Traditionally, the objective of environmental law has been to prevent or minimise pollution. This type of regulation is still with us, and it is tighter than ever, but there is a new objective for this ever-growing body of law: to encourage resource efficiency. Progress towards this objective requires a different viewpoint, as regulation that focuses on a source of pollution will only capture part of the issue. Environmental law that is directed towards improving resource efficiency is a supply chain issue, a sector issue, a market issue and, moreover, a global issue. This body of law flows from a core principle of modern global corporate responsibility: “sustainable development”.
In a mid-term review of industrial policy the European Commission recently emphasised the importance of sustainable development to the EU’s economic policy by making this statement:
“It is clear that economic competitiveness of the EU will, to a large extent, be based on its energy and resource efficiency and its capability to develop appropriate technological solutions. Key to future jobs, growth and wealth, as well as environmental protection, will be efficient eco-innovations and resource and material efficiency.”
Resource efficiency has been a policy discussion point for almost a decade without tangible regulatory action. Now, though, with recent recognition at EU and UK level of the future link between resource efficiency and economic success, we can expect to see this translate into legal obligations. Resource efficiency is about reducing energy, water and raw material use, and minimising soil and habitat degradation. The European Commission believes that improving resource efficiency will reduce the risks of raw material and energy unavailability and encourage innovation. Arguably, though, the impact of increased resource efficiency will reach further than encouraging the development of sustainable energy generation. Resource efficiency, through law and policy, is likely to pervade all future development and industrial operations and be a key element of successful new build in the future.
In this article we explain the challenges of an evolving regulatory framework to new energy sector projects and offer some thoughts on the advantages of embracing the shift towards resource efficiency. Throughout, we draw reference from the developing regulatory regime and policy framework that underpin these changes.
The challenges of an evolving regulatory framework
Make a move too early and you could exhaust your funding before your market materialises; move too late and you could miss out on the all-important intellectual property that supports a technology-driven business. This reads like a business dilemma but, in the arena of resource efficiency, this issue is becoming a legal challenge. Why? Because:
(i) the market place is being created by a regulatory framework;
(ii) implementation of technology is governed by strict permitting regimes; and
(iii) law is not keeping pace with evolving policy.
To encourage the shift away from unsustainable practices governments, and the UK Government in particular, are implementing regulatory regimes to alter the market place. Consider renewable energy. Fossil fuels generate electricity more cheaply, and so, to encourage the development of electricity generation from renewable energy sources, the Government has implemented the Renewables Obligation Order. This places an obligation on electricity supply companies to either demonstrate that a percentage (increasing annually) of their electricity sales came from qualifying renewable sources or pay a buy-out fee. The generation of renewable energy is represented by a Renewable Obligation Certificate (ROC) and the value of ROCs is designed to make renewable energy competitive with fossil fuels. The contribution of renewable source electricity to the energy mix is increasing, so by one measure at least the ROC regime is succeeding.
“Resource efficiency, through law and policy, is likely to pervade all future development and industrial operations and be a key element of successful new build in the future.”
The problem with markets created by regulatory frameworks is that legal or technical issues can severely impair market development. Take the EU Emissions Trading Scheme (EU ETS) as a case in point. The initial compliance period ran from 2005 to 2007. Therefore, businesses that were developing carbon abatement technology in the early part of the decade may well have geared themselves towards significant returns on investment during this period of time. In short, all installations covered by the EU ETS were given a number of allowances that correlated with a cap on emissions. The intention was (and is) that the caps would be set at a level that would encourage businesses to implement carbon abatement technology and drive down emissions. To support the cost of this expenditure, the businesses would be able to sell their excess allowances in the EU ETS to those businesses that faced penalties for exceeding their caps. The problem was that the caps were insufficiently challenging. As a result, companies that invested in abatement technology could not obtain a reasonable price for their excess allowances, and other businesses saw no reason to invest in new abatement technology at all. The policy makers had promised the creation of a new market, but the regulatory regime had failed to deliver it.
Understanding your permitting regime
Broadly speaking environmental law, as transposed by the Department of Environment, Food and Rural Affairs (DEFRA), will not differ much from one EU Member State to another. In England and Wales, environmental law is regulated primarily by the Environment Agency. It is in the Environment Agency’s approach to regulation and enforcement that differences arise. The Environment Agency’s approach is ultra-cautious and this translates into a higher level of permitting than that which may be experienced in other EU Member States, or other OECD countries. For those businesses that have developed technologies outside of England and Wales, this approach and the need for more detailed permitting applications and management can increase the cost and burden of entering the market.
