Oil

Oil markets rebounded. Brent prices rose over 20% at one point although the spot contract gave up some of its gains recently as worries over the 2nd wave pandemic weighed on the market. In the background, geo-political and upstream investment concerns over Middle Eastern supply remain. There is no end in sight for the shut-in of Iranian exports and there is rising concern over the export capacity of Iraq, Libya and Angola, where mounting political tensions and worsening infighting have thwarted efforts to reinforce war-damaged and aging infrastructure across the supply chain, from well-head production, pipeline transport, storage and offshore loading facilities. The sharp reduction in global demand this year has led to unprecedented oil inventories at or near full capacity, with a glut of crude cargoes still looking for a home. However, oil supply in non-OPEC regions has been curtailed and demand generally could see a rebound in years ahead, much of it within the region itself. Simply to illustrate, Egypt recorded a population eclipsing 100 million this year, just one example of rapid population growth across the North African and Middle Eastern region, which are on a steep oil demand trajectory. Should global demand pick up, the crude market may turn out to be tighter than the current headlines or short-term prices suggest.  

Natural Gas

Gas markets across Northern Europe recovered strongly up 28% over the period, in spite of the market going into winter with storage facilities across the Continent 85% full or higher still in some cases. Prices were said to have climbed amid agreed US-EU sanctions against Russia, which would threaten to delay or possibly block the completion of the huge Nord Stream 2 pipeline to Germany. However, with just 350 km to be finished, it is doubtful if this latest spat with Russia will finally affect the supply outlook for long. Gas prices traded at the National Balancing Point (NBP) may also be affected by any further weakening of Sterling versus the Euro. UK gas prices, traded in pence per therm, are strongly influenced by the arbitrage play between the NBP and Dutch TTF (Title Transfer Facility), which is the principal hub for the North European gas corridor and which is used to clear traded volumes in €/MWh. There are many factors in the mix. However were Sterling to fall to parity with the Euro, say, this would certainly feed through to the wholesale market and immediately to commercial prices here in the UK.

It is possible that the summer months may have been used to re-evaluate need for a new wave of gas-fired power stations, to counteract the impact of more intermittent renewable generation in the years ahead. We are already seeing evidence of this on the Continent with new coal/lignite-fired as well gas-fired generation projects being sanctioned to meet the expected demand for peak-demand electricity. Looking at just the few months ahead, wholesale gas prices will be most sensitive to demand (pandemic, general economy and weather-related – equally unpredictable); Sterling currency movements; background oil & gas prices and available supply from major North Sea, Russian and global LNG producers, among many other factors.

Electricity

Base-load power prices climbed by a fifth; almost in tandem with energy markets generally. However the increase was muted, cut back in its tracks amid renewed uncertainty over the economy and electricity demand itself, which has fallen substantially across the UK and the Continent this year.   

Supporting very long-term prices perhaps was the confirmed shut-down of the Advanced Gas-cooled Reactor at Hunterston B in Scotland, with other AGR closures now expected to happen sooner as a result. All of the UK’s currently operating nuclear power stations bar one employ the same AGR design and will have the same safe-operating design life; and most were built at around the same time during the 1980s. It is quite plausible a scenario for the UK to have just two nuclear power stations, at Sellafield and Hinkley Point, operating by 2029. It is not just an issue here but a concern on the Continent as well, typified again with one dominant design in a nuclear fleet which is older still, with many such plants having begun to be constructed in the wake of the Oil Crisis of 1974.

The medium-term supply outlook for electricity is stable and the market looks well-supplied for the time being, although a growing array of factors is at play which could influence base-load prices either way. Further, the Forward Market for electricity remains illiquid. This makes it difficult (and expensive, due to the high risk premiums resulting) for I&C buyers to lock into a forward contract price beyond a year or so. Prices along the forward curve are lacking in transparency and are also prone to sharp fluctuation. Equally, the intra-day Elexon and day-ahead/N2EX balancing markets have been exceptionally volatile of late, a trend that looks set to continue into the future as more renewable generation gradually comes online, requiring ever more urgent balancing actions by the system operator (National Grid) using its appointed market operator Elexon to requisition power from spinning reserve power stations and electric storage, all of which will come at a cost which will feed to consumers.  

Consequently, more commercial users could be looking to install on-site generation and energy storage in future: to mitigate increasing brownout/supply-disruption risks, reduce net power purchases and buy the residual electricity on more favourable price terms than otherwise. This together with improved energy conservation, demand management and purchasing strategy will each have a role to play in mitigating rising non-commodity costs which already make up circa 65% of a typical business electricity bill. Such pass-through charges, the Climate Change Levy in particular, will continue rising, possibly on a much sharper trend, in order to support the new nuclear power station at Hinkley Point and future low-carbon projects.

About the Author

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 private entities on a range of energy origination, strategy and trading issues.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

We are pleased to announce that we will be joining with US law firm K&L Gates in a webinar addressing how Governments are approaching risk and regulation when it comes to the commercial production of energy from nuclear fusion (as distinct from nuclear fission).

For nearly 100 years, scientists and engineers, as well as science fiction authors and fans, have dreamt of harnessing fusion reactions to power our economy. Despite daunting technical challenges, fusion energy may become a technically viable and economic energy source in the coming years, as an attractive carbon-free baseload alternative to conventional energy sources.

As the energy sector progresses towards commercial fusion, governmental regulators around the world are considering how they should treat fusion facilities. Two of the most active jurisdictions for commercial fusion development are the United States and the United Kingdom. Along with Fire Energy and Prospect Law, K&L Gates’ fusion energy team will provide an update on the regulatory approaches to fusion that the US and UK are taking, the prospects for differentiating regulations for future fusion facilities from those applicable to existing fission-powered nuclear plants and next steps in developing regulatory certainty for the emerging fusion power sectors in these nations, as well as  a section on risk and the management of risk through insurance.

Panellists:

• Tim L. Peckinpaugh, K&L Gates
• Michael L. O’Neill, K&L Gates
• Francis E. Iyayi, K&L Gates
• Fiona Reilly, Fire Energy
• Mark Tetley, Prospect Law

The Webinar will be hosted on Thursday 1^st October at 5pm BST.

If you are interested in attending, please click here to register or contact Adam Mikula on adm@prospectlaw.co.uk if you have any questions or problems.                      

We are pleased to announce that we will be hosting an Employment Law webinar addressing how businesses can get back on track and re-adjust post Covid-19.

