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Unlocking Poland’s Offshore Potential

2018 brought many positive changes in this area. The Polish government secured a favorable state aid decision from the European Commission and amended the key framework regulation on renewable energy sources (RES). This paved the way for the first major auction organized by the Polish National Regulatory Authority – the President of the Energy Regulatory Office.

Nearly 600 onshore projects, most of them smaller sized photovoltaic installations, received approximately €3.28 billion in 15-year contract-for-difference type benefits. Last, but not least, the Minister of Energy presented the draft Energy Policy of Poland 2040, setting out the expected future course of development of the Polish energy mix, which is especially promising for the offshore wind and PV markets.

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Published in the Project Finance International Global Energy Report April 2019 by Refinitiv (formerly the Financial and Risk business of Thomson Reuters)

Unlocking Poland’s Offshore Potential

Germany and the European Union expand scrutiny of foreign investment – Considerations for the energy sector

German energy assets continue to draw international investors’ interest. However, in Germany as in other EU Member States, foreign investment in critical infrastructure, such as energy facilities, is a sensitive issue for the Government. New rules introduced in 2017 and 2018 come amid rising concerns that such assets are being systemically acquired by foreign investors, particularly from China. The intensity of foreign direct investment (“FDI”) reviews by the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie – “BMWi” or “Ministry”) has increased since 2016. The more restrictive approach in Germany has been backed by Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (“EU framework”). Moreover, the next reform is well underway.

It is essential for foreign investors, sellers and targets’ executives to consider the scope and implications of FDI review. In this article we review the significant regulatory changes to FDI screening and highlight the considerations for those involved in transactions in the energy sector.

I Review tools in Germany

Germany has had formal mechanisms in place to review FDI since 2004. The jurisdictional threshold at which the Ministry can intervene to protect security interests is linked to the shares / voting rights acquired in a German company. The general threshold lies at 25%. Most recently, the German government lowered the threshold to 10% in particularly sensitive areas.

A national security screening mechanism requires that any non-German investor notifies the Ministry of the acquisition of a target company with certain defense and IT security / cryptography products within its portfolio (so-called sector-specific investment review: Sec. 60 – 62 Foreign Trade and Payments Ordinance – AußenwirtschaftsverordnungAWV”). However, the grounds for screening in Germany are not limited to the protection of essential interests of national security. Indeed, since 2009 BMWi may control and block acquisitions by investors established outside the territory of the EU and EFTA region in any sector, if the transaction would endanger public order or security (cross-sector review: Sec. 55 – 59 AWV). This procedure applies to the energy sector as well. EU Courts have acknowledged that public security may be affected by acquisitions related to issues such as security of supply in the event of a crisis, telecommunications and electricity, or the provision of services of strategic importance.[1] Even though this jurisprudence circumscribes Member States’ discretion regarding the scope of public security reviews, without specific guidance, it is hard to predict which transactions trigger review by the Ministry and which do not.

II. AWV-reform of 2017 – tighter controls on critical infrastructure

  1. Substantive amendments

In that regard, the AWV-reform of 2017 brought some clarification. The German government specified in which cases “an endangerment for the public order or security of Germany” likely exists. The amended Sec. 55 AWV requires BMWi to apply heightened scrutiny to certain types of investments, particularly those that could result in foreign control over German critical infrastructure. Federal Economic Minister Peter Altmaier recently stressed, “companies which supply us with electricity, gas and drinking water or which safeguard our telecommunications are of outstanding importance for our society.”[2] This includes German companies, which develop and modify “sector-specific software”, i.e. software that is used for operating and controlling critical infrastructure facilities (Art. 55 para. 1 sentence 2 no. 2 AWV). The concern is that the purchase of such highly significant IT application manufacturers by non‑EU investors could lead to the outflow of security-relevant information about the operation of critical infrastructures. Providers of critical infrastructure may have no or only less trustworthy alternatives available on the market.

In order to determine which companies can be regarded as operating critical infrastructure, reference is made to the German IT Security legal framework. According to the definition in Art. 2 para. 10 of the Act on the Federal Office for Information Security (Gesetz über das Bundesamt für Sicherheit in der Informationstechnik), critical infrastructures are facilities which belong to the energy, information technology, telecommunication, transport and transportation, health, water, nutrition as well as finance and insurance sectors and are of utmost importance for the functioning of the community.

In order to determine which energy facilities provide a significant level of supply for society, three steps should be considered.

First step (see first column of image below): Is the target company engaged in an energy service which is deemed critical (cf. Sec. 2 para. 1 Regulation for Determining Critical Infrastructures – “BSI-KritisV”)?

Second step (see second column of image below): Are categories of facilities involved, which are necessary for providing these services?

Third step (see third column of image below): Finally, crucial for the identification of sensitive transactions in the energy sector is, whether the target company achieves the stipulated threshold values or, whether the relevant software provider has such facilities among its customers. In order to ascertain whether the threshold has been reached, it may be necessary to count several systems together. In general, the thresholds of the BSI-KritisV apply to each system. Several installations may, however, comprise a so-called joint installation, with the consequence that the individual values have to be added together for the threshold calculation. In the energy sector, according to Annex I to the BSI-KritisV, part 2, para. 7, several installations of the same type, which have a close spatial and operational relationship and meet the relevant threshold together, are as joint installation considered critical infrastructure. Common management of installations is a pre-requisite for a close spatial and operational context (cf. Annex I to the BSI-KritisV, part 2, para. 7 lit d).

Source: Federal Ministry of the Interior

If according to the three-step test outlined above, energy assets are subject of the transaction, a filing of the foreign takeover with BMWi is mandatory. Please note, even if the energy facility is not deemed “critical”, the transaction may still be subject to cross-sector review pursuant to the general clause in Art. 55 para. 1 sentence 1 AWV. Therefore, one should always analyze whether the contemplated cross-border transaction bears any (energy) security relevance. It is prudent to explore the reaction of BMWi to the takeover of the particular energy facility. Informal discussion can be carried out without triggering an obligation to file.

  1. Procedural amendments

Prior to the AWV-reform of 2017, outside the defense and security sector, foreign investors were not required to notify any transaction. The Ministry was dependent upon information sharing by other public authorities; in particular, the Federal Cartel Office. Now, upon signing of the purchase agreement (schuldrechtlicher Vertrag), the direct acquirer of any German energy company covered by Art. 55 para. 1 sentence 2 AWV is obliged to notify the transaction. The notification sets in motion a time limit of three months for the BMWi to initiate the second phase of the cross-sectoral review procedure (cf. Art. 55 para. 3 AWV). If the investor does not either notify the transaction or apply for a clearance certificate (Unbedenklichkeitsbescheinigung), deal certainty can be obtained no earlier than five years after signing. Only then, is BMWi precluded from reviewing or blocking the transaction. Consequently, even if the transaction is exempted from notification, in cases of doubt, investors should apply for a clearance certificate. A clearance certificate is a formal confirmation of BMWi to the investor that the acquisition does not raise any concerns with respect to public order or security (cf. Sec. 58 AWV). The application shall cite the acquisition, the acquirer and the domestic company to be acquired and outline the fields of business in which the acquirer and the domestic company to be acquired are active. Under the old regime, a clearance certificate was deemed to have been granted if the Ministry did not open an examination procedure within one month after receipt of the application. The AWV-reform of 2017 has extended this period to two months. Additionally, the period for the review procedure itself (second stage) has been extended from two to four months. An issue to be considered is that the periods for any antitrust review of a transaction are very likely to differ from the periods for the review under the amended AWV. Still, the urgency to close a transaction must be balanced against the uncertainty created by not filing. In an era of risk abatement, the offer of safe harbor from post-transaction government action to alter or unwind the transaction is hard to resist.