Policy first, law later
In a jurisdiction such as the UK, which is a heavily regulated environment, it is natural for policy to be made, promulgated, debated and accepted before regulation is developed. The difficulty that has challenged the Government recently, particularly in relation to resource efficiency, is the complex web of consequences of regulating one aspect of the overall picture of sustainable development. An overly cautious regulatory response can restrict development of sustainable practices but, equally, regulation that fails to address all the consequences can threaten the reputation of obligated companies.
The “end of waste” issue is an example of an overly cautious regulatory position. In recent years the law has evolved so that more substances are being treated as waste and the point at which a waste is considered to re-enter the chain of utility as a product has been forced back. In England and Wales the Environment Agency has taken such a cautious approach to this issue that substances considered products in other Member States are considered waste in England and Wales. The knock-on effect of this “end of waste” regulatory stance is that businesses that are designed to recover secondary raw materials from waste offwill find that their markets do not exist as the material must be transported as waste and the customer must be regulated to treat waste on receipt. Often the adverse effect of this ultraprotective position of the Environment Agency is that people continue to use raw materials or new products rather than secondary raw materials or recovered products – a situation that is contrary to sustainable development and resource efficiency.
Conversely, the introduction of new law to encourage the use of biofuels may risk the reputation of obligated companies. Last year the Government introduced the Renewables Transport Fuel Obligation (RTFO). This requires blending of biofuels with gasoline. In the broadest sense, this appears to be a positive measure with the objective of reducing carbon emissions. However, the reality is that the sustainability of biofuels varies greatly. Issues to be considered include: the carbon footprint of harvesting, refining and bringing the biofuels to the market; environmental consequences of repetitive crop growth, fertilisers and pesticides, harvesting techniques and exhaust fumes; social and economic conditions at the plantations; deforestation and habitat displacement; and competition with local food markets. It is doubtful that the RTFO will take into account all these issues and enshrine clear and exhaustive sustainability criteria. Prior to the development of international law in this area, companies involved in this supply chain must therefore be vigilant of these issues to avoid the adverse impact on reputation of being involved with unsustainably sourced biofuels.
Avoiding hidden costs
The regulatory framework that underpins the drive towards resource efficiency is in part about encouraging investment in certain areas, but also about curbing unsustainable practices. Understanding what constitutes an “unsustainable” practice will help new build in the new era avoid hidden costs.
Costs of regulatory compliance
In the UK, as throughout the EU, the majority of energy sector new build over the coming decade will be authorised under the Integrated Pollution Prevention and Control regime (IPPC). The IPPC regime and its predecessor (the Integrated Pollution Control, or IPC, regime) are classic pollution prevention and minimisation regulatory frameworks. A PPC permit (now referred to as an environmental permit following a consolidation of the law) controls pollution by setting emission limits in respect of air, land and water, and waste control provisions. Currently, an operator will need to provide data on emissions, off site waste disposal and energy use. It is likely though that the environmental permit could be used as the regulatory mechanism to improve resource efficiency. Through amendments to existing permits, operators could be required to provide data on material consumption and water use (in addition to more detailed energy use requirements). Putting in place the management structures and reporting on physical water, energy and material use will have a modest impact on operational costs.
Real impact will be felt if the Environment Agency uses such data to establish an understanding of “best available techniques” (BAT) in the context of resource efficiency. It is a statutory obligation on all operators of PPC installations to employ BAT at all times. This is an ongoing and ever-evolving concept – as practices improve, all operators must follow suit. Failure to do so is a criminal offence. In relation to BAT, the Environment Agency recently stated:
“We’re fairly sure that emissions from PPC sites represent best available techniques, but we’re less sure if the total amount of resources they are using represents BAT. Until we monitor it, it’s difficult to know.”
It appears that, once the Environment Agency gathers data on resource efficiency and is able to benchmark BAT, it will be in a position to enforce against those operating beneath the standard. It is true that the Environment Agency has not gone as far as to state it in these terms yet, but it has stated in a recent Corporate Strategy:
“We will use Pollution Prevention and Control regulation to require companies to reduce the amount of raw materials and energy used and the waste that is produced.”
