Navigating the energy transition to net zero — the course is set

For decades, pressure has been building on the energy sector to decarbonise. In 2020, we witnessed a paradigm shift in the sector.

Offering investors a low carbon future

Pressure to decarbonize has been driven by growing evidence and awareness of the link between burning hydrocarbons and climate change, and the prevalence of hydrocarbons in our global energy system (80% of our global energy demand is still provided by hydrocarbons). In 2020, we saw a major shift take place, with the emission reduction commitments made in Paris by the international community in 2015 finally finding their way into national commitments from the world’s major emitting nations (including the US, China and Europe), and becoming enshrined in the corporate visions of the major European hydrocarbon producing companies (such as bp, Shell, Eni and Total). Confidence to make this shift has been supplied by the remarkable cost-reductions in renewables in recent years (particularly solar PV and wind) and improvements in technology, reinforced by ESG concerns and pressure from financial institutions on energy companies to divest from hydrocarbons.

These trends have been accelerated by the changes in our living and working habits brought about by Covid-19, many of which are likely to stay. The European integrated oil companies have started to prepare themselves for this “new normal”: recording massive asset write-downs, slashing hydrocarbon CAPEX and announcing multi-billion divestment programmes (over US$80 billion worth of assets were on the block from the oil majors, at last count), whilst at the same time pivoting towards new energy (hydrogen and carbon capture, utilisation and storage (CCUS)), renewables, EVs and emission reduction technologies. We’re also seeing a rise in the fortunes of the pure-play renewable companies, such as Orsted, Enel, Iberdrola and NextEra Energy Inc. These companies are attracting record amounts of capital and growing quickly as they offer investors a clean bet on a low carbon future.

“Energy companies have taken decisive action to reposition themselves for the energy transition, as emission reduction commitments find their way into the corporate visions of the major European hydrocarbon producing companies.”

A wave of consolidation

Oil & gas M&A deals proved difficult to close in 2020, as dealmakers struggled to agree on asset valuations due to the Covid-induced lower oil price, leading many deals to be abandoned or put on hold (for example Energean/Neptune in the UK North Sea). Creativity came to the fore, with Chevron acquiring Noble in a US$13 billion share for share deal and Chrysaor reversing into Premier Oil’s London listing. Distress drove Chesapeake and numerous other higher-cost US shale producers to the wall but intense cash conservation saved many of the companies outside of North America, leaving the oil service companies to take the brunt. A wave of consolidation is still expected to break in the services sector, and the broader upstream market, perhaps next year. The national oil companies were largely absent from auction processes in 2020, but are likely to return in 2021 once stability and opportunism return to the market.

Some of the biggest deals in the energy sector involved pension and infra funds buying into credit-backed structures linked to mid-stream assets: ADNOC raised over $10 billion using this method, and Shell is looking at a similar method with its QCLNG assets in Australia. Infrastructure funds, private equity funds and pension funds are where much of the world’s free capital is located and they are now regular partners with oil & gas companies on bids.

Decisive repositioning for energy transition

Energy companies have taken decisive action to reposition themselves for the energy transition, with billion-dollar plus offshore wind acquisitions being made by many of the majors in 2020 (including bp, Total and Eni). The oil majors are now competing with traditional renewable energy companies and funds for assets, driving prices up and returns down. Early movers such as Orsted and Equinor are reaping the benefits. European utilities are rapidly unbundling and decarbonising, leading to an even greater focus on wind and solar and on enhancing the customer experience: Origin Energy’s strategic partnership with Octopus of the UK is an indicator of things to come.

In 2021, we can expect to see more of the same, with the major US oil companies (particularly Chevron and Exxon) likely to also enter the fray in some way, with their recently clarified focus on lowest cost, lowest carbon. 2021 is looking likely to be a block-buster year for energy sector M&A.

See also our full report M&A in 2021 – resilient, agile and coming off mute, which considers the most important legal issues faced by M&A deals under the challenges of 2020.

Rebecca Major

Rebecca Major
Partner, Paris
+33 1 53 57 78 31

Lewis McDonald

Lewis McDonald
Partner, Global Head of Energy
+44 207 466 2257

Lorenzo Parola

Lorenzo Parola
Partner, Milan
+39 02 3602 1405

Ignacio Paz

Ignacio Paz
Partner, Madrid
+34 91 423 4005

Hilary Lau

Hilary Lau
Partner, Head of Energy, Asia
+852 21014164

Nick Baker

Nick Baker
Partner, Melbourne
+61 3 9288 1297

Key TCA issues for the energy sector

The EU-UK Trade and Cooperation Agreement (“TCA“) establishes objectives for the energy market by providing for the facilitation of trade and investment between the EU and the UK (the “parties”) in the areas of energy and raw materials, and supporting security of supply and environmental sustainability, notably in contributing to the fight against climate change in those areas.

Following the end of the transition period, the UK is now treated as a third country in relation to the EU generally, and this includes in relation to the Internal Energy Market (“IEM”). While the TCA avoids the imposition of tariffs (electricity and gas are classified as goods, as is equipment necessary to generate electricity, and as such no customs or tariffs will be imposed), it brings about a number of changes that will invariably have an impact on the UK and EU energy markets.

Generally, the energy provisions of the TCA, set out in Title VIII, are broad in nature and provide for a range of cooperation obligations and the prospect of detailed arrangements being made between the parties at specified times in the future.

This briefing provides a short overview of the main energy provisions in the TCA and discusses their likely impact on the UK energy sector.

Regulatory and TSO cooperation

With the aim of ensuring that the objectives of the TCA are met, the UK regulatory authority, ie Ofgem, and the Agency for the Cooperation of Energy Regulators (ACER) must develop contacts and enter into administrative arrangements covering, among others, electricity and gas markets, access to networks, offshore energy, the efficient use of electricity and gas interconnectors, and gas quality and decarbonisation.