The 2017 AWV-reform also clarified that EU acquisition vehicles cannot be used to circumvent the cross-sector investment review procedure, cf. Sec. 55 para. 2 AWV.

III. AWV-reform 2018 – German Government lowers review threshold

Shortly before Christmas 2018, the Federal Government adopted further amendments to the rules on FDI screening. Importantly, the Government lowered the review threshold from 25% to 10% in the particularly sensitive areas listed in Sec. 55 para. 1 sentence 2, i.e. critical infrastructure. Accordingly, an FDI review in the energy sector is now triggered if a non-EU investor acquires as little as 10%, rather than 25%, of a company that operates critical infrastructure facilities (cf. the three steps above). Thus, even more energy deals will be in the scope of the Ministry. With this move, the German Government plugs a gap in legislation. Last summer, State Grid Corporation of China (“SGCC”) planned the acquisition of 20% of 50Hertz, one of Germany’s power grid operators. Although 50Hertz qualified as critical infrastructure, BMWi had no authority to officially review or even block the transaction, as it was below the 25% threshold. Eventually, the Government intervened through the German state-owned development bank KfW (Kreditanstalt für Wiederaufbau) to preemptively acquire the 20% stake, and, effectively block SGCC’s proposed investment.

IV. Trend towards greater scrutiny in Germany backed by developments at EU level

Although the German Government was keen to emphasize that the meaning of public security, which derives from EU law, was not changed or even expanded by the 2017 AWV-reform, it sought additional backing for its initiative at EU level. In November 2018, EU legislating bodies reached a political agreement on an EU framework for the screening of FDI. The EU framework officially entered into force on 10 April 2019. Member States’ governments have 18 months to implement the new rules. The Commission, meanwhile, is taking the necessary steps to make the framework operational by October 2020. These steps concern, in particular, the setting up of the new EU-wide mechanism for cooperation, enabling Member States and the Commission to exchange information and raise concerns related to specific foreign investments. While the 2017 AWV-reform anticipated the substantive regulatory changes, procedural amendments to the German screening process will be necessary.

  1. EU ramps up scrutiny of foreign investors

The envisaged EU framework employs the screening criterion of public order or security and explicitly describes factors to help Member States and the Commission determine whether an investment is likely to affect public security. The indicative list in Art 4 para. 1 of Regulation (EU) 2019/452 includes the effects of the investment on, inter alia,

        • critical infrastructure, whether physical or virtual, including energy, as well as land and real estate crucial for the use of such infrastructure;
        • critical technologies and dual use items, including energy storage and nuclear technologies; and
        • supply of critical energy inputs.

Accordingly, the AWV-reform of 2017 in Germany, which aims at protecting critical infrastructure and, hence, the energy sector, is backed by the EU framework. Moreover, the framework (cf. Art 4 para. 2 of Regulation (EU) 2019/452) condones the recent practice of BMWi, which gives consideration to additional aspects in the screening procedure, such as access to sensitive information and whether the foreign investor is state-controlled or state-funded. In other words, even if a standalone investment in the energy sector would not appear to have a significant national security impact per se, BMWi could still apply mitigation measures or ultimately block the transaction, where overall foreign ownership of the investor would present a security concern.

  1. Procedural features of the EU framework

While the ultimate decision to allow, condition or block FDI remains with the Member State concerned, the Commission will have greater influence on future screenings of FDI. Furthermore, other Member States may exert political pressure. The Commission will obtain a new competence to screen FDI and issue a non-binding opinion in the event that the investment has the potential to affect the security of projects or programmes of EU interest (cf. Art. 8 of Regulation (EU) 2019/452), such as the “Trans-European Networks for Energy (TEN-E)” or the security of another / other Member State(s). The EU framework also creates a cooperation mechanism between Member States and the Commission. Currently 14 EU Member States[3] have FDI screening mechanisms in place. Differing approaches in terms of scope and design are followed in these countries. To date, no formal coordination among Member States and the Commission exists in this field. In future, Member States will need to inform each other and the Commission of any investment that is undergoing screening by their national authority (cf. Art. 6 of Regulation (EU) 2019/452). Even in cases where a foreign takeover is not undergoing screening but another Member State considers that this investment is likely to affect its security or the Commission considers that the investment is likely to affect the security in more than one Member State, the Commission is empowered to issue an opinion and other Member States may provide comments (cf. Art. 7 of Regulation (EU) 2019/452). In general, comments or opinions have to be addressed to the Member State where the foreign direct investment is planned or has been completed no later than 35 calendar days after receipt of certain relevant information.

Source: European Commission

For the exchange of information and analysis, formal contacts in each Member State will be set up. The screening procedures at national level in Germany will likely be extended to allow for an exchange of opinions with the Commission and other Member States. Consequently, deal timing gets even more important.

V. Next reform is well underway

Most likely, this was not the last reform bill passed to protect domestic companies from foreign takeovers. As part of Germany’s new National Industrial Strategy 2030,[4] Peter Altmaier has called for the creation of a state investment fund that would step in to pre-empt foreign takeovers of German companies.[5] Such a fund, once created, can be considered as a complementary tool to the authority of BMWi. A tangible discomfort around the issue of Chinese investment is even present among German business representatives. The influential German industry group Federation of German Industries (Bundesverband der Deutschen Industrie e.V. – “BDI”) calls for tougher policies against China.[6] However, BDI criticizes the idea of a state investment fund. Instead, it supports a reform of competition law, including EU state aid rules.

VI. Key takeaways – Implications for deal planning

In particular for China, with its “Belt and Road Initiative” and industrial plan “Made in China 2025”, investments in the EU’s energy market remain highly attractive. However, as we experience in our daily practice, the trend of expanding review of FDI does not appear to be going away soon. Foreign investors, in general, have to expect a more rigid approach of authorities compared to the past. Risk and time management at an early stage of the cross-border transaction process are key to project success. There is no doubt, the new rules increase deal uncertainty. Those contemplating investments in German energy facilities should allocate more time, attention and resources to the screening process. Pre-deal considerations should include:

  • Timing: Foreign investors, sellers and target companies should be aware of the timing of an investment review. While BMWi is responsible for the implementation of the review procedure, it will involve other federal ministries as the case may be within the scope of their respective authority. Obviously, such consultation and deliberation add to the length of the procedure. The screening procedures at national level in Germany will likely be extended to allow for an exchange of opinions with the Commission and other Member States after the final implementation of the cooperation mechanisms based on the EU framework by October 2020. Therefore, effective management is key to expedite the procedure to meet the timeline needs.
  • Know your business (and the one you are investing in): Foreign investors, sellers and target companies must have a thorough understanding of whether the energy facility is to be considered as “critical infrastructure” or bears any other relevance for energy security. Take careful stock in case the target company designs or modifies software for energy facilities. It may be classified as “energy-sector-specific software”, i.e. software that is used for operating and controlling critical energy infrastructure facilities or has access to a large amount of data. In cases of doubt, investors should apply for a clearance certificate (comfort letter). It provides legal certainty to the investor, the seller and the target.
  • State-driven takeovers: Consider whether the transaction involves a country of special concern that has demonstrated or declared a strategic goal of acquiring a type of critical technology or critical infrastructure that would affect issues related to national or public security.
  • It is not only about Control: Foreign investors, sellers and target companies must be aware of the types of transactions that, while not conferring the potential for control of the business on a foreign investor are now subject to review.

