The legitimacy of the make-up of the Jury was also called into question, with some feeling that the more vociferous members opposed to nuclear had gained an unfair advantage. It was also asserted that misinformation had been presented to the Jury relating to domestic and international legal matters. The time they had to consider the evidence was also questioned with the six days taken being thought to be too little time.

The Politics – It was apparent in discussions that party politics has now come into the mix. Not only was it the local SA state politics, but also Federal government and opposition stances were also relevant. NIMTO (Not In My Term of Office) was an underlying factor also. The opposition SA Liberal Party had “drawn a line in the sand” with its rejection of further debate and the thought of a referendum down the road. Politicians were also criticised for not being able to take tough, long-term decisions on controversial projects, although they had done so in the past such as with the Olympic Dam mine. It was recognised that the federal government’s assent would be required for SA to move ahead with the idea.

The Economics – As well as questioning the underlying assumptions of the economic case, there were concerns about whether there would be a market for the repository and whether also there could be competition and how this could be managed. SA would have the advantage of being the “first mover” to capture potential customers. However, it was felt that the risks associated with the upfront costs for a small state budget were too high and equated to the cost of a new hospital for example. This, it was thought by others, could be managed through contractual arrangements.

The Aboriginal situation – Given that it would be Aboriginal communities most likely to be affected by the development, the conference heard from several of their representatives. Under the UN Declaration on the Rights of Indigenous People, and as also promised by Premier Weatherill, they would have to give their consent for any project to go ahead. It was clear that they were opposed to the idea and that they could never be convinced it would be a good idea. At the heart of their opposition were the memories of the British weapons tests at Maralinga where many communities had been displaced and indeed many individuals had suffered directly from the side effects of the blasts. They clearly felt they had not received full reparation for this and were looking for more. The question was raised as to whether if they did receive full recompense for the damage suffered, would this ease the way for a repository. A further issue arose in discussion which related to the contamination remaining on the land. The common understanding was that there were areas of significant contamination still present, but this was challenged. A clean-up exercise had taken place which aimed to achieve a level of residual contamination which could deliver a dose rate of 5 millisievert per year, but in many cases accomplished 1 millisievert per year, in line with the range of natural background radiation in Australia. However, this fact seems to have been lost within the communities and the conference heard that this will be looked into further.

Safety – Safety wasn’t a major factor in discussions, with the possible exception for the Aboriginal representatives and some others. The conference heard that nuclear operations and transport continue safely around the world, and for the long term, that SA had about as good a geology and hydrogeology as you could want for a repository. There would still be some challenges to investigate further but there would be a very high chance of finding a good site. SA was also politically stable and had a good economy.

Continued public debate is important and a matter that the people should decide and not political parties. If there was broad social consent the local Aboriginal community would be given a final right of veto. From now the government will facilitate continued discussion and work to restore a bipartisan position.

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.       

Edward de la Billiere is a Solicitor and co-founder of Prospect Law. He retains a strong interest in energy related projects and has developed a particular specialisation in Regulatory Law, advising individual and major corporate clients in the UK and abroad on international requirements for compliance with various legislative frameworks and also defence and strategic advice where clients are involved in litigation connected with allegations of regulatory breaches. He has been named as a leader in his field since 2009.

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 first appeared on World Nuclear News on 18th November 2016. http://www.world-nuclear-news.org/V-Going-nuclear-in-South-Australia-18111601.html

For more information please contact us on 01332 818 785 or by email on: info@prospectlaw.co.uk.