Welcome to our Energy and Natural Resources update, written by members of Osborne Clarke's energy and natural resources team.
The key theme from the articles is one of change throughout the energy and natural resources sector. New legislation is likely
to have a significant impact on your business in whatever aspect of the energy and natural resources sector you are involved.
The following articles highlight some of the key changes.
From Energy Review to Energy Bill
On 10 January 2008, the UK Government published its much-anticipated Energy Bill (the Bill). The key contents of the Bill can be traced back to 11 July 2006, when the Government published its Energy Review entitled: "The Energy Challenge". These 'challenges' were principally identified as:
On the back of this review, the Government published its Energy White Paper in May 2007. As with the Energy Review, the future of nuclear power, a review of the renewables obligation, and improvements to offshore oil and gas infrastructure and licensing were key issues, with further public consultation in these areas announced to take place.
The Bill implements the legislative aspects of the White Paper. It provides detailed provisions in relation to renewables, nuclear, oil and gas licensing and infrastructure, offshore gas storage, and carbon capture and storage. Alongside the Planning Bill, Marine Bill and Climate Change Bill, it perhaps represents the Government's foremost legislative response to date to the global challenges of climate change and energy security.
The developments in the Bill will have significant impact on the UK energy sector. As the Bill moves from the Committee stage to its third reading in the Commons before being sent to the House of Lords, we look at the key amendments, focusing on offshore oil and gas, renewables and nuclear.
Offshore oil and gas
New offshore gas licensing structure
To meet the twin challenge of the UK's reliance on imported gas and the declining gas production from the UK continental shelf, the Bill seeks to rectify the current complex set of regulatory consents that developers require in order to invest in offshore gas and LNG infrastructure in UK waters. The Bill contains provisions to simplify this consenting process, and to extend the regulation to the continental shelf as well as UK territorial waters.
This is achieved in two ways:
DBERR will also have the power to make regulations relating to the application process and content, and to set out model clauses for licence conditions. In addition, the licence provisions or its term may be expressed in relation to a relevant Crown Estate Lease for the area in question.
Storage of carbon dioxide
The UK Government has recognised that the UK is in a favourable position to push ahead with carbon capture and storage (CCS) projects. CCS involves capturing carbon dioxide generated by fossil fuel power stations and permanently storing it in geological structures in the seabed. In the UK, depleted oil and gas fields are among the most important of these structures as many are coming to the end of their productivity.
The Government recognised the need to develop a regulatory regime for CCS to enable a demonstration project to proceed. Chapter 3 of Part 1 of the Bill introduces the need for a licence for the storage of carbon dioxide in UK territorial waters or within a Gas Importation and Storage Zone, as well as for any activities ancillary to storage, e.g., establishing installations, connected exploration, and conversion of a natural feature for the purpose of storing carbon dioxide. Once the Bill is enacted, CCS will be able to proceed on a secure legal basis, with the Crown Estate authorising and administering the right to store in the seabed, as well as leasing areas of the seabed to potential developers for CCS projects.
Petroleum licences
The Bill contains various minor changes to the Petroleum Licence regime.
The key reform is to the content of the Model Clauses that govern Petroleum Licences. However, the Bill also deals with a previously unsatisfactory scenario - multi-party licence requiring to be revoked against all the parties' interests rather than just the defaulting party. The Secretary of State will now have the power partially to revoke the licence interest of that defaulting licensee. Default for this purpose covers insolvency, change of ownership, and a breach of residence requirement.
Decommissioning of oil and gas installations and wells
Chapter 3 of Part 3 of the Bill contains provisions which amend Part 4 of the Petroleum Act 1998, dealing with the decommissioning of oil and gas installations and wells. These changes have been prompted by the changing nature of the entities owning the oil and gas facilities in the marine environment.
In the 1980's (parts of the Petroleum Act originate from the Petroleum Act 1987), the majority of these facilities were owned by large multi-nationals. The shift in the 1990's towards these assets being sold to smaller entities increased the risk of the Government becoming liable for decommissioning costs.
