by Hardwick Legal | May 31, 2019 | Purpose Built (LexisNexis)
This week’s edition of Energy highlights includes confirmation from the Office of Gas and Electricity Markets (Ofgem) on its methodology for calculating the next round of network controls between 2021 and 2026, which will deliver a ‘smarter and more sustainable’ energy network; the publication of the Department for Business, Energy & Industrial Strategy’s (BEIS) response document for its consultation on the enrolment of Secure SMETS1 meters in the Data and Communications Company’s (DCC) national communications network, along with a final statement for the second carbon budget period, as required by section 18 of the Climate Change Act 2008. Also this week, the Energy Progress Report revealed a significant increase in the global electrification rate.
Electricity and gas market regulation and licensing
Number of people with access to electricity up 360 million since 2010
The number of people without access to electricity has dropped to around 840 million, compared to 1.2 billion in 2010, the Energy Progress Report finds. The current global electrification rate is 89% and is expected to rise to 92% by 2030. Despite significant efforts made to develop and deploy renewable energy technology to generate electricity, development is lagging far behind the goals when it comes to access to clean cooking solutions and the use of renewable energy in heat generation and transport. See: LNB News 23/05/2019 71.
Networks and connections
Ofgem confirms new methodology on price control
Ofgem has confirmed its new methodology for calculating network price controls starting in 2021. In today’s terms, the methodology known as RIIO-2 would set the allowed baseline return on equity at 4.3% (CPIH) in a cost of equity range of 4.0%–5.6%. This is almost 50% lower than under the previous price control (RIIO-1) and it would reduce costs passed on to consumers by £6bn between 2021–2026. See: LNB News 24/05/2019 9.
Capacity Market, balancing services and energy system flexibility
DCC to rollout interoperable smart meter for SMETS1
BEIS has published a response document for its consultation on the enrolment of Secure SMETS1 meters in DCC’s national communications network. From the 21 responses received, BEIS has concluded that it requires the DCC to provide an interoperable smart meter service for the Secure SMETS1 meter set to create a single point of responsibility for communication with devices. See: LNB News 24/05/2019 2.
Renewable energy
UK and Azerbaijan to continue to develop renewable energy sectors
The Department for International Trade has announced that the UK and Azerbaijan have committed to a new partnership that will aim to tackle challenges in the energy sector and build on the renewable energy sectors in both countries. Total trade between the UK and Azerbaijan was worth over £1bn in 2018, a 66.4% increase on 2017, and the UK is the largest investor in Azerbaijan. See: LNB News 24/05/2019 63.
Air emissions, efficiency and climate change
Net UK carbon account exceeds target carbon emissions reduction
BEIS has published the final statement for the second carbon budget period, as required by section 18 of the Climate Change Act 2008. The statement revealed that between 2013–17, UK emissions, as calculated by the net UK carbon account, were 2,398 million tonnes of carbon dioxide equivalent (MtCO2e). This is 384 MtCO2e below the second carbon budget cap of 2,782 MtCO2e. This means that, on average, emissions, as measured by the net carbon account, were 40% lower than 1990 base year emissions over the second carbon budget period. See: LNB News 23/05/2019 78.
Source: LexisNexis Purpose Built
Energy weekly highlights—31 May 2019
![Brexit patchworking: the impact of continued uncertainty on the construction industry]()
by Hardwick Legal | May 27, 2019 | Purpose Built (LexisNexis)
Here we are in May 2019, and, almost 3 years on, Brexit is still not sorted. Whatever your politics, you can’t help but feel “what a mess”. Industry is suffering from uncertainty, people and organisations cannot plan, budget or invest with confidence. This ripples right down from the biggest public and private investors to the smallest of SMEs, like mine.
As I have remarked before (see: The ongoing impact of Brexit on the construction industry), lack of certainty creates risk, and the construction and engineering industry looks far in advance when planning its projects, so those involved, whatever their perspective or tier, need to be able to plan. Without a coherent plan, and confidence in the plan, you simply cannot start to think to execute (let alone actually put a spade in the ground). There has never been a greater need for the ”foresight and stamina” I mentioned in that interview.
