2014 Energy Regulation Markets Review

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The
Law Reviews
The Energy
Regulation
ABOUT THE AUTHORS
and Markets
Review
Appendix 1
Third Edition
Editor
David L Schwartz
Law Business Research

551
The Energy Regulation

and Markets Review
The Energy Regulation and Markets Review

Reproduced with permission from Law Business Research Ltd.
This article was first published in The Energy Regulation and Markets Review
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Editor
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ii
CONTENTS
Editors Preface
vii
David L Schwartz
Chapter 1
OVERVIEW OF CENTRAL AND WEST AFRICA1

Pascal Agboyibor, Bruno Gay and Gabin Gabas
Chapter 2
ANGOLA19
Catarina Levy Osrio and Helena Prata
Chapter 3
AUSTRALIA35
Mark Carkeet, Andrew Brookes and Darshini Nanthakumar
Chapter 4
BRAZIL55
Guilherme Guerra DArriaga Schmidt
Chapter 5
CANADA68
Patrick Duffy, Brad Grant, Erik Richer La Flche and Glenn Zacher
Chapter 6
COLOMBIA85
Patricia Arrzola-Bustillo and Fabio Ardila
Chapter 7
CYPRUS97
Michael Damianos and Electra Theodorou
Chapter 8
DENMARK107
Nicolaj Kleist and Morten Ruben Brage
Chapter 9
ECUADOR118
Jorge Paz Durini, Daniel Robalino, Leyre Surez and Rafael
Valdivieso
iii
Contents
Chapter 10
EGYPT127
Bassam Moussa and Mariam Fahmy
Chapter 11
FRANCE137
Fabrice Fages and Myria Saarinen
Chapter 12
GERMANY150
Kai Pritzsche, Sebastian Pooschke, Henry Hoda
Chapter 13
GHANA162
Emmanuel Sekor and Enyonam Dedey-Oke
Chapter 14
INDIA175
Akshay Jaitly, Sitesh Mukherjee, Neeraj Menon and Rashi Ahooja
Chapter 15
INDONESIA188
Mochamad Kasmali
Chapter 16
ITALY203
Simone Monesi, Piero Vigan and Giovanni Penzo
Chapter 17
JAPAN220
Reiji Takahashi, Atsutoshi Maeda, Shun Hirota,
Yuko Suzuki and Masato Sugihiro
Chapter 18
KENYA233
Albert Mumma
Chapter 19
KOREA248
Wonil Kim and Kwang-Wook Lee
Chapter 20
MALAYSIA264
Lukman Sheriff Alias
Chapter 21
MEXICO273
Gonzalo A Vargas
iv
Contents
Chapter 22
MOZAMBIQUE285
Fabrcia de Almeida Henriques and Paula Duarte Rocha
Chapter 23
NAMIBIA296
Axel Stritter
Chapter 24
NETHERLANDS315
Louis Bouchez and Maurits Bos
Chapter 25
NEW ZEALAND325
Mei Fern Johnson and Nicola Purvis
Chapter 26
NIGERIA338
Ken Etim and Ayodele Oni
Chapter 27
NORWAY352
Per Conradi Andersen and Christian Poulsson
Chapter 28
PHILIPPINES362
Monalisa C Dimalanta and Najha Katrina J Estrella
Chapter 29
POLAND377
Krzysztof Cichocki and Tomasz Modawski
Chapter 30
PORTUGAL390
Nuno Galvo Teles and Ricardo Andrade Amaro
Chapter 31
ROMANIA403
Lucian Caruceriu and Anca Mitocaru
Chapter 32
SPAIN415
Antonio Morales
Chapter 33
SWEDEN428
Hans Andrasson, Martin Gynnerstedt and Malin Hkansson
Contents
Chapter 34
SWITZERLAND440
Georges P Racine
Chapter 35
TURKEY452
Okan Demirkan, Zeynep Buharal and Burak Eryiit
Chapter 36
UKRAINE468
Wolfram Rehbock and Maryna Ilchuk
Chapter 37
UNITED ARAB EMIRATES486

Masood Afridi and Haroon Baryalay
Chapter 38
UNITED KINGDOM507
Elisabeth Blunsdon
Chapter 39
UNITED STATES524
Michael J Gergen, Natasha Gianvecchio, Kenneth M Simon
and David L Schwartz
Chapter 40
UZBEKISTAN541
Eldor Mannopov, Shuhrat Yunusov, Anna Snejkova and Ulugbek
Abdullaev
Appendix 1
ABOUT THE AUTHORS551
Appendix 2
CONTRIBUTING LAW FIRMS CONTACT DETAILS 577
vi
EDITORS PREFACE
Our third year of writing and publishing The Energy Regulation and Markets Review
has been marked by an increase in exploration and production of petroleum products
and natural gas, investment in energy infrastructure, renewable resource development,
competitive market developments in the electricity industry, privatisation of state-owned
energy companies, and Chinese state-owned investment. We have also seen decreases in
rate/tariff deficiencies and hydroelectric generation productivity in certain low-rainfall
regions, as well as an effort to reduce reliance on nuclear generation.
From a supply perspective, upstream oil and natural gas exploration, development
and production has continued to grow in North America. Canada continues to look for
export opportunities, the United States is continuing to consider export authorisations,
and Mexico is constructing natural gas pipelines to import low-cost natural gas from the
United States. In the wake of the Fukushima disaster, some countries, including Germany,
Switzerland, France, Japan and Korea, are seeking to reduce their current reliance on
nuclear generation. Certain countries, such as the United States and Denmark, have also
witnessed extensive retirements of coal-fired generation facilities, owing to greenhouse
gas emissions targets and comparisons with the cost of natural gas. At the same time,
other countries (including Malaysia, India and Indonesia) are continuing to develop
coal generation resources due to significant electricity generation needs that require fuel
source diversification. We have also seen increases in renewable generation development
efforts (including in Sweden, Denmark, Romania, Kenya, Australia, India, Japan and
Malaysia), while many other countries in Europe and North America have reduced
subsidies for renewable resource development.
From a demand perspective, we are seeing noteworthy reductions in demand in
some countries, owing to the residual effects of the global financial crisis, while we are
witnessing significant demand growth in other countries, including Indonesia, Turkey
and Angola.
From a market and rate perspective, we are observing substantial efforts to
reduce rate/tariff deficiencies. Many countries have fully liberalised their generation
markets, while others are heading towards a competitive market model. There are
vii
Editors Preface
continued efforts to develop competitive electricity markets for energy and capacity, and
some countries have developed effective carbon pricing mechanisms. We have seen an
increase in privatisations of state-owned energy companies, including in Turkey, Cyprus,
New Zealand and Nigeria. Chinese state-owned companies have acquired interests in
utilities in Australia (State Grid acquisition of significant shares of two Australian utility
companies) and Mozambique (China National Petroleum acquired certain offshore gas
rights).
Natural disasters and political strife continue to impair the ability to provide
reliable energy services, as evidenced by the impacts of Typhoon Haiyan in the Philippines
and the continued unrest in Ukraine. On the other hand, a lack of political strife has
contributed to significant development of the energy industry in other countries, such
as Angola, which has seen increased capital investment, including in oil exploration and
production.
I would like to thank all the authors for their thoughtful consideration of these
difficult challenges. We look forward to identifying possible mechanisms to resolve the
many issues and concerns discussed in these chapters.
David L Schwartz
Latham & Watkins LLP
Washington, DC
June 2014
viii
Chapter 1
OVERVIEW OF CENTRAL
AND WEST AFRICA
Pascal Agboyibor, Bruno Gay and Gabin Gabas1
I OVERVIEW2
i
Electricity sector
As an overview, the electricity sector in each of the states has the following characteristics:
a
the supply of electricity is among the weakest in the world,3 even compared with
other states of the same income bracket;
b
the cost of electricity is among the highest in the world as a result of the
preponderance of thermal energy dependent on the price of oil;
c
there is a precarious financial situation among public operators of electricity, who
cannot pass on the increased costs of production to consumers;
d
the power infrastructure is in a state of disrepair, which leads to significant energy
losses; and
1
2
Pascal Agboyibor is a partner, Bruno Gay is of counsel, and Gabin Gabas is an associate at
Orrick, Herrington & Sutcliffe.
This chapter covers the following countries: Benin, Burkina Faso, Cameroon, the Central
African Republic, Chad, the Democratic Republic of the Congo, Gabon, Guinea, the Ivory
Coast, the Republic of the Congo, Mali, Niger, Senegal and Togo (individually referred to as
state or collectively as states). This overview is not intended to present a detailed description
of all applicable regulations relating to electricity and hydrocarbons of each state, but rather to
highlight the common principles and main trends in each of the states concerning the rules and
functioning of these industries. However, this overview will not present local practices which
may deviate from the applicable law, and a deep analysis of the texts and practices in these states
will thus be necessary to acquire a thorough understanding of these sectors.
For instance, the electrification rate of the Member States of the ECOWAS is 17 per cent,
compared with a global average of 80 per cent.
Overview of Central and West Africa

e
growing demand colliding with a persistent shortfall in production and

poor quality of services is causing chronic power cuts and slowing industrial
development.
The current amount of investment only represents a small fraction of the sum needed
to fill the gap between supply and demand. The use of private investment appears today
to be the only way to significantly improve the performance of the electricity sector.
Resources in the region (hydraulic, gas, solar, wind) remain largely underutilised and the
question of their recovery is central.
In parallel with production capacity, the development of national transport
networks and their interconnection is a key factor for both industrial (mining industry
in particular) and remote rural community development.
African regional organisations have created a forum in which states agree to
coordinate their national energy policies. Among the instruments of this coordination,
the most relevant in the context of this study are:
a
the Convention dated 5 July 1996 governing the Economic Union of Central
Africa (CAEU), adopted within the framework of the Economic and Monetary
Community of Central Africa (CEMAC);4
b
the Protocol dated 18 October 1983 on cooperation in energy between the
members of the Economic Community of Central African States (ECCAS);5
c
the A/P4/1/03 Energy Protocol, adopted by the Economic Community of West
African States (ECOWAS)6 on 21 January 2003; and
d
the Additional Act No. 04/2001 dated 19 December 2001 on the adoption of
a common energy policy of the West African Economic and Monetary Union
(WAEMU).7
The first reforms of the electricity sector, which were conducted to segment activities,
introduce free competition and allow the participation of the private sector, appeared
4
5
The CEMAC is composed of six Member States: Cameroon, Chad, the Central African
Republic, Equatorial Guinea, Gabon and the Republic of the Congo.
The ECCAS is composed of 10 Member States: Angola, Burundi, Cameroon, the Central
African Republic, Chad, the Republic of the Congo, the Democratic Republic of the Congo,
Gabon, Equatorial Guinea and So Tom and Prncipe. It can be noted that, through its
Decision No. 15/CEEAC/CCEG/XIV/09 dated 24 October 2009, the ECCAS adopted the
Central African Regional Electricity Market Code. This code, however, does not yet seem to
have been implemented by the Member States.
The ECOWAS is composed of 15 Member States: Benin, Burkina Faso, Cape Verde, Gambia,
Ghana, Guinea, Guinea Bissau, the Ivory Coast, Liberia, Mali, Niger, Nigeria, Senegal, Sierra
Leone and Togo.
The WAEMU is composed of eight Member States: Benin, Burkina Faso, the Ivory Coast,
Guinea Bissau, Mali, Niger, Senegal and Togo.

twenty years ago, primarily within the framework of these organisations.8 However, no
French-speaking state seems yet to have fully completed the transition.
New power regulations are about to enter into force in the Ivory Coast and the
Democratic Republic of the Congo (see outlook below), and have not been included in
this overview.
ii
Oil and gas sector
The legal systems in each of the states are civil law-based and reserve to the state the
ownership of all natural resources located within its sub-soil, including hydrocarbons.
These systems provide for concession agreements or production sharing contracts
to be concluded between the state and hydrocarbons title holders, as well as the principles
on which they will interact with the mining titles to which they relate.
The electricity sector is notably governed: in Benin, by the 2004 Agreement revising the BeninTogo code of electricity and by Law No. 2006-16 dated 27 March 2007 establishing the code of
electricity and complementing the Benin-Togo code of electricity; in Burkina Faso, by Law No.
027-2007/AN dated 20 November 2007 establishing the general regulation of the sub-sector of
electricity and Decree No. 2008-370/PRES/PM/MCE/MEF/MCPEA/MATD establishing the
granting conditions of licences and authorisations, of concession or farming agreements and of
the declaration of facilities in the sub-sector of electricity; in Cameroon, by Law No. 2011/022
dated 14 December 2011 governing the electricity sector and Decree of Implementation No.
2012/2806/PM dated 24 September 2012; in Chad, by Law No. 14/PR/99 dated 15 June
1999 concerning the production, transmission and distribution of electric energy; in the Ivory
Coast, by Law No. 85-583 dated 29 July 1985 organising the production, transmission and
distribution of electric energy, soon to be replaced by the law passed on 27 February 2014
establishing the code of electricity (not yet published in the Official Journal at the time of
writing); in the Democratic Republic of the Congo, by numerous regulations, including the
Decree dated 2 June 1928 on the general conditions concerning electric energy, the Decree dated
31 July 1953 establishing provisions for the import and export of electric energy, the OrderLaw No. 61-61 dated 26 February 1953 on the distribution of electric energy, and numerous
ministerial orders dated 16 November 1994; in Gabon, by Law No. 08/93 setting the legal
status of the production, transport and distribution of drinking water resources and electric
energy; in Guinea, by Law No. L/93/039/CTRN concerning the production, transmission
and distribution of electric energy, as well as Decree No. D/2001/098/PRG/SGG dated 18
December 2001 establishing the reorganisation of the electricity sector during the transitory
period; in Mali, by Order No. 00-019 dated 15 March 2000 establishing the organisation
of the electricity sector; in Niger, by Law No. 2003-004 dated 31 January 2004 establishing
the code of electricity and its Decree of Implementation No. 2004-266/PRN/MME dated 14
September 2004; in the Central African Republic by Order No. 05.001 dated 1 January 2005
establishing the code of electricity; in the Republic of the Congo, by Law No. 14-2003 dated
10 April 2003 establishing the code of electricity; in Senegal, by Law No. 98-29 dated 14 April
1998 concerning the electricity sector, revised by Law No. 2002-01 dated 10 January 2002;
in Togo, by the 2004 Agreement revising the Benin-Togo code of electricity, and by Law No.
2000-012 dated 18 July 2000 concerning the electricity sector.

The legislation also provides for detailed rules applicable to midstream and
downstream sectors, which they regulate and generally subject to prior approval.
Half of the states do not produce hydrocarbons and are dependent on imports
from neighbouring countries. Some of these states are in the process of amending or
creating legislation to foster the development of the hydrocarbons sector so as to generate
revenues from the exploitation of their oil and gas resources.
Interconnected cross-border oil and gas infrastructure is being operated, and
projects are being developed or extended between a growing number of states which
are likely to attract producers and have a positive impact on states revenues and local
development, through both production of oil and gas and, ultimately, power generation.
New oil and gas regulations are about to enter into force in Niger (see outlook
below) and have not been included in this overview.
II REGULATIONS
i
National and regional regulators
Electricity sector
National regulation authorities
Except for Guinea,9 all the states legislation provides for the creation of a regulation
authority in the electricity sector.10 Some of these national authorities may have only
been set up very recently,11 or even not yet be effective.12
Among the recurring missions of the various national regulation authorities, one
may highlight the following:
a
monitoring that operators comply with the applicable regulations;
b
intervening in the setting or approval of electricity tariffs;
c
ensuring compliance with competition rules in relation to power production,
transport and distribution;
d
preserving customers interests;
e
promoting competition and private sector participation according to objective,
transparent and nondiscriminatory (e.g., third-party access to transmission
networks and customers access to the power supply) conditions;
f
taking part in the awarding of contracts via the setting up of tendering processes;
g
proposing amendments to the state relating to both the institutional and
regulatory frameworks; and
h
implementing dispute resolution mechanisms (such as conciliation or arbitration)
between the electricity sectors players (between operators or between operators
and customers).
9
10
11
12
Guinea established a National Council for Power, a consultative body whose mission is to assist
the minister in charge of energy on topics relating to energy policy.
It is common for the water sector to be under the supervision of the same authority.
For example, the regulation authority for the sub-sector of electricity in Benin has only been
effective since July 2013.
As is the case in Chad.

Regional regulation authorities
Within the framework of the West African Power Pool (WAPP), in January 2008 the
ECOWAS Conference of Heads of State established the ECOWAS Regional Electricity
Regulatory Authority (RERA).13 This special body is in charge of setting up cross-border
power exchange regulations as well as supporting the Member States national electricity
regulators.
Oil and gas sector
National regulation authorities
Contrary to the electricity sector and with some notable exceptions,14 the hydrocarbons
sector is not characterised by the existence of specific regulators that are independent
from the sectors supervisory authority (in most cases, the ministry in charge of energy
or hydrocarbons).
This obviously does not mean that this sector is not regulated.15 The hydrocarbons
sector is eminently strategic and constitutes one of the domains where the state fully
13
14
15
The RERA was created by Additional Act No. A/SA.2/01/08 and is governed by Regulation
of the Council of Ministers No. C/REG.27/12/07 dated 15 December 2007 relating to the
composition, organisation and functioning of the RERA.
For example, the Authority for the Downstream Petroleum Sector Regulation (Chad),
the Regulation Agency of the Petroleum Downstream Sector (Republic of the Congo), the
National Office of Petroleum Products (Mali), and the National Committee for Hydrocarbons
(Senegal).
The oil and gas sector is notably governed: in Benin, by Law No. 2006-18 dated 17 October
2006 establishing the petroleum code in the republic of Benin; in Cameroon, by Law No. 99013 dated 22 December 1999 establishing the petroleum code and Decree No. 2000/465 dated
30 June 2000, as well as Law No. 2012/006 establishing the gas code dated 19 April 2012;
in the Central African Republic, by Order No. 93.007 dated 25 May 1993 establishing the
petroleum code and its implementation decree, as well as Law No. 07.005 dated 24 April 2007
establishing the reorganisation of the downstream petroleum sub-sector in the Central African
Republic, Law No. 07.006 dated 24 April 2007 establishing the Agency of Stabilisation and
Regulation of Petroleum Product Prices and Law No. 07.007 dated 24 April 2007 establishing
the Central African Company of Storage of Petroleum Products; in Chad, by Law No. 07006 dated 2 May 2006 concerning hydrocarbons, modified by Order No. 10-001 dated 30
September 2010; in the Ivory Coast, by Law No. 96-669 dated 29 August 1996 establishing the
petroleum code as amended by Ordinance No. 2012-369 dated 18 April 2012 and amending
Law No. 96-669 dated 29 August 1996 establishing the petroleum code; in the Democratic
Republic of the Congo by Order-Law No. 81-013 dated 2 April 1981 establishing general
legislation on mines and hydrocarbons; in Gabon, by Law No. 14/82 dated 24 January 1983
establishing the regulation concerning the exploration and production of hydrocarbons in the
Republic of Gabon; in Guinea, by Order No. 119 PRG-86 dated 28 September 1986; in
Mali, by Law No. 04-037 dated 2 August 2004 establishing the organisation of exploration,
production, transport and refining of hydrocarbons and Decree No. 04-357 dated 8 September
2004, as well as Inter-ministerial Order No. 94-5801/MET-MFC dated 9 May 1994; in Niger,

exercises its sovereignty and the implementation and control of these regulations are
often left to the central (ministry level) and local (prefecture level) authorities.
Regional regulation authorities
With the exception of cross-border projects that are likely to exist mainly for the purpose
of transporting hydrocarbons,16 there is currently no regional authority regulating the
hydrocarbons sector in the states concerned.
ii
Regulated activities
Electricity sector
Electricity production, transmission and distribution is typically considered a public
service17 and placed under the states authority. The electricity sector is, overall, open to
the private sector, yet the above activities are regulated. Also, these activities are subject
to obligations of regularity, continuity, permanence and equality of treatment, which are
inherent to public service.
The public service of electricity can be delegated to private entities. Delegation
occurs though a contract, the most usual form of which is, in the electricity sector, a
concession contract (long-term lease contracts are also envisaged by some legislation).18
The public service concession holder is responsible for all operation and maintenance
costs and, when acting as a concessionaire, also for the financing of the infrastructure. It
is remunerated essentially through fees paid by users. Long-term lease contracts, under
which the state bears the responsibility for the investment, is generally reserved for the
countrys national company.19
Generally, the public service concession holder must comply with the following
obligations:
16
17
18
19
by Law No. 2007-01 dated 31 January 2007 establishing the petroleum code; in the Republic
of the Congo, by Law No. 24-94 dated 23 August establishing the hydrocarbons code and
Decree No. 2008-15 dated 11 February 2008 setting the granting procedure for liquid or gas
hydrocarbon mining titles and by Law No. 6-2001 dated 19 October 2001, modified by the
order dated 1 March 2002, concerning the refining, import, export, transit, re-export, storage,
massive export, distribution and sale of hydrocarbons and of derived products; in Senegal,
by Law No. 98-05 dated 8 January 1998 establishing the petroleum code, Law No. 98-31
dated 14 April 1998 concerning the activities of importing, refining, storing, transporting and
distributing hydrocarbons, and Law No. 2010-22 establishing the orientation of the biofuels
sector; and in Togo, by Law No. 99-003 dated 18 February 1999 establishing the hydrocarbons
code in the Republic of Togo.
The West African Pipeline Authority (WAPA) in particular regulates the project operated by the
West African Gas Pipeline Company Limited (WAPCo).
Importing electricity is sometimes also considered as a public service.
Although the legislation of Cameroon, Mali, Niger, Senegal and Togo provides that the
delegation of public service for electricity can only be established via concession agreements.
This is the case between Burkina Faso and Sonabel, for example.

a
b
c
guarantee a permanent and continuous supply of electricity under the best pricing
conditions;
comply with the principles of equality of treatment and electricity market access;
and
ensure a satisfactory coverage of power supply across the country.
The public service of electricity delegation is typically governed by a convention,

including specifications, the purpose of which is to determine, in particular:
a
the purpose, extent and duration of the relationship;
b
the investment plan;
c
the conditions relating to the maintenance of the infrastructure;
d
the quality of the service;
e
accounting and financial aspects;
f
tariffs;
g
the conditions of remuneration of the operator;
h
the applicable tax regime; and
i
termination events.
Legislation also allows private operators to access the sole power production sector.
Independent power production by private operators is, therefore, possible in most of
the states.
In order to carry out its activity, an independent producer must generally sign
a concession contract with the state, as well as a power purchase agreement with the
transmission and/or distribution network operator, as relevant. Legislation may also
provide for the granting of licences or sometimes even mere authorisations, in particular
when production facilities have a capacity below a certain threshold.20 The situation
in Chad is, in fact, very specific, as the legislation provides that producing and selling
electricity outside the framework of the public service is possible without formalities,
other than a mere declaration.
Oil and gas sector
Of strategic importance to the economy and development policies, the oil and gas
industries are particularly regulated. All the legislation indeed provides that the state
is (and remains) the owner of the resources located in its sub-soil (including liquid and
gaseous hydrocarbons), together with the right for the state to grant (and renew and
withdraw as the case may be) all titles necessary for prospecting, exploring and exploiting
these resources and monitor, on the one hand, the rational exploitation of these resources
and, on the other hand, the conditions for their marketing. This combines further with
strict monitoring of the upstream and downstream sub-sectors.
20
This is the case in Benin, Burkina Faso (below a certain threshold), Cameroon (for independent
production other than hydroelectricity), the Central African Republic, Mali (below a certain
threshold), the Republic of the Congo, Senegal (for producing or selling electricity in general)
and Togo.

Distinction based on the nature of the substance concerned
Traditionally, liquid and gaseous hydrocarbons were treated like any other mineral
substances and generally subject to the provisions of mining law.
Legislation has evolved, in particular based on international practice, the
development of production sharing systems (replacing concessionary systems), and
specific tax regimes applicable to hydrocarbons exploration and exploitation.
Distinction based on the sub-sector concerned
Regulations (upstream and downstream) relating to hydrocarbons in most of the states
are generally provided for in a unique legislative instrument enacting the countrys
petroleum or hydrocarbons code.21 If so, midstream and downstream activities,
the principles of which are provided for in said code, are regulated by implementing
regulatory instruments (such as presidential decrees or ministerial orders). Some states
enacted special legislative instruments dedicated to midstream/downstream activities,
which notably regulate the refining, transport, storage, transformation, distribution and
marketing of hydrocarbons.22
Hydrocarbons rights and titles
Hydrocarbons titles are either exploration or exploitation titles.23
These titles are granted by the state24 through administrative acts (generally
ministerial orders or presidential decrees) to companies that demonstrate the technical
and financial capacities required to carry out the necessary petroleum operations.25
21
22
23
24
25
In general, the word petroleum may be misleading, as this legislation also governs natural gas
exploration and exploitation. Therefore, and unless otherwise provided, the words petroleum
and hydrocarbons used in this chapter shall refer to both liquid and gaseous hydrocarbons.
For instance, in Senegal: Law No. 98-31 of 14 April 1998 relating to hydrocarbons import,
refining, storage, transport and distribution; in Guinea: Decree No. D/91/261 relating to oil
products specifications, storage, transport and distribution; in the Republic of the Congo:
Law No. 6-2001 of 19 October 2001, as amended, relating to the refining, import, export,
transit, re-export, storage, massive transport, distribution and marketing of hydrocarbons and
oil products; and in Cameroon: Law No. 2012-006 of 19 April 2012.
The term of exploitation titles range from 20 to 35 years depending on the applicable legislation.
States also regulate prospecting activities, which are generally non-ground disturbing and do
not grant the holder the exclusive right to obtain an exploration or an exploitation title. This
chapter does not cover such prospecting authorisations.
Authorities competent for granting these titles may vary from one country to another.
Exploration titles are generally granted by the minister in charge of hydrocarbons, and
exploitation titles are granted by the president.
Remarkably, certain legislation, e.g., that of Niger and the Republic of the Congo, provides
that exploration and exploitation titles can only be granted to companies specialising in the
hydrocarbons sector. Other legislation sets forth additional capacity-related conditions with
respect to companies acting as operators.

In almost all the states, exploration permits and exploitation permits or
concessions26 are granted within the context of concession agreements, while exclusive
exploration and exploitation authorisations are granted within the context of production
sharing contracts.
Remarkably, in almost all legislation the development of production sharing
contracts has not resulted in the disappearance of exploration and/or exploitation
administrative titles, and companies still have to apply for these in order to be authorised
to carry out such activities.
Legislation provides that companies are prohibited to carry out exploration or
exploitation works before being granted such titles. Equally, certain legislation may
require that hydrocarbons titles (including exploration titles) be held by local companies.
Other legislation will allow foreign companies to enter into petroleum contracts and
hold a hydrocarbons title subject to creating a permanent establishment locally.
An exploration title holder is not allowed, per se, to extract hydrocarbons. It
will only be able to do so once granted an exploitation title. However, legislation often
provides the possibility for the holder of an exploration title to apply for a temporary
authorisation to exploit, which is limited in time and does not extend the term of validity
of the exploration permit. This temporary authorisation aims to allow the holder of
an exploration title to start the exploitation of wells it has discovered in exchange for
pursuing the assessment and demarcation of these deposits.27
Most of the states legislation provides for common provisions to be stipulated in,
or common principles to apply to, petroleum contracts (mainly concession agreements
and production sharing contracts), and in particular that they:
a
cover the perimeter of the hydrocarbons titles to which they refer (exploration
title and, as the case may be, exploitation title);
b
are concluded for the term of the exploration title (and, as the case may be,
exploitation title to which they apply);
c
set the minimum work obligations of the holder during the various phases of the
project, as well as the conditions in which exploration and exploitation will be
carried out;
d
provide for the stipulations relating to the transfer of rights and obligations
deriving from the hydrocarbons titles;
e
set the tax and customs regime applicable to the holder;
f
set the obligation for the holder to respect local content;28
26
27
28
Both exploitation concessions and permits are exploitation titles, which derive from exploration
permits. Exploitation concessions shall not be confused with the concession agreements which
may attach to them.
Temporary authorisations to exploit are, for example, provided in the legislation of Benin,
Cameroon, the Central African Republic and the Ivory Coast.
Such as engaging by preference with local contractors or hiring local employees.

g
h
provide for the participation of the state or state-owned entities in all or part of
the petroleum operations and, as the case may be, to the capital of the holder;29
and
may stipulate dispute resolution and, in particular, arbitration provisions.
These contracts are generally signed by the minister in charge of hydrocarbons before,
depending on the applicable legislation, being approved by the President of the Republic
by decree or ratified by an Act of Parliament.
Legislation also envisages (without necessarily regulating in detail) the conclusion
of joint operating agreements when referring to the possibility for the title holder to
partner with other companies (including all national companies) with a view to carrying
out oil operations.30
The states legislation further provides that petroleum operations must be
carried out diligently and in accordance with high quality standards applicable in the
international oil and gas industry.
A number of states legislation provides for hydrocarbons titles to be granted
under certain conditions via tendering processes.31
Lastly, almost all of the states hydrocarbons legislation provides that petroleum
contracts may provide for the stabilisation of the contractual conditions entered into
with the title holder.32
iii
Ownership, participation and restrictions
Ownership
Electricity sector
Facilities dedicated to the public service of electricity are generally part of the public
domain, even when they are built by a private entity. Some states legislation provides,
however, that facilities built by independent producers shall be governed by the private
property regime.33
Oil and gas sector
As most of the states have enacted French law-inspired legislation, their legislation
reserves to the state the ownership of the natural resources located in its sub-soil,
29
30
31
32
33
Legislation generally allows states to participate in hydrocarbons projects (via the acquisition of
interests in the title or acquisition of shares in the company holding the title).
For instance, in Cameroon: Articles 7 and 8 of the petroleum code; in the Central African
Republic: Article 7 of the petroleum code.
This is the case in particular in Benin, Cameroon, the Central African Republic, Chad, Guinea
and the Republic of the Congo.
This is, for instance, the case in Cameroon in relation to economic and fiscal stabilisation; in
Mali in relation to legal, economic and financial stabilisation; in Niger in relation to legal,
economic and fiscal stabilisation; and in the Central African Republic in relation to contractual
conditions.
This is the case in the Republic of the Congo, Mali and Senegal.
10

including its territorial sea and exclusive economic zone.34 As mentioned, this results in
any entity (including the owner of the land containing the subsoil in which such deposit
is located) wishing to carry out exploration or exploitation works being obliged to obtain
all necessary approvals and titles.
The states legislation also provides for specific rules applicable to the access or
occupation of land required for carrying out the project, as well as the related rights and
obligations of the holder within or outside the perimeter of its title.
Technically, the transfer of ownership of the hydrocarbons extracted shall be
made in accordance with the provisions of the petroleum contract (which generally
provides that it occurs when passing the well head) and will result in either a transfer of
ownership of the entire hydrocarbons production to the holder of the hydrocarbons title
in a concessionary system, or the transfer of defined percentages of the production to the
benefit of both the holder and the state in a production sharing system.
Participation
Oil and gas sector
States legislation generally provides that the state can directly, or through a national
company, participate in all or part of the petroleum operations.
Change of control/transfers
Electricity sector
Regulations applicable to the electricity sector rarely address the possibility for a
concessionaire, licensee or authorisation holder to assign its rights to a third party. The
issues relating to indirect transfers occurring at the concessionaires shareholders level
are taken into account even less frequently.35 This, however, does not mean that transfers
of rights are completely free. Indeed, given the public service nature of the activities
relating to the electricity sector, agreements between the state and private operators are
concluded intuitu personae, and the question of direct or indirect transfers is very likely
to be addressed in said agreements.
Oil and gas sector
Assignment of the hydrocarbons title
States legislation provides rules relating to the transfer of hydrocarbons titles which
vary depending on whether they relate to an exploration title or an exploitation title.
The states provide for compulsory rules governing the transfer to third parties of the
hydrocarbons title held by the holder. Generally, such a transfer will have to be approved
by the competent authority prior to the transfer. Legislation commonly provides that
unapproved transfers are sanctioned (1) by the nullity of the act providing for this
transfer; and (2) the possible withdrawal of the title.
34
35
Some states also refer to the continental shelf (the Ivory Coast, for instance).
Cameroon is one of the only states which addresses this issue and requires, for instance, a mere
declaration to the Regulation Agency in case of changes in the concessionaires shareholding
structure.
11

The transferee shall agree, without reservations or restrictions, to comply with the
convention relating to the assigned title.
Change of control of the holder of the hydrocarbons titles/transfer of petroleum interests
Besides the assignment of hydrocarbons titles themselves, legislation generally provides
for the possibility to transfer all or part of the rights and obligations deriving from the
hydrocarbons titles and/or oil agreements. Most of the time, these transfers are conditional
on prior authorisation. In addition and similarly to what is provided for with regard
to assignments of hydrocarbons titles, legislation generally provides that unapproved
transfers of such rights and obligations may be sanctioned (1) by the nullity of the act
providing for such transfer; and (2) the possible withdrawal of the hydrocarbons title,
and/or the termination of the oil agreement, from which these illegally transferred rights
and obligations derive.
Lastly, states increasingly regulate the change of control of the hydrocarbons title
holders and subject it to the prior approval of the competent authority.
Market access restrictions
Electricity sector
Production
Overall, access to the power production market is possible through a competitive
tendering process. It is, however, common that, by way of exception, legislation relating
to the electricity sector or public procurement authorises the implementation of a
negotiated procedure. This exception is typically opened when urgency or general interest
demand fast completion of a specific project. However, social conditions in Africa may
easily constitute grounds of urgency and be likely to impede the full implementation
of competition rules. This is particularly true in the field of power production, where
concession agreements may be granted without a prior tendering process.
Transmission
Transmission is generally reserved for a single concessionaire. When this segment is
opened to the private sector, it is fairly common that the national companys monopoly
will remain.36 It can be further noted that the opening of this segment to the private
sector is sometimes allowed in rural areas.37
Distribution
Access to the power distribution market varies from one state to another. However, even
when legislation opens this segment to the private sector, structural weaknesses of the
36
37
This is, for instance, the case in the Republic of the Congo, where SNE is responsible for
transmission activities.
This is, for instance, the case in Gabon, insofar as the perimeter concerned is not covered by the
concession of the Energy and Water Company of Gabon.
12

market do not always allow full implementation of such liberalisation. It is, therefore,
common for de facto monopolies to survive the reforms.38
Oil and gas sector
Hydrocarbons law, like mining law, is a law of appropriation. States sovereignty over
their resources prevents, by its nature, the implementation of any principle to allow
third-party access to the resource. However, most of the applicable legislation imposes
that non-discriminatory third-party access be granted to certain midstream/downstream
oil and gas facilities and infrastructure (in particular in relation to transport, storage and
distribution, etc.).
Lastly, certain legislation provides that the company holding an exploitation title
is required to give priority to satisfying the needs of domestic consumption.
III
TRANSPORT AND DISTRIBUTION
Vertical integration
Electricity sector
To a large extent, states adopted regulations allowing either full or partial segmentation of
production, transmission and distribution activities. Guinea remains a notable exception
because it maintained full vertical integration of the electricity sector, which is fully
operated by the company Electricit de Guine.
The specific cases of Togo and Benin can also be mentioned, as they signed a
treaty on 27 July 1968 for the purpose of creating a public international body, the
Communaut Electrique du Bnin, which enjoys exclusivity for transmission39 and
importation activities, as well as the purchase of electricity for both states.
ii
Transmission, transport and distribution access
Electricity sector
Third-party access to the transmission grid is guaranteed in law in almost every state.
As such, the grid operator cannot refuse power producers the right to transmit their
electricity through the grid.
Under such circumstances, the power grid operator cannot discriminate between
operators40 on matters such as access to transmission capacities, quality of service, tariffs
and, in general, treatment of such operators. It is also very common that regulations
provide that the price of a connection shall be based on costs borne by the grid operator
and a reasonable profit margin.
38
39
40
This is, for example, the case in Cameroon, where AES-SONEL still enjoys a monopoly
position for distribution activities by virtue of its concession agreement. Such a monopoly also
exists in Burkina Faso to the benefit of SONABEL, and in the Republic of the Congo to the
benefit of SNE.
Local and temporary delegation of the transmission activity is allowed, however.
Note that Cameroon does not have such an obligation provided in its regulation.
13

Restrictions may, however, be allowed when justified by technical reasons or
capacity limitations, and tariff discrepancies may only be implemented if objective
differences exist between power producers.
Oil and gas sector
Local activities for the transport and distribution of petroleum products are generally
liberalised in the sense that private companies (the holder of the hydrocarbons title or
a third party) can exercise them. These companies are, however, subject to obtaining
approvals, which are generally granted for a limited period of time and likely to be
renewed. However, exploitation titles typically confer on the title holder the right to
transport its share of hydrocarbons.
Last, and subject to excess capacity being available, third parties may be granted
the right to access transport infrastructure on a non-discriminatory basis.
iii
Terminalling, refining and processing
Oil and gas sector

Hydrocarbons terminalling, refining and processing operations are generally liberalised
and can be exercised by private companies (the holder of the hydrocarbons titles or a
third party), which shall also obtain approvals generally granted for a limited period of
time and likely to be renewed.
iv Tariffs/rates
Electricity sector
In general, the tariffs which are set within the framework of public service of electricity
are regulated. National laws provide for joint action of both the regulation authority
and the government in order to set a tariff which allows an acceptable financial balance
for the public service delegation. However, in order to maintain a satisfactory level of
access to electricity for the population, tariffs are greatly undervalued, to the point that
electricity distributors fail to achieve a profit margin. For that matter, it is common for
states to heavily subsidise the operators which suffer from these tariff policies.
On the other hand, independent power producers are generally allowed to
freely negotiate their tariffs with the transmission or distribution operators within the
framework of power purchase agreements. In such cases, the contract may be required to
comply with specific instructions from the regulation authority.
Oil and gas sector
In general, prices of hydrocarbons produced in each of the states are determined in
accordance with a complex regulation organising the setting of a reference pricing
structure for petroleum and natural gas based on international market prices. A specific
price structure can also apply in relation to the price of hydrocarbons designated for local
market supply.
14

IV
INTERCONNECTIONS AND REGIONAL POOLS
Electricity sector
Within the states, electricity markets are underdeveloped. In Central and West Africa
several regional initiatives aim at developing a regional energy market supported by
interconnections between Member States, and at implementing power pools.
Central Africa
Within the framework of the CEMAC, the Regional Economic Program (REP)
implements various actions aimed at interconnecting electric grids between Member
States and developing hydroelectric potential up to the total capacity of 25,000MW by
the year 2025. This should enable the creation of an energy self-sufficient region with the
additional opportunity to sell any excess production to Nigeria and other West African
countries via a connection to the West African Power Pool (for more information about
the WAPP, see below).
In parallel to the CEMAC initiative above, the Economic Community of Central
African States (ECCAS) created a specialised body called the Central Africa Power
Pool (CAPP). This body is in charge of implementing the communitys energy policy,
following up studies and construction works relating to the communitys infrastructure,
and organising the electricity exchange between Member States through the construction
of a dozen regional projects.
West Africa
Within the framework of the ECOWAS and its REP, the Conference of Heads of State
decided to implement the West African Power Pool. The objective is to reduce the regions
power production deficit by constructing interconnection infrastructure and developing
electricity exchange between Member States. This system led to the implementation of a
regional regulatory authority in 2008 (see above).41
Concerning the power grid, Mali is currently connected to Senegal, the Ivory
Coast is connected to Burkina Faso and Ghana, and the latter is also connected to Togo
and Benin. Other interconnection projects exist within the region, such as between the
Ivory Coast, Liberia, Sierra Leone and Guinea; between Ghana, Burkina Faso and Mali;
and between Guinea and Mali.
ii
Oil and gas sector
Besides the Chad-Cameroon pipeline,42 the most significant example of cross-border

interconnected infrastructure in relation to hydrocarbons is the Western African Gas
Pipeline, which was created by international treaty and crosses four states including
41
42
The Regional Electricity Regulatory Authority (RERA).

This pipeline has been co-operated since October 2003 by two transportation operators:
COTCO (Cameroon Oil Transportation Company SA which is jointly owned by private
investors and the states of Chad and Cameroon) and TOTCO (Tchad Oil Transportation
Company SA, which is jointly owned by private investors and Chad).
15

Benin and Togo, and the operation of which, although managed by a private company,
is regulated by a regional regulator instituted by the treaty: the Western African Pipeline
Authority.43
The 258km Abidjan-Yamoussoukro pipeline will expand to Burkina Faso, with
a view to redistributing hydrocarbons to Mali and Burkina Faso. Finally, in November
2013 the Ivory Coast and Burkina Faso authorities signed agreements intended to
provide a general framework for the future construction of a gas pipeline linking the
Ivory Coast to Burkina Faso for it to benefit from a natural gas supply.
Lastly, a Niger-Chad pipeline is expected to be built, from where the existing
Chad-Cameroon pipeline will carry Nigers oil (from the Agadem fields) to the coast of
Cameroon. This project will allow the new oil-producing country to become an exporter
of crude oil. A bilateral convention was signed to this effect in Yaound on 30 October
2013, which stipulates the conditions under which Nigers oil will transit through the
Chad-Cameroon pipeline.
V
RENEWABLE ENERGY AND CONSERVATION
Development of renewable energy
Although some states did adopt legislation promoting renewable energy sources,44 they
do not have current practical implications as far as the energy sector is concerned.
VI
THE YEAR IN REVIEW/CONCLUSIONS AND OUTLOOK
Electricity sector
Projects based on regional initiatives

Almost two dozen power plant projects are currently ongoing in Central Africa among
the CEMAC, including two gas plants in Cameroon (Kribi and Limb) and one in
the Republic of the Congo (Pointe Noire), as well as several hydroelectric dams in the
Central African Republic (Loali 2 and Boali 3 extension) and the Republic of the Congo
(Imboulou). Twelve similar projects are also scheduled within the framework of the
ECCAS.
In West Africa, the Regional Initiative for Sustainable Energy identified more
than one hundred projects directly related to the power sector and which are to be
achieved by 2030, all within the framework of the West African Economic and Monetary
Union (WAEMU), including interstate organisations such as the Organisation for the
Development of the Senegal River (OMVS), the Organisation for the Development
43
44
Taking into account the existence of significant oil and gas resources in the sub-region, and
with a view to fostering the satisfaction of power requirements, the ECOWAS published a call
for expression of interest in July 2013 in order to assess the possibility of expanding the WAGP
to the coastal countries of the Community.
As, for example, in Senegal, with Law No. 2010-21 dated 20 December 2010 relating to
renewable energy and Law No. 2010-22 dated 15 December 2010 relating to the biofuel sector.
16

of the Gambia River (OMVG), the WAPP and the Electrical Community of Benin.
Production capacity should ultimately be multiplied by three.
Rural electrification
Populations access to power is a major concern which is shared by every state. Almost
every state implemented a national agency for rural electrification which is in charge
of conducting the necessary technical and economic studies, preparing the tendering
processes for delegating the management of the rural electric grid, promoting new
technologies and seeking finance. It should also be noted that, in the context of
decentralisation, the management of power infrastructure in rural areas may be
transferred to local authorities.
These agencies are typically supported by a rural electrification fund whose
purpose is to help finance the connecting rural infrastructures. Such funds are financed
by state allocations, lenders, gifts and bequests, loans, royalties, licence fees paid by
operating companies and taxes paid by end users.
Regional initiatives for the electrification of rural areas also exist. For example,
the CEMAC Energy Facility, which is part-financed by the EU-ACP Energy Facility,45
includes a peri-urban electrification project component, which aims to reinforce the
regional integration of energy policies in the context of the fight against poverty by
improving access to electricity in peri-urban and rural areas within CEMAC countries.
New regulations in the Ivory Coast and the Democratic Republic of the Congo
2013 and the beginning of 2014 were marked by the adoption of two reforms in the
power sector.
The Ivory Coast adopted a new electricity regulation on 27 February 2014. This
regulation is yet to be published in the Official Gazette at the time of writing. It can,
however, already be pointed out that the new code should open up to the private sector
the organisation and management of the different segments of the power sector. These
segments may now be licensed to one or more private operators. The new regulation
also implements opportunities for the management of energy flows, as distinct from the
transmission activity, which is carried out by the state. Furthermore, the right for third
parties to access the transmission grid is to be implemented, along with a regulatory
authority.
The Democratic Republic of the Congo is also in the process of adopting a new
law governing the electricity sector. The draft law was adopted by the National Assembly
and the Senate on 15 and 22 January 2014, and provides for an effective opening to
the private sector for electricity production, transmission, distribution, importation
and exportation activities. Better competition standards should be implemented as
concessions and licences should be granted under transparent and non-discriminatory
public procurement procedures. Third parties should also be granted access to
45
The Energy Facility is a co-financing instrument which was established in 2005 in order to
support projects aimed at increasing access to sustainable and affordable energy services for the
poor living in rural and peri-urban areas in African, Caribbean and Pacific (ACP) countries.
17

transmission infrastructure on a non-discriminatory basis. From an institutional point
of view, the Democratic Republic of the Congo is expected to follow the current trend
with the implementation of a regulatory authority, as well as a public body in charge of
electrification of rural areas.
ii
Oil and gas sector
New legislation
The Parliament of Niger would have adopted an important amendment to its existing
Petroleum Code on 7 April 2014. This amendment was not publicly available at the time
this chapter was written.
A new Hydrocarbons Code would have been enacted in Gabon by Presidential
Ordinance. Such Ordinance, which would still need to be ratified by the Gabonese
Parliament to enter into force, would differ from the instrument that had been debated
before the National Assembly over the past four years. The published version of this
Ordinance was not available at the time this chapter was written and could not be
commented on.
Draft amendments to applicable legislation
The Parliament of the Democratic Republic of the Congo is currently discussing a draft
law establishing a general regime for hydrocarbons.
Calls for expression of interest
Remarkably, at the beginning of April 2014 the Government of Burkina Faso issued
a call for expressions of interest in relation to the drafting of legislation governing the
hydrocarbons sector and defining the national technical specifications for petroleum
products and derived products.
18
Chapter 2
ANGOLA
Catarina Levy Osrio and Helena Prata1
I OVERVIEW
Angolas energy sector is characterised by strong public activity, with state companies
acting throughout the value chain of the oil, natural gas and electricity industries.
Despite the prominent public presence in the energy industry, the country is
progressively widening entry to private players, creating the necessary mechanisms to
allow private companies to take part in the industrys activities alongside and in close
cooperation with the respective public companies.
The electricity industry is the one that requires the most significant investment,
undergoing transformation and expansion plans that amount to US$13 billion, between
2009 and 2025, in order to meet growing demand.
In accordance with the measures set out by the Policy and Strategy for the
National Energetic Security,2 the Angolan government is committed to reforming the
energy industry. With this intention, among other measures, in the electricity industry
the government is mainly focusing on:
a
restructuring public companies;
b
developing a strategic and regulatory framework for renewable energies;
c
reinforcing powers of the Regulatory Institute of the Electrical Sector (IRSE);
d
revising the legal framework for the electricity sector;
e
defining an attractive model for private investment and development of its legal
framework; and
f
progressively eliminating electricity price subsidies.
1
2
Catarina Levy Osrio and Helena Prata are partners at Angola Legal Circle Advogados.
Put into force by Presidential Decree No. 256/11 of 29 September.
19
Angola
In the oil and natural gas industry, the focus is on:
a
ensuring the Angolanisation of upstream activities by defining a plan for
upgrading Sonangols management and integration capacities on deep-water
projects;
b
implementing the liberalisation of the market and creating a new legal and
regulatory framework;
c
enacting a natural gas regulatory framework;
d
reinforcing existing refining capacity;
e
finishing short-term projects such as pipelines and railways; and
f
defining a new tariff model and removing fuel price subsidies.
The Angolan electricity system is divided into two separate segments:
a
the Public Electricity System (PES), which encompasses the Electricity National
Transmission Network (NTN)3 and all generation and distribution infrastructures
tied to the NTN; and
b
the Non-Tied Electricity System (NTES), which encompasses non-tied producers,
self-producers and non-tied customers (together referred as non-tied agents).
The commercial relations between the aforementioned agents is governed by the General
Electricity Law4 and the Commercial Relationships Regulation.5
The producers tied to the PES are public service concessionaires or licence holders
who have the obligation to sell electricity to the NTN concessionaire. Under its capacity
as a single buyer, the NTN concessionaire is required to acquire all power generated by
tied producers. In order to do so, tied producers and the NTN concessionaire must enter
into power purchase agreements (PPAs), which set out the terms and conditions of their
commercial relations.
Subsequently, the NTN concessionaire (in which the Angolan state must have
a majority equity participation or a veto right) must sell the electricity acquired under
the PPAs to the high-voltage (HV) distribution network operators, at a single price,
including those who operate in isolated systems.
In turn, HV6 distributors sell electricity to medium-voltage (MV) distributors
who then sell electricity to low-voltage (LV) distributors, who in turn sell the electric
power to the customers, therefore acting as suppliers.
Without prejudice to the necessities of the PES, the non-tied agents are committed
to the role of strengthening the competitive regime on the supply and consumer markets
of the Angolan electric system. Hence, non-tied producers and customers are entitled to
establish bilateral agreements, freely negotiated between the parties, governing the terms
and conditions of the supply of electricity. Nonetheless, the terms and conditions of such
3
4
5
6
Mainly composed by ultra high-voltage networks, which operate at a voltage greater than 60kV.
Put into force by Law No. 14-A/96 of 31 May.
Put into force by the Presidential Decree No. 2/11 of 5 January.
The HV networks operate at a voltage between 35kV and 60kV, the MV networks between
35kV and 1kV and the LV networks below 1kV.
20
Angola
agreements must comply with the Regulation for the Licensing and Security of Electric
Facilities and the Networks Access Regulation, as well as the rules and procedures put
into force by the IRSE. If, at any given moment, the non-tied producers wish to sell their
electricity to the PES, they will need to enter into generation concession agreements or
request the attribution of a power generation licences, under the terms of the Electricity
General Law.
The commercial relationships established under the regime of the PES are
therefore regulated, with contractual terms and sale prices administratively set, as
opposed to relations with non-tied agents, whose contractual terms and prices can be
freely established by the parties. It should be noted that any tied customer who wishes to
migrate to the non-tied electric system is allowed to do so.
II REGULATION
i
The regulators
The IRSE, created by Decree No. 4/02 of 12 March, is the Angolan regulatory authority
in the electricity sector, a public institute with management, administrative and financial
independence, responsible for regulating the activities of generation, transmission,
distribution and sale of electricity in the PES.
The IRSE is, inter alia, in charge of regulating the business relationship between
agents included in the PES and between the PES and non-tied agents, and the
specification of tariffs and of revenue transfer models between different players in the
electricity industry, as well as the performance of duties related to national arbitration
and the composition of interests of different stakeholders of the industry.
The Oil Derivatives Regulating Institute (IRDP), created by Presidential Decree
No. 133/13 of 5 September, is the Angolan regulatory authority with management,
administrative and financial independence, responsible for regulating the activities of the
oil-derived products sector.
The IRDP is, inter alia, responsible for defending the consumers rights and
interests in matters of price, services and quality of service, fostering competition
among industry players, ensuring fairness and transparency of commercial relations,
monitoring compliance with public service obligations, performing duties related to
national arbitration and proposing public policies to the executive power regarding the
oil-derived products industry.
ii
Exploration for and production of oil and gas

Exploration and production activities related to oil and natural gas in Angola are governed
by Law No. 10/04 of 12 November.
The right to produce and explore for oil or natural gas is granted by concession
agreement, generally preceded by a public tender procedure.7
Decree No. 48/04 of 1 September governs the Rules and Procedures for Public Tenders in the
Oil Sector.
21
Angola
The concession for exploration and production, after the public tender procedure,
is granted by concession decree, issued by the Angolan government, attributing to the
national concessionaire Sonangol8 the right to develop a specific oil concession.
All successful companies that wish to explore for and produce oil or natural gas
in Angola have to form an association with Sonangol in one of three possible ways:
incorporation of a joint company, a consortium agreement or a production sharing
agreement. The concession agreement must subsequently be signed by the parties within
30 days of the publication of the concession decree.
Companies that wish to undertake preliminary exploration and prospection works
may do so by applying to the Ministry responsible for oil exploration and production
matters for the grant of a prospection licence. After hearing the national concessionaire,
the said Minister decides on the request and grants the licence by executive decree.
Refining, storage, transportation and markets of oil derived products
The construction, exploration, capacity transformation, licence renewal and any activity
that affects the safety condition of (1) oil refining facilities, (2) storage structures,
(3) transportation via pipelines, (4) oversight of the oil-derived products system, or
the (5) functioning of the oil-derived products wholesale and retail markets are subject
to licensing procedures set out in accordance with Presidential Decree No. 132/13 of
5 November.
The activities mentioned in (2), (3) and (4) above are classified as activities of
strategic interest for the country and are subject to public service concession agreements,
which are granted after completion of a tender procedure, except when such concessions
are attributed to entities controlled by the state.
Oil refining is authorised by the grant of a licence and is developed under market
conditions, except for the case of the Refinaria de Luanda, which is a refinery that
operates under a special regime.
Construction of electric facilities
The construction of electric facilities9 is subject to the licensing procedures prescribed
in Decree No. 41/04 of 2 July, the Regulation for the Licensing and Security of Electric
Facilities.
Under this Regulation, any entity interested in developing new electric facilities
is required to obtain an establishment licence (which grants the authorisation for the
construction of the facility) and, subsequently, an exploration licence, which grants the
necessary authorisation to start operating the facility.
The request for these licences is made to the licensing entity (which is the
competent entity, within the Ministry responsible for the energy sector,10 to conduct the
8
9
10
Sociedade Nacional de Combustveis de Angola, EP, the exclusive concessionaire for mining
rights in Angola.
Meaning generation, transmission or distribution facilities.
At the present, the Ministry of Energy and Water.
22
Angola
licensing process), enclosing the respective project and all other elements necessary to
understand the project as a whole.
The licensing entity may impose any modifications it deems essential to ensure
the safety of the population and assets as well as complying with the applicable security
regulations. In certain situations, the project may be subject to various consultation
procedures, namely with affected populations or official departments in charge of
activities that are affected by the project in question.
After all the foregoing formalities are successfully concluded, an establishment
licence is granted after the payment of the fee, allowing the commencement of
construction. Usually, the project developer is obliged to finish the construction works
within two years of the establishment licence being granted, although this may be
extended depending on the circumstances.
Following the completion of the construction works, the project developer should
request an inspection to ensure compliance of the facility with all applicable rules. If it
complies, the exploration licence is granted (no later than 15 days after the inspection)
and the facility may enter into operation.
In certain cases mostly construction of small facilities that do not interfere
with public domain terrains or assets there may be an exemption from obtaining the
establishment licence, or both the establishment and exploration licences.
Authorisation to develop generation, transmission or distribution activities
The authorisation to develop generation, transmission or distribution activities is granted
through concession agreements,11 entered into with the Angolan government, or through
licences granted by the local authority, depending on the circumstances.
Concession agreements
The attribution of concession agreements is made after a public tender procedure and the
concession has a maximum of 50 years, determined on a case-by-case basis. At the request
of the concessionaire, the concession agreement may be renewed, if such renovation is
of public interest. At the term of the concession agreement, all assets that integrate the
concession shall become property of the state.
Licences
Licences regulate the activities of public supply to isolated localities (not included in the
concession areas) of self-generation and of private supply. Licences are attributed by the
local authorities within their jurisdiction areas, authorising the generation, transmission
11
The concession agreements are signed and approved by the Council of Ministers. Although
the law grants the Council of Ministers the power to approve the concession agreements,
considering the governmental structure established by the Constitution of 2010, the Council
of Ministers ceased to develop executive functions, thus becoming a mere advisory body. As
such, given the concentration of executive powers operated in 2010, it is presumed that such
competence now rests with the holder of the executive power.
23
Angola
and distribution under a public service regime. Licences are attributed for each facility
and any entity may hold several licences, regardless of its category or nature.
Generation
As previously noted, the right to develop generation activities is granted either by
concession agreement or the attribution of a generation licence, depending on the
circumstances, without prejudice to the obtainment of the foregoing establishment and
exploration licences.
The producers tied to the PES hold concession agreements or licences for power
generation and must comply with public service obligations. Thus, the electric power
generated by the tied producers is earmarked to supply the PES. As compensation for such
obligation, these producers are entitled to receive a fair price12 for the sale of the electric
power they generate, established in the PPAs entered into with the NTN concessionaire.
Alternatively, non-tied producers hold concession agreements or licences for
the generation of electric power, but are exempt from public service obligations, and
therefore free to dispose their electric power by entering into bilateral agreements, with
terms and conditions set by the parties.
The integration of new generation plants by tied producers into the PES depends
upon the generation needs of the country, provided in the Electric System Expansion
Director Plan, in accordance with the National Energetic Plan. If the generation plant
uses public domain water resources, the project developer must also obtain the correct
authorisation for the use of public domain resources.
The granting of the right to explore a generation plant via concession agreement
is made through a public tender process.
The contractual position on a concession agreement may be assigned to third
parties, but it is subject to the IRSEs opinion and dependent upon authorisation by the
Ministers Council.
Licences for the development of generation activities are granted by local
authorities to entities who ensure supply to isolated localities, whose power needs are
equal to or under 1MW, as well as to those who generate power under a self-generation
or private supply regime and that provide power to the PES (and therefore need to obtain
a generation licence). Such licences are valid for a minimum of 15 years.
In order to obtain a generation licence, a request must be submitted to the local
authority, which shall request the opinion of the Energy and Water Ministry. In turn,
the Energy and Water Ministry must request the opinion of several official bodies that
may be involved or affected by the project. These opinions must be submitted to the local
authorities within 90 days.13 Upon receipt of such opinions, within 60 days, the local
authority must attribute a provisional generation licence, and the project developer then
has 180 days in which to obtain the establishment licence from the Energy and Water
Ministry.
12
13
Considering an adequate return on the investment made.

Or 120 days, in case of a hydropower generation unit.
24
Angola
Distribution
Similarly to generation of electric power, distribution activities are authorised via
concession agreements, entered into with the state, or a licence, granted by local
authorities.
In general terms, the authorisation to operate HV and MV distribution networks
is granted via concession agreements and distribution in LV networks is authorised by
granting of a licence.14
iii
Ownership and market access restrictions
Oil and gas

As previously mentioned, companies who wish to develop exploration and production
activities must do so in association with the Sonangol in one of three ways: incorporation
of a joint company, consortium agreement or production sharing agreement. Only
commercial companies may become associates of Sonangol, and if such association is
made via incorporation of a joint company, or via consortium agreement, Sonangol is
legally required to hold an equity participation greater than 50 per cent.15
Companies that intend to dedicate their activities to oil refining, storage and
transportation of oil-derived products, oversight of the oil-derived products system, or
that wish to operate in the wholesale or retail markets of oil-derived products must be
controlled16 by Angolan citizens. Furthermore, oil refining, storage and transportation of
oil-derived products (activities subject to the attribution of concession agreements) must
be developed by companies with management and headquarters effectively established
in Angola, must have the said activities as their primary scope of business, and must
demonstrate they possess the technical and financial capacity to develop such activities.
Electricity
Concessions and licences for generation, transmission and distribution activities may
only be granted to legal persons, private or public, and the development of new electric
facilities is dependent upon the attribution of the aforementioned establishment and
exploration licences.
Companies that develop generation, transmission or distribution activities
authorised by licence are allowed to hold several licences, regardless of their category or
14
15
16
Except for localities with more than 50,000 inhabitants or networks with a maximum peak
power required by the system equal or greater than 4MW, in which cases the right is attributed
via concession agreement, under the terms of Article 5 of the Electric Power Distribution
Regulation (Decree No. 45/01 of 13 July).
In duly justified situations, the government may authorise Sonangol to hold a smaller equity
participation.
In accordance with Presidential Decree No. 132/13 of 5 September, control means owning at
least 51 per cent of the companys share capital, hold the more than half the voting rights, being
able to appoint more than half the members of the board of directors and having the power to
set operational and strategic policies of the company.
25
Angola
nature. Consequently, there are no impediments to the development of such activities by
vertically integrated companies.
The Angolan state is legally required to hold a majority equity participation in the
share capital of the concessionaire of the NTN, or a veto right.
iv
Transfers of control and assignments
Oil and gas

The assignment of a contractual position in the exploration and production concession
agreement requires the prior authorisation of the Minister responsible for the exploration
and production of oil matters, provided that the transferee is of proven competence,
and technical and financial capability, unless the assignment is made between subsidiary
companies of the transferor.
In the event such assignment is authorised, Sonangol has a right of pre-emption.
If Sonangol does not exercise this right, Angolan companies that are party to other
concession agreements at the time of the transfer are entitled to exercise such preemption right.
The concessionaires of oil refining, storage and transportation of oil-derived
products activities cannot transfer or encumber the assets pertaining to the concession,
such acts being subject to prior authorisation of the grantor.
Electricity
Subject to prior authorisation by the Ministers Council, concessionaires for generation,
transmission or distribution activities may assign, sell or encumber their contractual
positions to third parties. Licensees may also transfer their licences to third parties,
provided that the licensing entity agrees to such transfer and the requirements that
determined its attribution are fulfilled at the time of the transfer.
III
TRANSMISSION/TRANSPORTATION AND DISTRIBUTION

SERVICES
Vertical integration and unbundling
As previously noted, the energy industry in Angola is strongly dominated by the presence
of public companies.
Oil and gas
In the oil and gas industries Sonangol is party to every exploration and production
agreement made with foreign companies, being responsible for the technical management
of such agreements in order to maximise both the state and the companys interests.
Sonangol Group, through its multiple subsidiaries, operates as a vertically
integrated company that has its main activities concentrated in all phases of the oil chain
of business. Its activities include exploration, production, development, marketing,
transportation and refining of hydrocarbons and its derivatives. Those activities can be
performed independently or in association with other companies, national or foreign.
The activity of oil-derived products storage and transportation is now subject to
a functional and accounting unbundling regime.
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Angola
The activity of overseeing the oil-derived products system17 is subject to a legal
unbundling regime.
The exploration, evaluation and development of natural gas reserves are the
responsibility of Sonagas, a subsidiary of Sonangol Group. Sonagas create joint ventures
with partners with financial capability, expertise and willingness to contribute to the
development of the natural gas industry in Angola.
In 2007, an agreement was made to develop the Angola LNG Project,18 where
Sonagas is a partner. Angola LNG operates one of the worlds most advanced liquefied
natural gas (LNG) processing facilities in Soyo, in Zaire province, under a consortium of
companies which includes Sonangol (22.8 per cent), and subsidiaries of Chevron (36.4
per cent), Total (13.6 per cent), BP (13.6 per cent), and ENI (13.6 per cent).
Electricity
In the electricity industry, the main public players are ENE EP,19 the state-owned power
company responsible for generation, transmission and distribution of electricity in
Angolas three main grids and a number of isolated systems, operating in 15 of Angolas
18 provinces, and EDEL EP,20 the state-owned power distributor in Luanda, accounting
for 70 per cent of the countrys electric power consumption.
Access to electricity is an essential feature to fuelling economic growth and one
that has been missing in Angola. Bearing this in mind, the government and ENE are
combining their efforts to improve and expand the countrys power grid.
In the Policy and Strategy for the National Energetic Security, the government
has approved an ambitious reform plan for the electricity sector, which foresees provision
of access to electricity for between 50 and 60 per cent of the population by 2025.21 As
part of the reform, the government plans to reorganise the public companies within the
sector, separating out the public companies monopoly and establishing the following
organisation:
a
a public company exclusively dedicated to the management of generation assets,
resulting from the merger of ENE and GAMEK;
b
a public company dedicated to the transmission of electricity in ultra-high and
HV networks and to the management of the national electricity system; and
c
a public company dedicated to the distribution of electricity, resulting from the
merger of the distribution assets of ENE EP, EDEL EP and the municipalities.
17
18
19
20
21
Currently developed by Sonangol Logstica, EP.

More information about this project can be found at www.angolalng.com/project/default.htm.
Empresa Nacional de Electricidade de Angola, incorporated by Decree No. 29/98 of
4 September. Being the national power company, ENE EP is a fully vertically integrated
electricity company.
Empresa de Distribuio de Eletricidade, incorporated by Decree No. 33/99 of 11 November.
EDEL, EPs main attributions are the distribution and supply of electricity, although being
authorised to develop electricity generation activities. More information at www.edel.co.ao.
Today, only around 30 per cent of the Angolan population has access to electricity.
27
Angola
This restructuring model accommodates the creation of a national holding company,
owning the aforementioned three companies.
The government estimates that the execution of the restructuring programme for
the electricity industry in Angola will require an investment of US$13 billion by 2025.
Consequently, the electricity sector will gradually open up to competition, and private
investors will be welcomed.
ii
Transmission/transportation and distribution access
Oil and gas

Under the Law for the Transport and Storage of Oil and Natural Gas,22 operators of oil
and gas pipelines have an exclusive right to explore these infrastructures.
The operators are prohibited from adopting discriminatory behaviour, unless
such discrimination is justified due to technical conditions.
Electricity
Concession agreements and the licences attribute to the concessionaires or the licensees
the exclusive right to explore and operate the transmission and distribution networks.
Under the Networks Access Regulation, the NTN concessionaire and the tied
distribution operators of HV and MV networks are obliged to provide equal access
conditions to third parties.
The Networks Access Regulation acknowledges the network access rights of:
a
entities that are tied to the PES and hold concession agreements or licence
authorisation to generate electric power under the terms of the Electric Power
Generation Regulation;
b
entities who are not tied to the PES and hold a concession agreement or a licence
to generate electric power;
c
tied customers under the terms of the Electric Power Supply Regulation;
d
non-tied customers recognised as such under the Commercial Relations
Regulation; and
e
self-producers or producers for private supply who intend to exercise their right
of providing electric power through access to PES networks, as well as the entities
that are supplied by these.
The commercial relations regarding networks access are governed by written agreements,
valid for a period of one year, and its general terms are approved by the IRSE.
According to the Commercial Relations Regulation, the NTN concessionaire is
responsible for operating and maintaining the NTN, managing the national electric
system and acting as a commercial agent.23 Also, the commercial relations between nontied agents and the PES are centralised in the NTN concessionaire.
22
23
Enacted by Law No. 26/12 of 22 August.

The commercial agent is the part of the NTN concessionaire that ensures supply and the
optimisation of the PES, managing the PPAs with tied producers and distributors, among other
duties.
28
Angola
For the purpose of avoiding discriminatory behaviours and ensuring transparency,
the NTN concessionaire must separate, in terms of organisation and accounting, the
three aforementioned activities.
iii
Terminalling, processing and treatment
Angola has great potential for natural gas production, with proven reserves of 270,000
million cubic metres (with some estimates indicating resources of over 1.2 billion cubic
metres), and intends to develop this industry aiming for the exportation markets.
Investment, however, has been limited (the main investment in the industry is
the Angola LNG project),24 mainly due to great legal and regulatory uncertainty.25 To
address these uncertainties, Presidential Decree No. 256/11 of 29 September sets the
development of such legal and regulatory framework of these activities as a primary goal
for the strategic orientation of the oil and natural gas industries.
Recent developments have been made with the publication in 2012 of the Law
for the Transport and Storage of Oil and Natural Gas. It is a first step, but the natural gas
industry is in great need of regulatory progress that attributes certainty and clarity to the
development of activities such as terminalling, processing and treatment of natural gas,
as well as access conditions by third parties to LNG facilities.
iv Rates
Rates for transmission and distribution of electricity are established in accordance with
the Tariffs Regulation,26 put into force by the IRSE. Rates are uniform for the entire
country, the application of different tariffs being prohibited for customers in the same
tariff category. The IRSE sets the maximum tariffs and hence the maximum prices for the
provision of transmission or distribution services.
Tariffs are based upon the providers costs plus a reasonable rate of return, resulting
in the allowed revenues of the network operators. The rate of return of the transmission
and distribution companies is calculated using the weighted average capital cost/capital
asset pricing model (WACC/CAPM) methodology.
The calculation of the allowed revenues of NTN transmission concessionaires
includes:
a
efficient investment costs;
b
efficient operation and maintenance costs;
c
other costs necessary to efficiently develop the transmission activity; and
d
a fair rate of return over the investments.
Investments made on network expansion projects are remunerated in accordance with
the aforementioned methodology.
24
25
26
More information available at www.angolalng.com.

An example is the fact that there is as yet no concession model specific to natural gas exploration
and production.
Presidential Decree No. 4/11 of 6 January.
29
Angola
For distribution services, remuneration is set through a distinction between the
rate of return of the distributors activity, via the HV, MV and LV networks, and the rate
of return of the investment costs and the costs for the connection of consumers facilities
to the grid. The first is called the aggregated value of standard distribution (AVSD), while
the second is called the connection fee.
The AVSD is set for a certain number of standard distribution areas, distinguished
by several variables such as consumption per unit area, consumption per capita, number
of consumers per unit area or the facilities age, which justify differences on the efficient
costs of the distribution activity.
The AVSD is composed of operational costs, calculated in respect of a reference
company for each standard distribution area, and a fair rate of return on efficient
investments. Operational costs should consider, inter alia, commercial, distribution,
administrative, financial and management activities.
The unitary cost of investment in the distribution network is calculated from the
annuity of the capital cost corresponding to the new value of replacement of the existing
network. The annuity is calculated considering a useful lifetime of the distribution
facilities of 30 years.
v
Security and technology restrictions
The NTN concessionaire, in its capacity as system operator and manager, is responsible
for ensuring the continuous and safe operation of the NES. As such, it is responsible for
constantly evaluating the security level of the grid and declaring, in extreme situations,
a situation of absolute shortage of power. The NTN concessionaire is also tasked with
the responsibility of elaborating a security plan, establishing the necessary preventive
measures to avoid incidents that may disrupt the provision of electric power to customers.
Under Article 6 of the Electricity General Law, concessionaires or licensees of
generation, transmission or distribution activities must ensure, at their own expense, that
their facilities are protected against sabotage or acts of war.
In a state of emergency, the state assumes the responsibility for the supply of electricity
to the PES. In addition, in these situations the state may tie independent producers to the
PES, without prejudice to the right of compensation of the affected entities.
Retail suppliers of oil-derived products are obliged to maintain safety reserves in
accordance with the law.
IV
ENERGY MARKETS
Contracts for sale of energy
As previously mentioned, only non-tied agents use a market-based approach. Accordingly,

the Commercial Relations Regulation allows the establishment of physical bilateral
agreements for the sale and purchase of electric power, with their terms and conditions
freely defined by the parties.
These agreements may be for long or short-term periods, short-term meaning less
than one year.
30
Angola
ii
Energy market rules and regulation
Only the entity in charge of overseeing the oil-derived products market (Sonangol
Logstica) is entitled to import oil-derived products to the Angolan market. Said entity
shall preferentially buy its oil-derived products from Refinaria de Luanda (a refinery
operating under a special regime). In addition, the entity in charge of overseeing the
oil-derived products market is committed with the role of last resort supplier of oilderived products, thus having the obligation to provide oil-derived products to the retail
suppliers at the price administratively set by the IRDP.
The retail suppliers of oil-derived products must ensure their supply by entering
into bilateral agreements either with the oil refineries operators under the market regime,
or with the entity in charge of overseeing the oil-derived products market.
V
The Angolan government considers renewable energies to be a key element in the

development of the countrys electric system, particularly in rural areas. The country has
high potential in terms of renewable resources, mainly in terms of hydro and solar power.
Solar power will play an important role in providing electricity to rural areas, while large
hydropower projects are intended to be connected to the NTN supplying the PES. The
country is also undertaking a wind power study to ascertain the potential of this energy
source.
The electric power industry in Angola is urgently in need of major financial
investment in the area of power generation. As a result, Angola is now seeking to create
attractive conditions for private investors to participate in the development of the electric
power industry.
In order to ensure attractive remuneration to private investors (without
compromising the cost-efficiency for the government and customers) the government
is taking into account the utilisation of PPAs as a privileged instrument to capture
investment into new large-scale generation units (over 10MW), and as a mechanism
that guarantees an adequate return on the investment made and ensures its long-term
amortisation.
In addition, Angola is ever-more inclined towards establishing public-private
partnerships (PPPs) with interested investors, allowing public companies to improve their
skills and expertise, and favouring the creation of long-lasting commercial relationships
with such investors.
For smaller projects, the use of feed-in tariffs will be the main mechanism of
remuneration for generation capacity in isolated systems (under 10MW).
Presidential Decree No. 88/13 of 14 June recently established the Strategic Plan for
New Environmental Technologies, which is divided into two perspectives, a transversal
and a sectorial perspective. The governmental body in charge of implementing such
project is the General Directorate for Environmental Technologies.
The transversal perspective aims essentially to promote, disseminate, foster and
raise the population awareness towards the use of environmental technologies in Angola,
mainly by (1) developing information campaigns using the existent social media, (2)
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Angola
implementing information campaigns in schools and local communities, (3) creating
a platform to share information between entities related with the environmental
technologies industries, and (4) promoting the countrys adherence to an international
sustainability index.
The sectorial perspective focuses on promoting and implementing tailored
measures and actions by economic sector, including specific programmes for the following
sectors: (1) real estate and construction, (2) agriculture and forestry, (3) industry, (4)
energy and water, (5) oil and (6) transportation.
The government has allocated around 224 million kwanzas to complete the
Strategic Plan for New Environmental Technologies.
ii
Technological developments
During the past year the government was committed to successfully complete a pilot
project for solar power villages the Aldeia Solar de Cabiri. This project is being financed
by Sonangol, which invested around US$30 million, and aims to test a solar village
concept that could be implemented throughout the country, especially in rural areas.
By the end of 2013, the Angolan authorities had foreseen that the construction of
the first wind farm in Angola would begin in the near future, after the wind studies were
completed. Located in the municipality of Tmbwa, the wind farm will be developed
under a PPP regime and will add 100MW to the countrys installed capacity.
The government approved a series of agreements regarding the construction and
development of generation, transportation and distribution of electric power, namely a
generation project in the city of Malanje27 and the construction of transportation grids
between Cambambe-Catete and Cambambe-Gabela.28
ZTE Corporation, a Chinese company, will provide smart meter solutions
to EDEL EP, the distribution network operator in Luanda, including equipment,
construction, personnel training, and operations and maintenance.
This project is intended to solve difficulties such as bill arrears, inefficient manual
meter reading and electricity theft, and to improve EDELs management efficiency, while
reducing its operation and maintenance costs.
VI
THE YEAR IN REVIEW
2012 began with one of the worlds most promising oil discoveries, a major deep-water
oil find by Cobalt International Energy.
The development of the pre-salt oil in Angola has generated great interest
among the industrys major players. By the end of 2011 some of the worlds biggest oil
companies including BP, Statoil, Total, Repsol, Eni and ConocoPhillips established
rights to 11 offshore blocks close to Cobalts discovery. These offshore blocks lie in the
Kwanza basin, which many believe has a similar profile to that of the Santos and Campos
basins in Brazil, where two of the largest oil finds have been made in recent decades: the
27
28
Approved by Presidential Order No. 57/13 of 26 June.

Approved by Presidential Order No. 49/13 of 15 May.
32
Angola
Tupi and Libra fields. Cobalts offshore discovery, and another discovery by Maersk Oil,
led analysts to quadruple their estimates of the onshore areas potential, although some
experts say it too soon to draw such conclusions.
Nonetheless, the pre-salt layer in Angola and its deep-water oilfields are generating
exciting prospects for the countrys oil industry, and many players in the sector have paid
an extraordinarily high signing bonus to secure the respective exploration rights. Angola,
now the second-largest oil producer in Africa, may at some point come to rival Nigeria
as Africas top producer.
After winning the elections held on 31 August 2012, the Popular Movement
for the Liberation of Angola was re-elected and Jos Eduardo dos Santos was assured of
another term. As such, it is expected that Angolas course of action will remain the same
as has been adopted in recent years.
2013 marked a decade of peace in Angola, which has transformed the country
in terms of modernisation. Its infrastructure is developing steadily, living conditions are
improving and the economy continues to grow. In fact, by 2013 the country had already
achieved its 2015 Millennium Development Goals.
In September, Sonangol announced a new round of bids for the oil exploration
and production rights on the onshore areas of the Lower Congo and Kwanza basins.
The first LNG cargo was shipped from the Angola LNG Project to Brazil, where
it safely harboured, thus completing the first LNG cargo shipping operated by such
facilities.
By the end of the year, Cobalt International Energy announced another promising
oil discovery, a major deep-water well Lontra well that is estimated to contain from
700 million to 1.1 billion barrels of oil equivalent. It is the companys third recent presalt discovery in the Kwanza pre-salt basin.
VII
CONCLUSIONS AND OUTLOOK
Angola is struggling to rebuild its infrastructure, and rise from the wreckage of its civil
war. Since 2002, it has managed to increase generation capacity, improve operational
capability and progressively rehabilitate and maintain the countrys electric power grids.
Nonetheless, productive ability is still unable to sustain existing demand and the service
is generally unreliable. Poor access and unpredictable power is also a consequence of the
fragmented nature of Angolas power system. The three main Angolan grids the north,
south and central systems are not interconnected (which would free up excess power
from the north to the central and south systems).
The electricity tariffs structure also needs revising. The current tariffs structure does
not allow public companies to cover their costs and finance the necessary investments,
but subsidies need to start being cut from supply prices.
The problem is exacerbated by the high level of commercial losses due to the
inefficiency of the transmission and distribution networks, unbilled consumption or
fraudulent connections, which lead to serious financial constraints from these companies.
In this context, Angola has committed to reforming the legal framework for energyrelated activities and restructuring of the companies in these industries, welcoming new
private players that may provide valuable expertise, along with a new financial stimulus.
33
Angola
The country has all the conditions to create a sustainable and prosperous energy
industry. Its economy is steadily growing and the country is rich in natural resources.
Now, it needs to create attractive conditions for new investors, and a business environment
that inspires trust and security in its players.
34
Chapter 3
AUSTRALIA
Mark Carkeet, Andrew Brookes and Darshini Nanthakumar1
I OVERVIEW
Australia is a federation of six states. Legal and political power is divided between
the federal government and the state governments in accordance with the Federal
Constitution.2
The Federal Constitution confers power on the federal parliament to legislate for
specific matters,3 while the states retain the power to legislate for other matters.
Each Australian state and territory has the power to make laws with respect to its
electricity and gas industries. Consequently, the regulation of each state and territorys
electricity and gas industries originally developed separately. Historically, each state
and territory operated a vertically integrated electricity industry under government
ownership and control. Major reforms in Australias electricity markets since the 1990s
have radically altered this model as the states and territories have, to varying degrees,
restructured and privatised their electricity industries.
Queensland, NSW, Victoria, Tasmania and South Australia and the ACT are part
of a single interconnected National Electricity Market (NEM), which began operating in
1998 and is governed by a largely consistent legal and regulatory framework within the
participating jurisdictions. The NEM is a wholesale market for the supply and purchase
1
2
Mark Carkeet is a partner and Andrew Brookes and Darshini Nanthakumar are senior associates
at Minter Ellison.
The six states forming the federation are Queensland, New South Wales (NSW), Victoria,
Tasmania, South Australia and Western Australia. The federal government created the
Australian Capital Territory (ACT) and the Northern Territory as politically autonomous
legislatures under its legal control.
These include taxation, external affairs, foreign, trading and financial corporations, foreign
investment, the banking and monetary system, and interstate and overseas trade.
35
Australia
of electricity combined with an access regime to enable connection to the transmission
and distribution networks in the participating jurisdictions. The electricity networks
making up the NEM stretch more than 45,000 kilometres from Cairns in Queensland
to Port Lincoln in South Australia and Hobart in Tasmania. Coal has historically been
the dominant fuel used for electricity generation in Australia. Currently, approximately
75 per cent of generation output in the NEM is coal-fired.4
The key features of the NEM are as follows:
a
electricity is predominantly traded through a centralised pool (spot market).
Generators bid to supply electricity at prices of their choice and are dispatched in
increasing bid price order; the price they receive is the pool clearing price for each
30-minute trading interval;
b
wholesale purchasers buy their electricity requirements from the pool; and
c
charges for use of network assets are separate from the pool price for electricity
paid to generators.
The Australian natural gas industry is in a period of transformation, marked by two
defining (and related) developments: the growth of the coal seam gas (CSG) industry,
and Australias emergence as a major exporter of liquefied natural gas (LNG).
Australias natural gas reserves are linked to major domestic markets by over
25,000 kilometres of high-pressure pipelines. The gas distribution system comprises over
80,000 kilometres of local reticulated pipelines. A wholesale gas trading market exists in
Victoria and a short-term gas trading market operates in each of Sydney, Adelaide and
Brisbane.
A series of legislative reforms has left a significant imprint on the shape of the
Australian energy sector. The national, broad-based carbon pricing mechanism (CPM)
which commenced on 1 July 2012, together with escalating renewable energy mandates
under the federal renewable energy target (RET), was thought to have the potential
to significantly change the competitive dynamics of the electricity generation and
other energy markets in the years ahead. However, the new federal Liberal-National
government, elected in September 2013, has pledged to repeal the CPM and replace it
with a direct action emissions reduction policy. If implemented, these policy changes are
likely to once again cause a change to the dynamics of the market.5
Meanwhile, the ongoing energy market reform agenda has continued to
be advanced through incremental changes, generally in the direction of increased
competition, privatisation and greater centralisation or inter-jurisdictional harmonisation
of regulatory arrangements.
4
5
Australian Energy Regulator, State of the Energy Market 2013, December 2013, available at
www.aer.gov.au/node/23147.
Liberal Party of Australia, The Coalitions plan to abolish the carbon tax, www.liberal.org.au/
our-plan-abolish-carbon-tax.
36
Australia
II REGULATION
i
The regulators
The key energy regulator in Australia is the Australian Energy Regulator (AER).6
The AER is responsible for the economic regulation of electricity transmission and
distribution networks and for enforcing gas and electricity laws and rules in the NEM
jurisdictions (Queensland, NSW, the ACT, Victoria, South Australia and Tasmania) and
for regulating gas pipelines in jurisdictions other than Western Australia and Tasmania.
The AER is a part of the Australian Competition and Consumer Commission
(ACCC),7 but it operates separately. The ACCC is responsible for administering the
Competition and Consumer Act 2010 (Cth) (CCA) and ensuring compliance with
Australias competition, fair trading and consumer protection laws.
Responsibility for electricity distribution pricing and access to distribution
networks was transferred from the states and territories to the AER from 1 January 2008.
Western Australia and the Northern Territory continue to regulate their own distribution
networks as they are not jurisdictions that participate in the NEM. Each state and
territory regulates technical and safety matters in respect of the electricity industry and
retains electricity rationing powers.
The regulator for Western Australia is the Economic Regulation Authority (ERA).8
The ERA regulates monopoly aspects of the gas, electricity and rail industries and is
responsible for providing licences to providers of gas, electricity and water services in
Western Australia. The regulator for the Northern Territory is the Utilities Commission
of the Northern Territory.9
Other key energy regulators and bodies in Australia include:
a
the Australian Energy Market Commission (AEMC), which is responsible for
rulemaking in relation to the economic regulation of electricity distribution
network services, gas transmission and distribution services, access to natural gas
pipeline services and other elements of broader natural gas markets, and electricity
and gas market rulemaking;
b
the Standing Council on Energy and Resources (SCER), which replaced the
Ministerial Council on Energy10 in February 2011;
c
the Australian Energy Market Operator (AEMO),11 which is a single, industryfunded, national electricity and gas market operator and network planner. Its
role includes management of the NEM and the retail and wholesale gas markets
in Victoria, NSW, the ACT, Queensland and South Australia, and overseeing
6 www.aer.gov.au.
7 www.accc.gov.au.
8 www.erawa.com.au.
9 www.nt.gov.au/ntt/utilicom/electricity/.
10
The SCER replaced the Ministerial Council on Energy and comprises federal, state and territory
energy ministers and acts as the national policy and governance body for electricity and gas.
11 www.aemo.com.au.
37
Australia
d
e
system security of the NEM electricity grid and the Victorian gas transmission
network;
the National Competition Council (NCC),12 which makes recommendations to
relevant government ministers on the coverage of natural gas pipeline systems;
and
the Clean Energy Regulator, which is responsible for administering a number of
climate change and clean energy laws, including the CPM and the RET.
Separate regulators also exist in each state and territory for generation and electricity and
gas retail licensing (although this is undergoing changes see discussion of the National
Energy Customer Framework (NECF) below):
a
in NSW, the Independent Pricing and Regulatory Tribunal;13
b
in Victoria, the Essential Services Commission;14
c
in the Northern Territory, the Utilities Commission of the Northern Territory;
d
in Western Australia, the ERA;
e
in Tasmania, the Economic Regulator;15
f
in Queensland, the Director-General of the Department of Employment,
Economic Development and Innovation;16
g
in South Australia, the Essential Services Commission of South Australia;17 and
h
in the ACT, the Independent Competition and Regulatory Commission.18
Legal framework
The legal framework in Australia for the regulation of both electricity and gas industries
consists of:
a
the National Electricity Law (NEL) and National Gas Law (NGL) in participating
jurisdictions;
b
legislation of each state and territory;
c
the National Energy Retail Law;
d
legislative instruments, including the National Electricity Rules (NER) and the
National Gas Rules (NGR);
e
regulations under the NEL and NGL, limited to minor processes and procedural
matters in the NEL and NGL and the prescription of civil penalties; and
f
statements of policy and principle from regulators, subject to the procedures set
out in the NEL and NGL.
12 www.ncc.gov.au.
13 www.ipart.nsw.gov.au.
14 www.esc.vic.gov.au.
15 www.economicregulator.tas.gov.au.
16 www.business.qld.gov.au.
17 www.escosa.sa.gov.au.
18 www.icrc.act.gov.au.
38
Australia
The NEL is contained in a schedule to the National Electricity (South Australia) Act
1996 (SA). The NEL is applied as law in each participating jurisdiction of the NEM by
application statutes.
The NGL is contained in a schedule to the National Gas (South Australia) Act
2008 (SA). An application statute for each participating jurisdiction governs the extent
to which the national gas legislation and national electricity legislation applies in that
jurisdiction. To date, the NGL and NEL have been adopted, in various forms, in each
Australian state and territory.
ii
Electricity
A person is prohibited from conducting the following activities unless that person is a
registered participant with AEMO:
a
owning, controlling or operating a generating system connected to the NEM;
b
owning, controlling or operating a transmission system or distribution system
that forms part of the NEM;
c
operating or administering a wholesale exchange for electricity; or
d
purchasing electricity directly through a wholesale exchange.
By registering with AEMO, a person becomes bound to comply with the NER.
NEM participants may also enter into financial hedge contracts (contracts for
differences) to manage their exposure to pool price fluctuations. These contracts operate
independently of the NEM, establishing a set price for electricity that will be obtained or
consumed at a particular time. While not regulated by the NEM, these contracts may be
subject to other requirements, such as financial services licensing.
In addition to the requirements of the NER, each state and territory currently
has its own licensing regime for electricity industry participants, such that participants
require a licence to generate, transmit, distribute or supply electricity in each state and
territory. Applicants are generally required to show they are a fit and proper person to
hold the licence, that they are in a position to meet the applicable financial and prudential
requirements, and that they have the requisite technical and operational capacity to
undertake the activities permitted under the licence. This means that electricity entities
participating in the NEM have to register as NEM participants under the NER and also
obtain any requisite electricity licence under the relevant state or territory legislation.
State and territory regulation of retail licensing is undergoing a standardisation
process through the ongoing implementation of the National Energy Retail Law (NERL)
and Rules, which are administered by the AER. The NERL is part of the NECF and is also
part of the overall trend towards the centralisation of gas and electricity regulation. Under
these laws, retailers will only need one licence to sell electricity in NEM jurisdictions.
The NECF broadly introduces a consistent set of rules in each participating
jurisdiction, but there is still scope for jurisdictional differences on some matters. The
NECF has commenced in New South Wales, South Australia, Australian Capital Territory
and Tasmania. The NECF has not yet been implemented in Victoria and Queensland.
Western Australia and the Northern Territory do not propose to implement the NECF.
39
Australia
Gas
A person is prohibited from engaging in the sale or distribution of gas unless that
person holds a licence or is exempt. As with electricity, licensing for gas is regulated on
a jurisdiction-by-jurisdiction basis. This means, for example, that a gas retailer operating
in Victoria, South Australia, NSW and Queensland must be separately licensed as a
gas retailer in each of those jurisdictions. As with electricity laws, however, state-based
regulation of the gas industry is being standardised under the ongoing implementation
of the NECF, meaning that gas retailers in the national gas market jurisdictions will only
need to hold one licence to operate in each of those jurisdictions.
For onshore and offshore petroleum activities, a person also requires the following
authorisations:
a
an exploration permit in order to carry out petroleum exploration;
b
a production licence in order to produce petroleum from a specified licensed area;
and
c
a licence in order to construct or operate a gas pipeline.
Process
AEMO is responsible for the registration of participants in energy markets operated by
AEMO. These are the markets regulated under the NEL and NGL.
Applicants must also submit their licence applications to the relevant state
regulator where required.
iii
Foreign investment restrictions

Foreign investment in Australia is regulated by the Foreign Acquisitions and Takeovers
Act 1975 (Cth), the regulations under the Act and associated policies and guidelines
(the Foreign Investment Rules), which set out a regime for notifying certain foreign
investment proposals to the Treasurer of the Commonwealth of Australia (the Treasurer).
The Foreign Investment Review Board (FIRB) is a non statutory body established to
advise the Treasurer and the government on the Foreign Investment Rules and their
administration.
Under the Foreign Investment Rules, a foreign person should notify and obtain
prior approval from the FIRB before acquiring a substantial interest in a corporation
or control of an Australian business that is valued above A$248 million. A substantial
interest is deemed to include any interest of 15 per cent or more by a single foreign
person or 40 per cent or more in aggregate by two or more foreign persons in the target
company. The A$248 million threshold only applies to New Zealand investor and United
States investors in certain prescribed sensitive sectors. A$1,078 million threshold applies
to New Zealand and United States investment in other sectors. If a foreign government
investor intends to make an investment or start a new business in Australia, FIRB
notification is required regardless of the monetary value of the proposed transaction.
Once conduct is notified to the FIRB, the FIRB will consider the proposed
conduct but may disallow it if the FIRB determines the investment is against the
Australian national interest, or allow the proposal with certain conditions imposed.
40
Australia
Competition restrictions
The CCA prohibits acquisitions of shares or assets that have the purpose or actual or
likely effect of substantially lessening competition in a market. This applies to both
foreign investment and to the transfer of control or assignment of assets by or to domestic
companies (see below).19
iv
Within the energy industry, merger controls represent a significant barrier to the purchase
of new assets. The ACCC has expressed concerns about the accumulation of market
power by merger in the electricity sector and about the potential anti-competitive effects
of vertical integration in the sector.
The ACCC administers and enforces the merger provisions under the CCA. There
are three main ways a proposed acquisition or merger may be assessed under the CCA:
a
informal clearance the ACCC may give an informal view on whether a
particular proposal is likely to breach the competition provisions of the CCA
and, by implication, whether the ACCC would challenge the proposal;
b
formal clearance the ACCC may grant clearance to a proposal if it is satisfied
that the proposal would not have the effect or likely effect of substantially
lessening competition in a market or markets. Clearance may be conditional or
unconditional; and
c
authorisation by the Australian Competition Tribunal the Australian
Competition Tribunal may grant an authorisation for a proposal if it is satisfied in
all the circumstances that the proposal would result or is likely to result in such a
benefit to the public that the proposal should be allowed to occur even though the
proposal may have the purpose or actual or likely effect of substantially lessening
competition in a market.
Clearance can take up to three months.
III

SERVICES
There has been a trend towards the separation of transmission from the production and
retail sectors, with energy industry operators generally specialising in either network
infrastructure, including transmission, or the non-network areas of production,
generation and retail. This trend has been linked to capital markets and the limited
efficiency benefits of full-scale integration. It also reflects national competition policy
pursued by the Commonwealth, state and territory governments in the 1990s.
19
Additional cross-ownership rules previously applied in Victoria under the Electricity Industry
Act 2000 (Vic) and Gas Industry Act 2001 (Vic), but were repealed by the Energy Legislation
Amendment (Flexible Pricing and Other Matters) Act 2013 (Vic), which received assent on 13
March 2013.
41
Australia
The ACT, South Australia and Tasmania have only one major electricity
distribution network each, and while there are multiple networks in Queensland, NSW
and Victoria, each is a monopoly provider in a particular area.
The distribution and transmission sectors are not generally integrated (except in
Tasmania, where transmission and distribution networks will be merged and operated by
a new integrated network business, TasNetworks, from 1 July 2014). In the ACT, there
is also some common ownership in the distribution and retailing sectors.20 There is a mix
of both government-owned and privately owned distribution or retail businesses, with a
trend to privately owned utilities in all states and territories.
There has been a trend towards vertical integration of generation and retail
activities, a trend sometimes referred to as gentailing. There is an acceptance in the
industry that gentailing enables generators or producers and retailers to manage the
risk of volatile wholesale prices and to enhance security of supply. Gas and electricity are
also increasingly being marketed jointly, with customers being able to obtain dual supply
under a single contract.
ii
Electricity
The NER sets out a regime that enables generators to connect generation equipment
to the national grid. Transmission and distribution network operators are obliged to
connect generators equipment, as long as certain conditions are met. For example, a
generators equipment must meet certain technical standards before it can be connected
to the grid. The network operator is required to consult with AEMO about the technical
requirements of connecting a generators equipment, and any changes to the network
that may need to be made to accommodate that equipment.
Gas
The NGL and NGR set out a coverage process, which determines whether a gas pipeline
should be subject to mandated third-party access arrangement and in what form.
The NCC must recommend that the pipeline be covered if the NCC is satisfied
that the following coverage criteria are met:
a
that access (or increased access) to services provided by the pipeline would promote
a material increase in competition in another market or markets (whether or not
in Australia);
b
that it would not be economical to develop another pipeline to provide the same
services;
c
that access (or increased access) to the services provided by the pipeline can be
provided without undue risk to human health or safety; and
d
that access (or increased access) to the services provided by the pipeline would not
be contrary to the public interest.
20
Australian Energy Regulator, State of the Energy Market 2013, December 2013, available at
www.aer.gov.au/node/23147.
42
Australia
Typically, a pipeline will be covered where a monopoly exists on its particular transmission
route. Since the early 2000s, increased investment in gas transmission pipelines around
Australia has increased competition between pipeline operators, resulting in fewer
pipelines being covered under the law.
Pipelines that are not covered are subject only to the general competition law
provisions of the CCA and third-party access to them is a private matter between the
pipeline owner or operator and the access seeker. Accordingly, operators of uncovered
pipelines may negotiate freely with access seekers without regulatory interference.
Alternatively, a form of light regulation applies in some circumstances with a low level
of regulatory intervention that does not include setting tariffs.
iii
Terminalling/processing and treatment
A range of laws and approval processes potentially apply to projects for the development
of oil and gas facilities, including LNG projects. For example, state and territory (and
in some case federal) environmental impact assessment or approval processes generally
apply. The precise nature of the obligation depends on the jurisdiction in which the
facilities are to be located.
Western Australia has a policy under which LNG producers are required, as a
condition of project approval, to make gas available for domestic use, equivalent to
15 per cent of production from the LNG project, and to develop or obtain access to
infrastructure necessary to meet these domestic supply obligations.21
iv Rates
Electricity
Regulated transmission businesses must periodically submit revenue proposals, together
with a proposed pricing methodology and negotiating framework, to the AER (typically,
every five years). The pricing methodology is a formula for the business to allocate its
revenue allowance and determine the prices it may charge for its services.
The AERs regulatory approach involves determining a revenue cap for each
transmission business, which is the maximum revenue a business can earn during the
regulatory period.22 The AER applies a building block model to determine the revenue
that a transmission business needs to cover its efficient costs and a commercial return to
the business. The building blocks cover:
a
operational and maintenance expenditure;
b
capital expenditure;
21
22
Western Australian Department of Finance, Strategic Energy Initiative: Energy 2031, August
2012, available at www.finance.wa.gov.au/cms/uploadedFiles/Public_Utilities_Office/WAs_
Energy_Future/Strategic_Energy_Initiative_Energy2031_Final_Paper.pdf.
Changes to the rules which govern the economic regulation of transmission and distribution
businesses were made in November 2012 by the following rule: AEMC, National Electricity
Amendment (Economic Regulation of Network Service Providers) Rule 2012, Rule
Determination, available at www.aemc.gov.au/Media/docs/Final-Rule-Determination4c10cf40-03a0-4359-8fe9-3e95a446579d-0.pdf.
43
Australia
c
d
e
asset depreciation costs;

taxation liabilities; and
a commercial return on capital.
The regulatory framework for distribution businesses is similar to the framework for
transmission businesses but there are some differences.
Unlike transmission businesses, which must all be subject to a revenue cap,
distribution businesses must be subject to some form of control mechanism, but the
AER may choose the form of incentive. In addition to revenue and price caps, the
following approaches are available in Australia and have been used by regulators in some
of the jurisdictions or networks:
a
revenue yield models, which link the revenue a business may earn to the volume
of electricity sold;
b
weighted average price caps, which set a ceiling on distribution prices but allow
flexibility in individual tariffs within that ceiling; and
c
schedule of fixed price caps, whereby a list or schedule of prices is set for each
individual service that the business provides.
When using any of the above control mechanisms, the AER is also required to forecast
the revenue requirement of the business over the regulatory period. This is achieved using
a building block model similar to that described for transmission businesses above.
Gas
The NGL applies nationally to Australian gas pipeline operators both transmission
pipelines and distribution networks. Pipelines that are covered under the law are subject
to set pricing regimes, determined by the AER. When determining the pricing regime
to apply to each gas pipeline, the AER will take into account the same factors as are
outlined above for electricity transmission rates.
v
AEMO is responsible for managing system security of the NEM electricity grid and
the Victorian gas transmission network. AEMO manages the market and power system
from two control centres, each of which is in a different state. The entire NEM can be
operated from one or both centres. This means that in the event of a natural disaster or
other emergency, continuous supply can be ensured.
If a critical supply shortfall occurs because system security or reliability of supply is
threatened, AEMO has a range of powers under the NER to restore supply and demand
balance, including:
a
demand-side management;
b
the power to direct generators to produce energy when a supply shortfall is expected;
c
the power to instruct network service providers to shed customer load (only
permitted when there is an urgent need to protect the power system by reducing
demand); and
44
Australia
d
tender for contracts for electricity supply from sources such as emergency
generators and other generators connected to the distribution network, who are
not usually factored into AEMOs forecasting process.
The states and territories also have reserve emergency powers under legislation to take
over and prioritise the use of the utilities in emergency situations. In Queensland, for
example, the Gas Supply Act 2003 (Qld) gives the relevant state minister power to
regulate the supply, distribution and sale of gas to customers in the event of a shortage
of gas supply.
IV
ENERGY MARKETS
Development of energy markets
Electricity
Each Australian state and territory has the power to make laws with respect to its
electricity industry. Consequently, each states and territorys electricity industry
originally developed separately, with each state and territory operating a vertically
integrated electricity industry under government ownership and control. Major reforms
in Australias electricity markets since the 1990s have radically altered this model.
While there remain jurisdictional differences in the structure and regulation of
the electricity industries in each Australian state and territory, all states and territories
have now restructured their respective electricity industries, generally to:
a
separate the electricity service providers into distinct generation, transmission,
distribution and retail supply entities;
b
remove the responsibility for performing regulatory functions from the electricity
service providers; and
c
introduce competition into the generation and retail supply sectors.
Under the NEL and NER, AEMO administers a spot market for the wholesale supply
and purchase of electricity, operated through a central pool. Generators make offers every
five minutes to supply the market with a set amount of electricity at a certain price. Based
on these offers, AEMO decides which generator is required to produce electricity to meet
the current demand at the best price. The selected generators are then dispatched into
production, and a dispatch price is set every five minutes. The spot price for each trading
interval is set by averaging the six dispatch prices given each half hour (in five-minute
intervals), within a maximum and minimum (floor) spot price. This is done for each
region in the NEM.
Gas
Victoria established a wholesale spot market in 1999 to manage gas flows on the Victorian
transmission system and to allow market participants to buy and sell gas at spot prices.
More recently, the National Gas Market Bulletin Board (BB) and short-term trading
markets in major hubs (Sydney, Adelaide and Brisbane) have also been established.
In the Victorian wholesale spot market, participants submit daily bids ranging
from A$0 per gigajoule to A$800 per gigajoule. Bids may be revised at designated
45
Australia
scheduling intervals during the day. At the beginning of each day, AEMO stacks supply
offers and selects the least-cost bid to match demand in the market (the clearing price).
AEMO can also schedule additional gas injections (typically LNG) at above-market
price to alleviate short-term constraints. Approximately 10 to 20 per cent of wholesale
gas volume is traded on the spot market. The remaining gas is sourced via contracts or
vertical ownership between producers and retailers.
The short-term trading market was launched in September 2010 in Sydney and
Adelaide and was extended to Brisbane in December 2011. The hubs link transmission
pipelines and distribution systems. Each hub is scheduled and settled separately but
each operates under the same rules. The market sets a daily ex ante clearing price at each
hub, based on scheduled withdrawals and day-ahead offers by gas shippers to deliver gas.
Participants may buy some or all of their gas requirements on a spot basis.
The BB, which commenced in July 2008, is a single electronic communications
system (website) covering all major gas production fields, major demand centres and
natural gas transmission pipeline systems of South Australia, Victoria, Tasmania, NSW,
the ACT and Queensland.
ii
Electricity
The NEL and the NER provide the framework for the operation of the NEM.
The NER sets out detailed rules for the operation of the spot market, power system
security, access to electricity networks, connection to networks and methods to be used
for pricing network services. It also defines the responsibilities of market participants.
Gas
The NGL and NGR provide a national framework for the regulation of gas transmission
and distribution networks, as well as for the gas and electricity trading markets. The
NGL and NGR replace the old Gas Pipelines Access Law and the National Gas Code.
iii
Price regulation
Retail electricity prices are regulated in a number of states and territories.23 Price caps are
set so that retailers can:
a
recover the costs that each state regulator considers an efficient retailer would
incur; and
b
make a reasonable margin (ranging from 3 to 10 per cent).
State and territory governments are currently reviewing their use of retail price caps and
have agreed to remove them where effective competition can be demonstrated.
23
Retail prices are not regulated in Victoria or South Australia.
46
Australia
Consumer unfair contract terms
Consumer energy contracts are also subject to the unfair contracts regime set out in the
CCA. Under the unfair contracts regime, an unfair term in a standard form consumer
contract will be unenforceable. Further, a court can injunct a supplier from relying on a
particular term. A term will be unfair if:
a
it causes a significant imbalance in the parties rights and obligations arising under
the contract;
b
it is not reasonably necessary in order to protect the legitimate interests of the
party who would be advantaged by the term; and
c
it would cause detriment (whether financial or otherwise) to a party if it were to
be applied or relied on.
The NECF
The NECF also contains a range of consumer protections, including the making of model
terms and conditions for standard retail customers that gas and electricity retailers must
adopt. If a retailers retail contract is inconsistent with the model terms and conditions,
the retail contract has no effect to the extent of that inconsistency.
iv
Market developments
SCER priorities
The current energy market reform priorities of federal, state and territory governments
being progressed through the SCER include:
a
the promotion of, and removal of barriers to, demand-side management;
b
the development of a consistent national approach for clean energy technology
development and deployment (including carbon capture and storage (CCS));
c
the implementation of the NECF and other nationally consistent regulatory
arrangements for the energy sector;
d
assessing the adequacy of existing market and regulatory mechanisms to secure
efficient and timely generation and network investment; and
e
streamlining upstream petroleum regulatory frameworks.24
CSG and LNG
In addition to Australias conventional natural gas reserves, Australia also has substantial
reserves of CSG in both Queensland and NSW. This, together with long-term projections
of rising international energy prices, has spurred the development of several LNG projects
using CSG resources. Construction of three export LNG projects is underway, with the
first CSGLNG exports expected in late 2014. CSG production has also reshaped the
domestic market by providing a new source of gas supply.
24 www.scer.gov.au/about-us/priority-issues-of-national-significance.
47
Australia
V
Implementation of the previous federal Labor governments Clean Energy Future Plan,25
including the CPM which commenced on 1 July 2012, was intended to provide a
significant boost to the renewable energy sector in Australia. However, it is the policy of
the current Liberal-National federal government, which was elected in September 2013,
to repeal the CPM and other aspects of the Clean Energy Future Plan, and to implement
an alternative climate change policy, the core element of which is the establishment of a
proposed Emissions Reduction Fund (ERF).
Carbon pricing mechanism
Under the CPM, entities who are liable under the scheme are required to surrender units
to the Clean Energy Regulator in respect of their greenhouse gas emissions. In general,
the CPM imposes liability on a person who has operational control of a facility that has
direct greenhouse gas emissions of 25,000 tonnes of carbon dioxide equivalent emissions
or more for a given financial year. During the fixed-charge period of the CPM (financial
years 2012/13, 2013/14 and 2014/15), carbon units are available for purchase by liable
entities at a fixed price from the Clean Energy Regulator. The fixed price for 2013/14 is
A$24.15 per unit.
It is currently proposed that the scheme will move to a flexible-price period from
2015/16 onwards, from which time the price of units would generally be determined
by the market and the number of units made available for any financial year will be
determined by the overall carbon pollution cap set for that year. However, if the LiberalNational government is successful in implementing its climate change policies, it is
unlikely the scheme will proceed to the flexible price phase.
Proposed emissions reduction fund
The Liberal-National government is currently in the policy design phase for the ERF,
which is proposed to commence operation from 1 July 2014. The ERF, if implemented,
would make funding available which is to be used for the purchase by the government of
emissions reductions proposed by businesses, using a competitive bidding process. Initial
funding of A$300 million in 2014/15, A$500 million in 2015/16 and A$750 million
in 2016/17 has been allocated. It is proposed that the Clean Energy Regulator would
administer the scheme, and would be responsible for conducting auctions and issuing
carbon credits to successful projects for emissions reductions achieved in accordance
with prescribed activity-based verification and calculation methodologies.
25
Australian government, Securing a Clean Energy Future The Australian Governments

climate change plan, Canberra, July 2011, available at www.cleanenergyfuture.gov.au/cleanenergy-future/our-plan/.
48
Australia
Renewable energy target (RET)
The RET is established under the Renewable Energy (Electricity) Act 2000 (Cth), the
goal of which is to ensure that by 2020, renewable generation accounts for approximately
20 per cent of overall electricity generation in Australia.
The RET requires entities that purchase wholesale electricity (mainly electricity
retailers) to acquire and surrender a certain number of renewable energy certificates
(RECs) to the Clean Energy Regulator. The ability for renewable power generators to
create and sell RECs is designed to operate as an incentive to bridge the gap between the
price of green energy and the price of black energy. The number of RECs required to be
surrendered for a year is determined as a proportion of the retailers overall acquisitions
of electricity. RECs are tradeable and may be banked for surrender in a later compliance
year.
Following changes to the RET that commenced on 1 January 2011, the RET was
split into a large-scale and small-scale component, so that separate markets exist for two
forms of REC:
a
large-scale renewable energy certificates, which can be created by accredited
renewable energy power stations (e.g., wind farms and large solar installations);
and
b
small-scale technology certificates, which are created from small units (e.g., solar
PV panels and solar water heaters).
There is a significant degree of uncertainty regarding the future shape of the RET. The
Liberal-National government has commissioned a review of the RET, to be completed
during 2014, which may lead to policy changes. There is the possibility that significant
amendments could be implemented following the review, for example, to reduce the
targets, or potentially even to abolish the scheme.
ii
Energy efficiency and conservation
Victoria and NSW currently operate energy efficiency certificate schemes known as the
Victorian Energy Efficiency Target scheme (VEET) and the New South Wales Energy
Savings Scheme (ESS), respectively. Under these schemes, liability is imposed on
electricity (and, in the case of VEET, gas) retailers in a similar manner to that described
above for the RET. These retailers acquit their liability by purchasing and surrendering
energy efficiency certificates, which can be generated for certain eligible energy efficiency
activities, such as retrofitting lights and other appliances, or on the purchase of eligible
energy-efficient appliances.
South Australia and the ACT have also introduced energy efficiency schemes
known as the Residential Energy Efficiency Scheme and the Energy Efficiency
Improvement Scheme. These schemes are not based on creating and trading certificates.
Large energy users are also required to undertake detailed energy assessments,
and publicly report on identified opportunities to increase energy efficiency, under the
Energy Efficiency Opportunities Act 2006 (Cth).
49
Australia
iii
Support for the development, commercialisation and deployment of clean energy

technologies is currently provided through the commercially oriented A$10 billion
Clean Energy Finance Corporation (CEFC), the Australian Renewable Energy Agency
(ARENA) and various other government funding programmes.
The CEFC was established by the previous Labor government as part of the
Clean Energy Future Package in order to help to overcome capital market barriers to
commercialising clean energy technologies by leveraging private sector financing. The
CEFC is run independently by a board of experts in banking, investment management
and clean energy, and low-emissions technologies and commenced investment operations
on 1 July 2013.26 It is the policy of the current Liberal-National government to abolish
the CEFC.
ARENA was established as an independent statutory body as part of the previous
Labor governments Clean Energy Future Package to administer A$3.2 billion in funding
to support renewable energy technology development in Australia.27 The current LiberalNational government has since reduced ARENAs available funding to A$2.5 billion.28
Carbon capture and storage
Australia is one of the first countries to have established regulatory frameworks specifically
for CCS activities. Under the framework, offshore CCS activities in waters administered
by the federal government are governed by the Offshore Petroleum and Greenhouse
Gas Storage Act 2006 (Cth), while onshore CCS activities and those in state waters are
regulated by separate state regimes.
The Australian government funds the Carbon Capture and Storage Flagships
Program, which supports the construction and demonstration of large-scale integrated
CCS projects. Additional government support for technological development in CCS is
provided via the Global Carbon Capture and Storage Institute established by Australia29
and the National Low Emissions Coal Initiative, which includes a national plan for
carbon transport and storage infrastructure.30
In Australia, several large-scale projects are under development, including the
Gorgon LNG project, which is expected to commence operations in 2015 and is one of
the worlds largest carbon dioxide storage projects in the execute stage, with an estimated
3.4 to 4.1 million tonnes of carbon dioxide expected to be to be injected and stored
under Barrow Island off the north-west coast of Western Australia.31
26 www.cleanenergyfinancecorp.com.au.
27 http://arena.gov.au/about-arena/corporate-publications/annual-report-2012-13/#chapter1.
28 http://arena.gov.au/.
29 www.globalccsinstitute.com/institute.
30 www.climateinstitute.org.au/articles/media-briefs/implications-of-the-coalitions-climatepolicy.html.
31 www.globalccsinstitute.com/project/gorgon-carbon-dioxide-injection-project.
50
Australia
Solar energy
Australias large-scale solar industry is still in its formative years due to the relatively high
technology costs compared with other more established types of renewable energy.32 The
Greenough River Solar Farm built by Verve Energy and GE Energy Financial Services
is Australias first commercial-scale photovoltaic plant. The Greenough River Solar Farm
opened in October 2012 near Geraldton in Western Australia and has a capacity of
10MW.33 However, there is significant penetration of solar power at domestic levels and
this is likely to place strains on distribution revenues.
Geothermal
Australias geothermal energy industry is still in the early stages of development as
significant R&D support is required to deliver the new technologies and processes
needed to access geothermal resources.34 Currently, there is only one commercial 80kW
geothermal plant operating in Australia, which is owned by Ergon Energy and operates
in Birdsville, Queensland.
In 2013, Geodynamics commissioned and successfully completed a 160-day
trial of its 1MW Habenero pilot plant at Innamincka in South Australia. This was a
key development in Australias geothermal energy industry as the Habanero plant is
an Enhanced Geothermal System plant, making it the most sophisticated hot rock
geothermal project in the country.35
Smart grids and smart meters
Under the Australian governments A$100 million initiative Smart Grid, Smart
City Ausgrid (formerly Energy Australia) and its consortium partners have deployed
Australias first commercial-scale smart grid demonstration project, based in Newcastle,
NSW.36 The initiative aims to result in nationwide advances in energy management
by gathering comprehensive information about the costs and benefits of smart grids
to inform future decisions by government, electricity providers, technology suppliers
and consumers across Australia.37 The project commenced in October 2010 and the
trials were completed in February 2014. The initiatives final report is proposed to be
published towards the end of the 2013/14 financial year.38
32
Clean Energy Council, Clean Energy Australia Report 2012, available at www.
cleanenergycouncil.org.au/policy-advocacy/reports/clean-energy-australia-report.html.
33 www.greenoughsolarfarm.com.au.
34
Geothermal energy: clean and sustainable energy for the future, CSIRO, 2012.
35
www.geodynamics.com.au/Our-Projects/Innamincka-Deeps.aspx and Clean Energy Council,
Clean Energy Australia Report 2012, available at www.cleanenergycouncil.org.au/policyadvocacy/reports/clean-energy-australia-report.html.
36 www.smartgridsmartcity.com.au/About-Smart-Grid-Smart-City.aspx.
37
Department of Resources, Energy and Tourism, Draft Energy White Paper 2011: Strengthening
the foundations for Australias energy future, Canberra, December 2011, available at www.ret.
gov.au/energy/Documents/ewp/draft-ewp-2011/Draft-EWP.pdf.
38
www.innovation.gov.au/Energy/Programs/SmartGridSmartCity/Pages/default.aspx.
51
Australia
VI
THE YEAR IN REVIEW
Proposed changes to climate change policy framework
A Federal Election was held on 7 September 2013, which resulted in the election of a
new Liberal-National government. A key plank of the Liberal-National policy platform
for that election was to implement major changes to Australias climate change and
clean energy policy framework. This includes the proposed repeal of the CPM and the
implementation of the ERF.
A package of bills to repeal the CPM and some other components of the previous
governments Clean Energy Future Plan were introduced into the Federal Parliament on
13 November 2013. Those bills passed the House of Representatives but were rejected
by the Senate on 20 March 2014. However, Senators elected at the September 2013
general election are due to take their seats on 1 July 2014. There is a prospect that the
government will be able to secure passage of the repeal bills after this time.
The current proposal is that new liabilities would not be incurred in relation to
emissions or other relevant activities occurring from 1 July 2014 onwards (even if passage
of the bills is not secured until after that date).
ii
RET review
As discussed above, the Liberal-National government has commissioned a review of the