The Bill's provisions now enable the Secretary of State to request financial information and security for decommissioning at any time during the life of an oil or gas field if the risks to the public purse are assessed as unacceptable. The Bill also allows the Secretary of State to make all the relevant companies party to decommissioning liabilities for an installation or pipeline.
Renewables
The Renewables Obligation (RO)
The majority of the content of the Bill in relation to the RO concerns enabling provisions to replace the old enabling sections of the Electricity Act 1989 with new sections 32-32M. The Bill leaves it for the Secretary of State to implement the detail of the RO in a new RO Order to come into force by 1 April 2009. Therefore, the RO provisions contained in the Bill do not materially alter the structure of the current RO, save for the key reform of RO 'banding', which is introduced in Section 32D of the Bill.
This new system for allocating RO certificates (ROCs) was confirmed following a widespread public consultation released at the same time as the White Paper, and published (like the Bill) on 10 January 2008. The banding system is intended to reflect the level of support needed to encourage investment in the various renewable technologies.
Full details of the banding principles will be set out in the forthcoming RO Order 2009.
The Governments response document confirmed that the banding would range from 0.25 ROC/MegaWatt hour (MWh) for landfill gas as an 'established' technology, to 2.0 ROC/MWh for 'emerging' technologies such as microgeneration, wave, tidal, solar photovoltaic and advanced conversion technology (e.g., anaerobic digestion).
Onshore wind maintains its current 1 ROC/MWh support, along with energy from waste, hydro, and combined heat and power, whilst offshore wind is set to receive an incentive boost to 1.5 ROC/MWh. Geopressure enters the ROC market at 1 ROC/MWh.
Decommissioning of offshore renewable energy installations
Existing international (UNCLOS) and domestic (Energy Act 2004) legislation, governs the removal of redundant offshore installations from the seabed. Whilst this focuses primarily on offshore oil and gas, Chapter 2 of Part 3 of the Bill introduces provisions that give the Secretary of State powers to issue decommissioning notices in relation to offshore renewable energy installations in addition to existing powers to request decommissioning programmes from relevant parties.
These notices would enable the Secretary of State to require security for decommissioning obligations. The policy driver here is to minimise the cost of decommissioning falling to the taxpayer, by ensuring operators accumulate sufficient funds to meet their future liabilities.
Nuclear
Nuclear White Paper
The Nuclear White Paper was released on the same day as the Bill in response to the (court ordered 'fuller') second consultation on the future of nuclear power in the UK.
The White Paper invites private companies to come forward with their proposals for taking on the new nuclear build programme, and confirms the tacit approval given to a new generation of nuclear power stations in the 2006 Energy Review. Secretary of State for DBERR, John Hutton, told Parliament that in the face of the double challenge of addressing climate change by reducing carbon emissions and ensuring security of supply, he believed that it was in the country's vital, long-term interest that nuclear power should play a role in providing Britain with clean, secure, and affordable energy.
The White Paper envisages a revised regulatory framework for new nuclear and a National Policy Statement to underline the Government's commitment to this policy. Before the expected new build construction begins (2013-2014, with power output anticipated from 2018), the White Paper deals with related actions, including a reform of the planning process for nuclear plants, a review of the licensing process, and clarity on responsibility for decommissioning and clean-up costs.
Nuclear waste and decommissioning financing
Chapter 1 of Part 3 of the Bill sets out new obligations for operators of new nuclear sites to submit a "funded decommissioning programme". This obligation will only apply to applicants for new nuclear licences who are proposing to use the site for power generation.
This programme must make provision for various "technical matters" in relation to a new build nuclear facility, i.e.:
Approval of a funded decommissioning programme rests with the Secretary of State.
Major changes to the UK's nuclear liability regime
Major changes are currently being proposed to the UK nuclear liability regime, a key issue for any entity involved in the UK nuclear sector.
The main changes include:
These proposals give rise to a series of important issues on liability for nuclear incidents. It also seems unlikely that insurance will be available to cover a number of the new obligations, or to the extent that it is available, that premiums may increase substantially.
