UK: The Third Limb Of The Energy 'Trilemma': Environmental Measures And Issues In The Energy Sector

Last Updated: 11 September 2013
Article by Duncan Sinclair

The aim is for this to be an article that provides updates from time to time on environmental energy schemes and legal issues arising. As the first in a series, it begins with a thumbnail sketch of the energy 'trilemma', as it is known, by way of context.

To take a step back to the mid-80's: at the time of liberalisation of the electricity and gas sectors (see in particular the Gas Act 1986 and Electricity Act 1989, as amended), the task facing government and the independent regulators1 was balancing low prices with security of supply. The second issue, due to North Sea gas, was not seen as a 'problem', and the UK was indeed a net exporter of gas. As gas can efficiently power generation, it also satisfied electricity issues. So the concern was simply that competitive markets (or price regulation where there was a monopoly) deliver the infrastructure and supply at efficient prices.

A lot has changed, including that the UK is now a net importer of gas. However, the focus of this piece is not energy security but rather what has made the classic 'dilemma' of secure supply at efficient prices into the energy 'trilemma'. The third limb is this: a main plank of government (and EU) policy is that greenhouse gas emissions be reduced dramatically, and the energy sector (amounting to some 70% of emissions in total) therefore bears the weight of this third policy aim: carbon/greenhouse gas reduction (also called 'sustainability'). The Gas and Electricity Acts now reflect this at their core, with the definition of 'consumer interest' – being the Principal Objective of the Secretary of State and the regulator Ofgem – as including the reduction of greenhouse gases.

So, the 'trilemma' involves balancing these 3 aims: security of supply, efficient pricing and sustainability (greenhouse gas reduction). The tension is obvious: reducing greenhouse gas emissions tends to increase prices as non-fossil fuel generation is relatively inefficient; likewise, no 'green' means of generating electricity is (yet) sufficiently reliable to ensure secure supplies ('keeping the lights on'): for simplicity, in general wind power only 'works' when there is sufficient wind; solar when there is sufficient sun.

The Myriad Of Schemes To Reduce Greenhouse Gases

Again, as one of an anticipated series of articles, this article cannot be comprehensive. Indeed, as the area is subject to ongoing deliberation and proposed new legislation, it will need to be followed by updates. However, one can at this stage distinguish two types of measure, and comment on certain legal issues (and 'lessons learnt' in government lingo). First, there have been various schemes aimed at reducing demand by increasing the energy efficiency of homes. In this one would include the (now superceded) Warm Homes scheme, the recently completed CERT scheme (legal obligations placed on the larger energy suppliers to make housing more efficient in terms of energy use) and the CESP scheme (a smaller 'pilot' along similar lines to CERT placed on the larger suppliers and generators), and the new ECO scheme to replace those two.

Secondly, there are measures aimed at encouraging low-carbon generation, such as distributed generation through the use of Feed-in Tariffs (benefitting, for example, the solar panel industry), and the Renewables Obligation (requiring suppliers to either generate or trade certificates with others so as to achieve a lower-carbon generation mix).

Aside from the tremendous complexity of some of these schemes, what have we learnt so far? Here are a few comments:

  • First, where an energy company (or indeed an individual, perhaps under the FiTs scheme) has engaged in expenditure with the aim of gaining something akin to a tradeable instrument (or in some cases even a legitimate expectation) this may give rise to a 'property right' within the meaning of the Human Rights Act and Protocol 1, Article 1 ECHR: see the successful claim for damages against Ofgem in Infinis [2011] EWHC 1873 (Admin), upheld on appeal this year ([2013] EWCA Civ 70).
  • In a similar vein, where parties have acted in reliance on a government scheme, the rights accrued cannot be retrospectively changed other than by clear primary legislation: see the 'Solar Panels' case on Feed-in Tariffs last year, successfully litigated by several members of these chambers: Homesun & Ors v SofS for Environment and Climate Change [2011] EWHC 3575 (Admin), also upheld on appeal ([2012] EWCA Civ 28). Issues of legitimate expectation and property rights are also relevant in such situations, but were not necessary for the court to resolve the matter against the Government.
  • Thirdly, the design of 'demand-side' measures has proved problematic. Several energy companies were not able to meet their CERT requirements (and even if they did, often at much higher costs than predicted), while well under half the companies falling within the CESP scheme were able to reach compliance, with the generators having a particularly high failure rate.
  • In the meantime, investigations have been commenced by Ofgem into these 'failures'. It has the ability to impose penalties on the licensed companies of up to 10% of turnover and it remains to be seen how much Ofgem will take into account the real practical difficulties of implementing the schemes faced by the licensed companies. In particular, the original government targets and estimates were in many respects so optimistic (and therefore unreliable) as to suggest no penalty ought to be levied. The companies, and in some cases their subcontractors, are adopting different positions in relation to these issues.
  • The replacement ECO scheme (see the Electricity and Gas (Energy Companies Obligation) Order 2012), while much simplified compared to the CERT/CESP schemes, faces a similar problem (as noted by Stephen Tromans QC in a recent post on our Energy blog): namely that the fulfilment of legal obligations placed on licensed companies depends to a large extent on third parties (both performance by the 'home insulation industry' as a whole and home owners themselves being willing to engage).
  • Any scheme or system of schemes carries the risk of unintended consequences – and the more complex, the higher the risk. For instance, it has been reported (Guardian, 29 May 2013) that the new 'Green deal' has actually lead to a decrease (a collapse of 97% year on year) in cavity wall insulation, one of the most effective energy efficiency measures2.
  • On the same issue, the level of the 'strike price' for contracts for difference under the new Energy Bill (perhaps the greatest 'environmental' measure/scheme to date) will be a key determinant of the 'generation mix' in the United Kingdom for decades to come: if any implicit subsidy for offshore wind (for example) is too high or too low relative to other forms of generation, then the unintended consequences may be enormous.

Concluding Remarks

While this short article is necessarily limited in scope, it seeks to show that the previous, current and likely future measures to reduce greenhouse gases, improve energy efficiency and promotion of renewable generation, throw up a myriad of legal issues - sometimes purely commercial ones between industry players, sometimes ones relating to the schemes themselves. Sometimes these can only be resolved by judicial review (see, for example, Infinis and Homesun), in other cases they are resolved through pre-action negotiation/correspondence or commercial settlement. One thing is clear: the legal climate in this field is hotting up.

Footnotes

1 At that time, Director Generals for Offer and Ofgas, latterly a single Gas and Electricity Markets Authority established by the Utilities Act 2000 – typically it is known as 'Ofgem'.

2 http://www.theguardian.com/environment/2013/may/29/cavity-wallinsulations- crash-green-deal

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