Entry into force of the Paris Agreement: 4 November 2016
On 5 October 2016, the threshold for entry into force of the Paris Agreement was achieved. In a political impetus, heralded as a historic move, EU ministers ratified the Paris Agreement at a meeting in Brussels, tipping the balance point for 55 countries with 55% of the global emissions to ratify in order for the Agreement to come into force. Despite what was expected to be a lengthier and more bureaucratic process, the EU pushed though the bill in record time. To date, all but two EU nations have ratified the law - the UK and Ireland - and both have pledged to do so by the end of the year.
The EU joins other major emitters such as China and America, who ratified the bill at the start of September. There is speculation that such a feat was achieved in anticipation of the American election looming on 8 November. The Agreement was specifically not designed as a treaty, to avoid the need for congressional approval due to the overwhelming majority of Republicans in office. Trump has previously indicated that, if elected, he would repeal the bill. The positive news is that even were Trump to repeal the law on his first day in office the process would take four years, by which time there would be another election.
At the date of writing, the agreement has been ratified by 81 countries representing 60% of global emissions. The first session of the COP for the Paris Agreement (CMA1) will take place in November in Marrakech, in conjunction with COP22 and CMP12. Ireland is reported to have begun the process for ratification in mid-October, with an intention to complete before CMA1. The UK has also pledged to ratify the agreement by the end of 2016, which is welcome news for investors. This, combined with the Government's adoption of the Committee on Climate Change's recommendation to the set emissions target of 57% by 2032 in the summer, may signal hope that the new government is still committed to its climate change targets in the wake of Brexit.
In contrast to earlier predictions, National Grid has downgraded the risk of the lights going out this winter. The cushion between demand and supply has now increased from 5.5% (summer prediction 2016) to 6.6%, partly helped by its decision to pay Eggborough and Fiddler's Ferry power plants £77 million to stay partly operational throughout the winter of 2016 (Eggborough coal plant was due to shut before the winter season). Other capacity has been sourced though Short Term Operating Reserve contracts (STOR) and Demand Side Response measures.
This is intended to be the last year that such emergency measures will need to be taken by National Grid, following the decision to bring next year's Capacity Market Auction forward for winter 2017/18. Earlier this month on 14 October 2016, National Grid announced the outcomes of the 2016 T4 Capacity Market Prequalification, which saw new diesel powered stations accounting for a significant percentage of the 8.7 GW of back-up power offered. This has led to anger among environmentalists, as the market has worked to incentivise cheap and easy to build/run, but dirty fuel. Over the summer Ofgem announced a consultation to review the same, and the results are due to be announced soon. The final auction will take place in December 2016, with a second Capacity Market Transitional Arrangements auction set to take place in March 2017, but ring-fenced for turn-down Demand Side Response.
OFTO tender rounds 4 and 5
The fifth round of tenders for ownership of offshore transmission assets for offshore wind projects was opened by Ofgem on 10 October 2016 following a preliminary information event on 30 September 2016. Round 5 consists of five offshore wind farm projects with a combined generation capacity of 2.3GW and a transmission asset value of roughly £2billion. The projects involved are: Rampion; Dudgeon; Walney Extension; Race Bank and Galloper offshore wind farms. However, on 5 October 2016, Ofgem confirmed its intention to delay the start of the tender process for Walney Extension and Galloper until 27 February 2017.
Round 5 reverses the downward trend for the number of projects involved in the OFTO tender rounds with nine, four, two and one projects' transmission assets being tendered in rounds 1-4, respectively. This reflects a greater number of offshore wind projects making their way through the planning system to construction. However, given the government's amendments to the Contracts for Difference (CfD) regime in 2016's budget, which reduced the strike price for offshore wind power generation; the increase in projects tendering may not continue moving forward as developers re-consider the viability of their projects. The four projects lined up for a sixth OFTO tender round are: East Anglia ONE; Beatrice; Hornsea and Neart Na Gaoithe. All of these projects already have CfDs secured.
On 13 September 2016, Ofgem announced a five-strong shortlist of bidders for the offshore transmission assets of Burbo Bank Extension wind farm in the bay of Liverpool. Burbo Bank is the only project involved in round 4 and has a transmission asset value of roughly £230million and a generation capacity of 258MW. A decision is expected from Ofgem on the successful bidder in April 2017.
On 21 October 2016, the Court of Appeal rejected Infinis's appeal against the government's removal of the Renewable Source Electricity (RSE) exemption from the Climate Change Levy. Infinis contended that the removal of the exemption with less than one month's notice breached the EU principles of legitimate expectation and proportionality. Infinis reasoned that they had worked on the legitimate expectation that the RSE exemption would stay in place and had conducted business planning and entered into contracts on that assumption, arguing that the removal of the RSE exemption was not foreseeable by a prudent and circumspect economic operator. The Court, however, rejected this argument and found the case law of the CJEU to be consistent in requiring 'specific and consistent assurances' to be made by an authority in order for a party to rely upon a legitimate expectation that the authority will or will not act in a certain way. The Court found that no specific assurances had been made regarding the presence of the RSE exemption and, importantly, that governments and tax administration authorities are likely and able to change the tax code as and when they feel that it is appropriate.
On the issue of proportionality, the Court found that the fact that Infinis had made a loss due to the removal of a section of the tax code was not sufficient to outweigh the government's objectives. It held that the government had considered the effects of the action of moving from an indirect to a direct system of subsidising renewable generation, and that consideration was sufficient.
This case is pertinent in warning the energy sector (particularly renewables) that given the volatile nature of government intervention in the market, sector players should be apprehensive when relying upon any present government schemes. Unless specific assurances have been issued by the government, there is unlikely to be any redress if companies suffer a loss as a result of a change of this nature. Keeping up to date with current proposals is therefore key.
In June 2016, we reported on Ofgem's and National Grid's plans to separately review embedded benefits within the capacity market (the article can be found here). Since then, on 29 July 2016, Ofgem published an open letter on charging arrangements for distribution-connected generation seeking contributions to help inform its position on embedded benefits. Ofgem also announced that it proposed not to undertake a significant code review, but instead to seek a solution through industry rule modification proposals CUSC Modification Proposals 264 and 265. As anticipated, this has been met with resistance from within the industry and Cornwall Energy has recently published a report in response to Ofgem's open letter warning against a hasty and ill thought through review of embedded benefits, especially TRIAD benefits. There has been increasing industry pressure for a more comprehensive review to take place, especially in light of Ofgem's indication that it wishes a solution to be in place before the next capacity market auction. Some have argued that this is as an unnecessarily restrictive timescale, which could get in the way of finding a workable and sufficient long-term solution.