The current position
The current UK law is set out in the Nuclear Installations Act 1965, as amended (the Act). The Act imposes strict, no fault and exclusive liability for nuclear incidents falling within its scope. Primary liability for a nuclear incident attaches to the holder of the nuclear site licence.
Compensation is the sole remedy under the Act for a claimant who suffers loss or damage arising from a particular nuclear incident. The current regime provides that a site licensee's maximum liability for such an incident be capped at a prescribed amount, with any claims exceeding that threshold to be met by the UK Government.
The proposed changes
The current proposals result from changes agreed in 2004 to 2 international treaties regulating the treatment of liability for nuclear incidents across national borders to which the UK is a party: the Paris Convention of 29 July 1960 and the Brussels Convention of 31 January 1963.
Increased maximum liability
Currently, the maximum liability of a site licensee is £140 million per occurrence of a nuclear incident, with a lower figure of £10 million applying to certain prescribed sites. These figures have historically been fixed at a maximum level at which it is possible for a site licensee to obtain insurance in respect of the risk.
Under the new proposals, the liability of the site licensee will increase to at least €700 million (approximately £500 million). In addition, the Government's liability - beyond that imposed on the site licensee - will increase from £240 million to at least €1,500 million (approximately £1,000 million), with any sums above the €1,500 million paid at the discretion of Parliament.
The lower limits under the Conventions relating to transport and low risk sites are also significantly increased by the proposed amendments. In relation to transport of nuclear material, the UK currently imposes a £140 million limit on the site licensee (although the Conventions permit lower limits). We understand that the Government is looking to increase this sum to €700 million (approximately £500 million).
This is clearly a huge increase in liability for the licence holder. However, as highlighted below, the new proposals go much further than a simple increase in financial limits.
Wider heads of damage
Under the current provisions, claims can be made for personal injury and loss of life, property damage, and consequential loss arising from a nuclear incident.
The new proposals add the following 3 heads of damage, which are not generally recognisable in UK law:
This significant broadening of the heads of damage increases the likelihood of a successful claim as well as the opportunity for nuisance claims.
Extended time limit for claims
Currently, a claim for compensation can only be brought against the licensee within 10 years of the date on which the nuclear incident occurred or, in the case of an incident continuing or part of a series of successive incidents, on the date of the last occurrence to which the claim relates. During this period, a licensee is required to make funds available or otherwise obtain insurance to meet claims up to the statutory maximum. The Act currently directs claims between 10 and 30 years to the Government.
Under the new proposals, liability of the licensee is extended to at least 30 years for personal injury claims.
More facilities covered
The proposals also extend to a wider range of facilities, including nuclear installations in the course of being decommissioned and all nuclear installations for the disposal of nuclear substances.
Beneficiaries widened
The Paris and Brussels arrangements currently restrict the right to claim compensation to countries that are contracting states (the EU plus a few others).
The amended Paris Convention however, expands the list of beneficiaries to non-nuclear countries (such as Ireland), parties to the Vienna Convention and Joint Protocol on the application of the Vienna Convention (once ratified by the UK), and countries whose nuclear legislation offers equivalent reciprocal benefits and which is based on principles identical to those in the Conventions.
Representative actions
Foreign Governments are currently able to bring representative actions on behalf of victims suffering damage from facilities covered by the Conventions.
The amendments create similar rights for the UK Government.
The future
As stated above, the proposals give rise to a series of important issues on liability for nuclear incidents, and in particular are likely to affect the availability and cost of insurance.
In addition, there is little doubt that the Act itself requires more wholesale amendment to bring it into line with the growing private sector involvement in the industry. Richard Temple of Osborne Clarke has previously highlighted these . However, the proposals above are to be introduced, on their own, through secondary legislation under the Energy Act 2004. A more wide-scale amendment of the Act would require primary legislation.
The Department for Business, Enterprise and Regulatory Reform (BERR) has recently appointed financial consultants to investigate the availability of insurance for nuclear incidents and consider how increased liabilities might be covered. BERR currently expects consultation on the proposed secondary legislation in May/June 2008, with the relevant order passed into law by the end of the year. Given the above issues, we think that anyone involved in the nuclear industry will want to be involved in these consultations.
