Legal Briefing

Hot topics for 2011: environment and energy key changes

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Projects, energy and natural resources | 01 February 2011

At the start of 2011, with environmental and energy issues high on the political agenda, this article highlights some of the key developments that can be expected by businesses and in-house lawyers in these fields this year. 


RESA 2008

The Regulatory Enforcement and Sanctions Act (RESA) 2008 is the product of the government’s better regulation agenda and incorporates many of the recommendations from the Hampton Review (March 2005), on reducing the regulatory burden on business, and the Macrory Review (November 2006), on making regulatory sanctions more effective. It was generally felt that many regulatory sanctioning regimes were too reliant on criminal prosecutions that were not always a proportionate regulatory response to the gravity of the offence committed. It was decided that what the regulators needed was a flexible tool kit of civil sanctions that can be used in situations where the nature of the offence does not warrant a full criminal prosecution.

Part 3 of RESA 2008 introduces the new regime of civil sanctions and gives individual regulators, subject to the passing of secondary legislation by the minister responsible for that particular policy area, the power to impose the following types of civil sanctions on businesses as an alternative to criminal prosecution:

  • fixed monetary penalties;
  • discretionary requirements;
  • stop notices; and
  • enforcement undertakings.

IHL179 (p7) contains an in-depth analysis of the new regime (‘Four key developments in regulation shake-up’).

It was announced on 2 February 2010 by the Department for Environment, Food and Rural Affairs (Defra) that the Environment Agency (EA) and Natural England would be the first of the 28 regulators designated under RESA 2008 to be given the power to impose civil sanctions. A consultation ensued that was followed by the introduction of secondary legislation in England and Wales (the Environmental Civil Sanctions Order 2010).

The EA has had the power to use the civil sanctions from 4 January 2011. Where permitted to do so, the EA will now be able to use civil sanctions for offences committed in England after 6 April 2010 and in Wales after 15 July 2010. The new approach to regulation envisaged by RESA 2008 has required an overhaul of EA enforcement policy. A suite of new enforcement documents have been published that provide an indication of how the EA intends to exercise its regulatory competences under RESA 2008 and the EA’s new enforcement policy will be based on these.

It is worth noting that civil sanctions are not currently available for several environmental offences, such as offences under the Environmental Damage (Prevention and Remediation) Regulations 2009 and the Environmental Permitting regime. At the outset, it is anticipated that civil sanctions will be used predominantly for offences in the hazardous waste, water resources and packaging waste sectors.

The use of civil sanctions alongside the existing criminal regulatory system provides the EA with greater enforcement flexibility. Whether or not these changes should be welcomed by businesses operating in susceptible sectors is not clear-cut. On the one hand, the imposition of civil penalties should be preferred to the stigma of a criminal prosecution. On the other, however, the introduction of alternative enforcement options is expected to increase regulatory enforcement activity for lower-level environmental offences. In addition, it should also be borne in mind that the levels of fines that can be imposed under variable monetary penalties could be significant (especially for small and medium-sized businesses), with the cap set at £250,000 for offences that can be tried in the Crown Court.

CONTAMINATED LAND REGIME REFORM

On 21 December 2010, Defra launched a consultation proposing changes to the statutory guidance document, which underpins the contaminated land regime under Part 2A of the Environmental Protection Act 1990. In addition, the consultation proposes minor amendments to the Contaminated Land Regulations 2006 in England and Wales. As the consultation document explains, one of the key reasons for the reform, which is widely considered to be long overdue, is that:

‘Experience has shown that [the guidance] does not adequately explain how to decide if land is contaminated land. This causes uncertainty at the heart of the regime that affects all aspects of how the regime performs, and it has caused the regime to score poorly against principles of good regulation.’

Defra has published draft revised guidance alongside the consultation document. Some of the key changes proposed in the consultation include:

  • a shorter and simpler guidance document;
  • separation of guidance on radioactively contaminated land into a separate stand-alone document;
  • the inclusion of the broad objectives of the regime at the beginning of the guidance document to ensure that they are legally required to be considered when regulatory decisions are made to ensure that such decisions are reasonable; and
  • new text is proposed to be added to the guidance document that builds on the existing principles of risk assessment (which will generally be retained).

