This month we welcome a team from Freshfields Bruckhaus Deringer as our guest bloggers. They anticipate next week’s Climate Ambition Summit and further ahead CoP26 which takes place in the UK in November 2021.
The UK is increasingly asserting strong international leadership in climate change mitigation and adaptation, particularly ahead of the next UNFCC Conference of the Parties (COP26) which it will host in Glasgow in November 2021. This international leadership has been matched with world-leading domestic measures, including the Climate Change Act 2008 (CCA), which was amended in 2019 to create a legally binding 2050 Net Zero target for UK emissions.
Following the implementation of the CCA, the routes to achieving Net Zero have been reinforced by ambitious Government policies, investment and facilitative support. This energy transition support has consistently featured in Government energy and finance initiatives, and includes the Renewables Obligation Certificate (ROC) and Contract-for-Difference regimes to support investment in low carbon power, and the streamlining of the development consent regime for nationally significant infrastructure projects, to direct R&D grants and procurement of demonstration projects for emerging technologies such as carbon capture and storage.
As the need to accelerate the transition becomes more urgent, the breadth of measures has expanded. Of key importance is the 2017 Clean Growth Strategy, which sets out the cross-governmental measures planned to achieve the carbon budgets required by the CCA, and which was updated substantially in 2019 to accommodate the Net Zero target. It identifies the need to nurture low carbon technologies, processes and systems that are as cheap as possible as a central driver, with two overriding objectives:
- to meet domestic commitments at the lowest possible net cost to UK taxpayers, consumers and businesses; and
- to maximise the social and economic benefits for the UK from this transition.
Despite the challenges of the Covid-19 pandemic, the Government has continued and strengthened this commitment, promising to “Build Back Better”. Whilst the delayed Energy White Paper is eagerly awaited, and the 25 November Spending Review and National Infrastructure Strategy include disappointingly little detail on energy spending, a 10-point plan for a Green Industrial Revolution promises to mobilise £12 billion of government investment, and up to triple as much from the private sector, to effect the energy transition.
Government investment and financial support
The Clean Growth Strategy includes a detailed and broad set of policies, with nearly half of the emission-savings needed in the energy and transport sectors:
- accelerating clean growth (with a focus on green finance, recognising the UK world leading role in the financial sector);
- improving business and industry efficiency (25% of emissions);
- improving residential properties (13% of emissions);
- accelerating the shift to low carbon transport (24% of emissions);
- delivering clean, smart, flexible power (21% of emissions);
- enhancing the benefits and value of natural resources (15% of emissions);
- improving public sector performance (2% of emissions); and
- government leadership, including public promotion of clean growth.
Against this background, the opportunities for the project sector are enormous. The Government’s 10 point plan has placed the focus squarely in investment in energy projects, flagging that direct Government investments and grants will be made, including:
- £500m in hydrogen, including £240m for new hydrogen production facilities;
- £525m in large and smaller-scale nuclear plants;
- £1.3bn to fast-track the rollout of electric vehicle charge points across England, £582m in grants for those buying zero or ultra-low emission vehicles, and nearly £500m for the development and mass-scale production of electric vehicle batteries;
- £200m to create two carbon capture, use and storage clusters; and
- £1bn for an energy innovation fund to develop technologies.
The detail and timing of these investments will be released in a series of strategies over the next year, including through the Energy White Paper and the National Infrastructure Strategy, which will outline additional support mechanisms, including further streamlining of project consent, procurement and development regimes.
This broad support for the delivery of the energy transition has been bolstered by a continued wider Government focus on sustainable procurement. In September 2020 the Cabinet Office issued a procurement policy note “taking account of social value in the award of central government contracts” (PPN 06/20) This PPN launched a new model to deliver social value through the Government’s commercial activities. The model articulates the areas of priority focus for social value delivery in central government procurement, in the form of policy themes and outcomes. One of the 6 themes is “Fighting climate change” with the policy outcome of “effective stewardship of the environment”. The delivery objectives – now required to be built directly into central government procurement – are activities that:
- Deliver additional environmental benefits in the performance of the contract including working towards net zero greenhouse gas emissions.
- Influence staff, suppliers, customers and communities through the delivery of the contract to support environmental protection and improvement.
In a significant shift in approach the PPN requires that social value should be explicitly evaluated in all central government procurement. This is backed up by a number of tangible obligations, for example a minimum weighting of 10% of the total score for social value should be applied in the procurement to ensure that it carries a heavy enough score to be a differentiating factor in bid evaluation; a higher weighting can be applied if justified. This is another strong assertion of the government’s focus on fighting climate change including the energy transition.
As well as the wider policy and spending measures announced in late 2020, the government has been progressing policies across different areas to facilitate the development of major projects which will support the energy transition. Just some of these examples include the following:
- Streamlined planning and permitting: The Development Consent Order (DCO) regime for nationally significant infrastructure projects was designed to streamline the consenting process for major energy projects, particularly in the low carbon sector. The government’s ongoing commitment to further simplifying these planning processes, the “Project Speed” Infrastructure Delivery Taskforce launched over the summer, recognises the need to support deployment of new project on a mass scale. Chapter 5 of the 25 November National Infrastructure Strategy reaffirms this commitment to cutting the planning red tape which slows the energy transition.
- Carbon capture, use and storage business models: The Government published a report on the business models it would support deploy CCUS clusters in August, and confirmed £1bn of investment in up to four clusters in November’s 10 Point Plan.