In amongst all this uncertainty, I consider myself lucky in that, as an independent consultant to industry, I work on a wide variety of projects, with public and private clients and across broad sectors. The past 2 years I have advised on more infrastructure projects than ever before, and many are procured through NEC contracts, or on long term frameworks, where contracts are “called off” at the clients’ direction. These types of projects, and other “major” projects which are primarily for socio-economic benefit, cannot be stopped and started, except at great cost and hassle to all involved. They also have long durations and are either done or not done; a half-built railway, or school, is no good to anyone. They have a steady stream of public money and, for this amongst other reasons, must demonstrate “best value to the taxpayer”. By contrast, commercial projects (hotels, office blocks etc), being privately-funded, are more sensitive to financial investor confidence; one or two of mine have paused for strategic rethinking while the real estate market was fragile, and been taken up again as the market recovered. Now, for these projects, it is all about the £/SQFT, the onward portfolio value, and the ability to spread the risk with, for example, multiple use occupation.
Our entire industry relies heavily on labour, in particular the skills of EU nationals. My contractor clients and professional services clients (architects, engineers) have significant percentage of EU contract (freelance) labour, or employed staff. Jittery staff is not a recipe for a good project. It is entirely understandable and not of their, or their employer’s doing. And yet, day to day, they, and we, must manage it.
On the ground, some of my clients have asked me to revise their Terms and Conditions to try to protect against the risk of Brexit. Recently, I wrote some optional clauses for a contractor to bind into its fee proposals. We will see how these work as they are rolled out on new jobs. In terms of contract negotiation, I am still seeing some attention being directly paid to Brexit, however it is very difficult when there is so much uncertainty, and it seems interest in thrashing out risk allocation is waning, and so we come back around to risk, foresight and proactive management.
One subcontractor specialist has been stockpiling for months, spending a chunk of money on a warehouse to store its EU-derived kit. Trying to get your Client to bear that cost has been difficult, and in some cases clients have refused. Others have been more sympathetic, and been grateful at my clients’ foresight in ensuring that the kit is available – albeit with an additional storage price - and most importantly, at no delay to the project; remember, whoever has the contractual risk, it is a practical problem.
The current date of 31 October 2019 allows, on the one hand, some short-term preparations to be made to manage the UK’s exit (no deal or some deal, who knows) but on the other hand, extends the uncertainty too, into the medium term and is only an interim “patchwork solution”.
Brexit means “horizon-“ or “vision-projects” are paying more attention to flexible sources of investment. This is to balance the risk of financial exposure to uncertain money markets, and, interestingly, is occurring in both public and private sectors.
All in all, it is a cautious time for industry.
The views expressed by our Legal Analysis contributors are not necessarily those of the proprietor.
Source: LexisNexis Purpose Built
Brexit patchworking: the impact of continued uncertainty on the construction industry
by Hardwick Legal | May 27, 2019 | Purpose Built (LexisNexis)
Environment analysis: The Committee for Climate Change’s (CCC) report into the UK’s contribution to stopping global warming comes at a time when climate change is high on the agenda. But, while the government’s commissioning of the report is to be lauded, it remains to be seen whether its response will be enough to ensure the UK retains its position as a world leader in the climate arena, as Simon Tilling, partner in Burges Salmon’s environment law team, explains.
Original News
Government ‘hard pressed to ignore’ new climate change zero-emissions report, LNB News 02/05/2019 65
The CCC has declared in a report that the UK can end its contribution to global warming within 30 years by setting new targets to reduce the country’s greenhouse gas emissions to zero by 2050. According to Simon Tilling, partner at Burges Salmon, the CCC’s report cannot be easily ignored by the government, and will likely have an effect regardless of whether its recommendations are implemented. Begonia Filgueira, legal director at Foot Anstey, contends that the report is a ‘game changer’. Although Filgueira believes that the 1–2% annual GDP hit estimated by the CCC is not insignificant, she nevertheless emphasises the opportunities of climate change policy. Finally, the charity ClientEarth has welcomed the report, although it has warned the government not to continue incorporating surplus emissions into future carbon budgets.