If you have questions about any of the issues raised in this post, our Competition, Antitrust and Regulatory practice group in Germany is happy to assist you – please contact Andreas Haak, Dr. Maria Brakalova or Dr. Barbara Thiemann, LLM.

[1]           The European Court of Justice explicitly recognized in Case C-503/99 (Commission v. Belgium, judgement of 4 June 2002 at para. 46) that “the safeguarding of energy supplies in the event of a crisis, falls undeniably within the ambit of a legitimate public interest”.

[2] BMWi, press release of 19/12/2018, “Strengthening our national security via improved investment screening”.

[3]               Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Hungary, Italy, the Netherlands, Poland, Portugal, UK and Spain.

[4]           Peter Altmaier presented on the draft of a National Industry Strategy 2030 early February 2019.

[5]           BMWi, 5 February 2019, „Nationale Industriestrategie 2030. Strategische Leitlinien für eine deutsche und europäische Industriepolitik“.

[6]           BDI, January 2019, „BDI-Grundsatzpapier China. Partner und systemischer Wettbewerber – Wie gehen wir mit Chinas staatlich gelenkter Volkswirtschaft um?“

Germany and the European Union expand scrutiny of foreign investment – Considerations for the energy sector

Another interesting year ahead for European renewables

On 5 February 2019, Dentons held its fourth annual workshop on investing in European renewables. Here we outline some of the key messages that emerged.

Setting the scene

At first glance, these should be happy days for the European renewables sector. Energy from renewable sources (RES) is firmly established in the mainstream of the power industry. Installation costs for wind and solar continue to drop: having fallen already by 75 percent in 2010-2017, PV costs are projected to fall by more than half again in 2015-2025. Mindful of their international and in some cases also their domestic commitments, governments have been setting some ambitious renewables targets for 2030 and beyond. Even the IEA, once a notably sceptical voice on renewables, has predicted that wind will be the largest source for power generation in Europe by 2027.

But of course life is never that simple. The days when the industry could sustain strong growth in revenues and profitability just by chasing the fattest feed-in tariffs, surfing the waves of subsidy as they washed across Europe, are long past. With maturity, the sector faces more complex problems. It must grapple with the fundamentals of commodity markets; sell itself to new classes of customers and investors; and work with governments, regulators and system operators to exploit the new technologies that can make whole power systems work in more sustainable and efficient ways. And whilst the broad outlines of the next stages in the energy transition are widely accepted, the details of how best to achieve it remain a matter of debate.

Country snapshots

No two jurisdictions in Europe present the sector with quite the same opportunities or challenges. Dentons lawyers gave brief sketches of the renewables sectors in their home markets, covering 12 of the 20 countries featured in Investing in renewable energy projects in Europe – Dentons’ Guide 2019. We summarise below the key talking points from their presentations (the slides from which can be accessed here).

Germany produced more electricity from renewables than from coal for the first time in 2018. The growth in RES capacity may not be so large in 2019, but if buildout rates are slowing down a little, the Energiewende overall is changing gear rather than coming to a halt. The new financial support mechanisms are functioning well. The recently announced conclusions of the German government’s Coal Commission point the way to a complete phase-out of coal-fired generation. The publication of an action plan for grid expansion further indicates the German government’s continuing commitment to taking the energy transition into its next phase, and interest is strong from other sectors of industry, as the activities of German companies in the e-mobility and hydrogen sectors show.

In France, the government plans to more than double wind and solar capacity by 2023, with a further doubling of solar and 50 percent expansion of wind in the following five years to 2028. Auction mechanisms have succeeded in bringing down the price of supporting RES. Procedural changes should reduce the potential for objectors to delay projects. At the same time, it is worth remembering that the initial trigger for the gilets jaunes protests was an increase in carbon taxes: in France as elsewhere, there is an inevitable tension between the need to adopt policies to avert the “end of the world” and the need of ordinary citizens to survive financially until the “end of the month”.

The market fundamentals for the RES sector in Turkey remain strong – notably, growing demand for power and a strong government commitment to reducing dependence on imported fuel.  At present, the regulatory regime favours either very large (1 GW+) or quite small (up to 1 MW) projects.  For the latter, there is a feed-in tariff / premium support mechanism; for the former, support is based on auctions. It is unfortunate that two of these were cancelled in 2018 – one of which would have included the country’s first offshore wind project – but it is hoped that these will be reinstated.

In Poland, 2019 should be a very busy year for RES projects, as the government focuses on meeting its 2020 RES targets. After a period in which various measures were taken to discourage onshore wind, auctions will be focused on solar and onshore wind. As in many markets, the longer term future depends on electricity market reform to integrate large amounts of intermittent renewable power.

Italy has set itself ambitious plans for increasing its share of RES to 2030, focused on wind and solar. At present, it is a little less clear how these will be supported in terms of any public subsidy. On the other hand, the secondary market remains active, and Italy is one of the jurisdictions where there is considerable excitement around the prospect of subsidy-free developments, possibly financed in part by arrangements with non-utility industrial offtakers (corporate PPAs).

The Czech Republic and Slovakia demonstrate some of the same features as the Italian market, in slightly more extreme form. The boom years were some time ago, and for the moment, these jurisdictions present secondary market, rather than development opportunities. As in Italy and some other jurisdictions, the authorities are now investigating whether the subsidies of some existing projects were properly awarded – did they, for example, commission exactly when they claim to have commissioned? Careful due diligence is therefore required when assessing acquisition opportunities.

In the UK, the renewables industry faces some challenges as a result of Brexit, particular if the UK leaves the EU with no deal. However, the government has recently committed to continue to hold subsidy auctions with a focus on offshore wind every two years, and – with a third of UK power already coming from RES – it is starting to address the decarbonisation of the heat and transport sectors. For those technologies without the prospect of new regulated support (solar and onshore wind), apart from a proposed new “smart export guarantee” for sub-5 MW projects, the position is starting to improve as steps are taken to make grid charging rules work better for storage and progress is made towards developing corporate PPA models that work in a subsidy-free market.

In the Netherlands, the government continues to contest the case brought by the Urgenda Foundation and others (and now twice upheld by the Dutch courts), that it is legally obliged to reduce greenhouse gas emissions by 25 percent against a 1990 baseline by 2020. But it has in any event allocated generous subsidies to RES, including €10 billion under the SDE+ regime this year. As in the UK and Germany, offshore wind is set to grow strongly in the next few years.