RET, with a report due to be delivered to the government in mid-2014. The review is
likely to play a significant role in determining the future fate of the RET.
iii
Energy White Paper
The federal government is in the process of preparing an Energy White Paper, the goal
of which is to develop and outline a coherent, integrated and efficient regulatory and
policy framework for the energy sector. The process is being coordinated by the Federal
Department of Industry. A Green Paper is expected to be released in May 2014, and the
final White Paper is expected to be released in September 2014.
Key mergers and acquisitions
The largest foreign investment in the Australian energy sector in 2013 was the purchase
by the State Grid Corporation of China of 19.9 per cent of SP Ausnet Ltd and 60
per cent of SPI (Australia) Assets Pty Ltd (locally known as Jemena) from Singapore
Power International at an approximate value of US$3.6 billion.39 SP Ausnet and Jemena
operate gas and electricity transmission and distribution networks in Australia. Another
39
PricewaterhouseCoopers, Power & Renewables Deals 2014 outlook and 2013 review,
2014, available at www.pwc.com.au/industry/energy-utilities-mining/publications/powerrenewables-deals-2014.htm and PricewaterhouseCoopers, Trends in M&A China outbound
deals: 2013 review and 2014 outlook, 2014 available at www.pwc.com.au/deals/publications/
trends-ma-china.htm.
52
Australia
significant transaction in 2013 also attracting Chinese investment was CNOOCs
acquisition of additional interests in Queensland Curtis LNG for US$1.9 billion.40
There has also been significant activity by the NSW government to further
privatise its electricity generation assets. During 2013, Delta Electricitys Mount Piper
and Wallerawang power stations were sold to EnergyAustralia for US$438.5 million,41
while Eraring Energys Eraring and Shoalhaven power stations were sold to Origin
Energy at a net cost of approximately A$75 million.42 The NSW government has also
sought to sell Macquarie Generation, which produces more than a quarter of NSWs
energy,43 to AGL Energy for A$1.5 billion.44 However, the ACCC has blocked AGL
Energys bid on the basis that it would result in a substantial lessening of competition in
the market for the retail supply of electricity in NSW.45 The ACCCs view is that barriers
to entry will be raised and therefore competition reduced because the deal would result
in the three largest retailers in NSW owning up to 80 per cent of generation capacity.46
AGL is currently seeking authorisation of the acquisition in the Australian Competition
Tribunal.
Key case
The High Court in Electricity Generation Corporation T/As Verve Energy v. Woodside
Energy Ltd & Ors; Woodside Energy Ltd & Ors v. Electricity Generation Corporation T/As
Verve Energy [2014] HCA 7 (5 March 2014) held that the obligation to use reasonable
endeavours to supply additional quantities of gas under a long-term gas supply agreement
(GSA) did not require the supplier to act against its business and commercial interests.
Following an explosion at a gas production facility owned by a third party
which resulted in a significant rise in demand and the market price for gas, the supplier
40
PricewaterhouseCoopers, Trends in M&A China outbound deals: 2013 review and 2014
outlook, 2014 available at www.pwc.com.au/deals/publications/trends-ma-china.htm.
41
PricewaterhouseCoopers, Power & Renewables Deals 2014 outlook and 2013 review,
2014, available at www.pwc.com.au/industry/energy-utilities-mining/publications/powerrenewables-deals-2014.htm.
42
Mike Baird MP, NSW Treasurer and Minister for Industrial Relations, Eraring Energy Sale
Finalised, Media Release, 1 August 2013 available at www.treasury.nsw.gov.au/__data/assets/
pdf_file/0015/26052/01-8-2013_Eraring_Energy_Sale_Finalised.pdf.
43
ACCC, ACCC opposes AGLs proposed acquisition of Macquarie Generation, Media Release,
4 March 2014, available at www.accc.gov.au/media-release/accc-opposes-agls-proposedacquisition-of-macquarie-generation.
44
Mike Baird MP, NSW Treasurer and Minister for Industrial Relations, Macquarie Generation
Sold For Proceeds Of $1.725 Billion, Media Release, 12 February 2014, available at www.
treasury.nsw.gov.au/__data/assets/pdf_file/0019/123193/12-02-14_Macquarie_Generation_
sold_for_proceeds_of_$1.725_billion.pdf.
45
ACCC, ACCC opposes AGLs proposed acquisition of Macquarie Generation, Media Release,
4 March 2014, available at www.accc.gov.au/media-release/accc-opposes-agls-proposedacquisition-of-macquarie-generation.
46 Id.
53
Australia
informed Verve Energy that additional quantities of gas could not be supplied under
the existing GSA. Instead, the supplier notified Verve Energy that it could be supplied
under a separate short term GSA. The prices under the short term GSA were significantly
higher than the prices that would have applied under the original GSA.
The High Court concluded that in the present case, the obligation to use
reasonable endeavours included an entitlement to take into account the sellers own
commercial, economic and operational interests in determining the sellers capacity to
supply the additional gas quantities to Verve Energy.
The consequence of this decision in Australia is the potential for a broader scope
of operational and economic matters to be considered in the context of determining
whether a reasonable endeavours obligation in a commercial context has been satisfied.
VII
Recent years have seen a tremendous amount of change in energy markets in Australia.
One of the biggest challenges facing lawmakers and industry participants has been
managing the goal of transitioning to a lower carbon energy sector, and it appears
that another significant round of policy and regulatory change in that area is on the
horizon. The continued transformations in Australian natural gas markets, including the
implications of expanded LNG export capacity, together with the prospect of further
energy market restructuring reform initiatives, are also likely to leave a major imprint on
the NEM and natural gas markets in Australia in the years ahead.
54
Chapter 4
BRAZIL
Guilherme Guerra DArriaga Schmidt1
I OVERVIEW
Over the past 15 years the Brazilian electric power sector (BPS) has undergone continual
reform in its framework in order to enable new investments to supply the increase of the
power demand derived from national economic growth.
In 1995, Law 9,074 was enacted bringing competition to the power
commercialisation and generation sectors. Distribution companies were also privatised.
The independent National Electric Energy Agency (ANEEL) was created by Law
9,427 in 1996 to oversee the electric power market. A wholesale power market was
incorporated in 1998 and power trading companies emerged.
Although the Brazilian Ministry of Mining and Energy (MME) has developed
other forms of power generation, the BPS is still mainly composed of hydroelectric
power plants encompassing 84,535MW, approximately 64.62 per cent of Brazils
power capacity. Gas thermoelectric power plants are the second-largest source of power
generation in Brazil, representing 10.33 per cent of its power capacity, followed by
biomass (7.82 per cent) and oil thermoelectric power plants (5.90 per cent), and other
sources with minor presence make up the rest.2
In view of its large territory and of the long distance from the big hydroelectric
power plants to the largest cities (centres of high power consumption), the BPS is based
on a very long and complex transmission system. Consequently, strong climate changes
and severe dry seasons may affect Brazilian power capacity and the price of energy.
1
2
Guilherme Guerra DArriaga Schmidt is a partner at L O Baptista Schmidt Valois Miranda

Ferreira Agel.
Study presented on the website of Grupo de Estudos do Setor Eltrico (GESEL UFRJ (www.
nuca.ie.ufrj.br/gesel/), based on data provided by ANEEL.
55
Brazil
The BPS is basically composed of two markets. First, a regulated power market is
mainly composed of distribution companies and captive consumers, whose commercial
relationship is fully regulated by ANEEL. The distribution companies are entitled to
charge and receive a determined rate (tariff) for the power they supply. They are, however,
obliged to acquire their entire power demand through power auctions organised and
supervised by ANEEL.
Alternatively, there is the free power market. Free power consumers, power
generators and trading companies are the main agents in this market. These agents are
free to negotiate their own power volumes and prices.
The Brazilian government also actively participates in the regulation of the BPS
in order to ensure the energy supply, protect the level of the power rate and plan the
expansion of the energy network to remote areas of the country.
II REGULATION
The Brazilian government has paid close attention to the regulation of the BPS in order
to secure investment for a strong and diversified energy matrix to cover the growing
power demand throughout the years.
Due to its strategic importance, there are extensive regulations for all segments,
in order to achieve legal security and the technical parameters needed for its expansion.
i
The regulators
The BPS is basically structured by a group of federal laws and several administrative
rules. It falls under the responsibility of the MME, which in turn answers to the Brazilian
president. The MME formulates and implements the policies in the electric sector in
accordance with the guidelines provided for by the National Energy Policy Council
(CNPE).
The MME is responsible for certain activities related to exploitation and
exploration of natural resources such as geology, mineral and energy recourses, mining,
metallurgy, oil, fuel and electric power, including nuclear energy.
Currently, the MME is the authority responsible for granting concessions and
permissions to agents in the electric sector for exploiting electric power services and
facilities. Such responsibility was previously carried out by ANEEL.
The oil and natural gas sector and the electric power sector are regulated by
different regulatory agencies. ANEEL regulates the electric sector and the National Oil
Agency (ANP) is responsible for the regulation of the oil and natural gas activities. Both
ANEEL and ANP are linked to the MME.
ANEEL is a special independent body, created by Law No. 9,427/1996 for the
purpose of regulating the electric sector. Although ANEEL is linked to the MME, it
has technical and political autonomy to regulate, supervise and monitor the activities
of generation, transmission, distribution and commercialisation of electric power, in
compliance with the guidelines established by the federal government.
ANEEL has two hierarchical levels. The board of directors is composed of five
directors, one of whom is the director general; the directors make collective decisions.
The board approves resolutions and is the final instance in administrative proceedings
56
Brazil
conducted before ANEEL. At the level below the board, there are 20 specialised
superintendents, each with particular expertise. The superintendents are assistants to the
board.
With respect to its regulatory function, the acts performed by ANEEL are
externalised by way of normative resolutions (creating technical rules), authoritative
resolutions (prior authorisation to allow certain acts conducted by an agent), approving
resolutions (approving act previously performed by an agent) and joint resolutions
(creating rules jointly with other regulatory agencies).
With regards to its supervisory functions, ANEEL is responsible for the inspection
and supervision of the activities carried out by agents in the electric sector. Administrative
proceedings for this regulatory agency follow Law No. 9,784/1999,3 ANEEL Normative
Resolution No. 273/20074 and ANEEL Normative Resolution No. 63/2003.5
This function of ANEEL also encompasses the revision and eventually the
imposition of fines against holders of concessions or permissions, or authorised agents
that violate the governing rules of the BPS.
ANEELs main responsibilities and obligations under the law are:
a
the management of concession or permission contracts of electric power public
services, as well as the supervision, directly or through state agencies, of the
concessions, permissions and authorisations of electric power services;
b
the authority to decide, at the administrative level, the differences between
concessionaires, permissionaires, authorised or independent power producers
(IPPs) and self-producers, as well as between these agents and their customers;
c
the establishment of restrictions, limitations and conditions on companies
and corporate groups willing to either assign or transfer their concessions,
authorisations or permissions in order to protect effective competition among
the agents, preventing economic concentration in the electric power services and
activities;
d
the imposition of administrative fines on agents for non-compliance with their
regulatory obligations;6
e
the calculation of rates for the provision of electric power supplies carried out by
distribution concessionaires, and establishing goals to be fulfilled by distributors
to universalise the use of electricity;
f
the approval of the rules and procedures for the commercialisation of electric
power; and
g
the organisations and promotion of auctions to accommodate market needs.
3
4
5
6
The Federal Administrative Proceedings Law.

ANEEL Organisation Standards.
Disciplinary Administrative Proceedings.
For each infraction, the fine is limited up to 2 per cent of the annual earning, or of the estimated
value of the energy produced in case of self-production and/or independent power production,
corresponding to the 12 months prior to the issuance of the violation notice.
57
Brazil
Although ANEEL has the exclusive authority to supervise the BPS, other
institutions have important functions for its operation. The main institutions are listed
below:
a
The CNPE is a governmental body linked to the Brazilian president, created by
Law No. 9,478/1997 and regulated by Decree No. 3,520/2000. Its main function
is to suggest policies and guidelines to promote the sensible use of national energy
resources in order to maintain the lowest possible rates for consumers.
b
The Monitoring Committee of the Electric Sector (CMSE) was approved by Law
No. 10,848/2004 and created by Decree No. 5,175/2004. Its main responsibility
is to monitor the continuity and security of the electricity, natural gas, oil and
oil derivatives supply throughout the country. The CMSE also indentifies any
risks to the energy supply and develops proposals for adjustments, solutions and
recommendations to predict or resolve risk situations.
c
The National Electric Power System Operator (ONS) is a non-profit private
entity created by Law No. 9,648/1998 and manages the national interconnected
transmission system (SIN). The ONS is formed by all the agents connected to the
basic grid.7 The principal functions of the ONS are:
planning and programming the operation and centralised dispatch of power
generation, envisaging the optimal operation of the SIN;
the supervision and coordination of the operation centres of the electrical
systems;
the preparation and presentation to the MME of studies relating to the
expansion and reinforcement of transmission systems; and
the preparation and presentation of new rules for the operation of the basic
grid for the approval of ANEEL.
d
The Energy Research Company (EPE) is a public company that conducts studies
and research to provide technical support for presenting long-term power planning
in Brazil. The EPE also identifies and determines potential energy resources that
should be developed in Brazil. Further, the EPE has an important role in the
preparation of power auctions conducted by ANEEL for the sale of energy to
distribution companies, technically qualifying the projects that may participate
in auctions.
e
The Electric Power Commercialisation Chamber (CCEE) is a non-profit private
entity regulated and supervised by ANEEL. The CCEE was created by the agents of
the Brazilian electric power market, as provided for in Law No. 10,848/2004. It is
responsible for registering and processing the volume of all the contracted energy
in the power market. Short-term power transactions are also financially settled at
the CCEE. Long-term power agreements are also registered with the CCEE but
are financially settled directly by the parties. The CCEE is also responsible for the
calculation of the clearance price of the difference in the contracted volumes in
The basic grid contains substations and transmission lines at a voltage equal to or higher than
230kV, which connect the four regions of the country, except for the isolated system, located in
the northern region of Brazil.
58
Brazil
the short-term market, as well as being responsible for conducting auctions for
the sale of energy to distribution companies in the regulated market.
ii
All activities in the BPS require corresponding authorisations from the granting
authorities. The operation of electric power services and facilities usually occurs by way
of concession or authorisation. The electric power distribution and transmission activities
shall be subject to concession. Power generation companies, which can be classified as an
IPP or as self-producers, are subject to either concession or authorisation. This depends
on the capacity and type of energy produced. Power trading companies are subject to
authorisation.
In accordance with Article 175 of the Constitution,8 public service concessions
are generally awarding following a bidding procedure. In the case of electric power public
services, the bidding procedure is conducted through an auction method. Agents wishing
to participate in such auctions must submit several documents to the EPE, which will
then analyse and assess the agents technical qualifications to take part in the auction.
With respect to hydroelectric plants, projects are initiated by the government,
which will obtain the prior environmental licence. The construction and exploration of
the plant is then subject to an auction.
Under the new model, the auctions intend to regulate the rate (i.e., the lowest
price possible at which the generator can sell the MWh). The generator that wins the
auction will sign a concession contract establishing the maximum amount that the
generator can provide to the basic grid. This guarantee is calculated by the MME for
each power plan and it represents the maximum amount of energy that power plant may
contract. Should the power plant generate more than the guarantee specifies, the excess
is sold on the short-term market; however, should the power plant generate less than the
guarantee, the generator agent must buy the difference on the short-term market in order
to supply the whole contracted energy.
The granting of a transmission concession is also subject to an auction in order
to hire the most competitive agent with the lowest rates. The auction is preceded by
studies of the ONS and of the EPE that must confirm the necessity to construct new
transmission lines for the expansion or reliability of the SIN. The agent that bids the
lowest price to provide the transmission services is the winner.
In connection with the distribution companies, new concessions were granted
to the companies when they were privatised in the 1990s through auction procedures.
The authorisation to perform as a self-producer or IPP is regulated by ANEEL
Normative Resolutions Nos. 389/2009 and 390/2009. In accordance with ANEEL
Normative Resolution No. 390/2009, the companys legal representative must provide
ANEEL with the documents confirming its technical and legal qualifications and the
tax position of the company, jointly with the licences listed in the first annex of the
resolution.
It is incumbent upon the State, as provided by law, directly or under concession or permission,
always through a bidding process, the provision of public services.
59
Brazil
In relation to power trading activity, ANEEL Resolution No. 265/1998 determines
the necessity to constitute a legal entity for the purpose of commercialising energy. The
authorisation is only granted upon presentation of documents before ANEEL that
confirms the fiscal and legal qualifications of the agent, and its satisfactory economic and
financial position.
iii
As a general rule, the companies that operate in the BPS should be located within Brazilian
territory. With respect to the foreign investment made in the BPS, Brazilian legislation
does not restrict the participation of foreign companies in operational companies.
However, with the new regulatory model currently in force, there are strong rules
to separate the activities carried out by the agents from the BPS. Such restrictions preserve
the competitiveness of the power market and also the lowest power rates for the sector.
In this sense, power distribution concessionaires cannot develop any activity related to
power generation, transmission of energy or trading of energy; they can only acquire
energy through an auction procedure based on the lowest price and can only sell energy
to captive power consumers, in accordance with the power rate determined by ANEEL.
On the other hand, power generation companies cannot be either associated
9
with or controlled by power distribution companies.
iv
The concession, permission or authorisation of electric power services granted to an

agent is personal. Therefore, any change of control is subject to the prior approval of the
granting authority.
In this sense, Law No. 8,987/1995,10 which provides the general rules for the
concessions and permissions in the public services, requires the prior consent of the
granting authority in case of a direct or indirect change in the concessionaires corporate
control. If this procedure is not complied with, the concessionaire may be subject to
penalties or may even lose the concession. ANEELs board of directors has the delegated
powers to review and grant such consent after the study of its Office of Economic and
Financial Supervision.
Participants of the BPS have called for clearer rules, particularly with respect to
trading agents; a new normative resolution relating to the rules applicable to obtaining
prior consent for the transfer of corporate control of agents has recently been subject to
a public hearing.11
9
10
11
A company in which the investor holds material influence (Article 243 of Law 6,404/1976).
The concession or corporate control transfer of the concessionaire without prior consent of the
granting authority results in forfeiture of the concession.
ANEEL Public Hearing No. 65/2011.
60
Brazil
III

SERVICES
In the BPS, the services of energy transmission and distribution are considered natural
monopolies, since competition in these segments does not result in any lowering of
electricity rates.
For that reason, transmission and distribution services providers are entitled
to exclusively operate in their respective areas of concession, as provided for in their
concession contracts.
The Brazilian rules divide the country into four sub-regions, interconnected by
the SIN; there is also an isolated region in the north of Brazil. Although there are certain
small restrictions and small differentials in price among the sub-regions, the transmission
lines allow power transactions from and among the four different sub-regions that are
part of the SIN.
i
Until the 1990s, the BPS was vertically integrated, mainly in view of the fact that there
was no competition or significant private participation. In 1995, however, Law 9,074
started certain important changes to the BPS. The first measures were implemented
to bring competition into the power generation and power trading sectors. Also, the
BPS initiated the privatisation of the state electric power distributors.12 In other words,
the BPS underwent modification, because of the governments recognition of the
necessity to attract new players, in order to attract the required investment in the sector.
Consequently, the state companies that operated in all segments were disaggregated and
the majority of the Brazilian power distributors were privatised. Nevertheless, the legal
obligation to the end of the companies vertical integration was only introduced in 2004,
by Law No. 10,848/2004, mainly motivated by competitive issues.
Pursuant to the new wording of Article 4, Paragraph 5 of Law No. 9,074/1995,
electric power distribution companies cannot carry out any activity related to electric
power generation and or transmission services. They are only allowed to sell energy to
captive power consumers13 in accordance with the rate approved by ANEEL.
Moreover, power generation companies cannot be related to power distribution
companies, as explained in Section II.iii, supra.
ii
In accordance with Law No. 9,074/1995, any electric power agent has the right to
access either the distribution or the transmission systems, upon reimbursement of the
transportation costs; such costs are calculated in compliance with a criteria set out by
the granting authority. ANEEL Resolution No. 281/1999 and ANEEL Normative
12
13
A few generators were privatised, but privatisation occurred mainly in the distribution segment.
Captive power consumers are the consumers, with charge lower than 1,500kW, that are obliged
to buy electric power from local distributors.
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Brazil
Resolution No. 67/2005 regulate the access to the basic grid (transmission) and the
distribution systems.
The agent interested in connecting to the transmission or to the distribution
system must request the access either to the ONS or to the distribution or transmission
concessionaire responsible for the access point where the connection should be made, as
the case may be.14
The ONS must prepare a technical study of the feasibility of access to the
basic grid. This technical study will determine the best alternative for the envisaged
connection, considering the technical alternatives and the lowest costs involved in the
implementation of the access.
With respect to the access to a distribution system, a technical study of the
feasibility of access must be performed by the local distributor, which will determine the
best point of connection.
Prior to the implementation of the access to the transmission system, the user must
enter into the transmission system use agreement (CUST) with the ONS, establishing
the technical conditions relating to the use of the transmission lines. The ONS signs the
CUST on behalf of all the transmission companies, representing such concessionaires
with the user. The user must also sign and the transmission connection agreement
(CCT) with the local transmission concessionaire responsible for the point of access,
establishing the responsibilities for the implementation, operation and maintenance of
the point of connection and its corresponding charges. The ONS signs the CCT as an
intervening party.
With respect to the connection to the distribution system, the user shall enter
into the distribution system use agreement and the distribution connection agreement
with the local distributor concessionaire. These agreements have similar characteristics to
the CUST and the CCT.
iii
The activities related to natural gas in Brazil such as storage, processing and treatment,
and the liquefaction and regasification process, as well as the commercialisation of gas,
are all governed under federal legislation, including Law 11,909, dated 4 March 2009
(the Gas Law) and implemented by Decree 7,382/2010.
The National Petroleum Agency (ANP) is competent to issue the necessary
normative rules for implementing the applicable legislation. Any agent who intends to
perform any of the aforementioned activities needs prior approval from the ANP.
Although there is no longer a monopoly in the construction of gas pipelines in
Brazil, more than 95 per cent of the gas pipelines in Brazil is still held by Petrobras, a
Brazilian company, the majority of whose voting shares is held by the government.
The Brazilian legislation provides open access rights to gas consumers. Therefore,
the power producers from thermoelectric gas plants tend to request and negotiate with
Petrobras the use of its transport gas pipelines for the transport of the gas that they have
acquired.
14
ANEEL Resolution No. 281/1999, Article 7, I and II.
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Brazil
iv Rates
Transmission and distribution concessionaires are entitled to be compensated for the
connection services to either the transmission or distribution system and for the use of
the transmission and distribution lines.
The costs for the use of the transmission or distribution systems are owed by all
users in connection with either the contracted or verified volume of energy and the rate
due by the use of the transmission or distribution systems. With respect to consumers,
the calculation of the costs for the use of the transmission or distribution systems are
based on such rates due during both peak and off-peak hours and the volume of energy
consumed during these hours.
The rate for the use of transmission systems is calculated by ANEEL and annually
adjusted taking into consideration the concessionaires permitted annual revenue. In the
same way, the rate for the use of distribution system is calculated by ANEEL with respect
to each distributor, and revised every three years. The calculation takes into account the
investments made by the distributor with the distribution lines and the costs incurred by
the distribution activity.
IV
ENERGY MARKETS
In 2000, Brazil suffered a severe power supply crisis, mainly caused by a halt in contracted
investment in the electric power generation together with a severe dry season that
adversely affected the hydroelectric basins. This crisis demonstrated weaknesses in the
electric power sector and led to changes, mainly introduced by Law No. 10,848/2004.
The current energy markets structure seeks to ensure expansion, securing the
sale of energy derived from new power plants and, consequently, a return of the capital
invested in the sector, together with the promotion of rate regulation and the continuity
of power supply growth. On such basis, Law No. 10,848/2004 confirmed and developed
both the free power market and the regulated power market.
Under the regulated power market, distribution concessionaires should have their
projected power demand fully contracted, by means of auctions based on the lowest
price. The price for the acquisition of the energy resulting from the auctions is reflected
in the adjustment of the rate approved by ANEEL.
The EPE, based on its studies, establishes a maximum price for the sale of
the electric power by the generators, who then offer to sell energy at the lowest price
considered viable by them. Such procedure protects rate regulation, reducing the final
rate for the captive consumers.
On the other hand, under the free power market free power consumers and
power-trading companies should have all of their demand contracted through power
and sale agreements registered with the CCEE. They may buy energy from any power
generator or other power trading company.
In both power markets there is the obligation for the energy user to contract its
full demand. This rule promotes transactions in the sector and reduces the risks related
to changes in the power price. This structure brings certain comfort to the agents in the
sector since it promotes the signing of power agreements, securing the receivables for
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Brazil
new investments. On the other hand, the government has the ability to decide what type
of energy it intends to promote through the studies prepared by EPE for the auctions,
also protecting the possible lowest price.
ii
Following the trend in other countries, the BPS protects the natural monopolies
granted to the concessionaires of distribution and transmission services and promotes
competition among the power generators and trading companies.
The Electric Power Commercialisation Convention and the CCEE
Commercialisation Rules and Procedures regulate the sale of electric power. Basically,
all power transactions should be made through power agreements, whose volumes are
registered with CCEE. The CCEE Commercialisation Rules and Procedures establish
the general terms and conditions related to the accounting rules, contract and physical
guarantees, penalties, liquidation and contracting of power reserve and procedures to
make the registration of the contracts. It also establishes the settlement price for the
energy and the forms of disclosure of the results.
The BPS further establishes certain specific rules in order to authorise Brazilian
agents to import or export power to or from Brazil. In this regard, the MME, either
directly or by means of a delegation of powers to ANEEL, is the granting authority
responsible for authorising an agent located in Brazil to import or export power, after
reviewing an administrative procedure filed by the agent in this regard. The importation
or exportation of power should also follow the terms of an international agreement
signed by the countries involved in the transaction.15
iii
In the BPS, there are two types of contract: the purchase and sale agreement in the
regulated power market (regulated contract) and the power purchase agreement in the
free power market (free power purchase agreement).
The parties, observing the necessity to register its contracted volume with the
CCEE, may negotiate the terms and conditions of a free power purchase agreement;
however, the parties do not negotiate the terms and conditions of the regulated contract.
When the MME determines an auction is going to take place, a public hearing is held
and a draft of the concession contract is issued. Therefore, the agents have knowledge of
the terms and conditions of the regulated contract before they take part into the auction.
It is prudent that the conditions of the regulated contract are determined by
the granting authority in order to ensure the envisaged provision of the electric power
services.
15
The power given by the MME to authorise a Brazilian agent to import or export power is
summarised in Article 26, III of Law 9,427/96; Article 21(2) of Decree 7,246/2010; and
Ordinance (Portaria) MME 596/2011.
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Brazil
iv
Market developments
There appears to be a continuous trend of the Brazilian government in promoting the

development of different types of clean energy. The wind power market has received
special attention from the EPE and, after an auction procedure held in 2011, many wind
power projects were contracted at competitive prices.
The solar energy market is currently in focus, due to the fact that it is a renewable
and non-polluting source and solar resources are particularly plentiful in Brazil. As a
result, ANEEL is discussing the possibility of a discount for solar generators equivalent to
80 per cent of the rates for the use of transmission system and for the use of distribution
system for the first 10 years of the plants operations. After such term the discount would
be reduced to 50 per cent.
The state governments are also engaged in the development of the solar energy
industry in order to bring it into the electric power matrix; however, this source is still
considered expensive, inefficient and not currently necessary.
V
In Brazil, wind and biomass sources are complementary to hydro sources, especially
considering that the dry season corresponds with the biomass harvest and the windy
season. For this reason, these renewable sources, which jointly with small hydro plants
(PCHs) are called alternative sources, are part of a development programme.
The Programme to Foster Electric Power Alternative Sources (PROINFA), as
provided by Decree No. 5,025/2004, was created to increase the participation of the
wind, biomass and PCH sources in the SIN and diversify existing and overexploited
energy matrices.
The main strategic objectives of PROINFA are the diversification of the Brazilian
energy matrix, increasing the power supply security in a sustainable manner; the
reduction of emissions of greenhouse gases; and the encouragement of new technologies.
The contract resulting from the auction held for one of the alternatives sources of
PROINFA has special conditions, such as a discount of 50 per cent or 100 per cent of
the rate for the use of transmission system or the rate for the use of distribution system,
as provided by ANEEL Normative Resolution No. 77/2004.
ii
Energy efficiency in Brazil involves the rational use of the energy sources in accordance
with their cost of production and availability; the ONS is responsible for national
energy efficiency. It controls the SIN, deciding which power unit will be dispatched, in
accordance with its efficiency in certain seasons.
In view of the specifics of the Brazilian electric power system the ONS takes into
account the most appropriate power generators to be dispatched in view of eventual
transmission restrictions or low volume of the reservoirs of hydroelectric plants. The cost
of the dispatch of a different power plant is borne by all the agents as a charge of the
electric system.
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Brazil
Moreover, certain power generators are constantly adopting new technology to
improve their efficiency, which increases their physical guarantee and consequently may
allow for the sale of a greater volume of energy.
iii
Besides the progress of solar energy technology, and the competitiveness of wind power
projects in Brazil, the use of methane thermal power plants is also being studied, which
results from the landfill and swine waste, without economic destination. As a result,
these projects may be part of an environmental solution against the methane pollution.
VI
THE YEAR IN REVIEW
On 11 September 2012, the Brazilian government issued a Provisory Measure 579

(MP579/12), which was later converted into Federal Law 12,783, dated 11 January
2013, establishing a group of rules for the electricity sector. Under this new programme,
certain costs charged in the tariffs were either eliminated or reduced. The reduction
or elimination of certain regulatory charges would be offset by contributions from the
Brazilian Treasury in order to bear the cost of their original purposes. Further, power
generation and transmission concessionaires with contracts ending between 2015 and
2017 were offered the possibility of renewing their concession contracts for an additional
term of up to 30 years if they accepted the new rules provided for in Federal Law
12,783/13. Basically, such rules have the concessionaires to be immediately submitted to
new reduced tariffs destined just to bear basic operational and maintenance costs. Also,
the energy produced by the power generation concessionaires that accepted to join the
new rules is only sold to captive consumers.
Although some eligible concessionaires did not accept the new rules and refused
to renew their concession contracts under such conditions, the government achieved, in
a first moment, a substantial reduction of the power tariffs for captive consumers.
However, Brazil has also faced a extremely poor hydrological situation in the final
months of 2013 and the beginning of 2014, mainly the result of a very long and harsh
dry season, that has forced the reduction of the use of the hydroelectric reservoirs.
In view of Brazils high dependence on its hydroelectric power plants, the ONS
was forced to assess the operational capability of a large number of thermoelectric power
plants in order to replace the power capacity expected to have been produced by the
reservoirs. The operation of at least some of the thermoelectric power plants throughout
the year is still possible in order to save water from the hydroelectric reservoirs, helping
them to recover a minimum secured volume of water during the dry season.
The use of thermoelectric power plants instead of hydroelectric power plants is
allowed by the Brazilian legislation under certain serious and limited circumstances, in
view of the increase of the production costs involved. In this case, the high costs in
the operation of thermoelectric plants have, from a practical standpoint, diluted the
reduction of the power tariffs envisaged by the government through the new programme
initiated by Federal Law No. 12,783/13.
Also, the changes brought by Federal Law No. 12,783/13, including the drastic
reduction of the value of the tariffs, have contributed to somehow weaken the financial
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Brazil
health of the concessionaires that have accepted to renew their concession agreements
under the new regulation.

In view of the new scenario of the BPS, the tariffs of the power to the consumers
were not reduced and investors became more selective when choosing a power project
to invest in. On 28 March 2014, a new concession for operating a hydroelectric power
plant was granted to the sole participant to the auction that was held for such purposes.16
This new concession will be governed in accordance with the rules established in Federal
Law No. 12,783/13. Further, scholars and specialists in the BPS have defended the idea
of the expansion of different sources of power generation in Brazil.17 Recent auctions
for the sale of energy have demonstrated a new trend in developing different sources of
energy giving less relevance to their production costs. Such a development mitigates the
risk of the BPS being basically dependent on a single source of energy, irrespective of how
competitive and low-cost this source may be.
VII
Despite the efforts of the government to reduce energy tariffs, the price of energy for
consumers continues to be high basically by virtue of the increase of the use of the
thermoelectric plants during a severe dry season. Also, private investors seem more
reluctant to invest in the BPS in view of the new rules.
The current structure of the BPS is and will still be mainly based on the
hydroelectric power plants; however, the government needs to continue to promote the
expansion of the national power capacity in diverse sources of energy in order to cope
with the growing power demands of Brazilian industry and other power consumers.
In this scenario, new investments will be required in next-generation plants,
transmission lines and equipment to guarantee competitive power supplies at a low cost,
and delivering good opportunities for the private sector.
16
17
Auction related to the concession of the Trs Irmos Hydroelectric Power Plant, located in the
state of So Paulo.
CanalEnergia, Special report, 8 March 2013, Leiles: a expanso sob nova perspectiva (Auctions:
the expansion under a new perspective).
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Chapter 5
CANADA
Patrick Duffy, Brad Grant, Erik Richer La Flche and Glenn Zacher1
I OVERVIEW
Canada is a federal state comprising 10 provinces (Alberta, British Columbia, Manitoba,
New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward
Island, Quebec and Saskatchewan) and three territories (Northwest Territories, Nunavut
and the Yukon). The respective powers of the various levels of government are set out in
the Constitution Act 1982.
Canada is a common law jurisdiction, with the exception of the province of Quebec,
which operates under the Civil Code of Quebec. Each province has its own provincial
court of general jurisdiction and an appellant court. The jurisdiction of Canadas Federal
Court is limited to specific matters under federal jurisdiction and appeals or judicial review
applications from federal tribunals. Canada operates a unitary system of courts in which all
cases can ultimately be appealed to the Supreme Court of Canada.
The provinces have primary responsibility for energy regulation through their
jurisdiction over local works and undertakings, non-renewable natural resources and
electrical energy. The provinces exercise jurisdiction through legislative enactments,
various forms of delegated legislation and independent energy and utility commissions.
Provincial legislation and tribunals also govern most environmental matters pertaining
to the development of energy projects.
The federal government has jurisdiction over international and inter-provincial
trade and commerce, which includes authority over international and inter-provincial
transmission lines and energy exports. The federal government also has jurisdiction over
nuclear safety, aboriginal affairs, and a number of environmental matters that affect
energy projects.
Patrick Duffy, Brad Grant, Erik Richer La Flche and Glenn Zacher are lawyers in Stikeman
Elliott LLPs energy group.
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Canada
For purposes of expediency, this chapter will discuss the regulation of energy at a
general level with illustrative examples drawn from various Canadian jurisdictions.
i Electricity
The power sector in Canada is principally regulated by the provinces and markets are
regional in nature. Most electricity trade is intra-provincial or northsouth, between
provinces and neighbouring US states; there is relatively little eastwest trade between
provinces.
Two provinces, Alberta and Ontario, restructured their electricity markets, albeit
with differing success. In the mid-1990s, Alberta deregulated generation, mandated open
access for regulated transmission and distribution and introduced a real-time electricity
spot market. Alberta now has a fully competitive wholesale and retail electricity market.
In 1998, Ontario unbundled transmission, generation and dispatch, and in 2002 it
introduced fully competitive wholesale and retail markets. Deficiencies in Ontarios
market design and a confluence of other market conditions and political pressures,
however, brought about a partial closing of the Ontario market. Today, Ontario operates
under a hybrid structure where there is nominally wholesale and retail competition, but
a large amount of generation remains regulated or subject to long-term governmentbacked contracts. The remaining provinces have more traditional government-owned
vertically integrated utility structures, which offer bundled services at regulated rates.
Some provinces for example, British Columbia, Quebec, Nova Scotia and Saskatchewan
have limited generation opportunities for independent power producers, largely in the
renewable sector.
The most significant developments in the power sector centre on investments in
renewable or clean generation and infrastructure renewal and upgrades. In 2009, Ontario
launched the most ambitious renewable feed-in-tariff (FIT) programme in North
America. On 16 August 2013, changes were made to the FIT programme, including
changes to the domestic content rules applicable to new contracts. The changes help
to move the FIT programme towards compliance with the 24 May 2013 World Trade
Organization ruling by lowering the domestic content requirements for certain renewable
electricity projects. Some other provinces have followed suit, albeit on a smaller scale.
A number of provinces are also investing in and constructing major transmission and
other infrastructure to facilitate economic and resource development, access renewable
resources (wind, hydro) and facilitate export to the United States. Alberta and Ontario
have launched competitive processes to develop major transmission projects, which are
attracting foreign companies.
ii
Natural gas
The Canadian gas sector, by comparison, has traditionally been characterised by more
national east-west trade. Most gas production is in the western Canadian sedimentary
basin (WCSB) and gas has traditionally been shipped via inter-provincial pipelines to
eastern Canada and the north-east United States. Recent non-conventional shale gas
discoveries in northwest Alberta, northeast British Columbia and the midwestern and
north-east United States are transforming the Canadian gas industry. Natural gas prices
have plunged in North America, west-to-east pipeline throughput has substantially fallen
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Canada
and plans are under way to satisfy eastern Canadian demand from the eastern United
States. As a result, western Canadian producers are eyeing opportunities for new markets
and making plans to export liquefied natural gas (LNG) to the Asian markets from
Canadas west coast. This will require the development of significant infrastructure to
transmit the natural gas to the west coast, liquefy it and ultimately ship the LNG to
foreign markets. A number of projects have been proposed, three projects have received
export licences from the National Energy Board (NEB) and export applications from
another four projects have been approved by the NEB and are awaiting approval of the
Governor in Counsel. The government of British Columbia has been highly supportive
of LNG development.
iii Oil
As is the case with natural gas, the majority of Canadian oil production is in the WCSB.
In particular, Albertas oil sands contain some of the worlds largest oil reserves. These
reserves have been attracting significant investment and, as a result, Canadian oil output
has reached all-time highs and the forecast is for a continued increase in Canadian oil
production. Currently, the vast majority of Canadian oil production is exported via
international pipelines to the midwestern United States; however, there is currently a
significant price differential between the price received by Canadian producers for oil
delivered to the Midwest. This differential is the result of a supply glut in the US midwest
(Cushing, Oklahoma) as US supply (primarily from the Bakken fields in North Dakota
and Montana) has increased in the presence of limited pipeline takeaway capacity. In
order to ease these price differentials in western Canada, pipelines are being proposed
that will connect Canadian and US production with coastal hubs that provide for export
and purchase of crude oil at international prices.
One such proposal is TransCanada Corporations Keystone XL pipeline. Keystone
XL was denied a presidential permit by the US, which partially halted its development
and the project continues to seek governmental approval. While the southern part of the
project has been completed to deliver 700,000 barrels per day of crude from Cushing
Oklahoma to the Texas Gulf Coast (helping to ease the current supply glut in the US
Midwest), the northern part of the project remains in flux. TransCanada has been
working to revive that part of the project. In January 2014, the US State Department
released its report for the Keystone XL pipeline project, which reaffirmed that approval of
the project would not significantly increase greenhouse gas emissions, which the White
House has identified as a key concern.
Enbridge Inc has also proposed the Northern Gateway oil pipeline, which could
connect Alberta production with Canadas west coast for export to the Asia-Pacific
markets. The joint Canadian Environmental Assessment and NEB review panel issued
its decision on the proposed Northern Gateway project on 19 December 2013. It
recommended that the federal government approve the pipeline, subject to Enbridge
satisfying 209 conditions that are to be included in the NEBs Certificate of Public
Convenience and Necessity. It remains to be seen whether Enbridge can satisfy all of the
conditions. Such access to Asia-Pacific markets would fundamentally change the balance
of future oil trade between Canada and the United States and help to ease the price
discounts currently received by the majority of Canadian producers.
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Canada
Other pipeline proposals are also being promoted to increase oil transportation
capacity to Canadas west coast and to eastern Canada, such as Enbridges Line 9 Reversal
and TransCanadas Energy East project that aim to ship oil to refineries in eastern Canada.
On 6 March 2014, the NEB approved Enbridges Line 9 reversal (with conditions), which
will, once completed, allow western Canadian oil to displace up to 300,000 barrels per
day of crude oil imported from the North Sea, West Africa and the Middle East which is
purchased by eastern refiners at international (Brent) prices.
II REGULATION
i
The regulators
The NEB establishes regulatory policies for energy matters under federal jurisdiction. The
primary area of NEBs activity is the regulation of Canadas interprovincial oil and gas
pipelines.. The NEB also has regulatory responsibility for the construction and operation
of international transmission lines and the export of natural gas, oil and electricity.
Provinces have authority over the exploration and development of energy resources.
This function may be assigned to an independent regulatory tribunal (e.g., the Alberta
Energy Regulator (AER) or may be under the direct control of a government ministry
(e.g., Saskatchewans Ministry of Economy). Oil and gas exploration in frontier and
offshore areas are regulated either by bodies created by federal or provincial management
agreements (e.g., the CanadaNewfoundland and Labrador Offshore Petroleum Board) or
by the NEB.
Canadas energy sector is also regulated by provincial utility regulators that are
responsible for facilities that lie completely within the borders of any single province.
This jurisdiction can include diverse matters such as facility siting, rate setting, utility
divestitures, retail issues and consumer complaints. In some provinces, energy regulators
authority is limited to responsibility for energy resources and energy utility regulation
(e.g., the Ontario Energy Board); in other provinces, utility regulators also have
jurisdiction over other sectors such as automobile insurance, railways and water utilities
(e.g., Nova Scotia Utility and Review Board).
A new regulatory development in the province of Alberta is the creation of the
AER. The newly passed Responsible Energy Development Act creates a single provincial
regulator the AER for all upstream oil, gas, oil sands, coal and related activities
previously administered by the Energy Resource Conservation Board and Alberta
Environment and Sustainable Resource Development. The transition to the AER was
completed on 31 March 2014.
Energy and utility commissions are established through federal or provincial
legislation and their members are appointed by the relevant government, usually for fixed
terms. They act as quasi-judicial tribunals, independent of the businesses they regulate.
Although in large part they exercise their powers free of interference from government,
their jurisdiction is set out in legislation that may be amended by the relevant legislature.
By statute, some tribunals are also subject to direction from provincial or local
governments. These tribunals generally exercise their powers through policy instruments
(such as codes, rules and generic decisions), licensing authority and individual decisions.
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Canada
The decisions of Canadian regulatory tribunals are generally subject to appeal
or judicial review by the courts the Federal Court in the case of the NEB and other
federal bodies, and the provincial superior courts in the case of provincial energy and
utility commissions. In some jurisdictions the right to appeal is not automatic but
requires leave of the court. Appellate judicial review is generally limited to questions
of law or jurisdiction, procedural unfairness, bad faith or unreasonableness on the part
of the regulator. Federal and provincial courts tend to give deference to regulators on
matters of law that are intertwined with economic policy and rate setting that lie within
a regulators area of expertise, but give less deference on matters of law that are of general
importance.
There is also federal and provincial jurisdiction over anti-competitive practices
in the energy sector. The Competition Bureau reviews anti-competitive practices, both
criminal and civil, under the federal Competition Act. Criminal offences are prosecuted
by the Attorney General before the criminal courts; the federal Competition Tribunal
has the power to issue remedial orders for reviewable civil matters (e.g., abuse of
dominance and tied selling). At the provincial level, bodies such as Ontarios Market
Surveillance Panel and Albertas Market Surveillance Administrator monitor activities
within competitive energy markets and the conduct of market participants to identify
abuses of market power, gaming and market deficiencies or design flaws.
ii
At the federal level, approval from the NEB is required to construct and operate an
interprovincial or international oil and gas pipeline, an international power line or any
inter-provincial power line designated by the federal government, and any additions to
an existing pipeline or transmission line that is under federal jurisdiction. In determining
whether a project should proceed, the NEB reviews, among other things, its economic,
technical and financial feasibility, and the environmental and socio-economic impact
of the project. Further, as a result of recent amendment to the National Energy Board
Act (the NEB Act), the NEBs responsibilities will include oversight of navigable waters
and fish habitats related to pipeline and international power line crossings projects. As a
result, if NEB authorisation is granted for these projects, a separate approval under the
Navigable Waters Protection Act will not be required. Ultimately, it is hoped this one
window approach will reduce regulatory duplication for these projects and streamline
the regulatory approval process.
The NEB regulates tolls and tariffs for oil and gas pipelines under its jurisdiction
to ensure they are just and reasonable and that there is no unjust discrimination in
tolls, services or facilities. Pipelines under the Boards jurisdiction are divided into two
groups that tailor the degree of financial regulation to the size of the regulated operations.
Group 1 consists of major oil and gas pipelines, which are generally subject to ongoing
regulatory oversight by the NEB. Some smaller Group 1 facilities and Group 2 pipelines
are regulated on a complaint basis.
The NEB also regulates the export and import of energy. The export and import
of natural gas is authorised under either long-term licences of up to 25 years (which
require a public hearing and approval by the federal Cabinet) or short-term orders for
a maximum of two years. However, recent amendments to the NEB Act provide that
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Canada
hearings for natural gas export licences are no longer mandatory and, when deciding
whether to issue these licences, the NEB will only consider whether the quantity to be
exported is surplus to Canadian needs, taking into account trends in discovery of the
resource. Oil exports are authorised by short-term orders for periods of less than one year
for light crude oil and less than two years for heavy crude oil. With respect to electricity,
the NEB has issued permits and licences for as short a period as three months and for
as long as 30 years, with the average being for 10 years. In reviewing applications for
electricity exports, the NEB applies a fair market access policy under which exporters
must afford Canadian purchasers who have demonstrated an intention and ability to buy
electricity for consumption in Canada an opportunity to purchase electricity on terms
and conditions as favourable as those offered to an exporter customer. The NEB does not
regulate imports of oil or electricity.
Provinces regulate oil and gas pipelines and facilities that lie completely
within their borders; this includes regulatory authority over the construction of new
infrastructure and the setting of just and reasonable rates for service. Electricity
generation, transmission, distribution and sale are all broadly regulated. Licences to
generate, transmit, distribute or sell electricity are required from provincial regulatory
authorities. Approvals or permits to construct generation, transmission or distribution
facilities must also be obtained from provincial energy commissions or from a variety of
provincial and municipal authorities. Rates for transmitting and distributing electricity
are also set by provincial regulators, as is generation in the case of those provinces with
vertically integrated structures.
In addition, a range of other authorisations may be required from federal,
provincial and local authorities. These will vary depending on the facilitys scale, physical
location, fuel type, discharge characteristics and the potential environmental effects. For
major projects, the most significant approvals required are generally under federal or
provincial environmental assessment legislation. The environmental assessment process
may be consolidated or coordinated with the project approval process, although this can
vary depending on the type of project and jurisdiction involved. Provincial approvals
are often required for air and noise emissions, water intake and discharge, storm sewer
management, archaeological assessment and for decommissioning and clean-up of
contaminated sites. Local land use approvals required may include official plan and bylaw amendments, sewer use, building permits and servicing easements. As previously
discussed, the NEB has introduced amendments to the NEB Act that are intended to
streamline the regulatory approval process.
Section 35 of the Constitution Act 1982 provides protection to the aboriginal
and treaty rights of Canadas aboriginal peoples. The courts have interpreted this section
as placing a duty upon the government to consult with aboriginal peoples where
approval of a project could affect an aboriginal or treaty right. While the duty belongs
to the government, in practice responsibility for consultation is often delegated to the
proponent. In some cases where the impact upon a right is significant, a proponent may
be required to accommodate the right. The courts have ruled that regulators may assess
whether the duty to consult has been satisfied when issuing an approval, although the
scope of that assessment depends on the nature of the particular approval being sought
and the stage of the project. For example, an economic regulator might assess the duty as
it relates to the issues that are within the regulators mandate and not the entire project.
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Canada
iii
The requirements to obtain a licence and licensing conditions vary depending on the
sector involved and the type of activity that is the subject of the licence.
Those segments of the energy industry that are economically regulated are subject
to restrictions designed to eliminate the risk of market dominance and improper crosssubsidisation of competitive business at the expense of captive ratepayers. For example,
there are restrictions in the electricity and gas sectors that prohibit regulated transmitters
and distributors from operating other competitive businesses. A shareholder is generally
permitted to own both competitive and regulated entities, although in those cases the
regulated entities will be subject to transfer-pricing provisions to ensure transactions
with affiliates are at fair market value. There may also be limitations on employee and
information sharing between regulated and unregulated affiliates.
Acquisition of control of a Canadian business, whether or not currently foreignowned, by a non-Canadian investor requires review (generally pre-closing) or notification
(post-closing) under the Investment Canada Act. A transaction will be reviewed if it
meets certain asset thresholds. Reviewable transactions may not be completed until
the Minister of Industry Canada has found that the proposed transaction will be of
net benefit to Canada. While the federal government has generally welcomed foreign
investment, in 2010 the federal government exercised its authority to block the acquisition
of PotashCorp by BHP Billiton because it failed the net benefit test. This issue was
revisited in 2012 with announcements by Petronas (Malaysias state-owned oil company)
of its proposed C$5 billion acquisition of Progress Energy and by CNOOC (a majority
Chinese state-owned oil company) of its proposed C$15 billion acquisition of Nexen.
Both acquisitions were approved by the federal government in December 2012, but the
government announced new guidelines governing proposed acquisitions by state-owned
enterprises (SOEs) of controlling interests, including joint ventures, in the Alberta oil
sands. Henceforth, proposed acquisitions of controlling interests in the oil sands industry
by SOEs will be found to pass the net benefit test only on an exceptional basis, and
updated SOE guidelines will require all SOE investors to demonstrate their commitment
to transparent and commercial operations and the extent of any influence by the foreign
state on such SOE. The new guidelines will apply only to oil sands investments, but the
government warned that it would continue to monitor investments by SOEs in other
sectors. As a general rule, Canadian provinces do not limit the acquisition of interests in
the energy sector by foreign companies, although the potential exists for restrictions and
conditions to be imposed if regulatory approval of a transaction is required.
iv
While the particular requirements vary by sector and jurisdiction, a regulators approval is
generally required before a regulated entity can issue any stocks or bonds, or dispose of or
encumber a significant part of its facilities. A regulator must also approve any change in
control of voting securities or any merger with or acquisition of another regulated entity.
In deciding whether to approve a particular transaction, the regulator must consider the
public interest and the continued financial stability of the regulated entity. The time to
obtain approval depends upon the complexity of the transaction and ranges between
several weeks and a few months.
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The transfer of oil and gas interests in Crown leases, and licences for wells, pipelines
and facilities, is regulated by the respective government in each provincial jurisdiction.
Typically, the transfer of a licensees rights must be approved by a provincial regulatory
body. The regulatory body will assess the licensees and licensors creditworthiness and
will assess the exploration or production site prior to approving the transfer of the licence.
Mergers, acquisitions or changes of control may also be reviewable under both
federal and provincial legislation. The federal Competition Act establishes mandatory
pre-merger notification for mergers meeting certain financial thresholds and if notifiable,
the merger cannot be completed for specified no-close periods. The Competition Bureau
reviews mergers and may challenge a transaction before the Competition Tribunal.
Competition Bureau review can take, generally speaking, from one to five months or
more depending on the complexity of the competition issues. Following expiry of the
no-close period, the merging parties are free to close unless the Competition Tribunal has
enjoined the transaction because of a finding that a merger would prevent or lessen (or
likely prevent or lessen) competition substantially, but in practice most merging parties
only close upon receipt of an affirmative clearance from the Competition Bureau.
III

SERVICES
Canada has had a competitive interprovincial natural gas market since 1 November
1986. The genesis of this was an agreement between the federal government and the
three western gas-producing provinces of British Columbia, Alberta and Saskatchewan
(commonly referred to as the Halloween Agreement). Consumers can purchase natural
gas directly from producers or indirectly through arrangements with local distributors.
While there is some overlapping ownership, the generation, transmission, distribution
and retail segments of the market are generally disaggregated.
The nature of Canadas electricity market is more complex. The provinces
of Alberta and Ontario have restructured their electricity markets and unbundled
generation, transmission, distribution and retail services. Other provinces have
functionally unbundled some services, but public ownership and vertical integration
remain common.
In Ontario, virtually all transmission remains in hands of the government-owned
transmitter Hydro One Networks Inc (which owns and operates more than 95 per cent
of the transmission in Ontario). The province, however, recently launched a competitive
process to designate a transmitter to develop a major new transmission project; this may
be followed by further competitive processes for other transmission projects. Ontarios
distribution sector is highly fragmented, with over 80 local distribution companies; there
are opportunities for consolidation and private sector investment in this area.
In Alberta, the provincial transmission system is owned by a number of utilities
(known as transmission facility owners or TFOs). The Alberta Electric System Operator
(AESO) contracts with the TFOs to acquire transmission services. The AESO oversees the
design and use of the transmission system to ensure fair market rates, non-discriminatory
access for all market participants and the safe reliable operation of the system. The
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Alberta Utilities Commission (AUC) approves the costs for transmission facility owners
to provide their services. The regulated costs of the transmission companies are passed
on to the AESO, which recovers the cost of operating the system and the transmission
companies costs through the AESOs transmission tariff, which is also approved by the
AUC. Like Ontario, Alberta has initiated a competitive process to select transmitters to
develop several major new transmission lines. The distribution system remains regulated,
with distribution tariffs being approved by the AUC. The majority of distribution
systems are owned by municipally owned utilities, rural electrification associations or
local cooperatives.
In the other provinces, government-owned utilities own most transmission assets,
with distribution in provincial or municipal hands. In Quebec, for example, HydroQubecs Transnergie division owns and operates the provincial transmission grid under
open-access rules and regulated tariffs. Hydro-Qubec Distribution has the exclusive
right to distribute electricity at regulated rates throughout the province with very limited
exceptions.
ii
Distributors of natural gas and transmitters and distributors of electricity generally enjoy
the exclusive right to serve a particular territory. These exclusive rights can be conferred
through franchise agreements with municipal governments or by way of specified service
territories or facilities prescribed in a utilitys licence. A competing utility will not be
permitted to operate in an exclusive franchise area without regulatory approval. It should
be noted that Canadian natural gas transmitters typically do not enjoy exclusive franchise
rights.
In exchange for exclusive franchise rights, transmitters and distributors in Canada
are legally obliged to connect and serve third parties that lie within their franchise area
upon request. These obligations are rooted in the common carrier doctrine that Canada
adopted from English common law. The obligations to connect and serve are generally
prescribed by statute and are typically enforced by regulators through codes and licensing.
For example, Sections 28 and 29 of Ontarios Electricity Act 1998 require an electricity
distributor to connect a building that lies along any of the lines of the distributors
distribution system and to sell electricity to every person connected to the distributors
distribution system.
The obligations to connect and serve are not absolute. A utility is entitled to
recover the reasonable costs to connect a third party and is not required to continue
to provide service to a customer that has failed to pay its bills. The precise parameters
of these obligations are spelled out in regulations, codes, regulatory decisions and the
utilitys conditions of service. A corollary of the obligations to connect and serve is that
transmitters and distributors must provide third parties with non-discriminatory access
and cannot favour a particular category of customer. This principle, however, can be
modified as illustrated by recent legislative changes in Ontario that direct electricity
transmitters and distributors to provide preferential access to renewable generators.
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iii
Provincial regulatory bodies, such as the AER in Alberta, are responsible for regulating
the design, construction, operation and maintenance of oil and gas facilities within
their respective provinces. Often, such regulation will require compliance with relevant
Canadian Standards Association standards as well as applicable environmental legislation.
The nature of storage of petroleum products depends on the product being
stored. Generally, crude oil is stored above ground in storage tank facilities. Often,
these facilities are owned and operated by the pipeline companies. In contrast, natural
gas is generally stored underground. Underground natural gas storage facilities are a
vital and a complementary component of the North American natural gas transmission
and distribution system. Natural gas storage serves a number of functions within an
overall scheme for the production, transmission and distribution of natural gas from the
wellhead to the ultimate consumer. Storage may be located at any point along that chain.
In Canada, most storage facilities are located close to the ultimate market and thus at the
distribution end of the chain (especially in Ontario), but there is significant upstream
storage in both British Columbia and Alberta.
In contrast to the very limited regulatory authorisations applicable to owners
of energy products, numerous and varied regulatory requirements arise in relation to
the ownership and operation of petroleum and natural gas storage, terminalling and
processing facilities in each of the provinces. Applicable regulatory schemes include
pipeline acts, acts to regulate oil and gas or petroleum-related activities, utility or energy
board acts, hazardous substances and waste-handling regulations and environmental
protection legislation.
Under such provincial acts it is normal that any rights, responsibilities and
liabilities attach to the operator and owner of the facility, as opposed to the title holder
of any substance-making use of such facilities. In some limited situations, however, such
as regarding liability on release under certain environmental protection legislation, the
title holder or owner of a substance may be included in the group of persons responsible
for a substance. In such cases there is a risk that ownership could potentially give rise to
liability for any environmental harm caused by a stored substance.
iv Rates
Rates for transmission and distribution services in Canada are generally set pursuant to
rate proceedings before federal or provincial regulatory tribunals. In some cases, rates may
be set by the provincial Cabinet, or in the case of some municipally owned distribution
systems, by the municipal council.
Where rates are set by a regulatory tribunal, transmitters or distributors are
required to submit applications requesting rates and providing evidence to support the
underlying revenue requirement (including a return on investment). Customers and
other interested parties are provided with an opportunity to intervene and challenge the
companys projected revenue requirement. The application may proceed to a full costof-service hearing before the regulator, although often many of the issues are resolved
through negotiated settlements with intervenors prior to a hearing.
When considering an application, the regulators mandate is to set a rate that
is just and reasonable to both utility owners and consumers. The concept of just and
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reasonable rates is well-established in Canadian law and the concept can be found in most
statutes that govern rate-regulated entities. Canadian regulators are generally granted
wide discretion over the methodology used to calculate a just and reasonable rate.
Canadian law requires that the resulting rate must be sufficient so that the utilitys
shareholders can earn a fair return upon their capital investment (i.e., as large a return
on the capital invested in the company as the investor would receive if it were investing
the same amount in other securities possessing an attractiveness, stability and certainty
equal to that of the company). The rate of return is composed of a return on equity and
cost of debt and may be set by a regulator in a generic proceeding to ensure consistency
between all of the entities it oversees.
Various Canadian regulators have experimented with performance or incentive
ratemaking and automatic adjustment formulas in an effort to limit full cost-of-service
rate proceedings.
v
Oil and gas pipelines are subject to safety and security standards established by the NEB
or applicable provincial regulators. The NEBs security standard includes criteria for
establishing a security management programme to ensure security threats and associated
risks are identified and managed and proper procedures are in place to minimise the
effects of any security breaches.
Electricity infrastructure in Canada is subject to standards established by
the North American Electric Reliability Corporation (NERC) and various regional
reliability organisations (RROs), which have established specific standards for protecting
the security of the bulk electric system. NERC and RRO standards are often made
enforceable through memorandums of agreement signed by provincial regulators.
The federal Export and Import Permits Act contains restrictions on the transfer
of technology outside of Canada. Generally, the Act restricts the export of technology
that is required for the development, production, or use of certain groups of products
identified on the Export Control List. The most notable items on the list for the energy
sector are nuclear dual-use goods and technology.
IV
ENERGY MARKETS
In Ontario, wholesale and retail competition in the electricity market has been dampened
by government intervention in the form of price caps, subsidies, rate-regulated baseload
generation and other policies. A merchant generation market has not developed in Ontario
and most new generation supply is procured by a government agency, the Ontario Power
Authority (OPA), under long-term power purchase agreements. While all generation
is, in fact, offered and scheduled through a real-time spot market administered by the
Independent Electricity System Operator (IESO), most customers are largely insulated
from the spot price through the aforementioned regulatory measures. Currently, there
are initiatives under way to enhance price fidelity and competition in the IESO market.
Alberta has fully functioning competitive wholesale and retail markets. The AESO
contracts with transmission facility owners to provide generators access to the electric
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grid. All wholesale power must be sold through the power pool, which is operated by the
AESO, subject to a few exceptions such as behind-the-fence generation or sales under
direct sales contracts or forward contracts. The AESO dispatches power through the
power pool based on relative economic merit. It is also important to note, however, that
much of the electricity traded in Alberta is not priced at the hourly pool price, rather
the price is set in a direct sales contracts or forward contracts pursuant to the exception
noted above. For example, forwards market trading organisations, provides wholesale
power purchasers with the option to buy quantities of power (one hour out, one day
out, one month out, one-quarter out and one year out). Electricity retailers, in turn, buy
large blocks of energy and then repackage it into offers to end-use consumers, whether
that is through the regulated rate or contracts. Alberta has an energy-only market, where
generators are paid for their electricity output on an hourly basis and do not receive any
other out-of-market compensation, such as capacity payments.
In other provinces that do not have competitive power markets there are some
government procurement opportunities for independent power producers. There is
also substantial trade between provincial utilities (e.g., Hydro-Qubec, BC Hydro) and
neighbouring US markets. In particular, British Columbia, Manitoba and Quebec all
of which have abundant hydro resources export substantial amounts of power to the
United States. These exports have in the past produced outsized profits; however, the
advent of plentiful shale gas has recently depressed electricity prices in the United States
making exports to the US less lucrative.
Canada has a well-developed national natural gas market. Traditionally, gas
has been shipped from western Canadian producers to customers in eastern Canada
and the US northeast via the TransCanada mainline (although as noted above the
recent proliferation of shale gas in North America is fundamentally altering this). The
Canadian and US natural gas markets operate as one large integrated market. Canadian
gas production is connected to the North American gas market through a network of
thousands of kilometres of pipelines that allows buyers to purchase and transport natural
gas from a number of supply sources across the continent.
The natural gas price has three components: the cost of the natural gas itself
(known as the commodity cost), the pipeline transportation cost and the distribution
cost. Generally, the transportation and distribution costs are regulated by government
agencies and tend to change moderately over time. The commodity cost makes up most of
the final cost to consumers and will change in response to supply and demand conditions
and can be much more volatile. The Henry Hub, an intersection of numerous pipelines
in Louisiana, is the pricing point for natural gas traded on the New York Mercantile
Exchange (NYMEX). As such, many gas market transactions in North America are based
on the pricing at the Henry Hub. The AECO-C hub in south-east Alberta is the main
Canadian pricing point. Also, Dawn, Ontario, located at the point of convergence of the
Vector Pipeline system and the TransCanada mainline system, is increasingly becoming
a major Canadian hub for gas trading in eastern Canada and the United States. The
price of gas traded at these hubs is publicly available and establishes a commodity cost of
natural gas. Natural gas is sold by unit of energy (common energy units include British
thermal units (Btu), therms, and joules). Natural gas can be traded for physical delivery
same day, or at some point in the future. A price set today for delivery at some later date
is referred to as a future price. Spot and future prices are set through the interaction
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of supply and demand through trading platforms such as the Natural Gas Exchange in
Alberta or the New York Mercantile Exchange in the United States.
Canada is a participant in the global oil market in which buyers and sellers trade
volumes, mostly on the basis of short-term contracts. It is this interaction that sets the
world price of oil. The Canadian and US markets for oil are fully integrated. Canadian
crude oil production is connected to the North American oil market through a network
of pipelines, tankers, rail and trucks. Although Canada is the sixth-largest producer in
the world, it produces only about 4 per cent of global production, so it does not have a
major influence on the world price of oil. Currently, Canada exports two-thirds of the
oil it produces each day, but also imports half of the oil it needs on a daily basis. Oil is
produced and exported from Western Canada and Newfoundland, while the refining
industry in Atlantic Canada, Quebec and part of Ontario relies upon imported crude oil
for feedstocks. Close to 100 per cent of Canadian crude oil exports are shipped to the
United States, to which Canada is the largest exporter of crude oil. Two of Canadas major
benchmarks for crude oil are Western Canada Select, which is a heavy crude benchmark
blend and Edmonton Par, which is a light oil benchmark blend. As the United States
is Canadas main export market, typically Canadian crude oil is priced relative to the
crude oil exports benchmark West Texas Intermediate, at Cushing, Oklahoma. Crude
oil, like natural gas, is bought and sold through a variety of contract types, including
spot transactions. As noted above, there is currently a disparity between the price paid
for Canadian oil production and the world price, such that Canadian oil production is
increasingly looking for markets outside of the United States.
ii
Power and gas markets are for the most part separately regulated, and power is much
more heavily regulated. In Ontario and Alberta, there are market rules administered
by the respective independent system operators that govern and regulate the wholesale
spot market and related markets. These address, inter alia, registration requirements,
reliability standards, prudential obligations, bid or offer protocols, dispatch, settlement,
compliance, penalties and dispute resolution. Retail markets are governed by various
consumer protection legislation or regulations and energy board rules and codes. These
typically impose more onerous requirements on sales to residential or other small-volume
consumers.
With regards to the gas market, wholesale trading is not governed by any pricing
regulations or rules in Canada. In the case of the retail gas market, like electricity, it is
also governed by various consumer protection statutes, regulations and energy board
codes and rules.
Some provinces in Canada have commodity futures legislation that regulates
trading and advising in commodity futures contracts and commodity futures options.
Moreover, in other provinces the definition of security in securities legislation includes
over-the-counter derivative transactions (i.e., swap contracts) or physical transactions
(including to make or take future delivery of natural gas). As a result, these types of financial
transactions and physical transactions are governed by dealer registration and prospectus
filing requirements unless the transaction fits within certain exemptions. A number of
provinces (including Alberta and British Columbia) have blanket orders that address this
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issue by exempting such transactions from filing and registration requirements as long
as each party to the transaction is a qualified party acting as a principal. It is important
to note that in Canada there is no national securities law and no national securities
regulator. Rather, securities law and regulation is the responsibility of the provincial and
territorial governments; however, many substantive aspects of securities regulation are
harmonised through the use of national instruments or national policies, which are
adopted by each of the provincial and territorial regulators.
As noted above, the NEB regulates the import and export of energy (see Section
II.ii, supra, for details concerning import or export permitting and licensing processes).
iii
In Ontario and Alberta, wholesale and retail customers may contract to purchase
electricity. In Ontario, residential and low-volume consumers may purchase from
competitive retailers or pay a default price passed through by their local distribution
company; this default price is periodically smoothed by the OEB to reduce volatility. As
a result of rate-regulation of most baseload generation, various government subsidies and
price smoothing, the retail market for residential and low-volume consumers has been
significantly dampened. There is a more robust market for commercial and industrial
customers.
In Alberta, consumers are free to purchase their electricity from any licensed retailer.
Neither wholesale nor retail electricity prices are regulated, making Alberta the only province
with fully competitive wholesale or retail markets. Small-volume consumers who do not
wish to purchase electricity from a competitive licensed retailer are eligible for a regulated
rate available to eligible consumers until 30 April 2018. Owners of distribution systems
must provide a regulated rate, either directly or indirectly, by appointing a regulated rate
provider. The AUC regulates the rates charged by the regulated providers. As previously
noted, much of the electricity traded in Alberta is not priced at the hourly pool price; rather
the price is set in direct sales contracts or forward contracts. These direct sales contracts and
forward contracts must be undertaken in accordance with rules set by the AESO.
In Canada, wholesale and retail customers may contract to purchase natural gas.
Depending on the province, the rate a customer pays for natural gas may be a regulated
rate or a contracted rate. Regulated rates are set by provincial regulators whereas the
provincial regulators have no jurisdiction over competitive contracts.
iv
Market developments
In 2013, a fundamental change was effected to Ontarios wholesale electricity market by

making transmission-connected renewable resources (particularly wind) dispatchable;
until then, renewable resources had been self-scheduling and received payment whenever
they generated. However, due to the unprecedented increase in renewable resources
(both transmission and distribution-connected) Ontario had been experiencing
surplus conditions during non-peak periods that had required it to dispatch off nuclear
units in favour of wind and other non-dispatchable renewable resources. In light of
surplus generation conditions and concerns about the over-market prices paid to
procure renewable generation, Ontario has substantially slowed renewable generation
development. At present, Ontario is focusing on demand-side initiatives, including
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programmes to procure new energy storage technologies, an area in which the province
has proclaimed it intends to become a global leader. Ontario has also taken the first steps
to investigate the development of capacity market.
As noted above, western Canada is experiencing a number of new developments
that are fundamentally changing the oil and gas industry. The application of horizontal
drilling and multi-stage hydraulic fracturing to tight oil formations has given new
life to previously low-producing or unproductive oil reservoirs in the WCSB. This is
reversing the long-standing decline trends in conventional crude oil production in
Alberta. Producers continue to take advantage of technological advancements in drilling
and stimulation techniques resulting in greater production from ageing oil reservoirs as
well as unlocking formations which were previously thought to be uneconomical (such
as the Cardium and Bakken formations) . This recent trend in conventional crude oil
production coincides with significant new investments being made to develop the oil
sands and shale gas reserves. Foreign investment in these projects is rapidly accelerating
through the proliferation of large joint ventures, financings and acquisitions. This
investment is fuelling rapid development of projects and of related infrastructure.
The development of shale gas reserves in northeast British Columbia (Horn River and
Montney) and the Alberta Deep Basin continue to fuel western Canadas nascent LNG
industry as companies look to acquire and develop natural gas reserves to feed proposed
LNG facilities on the west coast of British Columbia. If these projects come to fruition,
they will significantly alter the relationship between Canadian producers and markets in
the United States as well as internationally. These projects are encountering regulatory
challenges given their scale and the issues they create with respect to the rights of First
Nations, environmental impacts of new oil pipelines, hydraulic fracturing and horizontal
drilling and dirty oil. Initiatives are under way, some of which have been recently
implemented, to streamline Canadas environmental review process and to address the
potential for regulatory log-jams; however, it remains uncertain how successful these
initiatives will be.
V
Several Canadian provinces have introduced policy initiatives to spur renewable

development in recent years. These policies include renewable energy funds, renewable
portfolio standards, renewable procurements and feed-in-tariff programmes.
Ontarios green energy policies stand out as the most ambitious in Canada. The
Ontario government has mandated a dramatic increase in renewable resources. To meet
this goal, the provincial government introduced legislation to dramatically increase the
contribution of renewable and conservation resources to Ontarios supply mix to encourage
green investment and green jobs and to address climate change. The centrepiece of
the legislation is a FIT programme, which provides standard-offer prices and contracts
for renewable generation, including wind, solar and biomass. As part of promoting the
green economy objectives, the programme includes domestic content requirements
aimed at inducing wind turbine, solar panel and other component manufacturers to
locate in Ontario. The programme was launched in late 2009 and promises to assist
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in meeting the governments goal of 10,700MW of nonhydro renewable generation
by 2015. As noted above, surplus generation conditions and concerns about the overmarket prices paid to renewable developers have caused Ontario to substantially slow
renewable generation procurements.
Other Canadian provinces have introduced more limited green energy initiatives.
Notably, Nova Scotia introduced a renewable portfolio standard to source 25 per cent of
its electricity from renewable sources by 2015 and is currently introducing a competitive
procurement to purchase approximately 300MW of renewable energy from independent
power producers. Similar standards also exist in New Brunswick and Prince Edward
Island. Quebec, despite significant untapped hydro resources, has mandated that 10 per
cent of its generation should be sourced from wind. It is expected that Quebec will issue
a call for further tenders for up to 700MW of wind in 2012 or 2013. Saskatchewan has
set up the Go Green Fund, which will invest in results-based projects that contribute to
the reduction or avoidance of greenhouse gas emissions. Also, the Manitoba government
released Green and Growing, which provides a goal of developing 1,000MW of wind
power in Manitoba over the next decade.
ii
At the federal level, the government has established an Office of Energy Efficiency
(OEE), which offers a number of grants and incentives to encourage energy efficiency.
The OEEs initiatives have included efficiency standards, home retrofitting, and the
labelling of consumer products.
There are also various efficiency and conservation initiatives at the provincial
level. In Ontario, the provincial government has created a Conservation Fund to fund
electricity conservation initiatives. The Conservation Fund supports a wide variety of
electricity conservation projects, including programmes that allow electricity users to
take advantage of commercially available energy-saving measures and incentives.
iii
Ontario has established a Smart Grid Forum that is composed of members of the utility
sector, industry associations, public agencies and universities. The purpose of the forum
is to make recommendations that focus on removing barriers to smart grid development
in the province.
VI
THE YEAR IN REVIEW
As noted at various points throughout this chapter, access for Canadas abundant oil and
gas resources to the world markets continues to be a pressing issue for Canada. The price
for natural gas in North America is significantly less than the price for natural gas in Asia
and Europe. This discount may continue to be exacerbated as discovery and development
of unconventional gas resources continues in North America and the strength of natural
gas liquids pricing in North America continues to fuel increased production.
While progress is being made on the LNG front with a number of projects being
granted NEB export permits, LNG development is not taking place as quickly as many
had hoped and there are a number of factors that continue to delay final investment
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decisions by project proponents. Such factors include international pricing of LNG,
capital cost constraints, opposition from First Nations and environmental groups,
regulatory uncertainty and global competition for labour and materials to construct
new greenfield projects. Notwithstanding these constraints, the push to develop LNG
export projects on the West Coast has driven investment in natural gas assets in Western
Canada as participants in those LNG projects move to build reserves and consolidate
landholdings to feed potential projects. With the magnitude of capital expenditures
required and the number of proposed projects, it is anticipated that consolidation of
projects among industry participants is likely.
Canadian oil also continues to trade at a significant discount compared with
world oil prices. Increased access to refineries in the US is required to reduce the
discount that Canadian oil sells for when compared to the North American (West Texas
Intermediate) and International (Brent) benchmark blends. The lack of export capacity
is being exacerbated by the fact that US markets are increasingly being supplied by US
domestic production (particularly from shale plays in North Dakota and Montana).
These pressures are making the development of overseas markets for the Canadian oil
and gas sector more important than ever.
While the major pipeline projects continue to gather momentum and clear
regulatory hurdles, the shipment of oil by rail to tidewater markets in the US has
increased dramatically to bridge the gap. Between February 2012 and February 2013,
there was a 60 per cent increase in the amount of crude oil shipped by rail in Canada.
Rail loading capacity in Western Canada is expected to increase from 225,000 to over
900,000 barrels per day by the end of 2014. The derailment in the summer of 2013 in
Lac-Mgantic, Quebec will likely result in further regulations to attempt to reduce the
public risk associated with oil shipments by rail. That being said, there exist legitimate
economic advantages to shipping oil by rail such as diluent carry-back options and
drastically shorter time periods to ship product to tidewater markets. These advantages
will continue to spur investment in rail loading capacity and help to further decrease
the current price differentials for Canadian crude and our reliance on existing pipeline
infrastructure.
The issues with oil and natural gas have also affected other energy resources in
Canada. Access to abundant and cheap natural gas has reduced the urgency to develop
alternative forms of energy such as wind and solar energy. It has also caused provinces
such as Quebec and Ontario to question the wisdom of decisions to develop big hydro
projects and to refurbish and expand nuclear generating fleets, respectively. As such, the
energy landscape in North America continues to change dramatically.
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Chapter 6
COLOMBIA
Patricia Arrzola-Bustillo and Fabio Ardila1
I OVERVIEW
Under the Colombian Constitution of 1991, the government is responsible for ensuring
the provision of public utility services. In order to enable the government to fulfil these
obligations, the Constitution grants the government the powers to monitor and regulate
public utility companies to ensure the continued availability of such services.
Prior to 1991, the Colombian government either provided public utility services
directly through specialist providers or granted concessions to private parties to provide
such services. Since 1991, the government has adopted a strategy designed to restructure
the power sector by implementing various programmes that seek to reduce administrative
inefficiency in electric enterprises, to establish a rational tariff structure that will allow
energy companies to recover the true economic cost of electric services and to establish
opportunities for the participation of private entities. In fact, the Constitution allowed
private parties to provide public utility services, although the government retained
ultimate responsibility for the efficiency and availability of such services.
In 1994, significant reforms were undertaken to the public utilities industry.
These reforms, contained in Law 142 of 1994 (as amended, Law 142) and Law 143
of 1994 (as amended Law 143) were the result of constitutional amendments made in
1991, and created the basic legal framework that currently governs the electricity sector
in Colombia. The most significant reforms included the opening up of the electricity
industry to private sector participation, the functional segregation of the electricity
sector into four distinct activities, namely generation, transmission, distribution and
commercialisation, and the creation of an open and competitive wholesale electricity
market (MEM).
Patricia Arrzola-Bustillo is a partner and Fabio Ardila is an associate at Gmez-Pinzn Zuleta

Abogados SA.
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Colombia
As previously mentioned, the most important legislation regulating this sector is
Law 142, which contains the legal framework for public utilities and Law 143, which
regulates the generation, transmission, distribution and sale of power. Other relevant
regulations include CREG Resolution 024 of 1995 issued by the Energy and Gas
Regulation Commission (CREG), which regulates the MEM, while CREG Resolution
025 of 1995 regulates the national transmission system expansion plan and CREG
Resolution 071 of 2006, as amended and clarified, regulates the reliability charge that
power generators receive for the availability of their energy generation assets and back-up
energy generation capacity in order to guarantee an energy supply to end-users under
emergency conditions. On the other hand, CREG Resolution 128 of 1996 provides
certain rules for vertical and horizontal integration of business within the energy market.
Finally, Law 99 of 1993 provides the general environmental legal framework.
II REGULATION
i
The regulators
Although, strictly speaking the CREG is the sole entity that is defined as a regulator in
the energy sector, there are other entities with roles in the industry. The constitutional
duties and responsibilities of the Colombian government with respect to the electricity
sector are generally carried out through several governmental entities, including the
following.
The Ministry of Mines and Energy (MME) is responsible for the overall
policymaking and supervision of the electricity sector. It regulates generation,
transmission, trading, interconnection and distribution, and approves generation
and transmission programmes. Direct supervisory authority over the electricity sector
is entrusted to a number of agencies under its control, including the CREG and the
Mining Energy Planning Unit (UPME), which is a special administrative unit of the
MME responsible for developing and updating the national energy plan and the national
reference expansion plans. UPME is also responsible for forecasting the overall electricity
requirements of Colombia, planning and developing ways and means to satisfy such
electricity requirements (including the development of alternative sources of energy)
and establishing programmes to preserve and optimise the use of energy. All electricity
transmission companies are required to prepare and submit information to UPME upon
UPMEs request.
The CREG is a special independent administrative body created in 1994 whose
main purpose is to regulate and promote competition between the different areas of the
energy business in such a way that an efficient and high-quality service can be provided.
Its membership consists of the MME, the Minister of Finance, the Director of the
Department of National Planning and five experts appointed by the President for a fouryear term. Resolutions of the CREG require the approval of a majority of the CREGs
members, which gives the expert appointees effective control over the CREGs actions.
The following functions have been assigned to the CREG by Law 142 and Law 143:
a
promoting market competition;
b
establishing the conditions for the gradual deregulation of the sector towards an
open and competitive market;
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c
d
e
f
g
approving interconnection and usage charges for the transmission and distribution
of electricity;
establishing the methodology for calculating usage charges for the regulated
market;
defining the regulated and unregulated end-user markets;
establishing the regulations for the planning and coordination of the operation of
the national transmission system; and
establishing technical criteria relating to the quality, reliability and security of
supply.
The Superintendency of Domiciliary Public Utilities (SSPD) is a governmental agency

created pursuant to the Constitution, which possesses surveillance authority over all
public services companies. The SSPD monitors the quality and efficiency of all public
services companies, but does not issue regulations regarding their businesses. The SSPD
can also take over public services companies when the rendering of the service or viability
of such companies is at risk. The SSPD may impose sanctions on electricity companies
for non-payment and violations of the code of operations applicable to the electricity
industry, which establishes the principles, criteria and procedures for the planning,
coordination and operation of the National Interconnection System (NIS) and for
non-compliance with any of the resolutions of the CREG or the UPME. Penalties may
include monetary fines, removal of officers or administrative takeover.
The National Operation Council (CNO) is a consultative entity made up of:
a
one representative of each generation company accounting for more than 5 per
cent of the installed capacity of the NIS;
b
two representatives appointed by state-owned generation companies accounting
for between 1 per cent and 5 per cent of the installed capacity of the NIS;
c
one representative appointed by transmission companies (which representative
has limited voting rights);
d
one representative appointed by all remaining generation companies;
e
the director of the National Dispatch Centre (CND), who does not have voting
rights; and
f
two representatives appointed by distribution companies that do not engage
primarily in generation activities.
The CNO is responsible for establishing technical standards to facilitate the efficient
integration and operation of the NIS.
The Commercialisation Advisory Committee (CAC) is an advisory entity created
by regulation, which assists the CREG with the commercial aspects of the MEM. It
is composed of four representatives of companies that develop both the activities of
generation and commercialisation, four representatives of the companies that develop
both the activities of distribution and commercialisation, four representatives of
commercialisation companies, and a representative of the Commercial Exchange System
Administrator (ASIC), without voting rights.
The Superintendence of Industry and Commerce (SIC) investigates, corrects and
sanctions restrictive commercial competitive practices. Likewise, the SIC is the competent
Colombian antitrust authority. The SIC also oversees mergers of companies operating in
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the same productive activities to prevent the concentration or monopolisation of certain
industries.
Finally, XM, an affiliate of Grupo Empresarial ISA, is responsible for planning
and coordinating the NISs operations, managing the commercial exchanges in the
MEM and billing for use of the NIS. ASIC is a subdivision of XM, which is responsible
for the registration of contracts and the settlement and billing of all transactions that
take place on the wholesale energy market. The CND is also a subdivision of XM and is
responsible for the planning, supervision and control of the operations of the NIS.
ii
As a general rule, the generation, transmission, distribution and commercialisation are

all activities that are subject to the CREGs resolutions. In order to undertake any of
these activities there is no need of a specific licence; however, depending on the specific
situation these activities may require environmental licences and urban planning
permissions.
iii
Pursuant to applicable regulations, the electricity sector is largely segregated. In order

to achieve efficiency in the provision of electricity services and encourage privatesector investment, Law 142 and Law 143 segregated the electricity industry into
the four mentioned service functions: generation, transmission, distribution and
commercialisation. Therefore, pursuant to Article 74 of Law 143, the vertical integration
of utilities incorporated after the enactment of such Law is prohibited.
Likewise, according to Article 1 of CREG Resolution 095 of 1994, aiming to keep
the activities referred to in Article 74 of Law 143 fully separated, the vertical integration
of utilities is not incorporated before the enactment of Law 143 of 1994 with utilities
incorporated after such enactment permitted.
Where electricity companies were integrated prior to the enactment of Law142,
they are allowed to continue engaging in all of the functions in which they were previously
engaged on condition that they maintain separate accounting records for each business
activity.
On the other hand, companies incorporated after Law 142 and Law 143 can
simultaneously operate activities considered as complementary, such as generation and
commercialisation, or distribution and commercialisation; however, according to such
laws, companies cannot undertake generation and distribution activities at the same
time, and transmission companies cannot operate in any other activities.
There are others restrictions established by the CREG that are worth mentioning;
for example, there are regulations establishing certain other ownership and market share
restrictions such as:
a
limits on the ownership interest that an electricity generation company may take
in an electricity distribution company; and
b
pursuant to CREG Resolution 127 of 1996, no electricity generation company
may directly own more than 25 per cent of the capital of a distribution company.
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iv
Law 142 states that companies that render public services must avoid unjustified
privileges and discriminatory acts, as well as abstaining from any act that has the capacity,
purpose or effect of generating unfair trade or restricting competition in any way, or
abusing their dominant position. Similarly, those companies are subject to the special
unfair competition regime foreseen in Colombian law.
Therefore, in the event that any company does not comply with its obligations
regarding promotion of competition, the SSPD may impose penalties and can even
take over the business. Also, several resolutions issued by the CREG have established
additional norms regarding competition and promotion in the electric sector. Specifically,
the regulation states that the SIC is the competent authority when dealing with company
integrations in the energy sector. According to the regulations, Law 1340 of 2009, the
SIC can object to an integration when it results in undue competition restrictions and
when they are used to obtain a dominant position in the market.
As previously noted, CREG regulations additionally establish some rules that
must be taken into account, such as the following:
a
no electricity generator may have a participation in an electricity distribution
company exceeding 25 per cent of the distribution companys capital (however,
this ownership restriction does not apply to affiliates or subsidiaries of electricity
generation companies);
b
pursuant to CREG Resolution 60 of 2007, no company can have market
participation above 25 per cent in the generation activity; and
c
according to CREG Resolution 24 of 2009, no company can, directly or indirectly,
have a greater participation than 25 per cent in the commercialisation activity.
III

SERVICES
As previously mentioned in Section II.iii, supra, the vertical integration of utilities

incorporated before the enactment of Law 143 with utilities incorporated after such
enactment is not permitted.
With respect to the oil and natural gas industry, it is worth mentioning the
incorporation of Cenit Transporte y Logstica de Hidrocarburos SAS, a direct subsidiary
owned by Ecopetrol, whose purpose is the transportation and logistics activities related
to the needs of the hydrocarbons sector, resulting from the increase in hydrocarbons
production and higher sales of crudes and refined products, both in Colombia and
international markets. This entity was incorporated by means of the contribution of
several of Ecopetrols transportation assets, as well as its shareholder participation in
other oil and gas transportation companies.
ii
Electricity transmission is defined by applicable CREG regulations as the transportation

of electricity at a tension level equal to or greater than 220kV. In Colombia, electricity
transmission is regulated independently from other components of the electricity sector,
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and has the unique characteristics of a natural monopoly. The National Transmission
System (NTS) is an interconnected system for electricity transmission comprising an
array of electricity transmission lines and corresponding interconnection modules,
operating at 220kV or above.
The vast majority of generating stations, grid supply points for electricity
transmission and end users are directly or indirectly connected by the NTS. The NTS
enables the operation of generating stations to be coordinated, which reduces the amount
of backup generating capacity needed for plant maintenance and the amount of reserve
needed on a daily basis.
The NTS is made up of two subsystems, one on the Atlantic coast and one in
the central part of Colombia, which are interconnected by 500kV lines. The NTS links
Colombias 43 local and regional electricity distribution and transmission networks into
a single interconnected network. Approximately 92 per cent of the electricity consumed
in Colombia is transmitted over the NTS. The remainder is mainly generated and
consumed locally in Colombias sparsely populated south-eastern region. The Colombian
power grid is also interconnected at three points with the Venezuelan power grid and at
two points with the Ecuadorean power grid.
It is important to note that the NTS operates under open-access principles. In this
sense, all market participants in the electricity industry are entitled to access the NTS
to the extent that they comply with legal, technical and certain payment obligations,
including the payment of interconnection and usage charges. It is relevant to point out
that electricity transmission companies cannot engage in the purchase or sale of electricity.
Also, these companies have no decision-making powers in respect of the expansion of
the NTS or in respect of the NTSs utilisation parameters. These decisions are made by
the MME following studies and recommendations made by the UPME. The revenue of
electricity transmission companies is channelled towards recouping their investments in
the NTS, as well as their operation and maintenance costs.
iii
According to Article 58 of the Colombian Petroleum Code, treatment and refining of oil
within Colombian territory is a free activity that can be undertaken without any specific
licence, but this activity may require environmental licences. Storage of crude oil has no
specific regulations, and so is governed by the provisions established between individuals;
however, terminalling, processing, transportation and distribution of oil derivatives
are strictly regulated by Decree 1521 of 1998 and Decree 4299 of 2005. Essentially,
these provisions set out obligations related to safety and competition law. Rates and
terms of services are freely agreed between the parties, but rates of oil transportation by
pipeline are regulated by the Ministry of Mines of Mines and Energy in Resolution No.
181258 of 2010; however, the Ministry of Mines has announced the enactment of a new
regulation to govern oil transportation. Currently, the new regulation is under review by
the market agents. In fact, the Ministry establishes a mechanism to calculate the final
rate. In accordance with Article 56 of the Colombian Petroleum Code, this mechanism
has to take the following variables into consideration: depreciation on investments,
maintaining costs, and benefits to the carrier.
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iv Rates
The CREG determines the formula with which to calculate the remuneration of energy
distributors via resolutions issued by said entity. This remuneration is divided into two
components: connection and usage charges. Usage charges for the distribution network
are set in such a way that end-users must pay only the traders that supply them with
a single final charge. Usage charges are calculated with reference to a nominal charge
(pesos per kWh).
According to Resolution CREG No. 097 of 2008, rates of energy distributors
are valid for a five-year period counted as from the enactment of such resolution. Even
though the five-year period has already elapsed, the rates set forth on such resolution
are still in force and there is no applicable regulation that obliges CREG to update the
formula, this entity may, in any case, revise the charge and at any point in time issue new
regulations in compliance with the applicable law.
IV
ENERGY MARKETS
The energy is sold through the MEM, which is based on a competitive market model
and operates under open-access principles. The government participates in this market
through an institutional structure that is responsible for setting out policies and
regulations, as well as for exercising surveillance and control powers in respect of market
participants. The MEM relies for its effective operation on a central agency known as
the ASIC. This agency is in charge of the registration of contracts and the settlement and
billing of all the transactions that take place at the MEM.
The MEM is formed by various systems for the exchange of information
between electricity generation and commercialisation companies operating in the NIS.
These systems are designed to enable market participants to make long-term electricity
transactions. All of the electricity supply offered by generation companies connected
to the NIS and all of the electricity requirements of end-users, whose demand is
represented by commercialisation companies, are traded at the MEM. The NIS is formed
by generation plants, the NTS, the regional and inter-regional transmission lines, the
distribution lines and the electrical loading points of the users.
A substantial majority of the electricity generated in Colombia is initially
purchased on a wholesale basis through the MEM. The demand is covered through
electricity sales contracts between electricity generators and traders. In the daily process,
the participating agents converge on the spot market, adjusting their hourly transactions.
XM, through CND, conducts the planning, supervision and control of the operation
of the resources of the NIS. Also, the Liquidator and Administrator of Accounts is
responsible for liquidating the transactions, and XM manages the ASIC and is in charge
of the settlement and administration of the charges for the use of NTS networks in the
interconnected system.
The designated participants of the MEM are generation and commercialisation
companies. Generation companies are required to participate in the MEM with all of
their generation plants or units connected to the NIS with capacities equivalent to or
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Colombia
exceeding 20MW. Generation companies declare their energy availability and the price
at which they are willing to sell it. This electricity is centrally dispatched by the CND.
All commercialisation companies that deal with end-users connected to the NIS
are required to conduct their electricity transactions through the MEM. Electricity
transactions in the MEM are carried out under the following ways: the energy spot
market, bilateral contracts and firm energy. All generation companies in the MEM can
freely enter into any or all of these transactions.
ii
As mentioned above, Colombian law provides for open access to the NTS, and assures
any trader the right to connect its assets and network to and use the NTS, through the
payment of interconnection and usage charges payable to transmission companies by
users and liquidated by XM on a monthly basis. Access to the electricity exchange is
provided to electricity generators and electricity traders through the facilities of XM. XM
conducts the planning, supervision and control of the operation of the resources of the
NTS, and the administration of the NIS.
In order to have access to the MEM and execute commercial transactions
in the electricity exchange, market participants must enter into a contract with XM,
as administrator of the NIS and settler for the charges for the use of the NTS. The
contracts through which such transactions are executed have the features of mandate
agreements. Pursuant to the agreements, market participants authorise XM to represent
such participants with respect to the execution of transactions in the electricity exchange
and allow XM to collect, settle and distribute revenues received from market participants
in consideration for the use of the NTS and for the spot transactions entered into on the
electricity exchange.
Pursuant to the authority granted under the agreements, XM, as the SIC
administrator, records all the hedging contracts entered into by electricity generators
and traders, analyses dispatch on an hourly basis and calculates the amounts owed to or
by generators and traders under the contracts and for energy exchange spot transactions.
XM only bills and collects the amounts owed with respect of transactions executed on the
electricity exchange. It nets out the amounts owed by electricity generators and traders
participating in transactions executed on the electricity exchange on an hourly, daily and
monthly basis and bills the generators and traders monthly.
Unlike other MEM market participants, electricity transmission companies do
not enter into any agreements with other market participants. The only agreements
entered into by electricity transmission companies are the agency agreements granted to
XM, which govern the terms on which XM performs billing, collection, payment and
settlement services on behalf of electricity transmission companies for the use of their
transmission assets.
With respect to the international trade of energy, short-term spot transactions are
conducted under regulations issued by the Andean Community2 between the Member
States of such organisation. Currently, Colombia is an important exporter of energy
CAN Decisions 536 of 2002 and 757 of 2011.
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in the region, and its main trade is with Ecuador and Venezuela. With the latter, there
are two 230kV interconnections (the Cuestecitas-Cuatricentenario interconnector and
the Corozo-San Mateo international interconnector). The second is currently in use
under a scheme of bilateral contract between agents of the two countries through which
Colombia sells energy to the state of Tachira in Venezuela. In 2012, the energy exports to
Ecuador totalled 2,36GWh and energy exports to Venezuela totalled 478.4GWh.
iii
As previously stated, electricity transactions in the MEM are undertaken in different ways.
The generation companies in the MEM can enter into any or all of these transactions
without restrictions.
Firm energy auctions
Firm energy auctions are aimed at allocating firm energy among electricity generators
and prospective investors willing to commit to construct new generation assets to
provide additional capacity to supply firm energy, and ensuring a firm energy among
electricity generators and investors is conducted through a dynamic auction mechanism.
The electricity demand of end-users connected to the NIS is determined by a price/
quantity function established by the CREG in anticipation of the auction. Firm energy
auctions are conducted four years in advance of the date on which the firm energy
obligation is due. The price of firm energy obligations is established through descending
clock auctions. The first firm energy auction took place in May 2008 and allocated
firm energy commitments from December 2012 to November 2013. The second and
more recent firm energy auction took place in December 2011, allocating obligations of
64.2TWh per year, starting on 1 December 2015 and corresponding to the following
new projects: Gecelca 32 (250MW), Tasajero II (160MW), which are both thermal, and
Carlos Lleras Restrepo (78MW), Rio Ambeima (45MW) and San Miguel (42MW),
which are hydroelectric. In January 2012 the energy auction for special projects that
have construction periods exceeding the planning period took place. The auction was
called by means of CREG Resolution No. 056 of 2011. As a result of this auction,
two new projects are foreseen: Termonorte in the Magadalena region and Porvenir II in
the Antioquia region. They both will have a generation capacity of 440MW. Moreover,
the Sogamoso and Pescadero-Ituango projects that were already under construction
increased their allocated firm energy commitments.
Bilateral contracts market
In the bilateral contracts market, generation and commercialisation companies sell and
purchase electricity under the terms of mutually and freely agreed contracts. The purpose
of these contracts is to reduce the exposure of both the supplier and the end-user of
electricity, to price volatility in the short-term market. The generation companies that
initially entered into the agreement, or other electricity generators determined under the
optimal dispatch mechanism, deliver the electricity committed under these contracts
through the energy spot market, which is explained later. There are no restrictions as
to the amounts of electricity to which a generation or commercialisation company can
commit under these agreements or the periods of time that may be covered therein. The
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only requirement is for the contract to specify the quantity of electricity that will be used
on an hourly basis to enable ASIC to achieve the settlement required.
The purchase of electricity by commercialisation companies through bilateral
contracts to supply the demand of regulated users is subject to certain rules aimed at
ensuring fair competition among electricity generators. The purchase of electricity by
commercialisation companies through bilateral contracts, however, to supply the demand
of unregulated customers, is freely negotiated between the parties to the contract.
Energy spot market
The last modality is the transaction within the energy spot market. Under this system, the
transmission network is considered neutral, which implies that the electricity generator
sets its daily price offer and its hourly availability declaration without considering the
physical and technical restrictions of the transmission network. Electricity resources to
be dispatched at a particular time are selected based on the lowest price offers. This
mechanism is known as the optimal dispatch, and differs from the real dispatch because
in the latter the CND takes into account the restrictions that may affect the transmission
network. This price ranking system is intended to ensure that national demand is satisfied
by the lowest possible cost combination of available generating units.
The price offered by generation companies that participate in the MEM reflects
the variable costs of generation as well as opportunity costs. The price of the last resource
used to meet the total demand in each hour is the one that sets the price to be used to
pay all the inframarginal resources in the same hour, and it is known as the spot price.
Electricity demand from commercialisation companies that is not covered by bilateral
contracts is settled at the spot price.
V
According to a study by the World Banks Energy Sector Management Assistance