In relation to transmission system operators (“TSOs”), the parties commit to the establishing of technical procedures for transmission, and frameworks for cooperation between the European Network of Transmission System Operators for Electricity and Gas, respectively ENTSO-E and ENTSO-G, and the Great Britain (“GB”) TSOs. The TCA clearly states that these frameworks for cooperation will not involve, or confer a status comparable to, membership in ENTSO-E or ENTSO-G by GB TSOs.

The TCA also commits the EU and the UK to ensuring that “transmission system operators develop working arrangements that are efficient and inclusive in order to support the planning and operational tasks associated with meeting the objectives of this Title [VIII], including, when recommended by the Specialised Committee on Energy, the preparation of technical procedures to implement effectively” the provisions of the TCA on electricity and gas interconnectors, trading arrangements, grid developments and supply security.

At this early stage, the exact scope of these cooperation arrangements is unclear, as is the detail of their implementation.

Third party access and unbundling

Third party access (“TPA”) and unbundling were essential elements in the liberalisation of the European energy sector, and continue to be core tenets in both British and EU energy legislation. The TCA retains these two concepts and commits the parties to safeguarding the principals of TPA and unbundling, albeit at a high level. The TCA does however include a form of exemption regime under which the UK or the EU can decide not to apply the TPA or unbundling provisions of the TCA if relevant conditions are met.

On unbundling, under the TCA the parties have a broad obligation to implement arrangements to remove conflicts arising as a result of the same person exercising control over a TSO and a producer or supplier. This obligation, based on the limited detail given in the TCA, appears unlikely to add further restrictions in addition to those already existing under the provisions of the EU Electricity Directive and the Electricity Act 1989. The TCA provisions also do not reference the unbundling models of the current EU regime that was introduced by the third energy package in 2009, which leaves open the possibility of alternative unbundling models in the UK in the future.

Interconnectors

The TCA commits the UK and EU to cooperating to facilitate the timely development and interoperability of energy infrastructure connecting their territories (ie interconnectors). In as far as they relate to electricity interconnectors, the provisions of the TCA cover familiar ground in that they principally follow overarching principles set out in existing EU legislation governing electricity infrastructure, eg TPA, unbundling and congestion management.

The impact of these provisions on individual projects will depend on how the provisions are implemented in UK and EU law. For example, it is not clear how a decision by the UK or the EU not to apply the new ‘exemption’ regime of the TCA that allows the UK or the EU to decide not to apply TPA and unbundling requirements would impact the application of existing requirements of UK and EU law unless the relevant regulations are modified in order to implement the TCA.

Congestion management and transmission costs

Consistent with Article 16 of each of the EU Electricity Regulation and the UK Electricity Regulation (the EU Electricity Regulation is retained in UK law in an amended version following the expiry of the transition period), the parties are to ensure that capacity allocation and congestion management on electricity interconnectors is market based, transparent and non-discriminatory, and that the maximum level of capacity of electricity interconnectors is made available to the market.

Article ENER.13(1)(f) of the TCA requires the coordination of capacity allocation and congestion management between EU and GB TSOs, involving the development of arrangements for all relevant timeframes (forward, day-ahead, intraday and balancing). The parties are to ensure the conclusion between relevant TSOs of a multi-party agreement relating to the compensation for the costs of hosting cross-border flows of electricity which will aim to ensure that GB TSOs are treated on an equivalent basis to a TSO in a country participating in the inter-transmission system operator compensation mechanism. Until such time as this agreement is concluded, a transmission system use fee may be levied on scheduled imports and exports between the EU and the UK.

Power trading

GB TSOs will require certification to continue activities within the EU and will cease participation in EUPHEMIA, the single allocation platform for forward interconnection capacity, European balancing platforms such as TERRE and MARI, and the single day-ahead and intraday coupling mechanisms.

The UK market is now therefore de-coupled from the EU and has reverted to the situation which existed prior to market coupling in 2014. This means, amongst other things, that the UK market is moving to new access rules and losing access to the Joint Allocation Office, the single platform for allocation of long-term electricity transmission capacity to TSOs and short notice electricity balancing.

Once the UK became a third country to the EU, new access rules for all interconnectors were needed in the UK and with the relevant EU member state authorities in order for cross-border electricity trade to continue between the UK and the EU. In preparation for this, all operational interconnectors between the UK and continental Europe (France, Belgium and the Netherlands) had published modified access rules in the event of a no-deal Brexit, and Ofgem had approved the proposed modifications in each case. Broadly, this resulted in moving from the implicit day-ahead allocation under the IEM to explicit day-ahead allocation under the revised (no-deal) access rules of the relevant interconnector, which, according to the European Federation of Energy Traders (EFET) has led to increased costs in energy trading.

On a practical level, the UK’s exit from the market coupling arrangements has had consequences for the European electricity markets: From 31 December 2020 Nord Pool's day-ahead auction has a new gate closure time of 09:50 GMT with results available no later than 10:00 GMT; in Ireland the SEM-GB intraday auctions (IDA1 & IDA2) continue to operate with shared order books between power exchanges, offering implicit capacity between the island of Ireland and GB. Explicit capacity auctions will be staggered throughout the morning, starting with the BritNed interconnector, followed by IFA, IFA2 and finally Nemo Link.

On electricity trading arrangements, the Specialised Committee on Energy, established under the TCA, will ensure that TSOs develop arrangements for technical procedures within specified timeframes - technical procedures must enter into force by 2022. The committee will keep the arrangements under review and, if not satisfied with those arrangements, can take decisions and make recommendations as necessary for each party to request its TSOs to prepare technical procedures in line with the timeframes.

Renewable energy

The TCA contains a number of references to renewable energy and commitments by the EU and UK to maintain their current commitments in this regard (ie the commitments given under the relevant EU legislation and UK law, respectively). It does not however create any common climate change objectives or any new targets for renewable energy sources as between the EU and the UK. Instead, the TCA creates the bare regulatory minimum in terms of grid access and support for renewable energy sources.