Spain is another jurisdiction where interest in corporate PPAs is high, particularly among projects that have not secured support in the auction-based regime that began to operate in 2017. Some projects that did secure such support face a challenge to meet their commissioning deadlines. For those with deep pockets, there are opportunities to secure grid capacity where earlier developers’ rights have expired. There are separate incentives for self-consumption and projects in the Spanish islands.

For the renewables industry in Russia, progress has been slow for many years. Local content requirements and a bureaucratic, highly centralised power regime, have not helped, and the method of procuring RES power, being based on capacity and capital expendture, also sets it apart from other jurisdictions. But there are signs that the pace is starting to pick up. There are good prospects for self-consumption projects up to 25 MW, and for the energy from waste sector.

The renewables sector in Ukraine continues to attract international investment, driven by attractive feed-in tariffs and exemptions from import VAT. This looks set to continue under the new auction-based support regime that will take effect from 2020, but the industry’s resources will be stretched to meet the end-of-2019 deadline for projects to be eligible for subsidies under the old regime.

Alongside our own colleagues, industry stakeholders contributed insights in keynote speeches and a panel discussion (the slides from the keynote speeches can be accessed here and here). 

Conclusions

The broad, long-term direction for the renewables industry appears to be set, and in the right direction. As always, stability of regulation will be an important factor in realising the sector’s potential. But increasingly, its success will depend on the development of new investment approaches – not only to RES projects themselves, but to the development of the grid and of technology to make it work more efficiently, harnessing the power of big data, and facilitating new market models.

If you would like to discuss any of the issues raised in this post, or any other aspect of European renewables, please get in touch with any of the lawyers listed in our guide, or your usual Dentons contact.

, , ,

Another interesting year ahead for European renewables

Germany takes the first steps towards the end of coal-fired power

In 2018, the German government appointed a Commission on Growth, Structural Change and Employment, known as the Kohlekommission or Coal Commission with the task of evaluating a roadmap for the phase-out of coal-fired power production in Germany. The Coal Commission’s conclusions have now been published, setting the agenda for the next stage of the German energy transition (Energiewende).

Germany has been a pioneer of the mass deployment of wind and solar power generation. In 2018, its share of electricity generated from renewables (40.3 percent) exceeded that generated from coal (37.5 percent) for the first time. But 37.5 percent is still a lot of coal-fired power. On 26 January 2019, the Coal Commission passed its final (non-binding) resolution accompanied by a 336 page report. We summarise the effect of implementing its recommendations below.

1. Phase-out of coal-fired power production by 2038

The Coal Commission recommends the end of 2038 as the deadline for the phase-out of coal-fired power production in Germany. An integrated “opening clause” enables the phase-out date to be brought forward to 2035 in consultation with the operators if the electricity market, labor market and economic situation allow. This will be reviewed in 2032. In 2023, 2026 and 2029, the phase-out plan will also be evaluated in terms of security of supply, electricity prices, jobs and climate targets.

2. Gradual shutdown of coal power plants

At the end of 2017, Germany had operational coal power plants with a net capacity of 42.6 gigawatts (GW). They are gradually being taken off the grid anyway, however, the phase-out is supposed to be implemented earlier. 12.5 GW are expected to be taken off the grid by 2022, of which 3.1 GW are fed-in by lignite power plants that are particularly harmful to the climate. By 2030, no more than 17.0 GW may remain on the market. By 2038, all coal-fired power plants are to be shut down.

3. Compensation for (potentially) increasing electricity prices for consumers

To compensate for any increase in electricity prices triggered by the phase-out, the Coal Commission recommends reducing grid charges for private households from 2023 on. These grid charges can account for about a fifth of private households’ electricity bills, and the Coal Commission even goes so far as to suggest a subsidy for these network charges. The compensation would amount to approximately EUR 2 billion per year. But there shall be no new levies or taxes.

4. Compensation for (potentially) increasing electricity prices for companies

Energy-intensive industries are to be permanently relieved of costs arising from the price of CO2 pollution rights that coal and gas-fired power plants have to buy under the EU Emissions Trading Scheme (EU allowances). The current relief scheme for these indirect costs will expire in 2020. The government wants to apply to the EU (under state aid rules) for an extension of this compensation. Most recently, the relief amounted to almost EUR 300 million per year. Since EU allowances have become significantly more expensive, the sum will be higher in the future. The so-called electricity price compensation is to be extended until 2030.

5. Financial support for coal mining regions

Coal mining regions affected by the coal phase-out are to receive structural aids (Strukturhilfen) amounting to approximately EUR 40 billion by 2040. In addition to numerous transport projects, the establishment of federal authorities is being encouraged, which could create around 5,000 new jobs within the next ten years. Also, an investment subsidy for entrepreneurs is proposed.

According to the Coal Commission’s proposal, the aid could follow the Berlin/Bonn Act, which mitigated the impact of relocating the capital from Bonn to Berlin. By the end of April 2019, the cornerstones for a law of measures shall be in place that specifies how the German government will precisely promote structural change. Future federal governments of the individual German states are to be bound to it. The Coal Commission estimates the individual costs at EUR 1.3 billion per year over 20 years. In addition, EUR 0.7 billion is to be provided to the federal states that are not tied to specific projects. Furthermore, a special financing programme as well as an immediate programme amounting to EUR 1.5 billion in total will be set to improve the transport system. These expenses are already included in the federal budget until 2021.

6. Compensation for lignite power plants

The Coal Commission recommends contractual arrangements with power plant operators and compensation for decommissioning up to 2030, which should include both compensation for operators and socially acceptable arrangements. The older a lignite power plant is, the less compensation will be paid. If there is no contractual agreement with the operators by July 2020, the exit shall be subject to regulatory law also including compensation.

The Coal Commission also suggests that the amount of compensation should be based on amounts already paid in the past. Lignite power plants have already been taken off the grid and transferred to a reserve for climate protection purposes in the past. At that time, around EUR 600 million were paid per GW output. Of the currently more than 40 GW of coal-fired power plants still connected to the grid, about 21.8 GW are fuelled with lignite.

7. Compensation for hard coal power plants

There shall also be compensation here. However, since these power plants yield less return, a decommissioning premium shall be obtained by a series of tenders. In simple terms, this could work as follows. The German government specifies how much capacity is to be decommissioned. Power plant operators apply for this with bids for compensation. In each tender, whoever demands the lowest compensation or saves the most CO2 by shutting down the power plant will win the contract.

8. Support of coal workers and symbolic preservation of Hambacher Forst

For employees in the coal industry aged 58 and over who have to bridge the time until retirement, there will be an adjustment allowance and compensation for pension losses. Estimated costs amount to up to EUR 5 billion which employers and the state could jointly bear. Terminations of employment for operational reasons are excluded. There should be training and further education for younger employees, placement in other jobs and help with wage losses.

A piece of forest at the Hambach open-cast mine has become a symbol of the anti-coal movement. The report states that the Coal Commission considers it desirable that the Hambach Forest should remain. RWE wants to cut down the forest for brown-coal mining which was stopped by court order. Other villages and areas are also affected by opencast mining. The Coal Commission recommends a dialogue with the affected areas on the resettlements in order to avoid social and economic hardship.