This webinar will consider how businesses can cope with getting employees back to work after furlough, dealing with the challenges of changed employer/employee relationships and the way people work. New working from home arrangements, changed terms and conditions of employment, possible redundancies and Employment Tribunal claims for unfair dismissal and discrimination will also be considered.

The Webinar will be hosted via Zoom on Wednesday 30th September 2020, at 11.00 – 11.45 BST.

If you are interested in attending, please contact Adam Mikula on adm@prospectlaw.co.uk or +44 (0) 20 7947 5354 to request joining instructions.

A short talk will be given by Philippa Wood, Senior Employment Lawyer, who will guide the audience through getting back on track post Covid-19, outlining the necessary steps and issues to look out for. There will be a question and answer session at the end of the Webinar which will aim to deal with individual queries.

Click here to see the webinar flyer

It is very clear we are not out of the COVID-19 woods just yet. With the UK formally in the steepest recession in its history, New Zealand back in partial lockdown and spikes being seen across Europe, never mind the dreadful toll being seen across the Americas, the impact on trade will be far reaching and sustained.

The nuclear industry, whilst not immune, is enjoying some good news stories. In the UAE the Barakah nuclear power plant Unit 1 has achieved its criticality, with construction of Unit 2 officially completed in July.  Reactors in both China and India have achieved key milestones.  Work at Hinkley Point C also continues too, with Unit 2 following the footsteps of Unit 1.  Whilst revised working practices have been put into place to cope with COVID-19 restrictions, the resilience shown demonstrates the drive to ensure this key UK infrastructure project be completed as close to schedule as possible.

Romania is to undertake a major refurbishment of Cernavoda Unit 1 from 2026. Whilst the major portion of the critical reactor components will come from Canada, Romania is keen to achieve ‘value for money’ and therefore opportunities will occur for those keen to develop this interesting and exciting market.  By way of example, specialist US/UK companies are already in closing negotiation discussions.  The door remains open and in accordance with EU Procurement contracts will be announced through the EU Procurement portal, Tenders Electronic Daily.  Romania has again declared its intention to complete the CANDU type Units 3 & 4 at Cernavoda, and, for those with rather deep pockets, a negotiated settlement is available.  Opportunities to support the development of Romania’s waste repository also exist.

Japan and China are amongst a number of vibrant markets for those who can make the personal long-term commitment, however, with the current travel restrictions unlikely to be eased much before Q4 2020, companies should look to refine their product offering and market presentations. 

It is interesting to note that in markets that historically have relied upon ‘collective consensus in decision-making’, the internet meeting has found a role.  Whilst the lack of personal contact has created stress, business is taking place albeit with considerable added caution. Given the lack of opportunities for face-to-face meetings, including those at informal gatherings and trade conferences, businesses should seriously investigate the value of agents and client-based partnerships.

In closing this short piece on trade in the new COVID driven business environment, remember that the nuclear market is very buoyant, with approval or construction of over 100 new reactors already granted, reactor life extension underway to ensure climate change obligations are achieved at minimal cost, and radioactive waste management and disposal providing the ultimate world-class environmental solution to our global and vital nuclear industry.

About the Author

John Ireland is an internationally experienced energy specialist and senior business executive skilled in the development, negotiation, and management of businesses and technically complex contracts within both the Government and private sectors. John, a Chartered Engineer and Fellow of the Institution of Chemical Engineers, has been Chief Engineer advising clients on nuclear new build in Romania and investigating opportunities in Saudi Arabia, Jordan and Turkey, and Project Manager for the treatment and management of toxic and radio-toxic chemical wastes in the UK, Japan, and the EU.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

In this, the second in a series of articles on the NEC standard form of contract, we again look at a situation where the NEC standard form attempts to be user-friendly but:

• uses non-explicit language to describe obligations placed upon the Project Manager
• does not provide a solution in the case of default by the Project Manager

Unlike some other forms of contract, the intention with NEC is to make the programme not only a contract document but also a working tool, to be used by the Parties to evaluate progress and as the basis for the calculation of any extension of time granted.

Under NEC, Clause 31 sets out in detail the requirements to be complied with by the Contractor for an Accepted Programme.  These provide a list of inclusions to decide whether a programme can be accepted by the Project Manager and should provide clarity as they are contractually agreed.

Across the various Options, Clause 31 is split into three sub-clauses, for Options administered using a Bill of Quantities (see a to c) and four sub-clauses (see a to d) for Options administered using an Activity Schedule.  These sub-clauses deal with:

• 31.1 – The first Programme
• 31.2 – Detailed requirements for inclusion within the Programme
• 31.3 – Acceptance by the Project Manager and grounds for non-acceptance
• 31.4 – Requirements for a link between the Activity Schedule and the Programme

Clause 32 then deals with items additional to Clause 31.2 required for revised programmes.

The NEC makes securing an Accepted Programme a priority, but whilst placing obligations upon both the Contractor and the Project Manager to do this, the Contract effectively only provides real consequences for default in respect of the Contractor.

The First Programme

Clause 31.1 stipulates the requirements for a first Accepted Programme.  Clause 50 deals with payments due to the Contractor.  Under Clause 50.2:

“The amount due is:

1. the Price for Work Done to Date
2. plus other amounts to be paid to the Contractor
3. less amounts to be paid by or retained from the Contractor”

The last bullet point carrying most relevance in regard to an Accepted Programme.

Further Clause 50.3 states:

“If no programme is identified in the Contract Data, one quarter of the Price for Work Done to Date is retained in assessments of the amount due until the Contractor has submitted a first programme to the Project Manager for acceptance showing the information which this contract requires.”

This demonstrates a clear and potentially substantial financial consequence for the Contractor in not submitting a timely first programme.

It should be noted that obligations are placed upon the Project Manager to accept this first programme. However, the provisions could be abused by the Project Manager, thereby unfairly punishing the Contractor.

The Project Manager‘s obligations are contained under 31.3, which states:

“Within two weeks of the Contractor submitting a programme to him for acceptance, the Project Manager either accepts the programme or notifies the Contractor of his reasons for not accepting it. A reason for not accepting a programme is that:

1. the Contractor’s plans which it shows are not practicable
2. it does not show the information which this contract requires,
3. it does not represent the Contractor’s plans realistically or
4. it does not comply with the Works Information.”

But what if the Project Manager does not accept the Programme, stating one of the above reasons, and the Contractor does not agree?  The reasons are, after all, fairly unspecific in nature. And what if the Project Manager is silent or provides no grounds for not accepting the Programme?