In relation to renewable power, Article ENER.6 provides that the parties will enable the integration of electricity from renewable energy sources, and ensure the efficient and secure operation and development of the electricity system. In particular, the EU and the UK commit to ensuring that balancing markets are organised in such a way as to ensure that producers of renewable energy are accorded reasonable and non-discriminatory terms when procuring products and services.

In the same spirit, Article ENER.8 provides that the parties will ensure that TSOs treat producers of renewable energy on reasonable and non-discriminatory terms regarding connection to, and use of, the electricity network.

The TCA further provides, in Article ENER.21, that the parties commit to promoting energy efficiency and the use of energy from renewable sources, and ensure that its rules that apply to licencing or equivalent measures applicable to energy from renewable sources are necessary and proportionate. The parties are also committed to defining technical specifications which are to be met by renewable energy equipment and systems in order to benefit from support schemes.

Given the renewable energy potential in the North Sea, the parties will cooperate on establishing a specific forum for the development of renewable energy in the region and the development of an offshore grid. The parties’ cooperation in relation to the development of renewable energy in the North Sea region will include hybrid and joint projects, sharing of information on new technologies, best practices on onshore and offshore grid planning and exchanges of best practices on rules, regulations and technical standards. This is an area that will be of particular relevance for the development of multipurpose interconnectors in the North Sea (eg, HVDC cables linking wind farms in different countries) and an area in which innovations in both EU and UK law will be necessary in order to accommodate such projects.

Climate change

The TCA does not provide for any substantive new objectives in relation to climate change. More broadly, the parties acknowledge that climate change represents an existential threat to humanity and reiterate their commitment to strengthening the global response to this threat. Both the EU and the UK commit to continuing to work towards the objectives of the Paris Agreement on Climate Change.

Accordingly, each party will respect the Paris Agreement and the process set up by the United Nations Framework Convention on Climate Change (UNFCCC) and refrain from acts or omissions that would materially defeat the object and purpose of the Paris Agreement. The parties also commit to advocating the fight against climate change in international forums, including by engaging with other countries and regions to increase their level of ambition in the reduction of greenhouse gas emissions.

The UK reaffirms, in Article ENER.21, its commitment for the share of energy from renewable sources in gross final energy consumption in 2030 and its ambition for the absolute level of primary and final energy consumption in 2030 as set out in its National Energy and Climate Plan, which was originally set up in compliance with the EU Governance Regulation adopted in December 2018.

Carbon pricing

The UK left the EU Emissions Trading System (“EU ETS”) at the end of the transition period, however UK participants in the EU ETS must continue to comply with their obligations under that system for the 2020 compliance year.

The TCA provides for the UK to introduce its own emission trading system (“UK ETS”) from 1 January 2021. Whilst it was intended for the UK ETS to commence operation from 1 January 2021, the system is not yet operational and a number of technical questions still need to be clarified by the UK’s Department for Business, Energy and Industrial Strategy, who will run the system, such as the level of free allocations, how many UK ETS allowances should be auctioned, and how exactly will the auctions work, including the auction schedule. The following elements of the UK ETS are currently known:

·  Auctions will have a floor price of £15 per tonne and are understood to commence in the second quarter of 2021.

·  ICE Futures administer the auctions for UK ETS allowances and launch spot and futures contracts.

·  The UK ETS will cover energy intensive industries, power generators and aviation with a threshold of 20MW thermal input.

In the event of a no-deal Brexit, the UK Government had stated that it might introduce a carbon tax of £16 per tonne of CO2, and the anticipated introduction of a carbon floor price of £15 per tonne echoes this pricing level.

Nuclear power

In addition to the TCA, the EU and the UK entered into the EU-UK Agreement for cooperation on the safe and peaceful uses of nuclear energy (“NCA”), which sets out the future relationship between the UK and Euratom. The scope of nuclear cooperation under the NCA includes the facilitation of trade and commercial cooperation, the supply of nuclear and non-nuclear material and equipment, safe management of spent fuel and radioactive waste, nuclear safety and radiation protection, monitoring of levels of radioactivity in the environment, and nuclear safeguards and physical protection. The UK will continue to participate in EU research and development programmes such as the Euratom Research and Training programme.

Single Electricity Market on the island of Ireland (iSEM)

The iSEM is based on a bilateral cooperation agreement between the Irish and UK Governments (rather than as a matter of EU legislation) covering both Northern Ireland and the Republic of Ireland. The UK leaving the EU will therefore not have the effect of repealing or terminating this arrangement. However, the iSEM is subject to EU regulation for the energy sector as it is regulated by the Irish Commission for Regulation of Utilities (CRU), together with the Northern Irish regulator, which, as regulator of an EU member state, is bound to apply EU regulations.

A consequence of the UK being de-coupled from the IEM is that, in practice, Ireland would also be de-coupled from the immediate benefits of being in the IEM as the Republic of Ireland is currently dependent on a single cross-border interconnector with the UK (pending the construction of the Celtic Interconnector between Ireland and France, which is expected to be commissioned in 2026).

The EU has been mindful of the interests of Ireland (as an EU member state) in the negotiations and, in relation to energy, of the future of iSEM to avoid stranding Ireland from its supplies of electricity and gas. Article 194(1) TFEU, after all, provides that EU energy policy shall ensure supply security in the EU in a spirit of solidarity. As a result, the EU has requested that the UK Government “take[s] all possible measures to maintain [the iSEM]”.

In Northern Ireland, the Ireland/Northern Ireland Protocol to the Withdrawal Agreement provides the basis for the continued operation of the Single Electricity Market (“SEM”) after 1 January 2021. As part of the Withdrawal Agreement, the UK Government committed to implementing the iSEM provisions at Article 9 and Annex 4 of the Protocol, which apply key elements of European energy law in Northern Ireland to enable the effective operation of the SEM across the island of Ireland.