9. Hedge of power supply

In order to avert the risk of blackouts due to a lack of electricity generation, the security of supply should be monitored more closely. The approval of more environmentally friendly gas-fired power plants is to be accelerated. Besides, investment incentives shall be created.

Conclusion

The publication of the Coal Commission’s report is only the start of the process of coal phase-out. In order to implement the recommendations into national and therefore binding law, many details will have to be worked out, and both the German government and parliament have to agree on their adoption. Nevertheless, it marks a hugely important step in the Energiewende, as Germany moves from merely being a champion of renewable power generation to pointing the way towards the kind of net zero carbon economy that climate science shows that we need to achieve sooner rather than later.

Germany takes the first steps towards the end of coal-fired power

Natural Gas Public Company of Cyprus (DEFA) issues request for proposals for €500m LNG import facility

Cyprus’ long standing plans to import gas to the island have taken a big step forward with the release on 5 October 2018 of a request for proposals to design, construct, procure, commission, operate and maintain an LNG import facility at Vasilikos Bay, Cyprus (the Project).

It is interesting to note that (unlike previous tenders for LNG imports to Cyprus) the infrastructure is being tendered for separately to the LNG supply. DEFA expects to issue a request for expressions of interest for LNG supply to the market later this year, with a full RfP to follow in early 2019.

Overview of Project

The RfP divides the Project into three distinct elements:

  • The engineering, procurement and construction of the offshore and onshore infrastructure, including the gas transmission pipeline and associated facilities;
  • The procurement and commissioning of a floating storage and regasification unit (FSRU), through the purchase of an existing FSRU, design and construction of a new-build FSRU, or conversion of an LNG Carrier and, if applicable, provision of a floating storage unit (FSU); and
  • The Operations and Maintenance (O&M) of the infrastructure and FSRU for a period of 20 years.”

The following points are worth drawing out:

  1. the Project must be completed by 30 November 2020;
  2. initially, all gas imported through the facility will be sold on by DEFA to the Electricity Authority of Cyprus (EAC, the state owned electricity company, which owns and operates the Vasilikos power station adjacent to the proposed site of the facility). The Vasilikos plant is currently running on heavy fuel oil, but will burn gas once the Project is complete.
  3. DEFA has incorporated a special purpose vehicle, Natural Gas Infrastructure Company of Cyprus, for the Project. The SPV will contract with the successful bidder for the construction and O&M services; and will own the LNG import facility once constructed;
  4. DEFA will contract directly with suppliers for the LNG supply; and will acquire capacity in the facility from the SPV. The risk allocation between the various agreements that will need to be entered into between DEFA, the SPV, the LNG supplier and EAC will be a critical issue for the success of the project.
  5. DEFA will have an option to take over certain elements of the offshore and onshore O&M services at different stages of the Project;
  6. as part of the onshore infrastructure, the contractor will be required to install a “natural gas buffer solution”. The design of this piece of infrastructure is left for the contractor to propose, but could for example include a pipeline array. The intention behind this requirement is to ensure that the FSRU and pipeline infrastructure is capable of achieving the flexibility of gas supply required to meet the operational requirements of the Vasilikos plant.

Funding

The Project has an approved budget of €300m for the initial capex, and €200m for O&M costs over the 20 year term. The initial capex will be part funded by an EU grant under the Connecting Europe Facility, with the remainder expected to be funded wholly or in part by debt finance. It is not yet clear whether EAC will invest equity into the Project – reference is made to EAC taking up to a 30% interest in the SPV at a later date.

Key issues

From our team’s experience of working on similar projects in Cyprus, key issues for the success of the Project may include:

  1. credit support to be provided by Cyprus stakeholders (DEFA / EAC / the government) and the successful bidder. It is interesting to note that the government of Cyprus will be issuing a government guarantee to support the debt financing;
  2. the possibility (and timing) of DEFA selling gas to other buyers in the future, and the implications for EAC’s gas take from the facility;
  3. EAC’s ability to pass through the costs it incurs by generating electricity from gas to electricity consumers under the Cypriot regulatory regime;
  4. the flexibility of gas supply required to meet the operational requirements of the Vasilikos plant (see the previous comments regarding the buffer solution). This will be particularly important given the expected trend towards increased levels of renewable generation and consequential impact on required flexibility of thermal plants on the system;
  5. the impact of additional delivery points for piped gas to other buyers/plants;
  6. the expected timeframe for the conversion of the Vasilikos plant’s turbines to gas, and commissioning of the gas-firing equipment;
  7. impact of any electricity system operator requirements – e.g. regarding new electricity market rules in Cyprus.

Dentons: Cyprus / LNG experience

Dentons has unparalleled experience of working on LNG projects in Cyprus, having advised DEFA for a number of years on the potential long term import of LNG to Cyprus, and subsequently on shorter term interim gas supply arrangements; and MECIT on the commercialisation of the Aphrodite Field in the Cyprus EEZ through the development of a proposed onshore LNG liquefaction and export project at Vasilikos.

The team has a particular focus in advising on international LNG import projects. Team members are advising, or have advised on, LNG import projects in Ghana, the Caribbean, Jamaica, Pakistan, Jordan and Malta.

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Natural Gas Public Company of Cyprus (DEFA) issues request for proposals for €500m LNG import facility

Big data in the energy sector: GDPR reminder for energy companies

On 18 September, Dentons hosted an Energy Institute event in our London office with the title “The Clash of Digitalisations”. Speakers from Upside Energy, Powervault and Mixergy spoke about the Pete Project, an initiative funded by Innovate UK, that is exploring the potential of domestic hot water tanks and batteries to provide flexibility services to National Grid.  Fascinating as the technological and energy-regulatory aspects of this kind of household demand-side response aggregation services are, a key common theme of the evening was the central role played in them by the analysis of large amounts of “personal data”, and whether recent changes in privacy legislation help or hinder the development of such services.  We produced this short article to put that discussion in context.

The General Data Protection Regulation (GDPR) came into force across the European Union (EU) on 25 May 2018 and is intended to overhaul the way that companies collect and use personal data. GDPR puts the onus on companies to ensure that they have a lawful basis to collect and process personal data. It also requires mechanisms to allow data subjects to exercise the new rights available to them under GDPR.

Breach reporting requirements have been strengthened with a requirement to report most breaches to the relevant supervisory authority within 72 hours. Supervisory authorities have increased enforcement powers including the ability to impose fines of 20 million Euros or 4% of total worldwide annual turnover.

Compliance with the requirements of GDPR presents a particular challenge within the energy sector. One high profile example is in connection with the use of smart meters and smart grids. Smart grids when combined with smart metering systems automatically monitor energy usage, adjust to changes in energy supply and provide real-time information on consumer energy consumption. The EU aims to have 80% of electricity meters converted to smart meters by 2020. As such, the volume of personal data collected in the energy sector is set to increase.

What is Big Data?

Big data has been defined in various ways including by reference to the “three V’s”. This refers to volume being the size of the dataset, velocity being the real-time nature of the data and variety referring to the different sources of the data.

However, this definition does not accurately describe all big data. An alternative is to define big data as an extremely large data set that cannot be analysed using traditional methods. Instead such big data is analysed using alternative methods (such as machine learning) in order to reveal trends, patterns, interactions and other information that can be used to inform decision-making and business strategy.