In view of all of this, planning now to develop fully resource-efficient facilities would seem prudent, to avoid future compliance costs of playing catch-up.
Environmental taxation has been used for some years now to influence behaviour by passing costs on to the end user. Whilst we do not attempt here to analyse environmental taxation, it is important to underline that this will be an ever-increasing hidden cost for new energy sector infrastructure going forward. For example, consider the construction of a new facility in the UK. To the extent that virgin aggregates are used, they will carry the burden of the Aggregates Levy. To the extent that demolition waste or excavated soil is landfilled, disposals will be subject to Landfill Tax. Landfill Tax is escalating significantly each year. The current rate of £32 per tonne for 2008/2009 (increased from £24 in April 2008) is set to increase by £8 per year until at least 2010/2011.
Supply chain costs
We expect to see an increasing focus in law and policy on the resource efficiency of supply chains, and specific scrutiny of certain products. This focus lies at the heart of EU policy. The recent EU thematic strategy on the sustainable use of natural resources states that:
- environment policy needs to move beyond emissions and waste control; and
- there is a need to identify the negative impacts of the use of materials and energy throughout life cycles and to determine respective significance.
This policy aim will manifest itself as an internalisation of the costs of resource inefficiency. A current example of this is the range of “producer responsibility” legislation. In the UK framework, primary legislation in the Environment Act 1995 permits the Government to introduce waste stream specific regimes with secondary legislation. To date, this power has been used in respect of packaging waste, end of life vehicles and, most recently, waste electrical and electronic equipment.
Producers and distributors of electrical and electronic equipment must pay for the recycling and recovery of a certain percentage of the products that they place on to the market. This obligation is satisfied either by joining a compliance scheme or by arranging for takeback. The cost of recycling and recovery is therefore captured and will initially at least be passed on to the customer through increased prices. However, as with other challenges, this presents an opportunity to create a competitive advantage through early investment. Consider those producers who design electrical and electronic equipment in such a way as to minimise the disposal and thus minimise the relative extent of their obligation. These producers will have lower costs to pass through to customers.DEFRA took an important step towards focusing on supply chain issues by its recent creation of a Products and Materials Unit. As part of DEFRA’s sustainable development and production programme the Unit will focus on reducing the impact of 10 priority products on biodiversity, water use, methane emissions from landfilled waste, and energy use during materials manufacture.
The initial 10 priority products will have little relevance for energy infrastructure projects as they are focused on consumer products, but developers in the energy sector should take note of the direction of policy and recognise the risks associated with utilising products and assemblies that have not been manufactured using sound sustainable practices.
The current initiatives at European and UK level to establish formal and binding sustainability criteria for biofuels are a striking example of how those supply chain issues can give rise to the development of new areas of regulation in the energy sector. Another recent example of this is the obligation on generators under the Energy Act 2008 to provide information relating to the use of biomass in electrical generation, to help the government to form a view of the sustainability of the biomass in question. The information could relate to the source of biomass and the circumstances under which it is grown.
Thinking through the impact of legislative proposals
Understanding the tide of energy and environmental law is a key aspect of understanding the true costs and requirements of new energy infrastructure in the coming years. To demonstrate the advantages of foreseeing future developments we highlight three very different forthcoming changes in the UK: regulation on energy efficiency; requirements for site waste management plans; and pressures on our water resources.
A body of law that is currently in development and will evolve over the next couple of years is that which will govern energy efficiency. Primarily the EU Energy Efficiency Action Plan guides UK policy on the promotion of energy efficiency. The Government’s aim is to reach the EU target of saving 20 per cent of energy consumption by 2020 and to focus on the five priorities highlighted in the Plan, namely: transport; improving efficiency requirements for equipment; achieving greater energy saving by consumers; technology and innovation; and obtaining greater energy savings from buildings. The Government intends to do this by: pressing for the adoption and implementation of new EU minimum energy performance standards for 14 priority product groups; improving consumer product information; expanding the scope of legislation relating to the energy performance of buildings; helping small and medium-sized businesses to finance energy efficiency investments by working with European financial institutions; and ensuring energy efficiency is given more attention at EU level. Where possible, new build that is currently on the drawing board should take into account the impact of these likely developments before they materialise as regulatory obligations.