Outlook

Due to the TCA’s ‘skinny’ scope and its architecture, which provides for a series of regular review dates and interim deadlines to negotiate further issues, it is likely that the UK will continue to negotiate various aspects of its relationship with the EU on a near-permanent basis.

One of the key issues for the immediate negotiations between the parties will be to establish the various cooperation arrangements between regulators and TSOs, and also to establish the procedures for the practical implementation of the TCA.

The provisions of the TCA related to energy are to cease to apply on 30 June 2026, but the Partnership Council (established under the TCA and to comprise representatives of the EU and the UK) may thereafter decide on an annual basis whether these provisions should continue to apply. The effect of the TCA energy provisions ceasing to apply will depend on how they are implemented by the EU and the UK, it is therefore too early as yet to judge the full impact these provisions will have on the UK and EU energy markets.

Silke Goldberg

Silke Goldberg
Partner, London
+44 20 7466 2537

Chris Davis

Chris Davis
Senior Associate, London
+44 20 7466 2397

                                    

Spanish Government approves a royal decree on grid access and connection

Royal Decree 1183/2020, of 29 December, on access and connection to the electricity transmission and distribution networks (the Royal Decree or RD 1183/2020) was published in Spain’s Official State Journal (BOE) on 30 December 2020 and entered into effect on the following day.

RD 1183/2020 develops and implements – thus allowing for the full application of – the provisions on grid access and connection contained in article 33 of the Spanish Electricity Sector Law 24/2013, of 26 December (LSE) and, at the same time, fulfils the provisions of paragraph 3 of the Eighth Final Provision of Royal Decree-Law 23/2020, of 23 June, which approves measures in matters of energy and other areas to reactivate the economy (RDL 23/2020, the main aspects of which were analysed here), which called upon the Spanish Government and the National Markets and Competition Commission (CNMC) to approve provisions to implement article 33 LSE within three months from the date on which it entered into force.

As the Government and the CNMC have joint authority over grid access and connection, RD 1183/2020 does not contain complete provisions on grid access and connection nor does it contain regulations to fully implement article 33 LSE. Indeed, RD 1183/2020 itself details the elements that the CNMC must cover in a Circular, which is expected to be approved imminently. However, it should be taken into account that the Circular will not alone result in the lifting on the moratorium on grid access imposed by RDL 23/2020: the Eighth Transitional Provision of RD 1183/2020 points out that, other than the tenders that may be expressly called by the Ministry for Ecological Transition and the Demographic Challenge (MITERD), new joint grid access and connection applications will not be allowed until the network managers have published the information on available grid access capacity at the different nodes using the online platforms referred to in article 5.3.

The new procedure established in RD 1183/2020 will apply to grid access and connection applications made after it has entered into effect (and, on a transitional basis, to grid access or connection applications emerging after it has entered into effect but that are respectively linked to grid access or connection applications actually made before it did). The main content of the new Royal Decree is described below.

  • Context and impact of the new Royal Decree
  • Scope of RD 1183/2020
  • Regulation reserved for the CNMC and which is therefore not included in the RD 1183/2020
  • Generation facilities that must apply for grid access and connection
  • Essential characteristics of the general procedure for applying for grid access and connection: chronological order of preference
  • Exceptions to the standard procedure: special procedures for granting grid access
  • Hybridisation
  • Regulation governing the modification or updating of grid access due to modifications to a facility
  • Elimination of the Single Node Representative
  • Jurisdiction to resolve grid access and connection disputes
  • Guarantees and payments required for generation facilities: enforcement and cancellation
  • Expiry of the grid access and connection permits
  • Steps to be taken after obtaining grid access and connection permits and all required administrative authorisations
  • Other provisions of RD 1183/2020
Jose Ramon Mourenza

Jose Ramon Mourenza
Of Counsel, Madrid
+34 91 423 4006

EEG 2021 – New German Renewable Energies Act in force from 1 January 2021

The new German Renewable Energies Act 2021 (“EEG 2021”) was finally passed on 18 December 2020 and came into force on 1 January 2021, subject to certain exemptions. The EEG 2021 aims to promote the further expansion of renewable energies and the energy transition in Germany, and achieve greenhouse gas (“GHG”) neutrality by 2050.

Setting ambitious goals

In its ambitious goals towards achieving net zero by 2050, the EEG 2021 refers in particular to:

  • GHG neutrality by 2050: Under the EEG 2021, all electricity generated and consumed in Germany is to be GHG neutral before 2050.
  • Implementation of the Climate Protection Programme 2030: As an interim goal on the path to net zero by 2050, renewable energies will provide 65% of Germany’s electricity consumption in 2030; renewable energy accounted for 42% of electricity consumption in Germany in 2019. The extent to which individual technologies will contribute to achieving the 65% target and the expansion paths (Ausbaupfade) with which this can be achieved are regulated under the EEG 2021.
  • Cost development: The EEG 2021 sets out various measures on costs, which include an adjustment of the maximum values in the tenders for onshore wind and photovoltaics (PV).
  • Further expansion of renewable energies: Targeted measures to maintain acceptance for the further expansion of renewable energies are proposed, eg wind turbine operators can give local authorities a financial share (€ 2 cents per kilowatt) in the profits from new turbines; such payments can provide incentives for local designation of new areas for wind energy.
  • Grid and market integration: Among other things, ’southern quotas’ will be introduced in future tenders. The introduction of these quotas is aimed at relieving the grid bottleneck in central Germany and promoting flexible power generation in southern Germany. The current requirements for the controllability and management of renewable energy plants will also be expanded and the digitalisation strategy via smart meter gateways will continue.
  • Entering the ‘post-subsidy era’: The legal framework will be adapted for renewable energy plants for which the 20-year remuneration period expires from 2021.

