On June 29, 2016 the firm's Air Quality & Climate Change Practice will host a webcast looking at major trends and drivers impacting the energy sector and global climate policy, with an emphasis on China, UK, Europe and the US.
The energy sector is already undergoing a rapid transformation towards a lower carbon future. The sector is changing from a paradigm characterized by large power plants sending electricity across major transmission lines to a more dynamic, decentralized paradigm with many localized power sources, flat demand and myriad new technologies empowering the customer. The explosive growth of renewables — mostly wind and solar — has driven this transformation. Even as prices for petroleum and natural gas dip towards historic lows, the renewable energy market share continues to grow at a rapid pace. Climate policies are also accelerating the shift to a lower carbon future — spurring renewable growth and adding headwinds to some traditional power sources.
Below, lawyers from Latham's Air Quality & Climate Change Practice offer a preview of the topics that will be covered during the webcast. Register for the webcast here.
Why does Brexit matter in terms of the UK and the EU’s energy policy?
Michael Green: Whether the UK is a member of the EU will have a material impact on the direction of the UK’s energy policy and is likely to have an impact on EU energy policy as well. Large parts of the UK’s energy policy — such as the phase out of coal-fired power stations and the UK’s renewable energy targets — are being driven by EU regulations, targets and commitments. In addition, certain UK energy-intensive companies are participants in the EU’s Emissions Trading Schemes and a number of UK energy suppliers have access to the European transmission networks. Therefore, whether the UK remains in the EU or not, raises a number of questions concerning future energy policy in the UK and EU.
Is now the chance for Europe to reap the benefits derived from the implementation of COP-21?
Antonio Morales: The transition to a low carbon economy, which is one of the main targets of COP-21, will require a massive change in the energy sector. The three main drivers necessary to achieve the transition to a low-carbon economy in the EU include: (i) reduction of greenhouse emissions, (ii) promotion of renewable energy and (iii) increased energy efficiency. The EU, through its ambitious climate change policies, has historically been a leader in efforts to address climate change. The European Commission believes that implementing COP-21 offers the opportunity to reap the benefits of those efforts by exporting EU’s know-how and technology. However, the shift to a low-carbon economy raises many doubts, for instance, whether such a transition will be implemented on a global scale or not. Regarding the reduction of greenhouse emissions, many industries fear that if the low-carbon transition is not implemented on a global scale, it could lead to an uneven playing field negatively impacting EU’s industries’ competitiveness.
What will be the key challenges for China in implementing a national emissions trading system?
Paul Davies: Enforcement is a critical challenge, and one regulators must meet for the system to be effective. If enforcement is lacking it will negatively affect demand for Emission Reduction Quotas (ERQs), the allowances under the Chinese system, and the market will lack credibility for investors. Second, the amount of ERQs in the system (the cap) and the manner in which they are allocated must be studied carefully. China can draw upon the experience of the EU Emissions Trading System, in which too many allowances were distributed freely, resulting in massive overcapacity. In addition, the system needs to address early action, so that far-sighted companies which moved early to reduce emissions are not punished and firms cannot game the system by boosting their emissions before the program goes into effect.
What factors are driving the slowdown in building coal-fired power plants in China?
Andrew Westgate: There are several factors at play here. The first is that coal production fell in China for the first time in 50 years. At the same time, renewable energy generation grew by more than 20% in 2015, and is increasingly competitive with coal. Second, prior to this slowdown, there had been a glut of new coal plants, with 155 projects approved in 2015. Finally, China has set very ambitious targets for greenhouse gas reduction, and meeting those targets while continuing to grow the economy without shifting away from coal is simply not possible. That said, China has huge coal reserves, and we should not expect coal to disappear anytime soon.
What key developments are occurring in the United States and California with climate policy?
Marc Campopiano: The US Supreme Court’s stay of the Clean Power Plan has added regulatory uncertainty but is unlikely to significantly stall the rapid increase in renewable energy development that we have witnessed over the last decade. Other policy drivers remain in place, such as the extension of important renewable energy tax credits. States also continue to advance climate policy, with California leading. Following the state’s successful implementation of a cap-and-trade and emissions reduction system over the past seven years, Governor Jerry Brown pushed still further in April 2015 with an executive order requiring the state to reduce greenhouse gas emissions to 40% below 1990 levels by 2030. The recent passage of SB 350 will increase the required share of renewable electricity generation from 33% to 50%. SB 350 represents a sweeping expansion of renewable energy and energy efficiency mandates. The bill requires the state to double retail customers’ energy efficiency savings in electricity and natural gas by 2030 and to increase the Renewables Portfolio Standards so that half of the state’s electricity must be procured from renewable sources by 2030. These requirements are groundbreaking measures in and of themselves. Moreover, SB 350 also lays the groundwork for increasing coordination with neighboring states regarding renewable energy.
What has been the impact of low oil pricing on global energy markets and what patterns might we see emerge in the coming months?
Simon Tysoe: First, we will see a hiatus in significant new investment in oil and gas projects. In March, a Wood Mackenzie report identified 68 major oil and natural gas projects that have been put on hold. In addition, exploration has been cut to the bone. From an environmental point of view, many of the projects cut have been the most controversial, such as Arctic and new oil sands projects. Ultimately these cuts will help rebalance the market and we'll see projects come back on over the next 18-24 months. But there has been a global loss of momentum which will take some time to redress.
Secondly, there has been a big impact on power generation. We are seeing globally cheaper gas and LNG prices. This drop is beginning to lend momentum to gas and power projects in a wide range of countries. This really hurts new coal-fired power projects, already impacted in many countries by legislation and policy reducing the viability of coal because coal’s price advantage against gas has shrunk, but globally as Andrew notes, it’s too soon to write off coal.
This may seem surprising as inexpensive oil often creates challenges for clean and renewable energy investment, but renewables investment has not suffered. Better technology, robust policies and the fact that oil accounts for only 5% of the generation mix means renewables investment continues to rise despite the low oil price. That said, in developing economies like some African states, where diesel is more frequently used, we have seen some negative impact on renewables.
Thirdly, the effect on the economies of oil exporting countries such as Russia, Saudi Arabia and Venezuela has been significant. Saudi Arabia unveiled a record budget deficit last year and inflation in Venezuela rocketed to 800%. Some countries have seen a double hit. Whereas in most countries consumers have benefitted through cheap pump prices and transportation costs, many oil exporting nations, particularly Latin American and African ones, have reduced fuel subsidies to balance budgets. So in these countries consumer fuel prices have often risen.
In the UK in particular, we are seeing a focus on decommissioning activities. Cheap oil prices have forced producers to consider whether to permanently close platforms in the North Sea or to try to ride the wave. Increasingly, we are seeing the former — Oil & Gas UK estimate that decommissioning in the North Sea will peak between now and 2050 and cost £30-60 billion in total. We will see decommissioning on an unprecedented scale in the North Sea in the coming years.