The key to big data is the analysis and resulting output. Big data analytics can be achieved using machine learning where computers are taught to “think” by creating mathematical algorithms based on accumulated data. Machine learning falls broadly into two categories, supervised and unsupervised. Supervised learning involves a training phase to develop algorithms by mapping specific datasets to pre-determined outputs. Alternatively machine learning can be unsupervised where algorithms are created by the machine to find patterns within the input data without being instructed what to look for specifically.

Big data is a particular issue following the Facebook / Cambridge Analytica story and the public concern about mass data capture and exploitation.

Below, we consider the 7 key issues surrounding big data from a data protection perspective within the energy sector.

Key issues

1. Fairness and transparency

One of the principles of GDPR is that personal data must be processed in a fair and transparent manner.

In practice this means that companies processing personal data must provide a privacy notice to individuals that sets out how and why personal data is being processed. This raises a practical issue in connection with big data analytics because often the purposes of processing are not always known at the outset.

In addition, machine learning algorithms are often conducted in what is known as a “black box”. This means that the algorithm itself is unknown to the data controller and cannot be interrogated to determine how the output was selected or decision made. This likely means that the privacy notice may not be GDPR compliant.

2. Lawful basis for processing

The processing of personal data must have a lawful basis at the outset. There are a number of legal bases available (listed out in A6 and A9 GDPR).

Consent is unlikely to be an option when big data analytics are involved. The analysis of big data sets is often conducted to discover trends within that data set and if those trends were known prior to the analysis, the analysis would not need to be conducted. Machine learning algorithms are often impossible for humans to understand as they cannot be translated into an intelligible form without losing their meaning.  Consent must be freely given, specific, informed and unambiguous to be valid under GDPR. If the information regarding how personal data is processed cannot be understood then this cannot be translated into a meaningful consent.

In addition, under GDPR, data subjects have the right to withdraw consent and have a company cease processing their personal data. This would be difficult, if not impossible, in a big data context if the machine-learning algorithm is opaque and there is no ability to segregate personal data relating to a specific individual. As such, consent is highly unlikely to be a viable lawful basis for processing big data.

A potential alternative would be reliance on “legitimate interests”. This is available where processing of personal data is necessary for the pursuance of the legitimate interests of the company determining how and why the personal data is held and processed. The legitimate interests of the company need to be balanced against the interests, rights and freedoms of the individual (with particular care taken where data relates to children). A legitimate interests assessment should be conducted to determine whether legitimate interests can be relied upon. This should be documented.

An issue with legitimate interests as a basis for processing big data is that processing must be “necessary” for the purpose pursued by the company. In some instances big data analytics are pursued because the output may reveal a new correlation of interest. However, processing data because it may be “interesting” is unlikely to be sufficient to qualify as a legitimate interest that needs to be pursued by the controller.

3. Purpose limitation

GDPR requires that personal data be collected for specified, explicit and legitimate purposes and not further processed in an incompatible manner.

Big data analytics by their very nature often result in processing of data for new and novel purposes. These may be incompatible with the original purpose for which the data was collected. The issue then arises as to how and when privacy notices should be refreshed and brought to the attention of individuals.

Where material changes are made to a privacy notice or the reasons and methods by which personal data are processed these need to be actively brought to the attention of the data subject in advance of the processing. If the novel purposes or outcome is not known prior to analysis of the personal data then there is no logical way for a privacy notice to be refreshed or brought to the attention of an individual.

In addition, the personal data may have been obtained in bulk from a third party. This poses an additional challenge as it may be difficult or difficult to contact those individuals to whom the personal data relates.

4. Data minimisation

Big data analytics involves the collection and use of extremely large quantities of information. This is potentially problematic from a data minimisation perspective because GDPR requires that personal data held and processed should be limited to the minimum required for the purposes for which they were collected.

However, there are solutions to this issue. Personal data could be anonymised such that individuals are no longer identifiable from the information. A benefit of big data analytics is that it is often not dependent on the identification of specific individuals but rather of overall trends within the data population. Once personal data is anonymised it is no longer “personal data” for the purposes of GDPR and could be used and analysed as needed without the requirement for further refreshed privacy notices or legitimate interest assessments in relation to such processing. However data subjects should be told how their data may be used including that it may be anonymised and the purposes of subsequent usage.

5. Individual rights

There are practical issues around how data subjects can exercise their rights under GDPR in relation to big data. Data subjects have various rights under GDPR including the right to request confirmation that their personal data is being processed, access copies of personal data held, to correct inaccuracies, the “right to be forgotten”, to restrict processing, to have personal data “ported” to another entity and the right to object to processing.

The exercise of many of these rights requires business systems and processes that enable the identification and segregation of personal data relating to a specific individual. If personal data is being processed within an opaque algorithm then segregation of that personal data (e.g. to erase it) will be difficult.

Given the quantities of personal data held in the context of big data any exercise of individual privacy rights is likely to be a time consuming exercise and potentially a costly administrative burden.

There are also specific rules on automated decisions which are made concerning an individual that may have a legal (for example a mortgage rejection or acceptance) or other similarly significant effect. In practice this would involve explicitly referencing the automated decision-making within a privacy or other notice and gaining the explicit consent of the data subject (unless it is necessary for performance of a contract or otherwise authorised by EU or Member State law). As discussed above, consent is a tricky concept in connection with big data analytics and gaining a meaningful consent to the proposed automated decision making would be difficult.

Depending on the nature of the automated decision-making and its effect on the individual, one argument may be that the decision does not have a legal or similarly significant effect on the data subject. This would need to be carefully considered in the context of the automated decision-making and the effect on the individual.

6. Accuracy

GDPR requires that personal data held be accurate and that every reasonable step must be taken to ensure that personal data is accurate (and suitably erased or rectified to remove inaccuracies).

Whilst a level of inaccuracy may have minimal impact where large data sets are analysed to reveal general trends, there will be a significant impact when processing is used to analyse a specific individual.

An additional issue is that drawing conclusions or correlations from large data sets, even if the data itself is accurate, may still lead to inaccurate conclusions. This is a particular problem where the input data is not representative of the entire population.

The machine-learning algorithm may include hidden biases that will lead to inaccurate predictions. Consider Ethics Committee input and user testing to mitigate this risk.

Although there is no quick fix to rectify inaccuracies in data sets, the above highlights the importance of ensuring personal data and other information are both accurate and representative of the population sampled to ensure that the outputs and conclusions drawn from big data analytics are accurate.

7. Security

Security and the risk of hacking and data breaches are inherent to any business that is processing personal data. This risk is only increased where the personal data held consists of extremely large quantities of personal data. Any high profile organisation that holds large quantities of personal data will be a bigger target for hackers and also at higher risk of human error within the business resulting in the inadvertent loss of personal data.

It is therefore essential that companies within the energy sector review security measures and procedures to minimise the ability of hackers to breach systems and any resulting impact of a data breach. This will inevitably involve a combination of upgrades to security systems and regular training to ensure staff know how to hold and transmit personal data and what to do in the event of a breach.

Conclusion

The energy sector faces significant challenges if it wants to both utilise and benefit from large data sets available to it, comply with GDPR and protect the rights of individuals.