Program (Annual Report 2011), Colombia has significant wind potential, which alone
could more than cover the countrys current total energy needs.
Notwithstanding, the legal framework in this regard is still very precarious and
the development of renewable energy is yet to start, but may yet be a great source of
electricity generation. The main law related to renewable energy is Law 697 of 2001 by
means of which the rational and efficient use of energy is promoted, as well as the use of
alternative energy. Additionally, Decree 2755 of 2003 establishes tax exemptions for wind
generation plants. It was only in 2011, however, that the CREG issued Resolution 092,
which set out the methodology of determining the firm energy from wind generation
plants. It is important to bear in mind that this resolution is not yet definitive, and may
still be subject to some modifications. Even if the renewable energy generation is still
untapped in Colombia, there is a great potential due to the richness of natural resources
within the country. For instance, EPM is currently conducting a pilot scheme in the
Guajira region producing 19.5MW.
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VI
THE YEAR IN REVIEW
Based on the concern that declining of natural gas reserves combined with the effects of
climate change could put in risk the energy supply, by means of Resolution 062 of 2013,
CREG opened a bid to award the construction for a new LNG import terminal that will
be able to process up to 350,000mcf/d. It is expected that the plant will begin operations
in December 2015. Even though the bid was set up and supervised by the CREG, it
was a consortium of Colombian electricity generators located in the Atlantic coast that
launched the tender offering for a contract to build the countrys first LNG regasification
terminal and to render storage and regasification services.
The consortium was composed by the countrys largest gas-fired generator,
Termobarranquilla, power generators Medellin-based Celsia with power plants located
in Barranquilla and Termocandelaria. As a fuel for power generators, natural gas is more
attractive economically than diesel and other products; therefore such LNG import
infrastructure will guarantee the generators access to more competitive supply sources
internationally and ensure the energy supply of the country in a critical weather event.
In fact, Colombian gas demand can vary wildly because of the fluctuations in
hydroelectric power availability. In years of the El Nio phenomenon lower rainfall reduces
available generation capacity, forcing generators to ramp up the use of thermoelectric
plants. According to Colombian weather authorities, 2014 could be a year that sees the
El Nio phenomenon. In this sense, the auction organised by the consortium was one of
the most important projects during 2014.
Finally, after a process of several months, in March 2014 Sociedad Portuaria El
Cayao SA ESEP fulfilled with all the legal and technical requirements and won the
process and therefore is now in charge of the construction and operation of the LNG
plant.
Another of the most important events of 2013 was the Colombian governments
decision to sell its 57.66 per cent stake in Isagen SA, the operator of Colombias largest
hydropower plant. According to Colombia Minister of Finance, the proceeds obtained
in the sale will be invested in infrastructure development. However, in April 2014, the
Council of State ordered the government to suspend the sale of its majority stake. This
judicial authority based its decision on Isagens importance as the countrys third-largest
power generator, providing significant dividends to the government.
Among the bidders interested in acquiring the share participation are Charlotte,
North Carolina-based Duke Energy Corp, Tractebel Energia SA (TBLE3), Bogotbased Empresa de Energa de Bogot SA and China Huadian Corp, Gas Natural SDG
SA (GAS) and Cia Energtica de Minas Gerais (CMIG4) in association with Empresas
Pblicas de Medellin ESP.
VII
Colombia has important water, oil and coal resources and it has one of the largest
generation capacities in the region. For instance, Colombian corporations have expanded
across the continent, reaching Peru, Bolivia and Brazil. In Peru, Colombian companies
such as ISA own 8,150 kilometres of the transport and distribution network; in Bolivia,
588 kilometres; and in Brazil 19,017 kilometres. The next challenge for the Colombian
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energy sector is to implement regional interconnection. Currently, there are connections
with Ecuador and Venezuela, but the goal is to interconnect with more South American
countries such as Panama and Chile.
Another big challenge that the Colombian market faces is the increase of the
hydroelectric potential and the aim of increasing the role played by alternative energy
such as wind energy and solar energy, which could be an efficient way of reaching remote
rural populations where an electrical connection may not be economically viable. In this
context, it is worth mentioning the Ituango hydroelectric power project in Antioquia,
conducted by EPM, which will allow Colombia to raise energy exports while at the
same time ensuring energy supplies to heavy industry projects in the vicinity, such as the
development of the port at Urab.
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Chapter 7
CYPRUS
Michael Damianos and Electra Theodorou1
I OVERVIEW
Cyprus is not currently producing any primary sources of energy and it is considered to be
a heavily energy receiving country as over 90 per cent of its energy comes from imports.
It has no electrical or natural gas interconnections with other countries and, therefore,
has an isolated energy system. The countrys dominant source of energy in all sectors,
including transportation and electricity generation, is imported petroleum products,
which contribute over 93 per cent to the countrys gross final energy consumption.
The electricity market of Cyprus is currently dominated by the state-owned
Electricity Authority of Cyprus (EAC), which supplies 100 per cent of the electricity
in Cyprus. The EAC generates 97 per cent of its electricity from imported petroleum
products and only around 3 per cent from renewable energy sources (RES), which
basically relates to energy produced from wind farms, solar energy plants and biomass
plants, which are all privately owned and which sell their energy produced to the EAC.
The accession of Cyprus to the EU in 2004 has meant that the monopoly of
the EAC in Cyprus should legally come to an end. In 2004 a part of the electricity
market was liberalised (35 per cent) for certain non-domestic consumers. In 2009 the
electricity market was fully opened in relation to all non-domestic consumers (65 per
cent), with a view for full liberalisation for all consumers by 2014. Since January 2014,
the electricity market has been fully liberalised to allow all consumers (both domestic
and non-domestic) to choose their electricity supplier. Despite the above liberalisation
no electricity company has broken into the market yet and the EAC remains the sole
generator and supplier of electricity, thus enjoying a de facto monopoly.
Michael Damianos is the founder and managing partner of Michael Damianos & Co LLC and
Electra Theodorou is an associate of the firm.
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Cyprus
As far as gas is concerned, the legal regime is there, but there is currently no
production or imports to supply the market (and there is no infrastructure for this).
The most significant development in the energy history of Cyprus, however, is the fact
that it has discovered large natural gas reserves in its exclusive economic zone (EEZ)
in December 2011. Despite the natural gas discoveries, natural gas from the EEZ of
Cyprus will not be available to the Cyprus market at least until the third quarter of 2018.
The Council of Ministers of the Republic of Cyprus has, therefore, decided to import
natural gas for the production of (mainly) electricity (in order to decrease the cost of
production), and any power station or unit of considerable capacity is to be fuelled with
natural gas as soon as this is feasible (i.e., 2015 at the earliest). As will be seen in this
chapter, however, the supply of gas to the Cyprus market will also be a clear monopoly
for a number of years.
It should finally be noted that the current economic and financial developments
in Cyprus and its current commitments to its lenders mean that the government should
proceed with the denationalisation of certain profit-making state-owned organisations.
Legislation has been passed in March 2014 to allow for this, and the Council of Ministers
has recently approved a government plan for the period from 2014 to 2016, dealing,
inter alia, with the denationalisation of the EAC. The denationalisation of the EAC is
likely to have a significant impact on the unbundling of the Cyprus electricity market, as
is further discussed in this chapter.
II REGULATION
i
The regulators
The Cyprus Energy Regulatory Authority (CERA) is the sole regulator for the electricity
and (emerging) gas market in Cyprus. It was established by the Law on Regulating the
Electricity Market of 2003 (as amended) (the Electricity Market Law), which was enacted
for the purpose of harmonisation of Cyprus law with the (now repealed and replaced
by EU Directive 2003/54/EC, which itself was repealed and replaced by EU Directive
2009/72/EC) EU Directive 96/92/EC concerning common rules for the internal market
in electricity.
CERA was established aiming to liberalise the electricity market (which has been,
at least legally, fully liberalised since January 2014), and is the body responsible for
ensuring that electricity prices determined by (the current monopoly of ) the EAC reect
the actual costs of the services provided with a reasonable prot.
In addition to the above, by virtue of the Law Regulating the Natural Gas Market
of 2004 (as amended) (the Natural Gas Market Law), which transposes EU Directive
2003/55/EC (now repealed and replaced by EU Directive 2009/73/EC) concerning
common rules for the internal market in natural gas into Cyprus law, CERA is also
responsible for regulating the Cyprus gas market.
CERA is legally separate from and operationally independent of any other public
or private body. Its main objective is to effectively regulate and monitor the electricity
and (emerging) gas market. It is required to ensure that the energy market as a whole
operates on the basis of sound competition, that the various participants are acting with
transparency, that high-quality services are provided, and that the interests of consumers
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Cyprus
are protected. It is entrusted with various statutory powers and duties which mainly
derive from the Electricity Market Law and the Natural Gas Market Law.
One of CERAs main powers is to investigate any infringement of the law,
breach of the terms of any authorisation granted (i.e., a licence, order, prior permit or
exemption), or breach of any regulatory or other decision issued by it. It has the power to
issue orders to remedy any such infringement or breach by an authorisation holder, and
if the relevant authorisation holder fails to remedy such infringement or breach, CERA
has the power to impose administrative fines on it, depending on the nature, seriousness
and duration of the infringement or breach, and even revoke an authorisation granted to
the relevant authorisation holder.
CERA has also been granted with extensive powers to protect competition.
The highest authority in Cyprus in relation to the protection of competition, however,
is the Commission for the Protection of Competition (the Commission), which has
been established in accordance with the provisions of the Law for the Protection of
Competition of 1989 to 2000 (now repealed and replaced by the Law for the Protection
of Competition of 2008 to 2014). This basically means that, although CERA has the
power to protect competition itself, its actions must be aligned with the competition law
provisions and with the practice of the Commission.
ii
Under both the Electricity Market Law and the Natural Gas Market Law, it is prohibited
to carry out a licensable activity without an authorisation. Authorisations can take the
form of either a licence or an exemption. Licences are issued by CERA in accordance
with the relevant law, the regulations issued by CERA, and any government policy
guidance published by the Minister of Energy, Commerce, Industry and Tourism, from
time to time. Licences may be granted to both physical and legal persons.
Article 34 of the Electricity Market Law provides that CERA may issue a licence
with regard to the following activities:
a
constructing a generating plant or generating electricity;
b
supplying electricity to eligible consumers;
c
supplying electricity to non-eligible consumers;
d
discharging any of the functions of the transmission system operator;
e
discharging any of the functions of the distribution system operator;
f
discharging any of the functions of the transmission system owner; and
g
discharging any of the functions of the distribution system owner.
CERA considers certain criteria when evaluating an application for a licence under
the Electricity Market Law, including the safety of the system, the protection of the
environment, the location of the generating plant (if the application relates to a generating
licence) and the protection of public health and public safety.
Article 35 of the Electricity Market Law provides that CERA has the power to
grant exemptions, following a relevant application, from the requirement to hold a
licence in order to carry out any of the activities in (a) and (b) above. Any person who
auto-generates electricity of a capacity of less than 1MW can be granted an exemption.
CERA may also grant exemptions in relation to electricity generation from RES of a
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capacity of less than 5MW and electricity supply by a specific person of a total capacity
of less 0.5MW per generating plant.
It should be noted that, in exercising its powers, CERA may take regulatory
decisions setting out how it shall regulate the different segments of the electricity
market and which authorisation holders shall be bound by such regulatory decisions.
A regulatory decision was issued by CERA in 2013,2 pursuant to which CERA is not
currently accepting applications for a licence or an exemption regarding the construction
of a generating plant that will use conventional fuels and/or RES to generate electricity
(excluding any licences that fall under any government-backed or European support
scheme). CERA based its decision, principally, on the need to amend certain regulations
and market rules and to reconsider the countrys national plan on RES before proceeding
with the acceptance of any applications of new generating plants. This decision effectively
means that, in practice, a big part of the production segment of the electricity market is,
currently, not open to competitors and that the EAC is still a monopoly.
The Natural Gas Market Law is structured along the same lines. Article 8 of the
Natural Gas Market Law 2004 provides that CERA may issue a licence with regard to
the following activities:
a
building and/or operating natural gas facilities and/or storage facilities and or
pipeline networks, pipelines and associated equipment;
b
discharging any of the functions of the owner of natural gas facilities and/or
storage facilities and/or pipeline networks, pipelines and associated equipment;
c
discharging any of the functions of the network operator;
d
supplying natural gas to, among others, wholesale customers;
e
supplying natural gas to eligible customers;
f
supplying natural gas to non-eligible customers;
g
discharging any of the functions of the operator of the natural gas importation/
storage/transmission/distribution; and
h
discharging any of the functions of the owner of the natural gas importation/
storage/transmission/distribution network.
As far as natural gas is concerned, it should be noted that despite the transposition of EU
Directive 2009/73/EC into Cyprus law, Cyprus, being an isolated and emerging market,
has obtained derogation from a number of its provisions. As a result, it is planned that
the supply of natural gas to the Cyprus market will be a clear monopoly for a number of
years. The Natural Gas Public Company (NGPC), which is fully controlled by the state,
was established to become the body responsible for the development of the internal gas
market and network. The NGPC is responsible, among others, for the import, storage,
distribution, transmission, supply, and trading of natural gas, as well as the management
of the distribution and supply system of natural gas in Cyprus. It will, once Cyprus is
able to import natural gas as mentioned in the introductory section to this chapter, be the
sole importer and distributor of natural gas in Cyprus, therefore making it a monopoly.
The NGPC has to proceed with securing the necessary natural gas quantities, at the most
Regulatory Decision of the Cyprus Energy Regulatory Authority 856/2013.
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favourable commercial terms, in order to cover the needs of Cyprus for electricity power
generation (phase A) and supply industries, hotels and households (phases B and C)
with natural gas. It has to develop an efficient gas network, which will initially (phase A)
consist of three pipelines that will themselves be connected to the gas import hub and
to the three existing downstream power stations (all owned and controlled by the EAC).
The estimated cost for phase A is approximately 65 million and a 10 million grant
has been secured from the European Economic Programme for Recovery. Phases B and
C, which will connect the receiving terminal to industries, hotels and households, are
expected to cost over 500 million.
iii
As mentioned above, it is currently legally impossible to enter the natural gas market. As
far as the electricity market is concerned, a person is eligible to apply for a licence only if:
a
being a natural person, he or she is a citizen of the EU and resides in an EU
Member State; or
b
being a legal person (which includes a company, partnership, municipality, club,
foundation, or any other union or any other union or association of persons with
or without legal personality), it is established in an EU Member State, and, if a
company, it has been incorporated in accordance with the laws of an EU Member
State and it has its statutory place of establishment, central management or main
place of establishment within the EU.
iv
Under the Issue of Licences Regulations (Electricity Market) of 2004, a licence holder
who wishes to transfer or assign his, her or its licence to a third party, needs to make an
application to CERA at least three months before the proposed transfer or assignment
takes place stating who the transferee or assignee is and the reason for making the transfer
or assignment. The transferee or assignee then needs to follow an almost identical
procedure to that required when applying for a new licence.
The Issue of Licences Regulations (Electricity Market) of 2004 also provides that
a company that has obtained an electricity production licence must immediately notify
CERA of any (proposed) change of control in that company and to request CERAs
written consent for that. Such licensee shall also notify CERA of any intention to sell,
transfer or create a charge against any of its electricity generation assets (at least one
month prior to the sale, or transfer of the asset, or creation of the charge) and request its
written consent for that. Similar restrictions apply to any company that has obtained an
electricity supply licence.
III

SERVICES
The Cyprus electricity market has long been dominated by the vertically integrated EAC.
The EAC is currently engaged in all segments of the Cyprus electricity market. It is the
sole supplier and generator of electricity, it owns and operates the distribution network
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and also owns the transmission network (i.e., the only segment of the electricity market
which is independent from the EAC is the operation of the transmission network).
For this reason the EAC is required under the Electricity Market Law to keep separate
accounts for its electricity production, supply, transmission and distribution processes.3
CERA issued a number of regulatory decisions requiring the EAC to do this, but the
EAC has yet to comply with these regulatory decisions.
It should be noted that Cyprus has been one of the last EU Member States to
transpose the unbundling provisions of the EU Third Energy Package into national
legislation, and having a small isolated system it has obtained certain exemptions, as
discussed below:
Unbundling of distribution system operators
Cyprus decided to opt out from the provisions of the EU Directive 2009/72/EC on the
unbundling of distribution system operators on the basis that its integrated electricity
undertaking serves a small isolated system.4 It has, therefore, maintained its existing
distribution system regime and the function of the distributor system operator (DSO)
is still within the network business unit of the EAC. The DSO is provided with all of
its employees from the EAC and it is not an independent body. The DSO is required to
safeguard third party access to the distribution network and equal treatment of all users
of the said network.
Unbundling of transmission systems
Cyprus has obtained an exemption from Article 9 (unbundling of transmission systems)
of the EU Directive 2009/72/EC and has, therefore, maintained its existing regime on
transmission unbundling. Under the current regime, the transmission system operator
(TSO), which was established pursuant to a decision of the government of the Republic
of Cyprus for harmonisation with EU Directive 2003/54/EC (which was repealed and
replaced by EU Directive 2009/72/EC), acts independently in terms of organisation and
decision-making from the EAC, which is the transmission system owner and distribution
system owner and operator. Under the Electricity Market Law of 2003 (as amended),5
the TSO is legally unbundled and is prohibited from being engaged in production,
distribution or supply activities in the Republic of Cyprus.
The TSOs main functions and responsibilities are to secure the operation of the
electricity transmission system and to manage the electricity market on an objective, nondiscriminatory basis in a competitive environment, while at the same time supporting
and promoting electricity generation from RES. It ensures access and equal treatment of
all users of the transmission network. Both CERA and the TSO have a significant role
to play and their role will be even more significant if electricity companies do break into
the Cyprus market in the next few years.
3
4
5
Article 108(1) of the Law on Regulating the Electricity Market of 2003 (as amended).
Article 26 of EU Directive 2009/72/EC.
Article 64(1).
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As mentioned in the overview of this chapter, if the denationalisation of the EAC
proceeds, it will have an impact on the unbundling of the Cyprus electricity market. The
denationalisation plan, which was approved by the Council of Ministers in March 2014,
provides that the activities of the EAC (electricity production, transmission, distribution
and supply) should be unbundled to separate legal entities by 30 June 2015 (first stage of
the denationalisation process). The second stage of the denationalisation process involves
the transformation of the EAC, by 31 December 2015, from a body governed by public
law to one or more companies limited by shares of which the Cypriot government will
be the sole shareholder. By 31 March 2016, a decision should also be reached in relation
to the percentage of share capital that will be offered to employees of the EAC on an
individual or collective basis (provident/pension fund) in such company or companies.
The next stage of the denationalisation process involves the search for one or more
strategic investors in respect of one or more of the above-mentioned activities of the
EAC by 30 September 2017.
ii Rates
As far as rates and terms of access to the transmission and distribution network are
concerned, these are regulated by CERA, which may require the TSO and the DSO to
amend the methodologies they use for determining their tariffs. As mentioned above,
given the fact that the electricity market is currently dominated by the EAC, CERA must
protect consumers from being adversely affected by any abuse of the EACs dominant
position in the electricity market. It shall, therefore, ensure that the electricity prices
determined by the EAC reect the actual costs of the services offered plus a reasonable
prot.
IV
ENERGY MARKETS
The monopolies of the EAC and NGPC mean that there are no real or actual energy
markets operating in Cyprus. Despite that, there are certain energy market rules and
regulations that are worth mentioning for future reference, as follows:
i
Electricity Transmission and Distribution Rules
Pursuant to the Electricity Market Law, CERA has the power to issue regulatory decisions
instructing the TSO and the DSO to draft and publish certain transmission (as far as the
TSO is concerned) and distribution (as far as the DSO is concerned) system rules. The
publication of these rules is subject to CERAs consultation with an advisory committee
on transmission and distribution (which has not yet been formed) and CERAs prior
approval. The Transmission and Distribution Rules of 2004 (as amended) set out the
technical conditions and constrains that will apply to licensees who wish to connect
to the transmission or distribution network, or both, or use these two networks for
electricity transportation. The imposed conditions should not be discriminatory. The
said rules also ensure that the transmission and distribution system will be used and
developed in an efficient and reliable manner.
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ii
Electricity Trading and Settlement Rules (Market Rules)
Under the Electricity Market Law, CERA instructs the TSO to draft and publish certain
electricity market rules. The publication of these rules is subject to CERAs consultation
with an advisory committee on market rules and the written approval of CERA and the
Minister of Energy, Commerce, Industry and Tourism. The Trading and Settlement Rules
(Market Rules) of 2009 set out the mechanisms, tariffs and various terms and conditions
subject to which licensees buy or sell electricity, in accordance with arrangements made
by the TSO, and ensure that market participants who buy or sell electricity pursuant to
these arrangements should not be subject to discrimination. The said rules also promote
energy efficiency and energy saving and facilitate competition in the electricity market.
V
RES contribute only marginally to the energy mix of Cyprus, as they (currently) have a
share of only 6 to 7 per cent to the countrys gross final energy consumption. They are,
however, now more significant to the countrys energy mix that they used to be 10 years
ago (when their contribution was not much above zero). RES are used in Cyprus, as
follows:
a
Solar energy: solar energy is used by domestic and industrial solar thermal systems.
Cyprus ranks first in the world in terms of the use of solar energy for domestic
heating (through solar thermal systems). Photovoltaic grids are also used and they
are either connected (currently) to the EAC, or are stand-alone and used in other
ways.
b
Wind energy: there are currently five wind farms in operation (and three under
construction, one of which is actually an extension of one of the existing five
operating wind farms) and they all generate electricity which they sell in its
totality to the EAC. Wind energy is also used through wind turbines for water
pumping.
c
Biomass: the total capacity of biomass plants is insignificant, generated through
manure/organic animal waste and, again, sold to the EAC.
The energy policy of Cyprus is aligned with the energy policy of the EU. The three main
goals set by Cyprus are (1) the development of indigenous energy resources, (2) the
enhancement of security of energy supply and competitiveness, and (3) the protection
of the environment. In this respect, Cyprus has recently transposed the Renewable
Energy Directive 2009/28/EC into Cyprus law by enacting the Law for the Promotion
and Encouragement of the Use of Renewable Energy Sources of 2013. In accordance
with the above, Cyprus is bound to achieve certain targets by 2020, such as a share of
13 per cent of RES in its gross final energy consumption (after adjustment for aviation
consumption) and a share of 10 per cent of RES in the final energy consumption of
transportation.
In order to achieve the above-mentioned 2020 targets, the Ministry of Energy,
Commerce, Industry and Tourism has issued certain support schemes. The support
schemes aim to provide financial incentives in the form of government grants for the
promotion and penetration of RES into the market, and both individuals and companies
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or organisations are eligible for participation. The support schemes cover investments
for thermal insulation on existing residential buildings, heating and cooling from RES,
and electricity generation from RES. They address mature technologies rather than
technologies currently under research and development and are being reviewed and, if
required, updated on an annual basis, so that the incentives provided ensure the viability
of RES systems. Furthermore, any support scheme revision is done taking into account
any changes in the energy policy of the country.
In 2013, the government announced and implemented certain support schemes
for the promotion of electricity generation using RES. One of these schemes involved
the provision of state grants to vulnerable households for the installation of 2,000
photovoltaic systems of 3kW each and their connection to the grid of the EAC via
net metering. The electricity consumption of the household is offset by the electricity
generated by its photovoltaic system into the grid, with the household being billed for
the difference. This is estimated to save each participating household 80 per cent on
its electricity bill. A second scheme for the installation of a further 3,000 photovoltaic
systems of 3kW each (but without a grant) was also announced and implemented in
2013 and similar schemes are expected to be announced soon.
As far as energy efficiency is concerned, measures have been implemented to
promote the energy efficiency of buildings, such as minimum energy performance
requirements, energy performance certificates, and regular inspections of heating and air
conditioning installations.
VI
THE YEAR IN REVIEW
The most important development in the past year was surely the commitment of the
government of Cyprus to denationalise the state-owned EAC. The denationalisation
plan, which was approved in March 2014, will surely have an impact on the electricity
market of Cyprus as it will almost certainly result in the monopoly of the EAC ending. In
accordance with the plan, the EACs activities will be unbundled to separate legal entities
in order to be offered to potential investors. It is, therefore, likely that different investors
will acquire different activities of the EAC which will result in the actual disintegration
of the electricity market.
Although it is beyond the scope of this chapter, it should be noted that the
government of Cyprus is rapidly moving towards exploiting the countrys natural gas
reserves. The discovery of natural gas in the EEZ of Cyprus surely affects the countrys
energy policy. It should, however, also be noted that natural gas from the EEZ of Cyprus
will be available to the Cyprus market not earlier than the third quarter of 2018.
VII
One can conclude that Cyprus is a heavily energy receiving country with a monopolised
electricity market and a (currently) inexistent gas market. The EACs monopoly in
the electricity market is likely to end in the years to come with the EACs proposed
denationalisation, while the gas market, once this actually evolves, will be a monopoly of
the NGPC for a good few years.
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In order for the electricity market to be practically liberalised (as it is only legally
fully liberalised to date) electricity companies need to enter the market. Although the
legal and regulatory framework is there, this has yet to attract any new players, but it is
anticipated that this will change in the next few years.
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Chapter 8
DENMARK
Nicolaj Kleist and Morten Ruben Brage1
I OVERVIEW
The long-term goal of the Danish energy and climate policy is to have the total energy
demand covered by renewable energy by 2050. In November 2011, the Danish government
presented a strategy, Our Future Energy, placing expanded use of renewable energy at
the core of the Danish energy policy, along with security of supply, energy savings and
green growth. By 2030, coal is to be phased out of Danish power plants, and by 2035,
all electricity and heating should be generated using renewable sources. In March 2012,
the government drew up an energy agreement with almost all the parties in the Danish
parliament. One of the key points of the agreement is that by 2020, half of the electricity
consumption will come from wind power (compared with 25 per cent today), and the
energy consumption will be more than 12 per cent lower in 2020 compared with 2006.
Today, the energy demand is met by domestic natural gas resources and oil, coal
imports, and domestic renewable energy sources such as waste, woodchips, wind and
biogas. There is no large hydropower or nuclear power production in Denmark.
The first oil and gas exploration licence was granted in 1935 and since then oil
and gas have been exploited in Denmark. In 1966, hydrocarbons were discovered in the
North Sea, and in 1972 the first oil was produced. During the first 50 years, exploration
of oil was carried out under sole-right concessions, but in 1983 competitive licensing
rounds were introduced and the first licences with more than one concession holder
were awarded in 1984 the latest in 2005/2006. Oil and gas activities are governed
by the Subsoil Act,2 which lays down the basic framework for oil and gas exploration
and production. The Act regulates exploitation and recovery activities in the Danish
1
2
Nicolaj Kleist is partner and Morten Ruben Brage is a senior associate at Bruun & Hjejle.
Act No. 960 of 13 September 2011 on the Use of Danish Subsoil.
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Denmark
subsoil and on the Danish Continental Shelf concerning raw materials, and specifically
hydrocarbons.
The first comprehensive legislation governing electricity supply entered into force
on 1 January 1977. The aim has been to ensure electricity supply in accordance with the
principles of security of supply, economics, environmental and consumer protection.
Access to cheap electricity and consumer influence on the administration of the electricity
sectors assets are central. Promoting sustainable energy use, including in connection with
energy savings and use of combined power and heating, lasting and environmentally
compatible energy sources, as well as securing effective use of financial resources, and
creating competition on the markets for production and trade in electricity are also
essential elements in the legislation.
II REGULATION
i
The regulators
The overall administrative responsibility for the energy sector lies with the Danish Ministry
of Climate, Energy and Buildings (the Ministry).3 Part of the Minister for Climate,
Energy and Buildings (the Minister) authority has been delegated to the Danish Energy
Agency (DEA).4 The DEA is responsible for the entire chain of tasks linked to energy
production and supply, transportation and consumption, including energy efficiency
and savings as well as national carbon dioxide targets and initiatives to limit emissions
of greenhouse gases. The DEA prepares, in cooperation with the Minister, the majority
of the bills and other political proposals. The DEA carries out analyses and estimates of
the development in the energy sector and represents Denmark in international forums.
The Danish Energy Regulatory Authority (DERA)5 is an independent board
that controls prices and conditions in the energy sector. DERAs purpose is to ensure
an efficient and transparent energy market in Denmark. Transmission, storage and
distribution undertakings and supply-committed undertakings are under the supervision
of the DERA. Decisions of this DERA may be appealed to the Energy Board of
Appeal.6 Decisions by the Energy Board of Appeal cannot be brought before any other
administrative body, but may be challenged before the courts.
Energinet.dk, a state-owned undertaking, owns, operates and develops the
Danish transmission network for electricity and gas and is responsible for effective and
safe supply and for a competitive energy market. Energinet.dk must ensure open and
equal access to the transmission networks for all users. It also issues rules on gas transport
and coordinates the general planning of emergency supply for the natural gas sector.
The city councils in the municipalities are responsible for the planning of
local heat supply.7 In each municipality, the city council must carry out planning in
3 www.kemin.dk.
4 www.ens.dk.
5 www.energitilsynet.dk.
6 www.ekn.dk.
7
Act No. 1184 of 14 December 2011.
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Denmark
cooperation with the supply undertakings and other stakeholders. The heat planning
procedure ensures public participation, and as part of the heat supply planning, the city
council may decide that connection to a collective heat supply system be mandatory.
The Energy Supplies Complaints Board is a private board established by the
energy industry and the Consumers Council. The Energy Supplies Complaints Board
handles complaints about the purchase and delivery of energy from supply undertakings.
As a principal rule, the board only accepts complaints from consumers. Decisions of the
board cannot be appealed to any administrative authority, but can be brought before the
courts.
The main legislation for energy regulation is the Continental Shelf Act,8 the Act
on Raw Materials,9 the Subsoil Act,10 the Pipeline Act,11 the Natural Gas Supply Act,12
the Heat Supply Act13 and the Electricity Supply Act.14
ii
A licence issued by the DEA is necessary for exploration, production, transmission,

distribution and storage activities.15
A permit is required for the establishment of plants and for expansion or changes
to such plants causing increased pollution.16 Permits are issued by the relevant city
council or regional council depending on the size of the plant. Permits for major plants
require a prior public hearing, and for major plants there may be a duty to complete an
environment impact assessment under the rule of the Planning Act.17 Offshore plants
are primarily subject to the approval rules under the Subsoil Act and Continental Shelf
Act. Offshore installations are subject to approvals and permits issued by the DEA. These
include operation permit, manning and organisation plan approval and approval for
the contingency plan. To obtain an operation permit, there must be an evaluation of
safety and health conditions for the installation and the operational conditions (health
and safety review/safety case) and other relevant information regarding health and safety
conditions (e.g., certificates). Offshore installations operating in Denmark must have a
workplace assessment system.
iii
The Danish state has a general right to all hydrocarbons in the subsoil of the Danish
territorial jurisdiction area. The state can grant licences for preliminary investigation,
8
9
10
11
12
13
14
15
16
17
Act No. 1101 of 18 November 2005.

Act No. 657 of 27 May 2013.
See footnote 2, supra.
Act No. 277 of 25 March 2014.
Act No. 1184 of 14 December 2011.
Act. No 1329 of 25 November 2013.
See also Section III.iii, infra.
Act No. 879 of 26 June 2010.
Act No. 587 of 27 May 2013.
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exploration and production of hydrocarbons. Licences are granted through tender
procedures or under the open door procedure.
The main part of the natural gas on the Danish market is produced in the Danish
North Sea. Through the Danish North Sea Fund, the Danish state participates in
concessions for exploration and production of hydrocarbons. The fund is administered
by the Danish North Sea Partner, a unit under the Ministry. The fund, which was
established in 2005, is the Danish states oil and gas company, which contributes to the
decision-making processes in connection with exploration, production and development
activities with respect to Danish licences. In addition to the sole concession, the Danish
North Sea Fund is a partner in 20 new licences. The aim is to use existing knowledge
across licences and support the development of new technologies that can enhance the
recovery rate of oil and gas resources in the subsoil.
State-owned DONG Energy owns upstream pipelines and operates the gas
treatment plant at Nybro. The establishment and operation of upstream pipeline
networks requires a licence issued by the DEA. Any interested party is entitled to access
an upstream pipeline network against payment. The physical planning of the system
for supply of natural gas is governed by the Heat Supply Act. Establishment of new
distribution network facilities for natural gas and major alterations to existing facilities
requires approval from the relevant city council18 and, in certain cases, the DEA. A
storage undertaking is obliged to place storage capacity at the disposal of Energinet.dk,
but only to the extent necessary to enable Energinet.dk to maintain a physical balance
in the network and to ensure security of supply. A storage undertaking must grant access
to the storage facilities on the basis of objective, transparent and non-discriminatory
criteria. The Danish market for natural gas was fully liberalised on 1 January 2004, and
since then customers have had a right to choose their natural gas supplier. Anybody may
in principle establish a natural gas supply undertaking.
Danish electricity is mainly generated by heat and power producing plants
(CHP) as well as power plants solely producing electricity. The grid undertakings have a
monopoly on the distribution in their areas and are governed by the Electricity Supply Act.
The transmission system operator (Energinet.dk) is responsible for the general security
of supply in Denmark and must ensure the overall balance and quality of the electricity
supply system. Also, the operator must ensure players access to the transmission system
on objective, fair and transparent terms. Electricity supply undertakings supplying
electricity on commercial terms are generally not governed by the Electricity Supply Act.
iv
Natural gas and electricity licences, where applicable, can only be issued to applicants
with the necessary expertise and economic capacity. The licence can neither directly
nor indirectly be transferred to others without approval by the DEA. A gas distribution
network or shares in companies that own distribution networks are generally only
allowed to be transferred to the state. The state, on the other hand, has a duty to buy.
The state must exercise its duty to buy within three months after the date of notification
18
There are 98 municipalities (city councils).
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of the owners wish to dispose of the distribution network or the shares. If the parties
cannot reach an agreement on the conditions of the transfer, the prices and terms of the
transfer will be fixed by a valuation commission in accordance with the procedure that
applies to compulsory sale to the state.19
Since 1998, Danish competition legislation has been strongly influenced by EU
competition law, but the Danish rules are generally stricter than those of the EU in terms
of support for free competition.
III

SERVICES
The level of unbundling in Denmark generally exceeds the requirements of the Electricity
and Gas Directives. Through the establishment of Energinet.dk, Denmark has secured
ownership unbundling of the main transmission grid.
In the electricity and natural gas industries, there is a requirement for legal
unbundling in relation to the parts of the value chain of monopolistic character. The
Natural Gas Supply Act requires a company with a licence for transmission, distribution,
storage, LNG business or universal service obligations to only exercise activities allowed
under the licence.
As a general rule, the Electricity Supply Act does not allow grid and transmission
licences to be issued to the same company. Undertakings producing electricity by means
of waste incineration are not allowed to carry out other types of electricity production
or trading activities. The requirement for unbundling of activities does, however, not
preclude the use in combined waste incineration plants of other types of fuel (e.g., straw,
chipped wood or natural gas) together with waste suitable for incineration.
The requirements are supplemented by demands for managerial unbundling in
the Electricity Supply Act and in the Natural Gas Supply Act. To prevent conflicts of
interest, executives and managers of a distribution undertaking must not directly or
indirectly participate in the operation or management of an associated undertaking selling
or producing natural gas or electricity, or participate in an associated undertaking that
indirectly owns such an undertaking. Members of the board of directors of distribution
undertakings must not directly or indirectly participate in the operation or management
of associated undertakings selling or producing natural gas or electricity.
ii
Danish law allows full access on a non-discriminatory basis to the transmission and
distribution systems in both the natural gas and electricity sectors.
Natural gas
The transmission network for natural gas is connected to the natural gas transmission
networks in Germany and Sweden. The transmission network is connected to the
19
Act No. 1161 of 20 November 2008 on the procedure for compulsory sale of real property.
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Denmark
distribution network to which the end-users are connected. There is a general right to
use the transmission network against payment of applicable fees. Access can be denied
if the transmission undertaking cannot meet the capacity requirements, cannot ensure
the quality of the natural gas, cannot ensure security of supply, cannot ensure sufficient
quantities of natural gas, or if a natural gas undertaking has severe economic and financial
difficulties with fulfilling contracts (including take-or-pay commitments). Access can
also be denied if a natural gas undertaking does not comply with the access requirements
laid down by the transmission undertaking. Reasons must be given for denial of access,
and a denial of access can be brought before the DERA.
Electricity
The transmission grid for electricity is the part of the electricity grid that transports
electricity to local grid undertakings, which then distribute the electricity to end-users. The
transmission grid also transports electricity to and from other countries. The transmission
grid is owned and operated by Energinet.dk, which is responsible for the general security
of supply and the overall balance and quality of the electricity supply system. Energine.
dk is also responsible for the overall planning and development of the transmission
system. Energinet.dk must ensure that players have access to the transmission system
on objective, fair and transparent terms. The grid undertakings deliver electricity from
the transmission grid to individual end-users. Each owns and operates a distribution
grid within a local supply area. Grid undertakings have a monopoly on the distribution
within their area, but must ensure that players have access to the grid on objective, fair
and transparent terms.
iii
The storage facilities for natural gas are currently situated at two locations in Denmark:
Stenlille20 and Lille Torup. Storage activities require a licence and are regulated under the
Natural Gas Supply Act and the Subsoil Act. The Ministry has issued an executive order
regarding the storage obligations and supervises compliance.21
iv Rates
It is a general rule that access to transmission and distribution grids must be provided
on the basis of objective, transparent and non-discriminatory criteria. When setting
prices, grid undertakings must not discriminate between users. Transmission and grid
undertakings must prepare a plan for internal supervision, describing the undertakings
measures to prevent discriminatory practices. Prices must be based on the undertakings
costs and a reasonable return on capital invested by the undertaking.
20
21
Circular No. 31 of 25 February 1991.

Act No. 1177 of 8 November 2013 (storage requirements).
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Denmark
v
Undertakings that produce oil in Denmark must keep oil reserves in storage ready for
emergency use by the Danish state.22 Denmarks obligations to maintain such oil storage
follow from an EU directive and from rules laid down by the International Energy
Authority. The Danish Act on Emergency Oil Supplies ensures emergency supply in the
event of disruptions or threats in the oil sector, including keeping reserves of crude oil
and petroleum products, and collecting data on the oil conditions in Denmark.
IV
ENERGY MARKETS
Nord Pool Spot runs a power market in northern Europe and offers both day-ahead
(Elspot) and intraday markets (Elbas); 370 companies from 20 countries trade on the
market. Nord Pool Spot A/S is owned by the Nordic transmission systems operators (in
Denmark, Energinet.dk) and two Baltic operators. In 2013, 84 per cent of all power
consumption in the Nordic and Baltic regions was traded on Nord Pool Spot. The market
is the worlds largest market for buying and selling power. The power price is determined
by the balance between supply and demand. Factors such as the weather or power plants
not producing to their full capacity may have an impact on how much power can be
transported through the grid and will therefore influence the price of power.
ii
The Minister can decide that oil undertakings must submit information on the conditions
of import, export, production, sale, storage and transport, and on other general matters.
The Minister can stipulate that undertakings producing or importing oil must sell oil in
accordance with international distribution schemes.
The liberalisation of the gas market on 1 January 2004 meant that all natural
gas customers would have a free choice of supplier. Any party can establish a natural
gas undertaking supplying natural gas, provided that it enters into agreements with the
relevant transmission, storage (if needed) and distribution undertakings. An undertaking
trading in natural gas can sell its products on market terms. Natural gas suppliers may be
licensed as a supply-committed undertaking in areas designated for natural gas pursuant
to the Heat Supply Act, with the effect that the undertaking has the right and duty
to supply natural gas to all customers within the area that have not used their right to
choose an alternative gas supplier. The undertaking may deny supply of natural gas to a
customer that does not pay for the deliveries.
Sale and delivery of electricity to end-users are made by electricity suppliers,
which are either supply-committed undertakings or undertakings supplying electricity
on commercial terms. Supply-committed undertakings deliver electricity to consumers
who have not exercised their right to choose an alternative supplier.
22
Act No. 354 of 24 April 2012 on emergency oil supplies.
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Denmark
iii
As previously mentioned, approximately 84 per cent of all power in the Nordic and
Baltic region was traded on Nord Pool Spot in 2013. Natural gas, on the other hand,
is still primarily traded through bilateral contracts, although an increasing quantity is
traded at the Nord Pool Gas exchange. Danish energy legislation generally only regulates
contracts with end-users.
iv
Market developments
There are a large number of new energy policy initiatives seeking to accelerate the
transition to green energy. The four critical focus areas are: energy efficiency, electrification,
expansion of renewable energy and research, and development and demonstration.
V
Denmark has a long tradition of active energy policy, initiated by the first oil crisis in
1973. When oil prices accelerated in 1973, Denmark was among the OECD countries
most dependent on oil in its energy supply, with more than 90 per cent of all energy
supply deriving from imported oil. Denmark launched an active energy policy to
ensure the supply and enable Denmark to reduce its dependency on imported oil. In
combination with oil and gas production from the North Sea, Denmark went from
being a net importer of oil in 1973 to being more than self-sufficient in energy from
1997 and beyond.
In the Kyoto period 20082012, Denmark committed itself to a greenhouse gas
reduction target of 21 per cent. Today, renewables account for more than 40 per cent
of Danish electricity consumption and, through expanded offshore wind production
and use of biomass, the government expects that renewables will reach almost 70 per
cent of Danish electricity production in 2020. A new political agreement between
the government and all the major opposition parties was reached in March 2012. The
agreement covers the period 20122020 and sets out the following goals: more than
35 per cent renewable energy in final energy consumption, approximately 50 per cent
of electricity consumption to be supplied by wind power, 7.6 per cent reduction in
gross energy consumption in relation to the 2010 level, and 35 per cent reduction in
greenhouse gas emissions in relation to the 1990 level.
Energy taxes on electricity and oil were introduced in 1977, and since then taxes
have been increased several times and have also been extended to coal and natural gas. In
1992, the taxes were supplemented by carbon taxes.
Other means of achieving renewable energy are heat savings initiatives in
buildings, use of renewable energy in buildings, municipal heat planning, energy-efficient
electricity and district heat production, and use of renewable energy in electricity and
district heat production, plus energy savings and use of renewable energy in industry and
transportation.
Wind turbines have been supported politically for many years, including through
state subsidies, feed-in tariffs, orders to the electricity utilities to build wind turbines,
tenders for offshore wind farms and orders to the municipalities to allocate suitable
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Denmark
areas for new onshore wind turbines. Approximately 28 per cent of electricity is today
produced by wind turbines (which is planned to increase to 50 per cent in 2020).
In 2009, the Promotion of Renewable Energy Act23 was launched to promote
the production of energy through the use of renewable energy sources in accordance
with climate, environment and macroeconomic considerations, in order to reduce
dependence on fossil fuels, ensure security of supply and reduce carbon emissions and
other greenhouse gases.
ii
Denmark has long supported energy efficiency and conservation initiatives, which played
an important role in the efforts to free Denmark from dependence on fossil fuels. In the
1976 Energy Plan, energy efficiency was one of two main targets. During the 1970s, a
number of acts and initiatives were implemented to support energy efficiency, with a
focus on three main areas:
a
heat consumption in buildings;
b
industrial and process covering industrial and production-related consumption;
and
c
appliance and components covering electrical appliances and components not
directly related to industrial use.
A number of schemes have also been implemented, designed to promote energy savings
in buildings and industry. Major current initiatives include:
a
energy and carbon taxes on domestic and public sector energy consumption;
b
carbon taxes on industrial consumption;
c
carbon emission allowance trading scheme;
d
voluntary agreements for industry;
e
energy labelling for large and small buildings;
f
energy labelling of appliances and lighting;
g
norms for energy efficiency and voluntary agreements; and
h
reduction of standby consumption.
iii
Denmark has a strategy for energy-efficient technologies, covering the period 2005
2015. The strategy provides a framework for prioritisation and development of research
and development efforts to achieve the greatest possible impact by public funds used in
the field.
VI
THE YEAR IN REVIEW
Climate Act
In March 2014, the Minister of Climate, Energy and Building proposed a new bill. The
bill establishes an overall strategic framework for the Danish climate policy transforming
23
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Denmark
Denmark into a low-carbon economy by the end of 2050. The bill includes the
establishment of an independent Climate Council. The purpose of the Council is to
provide the government with recommendations regarding climate efforts and policy. The
bill introduces an annual climate report. The climate report will consist of an annual
overview of the climate policy and a summary of the Climate Councils recommendations
and the governments efforts towards implementation of the recommendations.
ii
New offshore wind tenders
Denmark will be expanding its energy supply by 1.450GW offshore wind power
towards 2020. The Danish government has announced a call for preliminary tenders in
September 2014 for 400 offshore wind turbines at Horns Rev in the North Sea, a call
for preliminary tenders in April 2015 for 600MW offshore wind turbines at Krigers Flak
in the Baltic Sea and a call for tenders in September 2015 for 450MW offshore wind
turbines in nearshore areas.
iii
New Open Door application in the eastern part of the North Sea
In January 2014, the DEA received an application for exploration and production of
hydrocarbons in the eastern part of the North Sea. ESP Oil & Gas Ltd applied for a
licence for exploration and production of hydrocarbons in the Open Door area. The
application is still being processed by the DEA. The procedure for the Open Door allows
oil companies to continuously apply for licences to explore for and produce oil and gas.
The scheme covers all unlicensed areas east of 6 15 eastern longitude (the entire onshore
and offshore area except the western part of the North Sea).
iv
Denmarks cooperation with China
In June 2013, DEA entered into an agreement with the Chinese government.
Danish experts are to demonstrate how renewable energy such as wind power and
biomass can be integrated into the Chinese power grid system and thereby contribute to
enhancing the efficiency of the heat supply in the provinces of Heilongjiang and Jilin.
The goal is to reduce carbon emissions in China by focusing on renewable energy.
v
Goldman Sachs became a part owner of state-owned energy provider DONG

Energy
Three private investors ATP, Goldman Sachs and the pension fund PFA have bought
a share of the state-owned energy company DONG. The buy-in reduces the Danish
governments percentage of ownership in DONG Energy from 81 per cent to 60 per
cent. Goldmann Sachs 8 billion kroner investment will buy it a 19 per cent share in the
company, while ATP will own 5 per cent for 2.2 billion kroner and PFA 2 per cent for
0.8 billion kroner. The capital increase is part of DONG Energys financial action plan
announced in February 2013, which included an injection of additional equity of at least
6 to 8 billion kroner.
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Denmark
vi
DONG Energy makes it largest investment ever
DONG Energy is investing 16.4 billion kroner in a German offshore wind farm project.
The installation will consist of 97 wind turbines from Siemens Wind Power and is
expected to supply power equal to the annual consumption of about 600,000 German
households. DONG Energy expects to begin the construction of the wind farm in the
first half of 2015.
VII
As is the case for many other countries, Denmarks energy policy was shaped after the
oil crises of the 1970s. Although Denmarks own supply is diminishing, Denmark is
still self-sufficient in oil and natural gas, and new explorations are planned. With recent
political agreements, Denmark has increased its focus on renewable energy, trying to
ensure self-sufficiency. The market is regulated under strong influence of EU legislation
and international obligations.
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Chapter 9
ECUADOR
Jorge Paz Durini, Daniel Robalino, Leyre Surez and Rafael Valdivieso1
I OVERVIEW
Until 1963, electric power systems in Ecuador were dispersed throughout the country.
Local entities developed and administered the first systems through local companies that
generated and distributed electricity, while the principal shareholders were municipal
governments.
In 1963 the state created the Ecuadorean Electrification Institute (INECEL), a
government entity with administrative and financial autonomy. The board of directors
was formed mostly from representatives of the central government and ministers and
other government functionaries. The INECEL consolidated 21 electrical distribution
corporations, including the two companies that delivered to the largest markets: the
Quito Electric Company Inc, serving 22.9 per cent of the market, and EMELEC, now
operating as Guayaquil Electric Company Ep, and serving 23.9 per cent.
Up until 1999, the INECEL built and operated central generators with a total
1,934MW of installed power. It built the National Transmission System, which currently
comprises the national network and allows for integration of all distribution companies.
The structure of the electric sector, as an integrated and vertical state monopoly, did
not permit the sale of energy to final consumers at rates that would cover the costs of
production, transportation and distribution of energy; therefore, the INECEL was selling
energy at prices lower than actual cost. The difference should have been compensated for
by the state through direct or indirect subsidies. This affected the economic balance of
Jorge Paz Durini is a partner, and Daniel Robalino, Leyre Surez and Rafael Valdivieso are
associates at Paz Horowitz Robalino Garcs Attorneys at Law. The authors would also like
to thank Anne-Marie Robinson, a graduate of Birmingham Law School at the University of
Birmingham, for her assistance on the chapter.
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Ecuador
both the INECEL and the state, which did not have the necessary resources to cover the
rate deficit or to develop new projects.
The state decided to transform the electric sector in response to this situation,
which was widely criticised during the early 1990s. It made an attempt to break the
monopoly and provide the private sector with opportunities to develop generation,
transmission and distribution activities under a system of free trade and free competition.
In 2007, Ecuador created the Ministry of Electricity and Renewable Energy (the
Ministry). In 2008, through Mandate No. 15, it established a single rate for distributors,
eliminated the concept of marginal cost and consolidated 19 distributors into one single
entity. The mandate was carried out through the creation of the Electric Corporation
of Ecuador (CELEC EP) and the National Electricity Corporation, which encompass
energy distribution companies. The new market structure was configured based on these
dispositions and entering into regulated agreements.
The Ecuadorean Constitution of 2008 considers the electricity sector as strategic.
As such, the government is currently developing an important programme to expand
the generation capacity (by over 60 per cent of the current installed capacity), paying
special attention to renewable energy projects, including wind, solar and hydroelectric
energy. The development and health of the Ecuadorean electricity market has encouraged
foreign investment in the sector, and there are currently a number of diverse projects
with concessions to private generators.
II REGULATION
i
The regulators
The main regulatory body for the electricity sector in Ecuador is the National Electricity
Council (CONELEC), which regulates and controls all areas of the electricity sector.
Alongside CONELEC, the Ministry is the public body representing the executive in
the electricity sector in compliance with the Electrification Master Plan. There are
other private and public bodies that make up the energy sector, such as the state-owned
CELEC EP and the National Centre for Energy Control (CENACE). These bodies have
a lot of influence in the sector but no regulatory powers as such.
CONELEC is in charge of the overall regulation and control of the electricity
sector.2 It is the main regulatory body for all the delegated activities in Ecuador, such
as the generation, transmission and distribution of energy. To generate electricity in
Ecuador, the interested entity must obtain a permit or licence from CONELEC. The
transmission and distribution of energy are reserved exclusively to the state through
state-owned companies.
As per the provisions in the main regulation governing the sector, CONELEC has
the following main powers and duties:3
Article 12 of the Law on the Electricity Sector Regime (LESR), published in the Supplement of
the Official Gazette No. 43, 10 October 1996; Article 13 of the Regulation on the LESR; and
Article 11 of Executive Decree No. 1274.
See Article 13 of the LESR.
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Ecuador
a
b
c
d
e
f
regulating the public sector and supervising compliance with the legal provisions;
drafting the Electrification Master Plan in order to guarantee the supply of
electricity;
approving the rates for transmission and distribution;
issuing regulations for all the areas regarding the environment, techniques,
procedures, control and other relevant areas;
developing tender documents for generation, transmission and distribution
contracts; and
granting permits and licences for the construction and operation of new generation
facilities.
The Ministry is in charge of general policymaking and planning for the electricity sector.4
It oversees and supervises the other actors in the sector (CONELEC and its agencies).
Furthermore, the Ministry is in charge of developing the Electrification Master Plan
(along with CONELEC), as well as the development of other related national policies.
The CENACE is a non-profit corporation that controls the supply of electricity in
the country.5 It regulates the functioning of the National Interconnected System (SNI).
All transmission, generation and distribution bodies (private or public) are members of
the CENACE, as are the major consumers. As mentioned above, the CENACE does not
have regulatory powers, but it is a very important participant in the Ecuadorean electricity
sector since it is the only body that decides which generators go online.
CELEC EP is the state-owned company created as a result of the merger
of Electroguayas SA, Hidroagoyan SA, Hidropaute SA, Termoesmeraldas SA,
Termopichincha SA and Transelectric SA (all of which were state generators). As a result
of the merger, the CELEC EP is the main generator of electricity in Ecuador.
The main legislation regulating the electricity sector is the LESR, which was
enacted in 1996. It contains several provisions to regulate every segment of the electricity
sector, such as generation, transmission, distribution and commercialisation. The LESR
also created CONELEC, the main regulatory body. Under the provisions of the LESR,
CONELEC issues regulations regarding the different areas of the electricity industry in
Ecuador, including authorisations and licences for such activities.
Furthermore, in 2006 the Regulation for the application of the LESR was enacted
in order to establish specific provisions and procedures regarding the provision of services
in different areas of the electricity sector, as well as any other relevant regulations, such as
rates, operative regulations and contractual regulations.
There are also many specific regulations issued by CONELEC regarding rates,
procedures and other relevant issues such as licensing for generation. Since 2013 there
have been few regulations issued by the CONELEC. The most important regulation
(No. 001-13) is related to renewable energy (see Section V, infra).
4
5
Article 5-A of the LESR and Article 12 of the Regulation on the LESR.
See Ministry Agreement No. 151, dated 27 October 2008.
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Ecuador
ii
The rights to carry out the main activities in the electricity sector (generation, transmission,
distribution and commercialisation) fall exclusively to the state, since they are classified
as public services. Exceptionally, these activities may be delegated to private entities
through a granting instrument after completion of the corresponding qualification and
licensing processes; however, currently only generation activities are delegated to private
entities, and transmission, distribution and commercialisation remain controlled by the
state.
Private generation organisations need to enter into contracts (power purchase
agreements, or PPAs) with distributors (with prior authorisation from CONELEC) in
order to sell the electricity generated. In addition, the connection to the SNI must be
authorised by CONELEC, and a rate will be set for the transmission of the energy.
For private generators, the type of licence or permit required will depend on the
power to be generated. A concession is granted for more than 50MW, an authorisation
for less than 50MW6 and a registration for less than 1MW.7 Furthermore, in order
to execute PPAs with authorised distributors or interconnection agreements with
transmission entities, CONELEC must grant an authorisation to the private entity to do
so. The process for these approvals will depend on the type of generator and the specific
(environmental, financial and contractual) characteristics of each request.
iii
As previously mentioned, all areas of the electricity industry are public services; therefore,
the state is in charge of their management, control and regulation as well as their
provision. Currently, the state only allows private entities to participate in generation
activities.
Local or foreign investors may own private entities; there is no restriction to
foreign ownership pursuant to the provisions of the LESR.8 Any form of association or
joint venture is permitted, but all activities and permits must be held and maintained via
a local corporation.
Any assets, equipment and materials that are used for such activities are requisitioned
to the public service,9 and so may not be removed without prior authorisation from
CONELEC. At the end of the licence term, all assets will be transferred free of charge
to the state.
iv
Pursuant to Article 87 of Executive Decree No. 1,247, the holders of a concession contract
may not transfer or assign the rights in the contract without express prior authorisation
from CONELEC. Although there is no specific regulation regarding the merger or
acquisition of a licence or permit holder, the provision of the aforementioned Executive
6
7
8
9
See Executive Decree 1,274 dated 3 April 1998.

See Regulation No. 009/08 regarding the Registry of Generators under 1MW.
Article 29 of the LESR.
Article 6 of the LESR.
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Decree states that any act or transfer under any title that has an effect on the terms of the
granting instrument will be considered as an unauthorised transfer, and so CONELEC
may unilaterally terminate the concession. Therefore, it should be understood that the
same principle of prior authorisation applies to any merger or share acquisition.
In order for the assignment process to be successful, the assignee should file
documents to demonstrate its financial and technical capabilities to continue with the
proposed operation; these documents form the legal basis on which CONELEC will
issue the approval for such assignment.
III

SERVICES
Under Ecuadorean law, electricity, gas and oil are the property of the state and,
exceptionally, these activities can be delegated to a private initiative. Electricity and gas
are highly regulated industries, controlled by public bodies.
Electricity
As described in Section I, the electricity industry was vertically integrated until the
1990s as a state monopoly. This structure caused significant economic problems, as the
rates charged were insufficient to cover production costs. The Ecuadorean government
therefore decided to open up the industry and allow private companies to invest and
provide services.10
Currently, the electricity market is made up of three principal activities
generation, distribution and transmission and there are two main regulatory entities:
CONELEC and the CENACE. The actors in the industry are separate entities and may
only carry out one activity. Both private and public organisations can be generators.
Distributors are state-owned companies that operate in a specific geographical area, and
transmission is a natural monopoly of the state.
Gas
The gas and oil industries are usually linked, and in many cases the holders of oil contracts
can obtain a permit to exploit gas. Activities in this industry are divided into production
(companies exploiting natural gas), storage, transportation and distribution. Actors in
the gas industry can exercise all the activities described herein, together or independently.
However, Petroecuador EP, a state-owned company that integrates its activities vertically,
has a monopoly on the transportation of gas through a gas pipeline network.
Private companies produce liquid gas (LPG) for domestic markets, and this is the
principal source of energy for domestic use (stoves and water heaters). Natural gas is used
in a few generation plants, mainly owned and operated by state-owned entities.
10
CONELEC, Closing of Accounts of the Wholesale Electricity Market, Period 19992003,

December 2004.
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Ecuador
ii
Ecuadorean legislation grants transmission and distribution access subject to certain

conditions. Pursuant to Article 33 of the LESR, distributors and transmission operators
are obliged to provide non-discriminatory access to third parties to their facilities in
exchange for a tariff. This access includes the transformation of energy.
As previously mentioned, electricity transmission is a natural monopoly controlled
by the state through the SNI, which comprises transmission lines and the corresponding
interconnection modules. Once the energy enters into this system, the CENACE
measures the generation and consumption of energy in order to determine the fee.
Distribution activities, on the other hand, are divided into specific territories,
where distributors have exclusive rights to sell the electricity to final consumers. All
producers should execute PPAs with distributors in order to sell their energy and have
a preferential order in the payment of the energy sold. Major consumers can enter into
direct PPA with private generators, so a private generator may produce electricity solely
for a major consumer, but the tariff for the use of the SNI must still be determined and
paid.
The Ecuadorean government takes a strong position on encouraging competition
in the electricity sector. In 2001, an antitrust regulation was enacted in order to avoid
private monopolies,11 and this has played an important role in the opening up of the
electricity sector. Pursuant to Article 31, no person or entity can control more than 25
per cent of the electricity generating market; however, these provisions are not applicable
to existing state generating companies, only private generators.
iii
According to Regulation of Law No. 85, which amends the Hydrocarbons Law, the
storage, transportation and distribution of natural gas is regulated under INEN norms.12
In addition, there are various international standards that must be achieved, which are
provided by the American Petroleum Institute and other international institutions.
The Ministry of Non-Renewable Natural Resources and the National Hydrocarbon
Regulation Agency control these activities, in which private entities may participate.
iv Rates
The provisions that regulate fees have been subject to many changes in recent years.
Each year, CONELEC establishes fixed rates for distributors to sell the electricity to the
final consumers. CONELEC also establishes the rates for distributors for access to the
transmission system, taking into account energy and the power losses.13
11
12
13
Antitrust Regulation for Electricity Sector Activities, published in the Official Gazette No. 408,
10 September 2001.
Ecuadorean Technical Standards Catalogue, in alphabetical order; www.inen.gob.ec/images/
pdf/catalogos/alfabetico2013.pdf.
Legislative Decree No. 15, published in the Supplement of the Official Gazette No. 393, 31
July 2008; CONELEC Regulation No. 006/08, 12 August 2008.
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Ecuador
Producers and distributors, producers and major consumers, and distributors and
major consumers may enter into PPAs, negotiating and freely determining the price of
the electricity. There used to be an exception for non-conventional energies generators,
who used to have a legal assurance of a fixed premium price for up to 15 years, pursuant
Regulation No. CONELEC-004/11. Regulation No. CONELEC001/13 derogated
Regulation No. CONELEC-004/11 and established preferential rates only for biomass
and biogas generators. However, Photovoltaic generators that entered into a generation
agreement before CONELEC 001/13 remain with the preferential fee established in
regulation CONELEC 004/11.
The CENACE measures the energy distributed, the transmission rates and the
costs, and determines under the PPAs, if applicable, the price that each producer should
receive in relation to the dispatch and sale of energy.
The payment system encourages efficiency and cost reduction by establishing
priorities in the payments; producers that produce the most expensive energy are at
the bottom of the priority order and receive payment last. Since payment through trust
funds was recently eliminated, the generators are currently receiving a direct payment
from the distributors. It can be presumed that this measure equates to the stability of the
market and the possibility of the distributors to pay for the energy supplied.
IV
ENERGY MARKETS
Please see Section I, supra.

ii
Ecuadorean legislation provides three market types for generators.

Short-term market or spot market
In setting short-term prices that imply an economic dispatch, operating over expenditures
of the generating units is not considered. This formula utilises variable and audited costs
of thermal power stations. The short-term price reflects the highest variable price of the
units released.
Currently the short-term market is only applicable to international electricity
transactions, as the national market functions only under regulated agreements.
Long-term market for regulated clients
Generators that operate in the national system have entered into regulated agreements
(PPAs) with the distribution companies. Private generation companies negotiate the sales
price, which establishes two elements:
a
a fixed charge, which is independently liquidated if the generator is or is not
released, if and when it maintains available capacity. The determination of the
fixed charged takes into consideration the costs of recouping investments, such as
those related to administration, operation and maintenance; and
b
a variable charge or production cost that is liquidated in accordance with the
measured electric energy production.
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Generation market for free clients
Generators are permitted to sell energy in bulk consumer market. Bulk consumers are
those that demand a monthly average at or above 650kW or a minimum annual energy
consumption of 4,500MWh.
Bulk consumers may enter into transactions in the market through free agreements
with generators.
V
The development of renewable energy in Ecuador from non-conventional14 resources is

very recent, but there is already a well-established infrastructure of hydroelectric projects
that generate approximately 11,100GWh (2013).15 This source of energy is the most
common in Ecuador due to the geological distribution of water currents and the high
cost and investments required for other renewable resource energy generators.
In 2011, CONELEC issued Regulation No. 04-11, which established preferential
rates and tax benefits for generation from non-conventional resources. In December
2012,16 CONELEC issued Regulation 07-12, which amended Regulation No. 0411, in which preferential rates were established for electric generation of wind power,
photovoltaic, solar thermoelectric, marine currents, biomass and biogas and geothermal.
However, on 13 March 2014, CONELEC issued Resolution No. 01-13 which repealed
Resolution No. 04-11 eliminating preferential rates for most forms of renewable energy
projects. With Resolution No. 01-13, preferential rates for non-conventional energy
generation were eliminated both in the continental and insular region of Ecuador.17
ii
In the past couple of years, photovoltaic and wind power generation projects have begun
in Ecuador; these are the newest clean generation units, which are of particular interest
in areas such as the Galapagos Islands, where there is no other available source of energy
generation other than diesel generators.
VI
THE YEAR IN REVIEW
The Ecuadorean government has attempted to promote changes in the energy matrix,
which up to now has been almost entirely oil-based. The Ministry of Electricity and
14
Non-conventional resources are defined as those used for the generation of energy through
aeolic, biomass, biogas, photovoltaic, geothermal and other resources of similar characteristics.
See Article 76 of the Regulation of the LESR and Article 63 of the LESR.
15 www.conelec.gob.ec/enlaces_externos.php?l=1&cd_menu=4223,.
16
1 December 2012.
17
Prefential rates are still available for biomass (US$9.67/US$10.64) and biogas (US$7.32/
US$8.05).
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Ecuador
Renewable Energy, considering the stability of the market, eliminated the payments
towards trust funds. Now, distribution companies pays directly to the generators.
Some important energy infrastructure projects have been contracted by
the government. For instance, CONELEC awarded to a Chinese corporation the
construction of several transmission lines from 230kV up to 500kV valued at more than
US$500 million.
VII
The Ecuadorean market is evolving and changing the energy matrix by developing new
sources of energy. Important projects are under way and the level of importation of energy
from neighbouring countries is declining. The changes introduced by the government
are encouraging energy efficiency by reducing energy losses and expanding the SNI.
The government is promoting the exploration and exploitation of gas. In the
eleventh oil bidding round, the industrialisation of gas has been introduced as part of the
deal for oil companies interested in entering into service contracts with Ecuador.
The Ecuadorean energy market presents interesting options for investors, since
the market has no deficit and is opening up to private investment.
126
Chapter 10
EGYPT
Bassam Moussa and Mariam Fahmy1
OVERVIEW
The energy sector in Egypt is heavily dominated by the government and the public
sector. The electricity sector is monopolised by the Egyptian Electricity Holding
Company (EEHC), which owns most of the electrical power generation, transportation
and distribution companies in Egypt.
According to the EEHCs annual report for the financial year 20112012,
approximately only 8.3 per cent of the generated electrical power is produced by
companies with a concession to generate electrical power by virtue of a BOOT (build,
own, operate and transfer) or similar model. However, due to high energy demand, lack
of energy generation exploitation of massive renewable energy resources has recently
led to severe power outages. In response, the government is looking into enacting an
Electricity Law as soon as the new parliament is elected that will aim at liberalising
the electricity sector in addition to incentivising private investment in all aspects of the
energy sector in Egypt.
Egypt is one of the wealthiest countries in terms of renewable energy resources,
notably, solar and wind. Coupling such potential with the current energy crisis provides
for a very strong need for drastic reform in the energy sector. Accordingly, the New and
Renewable Energy Authority (NREA), which is a governmental entity, recently began
implementing solar and wind energy projects, in addition to more projects that are
currently in the pipeline. These projects are offered through tenders by the NREA and
are implemented by local and foreign investors with the required expertise. Further, it is
expected that the Egyptian Company for Transporting Electricity will tender for power
generation plants that will generate electricity through renewable energy resources. This
Bassam Moussa and Mariam Fahmy are senior associates at Shalakany Law Office.
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Egypt
is expected to generate approximately 2,500MW through private investors.2 In addition,
the EEHC together with the NREA are working towards generating 20 per cent of the
gross generated energy through renewable energy resources by the year 2020.3
In addition, very recently, the government approved the use of coal as a source of
energy for industrial production due to the current energy crisis. However, this decision
was heavily criticised due to the hazardous implications for the environment.
II REGULATION
i
The regulators4
The Egyptian Electric Utility and Consumer Protection Agency (ERA) was established
by virtue of Presidential Decree No. 326 of 1997, which was later abolished by virtue of
Presidential Decree No. 339 of 2000 reorganising the ERA. The ERA is affiliated with
the Ministry of Electricity and Renewable Energy (MoEE).
The ERAs main purpose is organising and monitoring all aspects relating to the
electricity sector (i.e., generation, transmission, distribution, sale and consumption of
electric power) to ensure the availability and continuity of electricity provision in return
for fair prices all while guaranteeing environmental protection.
The ERAs mandate and authorities include, inter alia, the following:
a
ensuring that all activities relating to generation, transmission, distribution and
sale of electricity are carried out in compliance with the applicable laws and
regulations especially those relating to environmental protection;
b
regularly reviewing the plans prepared for electricity consumption, generation,
transmission and distribution, including the investments necessary for such plans,
in order to ensure availability of electricity for various usages in conformity with
government policy;
c
setting rules and regulations that ensure lawful competition in the field of
electricity generation and distribution in the best interests of the consumers;
d
ensuring that the costs of electricity generation, transmission and distribution
conserve the interests of all parties involved in such activities; and
e
issuing licences for projects relating to the construction, management, operation,
and maintenance of electricity generation, transmission, distribution and sale.
Oil and gas
The oil and gas sector is regulated by the Egyptian General Petroleum Corporation
(EGPC). The EGPC is affiliated with the Ministry of Petroleum.
The EGPC regulates the upstream sector, including entering into concession
agreements, granting the necessary licences (which differ depending on the activity), in
See the EEHC Annual Report 2011/2012 (available at www.moee.gov.eg/english_new/report.

aspx).
3 Ibid.
4
Presidential Decree No. 339 of 2000 reorganising the Egyptian Electric Utility and Consumer
Protection Agency.
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Egypt
addition to regulating midstream and downstream sectors. In doing so, the EGPC has,
inter alia, the following powers and authorities:5
a
establishing and operating petroleum entities;
b
undertaking exploration activities, in addition to refining, purchasing, selling,
transporting, storing and distributing oil in Egypt. The EGPC has the right to
undertake such activities by itself or through third parties;
c
importing oil and its products and exporting any excess by itself or through third
parties;
d
determining the standards of petroleum products alongside the competent
authorities; and
e
determining the prices of petroleum products alongside the competent authorities.
ii
Electricity
According to Law No. 12 of 1976, as amended, establishing the Egyptian Electricity
Authority, the predecessor of the EEHC, the EEHC is mandated, inter alia, to implement
and supervise projects relating to the generation, transmission and distribution of
electricity and to offtake the electricity generated by electricity power stations constructed
by local or foreign investors.6
In doing so, the EEHC has the right to establish companies solely or with other
private or public sector entities or individuals. In addition, the EEHC has the right
to grant concessions to local or foreign investors allowing such investors to construct,
manage, operate and maintain electricity power stations. This is carried out by virtue of
a concession agreement entered into between the EEHC and the investor for a period of
not more than 99 years after a fair and transparent bidding process.7
The concession agreement, and any amendments thereto, are issued by virtue
of a Ministerial Cabinet Decree upon the suggestion of the Minister of Energy and
Renewable Energy (i.e., the approval of the Minister of Energy and Renewable Energy
is also required).
In addition to the above, the construction, management, operation, and
maintenance of electricity generation, transmission, distribution and sale projects require
a licence from the ERA.8
The licence is issued for five years and can be renewed.9 The applicant must follow
the procedures issued by the ERA in this regard. Such procedures include the payment
of the relevant fee, which depends on the activity to be carried out by the applicant, and
submitting all required documents which are set out in the application form.
5
6
7
8
9
Article 2 of Law No. 167 of 1958, as amended.

Article 2 of Law No. 12 of 1976.
Article 3(11) of the Presidential Decree No. 339 of 2000 reorganising the Egyptian Electric
Utility and Consumer Protection Agency.
See the requirements for obtaining a licence relating to the generation, transmission and
distribution issued by the ERA, http://egyptera.org/en/rules.aspx.
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Egypt
Oil and gas
According to Law No. 66 of 1953, in order for an entity to explore and produce oil and
gas, the entity must be granted a concession.10 Concessions in Egypt are granted by virtue
of a specific law empowering the Minister of Petroleum to sign the relevant concession
agreement with either the EGPC, the Egyptian Natural Gas Holding Company (EGAS)
or Ganoub El Wadi Petroleum Holding Company (Ganope), depending on the subject
matter of the exploration and production (i.e., whether oil or gas) and the contractor
being declared as a successful bidder for the tender issued by the Ministry of Petroleum.
Further, in order for an investor to establish a plant for producing oil and gas
derivatives, a licence from the EGPC in addition to a licence from the Industrial
Development Authority must be obtained.
Moreover, with regard to the natural gas activities, the EGAS has the right to
establish companies with third parties to produce or liquefy natural gas11 (i.e., EGAS
must be a shareholder in any company operating in the production or liquefaction
of natural gas; however, there is no minimum or maximum shareholding percentage
requirement).
iii
Electricity
Generally, there are no ownership and market access restrictions. However, it should be
noted that there is a market monopoly by the EEHC which owns approximately 90 per
cent of the electricity generating capacity in Egypt in addition to its affiliated generation,
distribution and transmission companies.12
As stated above, the EEHC has the right to establish companies solely or with
other private or public sector entities or individuals in relation to the generation,
transmission and distribution of electricity, in addition to granting concessions to local
or foreign investors allowing them to construct, manage, operate and maintain electricity
power stations.
Further, any company operating in the electricity sector, whether construction,
management, operation or maintenance of electricity generation, transmission,
distribution and sale, must obtain the relevant licence from the ERA. Moreover, there
are no constraints on aggregate holdings.
Oil and gas
There are no ownership and market access restriction in the exploration phase of oil or
gas. However, once a discovery occurs, the contractor and the EGPC or EGAS, as the
case may be, will have to establish a joint venture where the contractor owns 50 per cent
and the EGPC or EGAS owns the other 50 per cent.
10
11
12

Article 4(6) of Ministerial Decree No. 1009 of 2001 establishing the EGAS.
EEHC Annual Report 2011/2012.
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Egypt
With regard to midstream and downstream oil activities, there are no ownership
restrictions. However, the necessary licences and approvals mentioned above must be
obtained.
With regard to natural gas, the EGAS must hold shares in any company producing
or liquefying natural gas. There is no minimum percentage of such shareholding. Further,
there are no constraints on aggregate holdings.
iv
Electricity
Usually concession agreements state that any assignment or change of control by the
concessionaire is permitted provided that the concessionaire obtains the prior written
approval of the EEHC.
Further, in relation to licensed activities, the licensee must obtain the prior
written approval of the relevant entity, which is usually the ERA, before any assignment
or change of control. It should be noted that the licence itself includes the process and
procedures for obtaining the prior approval for assignment or change of control.
Oil and gas
All concession agreements for the exploration of oil and gas include a provision by which
the concessionaire cannot transfer or assign, whether directly or indirectly, the concession
except after obtaining the prior written approval of the EGPC or EGAS, as the case may
be. Further, some concessions allow the concessionaire to assign the concession to its
affiliates without obtaining the prior written approval of the EGPC or EGAS.
Further, usually the concession agreements include a right of first refusal
provision where the EGPC or EGAS has a pre-emption right in case of assignment by
the contractor.
III

SERVICES
Electricity
The electricity sector is monopolised by the EEHC, which is a state-owned jointstock company. The EEHC owns six electricity generation companies, nine electricity
distribution companies and one electricity transportation company.13 This structure
was adopted in the late 1990s, following the growth in demand, when the Egyptian
Electricity Authority was converted into a joint-stock company, the EEHC.
This structure was supposed to be a step towards the liberalisation of the electricity
sector in Egypt, as after such structure was implemented, investors began engaging in
production and distribution of electricity according to the regulations, tariffs and fees
mandated by the ERA (as detailed in Section IV, infra). Further, the Public-Private
Partnerships (PPP) Unit, which is affiliated with the Ministry of Finance, announced
13
See www.moee.gov.eg.
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Egypt
that there is one project in the pipeline relating to generation of electricity from waste.
This means that the state is currently looking for more private investors to invest in the
electricity generation sector.
Oil and gas
In the exploration and production of oil and gas, the EGPC or EGAS must be a party
to all concession agreements. Further, as stated above, once a discovery occurs, the
contractor and the EGPC or EGAS, as the case may be, will have to establish a joint
venture where the contractor owns 50 per cent and the EGPC or EGAS owns the other
50 per cent.
In addition to the EGPC and EGAS, the main players in the oil and gas
sector are the Egyptian Petrochemicals Company (working in all activities relating to
petrochemicals, including monitoring the implementation of petrochemicals projects
and attracting investments in the petrochemicals field) and Ganope (working in the oil
and gas field, including exploration and production, in the South Valley region) which
are wholly-owned by the EGPC. Further, the oil sector has a lot of foreign investors
whether in the upstream, midstream or downstream sectors including BP and Apache.
This structure is not expected to change in the near future.
ii
Electricity
Electricity transportation and distribution companies may be required to serve a
particular geographical area in accordance with the licence granted by the competent
authority, i.e., the ERA, and their articles of incorporation. For example, the nine
electricity distribution companies and six electricity generation companies owned by
the EEHC are each mandated to serve different regions; however, the transportation
company owned by the EEHC serves all of Egypt.
It should be taken into consideration that the law does not specify whether or
not transportation and distribution companies have the right to exclusively provide
transportation and distribution services in a particular geographic area; as this depends
on the licence granted by the ERA.
The EEHC is mandated to offtake all electrical power generated by the privately
owned power generation stations in order for its affiliate companies and privately owned
distribution companies to distribute electricity to all consumers.
Further, electricity must be distributed to all of Egypt based on the determined
rates without discrimination between consumers.
iii Rates
Electricity
The MoEE is the entity mandated to determine the rates of the distribution and sale
of electricity for all voltage levels.14 There are no regulations, however, determining
the method upon which such rates are determined. Further, electricity rates in Egypt
14
Article 1(2) of Presidential Decree No. 1103 of 1974 organising the MoEE.
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Egypt
are uniform as they are subsidised. Such subsidy differs according to the nature of the
beneficiary (i.e., residency, commercial, etc).
The method of calculating the distributors and transporters profits is determined
in the concession agreement and/or the licence, as there are no regulations setting out
such method.
iv
The ERA is mandated to make sure that all laws and regulations related to the electricity
sector in Egypt are strictly adhered to by the different stakeholders. Further, the MoEE is
mandated to control and supervise all activities relating to the electricity sector.
Moreover, the EEHC is responsible for providing electricity power to all
consumers at reasonable prices.
In addition, the concessionaires and licensees have to abide by all provisions
included in the concession or the licence; otherwise, the concessionaire or licensee will
be subject to the sanctions stipulated for in the concession, licence and the relevant laws
and regulations.
IV
ENERGY MARKETS
Egypt does not have established markets for the sale of energy. Primarily, the supply
and sale of energy is controlled by the state through state-owned enterprises. Further,
the prices of different sources of energy are fixed by the state. However, in 1996 the
activities of production and distribution of electricity were opened to the private sector
while maintaining a state monopoly over electricity transmission. Investors can engage
in production and distribution of electricity under the regulations and using the tariffs
and fees mandated by the ERA.
Egypt, so far, has three privately owned production plants operating under a
BOOT agreement with the government and 14 private companies that have a production
licence as well as a total of 24 companies that have a electricity distribution licence.15 The
markets of other sources of energy remain a complete state monopoly.
ii
There are different rules governing the different sources of energy. The production and
sale of natural gas is managed through the exploration concessions regime with the
state-owned enterprises as sole purchaser of production and sole distributor of gas to
end-users. However, for electricity, private production and distribution companies are
entitled to sell to the end-user while observing the regulations of the ERA.
15
See http://egyptera.org/en/license_comp.aspx.
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Egypt
iii
Electricity producers and distributors are permitted to have individual contracts for the
sale of electric power, while the rates and other charges are mandated by the government.
Power producers and distributors are subject to the supervision of the ERA.
iv
Market developments
There is a draft electricity law that has been in circulation for a number of years, but has
not been enacted yet. The draft law should be presented and enacted upon the formation
of the new parliament. The law aims at liberalising the electricity production and
distribution market and encouraging private investment in the energy sector including
renewable energy.
V
Renewable energy in Egypt falls under the competencies of the NREA. The government
aims at boosting contribution of renewable energy sector to be 20 per cent of total power
generation by 2020, 12 per cent of which will be generated by wind energy. Given the
need to reduce dependence on gas, it is anticipated that Egypt will place greater emphasis
on its considerable solar and wind potential. Egypts overall power generation is expected
to increase by an annual average of 4.5 per cent during the period 20112016. This
includes annual increases of more than 9 per cent from renewable sources. Further, the
government is looking to attract US$110 billion of investment into its power sector by
2027.
Egypt has developed incentive schemes to encourage investment in renewable
energy, mainly: (1) a feed-in tariff scheme in the development of wind farms, reducing
project risks through signing a long-term power purchase agreement (PPA) for 20 to
25 years; (2) sovereign guarantee of all financial obligations under the PPA; (3) using
foreign currency for the sale of energy generated from renewable energy projects; and (4)
exempting renewable energy equipment from customs and tariffs.16
ii
Egypt has adopted a national plan for enhancing energy efficiency by 5 per cent from
2012 to 2015. The plan includes: (1) renovation of old electric power stations, (2)
implementing a programme for transforming gas-based stations to operate on a twin
turbine to reduce fuel consumption, and (3) renovating electricity transmission networks.
Further, on the side of consumption Egypt is undertaking several initiatives including:17
(1) introducing energy-efficient lighting for consumers at low cost, (2) implementing
16
See the General Authority for Investment and Free Zones (GAFI, Renewable Energy Report,
available at: www.gafi.gov.eg/content/invsectorsdocs/RenewableEnergyvalue.pdf ).
17 www.moee.gov.eg/tarshed/efforts_saving.aspx.
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Egypt
energy-efficient quality standards for white goods, and (3) using an energy-efficient street
lighting system including solar-based lighting.
iii
There have been technological improvements in the area of renewable energy sector. With
respect to solar energy, it is expected that its cost will decline sharply within the next five
to seven years.18 Egypt aims to develop a competitive market for solar energy. Egypt has
not fully implemented smart grid technologies, but as the energy market moves toward
more liberalisation and with the international grid connections projects contemplated by
Egypt it is expected to see more technological developments in the energy sector.
VI
THE YEAR IN REVIEW
In April 2014, the Cabinet of Ministers approved the use of coal as a source of energy
for industrial production to mitigate the shortage of supply of natural gas. Further,
the Cabinet of Ministers decided to double the prices of natural gas used for domestic
consumption.
The governments medium and long-term plan is to increase the electricity
generated from all sources of power supply by 5 to 7 per cent. The governments plan for
the FY 2013/2014 has a number of projects, including:
a
establishment of three wind power stations with a generating capacity of 220MW,
200MW, and 120MW in Gabal Eziet with a total production capacity of
2,413kWh;
b
continuing the establishment of four wind power stations in Suez Bay with a total
capacity of 800MW and total production of 3,155kWh; and
c
the preparation of the tendering documents for two energy production stations
through photovoltaic cells systems in Kom Ombo and Hurgada, with a production
capacity of 20MW each.19
VII
It is expected that once a new president is elected and a new government is formed,
electricity will be a priority given the current energy crisis. Further, it is expected that
once the Electricity Law is enacted, many of the grey areas in the current laws and
regulations governing the electricity sector will be resolved, resulting in a more suitable
climate for investment and increased actual privatisation of the sector.
In addition, there are calls for restructuring of the electricity tariffs and rates based
on the geographical areas, the level of consumption and the nature of the consumers.
Although the current government is denying that the electricity tariffs and rates
18
See the General Authority for Investment and Free Zones (GAFI, Renewable Energy Report,
available at: www.gafi.gov.eg/content/invsectorsdocs/RenewableEnergyvalue.pdf ).
19 Ibid.
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Egypt
restructuring will be implemented in the near future, it seems that such restructuring is
inevitable in order to deal with the electricity crisis.
The state will also focus on exploiting Egypts huge renewable energy resources
in the next few years through private investors as the state is taking steady steps towards
creating a safe and stable environment for foreign investment in the renewable energy
sector.
In light of the above, it is safe to say that Egypts main priority at the moment is
the development of the electricity sector and exploring alternative methods for generating
electrical power, and in doing so the state is working on attracting private investors to
invest in this critical sector.
136
Chapter 11
FRANCE
Fabrice Fages and Myria Saarinen1
I OVERVIEW
In France, the energy market has undergone a progressive liberalisation as a result of the
European plan to establish a unique energy market that would end national monopolies.
This has naturally led to an important legislative and regulatory change that was codified
by an order dated 9 May 2011, which created the legislative part of the Energy Code.2
This Code sets out provisions relating to electricity, gas, renewable energy, hydropower,
oil and both heating and cooling networks.
This chapter will focus mainly on electricity and gas markets since they have been
the main energy markets affected by such changes. It should, however, be underlined that
the other sources of energy are also subject to specific regulation.
As a matter of history, after World War II, the French authorities decided, in order
to rebuild the infrastructures and the network, to grant a state monopoly to Electricit
de France (EDF) and Gaz de France (GDF, today GDF Suez) with regard respectively
to the production, transportation and distribution of electricity and gas.3 This situation
remained substantially unchanged for half a century until France had to implement
into its national law two directives dated 1996 and 1998 adopted by the European
Commission in order to promote an effective and efficient internal energy market, open
to competition. These directives were progressively transposed into French law as of 2000
2
3
Fabrice Fages and Myria Saarinen are partners at Latham & Watkins AARPI. This chapter was
written with the assistance of Julie Ladousse, an associate at the firm, and Antoine Reillier, law
clerk.
Order No. 2011-504 of 9 May 2011.
Law No. 46-628 of 8 April 1946 concerning the nationalisation of electricity and gas, repealed
by the Law No. 2004-803 of 9 August 2004.
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France
and initiated the beginning of the liberalisation, although initially only large industrial
consumers could benefit from this system.
Further opening of the energy market occurred several years later with the
transposition into French law of new directives dated 2003, which aimed to make such
opening available to all professional consumers by 1 July 2004, and to all consumers,
including residential or customers, by 1 July 2007.4
Although significant progress had been made, the European Commission adopted
the Third Energy Package to further liberalise the energy market, which included two
new directives5 replacing the former electricity and gas directives. These directives were
transposed into French law on 7 December 2010 by a new law commonly referred
to as Law NOME.6 In addition, Law NOME led to the removal of obstacles of the
development of competition on the French electricity market. Greater price liberalisation
for industrial and residential customers has been achieved, by requiring EDF to sell a
substantial part of its existing nuclear facilities to alternative suppliers at a regulated price
(ARENH), from January 2011 to 2025, so as to allow alternative suppliers to compete
fairly with the historical supplier.
II REGULATION
i
The regulators
Compliance with the new energy market regulations is mainly controlled by the
Commission of Regulation of Energy (CRE), the sectoral regulator, which was created
by the Law dated 10 February 2000.7 Its overall mission is to contribute to the proper
operation of the electricity and natural gas markets, to the benefit of final customers.
6
7
Law No. 2004-803 of 9 August 2004 concerning the electricity and gas public service and
the electricity and gas companies, transposing (1) Directive 2003/54/EC of 26 June 2003
concerning common rules for the internal market in electricity and repealing Directive 96/92/
EC, and (2) Directive 2003/55/EC of 26 June 2003 concerning common rules for the internal
market in natural gas and repealing Directive 98/30/EC. Law No. 2005-781 of 13 July 2005
setting out the guidelines for energy policy regarding professionals and Law No. 2006-1537 of
7 December 2006 for individuals completed the transposition of these directives.
Directive 2009/72/EC of 13 July 2009 concerning common rules for the internal market
in electricity and repealing Directive 2003/54/EC; Directive 2009/73/EC of 13 July 2009
concerning common rules for the internal market in natural gas and repealing Directive
2003/55/EC.
Law No. 2010-1488 of 7 December 2010 establishing a new organisation of the electricity
market.
The CRE is governed by three founding acts: Law No. 2000-108 of 10 February 2000,
concerning the modernisation and the development of the electricity public service; Law No.
2003-8 of 3 January 2003 concerning the gas and electricity market and the public service
of energy; Law No. 2010-1488 of 7 December 2010 establishing a new organisation of the
electricity market. The legal framework applicable to the CRE is defined in Articles L131-1 to
L135-16 of the French Energy Code.
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France
a
b
c
d
e
f
The CRE is principally in charge of:

powers of decision, approval or authorisation (system operators, contributions to
the public electricity sector, etc.);
dispute settlement and sanctions relative to access to the electricity and gas
networks;
powers of proposal (tariffs for the use of public electricity grids, contributions to
public electricity services, etc.);
information and investigative powers with stakeholders;
advisory powers (tariffs, regulated access to incumbent nuclear electricity, etc.);
and
additional powers (processing of tenders for electricity generation, etc.).
The CoRDiS committee, which is an independent body of the CRE executes CRE
competencies with regard to sanctions and settles disputes related to the access and use
of public electricity grids and natural gas networks.
Further, an energy ombudsman has been put in place whose role is to provide
consumers with all necessary information concerning their rights, current legislation and
the means of dispute settlement available to them in the event of a dispute.
In addition, the French Competition Authority (FCA) has the power to prevent
and sanction anti-competitive practices in any economic sector, including electricity and
gas. It must inform the CRE when seized of any matter that would fall under the CREs
jurisdiction. The FCA must also notify the CRE of any abuse of a dominant position or
any anti-competitive practice in the gas or electricity sector.8
Finally, the Higher Energy Council is an organism established by the Ministry
of Energy which is composed by several members including Members of Parliament.
Its main purpose is to advise it on national energy policy. The Council is consulted on
regulatory acts relative to such policy and on electricity and gas markets related decisions.
ii
The energy market is composed of four main areas of activity: production (generation),
transmission, distribution and supply (commercialisation). Under the previous regime,
which was applicable until 2000, these four activities were carried out by EDF and GDF,
which self-regulated the monopoly.
There have now been greater strides towards liberalisation as production and supply
are open to competition. Transmission and distribution are still, however, public service
activities supervised by the CRE (see Section II, infra). Where, in order to guarantee this
public service mandate, a legal and financial separation between such activities has taken
place,9 transmission is performed by GRT (gas) and RTE (electricity), and distribution
is performed by GRDF (gas) and ERDF (electricity) or local distribution companies.10
8
9
10
Article L134-16 of the French Energy Code.

Law No. 2004-803 of 9 August 2004 concerning the electricity and gas public service. Law No.
2010-1488 of 7 December 2010 on the new organisation of the electricity market.
Local distribution companies are defined by Article L111-54 of the French Energy Code.
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France
More generally, some activities require an administrative authorisation such as
the exploitation of electricity production facilities. This authorisation is delivered by
the Minister of Energy according to specific considerations such as security, energy
efficiency, technical and economic capacities of the applicant.11 Similarly, gas exploration
also requires an administrative authorisation or a concession, which is granted further to
a public enquiry and a tender procedure.12
iii
Although the French Energy Code does not provide for any restriction or requirement
in relation to the acquisition of assets in the energy sector by foreign companies or
individuals, it clearly states that the French state must hold at least 70 per cent of the
capital and voting rights of EDF and 30 per cent of GDF Suez13 (in order to protect the
French national interest, the state may benefit from specific shares within the capital of
GDF Suez).14
iv
Transfer of control and assignments
Any merger or any change in control over businesses in the energy sector, or any
acquisition of utility assets, must be notified and supervised by the FCA if the following
three cumulative conditions are met:15
a
worldwide aggregate turnover of all the parties to the concentration exceeds 150
million;
b
turnover in France of each or at least two parties concerned exceeds 50 million;
and
c
the transaction does not meet the EC Merger Regulation thresholds.
The examination process by the FCA is twofold. In stage I (which takes up to 40 working
days), the FCA has 25 working days to examine the transaction starting from the date
when a complete notification is received. When remedies are proposed to the FCA, this
period is extended by up to 15 working days. At the end of this period, the FCA can clear
the transaction, with or without remedies or proceed to an in-depth investigation. In the
absence of any decision, the transaction is tacitly cleared.
11
12
13
14
15

Articles L131-1, L132-3 and L132-4 of the French Mining Code.
Articles L111-67 and L111-68 of the French Energy Code.
Article L111-69 of the French Energy Code and Article 10 of Law No. 86-912 dated 6 August
1986.
Articles L430-1 and L430-2 of the French Commercial Code.
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France
Stage II takes between 65 and 85 working days. If serious doubts remain as to the
competitive impact of the transaction, the FCA proceeds with an in-depth investigation.
During this stage, if the transaction relates to a regulated area, the FCA may request a
non-binding opinion from the relevant regulator (e.g., the CRE). At the end of stage
II, the FCA can either clear the transaction with or without remedies or prohibit the
transaction.
The FCAs authorisations for acquisitions may be subject to conditions.16
III

SERVICES
Vertical integration is the process in which different aspects of the market are controlled
by a common company or entity. Prior to the deregulation of the energy industry, French
energy companies were largely vertically integrated, which created potential conflicts of
interest and monopoly situations.
The European Commission issued Directives 2003/54/EC and 2003/55/EC
in order to principally ensure efficient and non-discriminatory network access, ensure
free choice of suppliers by consumers, and encourage investment. This legislation was
transposed into the French system by a law dated 9 August 2004, which provided for
a legal unbundling of regulated activities (distribution and transmission) from nonregulated activities (production and supply). After an inquiry launched in 2005 by the
European Commission, however, serious shortcomings in the electricity and gas markets
were identified, including an inadequate current level of unbundling between network
and supply interests deemed to have negative effects on the market and investment.17
Consequently, under Directives 2009/72/EC and 2009/73/EC, priority was given to
achieving effective unbundling of network and supply activities.
As explained above, these directives were transposed into French law in order for
the transmission and distribution system operators to be legally and fully unbundled
companies. Accordingly, transmission and distribution system operators must be
equipped with all the necessary human, technical, physical and financial resources to
fulfil their obligations under French law and, in particular, assets that are necessary for
their activity must be owned by them.
16
17
See, for example, the decision of the FCA dated 7 February 2012: the FCA made its
authorisation of the acquisition of Enerest by Electricit de Strasbourg conditional on a
number of commitments designed to resolve competitions concerns, such as the commitment
not to make offers for two energies that include at least one component at a regulated tariff.
This commitment, the effectiveness of which is to be guaranteed by separating the sales teams
responsible for electricity and gas at Electricit de Strasbourg, notably eliminates any risk of the
company using its business of supplying energy a regulated tariffs as a tactic to win customers
on the open market.
Final report from the Commission relating to the inquiry pursuant to Article 17 of Regulation
(EC) No. 1/2003 into European gas and electricity sectors, dated 10 January 2007.
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France
ii
Non-discriminatory and fair access to transmission and distribution networks for gas and
electricity are at the core of the free market approach.18 Any discrimination, prevention
of new participants from entering the market, and fair competition in favour of the
consumer, is subject to sanctions issued by the CoRDiS committee.19
Among the measures guaranteeing such non-discriminatory and fair access, it
should be noted that any refusal to enter into an agreement must be justified and notified
to the applicant, as well as to the CRE, specifying that any refusal is justified by objective,
transparent and non-discriminatory reasons.20
Furthermore, any transport or distribution system operator serving more than
100,000 clients must draw up a code of conduct in order to ensure compliance with the
non-discrimination principle.21
Finally, the CRE must publish an annual report concerning compliance with the
code of conduct and a summary of its assessment of the independence of the transport
or distribution system operators.22
iii
There are currently three natural gas terminals in France: Fos Tonkin, near Marseille,
and Montoir-de-Bretagne, near Saint-Nazaire (both of these are owned by a subsidiary
of GDF Suez (Elengy)) and Fos Cavaou, near Marseille (owned by Elengy and Total).
Tariffs for the use of natural gas terminals are regulated. They are decided at ministerial
level on the basis of proposals from the CRE.23
The operation of storage facilities is subject to a concession.24 The storage of
natural gas must ensure (1) the proper operation and balancing of systems connected to
underground natural gas storage facilities, (2) the direct or indirect meeting of domestic
clients needs, and (3) compliance with public service obligations (e.g., security, continuity
of natural gas supply from 1 November to 31 March of each year).25 Access to storage
is guaranteed; the operators of underground storage facilities are free to negotiate the
terms of their offers with their customers, with the latter being able to rely on objective,
transparent and non-discriminatory criteria.26
iv Rates
Pursuant to Articles L341-2 and L452-1 of the Energy Code, access tariffs to networks
aim at guaranteeing transparent and non-discriminatory access to public networks. These
18
19
20
21
22
23
24
25
26
Articles L111-91 et seq. of the French Energy Code.

Articles L134-25 et seq. of the French Energy Code.
Articles L111-93 (for electricity) and L111-102 et seq. (for gas) of the French Energy Code.
Ministerial orders dated 20 October 2009 and 3 March 2011.
Articles L211-2 and L 231-1 of the French Mining Code.
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France
fees are calculated in a way that cover all costs supported by the system operators (costs
arising from their public service duties, the research and development needed to increase
the transmission capacity, and the grid connection).
The methodology used to establish access tariffs to the network is set up by
the CRE. In addition to fixing the rates the CRE grants appropriate incentives for
transmission and distribution system operators over both the short and long term in
order to increase efficiency, foster market integration and security of supply and support
related research activities.27
v
Security of electricity and gas supply is an essential public service obligation.28 The
Ministers of Energy and Economy must ensure the fulfilment of this public service
mission mainly by EDF, GDF, RTE, GRT, ERDF, GRDF and local distribution
companies.
In the event of a serious energy shortage, the government may subject energy
resources to control and allocation.29 Such measures mainly concern production, imports,
exports, storage, acquisition, and transportation. In case of a serious energy market crisis,
threat to the safety or security of the networks and of people, the Minister of Energy
may take protective measures to grant or suspend licences for the operation of power
generating facilities. In times of war or serious international tension, the government
may regulate or even suspend oil import or export completely.30
IV
ENERGY MARKETS
The sale of energy takes place within either the wholesale market or the retail market. The
wholesale market is the market in which electricity and gas are traded (bought and sold)
before delivery in the network to final customers (individuals or companies), whereas
the retail market concerns the final clients who may freely choose their suppliers (eligible
customers).31
The participants of the wholesale market are:
a
the producers who trade and sell their production;
b
the suppliers who trade and supply gas or electricity before selling gas or electricity
to the final client; and
c
brokers or traders who purchase gas or electricity for resale and thus favour market
liquidity.
27
28
29
30
31
Articles L341-3 (electricity) and L452-2 (gas) of the French Energy Code.
Articles L121-1 (electricity) and L121-32 (gas) of the French Energy Code.
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France
As most of the activity in the wholesale gas market and wholesale electricity market takes
place over the counter, through direct transactions or through intermediaries (brokers
and trading platforms),32 the opening of these markets to competition has led to the
emergence of organised markets, namely trading platforms (such as Epex Spot France or
EEX Power Derivatives France).
ii
Even if the supply of energy is open to competition, it is still subject to certain

requirements and monitoring.
First, the sale of electricity or gas is subject to governmental approval. Indeed,
suppliers willing to purchase electricity or gas to sell them to consumers need an
administrative authorisation that is delivered subject to their technical, economic and
financial capacities, and according to their projects compatibility with the security of
supply obligation.33
Second, each transaction performed on the French market that would involve
the participation of a producer, broker or energy supplier, must be monitored by the
CRE, regardless of the trading method (two-way trades, with or without a broker or
transactions within organised markets).34
Finally, free competition is limited with respect to pricing practices since, in
certain circumstances, regulated tariffs may be chosen by buyers. Such regulated tariffs,
combined with the lack of access by alternative suppliers to the existing nuclear facilities,
aggravated the European Commissions unhappiness, especially with the electricity
retail market and the dominant position exercised by EDF. For this purpose, Law
NOME provides that regulated tariffs are to disappear after 2015 for customers having
contracted for more than 36kVA (yellow and green tariffs); however, for customers
having contracted for less than 36kVA (blue tariffs), the regulated tariff will remain
applicable.35
Furthermore, all operators providing electricity to final consumers may benefit
from the access to historical nuclear energy at the regulated price, ARENH, only up to
the 100TWh to be allocated between the suppliers. The price of the ARENH is currently
set at 42/MWh. A decree determining a new price has not been published yet.
iii
The legal unbundling between the production and the distribution activities imposed by
the energy market creates several inconveniences for the consumer who, as a result, gets
an increasing number of contractors, the responsibilities of which are diminished.
32
33
34
35
Commission de Rgulation de lEnergie, Electricity and gas market report, fourth quarter of
2011.
Articles L333-1 (electricity), L443-1 and L443-2 (gas) of the French Energy Code.
Article L131-3 of the French Energy Code and www.cre.fr/en/markets/wholesale-market/
introduction.
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France
In order to prevent this, the Law dated 7 December 2006, completed by the
Law NOME, created a new section in the French Consumer Code entitled electricity
supply or natural gas contracts (Articles L121-86 to L121-94). These provisions apply
to contracts concluded by consumers and professionals for less than 36kVA (electricity)
or less than 30,000kW (gas).
According to Article L121-92 of the Consumer Code, the energy supplier must
give the client an opportunity to sign a single contract dealing with both the supply and
the distribution of electricity or natural gas. This contract, which should at least last for
one year, thus creates a tripartite relationship between the supplier, the distributor and
the consumer, even though the supplier often remains the consumers main interlocutor.
The supplier must mention several specific provisions both in the offer and the
contract. Failure to do so is subject to sanctions.36 The consumer can rescind the energy
supply contract at any time if it plans on changing supplier. Professionals are not entitled
to ask the consumer for any other costs than those incurred by the rescission, provided
that these costs were mentioned in the offer.37
iv
Market developments
Market developments have taken place in different areas, and in particular on the cost
of electricity with the Law NOME. Moreover, the renewal procedure of hydraulic
concessions has been launched.38 Finally, various reports were submitted at the beginning
of 2012, aimed at clarifying what should be the investments to ensure the security of
supply.
V
In July 2007, the French government launched the Grenelle Environment Forum, a
major national consultation that led to the emergence of priority targets in terms of
controlling energy consumption and promoting renewable energies. This forum led
to the enactment of two Grenelle Laws, respectively on 3 August 2009 (Grenelle I)
and 12 July 2010 (Grenelle II),39 aiming at promoting environmental objectives such
as the increase of the share of renewable energy to at least 23 per cent of final energy
consumption before 2020, in accordance with European Union Directive 2009/28/
36
Articles R121-14 to R121-21 of the French Consummation Code.
37
Articles L121-89 of the French Consummation Code.
38 www.developpement-durable.gouv.fr/Les-concessions-hydroelectriques.html.
39
Law No. 2009-967 of 3 August 2009 relating to the implementation of the Grenelle
Environment Forum and Law No. 2010-788 of 12 July 2010 relating to national commitment
for the environment.
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France
EC.40 These laws were codified in a separate section dedicated to renewable energy in
the Energy Code.41
To enhance the development of renewable energies, public authorities can use
two economic instruments.42 First, feed-in tariffs require the historical operator to buy
energy produced from renewable sources, for a regulated tariff over a long period, which
can be changed and is slightly higher than the market price. Second, calls for tender
can be used to determine ex ante the quantity of renewable energies benefiting from the
public support.
Finally, a landmark decision regarding the French wind feed-in tariff was issued
by the European Court of Justice on 19 December 2013 in the Vent de Colre case.
Following a request for a preliminary ruling by the French Council of State,43 the
European Court of Justice ruled that the French wind feed-in tariff implemented by a
ministerial order dated 17 November 200844 falls within the concept of an intervention
by the state through state resources. If the Council of State has not rendered its decision
yet, it is very likely that the said aid will be found to be illegal. In response, the French
government notified to the European Commission a new feed-in tariff system, which has
recently been approved by the Commission.
The Commission has at the same time decided to initiate investigations regarding
tariff reductions for large electricity consumers while stating that the state aid guidelines
regarding renewable energies would soon be reviewed and will probably include the
possibility to grant such reductions.
ii
In order to achieve a 20 per cent increase in energy efficiency, in accordance with the
climate and energy package, on 25 October 2012 the European Union adopted Directive
2012/27/EU on energy efficiency. It lays down rules designed to remove barriers in the
energy market and to overcome market failures that impede efficiency in the supply and
use of energy, and provides for the establishment of indicative national energy-efficiency
targets for 2020.
Article 8 of such Directive, stating that enterprises must be subject to an energy
audit by 5 December 2015 and at least every four years thereafter, has been transposed
by French Law No. 2013-619 dated 16 July 2013.45
In addition, such Directive served as a basis for a national debate on energy
transition launched on 29 November 2012 by the government (see below).
40
Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on
the promotion of the use of energy from renewable sources and amending and subsequently
repealing Directives 2001/77/EC and 2003/30/EC.
41
Articles L211-1 to L261-1 of the French Energy Code.
42 www.cre.fr/operateurs/producteurs/appels-d-offres.
43
French Council of State, 15 May 2012, No. 324852.
44
Ministerial order of 17 November 2008 fixing the purchasing conditions for plants using the
mechanical energy of wind.
45
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France
iii
Directive 2012/27/EU includes several provisions related to the development of smart

grids, the aim of which is to reduce bills by paying what was really consumed and by
understanding how to consumption patterns better. The development of smart grids
is based on the idea that it improves energy efficiency and better integrates renewable
energy resources in the network.
The development of smart grids has also been decided in France. Indeed, a decree
dated 31 August 2010 provided that new connection points must be equipped with smart
grids from 1 January 2012 and provided for a test run or pilot for such equipment;46
however, this plan has been delayed. Despite a ministerial order dated 4 January 2012
and the governmental announcement that 35 million smart grids will be provided to
electricity customers throughout the country by 2020, the deployment has yet to begin.
VI
THE YEAR IN REVIEW
2013 and the beginning of 2014 were characterised by several developments in the
energy sector.
i
Energy transition
Following the national debate on energy transition launched on 29 November 2012,

a first draft of the Framework Law on the Energy Transition should be examined by
the French Council of Ministers by the end of June 2014. Such draft should be based
on preparatory notes that were submitted by the Ministry of Energy to the national
commission in charge of this debate on 20 March 2014.
Those preparatory notes notably provide for:
a
an important shift in the renewable energy support mechanism: instead of being
bought by EDF at fixed and regulated preferential rates, such energies would
be bought at market price with possible variable components (via indexation,
for example) and the financial aid would constitute an additional remuneration
(however, both regimes would coexist for a transition period). Also, a new specific
organism would be created whose mission would be to manage energy purchasing
contracts, today managed by EDF and local electricity distribution companies
(ELDs);
b
the possibility of regrouping hydroelectric concessions of the same valley for the
sake of simplifying their renewal;
c
an acceleration of the nuclear plants dismantling process. For example, a plant
closed down for more than two years will be considered as definitively closed
down;
46
Articles 6 and 3 of the Decree No. 2010-1022 dated 31 August 2010.
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France
d
e
the cap of liability for nuclear plants operators, actually set at 91.5 million would
be increased to 700 million;47 and
heavier obligations for environmentally classified facilities, notably the obligation
to secure the funding of dismantling costs (as already applicable for nuclear
plants).
In addition, the French government recently confirmed reduction goals with respect to
fossil fuels (30 per cent by 2030) and to greenhouse gas emissions (40 per cent by 2030).
ii
Law No. 2013-619 dated 16 July 2013
Law No. 2013-619 dated 16 July 2013 transposes six European directives among which
are the Seveso III Directive and the Energy End-Use Efficiency Directive. It therefore
contains various significant provisions relating to energy, notably:
a
a reinforcement of the requirements imposed on installations classified for the
protection of the environment (IPCE);
b
specific reporting obligations for IPCE likely to cause major accident hazards
involving dangerous substances;
c
the introduction of an energy audit by 5 December 2015 and at least every four
years thereafter for companies meeting certain thresholds;
d
the creation of a status for intensive natural gas consumers exposed to international
competition allowing them to benefit from specific supply conditions and specific
access to transport and distribution of natural gas; and
e
the law sets the objective of making the termination of greenhouse gas emission
allowances free of charge by 2027.
iii
The new carbon tax
The French Finance Act for 201448 established a new tax (Contribution Climat-Energie)
on the consumption of polluting energetic products49 applicable since 1 April 2014. The
amount of this tax is set at 1,41/MWh in 2014, 2,93 in 2015 and 4,45 in 2016.
This tax will notably have the effect of counterweighting the gas tariffs reform of
10 December 2012 which led to quasi-continuous tariff reductions in 2013 and 2014.50
47
48
49
50
Article L597-4 of the French Energy Code provides that this will be applicable once the
Protocol signed in Paris on 12 February 2004 and amending the Paris Convention enters
into force.
Law No. 2013-1278 dated 29 December 2013.
Only coal, gas and heavy fuel are concerned in 2014.
Except for modest-income homes which will benefit from revised reduced gas solidarity
tariffs.
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France
iv
The suppression of gas-regulated tariffs
Pursuant to Law No. 2014-344 of 17 March 2014 relating to consumption, the

suppression of gas-regulated tariffs is foreseen for all non-domestic consumers by
1 January 2016.51
The calendar is as follows:
a
18 June 2014: for all non-domestic consumers connected to the transport network
(suppliers have to inform their clients of the future termination of their contracts
two months before such termination);
b
1 January 2015: for all non-domestic consumers using more than 200,000KWh/
year (suppliers have to inform their clients of the future termination of their
contracts one month after the entry into force of the law, six months before such
termination, and three months before such termination); and
c
1 January 2016: for all non-domestic consumers consuming more than
30,000KWh/year (suppliers have to inform their clients of the future termination
of their contracts one month after the entry into force of the law, six months
before such termination, and three months before such termination).
In addition, if no new contract is signed by the suppression date, the client will be
deemed to have accepted the terms and conditions of the supplier, giving birth to a new
six-month contract terminable by the client at any time.
Provisions relating to information obligations and to the conditions of the renewal
of the contracts also apply to electricity suppliers regarding the suppression of regulated
tariffs by the NOME law.
v
Creation of a capacity market
In accordance with the NOME law, France has put in place a capacity market. The
capacity mechanism aims at encouraging demand management, especially during peak
hours, via the purchase or sale of certificates depending on whether energy consumption
needs are met.
The modalities have been defined by Decree No. 2012-1405 of 14 December
2012. However, a ministerial order still has to be adopted before its entry into force,
which is expected to be between 2016 and 2017.
VII
Since 2007, the liberalisation of the energy market and energy transition both continue
to go step by step. With respect to liberalisation, a fully free market as such still does not,
however, exist. Several safeguards are in place, such as regulated tariffs and ARENH,
which are in part due to the fact that France is strongly committed to energy public
service and the preponderance of the French nuclear power plants. With respect to
energy transition, even if there is a strong political will, the process will be slow as a lot
of modalities are still to be defined.
51
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Chapter 12
GERMANY
Kai Pritzsche, Sebastian Pooschke, Henry Hoda1
I OVERVIEW
The German energy sector continues to evolve dynamically. The new government, a
coalition between the two major political parties, the Christian Democrats (CDU/CSU)
and the Social Democrats (SPD), was elected in September 2013 and has announced its
programme for the energy sector. There is broad support in politics and society for the
energy transition (Energiewende), meaning a phase-out of nuclear energy, substantial
reduction of carbon dioxide emissions and a shift of electricity generation to renewable
energies. However, the side effects of these ambitious targets have resulted in rising costs
for the support of renewable energies, the need for considerable network expansion and
unintended effects on the viability of conventional generation capacities. In addition, the
European Commission has started a state aid review of the German renewables regime.
After some hesitation at the political level these challenges are now being tackled. In
particular the renewable energy sector will see considerable developments.
II REGULATION
i
The regulators
Following the formation of the new German government in December 2013, the
responsibility for the energy transition and all aspects related to it, including climate
change, are concentrated at the Federal Ministry of Economics and Technology, which
has since been renamed the Federal Ministry for Economic Affairs and Energy (BMWi).
The main national regulatory authority is the Federal Network Agency for
Electricity, Gas, Telecommunications, Post and Railway (BNetzA) under the authority of
Kai Pritzsche is a partner, Sebastian Pooschke is a managing associate and Henry Hoda is an
associate at Linklaters LLP.
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Germany
the BMWi. The BNetzA is responsible for the regulation of gas and electricity networks
with at least 100,000 grid customers or networks which extend beyond the territory of
an individual state. Since 2011, the BNetzA has also played a key role in planning and
approving large energy network extension measures. At regional level, the regulatory
authorities of the 16 German states are in charge of the regulation of the smaller networks,
in particular distribution networks.
The regulatory authorities monitor the compliance of network operators with
applicable law, and determine the general market rules for transport of electricity and
gas. Their duties include the supervision of non-discriminatory network access and
determination of the grid operators individual revenue caps, and they also ensure that
grid operators comply with unbundling rules and with their system security obligations.
The Federal Cartel Office (BKartA) has jurisdiction to apply competition law to
the non-network-related parts of the energy supply chain. The BKartA is also in charge
of merger control.
Both the regulatory authorities and the BKartA have wide-ranging powers of
enforcement, such as refusal of permits, issue of prohibition orders and imposition of
fines.
Since 2013, a market transparency unit at the BKartA has been overseeing and
publishing fuel prices in order to increase transparency and competition in these markets.
It is planned that from the end of 2014 a parallel market transparency unit at the BNetzA
will supervise the wholesale trade in electricity and gas markets.
Sources of law
The key source of legislation is the Energy Industry Act (EnWG), which was adopted
in 2005 and last amended in October 2013. A number of ordinances set out further
details, such as the Incentive Regulation Ordinance and the Electricity and Gas Grid Fee
Ordinances. As of 2013, a Federal Requirements Plan legally stipulates the economic
necessity for certain grid expansion measures. According to the Grid Expansion
Acceleration Act, the BNetzA has the competence to carry out the planning procedure
for these measures. The Renewable Energies Act (EEG) sets out the priority network
access and remuneration for generation of electricity from renewable sources.
Another important source of law is the administrative decisions of the BNetzA,
addressed to individual parties or to groups of network operators. BNetzA also issues
general guidelines addressed to the public and interpreting energy sector legislation. The
guidelines are not legally binding. However, market participants usually respect them as
they form the basis of the BNetzAs decision-making.
ii
Network operation
Operators of distribution and transmission networks must obtain a grid operation permit
confirming their personnel, technical and economic capability and reliability to ensure
the long-term operation of the network. The permit has to be issued by the competent
regulatory authorities within six months after the authority has the complete application
files at its disposal.
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Germany
In addition, transmission system operators (TSOs) require certification by the
BNetzA confirming their compliance with unbundling regulation. Before taking a final
decision, the BNetzA has to submit its draft decision to the European Commission and
must take utmost account of the European Commissions statement. In one instance, the
BNetzA had rejected certification of an electricity TSO (TenneT TSO GmbH) due to an
alleged lack of sufficient financial means. In January 2014, however, the BNetzA agreed
to issue the certification subject to the condition that TenneT TSO GmbH undertakes
to commission certain offshore grid connections in the North Sea.
Generation and supply
The construction of power generation facilities requires a permit under the Federal
Immission Control Act. The construction and operation of nuclear power plants requires
a special permit under the Nuclear Energy Act. However, following the incident at
the Fukushima Daiichi nuclear power plant in March 2011, the German government
decided to phase out nuclear energy by 2022. Hence, commercial nuclear power plants
will no longer be authorised.
Energy supply companies delivering energy to final consumers must notify the
regulatory authority of the commencement and of the discontinuance of their supply
activities, including proof of sufficient resources and reliability. Any persons controlling
companies active in the generation, production or supply of energy also have to comply
with the unbundling rules (see Section III.i, infra). Other than already mentioned, the
supply or trading of energy does not require any specific licences under energy regulation
provisions.
iii
If a transmission system operator or owner is controlled by one or more persons from a

country that is not a member of the European Union or of the European Economic Area,
the grid operator will only be certified by the BNetzA if it complies with the unbundling
rules and if the BMWi confirms that the certification does not endanger the security of
the electricity and gas supply of Germany or of the EU.
Under general foreign investment rules, the BMWi may prohibit on the grounds
of public order or national security the acquisition by a non-EU or non-EEA investor
of a participation of 25 per cent or more in a German company or asset. However, the
BMWi has not used these powers so far.
Apart from the aforementioned restrictions and general unbundling regulation
(see Section III.i, infra), there are no rules specifically aiming at a restriction of the
ownership of new or existing energy assets.
iv
The transfer of regulated assets (i.e., network assets) is not subject to any sector-specific
restrictions. However, network operators have to inform the regulatory authority about
transfers, mergers or the splitting of grid assets. In the case of a transfer of network assets,
part of the revenue cap is transferred with the assets.
The acquirer of transmission assets must comply with the unbundling rules.
TSOs have to inform the BNetzA of any intended transactions which may require
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Germany
a reassessment of their certification, particularly in the case of a planned takeover or
participation by an investor from outside the EU or EEA.
Any transfer of control or decisive influence must be notified for merger clearance
to the BKartA or to the European Commission if certain thresholds are exceeded. A merger
will be cleared if it does not significantly impede effective competition, in particular by
creating or strengthening a dominant position. The BKartA decides within one month
after notification or, if an in-depth investigation is initiated, within an additional fourmonth period. The European Commission has a maximum of 135 working days in
which to carry out an in-depth investigation to review a merger (maximum of 160
working days if remedies are offered).
III