Various new elements would be added to the new text, including: a description of the key principles of risk assessment, for example, the aim of dismissing low risk sites as soon as possible to focus on finding higher risk sites; using external expertise to contribute to the risk assessment; encouraging the use of generic assessment criteria for the purpose of screening sites early in the risk assessment; guidance that recognises uncertainty as an inevitable part of the risk assessment process and which sets out in broad terms how regulators should deal with uncertainty; and the introduction of a new requirement for authorities to produce risk summaries in a form that can be understood by non-experts. Other changes to the consultation include:

  • the introduction of amended wording to better describe the trigger points of ‘significant harm to human health’ and ‘significant possibility of significant harm’ to remove legal ambiguity;
  • the introduction of a new red-amber-green test to better characterise contaminated sites according to risk; and
  • the amendment of the definition of contaminated land as it relates to controlled waters through the commencement of s86 of the Water Act 2003 to clarify that part 2A is only intended to apply to cases of ‘significant pollution’ or ‘significant possibility’ of such pollution.

The consultation closes on 15 March 2011, and is an important document for parties involved in the identification and remediation of contaminated land, such as local authorities, owners and occupiers of contaminated sites, redevelopers, and environmental consultancies.

INDUSTRIAL EMISSIONS DIRECTIVE

The Industrial Emissions Directive was adopted on 24 November 2010 and came into force on 6 January 2011.1 It requires EU member states to transpose its provisions into domestic law by 5 January 2013.

The Directive will replace and consolidate the existing Integrated Pollution Prevention and Control (IPPC) Directive and its six associated directives into a single directive.2 The main aim of the new legislation is to simplify and extend the IPPC regime, which holistically regulates emissions to air, water and land through a single permit, and the requirement to use best available techniques (BATs). In addition to the simplification and clarification exercise, the Directive makes substantive amendments to the IPPC regime including:

  • Strengthening the application of authorities that apply BATs in a more consistent manner. This will primarily be achieved by restricting national authorities from deviating from established emission levels. These changes are intended to reduce inconsistencies across member states and to create a more level playing field for industry.
  • Stimulating eco-innovation by requiring member states to actively promote emerging techniques.
  • Reducing unnecessary regulatory and administrative burdens on industry by €32m per year at the EU level to help ensure that European industry remains competitive in the global marketplace.
  • The imposition of stricter maximum emission limits for the largest combustion plants to ensure that they apply BATs.
  • The establishment of minimum requirements for regular inspections and permit reviews, to help ensure compliance.
  • Extending the IPPC regime to new groups of polluting activities, such as medium-sized combustion plants (20-50 MW), and the production of wood-based panels and wood-preservation activities.

EMISSIONS TRADING

There are several important changes in the pipeline that will have an effect on the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme. In its spending review 2010, the government announced that the first sale of allowances will now be pushed back a year to 2012, and that there will no longer be revenue recycling. The removal of revenue recycling means that the revenues raised from the sale of allowances will go into the public purse rather than being distributed among the CRC participants. The draft CRC Energy Efficiency Scheme (Amendment) Order 2011 was issued for consultation in November 2010, and seeks to extend the introductory phase to 31 March 2014 and postpone the first sale of allowances in phase 2 until 2013/14. The government has also indicated that it will issue a further consultation in 2011 aimed at simplifying the CRC and taking forward the recommendations made by the Committee on Climate Change in September 2010. Early soundings from the government indicate that the proposed changes could be significant and CRC participants will need to follow these developments closely.

The establishment of binding targets for installations that fall within the scope of phase 3 of the EU Emissions Trading Scheme will take place during 2011. At the time of writing, the European Commission has still not published the community-wide implementing measures that will form the basis for the UK’s allowance allocation. It is, however, widely anticipated that the targets under phase 3 will be greatly reduced, which will mean that there will be a greater need for companies with qualifying installations to consider either purchasing allowances on the secondary market or improving the efficiency of their installations.

RENEWABLE HEAT INCENTIVE

The renewable heat incentive (RHI) is intended to provide financial support to individuals, communities and businesses to incentivise a switch from fossil fuel-based heating to specified renewable technologies and sources of heat. The RHI is designed to help the UK to meet its EU target of 15% overall energy use from renewable sources by 2020. It is anticipated that the RHI could reduce the UK’s carbon dioxide emissions by 60 million tonnes by 2020.

The RHI will offer long-term fixed payments for the installation of eligible renewable heat technologies, and will also offer payments for gas produced from renewable sources that is fed into the gas network.