During the legislative process to the EEG 2021, the legislator issued a resolution requiring the German Federal Government to define a more far-reaching expansion path for renewable energies in the first quarter of 2021, calling for a path that will ensure compatibility with the new European climate target for 2030 and the expected European targets for the expansion of renewables, as well as with Europe’s goal of achieving net zero by 2050.

The resolution issued by the legislator also requires further regulations to be made in the context of accelerated planning and approval of plants, and especially on the repowering of plants.

Initial reactions

Various critics in the political and business arenas have voiced that the reform of the renewable energies law in Germany in the form of the EEG 2021 does not go far enough, with one major aspect being that the electricity demand in Germany for 2030, as set out in the EEG 2021, is considered to be set too low.

The expansion of renewable energies as a ‘public interest’ is also not legally defined under the EEG 2021.

It remains to be seen whether the EEG 2021 and its upcoming amendments will be sufficient in paving the way forward to achieving an energy turnaround in Germany.

Kristin Kattwinkel

Kristin Kattwinkel
Junior Associate, Dusseldorf
49 211 975 59085

Marius Boewe

Marius Boewe
Partner, Dusseldorf
+49 211 975 59066

Silke Goldberg

Silke Goldberg
Partner, London
+44 20 7466 2537

Green finance and innovation – point 10 of the UK Government’s Ten Point Plan

In the final limb of its Ten Point Plan (the Plan), the Government acknowledges the significant investment required to achieve net zero through the developments and innovations elsewhere in the Plan. It seeks to leverage public and private sources of financing, increasing investment in research and development (R&D) while cultivating a green finance sector, including through the issue of UK Sovereign Green Bonds from 2021. This builds on the Government’s 2019 Green Finance Strategy and the establishment last year of the Green Finance Institute.

Net Zero Innovation Portfolio

The Government has committed to raising total R&D investment to 2.4% of GDP by 2027 and the first contributor to this is the £1 billion Net Zero Innovation Portfolio, which aims to accelerate the commercialisation of low-carbon technologies, systems and processes in the power, buildings and industrial sectors. The portfolio is designed to focus on priority areas that align with those emphasised in the Plan, including:

  • floating offshore wind;
  • nuclear advanced modular reactors;
  • energy storage and flexibility;
  • bioenergy;
  • hydrogen;
  • homes;
  • direct air capture and advanced carbon capture and storage;
  • industrial fuel switching; and
  • disruptive technologies, including AI for energy.

This builds on recent investments, such as the first phase in November of a £100 million injection in new greenhouse gas removal technologies, including direct air capture, a method of capturing CO2 from the air for storage in geological formations or use in industrial processes. In the Plan, the Government has pledged a further £100 million for energy storage and flexibility innovations, noting the increasing importance of such technologies as the UK more heavily relies on renewable sources of electricity generation and has to counteract their inevitably less predictable generation.

Nuclear fusion

Further to the commitments it makes to large-scale nuclear projects and advanced nuclear technologies in Point 3 of the Plan, the Government has emphasised its continued focus on commercialising nuclear fusion technology. It notes its ongoing £222 million investment in the STEP programme, which aims to build the world’s first commercially viable nuclear fusion power plant in the UK by 2040, as well as £184 million for new fusion facilities, infrastructure and apprenticeships to establish relevant expertise in the UK, creating a so-called “global hub for fusion innovation”.

Transport

In the transport sector, the Government has pledged to invest £3 million in the Tees Valley Hydrogen Transport Hub, which will lead research, development and testing of new hydrogen transport technologies across all modes of transport. This will sit alongside the world’s biggest hydrogen refuelling station in Teesside, plans for which have already been backed by Government. Aiming to address one of the more challenging aspects of decarbonising road transport, the Government has also committed £20 million to trials of zero emission heavy goods vehicles.

Financing – the public and private sectors

In terms of public funding, the Government has indicated that it intends to issue Sovereign Green Bonds in 2021, subject to market conditions, to be followed by subsequent issuances, the proceeds of which will finance sustainable projects and infrastructure. The Government will hope to tap into the exponentially increasing market for environment, social or governance-oriented investments, with around £190 billion of green bonds having been sold last year – 3.5% of global bond issuance.

In the private sector, the Government is continuing to encourage greater private investment in green innovation, building on 2019’s Green Finance Strategy and the corresponding launch of the Green Finance Institute. This organisation, chaired by Sir Roger Gifford, was established to promote collaboration between the public and private sectors, bringing together global experts and practitioners to design new ways of channelling capital into sustainable initiatives. It has since established a Coalition for the Energy Efficiency of Buildings and a Zero Carbon Heating Taskforce, as well as launching a Green Finance Education Charter.

The Plan sets out the Government’s next steps to encourage greener private investment, including introducing mandatory reporting of climate-related financial information across the economy by 2025, with a significant portion of mandatory requirements in place by 2023, aligned to the recommendations of the Taskforce on Climate-related Financial Disclosures. Measures will first be applied to entities such as premium listed companies, with their reach broadening over time, and will allow investors to better understand the impacts of their exposure to climate change, price climate-related risks more accurately and support the greening of the UK economy.

The UK and City of London will also be promoted as a leader in the global voluntary carbon markets, including in response to the recommendations of the Taskforce on Scaling Voluntary Carbon Markets. In relation to compliance markets, the Government wants to formulate a clear carbon price as the UK leaves the EU Emissions Trading System, and has since begun implementation of a replacement, domestic Emissions Trading System.

In order to facilitate informed investment, the Government will implement a green taxonomy that defines which economic activities are environmentally sustainable. The UK taxonomy will take the scientific measures in the EU taxonomy as its basis and a UK Green Technical Advisory Group will be established to review these to ensure their suitability for the UK market.

Together, the Government feels that these measures will provide investors a clear framework in which to deliver the low-carbon finance needed to achieve net zero by 2050. The Government predicts that enhancing green finance overall could attract £1 billion of matched funding and potentially £2.5 billion of follow-on private sector funding to supplement the Government’s own £1 billion investment.