The guidance notes only provide consequences for the Project Manager in regard to the first programme submission, classifying this situation as “a late reply” and stating that in this event a compensation event is triggered under Clause 60.1(6): “The Project Manager or Supervisor does not reply to a communication from the Contractor within the period required by this contract”.  It could be argued additionally that a compensation event is triggered under Clause 60.1(9) in the event the Contractor has complied in full with the requirements of Clause 31 in regard to content.  This clause states: “The Project Manager withholds an acceptance (other than an acceptance of a quotation for acceleration or for not correcting a defect) for a reason not stated in this contract”.

The problem is that subsequently the Contractor may notify a compensation event under Clause 61.3, but then potentially a “difference of opinion” arises, prompting a “game of ping-pong” as to whether there is in fact a compensation event or that the Contractor has not complied with the requirements stated within Clause 31.3.  The consequence to the Contractor will be the 25% deduction applied to payments and so any default on the part of the Project Manager has real consequences.  This being the case, many Project Managers will accept the first programme to avoid suggestion that they are in breach of Clause 10.1: “The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation”  and any suggestion that the Project Manager is not “administering the contract impartially and in the interests of both the Employer and the Contractor equally”, which would potentially amount to bias in favour of the Employer.

Revised Programme Submissions

Revised Programme submissions under Clause 32 are handled slightly differently in that the guidance notes do not this time account for or suggest a compensation event being triggered in the event the Project Manager does not reply within the period for submission.  The Contractor effectively must “think for himself” and apply the contract provisions as in the case of default by the Project Manager in regard to acceptance of the first programme. 

The big difference this time is that even if there is a compensation event triggered through Clauses 60.1(6) or 60.1(9), there may be little or no initial financial or temporal consequence to the Contractor through the programme not being accepted.  This being the case there is a lot of effort on the part of the Contractor to try to secure acceptance and little consequence for the Project Manager in not providing acceptance.  The main route open to the Contractor is, in this case, to ensure that good records are kept and notifications are issued to demonstrate the Project Manager’s default.  This would then potentially lead to an argument that the Project Manager is not complying with Clause 10.1 (“The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation”) and in addition that the Project Manager is not “administering the contract impartially and in the interests of both the Employer and the Contractor equally“.  Effectively, as above, the Project Manager is showing bias in favour of the Employer.

If the Contractor is sure that the requirements of Clause 31 have been complied with in full and the Project Manager still does not accept a revised programme, then it could cast a shadow over the Project Manager in the event the Contractor then took a dispute to adjudication in regard to the acceptance of the programme.

About the Author

John Blackshaw is a dual qualified specialist construction law lawyer who worked as a commercial manager, project/programme manager and contracts manager before qualifying as a solicitor. John has worked internationally for in excess of 25 years in North America, South America, and in Western, Central and Eastern Europe on a wide range of projects across the energy, nuclear, roads, rail, marine, infrastructure, automotive, industrial, residential and commercial sectors, both with Employers, and with Tier 1/Tier 2 Contractors as well as in-house.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical 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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

In the last article in this series we looked at the design and deployment basics of Small Modular Reactors (SMRs). In this piece we will be looking at SMR financing and in particular the prospect of them being deployed in the UK.

Background to SMR Financing

As a generality, new nuclear power plants (NNP) are highly capital intensive even before they start generating, and the financing for new projects is perhaps their greatest challenge, perhaps even more so than gaining public acceptance. The payback time is very long compared to more conventional investment opportunities, meaning there is little or no appetite for the more “conventional” financial markets to become involved.

Nuclear preconstruction activities are a significant cost component, and can take many years to achieve. These include regulatory engagements (design assessment and licensing), the siting and planning process (including Environmental Impact Assessment and stakeholder engagement) and initial site preparation. The major cost, of course, is the actual construction, not just of the station itself, but also of the associated infrastructure and the cost of the first load of fuel. Decommissioning and long-term waste management is also taken into account at this stage with many countries, including the UK, requiring funding arrangements to be established before a licence is issued.

SMR’s are attractive from the financial perspective as they are somewhat cheaper than the larger commercial reactors. For example, the latest published cost estimate for the UK’s new 3,260MW(e) Hinkley Point C is £22.5bn ($28bn, 2019 m.v.), whereas in our previous article we mentioned that Rolls-Royce had said they would get the cost of their 440 MW(e) reactor design to £1.5bn. This would give respective construction costs of £6.9m per MW(e) and £3.5m per MW(e), albeit such comparisons are in practice much more complicated than that.

Financial Risk

Financial risk is also an important factor to consider, and in particular how this would be shared between the various stakeholders: government, the reactor vendor, other investors, the operating utility and last, but not least, the ultimate consumer. New NNP projects, like many large infrastructure projects, are renowned for cost and schedule overruns. SMRs have yet to be deployed in earnest but have the benefit of lower production costs, shorter construction periods and better construction certainty, with modules built in the factory rather than on site, but still there are many unknowns in producing first-of-a-kind (FOAK) versions.

Other financial risks to consider would be those arising during the operational period such as accidents (nuclear or non-nuclear) which may permanently close the plant and mean no further income, either for the utility and/or investors, which would also lead to a shortfall in the decommissioning and waste management funds.

The electricity market may be influenced by other cheaper forms of generation leading to lack of competitiveness for nuclear; older plants were financed and constructed when regulated markets were in place, but many countries today have de-regulated markets. Political factors may change nuclear policy, as we have seen happen in many countries following the Fukushima-Daiichi accident, and there could be other risks, such as changes in safety regulations which may be too onerous to implement, or the utility may become bankrupt.

Each of the abovementioned risks can be mitigated to a greater or lesser extent and on balance it is thought SMR’s are a more favourable investment opportunity than the larger scale products. There are many financing models associated with new NNPs and they are often a combination of debt and equity. Debt financing is typically a conventional loan from a bank or other lender which is repaid with interest; equity involves the investor taking a stake in the project and at the same time taking on the commercial risks and rewards associated with that. Self-evidently, the model chosen will have an impact on the overall economics of the project concerned.

The Operational Period of any Reactor

In simplistic terms, the preconstruction and construction costs and interest have to be paid for during the operational period of the reactor, when it is earning income. The income received also pays for the ongoing operating and maintenance costs and the cost of new fuel. In addition, decommissioning, spent fuel and radioactive waste management has to be taken into account. The utility itself will be looking to make a profit and all of these components will be factored into the ultimate cost of the electricity generated and the price paid by the consumer.