Site plans for managing construction waste
In April 2007 DEFRA issued a consultation on the legal requirement for site waste management plans (SWMP) for construction projects above a specified value in England. SWMPs became a legal requirement in April 2008. Under the new legislation, the production of and compliance with SWMPs became a legal requirement for any construction or demolition project with a value of over £300,000.
The purpose of SWMPs is to promote responsible management of construction waste and ultimately limit the amount of construction waste produced thereby minimising disposal of waste and maximising volumes of waste recovered, and discouraging fly-tipping.
The consultation considers a number of key criteria in respect of the type and level of detail to be included in SWMPs and how they should be implemented. It considers the various types of information to be contained within an SWMP, including:
- forecasts as to the amount and type of construction waste that a project will produce;
- any alterations to the design of the project including materials to be utilised which have been implemented to limit construction waste production; and
- considerations as to how project waste can be sufficiently reused and/or recycled.
Water resource developments
Due to over abstraction and over licensing, water resources are under significant strain in the UK. The Environment Agency recently consulted on its new water resources strategy. This is likely to be of relevance to new developments in the energy sector because of its focus on water efficiency. Strains on our water resources are likely to impact on new developments in a number of ways:
- as outlined above, we expect to see water use data incorporated within IPPC permits, and there being specific constraints on the physical volume of water used at permitted installations;
- the drainage basin approach to good quality water resources (required to comply with the EU Water Framework Directive) will mean that discharges from new developments will be fettered by the existing state and condition of water sources and the need for improvement. In fact the allowable levels of discharges will be drainage basin specific, and so could impact similar facilities to differing extents depending on the current condition of receiving waters; and • the recent transposition of the Environmental Liability Directive (by the Environmental Damage Regulations 2009) has created new heads of liability for environmental damage, and water resources will be a key focus. In relation to pollution occurring after 1 March 2009, operators will need to be prepared to pay for not only traditional remediation (clean-up costs), but also compensatory and complementary remediation. This means paying for the environmental damage of the water resource being compromised during its period of contamination and also paying for the improvement of an analogous resource if it is not possible to fully repair the polluted water source.
Exploiting new revenue streams
A key way for a regulatory regime to encourage behavioural change is to create markets for the commodity that will support the sustainable practice. The ROC regime, the EU ETS and the Renewable Transport fuel obligation (RTFO) are all examples of this type of regime.
A current example of the evolution of a market place that is being driven by the push towards resource efficiency is the creation of markets for recycled and recovered wastes. The development of these markets hinges on the “end of waste” debate. Foresighted developers will give some thought to how this debate will play out and how this may impact their individual project design.
Recently the Court of Appeal expressly criticised the Environment Agency and DEFRA for implementing a restricted and narrow definition of waste recovery (OSS v. Environment Agency, 2007). The case concerned recovered waste oils. Crucially, the Court of Appeal agreed with the appellant company that waste oil was capable of being recovered and becoming a new “product” (thus free of waste regulation) before it is combusted to produce energy. Lord Justice Carnwath urged the regulators to develop a position on waste recovery that is in line with EU law and to ensure that UK industry has clear guidance on how to understand this difficult question. The overly cautious position taken by the Environment Agency (in this case, that waste oils could only be fully recovered when burned to produce energy) has undoubtedly impeded the development of markets for secondary raw materials and secondary fuels. This position, which has affected the revenue streams for innovative processes that are dealing with waste, has been clearly rejected by the Court of Appeal. This case will not open the floodgates, as no test was established by the Court - the development of the test is the responsibility of DEFRA and the Environment Agency - but the opportunity is there for those who understand the nature of EU law on this subject to prepare their business for a future which must deliver revenue streams for recognised recovered materials.
As the EuropeanCommission has recently recognised, the challenge for policy makers is to facilitate and stimulate growth while at the same time ensuring that the state of the environment does not get worse. The EU Commission states that its objective is to reduce the negative environmental impacts generated by the use of natural resources in a growing economy. This is the era in which new build energy facilities must operate.
It will be an era in which the regulatory environment extends beyond pollution control to life cycle analysis, to energy, water and materials efficiency. It will be an era in which those prepared to change will set the standards and enjoy the consequential competitive advantages. It will be an era in which “sustainable development” determines the bottom line.