SERVICES
In implementing the EUs Third Energy Package, since 2011 the EnWG has provided
different unbundling regimes for TSOs and distribution system operators (DSOs).
TSOs
As of 3 September 2009, the German transmission networks were all owned by vertically
integrated energy supply undertakings (VIUs); the TSOs could choose between three
unbundling models: ownership unbundling, the independent system operator model
and the independent transmission operator model.
Most of the TSOs have opted for the independent transmission operator model.
The independent system operator model has not been applied so far. Following several
competition law procedures initiated by the European Commission, and due to the
increased regulation of grid assets, three of the four major German VIUs (E.ON, RWE
and Vattenfall) have (partially) divested their electricity and gas TSOs. This has resulted
in foreign TSOs and financial investors, such as infrastructure funds, entering the
German transmission market.
With respect to the ownership unbundling model, the BNetzA holds the view that
a person controlling electricity or gas production, generation or supply activities may at
the same time hold a minority participation in a TSO of up to 25 per cent, provided
that this participation does not confer significant minority rights. This is evaluated on a
case-by-case basis.
The European Commission has in the meantime recognised that a TSO may be
certified as ownership unbundled despite having a shareholder with a participation in
generation, production and/or supply activities if it can prove that no conflict of interest
exists. This will be examined on a case-by-case basis, taking into account in particular
the geographic location of the transmission activities and the generation, production
and/or supply activities concerned, the value and the nature of the participations in
these activities, as well as the size and market share of the generation, production and/
or supply activities.
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Germany
DSOs and gas storage operators
Unbundling requirements for DSOs are less strict. DSOs with at least 100,000 grid
customers and gas storage system operators must be legally and operationally unbundled
from the VIU. In October 2013, the BNetzA initiated proceedings against several DSOs
in order to investigate a suspected breach of their obligation to operate under their own
brand.
At the level of the DSOs there remains a large degree of vertical integration. DSOs
typically belong to municipal utilities or to one of the incumbent energy suppliers.
ii
Connection to networks and network access is regulated. Network operators have to

ensure a reasonable, non-discriminatory and transparent connection and access to their
grids for all third parties, including extension of the network if required and reasonable
(regulated third-party access). By way of exception, priority will be given to network
connection and access of operators of renewable energy facilities.
Costs for network connection are in general borne by the network customer,
except for renewable energy facilities whose connection costs are socialised.
Access to electricity networks is granted on the basis of network access agreements
concluded between the grid operator and the grid customer or, in the case of electricity
suppliers, on the basis of supplier framework access agreements. The access agreement
grants nationwide access to all electricity networks.
Access to gas networks is based on capacity bookings in a two-contract entry-exit
system: one contract is concluded between the final consumer or supplier and the grid
operator for the feed-in of the gas, and a second contract is concluded between the grid
customer and the grid operator for the offtake of the gas. Gas can be transported and
traded without physical restrictions across networks, including on virtual trading points,
within each of two market areas in Germany (GASPOOL and NetConnect Germany).
Network operators do not have exclusive rights to provide services within their
network areas. Transmission and distribution networks are closely interlinked, and
operators are obliged to cooperate. Contracts for network access and general terms
and conditions are standardised and approved by the BNetzA. The BNetzA has the
competence to set detailed rules on network access applicable to all network operators,
for example in relation to balancing energy and capacity management.
Network operators may restrict network access to maintain system security.
They must use non-discriminatory and market-based measures to prevent or eliminate
bottlenecks. The increase in generation of electricity from renewable energy sources and
the phase-out of nuclear energy is leading to a shift of generation to northern Germany,
resulting in bottlenecks on the north-south transmission lines. Re-dispatch measures of
TSOs to relieve bottlenecks increased fivefold between 2010 and 2013. The resulting
costs for compensation of generators are socialised. Hence construction of additional
electricity transmission lines is one of the key priorities of German energy policy. Since
2011, TSOs have had to establish separate annual 10-year network development plans for
electricity, gas and for connection of offshore wind farms. The development plans set out
the required grid expansion measures. The BNetzA reviews the development plans and
may request modifications. The necessity of all listed projects is then legally determined
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by the federal government. The BNetzA is responsible for the actual planning approval
for projects that cross the borders between German states. However, grid expansion
projects are facing mounting opposition at the local level.
iii Rates
Since 2009, grid fees have been subject to revenue cap incentive regulation. Two years
prior to the beginning of each five-year regulatory period, the competent regulatory
authority determines a grid operators allowed cost and asset base by analysing its costs
of the preceding financial year (photo year). The cost and asset base in the photo year
is the basis for the network operators allowed revenues in the next regulatory period.
The regulatory authority sets the grid operators individual annual revenue cap for each
year of the five-year regulatory period, taking into account individual and sector-specific
efficiency targets and an allowed rate of return on equity set by the BNetzA. During the
regulatory period, the annual revenue cap will in principle only be adjusted in the case
of an adjustment of the consumer retail price index or a change of the grid operators
permanently non-controllable costs. As a result, the grid operator has an incentive to
outperform its efficiency targets before the revenue cap is reset for the next regulatory
period. Based on their fixed revenue caps, the grid operators charge the corresponding
access fees to their grid customers.
Grid customers with very high consumption (>10 GWh per year) and/or atypical
grid use have a right to individual network fees below the regulated tariffs, subject
to approval by the BNetzA. These exemptions were considerably tightened in 2013
following proceedings of the European Commission alleging that they constitute illegal
state aid.
The second five-year regulatory period for electricity network operators
commenced on 1 January 2013 and for gas network operators on 1 January 2012.
In 2013, the incentive regulation rules underwent some significant changes to
clarify items of the cost review that were in dispute between network operators and
regulators and were the subject of a number of court decisions. For example, exact price
indices were stipulated for conversion into current values of historic acquisition and
production costs of grid assets put into operation before 2006 (old assets). Permissible
interest rates for certain parts of debt of the network operators were also stipulated.
The BNetzA will submit by the end of 2014 an evaluation report on the effects
of incentive regulation and on potential future amendments for the period after 2018.
iv
There are no specific restrictions on technology transfer for the energy sector.
Based on a report from the TSOs, every two years the BNetzA reviews whether
the disruption or destruction of transmission assets in Germany could have a material
impact on at least two EU Member States. The BNetzA can declare such assets to be
critical European infrastructure. TSOs have to develop specific security plans for such
assets, including access control, security of IT systems and emergency protocols.
Cybersecurity concerns have recently been addressed. In 2013, the BNetzA, in
cooperation with the Federal Office for Information Security, published a draft catalogue
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of safety requirements to counter the threat to telecommunications and electronic data
processing systems, and opened a public consultation on the issue.
IV
ENERGY MARKETS
In 2013, gross electricity generation was composed of lignite (25.6 per cent), hard coal
(19.6 per cent), nuclear energy (15.4 per cent), natural gas (10.5 per cent) and renewable
energy sources (23.9 per cent), the latter mainly consisting of wind power (8.4 per cent),
hydopower (3.2 per cent), biomass (6.7 per cent) and photovoltaic (4.7 per cent). By
contrast, gross energy consumption was composed of oil (33 per cent), natural gas (22.5
per cent), hard coal (12.7 per cent), lignite (11.6 per cent), nuclear energy (7.6 per cent)
and renewable energy sources (11.8 per cent). These figures illustrate that despite an
increased share of renewable energy sources, conventional energy sources are still the
backbone of the German energy supply.
The European Energy Exchange AG (EEX) in Leipzig operates organised
markets for trading in electricity, natural gas, coal, carbon dioxide emission allowances
and guarantees of origin. Electricity futures are offered for delivery in the market areas
Germany/Austria, France, Belgium and the Netherlands. Gas futures and short-term
gas contracts are traded for delivery in the two German market areas GASPOOL and
NetConnect Germany, and in the Dutch Title Transfer Facility (TTF). The electricity
spot market for Germany/Austria, France and Switzerland is operated by EPEX SPOT
SE, a fifty-fifty joint venture of EEX and the French Powernext SA situated in Paris.
Germany has a joint electricity market area with Austria, and two separate gas market
areas, NCG and GASPOOL. Within each gas market area, gas can be traded without
capacity restrictions at virtual trading hubs through matching buy and sell orders between
two balancing groups.
Trade volumes at the energy exchange in Leipzig developed very dynamically in
2013. The trade volume for electricity futures increased by 36 per cent, from 931.4 TWh
in 2012 to 1,263.9TWh in 2013. The trade volume in gas even increased by 47 per cent
from 75.5TWh in 2012 to 110TWh in 2013.
Prices on the spot and futures markets are based on bids by generators and
customers. The order of the bids is determined by the short-run marginal costs of the
power plants (merit order). Due to the statutory priority of feed-in of renewable energies
(produce and forget), electricity from renewable sources is always first in line in the
merit order, usually followed by nuclear energy and due to currently low prices for
carbon emission certificates coal-fired power plants. The prices on the spot and forward
markets are the benchmark for wholesale retail prices and over-the-counter trades.
The spot and futures markets are energy-only markets (i.e., there are no capacity
payments). The increase in generation from renewable energies led to depressed
wholesale prices and pushed conventional generation capacity out of the merit order, in
particular flexible gas-fired power plants. In order to incentivise investments in flexible
conventional generation capacities, which can provide required back-up for intermittent
generation from renewable sources, the German government is reviewing the options
for introduction of capacity mechanisms. A separate capacity market could replace the
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strategic reserve currently in place. In 2013 a form of strategic reserve called network
reserve was introduced through the Ordinance on Reserve Power Plants. TSOs may
enter into reserve power supply agreements with operators of existing power plants in
order to guarantee security of supply. Operators receive a capacity price and a unit price.
The agreements and the pricing must be approved by the BNetzA.
Specific procedures apply to the decommissioning of power plants. Operators
of generation plants with a capacity of 10MW or more have to inform the responsible
TSO and the BNetzA of their intention to shut down a facility at least 12 months before
the planned decommissioning. Facilities with a capacity of 50MW or more may not be
decommissioned for a maximum period of 24 months if the facility has been designated
by the responsible TSO and the BNetzA as relevant for system security. In this case,
the operator is entitled to a reasonable compensation for the necessary maintenance
expenses.
ii
The energy market operated by EEX is subject to the Exchange Act. Under the authority
of the State Ministry of Economy, Labour and Transport in the German state of Saxony,
an independent market surveillance body continuously supervises trading activities in
order to prevent market manipulation.
Under the EU Regulation on wholesale energy market integrity and transparency
(REMIT), market participants are required to publish inside information in an effective
and timely manner. REMIT also prohibits market abuse in wholesale energy markets in
the form of market manipulation and insider trading.
Since 12 February 2014, all EU-based entities that enter into derivatives
transactions are required to report details of these transactions to a trade repository under
the European Marketing Infrastructure Regulation (EMIR). There is also an obligation
to report certain existing and historical derivatives transactions, although deadlines
for this vary. Furthermore, EMIR establishes a central clearing obligation for certain
over-the-counter derivatives and the application of risk mitigation techniques for noncentrally cleared over-the-counter derivatives.
iii
In principle, there are no regulatory limitations as to the entering of individual contracts

for the sale of energy, both at wholesale and retail level. However, household customers
have a right to be supplied at standard (but not regulated) tariffs by the local supplier
with the most household customers within a network area (supplier of last resort).
Energy supply contracts with household customers also have to comply with certain
transparency and information requirements.
While there is no ex ante price regulation of wholesale or retail energy prices,
regulated network charges, taxes and surcharges (such as the surcharge for renewable
energies) meanwhile account for more than half of the final energy prices. Competition
authorities may review energy prices (except the regulated components) and prohibit
dominant suppliers from charging prices that unreasonably exceed costs or that are lower
than on comparable markets. On the basis of this provision, the BKartA has taken action
against several suppliers and enforced price reductions.
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Germany
In recent years, energy prices and in particular price increases based on the passingon of input costs (e.g., increase in fuel cost for electricity generation) have frequently
been subject to review by the courts. The courts have annulled price increases, arguing
that these were not justified or that provisions in energy supply contracts enabling such
price increases were not sufficiently transparent. According to two landmark judgments
of the European Court of Justice and the German Federal Supreme Court, a standard
clause for price adjustments that was widely used in supply agreements is invalid. The
effects of these decisions remain to be seen.
iv
Market developments
The growing share of intermittent renewable energy sources in the gross electricity
generation of Germany as well as the decrease of market prices for electricity partly below
the cost of operation of conventional power plants has stimulated a discussion on the
introduction of capacity markets. The new German governments coalition agreement
stipulates the coalition parties intention in the medium term to develop a capacity
mechanism without specifying the details of such mechanism. While Germany is still
an energy-only market, the Ordinance on Reserve Power Plants (see Section IV.i, supra)
marks the first step towards such a capacity market.
Since late 2009, oil-indexed long-term gas supply agreements have come under
pressure from falling world market prices for natural gas. Whereas E.ON already
successfully renegotiated its supply conditions with Gazprom in 2012, RWE succeeded
with its adjustment claim before an arbitral tribunal in 2013.
The decision of the German government to immediately shut down eight nuclear
power plants following the nuclear incident at Fukushima in March 2011 in the meantime
triggered several successful court proceedings against the temporary shutdown prior to
the final decommissioning of these plants in August 2011. In addition, the nuclear fuel
tax imposed by the German government has recently been successfully challenged in
court. However, the outcome of these proceedings does not call into question Germanys
decision to phase out nuclear energy by 2022.
V
Reform of the EEG

In 2014, substantial changes are being made to the support scheme for renewable
energies. On 8 April 2014, the German government undertook a major reform of the
EEG, the law governing the development of renewable energy sources. The amended
EEG shall enter into force on 1 August 2014. Key points of the reform have been
agreed at a political level, and no major changes are expected in the legislative process.
This is expected to be a first step towards a more comprehensive reform of the German
renewables development regime in the context of the energy transition.
The principles of priority network access and priority offtake of electricity from
renewable energy sources will not be affected by this first step of the reform. The changes
will in general only apply to newly built facilities commissioned after the amendments
enter into force. Vested rights of existing facilities, in particular the guaranteed feed-in
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Germany
tariffs, will be preserved and continue to apply. Facilities commissioned by 31 December
2014 and that received an operating licence prior to 23 January 2014 will also benefit
from grandfathering provisions.
The general aim of the 2014 reform is to control the growth of the cost for
renewable energy production, and to move away from produce-and-forget guaranteed
feed-in tariffs towards market-based mechanisms for their remuneration.
The amended EEG 2014 will define binding corridors for the deployment of
renewable energies, thereby lifting the total share of renewable energy sources in the gross
electricity production from some 25 per cent today to 40 to 45 per cent by 2025 and
to 55 to 60 per cent by 2035. For this purpose it is intended that feed-in remuneration
for new facilities will be limited to a certain maximum capacity added per year (e.g.,
2,500MW per year for photovoltaic, 2,500MW per year for onshore wind). The growth
target for offshore wind farms is revised to (a more realistic) 6,500MW by 2020 and
15,000MW by 2030. Additional capacity of geothermal energy and hydropower will
not be restricted.
It is planned that from 2017 onwards new capacities will be auctioned. The details
are to be worked out over the next years. As a pilot scheme, all free-standing PV facilities
will be subject to a bidding process immediately after the reform enters into force.
In the interest of better market integration of renewable energy sources, the
current system of fixed statutory feed-in tariffs and market premiums will be replaced
by mandatory direct marketing of electricity by plant operators. Direct marketing will
be compulsory for new facilities with a capacity of at least 500MW as of 1 August
2014 (250MW as of 1 August 2016 and 100MW as of 1 August 2017). In addition
to the proceeds from direct marketing, plant operators will receive a market premium
which amounts to the difference between an average spot market price and a reference
remuneration set out in the law. In practice, it currently seems likely that plant operators
will be able to achieve the reference amounts.
The EEG 2012 grants energy-intensive industries and consumers of selfproduced energy reduction relief from paying the so-called EEG surcharge, which is an
extra charge on top of an end-consumers electricity bill socialising the cost of the EEG
support scheme. The reform aims to maintain the privileges, albeit limiting their scope
and bringing them into line with EU state aid rules.
State aid proceedings and support for energy-intensive industries
In December 2013, the European Commission opened an in-depth investigation to
examine the compatibility of the current EEG 2012 support scheme with EU state aid
law. The Commission considers that the current system constitutes state aid, but finds it
in principle to be in line with its Guidelines on State Aid for Environmental Protection.
However, according to the Commission the reduction of the EEG surcharge for
companies in energy-intensive industries distorts competition and constitutes state aid,
which may be illegal. On 9 April 2014, the European Commission issued new guidelines
on environmental and energy state aid for 2014 to 2020. The existing guaranteed feed-in
tariffs for renewable energy facilities will not be reviewed under the new guidelines and
hence can be continued. New support schemes, such as the EEG 2014, however, will
have to comply with the Guidelines.
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ii
Energy efficiency is considered the second pillar of a sustainable energy transition. The
third national action plan for energy efficiency will be published in 2014 and define
efficiency targets, ways of financing and competences of the different stakeholders.
On 1 May 2014 key amendments of the Energy Saving Ordinance entered into
force pursuant to which the requirements for energy efficiency of new buildings are
increased by 25 per cent as of 2016. The fourth amendment of the Energy Saving Act
(Energieeinspargesetz), which entered into force on 13 July 2013, requires the highest
energy efficiency standards to be introduced for new public buildings by 2019 and for
all new buildings by 2021, except for owner-occupied family homes. These measures are
part of an integrated energy and climate programme of the federal government that aims
to reduce primary energy consumption by 20 per cent until 2020 and by 50 per cent
until 2050 (compared to 2008). Electricity consumption shall be reduced by 10 per cent
until 2020 and by 25 per cent until 2050.
iii
In 2013 a number of pilot power-to-gas facilities have been commissioned. In such powerto-gas plants surplus electricity from renewable energy sources may be transformed into
hydrogen or synthetic methane to be injected into the gas pipeline system.
Another technological trend is virtual power plants, which are clusters of small
distributed generations plants, such as combined heat and power units, wind farms or
photovoltaic installations dispatched by a central control entity. For new renewable
energy installations the EEG 2014 will require all generation facilities to be remotely
controllable.
As part of the planned grid expansion measures new HVDC (high voltage direct
current) technologies are researched and deployed, both offshore and onshore. Due to
opposition against new transmission lines at local level, underground HVDC cabling will
play an important role to increase acceptance of the required grid expansion measures.
At the end of 2013, RWE commissioned the worlds longest commercial
superconductor connecting two transformer stations in Essen, Germany, as a pilot
project for energy efficient transmission which is co-funded by the BMWi.
In relation to smart meters the EU has set a non-binding target of rollout to 80
per cent of all consumers by 2020. A cost-benefit analysis commissioned by BMWi
showed in 2013 that the cost for such nationwide rollout would exceed the benefits.
The government will decide in 2014 on the rollout strategy and binding targets for
introduction of smart meters. Currently, smart meters have to be installed in all new
and refurbished buildings and for consumers with an annual consumption of more than
6,000kWh.
The carbon dioxide capture and storage technology (CCS) will not be deployed
in Germany on a commercial scale in the near future due to widespread opposition
against storing carbon dioxide underground. Vattenfall will decommission its test facility
at the end of 2014 due to lack of legal certainty around the future of this technology in
Germany.
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Germany
VI
THE YEAR IN REVIEW
Following the general elections in 2013 the new government started tackling the
challenges of the energy transition.
In terms of network regulation the changes to the incentive regulation scheme
clarified a number of disputed items leading, together with a growing body of case law,
to a more mature regulatory system.
A recurring issue in energy supply contracts was the adjustment of contract terms
on the basis of hardship clauses, where the Federal Supreme Court of Germany (BGH)
stressed the importance of the legal principle that contracts must be kept.
The initiation of state aid proceedings by the European Commission against
elements of the EEG will have a decisive impact on the reform of the renewables support
scheme.
The withdrawal from nuclear energy in the wake of the energy transition in
Germany led to several legal disputes which may have significant financial implications
for the federal states concerned. Courts held that a three-month moratorium on nuclear
energy production in two nuclear power plants immediately after the Fukushima
incident was unlawful, which may result in compensation payments to plant operators.
Swedish-based nuclear power plant operator Vattenfall AB also brought an action before
the International Centre for Settlement of Investment Disputes (ICSID), claiming the
infringement of its rights as an investor by Germany through the ordered phase-out of
nuclear energy.
VII
2014 is a decisive year for the German energy sector. The reform of the EEG and the
intended system change in the renewable energies support scheme will set the stage for
the development of the German energy markets in the next years. The shift to renewable
energies and phase-out of nuclear energy requires more market interventions and raises
concerns about affordable energy prices.
The government needs to form a view on capacity markets and the strategy
for rollout of smart meters. The large grid expansion measures (North-South HVDC
corridors) will enter the concrete planning phase and the BNetzA will provide its analysis
of the future of incentive regulation for energy grids.
It is expected that legislation on hydraulic fracturing of unconventional gas
(fracking) will limit the use of this technology in Germany until further research is
available on the potential environmental impact, in particular on groundwater. Currently
there are no specific legal rules on large-scale fracking. The public is to a vast extent
opposing it and several federal states have announced not to approve fracking projects.
There will also be further M&A activities as the large energy groups continue
to divest assets in order to adjust to the changing markets and due to the pressure on
generation margins.
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Chapter 13
GHANA
Emmanuel Sekor and Enyonam Dedey-Oke1
I OVERVIEW
Ghana is endowed with a variety of energy sources, which includes biomass, hydrocarbons,
hydropower, solar and wind. The energy sector vision, according to the Ministry of
Energy, is for the nation to achieve universal access to all the energy forms by 2020 and
to become a net exporter of oil and power by 2012 and 2015, respectively.2
Prior to 1997, the government of Ghana and the state-owned electricity utilities
combined operational responsibilities with regulatory mandates. The vertically integrated
state entity responsible for all generation and transmission capacity also provided
distribution services for about 10 per cent of the electricity demand. Distribution for
most of the country is still undertaken by a single state-owned enterprise. The systemic
challenges of the 1990s led to changes that included the establishment of a new armslength regulatory framework to promote investment and efficiency in both pricing and
operations. The monolithic state-owned electricity company was restructured to allow
competition in the wholesale supply of power through an open-access transmission
system to distributors and bulk consumers. The regulatory agencies that were formed
were to combine regulation of electricity and natural gas. Since then, the sector has been
evolving and the necessary legal and institutional framework is in place for the take-off
of the desired transparent wholesale electricity market (WEM).
Discovery of oil in 2007 and commercial production dramatically changed the
energy landscape. As the economy continues to grow, not least because of the impact of
oil, the demand for energy has increased.
1
2
Emmanuel Sekor is a principal consultant and Enyonam Dedey-Oke is a consultant at REM

Law Consultancy.
Statement of Energy Policy, Ministry of Energy, 2010.
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Ghana
Energy policy is made by the Ministry of Energy.3 The focus for electricity is to
attract investment to support the public sector for the enhancement and expansion of
critical infrastructure in order to improve security of supply, and transform the nation
into an exporter. The creation of the enabling institutional, regulatory, pricing and
market operations framework is a prerequisite for attracting the investment needed to
attain a generation capacity of 5,000MW in 2016 from the 2013 installed capacity of
2,875MW. With regard to petroleum, the priorities include attracting the investment
needed in the sector, development of the resource sustainably, improving institutional
capacities and tightening the legal framework, as well as local content enhancement and
transparency in the management of the sector.
The Energy Commission (EC) and Public Utilities Regulatory Commission
(PURC) oversee licensing, quality of service and pricing for electricity and natural gas.
The newly created Petroleum Commission (Petrocom) regulates the upstream activities
while the Environmental Protection Agency (EPA) oversees all environmental issues.
i Electricity
Ghanas electricity sector has been undergoing reforms since the mid-1990s. The main
objective of the reform was to create an enabling environment that could attract private
investment to support the public sector to improve and expand the capacity of existing
electricity supply infrastructure to meet growing needs at home and for export. Ghanas
power sector is significantly unbundled with laws already enacted that allow multiple
generation entities, including the independent power producers (IPPs), public-private
partnerships and state-owned generation companies, an independent transmission
system operator and the multiple distribution entities to operate in the market. Draft
market rules have also been developed and are being finalised, in consultation with
various stakeholders, for implementation.
ii Petroleum
All mineral resources, including petroleum belong to the state and are vested in the
President in trust for the population.4
In 2007, the Ghana National Petroleum Corporation (GNPC) and its partners
discovered oil in commercial quantities on the Ghanaian continental shelf. Commercial
oil production of the Jubilee Field started in December 2010. Further discoveries are
being made and various fields are at different stages of appraisal.
The natural gas supply to Ghana is expected from two main sources: the West
African Gas Pipeline (WAGP)5 and indigenous offshore sources. The indigenous gas
industry is in its infancy. The government is currently developing a plant to process
Jubilee Field gas and also lay transmission infrastructure to link the WAGP at a large
thermal plant complex near the port city of Takoradi. This critical gas infrastructure was
3 Ibid.
4
Article 257(6) of the Constitution.
5
A sub-regional venture for delivering Nigerian gas to its eastern neighbours, Benin, Togo and
Ghana.
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expected to be commissioned into use by the end of April 2014 and first gas is expected
to be transmitted by end of June 2014.
The Jubilee Field contains significant quantities of associated gas. In addition
to Jubilee, several other discoveries of oil, associated and non-associated gas have been
made.
The Petroleum (Exploration and Production) Act had been in force since 1984,
and the dialogues that followed the discoveries called for more modern and responsive
legislation. Thus the Petroleum Commission Act6 and Petroleum Revenue Management
Act7 were passed to establish an industry regulator and control revenues. Consultations
are still ongoing on the main Exploration and Production Act.
II REGULATION
i
The regulators
The Ministry of Energy is responsible for policies, programmes and projects for the
power sub-sector and the energy sector generally. It also issues petroleum licences. Under
the Petroleum Act, any person who wishes to engage in exploration, development or
exploration of petroleum must enter into an agreement with the state and GNPC.8
The bodies that currently oversee the regulated aspects of the energy industry are
the EC, the PURC, Petrocom and the EPA.
The EC9 was established with the mandate to regulate and manage the development
and utilisation of energy resources in Ghana. The EC takes direction from and advises
the Minister for Energy (the Minister) and prepares the plans for meeting the national
requirements for energy. It licenses transmission, wholesale supply, distribution, and the
sale of electricity and natural gas, and enforces performance standards of the utilities.
In so doing, it grants approvals for the siting of facilities for electricity and natural gas.
The PURC10 approves rates and monitors the quality of service provided by
electricity, natural gas and water utilities. The PURC approves charges for transmission
services, and bulk generation tariffs for power sold to distribution utilities and retail
tariffs. With regards to natural gas, the Commission approves rates for the downstream
activities, which are transmission by pipelines and distribution services. The PURC is not
subject to the direction of any body, but its membership is appointed by the President;
it depends on the government to fund its operations and reports to Parliament annually
on its activities.
Petrocom is the upstream petroleum regulator. Under direction of the Minister,
it is responsible for the regulation, management and utilisation of petroleum resources,
6
7
8
9
10
2011, Act 821.

2011, Act 815.
Section 2 of the Petroleum Act 1984 (Act 84).
The EC was established in 1997 by Act 541. Apart from the Act, the EC issues regulations,
codes, orders and other guidelines under its rule-making powers for implementing the
provisions of the Act.
The PURC was established in 1997 by Act 538.
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and the coordination of policies. Its functions include the promotion of well-planned
and cost-efficient petroleum activities, monitoring and ensuring compliance with
national policies, laws and regulations, and ensuring compliance with health, safety and
environmental standards in petroleum activities.11
The process for appeals against the decisions of the EC and Petrocom are similar.
A person who is aggrieved by a decision of the EC or Petrocom relating to licensing may
lodge a complaint with the Minister, who must make a decision within 30 days of receipt
of the complaint.12 If the Minister fails to make a decision within the time specified or
the person is dissatisfied with the decision of the Minister, he or she may apply to the
court for a review of the Ministers decision.
Currently, the decisions of the PURC are not subject to any special reviews except
for the general power of the courts under prerogative writs, whereby the courts exercise
their supervisory jurisdiction over administrative bodies.
The EPA is the regulatory body charged with the protection and management of the
environment in Ghana.13 It is tasked with enforcing environmental policy and legislation,
and prescribing standards and guidelines for the protection of the environment. The EPA
is also responsible for issuing environmental permits and pollution abatement notices.14
All companies involved in mineral operations in Ghana are required to apply for and be
issued with an environmental permit before they begin operations.15
ii
The regulated activities under the EC Act are generation, transmission and distribution
of electricity, as well as the processing, transmission and distribution of natural gas.16
The EC also regulates import and export of electricity.17 Pricing of the services of the
regulated segment of the electricity industry is subject to approval by the PURC, and the
licences include conditions to that effect.18
Regulated activities under the Petroleum Act are exploration, development and
production, and transportation if undertaken by an entity that is not developing the
field. A person can only engage in any of the regulated activities if granted a petroleum
agreement with GNPC and the state. By virtue of the Constitution, a petroleum
agreement must also be approved by Parliament to be valid.19
11
Section 3 of the Petroleum Commission Act (Act 821).
12
Section 20 of the Energy Commission Act and Section 20 of the Petroleum Commission Act.
13
Section 2 of the Environmental Protection Agency Act (Act 490).
14 Ibid.
15
Environmental Assessment Regulations 1999, LI 1652, as amended by LI 1703.
16
Sections 23 to 27 of Act 541.
17
EC has defined the activities under the wholesale supply licence to include export and imports
in its licensing manual.
18
Sections 24 to 26 of Act 541.
19
Article 268(1) of the Constitution.
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The WAGP is regulated by treaty20 and statute21 within the participating countries,
which established a WAGP Authority as the regulator. This arrangement was to ensure
harmonisation of the fiscal and operational rules governing the pipeline in each of the
four member countries.
Duration of licences granted by EC vary from five years, for broker, export and
import licences, to 25 years for a hydroelectric generating licence. With regard to natural
gas, the duration varies from 15 years, for a wholesale supply licence, to 25 years, in the
case of a gas processing licence.
iii
To qualify for a licence, the applicant must be a citizen of Ghana or a body corporate
registered under the laws of Ghana.22 A foreign company wishing to operate in the energy
sector must register under the Companies Code 1963 (Act 179). The application must be
processed within 60 days of acknowledgement of receipt. By law, the EC must grant one
licence in respect of the operation of the national interconnected transmission system for
electricity and natural gas, respectively.23 While a single entity may undertake more than
one industry activity, it must do so under separate industry licences. When granted, the
licences must be published in the Gazette and newspapers of mass circulation.24
In granting the licence, the EC must, inter alia, satisfy itself that the applicant
is suitable to hold the licence. The criteria considered include technical, financial and
commercial capabilities. The licence may be modified at the instigation of the licensee
or, if it is necessary in the public interest, ordered by the EC.
iv
There is no dedicated competition watchdog in Ghana and there are generally no

restrictions on ownership of assets of regulated industries. Licences granted are, however,
typically non-transferable except with the prior approval of the licensing body.
Also, the licensing application requires applicants to fully disclose affiliates and
subsidiaries as accessory to the application. Further, areas of cross-transactions between
the applicant and its affiliates and subsidiaries must be provided as a requirement
under the Licensing Manual. It should be noted that after the licence is granted, the
holder must go through an elaborate permissions process, from construction through
commencement to commercial operation, depending on whether the licence involves
the operation of facilities.
20
21
22
23
24
The Treaty on the WAGP.

Relevant law in Ghana is the West African Gas Pipeline Act, 2004 (Act 681).
Section 12 of Act 541.
Section 23(4) of Act 541.
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III

SERVICES
Prior to 2006, the Volta River Authority (VRA), a state-owned enterprise generating
electricity from its hydro plants, owned and operated the transmission network.
Electricity distribution is now mainly undertaken by the state-owned Electricity
Company of Ghana (ECG). VRA, however, still provides some distribution services
in the northern parts of the country through its wholly-owned subsidiary, Northern
Electricity Distribution Company (NEDCo). Transmission operations were ceded by
VRA to GRIDco (see Section III.ii, infra).25
ii
Electricity transmission is undertaken by GRIDCo, which has exclusivity under the EC

Act to operate the national integrated transmission system (NITS) as an independent
system operator (ISO). GRIDCo is also the market administrator for the WEM.
Accordingly, GRIDCo is required to provide fair, transparent, and non-discriminatory
open-access to transmission services to all market participants.26
Connection to the NITS is obtained in accordance with the Grid Code and other
relevant codes and rules of practice. Participation in the WEM is open to generation and
distribution licence holders as well as bulk customers who have been registered by the
EC to source their supplies directly through wholesale suppliers. These grid participants
are required to sign a connection agreement and coordination agreement with GRIDCo
to obtain connection to the grid. Thereafter, if the grid participants equipment and
facilities are compatible with the facilities of the NITS, non-discriminatory access is
provided subject to the technical limitations of the system.
A regional power pool, the West African Power Pool (WAPP) project is being
undertaken under the auspices of ECOWAS.27 This involves the upgrading and
development of an international transmission corridor to formalise and expand crossborder electricity exchanges that had previously existed on a limited basis. The regional
electricity trade will be regulated by the ECOWAS Regional Electricity Regulatory
Authority, ERERA.
Electricity distribution is undertaken by two state-owned public utilities, ECG
and NEDCo. Less than 1 per cent of the total energy sold is distributed by the third
distribution company, a private operator. The licences guarantee exclusivity within its
franchise areas.
iii Rates
Pricing for electricity transmission, distribution as well as wholesale supply to distribution
utilities is regulated by the PURC, which also regulates natural gas transmission and
25
26
27
See Volta River Development (Amendment) Act 2005 (Act 692).

Article 3.08(b) of the Grid Code.
The Economic Community of West African States.
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Ghana
distribution in parallel. The PURC is required to establish guidelines for approval of rates
by service providers in the electricity and natural gas sectors.28
A gas pricing committee is working on guidelines for the commodity pricing,
transportation tariffs, as well as other pricing-related rules to help the government
determine gas pricing policy. The PURC is also developing guidelines for the pipeline
tariffs and will be guided by recommendations of the gas pricing committees study.
Factors that will guide the pricing policy include projected gas supply from the
estimated reserves and resources, prices to be elicited from the characteristics of gas in
terms of various types of wells and fields, long-term demand, and optimum pricing
to ensure adequate returns on investments. The procedure for approving tariffs for
electricity and gas is for the public utility to file its proposal at least 60 days before the
commencement of the service or the effective date for revised rates. The proposals are
published in the mass media and reactions to the proposals collected from consumers or
representations made at public hearings organised by the commission prior to the tariff
reviews.29 These representations are taken into account by the commission in arriving at
a decision.
iv
The Minister is mandated under the EC Act to make regulations for the protection of
mains, pipes, electrical or natural gas installations and services.
The current developments in the petroleum industry as well as the anticipated
expansion in electricity infrastructure require the issuance of comprehensive regulations
sooner rather than later.
IV
ENERGY MARKETS
The WEM envisages a competitive wholesale market with multiple generators,

an independent state-owned transmission utility and final off-takers consisting of
distribution companies and bulk customers.
GRIDCo is charged to ensure procurement and dispatch of electricity from
facilities of wholesale suppliers to bulk customers or distribution companies in a fair,
transparent and non-discriminatory manner. To obtain the lowest cost of supply, the
supply of electricity to the market will be in accordance with economic merit order
dispatch principles. The segment of the Ghanaian electricity market that is regulated
by the PURC accounts for about 70 per cent of the total energy demand, whereas the
deregulated segment of the electricity market accounts for about one-third.
The full implementation of a WEM has been slow given that the Electricity
Regulations were established in 2008. A major reason for the delay is the determination
on a pricing mechanism and allocation of relatively cheaper electricity produced from the
state-owned hydro plants. Power generated from these hydro sources has been excluded
28
29

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Ghana
from trading in the WEM under the Electricity Regulations.30 Another major constraint
on the implementation of the WEM has been the financial situation of the state-owned
distribution utilities, which are the main off-takers of the bulk of electricity generated
and depend solely on revenues for their power purchases.
Rules are in place for regulating the natural gas industry. It is anticipated that there
will be competition in supply. In accordance with the law,31 the EC has issued the natural
gas transmission utility licence relating to the operation of the transmission network.
This will facilitate an open-access transmission system. Asset and facility ownership
would be separated from the operatorship of the network. The natural gas industry is,
however, just evolving; a fully competitive market could take some time to emerge.
ii
The electricity and natural gas industries are regulated by the same entities, the EC and
the PURC. The EC Act provides generally for the establishment of the competitive
market with oversight responsibility to be provided together with the PURC. The market
principles have been further elaborated in two instruments: the Electricity Regulations
2008 (LI 1937), which establish the WEM and provide the ground rules for its regulation,
and the Electricity Transmission (Technical and Operational Standards of Performance)
Rules 2008 (LI 1934), which define the technical requirements, procedures, practices
and standards that govern the development, operation, maintenance and use of the grid.
The instruments establishing the WEM provide for wholesale electricity trading
and provision of ancillary services within the NITS. The WEM is to be regulated by
a set of instruments: Electricity Market Rules, market manual and dispute resolution
procedures to be issued by GRIDCo.
An Electricity Market Oversight Panel, a stakeholders body, has been established
under the Electricity Regulations to oversee and monitor the operation of the market and
continually review procedures governing the market operations.
The corresponding instruments for natural gas regulation are the Natural Gas
Transmission Utility (Technical and Operation) Rules 2007 (LI 1913) which provides
the framework for the commercial operations in the gas industry and the Natural Gas
Transmission Utility (Standards of Performance) Regulations 2008 (LI 1936). The
current infrastructure is a simple one: it is meant to deliver treated gas to a thermal power
plant complex. The industry framework instruments have been designed to deal with the
complexities of future developments.
iii
Three categories of off-taker are recognised under the EC Act. These are wholesale
suppliers, distribution companies or bulk customers. By definition, a wholesale supplier
licensed under the Act could be an entity that produces or procures electricity for sale to
a distribution company or a bulk customer.32
30
31
32
LI 1937, Regulation 5(2).

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Ghana
LI 1937 recognises that contractual arrangements for the procurement of
electricity in Ghana consist of bilateral contracts and spot market purchases. Entities
that have been licensed by the EC either as bulk consumers or as distribution utilities
qualify to participate in the market, and they may enter into bilateral contracts with
wholesale suppliers to meet their power needs. Participants in the WEM are expected
to negotiate their own power purchases. Transmission charges in the WEM should be
uniform throughout the entire country and the spot market price for electricity based on
the system marginal cost of supply.
Wholesale suppliers must enter into power purchase agreements with the
purchasers of their electricity as part of the ECs licensing requirements.
With regard to natural gas, persons intending to engage in commercial activities
must enter into a framework agreement with the transmission utility to be able to access
transmission services for shipping their gas.33
Copies of all electricity and natural gas agreements must be lodged with the EC
and the PURC.34
iv
Market developments
A grid participant must enter into a connection agreement with GRIDCo as well as
meeting the technical requirements of the Code before gaining access to the grid.
GRIDCo is finalising terms of the connection agreement that forms the basis
for negotiating and agreeing the terms of connection and aspects of work relating to the
market rules are ongoing.
The provision of transmission services in the country is by a common operator
that gives the dispatch instructions. The performance of this transmission function is
guided by the Grid Code.35
In accordance with the EC Act, the operation of the NITS has to be assigned to
an electricity transmission utility (ETU), which also serves as the ISO. To ensure nondiscriminatory access and efficient operation of the NITS, all owners of the various assets
forming a part of the NITS are obliged to enter into an asset vesting agreement with the
ETU.36 The ETU must extend to all grid participants a fair and equitable access to its
services.
The plant for processing natural gas from the Jubilee field and the coastal pipeline
from the plant to the power stations is under construction. From the size of the current
gas production, indications are that the market will evolve gradually over time.
33
34
35
36
LI 1913, Regulation 2.
LI 1937 Regulation 5(3).
The Grid Code was issued by the EC under LI 1934; Electricity Transmission Rules (Technical,
Operational and Standards of Performance). It came into force in October 2009.
Article 3.12(a) of the Grid Code.
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Ghana
V
The government proposed in 2010, to increase the use of renewable energy sources to 10
per cent of the national energy mix by 2020.37
The passage of the Renewable Energy Act (REA)38 gave legal backing to the
introduction of a tariff regime which will be favourable to renewable energy generators. It
also provides the regulatory framework for connecting generation plants to the grid. The
REA places an obligation on a distribution company and a bulk customer to purchase a
yet to be specified percentage of its total electricity requirement from renewable energy
sources.39
The PURC published the expected Renewable Energy Feed-in-Tariffs in
September 2013 but the Commission and the EC are yet to publish the correspondent
renewable energy purchase obligation and technology caps.
ii
The government policy on energy efficiency and conservation focuses on removing

constraints to the promotion and implementation of energy efficiency and conservation
measures. The government proposes to rescue the situation with a combination of
initiatives including fiscal incentives, raising awareness and education, institutional and
human resource capacity development, and financial intermediation.
In furtherance of this objective a series of measures have been introduced over the
years. The measures so far introduced include legislation and administrative actions and
are summarised below.
a
The Energy-Efficiency Standard and Labelling (Non-Ducted Air Conditioners
and Self-Ballasted Fluorescent Lamps) Regulations 2005 (LI 1815). This
instrument established a minimum Ghanaian standard for this equipment and
prohibited the sale of those that did not meet the standard. A labelling system was
also introduced to inform users of the efficiency levels of the equipment to help
make informed choices when acquiring them.
The labelling requirement is to be extended to LED lamps. The related
Regulations are to be put before Parliament by the EC shortly to undergo the
processes necessary for becoming law.
b
The Energy Efficiency (Prohibition of Manufacture, Sale or Importation of
Incandescent Filament Lamp, Used Refrigerator, Used RefrigeratorFreezer,
and Used Air-Conditioner) Regulations 2008 (LI 1932). This was to curb the
37
38
39
Strategic National Energy Plan 2006 to 2020, Energy Commission, July 2006.
2011, Act 832.
Section 26 of Act 832. This percentage is yet to be determined by the PURC in consultation
with EC based on the following parameters: technology being used; assurance of the financial
integrity of the public utilities and the net effect of the cost of renewable energy on the end-user
tariff, inter alia.
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Ghana
phenomenon of importation of used equipment, a practice prevalent in the West

African sub-region.
The Energy-Efficiency Standards and Labelling (Household Refrigerating
Appliances) Regulations 2009. The objective of this intervention is similar to
the labelling aspect of LI 1815. Ghanaian standards were developed for the
equipment and dealing in substandard ones prohibited. The labelling system was
also introduced to help customers make informed choices. The EC is empowered
to enforce these measures in collaboration with relevant law enforcement agencies.
The Energy Foundation, a non-governmental organisation, and the EC have, since 2007,
implemented cost-saving programmes such as lighting retrofitting, capacitor installation
in public buildings and refrigerating efficiency and market transformation projects.
VI
THE YEAR IN REVIEW
i Renewables
Following the passage of the REA in 2011, various implementation measures were
developed by the regulators to ensure quick and smooth implementation. These include
the guidelines for the feed-in tariffs as well as the optimal percentage cap of renewable
energy to be safely accommodated within the energy mix. In addition, the EC has
drafted a Net Metering Code for individual consumer generation to be connected to
the distribution system. The draft will undergo stakeholder discussion before finalisation
and adoption.
VRA initiated a 10MW photovoltaic plant in the NEDCo area to be implemented
in phases. The first phase of the project which involved 2MW was completed in 2012.
It is hoped that this state-owned enterprise initiative will encourage the private sector to
invest in large renewable energy plants.
ii
Natural gas supply
The GNGC commenced the construction of a natural gas processing plant and
pipelines to link the WAGP pipelines at the thermal plants complex at Aboadze. The
commissioning date of the project has been postponed twice in the past has now been
fixed for April and first gas is expected by end of June 2014. The estimated 120mmscf/d
of indigenous gas to be supplied through the GNGC pipeline will augment current
supply of the WAGP line.
iii Oil
The Jubilee field production averaged about 110,000 barrels per day in 2013. As of the
end of the third quarter of 2013, some 86,014,872 barrels have been produced at the
Jubilee field.40 A significant sector development was the issuance by Parliament of the
Petroleum (Local Content and Local Participation) Regulations, 2013 (LI 2204). The
40
GNPC, 2013.
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Ghana
government seeks to promote the indigenisation of the upstream petroleum industry
in terms of award of licences and the provision of goods and services by this subsidiary
legislation. The Regulations provide targets for achieving this indigenisation policy
objective within 10 years.
iv
Ancillary services
Pricing of ancillary services for electricity though a requirement of the WEM had not
been traditionally provided for until the establishment of pricing guidelines for its
procurement by the PURC in 2012. Stakeholder engagement has been ongoing for
a while but it is still unclear when the guidelines and the pricing mechanism will be
adopted.
v Electricity
In addition to recent investments in thermal plants, VRA, which currently generates
about 73 per cent of the nations electric power requirement, proposes to add a further
1,000MW over the next five years. Implementation is yet to commence on other investor
plants that were licensed in 2012.
VII
Natural gas supply
Ghanas thermal generation future has long hinged on the delivery of gas from the WAGP,
but gas delivery has historically, never lived up to its contract quantity approximately
120 mmscf/d.41 The estimated 120 mmscf/d expected to be supplied from Jubilee field
through the GNGC facilities will improve the fuel supply situation greatly.
Jubilee gas is expected to be cheaper than WAGP gas. As such, continuous delivery
delays may prove costly to the power sector of Ghana.
ii
LNG options
LNG is considereda viable option to ameliorate Ghanas fuel supply situation, especially
with respect to energy generation; additionally, LNG could serve as a valuable source
of fuel for heavy and medium industries within the country. If the WAGP supply were
curtailed, the supply balance would reinforce the opportunity for development of a
viable LNG terminal.42 The LNG option provides for some medium-term security of
fuel that should incentivise development of IPPs.
iii
Renewable energy
The primary resources being studied towards fulfilling this requirement are wind and
solar energy.
41
2012 Energy Commission; 2012 Energy Outlook for Ghana.
42 Ibid.
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Ghana
Ghanas wind regimes are fair and in short supply as these winds are found in
small corridors along the eastern coast and Volta region. The technical feasibility of
implementing a wind farm based on existing wind speed is still under investigation.
Ghanas northern regions possess the best solar generation potential in the nation.
The solar radiation measurements from these areas are significant; hence, solar generation
is technically feasible in Ghana.
Biomass generation offers environmental benefits that neither of the
aforementioned renewable technologies can boast. Biomass is a viable technology because
it can aid in the clean-up of growing numbers of dumping sites throughout Ghana. The
abundance of waste from Ghanas major cities, upon initial assessment, appears to be of
a significant enough quantity to make biomass generation possible. Therefore, biomass is
technically feasible; further studies are needed to ascertain the exact generation potential
for biomass.
The technical feasibility of the technologies, as well as the cost-effectiveness of
weighted average tariffs of generation from renewable sources, compared with combined
cycle thermal generation and their implications for the electricity tariffs, need to be
carefully evaluated.
iv
Transmission and infrastructure improvements
Transmission losses on Ghanas NITS between January 2011 and June 2012 have varied
between 3.1 per cent and 6.1 per cent.43 Additionally, in 2012 Ghana has experienced
a number of total system failures. Major issues affecting the operation of the NITS are
aged infrastructure and transformer and line overloads.
GRIDCo continues to undertake line extension and upgrade projects, guided
by its Transmission Master Plan, to increase power transfer capability and operational
reliability on these and other potentially problematic lines. Hopefully, this programme
will be accelerated to ensure the grid is able to accommodate the increased generation
capacity.
43
2012 Energy Commission, Energy Data 2012.
174
Chapter 14
INDIA
Akshay Jaitly, Sitesh Mukherjee, Neeraj Menon and Rashi Ahooja1
I OVERVIEW
As energy consumption burgeons with economic development in India, demand greatly
outstrips the supply available. The government of India is continually evolving policies in
response to changes in the global and national markets, taking into account the political
and market dynamics. While providing reliable, uninterrupted electricity and finding
solutions to the alarming increase in unutilised capacity seem to be the primary concerns
for the country, the government is striving to secure the interests of all the stakeholders
concerned. While the dependence on fossil fuels is likely to continue at least into the
near future, energy security is also being pursued through renewable energy.
II REGULATION
i
The regulators
The power sector is governed by the federal government through, primarily, the Ministry of
Power and the Ministry of New and Renewable Energy (the Renewable Energy Ministry).
The Department of Atomic Energy2 is in charge of nuclear energy. The Electricity Act
2003 (the Electricity Act) is the primary statute that governs generation, transmission,
distribution and trading of electricity. The Electricity Act provides for the formulation of
the National Electricity Policy 2005, the Tariff Policy 2006, establishment of independent
electricity regulatory commissions at the central level (the Central Electricity Regulatory
Commission (CERC)) and state level (the state electricity regulatory commissions (SERCs))
and the setting up of the Appellate Tribunal for Electricity. The relevant SERCs exercise
1
2
Akshay Jaitly, Sitesh Mukherjee and Neeraj Menon are partners and Rashi Ahooja is an associate
at Trilegal.
Which is directly under the Prime Ministers charge.
175
India
jurisdiction over intrastate electricity regulatory matters (including tariffs), whereas the
CERC exercises jurisdiction over all interstate electricity regulatory issues (also including
tariffs).
Along with the Department of Atomic Energy, nuclear energy in India is regulated
by the Atomic Energy Regulatory Board, set up under the Atomic Energy Act 1954. The
government is also in the process of setting up a statutory, independent and autonomous
Nuclear Safety Regulatory Authority.
The Ministry of Coal administers all issues in relation to coal. In the past year, the
Ministry of Coal and the state-controlled Coal India Limited (CIL) have continued to be
at the receiving end of nationwide criticism on account of failure to supply the requisite
quantity and grade of coal, leading to strong lobbying on the part of power producers for
assured coal supplies by the government. The government has recently sought to regulate
the sector by setting up a Coal Regulatory Authority through an executive order. While this
authority has been empowered to specify the principles and methodology to determine
the price of raw and unwashed coal, it does not have the power to decide the price of
domestic coal (a function which will continue to be performed by CIL), nor will it have
any say in the allocation of coal acreages. The Ministry of Petroleum and Natural Gas
(MoPNG) deals with issues relating to petroleum, natural gas, coal bed methane, shale
gas and other petroleum products. Along with exploration and production, the MoPNG
also monitors its supply, distribution, marketing and pricing. The Directorate General
of Hydrocarbons (DGH), which is under the administrative control of the MoPNG,
regulates the upstream segments for issues relating to exploration and production
of oil and gas. The Petroleum and Natural Gas Regulatory Board (PNGRB) is the
midstream and downstream regulator that regulates the refining, storage, transportation,
distribution, marketing and sale of petroleum, petroleum products and natural gas.
ii
Electricity generation, including captive generation, is a delicensed activity. While

generation activities can be freely undertaken without a licence, approvals and procedures
under other laws for land acquisition, environmental, corporate and labour compliance
must be adhered to.
Electricity distribution activities (except for distribution of electricity in
rural areas) require a licence from the relevant SERC. Electricity trading is a distinct
recognised activity for which a separate licence is required from the CERC or an SERC
(for interstate and intrastate trading respectively). Licences are awarded by the CERC for
interstate transmission activity by way of a competitive bidding procedure in accordance
with CERC regulations. For intrastate transmission services, licences are awarded by
the relevant SERC. The Ministry of Power has recently proposed amendments to the
Electricity Act which provide for delineation of distribution activities by requiring the
supplier of electricity and electricity distribution network provider to be separate entities.
Once these amendments come into force, supply of electricity will also require a licence
from the relevant SERC. Exploration of oil and gas are separately licensed activities.
The DGH awards licences through international competitive bidding for natural gas
exploration blocks under the New Exploration Licensing Policy (NELP) rolled out in
1999. The production sharing contract (PSC) under the NELP programme stipulates
176
India
conditions regarding pricing and sharing of total product obtained with the government.
The DGH has successfully carried out nine rounds of bidding under NELP, in which
254 oil and gas blocks have been awarded.
Based on the inputs of the Rangarajan committee which was constituted in 2012
to look into the PSC mechanism in the petroleum industry (the Rangarajan Committee),
the government has notified Domestic Natural Gas Pricing Guidelines, 2014. These
guidelines provide for the prices to be fixed on the basis of average of netback price of
Indian gas imports and the weighted average of the price at international hubs, and
requires notification of the prices determined by the government on a quarter ahead basis
starting from 1 April 2014.
The coal bed methane (CBM) policy (formulated in 1997) offered blocks for
exploitation of CBM through biddable revenue sharing based on production-linked
payment.
Recognising the constraints experienced in the present PSC format and differences
in fiscal and contractual regime for oil and gas and CBM, the government has recently
proposed that the award of acreages for hydrocarbon exploration and production in
future will be under a uniform licensing policy covering all types of hydrocarbons. The
government seeks to implement this policy through the tenth round of bidding under
NELP (proposed to be held this year), in which approximately 46 blocks are on offer
(NELP X). While there has been no announcement on the expected date of bidding
for these blocks, it is likely that the blocks will be awarded in a process that will only
gather momentum after the general elections in AprilMay this year. There has been no
official announcement on the fiscal terms of NELP X, as the government is considering
two separate recommendations made by committees set up by the MoPNG to promote
efficiencies in the oil and gas sector. While the Rangarajan Committee recommended
bidders to quote the amount of oil or gas output they are willing to offer to the government
from the first day of production, another committee set up for recommending reduction
in import dependency in the hydrocarbon sector (the Kelkar Committee) has proposed
continuing with the existing mechanism allowed for recovery of costs of exploration and
production before sharing profits with the government, with certain adjustments.
The government has also introduced policy guidelines for exploration and
exploitation of shale gas and oil, which, at present, only allow national oil companies
to explore shale resources from onland blocks that were allotted to them before NELP.
While the potential shale gas reserves overshadow those of conventional gas, India
has a long way to go in identifying shale gas rich basins and acquiring the necessary
technology and experience to extract shale gas, and in the absence of any participation
by international and private players, it is anyones guess how soon this will be achieved.
Drawing on the recommendations of the Kelkar Committee report, the MoPNG is also
likely to accelerate the building of a national data repository which will help kickstart the
formulation of an open acreage policy in India (OALP). Unlike the NELP,3 where the
government invites bids for selected identified oil and gas blocks, the policy framework
It is believed that the government may consider introducing the OALP after the tenth round of
bidding under NELP has concluded.
177
India
under the OALP is likely to allow companies to approach the government at any time
expressing their interest in bidding for one or more blocks, after which the government
would invite competitive bids from others interested in the same blocks. Such a policy
would help find takers for blocks already relinquished or surrendered by companies that
won them in earlier rounds, while also providing flexibility and frequent opportunities
to interested bidders.
Petroleum, natural gas and city gas distribution (CGD) networks can be developed
either through an expression of interest to the PNGRB or under competitive bids invited
by the PNGRB. Under the expression of interest route, upon a receipt of interest, the
PNGRB must publicise it to receive proposals or comments from different entities, and
may invite competitive bids or allow for the proposal (with or without modification).
iii
Over the past decade, the government has progressively liberalised the energy sector,
although government companies continue to be active players. Up to 100 per cent
foreign direct investment (FDI) is permissible in generation (except nuclear power),
transmission, distribution of electricity and power trading, as well as in the oil and gas
sector4 and up to 49 per cent in power exchanges without prior regulatory approval. Such
investments are subject to sector-specific laws and policies.
A majority of generation, transmission and distribution capacities are with either
public sector companies or with state electricity boards (SEBs), however, private sector
participation is increasing, especially in generation and distribution. The interstate
transmission system is mainly owned and operated by Power Grid Corporation of India
Limited (PGCIL), a state-owned company, and the intrastate transmission system is
owned and maintained by state utilities. The government is looking to increase private
participation to strengthen transmission networks and has recently introduced a viability
gap funding model public-private partnership (PPP) structure for setting up intrastate
transmission networks. Electricity distribution is largely in the control of government
distribution utilities, however, based on the success of privatisation in certain areas (such
as Delhi, Orissa, Mumbai and Jamshedpur), it is also catching up in other parts of the
country. In India, the ownership of all mineral resources, including oil and gas vests
with the government, and is administered through the MoPNG. Gas Authority of India
Limited and Oil and Natural Gas Company are the largest owners of oil and gas pipelines
in the country. Private players are increasingly entering the CGD space.
iv
While there are no specific restrictions on transfer of control or assignment of a

generating company, for generating stations set up pursuant to certain renewable energy
policies or by competitive bidding (for thermal or hydroelectric projects), however, there
is a shareholder lock-in period for the developer. The Ministry of Power has recently
issued revised standard bidding documents for long-term (20 years and above) and
In investments in petroleum refining undertaken by public sector entities, only up to 49 per

cent FDI is permitted.
178
India
medium-term (one to five years) procurement of power from thermal power projects
(Revised SBDs), which provides for a lock-in period (though on a sliding scale) for a
period up to 10 years following commercial operations.
Holders of licences for oil and gas exploration can transfer or assign all or part of
their participating interest under the PSC, with prior consent of the government.5
Other than these sector specific restrictions, provisions of the Companies Act 1956,
Competition Act 2002, and the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations 1997 (applicable to listed companies)
will apply with respect to change in shareholding through mergers and acquisitions.
III

SERVICES
Under the Electricity Act, SEBs were required to be unbundled into separate generation,
distribution and transmission companies and most states have now completed the
process. Transportation, distribution and marketing activities in the oil and gas sector are
yet to be unbundled. While the PNGRB had circulated a concept paper on unbundling
of activities of transportation and marketing of natural gas, no policy decision has been
taken on this aspect.
ii
In the electricity sector, transmission licensees must provide non-discriminatory open

access to its transmission system for use by other persons (including electricity distributors,
traders and generating companies). Open access to distribution networks is also granted
to bulk power consumers (i.e., consumers of above 1MW), to procure electricity at
unregulated prices from entities other than the area distribution licensee. Separately,
while the government has the ability to issue directions to generators on operation of
their power stations in an extraordinary circumstance, a tool which more often than not
has been used by state governments to restrict supply of power outside the state (in case
of a shortage), the Ministry of Power has proposed amendments to the Electricity Act
that restrict application of such directions to the committed and contracted capacity of a
generating station, and in such cases open access would not be restricted.
The PNGRB prescribes an access code for common or contract carrier natural
gas pipelines and regulations for capacity release for natural gas pipelines and requires
natural gas transporters to declare capacity available for common carriage on a monthly
basis.
It must be noted that the change of control of a party is also deemed to be an assignment under
the PSC, requiring the consent of the government.
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India
iii
The PNGRB regulates the storage and treatment of oil and gas, including prescribing
the eligibility conditions for registration of liquefied natural gas (LNG) terminals and
prescribing the technical and safety standards for pipelines and CGD networks.
For imported LNG, the price under the term contracts and spot cargoes are
mutually determined and are usually very high. Consequently, the MoPNG is currently
exploring options such as price pooling to average out the prices and now that new
pricing guidelines have been introduced, it is to be seen whether a separate price pooling
mechanism will be adopted by the government.
iv Rates
Under the Electricity Act, transmission schemes are implemented either through the
tariff-based competitive bidding process or under a cost-plus mechanism where a
regulated tariff is determined by the relevant electricity commission. The CERC adopts
a point-of-connection method for calculating interstate transmission charges and losses,
which aims at developing a uniform transmission charge-sharing mechanism among grid
constituents. Tariff for electricity distribution, comprising wheeling charges and cost of
supply, is levelled and determined on a cost-plus basis by the relevant SERC.
The PNGRB has enacted regulations for determination of transportation tariff
for petroleum and petroleum products, natural gas pipelines and CGD network. The
tariff for such pipelines will be determined taking into consideration a reasonable rate
of return on the normative level of capital employed plus a normative level of operating
expenses in the relevant pipeline.
v
With sophisticated energy infrastructure and now smartgrids being proposed, cybersecurity concerns are paramount. The Information Technology Act 2000 addresses
hacking and security breaches of information technology infrastructure. The government
has issued a National Cyber Security Policy which aims at creating a secure cyber
ecosystem, encourages use of open standards to facilitate interoperability and data
exchange, and provides for creating mechanisms for security threat early warning and
vulnerability management.
Technology transfers into India are permitted in all sectors, including energy.
All payments made for technology transfers into India are subject to Indian exchange
control regulations. Export of technology transfers for specific sectors requires a licence
under Indias Foreign Trade Policy.
IV
ENERGY MARKETS
The National Electricity Policy 2005 envisions 85 per cent of power from new capacities
being contracted through long-term PPAs and the remaining 15 per cent power capacity
through market mechanisms. It is also expected that more merchant capacity will be
available in the next few years as the agreements for long-term procurement under the
Revised SBD provide for a quantum of installed capacity to be sold at market-determined
prices.
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India
The power market is dominated by long-term contracted power. For thermal
power projects (coal and gas) and hydro projects, long-term power is procured through
a negotiated route or pursuant to a competitive bidding route. The Ministry of Power
has directed state governments and distribution companies to procure power under
the competitive bidding route (except that mandatory competitive bidding for hydropower projects has been postponed). Since its notification in 2013, bidding for longterm procurement from thermal power stations can be done on the basis of the Revised
SBDs, that provide for two modes of bidding and supply of electricity. Under the Model
Power Supply Agreement DBFOO6 model (earlier Case 1), a distribution licensee invites
bids to procure a specified quantum of power, while also prescribing the type of fuel
and technology that is to be used for such supply. Under the Model Power Purchase
Agreement DBFOT7 model, one or multiple distribution licensees may collectively
invite bids for setting up projects on the basis of the lowest tariff, while also specifying
the fuel and location of the project (which is required to be arranged by the distribution
licensees). Apart from prescribing a minimum tenure of 20 years, the Revised SBDs have
prescribed higher normative availability, single-variable bidding, restrictions on usage of
concessional fuel (i.e., fuel procured at subsidised rates from government fuel suppliers),
pass-through of variable charges (including cost of fuel) to the consumers, detailed
construction and O&M standards and appointment of a mandatory independent
engineer for each project. In order to specifically address stakeholder concerns on
determination and impact of rising fuel import costs, the Revised SBDs provide for the
cost of imported fuel to be benchmarked at actuals and linked to prevailing prices on
international indices. While the pass-through mechanism of fuel costs is likely to lead to
an increase in the power tariffs for consumers, it appears to be a necessary evil to ensure
that commissioned generation capacity is not stranded.
While long-term procurement remains a top priority, the government is also
determined to set up the short-term and medium-term markets for procurement of
electricity. The Revised SBD for medium-term procurement of one to five years (from
coal/gas/hydro based stations) have recently been issued and the government is in the
process of finalising new bidding documents for short-term procurement (less than one
year). On the distribution front, the government has issued a Model State Electricity
Distribution Management Responsibility Bill 2013 to ensure financial and operational
turnaround and long-term sustainability of distribution utilities, and to ensure that
bailout packages for financial restructuring of state distribution utilities (as was done
in 2012) are no longer required. Further, the industry is hopeful that the proposal to
distinguish the responsibilities of a distribution licensee from that of a supply licensee
will help reduce losses on distribution of electricity and improve overall efficiency.
In order to reduce the dependency on imported coal and bring about transparency
in the allocation process, the government has introduced the Auction by Competitive
Bidding of Coal Mine Rules, 2012 for allocations of coal blocks to private companies
on competitive bidding. The government has also constituted a committee to propose
6
7
The DBFOO model refers to a project set up on a design-build-finance-own-operate basis.

The DBFOT model refers to a project set up on a design-build-finance-own-transfer basis.
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India
a PPP framework for mining of coal and bidding documents for this framework are
expected to be issued this year. Media reports suggest that the proposed PPP framework
will broadly be based on a model similar to the mine-developer-operator model which
is being followed currently. The domestic and international mining companies continue
to make representations to the government to allow them to have part ownership over
the coal, or of the mining lease, or grant of preferential linkage for coal supply, none of
which is allowed under the current framework. That being said, the governments recent
initiatives (including proposed auction of three identified blocks) are a good first step to
correct the skewed demand-supply ratio for availability of coal in India.
For renewable energy projects, contracts are entered into with state utilities under
specific state policies at preferential tariff or through competitive bidding depending on
the state or central policy. The CERC, through its Power Market Regulations 2010, seeks
to promote and regulate interstate electricity transactions in various contracts (such as
ancillary services market contracts and trading in renewable energy certificates (RECs)).
The REC is a market-based policy instrument created to increase and promote
renewable energy capacity. Under the REC mechanism, renewable energy producers get
tradeable generation-based certificates if they do not opt for the preferential feed-in tariff
offered by the state distribution utilities. These RECs can be bought by certain obligated
entities (such as electricity distribution licensees and captive power consumers) to fulfil
their renewable purchase obligations (RPOs).
The Indian gas markets are relatively small but expanding rapidly. In comparison
with the electricity market, the gas market has much to evolve in terms of outreach in
most states and pricing issues. As per NELP, the domestic market has the first choice
on the utilisation of natural gas discovered and produced domestically. The price of
LNG is generally linked to the price of crude oil, especially for long-term supplies. It
is purchased on term contracts or on a spot basis on mutually agreeable commercial
terms. The resultant price of regasified LNG is typically significantly higher than the
price of domestic gas, including from the NELP fields. With the introduction of the
new domestic gas guidelines, the underlying principle is that producers in India should
get a price similar to the rates prevalent in the international markets, which, in turn, is
expected to increase investment in the sector and reduce the dependency on imports.
V
The regulatory environment increasingly seeks to incentivise renewable energy, with

favourable tariff regimes established by SERCs. The Electricity Act, the National
Electricity Policy and the Tariff Policy encourage private sector participation in renewable
energy through measures such as providing for feed-in tariffs, fixing minimum RPOs for
distribution utilities and captive power users and providing incentives such as accelerated
depreciation schemes, excise duty exemptions and reduced customs duty on renewable
energy equipment. In addition, a renewable energy project developer is also entitled to
receive RECs if it does not opt for preferential feed-in tariffs. Several states have put in
place specific policies to promote renewable energy development, however, incentives
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and policies are not always consistent between states and developers often shop around
based on the policy that best suits their financial model and operational expertise.
Onshore and offshore wind power
Wind energy accounts for a substantial portion of the installed renewable capacity in
India. Wind power policies vary from state to state and policies in certain states are
rated more highly for the incentives they provide and availability of a (more or less)
single-window clearance mechanism. Until recently, wind-power projects could claim
either accelerated depreciation of up to 80 per cent or generation based incentives (i.e.,
a monetary entitlement per unit of electricity fed into the grid). While both schemes
were discontinued on 31 March 2012, the generation-based incentive scheme has been
reinstated from August 2013.
Development of offshore wind energy is also being considered in India. The
Renewable Energy Ministry has issued a draft National Offshore Wind Energy
Policy 2013, that proposes to offer blocks through a bidding process. The policy also
contemplates setting up of a National Offshore Wind Energy Authority to carry out
the initial wind resource assessment, allocate blocks and assist the project developers in
obtaining clearances. While this draft policy sets out a broad framework for development
of projects and is a step in the right direction to tap the vast offshore wind potential,
it does not fully address key issues such as creation of offshore transmission and power
evacuation infrastructure. Further, while the policy aims to create a single window
clearance for setting up an offshore wind power project, the project developers are
ultimately responsible for obtaining the required consents. Therefore in practice, the
developers will end up visiting multiple windows for obtaining various clearances for
their projects.
Solar energy
Solar plants can be set up under the Renewable Energy Ministrys Jawaharlal Nehru
National Solar Mission (JNNSM) as well as under state policies. Important incentives
such as accelerated depreciation of 80 per cent continues to be allowed for solar power
projects.
After successfully implementing Phase I of the JNNSM, the Renewable Energy
Ministry has issued guidelines and carried out bidding for Batch I of Phase II, with a
total capacity of 750MW. Under this batch, bids were invited on the basis of the amount
of viability gap funding quoted by the bidders in two separate categories: (1) 375MW
with a stipulation of mandatory domestic content requirements in respect of Solar PV
cells and modules; and (2) 375MW without any such sourcing restrictions.
One of the objectives of the JNNSM was to increase the domestic manufacturing
capacity, in pursuance of which the policy prescribes certain domestic content
requirements. While Batch I of Phase II of the JNNSM has specifically created a separate
category for sourcing equipment from the domestic market for solar power plants to
meet the twin objectives of promoting local manufacturers and attracting efficient and
advanced technology, the United States has again sought consultations at the WTO
regarding the domestic content requirements (having once challenged the requirements
under Phase I as well) for solar cells and modules. It has claimed such requirements
(although for a portion of the total capacity) to be in violation of Indias international
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India
trade obligations, as they discriminate against foreign suppliers. While there is a view
that the governments aim of developing domestic manufacturing capacity can also
be achieved by other means such as providing specific subsidies to domestic solar
manufacturers and providing low-cost financing, others believe that a fair balance of the
content requirements (as provided in Batch I of Phase II) strikes a safe middle ground.
Further, while tariffs for purchase of solar power currently offered under the JNNSM
are inching towards grid parity, the tariffs announced by certain state governments (e.g.,
Rajasthan) continue to be more attractive.
Bio-power and waste-to-energy projects
The Renewable Energy Ministry has proposed to launch the National Bio-Energy Mission
(along the lines of JNNSM) to boost power generation from biomass by facilitating
capital investments.
In the context of municipal waste-to-energy projects specifically, there is significant
scope in Indian cities for business; however, several challenges are being faced by ongoing
projects. While there is opposition on account of environment and health hazards for the
communities living in proximity to these projects, the government is trying to promote
schemes to encourage cities and municipalities to take up waste-to-energy projects in
PPP mode (such as the Pune Municipal Corporations project of producing energy by
utilising unsegregated waste). As a protective measure, stringent regulations allow use of
only those technologies that are duly approved by the Central Pollution Control Board.
ii
To institutionalise energy conservation efforts, the Energy Conservation Act 2001 was
enacted and the Bureau of Energy Efficiency (BEE) was established under the Ministry of
Power in 2002. Periodic energy audits have been made compulsory for power-intensive
industries under the Energy Conservation Act.
The National Electricity Policy affords high priority to energy conservation and
demand-side management through the BEE. To further enhance efficiency in thermal
power projects, the Revised SBDs specify the station heat rate at which the power stations
must be operated, failing which the developer is heavily penalised by a decrease in the
fixed charge. Additionally, the CERC tariff regulations provide for operational norms
such as reduction in heat rate for existing bigger units, linking of allowable heat rate
to design heat rate, tightening of working capital norms, and norms on reduction in
secondary fuel oil consumption.
iii
The National Electricity Policy envisages special efforts being made for research,
development demonstration and commercialisation of non-conventional energy
systems. Further, it envisages the gradual introduction of efficient technologies (such as
super-critical technology and integrated gasification combustion cycle) for generation
of electricity. It also requires cost-effective technologies to be developed for high-voltage
power flows over long distances with minimum possible transmission losses.
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VI
THE YEAR IN REVIEW
The past year has been significant in terms of the government reacting favourably to major
irregularities in the energy markets and adopting a solution-based approach to address
and remedy the gaps. For instance, introduction of Revised SBDs to address manifold
concerns of developers, lenders, and the government alike on issues ranging from no pass
through of fuel costs to delays in land acquisition and grant of approvals, and issue of
draft tariff guidelines (for 20142019), which provide for incentives based on plant load
factor as opposed to the earlier regime of plant availability factor, spell a move towards
greater efficiency and renewed focus on accountability of various stakeholders in the
electricity sector.
In the context of thermal energy, in light of the ongoing uncertainty over
domestic supplies of coal and gas for power projects, the government took many steps
in the past year, such as directing CIL and its subsidiaries to resolve disputes on the
terms of the standard fuel supply agreements (FSAs) and executing FSAs for around
78,000MW, and passing an executive order for setting up the Coal Regulatory Authority.
Acknowledging the lack of production of domestic coal, the government also modified
the New Coal Distribution Policy to require FSAs to be signed for 65 to 75 per cent
of the annual contracted quantity for the remaining four years of the 12th Five Year
Plan (i.e., 20142017), and allowing CIL to import coal to meet the balance of its
supply obligations under the FSAs and supplying it to power projects on a cost-plus
basis. Further, in a landmark decision, the Competition Commission of India imposed
a penalty of 17.73 billion rupees on CIL for abusing its dominant position, essentially
in relation to its FSAs with power generation companies. While CIL has received an
interim stay on the order for penalty, this order heralds a new approach of preventing
monopolistic tendencies of government instrumentalities. That being said, issues such as
the discovery of irregularities in the allocation of coal blocks to power generators have
not only compounded the problem but also undermined the control of the Ministry of
Coal over CIL and its subsidiaries.
While regulation seems to be necessary in the Indian market, overreaching by
the regulators is also becoming common. For instance, the CERC in two recent orders
has allowed a compensation tariff to be offered to power project developers facing fuel
shortages because of an increase in the price of coal imports as a result of change in the
taxation regime in Indonesia. While such orders are beneficial to the developers per se,
it could have a wide-ranging impact on the enforceability of contracts awarded through
competitive bidding in the country and could lead to an increase in the power tariff
to end consumers.8 The precedent seems to have already been set with another power
project developer claiming compensation in tariff due to unprecedented, unforeseen and
uncontrollable depreciation of the Indian rupee. On the oil and gas front, the MoPNG
is likely to go ahead with the tenth round of bidding under NELP by allowing bidders to
explore all hydrocarbons in a particular block. While there has been no announcement
on the expected date of bidding for these blocks, it is likely that this process will only
The orders have been appealed by some of the distribution utilities in the Appellate Tribunal for
Electricity and are currently pending a hearing for stay.
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India
gather momentum after the general elections in AprilMay this year. Further, the new
prices for domestic gas that were supposed to be released on 1 April have been delayed
due to the general elections. While an increase in domestic prices is likely to increase
investment in exploration and production activities in India in the long term (as bidders
will be able to receive rates similar to those prevailing in the international markets), it
could lead to further increase in costs for the end consumers, at least in the short term.
On the renewable energy front, while the mechanism of introduction of RPOs
and RECs proved to be a great investment opportunity in the renewable sector, the supply
of RECs has now greatly outstripped its demand, and there is repeated failure by the
state utilities in complying with their RPO requirements (on account of high renewable
energy tariffs). Anticipating a complete failure of the REC market in India, various wind
power producer associations and the government of India have approached the Appellate
Tribunal for Electricity against the inability of various state regulatory commissions to
enforce RPO obligations. Further, onerous amendments to the Grid Code, such as those
requiring wind farms to forecast their generation up to an accuracy of 70 per cent,
along with penalties if actual generation is beyond approximately 30 per cent of the
schedule, have only riled the wind developers.9 As regards solar energy, the resolution
of the domestic content issue at the WTO level would be crucial in determining the
policies that developing countries such as India adopt to align development of domestic
manufacturing capabilities with its international trade obligations. Additionally, the
Indian governments ambitious target of installing 20,000MW of grid-connected solar
projects by 2022 now seems to be achievable, going by the response of prospective bidders
in Batch I of Phase II of JNNSM (almost three times the proposed capacity on offer).
VII
Major problems that have prevented the Indian energy sector from growing at a faster pace
are now being addressed, with the government taking active initiatives for both thermal
and renewable energy; for instance, faster clearance of a number of gas, power and coal
projects by the Cabinet Committee on Investment, providing relief to project developers
by introducing the Revised SBD, alongwith taking tough decisions to check irregularities
within the system (with the more recent one being the probe by the Central Bureau of
Investigation on alleged irregularities in bidding UMPPs). The judicial authorities are also
taking a serious look at irregularities and inconsistencies in government policies, with the
more prominent one being the regular hearings at the Supreme Court on irregularities
in coal block allocations. The government is also recognising that bringing about sudden
changes in policy measures and incentives could dampen investor confidence (as was
witnessed in the wind sector when incentive schemes were stopped) and is adopting a
more consultative approach in determining policy matters (as was recently done in the
case of Batch I of Phase II of JNNSM).
Based on feedback from the generators and other stakeholders, the CERC has passed an
order stating that it will further review the commercial mechanism, and in the meantime has
temporarily stayed its operation.
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India
With the creation of capacity under the Revised SBDs (the bidding process for
two ultra-mega power projects is currently under way), announcement of issuance of up
to 480-rupee infrastructure tax free bonds, implementation of the recommendations of
the Rangarajan Committee, proposed auction of coal blocks and development of PPP
framework in coal mining, introduction of policies in relation to exploration of shale
resources and uniform licensing for all hydrocarbons, the sector is poised for greater
growth in the near future.
With the general elections under way, important proposals such as announcement
of the new domestic gas price and financial subsidy for distribution utilities have been
delayed, but one can hope that the new government recognises that achieving energy
security holds strategic importance not only to Indias economic growth but also its social
growth, and brings about a flurry of reforms to develop a regime that seeks to enable
transparency, market efficiency and competitiveness.
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Chapter 15
INDONESIA
Mochamad Kasmali1
I OVERVIEW
Indonesia is an archipelago of some 13,000 islands and 250 million people. It is the
largest economy in South East Asia and a G20 member.
As a rapidly developing economy in transition, which grew on average by 6.2 per
cent from 2009 to 2013, and with the worlds fourth-largest population, Indonesia faces
significant energy demands.
Currently, Indonesia has around 80.1 per cent electrification, but supply can be
unreliable. It derives its energy mainly from fossil fuels (approximately 87 per cent).
While rich in natural resources, growing industrial and residential consumption, as well
as decreasing production, has resulted in Indonesia being a net importer of electricity
and oil.2
i
Governance framework
Indonesia is a presidential republic. The national Peoples Consultative Assembly (MPR)

consists of two houses: the Peoples Representative Council (DPR) and the Regional
Representative Council (DPD).
Indonesia has 34 provinces, subdivided into a total of 501 regencies and
municipalities. Each sub-national government has its own executive (provincial governors
and regents/mayors for regencies and municipalities) and legislature (regional DPR).
Mochamad Kasmali is a partner at Soemadipradja & Taher, Advocates. The author would like
to thank Jared Heath (foreign counsel) and Jaka D A Satari, Anandianty Febrina, Nadya T
Sihombing and Maria Amanda (associates) at Soemadipradja & Taher for their assistance in the
preparation of this chapter.
In 2008, Indonesia left the Organization of the Petroleum Exporting Countries (OPEC) when
it ceased to be a net exporter of oil.
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Indonesia
In 1999, Indonesia decentralised control to sub-national governments over their
respective jurisdictions, except for foreign affairs, defence and security, judicial, monetary
and financial, and religious matters.3 As such, there are both national and regional laws
and regulations.
Indonesia has a civil law system, with the following hierarchy of laws:4
a
the Constitution;5
b
MPR decrees;
c
laws or government regulations in lieu of law;6
d
government regulations;
e
presidential regulations;
f
provincial regulations; and
g
regency/municipality regulations.
II REGULATION
The Constitution establishes the framework for energy regulation and policy. Article
33(3) provides that the earth and water and the natural resources contained within
them are to be controlled by the State and used for the greatest possible prosperity of
the people. The Constitutional Court of Indonesia has actively applied Article 33(3) in
a number of cases. An earlier electricity law proposed to unbundle electricity into seven
activities and remove the monopoly of the state electricity company (Perusahaan Listrik
Negara, PLN) where competition was possible.7 In response to a challenge to this law, the
Constitutional Court held that the concept of state control contemplates more than state
ownership or regulatory power, extending to management of the relevant enterprise. On
this basis, and because competition and unbundling were central to that electricity law,
the Constitutional Court determined the entire law to be invalid.8
Indonesias energy policy is established under the Energy Law,9 which applies to
both renewable and non-renewable energy.
Each energy sector is subject to different laws and regulations:
a
Electricity: the Electricity Law,10 with regulations including:
the Electricity Business Regulation;11
3
4
5
6
7
8
9
10
11
Law No. 22 of 1999 on Regional Government, as later revoked and replaced by Law No. 32 of
2004 (as amended by Law No. 8 of 2005, Law No. 12 of 2008 and Law No. 5 of 2014).
Article 7(1) of Law No. 10 of 2004 on Lawmaking, as later revoked and replaced by Law No.
12 of 2011.
Adopted in 1945 (as amended in 1999, 2000, 2001 and 2002).
Government regulations in lieu of law are only enacted in emergencies.
Law No. 20 of 2002 on Electricity.
Constitutional Court Decision 001-021-022/PUU-I/2003.
Law No. 30 of 2007 on Energy.
Law No. 30 of 2009 on Electricity, replacing Law No. 15 of 1985 on Electricity.
Government Regulation No. 14 of 2012 on Electricity Supply Businesses (as amended by
Government Regulation No. 23 of 2014).
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Indonesia
b
c
d
e
the Electricity Supporting Business Regulation;12 and

the Electricity Business Permits Regulation.13
Geothermal: the Geothermal Law,14 with regulations including the Geothermal
Business Regulation.15
Mining: the Mining Law,16 with regulations including the Mining Regulation.17
Nuclear: the Nuclear Law,18 with regulations including the Nuclear Regulation.19
Oil and Gas: the Oil and Gas Law,20 with regulations including:
the Upstream Regulation;21 and
the Downstream Regulation.22
Other renewable energy sectors remain to be specifically regulated.

i
The regulators
The Ministry of Energy and Mineral Resources (MEMR) has overall regulatory
responsibility for energy and natural resources.23 The MEMR consists of four Directorates
General responsible for different sectors:
a
electricity (DGE);24
b
minerals and coal (DGMC);25
12
13
Government Regulation No. 62 of 2012 on Electricity Supporting Businesses.

Minister of Energy and Mineral Resources Regulation No. 35 of 2013 on Procedures for
Electricity Business Permits.
14
Law No. 27 of 2003 on Geothermal.
15
Government Regulation No. 59 of 2007 on Geothermal Business Activities (as amended by
Government Regulation No. 70 of 2010).
16
Law No. 4 of 2009 on Mineral and Coal Mining.
17
Government Regulation No. 23 of 2010 on the Implementation of Mineral and Coal Mining
Business Activities (as amended by Government Regulation No. 24 of 2012 and Government
Regulation No. 1 of 2014).
18
Law No. 10 of 1997 on Nuclear Energy.
19
Government Regulation No. 2 of 2014 on Licensing of Nuclear Installations and the Utilisation
of Nuclear Materials.
20
Law No. 22 of 2001 on Oil and Natural Gas.
21
Government Regulation No. 35 of 2004 on Oil and Gas Upstream Activities (as amended by
Government Regulation No. 34 of 2005 and Government Regulation No. 55 of 2009).
22
Government Regulation No. 36 of 2004 on Oil and Gas Downstream Activities (as amended
by Government Regulation No. 30 of 2009).
23
Presidential Regulation No. 24 of 2010 on the Positions, Duties and Functions of the State
Ministries and Organisational Structure, Duties and Functions of Echelon I of the State
Ministries.
24 www.djlpe.esdm.go.id/.
25 www.minerba.esdm.go.id/.
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Indonesia
c
d
new energy, renewable and energy conservation (DGNEREC);26 and

oil and gas (DGOG).27
Other energy regulators include:

a
The National Energy Board (NEB).
The Energy Law provides for the establishment of the NEB, which is responsible
for formulating and implementing energy policies.
b
Special Task Force for Upstream Oil and Gas (SKK Migas).
The Oil and Gas Law provided for the establishment of the Upstream Oil and
Gas Activity Agency (BP Migas). In response to a challenge to the provisions
establishing BP Migas, the Constitutional Court applied Article 33(3) of the
Constitution and held that BP Migas impaired state control and its ability to
manage upstream oil and gas activities.28 As a result, the government transferred
BP Migass functions to the Minister of MEMR,29 then to a temporary work
unit,30 and finally last year to SKK Migas.31
SKK Migas advises the Minister of MEMR on tendering oil and gas blocks,
executes Production Sharing Contracts (PSC) with successful entities and
regulates such PSC contractors.
c
Oil and Gas Downstream Regulatory Agency (BPH Migas).
BPH Migass responsibilities include licensing and regulating downstream oil and
gas activities.
d
National Nuclear Power Agency (BATAN).
BATAN is responsible for research and development, exploration and exploitation
of radioactive materials and management of radioactive waste.
e
National Nuclear Power Supervisory Agency (BAPETEN).

BAPETEN is responsible for regulating, licensing and supervising nuclear
activities.
Indonesia also has a state electricity company, PLN, and a state oil and gas company, PT
Pertamina (Persero).
ii
Business activities in Indonesia, including in the energy and natural resources sectors,
requires the relevant approvals or licences set out in the prevailing laws and regulations.
26 www.ebtke.esdm.go.id/.
27 www.migas.esdm.go.id/.
28
Constitutional Court Decision 36/PUU-X/2012.
29
Presidential Regulation No. 95 of 2012 on the Transfer of Duties and Functions of the
Upstream Oil and Gas Activity Agency (BP Migas).
30
MEMR Decree No. 3135K/08/MEM/2012 on the Transfer of Duties, Functions and
Organisational Structure of the Upstream Oil and Gas Activity Agency.
31
Presidential Regulation No. 9 of 2013 on Management of the Upstream Oil and Gas Activities.
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Indonesia
Electricity
With appropriate approvals and licences, any entity (private companies, cooperatives
state-owned companies (BUMN) and region-owned companies (BUMD)) may
generate electricity. Importantly, however, such electricity must either be sold to PLN;
transmitted, distributed and marketed to a specific area (e.g., within an industrial estate)
as an integrated scheme; or used for the generators own purposes. Otherwise, PLN has
the exclusive right to transmission, transportation and distribution of electricity.32
Relevant approvals include:33
a
Electricity supply:
for the public interest (either for sale to PLN or as part of an integrated
scheme) requires an electricity supply business permit; and
for own use requires an electricity supply operating permit.
An application must be made to the relevant authority (DGE, regional governor
or regent/mayor) and follow the procedures and fulfil the administrative, technical
and environmental requirements under the Electricity Business Regulation and
Electricity Business Permits Regulation.
b
Electricity supporting business.
This requires an electricity supporting business permit. Again, an application
must be made to the relevant authority (DGE, if the applicant is majority foreignowned or relevant regent/mayor if majority Indonesian-owned) and follow
the procedures and requirements under the Electricity Supporting Business
Regulation and Electricity Business Permits Regulation.34
Coal mining
Under the Mining Law, in order to conduct coal mining an entity must hold either:
a
a mining business permit (IUP).
An entity must:
succeed in a public auction for the award of a mining area; and
obtain from the relevant authority (Minister of MEMR, regional governor or
regent/mayor, depending on the location of the mining area) an IUP; or
b
a coal contract of work (CCoW).
CCoWs were entered into between the government and companies under the
previous mining law.35 They remain valid for 30 years after the commencement
of production, but the Mining Law requires their provisions to be adjusted to
comply with the Mining Law and following their expiry they must be converted
into an IUP.
32
33
34
35
Article 11(2) of the Electricity Law.

Articles 8-9 of the Electricity Law.
MEMR Regulation No. 35 of 2013 on Procedures for Electricity Business Permits.
Law No. 11 of 1967 on the Basic Provisions of Mining, later revoked and replaced by the
Mining Law.
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Indonesia
Oil and gas
In order to conduct upstream activities (namely, exploration and exploitation), an entity
must:
a
succeed in a tender process held by DGOG for an oil and gas block; and
b
enter into a PSC with SKK Migas.
The PSC is valid for 30 years and can be extended once for up to 20 years.
To conduct downstream activities, an entity must obtain from MEMR the
relevant licence, such as:
a
a processing business licence;
b
a transportation business licence (and a special right from BPH Migas to transport
gas via a pipeline);
c
a storage business licence; or
d
a trading business licence.
Renewable energy
An entity is permitted to generate renewable electricity for sale to PLN.36 Under the
Geothermal Business Regulation, to undertake geothermal mining, an entity must:
a
succeed in a public auction for the award of a geothermal work area; and
b
obtain from the relevant authority (Minister of MEMR, regional governor
or regent/mayor, depending on the location of the geothermal work area) a
geothermal mining business permit.
To utilise generated geothermal electricity, an entity will also require the relevant
electricity supply permit.
Approvals and licences required for other renewable energy sectors remain to be
specifically regulated.
General
Energy and natural resources projects and proponents may also need to obtain appropriate
approvals and licences in relation to:
a
land, for example a right of ownership (Hak Milik), right of building (HGB) or
right of use (Hak Pakai);
b
the environment, principally an environmental impact analysis (AMDAL)
approval; and/or
c
forestry, principally a borrow use forest area permit (Ijin Pinjam Pakai).
iii
In accordance with Article 33(3) of the Constitution, and decisions of the Constitutional
Court, Indonesias natural resources are state-owned.
36
MEMR Regulation No. 2 of 2006 on Renewable Energy Medium Scale Power Plant Businesses.
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Indonesia
Foreign ownership
Under the Investment Law,37 a foreign entity may directly invest in Indonesia by
establishing a new, or purchasing shares in an existing, foreign investment limited liability
company (PMA company). Under the Company Law,38 the establishment of a company
(including a PMA company) requires approval from the Ministry of Law and Human
Rights (MoLHR), while foreign investment in a PMA company requires approval from
the Indonesian Investment Coordinating Board (BKPM).39
The Investment Law provides that all business sectors are open to foreign
investment, except those listed in the Presidential Regulation commonly known as the
Negative List.40 The Negative List identifies the business sectors that are closed to foreign
investment or are open subject to conditions. The sectors in the Negative List are derived
from the Indonesian Standard Classification of Economic Activities (KBLI). Sectors
that are open subject to conditions usually involve restrictions on the maximum foreign
ownership permitted and sometimes the imposition of specific requirements, such as
approvals from specific ministries. In addition to the Negative List, specific industry
laws and regulations may impose additional restrictions on certain business sectors or
activities.
Restrictions
Ownership restrictions in energy sectors include:
a
Electricity:
A PMA company with 100 per cent foreign ownership may invest in power plants
producing more than 10MW under a public-private partnership project during
the concession period, subject to obtaining all required approvals and licences.
Power plants of 110MW are open to up to 49 per cent foreign owernship, while
power plants of less than 1MW are closed to foreign investment.
b
Coal mining:
An IUP holder may be a PMA company that is 100 per cent foreign-owned.
Under the Mining Law and Mining Regulation (as amended), after five years
of commercial production, the foreign ownership must be progressively divested
so that Indonesian investors own a minimum of 51 per cent after 10 years of
commercial production.
However, under a new MEMR regulation, if:41
a non-PMA company holding an exploration IUP applies to become a PMA
company, the maximum permitted foreign ownership is 75 per cent;
37
38
39
40
41
Law No. 25 of 2007 on Investment.

Law No. 40 of 2007 on Limited Liability Companies.
Refer to BKPM Regulation No. 5 of 2013 on Guidelines and Procedures for Licensing and
Non-Licensing of Capital Investment (as amended by BKPM Regulation No. 12 of 2013) on
the procedure and requirements for an investment application.
Presidential Regulation No. 39 of 2014 on the List of Business Fields Closed to Investment and
Business Fields Open to Investment with Conditions.
MEMR Regulation No. 27 of 2013 on Procedures for Divestment and Share Pricing and
Changes to Capital Investment in Mineral and Coal Mining Businesses.
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Indonesia
a PMA company holding an exploration IUP or production operation IUP
seeks to transfer its shares to a new foreign investor, the maximum permitted
foreign ownership is 75 per cent and 49 per cent (respectively); and
a non-PMA company holding a production operation IUP applies to become
a PMA company, the maximum permitted foreign ownership is 49 per cent
(regardless of whether five or 10 years of commercial production have passed).
c
Oil and gas:
Despite the general requirements of the Investment Law, under the Oil and Gas
Law a foreign oil and gas company that wins a tender for an oil and gas block
does not need to establish a PMA company. Instead, the PSC is the basis for the
foreign oil and gas company conducting its upstream activities as a permanent
establishment business entity (BUT).
A BUT may be 100 per cent foreign-owned. Under the Upstream Regulation,
however, after the first oil field development plan is approved by SKK Migas, the
BUT must offer a 10 per cent participating interest to a BUMD in the region
in which the oil and gas block is located. Otherwise the Negative List provides
that offshore oil and gas drilling is open to 75 per cent foreign ownership, while
onshore oil and gas drilling and upstream production are closed to foreign
investment.
d
Nuclear:
A PMA company with a maximum of 95 per cent foreign ownership may engage
in certain activities in the nuclear sector, again subject to obtaining all required
approvals and licences.
iv
As Indonesias natural resources are state-controlled, transfers of control and assignments
must be of relevant approvals, licences, entities or shareholdings.
Any merger and acquisition or transfer of shares will require at the least BKPM
approval for a PMA company, MoLHR notification for all companies and likely approval
from the relevant authority responsible for any energy approvals or licences.
Some specific approval processes include:
a
Coal mining:
With MEMR approval, an IUP holder may transfer its IUP to another entity if it
owns at least 51 per cent of that other entity.
Any change to the capital investment of an IUP holder or CCoW company
(including amendments to its investment or financing sources, status as a
PMA company or a domestic investment company, shareholders, directors and
commissioners or articles of association) requires approval from the Minister (via
DGMC), the relevant regional governor or regent/mayor.
Any change to a PMA companys investment also requires BKPM approval.
b
Oil and gas:
During the first three years of exploration, the initial PSC contractor may only
transfer its participating interest in a BUT to an affiliate, subject to DGOG approval.
After those three years, the holder of a participating interest in a BUT may transfer
all or part of its interest to any other party, subject to a favourable recommendation
by SKK Migas and approval from DGOG. Such recommendation and approval
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Indonesia
is not required for a transfer to another holder of a participating interest in the
same oil and gas block. In the case of a proposed transfer to a non-affiliated party,
DGOG may request the participating interest is first offered to a BUMN.
III

SERVICES
As indicated in Section II, supra, an earlier electricity law that sought to unbundle
electricity activities was held invalid. As such, PLN retains an effective monopoly over
electricity transmission/transportation and distribution.42
In contrast, the Oil and Gas Law unbundled oil and gas activities. Those
undertaking upstream activities may not undertake downstream activities, including
processing, transporting, storing and trading. DGOG and BPH Migas are responsible
for determining how downstream activities are undertaken. DGOG is developing a
national transmission and distribution network master plan.
ii
Given its effective monopoly, third-party access to PLNs transmission/transportation

and distribution assets does not commonly arise.
In the case of oil and gas, BPH Migas will conduct a tender process to award
a special right to transport gas through a pipeline in a given area. The holder of a
Transportation Business Licence and a BPH Migas special right must provide third-party
access to its transportation facilities and pipelines. DGOG may mediate any dispute
between such operators.
In some circumstances, a storage business licence holder may also be required to
provide third-party access to its storage facilities. There are no such third-party access
obligations in relation to a processing business licence holder.
iii Rates
BPH Migas has the authority to determine the rates for the transportation of gas via
pipelines, which BPH Migas will evaluate from time to time. The most recent regulations
were issued in 2013.43 BPH Migas will consider the transportation business licence
holders proposed fee in determining the rate.
iv
The Minister of MEMR may by decree determine that certain energy and natural
resource activities, assets or areas are vital national objects. An activity, asset or area is
eligible to be a vital national object if:
42
43
Article 11(2) of the Electricity Law.

BPH Migas Regulation No. 8 of 2013 on Tariff Determination for Gas Transportation via
Pipelines.
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Indonesia
a
b
it relates to daily production needs; and

any threat or disturbance to the activity would:
cause human or development disasters;
cause national transportation or communication disorder; or
disturb state administration.
Once declared a vital national object, an entity that operates it must ensure its security,
but may request police assistance to provide additional security if a threat or disturbance
is identified. In turn, the police may request military assistance in the event of a severe
threat or disturbance.
IV
ENERGY MARKETS
All energy markets are highly regulated, with relevant tariffs determined and subsidised
by the government.
In terms of electricity generation, the appointment of an independent power
producer (IPP) commonly results from a competitive bidding process, although direct
appointment is sometimes permitted (for example, renewable energy generation).
The price payable by PLN is subject to MEMR approval. There is no transmission/
transportation, distribution or retail competition.
The governments objective is to increase energy security by relying on domestic
44
supply. In this context, large coal mining companies are subject to an annual domestic
market obligation.45 In 2014, these companies are required to sell 25.9 per cent of their
coal production domestically, principally to support power generation.46
Similarly, in relation to oil and gas, PSC contractors are required to sell 25 per
cent of their production domestically.47 Ultimately, all oil and the majority of gas is
consumed domestically, although some gas is exported to Singapore.
ii
PLNs electricity tariffs are regulated under the Tariff Regulation,48 which depend upon
the consumption purpose (residential, industrial, etc.). There are additional regulations
44
45
46
47
48
Presidential Regulation No. 5 of 2006 on National Energy Policy.