However, if the market price of electricity falls, the financial return may not be sufficient and so at the outset of the project, the utility may negotiate a Contract for Difference. In this case the difference between the “strike price” (what the utility needs the price of electricity to be to make a margin) and the market price is met by, say, the government (and consumers) if the difference is negative; if the difference is positive then the utility will credit consumers. These types of contracts are also applicable to other low-carbon power generation projects.

The CfD model was used for Hinkley Point C, but other financing models exist such as Power Purchase Agreements (PPAs), whereby there is a long-term agreement too but at a fixed price which may or may not be guaranteed by the respective government. This has been used in Turkey for the Akkuyu project.

A further approach which is being considered in the UK for new nuclear is the Regulated Asset Base (RAB) model. These are typically used for funding monopoly infrastructure and involve an economic regulator who grants a licence to a company to charge a regulated price to users of that infrastructure. The government says RAB-funded infrastructure has attracted significant investment from private sector capital over the last 20-30 years, with total value of RAB assets in 2018 of c.£160bn. They conclude: “a RAB model has the potential to reduce the cost of raising private finance for new nuclear projects, thereby reducing consumer bills and maximising value for money for consumers and taxpayers”.

The Findings of the Expert Finance Working Group

We don’t have the space here to go into the details of all the various models for financing new NPP projects. But what would be the most appropriate for an SMR new build project? The UK government set up an Expert Finance Working Group (EFWG) in January 2018 comprising experts from the finance community with input from academia and the supply chain, and government (BEIS) observers. Inter alia, one of its roles was to explore a range of potential financial models for SMRs which the government said could “engender market confidence, especially from private sector investors/financiers.”

The EFWG concluded that the UK could be well placed to develop First of a Kind (FOAK) “small reactor projects with overnight costs of less than GBP 2.5 billion by 2030”. They looked at nine potential finance models. Of these, four were derivations of a Project Finance approach (reliance on cash flow for repayment of equity/debt), while others were models/structures previously employed to finance nuclear around the world. They concluded that four potential models/structures could be adapted for financing SMRs in the UK and how the government could potentially feature in each of these. On this they concluded:

“For technologies capable of being commercially deployed by 2030, HMG should focus its resources on bringing FOAK projects to market by reducing the cost of capital and sharing risks through:

• assisting with the financing of small nuclear through a new infrastructure fund (seed funded by HMG) and/or direct equity and/or HMG guarantees; and
• assisting with the financing of small nuclear projects through funding support mechanisms such as a Contract for Difference (CfD)/ Power Purchase Agreement (PPA) or potentially a Regulated Asset Base (RAB) model while maintaining the supply chain plans required for larger low carbon projects.

For NOAK [nth of a kind] projects the market should be self sustaining having learnt the lessons of the large nuclear plant and the small nuclear projects that will have gone before.”

Advanced Modular Reactor Feasibility and Development Project (AMR F&D)

In September 2018, the UK Government announced the Advanced Modular Reactor Feasibility and Development Project (AMR F&D) in which BEIS would invest £44million in Advanced Modular Reactors (those being GEN IV reactors as opposed to GEN III SMRs). Phase 1 consisted of a £4m feasibility study with up to £40 million in Phase 2 which would take forward development activities. Under Phase 1, eight organisations were awarded contracts, but no Phase 2 money has yet been awarded, not helped by the current Covid-19 situation. Additionally, in 2017 the UK nuclear regulators, the Office of Nuclear Regulation and the Environment Agency were awarded £5 million and £2 million respectively to support the regulation of advanced nuclear technologies (i.e. AMRs and SMRs). Further, in October 2019 both regulators and Natural Resources Wales announced new Generic Design Assessment guidance which covered ANTs.  The UK government expects all future designs will go through this process.

As previously reported, new SMR developments have been announced in other countries. In the UK the Rolls-Royce consortium is making headway with its reactor development. We wait to see what progress will be made in the future when the current Covid-19 situation eases.

For further information on SMRs we can refer you to a series of SMR webinars hosted in June by the International Framework for Nuclear Energy Cooperation (IFNEC).

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources sectors, with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical 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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

On 5th May 2020, the Second Senate of the BvfG returned its verdict and granted the constitutional complaints of the claimants against the PSPP (C 2BvR 859/15, 2BvR 980/16, 2BvR2006/15, 2BvR 1651/15) in a 100-page, painstakingly detailed judgement.

Pronouncing itself against the findings of the EUCJ, it ruled that the German Government and the second Chamber of Parliament had indeed violated the Claimants constitutional rights by failing to take steps challenging the ECB.

In what can only be described as a withering section of the Judgement it adjudicated that the CJEU had itself acted ‘ultra vires’ beyond its mandate on the grounds that its judgement had strectched the legal limits within which the Bank was meant to be operating, so as to permit the Bank to conduct an economic policy all its own beyond the responsibility of the Member States. As a consequence, the leeway granted to the Bank encroached upon the economic competence and jurisdiction of the German state. The BvfG concluded that the CJEU’s Judgement had not been ‘comprehensible’ and as a result ‘objectively arbitrary’.     

In its key considerations, the BfvG makes clear that if any Member State could invoke the authority to decide through its own courts on the validity of EU acts this could undermine the precedence of EU law and moreover, harm the uniformity of its application. By contrast, if a Member State were not able to  conduct an ultra vires review of an EU act, they would grant EU institutions exclusive authority over the Treaties and their implementation even if a manifest wrong occurred. After all, the EU is not one federal state and as the Lisbon Treaty declares the Member States remain the “Masters of the Treaties’. Conceptually, one  recognises an area for considerable tension between Member States and EU organs. This tension has now overboiled in the case before the BfvG.

The BfvG further held that disregarding the overall effects of the PSPP in its assesment of the programme’s proportionality and refraining from conducting an in-depth assesment and appraisal of its effects does not satisfy the ECB’s monetary policy mandate. Here the principle of proportionality cannot fulfill its corrective function which is to safeguard the Member States own competences rendering the principle of conferality entirely meaningless. “Therefore, the interpretation of the principle of proportionality undertaken by the CJEU, and the determination of the ECSB’s mandate based thereon, exceed the judicial mandate conferred upon the CJEU in Article 19(1) TEU” and is as a result ultra vires.  It also held that the BfvG was not bound by the EUCJ’s Preliminary Ruling but should conduct its own review to determine whether the adoption and implementation of the PSPP “remained within the competences conferred on it by EU primary law”.