- Greening oil and gas: The Oil and Gas Authority consulted in 2020 on the introduction of a requirement into its Maximising Economic Recovery (MER) Strategy, which would require operators of UK upstream oil and gas projects to reduce greenhouse gas emissions as far as reasonable.
- Expansion of low carbon power investment support regimes: The Government has flagged in its consultation regarding rules for next round of Contract for Difference auctions that additional technologies will be permitted, including onshore wind and solar, alongside the recent decision to include energy-from-waste in the Capacity Mechanism. This consultation pre-dated the Primate Minister’s plan to make the UK the “Saudi Arabia of Wind” by a few months, so it remains to be seen if the auction’s capacity will be increased from the 6GW of capacity assumed by the consultation’s impact assessment, to achieve the 40GW touted by the 10 Point Plan. Meanwhile, the outcome of BEIS’s consultation on a proposal for a “Regulated Asset Base” model to support the deployment of nuclear is eagerly awaited.
- Electric vehicle charging infrastructure: The government announced on 18 November that the sale of fossil fuel cars will be banned from 2030, and that £1.3bn will be committed to the development of electric vehicle charging infrastructure.
Where are the risks?
The positioning of the UK Government as a leader in the global energy transition is not without risk and will come under significant scrutiny. There is potential for disputes in a range of forums across the full life-cycle of the transition and related projects. A clear understanding of these risks and focussed strategies for mitigation will be key to success.
First, there is risk of judicial reviews of a broad range of government decisions. Grounds for any such reviews will of course be specific to the policies and decisions (e.g. ranging from general public law challenges to challenges based on breach public procurement rules and planning legislation). However, what is clear is that interested parties will pursue proceedings to protect their positions. This can be seen for example in the recent judicial review proceedings that Banks Renewables brought against BEIS. The challenge related to the exclusion of onshore wind from the UK government’s third contracts-for-difference auction round. Banks argued that this exclusion unlawfully discriminated against onshore wind and other renewables in favour of offshore wind, in breach of the Government’s Clean Growth Strategy objectives of reducing carbon emissions at the lowest possible net cost. Ultimately, the challenge was withdrawn when the Government lifted the ban on onshore wind from government-backed contracts. As the Government progresses both reforms to judicial review, and the creation of a new Office for Environmental Protection post-Brexit, there is some uncertainty as to whether there will be a shift toward or away from robust scrutiny.
Second, there are risks associated with the renewable energy infrastructure and projects required for a successful energy transition. These risks are not unique to transition, but the market leading nature of the strategy, projects and technology makes them all the more acute. Some examples include the following:
- Construction risk: As renewable technologies develop, the construction of the required infrastructure can become increasingly challenging. For instance, as offshore wind farms are developed in more remote seabeds, the required length of the transmission cables increases, resulting in an associated increase in the risks of defects or damage. This can lead to delay, disruption and ultimately disputes. Further risks associated with novel technologies will be explored in more detail later in this blog series.
- Supply chain risk: Issues associated with potential disruptions or shutdowns in the supply chain pose significant risks for some renewable technologies, such as solar PV. The majority of the world’s manufacturing for solar PV technology takes place in China. As such, the solar PV industry is less resilient than traditional energy sources in the face of supply chain disruption, such as those caused by national shutdowns. When shutdowns do occur, as has been seen this year in response to the COVID-19 Pandemic, disputes can arise between parties in the supply chains as to which party is liable for any subsequent loss.
- Policy risk: In the UK and globally, state-investment in the form of special rates, feed-in tariffs or other investment schemes are subject to frequent, and often unforeseeable, change. If, in the face of such changes, parties who have invested in renewable infrastructure believe the state may have breached an obligation toward them, the renewable energy investor may wish to initiate a dispute. Several examples of this kind of dispute can be seen in Spain, where close to 50 arbitrations were initiated as a result of a rowing back or elimination of renewable energy subsidies granted by a Royal Decree in 2007.
Finally, given the commendable broad range of the routes to achieving Net Zero and government facilitation of the energy transition there is risk across a wide variety of disciplines. Considerations include potential for challenges under public procurement regulations, competition law concerns (although notably several competition authorities have recognised the challenges raised by the intersection of sustainability goals and competition law and are encouraging business to engage with them on the issues they are facing), considerations regarding foreign direct investment restrictions and the implications of the National Security and Investment Bill introduced into the House of Commons in November and even the potential for claims under bilateral investment treaties or under free trade agreements including in the WTO.
These legal risks and challenges are inherent in any period of rapid regulatory change. However, the government’s policy commitment to achieving Net Zero is unquestionable, and its spending and facilitative actions recognise the central role that major projects will play that strategy. The opportunities for the projects sector to contribute to the green industrial revolution are genuinely exciting.
Kate Gough: Kate specialises in complex contentious and non-contentious public procurement, construction and infrastructure matters.
She has advised public and private sector clients on a wide range of major domestic and international projects and disputes across a variety of sectors, including nuclear, transport, infrastructure, healthcare and defence.
Vanessa Jakovich: Vanessa advises on environment and planning issues, and the regulation of major energy and infrastructure projects.
She is focused on sustainability and innovation, guiding clients on issues including environmental governance, ESG strategy and climate reporting. She provides operational advice, as well as environment and planning support on corporate and real estate transactions across a range of sectors.
Natalie Keir: Natalie works in the disputes, litigation and arbitration practice at Freshfields.
Is a law firm that combines the knowledge, experience and energy of the whole firm to solve the biggest global organisations’ most complex challenges, wherever and whenever they arise. Their global teams span specialisms, regions and industries to deliver against three fundamental client needs: transactional, regulatory, risk.