MEMR Regulation No. 34 of 2009 on Prioritising the Supply of Mineral and Coal Needs for
Domestic Purposes.
MEMR Decree No. 2901 K/30/MEM/2013 of 2013 on the Determination of the Minimum
Needs and Sales of Coal for Domestic Purposes in 2014.
Goverment Regulation No. 55 of 2009 on the Second Amendment to Government Regulation
No. 35 of 2004 on Oil and Gas Upstream Activities.
MEMR Regulation No. 30 of 2012 on Electric Tariffs offered by PLN.
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Indonesia
for renewable energy electricity tariffs.49 MEMR determines the subsidised electricity
price as part of the annual budget.
The DGMC sets the benchmark coal price from time to time, based on the
Indonesian Coal Index, Newcastle Export Index and Newcastle Global Index. Coal
mining companies must sell their coal at or above the benchmark price, which is designed
to maintain state revenues from royalties and company tax.
BPH Migas determines the natural gas price for households and small consumers.
DGOG determines the price for certain types of fuel oil. Once again, MEMR determines
the subsidised fuel price as part of the annual process.
iii
An entity that generates electricity (other than for its own purposes) to sell to PLN must
do so as an IPP in accordance with a power purchase agreement (PPA). While there are
PLN guidelines on the content of a PPA,50 the terms and conditions vary from project
to project.
In the case of oil and gas, exploration and exploitation is regulated by a PSC. The
content of a PSC is regulated,51 including providing for the governments production
sharing and the domestic market obligations. The PSC contractor will also be entitled
to recover its investment/exploration costs at the production stage.52 While SKK Migas
executes the PSC, it is subject to the Minister of MEMRs approval.
V
In January 2014, the DPR approved a new government regulation on energy policy (the
New Energy Regulation),53 which contemplates abolishing electricity and fuel subsidies
over the next decade, as well as encouraging increased use of renewable energy.
49
50
51
52
53
Refer to MEMR Regulation No. 4 of 2012 on the Electricity Purchase Price by PT PLN
(Persero) sourced from Small and Medium Renewable Energy Power Plants or Excess Electricity
Power; MEMR Regulation No. 22 of 2012 on the Delegation to PT PLN (Persero) of the
Purchase of and the Benchmark Price for Electricity from Geothermal Power Plants; MEMR
Regulation No. 19 of 2013 on the Purchase of Electricity by PT PLN (Persero) from City
Waste Power Plants; MEMR Regulation No. 12 of 2014 on the Purchase of Electricity by PT
PLN (Persero) from Hydro Power Plants.
Dr Ir Santosa Gotosusatro, Experience and Management of Private Electricity: Independent
Power Producer (PLN, 2010).
Article 26, Upstream Regulations.
Government Regulation No. 79 of 2010 on Recoverable Operational Costs and Income Tax
Treatment for the Upstream Oil and Gas Business Sector.
While approved by the DPR, it is yet to be issued with an official Government Regulation
number.
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Indonesia
a
b
By 2025, the government aims to change its total energy use to:
reduce oil fuel dependence from 42 per cent to 20 per cent; and
increase renewable energy dependence from 6 per cent to 23 per cent.
Potential sources of renewable energy include biomass/waste, geothermal, hydroelectric,

solar, wave/tidal and wind energy.54 Indonesia is projected to hold 40 per cent of global
geothermal reserves and the government aims to produce 6,500MW of geothermal energy
by 2025. Since 2009, biomass/waste energy generation has also grown significantly.
Regulations specifically enable PLN to purchase renewable energy electricity,55
including geothermal electricity.56 There is also a regulation to involve PLN in
supporting private infrastructure development of new and renewable energy plants,57 as
well as income tax, value added tax and import duty relief for entities utilising new and
renewable energy.58
ii
Regulations impose obligations on certain energy consumers to manage their energy usage,
including by appointing an energy manager, formulating conservation programmes,
conducting regular audits and reporting conservation to DGNEREC (among others).59
MEMR has established a non-binding efficiency target to reduce electricity use
by 20 per cent. It is contemplated that there will be incentives for entities that effectively
manage and/or reduce their energy use, as well as penalties for those that do not.
iii
Among other developments, DGNEREC has established a group to prepare and
implement a strategic plan for research and development of new and renewable energy.
VI
THE YEAR IN REVIEW
Summary of new regulations
Over the past year, new laws, regulations and policy included:
a
the New Energy Regulation;
54 www.esdm.go.id/berita/37-umum/1962-potensi-energi-baru-terbarukan-ebt-indonesia.pdf/.
55
MEMR Regulation No. 4 of 2012 on the Electricity Purchase Price by PT PLN (Persero)
sourced from Small and Medium Renewable Energy Power Plants or Excess Electricity Power.
56
MEMR Regulation No. 22 of 2012 on the Delegation to PT PLN (Persero) of the Purchase of
and the Benchmark Price for Electricity from Geothermal Power Plants.
57
Presidential Regulation No. 4 of 2010 on Delegation to PT PLN (Persero) to Expedite the
Development of Renewable Energy, Coal and Gas Power Plants (as amended by Presidential
Regulation No. 48 of 2011).
58
Minister of Finance Regulation No. 21 of 2010 on the Granting of Tax and Customs Incentives
for the Utilisation of Renewable Energy.
59
Government Regulation No. 70 of 2009 on Energy Conservation; MEMR Regulation No. 14
of 2012 on Energy Management.
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Indonesia
b
c
d
e
f
g
h
i
j
ii
the Nuclear Regulation (to regulate the procedures and requirements to apply for
a permit to undertake nuclear-related activities);
Presidential Regulation No. 9 of 2013 (to transfer upstream oil and gas
responsibilities to SKK Migas);60
the new Negative List to regulate foreign investment;
MEMR Regulation No. 19 of 2013 on Waste Energy (to regulate electricity
produced from waste and its price);
MEMR Regulation No. 27 of 2013 (which, among other things, accelerated the
divestment requirements imposed on PMA companies holding IUPs);61
the Electricity Business Permits Regulation (Section II.ii, supra);62
MEMR Regulation No. 12 of 2014 (to regulate the price of hydroelectric
electricity);63
BPH Migas Regulation No. 8 of 2013 (to regulate the gas pipeline transportation
rates);64 and
Directorate General of Tax Land and Property Tax Regulation (which provides
land and property tax relief by imposing it only on those parts of an oil and gas
work area which are actually utilised by the relevant contractor, rather than the
whole work area).65
Draft new law
Since 2010, a draft new oil and gas law has been before the DPR. The primary purpose
of the draft law is to reduce bureaucracy and establish a new management agency to
replace SKK Migas. It remains unclear if and when the DPR will enact such a new oil
and gas law.
iii
Increasing supply
Last year reflected three ongoing issues informing Indonesian energy policy. First,
continued electrification and increased supply are required. Indonesia produced between
4,000 and 4,500MW per annum between 2011 and 2013. Demand is increasing
by approximately 8 to 9 per cent per annum. The government intends to increase
average production to 5,000MW per annum from 2014 to 2020. In order to do so, new
infrastructure is required.
60
61
62
63
64
65
Presidential Regulation No. 9 of 2013 on Management of the Upstream Oil and Gas Activities.
MEMR Regulation No. 27 of 2013 on Procedures for Divestment and Share Pricing and
Changes to Capital Investment in Mineral and Coal Mining Businesses.
MEMR Regulation No. 35 of 2013 on Procedures for Electricity Business Permits.
MEMR Regulation No. 12 on the Purchase of Electricity by PT PLN (Persero) from Hydro
Power Plants.
BPH Migas Regulation No. 8 of 2013 on Tariff Determination for Gas Transportation via
Pipelines.
Regulation No. PER-45/PJ/2013 on Procedures for Imposing Land and Property Tax for the
Oil, Gas and Geothermal Sector.
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Indonesia
Indonesias Ministry of National Development Planning Agency (Bappenas) has
a Master Plan for Acceleration and Expansion of Indonesian Economic Development
for 2011 to 2025 (MP3EI), which contemplates eight main programmes (including
energy) and foreshadows six economic corridors, with centres for energy in three of them
(Kalimantan, Papua-Moluccas and Sumatra).
Bappenass PPP Infrastructure Projects Plan in Indonesia for 2013 sets out 21
tendered projects (including three coal-fired power plants), 14 prospective projects
(including the Karama hydroelectric power plant) and 13 potential projects (no power
plants).
One of the 21 tendered projects is the Batang project in Central Java, which
will have two 1,000MW power plants. While the project has achieved contract close,
it has been significantly delayed by land acquisition challenges and local environmental
concerns. Only approximately 87 per cent of the required land has been acquired. The
government has announced revisions to the land acquisition regulations, including
streamlining the process to acquire land of up to 5 hectares, in order to advance this and
other projects.
Indonesia will need to continue to develop plans for, and laws and regulations to
better facilitate, new power infrastructure.
iv
Management of subsidies
Second, the electricity and fuel subsidies must be managed. In 2013, the governments
electricity subsidy was 99.8 trillion rupiah. In 2014, the government approved increased
electricity tariffs and budgeted for the subsidy to fall to 80 trillion rupiah.
Even more significant is the fuel subsidy. In 2013, it was 211 trillion rupiah.
Last year, the rupiah depreciated by over a quarter against the US dollar. As a net fuel
importer, this increased the cost of the fuel subsidy, contributing to a budget deficit and
a record current account deficit. In 2013, the current account deficit was 345.6 trillion
rupiah or 3.25 per cent of GDP. In 2014, the government is aiming to reduce the current
account deficit to 2.7 per cent of GDP.
In June 2013, despite widespread public protests, the government reduced the
fuel subsidy, resulting in a 44 per cent increase in petrol prices. It is likely that further
reform will be required, not only to manage the significant economic implications, but
also to manage domestic consumption and hence traffic congestion and environmental
consequences.
The New Energy Regulation contemplates increasing electricity and fuel prices
to better reflect production costs and drive sustainable investment and environmental
conservation. It contemplates abolishing the electricity and fuel subsidies over the next
decade.
v
Responding to new demand
Third, new mining regulations are likely to increase electricity demand. The Mining Law
requires domestic processing and refining of mining products from 12 January 2014. In
order to give effect to this, the government promulgated new regulations which set out
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Indonesia
the minimum levels of processing and refining for certain specific mining products.66
Some must be fully refined before export, while others will need to be fully refined from
2017.
In order to achieve such domestic processing and refining, new smelters will be
required which, when operational, will consume a significant amount of energy. Such
industrial demand for new energy makes the development and delivery of renewable
energy even more important.
VII
Indonesia will continue to face the challenge of meeting growing energy demands. As
other jurisdictions increasingly deregulate and/or privatise their energy markets, Indonesia
retains a significant level of both state ownership and control. The constitutional and
regulatory context explains this energy framework. It remains to be seen whether this
framework, aligned with market forces, can address the ongoing issues from last year and
ultimately ensure demand is met by sustainable supply.
66
Government Regulation No. 1 of 2014 on the Second Amendment to Government Regulation

No. 23 of 2010 on the Implementation of Mineral and Coal Mining Business Activities;
MEMR Regulation No. 1 of 2014 on Increasing the Added Value of Minerals through
Domestic Processing and Refining Activities.
202
Chapter 16
ITALY
Simone Monesi, Piero Vigan and Giovanni Penzo1
I OVERVIEW
Italian gross consumption of electricity in 2013 decreased from 328.2GWh to
317.1GWh. 86.7 per cent was satisfied by national production2 and 13.3 per cent was
imported.3
On February 2014, the demand, corresponding to 24.9GWh, registered a decline
of 4 per cent compared to February 2013.4 The market demanded an average of 39.5GW
of gross power (ranging from an average minimum of 22GW during night-time hours
to 53,942MW5 on 26 July 2013 at noon). The historical spot peak power demand
was recorded in 2007 (in coincidence with the peak of the economic cycle) equal to
56.82GW. The decrease trend that started in 2011 continued in 20136 as confirmed
by provisional data published by the national transmission grid operator. The aggregate
maximum net installed capacity as at 31 December 2012 was 124.234GW.
1
2
Simone Monesi, Piero Vigan and Giovanni Penzo are partners at Osborne Clarke.
56.8 per cent thermoelectric, 16.5 per cent hydroelectric, 1.7 per cent geothermal, 4.7 per cent
wind and 7.0 per cent solar.
3
Terna Dati provvisori di esercizio del sistema elettrico nazionale 2013, available at www.terna.it/
LinkClick.aspx?fileticket=hgxNckCSeyE%3d&tabid=380&mid=442; Italian gross consumption
of electricity in 2012 was 328.2GWh, of which 13.1 per cent was imported: Terna, Summary
Statistical Data on electricity in Italy 2012, available at www.terna.it/LinkClick.aspx?fileticket=
S14eWNgRUNs%3d&tabid=649.
4 www.terna.it/LinkClick.aspx?fileticket=Kb8kHHl56yQ%3d&tabid=166&mid=84.
5 www.terna.it/LinkClick.aspx?fileticket=hgxNckCSeyE%3d&tabid=380&mid=442.
6
The initial provisional data processed by Terna on the demand for electricity in 2013 marked a
decrease of 3.4 per cent compared to 2012 as affirmed in www.terna.it/LinkClick.aspx?filetick
et=hgxNckCSeyE%3d&tabid=380&mid=442.
203
Italy
In 2012, the main generation market players were ENEL (25 per cent of net
generation), Edison (7 per cent), followed by ENI (6 per cent), E.ON (4 per cent) and
GDF Suez (3 per cent).7
In 2012 the top three importers of natural gas were ENI (with a 44.6 per cent
share), Edison (19.2 per cent) and Enel Trade (12.9 per cent); while the top three players
in the sales to the retail market were the ENI group (with a 28.1 per cent share), the Enel
group (10.9 per cent) and the Edison group (8.8 per cent).
In 2012, 57.6 per cent of the demand was met through conventional power
plants burning fossil fuels imported to a very large extent from abroad, as opposed to
29.9 per cent from renewable sources (hydro, geothermal, wind and photovoltaic (PV))
and the balance through electricity imports.8 The nuclear programme that contemplated
the building of eight new nuclear power plants was abandoned in 2011 as a consequence
of a popular vote after the Fukushima accident in Japan.
In 2012, natural gas accounted for 39.8 per cent of the generation mix, renewable
sources 29.8 per cent, coal 18.5 per cent and oil products 1.3 per cent. A large-scale
shift towards natural gas has been achieved only in recent years (in 1994 oil-based fuels
accounted for 94 per cent of the fuel mix).
Italy is the fourth-largest importer of natural gas in the world, such imports being
sourced mostly from Russia, Algeria, Qatar and Norway; other significant imports are
from the Netherlands and Libya.
Transportation of gas takes place through pipelines connecting the Italian gas
transportation network with the aforementioned countries: the Austrian gas pipeline
TAG carries gas coming from Russia; TTPC and Transmed carry gas from Algeria; the
international pipelines Transitgas (passing through Switzerland) and TENP (passing
through Germany), supply gas coming from the Netherlands, Norway and other countries
in northern Europe; Green Stream pipeline carries gas from Libya.
The degree of dependence of Italy on foreign supplies has remained essentially
unchanged compared with 2011 and amounted to 90 per cent.
Natural gas coming from outside Italy is injected into the national grid through
eight points of entry, located at the interconnections with the import pipelines (Tarvisio,
Gorizia, Gries Pass, Mazara del Vallo, Gela) and LNG regasification terminals (Panigaglia,
Cavarzere and Livorno); while the national production gas is injected into the grid at the
51 entry points from the fields of production or from their collection and treatment sites;
also the fields of gas storage are connected to the grid.
The OLT Offshore LNG regasifier located in Livorno (Tuscany) started its
commercial operations on 20 December 2013 and the construction of the regasifier
of Porto Empedocle (in Sicily) continued throughout 2013. The projects located in
Falconara Marittima (in the province of Ancona) and in Gioia Tauro (in the province
of Reggio Calabria) are at an advanced stage of development. However, due to the
change in market conditions, the delays in the approval process and the opposition by
local communities, in many cases, capital investments are being deferred. The project
7 www.autorita.energia.it/allegati/docs/13/331-13.pdf.
8 www.terna.it/LinkClick.aspx?fileticket=hgxNckCSeyE%3d&tabid=380&mid=442.
204
Italy
of Rada di Augusta/Melli/Priolo (in the province of Siracusa) was abandoned. The
National Energetic Strategy (SEN) approved by the Italian government on 8 March 2013
lists among the projects of strategic importance the construction of the pipelines for the
importation of gas (TAP, Galsi, TGL and South Stream).
The high-voltage (HV) and ultra-high-voltage (UHV) electricity transmission
grid is mostly owned and operated under a concession regime by Terna SpA, a publicly
listed company in which Cassa Depositi e Prestiti SpA (the Italian state investment
arm) holds a 29.85 relative majority stake. Terna is also responsible for dispatching. The
medium-voltage (MV) and low-voltage (LV) distribution grid is operated by 143 (in
2011) distribution service operators (DSOs) under a concession regime.
Enel Distribuzione SpA accounted for 86 per cent of volume distributed, followed
by A2A Reti Elettriche (3.9 per cent), Acea Distribuzione (3.2 per cent) and Aem Torino
Distribuzione (1.4 per cent). All other DSOs have marginal market shares below 1 per
cent.9
The national and regional gas transportation grid is managed under a concession
regime by 10 participants, the most important being SNAM Rete Gas, which controls
32,245 kilometres out of 34,415 kilometres of the grid, followed by Societ Gasdotti
Italia, which controls 1,046 kilometres of the grid.10 There are 10 national gas storage
sites, of which eight are managed by Stogit SpA (part of the ENI group) and two are
managed by Edison Stoccaggio.11
At the end of 2012 there were about 236 gas DSOs, which confirms the trend
of a gradual reduction in their number. The National Energy Strategy states that the
construction of the already authorised gas storage sites will be sufficient to satisfy grid
security requirements and to reach 75 million cubic metres per day of peak supply. Both
the electricity and (downstream) gas markets are fully liberalised. Retail customers and
small business may opt between free market contracts and protected categories service.
Both electricity and gas are traded on exchanges organised and managed by Gestore
dei Mercati Energetici SpA (GME). Trading on exchanges is carried out by generators,
producers or importers, Acquirente Unico SpA (a single buyer, procuring energy for resale
through the distributors to protected categories), energy and gas wholesalers, and gas
shippers. Bilateral contracts may be entered into by all market participants.
II REGULATION
i
The regulators
In accordance with Law No. 481/1995, the energy market is regulated by the Energy and
Gas Regulatory Authority (AEEG), an independent authority led by five commissioners
Autorit per lenergia elettrica ed il gas (AEEG) Annual report on the status of services and
the regulation of the electricity and gas, 31 July 2012, www.autorita.energia.it/allegati/relaz_
ann/12/ra12_1.pdf, www.autorita.energia.it/allegati/relaz_ann/13/RAVolumeI_2013.pdf and
www.autorita.energia.it/allegati/docs/13/366-13alla.pdf.
10 Id.
11 Id.
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Italy
appointed by the government with the approval of a two-thirds majority of the competent
parliamentary commissions. The AEEG is responsible for, inter alia, overseeing access of
market operators to the gas and electricity grids and storage facilities, setting tariffs for
access to the gas and electricity grids, promotion of fair competitive practices, protecting
consumers interests, promoting market transparency and energy efficiency. The AEEG
may issue regulations that apply to market operators, and orders and decisions affect
single operators. The main sources of regulation in the energy market are state laws,
regional laws and administrative regulations issued by the AEEG.12
ii
The electricity and gas markets have both been liberalised in furtherance of the objectives
set by the EU liberalisation directives enacted at the end of the 1990s.
In the electricity market, according to Article 2, Letter (a) of Law No. 239/2004,
no licence is generally required to carry out generation, import, export, purchase, supply
and metering businesses. The operation of the distribution grid is carried out by DSOs
under a state concession regime. The transmission grid is a natural monopoly mostly
owned and operated under a concession regime by Terna SpA, a publicly listed company.
In the gas market, no licence is generally required for production, import and
sales of natural gas. Storage, transport and distribution activities are operated under a
concession regime.
The development and construction of new facilities (e.g., transmission lines,
power plants and gas storage facilities) require permits mandated by state and regional
legislation to ensure compliance with, inter alia, health and safety standards, environment
protection and compatibility with existing infrastructure.
The process for obtaining such approvals is regulated by a combination of
state and regional legislation and depends on the nature and location of the facility to
be realised and of the permits required. The process is most often led by the regions
(or, depending on regional legislation, further subdivisions delegated by the regions,
for example, provinces), which coordinate the process involving all the agencies and
authorities whose consent or opinion is required to finalise the permission process.
iii
There are no restrictions on ownership of new and existing assets or service providers,
other than in relation to mergers and acquisitions the instructions that the antitrust
authorities may require the parties to comply with for antitrust clearance.
iv
Law Decree No. 21 of 12 March 2012 requires the government to identify assets that are
strategic to the national interest in the transportation, telecommunication and energy
industries. The Decree provides for a duty of prior notification to the government of any
12
The AEEGs annual report on the status of services and the regulation of the electricity and gas
is dated 31 March 2012 and is available through www.autorita.energia.it/allegati/relaz_ann/12/
ra12_2.pdf.
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corporate resolution or proposed act or transaction, which may result in a transfer of
ownership or control over such strategic assets, and for the government to be able to veto
such transfer insofar as it would represent an actual threat to national security interests.
The Decree also provides that the government may oppose, or issue instructions in
connection with, any transfer to non-EU persons of controlling interests in such strategic
assets. In this respect, a first Prime Ministerial Decree13 identified national security and
defence assets as strategic. According to press reports, at the end of March 201414 the
government should also identify, among others, certain strategic energy and gas assets.15
In addition, local rules or the terms of a concession may sometimes make
the change in control of the entity owning or operating certain assets or holding the
concession subject to prior notice, or a prior clearance of, the local issuing authority.
III

SERVICES
The proprietary unbundling of the electricity industry has been substantially achieved
between 1998 and 2007, with the breakup of the infrastructure of the state-controlled
incumbent monopolist (ENEL) into different companies.
This process resulted in the separation of the business functions of the previous
incumbent into (1) generation (ENEL SpA, EDISON SpA and a variety of other generation
companies); (2) ownership and operation of the HV and UHV transmission grid (mostly
Terna SpA, now publicly listed); and (3) ownership and operation of the MV and LV local
distribution grid and sale (ENEL Distribuzione and a variety of local utilities).
As to the gas industry, the chain of production and transportation upstream
of the local distribution pipelines is still largely dominated by the state-owned former
monopolist (ENI), which has also been broken down into separate companies.
Most of such infrastructure is directly or indirectly owned by SNAM, a listed
holding company, which controls through separate companies the primary transportation
pipeline (Snam Rete Gas), the main regasifier operator (GNL Italia), the main storage
operator (Stogit) and one of the leading gas DSOs (Italgas).
Prime Ministerial Decree dated 25 May 2012 provided for the transfer to Cassa
Depositi e Prestiti SpA of most of ENIs stake in Snam Rete Gas. Completion of the
transfer was announced on 15 October 2012.
13
Prime Ministerial Decree No. 253 of 30 November 2012, published in the Italian Official
Gazette No. 29 on 4 February 2013.
14 www.asca.it/news-Governo__ok_a__golden_power__per_energia__trasporti_e_
comunicazioni-1372041.html.
15
In accordance with press report, the government had already drawn up on March 2013 a draft
decree that reportedly included the gas and electricity transmission grid operators (i.e., Terna
and Snam Rete Gas) among strategic assets for the foregoing purposes, as well as ENI, due to
its control over the main pipelines for gas imports.
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Pursuant to Law Decree No. 164/2000 and the relevant implementing secondary
legislation,16 the distribution of natural gas will be organised into 177 territorial areas
(defined as ATEM, ambiti territoriali minimi). In each ATEM the distribution service
will be awarded under a public concession regime through public competitive tenders for
a period not exceeding 12 years. To this day the tenders have not been launched because
of certain practical difficulties.
ii
Electricity transmission and gas transportation as well as electricity and gas distribution
infrastructures are operated on the basis of state concession having a duration of up to 12
years. The infrastructure operators are required to grant access to producers/generators
and sellers.
iii
Importing, processing and storage of oil and oil-derived fuels and other product have
been liberalised by Law 239/2004 and are no longer subject to any concession or general
authorisation. The construction and operation of new sites for oil processing or storage,
however, is subject to a complex authorisation regime that, depending on the size of the
facility, involves state, regional or province authorities, and covers safety, environmental
compatibility (integrated environmental authorisation or AIA) and construction issues.
Gas storage is based on a concession regime. The storage concession is regulated,
and requires an authorisation17 issued by the Ministry of Economic Development in
agreement with the region in which the storage facility is to be located, subject in any
event to the obtainment of the confirmation of the environmental compatibility of the
facility from the Ministry of the Environment (VIA). The term of the concession is fixed
at 30 years, extendable once and for no more than 10 years.18
Access to gas storage is regulated by the AEEG and the rules are included in the
Storage Code. Also, the fees charged by the owners of the storage sites are determined by
the AEEG every thermal year in accordance with prearranged criteria.19
The realisation of new regasifiers is subject, according to the specifics of the case,
to any one of three different types of authorisation procedures; all such procedures are
similar to the one required for storage sites (including the compulsory opinion of the
involved region and obtaining authorisation from the VIA). Access to regasifiers, as well
as the fees charged in connection with their use, are also regulated by the AEEG.
16
17
18
19
Prime Ministerial Decrees No. 51913 of 19 January 2011 (Decreto Ambiti) and No. 56433 of
18 October 2011 (Decreto Comuni).
Article 11, Paragraph 1 of Legislative Decree No. 164/2000.
Law Decree No. 221 of 17 December 2012.
Resolution ARG/gas 119/10 for the third regulatory period of four years from 1 January 2011
to 31 December 2014.
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iv Rates
Generally applicable tariffs for interconnection (dispatch, transportation, distribution
and metering services) are set by the AEEG on the basis of formulae that aim at a fair
remuneration of invested capital. The tariffs also include components to cover system
costs (e.g., the cost of decommissioning of nuclear plants, feed-in tariffs and other forms
of incentives for renewable sources).
v
The matter is regulated by EU Directive 2008/114/CE issued within the framework of

the European Programme for the Protection of Critical Infrastructure, launched in 2006.
The Directive provides a framework for the identification and determination of security
measures and procedures for the protection of critical European infrastructure. The
Directive was locally implemented in 201120 and sets out procedures and responsibilities
for the protection of critical infrastructures and for the preparation and validation of
emergency plans. Operators must appoint a safety and security representative, prepare an
operator security plan, identify the critical assets of European critical infrastructures and
the relevant means of protection, identify all potential threats, vulnerabilities and risks
and outline the appropriate response plans. These plans must also address, inter alia, IT
threats and vulnerabilities.
IV
ENERGY MARKETS
The market is operated by GME,21 a state-owned private company. An electricity market

has been in operation since 2004, and consists of the following:
a
a spot electricity market, where energy blocks are traded over a period of nine
days prior to the date of delivery; the market operates on an auction basis as bids
or offers are accepted under the economic merit-order criterion and taking into
account transmission capacity limits between zones;
b
a forward electricity market, where trading of base-load and peak-load contracts
with monthly, quarterly and yearly delivery periods are carried out on a continuous
basis, with GME acting as central counterparty; and
c
a platform for physical delivery of derivative contracts concluded on the IDEX
segment of the Italian stock exchange.
GME also operates the natural gas market (the M-Gas) where parties admitted to the
virtual trading point may make spot purchases and sales of natural gas quantities where
GME plays the role of central counterparty.
20
21
Legislative Decree No. 61 of 11 April 2012.

Legislative Decree No. 79/1999 provided for the creation of GME. Its structure and its
functioning are mostly regulated by Ministerial Decree No. 12783/2003 and Ministerial
Decree No. 38248/2009.
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The M-Gas consists of the day-ahead gas market (the MGP-Gas) operating on a
combined continuous trading and a closing auction basis and intraday gas market (MIGas) operating on a continuous trading basis.
GME also operates P-Gas, the platform for trading of imported natural gas and
royalties on natural gas extracted under domestic concessions, and PB-Gas, the platform
for trading of balancing gas.
ii
The energy and gas markets operate under market rules approved by the Ministry of
Economic Development in consultation with the AEEG and as well as a number of
technical rules issued by the GME.
The electricity markets and each of M-Gas, P-Gas and PB-Gas have their own
set of market and technical rules. Market rules include criteria and procedures for
admission of market participants, trading and settlement rules, as well as sanctions and
sanctioning procedures in the event of a breach of market rules by or default by the
market participants. GME is generally responsible for market operations and oversight
as well as for the enforcement of market rules.
iii
Contracts for the sale of energy
Market participants are generally allowed to enter into individual contracts for the sale
of power and natural gas. Since 2003 (for gas) and 2007 (for electricity) all customers are
eligible to freely enter into contracts for the purchase of gas or power from sellers that
meet certain minimum requirements. Power and gas sellers must comply with certain
rules on transparency and fairness of information to customers under the supervision
of the AEEG, but the rates and contractual terms may be freely determined subject to
the aforementioned AEEG rules. Predetermined terms and conditions and rates are set
out by the AEEG for the protected categories service (i.e., those retail clients and small
businesses that have not opted to join the liberalised market).
iv
Market developments
Both the electricity and gas market have achieved a considerable level of liberalisation
and the country has implemented efficient exchanges for trading of electricity and gas
contracts, and radical developments in the way regulated exchanges for trading of gas
and electricity operate are not expected at this stage.
However, certain amendments to pricing mechanisms are being introduced to
address certain unintended consequences of the recent installation of a massive amount of
PV power generation plants with a view to reducing the impact on operators of conventional
plants and certain intraday pricing distortions. Law Decree No. 83/2012 introduced a
capacity payment mechanism by which conventional plants using non-renewable sources
are granted specific compensation for making available their capacity so as to normalise
input from non-programmable renewable sources and to ensure grid security.
On the basis of the Liberalisation Decree, enacted on 24 January 2012 and
converted into Law No. 27 dated 24 March 2012, the Ministry of Economic Development
is still expected to issue new guidelines on price formation on the electricity markets in
order to control costs and guarantee the security and quality of the power supply also
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through the enhancement of flexibility taking into due account the increased production
from renewable sources.
On the gas markets there have been recent talks of allocating an increased
component of the cost of investment for infrastructure (regasifiers and import pipelines)
to the retail tariff.
Pursuant to the liberalisation decree, customers falling in the protected category
service will be charged a tariff more closely tied to market dynamics.
The AEEG has introduced a change in the method of determining the selling price
of gas for the protected categories service that, from 1 April 2013, will mean a reduction
of approximately 3 per cent of the final sale price, which could lead to a reduction of the
sale price of about 7 per cent by the end of the reduction process (planned for thermal
year 2014/2015).
V
The share of production from renewable sources has dramatically increased over the
past five years. This is due to public policy fostering the achievement of the 20/20/2022
objectives under the EU climate and energy package through incentives in the form of
a feed-in premium for solar plants and green certificates for all other renewable sources
above 1MWp (megawatt peak).
The estimated aggregate installed capacity from renewable sources as at December
2012, was 47.34GW, compared to 23,85GW at the end of 2008. In addition, the
renewable energy production, due to the new installations, reached a new record equal
to 92,222GWh.23
The burden allocated to Italy under the EU climate and energy package called for
17 per cent of primary energy consumption (subdivided into electrical, heat and transport)
to be generated from renewable sources with 26 per cent of electricity generation to come
from renewables (projected to be equal to 100TWh per annum in 2020). Energy generated
from renewables had already reached 94TWh per annum24 in 2011.
On 31 January 2014, the Ministry for Economic Development approved a
ministerial decree specifying how the Italian Energy Services Management (GSE) is
required to act for the purpose of checking the regularity of incentives already granted
to renewable sources plants, thus implementing Article 42 of the Legislative Decree No.
28/2011.
22
23
24
20 per cent reduction in emissions, 20 per cent renewable per cent per energies and 20 per cent
improvement in energy efficiency by 2020.
Rapporto Statistico Impianti a fonti rinnovabili Anno 2012 available at www.gse.it/it/
Statistiche/RapportiStatistici/Pagine/default.aspx.
Recitals to the draft fifth Conto Energia and slides used by the Italian government to present
its contents to the press.
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Solar
The growth in energy from renewable sources is mostly attributable to PV installations,
which rose dramatically from 0.432GW in 2008 to 3.47GW in 2010, to 16.35GW in
2012 and, finally, to about 18GW in 2013.25
A large share of the installed capacity benefits from the 20-year feed-in premium
that was granted under the second Conto Energia26 to PV plants commissioned between
2007 and the second quarter of 2011. The incentives, whose cost is charged to consumers
as a component of the electricity bill, were among the highest available in the world
between 2009 and 2011 and prompted a staggering acceleration of new installations
during those years.
The Italian government approved a string of subsequent Feed-in Premium Decrees
(the second, third, fourth and fifth Conto Energia), which incentivised the development
of new PV plants through a feed-in premium scheme, albeit subject to ever-growing
restrictions, and, starting from the fourth Conto Energia, to fixed expenditure caps.
This led to further growth of new installations as the industry anticipated the
enactment of considerably less profitable incentive schemes and rushed existing projects
to meet deadlines provided for to benefit from the then-current schemes.
The fifth Conto Energia provided for a feed-in tariff regime available until the
earlier of (1) the reaching of 700 million cumulative annual additional expenditure caps
(for the 20-year duration of the incentive), which will add up to the annual 6 billion
amount already committed under its four predecessors; or (2) five six-month periods.
Qualifications based on a ranking system for sub-caps for each six-month period now
extended from only large to virtually all plants (the only notable exception are those
that have an installed capacity of less than 12kW, those that provide the rebuilding of
asbestos-insulated roofs with PV tiles, and fully integrated innovative plants). Sub-caps
were also available for concentration plants and innovative (i.e., fully integrated) plants.
On 6 June 2013, GSE stated that the aggregate annual expenditures had reached
6.7 billion and, therefore, the resources available under the fifth Conto Energia were
exhausted.
It should be noted that, pursuant to Law Decree No. 1/2012, new PV plants on
agricultural land will no longer be entitled to receive any feed-in premiums, subject to
very limited exceptions.
Expectations on further solar installations (2.5 to 3GW per annum) have not so
far been met.
PV technology is expected to reach grid parity no later than 2016 and, according
to some operators, as early as 2014.27
In order to achieve savings on the electricity bills amounting to 700 million, Law
No. 9/2014 introduced, inter alia, an optional re-modulation mechanism of the already
25 www.terna.it/LinkClick.aspx?fileticket=hgxNckCSeyE%3D&tabid=380&mid=442.
26
Ministerial Decree of Ministry of Economic Development 19 February 2007.
27
Eclareon report available at website www.qualenergia.it/sites/default/files/articolo-doc/PV%20
Grid%20Parity%20Monitor%20-%20Issue%202%20(June%202013).pdf showed that all
the domestic PV Plants have already reached the grid parity.
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granted incentives according to which the producers of electricity from renewable sources
owing plants benefiting from tariff in any manner named can either:
a
continue to benefit from the same incentive regime due for the residual period,
provided that, for 10 years from the due term for the incentives regime, any
work carried out in the same site (e.g., increases in power of the plant, complete
restructurings of the plant) will not be entitled to obtain any further incentives;
or
b
opt for a re-modulation of the incentive regime already granted. In that case, the
producer will be entitled to an incentive that is reduced by a percentage yet to
be defined by a ministerial decree, originally scheduled to be approved, subject
to opinion from the AEEG, within 60 days from 24 December 2013. That
reduction will apply for the residual period for the incentives for the plant plus an
additional seven years. Furthermore, pursuant to Law No. 9/2014, the minimum
guaranteed prices, set forth by AEEG and concerning plants with a capacity up
to 1MW benefiting from the offtake regime (ritiro dedicato), will be equal to
the hourly zone price and, therefore, equal to the market prices if the energy is
produced by PV plants which benefit from other incentive mechanisms (e.g.,
feed-in tariff). Such reduction does not apply to energy produced by PV Plant
with a nominal peak power up to 100kW. By equating the minimum guaranteed
prices to the market prices the above-mentioned law substantially abolishes the
minimum guaranteed prices.
In this respect, by means of AEEG Resolution No. 618/2013, the AEEG has changed
the rules regarding the minimum guaranteed prices. Operators have challenged AEEG
Resolution No. 618/2013 before the competent administrative court (TAR) and the case
is still pending.
Other renewable sources
Plants generating electricity from renewable sources other than PV are generally
incentivised through the awarding of green certificates in proportion with electricity
generated multiplied by coefficients that are different for each technology.
Energy producers or importers accounting for more than 100GWh of production/
import per year are required to contribute to the grid a minimum quota (originally
2 per cent, which gradually increased to 6.8 per cent in 2011) of their production into
the grid. This minimum quota can be complied with by buying a corresponding amount
of green certificates.
Green certificates are issued by GSE and can be sold over the counter or through
a trading platform operated by GME.
The market for green certificates has been characterised by a structural bidoffer
imbalance that would have resulted in prices too low for investment in renewable sources
to be viable; however, GSE acts every year as a buyer of last resort of unsold green
certificates from the previous year at the annual average price of electricity defined in
such year by the AEEG. The duration of the green certificate regime is currently set at 15
years as of commissioning of the plant.
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The Renewables Decree provides for the guidelines for a phase-out of the green
certificate system and its replacement with an all inclusive feed-in tariff mechanism
applicable to plants commissioned after 31 December 2012.
The new feed-in tariff mechanism has been introduced by Decree 6 July 2012
that applies to new or radically renovated plants using renewable sources (other than
PV) commissioned after 1 January 2013. The aggregate annual expenditures for feed-in
premiums cannot exceed 5.8 billion. Larger plants with an installed capacity in excess
of 5MW commissioned after 1 January 2013 compete to obtain a feed-in tariff through
descending-price auctions, whereas smaller plants (i.e., those that are smaller than 5MW
but greater than a minimum nominal peak power that varies from source to source)
commissioned after such date compete for the allocation of feed-in tariffs within subcaps for six-month periods based on a registry enrolment and ranking system (similar
to that provided for by the fifth Conto Energia for PV plants). The Ministerial Decree,
finally, provides an all-inclusive feed-in tariff for plants with an installed capacity lower
than 1MW. The amount of the feed-in tariff will also be a function of the renewable
technology deployed.
The objective is to increase annual expenditure for incentive to non-PV renewables
from current amount of 3.5 billion to 5.8 billion. The target is an average additional
1.2GW per annum installed capacity. Incentives are expected to be phased out by 2020.
Plants commissioned before 1 January 2013 will continue to benefit from the
green certificates until the end of 2015 when they converge towards a feed-in tariff system
and the GSE continues to purchase the unsold certificates relating to the electricity
produced from 2011 to 2015 at a price equal to 78 per cent of the reference price for the
certificates for the previous year.
Renewable energy certificate of origin
A renewable energy certificate of origin (CO-FER or RECO) is a certificate proving
the renewable origin of the sources used by power plants. Each RECO corresponds to
1MWh and is granted on the basis of the electricity fed into the grid by such plants.
GSE grants the CO-FER qualification28 at the request of producers, which
document specifies the renewable electricity generated by each plant. RECOs are issued
on the basis on the meter readings of electricity fed into the grid that GSE receives from
grid operators. RECOs may be transferred from producers to suppliers, also through
traders and possibly traded on an exchange managed by the GSM.
The Renewable Energy Certificate System and the Guarantees of Origin system
serve the same purposes as RECOs.
ii
Energy efficiency policy
Public support to the achievement of energy goals (set forth by European Directive
No. 27/2012) in furtherance of the EU climate and energy package objectives is threepronged: a white certificate scheme, a programme of tax deductions on energy efficiency
and conservation investment on buildings, and public funding to support better
28
CO-FER qualification is given to the power plant.
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insulation, and energy-efficient heating and air conditioning systems as well as systems
for the production of thermal energy from renewable sources.
White certificates
White certificates (energy efficiency certificates, locally known as TEEs) were first
introduced by the Ministerial Decree of 20 July 2004, and then the programme
was overhauled by the Ministerial Decree of 21 December 2007 and the Legislative
Decree No. 11/2008. The Ministerial Decree of 28 December 2012 introduced further
amendments to the mechanism.
Depending on the type of saved energy (electricity, gas, fossil fuels), there are five
different types of white certificate.
Similar to green certificates, the incentives revolve around the obligation imposed
on gas and electricity DSOs with more than 50,000 customers to achieve certain
minimum primary energy savings targets that are expressed in tons of oil equivalent (toe)
and increased on a yearly basis (most recently by Ministerial Decree of 28 December
2012 for the 20132016 period). The cumulative target for 2012 was equal to 6 million
toe. A DSO or a voluntary participant in the scheme (DSOs with less than 50,000
customers, energy service companies, DSO parents or affiliates or companies that have
appointed energy managers pursuant to Section 19 of Law No. 10/91) may prepare and
submit energy-efficiency projects with a view to obtaining white certificates. The project
must comply with the criteria set out by the AEEG and be validated from a technical and
administrative standpoint by ENEA.29 The project, once validated, entitles the applicant
to be issued by GME one white certificate for each toe saving achieved. The certificates
may be traded on the platform operated by GME or sold to DSOs over the counter.
White certificates issued for projects submitted after 3 January 2012 cannot be
combined with other subsidies that impact the electricity and gas bill.
The Thermal Decree
Article 27 of Legislative Decree No. 28/2011 provides the framework for incentives
first to the replacement of obsolete systems and fixtures with new more energy-efficient
systems and fixtures (including thermal insulation of walls, replacement of transparent
vertical structures, installation of shielding and shading, replacement of central heating
with condensing boilers (energy-efficient measures) and, second, to promote the
installation of systems for the production of thermal energy from renewable sources
(solar thermal, biomass boilers, geothermal heat pumps, water heaters and heat pumps:
thermal RES).
Article 27 was implemented though the Ministry of Economic Development
Decree of 28 December 2012 (the Thermal Decree), which provides for an aggregate
0.9 billion annual public funding to investment of both the private (0.7 billion) and
public (0.2 billion) sectors in energy-efficient measures and thermal RES.
The cap will be reviewed after two years from the entry into force of the Thermal
Decree. Access to incentives will be discontinued 60 days after the expenditure cap is
reached and until a new cap is approved.
29
The Italian national agency for new technologies, energy and sustainable economic development.
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Tax deductions
The tax deduction programme provided for a tax credit equal to 65 per cent of investment
made in increased energy efficiency and conservation of buildings, to be broken down
into equal instalments over a period of 10 years and subject to a cap of 60,000 (65 per
cent of 92,307). The works must fall into identified categories of energy conservation
and optimisation works and be performed as part of renovations of existing residential
heated buildings. Law No. 147/2013, in the case of energy efficiency measures, extended
the term for the 65 per cent deduction from 6 June 2013 to 31 December 2014 and
introduced a 50 per cent deduction for expenditures incurred from 1 January 2015
to 31 December 2015. In the case of works on common areas of a condominium, the
deductions amount to 65 per cent for expenditures incurred from 6 June 2013 to 30
June 2015 and to 50 per cent for expenditures incurred from 1 July 2015 to 30 June
2016. After such periods, the tax deduction regime will merge with the more general 36
per cent tax credit on investments for building renovations.
iii
Technological developments, smart grids and impact on the grid of the

generation of power from renewables
Italy is a European leader in terms of financial resources committed to research projects

on smart grids (accounting for 55 per cent of the aggregate) and was third in terms of
number of research projects it leads or coordinates (5.5 per cent of an aggregate of 219
projects).30
Since 2001, ENEL has been deploying a smart electronic metering system to
its customer base, as well as providing other utilities capable of two-way real-time
monitoring of input and consumption, which is now in operation with its 34 million
customers (equal to 99 per cent of ENELs customer base) and 4 million other utilities
customers.31 Italy arguably has the largest operating smart grid in the world.
Legislative Decree No. 28/2011, specifically, entitles Terna to implement storage
capacity as part of its dispatching systems to allow the grid to flexibly adapt to variable
input from non-programmable renewable sources. Over the past year, AEEG passed three
Resolutions32 concerning the operation of eight smart grid pilot projects in southern
Italy, so as to test and experiment the technologies and better understand costs, benefits,
sizing and technical features of the storage systems.
AEEG Resolution No. 84/2012, as amended, introduced specific prescriptions for
plants connected to the MV and LV grids, including retrofitted fixes to existing plants in
order to prevent the occurrence of certain critical events on the network.
30 ec.europa.eu/energy/gas_electricity/smartgrids/doc/ld-na-25815-en-n_final_online_
version_april_15_smart_grid_projects_in_europe_-_lessons_learned_and_current_
developments_-2012_update.pdf.
31
Source: ENEL.
32
Resolution No. 228 dated 12 July 2012; Resolution No. 43 dated 7 February 2013; and
Resolution No. 66 dated 21 February 2013.
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At the end of December 2013, AEEG issued a consultation document (No.
613/2013), aimed at defining, in respect of storage systems, the mechanisms to get into
and use the grid.
Furthermore, AEEG Resolution No. 578/2013 sets forth the procedures for the
purpose of connection, measurement, transmission, distribution, dispatching and sale of
energy in the context of self-production and self-consumption systems, including the socalled SEU (net metering scheme).
Unbalancing costs
In order to avoid dispatching extra costs due to generation peaks or shortfall of plants
that use non-programmable renewable sources, AEEG Resolution No. 281, dated
5 July 2012, in force from 1 January 2013, introduced a provisional cost reflective/
back-to-back regulation of the distribution service of non-programmable renewable
plants. Such resolution provides that, during the initial interim period (from 1 January
2013 to 31 December 2013), the unbalancing costs will continue to be borne by
consumers to the extent that the shortfall in production or excess production does not
exceed 20 per cent (in the first six months) and 10 per cent (in the second six months)
of expected input. The producers will bear the cost of the excess imbalance. Starting
from 2014, unbalancing costs will be entirely borne by the producers, Resolution No.
281/2012 was challenged before the competent administrative court and was partially
struck down. In consequence, AEEG Resolution No. 462/2013 reformed the provisions
of Resolution No. 281/2012 by equalising non-programmable renewable sources of
energy to other sources, while stating that the provision ensuring the safety of the grid
will continue to apply.
Other initiatives for the development of new technologies
Renewable energy incentives have been structured over time to allow higher remuneration
of and access to separate sub-caps to certain advanced high-efficiency technologies (e.g.,
solar concentration plants and innovative integrated PV plants).
ENEA and ENEL have jointly developed and commissioned in 2010
Archimede, in Sicily: a pilot project for the realisation of a 5MW solar concentration plant
combined with a conventional CCGT plant that uses molten salts as heat accumulators
and vectors.
Several Italian companies, including Enel and Terna, are partners in the Desertec
initiative aimed at realising a joint AfricanEuropean initiative for the realisation of solar
concentration and large-scale wind-generation plants in northern Africa and the HV DC
lines for long-range transportation of electricity to the European grid.
VI
THE YEAR IN REVIEW
Key decisions, legislation, cases or policy changes
Some of the key developments in energy legislation 2012 and 2013 include:
a
Article 65 of Law Decree No. 1/2012, converted into Law No. 27/2012, regarding
the issuance of tariff for PV plants in agricultural lands;
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Italy
b
c
d
e
f
g
h
i
j
k
l
m
n
o
p
q
the draft law for the parliamentary delegation to the government to reform the
tax system approved on 16 April 2012, which includes a delegation to introduce a
carbon tax aimed at generating revenues to finance incentives for the development
of generation from renewable sources in coordination with similar action plans at
EU level;
two Decrees issued by Ministry of Economic Development: the fifth Conto
Energia, dated 5 July 2013, and the Decree on incentives for non-PV renewables
dated 6 July 2013;
AEEG Resolution No. 281 dated 5 July 2012 on unbalancing as modified by
Resolution No. 462/2013;
Law Decree No. 83/2012, introducing a capacity payment mechanism;
two Decrees of Ministry of Economic Development, dated 28 December 2012,
both relating respectively to White Certificates and Energy-Efficient Measures in
Public Administration and Heat from Renewables;
Three AEEG Resolutions, Nos. 288/2012, 43/2013 and 66/2013 relating to
eight pilot smart grid projects;
AEEG Resolution No. 84/2012, as subsequently modified, providing for urgent
actions in relation to distributed generation to secure national electrical system;
the National Electricity Strategy, approved on 7 March 2013, which defines the
main objectives in the energy sector until 2020. It provides, inter alia, for:
reduction of energy consumption by 40 per cent compared with 2005;
no more incentive tariffs for solar energy;
renewable sources becoming able to cover up to 90 per cent of national energy
demand;

enhancement
of national oil and gas production; and
construction of one additional 8 billion cubic metre regasifier;

Law Decree No. 145/2013 as modified by Law No. 9/2014, concerning the
re-modulation of the tariffs granted to PV plants and minimum prices guaranteed
under the offtake regime (ritiro dedicato);
Law No. 147/2013 on the postposition of the deduction fiscal regime;
AEEG Resolution No. 578/2013 providing the regulations of self-production
and self-consumption systems, including the SEU;
AEEG consultation document No. 613/2013 concerning storage systems;
AEEG Resolution No. 618/2013 relating minimum prices guaranteed under the
offtake regime;
the Ministerial Decree of 31 January 2014 concerning the control system of the
incentive to be made by GSE;
Law Decree 21 June 2013 No. 69 (Decreto Fare) has established new deadlines
for the the public tenders for the granting of ATEMs concessions; to this day the
public tenders procedure have not started;
Decree of Ministry of Economic Development 9 August 2013, which indicates
2 September 2013 as the start date of the MT-GAS (a physical forward market for
continuous trading, as defined in Article 1 paragraph 3 of Decrees of Ministry of
Economic Development 6 March 2013); and
Law Decree No. 145 of 23 December 2013 (Decreto Destinazione Italia)
converted into Law No. 9 of 21 February 2014 regulates the critical aspect of
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Italy
the definition of the reimbursement value of the facilities owned by the outgoing
operators at the expense of the operators winners of the public tenders; this crucial
point is one of the main reasons which prevented the start of the public tenders.
ii
Key M&A transactions
Key M&A transactions in 2013 through to March 2014 include the following:
a
On 23 January 2014 the plan for the merger between Amga Udine S.p.A (a local
multi-utility company operating in north-eastern Italy) and HERA (one of the
most important Italian multi-utilities) was signed. This merger, effective from
1 July 2014, creates the second-largest multi-utility on the Italian market.
b
The merger between ACEGAS Aps Holding S.r.l. (a local multi-utility company
operating in north-eastern Italy) with HERA became effective from 1 January
2013.
c
In January 2013: ERG reached an agreement with International Power
Consolidated Holding (entirely owned by GDF Suez) to acquire 80 per cent of
the shares in IP Maestrale Investments, one of the most relevant operators in the
Italian wind energy market. The enterprise value was equal to 859 million. The
agreement includes an call entitling ERG to acquire the remaining 20 per cent in
the next three years.
d
In February 2014, Terna signed an agreement to acquire the entire share capital
of Tamimi Trasformatori S.r.l. and some subsidiary companies of the Tamimi
Group. The agreement is subject to certain conditions precedent.
e
At the end of February 2014, ENI acquired from ACAM S.p.A. a stake
representing 51 per cent of ACAM Clienti S.p.A. against a payment of 12.5
million. Following such transaction, ENI has become the sole shareholder of the
capital of ACAM Clienti S.p.A.
iii
Market developments and trends in 2014
Some of the following developments could possibly be expected in 2014:

a
continued unfavourable outlook for the gas sector in Italy, because of uncertainties
on recovery in demand and high competitive pressure fuelled by the continuing
surplus supply;
c
acquisition on the secondary market of the best and largest existing PV
installations by both industrial (e.g., multi-utility companies) and financial (e.g.,
private equity, infrastructure and pension funds) players;
d
continuing focus of public support on energy efficiency;
e
introduction of a carbon tax and switching of the burden of incentives to
renewables from the electricity bill to revenues generated by the carbon tax;
f
further mergers and consolidation of municipal multi-utilities to achieve critical
mass to invest effectively in R&D and infrastructure development and possibly
operate internationally; and
g
focus on development of strategic infrastructure to secure supply and stock of
natural gas (import pipelines, regasifiers and storage facilities, simplification of
the relevant permissions process and harmonisation of the regulation.
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Chapter 17
JAPAN
Reiji Takahashi, Atsutoshi Maeda, Shun Hirota,
Yuko Suzuki and Masato Sugihiro1
I OVERVIEW
Japan is a country with limited energy resources and as such, energy legislation in Japan
can essentially be divided into legislation concerning electricity and that concerning gas.
Electricity serves as an indispensible element of the social infrastructure of Japan
and in recognition of the high level of public interest attached to the provision of
electric utilities, certain market entry regulations are in place to regulate the industry.
Also, because electric power consumers especially general consumers currently have
virtually no options in selecting an electric power supplier, strict regulations are in place
to monitor the content of all contracts executed between power companies and such
consumers in the interests of consumer protection. Due to the events of the Great East
Japan earthquake and the accident at the Fukushima nuclear power plant, however,
the current legislation has reached a transitional phase. In this chapter, we discern the
mounting interest in the separation of the electric power transmission function from
generation, and the introduction of feed-in tariffs (FITs).
The gas industry in Japan can be divided into the following two major enterprises:
the town gas industry, which is the primary source of natural gas to consumer residences
through piping, and the liquefied petroleum gas (LPG) industry, which provides LPG
via cylinders to consumers in areas where piped gas is not yet available.
In principle, the approval required for entry into the town gas industry as well as
the price of the gas itself are strictly regulated under Japanese law. In contrast, entry into
the LPG industry only requires registration with the relevant authority and prices for
such LPG may be freely set by the provider.
Reiji Takahashi and Atsutoshi Maeda are partners and Shun Hirota, Yuko Suzuki and Masato
Sugihiro are associates at Anderson Mri & Tomotsune.
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Japan
As of March 2013, statistics show that around 29 million consumers utilise town
gas whereas the corresponding number of consumers for LPG is around 24 million.
These statistics show that town gas and LPG are level-pegging with each other.
The Strategic Energy Plan fixed by the Ministry of Economy, Trade and Industry
(METI) in July 2010 aims to promote natural gas and LPG, being clean energies with
less carbon emissions.
II REGULATION
i
The regulators
The energy industry in Japan, which encompasses electric power and gas, is regulated
by the METI or, more specifically, the Ministrys Agency for Natural Resources and
Energy. The Ministry of Economy, Trade and Industries Establishment Act provides for
the Ministrys jurisdiction over matters concerning comprehensive policies in relation to
energy and mineral resources and over matters concerning the securing of the stable and
efficient provision of gas, electric power and heating to Japan, and for the handling of
such matters by the Ministrys Agency for Natural Resources and Energy.
Main sources of law and regulation
The Electricity Business Act is the main source of legislation regulating businesses
involving the generation, transmission and sales (distribution) of electric power
(collectively, electric power utilities). In addition to this, the Electricity Business Act
Enforcement Orders and the Ordinance for Enforcement of the Electricity Business Act
further provide detailed regulations for the enforcement and government of the system
provided under the Electricity Business Act.
As for nuclear power, regulation is provided in the Atomic Energy Fundamental
Act, the Act on Compensation for Nuclear Damage and other such specialised legislation.2
The Gas Business Act is the main source of legislation regulating businesses
involving town gas. In addition to this, the Gas Business Act Enforcement Orders and the
Ordinance for Enforcement of the Gas Business Act further provide detailed regulations
for the enforcement and government of the system provided under Gas Business Act.
As for LPG, the main source of legislation regulating businesses involving LPG
is the Act Concerning the Securing of Safety and the Optimisation of Transaction
of Liquefied Petroleum Gas (the LP Gas Act). In addition to this, the LP Gas Act
Enforcement Orders and the Ordinance for Enforcement of the LP Gas Act further
provide detailed regulations for the enforcement and government of the system provided
under the LP Gas Act.
Although, since the accident at Fukushima in 2011, various legislative acts for compensation
and support pursuant to nuclear damage have been enacted in Japan and there have also been
significant recent developments in these legal fields, these developments will nevertheless not
be covered in this chapter. For an update on such developments, please refer to Naoki Iguchi,
Ava Tabila and Yuko Suzuki, After The Quake: Rethinking Japans Renewable Energy Policy,
SEERIL Current Practice, vol. 7, p. 21.
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Japan
ii
Electricity
Under the Electricity Business Act, entities engaging in electric power utilities subject to
regulation are categorised under the following five groups:
a
entities supplying electric power to meet the general demand of consumers and
businesses (general electric utilities);
b
business operators utilising production facilities the output of which is in excess
of 2 million kW for the provision of electric power to general electric utilities
(wholesale electricity utilities);
c
business operators that execute agreements for the supply of electric power in
excess of 50kW and provide such electric power through the use of electric lines
and cables owned by general electric utilities (known in Japan as power producer
suppliers or PPSs);
d
business operators utilising their own privately owned power production facilities,
electric lines and cables to supply electric power to specified consumers (specified
electricity utilities); and
e
business operators that have executed long-term agreements with general electric
utilities for the supply of electric power (known in Japan as independent power
producers or IPPs).
Of the five aforementioned categories, most prominent are the general electric utilities.
There are currently 10 such regional electric companies in Japan, their representative
being the Tokyo Electric Power Co, Ltd (TEPCO). These companies at one time held
regional monopolies over Japans electric power industry and even now continue to cut
imposing figures in the energy industry.
As for the remaining categories, two entities (Electric Power Development Co Ltd
(or J-Power), and the Japan Atomic Power Company) currently fall under the category of
wholesale electricity utilities; 75 corporate entities currently exist as PPSs, such as Ennet
Corporation, a company established by a joint venture of Tokyo Gas Co Ltd, Osaka
Gas Co Ltd and NTT Facilities Inc. Various others operate under the title of specified
electricity utilities, such as Roppongi Energy Service Co Ltd, a supplier of electric power,
whose generators are located beneath the Roppongi Hills business complex in Tokyos
Minato ward and which supplies electric power to the entire Roppongi Hills complex.
Many still function as IPPs, such as the large majority of business operators utilising FITs
to run solar and wind power-generation businesses discussed in Section V, infra.
Entities intending to engage in any general electric utilities, wholesale electricity
utilities and specified electricity utilities activities are required to obtain approval
from the METI prior to commencing of such business. Criteria for the grant of such
approval include whether the applicant has sufficient financial resources and technical
capabilities to properly perform such businesses or whether such business is based on a
reliable business plan. Applicants will be judged on their ability to cater to the energy
consumption demands of the general public and whether they will be capable of running
a sound business. Processing time for such applications will depend on the approval
applied for. In general, an application for approval in relation to a general electric utility
will require three to four months, whereas approval for a wholesale electricity utility will
require anywhere from five weeks to two months with approval for specified electricity
utilities requiring five to eight weeks.
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Japan
In contrast, entities intending to engage in any of the activities of PPSs are only
required to file a notification with the METI upon the commencing such business.
Even in cases where neither approval nor notification are required for
commencement of business, when conducting an electric power generation business,
the METI must still be notified of the installation work plans of the power stations
depending on the type of power generation and scale of the generator facilities (additional
authorisation will also be necessary in the event of installation of nuclear power stations).
The majority of entities viewed as IPPs will likely be subject to these requirements.
Gas
Town gas businesses targeting general consumers
The Gas Business Act stipulates that entities intending to perform gas businesses targeting
households, corporations and other such general consumers must obtain the relevant
approval to become an operator of such gas businesses (general consumer gas utility
business operators or GCGUBOs) from the METI.
Applications for the relevant approvals involve the necessary submission of
application forms in which statutorily required data such as details of the service area,
gas generating facility and such other necessary information are described. The criteria
stipulated in the Gas Business Act for the grant of such approval include the existence of
sufficient demand for gas in the intended service area, the adequacy of the applicants gas
provision capability, whether the applicants entry into the market will result in an excess
in the supply of gas in the service area, whether the applicant has sufficient financial
resources and technical capabilities to properly perform such business, and whether the
proposed gas utility is based on a reliable business plan.
Although the foregoing criteria do not specifically limit town gas providers to one
provider per service area, in reality, the public administrative procedures utilised by the
relevant regulatory authorities requiring that the applicants entry into the market does
not result in an excess in the supply of gas in the service area effectively limits each service
area to a single town gas provider. If all necessary criteria are met, the METI must grant
its approval. In principle, the entire application and approval process will require around
four months to complete.
As of March 2013, 209 GCGUBOs had received the necessary approvals and
were currently operating such businesses (of this number, 29 are public utilities).
Regional monopolies have been recognised in relation to these business operators
and, accordingly, the percentage of operators for the service areas in large metropolitan
areas is understandably high. The share of the largest operator Tokyo Gas (service area:
Kanto region with Tokyo as its main focus) currently accounts for about 36 per cent
of the market whereas the combined share of the four major corporations (Tokyo Gas,
Osaka Gas, Tohou Gas and Saibu Gas) providing service areas in large metropolitan areas
accounts for about 72 per cent (based on sales volume as of February 2014).
Other types of town gas business
In addition to the above, the Gas Business Act also imposes certain restrictions on
operators providing LPG to housing estates and other such residences by entities through
the use of simplified gas-generating facilities (community gas utility business operators),
facilitating the large-volume supply of gas (defined as the provision of gas to consumer
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Japan
in excess of 100,000 cubic metres per year, discussed in greater detail below) via gas
pipelines over a certain size, which are independently maintained or utilised by such
operators (gas pipeline service operators) and undertaking the business of providing
large-volume supply of gas to consumers (commercial-scale gas suppliers).
Sellers of LPG
The LP Gas Act stipulates that necessary registration for the sale of LPG must be obtained
from the Minister for Economy, Trade and Industry when intending to establish sales
offices catering to two or more prefectures and from the prefectural governor when
catering to only one prefecture.
Registration involves the necessary submission of application forms in which
statutorily required data, such as details of the sales office, gas storage facilities and
other necessary information, are described. Applicants will be registered with the
corresponding authority (either the Minister for Economy, Trade and Industry or the
prefectural governor) as long as there are no applicable statutory grounds for denial of
the application.
Registrations will require 30 days to process or 15 days if the registration is applied
for via the relevant authoritys electronic information processing system.
As of March 2013, the number of business operators that had obtained the
necessary registrations and were currently engaged in the sale of LPG is 21,052. Entry
barriers to this section of the industry are low and a large number of small and mediumsized businesses have been entering into the LPG industry in which even retail rates are
not regulated. Due to the aggressive introduction of all-electric technology town gas and
other such products from the electric power companies, but this figure is still less than
half of when LPG sales were at their peak (54,000 operators in 1967).
iii
There are no particular restrictions on foreign investment in the electric power industry
or the gas industry. The only existing restrictions are those imposed by the general laws
regulating the entry of foreign investment in Japan stipulated in the Foreign Exchange
and Foreign Trade Act. For example, if a foreign investor were to obtain 10 per cent or
more of the shares of an electric power or gas utility (including both town gas and LP gas),
intend to set up a branch for the conduct of electric power or gas business or otherwise
engage in any such activities, the Foreign Exchange and Foreign Trade Act requires that
the relevant authorities be notified in advance of such activities. Furthermore, in the
event of the performance of any such activities requiring advance notification of the
relevant authorities, a follow-up report after such performance must also be submitted
accordingly. Both prior notification and follow-up reports must be submitted to the
Bank of Japan, which in turn will facilitate the submission of such notifications and
reports to the Minister of Finance or such other relevant minister in charge.
iv
Electricity
The prior approval of the METI is necessary in the event that a transfer of the business of
a general electric utility, wholesale electricity utility and specified electricity utility in its
entirety is contemplated, or in the event of a merger or demerger whereby the surviving
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entity completely absorbs any such business. The criteria for granting such approval are
the same as those for the original grant of approval to operate such businesses. Notification
of the METI is also required upon the handover of any equipment or facilities in relation
to general electric utilities, wholesale electricity utilities or specified electricity utilities.
In the case of a PPS, in the event of any transfer of such business in its entirety
or of any merger or demerger whereby the surviving entity completely absorbs such
business, the succeeding entity is only required to notify the METI.
Gas
The transfer or acquisition of all or part of a general consumer gas utility business
requires authorisation from the METI before it can be effective, as does the merger or
demerger of any entity that is a GCGUBO whereby all or part of a general consumer gas
utility business is succeeded by the surviving company. The criteria for the grant of such
required authorisation is the same as that for the original grant of approval to operate
such businesses.
In the case of LPG businesses, however, in the event of any transfer of such business
in its entirety or of any merger or demerger whereby the surviving entity completely
absorbs such business, the succeeding entity is only required to notify the METI or the
prefectural governor as relevant.
III

SERVICES
Electric power
Integrated system for the production and transmission of electric power

In Japan, following the end of World War II and up until 1995, the production and
transmission of electric power, as well as the its assorted related retail operations, were
run as a single integrated utility by 10 electric power companies, each with a regional
monopoly over the 10 main regions of Japan.
However, amid the four stages of institutional reform post-1995, Japan realised
the liberalisation of its electric power generation and sales sectors to a certain extent.
That being said, it should still be noted, however, that the electric power transmission
sector is still very much dominated by the aforementioned 10 power companies that
have continued as general electricity utilities (as only PPSs are capable of transmitting
electric power using their own electric power transmission facilities). The securing of the
stable provision of electric power has been cited as a reason for this and as a result, general
electricity utilities (electric power companies such as TEPCO) have an overwhelming
competitive advantage in the electric power industry over other competitors engaged in
the production and transmission of electric power and related retail operations.
Notwithstanding the foregoing, because the electric power distribution grid is
a public infrastructure, measures have been implemented to prevent general electricity
utilities from abusing their dominant market positions and to ensure the transparency
of the electric power industry, To be more specific, compulsory notification of electric
power transmission details, equal treatment of the consumers, and separation of electric
power transmission division accounts of general electric power business operators from
its other divisions have been implemented for the foregoing purpose.
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Japan
Government policy on separation of electric power transmission sectors
Despite the aforementioned promotion of more transparency and fairness in electric
power transmission services provided under the Electricity Business Act, the cost of such
services is still relatively costly (although somewhat dated, statistics from the energy
transmission and distribution sector indicate that the combined excess profits of the
10 power companies in 2006 was roughly 850 billion), and this inhibited the entry
of new entrants into the electric power generation and related retail operation sectors.
On the other hand, the cessation of operations of almost all the nuclear power plants in
Japan following the accident at Fukushima has resulted in the current feeling in Japan
that the expansion of electric utilities by operators other than these 10 power companies
is an urgent priority.
As a result, on 15 February 2013, an advisory committee for electric power
systems reform was set up by the METI, which finalised its report and implementation
schedule. The report recommended the independence of the electric power transmission
and distribution functions (formation of separate corporations for power distribution,
in particular). As a result, on 2 April 2013, Prime Minister Shinzo Abe instructed the
relevant ministers to prepare the bills required to implement the committees proposals.
Pursuant to the schedule for the reform of the electric power system: (1) the Organization
for Cross-regional Coordination of Transmission Operators shall be established (bill
passed on 13 November 2013); and (2) cabinet has approved a bill for the deregulation
of electricity retail sales and generation in all respects in the near future. In this regard, it
may be said that such reforms are making steady progress.
Fully distributed cost method
General electric utilities are required to obtain the approval of the METI in relation to the
setting of rates and other conditions for the supply of electric power. A condition for the
grant of such approval is that the rates consist of fair costs incurred as a result of efficient
management and fair profits. Calculation of electricity rates is supposedly subject to the
General Electric Utility Supply Provisions rules for fee calculation, which aim to limit
costs and reduce electricity prices by making efficient management a requirement for
all such operators. In reality, however, it has been pointed out that TEPCO can easily
declare prices higher than necessary and unjustifiably increase electricity rates and many
share serious doubts as to the ability of the METI to monitor it.
ii Gas
After importation, LNG meant for the town gas industry is converted into gas and sent
through pipelines or transported by tanker lorries, and stored in gas storage facilities for
supply to consumers. The facilities for processing, transportation and storage are mainly
owned by the gas utility business operators, who supply the gas to consumers.
Pipelines that are used for gas transportation and gas holders that are used for
storage of gas are regulated by the Gas Business Act and the technical standards for gas
facilities prescribed by ministerial order. Likewise, tanker lorries are regulated by the
High-Pressure Gas Safety Act and the Safety Regulations for General High-Pressure Gas.
The transportation and storage of LPG are regulated by the LP Gas Act and the
High-Pressure Gas Safety Act. More particularly, whereas storage and transportation at
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Japan
distribution and wholesale levels are regulated by the High-Pressure Gas Safety Act, the
storage and transportation supply level to general end-users are regulated by the LP Gas
Act.
Transportation obligations for town gas
As mentioned earlier, because GCGUBOs are, pursuant to public administrative
procedure, restricted by the practical principle of one town gas service provider per
service area, it has been acknowledged that town gas provider monopolies exist within
certain regions.
In exchange for such monopoly, GCGUBOs are obligated to broaden the piping
grid, in other words to provide gas transportation. As mentioned later in this article, the
revitalisation of competition through the utilisation of the piping grid by GCGUBOs in
order to liberalise rates for commercial-scale supplying of gas is highly anticipated.
Nevertheless, current transportation rates are still relatively expensive and
revitalisation of competition merely through the utilisation of the piping grid by
GCGUBOs is far from sufficient. As of March 2008, of the 207 new entrants to the
commercial-scale gas supplier industry, only 52 entrants will be utilising gas transportation
barely 25 per cent.
Rate system for gas businesses
A GCGUBO wishing to possess a regional monopoly, because its consumers lack the
freedom to choose their provider, is required to base its rate upon its costs incurred
while under efficient management plus a reasonable rate of return (a rate calculated
by the FDC) as stipulated in the general supply provisions approved by the METI.
Costs incurred while under efficient management refers to costs assumed to be
incurred by a GCGUBO in its business operations pursuant to the necessary exercise
of its corporate activities, while reasonable rate of return refers to the reasonable total
amount of production costs, provision and distribution costs and general administrative
costs as calculated based on actual and realistic future prospects of operations, plus the
amount of any funds obtained from interest and dividends to the extent fairly raisable
or attainable respectively, as necessary for the realisation of the reasonable development
of the business.
Raising of rates is subject to the approval of the METI; however, the lowering of
rates is not subject to such requirement and merely requires notification of the relevant
change in rate.
LPG pricing is not subject to regulation and prices may be set as negotiated
between the relevant parties of each transaction. Because of the accumulation of retailers
overheads, which accounts for over 60 per cent of the retail price of LPG, said retail price
of LPG has become more expensive than that of town gas.
IV
ENERGY MARKETS
Japan Electric Power Exchange
The Japan Electric Power Exchange (JEPX) exists for the benefit of all electric powerrelated transactions. It was founded in 28 November 2003 as a market for the commodity
trading of electric power and serves as an intermediary for electric power spot trading,
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Japan
forward transactions and other such transactions. (It is possible to undertake both buy
and sell orders through the JEPX.) In order to participate in electric power commodity
trading on the JEPX, membership as a trade affiliate is necessary. As of 1 April 2014,
79 companies were trade affiliates of the JEPX.
The JEPX is managed by a general incorporated association comprising electric
power companies and other such entities. It is a private exchange that operates and is
regulated by its own market rules.
ii
Terms and conditions of supply
Electricity
General electric utilities are required to only execute contracts with consumers, the
terms and conditions of which have been approved by the METI. Such entities are
also prohibited from refusing to supply electric power to consumers unless there are
legitimate grounds for doing so.
Additionally, specified electricity utilities are required to notify the METI of the
contents of their electric power supply contracts.
In direct contrast, PPSs are free to set the terms and conditions of their electric
power supply contracts at their discretion, based only on negotiations with their relevant
counterparties.
Gas
Obligation to supply
In recognition of the inevitably monopolistic nature of the general consumer gas utility
business and other such considerations, GCGUBOs are subject to an obligation to
supply gas and accordingly are prohibited from rejecting an application for the supply
of gas received from a consumer and, in principle, from cutting off gas already supplied
to a consumer.
This is not the case with LPG and no such obligations are imposed on LPG
business operators.
Liberalisation of the town gas business
As a result of amendments to the relevant legislation, the town gas industry is currently
experiencing an overhaul of its competitive environment due to the relaxation of
regulations. Specifically:
a
it has become possible for a town gas supplier to supply gas to the service area of
another town gas supplier or other white areas (areas not already serviced by any
specific town gas supplier);
b
companies other than town gas suppliers may now enter into the commercial
scale gas utility business;
c
pricing for commercial scale gas supplying has been liberalised; and
d
in order to encourage new entrants to enter the market, a gas transport system
has been set up whereby the utilisation of existing gas piping belonging to other
business operators is allowed.
In particular, the scope of the liberalisation of commercial scale gas supply pricing has
been progressively expanding due to legislative amendments. Beginning with the first
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Japan
round of reforms in March 1995, which saw the liberalisation of the rates for the supply
of gas to consumers whose annual usage exceeded over 2 million cubic metres, as of the
fourth round of reforms, which took effect from April 2007 the rates for supply of gas to
consumers whose annual usage exceeds 100,000 cubic metres have also been liberalised,
accounting for the liberalisation of roughly 62 per cent of the total volume of town gas
sales in Japan.
As a result of these efforts, 34 new gas companies entered into the gas industry
(based on approval applications and notifications as of 21 October 2013) and as of 2012,
15.3 per cent of the total volume of commercial-scale gas supplied could be attributed
to them. New entrants entering into commercial-scale gas supplier business include
such entities as electric power companies, domestic natural gas utilities and commercial
enterprises.
iii
Market developments
Electricity
On 27 December 2011, JEPX, by creating the Distributed Model Electricity Selling
Market and enabling the sale of up to 1,000kW, envisaged the sale of excess electricity
generated by private power generators or cogeneration systems. Under this model,
anyone can sell excess electricity or reverse current if it is transmittable through electricity
transmission lines. This could be seen as an effort to invigorate the market.
Gas
With respect to gas, no particularly noteworthy market developments are currently
anticipated or under consideration.
V
i Electricity
The Renewable Electric Energy Act
Japan has recently been subject to huge developments in the area of renewable energy.
The Act on Special Measures concerning the Procurement of Renewable Electric Energy
by Operators of Electric Utilities (the Renewable Electric Energy Act) was enacted with
the objective of introducing FITs (a system whereby the total volume of electric power
is bought back at a fixed price). The Renewable Energy Act became effective on 1 July
2012, the major requirements of which can be summarised as follows:
a
Business operators including TEPCO, which supply electric power, are expected
to become providers of renewable electric energy and as such must execute all
applications for contracts for sale of electric power submitted to them by renewable
electric energy suppliers and facilitate the connection of the power generating
facilities of such suppliers to their own electric facilities for transformation,
transmission and distribution of electric power.
b
Renewable electric energy is defined as electric power obtained and converted
through the use of electric transduction facilities from renewable energy sources
such as solar, wind, water (currently statutorily limited only to small and medium
hydroelectric generators with output of less than 30,000kW), geothermal,
biomass and other sources as stipulated in the relevant cabinet order. Electric
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Japan
power suppliers that wish to become part of the aforementioned system are
required to obtain approval from the METI for power-generating facilities.
Sales prices and contract terms shall be as set by the METI upon the input of the
Committee for Calculation of Procurement Cost and Related Matters. The sales
prices and contract terms will be revised every financial year and, in principle,
these electric power sales and connection contracts will have to be executed in the
same financial year; the METIs approval should also be obtained for the facilities.
All transactional costs will ultimately be borne by the end-consumers (both
private and corporate).
Sales prices and contract terms

Set out below are the changes in sales prices and contract terms since 2012. In relation
to solar power, as a reflection of the sudden drop in price of solar panels, the sales price
is falling (as per our further notes below). In comparison, measures have been taken
to establish favourable pricing and to support investment in respect of offshore wind
power and existing headrace tunnel-type medium and small-scale hydroelectric power
generators.
Electricity
generated
Solar power
Wind power
Sales price (excluding tax)

2012
2013
2014
Contract term
< 10kW/h
JPY 42
JPY 38
JPY 37
10 years
10kW/h
JPY 40
JPY 36
JPY 32
20 years
< 20kW/h
JPY 55
JPY 55
JPY 55
20 years
20kW/h
JPY 22
JPY 22
JPY 22
20 years
JPY 36
20 years
JPY 40
JPY 40
15 years
Off-shore Wind
power*
Geothermal
power
< 15000kW/h
JPY 40
15000kW/h
JPY 26
JPY 26
JPY 26
15 years
Hydroelectric
power
< 200kW/h
JPY 34
JPY 34
JPY 34
20 years
200kW/h
< 1000kW/h
JPY 29
JPY 29
JPY 29
20 years
1000kW/h
< 30000kW/h
JPY 24
JPY 24
JPY 24
20 years
< 200kW/h
JPY 25
20 years
200kW/h
< 1000kW/h
JPY 21
20 years
1000kW/h
< 30000kW/h
JPY 14
20 years
JPY 13 to JPY
39
depending on
material used
20 years
Existing
headrace
tunnel-type
medium and
small-scale
hydroelectric
power*
Biomass power
JPY 13 to JPY
39
depending on
material used
JPY 13 to JPY
39
depending on
material used
* Off-shore Wind power: Generators that require a vessel to access for the purpose of construction and
operational maintenance.
* Existing headrace tunnel-type medium and small-scale hydroelectric power: Generators which utilise existing
headrace tunnels with renewed electric power equipment and hydraulic steel pipes.
230
Japan
Increase in renewable electric energy generation
Following the introduction of FITs, renewable source energy generation solar power
generation in particular is increasing rapidly. According to the Resources and Energy
Agency, a total of 30,311,000kW of electricity has been produced by such facilities
approved by the METI, of which 28,381,000kW was from solar energy, between July
2012 and December 2013.
Nonetheless, in the same period of time, the total power output from the facilities
that have commenced operation was limited to 7,044,000kW (6,865,000kW of which
is solar power). Further, during 2012, the portion of such generation coming from
problematic businesses (such as those which utilised favourable pricing to obtain facility
approval but delayed commencement of work and attempted to obtain fraudulent
profits) rose to 7,380,000kW. In response, the METI has moved to revoke the approval
for some of these businesses. Further, it is important to note that facility approvals to
date have not been issued for any particular term. However, with respect to approvals
issued from 2014 onwards, solar power facilities with capacity of 50kW or more that
have not secured a site and equipment within six months of receiving approval will have
their approval lapse.
ii Gas
In terms of gas-related renewable energy, biogas has been generating a lot of attention in
recent years. Biogas is a flammable gas produced by the fermentation of organic waste
such as raw sewage, food waste and livestock excretions, a feature that allows it to be
harvested at sewage treatment plants, food factories and other such locations. Major
town gas utilities such as Tokyo Gas and Osaka Gas have in recent years established
guidelines for and promoted the purchase of biogas.
VI
THE YEAR IN REVIEW
At present, the Gas System Reform Subcommittee, being an advisory body to the
Minister of Economy, Trade and Industry is discussing the introduction of reforms
that would lead to the deregulation of retail sales of town gas in all respects. However,
there still remain many issues to be resolved in respect of the implementation of such
deregulation, such as the improvement of infrastructure such as pipelines. Accordingly,
it will be necessary to monitor the continued progress of such discussions.
On the other hand, the electric power industry regulations have, following the
events at Fukushima in 2011, already witnessed great reforms such as revisions for the
integration of a single system for the production and transmission of electric power
and the introduction of FITs. It is considered that these reforms are likely to encourage
the emergence of new entrants to the energy industry and merit attention in light of
potential future developments arising.
VII
The events at Fukushima in 2011 served as the main catalyst for the reforms that the
electric power industry has recently been facing. The full extent of these reforms and
231
Japan
their effects, however, remain to be seen. As of March 2014, all 48 nuclear power stations
in Japan are undergoing periodic maintenance. In the meantime, the Nuclear Regulation
Authority issued new safety standards of nuclear power station in July 2013 and currently
10 nuclear power stations are in the process of the review for restart under the new safety
standard. However, it is still unclear when and how many nuclear power stations will be
allowed to restart operations.
Under these circumstances, Japan will become increasing reliant on its remaining
sources of energy, that is, oil and LNG. These traditional sources of fuel are regarded as
more stable and reliable; however, because they are ultimately non-renewable resources,
this in and of itself introduces an entirely different set of issues. At the end of the day,
Japans energy requirements may push it in the direction of renewable energy such as
those discussed above. The output of such energy sources is, however, substantially
smaller compared with nuclear energy, not to mention inherently unstable and less
reliable. Accordingly, Japans demand for alternative and reliable sources of energy may
even result in renewed interest in the gas industry, which in turn will surely lead to
further developments in this field.
With the rapidly shifting facets of the energy industry at the moment, the only
thing that can be said with any certainty is that change is imminent. Exactly how and
in what form such change will take place remains to be seen and it is certainly worth
keeping a close eye on Japan in the years to come.
232
Chapter 18
KENYA
Albert Mumma1
OVERVIEW2
Kenya is well endowed with both renewable and non-renewable energy resources. Nonrenewable energy sources include petroleum to the north, in Turkana County,3 and
coal in the arid and semi-arid lands (ASALs) Mui Basin in Kitui County.4 Renewable
energy sources in Kenya include hydropower, geothermal, wind power and solar energy.
Petroleum, geothermal and hydropower are the major sources of commercial energy in
Kenya,5 with diesel traditionally used in thermal power plants to plug electricity deficits
arising from the susceptibility of hydropower to drought.
According to the 2013 National Economic Survey, during 2011, electricity
provided 9 per cent of the overall energy requirement in Kenya. 67.7 per cent of electricity
provided was generated using renewable energy sources, while 31.3 per cent was thermal
1
2
Albert Mumma is a principal partner at Prof Albert Mumma & Company Advocates.
The author recently participated in a project under the aegis of the International Development
Law Organisation (IDLO) titled Strengthening Legal and Policy for Energy in Africa: Lessons
Learned from Regulatory Reforms in Kenya, 2014. The author has drawn from the report of
this study in writing this chapter.
Third Draft National Energy Policy (May 2012), p. 27. See also State House, Nairobi Kenya,
Kenya Discovers Oil, President Kibaki Announces (2012), www.statehousekenya.go.ke/news/
march2012/2012260301.htm at 30 January 2014.
K Senelwa, Kenya to Lease 31 coal blocks, As it Eyes Cheaper Energy, The East African,
2 February 2013, www.theeastafrican.co.ke/news/Energy-ministry-set-to-lease-31-new-coalblocks/-/2558/1682726/-/htw1gbz/-/index.html at 30 January 2014.
B Aurela, Kenya and Renewable Energy: Country At-a-Glance, Laurea University of Applied
Sciences, www.laurea.fi/en/connect/results/Documents/Kenya%20Fact%20Sheet.pdf at 30
January 2014.
233
Kenya
generated using fossil fuels.6 The total installed electricity generation capacity increased
by 4.7 per cent to 1,606.1 MW in 2012 against a peak demand of 1,197MW with
transmission losses and unallocated demand accounting for 17.9 per cent of the total
demand.7
Demand for electricity is projected to reach 2,511MW by 2015 and 15,026MW
by 2030.8 The Ministry of Energy credits the growth in demand to greater consumer
connectivity to the network and robust economic growth performance driven by
industry. The 2012 Draft National Energy Policy of Kenya envisages projected installed
capacity to increase gradually to 19,199MW by 2030.
Hydropower is the most important and dominant source of electricity in Kenya,
constituting over half of Kenyas electricity generation.9 Aside from large hydropower
dams, micro hydropower is also a viable option for many small, off-grid communities in
Kenya. The government has identified around 300 sites with an approximate potential
of 600MW (cumulatively). The major challenge that faces hydropower in Kenya is its
vulnerability to climate change because the now annual drought cycles diminish the
water levels in the main reservoirs and inhibit generation capacity.
Kenya is Africas largest producer of geothermal power (180MW) and has a
geothermal generation potential of 10,000MW, most of which is situated in the Great
Rift Valley.10 As of March 2012, geothermal projects with a total capacity of approximately
800MW were being implemented and additional projects nearing 800MW in capacity
were scheduled to commence soon.11
However, the geothermal energy industry has been slow to establish itself in
Kenya. This is in part due to financing obstacles associated with the very high start-up
costs of geothermal energy,12 and the risks involved with such new forms of technology.13
In addition, the proposed geothermal projects are located far from major load centres,14
creating an additional need for investments in high voltage transmission lines.
6
National Energy Policy, Third Draft, above No. 32, Section 4.
7 Kenya, Economic Survey 2013, Kenya National Bureau of Statistics (2013) 183184.
8
Compared to 899MW in 20042005.
9
National Energy Policy, Third Draft (2012).
10
K Murungi, Investment Opportunities in Geothermal and Coal Resources in Kenya, Commonwealth
Business Council (2010), www.cbcglobal.org/images/uploads/library/KIS2012_Investment_
Opportunities_in_Geothermal_and_Coal_Resources_in_Kenya_Minister_of_Energy.pdf at
30 January 2014.
11
P K Ngugi, Financing the Kenya Geothermal Vision (presented at the UNU-GTP and LaGeo
Short Course on Geothermal Development and Geothermal Wells, Santa Tecla, El Salvador,
1117 March 2012, 1).
12
Ibid, 2: It is estimated that the development of the 5,000MW will cost about US$18 billion.
13
Geothermal Development Company, Why Invest in Geothermal (2014) www.gdc.co.ke/index.
php?option=com_content&view=article&id=193&Itemid=165 accessed at 18 February 2014.
14
J Sutter and C Muriithi, Analysis of Power System Transient Stability Due to Increased Integration
of Geothermal Power (paper presented at the 39th Workshop on Geothermal Reservoir
Engineering, Stanford University, 2426 February 2014).
234
Kenya
The wind resource in certain parts of Kenya is abundant, with wind speeds ranging
from 8 to 14 metres per second.15 Currently, Kenyas wind installed capacity is 5.1MW.16
Therefore, there is enormous investment potential in harnessing wind power. However,
high up-front capital costs and lack of sufficient wind resource data are two of the major
obstacles to the exploitation of wind energy in Kenya.17 In addition, the locations with
the best wind resource are far away from the grid and load centres, requiring large capital
investment for transmission lines and road infrastructure.18
Kenya boasts an impressive solar resource. It receives an average annual insolation
of 4 to 6kWh per square metre per day.19 However, solar resource is restricted to the
daytime and storage of solar energy remains expensive. The efficiency of solar technologies
remains less than many other renewable energy sources, with the standard commercial
photovoltaic (PV) panel about 19 to 20 per cent.20
Nonetheless, solar PV technology has been embraced in Kenya, particularly for
off-grid household solar electric systems.21 Indeed, Kenya already sells about 30,000 solar
PV systems each year, the worlds highest rate of solar home systems.22 Consequently, the
country is often described as the leading market for solar PV in Africa.23 PV technology
is particularly exploited in rural Kenya, where solar cookers and small-scale solar electric
systems are providing clean cooking facilities and light to rural communities.24
Petroleum constitutes 22 per cent of Kenyas total primary energy consumption.
However, due to the only recent discovery of hydrocarbons in Kenya, the country remains
wholly dependent on imported petroleum products.25 From 2009 to 2010, petroleum
imports averaged 3.95 million metric tons per annum. This represents 25.3 per cent of
the countrys total annual import bill.26
15
16
National Energy Policy, Third Draft, above No. 32, Section 3(6).
Energy Regulatory Commission (ERC), Wind Resources (2012) Renewable Energy Portal,
www.renewableenergy.go.ke/index.php/content/32 at 30 January 2014.
17 Ibid.
18 Ibid.
19
20
G Simbolotti, Solar Photovoltaics: Technology Brief, IEA-ETSAP and IRENA Technology Brief
E11 (2013) 3.
21 Ibid.
22
D M Kammen and A Jacobson, Solar Innovation and Market Feedbacks: Solar Photovoltaics
in Rural Kenya in A Grubler A et al (eds), The Global Energy Assessment Toward a Sustainable
Future (2012) 2; S Bhattacharyya, Rural Electrification Through Decentralised Off-grid
Systems in Developing Countries (2013) 146.
23
J Ondraczek, The Sun Rises in the East (of Africa): A Comparison of the Development and Status
of the Solar Energy Markets in Kenya and Tanzania, Working Paper FNU-195(2011) 6.
24
D M Kamman, Kenya Steps Ahead into Solar Future (2011) Development in a Changing
Climate, http://blogs.worldbank.org/climatechange/going-solar-rural-kenya at 30 January
2014.
25
26
Ibid., Section 2.
235
Kenya
In 2012, four sedimentary basins with good potential for discovery of hydrocarbons
were identified and exploration is ongoing in these regions. This discovery of petroleum
has big implications for Kenya. As noted in the 2013 Sustainable Integrity report on
Kenyas petroleum sector: Managed well, [petroleum] has the potential to finance rapid,
broad-based and sustained development.27
While petroleum is a major energy source for many countries,28 the petroleum
produced in Africa is exported as crude oil and re-imported as a refined product, due to
limited refining capacity and oil consumption.29 Imported refined products are expensive.
Currently, the only thermal power station in Kenya that makes use of petroleum
is the 120MW Kipevu II thermal power station. Kenya Petroleum Refineries Limited
(KPRL) operates the countrys sole oil refinery in Mombasa, which has a capacity
of 35,000 barrels per day (bpd).30 It has been facing significant financial challenges,
especially in capitalisation for upgrading the technology.
While Kenya currently has no coal power plants, industrial users rely on energy
from coal-fired power stations, which is imported into Kenya and makes up about 1 per
cent of its total primary energy.31 Like petroleum, commercial quantities of coal have
recently been discovered in Kenya, and this energy source has already been earmarked
for used in power generation, cement production and smelting in the steel industry.32
Nuclear energy has been identified as potential source of secure energy, and the
government began preparations with establishment of the Kenya Nuclear Electricity
Board.33 The Board has the mandate to guide development of nuclear electricity
generation in order to enhance the production of affordable and reliable electricity.
Kenyas long-term development planning strategy is to become a newly
industrialising medium-income country providing a high quality of life to its citizens
by 2030. The Vision anticipates a remarkable increase in energy demand, due to its
targeted development projects. To meet this demand, Vision 2030 aims to increase
electricity generation to meet the projected peak load of 15,000MW by 2030, from
27
28
29
30
31
32
33
Sustainable Integrity, Executive Summary: Kenya Petroleum Sector Scoping Study (June
2013).
KPMG, Oil and Gas in Africa: Africas reserves, potential and prospects (2013), www.kpmg.
com/Africa/en/IssuesAndInsights/Articles-Publications/Documents/Oil%20and%20Gas%20
in%20Africa.pdf, p. 4.
KPMG, Oil and Gas in Africa: Africas reserves, potential and prospects (2013), www.
kpmg.com/Africa/en/IssuesAndInsights/Articles-Publications/Documents/Oil%20and%20
Gaspercent20in%20Africa.pdf, p. 4.
National Energy Policy, Third Draft, Section 2.
Minister for Energy, Hon. Kiraitu Kiraitu, Investment Opportunities In Geothermal and
Coal Resources In Kenya (2010), www.cbcglobal.org/images/uploads/library/KIS2012_
Investment_Opportunities_in_Geothermal_and_Coal_Resources_in_Kenya_Minister_of_
Energy.pdf.
See The Kenya Gazette Vol. CXII-No.123, Gazette Notice No. 14188 on 19 November 2010.
236
Kenya
about 1,500MW currently.34 It also suggests strategies such as institutional reforms in the
energy sector, strong regulatory framework, encouraging more private power generation
and separating generation from distribution. The Vision also anticipates new sources of
energy through exploitation of geothermal power, coal, and renewable energy sources.
II REGULATION
i
The regulators
The regulatory framework of the energy sector in Kenya includes a complex network
of laws, regulations, policies and institutions. The framework is currently based on
the Energy Act 2006 as the principal legislation. However, there is other applicable
legislation, including legal requirements and institutional mandates on land, business
licensing, environmental assessment and forestry, as well as obligations found in Kenyas
Constitution. The pertinent regulatory and implementing institutions comprise the
relevant ministries, parastatal agencies, public-private power producers, independent
power producers (IPPs) and financiers.
Since the 1990s, Kenya has undertaken substantial structural and regulatory
energy sector reforms, first resulting in the enactment of the Electric Power Act of
1997 and later the Energy Act of 2006.35 The Energy Act is the primary legislation,
implemented together with Sessional Paper No. 4 of 2004 on Energy Policy. A number
of specialised regulations have been enacted to operate as subsidiary legislation, aiding
the implementation of this regulatory framework. Kenya is undertaking legal and policy
reforms to the energy sector in response to the new constitutional order and identified
energy needs. The Draft (2014) Energy Bill, and the Draft (2014) National Energy
Policy are undergoing national stakeholder review, and the Bill has been submitted to
Parliament for enactment into law.
The Energy Act 2006
The Energy Act36 regulates electricity, petroleum, coal, natural gas and renewable energy
sources, but not charcoal, which falls under the Forests Act, 2005. It repealed the Electric
Power Act of 199737 and the Petroleum Act,38 taking over regulation of downstream
petroleum activities. This law created the ERC, which is the sole regulator responsible for
economic and technical regulation of electric power, renewable energy, and downstream
petroleum sub-sectors.39
34
35
36
37
38
39
Vision 2030, above No. 7.

Electric Power Act 1997, No. 11 of 1997 and Energy Act 2006, No. 12 of 2006.
The Energy Act 2006 and its Regulations have undergone revision recently in 2012.
No. 11 of 1997.
Chapter 116, Laws of Kenya.
Energy Act 2006, Section 4.
237
Kenya
The ERC is mandated to ensure the implementation and observance of the
principles of fair competition in the energy sector,40 in coordination with other authorities
such as the Competition Authority. Moreover, the ERC may issue, renew, modify or
revoke licences and permits for all undertakings and activities in the energy sector.41 It is
also responsible for setting electricity tariffs.42
Renewable energy, for instance, is briefly provided for in the Energy Act 2006,
through a mandate to the Minister of Energy to perform such functions and exercise
such powers as may be necessary under this Act to promote the development and use of
renewable energy.43
The Constitution of Kenya, promulgated in August 2010, has substantially
transformed Kenyas government structure by introducing a devolved system comprising
two levels: the national government and 47 county governments.
Government functions pertaining to administration, resource allocation and
service delivery are performed at both the national and county levels in accordance with
the constitutional mandate of each level of government. Functions related to the energy
sector fall within the shared jurisdictions of national and county governments.
Under the Fourth Schedule of the Constitution functions are allocated to the
national government and county governments. The national government is charged
with the duty of formulating energy policy,44 including electricity and gas reticulation
and energy regulation. This responsibility ought to be seen as related to the national
governments function to protect the environment and natural resources, establishing a
durable and sustainable system of development, including energy policy.45 The national
government is further charged with promoting public investment. In Part 2 of the
Fourth Schedule, the county governments are constitutionally mandated to undertake
county planning and development, including electricity and gas reticulation and energy
regulation.46 Devolution creates new complexities for energy investments, as investors are
required to navigate multiple levels of governance.
For Kenya, the situation increases in difficulty as county governments have been
tasked with many new responsibilities. This can create overlap and duplicity of roles,
licences and permitting procedures between the county and national governments that
could act as a barrier to investments.
ii
The Energy Act provides different sets of licensing requirements in the electricity subsector from those in the petroleum sub-sector.
40
41
42
43
44
45
46
Energy Act 2006 (Republic of Kenya) Section 5.

Section 31, Part 1 to Fourth Schedule, Constitution of Kenya, 2010.
Section 22 Part 1 to Fourth Schedule, Constitution of Kenya, 2010.
See Section 8 Part 2 to Fourth Schedule, Constitution of Kenya, 2010 and the County
Government Act No. 17 of 2012, Part XI which envisages provisions as to County Planning.
238
Kenya
Electrical energy
Part III of the Energy Act deals with licensing activities in the electrical energy sector.
Section 27 provides that a licence is required for the generation, importation or
exportation, transmission or distribution of electrical energy or for the supply of electrical
energy to consumers. Undertakings involving a capacity not exceeding 3,000kW require
a permit. However, a permit shall not be required in the case of installations with a
generating plant of a capacity not exceeding 100kW and connected within the premises
of any person in such a manner that conveyance of electrical energy to a transmission
system or distribution system cannot occur.
An application for a licence or a permit shall be made to the Energy Regulatory
Commission (ERC). Before making the application for a licence the intending applicant
shall give 15 days notice by public advertisement in at least two national and one regional
newspaper of wide circulation and serve a notice of the application in writing on every
county government in the area of the proposed supply.
The notice shall state that any person desirous of making any representation or
objection to the grant of the licence shall do so by letter addressed to the Commission
before the expiry of 30 days from the date of the application. The ERC shall inform the
applicant of the objection and may hear any objections in public at a time and place
notified to the objector and applicant at least 15 days before the date of the hearing.
In determining an application the ERC shall take into consideration:
a
the impact of the undertaking on the social, cultural and recreational life of the
community;
b
the need to protect the environment and conserve natural resources;
c
land use and the location of the undertaking;
d
economic and financial benefits to the country or the area of supply of the
undertaking;
e
the economic and energy policies in place from time to time;
f
the cost of the undertaking and the financing arrangements;
g
the ability of the applicant to operate in a manner designed to protect the health
and safety of users of the service and other members of the public who would be
affected by the undertaking;
h
the technical and financial capacity of the applicant to render the service for
which the licence or permit is required;
i
any representations or objections made or received;
j
the proposed tariff offered; and
k
any other matter that the Commission may consider likely to have a bearing on
the undertaking.
The ERC shall process all applications within 90 days after the ERC confirms to the
applicant that the application is complete. Where the application is refused the ERC
shall give reasons for the decision.
239
Kenya
Petroleum
The licensing of petroleum related activities is provided for in Part IV of the Energy Act,
2005. Section 80 provides that a person shall not conduct a business of importation,
refining, exportation, wholesale, retail storage or transportation of petroleum except
under and in accordance the terms and conditions of a valid licence. A licensee shall not
sell petroleum to a person for the purpose of exportation or for resale in Kenya unless
that person has a valid exporters or retail licence. The application for the licence is made
to the ERC.
Section 90 imposes a requirement for a construction permit. It states that any
person intending to construct a pipeline, refinery, bulk storage facility or retail dispensing
site shall, before commencing such construction, apply for a permit. In considering the
application the Commission shall take account of all relevant factors including:
a
relevant government policies;
b
compliance with EIA regulations;
c
the financial capability of the applicant and the method of financing proposed;
and
d
any other relevant matters.
A permit, if granted, shall stipulate:
a
the duration;
b
the person authorised to execute the works;
c
the area in which the works shall be executed; and
d
conditions to be satisfied before any works authorised under the permit are used.
Under the Act it is an offence to undertake works or to carry out an activity without the
required permit or licence.
iii
The 2010 Constitution also establishes the ownership of and authority to contract
to exploit natural resources, including energy sources. Specifically, minerals and
oil resources are established as public land, held by the state.47 Article 71 asserts that
agreements relating to natural resources are subject to ratification by the Parliament, if
they involve the grant of a right or concession by or on behalf of any person, including
the national government, to another person for the exploitation of any natural resource
of Kenya. These are important provisions, particularly as they relate to oil and gas,
as extractive industries are one of the most important means of generating funds to
drive development.48 They have not been tested as yet since the implementation of the
Constitution is still in its early stages.
The law does not, however, impose restrictions with regard to ownership of
assets or otherwise restrict market access, even where the asset owners are not Kenyan
47
48
Constitution 2010 (Republic of Kenya), Sections 61 and 62.

Sustainable Integrity, Kenya Petroleum Sector Scoping Study (2013), 12.
240
Kenya
nationals. Foreign companies and persona are entirely free to own assets and investments
in the energy sector.
iv
The Energy Act imposes restrictions on transfers of an electrical energy licence. Section
34 states that a licensee or permit holder shall not transfer or otherwise divest any rights,
powers or obligations conferred or imposed upon him by the licence without the consent
of the ERC. Transfer of a licence or permit includes the acquisition of a controlling
interest directly or indirectly in the licence holder or permit holder.
If the licensee or permit holder fails to meet their obligations the ERC may serve
on them notice to meet their obligations within a stipulated period failing which the
Minister of Energy may, on the recommendation of the ERC, take possession of the
undertaking and operate it at the risk and expense or the licensee or permit holder.
The Commission may suspend or revoke a licence or permit where the licensee
or permit holder is not operating in accordance with the terms and conditions of the
licence or permit. Where the licence or permit is suspended the Commission shall, in
consultation with the Minister, take such action as is necessary to ensure that the supply
of electrical energy to consumers is not unduly interrupted as a result of the revocation.
Where the revocation or suspension is likely to interrupt or affect the importation,
exportation, generation, transmission, distribution or supply of electricity to consumers
the Minister may, after consultation with the owners declare that the undertaking shall
continue, in which case the owners shall, within a reasonable time, sell and transfer
the undertaking to other persons who have the technical, economic, financial and
organisational capabilities to operate the undertaking.
If the owners decline to sell the undertaking the Minister may appoint an
independent valuer who shall value the undertaking, after which the Minister shall
proceed to sell the undertaking through an open tendering system. Proceeds of the sale
shall be remitted to the owner minus the Ministers reasonable costs.
In the event that no bidder meets the minimum requirements of the tender the
Minister may appoint a competent person to operate the undertaking until such time as
a suitable buyer is found.
III

SERVICES
The Energy Act, enacted in 2006, sought to consolidate regulation of the entire energy
sector by including most energy sub-sectors and components in a single legislation, with
the Energy Regulatory Commission (ERC) as the sole regulator.49 The reforms were
49
Christopher H Onyango, Grace N Njeru and Boaz O Munga, Regulatory and CompetitionRelated Reforms in Kenyas Power and Petroleum Sectors (2011) Investment Climate and
Business Environment Research Fund (ICBE-RF) Research Report No. 19/11: www.trustafrica.
org/icbe, p. iii.
241
Kenya
supported by a desire for vertical separation and to reduce domination by the Kenya
Power and Lighting Company (KPLC), the state-owned utility that then undertook
both generation and distribution of electricity.50 These changes also sought to enhance
pricing competitiveness for electricity and petroleum product services.51
In the electricity sector, the major utility KPLC was previously a vertically
integrated utility services provider. It generated electricity, undertook transmission
through a nationally integrated national grid, distributed and supplied electricity
to consumers nationwide. Changes commenced in the 1990s with the separation of
generation from the rest of the electricity supply chain. The mandate for generation
was transferred to the Kenya Electricity Generating Company Limited (KenGen). These
changes were reflected din the Electric Power Act of 1997. In addition to KenGen, there
are several private independent power producers operating in the country using either
thermal sources or small hydro to generate electricity.
Subsequently, Sessional Paper No. 4 on Energy signalled the desire to further
unbundle the remaining vertically integrated aspects of the supply chain. With the
enactment of the Energy Act, 2006 the government established the Rural Electrification
Authority with responsibility over rural electrification. This was a mandate previously
exercised by KPLC. The Rural Electrification Authority is charged with responsibility for
extending the national grid to rural areas and is funded by the government to undertake
constitution works. The Authority then hands over the network it has constructed to
KPLC, which utilises it to distribute and supply electricity to consumers.
In 2009 the government established a new company the Kenya Electricity
Transmission Company Limited (KETRACO) with responsibility for undertaking
long-distance transmission of electricity, while KPLC retained the role of distribution
and supply. KETRACO has not, however, taken over the entire transmission mandate.
KPLC will continue to use its existing transmission infrastructure while KETRACO
builds new transmission infrastructure. This has been adopted as the approach to
undbundling for the reason that in the meantime KPLC had floated shares through an
IPO and there were therefore private shareholders whose interests would be adversely
affected by a transfer of part of its assets to KETRACO.
In the geothermal sector, the government established the Geothermal Development
Corporation (GDC) with the mandate of carrying out upfront development activities,
including exploration and drilling to release the steam and then making the steam available
to generation companies to use for generating electricity for sale to the distributor. This
is a mechanism for absorbing some of the high upfront costs, which has been a deterrent
to the development of geothermal energy in Kenya.
50
51
The Kenya Power Company, later split into KenGen, KPLC and GDC.
Christopher H Onyango, Grace N Njeru and Boaz O Munga, Regulatory and CompetitionRelated Reforms in Kenyas Power and Petroleum Sectors (2011), Investment Climate and
Business Environment Research Fund (ICBE-RF) Research Report No. 19/11: www.trustafrica.
org/icbe, p. iii.
242
Kenya
ii
Section 32 of the Energy Act deals with the provision of access to the network. It
provides that a licence holder or permit holder who is a network service provider shall
provide access to all existing and potential network users of that part of the grid owned
or operated by them upon payment of such fees and other charges for network services
and compliance with minimum requirements of the network service provider as may be
approved by the Commission.
The Act defines a network service provider to mean a person who engages in the
activity of owning, controlling or operating a transmission or distribution system, while
a network service is a transmission or distribution service associated with the conveyance
and controlling the conveyance of electrical energy through the network. It is therefore
the case that any person who has a licence to generate, transmit, distribute or supply
electrical energy or any large retail consumer may use the network service. The law
therefore allows for access to or through the network.
The issue of wheeling charges is yet to be fully addressed and therefore the
unbundling process has not yet been fully operationalised. It is an issue to be dealt with
in the proposed Energy Bill.
iii Rates
Rates are dealt with under Section 43 of the Act. It states that all contracts for the sale of
electrical energy, transmission or distribution services between and among licensees and
between licensees and large retail consumers shall be submitted to the Commission for
approval before execution.
In considering a contract the Commission shall ensure that the rates or tariffs
established in the contract are just and reasonable. The Act defines a just and reasonable
tariff as a rate that enables a licensee to:
a
maintain its financial integrity;
b
attract capital;
c
operate efficiently; and
d
fully compensate investors for the risks assumed.
The regulations that will deal with the process and requirements for determining just and
reasonable tariffs are currently being discussed and will be gazetted in due course.
iv
The law contains no express provisions on issues such as cybersecurity. However, general
laws on national security will apply to the energy sector.
IV
ENERGY MARKETS
Kenyas legal and policy framework does not make provision for organised markets for
the sale of energy, as these have been mostly in the hands of a few national agencies that
have been sole providers.
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Kenya
ii
In the electricity sector the energy markets in Kenya are not yet properly developed
or structured. This is because the utility service providers are predominantly national
monopolies. As regards the generation of electricity from resources such as geothermal,
the resource is allocated through a process involving an application for a block. The
application is made to the Minister and when a block is allocated the exploitation is
exclusive to the holder of the block.
The same regulatory framework applies to crude oil in which the Petroleum
(Exploration and Production) Act provides for dividing the country into the blocks.
Upon application, the Minister will allocate a block to an entity for exploration. If viable
discoveries are made then development rights are granted exclusively to the entity.
iii
The law permits market participants to enter into individual contracts for the sale of
power. These provisions are the same as those governing network service providers. The
Act defines a network service provider to mean a person who engages in the activity of
owning controlling, controlling or operating a transmission or distribution system, while
a network service is a transmission or distribution service associated with the conveyance
and controlling the conveyance of electrical energy through the network. It is therefore
the case that any person who has a licence to generate, transmit, distribute or supply
electrical energy or or a large retail consumer may use the network service. The law
therefore allows for access to or through the network. The rates chargeable are to be
approved by the ERC.
iv
Market developments
The law is being reviewed to introduce charges for wheeling electricity through the
network to further open up access to the market by individual operators. This will
enhance competition.
V
Kenya has adopted the Renewable Energy Feed-in-Tariff (ReFiT) mechanism as a legal
and policy mechanism that guarantees that power utility companies will purchase
renewable energy produced by private investors, and a predetermination of tariff rates by
the regulator. It is currently implemented through administrative policy.
The core aspects of ReFiTs include (1) access to the grid, (2) long-term PPAs, and
(3) a set price per kWh. The 2014 Energy Bill crystalises these aspects as functions of a
ReFiT mechanism in law, to:52
a
provide for connection to the grid to enable sale and purchase of electricity
generated from licensed entities;
52
Energy Bill, 2014, Section 118.
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Kenya
b
c
ensure priority of purchase for electricity from renewable sources by licensed

power distributors; and
determine the tariff rates for electricity from renewable sources.
Review of ReFiT Policy Mechanisms (20082012)

The Ministry of Energy and Petroleum established a ReFiT policy in 2008 after a fouryear design process.53 This initial policy covers wind, micro hydropower and biomass
sources (municipal wastes and cane bagasse), for plants with capacities not exceeding
50MW, 10MW and 40MW, respectively. In addition, the policy requires the national
electricity utility, KPLC, to enter into a PPA to purchase all electricity supplied by
renewable energy projects.54 Nonetheless, renewable energy investments remained
limited.55 In order to strengthen the policy and attract private sector investment, the
government undertook a review of Kenyas ReFiT in 2010 and again in 2012.56
The major challenges for the 2008 ReFiT scheme were threefold: (1) the scheme
only covered small hydro, biomass, and wind; solar and geothermal sources were
excluded from such the scheme; (2) although PPAs were set up at predetermined prices
for each of the energy sources, these agreements only spanned a total of 15 years
this represented a relatively short period to secure profitability, and as compared to
international counterparts;57 and (3) the 2008 ReFiT scheme was criticised for favouring
public-funded generators, such as KenGen, as the tariff prices did not take into account
the higher interest rates and capital costs of private sector investments.58
In the revised ReFiT policy of 2010, solar and geothermal sources were included.
Another important change from this revision involved modifying the terms of the PPA,
including lengthening the contract duration to 20 years. The tariffs for wind and biomass
were also adjusted upwards.59
Focusing on the method for calculating the tariff price, it is particularly interesting
to note that tariffs in Kenyas 2010 ReFiT Policy were not fixed. Instead, tariffs were
negotiated for each project, calculated on a technology-specific basis using the principle
53
Feed-In-Tariffs Policy on Wind, Biomass, Small-Hydro, Geothermal, Biogas and Solar Resource
Generated Electricity 2008 (Republic of Kenya).
54 www.nortonrosefulbright.com/files/investing-in-power-in-kenya-100614.pdf.
55
National Energy Policy, Third Draft, above No. 32.
56
The ReFiT policy should be subject to review every three years from the date of publication,
though a policy review may be undertaken earlier than three years in exceptional cases, as
happened in the last revisions of the ReFiT Policy.
57
The UK ReFiT provides a guaranteed price for 25 years, Germanys ReFiT provides a guaranteed
price for 20 years, Spains ReFiT provided a guaranteed price for 1525 years, depending on the
renewable energy source.
58
J Nganga, et al, Powering Africa though Feed-in Tariffs: Advancing Renewable Energy to Meet the
Continents Electricity Needs, World Future Council (WFC), the Heinrich Bll Stiftung (HBS)
and Friends of the Earth England, Wales & Northern Ireland (FoE-EWNI) (2013) 37.
59
Ibid., 37 and R Fischer and M Crevecoeur, Financing Renewable Energy in Developing
Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa (February 2012).
245
Kenya
of cost plus reasonable investor return.60 While this formula assured attention to each
projects specific circumstances, it also led to long negotiation times. In some instances,
negotiations took two years.61 This was a major challenge that was addressed in the
following 2012 review.
In 2012, a second revised version of the ReFiT Policy addressed some of the
remaining issues. In particular, the 2012 revision established standardised PPA templates
to be used as the basis for tariff negotiations in an attempt to reduce time and transaction
costs for small-scale renewable generators.62
Solar energy both solar photovoltaic and solar thermal technologies has been
one of the most successful renewable energy technologies in Kenya, with a strong market
since the 1980s.63 The solar PV market is the largest in Kenya, built on three main areas
of investment: individual solar home systems, systems that provide electricity to public
buildings such as schools and health clinics and telecoms and signalling systems. Solar
thermal technologies are mainly used for solar water heaters.64
The ERC has enacted subsidiary legislation to the Energy Act 2006 to enhance
use of both solar PV and solar thermal energy technologies. The Energy (Solar Water
Heating) Regulations65 require that all buildings within the jurisdiction of a local
authority with hot water requirements of a capacity exceeding 100 litres per day shall
install and use solar heating systems.66 Moreover, any new buildings, extensions or
alterations of premises shall also incorporate solar water-heating systems.
60

61
62
63
64
65
66
Feed-in-Tariffs policy for wind, biomass, small hydros, geothermal, biogas and solar 2012 (Republic
of Kenya) (2nd revision) 89. ReFiT levels should also be calculated based upon:
a the investment costs for the plant (including the costs of feasibility studies, site development,
construction costs, and the costs of connecting to the transmission system including
transmission lines, substations and associated equipment);
b the operations and maintenance (O&M) costs;
c fuel costs where applicable;
d financing costs (including interest during construction) and a fair return on the invested
capital. The availability of concessionary finance will be taken into account when estimating
such costs;
e estimated lifetime of the power plant; and
f amount of electricity to be generated.
Joseph Nganga, Marc Wohlert, Matt Woods, Christina Becker-Birck, Summer Jackson and
Wilson Rickerson, Powering Africa though Feed-in Tariffs: Advancing Renewable Energy to
Meet the Continents Electricity Needs, (2013) p. 37.
Feed-in-Tariffs policy for wind, biomass, small hydros, geothermal, biogas and solar 2012
(Republic of Kenya) (2nd revision) 7.
J Ondraczek, The Sun Rises in the East (of Africa): A Comparison of the Development and Status
of the Solar Energy Markets in Kenya and Tanzania, Working Paper FNU-195(2011) 26.
Ibid., 10.
Energy (Solar Water Heating) Regulations 2012 (Republic of Kenya). The regulations are to
commence in 2014.
Energy (Solar Water Heating) Regulations 2012 (Republic of Kenya) Section 3.
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Kenya
The Energy (Solar Photovoltaic Systems) Regulations,67 which were gazetted
in 2013, also require that all persons designing and installing solar PV, as well as all
manufacturers, vendors, distributors and contractors shall be licensed by the ERC.
Maintenance and repair of solar PV systems is, however, the responsibility of the owner
of the solar PV system.68
ii
In the area of energy efficiency the Energy Act makes provision for the Minister to develop
and manage a prudent national energy efficiency and conservation programme. The Act
also mandates the ERC to designate buildings and factories ad electrical appliances by
type, quantity of energy use, and methods of energy utilisation for purposes of energy
efficiency conservation.
The ERC has proposed regulations requiring the owners of buildings and factories
to undertake audits to determine the efficiency of use of energy in the buildings.
iii
There have not been significant developments in this area.