What is the background leading up to this report?
The CCC report comes at a time when the momentum around urgent action on climate change is hitting a crescendo—Greta Thunberg-inspired school strikes, extinction rebellion’s protests, Sir David Attenborough’s call to arms on prime time and Parliament’s declaration of a climate emergency all suggest that it’s an issue the public wants the government to address. All eyes are now on the government to see what it does with this report. But to truly understand the report, we need to go back in time to understand its origins.
The UK set out its stall as a leader in the international climate arena back in 2008 when Parliament passed the Climate Change Act 2008 (CCA 2008). It was the first Parliament to set binding carbon reduction obligations on future governments—namely to reduce emissions by 80% by 2050—and to hold future governments to account on progress towards this target by setting up the independent CCC.
The UK continued its influential role in the 2015 negotiations that led to the Paris Agreement, a commitment to carbon reduction targets to keep temperature increases to below two degrees Celsius above pre-industrial levels, and to pursue efforts to limit rises to one and a half degrees Celsius.
However, in 2018, the Intergovernmental Panel on Climate Change (IPCC) published a report warning of the dangers of a two degree Celsius increase, and pressing for more action to ensure the rise does not exceed one and a half degrees Celsius. Governments across the globe were told that more needs to be done, and faster.
This prompted the government to ask the CCC to advise on whether the targets under CCA 2008 should be revisited and whether a target should be set for net zero. This report has now landed back on government desks—it just so happens it is at a time when numerous sections of society are clamouring for action. That makes the report—and its recommendations—hard to ignore.
What is the significance of the recognition of the need for urgent action?
Credit should be given to the government for asking the question in the first place—it shows that CCA 2008 remains relevant and the advisory role of the CCC is taken seriously. That is good. Of course, what really matters is what the government does with the advice.
What are the key recommendations made in the report?
The crucial recommendation that has come out of the report is the new carbon target suggested by the CCC of net-zero carbon by 2050 for the UK. Scotland should be given a more ambitious target to reach net-zero by 2045 and Wales a slightly lower target of 95% reduction in emissions by 2050, due to fewer opportunities to decarbonise there. This target will mean a greater reduction in carbon emissions than set in CCA 2008 and matches up with the IPCC’s recommendation.
In order to be net-zero by 2050, the report recognises that policy-making will need to accelerate. This will likely focus around tightening up restrictions on key industries but the report makes clear that all sectors should address emissions.
A continued investment of 1-2% of GDP with the costs shared equally across the country is another key recommendation.
Practical suggestions in the report for achieving net-zero include:
- concentrating on resource and energy efficiency
- electrification of transport and heating
- development of hydrogen as a fuel
- increasing the uptake of carbon capture and storage
- changing the way we use land
These practical suggestions reflect the report’s focus on the role of technology in achieving the goal of net-zero by 2050. There is already a strong clean tech industry in the UK—a development we have seen at Burges Salmon in the work we do to support the energy and transport sectors. No doubt this will continue to be a focus, in particular developing carbon neutral transport through the use of electric vehicles and electrification of rail. Similarly, there will likely be an increase in environmental standards in certain key emitting sectors.
What has the government said in response to publication of the report?
On the day of publication Greg Clark, the Secretary of State for Business Energy and Industrial Strategy, welcomed the report but said more time was needed to consider the recommendations fully. Prime Minister Theresa May would not go any further when the question arose at Prime Minister’s question time. In fairness, all legislative interventions should be given careful thought before being brought forward, but if there is too long a delay within government then it risks accusations that it is not listening to the central demand for urgent action.
Do you have any thoughts on what the government’s formal written response might contain?