However, despite the challenges, the benefits of big data analytics for both the company and the individual in the energy sector mean that solutions to these issues must be considered in order to facilitate the growth of domestic demand-side response services, to manage energy consumption more efficiently and respond to changes in local usage and give individuals greater visibility and control over their individual energy consumption. A balance needs to be found between the needs of the sector and privacy of individuals, and a proper GDPR analysis can help you achieve that.

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Big data in the energy sector: GDPR reminder for energy companies

Talking points in the solar market

A Dentons team from the UK, Germany, the Netherlands and Turkey had a good day at Intersolar Europe towards the end of June, which is a great conference for meeting old friends and making new connections.

For those who didn’t make the trip to Munich, here are a few thoughts on the key talking points.

  • Solar PV is clearly a very healthy industry – there were over 850 exhibitors, spread over 6 exhibition halls. The panel manufacturers were particularly impressive, with Canadian Solar, SMA and others having large stands.

 

  • Key new target markets in Europe include Ireland (with a subsidy policy decision expected to be announced imminently); Spain (driven by merchant sales and PPAs, rather then Government tenders); and France (where the industry is increasingly being seen as a Government priority with its #PlaceAuSoleil plan).

 

  • Competition remains fierce, with Q-Cells (Hanwha) announcing its new half-cell technology (winning the conference award for innovation), and a number of suppliers (e.g. Jinko and First Solar) marketing panels with increased efficiency.

 

  • Storage attracts attention, but is still not part of the mainstream – the focus was much more towards smart vehicle charging (with the conference running alongside the Smarter-E convention), than having batteries within the home itself (or indeed on a commercial scale).

 

  • There is continued uncertainty regarding the future of solar panel anti-dumping – the current EU measures expire in September, though there is the possibility of a further review (extending existing minimum import prices for at least a year). The EU restrictions also have potential to be part of a global trend, with the US currently reviewing its position on solar cells and modules with the possibility of a 25% tariff.

 

  • There is quite a bit of concern about the recent sudden withdrawal of Chinese subsidies. Given the huge growth in new domestic projects in recent years this perhaps points towards greater exports and falling prices (together with the possibility of a limited number of panel supplier insolvencies). There may be some local government subsidies available, though many projects will be put on hold.

We have been seeing a number of these issues first-hand on our current projects. Do get in touch if you would like to discuss any of them.

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Talking points in the solar market

CJEU rules on validity of natural resources agreements

On 27 February 2018 the CJEU issued its judgment in the Western Sahara Campaign case (Case C-266/16). In a short judgment, the court held that the 2006 partnership agreement in the fisheries sector (Fisheries Agreement) and a 2013 protocol to that agreement are inapplicable to the territory of Western Sahara. This was because including Western Sahara within the scope of these agreements would be contrary to “rules of general international law applicable in relations between the EU and Morocco”, particularly the principle of self-determination, and to the UN Convention on the Law of the Sea.

Why are we writing about fish in an Energy blog? As we explained in an earlier post on this case, the international law principles on which it turns are potentially relevant to other agreements about natural resources in areas where local populations claim rights of self-determination.

By interpreting the Fisheries Agreement and the 2013 protocol in this way, the CJEU did not have to determine whether agreements that did deal with resources in Western Sahara would be valid under EU and international law (a question Advocate General Wathelet answered in the negative). Nevertheless, the court’s willingness to invoke and apply international law principles, in particular that of self-determination, is an interesting demonstration of the possible impact of those principles. This may well be of broader importance with regard to agreements that purport to deal with other territories whose populations assert – or may in future assert and gain support for – the right to self-determination.

The court’s judgment relies heavily on its December 2016 judgment in Polisario (Case C-104/16), issued after the request for a preliminary ruling was made in Western Sahara. In Polisario, the court had held that the Euro-Mediterranean “association” agreement (the Association Agreement), as well as a Liberalisation Agreement (concerning liberalisation measures on agricultural and fishery products) had to be interpreted, in accordance with international law, as not applicable to the territory of Western Sahara. The Association Agreement and Liberalisation Agreement were initially also included in the Western Sahara reference, but in light of Polisario those aspects were withdrawn by the English High Court.

When interpreting the scope of the Fisheries Agreement and the 2013 protocol, AG Wathelet had considered that, unlike the agreements addressed in Polisario, the Fisheries Agreement and the 2013 protocol were applicable to Western Sahara and its adjacent waters. He reached this view on several bases, finding it was “manifestly established” that the parties intended the agreements to include Western Sahara, that their subsequent agreements and actions were consistent with this interpretation, and that it was also supported by the genesis of the agreements and previous similar agreements.

The court took a different view (without reference to the AG’s Opinion). First, noting the Fisheries Agreement is stated to be applicable to “the territory of Morocco”, the court held that this concept should be construed as meaning “the geographical area over which the Kingdom of Morocco exercises the fullness of the powers granted to sovereign entities by international law, to the exclusion of any other territory, such as that of Western Sahara”. It stated that, if Western Sahara were to be included within the scope of the agreement, that would be “contrary to certain rules of general international law that are applicable in relations between [the EU and Morocco], namely the principle of self-determination”.

The Fisheries Agreement also refers to “waters falling within the sovereignty or jurisdiction” of Morocco. Referring to the UN Convention on the Law of the Sea, the court noted a coastal state is entitled to exercise sovereignty exclusively over the waters adjacent to its territory and forming part of its territorial sea or exclusive economic zone. Given Western Sahara did not form part of the “territory of Morocco”, the waters adjacent to it equally did not form part of the Moroccan fishing zone referred to in the agreement. A similar conclusion followed with regard to the 2013 protocol’s scope.

While more closely tied to the text of the fisheries agreements than the AG’s Opinion, the judgment suggests the court may seek to arrive at an interpretation of such agreements that respects international law insofar as possible. It is therefore a significant restatement of the importance of international law principles, particularly self-determination, to questions regarding sovereignty over natural resources in occupied territories, and therefore has potential ramifications for international agreements which purport to deal with such resources.

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CJEU rules on validity of natural resources agreements

EU Advocate General restates importance of self-determination to validity of natural resources agreements

In a landmark opinion, Advocate General Wathelet (the AG) of the European Court of Justice (CJEU) has invited the court to conclude that fisheries agreements between the EU and Morocco are in violation of the international law principle of self-determination, and therefore invalid under EU law. It comes as a clear reminder that EU institutions must respect international law principles binding upon them when entering into international agreements.

If the court follows the AG’s lead, the case could have ramifications for other territories whose populations may claim rights to self-determination, such as Catalonia and the Kurdistan Region of Iraq, and for the validity under international law of agreements with the states occupying those territories.

Background

The territory of Western Sahara is occupied by Morocco, a situation widely considered to breach the principles of international law entitling peoples to self-determination. The UN recognises Western Sahara as a non-self-governing territory occupied by Morocco.

The reference to the CJEU emanates from an English court case brought by Western Sahara Campaign UK, an NGO aiming to support the recognition of the Western Saharan people’s right to self-determination. It argues that the EU-Morocco agreements (insofar as they purport to apply to Western Sahara) violate that right and so are contrary to the general principles of EU law and to Article 3(5) of the Treaty on European Union, under which the EU is required to respect international law. Under the agreements, the EU paid Morocco for access to waters including Western Sahara’s.