In its spending review, the coalition government confirmed that it would introduce the RHI from June 2011. This target is still achievable although the sector was hoping for more details in government papers by now and these have been delayed. However, unlike the previous Labour administration, it has decided to fund the scheme through annually managed expenditure, and not by the imposition of a renewable heat levy.

The power to introduce the RHI scheme is derived from s100 of the Energy Act 2008, which enables the Secretary of State to establish and finance a scheme (the RHI) to facilitate and encourage the generation of heat from renewable sources. The RHI scheme will support the following types of heat generation technology:

  • bio-energy, being solid biomass and biogas (including heat produced from on-site combustion of biogas and injection of biomethane into the natural gas grid);
  • bioliquids;
  • air and water source heat pumps;
  • ground source heat pumps and geothermal sources;
  • solar thermal; and
  • renewable combined heat and power.

The proposed tariff levels vary depending on the technology type and the size of the installation. Regular reviews of the RHI scheme’s scope and tariff levels will be undertaken to ensure that the scheme is sufficiently flexible to adapt to new technology types and cost changes.

From June 2011, the RHI scheme will apply to RHI installations completed after 15 July 2009, and to additional capacity increases that are made after 15 July 2009 to pre-existing RHI installations. The scheme will remain open to new installations until at least 2020.

ELECTRICITY MARKET REFORM

On 16 December 2010, the UK government published proposals for electricity market reform, which were billed as the most comprehensive reform of electricity markets since electricity privatisation in 1989. These proposals will be out for public consultation until Spring 2011 when it is anticipated that they will be taken forward in a future energy white paper. The key objectives of the reform are security of supply, decarbonisation and affordability. The government seeks to address these objectives in four main ways:

  • carbon price support;
  • revisions to feed-in-tariffs (FITs);
  • capacity payments; and
  • emissions performance standard.
Carbon price support mechanism

HM Treasury has put forward proposals, to be introduced from 1 April 2013, for a floor price for carbon, supported by a carbon tax on fossil fuel use. This would be funded by applying the climate change levy (CCL) and fuel duty on all fossil fuels used to generate electricity in the UK. Current CCL exemptions relating to fossil fuels used in electricity generation would be replaced by a tax on fossil fuel commodities at ‘CCL carbon price support rates’. Subject to consultation, these proposals would be included in the Finance Bill 2011, and followed by more detailed secondary legislation.

It is estimated that the changes will lead to approximately 1.4% of current UK electricity generation having to pay a price for their carbon emissions for the first time. It is ultimately hoped that these measures will increase investment in new low-carbon capacity by up to 11GW by 2030.

The rationale for the measures is that low-carbon technologies have lower operating costs but much higher up-front capital costs, so total costs per megawatt hour are more expensive than conventional generation. Some low-carbon technologies have yet to be built on a commercial scale and therefore have added uncertainties that increase investment risk. To be able to make informed investment decisions in low-carbon generation capacity, investors need some certainty on future revenues. Carbon price certainty is particularly important given the long life of low-carbon investments. By strengthening the carbon price for electricity generators, it will increase the cost of fossil fuel generation, making lower-carbon power a more attractive investment option.

In the short- to medium-term, the government accepts that supporting the carbon price will have a knock-on effect on the wholesale electricity price, which is likely to increase retail prices. The government argue, however, that electricity prices would rise even higher in the long-term if the UK continues to rely on fossil fuels for power generation.

Feed-in Tariffs (FITs)

The FITs regime was established in April 2010 with the aim of incentivising and providing greater revenue certainty for small scale (under 5 MW) renewable electricity generation. The consultation document proposes extending the regime and making FITs available for large-scale low-carbon generation.

Under the proposals, the government expresses a preference for introducing a ‘contract for difference’ approach into the large-scale FITs regime. Under this system, generators sell their electricity into the market, and then receive a top-up payment (or they may have to repay revenues). The top-up payment or repayment is calculated as, for example, the difference between the average market wholesale price and the agreed tariff levels. Unlike the current FITs system, which is generally predicated on a fixed pricing mechanism, under the proposals, the payment of FITs for large-scale generation will be linked to the market price for electricity, which should continue to provide stable returns for investors while at the same time help control the costs for consumers.

Capacity mechanism for generators

The reform proposals include the suggested introduction of targeted payments to encourage security of supply through the construction of flexible reserve plants and/or the introduction of demand reduction measures. Capacity payments will help ensure that there remains adequate capacity as the amount of intermittent and inflexible low-carbon generation that is produced increases.