Given that it was the government who requested the report, I doubt it will be shelved, and I doubt others in society would allow that to happen. The question is whether whatever comes forward will match the ambition of the report. Maybe it will—the UK is looking for opportunities to lead on the world stage, and it already has a track record in climate change action, so the government might see this as a chance to cement the UK’s role as a climate leader by becoming the first industrialised economy to legislate for net zero and an end to its contributions to climate change. We shall see.
What are the next steps and likely timescales?
Should the government decide to follow the recommendations of the report, then there is first the relatively simple task of legislating (provided, of course, the government can carry a parliamentary majority on this matter—although I suspect they will be able to, given the policy position of the other parties), followed by the rather more difficult task of delivering against those targets. There is a lot to be done.
The execution is always the hardest part. It might be worth concluding with a reminder that part of the CCC’s role is to report on the government’s progress against the CCA 2008 targets, and that the CCC has warned that the UK’s fourth carbon budget (2023–27) is unlikely to be met. There is nothing wrong, of course, with setting more stretching targets even though current projections indicate we will miss the current targets. It might just mean a redoubling of efforts. But the government’s appetite for stretching itself even further—with the impact on society that will result—remains to be seen.
Source: LexisNexis Purpose Built
Net Zero—will the UK lead the way in combatting climate change?
by Hardwick Legal | May 27, 2019 | Purpose Built (LexisNexis)
Commercial analysis: Deterioration and cessation of relations between two companies that had partnered in the retail electricity market provides lawyers with an instructive case, particularly concerning the question of whether electricity is to be classed as ‘goods’. Jeffrey Chapman QC, barrister at Fountain Court Chambers, gives an overview on those details that the case of Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd and others has helped bring into the light.
Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd and others [2019] EWHC 507 (Ch), [2019] All ER (D) 79 (Mar)
What are the practical implications of this case?
The case of Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd and others had the largest award made by an English court in a contested case of compensation to an agent whose agency had been terminated. It was made under regulation 17 of the Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053, a notoriously difficult piece of legislation to interpret. It will be used in the future as an example of the way in which the court values an agent’s business at the date of termination in order to calculate the compensation due to the agent from his principal.
The court also decided (at para [143]) that electricity was ‘goods’ under SI 1993/3053 which may be important in future agency cases in order to decide whether an agency relationship is within the terms of SI 1993/3053.
What was the background?
EE was an energy company selling gas and electricity to consumers largely through pre-paid meter supplies. The claimant, GDM, had provided the defendant, EE, with a sales force whose job was to persuade consumers to ‘switch’ energy suppliers to EE. The commercial relationship between the parties started in May 2015 under the terms of a partnering agreement. On GDM’s case, that was replaced with effect from 29 June 2016 by a document entitled ‘Heads of Terms’.
EE argued that the document was not binding and required another agreement to be drawn up and signed in order to be effective. In the event, Ofgem started an investigation into EE into alleged non-compliance by EE with regulations designed to prevent mis-selling. Relations between EE and GDM thereafter worsened until the end of January 2017 when EE informed GDM that it intended to suspend field sales with immediate effect. On 27 February 2017, GDM’s solicitors (Brandsmiths) wrote to EE confirming the agreement between the parties had been terminated.
What did the court decide?