Essential was it for the ECB to weigh and balance the economic policy effects inherent in and direct consequences of the PSPP against the monetary policy objective. From the information known about the consideration the ECB had given to the balancing exercise, it was not acertainable whether the ECB Governing Council had prudently carried out this exercise either at the onset or later.

Unless the ECB provided documentation evidencing that such balancing exercise substantiated with comprehensible reasons, did take place, it would in any event be impossible to carry out the judicial review necessary to establish whether the ECB had stayed within its mandate and the PSPP had in fact been proportional and not adversely affected the German Consitution.

Addressing itself to the Bundesregierung and the Bundestag in slightly more conciliatory tones, the BfvG indicated that a conclusive decision in the matter could only be reached after they had themselves taken active steps against the PSPP in its current form by taking suitable action to limit the domestic impact as much as possible. Based on their responsibility to ensure adherence to the European integration agenda, this meant specifically that they must urge the ECB to conduct its assesment as well as continue monitoring its decisions on the purchases of government bonds under PSPP, closely.

Next, the BvfG addressed the Bundesbank stating that German constitutional organs, administraticve authorities and courts may not particpate in ultra vires acts. Accordingly, after a transitional period of no more than three months, the Bundesbank would no longer be allowed to participate in the PSPP unless the ECB adopted a fresh decision which demonstrated in a convincing manner that the ECB’s monetary policy objectives as persued by the PSPP were not disproportionate to the economic and fiscal policy effects resulting from the PSPP. Finally, the Bundesbank also had to ensure that the bonds it had already purchased and held in its portfolio were sold based on – “possibly long term” – strategy coordinated with the entire Eurosystem.

 The Consequences

The BfvG did not only condemn the actions taken by an EU organ, the ECB, but also defied the EUCJ which had ruled that its actions were permissible under the EU treaties. This defiance caused a storm of excited reactions primarily from the anti-European front. “The BfvG has constitutionally taken a step further in the European ‘desintegration” tweeted Yannis Varoufakis, the ex Greek minister of Finance, known for his rather ignominious defeat at the hands of the ‘Troika’ in the summer of 2015. Lorenzo Smaghi, a retired director of the ECB exclaimed :”This is the end to the independence of the ECB”  and Vitor Constáncio, retired vice-president stated : “The difference which the BFvG makes between economic and monetary policy is ridiculous”.

Even the Eurominded foresaw problems with the Judgement. Angela Merkel, the German Chancellor, no less, warned for the possibility that other European countries might follow suit and ignore the verdicts of the ECJ in future after the Polish President Mateusz Morawiecki had praised the ‘disobedience’ of the BfvG on the previous day.

After more than a week of radio silence, the EU Commission finally reacted – with dismay and a threat. Commission President Ursula von der Leyen assured the public that she was taking the matter seriously and was considering initiating infringements proceedings against the German Republic.

Conclusions

The BfvG’s judgement declaring (a) actions of EU organs to be contrary to a Member States’ legal order and best interests and (b) condemning the German Government and its Parliament for participation in the PSPP and ordering it to take active steps to ensure constructive action by the ECB as well as (c) instructing the Bundesbank to refuse the further implementation of PSPP, are all a healthy testimony to the national courts continuing to play a pre-dominant role within the European legal order and firmly retaining their independence. After all, the Member States are the ‘Masters of the Treaties’. In this context it is right to point out that in the Treaties of Rome the primacy of EU law is not be found, but is a legal paradigm only adopted by the CJEU in its early 1960-ies case law.

The EUCJ interprets EU law, as we have seen, including the methodological standards applied by EU organs. Domestic courts and the EUCJ would not need to clash, as they do in this instance, since each should be able to operate freely and in parallel in their own domain. However, where there is confusion (or a conscious overstepping of the mark) over the limits of the competences exercised by either party, it is no great surprise that at times they do collide. Historically, this has happened before and the Karlsruhe judgement will not be the last to have dealt with such a confrontation.

In my view what we see here is no ‘disintegration’ of the European project and no ‘bomb under the Monetary Union’. There is another characteristic of the EU at work. Although ever-present, it only at times emerges in the full glare of day. As we have seen the EU is no federal state but a particularly diverse group of sovereign nations. Each country has a distinct national identity and culture. Since its beginnings but especially after its last enlargement we have seen this grouping breaking up in various separate sectors in which the members each favour each other, alternatively nurture a deep distrust of each other. This dynamic plays a role in this narrative.

The ECB has been a very high profile EU organ particularly so in the Eurocrisis and beyond. As such it has also attracted public scrutiny as well as opprobrium. Particularly, its policy continuing the PSPP well into the economic recovery ( NB leading to the resignations of three members of its Board in succession), supported by the majority of southern European countries  was seen as favouring the indebted Southern nations.

Adding to that, its accountability as the CJEU’s judgement makes clear is at least, dubious. As for the ECB’s true independence, it is worth mentioning that the Bundesbank is a 26% shareholder of the ECB … so much for independence.

It is against this background that the senior court of an EU Member State has had the courage to stand up and say “Enough is enough. Either the ECB explains on substantiated and convincing grounds how it conducts its PSPP assuring us all that it does not intend to make inroads in our national economic policy and or sovereignty or this country will no longer particpate in its schemes no matter the attendant risk of infringement proceedings and a substantial fine at the end”.

Instead of fearing, however, for European integration and the monetary union as some commentators do, these are not undermined by one judgment, even if it comes from a  highly regarded superior court in a democratic and respected Member State such as Germany. On the contrary, a full and frank explanation by the ECB of its motives and clarification of its balancing act between the various considerations involved in its monetary policy may actually benefit the monetary union. This is particularly so if the ECB takes more care to substantiate its various schemes and programmes in the future.

As for the European ‘desintegration’ predicted, since the outbreak of the Coronavirus in Europe there are hotter issues of European solidarity under discussion, than the outcome of one Judgment of which we shall only see the full impact in August when the transitional period which the Bundesbank has been granted to scale down its particpation – and implementation and execution of the ECB’s decsions on PPSP, expires.

At least until August 2020, the writer views the furore which the BvfG has caused as a storm in a tea cup, rather than as a bonus for all those who, with undisguised glee, have welcomed its Judgement as being another nail in the European coffin.

Finally, in a positive speech to the European Parliament on 8th June, ECB President Christine Lagarde came down from the sidelines on which the ECB had stayed until then. She promised that the “ECB would provide any support and assistance that can be helpful” to help resolve the ‘German Court problem’ and constructively diffuse the crisis, adding tactfully that “the Bundesregierung and the Bundestag must take the lead in this….”.

The Learned Judges of the BvfG will doubtlessly have been very pleased to take note of her words.