As the measures in question related to the validity of EU law, the English court referred the case to the CJEU, itself characterising Morocco’s presence in Western Sahara as a “continued occupation”.

The Advocate General’s Conclusions

Article 3(5) of the Lisbon Treaty states that the EU will respect the principles contained in the UN Charter, of which Article 1 sets out the principle of self-determination of peoples, while Article 73 promotes self-government. Yet the EU fisheries agreements with Morocco purport to deal with waters off the coast of Western Sahara.

The AG considered, first, that, where the relevant principles of international law (here, both treaty and customary law forming part of general international law) are “unconditional and sufficiently precise”, a claimant can rely on them to challenge EU actions. He noted that the right of self-determination, because it formed part of the law of human rights, was not subject to these requirements, but in any event met them. Similarly, (i) the principle of permanent sovereignty over natural resources and (ii) the rules of international humanitarian law applicable to the exploitation of Western Sahara’s natural resources were also sufficiently precise and unconditional to be invoked by the NGO.

Examining whether the fisheries agreements breached the international legal principles in play, the AG examined in some detail the historical background to Morocco’s occupation. An advisory opinion issued by the International Court of Justice in 1975 had stated that Western Sahara was not a “territory belonging to no one” at the time of its earlier occupation by Spain. A referendum on self-determination under UN auspices was thus envisaged, but Morocco considered this unnecessary on the basis the population had already de facto determined themselves in favour of returning the territory to Morocco. The AG, however, concluded that Western Sahara was integrated within Morocco “without the people of the territory having freely expressed its will in that respect”.

Because the fisheries agreements with Morocco make no exception for Western Sahara, the AG considered the EU is in breach of its obligation not to recognise an illegal situation resulting from the breach of the right to self-determination, and to refrain from rendering aid or assistance in maintaining that situation.

The AG also emphasised that as “Western Sahara is a non-self-governing territory in the course of being decolonised … the exploitation of its natural wealth comes under Article 73 of the United Nations Charter and the customary principle of permanent sovereignty over natural resources”. He found that the fisheries agreements did not contain the necessary legal safeguards to ensure that the natural resources were used for the benefit of the people of Western Sahara. On that basis also, in his view the provisions of the agreements were not compatible with EU or international law.

Impact of the opinion

It remains to be seen whether the CJEU will follow the AG’s opinion. The opinion is nevertheless significant, not only for the Western Saharan situation. It is a robust restatement of the importance of the right to self-determination, and of the consequences that may flow where it is held to be breached, as well as of the importance of the protection of natural resources in occupied territories.

The arguments set out in this opinion will undoubtedly influence independence discourse in territories as disparate as Catalonia and Kurdistan, and the CJEU’s decision, expected at the end of February, will be keenly anticipated.

The reaffirmation of the principle of permanent sovereignty over natural resources is of particular interest regarding the Kurdistan Region of Iraq, where the exploitation of natural resources has been a contentious issue for decades. Kurdistan’s status as a semi-autonomous region with the right to manage its oil resources is enshrined in Iraq’s 2005 Constitution, and the Region has not declared independence.  Although not analogous with the Western Sahara situation, one can envisage questions being raised as to the compatibility with international law of any agreements which states may have or may enter into with the Iraqi federal government that relate in some way to resources in Kurdistan territory.  It may well be argued that these too fail to respect the Kurdish people’s sovereignty over their natural resources and/or their right to self-determination (as well as potentially breaching the constitutional provisions).  The AG’s comments as to the unconditional and precise nature of these principles paves the way for challenges before national courts on the basis that these are binding upon states, which may not enter into agreements that disregard them.

Case C-266/16 Western Sahara Campaign, Opinion of Advocate General Wathelet, 10 January 2018

The authors are grateful to Seonaid Stevenson, a trainee solicitor at Dentons, for her assistance with this piece.

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EU Advocate General restates importance of self-determination to validity of natural resources agreements

Energy Market Mergers – quick guide to EU Competition Law assessment

This blog is a summary of an article that appeared in Competition Law Insight examining the key competition law principles in energy market mergers. The article can be found at: https://www.competitionlawinsight.com/competition-issues/energy-market-mergers–1.htm?origin=internalSearch.

Since the mid-1990s, the European Commission has pursued a policy of energy market liberalization. At first, the Commission did so as legislator with the adoption of three successive liberalization directives. Since the beginning of the century, the Commission has supplemented its role as policy-maker by making full use of its competition policy enforcement powers. This has particularly manifested itself in its assessment of gas and electricity mergers under the EU Merger Regulation. The Commission’s push towards increasingly competitive energy markets by way of this two-track approach was approved by the Court of Justice of the European Union in a 2010 judgment.

In its assessment of energy mergers, the Commission must first define the relevant product and geographical markets. Because energy mergers usually comprise both gas and electricity markets, this determination must be made for both markets separately. In terms of the relevant product market, the Commission distinguishes between upstream and downstream markets for electricity. The upstream electricity market comprises a single wholesale electricity market, which interestingly includes the financial trading of electricity, as well as the market for ancillary services and balancing power. In making these distinctions, the Commission bases itself mostly on the criteria of substitutability, including price elasticity.

At the downstream level of the electricity market, the Commission has identified three levels of supply, i.e. supply through the transmission network, and two types of supply through the distribution network, one to small industrial and commercial users and the other to eligible household customers. The Commission’s assessment practice has demonstrated a steady preference for market share calculation on the basis of supplied volume, despite the fact that publicly available data released by regulators is mostly provided on the basis of physical connection points. To date, it firmly refuses to differentiate between sources of electricity such as wind, solar or nuclear. In future, this practice could come under increasing pressure for change given the increased impact of these power sources on consumer preferences.

In defining the relevant product market for natural gas, the Commission has categorized five different supply markets—supply to dealers from the supply to electricity producers, supply to large industrial and commercial users, supply to small industrial and commercial users and supply to eligible household customers. Finally, markets having a physical trading hub, such as a dedicated LNG sea port terminal, also constitute a separate gas market segment. Despite this seemingly uniform approach in defining market segments, there exists a high degree of variation in the thresholds at which they have been categorized. For example, in France, the threshold between the categories for small and large industrial and commercial users was set at 5 Gigawatt hours, whereas the threshold between the same gas market segments was set at 12 Gigawatt hours for Belgium. The Commission breaks down gas market segments further between high-calorific and low-calorific gas (H- and L-gas) because of their non-substitutability. However, there have been recent cases where parties have not even disclosed such data because they were of the view that the market shares would not differ significantly, or would involve a minimum increment.

At the geographic market level, energy market definition is subject to a case-by-case approach, with some markets being national and others sub-national or regional. These ad hoc determinations are made mostly by looking at customer switch rates, local marketing strategies and pricing policies.

Finally, our article identifies five market factors that can be regarded as the most significant obstacles to further market liberalization. In particular, we have pointed to high concentration levels on energy markets, high levels of vertical integration, the remaining government regulatory influences on pricing as well as public ownership, differences in prices and the “incumbency effect”, referring to the structurally lower rate of customer switching, to the benefit of legacy suppliers.

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Energy Market Mergers – quick guide to EU Competition Law assessment