The court decided in summary:
- the parties’ relationship was governed by the ‘Heads of Terms’
- EE had no good grounds to terminate the ‘Heads of Terms’
- EE had wrongfully terminated the ‘Heads of Terms’
- GDM was an agent within the meaning of SI 1993/3053
- GDM was entitled to £1,049,600 for compensation under SI 1993/3053 on the basis of the court’s assessment of the value of GDM’s business at the date of termination
- as to formation of contracts, variation and superseding terms—the use of the description ‘Heads of Terms’ was not determinative and, applying the objective test from RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14, [2010] All ER (D) 95 (Mar) (at para [95]), the ‘Heads of Terms’ took effect as a valid contract with effect from the date it was signed on 29 June 2019 (at para [98])
- as to repudiatory breach, key performance indicators and impact on a claim for repudiatory breach—the argument that any mis-selling by GDM was a repudiatory breach of contract by GDM was rejected (at para [124])
- as to the application of the definition of ‘commercial agent’ in SI 1993/3053, reg 2(1) and the broad interpretation of ‘negotiating’—GDM was an agent under SI 1993/3053 and that its sales force ‘negotiated’ in the broader sense applicable to SI 1993/3053 when selling gas and electricity (at para [146])
- as to the classification of electricity as ‘goods’ under SI 1993/3053— the 19th century sale of goods cases were unhelpful and concluded that electricity, like gas, was ‘goods’ (it is notable that, since the judgment, the Supreme Court has referred the case of Computer Associates Ltd v The Software Incubator Ltd [2018] EWCA Civ 518, [2018] All ER (D) 21 (Apr) (referred to at para [143]) to the European Court of Justice on the issue of whether computer software which is downloaded constitutes ‘goods’—the judge said he was unsure why Gloster LJ in Computer Associates had found the meaning of goods in the 19th century sale of goods act cases to be helpful (at para [143(6)]))
- as to the right to compensation under SI 1993/3053, reg 17 and damages for breach of contract—on the facts of this case, common law damages would be based on the same facts as the claim under and would amount to double recovery (at para [188])
Source: LexisNexis Purpose Built
Is electricity considered ‘goods’? (Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd and others)
by Hardwick Legal | May 27, 2019 | Purpose Built (LexisNexis)
CfD Allocation Round 3—final contracts and statutory notices published, LNB News 02/05/2019 39
The Department for Business, Energy and Industrial Strategy (BEIS) has published the final contract documentation and issued the required statutory notices for CfD AR3 that opens on 29 May 2019. These include the final versions of the Standard Terms and Conditions, the generic front-end CfD agreement and the contract variants for CfD AR3. BEIS has also published the final statutory notices required and the allocation framework that sets out the rules and eligibility requirements for CfD AR3.
What is the background to CfD AR3 and the key next steps on the process?
The next round of allocation of standard form CfD support to new renewables projects in Great Britain (GB) has for some time been expected to commence in May 2019. On 1 May 2019, government formally confirmed and triggered the AR3 process through the issuing of:
- a number of notices under the Contract for Difference (Allocation) Regulations 2014, SI 2014/2011(Allocation Regulations) and the Contracts for Difference (Standard Terms) Regulations 2014, SI 2014/2012, Statutory Notices
- final forms of the standard contract terms (and variants thereof) to be awarded to successful applicants, AR3 Standard Terms and Conditions
- a final form AR3 Allocation Framework (the Allocation Framework), which supplements the legislative position to provide more detail on the allocation and auction process
Accordingly, project developers will be able to submit applications to National Grid Electricity System Operator Limited (in its capacity as the Electricity Market Reform (EMR) Delivery Body) from 29 May 2019, with a deadline of 18 June 2019 for such applications. Those projects found, following any reviews and appeals, to be eligible will (assuming there is more eligible project capacity than budget available, which is very likely) then be required to compete in a competitive auction process to establish which projects will win support and the level of subsidy (the strike price) they will receive.
The timing of this auction process is contingent on the review/appeals process, however assuming there are reviews/appeals then an indicative window of 9-15 October 2019 for submission of sealed bids has been established by the Allocation Framework. This would lead to CfD contracts being signed in respect of successful projects around early December 2019.
What are the key differences between the CfD Allocation Round 2 (AR2) and AR3 and what impact are these changes likely to have?
Since AR2, there have been a series of government consultations and draft documents, establishing and refining the amendments to the CfD contractual terms and the CfD allocation process that will apply for AR3.