About the Author

Reina Maria van Pallandt is a senior disputes resolution lawyer with dual British and Dutch nationality. After obtaining an LLB Honors degree in Dutch Law and Public International Law at the University of Amsterdam (UvA), Reina Maria studied International Law of the Sea at London School of Economics (LSE). She was admitted as a Solicitor of the Senior Courts of England & Wales in 1979 and of the Law Society of Ireland in 2019. Reina Maria originally practised as a solicitor at Holman, Fenwick & Willan in London and Paris and thereafter at Clifford Chance where she specialised in marine and general commercial arbitration and litigation representing shipowners, P&I Clubs, shipbuilders, repair yards and charterers such as oil and gas companies and commodity traders.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical 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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

Prior to commenting on the Ruling of the EUCJ of 11 December 2018 and the reaction of the BvfG which followed on 5th May 2020, it is appropriate to discuss the basis of their mutual relationship and the roles the two play in relation to each other. These are at the heart of the narrative. Once the relationship is understood, the contrary judgement given by the BvFG as a reaction to the Preliminary Ruling is no longer so contrary and the excitement surrounding its ‘revolutionary act of disobedience’ should soon disappear.

The Respective Roles of both courts

The EUCJ

The application and interpretation of EU law, including the application of the methodological standards, is conferred upon the CJEU by mandate of the European Treaties. Article 19(1) of the Treaty of the European Union (TEU) provides that the CJEU observes the law when interpreting the Treaties. It is to ensure conformity and coherence of EU law. The application by the CJEU of the methods and principles cannot and need not completely correspond to the practice of domestic courts. The CJEU may not entirely disregard such practice. Yet, the mandate conferred in Article 19(1) is exceeded where the traditional European methods of interpretation or, more generally, the general legal principles common to the laws of all Member States are manifestly disregarded. As long as the CJEU applies recognised methodological principles and its decision is not arbitrary from an objective perspective, a court of a Member State must respect its decision even if it holds a view against which ‘weighty arguments’ could be levelled. Generally, provided the CJEU honours those safequards, its rulings have precedence over the judgments of the national courts.

The BvfG

The BvfG’s duty is to ensure that the Constitution of the Federal Republic is obeyed. It helps to secure respect for and the effectiveness of the German democratic order. This applies particularly to enforcement of the fundamental rights. The BvfG’s decisions are final and all other government institutions are bound by its case law. The work of the BvfG may also have political effect which occurs when the Court declares a law to be unconstitutional. Within the EU context, its role is to test substantiated ultra vires challenges regarding acts of institutions, bodies, offices and agencies of the European Union. Whether Germany has effectively transferred a mandate to a European body can only be determined by the BvfG and not by the CJEU. According to the BvfG’s own case law it helps to ensure that both courts’ mandates are excercised in a ‘coherent’ and co-operative manner in keeping with the spirit of European integration. One Court does not toe the line to the other but they cooperate. At least that is the intention.

The Preliminary Ruling of the European Court of Justice

In its Judgment of 11th December 2018 (ECLI:EU:2018:1000), the CJEU held that the Decision of the ECB Governing Council on the PSPP and its subsequent decisions were within the ambit of the ECB’s competences, were not ultra vires and did not infringe the principle of proportionality. The answers to three of the five questions which the BvfG had raised in their request for a Preliminary Ruling are discussed below:

The EUCJ first ruled that the statements of reasons (behind the initiation of the PSPP) given by the ECB fulfilled the safequard measures in place to ensure a review of procedural steps taken and a careful and impartial examination of all the relevant elements and possible (side)effects of the Decisions. It did however, admit that “ in the case of a measure intended to have general application, which makes clear the essential objective pursued by the institutions, a specific statement of reasons for each of the technical choices made by the institutions cannot be required”. Nevertheless, it ruled that the ECB had published sufficient information at the time of the initiation of the PSPP and the intervening years, that its Decision 2015/774 was not invalidated by any defect in the statement of reasons so as to render the Decision invalid.   

Secondly, going back to 2003 when the ECB adopted the specific objective of maintaining price stability and the maintenance of inflation rates at levels below but close to 2% over the medium term, it determined that this monetary policy contained no manifest error of assessment and did not go beyond the framework of the TFEU. Thus it attached the specific objective of the ECB’s Decision(s) to the primary objective of the ECB’s monetary policy. Here also, the Court made an admission: ”In the present case it is undisputed that, by virtue of its underlying principle and procedures, the PSPP is capable of having an impact both on the balance sheets of commercial banks and on the financing conditions of the public deficit of the Member States covered by the programme and that such effects might possibly be sought through economic policy measures”.

Thirdly, the Court addressed proportionality in relation to objectives of monetary policy.

As regards compliance with this principle, the CJEU began by allowing the ECB considerable leeway, stating that when preparing and operating open market operations of the kind provided for in Decison 2015/774, the ECB had to make choices of a technical nature and undertake complex forcasts and assesements :”….it must be allowed a broad discretion”.  From the CJEU’s extensive and praising review of the economic policies of the ECB and the mechanics generally for assisting the Member States’ economies, it is clear that the Court never seriously considered inviting a discussion of the importance, scope and legality of the subject ‘proportionality’ with the BvfG.

In this respect a necessary review of the division of competences between the ECB and the Member States was also conveniently overlooked. Instead, the ECJ limited the scope of its review to whether there was a ‘manifest error of judgement’ on the part of the ECB when initiating the PSPP, whether the PSPP had manifestly gone beyond what was necessary to achieve it’s objective and whether the disadvantages were manifestly disproportionate to the objectives persued.

It concluded unequivocally that the questions put to it by the BvfG had not ‘disclosed a factor of such a kind as to affect the validity of Decision (EU) 2015/774 of the European Central Bank of 4th March 2015 on a secondary markets public sector asset purchase programme, as amended by Decision (EU) 2017/100 of the European Central Bank of 11th January 2017’.

Clearly, the ECB’s objective to stabilise the European economy is not obviously wrong in itself but by introducing the concept of a ‘manifest’ (in law defined as ‘completely obvious or evident’) wrong, the CJEU deftly side stepped the central question:  In introducing the PSPP did the ECB manage to step outside and beyond its remit – which is limited to monetary policy – thus subtly expanding its own field of influence in matters of economic policy and without sufficient clarification of the basis for its first and subsequent decisions?