New proposals to enhance competition in the water sector
In December 2007, as part of its plan to introduce more effective market competition into the water and sewerage sectors in England and Wales, OFWAT published its recommendations for changes to the Water Supply Licensing (WSL) regime.
The recommendations included:
This represents the conclusion of the first part of the OFWAT competition review, which is focused on making the WSL regime more effective.
A further paper reviewing wider changes to the water and sewerage sector is scheduled for publication in spring 2008. The combined reforms could result in major changes to the water and sewerage sector in England and Wales, providing additional opportunities for both incumbent and new entrants to the market.
Background
On 1 December 2005, to enhance competition in the industry, the Water Act 2003 introduced the licensing of new suppliers to put treated water into the public distribution network and to sell water to eligible customers. This regime applied to suppliers to non-household premises who take a supply of at least 50 mega litres of water a year. There are approximately 2,200 such businesses in England and Wales, each having the opportunity to switch licensed water supplier. Whilst in principle this was a major innovation in the provision of water services, in practice, the new WSL regime has not proved successful.
The current regulatory regime used by OFWAT is based on comparisons between vertically integrated monopoly firms. However, OFWAT considers that regulation of vertically integrated monopolies by means of comparative competition alone is not sufficient to deliver either the best possible prices, incentives for innovation, quality or choice of services for users in the long run. OFWAT's focus is to increase competition to deliver these benefits and to promote and protect the interests of consumers. In due course, such an approach may also lead to regulatory withdrawal, reducing the regulatory burden in the sector.
Costs Principle
Under the Water Industry Act 1991, whether agreed by the parties or determined by OFWAT, WSL access prices (the price at which the new supplier acquires the water from the incumbent utility) must be set in accordance with the "Costs Principle". The aim of the costs principle is to obtain prices that fully compensate each incumbent for the net costs that it unavoidably incurs when providing a wholesale supply, rather than continuing to supply the final customer directly.
OFWAT is recommending that the Government remove the Costs Principle from primary legislation, replacing it with a set of criteria relating to access pricing. Under this approach, the Government would set out general access pricing criteria and legislation, while OFWAT would have the flexibility to specify access price methods that are appropriate for different access arrangements within the framework of these criteria. The precise criteria to be applied will need to be discussed further with the stakeholders.
Eligibility threshold
OFWAT is recommending that within a year, the eligibility threshold for supply to customers by water supply licensees be reduced from 50 to 5 mega litres as an initial step to enhance competition. Within a further 2 years, the threshold should then be amended to include all non-domestic customers.
Licence application fees
OFWAT has also considered whether the licence application fees payable by applicants should be abolished. However, it concluded that the cost of changing the legislation is likely to outweigh the benefits, and that since the licence fees are minimal, they should remain.
Supplier of last resort
One issue raised by customers was that of a statutory duty on the incumbent utility to act as a "supplier of last resort" in the event of licensee insolvency or withdrawal from the market. OFWAT concluded that the current legislation does not need to be changed for retail supplies. However, OFWAT will require water utilities to develop and publish a default tariff for returning retail customers. OFWAT also recommends that the Government pursue the changes to the strategic supply regime to allow further protection for combined licensees (where a licensee puts water into the network and sells water to eligible customers) and their customers. Again, OFWAT will require water utilities to develop and publish tariffs for returning combined supply customers to be approved as part of the changes to the scheme.
Competition in providing sewerage services
Although not prohibited, there is currently no specific framework in the Water Industry Act 1991 for competition in providing sewerage services. OFWAT has now concluded that the Government should allow retail competition for sewerage as part of the WSL regime.
Wider competition
OFWAT is considering additional approaches to promoting competition in the water and sewerage sectors. These include accounting separation. This is common in other utilities sectors, and will enable the identification of discrete activities and functions, treating each of them as if it were a separate business unit. OFWAT are looking to require each company to identify clearly and report separately on each area of its business. This separation can reveal redundant services and costs. OFWAT will also consider structural separation of the various businesses and how best to increase household competition, competition in the 'production' of water, and competition in abstraction.