The fundamental architecture of both the allocation process and CfD contractual terms remains the same as for AR2, but there have nevertheless been some important changes. Key among these changes are:
- onshore wind farms of over five megawatts (MW) that are located on remote islands off mainland GB will be eligible to participate in the allocation process. This means that such wind farm projects join offshore wind, advanced conversion technology (ACT), anaerobic digestion (AD), dedicated biomass with CHP, tidal stream, wave, and geothermal in being able to participate in this allocation round. This sets remote islands onshore wind apart from mainland onshore wind, which (as for AR2 and in common with other technologies classed as established) is not able to participate. Whether a project is defined as remote islands onshore wind is in large part determined by the distance of the relevant island from mainland GB and the length of cabling required to link to the project the GB mainland transmission system. The detailed requirements are set out in the Allocation Regulations, as amended for AR3
- the budget available for subsidy under AR3 is £65m per year (in 2011-12 prices) and the new capacity to be supported is capped at a maximum aggregate of six gigawatts (GW). To compete, projects must be expecting to commission between 1 April 2023 and 31 March 2025. The ‘administrative strike price’ caps on the maximum strike price levels at which project can bid have been reduced—most notably for offshore wind and £65m is a considerably lower budget than made available for previous allocation rounds, and therefore competition is expected to be fierce. This will be heightened by the introduction of higher load factor assumptions for AR3 when the EMR Delivery Body is valuing the cost of supporting projects, although conversely lower strike prices would of course have a positive effect on how far budget can stretch. The revised load factors to be used can be found at Appendix 3 of the Allocation Framework and the administrative strike prices are set out in the statutory ‘Budget Notice’ in respect of AR3
- various relatively minor (but nevertheless important) amendments have been made to the standard CfD contractual terms to apply to projects successful in AR3 (versus those term which apply for projects successful in previous allocation rounds). These changes include amendments to the definition of force majeure and the provisions for grid connection/grid reinforcement delay, heightened requirements on forecasting of anticipated generation levels, tightened requirements in respect of ACT plant efficiency and types of equipment and updated Combined Heat and Power Quality Assurance scheme requirements for biomass with combined heat and power (CHP), updated definitions of ‘waste’ and bioliquid sustainability requirements to reflect Directive 2015/1513/EU on renewable energy and biofuels in the EU transport sector, new greenhouse gas emissions level requirements for biomass with CHP, updated drafting to clarify that CfD difference payments should be paid on electrical output net of parasitic loads, various changes regarding State aid, and references to reflect the anticipated Brexit position
- finally, while it has had less emphasis in consultations, the Allocation Framework tweaks the allocation process and auction process in a number of respects. Again, the fundamentals around the eligibility requirements and competitive auction process remain the same (subject to the introduction of remote island wind), but amendments include refinements to evidencing planning consent and connection requirements, updated requirements for ACT reflecting the amended contractual requirements set out above, changes to the flexibility afforded to phased offshore wind bidding, and updates to bids that ‘interleave’ a projects’ flexible bids. Together with the Allocation Framework itself, the EMR Delivery Body’s Round 3 guidance provides additional information on this
Do you view any of the changes to the CfD standard form contracts as likely to have much effect? Anything of surprise?
To a large extent the changes being made in respect of AR3 have been well sign-posted and therefore should not come as a surprise. In AR2, perhaps the main surprise was how low offshore wind farm projects were able to bid versus the 2014 auctions from allocation round one (AR1). Therefore, there will be a keen interest in where strike prices end-up after AR3.
The amendments to the contractual terms are, in the main, perhaps best defined as clarificatory rather than fundamental. Nevertheless, as for previous rounds, it is of course important for projects developers (and their advisors) to consider the specific position of their projects as against both the requirements of the allocation process and the contractual requirements that will apply if a CfD contract is awarded.
The participation of remote island wind will inevitably attract attention as, linked to this, will the ultimate mix of technologies that win support. Depending on where strike prices settle, no doubt the policy debate will continue on the types of technology/projects that should be given CfD support and (of relevance to some technologies more than others) the use of the CfDs with low strike prices to give price certainty as opposed to subsidy.
Source: LexisNexis Purpose Built
Contracts for Difference Allocation Round 3—key changes and likely impact