In legal circles the EUCJ’s Preliminary Ruling was generally accepted.Nevertheless, the Claimants in the joined actions, unabashed by losing this battle, did not leave matters at that but returned to the BvfG for a final interim award in what was later to be described by legal commentators as the ‘War of the Courts’.

In the next article in this series, we will discuss the Judgement of the BvFG which gave rise to the storm in European legal and political circles.

About the Author

Reina Maria van Pallandt is a senior disputes resolution lawyer with dual British and Dutch nationality. After obtaining an LLB Honors degree in Dutch Law and Public International Law at the University of Amsterdam (UvA), Reina Maria studied International Law of the Sea at London School of Economics (LSE). She was admitted as a Solicitor of the Senior Courts of England & Wales in 1979 and of the Law Society of Ireland in 2019. Reina Maria originally practised as a solicitor at Holman, Fenwick & Willan in London and Paris and thereafter at Clifford Chance where she specialised in marine and general commercial arbitration and litigation representing shipowners, P&I Clubs, shipbuilders, repair yards and charterers such as oil and gas companies and commodity traders.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical 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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

Crude prices halved as the oil market experienced an output surge and a collapse in global demand. So great was the imbalance that West Texas Intermediate momentarily traded at negative prices, below $30/bbl at one point. The International Energy Agency is now predicting that the pandemic will lead to the largest reduction in world energy infrastructure spending on record: an annual reduction of 30% in fossil fuel and 20% general energy investment. The IEA has also stated, however, that fossil fuel demand may rebound sharply as the crisis passes. It observed how China and certain other Asian nations had placed recent orders for new-generation coal-fired power stations.

In some respects, the oil market has hit a perfect storm: a coincidence of a sharp supply contraction and increased oil production export policy, which Saudi Arabia had already initiated before the effects of the pandemic were known Seeking to reassert authority over fellow OPEC states and non-OPEC producers alike, including Russia with whom talks over output reduction co-operation had broken down barely three months before the economic impact of the pandemic became apparent. The tactic has had a far more negative impact on oil prices and with it an adverse effect on investment which has been acutely lacking in Iran, Iraq and Libya, the latter producer also having to deal with Russian backed insurgence, limiting its export capability further.  It may not sound terribly scientific but the proverb ‘the greater the fall, the sharper the rebound‘ could be possibly be true in this extreme instance.  Throughout history, oil prices have instigated their own cycle: low prices reducing investment and lower medium-run lower output and consequently higher prices longer-term; and vice-versa. The oil market is certainly in the doldrums now, but prices could soon recover, potentially past $50/bbl, once demand returns closer to pre-pandemic levels.

Natural Gas

Forward Year gas prices fell by another 18% to close below 30 pence a therm for the first time in over 15 years.  The gas market fell amid reduced LNG demand by South East Asian buyers as well as major European users and some seasonally very high inventories at gas storage facilities across the Continent, with many units closing out the winter period over three quarters full. This will have added to a sense of over-supply and will also limit contingency gas purchasing over the summer months by the major energy utilities. Looking further ahead, the pandemic has compromised gas infrastructure investment, just as it has in the case of oil. This is notably the case in the US, where key LNG export projects have already been mothballed and in Russia too; whose vaunted 16 bcm/year Blue Stream pipeline into Germany is looking increasingly in doubt, now having to contend with lower-than-projected gas prices as well US sanctions directed at the project, which were put in place before the new economic uncertainty hit home.

However, gas prices follow a cycle which is in many ways analogous to the crude market. In real terms, wholesale gas is now trading at its cheapest levels in over 20 years. If economic activity picks up and oil prices continue their recent, if muted, recovery, then we could see forward gas prices enter a recovery phase, especially if we see a policy shift is support of new gas-fired power plants, seen necessary in order to balance inflexible low carbon electricity generation in future. One of Europe’s newest coal-fired plants is the 1.1 GW Datteln 4 plant in North Rhine-Westphalia, Germany, which will burn lignite. Whether or not this example, among other brown coal and gas projects in Europe, prompts a rethink of the role gas-fired generation should play in Britain remains to be seen. Recognised Gas Carbon-Capture and Clean-Coal generation solutions have proved elusive or prohibitively expensive so far. However, innovation and also test projects are now progressing. These developments, as well as a future Hydrogen Economy, taken together could affect the long-term outlook for gas.

Electricity 

Power prices followed the gas market down, falling 10%, although base-load prices have started to pick up towards the late end of May amid signs of some return to normality in Continental Europe. On the supply side, the concern is over the summer availability of nuclear and hydro electric volumes should the latest meteo forecasts of a dry European summer prove to be accurate and reservoirs fall short of the cooling capacity required for such power plants. With wind output likely to be very limited and thermal generators constrained in the short term, there is scope for power prices to recover further, even if the market is over-supplied and subject to sudden dips just at the moment. Meanwhile, the last quarter saw a substantial portion of Britain’s existing nuclear fleet being put up for sale. British Gas’ owner, Centrica, already had plans to sell its own 20% stake in the UK’s eight operational reactors but has now been joined by its partner, EDF, which is seeking a buyer for 30% (or possible half) of its 80% stake. How soon a pension fund or other buyer can be found is anyone’s guess. However, end-of-life nuclear acquisitions involve huge unknowns, decommissioning being just one. 

All of the UK’s operational reactors are now over 35 years old and operating at or beyond their original design lives; the one exception being the pressurised-water reactor at Sellafield, which could theoretically still run past 2030. However the other seven will need to shut, well before the end of the decade and the closure of one power station could be imminent.   Leaving supply-availability to one side, the UK power market is likely to see increasing day-to-day and intra-day price variations as balancing volumes command a premium. This will increase the cost of load-shape in business electricity contracts just as capacity prices also see sharp increases, partly to finance new-build nuclear and other low carbon projects under the CfD surcharge to power bills. If/when these prices climb, electro-intensive users will look to mitigate by shaping the electricity themselves as much as possible, potentially through on-site generation, storage, demand side management and, especially, energy conservation. The commodity price for base-load power certainly looks subdued. The electricity market was always going to be far less affected by this pandemic than the oil market, which is reliant on demand for automotive fuels. Nevertheless, should any scarcity in the availability of flexible electricity become apparent, this market could still turn quite quickly if and when that may happen.

About the Author

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 private entities on a range of energy origination, strategy and trading issues.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

On 5th May a storm broke out in European legal and political circles: Germany’s most senior judges had dared to overrule a Judgement of the European Court of Justice. Not only had the Bundesverfassungsgericht, Germany’s highest Court, had the gall to state that the European Court had exceeded its powers but it also ruled that the European Central Bank had acted beyond its mandate and in contravention of EU and German national law. The otherwise unassailable status of the European Court and the reputation as saviour of the Eurozone for which the European Bank likes to be known, were both at stake. 