These proposals are thought to have the most immediate effect on gas-fired generation in the short term. As an alternative, the National Grid could be given powers to commission back-up generation.

Emissions performance standard (EPS)

The reforms propose an EPS for new power stations. This is an attempt to introduce a back-stop limit that controls how much carbon the most carbon-intensive power stations can emit. Sufficient flexibility is provided to power generators as to the means by which the EPS is achieved. The EPS would be set at a level that would make it impossible to commission new coal fired power stations without them first being fitted with carbon capture and storage technology.

It was originally envisaged that new gas plants would be subjected to similar restrictions, but it now appears that they will escape from the full potential effect of the EPS measures, at least initially.

Energy white paper

It is clear that the forthcoming energy white paper will be a key document for all those involved in the power generation industry in establishing the direction of travel for future regulatory policy.

ENERGY BILL 2010/11

The Energy Bill 2010/11 (formerly known as the Energy Security and Green Economy Bill) is currently making its way through the House of Lords and received its second reading on 22 December 2010. It has three principal objectives:

  • tackling barriers to investment in energy efficiency;
  • enhancing energy security; and
  • enabling investment in low-carbon energy supplies, such as new nuclear and renewables.
Green deal

The majority of the Energy Bill is dedicated to the introduction of measures aimed at implementing the coalition government’s flagship green deal energy efficiency scheme. It is anticipated that the scheme will be operational from autumn 2012. Some of the key features of the scheme include:

  • The establishment of a legal framework whereby accredited providers can offer the occupiers of domestic and non-domestic buildings (including private sector landlords) energy efficiency measures at no upfront cost and without government support.
  • The introduction of a ‘pay as you save’ repayment framework, where the capital costs of the accredited providers are recouped through an amortised charge added to energy bills. In this way, the repayment obligation attaches to the Energy Bill and is not a debt owed by the individual occupier.
  • The establishment of the ‘golden rule’ that amortised repayments will always be set at a lower level than the energy savings achieved by the efficiency improvements.
  • Powers to enable the creation of the energy company obligation (ECO), which is intended to provide additional financial support to the primarily market-led scheme for vulnerable and hard-to-treat domestic properties. The ECO will help ensure that all domestic properties will have access to energy efficiency measures and will replace the existing obligation on energy suppliers to reduce carbon emissions under the carbon emissions reduction target.
  • The imposition of a duty on sellers, landlords or licensors to disclose a green deal plan and to secure an acknowledgment from prospective purchasers, tenants or licensees that the bill payer will be bound by the plan.

The Energy Bill provides the Secretary of State with extensive powers to make secondary legislation that will flesh out important details of the green deal framework. This includes the power to authorise people to act as green deal assessors, providers and installers, and the power to regulate the conduct of these bodies.

Security of energy supplies

Part 2 of the Energy Bill deals with energy security and includes several proposed changes that reflect the fact that the increases in low-carbon generation will require the close monitoring of energy capacity. There are important areas of overlap between these provisions and the proposed electricity market reform discussed above.

NATIONAL POLICY STATEMENTS AND THE LOCALISM BILL 2010/2011

Towards the end of 2010, the Department of Energy and Climate Change launched a consultation on revised national policy statements (NPSs) for energy infrastructure, which closed on 24 January 2011. NPSs will be used by the Infrastructure Planning Commission (IPC), and its successor, the Major Planning Infrastructure Unit (MPIU), when deciding planning applications for nationally significant energy infrastructure. It is anticipated that the final version of the NPSs will be ratified by Parliament in spring 2011.

The Localism Bill 2010/11 (formerly known as the Decentralism and Localism Bill) received its second reading in Parliament on 17 January 2011. There are numerous significant implications for the planning system including:

  • the abolition of the IPC and its replacement with the MPIU, with final planning decisions on nationally significant energy infrastructure taken by ministers;
  • the abolition of regional strategies; and
  • the need for parliamentary approval of NPSs.

CONCLUSIONS

2011 promises to be a busy year for legal developments in the environmental and energy sectors, and companies and in-house lawyers will need to keep on top of them. Future articles in this publication will focus on some of the more significant developments as they materialise.

NOTES


  1. Directive 2010/75/EU of the European Parliament and of the European Council on industrial emissions (integrated pollution prevention and control). (Recast.)
  2. Directive 2008/1/EC of the European Parliament and of the European Council of 15 January 2008 concerning integrated pollution prevention and control.