VI
THE YEAR IN REVIEW
During 2013 the government proposed a new Energy Policy paper and a new Energy Bill
to replace the current policy and legal framework. These are designed to give effect to the
changes introduced by the Constitution of Kenya 2010 and other developments in the
sector such as the discovery of crude oil.
VII
Kenyas energy sector is undergoing rapid transformation driven by the discovery of

oil reserves and the demand fuelled by a growing economy. The government has an
ambitious programme to enhance generation capacity in a relatively short period of time.
This has to be matched by a robust policy institutional and legal framework, and the
relevant policy and legal changes are already under way. This should place Kenya at the
forefront in the energy sector.
67
68
Energy (Solar Photovoltaic Systems) Regulations 2012 (Republic of Kenya).

Energy (Solar Photovoltaic Systems) Regulations 2012 (Republic of Kenya), Section 8(7).
247
Chapter 19
KOREA
Wonil Kim and Kwang-Wook Lee1
I OVERVIEW
Korea relies on over 97 per cent of its primary energy sources from overseas acquisition,
and fossil fuels, such as petroleum, gas and coal account for 85 per cent of such sources.
Therefore, there are policy needs in the short term to take measures against fluctuations
in the supply and demand for energy based on global factors, and in the long term to
take measures against the depletion of fossil fuels. The 2011 Fukushima nuclear power
plant accident in Japan has served as a warning to carefully consider the use of nuclear
energy policy and the new energy environment, and the effects of climate change, has
increased the use and interest in new and renewable energy.
Under the current environment and policy needs, Korea has designated the
Energy Act and Framework Act on Low Carbon and Green Growth (the Framework
Act) as its basic laws. Such energy laws were prepared with the intention of achieving
certain policy goals such as having a steady supply of energy, eco-friendliness, market
principles and energy security, and such goals are being implemented in line with the
changes to the energy market and environment through the enactment and amendment
of individual laws.
The new Geun-Hye Park administration, which took power in 2013, has
designated its basic goals for its energy policy as reasonably establishing plans for supply
and demand of energy, strengthening energy safety, such as prevention of nuclear
accidents, engaging in political and technical efforts in order to reduce greenhouse gases,
promoting an energy rate policy that accurately reflects production costs, and stabilising
overseas resource development. It is anticipated that the enactment and amendment of
the relevant laws will reflect such policy.
Wonil Kim and Kwang-Wook Lee are partners at Yoon & Yang LLC.
248
Korea
II REGULATION
i
The regulators
Regulators
The Ministry of Trade, Industry and Energy (MOTIE) is in charge of all regulations
regarding individual energy resources (e.g., electricity, petroleum and gas). In particular,
the MOTIE carries out duties regarding entry regulations for individual energy
resources with respect to licences, reporting and registration. Among the individual
energy resources, with respect to electricity, the Electricity Regulatory Commission is
an affiliated organisation within the MOTIE that was formed to, inter alia, decide on
granting approval and licences for electric utility businesses, electric business acquisitions
and other matters.
The Korea Power Exchange (KPX) is in charge of duties regarding establishing or
managing the electricity market, and duties regarding transactions involving electricity,
etc.
Further, the Prime Ministers Office is in charge of matters related to the
Framework Act, which is a basic law regarding the macroscopic energy policy, and the
Energy Commission, which is an affiliated organisation within the MOTIE, was formed
to, inter alia, deliberate over matters regarding important energy policies and plans. The
Ministry of Environment and the Ministry of Foreign Affairs are also involved in energyrelated policies such as establishing emissions-trading systems, clean energy and climate
change, as well as joining international treaties.
Main sources of law and regulation
The Framework Act, which was enacted in January 2010, is a general law regarding energy
policies. In the past the Energy Act was the general law regarding energy policies, but
after the enactment of the Framework Act, several of its provisions were transferred to the
Framework Act. The Framework Act establishes or promotes comprehensive government
energy policies and national strategies, including solutions to climate change and energy
issues, expansion of growth and development, strengthening the competitiveness of
companies, efficient use of land and creation of a pleasant environment (Articles 3(1)).
The Energy Act still regulates matters such as the establishment of regional energy
plans and emergency energy plans and the establishment and operation of the Energy
Commission.
Individual energy resources and the related businesses are regulated pursuant to
the following laws:
a
Electricity: the Electric Utility Act (EUA) regulates matters such as the production,
distribution and sale of electricity and the Electrical Construction Business Act
was enacted to ensure the safety of businesses that engage in electricity-related
construction.
b
Petroleum and gas: the Petroleum and Petroleum Substitute Fuel Business Act
(PBA) and the Urban Gas Business Act (UGBA) regulate the adequate distribution
of petroleum and gas to consumers, and the High-Pressure Gas Safety Control
Act was enacted to introduce safer measures to prevent the possibility of gas
exploding.
249
Korea
c
Nuclear energy: the Nuclear Energy Promotion Act regulates the research,
development, production and use of nuclear energy; the Nuclear Safety Act
regulates the safety of nuclear energy; and the Nuclear Damage Compensation
Act regulates matters regarding damage compensation due to nuclear energy.
New and renewable energy: the Act on the Promotion of the Development, Use
and Diffusion of New and Renewable Energy (the New and Renewable Energy
Act) acts as the basic law regarding the development of technology for new and
renewable energy as well as the use and dissemination of new and renewable
energy.
ii
Electricity
Under the EUA, electric utility businesses are categorised into five types of business, the
definitions of which are as follows:
a
Electricity generation business: a business, the main purpose of which is to
generate and supply electricity to operators of the electricity sales business via the
electric utility market.2
b
Electric transmission business: a business, the main purpose of which is to set
up and operate electric installations necessary to transmit electricity produced at
power stations to operators of the electricity distribution business.3
c
Electric distribution business: a business, the main purpose of which is to establish
and operate electricity installations necessary to distribute electricity transmitted
from power stations to consumers of electricity.4
d
Electric sales business: a business, the main purpose of which is to deliver electricity
to consumers.5
e
District electric business: a business, the main purpose of which is to generate
electricity with electric generating units of up to 35,000kW to meet the demand
of a specific supply district, and to supply the produced electricity to consumers
of electricity in such specific supply district, not via any electric utility market.6
The Korea Electric Power Corporation (KEPCO) had a monopoly on the production
and supply of electricity in Korea until the late 1990s, and was entirely responsible for
generation, transmission, distribution and sales. Currently, KEPCO is still responsible
for transmission, distribution and sales of electricity, KEPCOs subsidiaries and various
private companies are competing in the electricity generation business.
According to Article 7 of the EUA, any person who intends to operate an electric
utility business must obtain a licence, based on the business type, from the Minister of the
MOTIE (the Minister); the Ministers approval is required when the person intends to
2
3
4
5
6
Article 2(iii) of the EUA.

Article 2(v) of the EUA.
Article 2(vii) of the EUA.
Article 2(ix) of the EUA.
Article 2(xi) of the EUA; Article 1-2 of the Enforcement Decree of the EUA.
250
Korea
modify important matters relating to the licence, such as the business district or specific
supply district, supply voltage, and in the case of electricity generation businesses and
district electric businesses, the place of electric installations, equipment capacity, and the
type of motive power.7 In order to obtain such licence, the following documents must be
submitted to the Minister:8
a
an application for a licence;
b
a business plan;
c
an anticipated annual profit and loss statement for the five years following the
commencement of business;
d
a summary of electric installations for an electric utility business (excluding the
distribution line); and
e
the articles of incorporation of the applicant if the applicant is a corporation.
The Minister will grant an electricity utility licence after an application has undergone
deliberation by the Electricity Regulatory Commission. The criteria for issuing such
licence as provided by Article 7(5) of the EUA are:
a
to have the financial and technological capability necessary to operate the electric
utility business in the optimal manner;
b
to be able to carry out the electric utility business as planned;
c
all or a part of two or more business zones for operators of the electric distribution
business or specific supply districts for operators of the district electric business
must not overlap;
d
in the case of district electric businesses, to meet at least 60 per cent of the
electricity demand of a specific supply district and not to constitute any obstacle
to the supply of electricity by another operator to consumers residing in the
neighbouring area due to such business; and
e
to conform with the standards set by the Enforcement Decree of the EUA on the
basis of public necessity.
An operator of the electric utility business must set up the electric installations necessary
to operate the electric utility and start up the business within the period of preparation
determined by the Minister.9
Petroleum
Article 2 of the PBA defines the term petroleum as crude oil, natural gas (including
liquefied natural gas) and petroleum products [hydrocarbon oil and petroleum gas]10
7
8
9
10
Article 7(1) of the EUA; Article 5(1) of the Enforcement Rule of the EUA.
Article 4(1) of the Enforcement Rule of the EUA.
Article 9(1) of the EUA.
Article 2(i) and (ii) of the PBA.
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Korea
and categorises petroleum businesses into three types of business: petroleum refinery
businesses,11 petroleum export and import businesses12 and petroleum sales businesses.13
Anyone who intends to operate a petroleum refinery business must register his
or her business with the Minister by submitting an application for registration and a
business plan to the Korea Petroleum Quality and Distribution Authority, which was
established pursuant to Article 25-2 of the PBA.14 In connection with the petroleum
refinery businesses, anyone who intends to operate a business for manufacturing asphalt,
base oil and lubricant must report such business to the Minister.15
Also, anyone who intends to operate a petroleum export and import business
must register his or her business with the Minister 30 days prior to the expected date of
the initial customs clearance, by submitting an application for registration, a business
plan and import agent agreement to the Korea Petroleum Quality and Distribution
Authority.16 Such registration, however, is not required by a person who is already
registered as an operator of a petroleum refinery business, and for the import and export
of certain petroleum products such as asphalt, lubricant and base oil.17 In order to qualify
for the registration of a petroleum export and import business, an applicant must be
equipped with a storage facility capable of storing the greater of the quantity of 30 days
worth of planned domestic petroleum sales or 5,000kL.18 This provision was amended
in 2012 from the greater of the quantity of 45 days of the planned domestic sales of
petroleum or 7,500kL in order to promote competition in the petroleum export and
import business by relaxing the requirements.
Petroleum sales businesses are classified into (1) general agents and solvent agents;
(2) gas stations; (3) solvent vendors; (4) manufacture and sales businesses of petroleum
by-products; (5) secondary fuel oil vendors; and (6) general vendors, aviation fuel sales
business and special vendors. While (1) to (5) need to be registered with the head of the
local government,19 petroleum sales businesses that fall under (6) need to be reported to
the head of the local government.20
Urban gas
The UGBA defines the term urban gas as natural gas (including liquefied gas), petroleum
gas, by-product gas from naphtha and biogas21 and classifies urban gas businesses into
11
12
13
14
15
16
17
18
19
20
21
Article 2(iv) of the PBA.

Article 2(v) of the PBA.
Article 2(vi) of the PBA.
Article 5(1) of the PBA; Article 4(1) of the Enforcement Rule of the PBA.
Article 5(2) of the PBA; Article 8(1) of the Enforcement Decree of the PBA.
Article 9(1) of the PBA; Article 10(2) of the Enforcement Decree of the PBA.
Article 12(1) of the Enforcement Decree of the PBA.
Article 10(1) of the PBA; Article 12(1) to (6) of the Enforcement Rule of the PBA.
Article 2(i) of the UGBA; Article 1-2 of the Enforcement Decree of the UGBA.
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Korea
three businesses: gas wholesale business, general urban gas business and urban gas
recharging business. The UGBA also regulates natural gas export and import business.
Meanwhile, the amended UGBA, which will be effective from 22 July 2014, added
synthetic natural gas/substitute natural gas (SNG) to urban gas22 and added the SNG
manufacturing businesses and by-product gas from naphtha and biogas manufacturing
business to urban gas businesses23 for the manufacture and supply of SNG and biogas.
Besides the above, recently, the development of shale gas has become very active. In
line with the status of the international energy market, such as the expansion of the
Northeast Asia LNG purchase market, in order to allow private businesses to flexibly
take measures and seek new business opportunities in regard to such changes in the
international energy market a reporting system was implemented for businesses that
carries natural gas in and out24 and the sale of natural gas abroad by a direct importer for
self-consumption (which had imported the natural gas) is permitted.25
According to the amended UGBA, the definition of each urban gas business is as
follows:
a
Gas wholesale business: a business by which urban gas is supplied by a person,
other than an operator of general urban gas businesses or by-product gas from
naphtha and biogas manufacturing businesses, to general urban gas business
operators, urban gas recharging business operators or large users.26
b
General urban gas business: a business that supplies urban gas supplied by gas
wholesale business operators, or petroleum gas, by-product gas from naphtha
or biogas produced by the general urban gas business operator itself, to users
through pipelines according to the general demand.27
c
Urban gas recharging business: a business that supplies urban gas supplied by gas
wholesale business operators, or by-product gas from naphtha or biogas produced
by the urban gas recharging business operator itself, by recharging such gas in a
container, storage tank or tank fixed to a vehicle.28
d
By-product gas from naphtha and biogas manufacturing business: a business that
manufactures by-product gas from naphtha and biogas itself for self-consumption
or supplies to gas wholesale dealers or general urban gas businesses.29
e
SNG manufacturing business: a business that manufactures SNG itself for selfconsumption, supplies to gas wholesale dealers or supplies to a party that holds
the majority of the shares of the applicable SNG manufacturing business for such
parties self-consumption.30
22
23
24
25
26
27
28
29
30
Article 2(i) of the amended UGBA.

Article 2(i-2) of the amended UGBA.
Article 2(ix-2) and (ix-3); Article 10-2(3) of the amended UGBA.
Article 10-6 of the amended UGBA.
Article 2(iii) of the amended UGBA.
Article 2(iv) of the amended UGBA.
Article 2(iv-2) of the amended UGBA.
Article 2(iv-3) and Article 8-3 of the amended UGBA.
Article 2(iv-4) of the amended UGBA.
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Korea
f
g
Natural gas export and import business: a business exporting or importing natural
gas.31
Business that carries natural gas in and out: a business pursuant to Article 154 of
the Customs Act that carries natural gas in or out from the storage facility in the
bonded area.32
A person who intends to operate a gas wholesale business must obtain a licence from
the Minister33 and a person who intends to operate general urban gas business must
obtain a licence from the head of the local government.34 A licence for the gas wholesale
business and general urban gas business will only be granted if applications meet the
following requirements:35 (1) the relevant urban gas business is of an economic scale
appropriate for the public interest and general demand; (2) the relevant applicant has
financial resources and technical capability necessary to properly conduct such urban gas
business; and (3) the relevant applicant has the capability of establishing and maintaining
appropriate supply facilities for the stable supply of urban gas. A person who intends to
operate an urban gas recharging business and by-product gas from naphtha and biogas
manufacturing business must obtain a licence from the head of the local government
for each place of business.36 A person who intends to operate an SNG manufacturing
business must obtain a licence from the Minister for each place of business.37
Anyone who intends to operate a natural gas export and import business must
register his or her business with the Minister 30 days prior to the expected date of the
initial customs clearance, by submitting an application for registration and a business
plan (including current status or construction plan of the storage facility of natural gas
and a supply plan for the five years following the year of the import of natural gas).38 If
a natural gas export and import business operator who is an urban gas business operator
intends to conclude a natural gas import, export or transportation agreement, he or she
must obtain approval from the Minister after meeting the urban gas requirements in
relation to demand and supply, and appropriateness of price.39 Anyone who intends to
operate a business that carries natural gas in and out must report such business to the
Minister.40
31
32
33
34
35
36
37
38
39
40
Article 2(vii) of the amended UGBA.

Article 2(ix-2) of the amended UGBA.
Article 3(1) of the UGBA.
Article 3(2) of the UGBA.
Article 3(7) of the amended UGBA.
Article 3(3) of the UGBA and Article 3(4) of the amended UGBA.
Article 3(5) of the amended UGBA.
Article 10-2(1) of the UGBA; Article 10-5 of the Enforcement Rule of the UGBA.
Article 10-5(1) of the UGBA.
Article 10-2(3) of the amended UGBA.
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Korea
New and renewable energy
After the Minister of the Ministry of Trade, Industry and Energy engages in discussions
with the head of the applicable central administrative agency, it goes through deliberation
by the New and Renewable Energy Policy Counsel and, subsequently, it establishes a
basic plan for over 10 years for the promotion of technological development and use and
supply of new and renewable energy.41 Pursuant to the amended Act, which will become
effective from 22 April 2014, such basic plan must be established every five years.42 Also,
in order to achieve the goals set out in the basic plan, plans for implementation must be
established and carried out for each type of new and renewable energy every year.43
iii
Article 96 of the EUA provides that a foreign-capital invested company under the
Foreign Investment Promotion Act may not obtain a licence for an electricity generation
business under Article 7(1) of the EUA (such restriction is limited to the operation of
atomic power stations) or approval for a plan for the manufacture and supply of fuel
for atomic power generation under Article 28 of the EUA. There is no other restriction
on foreign-capital invested companies with respect to the operation of electric utility
businesses. The PBA and UGBA do not contain any provisions limiting foreign-capital
invested companies operation of the relevant businesses.
iv
With respect to an electric utility business, if a person intends to acquire all or part of
an electric utility business from its operator or to divide or merge a corporation that is
the operator of an electric utility business, it must obtain approval from the Minister.44
There are no particular restrictions on the acquisition, division or merger of petroleum
businesses and urban gas businesses.
III

SERVICES
Electric power
In Korea, KEPCO, which was established pursuant to the Act on the Korea Electric
Power Corporation, initially had a monopoly on the production and supply of electricity
as the Korean government decided that, in order to protect the public interest, it
would be appropriate for a public corporation to conduct the business of generating
and distributing electricity. The supply of electric power, however, became unstable
from the late 1980s due to a rapid increase in the demand for electricity, so the Korean
41
42
43
44
Article 5(1) and (2) of the amended UGBA.

Article 5(1) of the amended New and Renewable Energy Act.
Article 6(1) of the amended New and Renewable Energy Act.
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Korea
government enacted the Act on the Promotion of the Reorganisation of Electric Power
Industry in 2000 and privatised the electricity generation business by dividing KEPCOs
electricity generation business into six subsidiaries. As of 28 February 2014, the number
of private companies operating electricity generation business increased to 543 (among
such number, 529 were new and renewable energy development companies), and the
electricity generated by private companies other than KEPCOs subsidiaries accounts
for about 11.8 per cent of all electricity generated. Other electric utility businesses (i.e.,
electric transmission business, electric distribution business and electric sales business)
are still wholly operated by KEPCO.
Urban gas
The UGBA has various provisions that regulate the proper management of the supply
and consumption of urban gas, which is public property. A general urban gas business
operator and gas wholesale business operator must prepare and submit to the head of the
local government a gas supply plan for five years.
ii
Electric power
According to the EUA, only members of the KPX are entitled to carry out electric
utility transactions at the electric utility market45 and, other than a consumer who uses
30,000kVA or more, no consumer may purchase electricity directly from the electric
utility market.46 Accordingly, electricity produced by electricity generation business
operators must be supplied to electricity consumers by operators of electric transmission,
distribution and sales businesses. The EUA further provides that no operator of
the electricity generation business and electric sales business may refuse to supply
electricity without a justifiable reason47 and the operator of an electric utility business
must maintain the quality of service that it provides.48 Moreover, operators of electric
transmission businesses, electric distribution businesses and district electric businesses
must be equipped with and maintain and manage installations meeting the standards
determined and publicly notified by the Minister so as to smoothly transmit or distribute
electricity regardless of changes in the supply and demand of electricity.49
Petroleum
The PBA has various provisions that regulate the management of the quality of petroleum
products and prevent the distribution of pseudo-petroleum products.50
45
46
47
48
49
50
Article 44 of the EUA.

Article 32 of the EUA; Article 20 of the Enforcement Decree of the EUA.
Products manufactured by a method of mixing petroleum products with other petroleum
products or petrochemicals; Article 2(x) of the PBA.
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Korea
In the event that a petroleum refinery business operator, petroleum export and
import business operator or a registered petroleum sales business operator intends to
sell or deliver certain petroleum products (e.g., gasoline for vehicles, kerosene, light oil,
petroleum by-products), such operator must have the petroleum products inspected by a
quality inspection institution appointed by the Minister.51 Any operator will be prohibited
from selling or delivering petroleum products that have failed such quality inspection.52
According to Article 29(1) of the PBA, no one may engage in manufacturing, importing,
storing, transporting or keeping pseudo-petroleum products.
Meanwhile, in order to promote the expansion of the exporting of petroleum
products, the amended Act, which will become effective on 22 July 2014, stipulates
that the blending of petroleum products at the general bonded area for the purpose
of export only, as well as storing and transporting such mixture, will not be viewed as
manufacturing of fake petroleum products.53
Urban gas
A general urban gas business operator and gas wholesale business operator may not refuse
to supply urban gas to gas users in the licensed service area without a justifiable reason.54
Each urban gas business operator must have the urban gas that it supplies inspected by
an urban gas quality inspection institution in order to confirm that such gas fulfils the
required quality standards.55
iii Rates
Electric power
An operator of an electric sales business must prepare terms and conditions concerning
electric utility charges and other conditions of supply (i.e., supply districts, type of supply
and supply voltage and frequency), and obtain approval from the Minister.56 Further, an
operator of the electric sales business must specify the details of the utility charges based
on items in electric utility bills charged to consumers of electricity.57 An operator of the
electric transmission business or electric distribution business must set charges for the
use of electric installations and other matters concerning the conditions of their use.58
51
52
53
54
55
56
57
58
Article 27 of the PBA.
Article 29(2)(v-2) of the amended PBA.
Article 19 of the UGBA.
Article 16(1) of the EUA; Article 16(1) of the Enforcement Rule the EUA.
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Korea
Petroleum
A petroleum refinery business operator, petroleum export and import business operator
and petroleum sales business operator must report their sale prices of petroleum products
to the Minister.59
Urban gas
A general urban gas business can have a party that is requesting a change in the contract
regarding the supply of urban gas or supply of gas pay for all or a portion of the installation
costs of the gas supply equipment/facilities (Article 19-2). Also, where it is difficult to
supply urban gas for any of the reasons stipulated under Article 19, the national and local
government can pay for all or a portion of the installation costs (Article 19-3). An urban
gas business must obtain the approval of the Minister of Ministry of Trade, Industry
and Energy or governor or mayor in determining the rate. When a determined rate is
changed, the same approval is required (Article 20-1).
iv
Electric power
Where an operator of an electric utility business intends to perform the works for setting
up or altering electric installations for the electric utility, he or she must obtain approval
for the plan for such works from the Minister,60 and undergo periodic inspections
conducted by the Minister.61
New and renewable energy
If the Minister of the Ministry of Trade, Industry and Energy deems it necessary for the
promotion of the use and supply of new and renewable energy or to increase the vitality of
the new and renewable energy business, it may make it mandatory for a party that holds
over 500,000 kilowatts of generating units (excluding equipment for new and renewable
energy), the Korea Water Resources Corporation and the Korea District Heating
Corporation to use new and renewable energy with respect to a determined generation
quantity per year within the scope of 10 per cent of the total power production amount
for supply energy.62 Where the Minister of the Ministry of Trade, Industry and Energy
deems that the above party with the obligation to supply did not fulfil its obligation by
not using sufficient new and renewable energy in supplying its energy, the Minister may
impose an administrative fine.63
59
60
61
62
63
Article 38-2(1) of the PBA.

Article 12-5(1) and (2) of the New Energy and Renewable Energy Development, Use and
Supply Promotion Act; Article 18-3 of the Enforcement Decree of such Act.
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Korea
IV
ENERGY MARKETS
Electricity
As previously described, transactions regarding electricity take place at the KPX pursuant
to the EUA, which was established as an independent legal entity on 2 April 2001.
Specifically, transactions occur between the over 500 electricity generation business
operators and a sales business operator, 24 hours a day and 365 days a year, based on
prices that change every hour.
Gas
Gas is divided into the wholesale sector and retail sector, and the Korea Gas Corporation
is in charge of business in the wholesale sector, and regional urban gas companies are
in charge of business in the retail sector. Specifically, through the main line operated by
the wholesaler operator (i.e., the Korea Gas Corporation), gas is supplied to the general
urban gas companies, and urban gas companies supply consumers through the pipes
that are operated regionally. Due to the public nature of the gas business, the central
government oversees and supervises each of the duties of the wholesaler operator and
local governments oversee and supervise each of the duties of retail operators.
ii
Electricity
Electricity is regulated through the EUA. Electricity transactions must occur through
the Korea Power Exchange and users of electricity cannot directly purchase electricity
from the power market (EUA, Article 31). Electricity transactions are regulated by
the power market operating regulations as determined by the Korea Power Exchange
pursuant to Article 43 of the EUA and, pursuant to Article 53 of the EUA, the Electricity
Commission, which is a part to the Ministry of Trade, Industry and Energy (MOTIE),
regulates the above.
Gas
Gas is regulated pursuant to the Urban Gas business Act (UGBA). With respect
to the importing (wholesale) of gas, aside from the direct importing system for selfconsumption, it is exclusively imported by the Korea Gas Corp. Urban gas businesses
purchase urban gas from the Korea Gas Corp and sell it to consumers.
iii
Electricity
The price on the electricity market is determined based on the electricity demand
price predicted by the KPX a day in advance and the supply bid price of the electricity
generation business operators. The electric charge (the sales price of businesses that sell
electric), however, is approved by the government pursuant to laws such as the EUA, as
opposed to supply and demand, due to its public nature. After a large-scale power outage
in Korea on 15 September 2011, electric costs were increased a total of four times until
November 2013. The main reason behind such increase was due to the actual usage
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Korea
amount in light of reflecting the increased costs. In particular, in November 2013 electric
costs increased by an average of 5.4 per cent and, among such increase, the industrial
electric cost increased by 6.4 per cent. According to the 2nd Basic Energy Plan confirmed
in January 2014, it is possible that the electric cost could still be increased for the purpose
of managing use. Also, besides classifying the costs based on use as in the past (e.g.,
industrial, general and housing), a variety of rate systems are planned to be adopted such
as distinguishing the rate based on the season or period or imposing the rate based on the
quality of power selected by the consumer.
Gas
The transacting price in the wholesale sector is determined based on the contracts
executed between the Korea Gas Corporation and urban gas companies. Since the
Korea Gas Corporation imports all of its gas, it is directly or indirectly regulated by
the government regarding the import volume and conditions. With respect to the issue
of whether to strengthen or relax regulations on importing gas, there are differences in
views between the government (which favours relaxation) and the National Assembly
(which favours strengthening). In the retail sector, approval of the charge is required
from local governments.
iv
Market developments
On 21 January 2014, the UGBA was partially amended to permit the sale of direct
imports for self-consumption (currently for generating power SK and for manufacturing
steel POSCO) abroad (Article 10-6(1)). While this could result in the development of
a new market, the sale of direct imports for self-consumption in Korea by the private
sector is still prohibited.
V
The Act on Promotion of Alternative Energy was enacted in the 1980s, and the
government later established its comprehensive support policy, the Basic Plan for
Technical Development for Alternative Energy (19882001). Also, in order to achieve
its efficient promotion, the government established the Alternative Energy Business
Department within the Korea Energy Management Corporation as the organisation in
charge of the development of new and renewable energy.
In the 1990s, in order to prepare for the Climate Change Convention, the
comprehensive technology development plan for energy and the environment, the
Energy Technology Development 10-Year Plan (19972006), was established to establish
a system to promote technological development of not only new and renewable energy,
but also to help saving energy, and develop clean energy and resource technology.
As 2000 approached, there was a new understanding of the importance of new and
renewable energy and, in order to strengthen policies regarding technical development
and its increased use, the Act on Promotion of Alternative Energy was amended to
become the Act on Promotion of Development, Use and Diffusion of Alternative Energy.
Such Act served to form the basis for business promotion regarding feed-in tariffs (FITs)
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Korea
for new and renewable energy general output, an obligation for public institutions to
use new and renewable energy and new and renewable energy equipment certification
procedures, etc., which made it possible to create an early market for new and renewable
energy.
The Basic Plan for Development and Use of New and Renewable Energy (2003
2012) was established and implemented for the further promotion of new and renewable
energy development and dissemination, and the relevant law was again amended in 2004.
Korea applied FITs from 2002, but in 2012 they were replaced by the Renewable
Portfolio Standard (RPS), which obligates certain operators of energy businesses to supply
certain amount of new and renewable energy. In March 2014, according to the RPS,
KEPCO and its six subsidiaries will invest a total of 42.5 trillion by 2020 to increase the
supply of ESS using wind or solar power and other new technologies from the current
0.8GW to 12.3GW. The government is, however, considering reimplementing the FIT
system, particularly for small to medium-sized companies.
Also, new systems have been put in place such as the 1 Million Green Homes
Project, where the goal is to build 1 million units of new and renewable energy housing
by 2020. Further, under the new and renewable energy financial support plan, the
new and renewable energy equipment industry is being fostered by reducing initial
investment costs and assisting in economic feasibility based on long-term low-interest
financial support to consumers that install equipment to use new and renewable energy
and manufacturers of equipment that use new and renewable energy.
In order to promote the growth of Koreas new and renewable energy industry
in the relevant market, the government has established the 4th Basic Plan for New
and Renewable Energy for the second half of 2013 and, through methods such as the
newly organised supply business structure and mandatory system of mixing new and
renewable energy, it is promoting various policies to promote the new and renewable
energy environment.
ii
In 1995, the government established the use of demand management investment plans
for energy suppliers pursuant to Article 12 of the Energy Use Rationalisation Act (Article
9 in the current version of the Act) and these plans have been in use since 1996 by
companies such as KEPCO, the Korea Gas Corporation and the Korea District Heating
Corporation. Meanwhile, due to the restructuring and privatisation of the electricity
industry, and based on the amendments to the EUA, the government established the
groundwork formation plan for the electricity industry in December 2000, which,
with the government funds for such groundwork, separately promotes the demand-side
management businesses.
Under the electricity demand management policy, which was established in order
to achieve a stable supply and demand of electricity and efficient electricity use, the
representative businesses are divided into load management businesses, which reduces
the maximum electricity demand, and energy-efficiency businesses, which reduces
electricity consumption through high-efficiency devices. In terms of gas and heating, for
the management of a stable supply and demand, emphasis is put on the dissemination
of gas cooling and cogeneration facilities and efforts are being made to obtain greater
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Korea
energy efficiency compared with individual heating systems through regional heating
and cooling businesses.
According to the 6th Electricity Supply and Demand Basic Plan, which was
announced by the MOTIE in February 2013, the government is strengthening measures
to manage demand by companies, such as the demand adjustment programme of
advance notice (where financial incentives are offered to customers who reduce their
demands at peak times by observing contract terms and conditions during the KEPCOannounced summer and winter peak periods) and load reduction by adjusting vacation
or maintenance schedules, as well as using smart meters to manage the electricity-saving
system and intelligent demand.
iii
In 2004, Korea held the Green Energy Expo in Daegu City, as a pioneer in new and
renewable energy technology development. While recently the solar power industry
has been facing relative difficulties, technical development in the alternative energy
field such as wind power is very active. In particular, in the case of Korea, there is
rapid development in the fuel cells field. Also, based on the joint participation of the
government and private sector, a strategy for technical development for energy called
the Green Energy Strategy Roadmap has been established and implemented and such
roadmap has information on the short, medium and long-term plans for 15 technical
sectors that require intensive development.
With respect to new and renewable energy technology, through the financing of
funds and commercialisation of businesses for new and renewable energy technology, the
Minister of Ministry of Trade, Industry and Energy may support such businesses through
the gratuitous transfer of industrial property rights obtained by the government and
provision of education and advertising regarding developed new and renewable energy
technology.64 Also, among those companies that seek to install new and renewable energy
as a speciality, those that satisfy a certain standard may make a report to the Minister of
Ministry of Trade, Industry and Energy and,65 if recognised to be necessary for use and
supply of new and renewable energy, the Minister can provide support such as financial
support for some of the necessary costs for the speciality company.66
In the case of the Smart Grid, based on the February 2009 Report by the
Presidential Committee on Green Growth, Korea (1) selected the Smart Grid as the
core infrastructure for green growth in Korea, (2) became the first country to establish
a smartgrid country roadmap, (3) enacted the Act on Promotion of Deployment and
Utilisation of Intelligent Electricity Network, and (4) built the Jeju Island Smart Grid
Test-Bed. Between 2013 and 2017, in fields such as electronic vehicles, there are plans to
implement the smartgrid expansion businesses.
64
65
66
Article 22-1 of the UGBA.

Article 22-1 of the UGBA.
Articles 22-4 and 27 of the UGBA.
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Korea
VI
THE YEAR IN REVIEW
Since the Geun-Hye Park administration took office in Korea in 2013, the following
policies have been established in relation to the energy sector:
a
expanding the electric power production equipment to prevent incidents such as
the large-scale power outage in 2011 from recurring;
b
implementing the 2nd Basic Plan to increase the proportion of new and renewable
energy in the long-term energy mix, in which the original target in the energy
mix is reduced from 41 to 29 per cent while the new and renewable energy is
maintained at 11 per cent;
c
safe management of nuclear power and measures against cyber terrorism;
d
efforts to reduce greenhouse gases, such as increasing the use of Smart Grid and
improving thermal power plants (such as increasing the implementation of the
integrated gasification combined cycle (IGCC));
e
promoting an energy rate policy that accurately reflects production costs; and
f
pursuing growth for overseas resources development.
The Energy Use Rationalisation Act has been amended so that manufacturers and
importers of vehicles where the fuel efficiency standard is below a certain threshold may
be handed administrative fines.67
VII
There were two important incidents in 2011 that have had a significant effect on
Koreas energy policies and laws: the Fukushima nuclear power plant accident in Japan
on 11 March and the large-scale power outage on 15 September in Korea. Due to the
Fukushima nuclear accident, the likelihood is high that nuclear energy, which accounted
for about 12 per cent of the energy mix, will be reduced in the future and the reduced
amount would be replaced with new and renewable energy. The power outage was the
combined result of factors such as the failure to predict electricity demand, the electricity
price, which fell short of the production cost, and structural deficiencies in the industry,
and this is likely to cause policy-oriented changes to the electricity industry, such as an
increase of electricity rates.
Meanwhile, the production capacity of Koreas petrochemical businesses is the
fifth-largest in the world as of 2011. While there are limitations to focusing on new and
renewable energy-concentrated policies in Korea, since it has a high energy consumption
that relies heavily on imports compared with other countries that are focused on the
service industry, it needs to make continuous efforts to react to climate change.
67
According to the above, in the case that a vehicle manufacturer sold 100,000 vehicles that were
below the standard, a maximum of 8.2 billion won in administrative fines may be imposed.
263
Chapter 20
MALAYSIA
Lukman Sheriff Alias1
I OVERVIEW
2013 saw significant progress in Malaysias energy sector. In the past year, the Energy
Commission has completed tender exercises in relation to two new coal-fired power
plants, one being a 1,000MW brownfield power plant located at Manjung, Perak
(Track 3A) and the other being a 2 x 1,000MW greenfield plant located at Jimah, Negri
Sembilan (Track 3B). The bidding invitation for Track 3A and Track 3B has attracted
the participation of renowned players in the nations energy industry, where the tender
in relation to Track 3B takes the form of a competitive international bidding exercise.
Such a trend is testament to the Energy Commissions commitment to introduce and
implement an open bidding system for power projects to attract quality players to
develop the nations energy industry.
The Malaysian energy industry has also experienced significant progress in its
renewable energy sector, with further increase in the approval and award of renewable
energy installations and the development of the nations first geothermal plant in Tawau,
Sabah. This development is much welcomed in the nations renewable energy circles, as
Malaysia seeks to further explore the potential of renewable energy resources in terms of
generating sufficient electricity to meet the nations growing demand for energy.
For reference, the energy industry referred to in this chapter is confined to the
electricity supply industry.
II REGULATION
The regulatory regime for the supply of electricity in Malaysia is divided into two. The
first is the primary regulatory regime applicable to the whole of Malaysia, except for
Lukman Sheriff Alias is a partner at Zul Rafique & Partners.
264
Malaysia
Sarawak, which is a state in East Malaysia. The Energy Commission of Malaysia is the
regulator. The other regulatory regime applies exclusively to the supply of electricity in
Sarawak. The Director of Electricity Supply is the regulator for Sarawak.
i
The regulators
Malaysia
The Energy Commission of Malaysia is a statutory body established under the Energy
Commission Act 2001 (Act 610) responsible for regulating the energy sector and
enforcing energy supply laws in Peninsular Malaysia and Sabah. In particular, it regulates
activities relating to supply and use of electricity including the generation, transmission
and distribution of electricity supply and also those relating to the supply and use of
gas including the delivery, transportation, distribution and reticulation of gas supply.
The Energy Commission, however, does not regulate activities pertaining to petroleum
development activities, which include upstream gas exploration and mining, which are
governed by other laws including the Petroleum Mining Act 1966 (Act 95). The Energy
Commission is under the purview of the Ministry of Energy, Green Technology and
Water.
The relevant laws under its jurisdiction comprise laws not only relating to
electricity supply law as listed below, but also the following:
a
the Gas Supply Act 1993 (Amendment) 2001;
b
the Gas Supply Regulations 1997 (Amendment) 2000; and
c
the Gas Supply (Compoundable Offences) Order 2006.
The Energy Commission Act 2001 confers on the Minister of Energy, Green Technology
and Water the prerogative to appoint the members of the Energy Commission. At
present, the Energy Commission comprises 10 members from various backgrounds
and the newly appointed Chairman, Dato Ir Abdul Razak bin Abdul Majid, who was
previously the Chief Executive Officer of MyPOWER Corporation, a special purpose
vehicle under the Ministry of Energy, Green Technology and Water set up to initiate the
transformation of the Malaysian electricity supply industry.
Although the Energy Commission Act 2001 expressly covers the whole of
Malaysia, by virtue of the Suspension of the Operation of the Act (Sarawak) Order 2001,
the operation of the Energy Commission Act is suspended for the state of Sarawak.
Sarawak
The regulator for the supply of electricity in Sarawak is the Director of the Electricity
Supply. This position was created pursuant to the provisions of the Sarawak Electricity
Ordinance (Chapter 50 Revised 2002). The Director of Electricity Supply heads the
Electrical Inspectorate Unit (EIU) under the Ministry of Public Utilities in Sarawak.
The functions of the EIU are to:
a
advise the Sarawak government on the policy and direction with regard to the
planning and development for an adequate, reliable, efficient, affordable and safe
power system in the state;
b
monitor the technical performance of the industry in general and licensees in
particular to ensure technical compliances and public safety; and
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Malaysia
c
provide an environment that encourages continued investment in the sector,

efficiency improvement and to protect consumer interests.
The Electrical Inspectorate Unit is also responsible for the following matters:
a
licensing of electricity generation and supply;
b
registration of electrical installations;
c
registration of electrical contractors;
d
issuance of certificates of competence for competent persons;
e
establishment of technical and safety standards, monitoring performance and
enforcing compliance;
f
safety of electrical equipment and appliances;
g
accidents notification and investigations; and
h
technical and economic regulation of the planning, development and operation
of the power grid system.
ii
Malaysia
The relevant laws relating to the supply of electricity in Malaysia are as follows:
a
the Electricity Supply Act 1990 (Amendment) 2001;
b
the Electricity (Amendment) Regulations 2013;
c
the Electricity (Amendment) Regulations 2014;
d
the Electricity Regulations 1994 (Amendment) 2003;
e
the Licensee Supply Regulations 1990 (Amendment) 2002;
f
the Electricity Supply (Compounding of Offences) Regulations 2001; and
g
the Efficient Management of Electrical Energy Regulations 2008.
The primary source of law is the Electricity Supply Act 1990 (Act 447) (ESA). It provides
regulation for the supply of electricity, licensing of any electrical installation, the control
of any electrical installation, plant and equipment, the safety of persons using such
installation and the efficient use of electricity. This is provided in the preamble to the
ESA.
Under the ESA, no person can use or operate any electrical installation or supply
energy from such installation to any person without obtaining the required licence from
the Commission. In essence, any company seeking to either undertake the generation,
transmission or distribution of electricity would thus have to obtain a licence from the
Energy Commission.
Another important aspect of the ESA is the control of the tariff chargeable by
licensees. Under the ESA, any levy or tariff imposed must obtain prior written approval
from the Minister and so requires the decision of the Cabinet. The ESA also sets out the
provisions on the requirement of competent persons to operate electrical installations
and stipulates the duties and obligations incumbent on licensees.
Sarawak
The legal framework for the supply of electricity industry in Sarawak comprises the
following laws:
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Malaysia
a
b
c
d
e
f
the Electricity Ordinance (Chapter 50);

the Electricity (Amendment) Ordinance 2003 (Chapter A109);
the Electricity Rules 1999;
the Electricity (State Grid Code) Rules 2003;
the SESCO Ordinance, 1962 (Cap 51); and
the Sarawak Electricity Supply (successor Company) Ordinance, 2004.
The primary source of law in Sarawak for electricity supply is the Electricity Ordinance
as amended by the Electricity (Amendment) Ordinance 2003.
The Energy Ordinance prohibits any person from using and operating any
electricity installation, the supply, distribution and transmission of energy from such an
installation and the establishment of any installation or power generating plant without
obtaining a licence from the Sarawak state government represented by the head of state,
Yang DiPertua Negeri. Thus, any company seeking to either undertake the generation,
transmission or distribution of electricity would have to obtain a licence from the
state. Any tariff charged by the licensee must be approved by the state government.
The Electricity Ordinance also stipulates that the Minister may also set out a maximum
price for the reselling of energy by a licensee to consumers. Apart from the foregoing,
the Electricity Ordinance sets out provisions on the requirements of competent person
to operate electrical installations and stipulates the duties and obligations incumbent on
licensees.
iii
Malaysia
At the time of writing, only Tenaga Nasional Berhad (TNB) has been awarded
transmission and distribution licences for the whole of Malaysia except for the states of
Sabah and Sarawak.2 The government and Energy Commission have, however, awarded
the generation licences to a number of independent power-producing companies other
than TNB.
For the state of Sabah, Syarikat Electricity Sdn Bhd (SESB) is the sole transmission
and distribution licence holder. Similar to Peninsular Malaysia, generating licences have
been awarded to SESB and a few other independent power-producing companies.
There is no provision in law restricting the ownership of the licences; however,
approvals normally contain restrictions on ownership pertaining to Malaysian and
Bumiputera shareholdings. In the 3B Project, the majority shareholding is held by a
local entity.
Sarawak
The sole transmission and distribution licence in Sarawak has been granted to Syarikat
Sesco Berhad (SESCO), which is the privatised entity of Sarawak Electricity Supply
Distribution licences are awarded by the Energy Commission in peninsular Malaysia for the
supply of electricity within a private area or within a franchise area such as within a port or
industrial area.
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Malaysia
Corporation. It is a wholly-owned subsidiary of Sarawak Energy Berhad (SEB), which
is majority owned by the Sarawak state government. The generating licences have been
granted to SESCO and subsidiaries of SEB.
iv
Under the ESA in Malaysia, licences cannot be transferred without the approval of the
Minister. Under the Ordinance in Sarawak, licences cannot be assigned or transferred in
any manner without the approval of the state government.
III

SERVICES
The transmission and distribution network in Malaysia has not been unbundled and
in essence can be divided into three parts. One is Peninsular Malaysias distribution
network, which is wholly-owned, controlled and operated by TNB, except in certain
privatised or franchise areas. The other is the Sabah network, which is owned, controlled
and operated by the SESB, and the third is the Sarawak network, owned, controlled
and operated by SESCO. As a result, Malaysia has three grid codes: the Malaysian Grid
Code, the Labuan and Sabah Grid Code, and the Sarawak Grid Code. In addition, there
is a Malaysian Distribution Code.
IV
ENERGY MARKETS
There is no wholesale electricity market in Malaysia. It has only liberalised certain parts
of the generation market and even then the supply of electricity from TNB, SESB and
SESCO forms the main portion of the supply chain. Each generation company enters
into a power purchase agreement expressly stipulating the manner of supply of electricity
to the grid. The grid system operator determines the order of priority for despatch of
the plant. Electricity tariffs are regulated and fixed by the government as opposed to
following market prices.
ii
There have been no new energy market rules and regulations for the past year, save
for the Electricity (Amendment) Regulations 2013 and the Electricity (Amendment)
Regulations 2014.
iii
In August 2013, TNB signed a 25-year power-purchase agreement (Manjung PPA)

with the state-controlled utilitys wholly-owned unit TNB Manjung Five Sdn Bhd. The
Manjung PPA was executed as a result of the award of the Track 3A Project, a 1,000MW
coal-fired brownfield plant to TNB by the Energy Commission, on 16 July 2013.
Under the Manjung PPA, TNB Manjung Five will design, construct, own, operate
and maintain Track 3A in Manjung, Perak. The Manjung PPA, which has an expected
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Malaysia
commercial operation date of 1 October 2017, governs the obligations of the parties to
sell and purchase the daily available capacity and the net electrical output generated by
the facility for a period of 25 years in accordance with the agreed terms and conditions.
In addition, TNB has also entered into two other agreements in relation to the
Track 3A Project; namely a shared-facilities agreement with TNB Manjung 5 and TNB
Janamanjung Sdn Bhd and also a coal supply and transportation agreement. These
agreements were executed to enable TNB to use and have access to the facilities owned
by TNB Janamanjung and to procure the supply of coal to the Track 3A project facility.
iv
Market developments
In the past year, the Energy Commission has completed the tender exercise in relation
to a 2 x 1,000MW coal-fired power plant (Track 3B). Track 3B is an international
competitive bidding exercise undertaken by the Energy Commission which has received
an overwhelming response. The Energy Commission announced on 28 February 2014
that the 1MDB-Mitsui Consortium had been selected to build, own and operate Track
3B at Jimah, Negri Sembilan, beating close competition from YTL Power International
Limited and five other bidders, namely Automan Energy Sdn Bhd, Formis Resources
Bhd, Global Power Ventures Sdn Bhd, Malakoff Corp Bhd and Tadmax Energy Sdn Bhd
who ventured with various other international corporations.
Continuing the progressive pace of the energy market development, the Energy
Commission has also announced plans to call for tenders in relation to the construction
of two 1,000MW new gas-fired power plants, namely Track 4A and Track 4B. Such plans
were mooted in anticipation of increased electricity consumption in Peninsular Malaysia
by 2019.
V
Two laws govern the renewable energy sector in Malaysia. One is the Sustainable Energy
Development Authority Act 2011 (Act 726), and the other is the Renewable Energy Act
2011 (Act 725).
The regulator for renewable energy is the Sustainable Energy Development
Authority (SEDA) that was established under the Sustainable Energy Development
Authority Act 2011 (Act 726). At the time of writing, the Sustainable Energy
Development Authority Act 2011 has yet to come into force in the state of Sarawak.
The primary function of SEDA includes administering and managing the
implementation of the feed-in tariff (FiT) mechanism as prescribed under the Renewable
Energy Act 2011 and also extends to:
a
advising the government on all matters relating to sustainable energy including
recommending policies and laws on sustainable energy;
b
implementing sustainable energy laws; and
c
promoting and developing sustainable energy.
The laws pertaining to renewable energy are as follows:
a
the Renewable Energy Act 2011 (Act 725);
b
the Renewable Energy (Criteria for Renewable Resources) Regulations 2011;
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c
d
e
f
g
h
i
j
k
the Renewable Energy (Criteria for Renewable Resources) (Amendment)

Regulations 2013;
the Renewable Energy (Allocation from Electricity Tariffs) Order 2013 (which
revoked the Renewable Energy (Allocation from Electricity Tariffs) Order 2011);
the Renewable Tariff (Feed-in Approval and Feed-in Tariff Rate) Rules 2011;
the Renewable Energy (Feed-in Approval and Feed-in Tariff Rate) (Amendment)
Rules 2013;
the Renewable Energy (Feed-in Approval and Feed-in Tariff Rate) (Amendment)
(No. 2) Rules 2013;
the Renewable Energy (Renewable Energy Power Purchase Agreement) Rules
2011;
the Renewable Energy (Technical and Operational Requirements) Rules 2011;
the Renewable Energy (Recovery of Moneys by Distribution Licensee) Rules
2011; and
the Renewable Energy (Administrative Fees) Order 2011.
The primary law is the Renewable Energy Act 2011, which establishes the FiT system
that sets up the following framework:
a
the connection of supply line for the distribution of renewable energy;
b
the priority of purchase and distribution; and
c
the feed-in-tariff rates.
Any person who wants to generate renewable energy must first obtain approval from
SEDA. The maximum permitted generating capacity for each renewable energy
installation is no more than 30MW unless the government approves otherwise.
Initially, the Renewable Energy Act only recognises the following renewable
sources of energy; biogas, biomass, small hydropower (not exceeding 30MW) and solar
photovoltaic. As of 1 January 2014, via the Renewable Energy (Amendment of Schedule)
(No. 2) Order 2013, the Renewable Energy Act was amended to recognise geothermal as
a source of renewable energy. Other renewable resources such as those from wind or wave
farms are currently not covered by the current FiT system, though SEDA has announced
that it is undertaking a study on the viability of wind farms.
The Renewable Energy Act provides a standard form of renewable power purchase
agreement which is to be entered into by the parties as prescribed by SEDA. It also sets
out the terms of priority purchased which puts an obligation on the distribution licensee
to purchase renewable energy in priority of other non-renewable sources of energy. The
only exception to this rule is when SEDA grants an exemption on the ground of public
and private safety.
The FiT mechanism under the Act provides various tariff rates and periods for
different renewable resources. The tariff mechanism also takes into account different
technologies and materials used by providing differing rates. There are also provisions for
a fixed annual regression rate of the feed-in-tariff rate. SEDA has a further right to review
and revise the regression rate every three years; however, the Renewable Energy Act
provides that such review must take into account, inter alia, the ability of FiT approval
holders to recover their initial cost and to achieve satisfactory returns within a reasonable
timescale.
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In addition to the foregoing, the Renewable Energy Act further provides provisions
for technical and operational requirements. Assignment and transfer of FiT approvals
can only be made upon obtaining approval of SEDA.
VI
THE YEAR IN REVIEW
The energy industry in the past year has seen the continuance of the Energy Commissions
practice of implementing an open bidding exercise in respect of power project tenders.
This is true considering the successful tenders relating to Track 3A and Track 3B. This
was followed by the plans to call for tenders for the construction of two new gas-fired
power plants, namely the Track 4A and Track 4B projects.
Malaysia has also experienced encouraging developments in its renewable energy
sector. By October 2013, SEDA has approved 2,628 renewable energy applications with
a total installed capacity of 484MW since the implementation of the FiT mechanism on
1 December 2011. Solar photovoltaic (solar PV) installations had the highest percentage
for approved applications at 39.7 per cent or 192MW of installed capacity. Biomass
came second at 152.5MW or 31.5 per cent, while small hydro had 23.8 per cent or
115.1MW and biogas 5.01 per cent or 24.2MW.
Further, SEDA is empowered under the Renewable Energy Act to review the
degression rates at least once every three years. In January 2014, SEDA revised the
degression rates in respect of biomass, biogas and solar PV. The degression rates for both
biomass and biogas have been reduced from 0.5 to zero per cent while there has been
an increase of the bonus rate for use of locally manufactured or assembled gas engine
technology (biogas) and use of locally manufactured or assembled boiler or gasifier
(biomass). These new degression and bonus rates are effective from 1 January 2014.
As for solar PV, the degression rates have been adjusted to 10 per cent across
the entire Schedule with the exception to the bonus criteria of locally manufactured
or assembled solar PV modules and solar inverters. For these two bonus criteria, their
degression rates have been retained at zero per cent and their bonus rates adjusted
upwards for solar PV modules and solar inverters. The new degression and bonus rates
for solar PV are effective from 15 March 2014.
Another renewable energy milestone is the plan for the countrys first geothermal
plant called the Apas Kiri Geothermal Prospect, located in the district of Tawau, Sabah.
The geothermal plant is being developed by Tawau Energy Sdn Bhd and expected to
become operational by the second quarter of 2016. The electricity output from the
geothermal plant will be sold to SESB via an interconnection to SESBs State Grid
under a 21-year renewable energy power purchase agreement. This project is expected to
mitigate about 200,000 tonnes of carbon dioxide emissions annually.
VII
During the past few years, the Energy Commission has been actively calling for proposals
from the energy industry players to either build or operate power plants in the quest to
satisfy the nations ever-growing demand for energy. In doing so, the approach taken by
the Energy Commission in liberalising the bidding process for energy projects only shows
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its intention to make the nations energy industry more competitive and progressive.
Such an approach is expected to continue as independent power producers (IPPs) are
making preparations in anticipation of the Energy Commission calling for proposals to
build gas-fired power plants under Track 4A and Track 4B sometime in 2014.
Similar positive developments can be found in the renewable energy sector
where there has been encouraging growth in renewable energy installations and further
recognition of geothermal as a new source of renewable energy.
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Chapter 21
MEXICO
Gonzalo A Vargas1
I OVERVIEW
During the last part of 2013 and the beginning of 2014, after many years of discussion
between several political groups, some amendments to Articles 25, 27 and 28 of the
Mexican Constitution were carried out with the intention of opening up the energy
market in such a way that (1) contracts related to the exploration for and exploitation
of oil shall evolve into much more attractive schemes for private investment; (2) private
entities may participate in refining, petrochemical, transport, extraction and storage
activities related to oil products; and (3) private entities may generate electricity to sell
to the Federal Electricity Commission (CFE) or private entities or persons. However, the
constitutional amendment provides that secondary laws must determine the manner and
scope in which the Mexican government shall exploit the hydrocarbon and energy sector
and award contracts for such purposes, in the understanding that secondary laws are still
to be enacted at the time of writing.
Notwithstanding the above, and until such secondary laws are enacted, for 76 years
the exploration and exploitation of oil and gas have been reserved to the Mexican state
through the governmental agency Petroleos Mexicanos (Pemex). In the electricity sector,
for 77 years the CFE has been responsible for designing and developing the required
infrastructure for the generation and distribution of energy. Since the 1982 amendment
to the Law of the Public Service of Electric Energy (the Electric Energy Law), which
allowed, under limited schemes, the participation of the private sector in the generation
of energy, private companies slowly started to participate under the available schemes,
but the CFE has remained the cornerstone of the sector, given that not only did it
retain ownership of producing plants, but also the distribution network and the exclusive
rights to transfer energy. The applicable regulatory legal framework has been further
Gonzalo A Vargas is a partner at Gonzlez Calvillo, SC.
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Mexico
enhanced with a view to creating more equitable grounds for different participants in the
field, and diminishing the discretionary powers of the CFE, thus allowing it to maintain
its plants and transmission network, but at the same time incentivising further private
sector participation.
II REGULATION
i
The regulators
The main authority in charge of regulating all matters related to the energy sector is
the Ministry of Energy, with the active participation of two entities with administrative
independence from the Ministry of Energy, the Regulatory Energy Commission (CRE)
and the National Hydrocarbons Commission (CNH).
The CRE is responsible for regulating all matters related to private energy
production, transportation and first-hand sale to private parties,2 except for the
exploitation and extraction of hydrocarbons, as well as its shipment and storage, which
falls under the competence of the CNH. Mexican law specifies that refined hydrocarbons
and gas extracted from ground deposits of mineral carbon, as well as the first-hand sales
to private parties, shipment, storage and distribution of basic petrochemicals that can
be used as raw materials for industrial production do not fall within the purview of the
CNH, the CRE thus being the competent regulatory authority.
The CRE is entitled to:
a
participate in the determination of the tariff for the distribution, transmission
and delivery of electricity;
b
approve and establish the terms and conditions for the first-hand sale to private
parties, shipments, storage and distribution of gas, oil, products obtained from oil
refining, basic petrochemicals and bioenergetics;
c
grant and revoke permits and licences to carry out all the activities that are
regulated by the CRE; and
d
impose fines to individuals or entities that produce, export or import electricity
without the proper permits or licences.
Until the enactment of secondary laws regulating the constitutional amendment, the
exploitation and extraction of oil and hydrocarbons remain the preserve of the Mexican
government and the regulatory function of the CNH does not encompass any activity
carried out by private parties. Its functions make it the supervisory and advisory authority
for Mexican public entities in charge of the exploitation and extraction of hydrocarbons
as provided by Article 27 of the Constitution. Its role includes establishing technical
guidelines for the exploration and exploitation of hydrocarbons, reviewing and opining
Through the concept of first-hand sale to private parties Mexican law sets a legal shield for
Petroleos Mexicanos (Pemex), the state-owned petroleum company, so that it can carry out any
activities of transportation, distribution, storage and production of chemical products derived
from hydrocarbons, subject only to its own laws and regulations but without having to apply
for permits from the CRE, until the first sale of products is made to a private party.
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Mexico
on hydrocarbon exploitation and exploration projects, and establishing methodologies
to evaluate the efficiency of such exploitation and exploration.
It is worth mentioning that the constitutional amendments consider the execution
of different kinds of agreement, such as service agreements, shared profit agreements,
shared production agreements and licence agreements, as well as others that may be set
out within the secondary laws.
In terms of regulating bioenergetics, there is an interministerial commission, the
Inter-Ministerial Commission for the Development of Bioenergetics, formed by six state
secretaries. This agency is responsible for defining the policy applicable to the production,
commercialisation and use of bioenergetics.
All bioenergetics permits and licences are granted by the Ministry of Energy,
and in cases when bioenergetics are to be produced from corn as its raw material, and
such corn is cropped in Mexico, an additional licence from the Ministry of Agriculture,
Livestock, Rural Development, Fisheries and Food (SAGARPA) is required.
The current main sources of legislation in the energy sector are the Law Regulating
Constitutional Article 27 on the Oil Sector, the Electric Energy Law, the Law on the
Promotion and Development of Bioenergetics and the Law on the Use of Renewable
Energy and Energy Transition Financing (the Renewable Energy Law). The Mexican
Congress also enacted the Law of the CRE and the Law of the CNH, which establish
the scope of authority and internal organisation of each of these regulatory entities.
Nonetheless, the aforementioned laws are supposed to be amended in order for them to
be adapted to the new content of the Mexican Constitution, and also other new laws and
regulations shall be enacted to cover other aspects where the CRE and the CNH have to
act as a consequence of the constitutional amendment.
The executive branch has the power to issue the regulations on the laws approved
by the Mexican Congress and has thereupon issued regulations dealing with oil, natural
gas, LP gas, electric energy and renewable energy.
In addition, the CRE and the CNH are entitled to issue rules, manuals and
directives regarding matters on which they are competent to rule.
ii
Before the constitutional reform of 2013, Mexico had a closed market regulation
regarding the exploitation and extraction of oil, gas that does not come from mineral beds
or reservoirs and the different raw materials that are deemed to be basic petrochemicals
(ethane, propane, butane, pentanes, hexane, heptane and naphtha), whose extraction or
production, transportation, storage and first-hand sale to private parties can only be
carried out by the Mexican government through subsidiaries of Pemex. It is expected
that, before the end of 2014, the upcoming secondary legislation shall regulate the
participation of private investors in such areas.
The transportation, storage and supply of natural gas and liquefied petroleum gas,
as well as the production, storage and distribution of biogas, biodiesel, bioethanol or any
other bioenergetics, are regulated activities that can be carried out by private parties after
obtaining permits from the CRE.
As the Mexican Constitution deems the transmission and distribution of electricity
a public service that must be guaranteed to the population in general, the Mexican state
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Mexico
maintains exclusivity over the National Electricity System, providing a guarantee to the
access to all the electricity producers. The CFE is the public entity in charge of producing
and providing electric power throughout Mexico.
To date, and until the above-mentioned secondary laws are enacted and/or the
current and applicable laws are amended, as a result of the North America Free Trade
Agreement (NAFTA), the current Electric Energy Law allows private participation in the
production of electricity focused on enabling private parties to produce electricity for
self-consumption or for its distribution to the CFE. For that purpose, the current Electric
Energy Law includes four basic production schemes that allow private participation:
a
Independent production: private parties produce electricity and must distribute
all their power output to the CFE. In this case, the licence to be granted is subject
to a public bidding process in which technical requirements need to be met, and
price is a determining factor.
b
Self-supply: private parties can generate electricity for their own consumption.
Likewise, various consumers can acquire electricity if they acquire an interest in
the producing entity.
c
Cogeneration: cogeneration companies will own private facilities intended to
produce electricity to be supplied to private entities or individual establishments
associated with the cogeneration company.
d
Small-scale production: private parties produce electricity with a capacity of no
more than 30MW, for the sole purpose of supplying their power output to the
CFE.
Furthermore, private parties are also able to import and export electricity when
importation is done only for self-consumption while exportation may be made under
any of the previous production schemes.
A permit granted by the CRE is required to operate electricity production facilities
under any of these production schemes, as well as for the importation or exportation of
electricity as set out in the Electric Energy Law. During the permit granting analysis
process, the CFE may opine on the granting or denial of the permit.
In all cases, irrespective of the type of activity to be developed, the process to
obtain a permit from the CRE consists mainly of the submittance of an application
containing legal, technical and financial information of the company and the project,
demonstrating its experience and proficiency to carry out the activity. Although the legal
provisions establish a period of between three and four months for the analysis of the
application and issuance of the permit (or denial of it, as the case may be), in practice it
usually takes around six months from the application filing date.
Regarding the permit granted by SAGARPA for the production of bioenergetics
using corn as raw material, after submission of the application SAGARPA has 15 business
days to issue the permit. Thereafter, an application must be submitted to the Ministry
of Energy for the production of bioenergetics, attaching a copy of all the environmental
licences required for the project and the permit granted by SAGARPA. The Ministry of
Energy then has 30 business days to deny the issuance of the permit, otherwise it will be
deemed granted. Such permit will be in force for 30 years from its issuance date.
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Mexico
iii
In the past, the Mexican regulatory system excluded foreign investors from participating
in sensitive areas such as electricity production and hydrocarbon extraction and
exploitation. Throughout the past two decades, the Mexican governments position
has gradually changed, allowing the participation of foreign investors in such areas.
Currently, foreign investors can fully participate in the same activities as Mexican citizens
or companies, except for three specific cases: (1) gasoline retailing and LP distribution;
(2) construction of pipelines for the transportation of oil and its derivative products; and
(3) oil and gas drilling.
In the first case, only Mexican individuals or companies with a foreigners exclusion
clause in their by-laws can carry out gasoline retailing and LP gas distribution activities.
In the second and third cases, the Foreign Investment Law states that for the
construction of pipelines for transportation of oil and its derivatives, and for oil and gas
drilling, an authorisation from the Ministry of Economy must be obtained when foreign
investors hold more than 49 per cent of the corporate capital of the company developing
such activities.
In the event of the acquisition of assets for the production of electricity, the
distribution of LP gas or natural gas, or generally any activity related to the energy
market, it is likely that the related transaction surpasses the thresholds established by
the Federal Law on Economic Competition (FLEC) and so will need the approval of
the recently created Federal Economic Competition Commission (COFECE, formerly
known as COFECO) to be able to accomplish such transaction that may be deemed a
concentration.
Environmental licences are needed to install facilities for the production of
electricity and bioenergetics, as well as for the transportation and storage of natural
gas, LP gas and bioenergetics, since environmental risks can arise from such activities.
Environmental licences are commonly granted by local and federal authorities, depending
on the activity to be carried out (construction or operation), and they are typically
regarded as sensitive items to consider and deal with. As part of a legal due diligence, an
environmental expert may have to address social issues with adjacent communities.
At a federal level, such environmental licences may be environmental impact
authorisations (whose application process lasts about 60 business days), risk authorisations
(whose application process lasts about 45 business days), and air emissions permits,
known in Mexico as comprehensive environmental licences (the application process for
which lasts about 30 business days). These licences are requested from the Ministry of
Environmental and Natural Resources. At the state or municipal levels of government,
common approvals include land use licences (or in the case of transmission lines or
pipelines a route-tracing approval) and construction licences whose issuance time frames
vary depending on the state or municipality, but are usually granted within one month
of the application date.
Finally, authorisations from the applicable governmental agency (municipal, state
or federal) must be obtained if facilities for electricity production and the installation of
trunk lines to transmit the electricity produced to the National Electric System (SEN),
or the transportation of gas through pipelines is done via rivers, lakes, crossing land or
any government-owned land.
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Mexico
iv
Transfer of control and assignments
To convey assets or for the assignment of permits for the production of electricity,
transportation or distribution of natural gas, as well as for the merger and acquisition of
companies developing such activities, the relevant authorities reviewing such transactions
and authorising or rejecting the same, are the CRE and, if applicable, the COFECE.
The Electric Energy Law states that when the ownership of private production
energy facilities is sold, the permit for the production of energy can only be assigned to
the new owner of the facilities, therefore the assignment of the facilities is always linked
to the assignment of the production permit.
For the assignment of the aforementioned permits and production facilities, an
assignment application to the CRE is required. In the same way, legal, technical and
financial information of the assignee must be submitted. If the CRE considers that the
information demonstrates the economic and technical capability of the assignee to carry
out the production of energy, it will authorise the assignment within a month of the
filing being made.
In the case of assignment of the transportation, storage or distribution of natural
gas permits, the procedure and period of analysis by the CRE of the assignment request is
similar to the aforementioned, but there is no need to ask for a permit to assign facilities.
Concerning the procedure for the assignment of the permit related to the
transportation, storage or distribution of LP gas, the time frames and relevant authorities
are different from the foregoing cases. If the permit is for the transportation of LP gas on
tankers (ships or trucks), the permit assignment must be requested from the Ministry of
Energy by filing an assignment application and the decision will be rendered within 10
business days. If the permit to be assigned is for the transportation through pipelines and
the storage or distribution of LP gas, the relevant authority is the CRE, which will render
a decision within 140 days of submission.
In all cases, the Law on Economic Competition will be applicable if the thresholds
set out in such law to notify asset concentrations are surpassed.
In the case of permits for the development of activities related to electricity
generation, natural gas and LP gas, COFECE must also render an opinion on the
assignment of permits, as these areas are considered especially sensitive in terms of
competition and market access matters; such opinion will be considered by the CRE
while analysing the assignment application.
III

SERVICES
With regard to the oil market, due to the constitutional mandate, indicating that the
state has direct domain over oil and hydrocarbons, oil transportation, gathering and
supply lies with Pemex.
Currently, transportation, gathering or storage and supply or distribution of
natural gas is carried out by licensed private parties, but generally jointly with Pemex Gas
y Petroquimica Basica (PGPB), a regulated subsidiary of Pemex, and the most important
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Mexico
market participant given that it owns the majority of the transportation network,
together with the CFE.
Although under the current law vertical integration is not permitted in the natural
gas market, since the regulations forbid the same company or individual from holding a
permit for both distribution and transportation of natural gas, Pemex (through PGPB) is
the only entity that can legally be vertically integrated, until the first-hand sale to private
parties.
On the electricity market, the CFE is the only entity entitled to carry out the
transmission and distribution of electricity to final consumers through the SEN, which
is also administered by it, and this remains under the amendments to the Mexican
Constitution.
From a technical standpoint, a private company that holds a permit to produce
electric power under the schemes for self-supply and cogeneration may distribute the
electricity to its shareholders, but in reality the electricity produced is output to the SEN,
which will transmit and distribute the electricity to the shareholders or partners of the
producer company for a distribution fee.
After the first-hand sale of crude occurs, Pemex will still have some degree of
intervention in the distribution given that gasoline distributors must enter into franchise
agreements with Pemex Refinacion.
ii
Concerning natural gas, currently permit beneficiaries or licensees must allow users open
access to their services on a non-discriminatory basis, subject to availability of capacity,
technical feasibility and the execution of a services agreement. Refusal to do so may be
notified to the CRE and the lack of available capacity at the time of denial should be
supported. Payment of connection is agreed between the parties.
Natural gas distributors are bound to extend or enlarge the systems within their
geographical zone at the request of a third party who is not a permit beneficiary, provided
the service is economically feasible. Transporters are bound to extend or enlarge their
systems at the request of a third party provided the service is economically feasible or
parties enter into an agreement to cover the cost of the pipelines or other installations
that constitute the extension or enlargement.
For serving a determined geographical zone, transportation and distribution,
permits may not be issued to one single equity unless there are efficiency and profitability
gains or it becomes necessary due to the lack of transportation infrastructure and there
are no other parties interested in undertaking a natural gas investment project.
iii
For the construction of LNG terminals the main permit has to be obtained from the CRE;
however, zoning and environmental impact statements are also critical. A concession for
the use of national waters, as well as a permit to operate within the shoreline must be
secured. LNG permit holders must allow open access to their systems, and rates and
prices must be fixed according to the guidelines published by the CRE.
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iv Rates
The rates and process for the sale, transportation, gathering and distribution of natural
gas and LP gas in Mexico are regulated by the CRE.
For the sale, distribution, transportation and storage of natural gas, rates and
prices are determined pursuant to the provisions of the Directive on Rates and Price
Transfer for Natural Gas Activities from 2007, and the Directive on Highest Prices of
Natural Gas on its First Sale to Private Parties from 2009.
Under such legal provisions the price for the first-hand sales to private parties may
be determined considering the following:
a
the reference price at the Henry hub (the pricing point for natural gas futures
contracts traded on the New York Mercantile Exchange);
b
the difference between the Henry hub price and the price of gas at South Texas,
United States; and
c
transport costs between the border in Reynosa and pipelines in South Texas,
which are added, subtracted or removed depending on the balance of foreign
trade of natural gas.
The rates for distribution, storage and transportation of natural gas may be different
for each carrier or distributor and are determined by the CRE considering the market
characteristics.
In the case of the rates and prices of the first-hand sale to private parties, sale to
final consumers, storage, distribution and transportation of LP gas, the methodology to
determine them is much more complex than in the case of natural gas, since the CRE
must take into consideration several market variables.
Apart from the current special or private schemes of electricity production that
the law allows, the only entity that can produce and sell energy to private individuals
or companies is the CFE (this shall change once the secondary laws are enacted and/
or the current laws are modified as consequence of the above-mentioned constitutional
amendment); therefore, most of the energy that is supplied and used throughout Mexico
is that supplied directly by the CFE.
Energy tariffs vary depending on whether electricity is used for commercial,
industrial or residential purposes, and also the zone in which the consumer is located, and
is determined, based on proposals made by the CFE, and by the Ministry of Treasury and
Public Credit with the advice of the Ministry of Energy and the Ministry of Economy.
The sale price tariffs for energy sale by private parties to the CFE is determined by
the production scheme to which the private parties are subject to. If they are independent
producers, the tariff is determined by the electricity purchase sale agreements they
execute with the CFE. Otherwise, if private parties produce electricity under the
scheme of cogeneration or self-supply, the sales price can be freely determined between
cogeneration or self-supply companies and their shareholders or associates, while the
excess electricity can be sold to the CFE.
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v
In Mexico security aspects have increased in importance, especially since 2007 when
the government initiated a frontline battle against the drugs cartels, and since then
special laws and provisions have been enacted in order to guarantee security and legal
compliance.
As a consequence of such security-strengthening policy, protection of the
infrastructure related to the energy sector is granted by the Article 253 of the Federal
Criminal Code to facilities that carry out the production of electricity and storage of gas
and other hydrocarbons, as well as to pipelines that transport such products, stipulating
as a crime the obstruction of production, transmission or transportation, and to the sale
of electricity, natural gas and LP gas.
Another issue to consider is cybersecurity, which must be analysed from an
infrastructure perspective, as the Federal Criminal Code punishes the destruction of
poles, insulators, wire or machines employed for public telecommunications services,
including any component for the production of magnetic or electromagnetic energy or
means of transmission.
As a general rule there are no restrictions for the transfer of technology. Royalty
payments should meet international transfer-price rules from a tax standpoint.
IV
ENERGY MARKETS
At present, there is no organised domestic market for the sale of any type of energy.
Concerning electricity, even when there are regions with different tariffs, given that
the only purchaser of energy is the CFE, it is difficult to say that there is a real market.
With respect to natural gas, even though the current legal framework sets the basis
for the creation of a market, a resellers market has not yet been created given that current
permit beneficiaries may deny access if they can demonstrate the fact that access is not
technically or economically feasible.
ii
Market participants may enter into individual contracts for the sale of natural gas.
Natural gas service providers may stipulate maximum charges, and the parties may freely
agree on a price different from the maximum charge for a determined service, provided
the agreed amount is no lower than the variable cost of providing the service. Charges
made by a permit beneficiary may not be unduly discriminatory or be conditional on the
rendering of other services.
iii
Market developments
It is foreseen that with the implementation of the secondary legislation, which is still
being discussed and pending approval at Congress, a market through which energy will
be offered to the public in general will be created.
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V
Along with the enactment of the Renewable Energy Law in 2008, in recent years Mexican
federal and local governments have developed a wide variety of programmes and benefits
related to the development of renewable energy.
The Renewable Energy Law seeks to foster programmes, activities and projects
aimed at achieving a larger use of renewable energy sources and clean technologies. It
also affords an important right to renewable self-supply energy producers of less than
0.5MW to have unrestricted access to the energy bank of the CFE, thereby being able to
make deposits and recoveries of the electricity produced for the purpose of promoting
investment in this area.
This energy bank was created in 2001 by the CRE when it realised that any
renewable energy production project was not capable of being developed if no system
existed to guarantee energy producers, especially self-suppliers; they can deposit their
energy in a system that will allow them to recover it when their production does not
satisfy their demand.
Another important programme to promote investment by private companies
in renewable energies is, at the federal level, accelerated tax deductions for companies
investing in equipment employing solar energy or generally using clean technologies.
Similarly, the Mexican federal government has implemented different types of
economic benefit to livestock farmers in order to reuse organic waste produced by animals
to produce energy by means of the installation of biodigesters on the farms; likewise, there
have been efforts to produce energy based on all waste collected from deposits.
In recent years, the Mexican federal government determined that within Mexico
there was potential for the production of energy by wind farms equal to 11,000MW;
consequently, it instructed the CFE to plan the installation of new wind farms to
guarantee the energy supply in the south-east and north-west of Mexico.
ii
Several programmes have been created by the Mexican government aimed at obtaining
a better and more efficient use of energy. Of these, the programmes that have had the
greatest impact on energy savings are those aimed at reducing household electricity
consumption. Household consumption represents between the 25 per cent and 27 per
cent of the total electricity consumption in Mexico and is the sector in which fewer real
efforts have been made to achieve a more efficient use of electricity and other energy
products such as gas.
In 2008, the federal government established the National Commission for Energy
Efficiency, an independent entity, part of the Ministry of Energy that aims to promote
energy efficiency by pursuing the reduction of the amount of energy required to satisfy
energy needs, and ensuring the lessening of negative environmental effects resulting from
the generation, distribution and consumption of energy.
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Mexico
iii
Technological development
Mexican oil reserves have diminished gradually and Pemex now needs to carry out deepwater drilling activities at the Mexican Gulf. It is expected that regulatory changes will
foster the exchange of technology and the implementation of less restrictive alliances
with technology developers.
The Mexico City government, with the support of the CFE, has started a
programme to reduce the emission of greenhouse gases by substituting the use of gasoline
cars with electric cars, especially for taxi services, as well as installing bicycle stands and
other public transportation throughout the main venues of the city to reduce pollution
caused by greenhouse gases. These projects are relatively new, but they may be the start of
federal and local policies that will eventually spread to the rest of the country.
Likewise, the Mexican Institute of Petroleum, a Mexican state agency dedicated
to public research for the development of technical solutions, and General Electric Oil &
Gas recently celebrated an agreement focused on the development of technology needed
to support and improve the development of Pemexs projects. The results from said
agreement shall allow Pemex: (1) to improve the efficiency of a mechanical flow device
which shall permit Pemex to increase the recovery factors for oil wells; (2) to increase
the reliability of equipment to meet challenges found in terrestrial fields operated by
Pemex; and (3) to develop monitoring and exploration equipment and technology for
deep-water projects.
VI
THE YEAR IN REVIEW
As mentioned throughout this chapter, amendments have recently been made to specific
articles of the Mexican Constitution related to the control and exploitation of natural
resources found in Mexican soil, which included relevant changes on the hydrocarbon
and energy sectors, intended to promote important foreign investments in order to boost
the Mexican economy. The importance of the energy sector and the participation of
private investors in projects is recognised and for this reason the new amendments were
approved by Congress as proposed by the executive. One of the main changes expected
relates to consolidating Pemex into one company, which is expected to break down
barriers within the existing Pemexs subsidiaries.
On the other hand, it is also expected to strengthen the presence of both Pemex
and the CFE as leading companies in the energy industry around the globe, giving
them access to more sophisticated technologies by opening up oil, gas and electricity
sectors to competition in several activities, such as (1) exploration and exploitation of
oil; (2) refining, petrochemical, transport, extraction and storage of oil products; and (3)
generation of electricity.
Under new guidelines for public bids implemented by the CFE, COFECE is
obligating bidders to demonstrate that their proposal is not the result of any agreement
or arrangement that has the purpose of setting or coordinating similar proposals between
competitors, or has the purpose of coordinating the participation of two or more
competitors in that bid or further bids; due to the latest amendments to the FLEC,
COFECE has the authority to impose heavy fines on transgressors. Bid winners will
have to obtain an authorisation from COFECE before they can execute the relevant
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Mexico
agreement with the CFE. With the recently approved constitutional amendment the
Ministry of Treasury and Public Credit will be in charge of establishing fiscal aspects on
the bidding processes and on the contracts.
The CFE is on the process of bidding the construction of two combined-cycle
electricity generation plants in the states of Chihuahua and Jalisco. These projects will
provide Mexicos northern and western areas with a gross capacity of nearly 19,828MW
by 2018.
Finally, it is worth mentioning that Pemex has initiated the construction of the
project known as Los Ramones I & II, which consists in the construction of a pipeline
conducting natural gas from the north-eastern border with the United States in Camargo,
state of Tamaulipas to Los Ramones, state of Nuevo Leon, and from there to the state
of Guanajuato in the lowlands region of Mexico, known as the Bajio. This is considered
to be the most important project related to gas pipelines in Mexico in the past 40 years.
VII
The amendment to Articles 25, 27 and 28 of the Mexican Constitution is only the first
step of a much anticipated major energy reform in Mexico, as the intent is to basically
make Pemex and the CFE more efficient and productive. Even though this new reform
represents a great opportunity to invest in Mexicos oil and energy markets, it seems
that the energy policy will continue to have a protectionist policy line. The Mexican
government has taken large and concrete steps to modernise the Mexican energy industry
to face the demand for electricity, oil and gas, as well as its derivatives, for the coming
years, but without completely opening the market for risky investments. The priority
focus is to seek new oil reservoirs but also to start reducing the dependency on oil,
not only from an economic standpoint, but in electricity production. The new reform
intends to position Mexico as one of the leading countries in energetics.
Due to the necessity of stopping the importation of final oil products, gas and
petrochemical products, the number of bids, contracts and arrangements between
Pemex, the CFE and the private sector is increasing and is expected to increase more
in the coming years. The Mexican energy reform is projected to result in a significant
increase of private capital, technology and technical expertise into Mexicos oil and gas
industries as well as a transformation of the electric energy sector into a competitive
wholesale market.
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Chapter 22
MOZAMBIQUE
Fabrcia de Almeida Henriques and Paula Duarte Rocha1
I OVERVIEW
Mozambique is a rapidly developing country with great potential for the production and
export of hydrocarbons and the generation of electrical power.
However, legislation in energy matters is in many ways not keeping up with the
pace of the growing complexity of the energy investments being made in the country,
and the aspiration of establishing specific incentives for the generation of renewable
electricity and for off-grid power initiatives in non-urban and peri-urban communities.
The framework of the electricity sector, the Electricity Act,2 for instance, is over 15 years
old, while regulation for natural gas a booming sector in the Mozambican economy is
still scarce. A regulatory overhaul in the electricity sector is said to be in the pipeline and
the proposal for the new framework legislation for oil has been approved by the Council
of Ministers and is expected to be presented to Parliament in 2014.
Recently, legislation has been enacted in the oil and gas sector, notably Decree No.
45/2012 of 28 December, relating to the production, import, loading, storage, handling,
distribution, sale, transport, export and re-export of petroleum products (the Petroleum
Products Regulation) and Ministerial Diploma No. 210/2012 of 12 September, relating
to the setting of maximum retail prices for natural gas.
The electricity sector is a concession-based system with limited competition, in
which one company, state-owned Electricidade de Moambique, EP (EdM) is the national
transmission grid operator, and also holds concessions for generation, transmission,
distribution and supply of electricity. Other notable concessionaires include Hidroelctrica
de Cahora Bassa SA, which produces most of the energy consumed in Mozambique, and
1
2
Fabrcia de Almeida Henriques and Paula Duarte Rocha are partners at Mozambique Legal
Circle Advogados.
Law No. 21/97 of 1 October.
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Mozambique
MoTraCo SA, a joint venture between the Mozambican, South African and Malawian
governments, which transmits power from South Africa to the Mozal aluminium smelter.
The oil and gas sector also has a concession system, where operating risks from
the exploration of hydrocarbons are mostly borne by private investors. Empresa Nacional
de Hidrocarbonetos EP (ENH) operates mainly in the upstream sector and holds
participations in all oil and gas fields concessions in Mozambique. Recent years have
witnessed very significant discoveries of natural gas, which have attracted several oil and
gas players to the country and transformed the upstream industry.
In the petroleum products sector, there have been recent legislative attempts at
creating an unbundled and competitive market. State-owned company Petrleos de
Moambique SA (Petromoc) is active in the midstream and downstream sector, storing
and selling petroleum derivatives such as fuels, oils and lubricants.
The latest and most detailed instrument of government policy for the energy
sector is contained in Resolution No. 10/2009, of 4 June (the Energy Strategy), in which
one can find the main policy goals defined by the Mozambican government in this
matter, notably:
a
to provide greater access to electricity and fuels to rural and peri-urban areas;
b
to discourage the non-sustainable use of lumber as a source of energy;
c
to stimulate the sustainable production of biofuels;
d
to diversify energy sources;
e
to implement a cost-based tariff system, one which includes environmental
externalities; and
f
to engage in international cooperation, especially with the Southern African
Development Community (SADC).
Other important policy resolutions for the government can be found in (1) Resolution
No. 27/2009 of 8 June, which adopted the Strategy for the Concession of Areas for
Petroleum Operations; (2) Resolution No. 62/2009, of 14 October, which adopted
the Policy for the Development of New and Renewable Energies; and (3) Resolution
No. 64/2009, of 2 November, relating to the Strategy for the Natural Gas Market in
Mozambique.
II REGULATION
i
The regulators
The most relevant administrative entities regulating the Mozambican energy industry
are:
a
the Council of Ministers, for all sectors of the energy industry;
b
the Ministry of Energy, for all sectors of the energy industry;
c
the National Electricity Council (CNELEC), for the electricity sector; and
d
the National Petroleum Institute (INP), for the oil and gas sector.
The Council of Ministers represents the executive branch of government in Mozambique
and, as such, the Constitution and main legislative diplomas in this sector grant it
substantial powers in this field. As per the terms of the Constitution, the Council of
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Mozambique
Ministers may propose or enact legislation and promote and regulate economic activity.
Making use of such powers, the Council of Ministers has adopted the vast majority of
energy legislation in Mozambique.
In addition to the powers of legislation and regulation, the Council of Ministers
has regulatory powers set out in the law, such as the granting of concessions (after the
applicable tender offer) for electricity projects with nominal installed capacity of over
100MVA, as per the terms of Decree No. 8/2000 of 20 April (the Energy Concessions
Regulation).
The Ministry of Energy, as part of the central government, also has important
powers in what the energy sector in Mozambique is concerned, defined in Presidential
Decree No. 21/2005, of 31 March, such as in adopting regulations in the energy sector
and licensing the activities of storage, distribution, supply and sale of natural gas and
petroleum products, as well as the granting of concessions of electricity projects with
nominal installed capacity between 1MVA and 100MVA. More importantly, the Ministry
of Energy is the entity that instructs and (in tandem with the Council of Ministers)
decides on concession requests for electricity and oil and gas projects, and monitors the
activities of the concessionaires.
CNELEC is the regulatory body for the electricity sector3 and its powers, mainly
set out in the Electricity Act and Decree No. 25/2000 of 3 October, include:
a
promotion of compliance with legislation in the electricity sector;
b
issuance of opinions on a variety of issues, such as expropriation proposals for
electric facilities projects, new concessions and tariffs;
c
performing studies on different aspects of the electricity sectors; and
d
participation and supervision of public tenders for electricity concessions.
CNELEC also has mediation and arbitration functions for disputes arising between
concessionaires and their respective consumers.
Finally, the INP has its powers set out in Decree No. 25/2004 of 20 August,
categorised as:
a
management of National Petroleum Database;
b
research activities;
c
powers relating to petroleum development, production and transport activities;
d
powers relating to the safekeeping of operators interests; and
e
general powers of administration, monitoring and regulation.
The INP also has powers to license as well as inspect any facilities relating to petroleum
operations.
As for the applicable sources of law, the main framework legislation both in the
electricity and in the oil and gas sectors is enacted in the form of law of the Mozambican
parliament (the Electricity Act and Law No. 3/2001 of 21 February, the Petroleum Act).
In practice, CNELEC has not yet fully assumed its role as a regulatory authority, mainly
exercising advisory functions in what regards to the aforementioned matters.
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Regulation of this legislation is mostly adopted by the Council of Ministers in the form
of Decrees. Finally, the Ministry of Energy may also issue orders.
ii
All activities in the electricity value chain (generation, transmission, distribution and
supply) and most activities in the oil and gas value chain (prospection, research and
production and transport of oil and natural gas, as well as the distribution and supply of
natural gas) are subject to a regulatory approval by the Ministry of Energy, the Council
of Ministers or local authorities, depending on what is established in the applicable
law, in the form of a concession agreement. Activities in the petroleum products value
chain (production, storage, transport, distribution and sale, as well as the operation of
unloading terminals and oil pipelines) are subject to licensing by the Ministry of Energy
in accordance with the terms of the Petroleum Products Regulation.
Energy facilities across all sectors are also subject to licensing, as per the terms of
the relevant legislation.
Concessions in the electricity sector are subject to tender offers, in accordance
with the Energy Concessions Regulation. Tenders must follow the guidelines set out
in the terms of reference and are directed to the relevant competent authority (i.e., the
Council of Ministers, the Ministry of Energy or local authorities). Tenders must also
specify the technical and financial details of the project and provide sufficient evidence of
the appropriate qualifications of the applicant. Hydroelectric projects require additional
information on the characteristics of the hydroelectric use of the water resources; energy
generation and transport concessions are also subject to additional requirements.
After the tender has been requested, CNELEC issues an opinion on the subject;
projects that imply the acquisition of land use rights must also be preceded by a public
consultation. After these steps have been undertaken, a decision by the relevant regulatory
authority must be issued within 15 days. Such decisions effectiveness may be subject to
conditions, such as expropriation or the granting of land use rights.
A favourable decision by the authority will determine the entering of a concession
agreement, where terms such as duration, applicable taxes and tariffs, conflict resolution
mechanisms, guarantees, reversion and applicable law must be included. The concession
agreement must also include a draft of the agreement to be signed by the National
Transmission Network operator.
Electricity facilities are also subject to the granting of establishment and operation
licences by the Ministry of Energy prior to the start of operations. For the establishment
licence, technical features of the facilities must be presented with the application, which
must be decided within 15 days, except if additional documents or information are
requested by the Ministry of Energy. If granted, the publication of an edict in the Official
Gazette will ensue and the project for the construction of the facility may begin. At the
end of construction, a site visit accompanied by a favourable opinion from the competent
inspector is required for an operation licence to be issued.
Concessions pertaining to hydrocarbons prospection, research and extraction or
construction and operation of pipelines are also subject to tender offers, as per the terms of
Decree No. 24/2004 of August 20 (the Petroleum Operations Regulation). Exceptions are
made for tender offers in which no bidder has been chosen, termination of concession, or
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unitisation purposes. In this case, the diploma does not regulate the procedure and merely
defines the information and documentation that must be presented by the applicant. As
such, in this case it may be argued that general public procurement rules apply.
In the sale and distribution of natural gas, the competent authority to grant
a concession depends on the area for distribution or sale awarded as per the terms of
Decree No. 44/2005 of 29 November through a tender offer. As in oil and gas upstream
concessions, the procedure for the awarding of a concession is also not regulated in the
diploma.
Licensing of oil or gas facilities must include an establishment licence, requested
from the INP, which has 10 days to decide upon receipt of the necessary information
and documents, as well as the opinion of various regulatory entities such as for health,
environment, labour and civil protection. The operation licence is then granted after
construction, and a site visit made by a committee, which will confirm whether the facility
conforms to the project, any regulatory conditions and applicable technical norms.
Finally, licensing of activities relating to petroleum products are subject to the
approval of the Ministry of Energy and respective facilities, except for licensing of fuel
stations for resale and sale to end-consumers, which are carried out by the local authorities
and by the provincial directorates of the Ministry of Energy, respectively. Licence requests
must be accompanied by several elements of identification, as well as the main technical
characteristics of the facilities at which the activities will be undertaken; different
activities entail specific documentation or information, which must be presented with
the request. The licensing entity must decide within a period of 30 days from receipt of
the request, and is bound by certain criteria to overrule it, such as the occurrence of anticompetitive effects stemming from the granting of such licence. Licences may be subject
to conditions to be defined by the relevant licensing entity.
Before the start of operations of any of the aforementioned activities in the
petroleum products fuel chain, licences must be registered after a mandatory site visit,
to be carried out by a commission that includes representatives of various regulatory
authorities, including the licensing entity.
iii
In the electricity sector there are no obvious limitations on the ownership of both new
and existing assets and companies in such business, nor direct restrictions on assets
ownership save for the general merger and takeover control provisions introduced in Law
No. 10/2013, enacted on 20 March 2013 (the Competition Act), the scope of which
is the protection of competition in the undertaking of economic activities. Preference,
however, is given to applicants for oil or natural gas concessions that are Mozambican
nationals or are associated with Mozambican nationals if two or more applicants are on
equal footing.
In the petroleum products sector, however, several restrictions of this nature exist,
set out in the Petroleum Products Regulation, the most relevant being:
a
the prohibition of the mingling of distribution and retail activities, except when it
relates to liquid petroleum gas (LPG) or compressed natural gas and for training
purposes (undertaken in fuel stations);
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Mozambique
b
c
licensed entities may be entitled to hold more than one licence in the value chain,
as long as no anti-competitive effects stem from this situation; and
only Mozambican nationals and Mozambican companies may hold licences
for petroleum products (there appears to be no restrictions for Mozambican
companies held by foreign equity holders, however).
There are no restrictions on the provision of regulated services (i.e., supply of electricity
and natural gas) and no restrictions on the ownership of assets or licensed activities other
than those set out in the previous paragraph.
iv
Transfer of interests in electricity concessions, of assets encompassed by an electricity

concession and of establishment licences of electricity facilities are subject to regulatory
approval by the regulatory authority that granted the concession or the licence, as per
the terms of the applicable Mozambican law. Transfer of operation licences of electrical
facilities is not possible under Mozambican law and, as such, should the licensee change,
a new licence will have to be issued as per the terms of Decree No. 48/2007 of 22
October.
The procedure for the transfer of concession rights or assets encompassed by the
concession itself is not clear in either the Electricity Act or the Electricity Concessions
Regulation, but will likely depend on a request submitted to the relevant regulatory
authority and, if land use rights are transferred, a public consultation, the same as with
the granting of a new concession. In respect of establishment licences, the transfer will be
subject to a request to the Ministry of Energy. No express standard of reviews or decisionmaking guidelines are established in these procedures for the regulatory authorities, but
such authorities in Mozambique are, according to the Constitution, bound by principles
of equality, impartiality, ethics and justice.
With regards to the transfer of interests in oil or natural gas concessions, there are
no statutory restrictions for the transfer of interests. Concession agreements, however,
may include assignment provisions, subject to approval by the Minister of Natural
Resources of the transfer of the concessionaires interest.
As for the petroleum products sector, transfer of facilities in the respective value
chain is subject to prior authorisation from the Minister of Energy, who is bound to
grant it if the licensee does not obtain, after the transaction, more than 30 per cent of
market share for the relevant petroleum products market.
III

SERVICES
Shortly after the independence of the Republic of Mozambique from Portugal in 1975,
EdM was granted, by Decree Law No. 38/77, a quasi-monopoly in the generation,
transmission and distribution of energy, with the exception of off-grid generation and
other existing concessionaires (notably the Cahora Bassa dam, albeit not in operation
at the time). The result was a fully integrated vertical system in the electricity sector
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Mozambique
until the adoption of the Electricity Act. Nowadays, the sector is still bundled to some
degree, as EdM still holds a single concession for distribution and sale of electricity. It is
the main transmission concessionaire, as well as the national transmission grid operator,
through the provision set out in Decree No. 43/2005 of 29 November, as unbundling
requirements in this sector do not exist under Mozambican law.
With regards to oil and natural gas, there is also no formal bundling or
concentration of the upstream industry, notwithstanding the fact that ENH is a party to
all concessions in the upstream sector.
Recent efforts towards the implementation of networks for distribution and
sale of natural gas have been made, and the law determines that concessions must be
unbundled. Concessions for suppliers of natural gas are further subject to an exclusivity
period, after which third parties may sell natural gas to end-consumers.
ii
Operators of storage, transport, transmission and distribution networks are obliged to

provide access to such networks and to a non-discriminatory treatment of third parties.
In the electricity sector, the Electricity Act provides for the mandatory granting
of access to third parties to electrical networks. Decree No. 42/2005 of 29 November
(the National Transmission Grid Regulation) establishes that transmission concessionaires
must enter into agreements for the transmission of electricity to any generation and
distribution concessionaire, as well as any final consumer, that requires connection to the
grid. Likewise, distribution concessionaires must guarantee the supply of electrical energy
to all consumers who have the capacity to ensure payment for their respective connections.
Connection may be refused only in certain cases, such as if the supply is in medium or
low voltage and the requested capacity may cause damage to the distribution grid, or if the
applicant is declared insolvent or bankrupt. Distributors also have the obligation to install
new lines whenever so required (as long as a minimum consumption per 100 metres of
new distribution lines is assured). Access to transmission and distribution grids must be
made in a non-discriminatory fashion regarding quality of service and agreed-upon tariffs.
Pipelines and petroleum product facilities must also transport, store, unload or
handle hydrocarbons or fuels from third parties without discrimination, as long as there
is available capacity and no insurmountable technical issues exist. Capacity must further
be increased if such operation does not affect the integrity of the facilities and as long
as those third parties provide the necessary funding. Access to natural gas distribution
networks, on the other hand, is subject to rules for negotiated access to be enacted by the
Minister of Energy. In any case, treatment must be made with transparency and without
discrimination against third parties.
Network providers in distribution and transmission of energy, as well as
distributors of natural gas, are granted rights over a predetermined area. The law is not
clear, however, on whether such rights are exclusive.
Finally, competition concerns have definitely played a role in the rules concerning
third-party access to energy networks. Council of Ministers resolutions regarding
energy policy mention tackling competition issues, which necessarily implies dissipating
the negative effects of bottlenecks for consumers by giving suppliers ease of access
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Mozambique
to electricity and natural gas networks. A general provision on the matter has been
implemented by the Competition Act regarding the abuse of a dominant position.4
iii
Storage, processing and treatment of oil and natural gas, as well as the storage of petroleum
products, are subject to licensing of the activity and registration of the respective facilities
(see Section II.ii, supra). There does not appear to be any specific regulation on liquefied
natural gas facilities.
iv Rates
As a general rule, rates for transport and distribution of energy are mostly determined
by bilateral contracts rather than regulated tariffs (which are only set for the sale of
electricity, natural gas and fuels to the end-consumer). There are, however, standards
that some concessionaires must consider when setting the fees for the rendering of their
services.
Nonetheless, the Electricity Act in the electrical sector establishes a transit tariff
for third-party use of transmission and distribution facilities, which is not regulated.
The National Transport Grid Regulation determines that contracts entered into with
transmission concessionaires must set rates that:
a
assure non-discriminatory treatment of consumers;
b
assure the coverage of costs consistent with standard costs;
c
stimulate new investment in the expansion of electrical systems;
d
induce the use of electrical systems; and
e
minimise the costs for expansion or use of electrical systems.
As for distribution, rates are fixed with generation and energy supply concessionaires. For
the latter, a tariff for use of the distribution system must be set.
Oil and gas pipelines operators as well as petroleum products storage facilities,
are subject to non-discriminatory and commercially acceptable terms standards in
the setting of use rates. In oil re-exporting services (in bunkers), rates must be fair,
competitive and non-discriminatory, taking into account the prices charged in other
terminals in Southern Africa.
Natural gas distribution network rates are set by concessionaires, subject to the
rules of negotiated access set by the Minister of Energy.
Article 19(3)(b) of the Competition Act establishes that the following is considered an abuse
of a dominant position: the refusal to grant, against adequate compensation, to any other
company the access to a network or other essential infrastructure which the former controls as
long as the latter cannot, for legal or practical reasons, operate as a competitor of the company
which controls the assets. Such provision shall not be applicable if the latter demonstrates that
such access is impossible under reasonable conditions.
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v
Energy legislation in Mozambique takes into account several security policy concerns,
such as:
a
fuel supply security and safety;
b
theft of energy and theft and vandalism of power lines; and
c
energy supply and network security.
As regards supply security and safety of hydrocarbon fuels supply (e.g., gasoline), the
Petroleum Products Regulation addresses safety concerns in petroleum products facilities
by imposing several obligations on the respective owners, such as:
a
the obligation of distributor to keep a permanent deposit of 6 per cent (or 3 per
cent, in the case of LPG) of the fuels acquired for sale in the previous 12 months,
as well as operational reserves of the aforementioned fuels;
b
the mandatory decommissioning of redundant petroleum product facilities;
c
specialised works on petroleum products facilities being conducted or supervised
by licensed oil technicians;
d
the obligation to be subject to a five-year inspection obligation on petroleum
product facilities; and
e
the prohibition on causing or allowing oil or petroleum product spills.
The Energy Strategy expressly issues recommendations for tackling the problem of theft
and vandalism in the electricity networks, notably by advocating greater involvement of
local communities in distribution and transmission power lines projects. Notwithstanding
the foregoing, the Electricity Act establishes the theft of electricity or power lines as a
crime.
Security of electricity supply is also a relevant concern in energy policy and
the National Transmission System Regulation provides relevant rules on this subject.
First, capacity of transmission and distribution networks must be adequate in relation
to expected consumer demand. Solely regarding the distribution grid, the National
Transmission System Regulation obliges distribution concessionaires to ensure service
quality and supply of energy through the grid may only be interrupted under certain
conditions. Finally the operator of the National Transmission System, as the coordinator
of the electricity grids in Mozambique, has the obligation regarding the overall
management of the systems quality, security and continuity of supply.
IV
ENERGY MARKETS
There are no organised markets for the sale of energy commodities in Mozambique. The
import and export of electricity is subject to a concession, to be granted as per the terms
of concessions for the generation, distribution or transmission of electricity (see Section
II.ii, supra).
With regards to petroleum products, imports of LPG, gasoline, jet fuel and diesel,
are aggregated through a company with both state and private ownership (IMOPETRO),
and customers of this entity must be holders of generation or distribution licences. In
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exceptional cases (i.e., to defend the countrys economic interests) imports may be made
through a duly licensed distributor and only if and when local production does not meet
demand.
ii
The sale of electricity and natural gas in Mozambique takes place exclusively through
bilateral agreements between generators and suppliers.
iii
Market developments
As has been previously mentioned above, the electricity market is expected to undergo
a regulatory overhaul and a new statute for petroleum operations is expected to be
approved by Parliament in 2014.
V
Recently, the Council of Ministers enacted the Policy for the Development of New
and Renewable Energies. Its main objective is to promote greater access to clean energy
through the equitable, efficient, sustainable and culturally sensitive use of new and
renewable energy. So far, however, no concrete legislative actions have been taken to
fulfil this goal.
ii
The aforementioned Renewable Energy Development Policy also approaches energyefficiency issues but, as in the area of renewable energy, no rules or policies have yet been
enacted to promote it.
iii
Encouragement of greater technological developments in the field of renewable energies

has recently taken place through the creation of a laboratory for photovoltaic energy, the
first in the field of renewable energies in Mozambique.
VI
THE YEAR IN REVIEW
Key events in the energy sector in 2013 for Mozambique include:

a
the sale by ENI of a 20 per cent stake in the Area 4 Rovuma offshore gas block to
China National Petroleum Corporation for US$4.21 billion;
b
5 to 7 trillion cubic feet of natural gas found in Area 4 Rovuma offshore gas block;
c
the entry into a 25-year power purchase agreement between EdM and Ncondezi
Energy for the supply of coal-powered energy within the context of the
construction and operation of a coal mine and thermal-powered power plant in
the Tete province; and
d
the first solar panel factory in Mozambican territory was inaugurated in Beluluane.
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Mozambique
VII
The Mozambican energy sector faces a multitude of challenges outlined through this
chapter:
a
the countrys infrastructure is not sufficient to meet demand, reflections of which
are large areas of the country without electricity or natural gas and outdated
distribution networks of electrical power;
b
due to the inefficient power purchase arrangement with South African utility
company Eskom, Mozambique still has to import electrical energy from its own
hydroelectric power plant in Cahora Bassa; and
c
oil and gas findings lack a stable governance structure with experienced players in
the oil and gas industry in order for commercial development of such findings to
begin.
These problems are being tackled, but most are very capital-intensive. Electrification of
rural areas, promoted by the Mozambican Electricity Fund by way of small distribution
networks and off-grid projects, and the various electricity generation projects that are
being planned for this decade, are both examples of how the country is dealing with
some of these issues.
Should these obstacles finally be overcome, there is no doubt that Mozambique is
poised to become one of the key players in the sub-Saharan Africa energy market, with
its abundant natural resources and strategic geographical position in the region.
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Chapter 23
NAMIBIA
Axel Stritter1
I OVERVIEW
The government of Namibia recognises that there is a clear need for investment in
the generation and transmission of power in order for Namibia to become self-reliant
in meeting the local, current and future electricity demand, and to ensure economic
development and the achievement of the aims in Vision 2030.2
Namibia has a gross installed electricity generation capacity of 498MW with
the current actual demand being considerably higher necessitating the importation of
a significant quantity of electricity from neighbouring countries, including Zambia
(Zesco), Zimbabwe (Zesa) and South Africa (Eskom), with further electricity being
imported from Mozambique and the Democratic Republic of the Congo. Namibia has
a coal-fired thermal power station in Windhoek (Van Eck Power Station with 120MW
installed capacity), diesel-powered stations at Walvis Bay (Paratus Power Station and
Anixas with capacities of 24MW and 22.5MW respectively), and one hydroelectric
power station at Ruacana of 332MW capacity.
The hydroelectric power station at Ruacana is Namibias main power generating
source, but it is dependent on the highly variable water flow in the Cunene River. This
has a major impact on Namibia Power Corporation (Pty) Ltds (NamPower) ability to
supply the demand from its own generation facilities.
Importation of electricity power averages 60 per cent per year, reaching 80 per
cent during dry seasons due to Ruacanas power generation, dropping to less than 50 per
cent during rainy seasons.
1
2
Axel Stritter is a partner at Engling, Stritter and Partners.