Further measures directed at consumers and taxpayers, including on tax and regulations, are expected as part of HM Treasury’s Net Zero Review.

Matthew Job

Matthew Job
Partner, London
+44 20 7466 2137

Amy Geddes

Amy Geddes
Partner, London
+44 20 7466 2541

Jake Jackaman

Jake Jackaman
Partner, London
+44 20 7466 2883

Protecting our natural environment – point 9 of the UK Government’s Ten Point Plan

Recognising that the natural environment plays a key role in capturing and sequestering carbon, and with the objective of reversing environmental harm and enhancing biodiversity, the government has committed to “safeguard our cherished landscapes, restore habitats for wildlife…and adapt to climate change, all whilst creating green jobs” through plans that include the planting of 30,000 hectares of trees.

What is proposed?

National Parks, AONBs and Landscape Recovery networks

The government proposes to create new National Parks and Areas of Outstanding Natural Beauty (AONB) by designating and safeguarding “beautiful and iconic” landscapes across England from 2021. In addition, ten long-term “Landscape Recovery projects” will be established between 2022 and 2024, which are intended to restore wild landscapes in England, potentially creating “over 30,000 football pitches of wildlife rich habitat”. This is to help sequester carbon and establish the Nature Recovery Network (NRN), which was announced as part of the government’s 25 Year Environment Plan and launched on 5 November 2020. The new National Parks, AONBs and Landscape Recovery projects are intended to protect up to an additional 1.5% of natural land in England, playing a “key role in meeting the Government’s commitment to protect and improve 30% of UK land by 2030”.

Green Recovery Challenge Fund

The government has committed to inject a further £40 million (already having committed £40 million) into the Green Recovery Challenge Fund in 2021, aiding the immediate creation of green jobs to work on conservation and restoration projects across England. This increase to the Fund is expected to deliver over 100 nature projects over the next two years.

Environmental Land Management Scheme

As the UK leaves the EU, the government’s Environmental Land Management Scheme published earlier this year, (the Scheme) is an important part of the UK’s efforts to combat climate change, deliver clean air and water, protect the natural environment and protect from environmental hazards. The pilots under this Scheme are expected to be rolled out next year, with a full roll-out before 2024. The Scheme runs alongside the already existing Productivity Grants available to farmers, to encourage investment in technology to reduce emissions, while making their businesses efficient and profitable.

Flood defences

The government has also committed to invest £5.2 billion over six years from 2021 to protect homes, businesses and communities from flood risks, while also protecting the environment. Such improvement in flood defences is expected to deliver up to 20,000 jobs and protect over 336,000 properties from risk of flooding.

What will the impact be?

Environment

Businesses which require environmental permits for their operations may find more stringent conditions imposed on them or permits refused where their operations have the potential to negatively impact one of the newly protected areas.  They may be more likely to face local objection to the issue of a permit and a greater likelihood of challenge of the decision to grant a permit.

Planning

In planning terms, National Parks and AONBs are protected areas, subject to strict development controls respecting the sensitivity of the landscape. The recent Planning White Paper proposes to preserve such controls, noting that, for example, AONBs would be designated as “Protected” areas within the proposed new local plan system and subject to a presumption against development. Whilst beneficial for environmental protection, existing development controls in National Parks have created an imbalance between housing need and supply. This is acknowledged in the Planning White Paper, noting that the proposed new standard method for establishing housing requirement figures would have to take this into account to avoid undermining the purpose of National Parks. However, if the number and area of National Parks and AONBs significantly increases, the area of land subject to stricter development controls, and therefore not available for housing development, will also increase. The potential impact of this on the government’s ability to meet its ambitious housing target of 300,000 new homes per year (1 million by the end of this Parliament) is not clear. Designation of land as a National Park or AONB will certainly help those objecting to new homes in such areas.

The Environment Bill, which has resumed its passage through Parliament, includes a requirement that “responsible authorities”, including National Park authorities in England, must prepare and publish local nature recovery strategies. This will support the creation of the NRN. These proposals to protect the natural environment, safeguard landscapes and restore habitats also repeat existing commitments in the 25 Year Environment Plan to conserve and enhance the beauty of the natural environment, meaning that they will be capable of scrutiny by the Office for Environmental Protection (OEP) to be created pursuant to the Environment Bill.

Commentary

The government’s plans are a welcome step towards protecting natural landscapes and restoring wildlife habitats. However, they are effectively only a partial implementation of the much wider ranging commitments made in the 25 Year Environment Plan issued in 2018, which covers additional aspects of environmental protection such as waste, water and clean air in a much more comprehensive fashion than those aspects showcased in the latest Ten Point Plan.

Progress against the 25 Year Environment Plan to March 2020 was reported on by Government earlier this year and scrutinised by the Natural Capital Committee (NCC) which advises government on the natural environment and implementation of the 25 Year Environment Plan. The NCC highlighted in their October response to the progress report that the majority of England’s natural assets (air quality, marine environment, soils and land) examined by the NCC, five out of seven were still “deteriorating”, while no natural asset group was making progress in meeting existing targets and commitments. However, the NCC’s role with regard to progress under the 25 Year Environment Plan ends this year, and will pass to the new OEP once it is established in 2021. Of key importance therefore will be the new body’s confidence and enthusiasm for continuing to hold the government strictly to account.

Catherine Howard

Catherine Howard
Partner, London
+44 20 7466 2858

Julie Vaughan

Julie Vaughan
Senior Associate, London
+44 20 7466 2745

Carbon capture, usage and storage – point 8 of the UK Government’s Ten Point Plan

Becoming a world-leader in carbon capture, usage and storage (CCUS) technology is at the heart of the UK Government’s new plan for a “green industrial revolution” released on 18 November 2020 (Ten Point Plan).