The future
It has long been thought extremely difficult to introduce competition into the water sector. Due to the non-homogenous qualities of the water itself, combined with the costs of transporting large volumes, it seemed that this was one utility sector where a vertically integrated monopoly would remain.
However, OFWAT's recommendations, together with the review of wider competition to be published in the spring, will bring
additional opportunities for both incumbent and new entrants to enhance their position in the market. Significant industry
reorganisation of a type not seen elsewhere in the world is a distinct possibility.
Gasunie acquires major German gas transmission network
Osborne Clarke's Cologne and London offices, together with Osborne Clarke Alliance Member, Ploum Lodder Princen in Rotterdam recently advised N.V. Nederlandse Gasunie (Gasunie) on the acquisition of a major German gas transmission network.
Background to the transaction
Already one of Europe’s largest transport system operators (TSOs) for natural gas, Gasunie signed agreements with Shell and Exxon Mobil to acquire two supra-regional pipeline systems in Northern Germany. The transaction creates of a cross-border network reaching from The Hague to Berlin. As its operator, the Gasunie group is taking an active part in the creation of a European energy market. It might also become a role model for other industry players: Gasunie has been a fully unbundled transport operator ever since the separation of Gasterra in 2005.
The German gas market
Tariffs
TSOs' activities are subject to sector-specific regulation. In Germany, tariffs for the transportation of natural gas are subject to review by the Bundesnetzagentur or Federal Network Agency (FNA).
If they are subject to effective competition, operators of supra-regional networks are allowed to charge market-based tariffs. Such competition may exist between different pipelines having entry and exit points in the same geographic area, or through pipe-in-pipe competition, where a pipeline is jointly owned by several TSOs, but each TSO can market its capacity independently of the others, and customers can choose between these different TSOs. However, the FNA has yet to delineate which degree of competition is required, and is currently investigating the market-based tariffs of several supra-regional TSOs. Decisions are expected by mid-year.
Where market-based tariffs are not approved by the FNA, TSOs will need to calculate their tariffs based on a scheme provided for in German energy law. The current model essentially focuses on the cost base of a TSO. However, following a German Federal Decree passed in late 2007, the FNA will now compare the efficiency of TSOs and the level of tariffs will factor in the class rank of a particular TSO. Those faring badly against their counterparts will face a mandatory reduction in the level of tariffs that they are allowed to charge. The regulatory regime is designed as an incentive for efficiency, as well as aiming to reduce the overall level of prices in the energy sector.
Regulatory authorities
The German energy sector is monitored by the FNA as well as the German competition authority or Bundeskartellamt (BKartA). The BKartA reviews mergers and prohibits anti-competitive agreements and abuses of market dominance. It normally carries the burden of proof in successfully prosecuting breaches of the rules. However, according to a recent amendment of the German Competition Act, the burden of proof is reversed when it comes to a dominant energy provider charging prices that are higher than those charged by other providers in similar circumstances. The provider will therefore need to show that there is an objective justification for the higher level of prices. This provision only applies to suppliers of electricity or natural gas, however, and not TSOs.
Only a few weeks after the amendment entered into force, the BKartA initiated investigations against 35 suppliers of natural gas. These will now need to justify their conduct, including the prices charged to their respective customers.
Unbundling
Under current German law, companies may include energy providers and TSOs within the same group. For example, E.on Ruhrgas operates pipelines and sells gas. Unbundling requirements are stricter in the Netherlands, which introduced such legislation in 2005. The Dutch experience may soon become relevant to all other EU member states, as the European Commission has presented plans for a third liberalisation package, which would require a far-reaching separation of infrastructure companies from energy providers. After having originally opposed the idea, the leading providers of electricity in Germany, E.on and RWE, have now indicated their readiness to sell their respective grids.
In light of the push to more unbundling in the energy sector, the next few years are likely to be a time of great change for
German and other EU energy companies.