A long-term framework and strategy study that sets the direction for economic and social
development, whose goals include the reduction of poverty, creation of employment, promotion
of empowerment, and stimulation and sustainability of economic growth (Vision 2030).
296
Namibia
Namibia has thus far relied on electricity imports from the Southern African Power
Pool (SAAP) for its shortfall of power supply but because of the demand-supply balance
in the region changing significantly it needs to develop its domestic power generation
capacity. The current power purchase agreements (PPAs) with Namibias neighbouring
power utilities with a combined capacity of up to 750MW are due to expire within the
next 15 months. These include the expiry of the ZESA Agreement in October 2014, the
Supplementary Eskom Agreement in April 2015, the Aggreko Agreement in August 2015
and the Eskom Off-peak Agreement in April 2016. Renegotiation of these agreements
has proved to be challenging.3
A combined-cycle gas-fired power station, known as the Kudu Project (the first
F Class CCGT power plant in Southern Africa), with an anticipated capacity ranging
between 800MW and 1,050MW is being developed, with the first unit expected to be
commissioned in early 2018.
In terms of the National Integrated Plan (NIRP), various actions and
implementation programmes have been identified to restore balance between the supply
and demand of electricity within Namibia in the short term, which include diesel units
and heavy fuel oil, to the extent that the Kudu Project is not available to meet the
peaking requirement.4
In terms of the restructuring of the electricity distribution sector, it is intended
that NamPower will be replaced by regional electricity distributor companies (REDs).
There would be five REDs, one for each of the five regions in Namibia: Nored, Cenored,
Erongo RED, Central RED and Southern RED.
In 2005, the Namibian Cabinet took a decision that NamPower tariffs must reflect
costs by 20102011, enabling NamPower to recover all costs for supplying electricity,
which includes all operational, administrative and customer service costs. In addition,
the ECB would allow a return on assets in line with its approved tariff methodology.
The governments National Development Plan to provide electricity through
economies of scale and the pooling of human, operational and capital resources to
eventually stabilise electricity prices and offer affordable tariffs to end-consumers was
the reason for the formation of the REDs. The idea was also to secure electricity supply
for all and end the days where whole towns were disconnected due to unpaid electricity
accounts to the national utility.
Namibia imports all of its crude oil requirements. In recent years, Namibia has
attracted the attention of the global oil industry due to the similarities of its offshore
basins with two oil-rich Brazilian basins.
HRT Participacoes em Petroleo SA, which has 10 exploration blocks in Namibia,
made a sub-commercial discovery after failing to find crude oil at two other wells.
Tower Resources holds 30 per cent in a licence that is 200 kilometres north of HRT
Update on the power supply situation and progress of Nampower projects and initiatives
aimed at addressing the power supply situation in Namibia, 15 April 2014, NamPower Media
Briefing.
The World Bank & Electricity Control Board, National Integrated Resource Plan: Task 5 Final
Report, Section 10.5.2, page 10-8.
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Namibia
Participacoes em Petroleo SAs well, where a sub-commercial discovery was announced
in May 2013. A drillship was expected to start operations on 11 April 2014. BP Plc and
Chariot Oil & Gas Ltd hold interests in exploration licences in Namibia. Royal Dutch
Shell Plc announced in February 2014 that it was taking over two exploration blocks
in the Orange Basin. Namibia neighbours Angola, which is Africas second-largest oil
producer.5
Repsol SA, which has a 44 per cent interest in an offshore licence, started drilling
its first well offshore from Namibia on 23 April 2014. At the time of writing this chapter,
no results have been disclosed.
II REGULATION
i
The regulators
Namibia does not yet have legislation that broadly regulates all aspects of the use of gas,
nuclear power, renewable energy and the generation of power. A draft bill, the Namibian
Energy Regulatory Authority Bill, has been passed on for comment and provides for
the establishment of a single national energy regulator, the Namibia Energy Regulatory
Authority, to deal with the regulation of electricity, downstream gas (including gas
pipelines and storage facilities), downstream petroleum pipelines and storage facilities,
renewable energy, energy efficiency and energy conservation; it also establishes the
functions and duties for the said authority, and provides for matters of its day-to-day
running.
It is further intended to repeal the current Electricity Act No. 4 of 2007 (the
Electricity Act) and replace this with a statute dealing with control over energy and a
new statute governing electricity. The Electricity Act establishes the Electricity Control
Board (ECB), which currently exercises control over and regulates the provision, use
and consumption of electricity in Namibia. The ECB will soon be replaced by the
aforementioned multi-sectoral energy regulator.
Petroleum
A licence issued by the Minister of Mines and Energy (the Minister) is required for the
production operations for petroleum. A production licence authorises the holder of such
a licence exclusively:
a
to carry on production operations on the block or blocks to which that licence
relates;
b
to sell or otherwise dispose of petroleum recovered within such block or blocks;
and
c
to carry on such other operations and works in or in connection with such block
or blocks as may be necessary for or in connection with the operations and selling
or disposal referred to in (a) or (b).
Felix Njini , HRT Seeks Partners to Explore for Oil in Namibian Blocks (1), Bloomberg
News, 16 April 2014.
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Namibia
The National Petroleum Corporation of Namibia (Pty) Ltd (Namcor) is a parastatal
organisation tasked, inter alia, with advising the Minister of Mines and Energy on
matters relating to the importation and distribution of petroleum products in Namibia.
Electricity
The Ministry of Mines and Energy developed the Energy White Paper in 1998, which
served as the overall guiding policy document for the development and regulation of the
Namibian electricity supply industry which consists of power generation, a high voltage
transmission network and various local authorities and other medium- and low-voltage
distribution or reticulation networks, most of which are owned and operated by local
authorities, regional authorities and regional electricity distributors (REDs).6 In terms
of electricity, the Minister also issues the licences, but this is done on the advice of the
ECB. The ECB was established in the Electricity Act No. 2 of 2000 (repealed by the
Electricity Act No. 4 of 2007), as amended. The objectives of the ECB are to exercise
control over and regulate the provision, use and consumption of electricity in Namibia
and to oversee the functioning and development of the electricity industry, in accordance
with prevailing government policy, so as to ensure an sufficient supply of electricity.
The ECB also exercises control over the electricity supply industry, with the main
responsibility of regulating electricity generation, transmission, distribution, supply,
import and export in Namibia through the setting of tariffs and issuance of licences.
The transformation of the ECB to a broader energy regulator referred to in
Section I, supra, was expected to be completed earlier, in 2013. According to the manager
of technical regulation at the ECB, all upstream energy activities concerning oil and gas
will continue to be regulated by the Ministry of Mines and Energy (MME) and the new
regulator will manage the downstream activities.
The new regulator will regulate electricity in all respects from generation to supply,
distribution, import and export, and will also be responsible for gas, renewable energy
and distribution infrastructure for gas and petroleum products.7
NamPower is a company that is wholly-owned by the government of the Republic
of Namibia. NamPower owns and operates most of the generation capacity of Namibia
as well as the national transmission network in Namibia. In the local newspaper The
Namibian, an article published on 8 April 2014 stated that Fitch had affirmed NamPowers
long-term foreign currency Issuer Default Rating (IDR) at BBB- and Short-Term IDR
at F3, and that The state also guarantees 21 per cent of NamPowers debt as at the
financial 2013.8 NamPower holds shares in the above-mentioned REDs. NamPower is
6
7
Procurement of a Power Plant of up to 250MW Request for Information, issued by NamPower,

24 February 2014.
According to an article published in the local newspaper Economist, the manager of technical
regulation, Dr Mawxwell Muyambo of the ECB stated that: The government is currently
working on the fundamental requirements for establishing a policy and regulatory framework
for nuclear energy through engaging experienced development partners.
The Namibian, 8 April 2014.
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Namibia
the only entity that may import electricity that may enter into PPAs with independent
power producers (IPPs).
Nuclear power
The Atomic Energy and Radiation Protection Act No. 5 of 2005 determines that the
National Radiation Protection Authority is independent and consists of the DirectorGeneral and such staff members as are charged with the administration of the Act.
The Act, which came into operation on 16 January 2012, stipulates that, except
when such activity is explicitly authorised by a licence, no person may:
a
possess any radiation source or nuclear material;
b
import into or export from Namibia any radiation source or nuclear material or
transport any radiation source or nuclear material or instruct, require or permit
any person employed by him or her, or acting on his or her behalf to import,
export or transport a radiation source or nuclear material; or
c
dispose of, dump or abandon any radiation source or nuclear material.
The Director-General of the National Radiation Protection Authority issues the
aforementioned authorisation.
The ECB has asserted that should nuclear power generation become a reality in
Namibia, a separate regulator for nuclear energy will be established.
ii
Electricity
As previously discussed, the Electricity Act establishes the ECB, which exercises control
over and regulates the provision, use and consumption of electricity in Namibia.
Licences are required for:
a
the generation of electricity;
b
the trading of electricity;
c
the transmission of electricity;
d
the supply of electricity;
e
the distribution of electricity;
f
the importation of electricity; and
g
the export of electricity.
The Minister may, upon recommendation of the ECB, subject to such conditions as the
Minister may determine, grant permission to a person to operate without a licence under
the licence of a person to whom one has already been issued.
An application for a licence must be submitted to the ECB and must be advertised,
inviting interested parties to submit objections. The ECB considers any objection, and
may, for that purpose, arrange for a public hearing of the application. It then submits the
application, any objection thereto, and any recommendations, to the Minister, including
any additional conditions that the ECB recommends should be imposed.
The Minister may either grant or refuse the application, and if granted, the ECB
issues the licence, which must specify the particular activity and define the area, any
conditions imposed and any schedule specifying the approved tariffs authorised by the
licence.
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A typical applicant for a licence is a municipality, electricity distributing company,
NamPower or industry with its own electrical installations.
Due consideration must be given to matters or activities that may adversely affect,
or result in damage to, the environment or the rights of others, and these must be weighed
against the advantages in general that may be derived from the grant of the application.
An environmental impact assessment study may be requested from the applicant.
A licence may be subject to such conditions as the Minister, on recommendation of
the ECB, may impose when granting an application for the issue of a licence. Conditions
may include provisions relating to:
a
the provision by a licensee of institutional support, transfer of technology and the
funding thereof on a specified basis;
b
the obligations of the licensee, upon cessation of the activities carried on under
the licence concerned, and the restoration of any land disturbed by such activities;
c
the furnishing by the licensee of acceptable security for compliance with any
condition contemplated in (b); and
d
prohibitions relating to the provision of electricity, including prohibitions on
the trading of electricity, unless the electricity concerned is obtained under the
conditions and from the person or persons determined in such licence, or sold on
the conditions and to the person or persons so determined.
Petroleum
In respect of petroleum, the Minister of Mines and Energy considers applications for
reconnaissance, exploration, or production licences to carry out such operations, and
may require the applicants to furnish such information as the Minister may, at his or her
discretion, deem necessary for the purposes of the application. In order for the Minister
to consider an application, he or she may:
a
require any investigations or negotiations to be made or undertaken as he or she
deems necessary; and
b
require the applicant:
to provide such environmental impact studies as may be specified; and
to furnish the Minister with proposals for any alterations to or additions to the
proposals set out in the application.
The Minister will grant such application according to the Petroleum (Exploration and
Production) Act No. 2 of 1991 (the Petroleum Act). The Minister and the applicant are
required, before a licence is issued, to enter into an agreement containing the terms and
conditions agreed upon on which such licence is issued (petroleum agreement), which
may relate to:
a
minimum exploration operations or production operations to be carried out and
the timetable for such operations;
b
the minimum expenditure in respect of exploration operations or production
operations;
c
the formation of joint ventures or the operation of production sharing or other
joint arrangements, including profit-sharing by the state;
d
the participation, including the acquisition of equity share capital, by the state,
the corporation or any other person in any ventures or arrangements, and, in
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e
f
g
the event of profit-sharing by the state, the basis upon which the holder of a
production licence may be exempted, wholly or partly, from any provision of the
Petroleum (Taxation) Act 1991, or any other law governing taxes on income;
the manner in which reconnaissance, exploration or production operations will
be carried out;
guarantees to ensure the proper performance by the company of its obligations,
(e.g., in respect of the minimum expenditure), and a performance guarantee; or
financial and insurance arrangements.
The holder of a production licence is further obliged to establish a fund one year before
the estimated date on which 50 per cent of the estimated recoverable petroleum reserves
should have been produced for the purposes of decommissioning the facilities on the
cessation of production operations.
Any person wishing to operate a fuel outlet will have to apply to the Minister for
a retail licence, and any person intending to operate as a wholesaler of fuel will have to
apply for a wholesale licence.
iii
There are currently no restrictions on the ownership of new and existing energy assets,
service providers or licence holders, such as foreign ownership and constraints on aggregate
holdings, and neither do there exist any limitations on the provision of regulated services,
ownership of new and existing regulated assets or other licensed activities.
Any petroleum agreement that the government and the licence holder are required
to enter into under the Petroleum Act may, however, contain a condition that a joint
venture be formed or that a production sharing operation, or other joint arrangement, be
entered into, including profit-sharing by the state. The terms of such agreements may also
include the participation (including the acquisition of equity share capital) by the state, the
state-owned National Petroleum Corporation of Namibia (Proprietary) Limited, or any
other person. In the case of profit-sharing by the state, the basis upon which the holder of
a production licence may be exempted from any provision of any income tax law must be
set out.
Economic empowerment
Article 23 of the Namibian Constitution prohibits discrimination, except under an act of
parliament expressly providing for the advancement of persons who have been socially,
economically or educationally disadvantaged by historic discriminatory laws.
On 19 October 2011, the Cabinet of the Republic of Namibia adopted the New
Equitable Economic Empowerment Framework (NEEEF).9 NEEEF does not have the
force of law but is a policy framework.
It is stated that NEEEF will be based on voluntary business practice but that
the government may use all the legitimate market mechanisms at its disposal, in the
form of procurement programmes and licensing regimes, to promote transformation and
Government of the Republic of Namibia: Office of the Prime Minister, New Equitable
Economic Empowerment Framework (NEEEF), 19 October 2011.
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Namibia
empowerment. NEEEF stipulates that companies applying for licences would receive
a NEEEF rating and are required to score a minimum of 10 points in three of the
five empowerment pillars.10 These three mandatory pillars are ownership, management
control and employment equity, and human resources and skills development. A total of
20 points could be achieved in respect of each of the five empowerment pillars, and in
order to be considered as empowered, businesses would be required to achieve at least
50 of the total 100 points. The criteria for meeting the requirements to be allocated the
said points are set out in NEEEF.
iv
A licence issued under the Electricity Act may not be transferred to any other person,
unless the Minister, on recommendation of the ECB, has granted its approval.
An application for the transfer of interest in a licensee under the Petroleum Act
may be granted by the Minister on such terms and conditions as he or she may determine.
The regulations that were issued in terms of the Petroleum Products and Energy Act
No. 13 of 1990 provide that a wholesale licence for petroleum products is not transferable
and a retail licence is also not transferable except by way of an amendment of the licence.11
A licence to possess, transport, or import into or export from Namibia any
radiation source or nuclear material may not be transferred without written notification to
and written permission from the Director-General of the National Radiation Protection
Authority.
The Namibian Competition Act No. 2 of 2003 provides that a merger occurs
when one or more undertakings directly or indirectly acquire or establish direct or
indirect control over the whole or part of the business of another undertaking.
The Competition Act contemplates that the acquisition of an asset may constitute
the acquisition of a business. It also contemplates that a business is divisible, and hence
a merger can be accomplished by the acquisition of part of the business of another
undertaking. Thus, if a licence forms part of the transferors business, and this asset is
transferred to another business, it could constitute a merger.
It is important to note that the Competition Commission and the Namibian
courts have as yet not created a footprint or body of jurisprudence in relation to the
interpretation of what constitutes an undertaking and the acquisition of control of an
undertaking triggering the requirement of a merger approval, and it is possible that a
court may find that a company acquiring the transfer or control in respect of certain
licences can be seen as a potential enterprise that is to be regarded as an undertaking, in
that it has an economic capacity of conducting a business with such licence.
10
11
Ownership, management control and employment equity, human resources and skills
development, entrepreneurial development, and community investment.
E.g., if the agreement between the wholesaler and the retailer has terminated a wholesaler
would be entitled to apply for a change of the operator.
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Namibia
III

SERVICES
Namibia currently follows a single-buyer model in terms of which only NamPower is able
to import or export electricity. Since power transmission is almost exclusively undertaken
by the state-owned entity NamPower, a licensee will in most instances provide electricity
to NamPower. Any PPA entered into with a customer such as NamPower, and the price
structure of such agreement, must be approved by the ECB prior to being entered into.
It is the legislators intention to divide Namibia into a limited number of regions,
each with only one RED, but it is anticipated that distribution and retail activities in
Namibia will be merged for some time to come. Consequently, distribution tariffs should
cover both the distribution and supply or retail elements of the value chain.
In making a decision in respect of an application for a retail licence to sell fuel,
the Minister is required to take into account the prevention of vertical integration by
wholesalers in the petroleum product retail sale industry. The Minister presently does not
issue retail licences to holders of wholesale licences of fuel products.
ii
Subject to the availability of capacity and such further circumstances as may be prescribed,
determined in a rule or code or included in the licence conditions of a licensee, a licensee
who is licensed to supply electricity must supply electricity within its licensed area
to every person who makes such a request and who is capable of making satisfactory
arrangements for payment for such supply.
A licensee who is licensed to transmit or distribute electricity within its licensed
area must provide access to all existing and potential users of the transmission and
distribution networks against payment of compensation at a rate included in the
schedule of approved tariffs, except if such refusal is reasonably based on an insufficiency
of technical availability of capacity.
The Competition Act provides for a prohibition of restrictive practices that have
as their object or effect the prevention or substantial lessening of competition, which will
guard against exclusive rights to provide transmission or transportation, gathering and
distribution services in a particular geographical area.
iii Rates
Electricity
The holder of a licence issued in terms of the Electricity Act may not levy any charge in
connection with the provision of electricity against any customer, other licensee or any
other person other than in accordance with the tariffs specified in the licence. The ECB
determines the electricity tariff methodology and approves electricity tariffs.
The ECB may from time to time, upon application by a licensee, revise the
schedule of approved tariffs of the licence concerned and may require the licensee to
submit such information as it may require for that purpose.
The ECB has stated that Namibia will not be in a position to attract investors to
invest in new generation projects if prices are not cost-reflective, which, it recognises,
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Namibia
is a prerequisite for private investors, and that electricity tariff increases are therefore
unavoidable.
The power supply agreement under which NamPower supplies power generally
provides that the prices at which electricity will be supplied may be adjusted from time
to time, subject to the approval of the ECB.
A tariff study12 that had been undertaken by the ECB recommended that an
electricity distributor in Namibia be regulated based on its revenue requirement,
including a return on assets used for electricity distribution and supply. The cost structure
of the distributor must be determined in order to calculate the revenue requirement, and
should include:
a
power supply costs;
b
distribution costs, including network assets and capital related costs;
c
operation and maintenance costs associated with electricity distribution;
d
distribution losses; and
e
customer services costs, including marketing and billing and overhead costs
attributed to retail.
To this end, an operating and reporting manual and user guideline had been developed
to ensure a unified approach to the collection and reporting of information to the
ECB. Reporting schedules have been developed to include the necessary information
to calculate the revenue requirement. The ECB has also published approved tariffs that
would apply to power purchased from mainly local authorities, REDs and NamPower.
Where a charge in a licensees schedule of approved tariffs is such that it
compromises the efficient use of electricity, the ECB may decide to amend such schedule,
after having considered:
a
the economic impact of the amendment on the licensee and its customers;
b
representations made by the licensee; and
c
the general benefits and disadvantages that may result from the amendment.
Such amendment must also ensure the licensees tariffs being sustainable and affordable
in line with prudent electricity industry practices.
The Minister may also impose a levy on every kilowatt-hour of electricity provided
or consumed at any point in Namibia or upon any licensee, after having notified it in
the government gazette.
Erongo RED has taken the lead in tariff adjustments, whereby domestic
consumers can now opt for the best solution for them in applying choices of prepaid or
conventional supply on a staggered tariff system. This means that the domestic consumer
is now in control of his or her electricity bill.
12
The National Electricity Tariff Study prepared for the ECB, by EMCON Consulting Engineers,
November 2001 concerned a study of existing electricity tariffs at all levels of the Namibian
ESI value chain (generation, transmission, distribution and supply) and design tariff policy and
methodologies that enhance the efficient allocation of resources, promote the financial viability
of the ESI and are simple to implement.
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Namibia
Petroleum products
The Petroleum Act determines that any licence is required to include terms and conditions
relating to the basis on which the market value of petroleum may be determined from
time to time.
The Minister may, by regulation, prescribe the price, or a maximum or minimum
price, at which petroleum products may be sold, or determine that such product may be
sold without restriction on the selling price.
The Minister issues regulations and, for instance, determines that petrol may be
sold by a person who acquires petrol directly from a wholesale distributor and sells it to
any other person, only at a particular fixed price which would differ in respect of the
different places where petrol is sold.
During 2002, the then-Minister gave notice that all wholesale licences were to be
amended by the addition of a condition stipulating that each wholesale licence holder
was required to procure from Namcor Petroleum Trading and Distribution Corporation
of Namibia (Pty) Ltd (wholly-owned by Namcor), or its appointed nominee, 50 per
cent by volume of each petroleum product specified in such notice, at a price calculated
according to the inbound landed cost formula accepted and applied in Namibia at the
time, which included diesel and petrol. That notice has since been withdrawn.
v
Under Vision 2030, the governments aim is to achieve 100 per cent self-sufficiency in
terms of power generation.
In its transmission connection agreements, NamPower stipulates that it will
maintain the connection facilities, and the customer in turn is obliged to maintain its
facilities in accordance with good industry practice for the maintenance of the transmission
plant and equipment. Good industry practice is not defined in the legislation but refers
to those that are approved and supplied by an international utility. Such agreements
further determine that facilities must be constructed in compliance with the technical
specifications and requirements determined by NamPower, the Grid Code13 and further
technical requirements set out in such an agreement.
The MME has also identified and set minimum quality levels that have to be met
by solar energy technologies products and the associated services as outlined in the Code
of Practice and Register of Products for Namibian Solar Energy Technologies. These
quality levels concern installation workmanship, system performance and after-sales
service. To enforce and monitor these quality issues, the MME has formulated a National
Technical Committee on Renewable Energy (NTCRE) with the role of certifying solar
energy technologies and services. The NTCRE is the first technical committee of the
Namibian Standards Institution (NSI) and is one of the nine committees of the NSI.
13
The Namibian Grid Code Governance Code (final draft 070405) describes the provisions
necessary for the overall administration and review of the various aspects of the Grid Code.
This code is to be read in conjunction with the relevant legislation, licences issued to generators,
transmission companies and distributors, and other operating codes that relate to the electricity
supply industry.
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After having notified such in the government gazette, and after consultation with
the Minister and such players in the electricity industry as it may determine, the ECB
may:
a
set standards on the quality of provision of electricity and of electricity-related
services; or
b
with or without amendments, incorporate any standards on the quality of
provision of electricity and electricity-related services in its rules, and must
indicate whether such standards are compulsory.
IV
ENERGY MARKETS
Market developments
The Southern African Power Pool (SAPP) is formed by the cooperation of the national
electricity companies in Southern Africa, including NamPower, which have created a
common power grid between their countries and a common market for electricity in the
Southern African Development Community (SADC) region.
The draft Electricity Bill referred to in Section I, supra, provides that the Minister
may, after consultation with the new Namibia Energy Regulatory Authority (established
by the draft Namibia Energy Regulatory Authority Bill referred to in Section I, supra) and
relevant stakeholders, establish an independent system and market operator responsible
for the buying and selling of electricity at the wholesale level.
The draft Electricity Bill also refers to a system operator, meaning the entity
responsible for operating, ensuring the maintenance of, and, if necessary, developing
a transmission power system and where applicable its interconnections with other
systems, and for ensuring the long-term ability of the system to meet reasonable demands
for the transmission of electricity.
The system operator, in accordance with prevailing policies, will be responsible for
balancing supply and demand, dispatch, ancillary services, etc.; overall generation and
transmission planning; and procurement and contracting of electricity.
Eligible customers (meaning consumers who purchase electricity directly from
providers without the intervention of a distribution licensee) may purchase their
electricity independently, in the manner prescribed by the rules, and for this purpose
the rules may prescribe which customers or which category or categories of customers
qualify as eligible.
IPPs would be entitled to supply electricity either to the system operator, to
eligible customers or across the border.
The draft Electricity Bill also provides for private sector investment in the
generation of electricity, which may take the form of an IPP in accordance with the
terms and conditions agreed upon in the PPA, and in conformity with the respective act,
as well as any other relevant law. A PPA may be entered into by such parties, subject to
appropriate terms as may be prescribed by the rules, but also subject to the review and
written approval of the new Namibia Energy Regulatory Authority. This authority may
also exempt any person or category of persons or type of PPA from these requirements.
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ii
There currently do not exist market rules for the sale of energy. Power is exclusively
imported and exported by NamPower.
iii
Holders of power generation licences are required to enter into PPAs with NamPower and
the ECB must determine tariff methodologies and approve tariffs. There are currently no
regulatory requirements that govern the rates or contractual terms for the purchase and
sale of natural gas.
iv
Market developments
The Electricity Bill is planned to be promulgated, which would provide for the matters
referred to under Section IV.i, supra.
V
During 2012 a number of power generation licences have been issued in respect of solar
photovoltaic projects, which were issued subject to the condition that the licensees enter
into PPAs with NamPower. In September 2012, NamPower stated that the government
had approved the creation of a Project Steering Committee to oversee renewable energy
procurement, which is tasked with determining the amount of renewable generation that
will be procured and placed on the Namibian Grid network at any given moment. The
ECB advised all IPPs to take part in a solar PV request for proposals for three individual
sites of 10MW capacity situated at the towns of Mariental, Omaruru and Okahandja. It
seems that presently, the only manner in which an IPP would be able to enter into a PPA
with NamPower is by participating in a request for proposals concerning specific projects.
A total of 50 responses were received in response to a request for proposals, of which
nine respondents were short listed for prequalification. In its media briefing of 15 April
2014, NamPower stated that as soon as the Namibian government states its final position
regarding a request for protection against political risks through the Implementation
Agreements these respondents will be invited to participate in the second round of the
procurement process which involves detailed bidding as potential IPP project developers.
A Background Information Document was issued to provide stakeholders with a
background to three proposed solar energy facilities and to invite interested and affected
parties to register in the environmental impact assessment (EIA) process and submit
comments on the proposed solar energy facilities from 4 April 2014 until 23 April 2014.14
NamPower signed a PPA with InnoSun Energy Holding (a sister company of
InnoVent of France), a local IPP, on 13 December 2013, which will be the first ever PPA
that the utility is signing with a local IPP. The new Omburu Solar PV Park, near the
14
EIA for three proposed 10MW photovoltaic (solar) energy facilities at Mariental, Omaruru and
Okahandja, Namibia.
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Namibia
town of Omaruru, to be constructed by InnoSun Energy Holding, will provide 4.5MW
of power to Namibia from the end of 2014.
NamPower has completed a pre-feasibility study into the use of invader bush and
resolved to proceed with a full-scale feasibility study concerning decentralised biomass
power plants with 5MW capacities on the base of biomass chips. The feasibility study
will consider options for hybridisation with solar.15
In 2012, the ECB also commenced a project to assess the technical application
of net metering and the development of net-metering rules for renewable energy
technologies in Namibia.
In November 2005, a utility-scale wind turbine was connected to the electricity
distribution grid of Erongo RED to exploit the wind resources in the coastal town
of Walvis Bay. This project constituted the first renewable energy initiative based on
wind generation by a local authority in Namibia and southern Africa. Apart from
supplementing the power supply to Walvis Bay and, in particular, consumers of the Mile
7 wind-turbine generator, the project provided a learning experience to develop local
expertise in the assessment, design, implementation and operation of grid-connected
wind energy converters.
The Ministry of Mines and Energy established a Solar Revolving Fund (SRF),
which is a credit facility to stimulate demand for the utilisation of renewable energy
technologies in the rural areas, especially for communities living off-grid areas, but also
to urban users. Individuals would be able to obtain loans at a low interest rate to purchase
renewable energy technology such as solar water pumps, heaters, and cookers.
Draft Renewable Energy Feed-In Tariff Rules have been published by the ECB
inviting all stakeholders to submit their comments on the proposed rules, as well as the
associated PPA guidelines and application procedures.
The feed-in tariffs are split into categories for electricity that is generated by
biomass, solar and wind.
The draft rules currently stipulate that there should be a presumption that, if a
project is proven to be viable and meets the rules, the offtaker (who the rules define as
NamPower only) should sign a PPA with the qualifying IPP.
Twelve rules are provided for dealing with: a take-or-pay obligation, project
viability, willing buyerwilling seller arrangements, distance to grid sub-station,
connection/wheeling costs, land, fiscal treatment, currency of payment, indexation,
resource ceilings, carbon credits and refit duration.
One of these rules would provide that the offtaker and the IPP, qualified under
the Renewable Energy Feed-In Programme (REFIT Programme), shall enter into a takeor-pay PPA, in compliance with the REFIT conditions and associated PPA guidelines,
and subject to: (a) the proposed project meeting the criteria specified in the rules, (b)
good faith negotiations, and (c) proper licensing and PPA approval by the ECB.
15
Briefing.
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Namibia
A further rule provides that: all projects shall have the right to enter into willing
buyerwilling seller arrangements with a party other than the offtaker, at mutually agreed
price levels, irrespective of the REFIT levels and subject to proper licensing. In line with
the take-or-pay provisions, there shall be only one offtaker in each PPA. Such a willing
buyer shall be allowed, subject to ECB approval of the PPA, to recover its purchase costs
from its customers on a cost pass-through basis.
The rules include guidelines (PPA Guidelines) which are intended to serve as
principles or recommendations in the negotiations concerning PPAs entered into
between the offtaker and the IPP(s). These guidelines are not intended to set out the
terms of a standard PPA, but seek to provide uniformity of principles and compliance
with the aforesaid rules allowing flexibility in the negotiations between an IPP, as seller,
and the offtaker, as buyer, and monitored for compliance by the ECB, as regulator.
The REFIT Rules are also intended to provide for an application and project
screening protocol to facilitate decision-making in issuing proper generation licences
to IPPs to develop renewable energy power projects. Furthermore, the intention is to
form a Renewable Energy IPP Committee which would comprise representatives of the
Ministry of Mines and Energy, NamPower, the ECB and other entities whose purpose
would be to evaluate an applicants expression of interest and the pre-feasibility of a
renewable energy project.
The Renewable Energy IPP Committee would issue a non-objection or objection
to the offtaker entering into a PPA and to the ECB issuing the relevant licence.
If the Renewable Energy IPP Committee issued a non-objection, an applicant
would be required to complete a full feasibility study acceptable to creditors and
investors, who could collectively demonstrate that they would provide the debt and
equity financing necessary to provide the entire financing required to complete the
project and an environmental impact assessment (EIA) acceptable to all the competent
authorities, as well as creditors and investors. The feasibility study and EIA would be
submitted to the offtaker for it to determine whether the proposed project is viable.
ii
The supervisory control and data acquisition (SCADA) system is to be expanded

throughout the entire Erongo region by Erongo RED, which will improve response
times for power failures, coordinate operations and ensure safe operations.
The introduction of automatic and remote metering will not only reduce costs
but also accuracy and on-time invoicing for supplies of electricity.
Implementation of a customer liaison service to assist in time-of-use as well
as demand-charge planning will reduce the costs of all concerned parties, reduce and
optimise electricity demand for the region, and eventually curb costs of Erongo RED
and all its customers.
As the company is approaching cost-reflectivity, Erongo RED now offers time-ofuse metering and tariffs for all bulk and three-phase customers, which enables them to
effectively control their power consumption.
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Namibia
The ECB issued draft Net Metering Rules,16 which allow for electricity generated
by customergenerators, and delivered to an electricity distributors local distribution
facility, to be used to offset electric energy provided by the electricity distributor to
the consumergenerators during an applicable billing period. This has the purpose of
(1) generating additional power into the national grid, (2) reducing the investment
requirements of utilities and conventional power producers, and (3) promoting sustainable
renewable energy sources, small-scale investment, value addition and electricity market
development. All renewable energy technologies are eligible for net metering, including
facilities for the production of electrical energy that uses solar, wind, water, geothermal,
biomass or fuel cell resources. The intention is to exempt net metering consumers from
the requirement under the Electricity Act 2007 to obtain a generation licence, and the
ECB is currently considering in which manner to legislate these Rules.
In May 2014, NamPower announced that, until the net metering rules are
finalised and issued by the ECB, and as an interim measure, NamPower would allow its
customers to connect a photovoltaic (Solar PV) roof-top system on a first-come, firstserved basis until 15 per cent of the maximum demand of the main feeder line serving
a specific group of customers is reached, but such customers would not be compensated
for any electricity fed back to the NamPower network.
NamPower suggested certain programs as part of a Short Term Critical
Supply (STCS) project to counter power supply constraints, one of these being the
implementation of a demand-side management (DSM) project, which includes
specific DSM campaigns, time-of-use tariffs and a public awareness campaign under
the theme power of knowing, advocating energy-saving initiatives. These campaigns
include the import and free installation of 1 million LED bulbs in residential houses
throughout Namibia, the installation of solar water heaters in residential houses through
a rebate initiative (installation of 20,000 solar water heaters over the next five years),
and negotiations with large customers for access to their standby generators to support
electricity demand during peak and emergency periods (NamPower would engage
electricity users who have their own standby generators or potential to reduce significant
loads on demand or to provide additional generation to the grid or effect load reductions
on notification). The programme is expected to cost approximately N$350 million and
to yield a combined saving of approximately 110MW over a period of five years.17
iii
The Ministry of Mines and Energy and the United Nations Development Programme
(UNDP)18 agreed on a programme referred to as the Concentrated Solar Power
Technology Transfer for Electricity Generation in Namibia (CSP TT NAM). NamPower
16
17
18
Most recent version dated June 2013.

Briefing.
UNDP is the UNs global development network, advocating for change and connecting
countries to knowledge, experience and resources to help people build a better life.
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Namibia
and the Ministry of Mines and Energy are working together on a concentrated solar
power plant (CSP) project. The key objective of the proposed project is to increase
the share of renewable energy resources in the Namibian energy mix by developing
the necessary technological framework and conditions for the successful transfer
and deployment of CSP technology for on-grid power generation, thereby reducing
greenhouse gas emissions.19
NamPower has proposed to develop a 20MW hydropower station on the
Okavango River on the north-eastern boundary of Namibia. Co.Plan (Pty) Ltd had
been appointed to undertake a preliminary environmental assessment as part of a prefeasibility study by Water Transfer Consultants, whose study had been submitted to
the Permanent Okavango River Basin Water Commission (OKACOM) to consider the
viability of developing such a station situated near the Popa Falls. OKACOM took note
of the completion of the pre-feasibility study and agreed that NamPower in Namibia
could proceed with the proposed feasibility study for the project and for OKACOM20 to
participate in the study.21
VI
THE YEAR IN REVIEW
The intention is for the Kudu Project to be implemented and commissioned by the
end of 2017, and at the latest during the first quarter of 2018. Tenders in respect of the
Kudu Project included the engineering, procurement and construct (EPC) tender for
design, supply, manufacture, delivery, erection, test and commissioning of the 800MW
combined-cycle gas turbine Kudu power station, the tender for an operations and
maintenance services contractor, the tender for the strategic equity investor (SEI), and
the tender for the lead arranger role. The evaluation of all tenders has been completed,
except for the operation and maintenance services tender, which is nearly complete at
the time of writing this chapter. All commercial agreements concerning the project are
expected to be concluded by June/July 2014 according to a project update presentation
by NamPower in May 2014.
In the local newspaper The Namibian, it was stated that:
In the 2014/2015 budget, the government has provided for N$1,6 billion and a further N$2,6
billion is likely to be provided in the 2016/2017 budget for NamPower to support Kudu Power.
NamPowers minimum 51 per cent equity component for Kudu Power Special Purpose Vehicle
(SPV) is estimated at US$190 million (N$1.9 billion). The final investment decision for Kudu
Power is expected in June. Copperbelt Energy Corporation (CEC) has signed a joint development
19
Briefing.
20
OKACOM comprises governmental representation from Angola, Botseana and Namibia,
and has the responsibility to oversee the management, including developments within the
Okavango Basin.
21 www.nampower.com.na/pages/popa-about.asp.
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Namibia
agreement and will have a stake of approximately 20 per cent to 30 per cent in the Kudu Power
SPV. NamPower will on sell 200MW to 300MW to CEC. Further equity (19 per cent to
29 per cent) will be sourced from other strategic investors and offtake counterparties. All the
power produced by Kudu Power Station will be sold to NamPower through a long term PPA.
NamPower will sell about half of the power on the domestic market under the existing cost pass
through regulation with the remainder being exported under long-term Power Export Agreements
(PXA).22
NamPower had issued an expression of interest (EOI) for the joint development of an
independent power plant with a generation capacity of up to 250MW for the purpose
of bridging the medium to long-term power supply shortage in Namibia. The closing
date in respect of this EOI is 22 April 2014. NamPower would be the offtaker of power
generated by this plant, which is to be owned by a special purpose vehicle in which
NamPower would hold minority equity. NamPower stated that preliminary studies
indicated that the most feasible fuel sources for the envisaged power plant would be
imported natural gas and liquid fuels. In its request for information, NamPower stated
that In order to meet the demand needs of the country, the plant will operate as a base
load plant prior to commissioning of Kudu. Post commissioning of Kudu the plant will
operate as a mid-merit plant with an anticipated load factor of between 25 and 30 per
cent. The full commercial operation date is intended to be during June 2016.
NamPower intends to have installed a set of diesel generators next to the
existing Paratus power station in the coastal town of Walvis Bay which would provide
approximately 50MW of electricity on order to meet immediate needs for power.
In its media briefing of 15 April 2014, NamPower stated that the Joint Technical
Commission (PJTC) between Angola and Namibia has found the Baynes Hydropower
Project to be financially and technically viable. The PJTC has resolved to submit the
report and recommendations to the governments of Angola and Namibia for final
approval before the commencement of the next phase of the project.
The company Arandis Power (Pty) Ltd is proposing to construct a thermal power
generation and waste oil recycling plant to the east of the town of Arandis located in the
Erongo region, about 60 kilometres east of the coastal town of Swakopmund and in the
immediate vicinity of the existing Rssing uranium mine and the Husab uranium mine
that is currently being built and which will become the second-largest uranium mine in
the world. This plant would have a nominal output capacity of approximately 120MW
and utilises reciprocating engines. Arandis Power will utilise a residual fuel known as
heavy fuel oil (HFO) and recycled oil from a waste oil recycling plant. It is anticipated
that the power station will be initially fuelled predominantly by HFO and as the recycling
plant becomes well established as a repository for waste oil, the proportion of recycled
waste oil to commercial HFO will gradually increase.23 The intention is to commence
22
23
The Namibian, 8 April 2014.

Environmental Impact Assessment Report for the proposed Arandis Thermal Power Generation
and Waste Oil Recycling Plants, SLR Project No.: 7NA.14008.00001, Report No.: Doc. No.
1, July 2012, SLR Environmental Consulting (Namibia) (Pty) Ltd.
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Namibia
construction work at the end of 2014 and construction is expected to take 22 months.
Arandis Power (Pty) Ltd has also stated that it intends to erect a solar photovoltaic power
plant able to generate a further 50MW, and the recycling plant is now expected to give
way to the solar power compound.
VII
In order to attract investors in the long term to Namibia, and facilitate investment in the
Namibian ESI, the ECB has completed an IPP and investment market framework for
Namibia. Apart from providing potential investors in the generation sector of Namibia
with detailed information on the power supply situation in Namibia and the Southern
Africa Region, it also provides guidelines to the framework that Namibia intends to use
to attract investments in the generation sector as well as the current electricity policies
in Namibia.
The primary objective of these guidelines is thus to assist potential new investors
in the electricity generation sector of Namibia to acquire a licence through clarifying the
procedural and information requirements as well as the licence evaluation process. The
rationale behind this objective is that new investments in the power generation sector are
required urgently not only in Namibia, but also in the Southern Africa region, due to a
looming power supply shortage.
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Chapter 24
NETHERLANDS
Louis Bouchez and Maurits Bos1
I OVERVIEW
The Netherlands energy markets have been fully liberalised in accordance with the
relevant EU directives. A consequence of the liberalisation process has been heavy
regulation. In particular for energy markets such as the electricity and gas markets,
which depend on transportation/transmission infrastructure, third-party access had to
be secured. The liberalisation process began with entry into force of the Electricity Act
in 1998, followed by the Gas Act (together with the Electricity Act, the Acts) in 2000.
Subsequently in 2003 a new Mining Act came into force and finally on 1 January 2014
the Heat Act entered into force. All of these acts have been accompanied over time by
numerous secondary legislation such as codes, regulations and decrees.
Prior to the liberalisation process the Netherlands energy market was already well
developed due to the fact the country has always had inland energy resources. In the first
instance coal was a key fuel. But the discovery in 1959 of natural gas in the municipality
of Slochteren near Groningen (the Groningen field) was the real start of the development
of the Dutch energy sector. The producer of the Groningen field is NAM, a fifty-fifty
joint venture of Shell and ExxonMobil. The gas produced from the field is sold and
marketed by Gas Terra, a fifty-fifty joint venture between NAM and the Dutch state.
This contractual partnership between the Dutch state, Shell and ExxonMobil is often
referred to as the gas building (gasgebouw) and the foundation hereof stems from 1963,
the year that the first gas was produced from the Groningen field. The enormous impact
of the gas on the Netherlands society is best shown by the fact that around 1968 all
municipalities were connected to the national transmission network. The gas building
is the best example of the strong control the Dutch state has over its natural energy
resources.
Louis Bouchez is a partner and Maurits Bos is a senior associate at Kennedy Van der Laan.
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Netherlands
Considering the fact that the Dutch energy industry is nowadays responsible for
about 10 per cent of GDP with a total value of more than 41 billion, providing for
more than 100,000 employment years, the government realised that solid regulation was
a condition precedent for liberalisation.
Recently the Dutch government has strongly focused on improving energy
efficiency and developed a policy framework for that which resulted in the adoption in
2011 of the Energy Conservation Act. This Act is the implementation of the 2006 EU
Energy Service Directive.
The Netherlands reached a society-wide Energy Agreement for Sustainable Growth
(the Energy Agreement) in September 2013, laying out the actions needed for the 2020
targets. On the basis of the Agreement and the Climate Agenda of October 2013, the
country reaffirmed its ambition to reduce carbon dioxide emissions in the transport
sector by 17 per cent by 2030 and by 60 per cent by 2050. It also supports an EU-wide
reduction in GHG emissions of at least 40 per cent by 2030 and further reductions
of between 80 and 95 per cent by 2050, in line with international commitments. The
government considers this 40 per cent goal by 2030 a minimum commitment.
Moreover, since 2011 the government has been working on plans to tackle
bottlenecks in the current energy policy framework and to simplify the legislation. This
resulted in the adoption of the policy framework called STROOM or STREAM.
II REGULATION
i
The regulators
Authority for Consumers and Markets

The Netherlands Authority for Consumers and Markets (ACM) is the market authority
that has been created through the consolidation of the Netherlands Consumer Authority
(CA), the Netherlands Independent Post and Telecommunication Authority (OPTA)
and the Netherlands Competition Authority (NMa). The ACM was established on
1 April 2013. The ACM is the national regulatory authority for energy. It aims to
establish the European internal energy market, create a stable investment climate, foster
reliable energy supply, and protect and empower consumers enabling them to make wellinformed choices.
Enforcement is one of the ACMs core tasks. Its objective is to prevent and
resolve market and consumer problems. In general the supervision of compliance
with the contents of the Acts lies with the ACM. However, excepted from this general
provision are the areas regarding security of supply, management of national gas reserves,
network access conditions and tariff structures (by way of ministerial decree) for which
the Minister of Economic Affairs (MEA) assumes responsibility and for which he is
accountable to Parliament.
The ACMs specialised Energy Department also supervises the exercise of
dominance in the electricity sector, including regulation of third-party access and tariffs
related to the Dutch electricity transport networks. In the gas sector, the ACM adjudicates
disputes related to provisional tariffs and conditions, which the Energy Department sets
for access to the gas transport network.
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Through the frequently used possibility included in the Acts of the use of
ministerial regulations by the MEA, the regulating influence of the MEA is substantial.
The MEA thus plays an important role in the energy industry, in particular as regards the
cross-border transmission of electricity and gas. The MEA uses the Energy Report as a
tool to set out the governments medium and long-term energy policy. At least once every
four years (the last report was published in 2011) the MEA issues said report providing
guidelines for the decisions to be taken by the government in the following four years
regarding reliable, sustainable and efficient energy supply.
State Supervision Authority on Mining
The MEA has delegated the supervision on mining to the State Supervision Authority
on Mining (SSAM). Apart from the SSAM there is the Mining Commission, which
provides the MEA, if so requested, with information necessary for him or her to decide
on the feasibility of legislation and general policy rules.
The Technical Commission Earth Movement (TCEM) advises in relation to new
policy developments. The TCEM also has a duty to provide the public with information
where damage might be expected as a result of earth movement due to mining activities.
Authority for Nuclear Safety and Radiation Protection
In January 2014 the MEA announced the establishment of a new regulator for the nuclear
energy sector, the Authority for Nuclear Safety and Radiation Protection (ANVS). The
new authority will draft legislation, develop safety requirements, issue licences, carry out
inspections and provide information.
ii
Gas and electricity supply

For gas and electricity supply to small-scale or household consumers a specific licence is
needed pursuant to the Acts. These captive customers are defined in the Acts. Licences
are granted by the ACM (through delegation by the MEA). The ACM may grant a
licence to an applicant (the licensee) when certain conditions are met, and in addition
the ACM may attach conditions and restrictions to such licence; any licensee needs
to have the required organisational, financial and technical qualities for the effective
performance of its duties. The ACM has the right to revoke the licence if a licensee no
longer meets the requirements. Also, there are certain exemptions possible.
Exploration and exploitation of minerals
Pursuant to the Mining Act, licences are required for (1) the exploration and (2)
exploitation of minerals, (3) the exploration and (4) exploitation of terrestrial heat, and
(5) the underground storage of minerals. Licences are granted by the MEA. Furthermore,
the MEA is authorised to withdraw a licence on the grounds mentioned in the Mining
Act.
Storage of minerals
It is prohibited to store minerals underground without a licence. A storage licence applies
to a specified area. A storage licence can only be refused or withdrawn by the MEA
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because of the technical or financial background of the petitioner, the way it intends to
undertake the storage activities, the lack of efficiency and responsibility of the petitioner
in earlier projects, safety reasons, military defence reasons or because of the policy
regarding the exploration and operation of minerals and terrestrial heat.
iii
The Electricity Act makes a distinction between (1) the national high voltage network,
defined as the network intended for transport of electricity at 220kV or higher, which
is used for such purpose, as well as networks that cross national borders at 500V or
higher (the High Voltage Network); and (2) any other network (the Network). For the
entire High Voltage Network there is one transmission system operator (TSO), TenneT.
TenneT is responsible for operating the High Voltage Network, maintaining the (crossborder) interconnectors and balancing supply and demand, both on the High Voltage
Network and the Network.
Gas Transport Services BV (GTS) is a wholly-owned subsidiary of Gasunie, with
primary task to act as the national TSO for gas. The tasks of GTS, as national gas TSO
include (1) operation and development of the gas transport network, (2) the provision
and marketing of transport services, and (3) assisting with general public tasks.
Regional gas and electricity distribution networks are operated by nine designated
independent regional network operators.
In relation to network operators, the Acts contain four key prohibitions which can
be summarised as follows: (1) the grouping or integration prohibition, which determines
that it is prohibited for network operators (national or regional) to undertake any energy
supply activities; (2) the prohibition to undertake any side-activities pursuant to which
network operators are not allowed to undertake any activities that may be in conflict
with the interests of the network management or operation; therefore network operators
may only undertake infrastructural activities and cannot accept any liability for activities
of any of its consolidated group companies; (3) the non-compete prohibition, which
determines that network operator may only do those things as prescribed by the law
against regulated tariffs; and (4) the privatisation prohibition, which imposes that the
shares in any network operator are always, directly or indirectly, owned by the state.
Each of these prohibitions draws a line: (1) the distinction between a production
and/or a supply company and network operator, (2) the distinction between network
operators and other (group) companies, (3) the distinction between network operators
and the network company, and (4) the distinction between public and private.
The actual third-party access to the networks is regulated within the Acts, while
the conditions for access as well as the tariffs are regulated by the ACM.
iv
Apart from any mandatory merger control pursuant to the Competition Act acquisitions
of distribution networks or of shares of a network operator by non-public entities are
prohibited pursuant to the Acts.
Although there is no explicit prohibition on the (partial) privatisation of the
TSOs TenneT and GTS, in October 2013 the government decided not to initiate any
(partial) privatisation of TenneT or GTS. This is in accordance with the government
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policy embedded in the State Participation Policy but somewhat contradictory to the
governments intentions outlined in its 2011 Energy Report, which hinted at gradual
minority privatisation of GTS and TenneT.
Moreover, any change of control of an LNG installation or LNG company needs
to be notified to the MEA. The MEA may subsequently prohibit the contemplated
transaction or impose conditions.
III

SERVICES
Pursuant to the Acts, in order to be allowed to operate a natural gas or electricity

transmission or distribution network a separate company must be appointed as gas or
electricity network operator by the owner of the transmission or distribution network
with ministerial approval. Several provisions of the Acts impose legal and managerial
and accounting unbundling requirements on network owners and network operators.
Consequently, the management and operation of a network must be entrusted to a
separate legal entity, the network operator, which has to keep separate accounts in respect
of the management of the network. Network operators are usually part of the same
corporate group as the owner of the network. The network operators are subject to legal
obligations in order to prevent them from abusing their dominant position.
In order to further increase the independent position of network operators the
legislator included in the Acts a provision providing for mandatory transfer of the
economic ownership of the networks for which the network operator acts as network
operator.
Furthermore, from 2011 onwards network operators and the networks under
their supervision may no longer belong to an energy company that also supplies or
produces energy. Ownership of the network operator must be transferred to the public
shareholders of the energy company. The legislator intended that as such network
operators would become entirely independent in the Dutch energy market. However,
following a 2010 court decision part of the law on full ownership unbundling cannot
be applied. As a result two vertically integrated companies, Delta and ENECO, decided
to postpone their unbundling process. The MEA then decided to file an appeal with the
Supreme Court of the Netherlands, which subsequently asked for a preliminary ruling by
the European Court of Justice. The central question was whether the group prohibition
(as described in Section II.iv, supra), which requires unbundling of the network business
shared by energy companies and prohibits mutual shareholdership, and the prohibition
on other side activities are in conflict with the free movement of capital. In its ruling
of 24 February 2012, the Supreme Court stayed the appeal and made a preliminary
referral to the ECJ. On 22 October 2013, the ECJ ruled that Member States are allowed
to regulate ownership. Furthermore the ECJ determined that the objectives underlying
the unbundling measures may justify the restriction of the freedom of capital. The
ECJ further ruled that the Dutch court needs to determine whether the restrictions
are appropriate. The ECJs ruling seems to indicate that the unbundling of the energy
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companies is possible, however it is expected that the actual unbundling remains subject
to national court proceedings for years to come.
ii
As pointed out above, the Acts distinguish between (1) the national transmission network,
which is operated by GTS respectively TenneT, and (2) the regional distribution networks.
As such the Acts have created a hybrid system of third-party access, which contains
elements of both negotiated and regulated third-party access. The Acts prescribe that
the ACM establishes the tariff structures and the conditions that each network operator
has to comply with when its submits its annual indication of tariffs and conditions. In
conclusion, third-party access to gas and electricity transportation facilities is organised
by a system of negotiated third-party access, in which the tariffs and conditions offered
by the gas and electricity transportation companies are substantially influenced by the
ACM.
iii Rates
Pursuant to the Acts there is a system specifying two regulated tariffs: the tariff for
transport services and the tariff for supply services. In addition a distinction can be
made between liberalised tariffs and regulated tariffs: the tariffs for the supply services are
liberalised while the tariffs for transport services are regulated.
A yardstick regime is used to regulate the regional distribution networks. With
this regime the allowed annual change in average industry charges is restricted to equal
CPI-x%. CPI-x is an incentive-based form of price/revenue control. Changes in price or
revenues of controlled goods or services are limited to: (1) the increase in a general price
index, such as the consumers price index (CPI), minus (2) a factor (x) determined by the
regulatory authority to reflect anticipated efficiency gains or productivity growth which
will lower the cost of producing the regulated goods and services. The ACM determines
the anticipated efficiency gains.
Moreover there is an adjustment for quality of service performance possible; such
an adjustment is to be established by the ACM (the q-factor).
iv
The MEA is responsible for oil and natural gas emergency policy. The Dutch National
Emergency Strategy Organisation (NESO) prepares and advises the MEA on matters of
oil emergency measures and their implementation.
The Gas Act establishes responsibilities related to gas crises with the MEA. The
MEA appoints GTS, as the national gas TSO, to perform certain tasks specified in the
Gas Act, however ultimate responsibility remains with the MEA. Tasks allotted to GTS
include performing the specific tasks established in related EU regulations.
Emergency supply procedures are activated if a licence holder or supplier cannot
supply gas to small consumers. In such situations, GTS can impose measures to guarantee
temporary supply to these consumers as long as they have failed to find an alternative
supplier.
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IV
ENERGY MARKETS
The Netherlands has various markets for the trading in energy. Electricity can be
exchanged via two official electricity exchanges, the APX and the ICE Endex. The APX
is an independent electronic exchange for trading on the spot market.
The APX offers day-ahead trading and intraday trading. On the day-ahead
auction trading occurs one day before the delivery of the electricity, whereas the intraday
market offers traders the opportunity to continuously trade in hourly intervals as well
as place orders for up to five minutes prior to delivery. The ICE Endex facilitates the
trading in electricity in the form of futures. Electricity is also traded directly between
trading parties or via a broker on the over-the-counter market. In addition, TenneT, as
TSO, operates an imbalance market for regulating reserve capacity, assuring that the
balance between electricity injected into and taken from the Dutch electricity network
is preserved. On this single buyer market, market parties can offer regulating or reserve
capacity to TenneT. In respect of gas, GTS operates the title transfer facility (TTF), a
virtual market place that enables national and international parties to transfer ownership
of gas that is already in the transport network to another party. Gas can be exchanged on
the TTF via the ICE Endex in the form of a spot market and a derivatives market. An
imbalance system is also operated in respect of gas, which is managed by GTS.
ii
In order to be able to supply electricity and gas to consumers and small businesses, a
licence is required from the ACM. The ACM also establishes the tariff structures and
conditions for the transmission of electricity and gas and supervises TenneT and GTS
which as TSOs are the main parties responsible for the transmission of electricity and
gas from producers to consumers.
In addition, TenneT is responsible for supervising and recognising each
programme responsible party (PRP). Any party that has one or more connecting points
to the electricity network bears programme responsibility for these connecting points.
This means that the party concerned (the PRP) is obliged to draw up programmes
relating to the expected electricity supply to the network and the expected consumption
from the electricity network. These energy programmes have to be supplied to TenneT
on a daily basis. TenneT settles the differences between the volume agreed on in advance
and the actual measured volume.
To be able to trade on the APX, ICE Endex and TTF, membership is required
and each of APX and ICE Endex impose their own additional regulations on members.
Exchanges for derivatives fall under the supervision of the Financial Markets Authority
since derivatives may qualify as financial products within the meaning of Markets in
Financial Instruments Directive (MiFID), which is implemented in the Dutch Financial
Supervision Act.
iii
Suppliers holding a licence to supply to consumers usually offer either fixed-price

contracts for a fixed term, flexible contracts that fluctuate with the changing prices of
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energy, or a combination of the two, with for instance fixed prices for electricity and
fluctuating prices for gas or vice versa. The general terms and conditions used by the
suppliers of energy to consumers have been standardised in collaboration with the ACM
and the Dutch Consumer Union. A standardised contract for the supply of energy has
also been established by the ACM which contains the same terms in respect of all but
price, which thus gives consumers the option to easily compare these contracts between
different suppliers.
iv
Market developments
In respect of both electricity and gas the Dutch government stimulates national operators
of the relevant networks to work cross-border, since an integrated North-West European
energy market simplifies trade and enables network operators to invest elsewhere in
Europe.
Regarding the development of the sustainable energy markets, in December 2013
the Dutch government designated new areas for the construction of offshore wind farms
off the coast of North and South Holland and north of the Wadden Islands in accordance
with the draft National Policy Strategy on Offshore Wind Power.
V
i
In September 2013 the Dutch government entered into the Energy Agreement, which,
as indicated above, is an agreement uniting various organisations including the Dutch
central and local government, employers associations, trade unions, environmental
organisations, financial institutions and other civil society organisations. The Energy
Agreement has the goal of aligning the interests of the various involved parties towards
a more sustainable and secure energy supply, as well as to create additional jobs and
lower prices for consumers. Two main targets of the Energy Agreement are to achieve an
average energy consumption saving of 1.5 per cent (resulting in a saving of up to 100
petajoules by 2020) per year and an increase of the share of renewable energy from the
current approximate 4 per cent to 14 per cent by 2020 and 16 per cent by 2023, and the
ultimate goal of a strictly renewable energy generation by 2050.
The Energy Agreement contains a broad range of measures to scale up renewable
energy generation, for instance by a strong focus on onshore and offshore wind energy
farms, the closing down of coal plants and tax incentives for consumers to generate
their own renewable energy and for isolating their houses and other incentives like the
renewable energy incentive scheme (SDE+). The SDE+ scheme is an operating grant
aimed at businesses, institutions and non-profit organisations. Pursuant to the SDE+
scheme, producers of renewable energy receive financial compensation for the energy
they generate (effectively neutralising the difference between the generally lower cost
price of energy derived from fossil fuels and the higher cost price of energy derived from
renewable resources).
In the Netherlands the main types of renewable energy are wind, solar, biofuel
and geothermal, bio-fuels, and onshore and offshore wind power currently having the
best credentials for future growth. Biomass currently accounts for around 60 per cent of
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sustainable energy production in the Netherlands and the Dutch government believes
the Netherlands can become a world centre for sustainable biomass applications, in for
example the chemical and energy sectors.
The Energy Agreement contains a strong focus on wind energy, which makes
sense since the flat, windy countryside in the Netherlands makes it very well suited for
the deployment of wind capacity. The Dutch government therefore wishes to increase
wind energy capacity in the coming years, and increasingly aims for groups of wind
turbines on carefully selected sites. In connection therewith, on 20 March 2014 a draft
for a new offshore wind act was published which will help to up-scale the offshore wind
energy capacity. The new act introduces a plot-decision, which determines the location
and the requirements pursuant to which a licence to realise a wind farm will be granted.
Environmental aspects are integrated into the plot-decision so applicants no longer need
to make a separate environmental assessment pursuant to the EU Birds and Habitats
Directive.
ii
In January of 2014 the first piece of legislation pursuant to the STROOM policy
framework was effectuated. As indicated above, the STROOM policy framework consists
of a general revision of the Electricity Act and Gas Act which simplifies the structure of
said acts and brings them more in line with EU directives both in themes, set-up and
terminology. The first amendments relate to, inter alia, the obligation of the ACM to
take into account the importance of sustainability in the context of determining the
prices for gas and electricity. This was already done in practice by the ACM but is now
formalised in the Gas Act and Electricity Act.
Another amendment pursuant to the implementation of the STROOM policy
framework is that for small-scale users the limit for delivering power with tax deduction
to the network that was generated from renewable power sources has been abolished. The
tax deduction implies that the supplier of electricity is obliged to lower the costs for of
the amount of electricity the small-scale user has used from the network with the amount
he or she has fed into the network using renewable power sources.
iii
A regulation that is to promote renewable energy initiatives that is to come into effect
mid-2014 is the Experiment Regulation. Pursuant to this Regulation exemptions from
obligations pursuant to legislation (for instance the obligation to obtain a licence for the
supply of electricity) may be granted. Such exemptions can be granted in the event the
relevant experiment stimulates the generation of production, transport and supply of
decentralised generated energy from renewable power sources.
In addition, the existing Green Deal approach, pursuant to which the government
aims to help local renewable energy projects, will be continued in 2014. The Green Deal
approach aims to remove obstacles for getting local initiatives up and running, provides
access to useful networks or financing and by changing legislation. Currently around 160
Green Deals have been concluded.
The Dutch government promotes the development of smart grids, inter alia,
through subsidies for trial projects.
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VI
THE YEAR IN REVIEW
The conclusion of the Energy Agreement in the autumn of 2013, the continued focus
on concluding additional Green Deals and the implementation of the first part of the
STROOM proposal early in 2014 all mark the intention of the Dutch government to
increase the production of sustainable and secure energy and lower its energy consumption
in order to have a better chance of reaching its long term energy goals.
In 2013 Taqa sold its 40 per cent stake in the Noordgastransport (NGT) natural
gas pipeline in the Netherlands to Danish pension fund PensionDanmark and Dutch
pension fund PGGM acquired an interest from GDF SUEZ in NOGAT, the owner of
the Northern Offshore Gas Transportation system bringing gas form the North Sea to
the Netherlands.
Throughout 2013 there have been investigations by experts at the instruction of
the government regarding soil movement and earthquakes occurring more frequently
in recent years in the north-eastern part of the Netherlands to verify whether these are
caused by gas production from the large Groningen field nearby. As a consequence of the
ongoing debate about the earthquakes the MEA decided to install a moratorium on any
exploration activities regarding shale gas and coal bed gas production based on fracking
technology.
In a 2013 review the ECJ decision on the ENECO and Delta unbundling case as
described in Section III.i, supra, cannot be left out. And finally, the decision of the Dutch
government in December 2013 to designate new areas for the construction of offshore
wind farms means a concrete step forward for renewable energy in the Netherlands.
VII
The challenge for the Netherlands is to implement the actions pursuant to the Energy
Agreement and to reach the goals set for 2020. Furthermore, the Netherlands should
develop international partnerships in areas where it has a competitive edge, notably
in natural gas, carbon capture and storage, biofuels and energy efficiency in industrial
processes. Last but not least, the Dutch government should finally come up with a stable
and consistent long-term policy and subsidy framework regarding the renewable energy
sector to also facilitate investment by the private sector in said sector and importantly,
stick to such policy.
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Chapter 25
NEW ZEALAND
Mei Fern Johnson and Nicola Purvis1
I OVERVIEW
New Zealands energy sector, one of the least regulated in the developed world in the
1980s, has gradually been re-regulated to the extent that government control and
oversight of the sector is now comparable with those in major overseas jurisdictions,
particularly Australia. Significant differences do, however, remain. This is in large part
due to geographical factors that shape the location and extent of New Zealands energy
networks and markets.
New Zealand is a long, narrow country with two main inhabited islands. Electricity
is predominately hydro-generated (largely in the South Island) and transmitted by a single
state-owned enterprise, Transpower, along over 11,000 kilometres of high-voltage lines
known as the national grid. A high-voltage DC undersea transmission cable connects the
North and South Islands, with electricity typically flowing northwards.
Electricity is distributed to consumers by 29 geographically distinct lines
businesses, ranging in size from approximately 5,000 to 500,000 customer connections.
Some major customers are also connected directly to the national grid.
There are five main electricity retail companies (three of which are majority stateowned) and more than 20 electricity retail brands in New Zealand. Those five retail
companies are also electricity generators and are therefore commonly referred to as
gentailers. Retailers participate in a national wholesale electricity spot market, which is
overseen by Transpower in its separate role as system operator.
In relation to gas, New Zealands production fields (both onshore and offshore) are
located in the Taranaki region on the west coast of the North Island. Gas is transmitted
from the production stations along two high-pressure pipelines to key demand points
Mei Fern Johnson is a partner and Nicola Purvis is a consultant in Russell McVeaghs energy
practice. Sam Wevers (solicitor) also contributed to this chapter.
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New Zealand
in the upper North Island, and distributed along low-pressure pipelines to customers
throughout key population centres in the North Island, where it is sold by retailers.
There are no gas pipelines to the South Island.
These aspects of the New Zealands energy sector are regulated within the nations
broader constitutional and legal system. New Zealand is a parliamentary democracy
operating under common law, similar to the rest of the Commonwealth. The New
Zealand parliament is unicameral and sovereign (in that there is no higher law by which
New Zealand courts can question the legitimacy of Acts of Parliament). This, combined
with New Zealands triennial elections, means that the legal framework for the regulation
of the energy sector can change relatively rapidly in response to political and public
preferences.
II REGULATION
i
The regulators
The Electricity Authority (EA) has oversight of New Zealands wholesale and retail
electricity markets. It is responsible for market design, overseeing market operations, and
monitoring and enforcing compliance with market rules. In that capacity, the EA makes
and administers the Electricity Industry Participation Code 2010 (the Code), which sets
out the responsibilities of all market participants.
The Gas Industry Company Limited (GIC) is a gas industry body that works with
both government and industry participants to develop recommendations on industry
arrangements. The GIC is owned by industry participants and is governed by a board
comprising a majority of independent directors. The GIC is tasked with facilitating
efficient investment in and use of gas infrastructure, and with ensuring that gas is
delivered safely, efficiently and reliably to customers. It is funded by a levy on industry
participants.
The Commerce Commission (the Commission) is responsible for the economic
regulation of electricity lines and gas pipelines services under Part 4 of the Commerce
Act 1986 (the Commerce Act). Among other things, it also administers and enforces
compliance with the general competition law provisions in that Act. The Commission
has memoranda of understanding with the EA and the GIC that define the parties
interests and responsibilities regarding regulation.
The Energy Efficiency and Conservation Authority (EECA) is a government
agency tasked with improving the energy efficiency of homes and businesses and
encouraging, supporting, and promoting energy efficiency, energy conservation, and the
development and use of renewable energy in New Zealand.
Other governmental bodies that are not specific to the energy sector but have a
significant role to play include:
a
the Ministry of Business, Innovation and Employment, which is responsible
for developing regulatory policy for the energy sector, including monitoring
the co-regulatory model of gas governance outlined above, and managing the
governments oil, gas and mineral resources (through its New Zealand Petroleum
and Minerals unit); and
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b
the Ministry for the Environment and local government authorities, which
administer and enforce the Resource Management Act 1991 (RMA). The RMA
sets out restrictions on the use of land, water and coastal areas, and requires the
grant of resource consent prior to the use of such land, water and coastal areas for
a restricted purpose.
Legal framework
The legal framework for energy markets and regulation in New Zealand comprises:
a
the Commerce Act and Commission determinations made pursuant to that Act;
b
statements of government policy made pursuant to the Commerce Act or
Electricity Industry Act 2010 (EIA) (and to which the Commission and EA must
respectively have regard);
c
legislation specific to the energy sector (including, for example, the EIA,
Electricity Act 1992, Gas Act 1992 (GA) and Energy Efficiency and Conservation
Act 2000);
d
rules, regulations and codes made under legislation specific to the energy sector
(including the Code and the Gas Governance (Compliance) Regulations 2008);
and
e
general legislation, such as the Crown Minerals Act 1991 (the Crown Minerals
Act), the RMA, and general health and safety legislation (as well as regulations
and local by-laws made pursuant to those pieces of legislation).
ii
Electricity
Electricity industry participants are not subject to a licensing regime. However, the
electricity wholesale and retail markets are subject to market rules and requirements
enforced by the EA. In particular, each person who buys or sells electricity on the
wholesale spot market, or who sells electricity to consumers in the retail market, must
register with the EA as a market participant, and comply with the Code.
Electricity lines services (ELSs) are subject to economic regulation by the
Commission under Part 4 of the Commerce Act. This includes all electricity transmission
and distribution networks, with certain limited exceptions (for example, distribution
networks that are not connected to the national grid or that are in competition with
other distribution networks).
All ELSs are subject to information disclosure regulation. All ELSs that are not
consumer-owned are also subject to price/quality regulation. To qualify as consumerowned, an ELS must meet a number of statutory requirements, including being controlled
by a trust in respect of which at least 90 per cent of the income beneficiaries reside within
the geographical areas of the ELS. There are 12 ELSs that qualify as consumer-owned
and so are exempted from price/quality regulation.
Gas
Similarly to electricity, there is no licensing regime for gas industry participants. There
is also currently no direct regulation of the gas wholesale and retail markets in New
Zealand. Instead, market participants enter into bilateral gas supply contracts, often
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long term. Within that framework, the GIC functions as market administrator and
promotes competitive outcomes in the wholesale and retail markets.
Gas pipeline services (GPSs), which are provided to various parts of the North
Island but not to the South Island of New Zealand, are also regulated under Part 4 of the
Commerce Act. This includes gas transmission and distribution networks, with certain
limited exceptions (for example, conveying natural gas to gas processing facilities).
Exploration for and extraction of natural gas is subject to a permit regime
administered by New Zealand Petroleum and Minerals. The Crown Minerals Act
contains three different petroleum permits: prospecting, exploration and mining. It is an
offence to carry out any of these activities without the required permit.
iii
Foreign investment restrictions

While there is currently no specific regulation regarding ownership of energy infrastructure,
New Zealand restricts foreign investment through the Overseas Investment Act 2005
(OIA) and associated regulations. The OIA requires prior government consent for
overseas investment in significant New Zealand assets or sensitive land, including where
the investment occurs upstream of the actual assets or land. An investment in business
assets is significant when a 25 per cent or greater stake is being purchased in a company
(or a 25 per cent or greater stake is increased) and consideration or assets of more than
NZ$100 million are involved.
Competition restrictions
Section 47 of the Commerce Act prohibits the acquisition of assets or shares of a business
if that acquisition would have, or would be likely to have, the effect of substantially
lessening competition in a market.
A party to a proposed merger may apply to the Commission for a clearance,
which the Commission may grant if satisfied that the acquisition will not have or
would not be likely to have the effect of substantially lessening competition in a market.
Alternatively, where an acquisition would result in a substantial lessening of competition,
the Commission may authorise the acquisition if the public benefits resulting from the
acquisition are likely to outweigh the detriments.
Separation of distribution from generation and retailing
The EIA places some restrictions on electricity distributors also engaging in electricity
generation or retailing. In particular, a distributor must not be involved in any generator
that is over a certain size (250MW capacity) and directly connected to the national grid,
and must not be part of the same company as a retailer or generator that is over a certain
size and connected to the distributors network.
iv
Other than the foregoing, there are no energy sector-specific restrictions on transfers
of control and assignment. There is generally considered to be substantial scope for the
rationalisation of the energy distribution sector in New Zealand, where there are many
small suppliers. The EA consulted the industry and the general public on ELSs pricing
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(as between classes of consumers) over the course of 2013 and, at the time of writing, is
still considering how to respond to industry submissions.
III

SERVICES
Electricity
New Zealands electricity transmission network (owned by Transpower) is vertically
separated from the 29 local electricity distribution networks. In addition, as previously
explained, there are significant restrictions on electricity distributors also engaging in
generation or retailing.
Gas
New Zealands gas pipeline businesses have varying degrees of vertical integration of
production, transmission and distribution. For example, of the two gas transmission
businesses that operate in the upper North Island, Maui Developments owners are also
involved in gas production, and Vector is also a gas distributor and wholesaler.
ii
Electricity
Under the Code, Transpower must enter into transmission agreements with electricity
distributors and generators, as well as other specific designated transmission customers
(including, for example, large consumers that purchase transmission services directly
from Transpower). These agreements ensure that all relevant parties have access to the
transmission network. There are separate rules for the direct connection of generation to
distribution networks.
Connection of distribution networks to customer premises is generally on
commercial terms, subject to the general competition restrictions in the Commerce Act.
Gas
New Zealands two gas transmission pipelines are privately owned, and are administered
in accordance with separate operating codes. Those codes provide for open access
arrangements whereby users negotiate individual contracts for the transmission of gas.
The GIC facilitates consultation on, and recommends amendments to, these operating
codes. Connection of gas distribution to customer premises is on commercial terms.
iii
Mining permits issued under the Crown Minerals Act allow for operations relating to
the extraction, separation, treatment and processing of petroleum. In addition, the GA
provides for the issue of codes of practice or regulations that can relate to the processing,
treatment and storage of gas, and gas safety, among other matters. General construction
and health and safety regulations and RMA processes apply to the construction and
operation of gas facilities.
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iv Rates
Prices for regulated ELSs and GPSs are set by the Commission under Part 4 of the
Commerce Act, which came into force in 2008. Under this regime, allowable prices
or revenues are reset approximately every five years based on a suppliers current and
projected costs and allowing for returns of and on capital. During each regulatory period,
allowable prices or revenues are permitted to increase by CPIx that is, the rate of
inflation less an industry-wide productivity improvement rate (currently set at zero). The
Commission also sets quality standards that must be met by each supplier.
Within that general framework, a number of different forms of price regulation
apply. ELSs and GPSs are subject to default/customised price/quality path regulation.
Under that form of regulation:
a
The Commission determines a default price/quality path (DPP) for each
supplier in a given industry. The DPP is intended to provide a relatively low-cost,
less than full building blocks form of price control, using suppliers information
disclosures and other relatively low-cost data sources and projections. Suppliers
are not required to provide a proposal to the Commission.
b
If the DPP does not meet an individual regulated suppliers particular
circumstances, that supplier can apply for a customised price/quality path (CPP).
The CPP is a full building-blocks approach whereby the Commission assesses
proposed costs for prudency and efficiency and determines the price/quality path
that it considers is most appropriate.
Transpower is subject to individual price/quality path (IPP) regulation. Like the CPP,
the IPP is a full building blocks form of price control whereby the Commission assesses
a price/quality proposal made by Transpower, including in relation to the prudence and
efficiency of grid upgrade plans.
For all three forms of price regulation, input methodologies are required to be
determined by the Commission in advance and applied to the price-setting decision.
Input methodologies are the rules, requirements and processes applying to regulation,
and are intended to promote certainty for suppliers and consumers as to how regulation
will apply. The Commission is required to determine input methodologies for matters
such as cost of capital, valuation of assets, allocation of common costs, and treatment of
taxation, but is not required to determine an input methodology that specifies how price
paths are to be determined.
Input methodology determinations may be appealed to the High Court. On
appeal, an appellant must satisfy the Court that an alternative input methodology would
have been materially better at meeting the purpose of Part 4 of the Commerce Act (to
promote the long-term benefit of consumers), or the purpose of input methodologies
(to promote certainty), or both. A DPP may be appealed to the High Court only on
a question of law, whereas in respect of a CPP or IPP there is a general right of appeal.
v
The EIA and the Code require Transpower, as system operator, to manage electricity
supply emergencies. Such management is achieved through, for example, an emergency
management policy, a technical code establishing the basis on which Transpower and
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electricity suppliers will anticipate and respond to emergency events on the national grid,
and the ability to require outages. Under the Gas Governance (Critical Contingency
Management) Regulations 2008, similar demand-side management powers are granted
to a critical contingency operator appointed by the GIC (currently, Core Group). In
the event of a critical contingency (a gas shortage), prices for gas may be set by an
independent expert, and gas consumption can be progressively curtailed according to
classes of consumers.
IV
ENERGY MARKETS
Electricity
The New Zealand electricity industry consists of three key markets:
a
a spot market for wholesale supply and purchase of electricity;
b
a hedge market for electricity generators and purchasers; and
c
a retail market for purchase of electricity by end-user consumers from electricity
retailers.
The spot market is administered by the EA in accordance with the Code. Generators
make offers to supply the market at 52 grid injection points with a specified quantity
of electricity for a future half-hour trading period, at a specified price. Retailers and
a handful of large industrial users purchase electricity directly from the spot market
at one of 196 grid exit points. The spot price that all generators will receive at a grid
injection point is set by a pricing manager (contracted by the EA to ensure the real-time
coordination of the electricity system), and is generally the highest-priced bid actually
dispatched for a given half-hour. Final prices at each node are processed and confirmed
on an interim basis the following day and confirmed as final prices the day after that.
Generators and purchasers protect themselves against fluctuations in the spot
price of electricity through the hedge market, which historically consisted of over-thecounter contracts. Since 2011, market participants have also had access to exchangetraded derivatives on the futures market operated by the Australian Securities Exchange.
Financial transmission rights (FTRs) are a new type of hedge contract that has
been implemented in New Zealand over the last year. FTRs are designed to be used
to manage the risk of price differences between grid nodes. Unlike over-the-counter
contracts, FTRs are centrally funded through the loss and constraint rentals that arise
due to the fact that wholesale market prices reflect the marginal cost of supply at each
node. Initially, parties will be able to use FTRs to cover their price risk between two
nodes on the national grid only (Otahuhu and Benmore), but it is expected that over
time FTRs will cover a greater number of nodes.
The retail market comprises more than 20 retail brands, most of which are linked
to the generating companies. Competition in the retail market has been enhanced by
the Whats My Number initiative, which was developed to provide consumers with
information about the ability to switch retailers, the ease of switching and the potential
savings consumers can make on their electricity bills by switching. The EA estimates that
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out of the approximately 2 million nationwide connections over 1 million customers
have switched retailers since the campaign launched in 2011.
Natural gas
In late 2013, New Zealands first centralised wholesale natural gas spot markets were
brought on line. These two markets, called emTrade and the New Zealand Gas Market,
are operated by Transpower and NZX Limited, respectively. As well as these spot markets,
wholesale gas is bought and sold through bilateral contracts between gas producers or
wholesalers and retailers or large industrial users.
The gas retail market is relatively competitive, with retailers competing to sell
natural gas to small gas users (including households, hospitals and factories) as well
as larger users that do not purchase directly from the gas producers. The gas retailer
companies attempt to achieve economies of scale by aggregating all purchases of gas
from many smaller users and purchasing gas from gas producers in the wholesale market.
Retailers also pay the tariffs associated with transmission and distribution in order to
offer a bundled product to retail customers.
ii
Electricity
The EIA and the Code provide the framework for the operation of the electricity market.
These instruments set out detailed rules for the operation of the market, access to
networks, responsibilities for metering and other key market mechanisms.
Natural gas
The GA establishes the rule framework for gas distributors, retailers and customers. The
GA provides for the Governor-General to make regulations for the establishment and
operation of a wholesale gas market.
Customer complaints
Every electricity and gas retailer must, under the EIA and GA respectively, participate
in an approved disputes resolution scheme. The Electricity and Gas Complaints
Commission is currently the only approved dispute resolution scheme, providing a free
and independent dispute resolution service for consumers having difficulties with their
electricity or gas supplier.
Regulation of imports and exports
Due to New Zealands isolated geographical location it neither imports nor exports
electricity or natural gas.
iii
Electricity
Participation in the wholesale spot market in New Zealand is compulsory for generators
and retailers, and buying and selling electricity outside this market is not permitted.
Prices are largely determined by supply and demand.
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The EIA lists a number of new matters that the EA is required to consider
implementing, one of which is imposing a floor or floors on spot prices for electricity in
the wholesale market during supply emergencies. The EA decided against price floors as
the response to such emergencies, instead adopting a stress-testing regime. Under this
regime, certain participants in the wholesale electricity market are required to apply a
set of standard stress tests to their market position, and then to report the results to their
board and to an independent registrar appointed by the EA.
In respect of the retail electricity market, the EA has published voluntary minimum
terms and conditions for retail contracts that it recommends electricity retailers adopt in
their standard terms and conditions. While these terms are currently voluntary, there is
likely to be further regulation if retailers are slow to adopt them.
Natural gas
Similarly to the electricity market, there is currently no price regulation in natural gas
markets, and prices are determined by market forces.
The Gas Retail Contracts Assessment Scheme (the GRCA Scheme) is a voluntary
scheme for assessing retail contracts against a set of benchmarks. It was introduced in
2010 and three assessments of retail gas supply contracts have been conducted to date.
The most recent assessment found substantial overall alignment with the benchmarks
across the retail gas contracts assessed.
The Gas Distribution Contracts Oversight Scheme (the GDCO Scheme) was
created to ensure that the core terms and conditions in distribution contracts are clear
and reasonable, promote market efficiency and, ultimately, enhance consumer outcomes.
It is conceptually similar to the GRCA Scheme, with the key difference being that it is
based on a set of distribution principles (rather than the more prescriptive benchmarks
under the GRCA Scheme). The first assessment under the GDCO Scheme commenced
in February 2013, but as no distribution companies had published standard contracts at
that time no assessment could be made. Another assessment will be undertaken in 2014.
Changes to consumer law
Consumer energy contracts (for both electricity and gas) will become subject to an unfair
contract terms regime in March 2015. The new regime is very similar to the Australian
unfair contracts regime, in that an unfair term (as determined by a court) in a standard
form consumer contract will be unenforceable. The Bill will also introduce a specific
guarantee of acceptable quality in the supply of gas and electricity applicable to all
standard form supply contracts. Further, electricity and gas distributors will be deemed
to indemnify retailers against claims for breaches of those quality guarantees arising out
of faults by the relevant distributor.
iv
Market developments
Electricity
The EA is continuing its review of the pricing methodology for allocating the costs of
Transpowers electricity transmission grid. The EA has also recently amended the Code
to establish a regulated process for ensuring that a defaulting retailers customers are
transferred efficiently to another retailer.
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Under the Code, an undesirable trading situation (UTS) is an event that threatens
trading on the wholesale market and is likely to preclude orderly trading or settlement.
The EA has recently concluded its review of the UTS provisions and has amended the
Code. These amendments include a broadening of the test for when a UTS has occurred
and the application of UTS provisions to the hedge and ancillary services markets.
Also of note is the fact that the major electricity retailers in New Zealand have
been (voluntarily) installing smart meters around the country, with approximately
1 million currently installed (about half of the New Zealand retail electricity customer
base). The roll-out is likely to continue, with current forecasts projecting the installation
of about 1.2 million smart meters by April 2015.
Natural gas
The GIC is currently consulting on possible industry arrangements to provide for gas
quality in a manner that facilitates the safe, efficient and reliable delivery of gas, and for
risks relating to security of supply to be properly and efficiently managed by those parties
best able to manage such risks.
V
Renewable energy resources contributed to approximately 73 per cent of New Zealands

electricity output and 37 per cent of total primary energy supply in 2012, one of the
highest shares of renewable energy among OECD countries.
The current sources of renewable energy in New Zealand (as at April 2013) are:
a
hydro: 75 per cent;
b
geothermal: 17 per cent;
c
wind: 6 per cent; and
d
solar and bioenergy: 2 per cent
Future targets
The New Zealand government has, in its New Zealand Energy Strategy 20112021 (the
Energy Strategy), set a target of 90 per cent of all electricity (in an average hydrological
year) being generated from renewable resources by 2025.
Government policy and legal framework
The renewable energy sector in New Zealand is not subsidised by the state or subject
to any sector-specific fiscal mechanisms. The main government policy (as set out in the
Energy Strategy) to encourage investment in and increase the economic competitiveness
of new renewable electricity generation is the New Zealand emissions trading scheme
(the NZ ETS).
The NZ ETS is intended to incentivise investment in renewable energy ahead of
fossil fuels by creating an emission unit-based trading and surrender scheme. It forms
part of an attempt to reach the governments target to reduce New Zealands greenhouse
gas emissions by 50 per cent from 1990 levels by 2050. The NZ ETS was, however,
scaled back in 2009 following a change in government, with participants required to
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New Zealand
surrender only half the number of required emissions units (this half-price transition
phase is set to continue indefinitely following legislative amendments in late 2012).
Another key legal framework relevant to development of new renewable energy
is embodied in the RMA. Decisions for projects of national significance are referred to
the Environmental Protection Authority, and must be made within nine months. The
National Policy Statement issued under the RMA recognises the national significance
of electricity transmission and renewable electricity generation, bringing the renewable
sector under this regime.
The government has recognised the potential barriers to (and delays in) investment
in large-scale renewable electricity generation created by the lengthy consenting process
under the RMA. The Resource Management Reform Bill 2012, aimed at improving the
consenting process, was introduced to Parliament in December 2012 and is, at the time
of writing, nearing the end of the legislative process.
ii
The aforementioned EECA was established under the Energy Efficiency and Conservation
Act 2000, an Act that provides the basis for the promotion of energy efficiency and
renewable energy in New Zealand.
The New Zealand Energy Efficiency and Conservation Strategy 20112016,
published as part of the Energy Strategy, sets out the governments energy efficiency
target for New Zealand at a rate of energy intensity improvement of 1.3 per cent per
annum. This is a slight increase in the current energy intensity rates which, adjusted for
purchasing power parity, have declined at an average of 1 per cent per year since 1990.
Three key sectors are expected to assist New Zealand to reach the new target:
a
transport: through continued government investment in roads to ease congestion
and to link the major sea and air ports more effectively to the road network, as
well as in an efficient rail system, a reliable and cost-effective public transport
system, and an improved infrastructure for walking and cycling;
b
business: through continued government support for energy efficiency initiatives
for businesses, with measures such as energy audits, support for energy efficient
purchasing, grant and subsidy programmes, and building sector capacity and
capability in energy management; and
c
residential: through the governments Warm Up New Zealand: Heat Smart
programme, which subsidised homeowners for installation of insulation and
clean heating devices in their homes. By the time of its completion in 2013, more
than NZ$340 million had been committed to the programme, assisting at least
235,000 homes. A new programme has since been introduced, aiming to insulate
46,000 homes within three years.
iii
Research and development of, and investment in, new energy technologies, in particular
in bioenergy, marine, geothermal, petroleum, smart electricity network technologies and
energy efficiency, form part of the priorities set out by the government in the Energy
Strategy.
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New Zealand
In addition, the government has stated that it will encourage investment in
smart meter, grid and appliance technologies, enabling higher levels of distributed
generation and integrated smaller-scale generation, and providing consumers with better
information and options for their energy management.
While New Zealand does not have any carbon capture and storage (CCS) projects
currently operating or under development, the government and industries are taking part
in several international initiatives aimed at developing pathways towards commercial
adoption of CCS.
VI
THE YEAR IN REVIEW
The major change in New Zealands electricity and gas markets over the past year has
been the governments public offering and listing of up to 49 per cent of its shares in
each of the three state-owned electricity gentailers. These offerings have raised upwards
of NZ$4.6 billion for the Crown.
Another focus of the past year has been the completion of the first merits
review appeal of the Commissions transmission and distribution input methodologies.
Appeals having been heard by the High Court in relation to a number of those input
methodologies, judgment was given in December 2013. No material variations were
made to those input methodologies in question, and the relevant price paths have
therefore not changed (although aspects of the judgment relating to the cost of capital
are currently being appealed).
The past year has also seen the first CPP implemented in response to cost increases
consequent on the Canterbury earthquakes. This CPP, for the Christchurch ELS Orion,
resulted in a price path materially lower than Orion applied for, with the Commission
disagreeing that all of the expenditure planned by Orion was necessary and that Orion
should be able to recover revenue not earned since the earthquakes.
In electricity markets, the EA has continued to advance the reform agenda
mandated by the EIA, with consumers continuing to switch retailers and competition in
retail markets continuing to improve. In gas markets, the introduction of two wholesale
gas spot markets is expected to improve transparency around gas prices.
The past year has also seen an increase in construction and M&A activity. AMP
Capital (a large Australasian fund manager) purchased a 42 per cent stake in New
Zealands second largest electricity and gas distributor (Powerco) for NZ$525 million
from Brookfield Infrastructure. Transpower has, with Commerce Commission approval,
continued to progress its grid update plans, notably completing its upgrade of the
transmission cable connecting the North and South Islands. In September 2013, Mighty
River Power also commissioned the NZ$475 million 82MW Ngtamariki geothermal
power station. 166MW of geothermal is expected to come on line in the near future with
the completion of Contact Energys NZ$750 million 159MW Te Mihi plant.
VII
Overall, New Zealand has reliable and well-integrated energy markets, and a relatively
stable and sophisticated regulatory environment. As in other parts of the world, the
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New Zealand
economic environment has affected growth in recent years, but new capital expenditure
projects lie ready for development should the demand outlook improve.
Looking forward, the most significant issue facing New Zealands energy markets
is a possible change to the wholesale electricity market. If the current National-led
government is replaced by a Labour/Green coalition at New Zealands next general
election in September 2014, then the Labour and Green parties have stated that they
will move to replace the current marginal-cost pricing model in the wholesale market
with a mechanism involving a single buyer of wholesale electricity (provisionally named
NZ Power). The single buyer would aim to bring prices in line with the average cost
of generation. These proposals also anticipate abolishing the EA and transferring its
functions to the new NZ Power.
337
Chapter 26
NIGERIA
Ken Etim and Ayodele Oni1
I OVERVIEW
The Nigerian oil and gas industry is made up of an upstream sector, comprising
exploration and production of oil and natural gas, a midstream sector comprising
transportation and refining of petroleum and natural gas,2 as well as a downstream sector
comprising the importation, storage, transportation and distribution of petroleum
products all aspects of which are still highly regulated by the federal government of
Nigeria. The 1999 Constitution of the Federal Republic of Nigeria, which is the supreme
legislation of the country, vests all petroleum in situ in the federal government. As one
of the largest producers of petroleum in the world, the Nigerian petroleum industry is
the major source of income for both the federal government and the governments of
the component states of Nigeria (the state governments), with the federal government
involved in the industry as both participant and regulator.
The rights to the exploration and production of petroleum are granted by the federal
government through the issuance of oil exploration licences (OELs), oil prospecting
licences (OPLs) and oil mining leases (OMLs).3 The federal government also awards
rights to explore and extract petroleum through production-sharing contracts, which
are awarded in respect of OPLs and OMLs held by the state-owned oil company, the
Nigerian National Petroleum Company (NNPC). The NNPC is also a major stakeholder
in several unincorporated joint ventures with international oil companies that act as
1
2
3
Ken Etim is a partner and Ayodele Oni is a senior associate at Banwo & Ighodalo.
Liquefied natural gas (LNG) is considered Nigerias key midstream product.
It is pertinent to note that, although, there is provision for the grant of OELs under the law,
OELs are no longer granted in practice as the current practice is the engagement of a seismic
data gathering service company to provide seismic information which is made available for
perusal by oil companies.
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Nigeria
operators in respect of numerous OPLs and OMLs. Recently, government policy has
focused on increasing indigenous participation in all segments of the Nigerian oil and gas
industry. The Nigerian Oil and Gas Industry Content Development Act (NCA), enacted
in 2010, establishes a framework for ensuring increased Nigerian participation in the
petroleum industry. Of note is the fact that, the NCA provides for preferential treatment
in the award of licences and contracts to be accorded Nigerian incorporated companies
in which Nigerians hold at least 51 per cent of the equity shares. The NCA also makes it
mandatory for certain services to be sourced from Nigerian oil and gas industry service
companies.4
The Petroleum Act, Cap P10 Laws of the Federation 2004 (PA) is the principal
legislation regulating the oil and gas industry. The federal government is currently
proposing wide reforms in the oil and gas industry through the enactment of the Petroleum
Industry Bill (PIB). The PIB seeks to consolidate all major Nigerian oil and gas laws, as
well as introduce reforms to the rules, procedures and institutions regulating the industry.
Although originally introduced in 2008, the PIB is yet to be passed by the National
Assembly. Following the spate of nationwide strikes due to corruption in the oil and gas
industry5 and the purported removal of the subsidy on the supply of premium motor
spirit (PMS) by the government on 1 January 2012, the federal government established a
committee to further review the PIB to address pertinent issues in the industry. The revised
bill prepared by the committee was submitted to the National Assembly in June 2012.
The Nigerian electricity industry is also divided into three broad segments:
generation, transmission and distribution. Until recently, the industry had been run
almost exclusively by the federal government, through the federal government-owned
vertically integrated monopoly (the National Electric Power Authority). Recognising
the poor state of the industry, however, and the need for reform in order to attract the
necessary investment to meet the electricity needs of the Nigerian economy, the federal
government commenced a major reform of the industry in 1999.
These reforms are based on the Nigerian Electric Power Policy 2001/2002 (NEPP),
and the Electric Power Sector Reform Act 2005 (EPSRA), which have opened up the
electric power industry to participation by the private sector. The EPSRA provides for
the licensing of private companies for the establishment of independent power projects.
Also, the government, through the Bureau of Public Enterprises (BPE) is currently in the
process of finalising the privatisation of the various generation and distribution successor
companies established to hold assets formerly owned by the Power Holding Company of
Nigeria (PHCN),6 while retaining the electric power transmission network for national
security reasons. The government has also awarded a management contract to Manitoba
Hydro International of Canada in this respect to ensure the effective running of, as well as
4
5
6
It is pertinent to note that the NCA does not preclude the 100 per cent foreign ownership of
companies in the oil and gas industry in Nigeria.
Corruption is allegedly more widespread than formerly believed in the downstream segment of
the Nigerian oil and gas industry.
The PHCN was the holding company (now unbundled) for the assets and employees of the
former state-owned vertically integrated company NEPA.
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Nigeria
increased investment in, the Nigerian electric power transmission network. The National
Council on Privatisation (NCP)7 in April 2013 set up transition committees for successor
companies to facilitate the smooth transition and eventual handover of the management
and operational control of successor companies to their new owners.8 On 1 November
2013, the government handed over the ownership and control to new owners, of 15 out of
the 17 power companies that were being privatised. It is expected that the handover to the
new owners of the last two companies would take place no later than July 2014.9
II REGULATION
i
The regulators
The Federal Ministry of Petroleum Resources (FMPR) has overall regulatory oversight
of the Nigerian oil and gas industry. The FMPR acts primarily through the Department
of Petroleum Resources (DPR), the regulatory agency of the FMPR. The DPR is
responsible for the monitoring of the operation of petroleum companies and compliance
with petroleum laws and regulations, as well as the collection of rents and royalties.
Other regulatory bodies include the Petroleum Products Pricing Regulatory Agency
(PPPRA), which regulates the rates for the transportation and distribution of petroleum
products; the Federal Ministry of Environment, Housing and Urban Development,
which is responsible for approving environmental impact assessment reports in respect
of oil and gas projects; the Nigerian Content Development and Monitoring Board,
which is responsible for ensuring compliance with the NCA; and the Joint Development
Authority, which is responsible for the supervision of petroleum activities within the
NigeriaSo Tom and Prncipe Joint Development Authority.
The principal Nigerian law is the Constitution, while the primary piece of legislation
regulating the exploration, production and distribution of petroleum and its derivative
products is the PA. The Constitution and the PA vest in the federal government, the entire
ownership and control of the petroleum resources in, under and upon any land in Nigeria.
Pursuant to the PA, the prospecting, exploration, production and distribution of petroleum
resources may only be undertaken with the consent of the Minister of Petroleum (the
Minister) through the DPRs issuance of leases, licences and permits for the prospecting,
exploration or distribution of petroleum and petroleum products.
The Petroleum (Drilling and Production) Regulations (the Petroleum Regulations)
made pursuant to the PA regulates technical matters relating to petroleum production and
the licensee or lessees conduct of operations, including issues related to filing of monthly
7
8
9
The NCP is a think-tank sponsored by the Nigerian government charged with the responsibility
of formulating and approving policies on privatisation.
Private-sector participation in the two hydrogeneration companies (Kainji and Shiroro) is
expected to be through the granting of concessions as opposed to outright sale.
Comprehensive information can be found on the electric power sector in Nigeria in the
Nigerian Electric Power Sector: Policy. Law. Negotiation Strategy. Business, written by Ayodele
Oni. See www.nesi.com.ng.
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Nigeria
progress reports of operations with the DPR, abandonment, assignments of participating
interests, permits to carry out seismic data surveys and fees, rents and royalty rates.
The Oil Pipelines Act regulates the construction, operation and maintenance of
gas pipelines and associated infrastructure. This legislation is also enforced by the DPR
and provides for the grant of licences and permits for the construction and operation of oil
or gas pipelines. It also confers the right to construct, maintain and operate installations
that are ancillary to the construction, maintenance and operation of such pipelines. The
Petroleum Regulations, also administered by the DPR, regulate the transportation of
petroleum and natural gas derivatives in Nigeria.
The fiscal regime of the oil and gas industry primarily comprises the Petroleum
Profits Tax Act (PPTA) and the Companies Income Tax Act (CITA), which regulate
the taxation of profits made from the production and distribution of petroleum, the
Deep Offshore and Inland Basin Production Sharing Contracts Act (DIPSA) and the
Petroleum Regulations, which prescribe the rates for royalties and rents. The PPTA
governs the taxation regime of upstream petroleum operations in Nigeria and provides
for an applicable tax of 85 per cent of the companys chargeable profits, generally.10
The CITA governs the taxation regime of midstream and downstream petroleum
operations in Nigeria and provides an applicable tax of 30 per cent of the companys
chargeable profits. The DIPSA provides fiscal incentives for companies operating in the
inland basin and deep offshore areas of Nigeria. Also the Education Tax Act provides an
applicable tax of 2 per cent of the companys chargeable profit.
The National Environmental Standards and Regulations Enforcement Agency
Act, the Environmental Impact Assessment Act and the Environmental Guidelines and
Standards for the Petroleum Industry in Nigeria prescribe environmental and emission
standards applicable to petroleum activities in Nigeria.
There are a number of laws, statutory instruments and policies that may also
apply to companies engaged in natural gas operations, including the Companies and
Allied Matters Act, Nigerian Investment Promotion Commission Act, Pension Reforms
Act, the Immigration Act, the National Insurance Commission Policy Guidelines 2008,
the Foreign Exchange (Miscellaneous and Monitoring) Provisions Act, the Pre-Shipment
Inspection of Exports Act, the Customs and Excise Tariff, Etc (Consolidation) Act, the
Customs and Excise Management Act, the Personal Income Tax Act and the Harmful
Waste (Special Criminal Provision, Etc) Act.
In relation to the electric power industry, the primary regulator is the Nigerian
Electricity Regulatory Commission (NERC) mandated to regulate and issue licences to
participants in the industry. The Federal Ministry of Environment, Housing and Urban
Development is responsible for approving environmental impact assessment reports in
respect of power projects. The main regulatory framework for the electric power industry
is provided by the EPSRA. By virtue of the EPSRA, the NERC is empowered to issue
licences in connection with activities such as electricity generation, transmission, system
operation, distribution or trading.
10
Profits from natural gas are taxed at the CITA rate of 30 per cent.
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Nigeria
ii
As previously noted, the granting to investors of rights to develop natural gas reserves is
done via the issuance of permits and licences. In respect of licensing, there is generally
no distinction between oil and natural gas, and the relevant licences OELs, OPLs and
OMLs apply to both. The installation of oil terminals cannot be undertaken unless by
or under the authority of a licence or lease granted under the Minerals and Mining Act or
the express written approval of the Minister. Other governmental authorisations required
are a permit to survey a route for a proposed gas pipeline and an oil pipeline licence, both
issued under the Oil Pipelines Act. Permits are also required to be obtained from the
DPR to lift crude oil where it is to be exported for sale outside Nigeria.
The right to construct, maintain and operate a gas pipeline is granted via an oil
pipeline licence as well as rights to construct and operate ancillary installations, such as
pumping stations, storage tanks and loading terminals. A licence is also required for the
construction and operation of refineries. This is the same licence required to construct
and operate gas-processing facilities.
Nigerian law also requires the pre-shipment inspection of goods including
petroleum before export. Additionally, pursuant to the guidelines for the importation
of petroleum products into Nigeria (the Guidelines), any company wishing to engage
in the business of importation of refined petroleum products is required to obtain an
import permit from the DPR.11 The Guidelines stipulate that all facilities for the storage
of imported petroleum products must be inspected by both the Nigerian customs service
and the DPR prior to the grant of a storage or sale licence. The DPR also issues licences
for the transportation of petroleum derivatives pursuant to the Petroleum Regulations,
which prohibits the transportation of many of such derivatives without an applicable
licence. Where LNG is to be stored, a licence to store LNG must also be obtained from
the Minister. The DPR further issues a permit to survey a route, which entitles the
holder to construct, maintain and operate oil or gas pipelines, as well as other ancillary
infrastructure (such as storage devices), that relate to the construction, maintenance and
operation of the oil or gas pipeline.
Regarding the electric power industry, the EPSRA requires any person intending
to engage in the business of electricity generation, transmission, system operation,
distribution or trading to obtain the applicable licence from the NERC. The exceptions
are in circumstances where the power plant has a capacity not exceeding 1MW or
distribution activities of less than 100kW. Additionally, permits (which are much easier
to obtain) are sought rather than licences where the power plant to be licensed is a
captive plant.12
Applications for licences in relation to the aforementioned activities are to be
submitted to the NERC. The issuance of licences under the EPSRA is at the discretion of
the NERC. Applications are required to comply with the form prescribed in the relevant
11
12
As part of its efforts to ensure efficiency, viability and service, the PPPRA is finalising a review
that will see the number of companies permitted to import refined petroleum products into
Nigeria limited to about 20.
A captive plant is one for self-use and not to be sold to third parties.
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regulations, and are required to be accompanied with the relevant application fees, as
well as non-refundable processing fees. Relevant application forms are provided by the
NERC. Within 30 days of NERCs acknowledgment of the application, the applicant
is required to publish its intention to obtain a licence in one national newspaper and
a newspaper in the area it intends to operate and invite any objections thereto to be
submitted to the NERC for its consideration.
In granting a licence, the NERC is required to consider the interests of consumers
and the development of the industry generally. Other key criteria in granting licences
include that the applicant is suitably qualified to hold a licence, the applicant will comply
with all relevant laws and regulations as well as the terms and conditions of the licence,
and the grant of the application is in the public interest. There are also new fit and
proper rules, where directors and shareholders of the applicant for a licence would have
criminal background checks conducted on them by independent experts, on behalf of
the NERC.
Where the application relates to transmission and distribution licences, the NERC
must be satisfied that the network has the relevant capacity to transmit or distribute
electricity in a safe market, and that open access is provided to all users with transparent
and non-discriminatory prices. It is also important to note that licences are not required
in respect of the generation of electric power not exceeding 1MW (in aggregate at a site)
or the distribution of not more than 100kW. Also, applicants that have acquired 10 per
cent or more of a company that holds a licence are required to disclose same to the NERC.
iii
There are generally no restrictions in relation to the ownership of energy assets, service
providers or licence holders in the energy industry. The PA provides, however, that any
sale of an interest in an OML, OPL or OEL will require the prior written consent of
the Minister. The PA also provides that the Minister may revoke an OML or OPL if the
licensee or lessee company becomes controlled directly or indirectly by a citizen of, or
subject of, or a company incorporated in a country whose laws do not permit Nigeria
citizens or Nigerian companies to acquire, hold or operate petroleum concessions on
conditions which, in the opinion of the Minister, are reasonably comparable with those
applicable to Nigerian citizens or companies. Further, the recent decision of the Federal
High Court of Nigeria in the case of Moni Pulo Limited v. Brass Exploration Unltd and 7
others has set the precedent that any sale of a majority shares of a company that holds an
OML, OPL or OEL will require the consent of the Minister.
Pursuant to the EPSRA, licensees are precluded from acquiring or otherwise
affiliating with other licence companies without the prior approval of the NERC. It is
also important to note that the NERC may issue licences upon such terms and conditions
as it may deem fit, which may include restrictions in relation to assignments or change of
control in the shareholding of the licence.
iv
The Securities and Exchange Commission (SEC), the regulatory body of the Nigerian
capital market, has regulatory oversight in respect of mergers and acquisitions. Further to
the Investment and Securities Act of 2007 (ISA), mergers and acquisitions are generally
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Nigeria
subject to the prior review and approval of the SEC. The SEC has issued guidelines
and rules in respect of these to guard against anti-competitive practices and they are
applicable to all sectors, including the energy sector.
In considering whether a merger or acquisition is anti-competitive, the SEC will
consider whether same will result in any technological or other pro-competitive gain that
will be greater than, and offset, the effects of any prevention or lessening of competition,
which may result or is likely to result from the merger, and whether all shareholders
are fairly, equitably and similarly treated and given sufficient information regarding
the merger. After making this initial determination, the SEC may grant an approval in
principle to the merger. The timing for approval of such transaction varies based on the
complexity of the transaction. Where approval is given, an application is required to be
made to the Federal High Court to obtain approval for the merger.
Also, where a merger or change in control results in the direct or indirect
assignment of an OPL or OML, ministerial consent may be required. While these
licences may be transferred and even sometimes pledged as security, the enforcement of
such security, which could typically translate to an assignment of the OML, the OPL
or any right, power or interest arising therein, may only be done with the prior consent
of the Minister. An application for consent to an assignment must be made in writing,
accompanied by the prescribed fee. There may also be a requirement for the payment of
other fees and or premium at the discretion of the Minister.
The consent requirement extends to the farm-out of marginal fields. Where
interests in OMLs or OPLs are transferred without the requisite consent, such a licence
or lease may be revoked. This is in addition to any pre-emption rights or rights of first
refusal that may exist by virtue of contract. There is, however, no restriction on booking
the rights for accounting purposes.
III