The Ten Point Plan makes it clear that by capturing carbon from power generation, low carbon hydrogen production and industrial processes, and storing it underground so that it cannot enter the atmosphere, CCUS technology will play a critical role in addressing the UK’s ambition to become a net zero economy. The Government aims to use CCUS technology to revitalise industrial regions and capture and store 10 Mt of Co2 per year by 2030. Recognising that no one country has yet captured the CCUS technology market, the Ten Point Plan emphasises the UK’s unique position to lead in this respect, with the unrivalled asset of having the North Sea that can be used to store captured carbon under the seabed.

The government sees in CCUS technology a means to contribute to the economic transformation of the UK’s industrial regions, enhancing the long-term competitiveness of the UK industry. In fact, the Ten Point Plan reveals a £1 billion CCUS Infrastructure Fund that will be used to establish CCUS technology in two industrial clusters by mid 2020s, and aim for four of these clusters by 2030, saving the equivalent of 9% of the 2018 UK emissions between 2023 and 2032. The Ten Point Plan concludes that CCUS technology would support up to 50,000 jobs in the UK by 2030, with a sizeable export potential.

There is also a cross-over between CCUS and other elements of the Government’s Ten Point Plan. The Ten Point Plan recognises the link between low carbon hydrogen production growth and the expansion and increase of CCUS infrastructure, and the combination of CCUS technology and hydrogen will render the creation of various CCUS clusters possible in what the Government describes as industrial “SuperPlaces”. To set this plan in motion, the UK government is expecting to execute in 2021 a process for CCUS development, working in collaboration with industry and set out further details of a revenue mechanism for industrial carbon capture and hydrogen projects.

With plans for more than 30 new integrated CCUS facilities announced globally since 2017[1] and increased action by governments worldwide to incentivise technologies that capture carbon emissions, the Ten Point Plan is part of the UK’s plan to becoming a global leader in CCUS technology.

HSF will follow new UK policy papers on CCUS closely – follow our Energy Notes blog for more information as the policies evolve.

[1] www.iea.org/reports/ccus-in-clean-energy-transitions/a-new-era-for-ccus#growing-ccus-momentum

Steven Dalton

Steven Dalton
Partner, London
+44 20 7466 7470

Silke Goldberg

Silke Goldberg
Partner, London
+44 20 7466 2537

Reza Dadbakhsh

Reza Dadbakhsh
Partner, London
+44 20 7466 2679

Russian Petrochemical Industry gets the roadmap and achieves its first milestone

What are the key features of the Russian refining and petrochemical industry?

While Russia takes a leading position in gas and oil production, the same cannot be said about the processing and petrochemical industry. Russia holds only 2.5% of the global refined products market. In 2019, roughly only 11% of gas and 50% of oil produced in Russia was processed locally, which means Russian downstream production has a lot of growth potential. Outdated technology and high depreciation of fixed assets are viewed as key problems and deep revamp as well as new greenfield initiatives are the way of addressing this bottleneck.

The Russian petrochemicals industry is primarily dominated by large companies, with the leading players being Sibur, Rosneft, LUKOIL and Gazprom. Historically these and other Russian companies have underinvested in the petrochemical production capacity preferring to export crude oil and basic refining products. In the last five years we have witnessed the increased interest in creating a domestic petrochemical production focused both on domestic consumption and export.  Many Russian oil companies are looking to invest in greenfield petrochemical production units. There is also a lot of focus on ethylene as a feedstock given the abundance of natural gas in Russia. However the progress has been slow and we have not seen many investment decisions.

To support this trend in 2019 the Russian Government adopted a plan for development of the petrochemical industry up to 2025 (the Plan). In the Plan, the Russian Government declares that the Russian petrochemical complex is of strategic importance for the Russian economy, as it is one of the key drivers of industrial growth. The Plan outlines areas for development, sets goals and contains a roadmap. Among the main problems facing the sector, the Plan identifies the lack of long-term incentives for deep processing, including of LPG and ethane. The Plan suggests granting financial incentives to boost production and export of high value added petrochemical products as well as infrastructure investments.

The upgrade of existing and investment in potential Russian petrochemical projects (see the table below) could boost the production and export capacity delivering over US$15 billion (bln) per year in revenues.

New projects Contemplated Investment
Amur GPP (Gazprom) RUB 950 bln
Amur GCC (Sibur) app. RUB 835 bln (US$ 10.7 bln)
Ust-Luga GPP (Gazprom and RusChemAlliance) app. RUB 960 bln  (US$ 13 bln)
Ust-Luga GCC  (RusChemAlliance) app. RUB 966 bln (US$ 13.05 bln)
Irkutsk Polymer Plant (INK) RUB 168 bln
Yamal GPP app. RUB 318 bln (US$ 4.3 bln)
Yamal GCC app. RUB 725 bln (US$ 9.8 bln)
Upgrade Contemplated Investment
Expansion of ZapSibNeftekhim (Sibur) Not less than RUB 65 bln
New olefin complex for Nizhnekamskneftekhim (TAIF Group) RUB 234.2 bln

 

 

 

 

Reverse excise for LPG and ethane will be introduced in Russia from 2022

The introduction of the financial incentives envisioned in the Plan has been eagerly awaited by the Russian downstream sector. According to the latest legislative changes pushed through by the Ministry of Energy this year from 1 January 2022[1], LPG and ethane will become subject to an excise tax which in certain cases will be refunded and in some cases the processing companies will be entitled to refund more excise than they have initially paid.

The tax rebate for LPG and ethane processing will work as follows. The refund may be received by the taxpayers who have obtained special certificates confirming that they have processed LPG or ethane and satisfying the following criteria:

  • from 1 January 2022 the company has put into operation new production capacities for processing of ethane/LPG into petrochemical products with minimum capacity of 300 thousand tons of ethane/LPG per year; or
  • by 1 January 2023 the company has entered into an agreement for the creation or modernization of capacities for the production of petrochemical products with the competent authority and the amount of company’s investment exceeds RUB 65 billion.

