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Regula'ng for Sustainable Electricity Market Outcomes: Asking the Law Ques'on

Aileen McHarg

What is Sustainable Electricity Regula7on?

•  Regulatory system which seeks to integrate economic, social and environmental goals: – Managing transi7on to a low carbon economy; – Eradica7ng fuel poverty and protec7ng vulnerable consumers;

– Promo7ng energy saving; – Ensuring a secure and reliable energy supply; – Suppor7ng improvement in all aspects of the environment.

Previous Energy Policy Paradigms

•  The market paradigm: – Protec7ng consumers and promo7ng economic efficiency through compe77on and compe77on-‐subs7tutes

•  The post-‐war ‘industrial model’: – Securing economies of scale and expansion of networks and genera7ng capacity to meet rising demand, though centralisa7on, ver7cal integra7on and monopolisa7on

•  Paradigm shiLs are never complete

The Transi7on to Sustainable Energy Markets

•  Changes to wholesale and retail markets •  Reform of network price controls, plus charging, access and opera7onal rules

•  Greater interconnec7on between systems •  Incen7ves for innova7on •  Support for low carbon genera7on •  Promo7on of energy efficiency/conserva7on •  Protec7on for consumers against rising energy costs •  Removal of planning and other legal barriers to low carbon genera7on/networks

•  Control of GHG and other emissions •  Greater co-‐ordina7on between energy markets

Sustainable Electricity: the Regulatory Challenge

•  Massive investment required: –  Capital intensity, sunk costs and long-‐asset lives make electricity investments very risky

–  Par7cularly prone to path dependency and technological lock-‐in

•  Urgent and concerted regulatory ac7on required, but: –  Considerable uncertainty about appropriate development path

–  Hos7le regulatory cultures –  Dispersed regulatory capaci7es –  Significant short term costs/poli7cal opposi7on

•  The problem: securing the necessary investment in change requires high degree of regulatory commitment, but commitment is hard to achieve

Electricity Regula7on in Britain •  Priva7sa7on and liberalisa7on 1990/1; full market opening 1998 –  ‘the poster child of global liberalisa7on’ (The Economist, 2002)

–  Strongly pro-‐market regulatory culture •  Widening of energy policy goals in 2003 and regulator given new sustainable development objec7ve in 2004

•  But 2007 Sustainable Development Commission report – sustainable development only weakly embedded in Ofgem’s culture; social and environmental measures seen as market distor7ons to be kept to a minimum

•  Heavy reliance on emissions trading •  Measures to promote social and environmental goals weak, piecemeal and of limited effec7veness

Electricity Regula7on in Britain

Since 2008, a step-‐change in Bri7sh energy regula7on: •  Energy policy goals: –  ‘to keep the lights on, to keep energy bills affordable and to decarbonise electricity genera7on.’ (DECC, 2012)

– Market the context, but no longer the overriding goal

Electricity Regula7on in Britain •  Significant regulatory reform, eg: –  Fundamental reform of network price regula7on – New incen7ves for microgenera7on –  Stronger support for renewables –  Promo7on of carbon capture and storage –  Statutory social tariffs –  Innova7ve measures to promote energy efficiency –  Planning reform to facilitate infrastructure investment –  Carbon price floor –  Smart meter roll out – New capacity market – New financial supports for low carbon genera7on –  Emissions performance standards for fossil generators

Electricity Regula7on in Britain

•  But major problems: –  Investment problems in renewables, CCS, nuclear – Significant public opposi7on to grid expansion/onshore wind

–  Imminent security of supply crisis – Rising prices and fuel poverty – Energy efficiency underdeveloped – Wholesale market reform insufficient – Mixed messages over commitment to decarbonisa7on and future role of unabated gas

Sustainable Electricity Regula7on and the Role of Law

Why focus on meta-‐regula7on? •  Achieving sustainable outcomes requires mul7ple interven7ons and repeated adjustments ∴ regime orienta7on mahers

•  Promo7on of good governance = key element of sustainable development

•  Law makes independent and not merely facilita7ve contribu7on to achievement of sustainable outcomes

Sustainable Development and the Role of Law

Func7ons of law: •  Reinforcing poli7cal commitment to sustainable outcomes and maintaining it over 7me

•  Co-‐ordina7ng dispersed regulatory capaci7es •  Balancing regulatory certainty and flexibility

Ins7tu7onal Design

•  New regulatory ins7tu7ons (personnel, procedures) as means of changing regulatory culture and securing policy integra7on

•  Limited scope for ver7cal integra7on – independent regulatory agency required by European Union law