It is not surprising that Eurosceptics, both in the UK and elsewhere in Europe, publicly gloated at this act of defiance of a national court and welcomed the Judgment with considerable glee. But what really happened and why, and, most importantly, was the judgement truly like laying a “bomb under the European project” as even quality papers have suggested.

Background

The story begins with the Eurozone Crisis. The Crisis arose late in 2009 when it transpired that several Euro Zone countries were no longer able to repay their sovereign debts or to bail out their over-indebted banking institutions. In September 2012 the European Central Bank (‘ECB’), offering ‘unlimited support’, adopted a number of monetary policy procedures on the grounds that these would provide time for the weaker Eurozone States to take important structural measures so as to be able to modernise and make their economies more efficient. In short, this policy was intended to restore some financial balance in the Eurozone. Furthermore, the ECB also assumed a number of procedures regulating the prudential supervision of credit institutions as well as macro-prudential oversight of the financial systems within the EU. As Mario Draghi, the ECB President said at the time, the ECB would do “whatever it takes” to save the Euro.

In this context, the ECB Governing Council decided in September 2014 to initiate an asset-backed securities purchase programme (ABSPP). In January 2015 the ECB decided that the ABSPP should be expanded to include a secondary markets public sector asset purchase programme (PSPP) confirmed by its Decision (EU) 2015/774 of 4 March 2015. Under this programme, the national central banks, in proportions reflecting their shares in the ECB’s capital key, and the ECB, might, within a given time limit, purchase outright eligible marketable debt securities from eligible counterparties on the secondary markets.

A further ECB Decision followed in December 2015 whereby the time limit whithin which the PSPP would be operative was extended. These asset purchases, also known as ‘quantative easing’ (QE), were to “support economic growth across the Euro area and help the Eurozone return to inflation levels below, but close to 2 %”. This in the context of the ECB’s monetary policy’s primary objective of maintaining price stability. In 2016 and 2017 the ECB refined their original Decision even further.

Not every Eurzone country was happy with this measure. From a number of quarters – political, banking, economic and legal – came warnings signs of the far reaching nature the PSPP as operated would have and of the direct influence the ECB’s policy might exercise over the countries’ own fiscal policies.

In 2014 a number of prominent German individuals issued a constitutional action – referred to as the ‘OMT Case’- before the Bundesverfassungsgericht (‘BvfG’), the Federal Constututional Court of Germany, located in Karlsruhe. This turned on the ECB’s so called Outright Monetary Transactions strategy (‘OMT’) and its continued purchases of government bonds (BVerfG Case No 2 BvR 2728 (January 2014). The BvfG gave its reasoned judgement in this case in June 2016. Nevertheless, the OMT Case is not to be mistaken for the ‘Gauweiler Judgement’ which gave rise to the legal storm at the centre of this story and which we will now discuss.

The Gauweiler Actions   

In June 2015, concerned about the monetary effects of the PSPP on German society as a whole and in particular on its democratic basis laid down in das Grundgesetz (the German ‘Constitution’), largely the same group of litigants as in the OMT case, brought joined constitutional actions before the BvfG to test the ECB’s Decision EU 2015/774 of March 2015 (Peter Gauweiler and others v Deutsche Bundestag (C-62/14 (EU: C: 2015).

The proceedings which were brought against the German Government (the ‘Bundesregierung’ and the Second Chamber of the Federal Parliament (‘the Bundestag) as Defendants concerned the participation of the German Central Bank (the ‘Bundesbank’) in the ’implementation of the ECB Decision in question and, the alleged failure of the Bundestag and the Bundesregierung to act in respect of that participation.

It was alleged that the PSPP violated the prohibition of monetary financing and was ultra vires (an act which requires legal authority but which is done without it) violating as it did the principle of conferral which indicates that the EU Member States have the right to deal with all matters that fall outside the agreements of the EU Treaties and that the EU can only act whithin the conferred competences defined by the Member States in the Treaties. It was also argued that the decisions were in fact anti-democratic, because they undermined the German constitutional identity by their encroachment upon the competences of the German state, as laid down in the Constitution (the ‘Grundgesetz’).

The Referral to the CJEU for a ‘Preliminary Rulling’ by THE BVFG

By Order of 18th July 2017, the Second Senate of the BvfG stayed the Gauweiler actions and referred a number of questions which had arisen during the proceedings for a Preliminary Ruling under Article 267 of the TFEU (The Treaty on the Functioning of the EU) to the European Court of Justice (CJEU) (Case C-493/17).

If a national court is in doubt about the interpretation of European law it can ask the CJEU for a Preliminary Ruling, i.e. interpretation and clarification. A Preliminary Ruling is binding on the national court which has requested it but not on the courts of other EU Member States.

It was the first time ever that the BvfG made a reference under Article 267 TFEU to the CJEU, and, both for that reason and for its content, the request drew considerable attention.

In it the BvfG asked the CJEU to determine the validity of ECB Decision 2015/774 and its subsequent decisions and the applicability of the PSPP in a Member State, on the premise that the PSPP exceeded the ECB’s monetary policy mandate on account of the external monetary policy practised by the Member States, and the immediate economic effects flowing from it in the Member States. It was also asked to rule on the issue of whether the ECB had sufficiently assessed or substantiated the measures provided for in its Decisions and whether their assessment had satisfied the principle of proportionality. The proportionality principle means that to achieve its aims, the EU will only take the action it needs to or no more and stay within its own competences.

The Grand Chamber of the CJEU would pronounce its judgement on 11th December 2018. We shall see in the next instalment in this series of blogs, what its conclusions were and how the BvfG reacted.

About the Author

Reina Maria van Pallandt is a senior disputes resolution lawyer with dual British and Dutch nationality. After obtaining an LLB Honors degree in Dutch Law and Public International Law at the University of Amsterdam (UvA), Reina Maria studied International Law of the Sea at London School of Economics (LSE). She was admitted as a Solicitor of the Senior Courts of England & Wales in 1979 and of the Law Society of Ireland in 2019. Reina Maria originally practised as a solicitor at Holman, Fenwick & Willan in London and Paris and thereafter at Clifford Chance where she specialised in marine and general commercial arbitration and litigation representing shipowners, P&I Clubs, shipbuilders, repair yards and charterers such as oil and gas companies and commodity traders.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical 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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here