The certificate holders will be entitled to the double rebate if they process using ethane cracking or dehydrogenation of LPG. In all the other cases the certificate holders will be entitled to 100% of the originally paid tax.

This should incentivise the construction and modernisation of the processing facilities, however it is not clear how this would impact the existing producers who on the face of it would not be allowed to claim any tax rebates and thus face the increased cost of their products.

[1] On 1 January 2022, Federal Law of 15.10.2020 N 321-FZ “On Amendments to Part Two of the Tax Code of the Russian Federation regarding the introduction of a reverse excise tax on ethane, liquefied petroleum gases and the investment coefficient used to determine the amount of the reverse excise tax for crude oil” will come into force.

 

Danila Logofet

Danila Logofet
Partner, Hong Kong
+852 2101 4261

Sergei Eremin

Sergei Eremin
Senior Associate, Moscow
+7 495 36 36887

Elvira Vanieva

Elvira Vanieva
Senior Associate, Moscow
+7 495 36 36794

 

 

Spanish Government announces first renewable energy auction for new remunerative scheme

The Spanish Government recently approved Royal Decree 960/2020, of 3 November, which regulates the remunerative framework applicable to renewable energy production facilities (RD 960/2020), which was analysed here.

In order to develop and implement RD 960/2020, the Ministry for Ecological Transition and the Demographic Challenge approved Order TED/1161/2020, of 4 December, which regulates the first auction to award the remunerative framework for renewable energy and establishes an indicative timetable for the 2020-2025 period (Order TED/1161/2020), which was published in Spain’s Official State Journal (Boletín Oficial del Estado, or BOE) on 5 December. A Resolution issued by the Secretariat of State for Energy on 10 December (the Resolution), published in the BOE on 12 December 2020, then announced the first auction to award the “remunerative framework for renewable energy” (régimen económico de energías renovables, or REER), which is due to take place on 26 January 2021 with a power quota of 3,000 MW (including a minimum reserve of 1,000 MW each for photovoltaic and land-based wind energy) and a maximum energy supply period of 12 years.

The key contents of Order TED/1161/2020 and the Resolution, which establish the rules applicable to the first auction, are set out below.

  • Auction process and phases
  • Auctioned product, power quota and minimum reserves
  • Terms of the bids
  • Matching bids
  • Successful tenderes’ immediate obligations; power pre-allocation registration, identification of facilities and construction permit
  • Completion of the facility and registration as operational energy supply deadline and cut-off date
  • Remunerative parameters defined in Order TED/1161/2020 and in the Resolution
  • Penalties for failure to supply the minimum auctioned energy
  • Auction timetable
Jose Ramon Mourenza

Jose Ramon Mourenza
Of Counsel, Madrid
+34 91 423 4006

Summary: Revised TEN-E Regulation – future financing of European energy infrastructure

The European Commission has announced this week a proposed revision of the Trans-European Networks for Energy Regulation (the TEN-E Regulation). The revision aims to bring European energy infrastructure in line with the EU’s new climate targets and the European Green Deal. Changes in technology and ambitions have required new infrastructure categories along with changes to the related regulatory framework, processes and incentives.

The TEN-E Regulation is seen as a central instrument for the further development of an internal energy market and its revision is necessary to aid in achieving the objectives of the European Green Deal. The objectives of the TEN-E Regulation remain largely valid, yet the current framework in the TEN-E Regulation does not fully reflect the expected changes to the energy system as a result of new political contexts and, in particular, the updated EU green targets for 2030 and carbon-neutrality target for 2050.

The key revisions as set out in the proposal are:

  • Smart grids – The criteria for smart electricity grids have been updated in line with technological changes in recent years, and to include potential innovations and digital elements.
  • Gas – There is an increased focus on renewable and low-carbon gases, such as biogas, biomethane and hydrogen, through the creation of a new category of infrastructure for smart gas grids. Hydrogen networks and power-to-gas facilities above a certain threshold with a cross-border relevance will be included in the revised TEN-E Regulation.
  • Projects of common interest (PCIs) – An additional selection criterion for PCIs has been added to include PCIs that demonstrate sufficient socio-economic benefits for at least two Member States and at least one third country. To reflect the objectives set in the European Green Deal, cross-border oil pipelines will no longer be eligible to be a PCI. In the preparation of Union PCI lists, the revised TEN-E Regulation includes a mandatory sustainability criterion for all infrastructure categories with at least one other criterion (e.g. market integration, security of supply, competition) at the stage of project selection. ACER and the European Commission will have a greater role in the identification of PCIs due to the need for independent validation.
  • Permitting procedures – Competent authorities will need to coordinate and find synergies with neighbouring countries when developing procedures. This is in order to avoid additional requirements or legislative amendments during the permitting process and to accelerate the permitting stage. An ‘offshore one-stop shop’ is introduced to simplify and expedite the process for offshore grids for renewable energy. There is a greater transparency obligation on project promoters.
  • Financing – Provisions on cost allocation have been revised to increase transparency and clarity and in order to accelerate investment. PCIs will remain eligible for EU financial assistance, but only those investments located in the territory of the EU will be eligible for financial assistance from the Connecting Europe Facility in the form of grants for works under specific conditions.

It is not clear yet when exactly the proposed new rules will enter into force and this will largely depend on negotiations with the European Parliament and Council. The fifth PCI list due to be published at the end of 2021 will follow the existing TEN-E Regulation with added sustainability assessment.

For further detail on the proposal for the revised TEN-E Regulation please read our other HSF Energy Notes article here.

Silke Goldberg

Silke Goldberg
Partner, London
+44 20 7466 2612

Lorenzo Parola

Lorenzo Parola
Partner, Milan
+39 02 3602 1405