•  Objec7on in principle to horizontal integra7on: –  giving economic regulators social and environmental objec7ves undermines efficiency and involves them in poli7cal decision-‐making

– Over-‐es7mates neutrality of economic regula7on and under-‐es7mates connec7ons between economic, social and environmental objec7ves

Ins7tu7onal Design

•  No fundamental ins7tu7onal change, but: – New func7ons for Ofgem in delivering social and environmental programmes

– New statutory objec7ves/guidance – New department for energy and climate change (DECC) established 2008

•  Limits to ins7tu7onal integra7on: – The Treasury as an obstacle to sustainability

Statutory Du7es

•  Changes to Ofgem’s general statutory du7es 2004, 2008, 2010, 2011, to increase priority to be given to sustainability objec7ves

•  Administra7ve law literature scep7cal about extent to which law influences bureaucra7c behaviour: no automa7c transla7on of statutory instruc7ons into regulatory decisions

•  Compliance ac7on may be taken for norma7ve, instrumental or symbolic reasons

Statutory Du7es

•  Substan7al legal discre7on makes judicial enforcement unlikely: – Vague and complex list of du7es – Courts unwilling to interfere with substan7ve policy judgments

•  But Ofgem exhibits high legal consciousness: – Credible threat of legal challenge – Statutory du7es important to regulatory legi7macy

– Legal change creates expecta7on of ac7on and peg for public cri7cism

Statutory Du7es

•  Evidence of symbolic change in response to changing statutory du7es –  Ini7ally limited and superficial, reflec7ng rela7vely weak poli7cal commitment to sustainable energy

– More significant impact on organisa7onal structures, policy ini7a7ves and decision-‐making processes as sustainability obliga7ons have become stronger over 7me

– Ofgem now sees itself as having important role to play in facilita7ng transi7on to sustainable electricity system

Statutory Du7es

•  But limits to what can be achieved by general statutory du7es: – Open to interpreta7on, and may not achieve effec7ve alignment with wider policy objec7ves

– Need to be supported by appropriate procedural requirements for consulta7on, repor7ng and scru7ny

Legally-‐Binding Targets

UK government subject to number of legally-‐binding targets relevant to electricity industry: •  Eradica7on of fuel poverty by 2016, as far as reasonably prac7cable

•  80% reduc7on of greenhouse gas emissions by 2050 (26% by 2020 + 5 yearly binding ‘carbon budgets’)

•  15% of final energy consump7on from renewable sources by 2020

•  17% reduc7on in EU-‐wide energy consump7on by 2020 (+ indica7ve na7onal targets)

•  ??? Power to set target for decarbonisa7on of electricity system by 2030


Why set legally-‐binding targets? – Commitment – Accountability – Certainty

Cri7cisms: –  Inflexible, inefficient , arbitrary and distor7ng – Deliverability


•  Significant doubts as to enforceability: – R (Friends of the Earth) v Secretary of State for Energy and Climate Change 2009

– Other targets dis7nguishable? – Relevant considera7ons/irra7onality/procedural impropriety

•  Is legal enforceability missing the point? – Symbolic importance of (not) seqng binding target

– Significance of suppor7ng procedural framework

Guidance, Strategies and Plans

•  Prolifera7on of statutory obliga7ons to produce statements, strategies and plans, but contents rarely have any legal weight.

•  Excep7ons: –  Social and environmental guidance –  Strategy and Policy Statement – Na7onal Policy Statements

•  Limita7ons: –  Limited scope/7mescales/specificity –  Liable to change – A marked reluctance to plan

Legal Protec7on Against Regulatory Change

•  Protec7on of vested interests oLen built into regulatory instruments, e.g.: – Transi7onal arrangements – Sustainable network regula7on and the Regulatory Asset Value

– Contracts for Difference and private law contracts •  But addi7onal protec7on some7mes required: – Secretary of State for Energy and Climate Change v Friends of the Earth and Others 2012

– Cf Tate and Lyle Sugars Ltd v Secretary of State for Climate Change 2011

Conclusions •  Law can play important role in facilita7ng transi7on to sustainable electricity regula7on: –  Not limited to judicial enforcement –  Symbolic commitment, visibility, clarity –  Ins7tu7onal and procedural reforms

•  Law isn’t a subs7tute for poli7cal change, but legal and poli7cal commitment are mutually reinforcing

•  More specific the legal commitments, the more effec7ve they are in producing change

•  But significant tensions – market efficiency, democracy, sustainability all require flexibility

•  How far should the law go in commiqng to a par7cular development path?

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