SERVICES
A substantial part of the transportation pipelines, gas-processing facilities and other

associated infrastructure is currently owned and utilised by individual gas producers.
However, owners are required by law to provide third-party access to available capacity,
if any, upon mutually agreed terms and under the supervision of the Minister.
In order to promote the utilisation of gas in the domestic and export markets, the
FMPR has developed a gas master plan and an infrastructure blueprint. The infrastructure
blueprint aims to optimise the development of gas facilities in line with government
policy. It envisages the establishment of three central processing franchise areas, which
are to be concessioned to preferred bidders. These facilities will form the major hubs for
the processing of gas.
In the electric power industry, there are no vertically integrated players. While the
federal government has retained control of the transmission infrastructure, the power
generation and distribution infrastructure is now largely controlled by the private sector,
following the unbundling and privatisation of the PHCN.
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ii
As regards the electric power industry, regulations that require holders of transmission
and distribution licences to provide non-discriminatory open access to other licensees,
provided there is available capacity to do so, have been recently issued. Notwithstanding
third-party access rights, existing electricity distribution companies have exclusivity with
respect to their areas of coverage, which typically is about three to five component states
of Nigeria, except for two of the 11 distribution companies that cover only Lagos state.
Regarding oil and gas, the Oil Pipelines Act provides that any person who requires
access to any pipeline may make an application to the Minister, who considers the
application in consultation with the owner of the pipeline. The Minister will grant the
application if he is satisfied that the pipeline can conveniently convey the substance the
applicant wishes to convey. The terms and conditions of the access will be as negotiated
and agreed upon between the parties; where the parties fail to reach an agreement, the
Minister may impose such terms and conditions that he deems expedient to secure
the access rights of the applicant and to regulate the access charge. Notwithstanding
the foregoing, gas distribution companies typically have exclusive rights within their
franchise areas.
iii
The storage, processing and treatment of oil and natural gas is generally regulated. The
Petroleum Act and ancillary guidelines regulate the construction and actual operation of
such facilities.
Also, the construction and operation of Liquefied Natural Gas facilities is generally
regulated by the Petroleum Act and regulations made pursuant to the Act, including the
Petroleum Refining Regulations, which cover from construction to the actual operation
of such facilities. Further, the Oil Pipelines Act 1956 regulates the construction, operation
and maintenance of gas pipelines and associated infrastructure wherein operators are
expected to procure a permit for the route of a proposed gas pipeline and, subsequently,
an oil pipeline licence. Licences are also required to construct and operate refineries and
gas processing facilities.
The National Environmental Standards and Regulations Enforcement Agency Act
(NESREA), the Environmental Impact Assessment Act and the Environmental Guidelines
and Standards for the Petroleum Industry in Nigeria (EGASPIN) prescribe environmental
and emission standards applicable to natural gas activities in Nigeria. Regarding operations,
the Petroleum (Drilling and Production) Regulations stipulate that licensees/lessees must
only use approved practices and methods acceptable to the DPR.
Furthermore, rates, siting and terms of service, including access to services, are
on a willing-buyer and willing-seller basis, although the Minister in charge of Petroleum
Resources may mediate where parties are unable to reach an agreement. The Department
of Petroleum Resources, which is essentially the technical arm of the Ministry of
Petroleum Resources in Nigeria, is primarily responsible for the implementation of the
applicable regulations and guidelines for the oil and gas industry.
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iv Rates
The NERC is mandated under the EPSRA to regulate prices in the industry with a view
to ensuring fair pricing for consumers of electricity as well as ensuring sufficient returns
for market participants. The EPSRA further empowers the NERC to establish one or
more tariff methodologies for regulating electricity prices. The NERC, in consultation
with market participants, established the Multi-Year Tariff Order (MYTO), a tariff
structure for all levels of the industry, which incorporates all cost elements in order
to arrive at electricity prices that are reasonable and guarantee a minimum return on
investment for market participants.
The MYTO also provides incentives for participants who are able to achieve a
higher efficiency in their operations. The structure is such that at the commencement
of the MYTO all prices will be regulated; however, this will be reduced over time
as competition increases in the market and electricity supply is sufficient to meet
requirements of the market. In June 2012, an updated version of the MYTO, MYTO II,
was issued, which now provides a tariff regime for renewable energy such as small hydro
plants, solar, wind and biomass run plants. These tariffs are some of the most generous
in the world and are attractive to investors.
The PPPRA, on the other hand, regulates the rates for the pricing and distribution
of petroleum products. The pricing template is a pricing information sheet detailing
the components used in deriving the PPPRA daily or monthly guiding products prices,
which in turn affects the rates paid. Access charges to gas pipelines are negotiated and
determined by the parties but are subject to the approval of the Minister.
v
The National Office for Technology Acquisition and Promotion Act (the NOTAP Act)
requires the registration of all contracts involving the transfer of technology between
Nigerian and foreign companies. The NOTAP Act sets maximum limits for charges that
may be imposed by foreign companies in connection with the provision of such technical,
training, management and other such technology acquisition or transfer agreements.
Failure to register such contracts with NOTAP will result in the Nigerian company not
being able to access official foreign exchange markets and approved government channels
for the purpose of making payments under such contracts.
With respect to security of critical information on the energy sector and the role
of cybersecurity in this respect, concrete steps are being taken by the federal government,
to ensure same, through a number of cybersecurity bills as well as critical infrastructure
protection being considered by the Nigerian legislative houses.13 Further to the federal
governments desire to, inter alia, protect such information, a committee was recently
set up by the executive arm of the federal government to review the bills before the
legislative houses with a view to assisting in fine-tuning same before enactment into law.
13
Nigerias federal legislative houses are the House of Representatives and the Senate.
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IV
ENERGY MARKETS
As previously noted, the electricity industry is currently undergoing significant changes

with the introduction of private sector industry participation. Currently, there are several
licensed active independent power projects (IPPs) operating in the industry. Many of
these IPPs were established for the sole purpose of supplying electricity to particular
areas, companies or cluster of industries or industrial areas, while others supply electricity
directly to the national grid. As there is only one electric power transmission network
in the country, dedicated IPPs are typically located around the areas or companies that
they supply.
The federal government established the Nigerian Electricity Bulk Trading Company
plc (the Bulk Trader) to act as an interface between the electric power generation segment
and the electric power distribution segment of the electric power industry, because of
concerns as to the creditworthiness of companies in the power distribution segment
of the industry.14 The Bulk Traders functions include negotiating and executing power
purchase agreements (PPAs) with the privatised PHCN successor-generation companies,
assuming the responsibilities under existing PPAs entered into by the PHCN, as well as
negotiating PPAs with interested IPPs. It is understood that the World Bank will provide
partial risk guarantees in respect of the payment obligations of the Bulk Trader.
The Bulk Trader currently has a capitalisation of $750 million and this is expected
to increase to $1 billion in the coming weeks with grants and loans from the federal
government.
Natural gas trading is mainly controlled by the Nigerian Gas Company (NGC),
which, due to its ownership of the major transmission infrastructure, plays the role of
gas merchant in Nigeria and grants franchises to private companies for the distribution
of gas within established distribution zones.
ii
The government has issued the National Gas Supply and Pricing Regulations, which set
out a pricing framework for gas supplied to different sectors of the domestic market. The
Pricing Regulations also impose domestic supply obligations on natural gas producers,
the fulfilment of which is a prerequisite for an export gas project. Outside the domestic
supply obligations of gas producers, natural gas is sold on a willing-buyer, willing-seller
basis, and the pricing is negotiated on a bilateral basis.
The pricing of grid electric power supply is, however, regulated by the MYTO.
Where the electric supply is to be off-grid, parties may negotiate such terms and
conditions, including pricing that would regulate their relationship under the electric
power sale agreement.
There is at the moment, no exchange-traded energy derivatives market in Nigeria.
Any such derivative arrangement would typically be over the counter.
14
Please note that this does not create a single-buyer model, such that a generation company is
still allowed to sell to a distribution company of its choice.
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Nigeria
iii
Market participants are free to enter individual contracts for the sale of power or natural
gas. Where such natural gas sale is for sale of gas that falls within the purview of a
companys domestic supply obligation, a standard template gas sale and aggregation
agreement, already finalised by stakeholders, is required to be used with many of the
terms, such as pricing formulae, force majeure definition, and such other predetermined
terms. Only a few terms that are party, plant or location-specific are typically negotiated
on bilateral basis.
With respect to power, there are also the template bulk PPAs and vesting contracts
that are used for grid power sale and purchase pursuant to the ongoing electricity reform
programme. Like the template gas agreement, many of its terms are fairly standard and
fixed with only a few terms considered as bilateral terms subject to negotiations.
It is expected that the regulatory bodies for both the petroleum industry and power
may mediate in negotiations. It is also the case that the prudence of utility purchases of
power or natural gas is subject to regulatory scrutiny.
iv
Market developments
The ongoing reform and power sector privatisation remain the primary developments
in the electric power sector. The successor companies that emerged from the unbundled
PHCN have been successfully privatised, except for two (the Afam Generation Company
plc and the Kaduna Electricity Distribution plc which are expected to be handed over
to their new owners no later than July 2014). The process for the privatisation of those
two companies was recommenced.
Also, following the reintroduction of the updated PIB to the National Assembly
in June 2012, the PIB has passed its second reading and has been referred to the relevant
committees of the House of Assembly and Senate. There is, however, no indication on
when the bill will be passed into law.
Furthermore, preferred bidders for a set of 10 power generation companies owned
jointly by the three levels of government of Nigeria15 have been selected. Additionally, a
number of Nigerian indigenous exploration and production companies are expanding
their assets portfolios by acquiring oil and gas assets from outside Nigeria. In addition,
the Department of Petroleum Resources, in December, announced the commencement
of a bid round for the award of marginal fields, a first since 2002. The bid round is slated
for 2014, although the details of the marginal fields are yet to be communicated. Some
of those same companies are also raising funds from international capital markets like
the London Stock Exchange, the Toronto Stock Exchange and the Johannesburg Stock
Exchange.
15
The federal government, component states and local government.
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Nigeria
V
A national energy policy was approved by the federal government in 2003 with the
overall thrust of optimal utilisation of the nations energy resources; both conventional
and renewable, for sustainable development and with the active participation of the
private sector. There is also the Renewable Energy Master Plan (the Renewable Energy
Plan), which aims to upscale the use of renewable energy in Nigeria. The Renewable
Energy Plan articulates Nigerias vision for achieving sustainable development. The
plan also aims at moving the economy from a monolithic fossil economy to one driven
by an increasing share of renewable energy in the national energy mix. It involves
the exploitation of renewable energy in quantities and at prices that will promote the
achievement of equitable and sustainable growth.
In 2005, a Presidential Directive was issued to the NNPC to explore the
development of renewable energy in Nigeria. The NNPC, through its Renewable Energy
Division, has promoted the production and importation of biofuels such as biodiesel
and fuel-ethanol to be blended with PMS with a view to reducing carbon emissions.
The regulation of the production and importation of biofuels is carried out by the DPR.
As specified above, the new MYTO provides a generous tariff structure for
renewables. This tariff structure is regarded as the renewable energy feed-in-tariffs
(refits). The refits under Nigerias electricity tariff system are among the most attractive
in the world. There are also a number of renewable power projects under public-private
partnerships. To encourage renewable energy investments, the government is promoting
incentives. A template power purchase agreement for renewable energy is also currently
being finalised.
ii
Energy efficiency regulations are currently absent in Nigeria. The process of extraction,
conversion and utilisation of energy is prone to wastage. Apart from direct losses, the
inefficient use of energy has resulted in increased cost of energy products and services,
faster depletion of energy resources and environmental degradation. The concept
of sustainable development, therefore, dictates that deliberate efforts be made to
promote efficiency in the production, conversion and utilisation of energy. The Energy
Commission of Nigeria (ECN) has developed a draft national energy policy and the
draft Energy Master Plan that contains basic policies and strategies for energy efficiency
and conservation. Specifically, the policy provides for the promotion of energy efficiency
and conservation in industrial, residential and transport sectors. The master plan also
provides for the designing of a national programme on industrial energy efficiency and
conservation in collaboration with the Manufacturers Association of Nigeria and experts
in higher institutions and research centres. The policy also aims at the introduction of
fuel-efficiency labelling programme in the transportation sector for various vehicle types.
The policy also provides for establishing codes and standards for energy efficiency
and conservation technologies. The Commission has also recently established an
Energy Conservation Research Centre. There is also a pilot compact fluorescent lamps
(CFLs) programme being anchored by the ECN in collaboration with the Economic
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Nigeria
Community of West African States (ECOWAS) and the Cuban government to replace
1 million incandescent lamps with CFLs. In the power sector, the NERC has initiated
some processes towards developing energy efficiency regulation. Specifically, the NERC
is currently developing energy efficiency labelling standards for domestic appliances,
energy efficiency standards for luminaries and other household appliances.
iii
Smartgrid technologies are yet to be implemented in Nigeria, but the government of

the federation has earmarked funds for the development of smartgrid technologies in
Nigeria. With private sector participation in the electricity value chain, we expect that
there will be a leap in technological developments in the sector.
VI
THE YEAR IN REVIEW
The Shell Petroleum Development Company, which currently holds a large number of
oil and gas concessions in Nigeria is currently negotiating agreements to exit some of
its onshore oil and gas concession areas as a result of the conflicts it has been having
with host communities in those areas. Its decision to exit those concessions has opened
up the industry for participation by several indigenous Nigerian companies and other
independents.
Additionally, as regards the power sector, the federal government handed over its
majority stake in 15 power generation and distribution companies and has awarded a
management contract for the transmission network. The three levels of government have
also selected preferred bidders for the majority stake in 10 power plants. In the upstream
petroleum sector, mini bid-rounds for marginal fields are expected to take place soon and
new draft regulations are currently being finalised.
In the downstream petroleum segment, there are plans by the federal government
to deregulate the sale and marketing of petroleum products, remove subsidies, encourage
companies to build more refineries and, consequently, refine more crude oil in Nigeria.
VII
Although Nigeria has its fair share of challenges in the energy sector, it appears that
the ongoing reforms in the entire energy supply chain have come at an auspicious
time, and if the federal government forges ahead with its reforms, the energy sector
generally would open up further for private sector participation, with improved energy
security. For success to be recorded, however, issues such as corruption, nepotism and
inconsistency in government policy must be adequately dealt with. Additionally, the
federal government must act transparently while showing that it has the political will
to conclude the reforms. The outlook therefore appears to be positive, largely because
of the yawning gap in energy demand and supply, and the continuing reforms. Nigeria
may well be particularly attractive to prospective investors if the reforms are successful.
The federal government is currently doing a great deal to encourage renewable
energy. Some of the actions of government in this regard include the development of a
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Nigeria
new tariff system that incentivises investments in renewable energy and the development
of a bankable template power purchase agreement.
An issue currently being discussed is the electioneering process. Elections are to
take place in Nigeria early 2015 and some investors fear an adverse change in policy
where a government that has a different view about reforms and privatisation is elected.
However, from a dispassionate point of view, many of the reforms have reached advanced
stages making them difficult for any government to reverse. Many smart investors would
also argue that, because of the apathy to invest, this is the best time to invest in Nigeria
as the returns are currently higher than they have been in the past.
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Chapter 27
NORWAY
Per Conradi Andersen and Christian Poulsson1
I OVERVIEW
The Norwegian onshore energy sector is almost 100 per cent based on electricity
generated by hydropower. Other energy sources play a rather modest role in the onshore
energy sector. Hence, the description in this chapter will focus on electricity generated
by hydropower.
The Norwegian electricity sector is highly influenced by public ownership
combined with tough restrictions on private ownership. This does not necessarily differ
from other countries around the world, but stands in contrast to the fact that Norway
has, since 1990, had a well-functioning market for electricity and connected commodity
derivatives ahead of most other countries.
Main sources of law are the Industrial Concession Act, the Watercourse Regulation
Act, the Energy Act, the Water Resources Act and the Ocean Energy Act.
II REGULATION
i
The regulators
The Ministry of Petroleum and Energy (OED) holds the overall administrative
responsibility for energy and water resource management in Norway.
The Ministry is responsible for ensuring that the resource management is carried
out in accordance with guidelines given by Parliament.
The Norwegian Water Resources and Energy Directorate (NVE) is a subordinate
agency of the Ministry. The NVE holds the managing responsibility according to the
Energy Act and the Water Resources Act. Further, the NVE assists the Ministry of
Petroleum and Energy managing the Industrial Concession Act and the Watercourse
Per Conradi Andersen and Christian Poulsson are partners at Kvale Advokatfirma.
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Norway
Regulation Act. The NVE has legislative powers to issue regulations and individual
decisions and perform preparatory procedures in cases to be resolved by the Ministry of
Petroleum and Energy.
Statnett SF is the National Grid company and transmission system operator
responsible for operation and development of the central grid for electricity transmission.
ii
A concession is mandatory for anyone who wants to develop hydropower plants, wind
power plants, gas-fired power plants, power lines, district heating systems, domestic
transmission pipelines for natural gas, etc.
The Industrial Concession Act specifies that anyone who acquires ownership, user
rights or long time user rights to a waterfall, or shares in companies with such rights,
must obtain a licence. Development of a waterfall and construction of a power plant
usually require an additional licence pursuant to the Water Resources Act.
The Energy Act requires licensing for the construction, ownership and operation
of all installations for generation, conversion, transmission and distribution of electricity,
from power plant to consumer, as well as district heating plants with a capacity over
10MW. A licence pursuant to the Energy Act is also required to trade in electricity and
for the organisation of marketplaces for such trading.
Systems for transporting natural gas intended for delivery to natural gas
undertakings in another region, cannot be constructed or operated without a licence
pursuant to the Natural Gas Act. Minor liquefied natural gas installations and small-scale
facilities for transmission or distribution of natural gas do not need to be licensed.
A developer, or licensee, must have a licence pursuant to the Watercourse
Regulation Act to carry out regulatory measures or divert water in a watercourse.
The Watercourse Regulation Act gives the licensee the authority to expropriate
the necessary property and rights in order to carry out the regulatory measures. For other
energy projects, corresponding expropriation rights are laid down in the Expropriation
Act of 1959. Expropriation questions are often handled as part of the licensing process
for energy projects.
The Ocean Energy Act regulates renewable energy production, conversion and
transmission of electricity at sea. A licence is needed on order to construct, own or
operate production facilities and cabling systems located outside the baseline but within
the Norwegian continental shelf. The same applies to reconstruction or extension of
existing facilities.
iii
Norway has, for more than 100 years, had huge restrictions on acquisition of waterfalls
and hydropower generators. During the 20th century these restrictions were extended
to include restrictions on lease of such facilities and partial ownership in a way that
established preferential treatment of public (state, counties or municipalities) ownership.
The main principle of acquisition of ownership to hydropower plants is found in
the Industrial Concession Act (of 14 December 1917). Without a concession, only the
Norwegian state may acquire ownership or the right to use waterfalls of a certain size. The
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threshold for concessions has recently been raised from 1,000 (736kW) to 4,000 natural
horsepower; waterfalls under this limit may be acquired or rented without concession.
Norwegian state enterprises, municipalities and counties will normally be entitled
to a concession for the acquisition of a waterfall. The same applies to legal entities (jointstock companies, enterprises and organisations) in which at least two-thirds of the capital
and votes are owned by a Norwegian state enterprise, a Norwegian municipality or
county (or a combination of such owners), i.e., a publicly owned company.
Private entities (domestic and foreign), as well as publicly owned foreign companies,
may, on application, be granted a concession to acquire ownership up to one-third of
the shares in the legal entity registered as a owner of the waterfall. In these instances it is,
however, an additional condition that the legal entity in question be organised so that a
genuine public ownership is manifest. This condition may entail limitations as to, inter
alia, the influence granted to minority private or foreign owners through, for example,
shareholders agreements. It also excludes partnerships with private or foreign minority
owners from being eligible to own such waterfalls.
Prior to 2008 and 2009, concessions for the acquisition or rent of waterfalls or
other acquisitions of production rights were given to private owners or foreign public
owner for a maximum of 60 years; Norwegian public owners or publicly owned
companies may, however, be (and have always been) given concessions in perpetuity.
When a concession was granted for the maximum 60 years, several conditions
applied. Most important are those concerned reversion of the shares or the waterfall
rights (including power plants, etc.).2 There are still concessions with such conditions
and hence several power plants will in future revert to the state. In order to avoid such
reversion, a private owner may transfer the ownership (through a regular sale) to publicly
owned companies before the date for reversion. This will most likely lead to future
transactions concerning hydropower plants.
The scheme of reversion was, however, challenged by the EFTA Surveillance
Authority under the EEA agreement in 2006. After the ruling in the EFTA Court, the
Norwegian government was forced to change the legislation. The system of reversion was
abolished for new acquisitions and the former possibility for private entities and publicly
owned foreign entities to acquire waterfalls was removed. As set out above, such entities
are now only able to acquire one-third of publicly owned companies holding such assets.
As an equivalent to transfer of ownership it is still possible to lease waterfall rights
with adjacent generators, but only for a maximum 15 years. The lessee has to apply for a
concession when parties enter into such agreements.
According to the Energy Act a licence is necessary to own and to operate electricity
grids (transmission and distribution) and certain installations such as transformers.
iv
Transfer of more than 20 per cent ownership to companies holding licences under the
Industrial Concession Act will need an acceptance from the OED. If as much as 90 per
Reversion means that the shares or waterfall rights will be assigned to the Norwegian state
without compensation at the end of the concession period.
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Norway
cent is acquired this will be considered as an acquisition of the underlying assets and a
call for a complete concession process. Generally, the Act is construed as catching up
with agreements where a party receives a position equivalent to direct ownership through
voting rights, shareholders agreements, etc.
In contrast with the Industrial Concession Act, the Energy Act has no regulation
on partial transfer of ownership to companies holding such assets or licences. Acquisition
of more than 90 per cent will, however, be considered as a change of ownership to the
underlying assets, even if the business continues unchanged.
III

SERVICES
The Norwegian Energy Act is based on the principle that natural monopolies, such as
operation of the grid, should be protected against any influence from, and cross-subsidies
to, the competitive market embracing generation and trade of electricity. Since the Act
was implemented in the early 1990s the authorities have been given incentives in order
to fulfil the aim of splitting up vertically integrated companies into separate entities,
preferably limited liability companies covered by the Limited Liability Company Act.
ii
Grid companies with an area licence have a supply requirement, according to Section
3-3 of the Energy Act. The supply requirement entails a connection requirement towards
non-professional (private) customers.
For producers, the grid companys only requirement is to provide market access
with non-discriminatory and objective tariffs and conditions.
Grid companies can require an investment contribution to cover construction
costs of connecting new production or extending production capacity.
In cases where the connection causes reinforcement of installations with several
network users, a pro rata share of these costs may be included in the investment contribution.
iii Rates
The Norwegian Water Resources and Energy Directorate (NVE) is responsible for
monitoring grid management and operations, including determination of income caps
for each grid company. The income cap reflects factors that influence area-specific costs,
such as climate, topography and settlement patterns. Each companys income, which
mainly derives from transmission tariffs, must not exceed the maximum permitted level
determined by the NVE. This system is intended to ensure that grid companies do not
make unreasonable monopoly profits and that cost reductions also benefit grid customers.
Income caps are updated annually. To promote quality of service, a mechanism
that imposes direct consumer compensation for long service interruptions was introduced
in addition to the already existing mechanisms, which provide for penalties for grid
companies when interruptions occur.
All grid companies are required to use point tariffs when charging for transmission
and distribution. Point tariffs mean that grid customers pay the same transmission tariff
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Norway
regardless of whom they buy electricity from or sell to. An individual customer only
pays a transmission tariff to its local grid company, Consumers pay a single tariff to
tap into electricity from one point in the grid (consumption tariff), whereas generating
companies pay a different tariff to feed power into a connection point (input tariff).
Grid companies transmission tariffs are regulated by the Regulation No. 302
of 11 March 1999 concerning financial and technical reporting, permitted income
for network operations and transmission tariffs. The regulations require that tariffs to
household customers must consist of a fixed component and an energy component. The
fixed component is a fixed annual amount, and should at least cover customer-specific
costs. These are costs related to metering, settlement, invoicing, etc. The fixed component
is independent of the current input of power and should give grid companies sufficient
income according to regulated permitted income fixed annually for each company by
the NVE. The central grid input tariff should be normative for the fixed component by
power input into regional and distribution networks.
The energy component depends on the customers current input of power. When
power is transmitted some of the power is lost. The energy component should reflect costs
(kroner per kWh) related to power loss when one extra kWh is transmitted (marginal
loss). The energy component should refer to the connection point.
In addition, the transmission tariff (i.e., fixed component plus the energy
component) should cover the fixed costs in the network.
iv
As a result of increased fear of terror around the world and climate changes the authorities
have increased focus on security of supply in the energy sector.
During the winter of 2012, several parts of Norway were struck by storms which
took down the electricity grid in many places. More than 421,000 people were without
electricity for some time during Christmas as a result of the Dagmar storm. For more
than 10,000 people this outage lasted for several days. This has led to increased focus
on transmission tariffs and the grid companies duty to maintain the quality of the grid.
IV
ENERGY MARKETS
The Nordic countries power systems are interconnected and mutually dependent.
The power price is determined by the market based on generation, transmission and
consumption conditions in the region, and thus the price will vary over both the short
and long term. The power price must also reflect possible congestion in transmission
capacity between the areas, but the price will be the same in all areas of the Nordic
region if there is no such congestion. Water inflow to hydropower plants is of great
importance for the determination of the power price, since hydropower represents such
a large share of the Norwegian and Nordic power supply. In Norway, consumption
tends to be slightly higher than power production in years with normal precipitation
and temperature conditions, which means that Norway is dependent on imports from
abroad. In years with low inflow, the need for power imports is even higher. Temperature
and weather conditions influence short-term demand in the Nordic region and Europe,
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which also affects the power prices. Periods of cold temperatures and high demand can
result in higher power prices.
Wholesale market
The power market is often divided into wholesale and end-user markets (retail market).
The wholesale market embraces generators, suppliers, large industrial enterprises, traders
and other undertakings. Electricity is traded physically on a day-ahead basis in the spot
market organised by the Nordic power exchange, Nord Pool Spot, which accounted for a
traded volume of approximately 316TWh in 2011. In addition, wholesale players trade
power derivatives representing multiple volumes in the financial forward/futures market
organised by Nasdaq OMX Commodities. Electricity is also traded bilaterally between
wholesale players, both on a physical and financial basis.
End-user market
Any person who buys electricity for its own consumption is an end-user. Small endusers normally buy power from an electricity supply company. Larger end-users, such as
industrial enterprises, often buy directly in the wholesale market.
All end-users are free to choose electricity supplier and contract type. The most
common contracts for households have prices that vary according to market conditions.
International power trading
Norway was traditionally a net exporter of power, but in the late 1990s consumption
of electricity rose faster than the power supply, as hydropower development has been
limited in recent times. Thus, Norway is generally a net importer.
Norway has interconnectors with Sweden, Denmark, Finland, the Netherlands
and Russia. Additional connections are planned to Germany and England. The
transmission capacities to Finland and Russia are low, and the connection with Russia
is used only for imports to Norway. The highest transmission capacity from Norway
goes towards Sweden, at about 3,600MW, while the capacity in the other direction is
somewhat lower. Capacity between Norway and Denmark is about 1,000MW.
ii
Nord Pool Spot organises the leading power market in Europe and offers both day-ahead
and intraday markets to its customers. 370 companies from 20 countries trade on the
market. In 2013, the group had a total turnover of 493TWh, which includes the auction
volume in the UK market N2EX.3 In 2012, total volumes traded over Nord Pool Spot
amounted to 432TWh, including the UK auction volume on N2EX. This represented
a value of 18 billion.
Nord Pool Spot AS is owned by the Nordic transmission system operators
Statnett SF (30 per cent), Svenska Kraftnt (30 per cent), Fingrid Oyj (20 per cent)
and Energinet (20 per cent). Nord Pool Spot AS is licensed by the NVE to organise
Nord Pool Spot and NASDAQ OMX Commodities operate the N2EX in the UK market.
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and operate a market place for trading power with physical delivery, and by the OED to
facilitate the power market with foreign countries.
While a licence is required under the Energy Act in order to trade or organise
marketplaces for physically deliverable electricity (see Section II.ii, supra), certain aspects
of financial trading in electricity falls to be regulated under the Securities Trading
Act. Regulated activities include receipt, mediation and execution of orders, portfolio
management and investment advice in electricity derivatives, all of which require an
investment services licence. The licensing regime implements Directive 2004/39/EC
(MiFID). In addition, the Securities Trading Act regulates market behaviour such as
insider dealing and market manipulation by implementing the requirements of Directive
2003/6/EC.
iii
Physical or financial electricity trading that takes place on Nord Pool Spot, Nasdaq
OMX Commodities or other regulated marketplaces follow standardised contracts and
rulebooks applied by the relevant exchange or regulated marketplace in respect of the
product in question.
Bilateral OTC contracts for sale of electricity in the wholesale market are to a large
extent also standardised. Different organisations have contributed with standardised
contracts, including Nordic Association of Electricity Traders, European Federation of
Energy Traders and International Swaps and Derivatives Association (ISDA). These types
of trade usually take place within a master agreement framework that provides for swift
exchange of documentation in respect of individual trades, as well as risk-mitigating
mechanisms such as early termination and netting in the event of bankruptcy. Such
mechanisms are generally recognised by Norwegian law as far as commodity derivatives
are concerned. The demarcation of commodity derivatives under Norwegian law basically
follows the demarcation applied under MiFID. This means that as a rule, financially
settled electricity contracts may generally be netted in a bankruptcy situation, while the
same only holds for certain physical contracts.
Contracts for sale of electricity to households and similar end-users are generally
standardised by the retail electricity suppliers, while larger contracts concerning electricity
deliveries to industrial end-users vary significantly depending on the commercial strength
of and negotiation process between the parties.
iv
Market developments
The Norwegian electricity market has since its deregulation, represented by the Energy
Act in 1990, developed to become one of the most liberal electricity markets in the
world, easily accessible to producers, end-users and traders alike.
On the power production side, due to the NorwegianSwedish electricity certificate
scheme introduced from 1 January 2012, there is a marked expectation for the installation
of significantly more production capacity in the years to come (see Section V.i, infra).
Coupled with lower expected electricity consumption in the industrial sector, as well as
limited transmission capacity between the Nordic market and continental Europe, there is
a growing concern in the market that electricity prices will drop in the long term.
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On the regulatory side, Norwegian law, through the EEA Agreement, is closely
connected to EU law. Thus, the developments in this sector are on an overall basis
expected to follow the developments in the EU.
V
Since 1 January 2012, Norway has been part of a NorwegianSwedish electricity certificate
market, which was introduced in order to increase production of renewable energy.
Until 2020, Norway and Sweden intend to expand their electricity production
based on renewable energy sources by 26.4TWh. This corresponds to the power
consumption of more than half of all Norwegian households.
The following plants are entitled to electricity certificates:
a
power plants based on renewable energy sources (hydro or wind) whose
construction started after 7 September 2009;
b
existing power plants expanding their production on a permanent basis, whose
construction started after 7 September 2009; and
c
hydroelectric power stations with installed capacity up to 1MW whose
construction started after 1 January 2004.
The system may cover the entire production or parts of it.
Power plants must be built in accordance with the licensing terms or comply with
conditions for exemption from licensing. Any received government investment aid had
to be repaid before 30 April 2012 in order to receive certificates.
All actors delivering electricity to end-users must buy or obtain by other means
(e.g., own production) a certain yearly quota of electricity certificates. In addition, certain
electricity users that have entered into bilateral agreements, (e.g., with a producer) have
to buy electricity certificates. Moreover, generators who use their own electricity are to a
certain extent required to buy electricity certificates.
The end-users finance the system, as the costs of purchasing certificates is added
on the electricity bill. the certificate cost should, however, be an upfront fixed part of the
suppliers handling costs. In this way, the suppliers must calculate the cost before delivery
starts and in this respect compete with other suppliers in offering the lowest handling
costs. The certificate costs should, however, be separately itemised on the invoice to
customers.
The NVE manages the electricity certificates in Norway in cooperation with
Statnett (register coordinator) and the Swedish Energy Agency in order to develop a
well-functioning NorwegianSwedish electricity certificates market.
Statnett issues electricity certificates to accredited power generators and maintains
an electronic certificate register that shows how many electricity certificates power
producers and other liable actors hold.
Certificates are sold on the NorwegianSwedish electricity certificate market.
Power suppliers and some electricity users are required to purchase electricity certificates
for a certain proportion of the electricity they deliver or use.
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At the end of March each year, power suppliers have to update their balance of
certificates and cancel a number of certificates according to a calculation based on the
amount of electricity and certificates sold to end-users.
NVE and the Swedish Energy Agency accredit power plants that receive one
electricity certificate for each MWh of electricity generated. Thus, the support is
independent of whether the power plant is located in Sweden or Norway, and which
renewable energy source is used.
The Finnish company lands Vindkraft AB has applied for approval of the Oskar
wind farm on the island of land4 for allocation of electricity certificates. The application
was denied by the Swedish public authorities. The power company launched a case
before the Swedish courts who, in December 2012, referred the case to the Court of
Justice of the European Union for a preliminary ruling under Article 267 of the TFEU.
The company argues that the only connection it has from the island to the mainland
is a high-tension cable to Sweden. As it is has a grid connection to a Member State
of the European Union, the company argues that is has a right to be treated on equal
terms with any Swedish company, and hence has the right to certificates. The case is still
pending before the court.
The power suppliers and certain electricity users liable for electricity certificate may
choose to purchase their electricity certificates in either Norway or Sweden. Trading of
electricity certificates across national borders means that the renewable energy resources
in both countries are utilised more effectively than if national markets were established.
The price of electricity certificates is determined by supply and demand. Demand
is determined by how much power is used and the set electricity certificate quota for
each year. The supply is dependent on how much electricity is being produced. Largescale investments in new energy production will result in many certificates in the market
and the price of each certificate will drop. Fewer power plants being under construction
will cause rising certificate prices, until prices reach a level where the energy market will
attract new investors. The average price on certificates in 2012 was 178.50 kroner.
ii
Both the NVE and ENOVA focus on energy efficiency. While the NVE implements
regulations regarding energy efficiency, ENOVA is a state-run entity supporting various
activities and incentives in order to trigger an conversion in the consumption and
generation of renewable energy in Norway.
ENOVAs programmes and activities within industry, construction, and housing
are meant to stimulate the market into introducing new energy-efficient solutions and
adopting them in practice. In recent years, construction programmes have been revised
and now have a greater focus on innovators in the market, in particular the passive house
standard. In addition ENOVA focus on increased use of alternative sources, increased
Although part of Finland, Aland has its own parliament and is Swedish-speaking. Similarly,
its link to the European Union is regulated by a special protocol; www.reuters.com/
article/2013/03/17/us-eu-ecj-idUSBRE92G07120130317.
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Norway
production from renewable energy sources and introduction and development of new
technologies and solutions.
iii
Norway is at the forefront of development of offshore floating wind power generation.

Statoils Hywind project is the first full-scale floating wind turbine in the world.
In 2009, Statoil invested about 400 million kroner in the construction and completion
of the pilot, including scientific research and development of the wind turbine concept.
ENOVA SF has given 59 million kroner in support of the project.
The concept has been verified during the first two years of testing and the results
have throughout that time been above expectations. With few operational challenges,
good production results and well-functioning technical systems, it is expected that the
Hywind concept will have great influence on offshore wind production in the future.
Statoil is currently looking for possible future locations within the United States and the
United Kingdom for pilot wind farm projects with three to five floating wind turbines.
VI
THE YEAR IN REVIEW AND OUTLOOK
Last year the Norwegian Supreme Court handled some cases concerning the energy sector
regarding compensation to landowners in cases of expropriation and some contractual
issues. The judgments have not, however, had any particular influence on the Norwegian
energy market.
More interesting is the ongoing debate regarding how many grid companies there
shall be in Norway. The government has set up a group to assess the pros and cons in
this respect. Obviously there may be a great deal of benefit from merging several minor
local grid companies; on the other hand there are both political and economic reasons
not to merge such companies. The report from the expert group will be delivered to the
Ministry in May 2014.
The market price of electricity is still at a low level. The market forecast promises
no significant changes.
361
Chapter 28
PHILIPPINES
Monalisa C Dimalanta and Najha Katrina J Estrella1
I OVERVIEW
The passage of Republic Act No. 9136 (2001), or the Electric Power Industry Reform Act
(EPIRA), ushered in significant changes to the electric power industry. The most relevant
of these, which are discussed in further detail below, have been (1) the restructuring of
the industry from a vertically integrated system, controlled primarily by the state-owned
National Power Corporation (NPC), into one divided among the four major sectors
generation, transmission, distribution and supply; (2) the privatisation of several stateowned assets, which paved the way for the entry of private investors; (3) the creation of
the wholesale electricity spot market; and (4) the introduction of open access and retail
competition.
The more recent promulgation of Republic Act No. 9513 (2008), or the
Renewable Energy Act (the RE Act), is pushing the entry of green energy alternatives to
the power sector by offering several incentives to renewable energy developers, including
a feed-in-tariff system.
II REGULATION
i
The regulators
Electric power industry

The power industry in the Philippines is primarily governed by the EPIRA and its
Implementing Rules and Regulations (EPIRA IRR), as amended, and the issuances by
the Department of Energy (DOE) and the Energy Regulatory Commission (ERC).
Monalisa C Dimalanta and Najha Katrina J Estrella are partners at PJS Law.
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Philippines
Under the EPIRA, key government agencies and instrumentalities were either
created or their powers and functions reorganised, with the aims of fulfilling the mandate
of the law.
The DOE is the primary policymaking and implementing body for the industry2
with a mandate to supervise and control all government activities pertaining to energy
projects.3
The EPIRA also created the ERC (in place of the Energy Regulatory Board) as
an independent, quasi-judicial regulatory body, mandated with promoting competition,
encouraging market development, ensuring customer choice, and discouraging or
penalising abuse of market power in the restructured electricity industry.4 The ERC has
original and exclusive jurisdiction over all cases contesting rates, fees, fines and penalties
it imposes, and over all cases involving disputes between and among participants or
players in the energy sector.5
The law also established the Power Sector Assets and Liabilities and Management
Corporation (PSALM) to manage the orderly sale, privatisation and disposal of
generation assets, real estate and other disposable assets of the NPC.6 PSALM was
authorised to take title to and possession of those assets transferred to it. The EPIRA
mandated that all such assets should be sold through public bidding, with the exception
of the Agus and Pulangui hydropower complexes in Mindanao, the privatisation of
which was left to the discretion of PSALM in consultation with Congress.7
Also created under the EPIRA was the National Transmission Corporation
(TRANSCO), a government-owned and controlled corporation that assumed the power
transmission functions of the NPC, including the authority and responsibility for the
planning, construction and centralised operation and maintenance of ancillary services.
Designated as the system operator under the Philippine Grid Code, TRANSCO is
responsible for providing open, equal and non-discriminatory access to its transmission
system to all electricity users.
Also worth noting are certain private entities that perform key functions for the
Philippine power industry: the Philippine Electricity Market Corporation (PEMC),
a non-stock, non-profit company that manages and operates the wholesale electricity
spot market (WESM); and the National Grid Corporation of the Philippines (NGCP),
the private corporation that holds the concession to operate and maintain the power
transmission system and sub-transmission system owned by TRANSCO and presently
acts as system operator.8
2
3
4
5
6
7
8
Section 37 of the EPIRA.

Rule 3, Section 1 of the EPIRA IRR.
Section 43(a) of the EPIRA.
Section 47(f ) of the EPIRA.
Republic Act No. 9511 (2008).
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Philippines
Other industries
Both the oil and natural gas industries are subject to regulation by the DOE.
Presidential Decree No. 87 (1972), or the Oil Exploration and Development
Act (PD87), was passed in 1972 to hasten the discovery and production of indigenous
petroleum through the utilisation of government and/or private resources.9 PD87
remains the basis for the current service contract system adopted by the Philippine
government, through the DOE, to directly conduct exploration and produce indigenous
petroleum or to appoint technically competent and financially capable contractors to
do this, whether local or foreign.10 Presidential Decree No. 1857 (1983) complements
PD87 in providing the fiscal and contractual terms of the service contracts, with special
consideration for deepwater oil exploration.11
In 1998, Republic Act No. 8479, or the Downstream Oil Industry Deregulation
Act, sought to liberalise and deregulate the industry by promoting, among others, the
entry of new participants in the downstream oil industry and granted the DOE various
powers to this end.12
In 2001, the regulation of the natural gas industry was entrusted by the President
of the Republic to the DOE,13 which promulgated Department Circular No. 2002-08005, or the Interim Rules and Regulations Governing the Transmission, Distribution
and Supply of Natural Gas (the Natural Gas Interim Rules), providing a set of guidelines
for the downstream natural gas industry.
This chapter focuses primarily on the electric power industry, which has seen
more vigorous developments in recent years. Reference is made to the oil and natural gas
industries where relevant.
ii
The electric power industry is segregated into four main sectors: the generation,
transmission, supply and distribution sectors.
The generation of electric power is recognised as a business affecting the public
interest and is mandated to be both competitive and open.14 A generation company is
a person or entity authorised by the ERC to operate facilities used in the generation
of electricity.15 The generation business is not regulated and the parties to power (or
ancillary services) supply agreements are generally free to negotiate a mutually acceptable
tariff; if, however, one of the parties is a regulated entity such as a distribution utility or
transmission company the negotiated tariff is subject to ERC approval.
9
10
11
12
13
14
15
Section 2 of PD87.
Section 4 of PD87.
See www.doe.gov.ph/pecr4/laws_issuances.html.
Section 2 of Republic Act No. 8479 (1998); also see Chapters II, III and IV of Republic Act
No. 8479 (1998) for the various powers granted to the DOE.
Executive Order No. 66 (2001).
Section 4(x) of the EPIRA.
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Philippines
In contrast, the transmission of electric power is considered a regulated common
electricity carrier business requiring a national franchise and subject to the rate-making
powers of the ERC.16 The NGCP was issued the national franchise for the operation
and maintenance of TRANSCOs power transmission and subtransmission system, with
TRANSCOs oversight to ensure compliance with the concession agreement.17
The distribution of electricity to end-users is a regulated common electricity
carrier business requiring a national franchise. Distribution of electric power to endusers may be undertaken by private distribution utilities, cooperatives, local government
units and other duly authorised entities, subject to regulation by the ERC.18 Any of
these entities can be a distribution utility provided it holds an exclusive franchise area to
operate a distribution system in accordance with the EPIRA.
Finally, the supply sector is also regarded as a business affecting the public
interest. A supplier is any person or entity authorised by the ERC to sell, broker, market
or aggregate electricity to end-users.19 Except for distribution utilities and electric
cooperatives with respect to their existing franchise areas, all suppliers of electricity to
the contestable market require a licence from the ERC.20
The law also allows for wholesale aggregators21 being any person or entity, other
than a generation company to be issued with a certificate of registration by the ERC to
sell electricity to distribution utilities.22
iii
To protect against market abuse and anti-competitive behaviour, the EPIRA prohibits the
following persons or entities from holding any interest, whether directly or indirectly, in
any generation company: TRANSCO and its concessionaire (NGCP) and stockholders
or officials of TRANSCO or the NGCP, or their relatives within the fourth civil degree
of consanguinity or affinity, whether legitimate or common law.23
The EPIRA also states that no company or related group can own, operate or
control more than 30 per cent of the installed generating capacity of a grid and/or 25 per
cent of the national installed generating capacity.24 The ERC determines the installed
16
17
18
19
20
21
22
23
24

Section 2 of the Republic Act No. 9511 (2008).
Rule 4(kkkk) of the EPIRA IRR.
Rule 8, Section 4 of the EPIRA IRR.
On 22 May 2006, the ERC adopted the Rules for the Registration of the Wholesale Aggregators
to purposely open an avenue by which distribution utilities, especially small electric cooperatives,
would be able to obtain supply from the WESM (ERC Resolution No. 23, Series of 2006).
Section 5 of the ERC Rules for the Registration of the Wholesale Aggregators.
Rule 5, Section 3, and Rule 11, Section 3 of the EPIRA IRR.
Section 45(a) of the EPIRA.
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Philippines
generating capacity per grid and in the national grid as well as the market share limitations
each year or as often as necessary, based on the maximum capacity of the power plants.25
The business of power generation by itself is not subject to foreign ownership
limitations; it is not considered a public utility operation and therefore is not considered
a nationalised activity that requires a national franchise.26 The issue of foreign ownership
only arises if power generation involves the exploration, development and utilisation of
natural resources27 such as renewable energy as this activity must be under the full
control and supervision of the state. This may only be undertaken jointly with Filipino
citizens or corporations or associations 60 per cent of whose capital is owned by Filipino
citizens under co-production, joint venture, or production sharing agreements.28
In contrast, the transmission and distribution sectors are subject to nationality
restrictions since they are considered regulated common electricity carrier businesses and
thus public utilities. Entities engaged in the transmission and distribution of electricity
are required to secure a franchise and a certificate of public convenience and necessity
prior to operation.29 The operator must then be a Filipino citizen or a corporation or
other entity organised under the laws of the Philippines, at least 60 per cent of the stock
or paid-up capital of which must belong entirely to citizens of the Philippines.30
iv
In general, there are no restrictions or approvals necessary in the power industry for
the transfer of assets, services or control, other than for those entities with legislative
franchises, which usually include a clause providing that any change in ownership will
require Congressional approval. The distribution and transmission of electric power
require a national franchise.31
While the generation sector is not subject to the foregoing restriction, any change
in ownership or control of assets and services of a generation company must comply with
the ownership threshold on installed generating capacity, as previously discussed.
25
26
27
28
29
30
31
Guidelines for the Determination of Installed Generating Capacity in a Grid and the National
Installed Generating Capacity and Enforcement of the Limits on Concentration of Ownership,
Operation or Control of Installed Generating Capacity under Section 45 of Republic Act No.
9136.
Section 6 of EPIRA.
IDEALS Inc v. Power Sector Assets and Liabilities Management Corporation, GR No. 192088, 9
October 2012.
Article XII, Section 2 of the Constitution.
Section 1 of the ERC Rules to Govern the Issuance of Certificate of Public Convenience and
Necessity to Entities Engaged in the Transmission and Distribution of Electricity.
Section 2 of the ERC Rules to Govern the Issuance of Certificate of Public Convenience and
Necessity to Entities Engaged in the Transmission and Distribution of Electricity.
See, for instance, Section 6 of Republic Act No. 9511 (An Act Granting the National Grid
Corporation of the Philippines a Franchise to Engage in the Business of Conveying or
Transmitting Electricity through the High-Voltage BackBone System of Interconnected
Transmission Lines, Substations and Related Facilities, and for other Purposes).
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Philippines
III

SERVICES
Transmission sector
The transmission sector in the Philippine power industry essentially remains a monopoly.
After open competitive bidding, the operation and management of the transmission
system was privatised and transferred from TRANSCO to the NGCP in 2008 as part
of the mandated privatisation of TRANSCO under the EPIRA. The NGCP was also
awarded the legislative franchise with a term of 50 years to engage in the business of
conveying or transmitting electricity through the high-voltage backbone system of
interconnected transmission lines, substations and related facilities.32
Distribution sector
As discussed above, the distribution of electricity to end-users is undertaken by Distribution
Utilities, which may be electric cooperatives, private corporations, government-owned
utilities or existing local governments.33 These utilities also hold franchises covering their
respective distribution areas.
Supply sector
The supply of electricity to end-users may be undertaken by a retail electricity supplier
(RES) or aggregator duly licensed by the ERC upon the implementation of the regime of
open access. An RES is a person or entity authorised by the ERC to sell, broker, market,
or aggregate electricity to end-users forming part of the contestable market,34 which
initially consists of end-users with a monthly average peak demand of at least 1MW.35
Nevertheless, distribution utilities and entities authorised to supply electricity within
economic zones may engage in the supply of electricity within their respective franchise
areas without securing a licence from the ERC.36
An aggregator is a person or entity licensed by the ERC to engage in consolidating
demand of end-users in a contestable market for electric power for the purpose of
purchasing and reselling electricity on an aggregate basis.37 Aggregators are only allowed
to supply electricity to end-users during the second phase of open access, when the
threshold level for the contestable market has been reduced to a monthly average peak
demand of 750kW.38
32
33
34
35
36
37
38
Republic Act No. 9511 (2008); Section 8 of the EPIRA.

Rule 4(cc) of the EPIRA IRR.
Section 3 of the ERC Rules on Customer Switching; contestable market refers to electricity
end-users who have a choice of supplier of electricity as determined by the ERC.
Article II, Section 1.1 of the ERC Rules for Contestability.
Section 2 of the Revised Rules for the Issuance of Licences to Retail Electricity Suppliers.
Section 3 of the ERC Rules on Customer Switching.
Article II, Section 1.2 of the ERC Rules for Contestability.
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Philippines
ii
Consistent with the policy of ensuring transparent and reasonable pricing of electricity in
a regime of free and fair competition,39 the EPIRA mandates TRANSCO, the NGCP and
the distribution utilities to provide open and non-discriminatory access to all electricity
end-users to the transmission system and distribution systems.40
A customer seeking to connect to the transmission system must, however, comply
with the requirements under the Revised Rules, Terms and Conditions for the provision
of Open Access Transmission Service (the OATS Rules), the Philippine Grid Code
(PGC) and related issuances for connections to the transmission system.
Further, end-users within the franchise area of a distribution utility intending to
connect directly to the transmission system need to secure the prior approval of the ERC.
In seeking this approval, it must be shown that the distribution utility is unwilling or
unable to adequately service the power requirements of such end-user41 in deference to
the franchise held by the distribution utility covering such area.42
Similarly, an end-user seeking to connect to the distribution system of a
distribution utility must comply with the requirements under the Distribution Services
and Open Access Rules (DSOAR), the Philippine Distribution Code (PDC) and other
related issuances.
The goal of retail competition and open access on distribution wires is to provide
end-users forming part of the contestable market ultimately at household level with
their choice of electricity service providers.
iii Rates
The ERC generally sets the rates that the NGCP and the distribution utilities may charge
its customers. In the exercise of its rate-setting functions, the ERC is mandated by the
EPIRA to fix such rates such as to allow the recovery of just and reasonable costs and a
reasonable return.
Transmission
The maximum rates which may be charged by the NGCP for the provision of
transmission services are subject to the approval of the ERC.43 In determining the
maximum transmission wheeling rates that can be charged by the NGCP, the ERC is
guided by the Rules for Setting Transmission Wheeling Rates (RTWR), which provides
the methodology and pricing principles to be adopted by the ERC, the annual rate
verification and adjustment process to be undertaken, the regulatory processes and
timelines, performance indicators, performance targets and reporting arrangements
39
40
41
42
43
Section 2(c) of the EPIRA.

Sections 9(b) and 23 of the EPIRA.
ERC Resolution No. 48, Series of 2006.
Batangas II Electric Cooperative Inc v. Energy Industry Administration Bureau, GR No. 135925,
22 December 2004; Rule 7, Section 1(a) of the EPIRA IRR.
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Philippines
required from the NGCP.44 The RTWR further provides for a performance incentive
scheme, which rewards or penalises the NGCP depending on its compliance with set
performance targets and indices.45
Distribution
The distribution wheeling rates and connection charges, which may be charged by
distribution utilities to end-users, are also subject to the approval of the ERC.46 Different
rate-setting regimes govern different classes of distribution utilities.
The rates that electric cooperatives may charge end-users are determined in
accordance with the Rules for Setting the Electric Cooperatives Wheeling Rates (RSECWR). Under the RSEC-WR, electric cooperatives are classified into groups based on the
number and consumption of their customers.47 The rates are then determined based on
the operating revenue requirements of the different classes of electric cooperatives.48
On the other hand, the maximum distribution wheeling rates to be charged by
private distribution utilities are governed by the Rules for Setting Distribution Wheeling
Rates (RDWR). The RDWR provides the methodology and pricing principles to be
adopted by the ERC, the annual rate verification and adjustment process to be undertaken,
the regulatory processes and timelines, performance indicators, performance targets, and
reporting arrangements required from the distribution utilities. A performance incentive
scheme is incorporated into the RDWR, whereby a qualified distribution utility is
rewarded or penalised depending on its compliance with set performance targets and
indices.49
iv
The operation, maintenance and development of the transmission system are generally
governed by the PGC, the OATS Rules and related issuances. Similarly, the operation
and maintenance of distribution systems are regulated by the PDC, the Amended
DSOAR and related issuances.
IV
ENERGY MARKETS
Wholesale electricity spot market

The EPIRA mandated the establishment of the WESM to provide a mechanism for
identifying and setting the price of actual variations from the quantities transacted under
contracts between sellers and purchasers of electricity.50
44
45
46
47
48
49
50
Section 1.2 of the RTWR.

Section 8.2 of the RTWR.
Section 2.3 of the RSEC-WR.
Article 4 of the RSEC-WR.
Section 8.2 of the RDWR.
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Philippines
In 2003, the Philippine Electricity Market Corporation (PEMC) was organised
as a non-stock, non-profit corporation to undertake the preparatory work and initial
operation of the WESM. The PEMC currently operates the WESM as the autonomous
group market operator pending transition to an independent market operator, pursuant
to the EPIRA.
The WESM is currently organised on a grid basis, consisting of three separate
markets for Luzon, Visayas and Mindanao. The WESM commenced commercial
operations in Luzon in June 2006 and in Visayas in December 2010.51 The Interim
Mindanao Electricity Market (IMEM) was launched in 2013 to provide a trading
platform for any uncontracted capacity in Mindanao.52
The Luzon-Visayas WESM operates on the basis of a gross pool whereby all
transactions for the sale and purchase of electricity are channelled through the market.
The market network model is used for the purpose of central scheduling, dispatch,
pricing and settlement.53
Generation companies submit generation offers and customers their demand bids
for each trading interval of each trading day of the week.54 Market clearing prices55 and
dispatch are determined based on the results of the market dispatch optimisation model
for a specific trading interval,56 subject to adjustments for bilateral contract quantities
declared for dispatch but settled outside the market. The dispatch targets set by the
market operator are then implemented by the NGCP, as system operator, through
dispatch instructions to the trading participants.57
Unlike the Luzon-Visayas WESM which is based on a gross pool design, however,
the IMEM operates on a net pool concept intended only for imbalance correction.
Other markets
Under the current legislation, provisions have been made for the establishment of a
reserves market for ancillary services58 and a renewable energy market (REM) for the
trading of renewable energy certificates.59 In 2010, the Steering Committee on the
Establishment of an REM was created, composed of representatives from the DOE, the
PEMC, PSALM, the National Electrification Administration, the NGCP, the NPC and
51
52
53
54
55
56
57
58
59
See www.wesm.ph/inner.php/about_us/wesm.
IMEM Implementing Rules, DOE Department Circular 2013-05-008.
Section 3.2.1 of the WESM Rules.
Section 3.5.5 and 3.5.6 of the WESM Rules.
The price determination methodology used by the market operator is subject to the approval of
the ERC (Rule 9, Section 5(d) of the EPIRA IRR).
Section 8 of the RE Act; Rule 3, Section 10 of the RE Act IRR. Renewable energy certificates are
certificates issued by the Renewable Energy Registrar to an electric power industry participant
indicating the energy sources, produced, sold or used (Rule 1, Section 3(tt) of the RE Act IRR).
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Philippines
TRANSCO.60 The reserves market is posed for implementation, while the REM has not
yet been established at the time of writing.
ii
The WESM Rules, promulgated by the DOE and formulated jointly with the electric
power industry participants,61 and the WESM Manuals issued pursuant thereto generally
govern the operation of the WESM.62 By express provision of the EPIRA, all electric
power industry participants are bound to comply with the WESM Rules relative to
transactions in the WESM.63
iii
Electric power industry participants are generally free to enter into bilateral contracts
for the supply of electric power and the prudence of utility purchases of power are
customarily driven by commercial considerations.
Certain limitations on the purchases of electric power through bilateral power
supply contracts by distribution utilities are imposed under the EPIRA as a measure
against market abuse and anti-competitive behaviour and to encourage participation by
distribution utilities in the WESM:64
a
contracts with distribution utilities are subject to review by the ERC; and
b
distribution utilities are prohibited from sourcing more than 50 per cent of its
total demand from an affiliate65 engaged in generation.
The ERC is also poised to promulgate the Rules Governing the Execution, Review, and
Evaluation of Power Supply Agreements Entered into by Distribution Utilities for the
Supply of Electricity to their Captive Market. In its latest version, the rules prescribe
a competitive selection process for contracting supply of electricity to the distribution
utilities captive markets and establish requirements and review procedures by the ERC.66
iv
Market developments
Open access and retail competition for the contestable market of 1MW (minimum)
users have been implemented since June 2013. The PEMC acts as the central registration
60
61
62
63
64
65
DOE Circular No. DC2010-02-0001.

Foreword to the WESM Rules.
Rule 11, Sections 5 and 6 of the EPIRA IRR.
Under the Rule 4(c) of the EPIRA IRR, an affiliate is defined as any Person which, alone
or together with any other Person, directly or indirectly, though one or more intermediaries,
Controls, is Controlled by, or is under common Control with another Person. Affiliates shall
include a subsidiary company and parent company and subsidiaries, directly or indirectly, of a
common parent.
66 See
www.erc.gov.ph/PressRelease/ViewPressRelease/ERC-holds-Public-Consultations-forproposed-PSA-Rules .
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Philippines
body and certified contestable customers have elected to be served either by their RES of
choice, or by the local RES arm of their distribution utilities.
During November and December 2013, significant price spikes were also noted
in the WESM arising from critical supply issues following the shutdown of several
generation plants in Luzon. The prices registered in the WESM and sought to be collected
from end-users were challenged in the Supreme Court and still await a resolution of the
high court.67 The ERC has also issued a resolution voiding the WESM settlement prices
on account of market failure and ordered the PEMC to recalculate the prices on the basis
of certain parameters.68
V
In 2008, the RE Act, was passed into law to establish a framework to accelerate the
development and advancement of renewable energy resources and the development of
a strategic programme to increase its utilisation.69 To this end, the law included the
granting of fiscal incentives to persons engaged in the exploration, development and
utilisation of renewable energy resources (RE developers) and the adoption of a feed-in
tariff (FIT) system, among others.
The RE Act grants the following incentives to RE developers:
a
a seven-year income tax holiday from the start of commercial operations followed
by a corporate tax of only 10 per cent of its net taxable income substantially
lower than the regular 32 per cent imposed under Republic Act No. 8424 (1997)
or the National Internal Revenue Code;70
b
duty-free importation of renewable energy machinery, equipment and materials
and their parts within 10 years from the issuance of a certification to RE
developer;71
c
special tax rates on civil works, equipment, machinery and other improvements
actually and exclusively used for renewable energy facilities, not exceeding 1.5 per
cent of their cost less the accumulated normal depreciation or net book value;72
d
the net operating loss carry-over of the RE developer during the three years from
the start of commercial operations may be carried over as a deduction from gross
income for the next seven consecutive taxable years immediately following the
year of such loss which is substantially longer than the three-year period under
the National Internal Revenue Code;73
67
See http://sc.judiciary.gov.ph/microsite/erc-meralco/.
68 See
www.erc.gov.ph/PressRelease/ViewPressRelease/ERC-Voids-Nov---Dec-2013-WESMPrices.
69
Section 3 of the RE Act.
70
Section 15(a) and (e) of the RE Act; Section 27(A) of Republic Act No. 8424 (1997).
71
Section 15(b) of the RE Act.
72
Section 15(c) of the RE Act.
73
Section 15(d) of the RE Act; Section 34(D)(3) of Republic Act No. 8424 (1997).
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Philippines
e
f
the sale of power generated from renewable sources of energy are subject to zerorated value added tax (VAT), as well as purchases by RE developers of locally
supplied goods, properties and services;74 and
RE developers who purchase locally produced renewable energy machinery,
equipment, materials and parts will be entitled to a tax credit of 100 per cent
of the VAT and customs duties that would have been paid had these items been
imported.75
With respect to the FIT, the RE Act mandates the ERC, in consultation with the
National Renewable Energy Board (NREB), to promulgate an FIT system.76 Thus, on
12 July 2010, the ERC approved and adopted Resolution No. 16, Series of 2010, or the
Feed-in Tariff Rules, which established the FIT as a fixed tariff, specific to a technology
and size of the renewable energy power plants.77
In July 2012, the ERC approved the following initial FIT rates:
a
hydro: 5.90 pesos per kW/h;
b
biomass: 6.63 pesos per kW/h;
c
wind: 8.53 pesos per kW/h; and
d
solar: 9.68 pesos per kW/h.
The currently pending installation targets for renewables are 250MW for biomass,
50MW for solar, 200MW for wind, 250MW for run-of-river and 10MW for ocean
power.78
The RE Act also mandates the NREB to set the minimum percentage of generation
from eligible renewable energy resources and determine to which sector the renewable
energy portfolio standards (RPS) will be imposed on a per-grid basis. Currently pending
before the DOE are draft RPS Rules requiring power industry participants to maintain
a minimum share of renewable energy in their portfolio, based on a five-year average of
renewable energy use by the participant and subject to a 1 per cent annual increase of its
actual demand.79
ii
The DOE has promulgated Implementing Rules and Regulations Directing the
Institutionalisation of a Government Energy Management Programme (the GEMP
IRR), which mandates the formulation of an energy conservation programme by each
government entity to reduce monthly electricity and fuel consumption by 10 per cent.80
No similar issuances apply to the private sector.
74
75
76
77
78
79
80
Section 15(g) of the RE Act.

Section 15(j) of the RE Act.
Section 2.2 to 2.3 of the FIT Rules.
DOE 2012 Accomplishment Report; at www.doe.gov.ph/EnergyAccReport/default.htm.
See www.doe.gov.ph/Announcements/Draft_RPS_08%20March%202011.pdf.
Rule III, Sections 1 and 3 of the GEMP IRR.
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Philippines
iii
There is no special legislation that promotes or advances particular technological

developments in the RE sector. Some of the incentives provided above, however, that are
available to RE developers are also available to manufacturers, fabricators, and suppliers
of locally produced renewable energy equipment and components.81
VI
THE YEAR IN REVIEW
The year 2013 for the Philippine energy industry was marked by regulatory issues that
revealed certain gaps in the framework that compel review, consultation and legislation
or policy decisions. The Malampaya Natural Gas-to-Power System supplying fuel to
three power plants in Luzon responsible for about 2,700MW or more than 25 per cent
of the peak demand in the island went on scheduled shutdown in November and
December 2013. Several generation plants also suffered forced outages at certain days
during the same period exacerbating the tight supply situation. Prices in the WESM
reached the market price cap of 62,000 pesos per MWh during several trading intervals,
and this translated to an increase in retail electricity rates of an average 10 pesos per kWh
from an average of 4.50 pesos per kWh.82
The collection of the increased prices was challenged by petition in the Supreme
Court for alleged failure by the ERC to implement measures against violation of the anticompetition rules. While the resolution of the Court is still pending, the ERC has since
voided the WESM prices of November and December 2013 and ordered the PEMC to
recalculate the settlement price. This ERC order is now questioned by certain industry
participants for lack of basis.83 In the meantime, the WESM price cap has been adjusted
to 32,000 pesos per MWh.
On the other hand, the declaration of open access and retail competition is
viewed as the commencement of the transition of the electric power industry from a
sellers market to a buyers market.84 This shift is demonstrated by the increasing number
of registered contestable customers85 and participants in the supply sector.86
81
82
83
84
85
86

See www.philstar.com/headlines/2014/01/13/1278202/special-report-why-power-rates-willcontinue-increase-first-two-parts.
See ERC Order, dated 27 March 2014, in ERC Case No. 2014-021MC in www.erc.gov.ph/
Generation/Generation.
See www.eefphilippines.com/cms_cebu/medrep/_uploads/f_20120823-092534_Enhancing_
Customer_Efficiency_with_the_Help_of_Power_Providers_ILECO_Billena.pdf.
See www.erc.gov.ph/Notice/ViewNotice/Contestable-Customers for list of registered contestable
customers.
See www.wesm.ph/inner.php/the_market/retail/retail_market_registration for the list of
registered and applicants for registration in the WESM as retail electricity suppliers.
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Philippines
VII
Power situation
The ERC has set the national installed generating capacity for 2014 at 15,832,348.28kW.87
With the projected increase in electricity consumption per capita, the DOE forecasts
a required capacity of 29,329.7MW88 and indicative investment cost of 3.174 trillion
pesos for energy projects89 by 2030. Of the required capacity, only 1,766.7MW is
committed.90
Among the national grids, Mindanao suffers the biggest supply deficit which
was exacerbated recently by forced outages that affected generation plants in Mindanao
resulting in 10-hour rotating blackouts.91 Insufficient power infrastructure, heavy
reliance on hydropower amid climate change, the inability of distribution utilities to
contract sufficient power supply, and non-compliance by some electric cooperatives
with nomination, dispatch and curtailment protocols are among the factors that have
contributed to the power crisis in Mindanao.
The shortfall is expected to ease by 2015 upon completion of committed projects in
the region, which will provide an additional capacity of at least 400MW.92 In the interim,
proposed stop-gap measures include the purchase of diesel generators by distribution
utilities, immediate rehabilitation of the Agus-Pulangi plants, and implementation of the
interruptible load programme. The NPCs diesel-fired power barges, 101, 102, 103 and
104, located in the region, are also being considered for privatisation.93
ii
Privatisation prospects
PSALMs mandate of managing the disposable assets of the NPC also includes the
privatisation of the outstanding contractual obligations of the NPC.94 PSALM appoints,
through public bidding, independent power producer administrators (IPPAs) who
are qualified private sector independent entities tasked to administer and manage the
contracted energy from the energy conversion agreements and power purchase agreements
87
88
89
90
91
92
93
94
ERC Resolution No. 3, Series of 2013.

See www.doe.gov.ph/Presentations/PEP%202012-2030/html/2.htm.
See www.philstar.com/business/2013/01/01/891996/yearender-investments-reforms-propelenergy-sector.
See www.doe.gov.ph/Presentations/PEP%202012-2030/html/2.htm.
See www.philstar.com/headlines/2014/03/06/1297623/10-hour-rotating-blackouts-bedevilmindanao.
See footnote 96, supra.
See www.bworldonline.com/content.php?section=Nation&title=Mindanao-brownouts-tocontinue-through-Holy-Week-as-stop-gap-measures-proposed-&id=67892; www.interaksyon.
com/business/58382/mindanao-power-crisis--psalm-to-decide-on-fate-of-4-power-bargesthis-month; and www.philstar.com/headlines/2013/03/27/924425/mindanao-power-woesresolved-2015-....
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Philippines
that the NPC entered into with the independent power producers.95 The IPPA process
gives successful bidders a way to participate in the WESM for a very low capital outlay.96
The next IPP contracts to be put out to tender include the 140MW Casecnan
hydroelectric plant, in the province of Nueva Ecija, the Benguet mini hydroelectric power
plants with an aggregate installed capacity of 30MW located in Cordillera autonomous
region, and the 728MW Caliraya-Botocan-Kalayaan hydroelectric plant.97
A total of 2,043.07MW contracting capacity, divided among 11 plant facilities
spread across Luzon, Vizayas and Mindanao, is projected to be turned over to qualified
IPPAs by 2016.98
iii
Philippine growth
All the foregoing developments come on the heels of record growth rates in the
Philippines. The country posted an annual gross domestic product (GDP) of 7.2 per
cent in 2013, driven by the services sector. Per capita GDP also grew from 5.0 per cent
to 5.4 per cent in 2013.99
In March 2013, the Philippines country rating was upgraded to investment grade
status by Fitch Ratings, with more ratings upgrades expected to follow.100
The trend suggests that the Philippines should expect continued investments in
the country, which will certainly require a concomitant growth in the energy sector. Thus,
it appears that exciting opportunities in the Philippine power industry may continue to
open up in the next few years.
95
Section 4(ff) of the EPIRA.
96 www.psalm.gov.ph/IPP%20Administration.asp.
97
20th EPIRA Status Report, pp. 78.
98 Ibid.
99
See www.nscb.gov.ph/sna/2013/4th2013/highlights.asp.
100 See www.bworldonline.com/content.php?section=TopStory&title=Another-upgrade-eyed&id=
67959; www.bworldonline.com/content.php?section=TopStory&title=Peso,-assets-get-mild-tonic
&id=67958.
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Chapter 29
POLAND
Krzysztof Cichocki and Tomasz Modawski1
I OVERVIEW
Demand for primary energy sources in Poland is currently estimated at 102 million
tonnes of oil equivalent (Mtoe) per annum. It is satisfied primarily by coal (42.5 per
cent), oil (25 per cent), natural gas (13 per cent), lignite (12 per cent) and renewable
energy sources (7.5 per cent). According to the information published by the Polish Main
Statistical Office with respect to 2012, the renewable energy sources (RES) included in
the Polish primary energy mix comprised solid biomass (82.16 per cent); biofuels (7.97
per cent); water (2.06 per cent); wind (4.8 per cent); biogas (1.98 per cent); and smaller
shares of other sources (municipal waste as well as geothermal and solar heat), with an
increasing installed capacity of wind farms.
Local production satisfies approximately 95 per cent of hard coal demand and
27.8 per cent of natural gas demand in Poland. Oil demands are primarily met by import,
with only 2.8 per cent of petroleum products coming from local crude oil production.
On the other hand, lignite consumption is almost fully covered with local production,
which stems from the fact that lignite is not customarily transported for great distances
for economic reasons.
Final energy consumption in Poland is estimated at 68.3 Mtoe per annum and
it is based on energy demand of: industry (23.2 per cent); transport (26.5 per cent);
household (31.7 per cent); services (12.9 per cent); and agriculture/forestry (5.7 per
cent).
According to the government publication Energy Policy of Poland until 2030,
the total consumption of primary energy in Poland should increase to 118.5 Mtoe per
annum in 2030 and it should be satisfied by coal (31.0 per cent), oil (26.2 per cent),
Krzysztof Cichocki is a partner and Tomasz Modawski is an associate at Sotysiski Kawecki &
Szlzak.
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Poland
natural gas (14.5 per cent), lignite (8.2 per cent), renewable energy sources (12.4 per
cent), and nuclear energy (6.3 per cent). At the same time, final energy consumption
should increase to 84.4 Mtoe.
In line with EU policies for the reduction of greenhouse gas emissions, the
Polish government continues to take measures aimed at reducing the share of high
emission resources (in particular, hard coal) in primary energy consumption in Poland
and achieving the envisaged 15 per cent share of RES in final energy consumption by
2020. In general, these actions are focused on the following basic aims: (1) to boost
natural gas consumption by liberalising natural gas market, currently monopolised by
only one single player the Polish Oil and Gas Company (PGNiG) controlled by the
State Treasury; (2) to develop a programme of exploitation of unconventional gas; (3) to
intensify RES consumption; as well as (4) to promote nuclear power generation with
the flagship project of the first nuclear power plant to be developed in Poland by PGE
EJ1, a subsidiary of Polish Energy Group SA.
II REGULATION
i
The regulators
The primary regulation of the Polish energy industry is set forth in the following main
statutes adopted by the Polish Parliament (i.e., Sejm and Senat) and thereafter approved
by the President of the Republic of Poland:
a
the 2011 Geological and Mining Law, which provides for general legal framework
governing exploration for and exploitation of fossil fuels within Poland (including
coal, lignite, hydrocarbons, uranium, etc.) as well as the use of underground
reservoirs for storage of hydrocarbons, liquid fuels as well as the carbon dioxide
handled within the carbon capture and storage projects;
b
the 1997 Energy Law, which provides for regulation of the entire electricity and
district heating sectors as well as the midstream and downstream oil and gas
sectors, including production, transmission, storage and trading in liquid fuels;
c
the 2007 Act on Reserves of Crude Oil, Petroleum Products, Natural Gas and on
Procedures in case of Emergency in Security of Fuel Supply and Disturbance on
Oil Market (Act on Reserves), which provides for certain obligations imposed on
entrepreneurs involved in the natural gas and oil sectors, such obligations being
aimed at ensuring security of natural gas, oil and petroleum products supplies;
d
the 2006 Act on the System of Monitoring and Control over the Quality of Fuels;
e
the 2006 Act on the Liquid Bio-components and Biofuels;
f
the 2011 Act on Energy Efficiency;
g
the 2000 Nuclear Law;
h
the 2011 Act on Preparation and Implementation of Investments in Nuclear
Power Facilities and Associated Investments;
i
the 2009 Act on Investments with Respect to the Regasification Terminal in
winoujcie;
j
the 2007 Act on Emergency Management; and
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k
the 2010 Act on special powers of the minister competent to the State Treasury
affairs and their enforcement with respect to certain companies and capital groups
conducting their businesses within the electricity, crude oil and natural gas sectors.
Under the statutes listed above, a number of governmental bodies, including the Council
of Ministers, the Minister of Economy as well as the Minister of Environment, are
authorised to lay down secondary legislation providing for more detailed regulations
within the scope delegated to those bodies under the pertinent statute. Furthermore,
the Council of Ministers is authorised under the 1997 Energy Law to adopt the general
energy policy of Poland setting general goals to be achieved by, inter alia, enforcement of
the existing statutes as well as adoption of new legislation.
The competence to enforce the above-mentioned legislation and policies as well
as to exercise supervisory and regulatory powers over the energy market players is vested
in the following bodies:
a
the Minister of Environment, vested with power to grant authorisations for
exploration for and exploitation of fossil fuels within Poland as well as for the use
of underground reservoirs for storage of hydrocarbons, liquid fuels as well as the
carbon dioxide;
b
directors of mining offices, responsible for supervision over exploration and
exploitation of fossil fuels as well as over the use of underground reservoirs for
storage of hydrocarbons, liquid fuels as well as the carbon dioxide;
c
the President of the Energy Regulatory Office, vested with competence to,
inter alia, (1) grant licences for production, storage, transmission, distribution,
trading and supply of electricity, heat and fuels (including natural gas) as well as
liquefaction and regasification of LNG, (2) approve tariffs, (3) grant exemptions
from tariff obligation, (4) approve grid codes, (5) certify operators of both gas
and electricity transmission systems, (6) organise tenders for new electricity
generation capacities, (7) organise tenders for energy efficiency projects eligible
to benefit from the support scheme based on tradable white certificates, (8)
grant tradable green and red certificates to energy producers benefiting from
the support schemes addressed to RES as well as the combined heat and power
plants, and (9) control compliance with a number of obligations imposed on
energy market participants (including those related compulsory stocks of natural
gas, coal and lignite as well as public sale of electricity and gas) and to enforce
financial penalties for non-fulfilment of such obligations;
d
the Minister of Economy and the President of the Material Reserves Agency,
responsible for enforcement of compulsory stocks of crude oil and liquid fuels;
e
the President of the Office for the Competition and Consumers Protection,
responsible for enforcement of antitrust regulations (control of mergers and
acquisitions, investigation and punishment for conclusion of anti-competitive
agreements and/or abuses of dominant position, etc.); as well as
f
courts considering appeals against the decisions issued by the above-mentioned
authorities.
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ii
The following types of activities performed within the territory of Poland require prior
authorisation in the form of a licence:
a
exploration for and exploitation of fossil fuels, including crude oil, natural gas,
coal, lignite, uranium etc.;
b
development and exploitation of underground storage facilities;
c
production of electricity except for generation performed in facilities with
total installed capacity not exceeding 50MW, it being specified, however, that
generation in of electricity in RES or CHP installation is always subject to licence
requirement;
d
production of heat except for generation performed in facilities with total installed
capacity not exceeding 5MW;
e
production of liquid fuels;
f
storage of gaseous fuels, liquefaction of natural gas and regasification of LNG, as
well as storage of liquid fuels, except for local storage of liquid gas in installations
with capacity below 1MJ/s and/or storage of liquid fuels in retail trading;
g
transmission and distribution of fuels and energy (including electricity and heat),
except for distribution of gaseous fuels in networks with capacity below 1MJ/s
and distribution of heat where the total ordered capacity does not exceed 5MW;
h
trading in fuels and/or energy (including electricity and heat) except for: (1)
trading in solid fuels, (2) trading in electricity provided that trading is performed
in installations with capacity below 1kV owned by the customer, (3) trading in
gaseous fuels provided that the annual turnover does not exceed 100,000, (4)
trading in liquid gas provided that the annual turnover does not exceed 10,000,
(5) trading in heat provided that the total ordered capacity does not exceed 5MW,
(6) trading in gaseous fuels and electricity performed via the commodity exchange
by certain qualified participants of exchange (including brokers, commodity
exchange operators, clearing house and/or National Security Depository, etc.),
and (7) trading in gaseous fuels and electricity performed by clearing house and/
or National Security Depository in the course of fulfilment of their duties to settle
OTC contracts; and
i
transmission of carbon dioxide.
The exploration for and exploitation of fossil fuels is possible upon obtaining both an
agreement setting up the mining usufruct rights within the areas specified therein as
well as the related licence granted by the Minister of Environment, such licences being
in each case limited to specific areas covered by the relevant mining usufruct agreement.
Subject to certain exemptions, hydrocarbon exploration and production licences are
generally granted within the tender procedure which is intended to give priority to the
best method for the prospection or exploration and production of the oil, which means
that each bid must be evaluated on the basis of the following criteria:
a
the technical and financial capacity of the bidder;
b
the proposed technology to be utilised in the licensed operations, and
c
the best remuneration for the mining usufruct right offered by the bidder within
the tender process.
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Poland
If either the relevant mining usufruct agreement or licence is rescinded or withdrawn,
the whole authorisation is lost with respect to the area covered by the relevant documents
(i.e., effectively there is a cross-default mechanism between the mining usufruct agreement
and the licence). Regulations set forth in the relevant Polish legislation and included in
the mining usufruct agreements provide for the following circumstances as grounds for
rescission of a mining usufruct agreement and/or withdrawal of a licence:
a
flagrant (i.e., exorbitant) violation of the terms set forth in the licence and/or
other regulation that applies to the licensed activity;
b
infringement of any regulation set forth in the 2011 Geological and Mining Law,
in particular with respect to environment protection, reasonable management
of mineral deposits, failure to fulfil requirements set forth in the licence, failure
to commence the licensed activity within the required period and/or permanent
discontinuation of such activity where the licence holder has not remedied
any such infringement despite being summoned to do so by the Minister of
Environment;
c
breach of any obligation arising from the mining usufruct agreement, in particular
the failure to pay the remuneration due for establishment of the mining usufruct
right,
d
a final judgment which prohibits the licence holder from conducting business
activity with respect to hydrocarbon prospection/exploration;
e
bankruptcy and/or liquidation of the licence holder; and
f
if it is justified due to reasons related to the defence and/or security of the state
and/or security of citizens.
If none of the above default circumstances occurs, expropriation is allowed exclusively
under the conditions set forth in Article 21 of the Polish Constitution (i.e., solely for
public purposes and for just compensation).
The remaining energy licences for operation of installations and provision of
services (i.e., other than for exploration and exploitation of fossil fuels) are granted
by the President of the Energy Regulatory Office at the request of the interested party
provided that they prove their compliance with statutory conditions, including: (1)
having a registered seat within any country belonging to the European Economic Area
or the Swiss Confederation (subject to certain exemptions), (2) having the technical
and financial capacity to conduct licensed activities, and (3) provided that the granting
of a licence to a given entrepreneur does not pose a threat to defence or security of the
Republic of Poland.
Regulatory consent of the President of the Energy Regulatory Office is also
required for development of direct lines, including those connecting electricity or natural
gas production installations with end-customers who are not interconnected to the
transmission or distribution grid or network.
iii
In general, Polish law does not impose restrictions on ownership of existing and new
energy assets and these may be owned by any natural or legal person, either seated in
Poland or abroad. However, as an exception to the foregoing general principle, any
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Poland
new elements of the electricity and gas transmission networks used for the provision of
transmission services may be owned exclusively by joint-stock companies incorporated
in Poland and wholly-owned by the Polish State Treasury. The foregoing restriction arises
from the fact that Polish law provides for the ownership unbundling of gas and electricity
transmission system operators and it further provides that gas and electricity transmission
system operators should be joint-stock companies wholly-owned by the State Treasury.
The licensed activities and services listed in Section II.ii, supra, may be generally
conducted by any entrepreneur seated within any country belonging to the European
Economic Area or the Swiss Confederation. However, as an exception to the foregoing
general principle, gas and electricity transmission networks may be operated (and
thus the related transmission services provided) exclusively by joint-stock companies
incorporated in Poland and wholly-owned by the Polish State Treasury. Besides, in
specific circumstances there might also arise certain restrictions on foreign control over
licence holders, such restrictions stemming from the fact that the authority may refuse
to grant a specific energy licence or may withdraw a previously granted licence if it is
justified by a need related to defence or security of the Republic of Poland.
iv
Transfer of title to energy assets

As regards transfer of title to the regulated energy assets, such transactions are generally
exempted from administrative approvals, except for common antimonopoly clearance.
However, owners and operators of energy assets:
a
used for generation and transmission of electricity, as well as for production,
refinement, processing, storage, transmission and/or transhipment of natural gas,
LNG, crude oil and/or petroleum products; and
b
qualified as critical infrastructure under the 2007 Act on Emergency Management,
are subject to certain security obligations set forth in the 2007 Act on Emergency
Management and the 2010 Act on Special Powers of the Minister Competent to the
State Treasury affairs and their enforcement with respect to certain companies and
capital groups conducting their businesses within the electricity, crude oil and natural gas
sectors. In particular, owners and operators of the above-mentioned critical infrastructure
are obliged to, inter alia, develop and enforce security and emergency plans for their
assets as well as to provide the Minister of the State Treasury with all the legal acts
made and resolutions adopted in the course of exercising of their powers as owners or
operators of critical infrastructure, including: disposal, alienation, decommissioning,
lease and/or establishment encumbrances over critical infrastructure, as well as adoption
of investment, financial or strategic plans or dissolution of company. The Minister of
the State Treasury has power to raise objection to and hence invalidate such legal acts or
resolutions if performance or enforcement of such act or resolution would pose an actual
threat to the functioning, continuity of operation or integrity of critical infrastructure.
Transfer of licences
As regards transfer of administrative authorisations to conduct regulated energy
businesses, it is generally not possible under Polish law to transfer an energy licence to a
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Poland
third party, except for certain situations indicated below. Therefore, if any entrepreneur
would like to acquire the energy assets within the asset deal and ultimately continue
business previously conducted by vendor based on those assets, it is generally required
to purchase the regulated assets and apply to the respective authority for a new licence.
Nevertheless, it is possible to transfer energy licence in the course of a merger of
companies effected under the 2000 Code of Commercial Companies, provided that the
pertinent energy licence held by the merged company was issued after 1 January 2001.
Such transfer is effected by operation of law.
Besides, in accordance with the 2011 Geological and Mining Law, the licence
covering exploration or production of fossil fuels may be assigned, such assignment to
be followed by a transfer of the related mining usufruct right to the space covered by
the respective licence. Nevertheless, it is not admissible under Polish law to assign any
share in an exploration or production licence. An assignment of the licence is subject
to the prior consent of the Minister of the Environment to be granted in the form of
an administrative decision issued upon application of the assignee under the following
conditions:
a
the assignee meets all the conditions required to carry out the pertinent geological/
mining activity, consents to all the terms and conditions of the pertinent licence
and proves its capability to fulfil all requirements related to the licensed activity;
b
the assignee proves its rights to the geological information necessary to conduct
the activity, as well as rights to the real estate and underground space used for
the purpose of business activity or submits the documents stating the promise to
transfer the foregoing rights to the assignee; and
c
the Minister of the Environment determines that the assignment is not against the
public interest (an assessment of this condition is left to the Ministers discretion).
Customarily, transfer of the mining usufruct right is effected simultaneously with the
assignment of the licence being implemented upon the agreement concluded between
the assignor and assignee upon written consent of the Minister of the Environment to
be granted with the Ministers discretion. As a result, the assignment procedure shall
involve:
a
conclusion of the agreement between the assignor and the assignee concerning
future transfer of: the mining usufruct related to the licence as well as the title
to the real estate (subsurface spaces) where the activity shall be conducted and
geological information (where necessary);
b
submission of the application by the assignee; and
c
issue of the pertinent consents by the Minister (if the consent to the assignment
of a licence is refused twice due to reasons of public interest, such decision might
be challenged by way of appeal to the Regional Administrative Court in Warsaw).
The Ministers consent to the assignment should be given within two months from
the time the complete application for an assignment is submitted. The timing may be
extended if the Minister demands further documents to prove the assignees capability
to fulfil all requirements related to the concession. Assignment is not related to any
additional costs, except for stamp duty in the amount of 10 zlotys.
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Poland
Change of control
Change of control over companies holding energy licences is not generally subject to
regulatory approval of the licensing authority. However, a change of control may in
specific circumstances result in withdrawal (and effectively loss) of the licence if the
licensing authority determines that regulated activity conducted by the licence holder
controlled by a new shareholder poses a threat to defence or security of the Republic
of Poland. Change of control may also be subject to antimonopoly clearance by the
President of the Office for the Competition and Consumers Protection.
III

SERVICES
Subject to certain de minimis exceptions applicable to the electricity and gas distribution
systems operators, Polish law provides for unbundling of electricity and natural gas
transmission/distribution systems operators as well as operators of LNG liquefaction/
regasification facilities (transmission, distrubution and LNG operators). In particular,
Polish legislation sets forth detailed regulations implementing the European accounting,
management and legal unbundling rules as laid down for transmission, distribution and
LNG operators in the 2009/72 Directive and 2009/73 Directive and it further provides
for ownership unbundling rules applicable to electricity and natural gas transmission
system operators (except for services provided with gas transmission network existing
and owned by the vertically integrated companies as of 3 September 2009 where
appointment of an independent system operator is available). It is also provided that
the gas and electricity transmission system operators should be joint-stock companies
wholly-owned by the State Treasury which results in only one electricity and one gas
transmission system operator being appointed in Poland.
In practice, within the past 10 years the State Treasury separated the existing
transmission assets previously owned by vertically integrated undertakings (such
separation being effected in the course of either transfer of assets or division of companies
controlled by the State Treasury) and established two sole-shareholder companies
controlled by the State Treasury: PSE SA, which is appointed as a transmission system
operator for electricity and OGP Gaz-System SA, which is appointed as transmission
system operator for natural gas. OGP Gaz-System SA is also appointed as independent
transmission system operator with respect to the Jamal pipeline owned by the vertically
integrated company named EuRoPol GAZ SA a joint venture company of the Polish
company PGNiG and Russian company GAZPROM. The foregoing transmission
system operators are responsible for development of the respective transmission networks
within the territory of Poland as well as expansion of transborder interconnectors. OGP
Gaz-System also established its wholly-owned subsidiary named Polskie LNG Sp. z o.o.
responsible for development of the LNG regasification facility in winoujcie.
In turn, electricity and gas distribution systems are generally operated by separate
companies belonging to vertically integrated undertakings, the most significant of them
being local incumbents (ENEA in northwest Poland, ENERGA in northern Poland,
TAURON in southern Poland, PGE in central and eastern Poland). Depending on the
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Poland
specific situation, distribution system operators (DSOs) are appointed with respect to
either certain geographic areas (especially operators belonging to incumbent vertically
integrated undertakings) or specific installations (e.g., operators of local distribution grid
developed within industrial zones, office complexes, etc.). Nevertheless, Polish law does
not provide for exclusive rights of DSOs to provide distribution services in a particular
geographic area, such right to provide distribution services being limited to installations
operated by given DSOs.
ii
In general, Polish law implements the third-party access principle within the electricity
and natural gas transmission and distribution sectors. According to the foregoing
principle, the transmission and distribution system operators are required, subject to
certain exemptions, to render services to all market players on an equal, transparent and
non-discriminatory basis. The foregoing principle is envisaged to foster competition in
wholesale and retail electricity and natural gas market within the single European zone.
iii Rates
Except for transborder transmission services provided based on prices set within the
capacity allocation auctions, the remuneration for access to the transmission and
distribution system is generally calculated based on rates set forth in regulated tariffs, such
tariffs being developed by a given system operator and subject to review and approval of
the President of the Energy Regulatory Office. According to Polish law, the rates set forth
in tariffs should reflect actual (so-called justified) costs incurred by the service provider
in the course of provision of respective services as well as reasonable return. Except for
the minimum rate of return for storage of natural gas which is set in the 1997 Energy
Law at 6 per cent, the rates of return are not provided in legal acts. Such rates of return
are established by the President of the Energy Regulatory Office in accordance with its
own current regulatory policy adopted with respect to a given type of business or sector.
The algorithms used for calculation of the tariff also include certain factors envisaged to
encourage efficiency and cost reductions, the rate of such factors being often established
by the President of the Energy Regulatory Office in accordance with its own current
regulatory policy. The foregoing regulatory power vested in the regulator results in much
uncertainty as to what rates are acceptable to the authority in a given year.
iv
The energy interests and security of Poland are protected by number of instruments
spread across several acts, including: (1) the power of a regulator to refuse or withdraw
energy licences if it is justified by needs related to defence or security of the Republic of
Poland, (2) the power of the Minister of the State Treasury to prevent or invalidate legal
acts or resolutions resulting in actual threat to functioning, continuity of operation or
integrity of critical infrastructure, as well as (3) numerous obligations imposed on market
players, inter alia, the obligation to diversify natural gas supplies, maintain compulsory
stocks of crude oil, petroleum products, natural gas as well as coal/lignite used for
generation of electricity, develop security and emergency plans for critical infrastructure.
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Poland
IV
ENERGY MARKETS
The organised trade in electricity was originally established in Poland by Towarowa Gieda
Energii SA (TGE). At present, TGE is controlled by Gieda Papierw Wartociowych w
Warszawie SA (the Warsaw Stock Exchange) and it operates the commodity exchange
named Polish Power Exchange allowing for (1) trading in electricity within the the
Polish national electricity system as well as in transborder exchanges (market coupling)
with the Swedish electricity system (the latter effected via the SWE-POL link developed
on the seabed of the Baltic Sea); (2) trading in emission allowances as well as certificates
issued under the incentive schemes addressed to RES and CHP installations as well as
energy-efficiency investments; (3) trading in natural gas; and (4) entering into derivatives
contracts based on commodities traded at Polish Power Exchange. TGE also renders
a system designed for public auctions of power. Transactions executed at the Polish
Power Exchange are cleared and settled by Izba Rozliczeniowa Gied Towarowych SA
(the Warsaw Commodity Clearing House). According to the respective grid codes, the
transactions concluded within the Polish Power Exchange have priority when it comes to
their physical performance via transmission system.
Apart from the Polish Power Exchange, there is one more organised system for
trading in electricity in Poland named Platforma Obrotu Energi Elektryczn (the
Electricity Trading Platform) which is currently directly operated by the Warsaw Stock
Exchange. The foregoing platform should be gradually unified with the Polish Power
Exchange.
ii
Trading in electricity and natural gas at the Polish Power Exchange is regulated by the 2000
Act on Commodity Exchange as well as internal by-laws developed by the operator of the
commodity exchange and subject to prior approval of the Polish Financial Supervisory
Commission. The remaining OTC electricity and gas sale agreements are regulated by
the 1997 Energy Law and secondary legislation issued thereupon as well as grid codes
which are binding on market participants upon their approval by the President of the
Energy Regulatory Office.
iii
In principle, electricity and natural gas may be traded either via commodity exchange or
in the OTC contracts. However, recent amendments to the 1997 Energy Law provide
that:
a
every electricity producer is obliged to sell at least 15 per cent of its annual
production via the commodity exchange and/or other organised trading platforms
operated by the company operating the regulated stock exchange;
b
furthermore, the electricity producers entitled to compensation for the stranded
costs are obliged to sell their outstanding production (i.e., not subject to the
abovementioned 15 per cent commodity exchange obligation) via the commodity
exchange and/or other organised trading platforms operated by the company
operating the regulated stock exchange and/or in public auction;
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c
iv
the above-mentioned obligations related to public sale of electricity do not apply

to certain types of electricity (inter alia, electricity delivered via direct lines,
electricity generated in installations with total installed capacity not exceeding
50MW and/or renewable energy sources and/or certain CHP installations, as well
as electricity used for the producers own purposes or for statutory tasks allocated
to system operators); and
the entrepreneur trading in natural gas is obliged to sell via the commodity
exchange and/or other organised trading platforms operated by the company
operating the regulated stock exchange at least 55 per cent (in 2014 40 per cent)
of natural gas introduced into Polish gas transmission system, it being specified
that the foregoing obligation does not apply to certain quantities of natural gas
(inter alia, compulsory stocks, natural gas exported from Poland and/or used for
own purposes of the gas trader and/or used for statutory tasks allocated to system
operators).
Market developments
As of the time being, the main goals of the Polish legislator and regulators include: (1) to
strengthen competition within the natural gas market, which is now subject to the actual
monopoly of PGNiG, such competition to be fostered by obligation to sell natural gas
via commodity exchange as well as by adoption of more transparent and secure provisions
facilitating natural gas exploration and production; (2) to support most efficient CHP
and RES generation with the aim to limit at the same time the budget allocated for
incentive schemes; and (3) to secure long-term profitability of large conventional system
power plants by, inter alia, organisation of the power supply capacity market auctions.
V
RES operators currently benefit from a number of incentives, including (1) an incentive
scheme based on an obligation imposed on certain market players (mainly electricity
suppliers and major end-users) to acquire and redeem green certificates corresponding
to a pre-defined percentage of electricity sold to end-customers or pay a substituting fee
(such fee working in practice as maximum level of support available to beneficiaries);
(2) exemption from excise tax; (3) reduction of interconnection fees payable by certain
RES energy producers; as well as (4) preferential financing, etc. In general, the current
incentive system does not differentiate in the level of support depending on the RES
technology applied (biomass, wind, photovoltaic, etc.) or generation capacity of a given
RES installation. It does not provide RES operators with stable support as the level of
support depends on the global amount of RES energy supplied to the market in a given
period (thus if the overall production of RES energy is higher than the general aim set
forth in the law, the level of support is lower). Therefore, it is envisaged that the current
incentive scheme based on tradable green certificates will be soon replaced by auctions
(type of feed-in tariffs where the price is determined in the auction) which are to limit
overall budget allocated for the support system.
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ii
The main incentive scheme relating to energy efficiency and conservation is based on
tradable white certificates, which are granted to investors that completed investments
related to energy efficiency, such investments selected within tenders organised by
the President of the Energy Regulatory Office. According to the 2011 Act on Energy
Efficiency, certain market players (including electricity suppliers and major end-users)
are obliged to acquire and redeem white certificates corresponding to a certain percentage
of electricity sold to end-users or pay a substituting fee (such fee working in practice as
maximum level of support available to beneficiaries). The foregoing scheme is effectively
designed for the period 20122015 (while some of obligations should be performed
by 31 March 2016). Apart from the foregoing incentive scheme, there are preferential
financing schemes offered by governmental funds and banks (e.g., the National Fund
for Environmental Protection and Water Management) addressed to energy-efficiency
investments.
iii
The Polish government supports the development of RES and CHP generation as well
as investments aimed at energy efficiency, such investments currently benefiting from,
inter alia, (1) incentive schemes based on tradable certificates, (2) tax exemptions, (3)
reduction of interconnection fees, and (4) preferential financing, etc. For the time being,
there are also plans to support clean technologies and energy efficiency, including socalled distributed generation, by way of, inter alia: (1) exemption of so-called prosumers
from licensing obligations, (2) the electricity suppliers obligation to purchase electricity
generated in micro-installations at a price equal to 80 per cent of the market price for
electricity, and (3) support for investments in smart-grid and smart-metering. The
foregoing policies should still be implemented in 2014 by adoption of the so-called
tripack (i.e., new acts: the Energy Law, the Gas Law and the Renewable Energy Sources
Law).
VI
THE YEAR IN REVIEW
Polish energy policy is subject to discussions and significant changes arising from a need
to implement the European Third Energy Package (including 2009/72 Directive and
2009/73 Directive) as well as the intention to adopt more transparent and entrepreneurfriendly regulations ensuring proper level of security within the Polish energy market. In
particular, there are pending discussions on new legislation, including so-called tripack,
new acts: the Energy Law, the Gas Law and the Renewable Energy Sources Law, as well as
amendments to the 2011 Geological and Mining Law that are envisaged to revolutionise
regulation of the upstream hydrocarbon sector. The general aims of the foregoing draft
legislation are to: foster competition within the energy market, develop application of
the smart-grid technology, alleviate administrative restrictions applicable to exploration
of shale gas and facilitate exploration works, and secure fiscal and security interests within
the upstream hydrocarbon market, including control over ownership of the upstream
hydrocarbon assets, etc. Provisions of the foregoing acts are still under discussion but the
acts should be finally adopted in the second half of 2014.
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VII
The Polish energy market is still under reconstruction stemming from the implementation
of European energy and climate change policies, technological revolution, and a need to
foster market competition and replace worn energy assets developed more than 40 years
ago. It seems that reconstruction of the regulatory framework has been delayed in recent
years (the new Energy Law, the Gas Law and the Renewable Energy Sources Law as well
as amendments to the 2011 Geological and Mining Law have been discussed for more
than three years now), which arises from the fact that the government is aware of the
costs related to such reconstruction and it would like to prepare balanced reforms that
will not become excessive burdens for the Polish industry and customers. In practice, the
delayed reforms and uncertainty with respect to future regulation restrained investments
in energy projects (especially shale gas exploration, development of RES installation
and conventional power generation), which may have a negative impact on the future
energy security, especially for generation capacities after 2016 when a number of old and
worn power plants will be decommissioned. Therefore, the Polish government seems
to be determined currently to complete regulatory reforms so as to ensure the progress
of energy investments and competition as well as to avoid disturbances in the energy
market.
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Chapter 30
PORTUGAL
Nuno Galvo Teles and Ricardo Andrade Amaro1
I OVERVIEW
In recent years, following the publication of European Union directives for the
implementation of the electricity2 and natural gas3 internal markets, the legislation and
regulation of the energy sector in Portugal have undergone significant changes.
From production to supply, both in the electricity and the natural gas industries,
all activities must be developed by legally separate entities, except for some specific cases.
The liberalisation of these sectors in mainland Portugal has almost been concluded, and
with the abolition of end-user energy supply tariffs due to happen in 2015, all consumers
will shift to the liberalised markets.
Generation and supply of electricity and natural gas are free and deregulated
activities, while the operation, maintenance and exploration of infrastructures such
as transmission and distribution networks, LNG terminals and storage facilities are
regulated activities, with access rates set administratively by the national regulatory
authority, the Energy Services Regulatory Authority (ERSE).4
Currently, the Portuguese governments policy for the energy sector is set out in
the National Plan of Action for Energy Efficiency 20132016 (PNAEE 2016) and in
1
2
3
4
Nuno Galvo Teles is a partner and Ricardo Andrade Amaro is a senior lawyer at Morais Leito,
Galvo Teles, Soares da Silva & Associados, Sociedade de Advogados RL.
Directives No. 96/92/EC, 2003/54/EC and 2009/72/EC of the European Parliament and of
the Council.
Directives No. 98/30/EC, 2003/55/EC and 2009/73/EC of the European Parliament and of
the Council.
Taking into account their geographical limitations, electricity and natural gas activities on
the archipelagoes of Azores and Madeira continue to be developed by vertically integrated
companies, and therefore the considerations that follow refer mainly to mainland Portugal.
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the National Plan of Action for Renewable Energies 20132020 (PNAER 2020), both
approved by Ministers Council Resolution No. 20/2013 of 10 April. The PNAEE 2016
and PNAER 2020 are intended to be tools for a better energy strategy by establishing
the means of achieving international goals and commitments5 assumed by Portugal in
matters of energy efficiency and the use of renewable resources, without losing sight of
economic rationale and the need to ensure adequate levels of energy prices, which do not
prejudice the competitiveness of Portuguese companies or the minimum living standards
of the general population.
Given the scarceness of fossil fuel resources in the country and the current
economic and financial situation of the country, these Plans of Action focus primarily
on the reduction of the countrys energy dependence, the increase of energy generation
using renewable resources and the promotion of energy efficiency and sustainable
development, namely by:
a
ensuring the continuance of measures that guarantee the development of an
energetic model with economic rationale, which provides sustainable energy
costs;
b
ensuring a substantial improvement of the countrys energy efficiency; and
c
maintaining the reinforcement to diversify primary energy sources, revaluating the
investments made in renewable technologies and presenting a new remuneration
model for more efficient and prominent technologies.
The PNAEE 2016 and PNAER 2020 have the following five major objectives:
a
to comply with the commitments assumed by Portugal with greater economical
rationale;
b
to significantly reduce greenhouse gas emissions;
c
to reinforce primary energy sources diversification, thus contributing to enhancing
Portugals security of supply;
d
to improve the energy efficiency of Portugals economy, particularly in the state
sector, thus reducing public spending and promoting an efficient use of available
resources; and
e
to improve economic competitiveness by reducing consumption and costs
related to companies functioning and household economy management, freeing
resources to boost internal demand and new investments.
II REGULATION
i
The regulators
The national regulatory authority of both the electricity and natural gas industries is
ERSE, a public entity with administrative and financial independence. ERSEs by-laws
Under the context of the European 20-20-20 measures, Portugal committed to achieve an
overall reduction of primary energy consumption of 25 per cent and to have 31 per cent of its
gross final energy consumption fuelled by renewable sources.
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were enacted by Decree-Law No. 97/2002, of April 12, and recently amended by DecreeLaw No. 212/2012 of September 2012.
ERSE is in charge of regulation, supervision and sanctioning in the aforementioned
sectors, from generation to supply. Recently, Law No. 9/2013, which came into
force on 28 January 2013, established the Energy Sector Sanctioning Regime, which
substantially reinforced ERSEs sanctioning competences and powers. Later, Decree-Law
No. 84/2013 of 25 June revised ERSEs by-laws, completing the implementation of
Directives 2009/72/EC and 2009/73/EC.
Alongside ERSE, the General Directorate of Energy and Geology (DGEG), a
state-administered entity with financial independence, has the task of implementing and
developing the states policies regarding energy matters and the exploitation of geological
resources.
As such, and in most cases, the DGEG is the competent entity for granting
licences and other administrative authorisations concerning energy-related activities,
such as power-generating licences or exploration and production licences for oil or gas.
Regarding the oil sector, the DGEG, via its oil exploration and production
division is the competent authority to:
a
manage, organise and integrate all data and technical information resulting from
oil exploration and production activities and other relevant data;
b
promote and carry out specialised studies aimed at establishing the value of oil
resources;
c
promote the oil potential of Portuguese basins throughout the industry;
d
negotiate and ensure the proper procedures to grant (by direct negotiation or
public bidding), transfer and annul exploration and production rights;
e
prepare and supervise licences for preliminary evaluation and concession contracts;
f
evaluate work programmes and specific technical projects during the execution of
the contracts; and
g
regulate and supervise the activities during the execution of contracts, ensuring
that legal provisions and regulations are followed, including those related to
health, safety and environmental protection.
The DGEG is also the competent authority concerning the liquid fuels market, being,
inter alia, responsible for:
a
promoting and actively participating in the development of the legal and regulatory
framework for licensing of activities, technical responsibility, safety and efficiency
of the production, transformation, storage, transport and distribution of liquid
fuels;
b
licensing and auditing of oil, natural gas and channelled liquefied natural gas
(LNG) facilities; and
c
ensuring the technical and supply safety of fossil fuels and oil-derived products,
including channelled LNG and natural gas.
In summary, while ERSE is the independent national regulatory authority, the DGEG
is the body that represents the state on energy matters, also being competent to grant
licences and receive the respective applications or requests.
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The core legal framework for the electricity sector is composed of Decree-Laws
No. 29/2006 and No. 172/2006, both of 15 February, and in the natural gas sector, by
Decree-Laws No. 30/2006 of 15 February, and No. 140/2006 of 26 July (which have all
undergone significant changes in recent years).
Another significant source of law within the scope of these industries is the
regulations put into force by ERSE, such as the Commercial Relations Regulation, the
Tariffs Regulation, the Quality Standards of Service Regulation and the Infrastructures
Operation Regulation,6 and those put into force by the DGEG, such as the Transmission
Network Regulation and the Distribution Network Regulation.
ii
In the electricity industry, transmission and distribution are activities that are subject to
administrative authorisations.
The operation and exploration of the national transmission and distribution
networks are awarded by means of concession agreements entered into with the
Portuguese state, granting the concessionaires the exclusive right to explore the networks
within a determined geographical area, for 50 and 35 years, respectively.
Besides the national distribution network,7 there are also municipal distribution
networks, mainly composed of low-voltage grids. The right to explore these networks
is also granted through concession agreements, but these are awarded by the respective
municipalities and are valid for a period of 20 years.
In the natural gas industry, the exploration and production, transmission,
distribution and operation of LNG terminals and of LNG storage facilities are also
regulated, subject to administrative authorisations.
The operation of the national transmission and distribution networks, of LNG
terminals and LNG storage facilities is also granted by means of concession agreements,
offering the exclusive right to develop these activities for 40 years within a certain
geographical area.
Additionally, there are some local natural gas distribution networks with no physical
connection to the national distribution network, which may be operated by obtaining a
licence, valid for a period of 20 years. The request for its attribution should be directed to
the Minister of the Economy and Employment and delivered to the DGEGs office.
The right for prospection, exploration, development and production of oil is granted
by the Minister of the Economy and Employment through a concession agreement.
Although over the years, Portugal has been targeted with exploration and prospection
studies, no actual discovery of any commercial interest has been made to date.
Bearing this in mind, the law established a more attractive and simple legal
framework for the development of upstream activities. Apart from production, income
and real estate taxes, and some sporadic fees, there is no legal obligation for production
sharing, the concessionaire is exempted from paying royalties, and it is free to sell the
6
7
All available at www.erse.pt/pt.

Which, in general terms, refers to high and medium-voltage grids.
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oil, except in the event of war or public emergency. The concessionaire is also entitled to
freely dispose of all findings of natural gas, being exempt from any production taxation.
The concession agreements for the aforementioned activities are granted by means
of a public procurement process.
iii
Electricity generation is a free activity, being subject only to obtaining a generation

licence. The licensing entity may vary upon the generation technology or geographical
location where the generation plant is to be installed. Prior to entry into industrial
exploration, the generation groups of the facility must also obtain an exploration licence,
granted after an inspection that ensures they meet all technical and safety conditions to
start operating.
Generation licences do not have a term, unless the power is generated using
public domain water resources, or the generation plant is installed in maritime space
that is under sovereign or national jurisdiction, in which cases the term of the generation
licence will be that of the licence or concession agreement that confers the right to use
public domain resources.
The transmission network operators (TNOs) of the electricity and natural gas
sectors are subject to a full ownership unbundling regime.
Under this regime, no entity may hold an equity participation greater than 25 per
cent of the share capital of the TNO. Also, the TNO or the companies that control it8
may not, directly or indirectly, exercise control or any rights over companies dedicated
to generation or supply of electricity or natural gas. Equally, companies dedicated to
generation or supply of electricity or natural gas or companies that control such, directly
or indirectly, cannot exercise control or any rights over the TNO.
Subject to certain exceptions that relate to the historical role of the electricity
TNO, the TNO is also strictly forbidden from acquiring electricity or natural gas for
selling purposes.
iv
The transfer or encumbrance of any assets related to activities granted through concession
agreements must obtain prior authorisation from the competent Ministry.
Concentration operations that meet some predetermined conditions must be
notified to the Portuguese Competition Authority and are subject to its prior approval.
After being notified, the decision should be issued within 30 or 90 days, depending
on whether or not a detailed investigation of the concentration operation is required.
The definition of control refers to the definition provided for in Council Regulation (EC) No.
139/2004 of 20 January 2004, regarding the control of concentrations between undertakings
(the EC Merger Regulation).
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III

SERVICES
Currently, the operation and exploration of the national transmission network of

electricity and natural gas is carried out in accordance with the full ownership unbundling
regime. This means that the company that operates the national transmission network
may not integrate any group of companies dedicated to the generation, distribution or
supply of electricity or distribution or supply of natural gas.
Under this context, EDP Energias de Portugal SA, formerly the company that held
the monopoly in the electricity industry, was required to spin off any assets related to the
transmission network into a separate company, thus forming REN Rede Elctrica Nacional
SA. Similarly, GALP Energia SA was also forced to dispose of its natural gas transmission
assets, which are now owned and operated by REN Gasodutos SA.9
In 2012, in line with the latest European directives, the Portuguese legal framework
for the electricity and natural gas sectors allows transmission activity to be developed by
a vertically integrated company. In this case, however, the transmission system operator
must be a legal entity separate from the rest of the companies, forming an independent
transmission operator (ITO). The ITO must observe strict independence obligations
and comply with several independence criteria to avoid falling foul of discriminatory
behaviours, namely those set out in Article 9 of Directives 2009/72/EC and 2009/73/
EC. Compliance with such obligations and independence criteria is assured by means of
a certification process, monitored by ERSE and the European Commission, that the ITO
must fulfil in order to develop such activity.
The distribution of electricity and natural gas is subject to a legal unbundling
regime. This means that operators of distribution networks must be independent from
a legal, organisational and decision-making process standpoint from other activities
unrelated to distribution. Distribution companies that serve fewer than 100,000 clients
are not subject to the legal unbundling regime, but they must still implement accounting
and functioning unbundling measures.
Supply activities are also subject to the unbundling regime, implying that they
must be legally separate from other activities. The last resort supplier is also bound by
this unbundling regime, even in relation to common suppliers.
The operation of LNG terminals and storage facilities is also subject to the legal
unbundling regime.
ii
To ensure equal market conditions for all market participants, the concessionaires
of transmission and distribution activities must comply with specific public service
obligations: to guarantee equal access conditions to all markets participants and to
abstain from adopting any discriminatory behaviour or practices.
Both companies are wholly-owned by REN Redes Energticas Nacionais SGPS, SA, a listed
company.
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The ensuring of equal conditions to all market players for the access and use of
infrastructure is intended to create effective market conditions, promoting competition
and thus enhancing consumers experience on such markets.
iii
The access and use of LNG terminals and storage facilities is also regulated, under the
same terms as for distribution networks. Rates are determined by ERSE according to the
Tariffs Regulation, and all users must benefit from equal commercial conditions.
The only exception is for storage facilities. Part of the storage capacity is operated
under regulated conditions by REN Armazenagem SA, with rates determined by ERSE.
The other part of the storage capacity is operated by Galp Energia SA and access to these
facilities can be made under a negotiated access regime, with leeway to negotiate access
and use terms.
The rates of services rendered by the LNG terminal (reception and unloading of
natural gas, liquefaction, storage and loading) are regulated, being established by ERSE
according to the terms of the Tariffs Regulation.
iv Rates
Rates for the transmission and distribution of electricity and natural gas are determined
by ERSE according to the Tariffs Regulation.
ERSE also determines the matters that must necessarily be included in the network
use agreement, such as duration, interruption of service conditions, payment methods
and terms of resolution, which vary depending on the contracting parties (generators,
suppliers, network operators or consumers). The general terms of the network use
agreement are submitted to ERSE for prior approval.
The Portuguese tariff system is constructed in such a way that for each regulated
activity there is an associated regulated tariff, and the tariff applicable to each client is
made up of the total of the various activity tariffs.
Tariffs for the use of regulated infrastructures are based upon the providers cost
plus a reasonable rate of return, which will determine the operators allowed revenue. The
reasonable rate of return is also established by ERSE for a certain period of time.
The allowed revenue and the providers cost for the activity of transmission
and distribution of electricity is determined in accordance with the Electricity Tariffs
Regulation.
The formula used to calculate the allowed revenue of the transmission network
operator includes the application of efficiency factors to the providers costs, in order to
reward efficient spending and investments, along with incentives for the maintenance
and operation of equipments that are at the end of their lifetime.
In the transmission and distribution of natural gas, the formulae used to
determine the allowed revenue of the service provider are set out in the Natural Gas
Tariffs Regulation.
Although these are not specifically determined in this regulation, it is established
therein that the cost of the TNOs activity will be subject to efficiency incentives to be
determined by ERSE.
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v
The concessionaires of electricity and natural gas transmission activities are also in charge
of managing and monitoring the National Electric System (NES) and the National
Natural Gas System (NNGS).
The concessionaires of electricity and natural gas transmission activities have the
following responsibilities:
a
assuring the long-term capacity of the NES and the NNGS;
b
providing information to other network operators in order to:
maintain safe operation;
estimate the level of reserves needed for medium-term safety of supply
(especially the level of water reserves); and
in general, form a central part in the NES and NNGS;
c
operating the transmission network; and
d
coordinating with all other networks and infrastructure operators, generations
units and suppliers.
Recently, in cooperation with the DGEG, the concessionaire of electricity transmission
activity published a Report for Monitoring the Safety of Supply of the NES for 2013
2020. This report describes, inter alia, the NES, provides future grid scenarios, planned
and installed capacity, and levels of power generation by source.10
IV
ENERGY MARKETS
The Iberian Electricity Market (MIBEL), a regional, organised electricity market was put
in place by Portugal and Spain in July 2007.
One important aspect of MIBELs functioning is the principle of reciprocal
recognition of agents. Under this principle, if an agent is granted the status of producer
or supplier by one country, this implies automatic recognition by the other country,
granting equal rights and obligations to that agent.
The management of the Iberian spot electricity market is the responsibility of
OMEL, the Spanish division of the Iberian Energy Market Operator.
In the spot electricity market, transactions are executed by the participation of
agents on the daily and intraday market that aggregate the Spanish and Portuguese zones
of MIBEL. Trading on the daily market is based on a daily auction, with settlement of
energy at every hour of the following day.
There are various intraday sessions subsequent to the daily market auction in
which agents can trade electric power for the various hours of the day covered by that
market. Trading is also done by auction.
The financial settlement of the transactions occurs weekly, and guarantees must
be deposited.
10
Available at www.dgeg.pt.
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Producers, self-producers, external agents (non-resident entities), suppliers,
representatives and qualified consumers can be spot market agents.
OMIP is the operator of the Portuguese division of MIBEL and is responsible
for the management of the derivatives trading market. OMIP holds a 100 per cent
stake in OMIClear, which has the role of clearing house and central counterparty in all
operations executed on the market managed by OMIP, also being able to clear trades
on the over-the-counter market or even other markets that have, as underlying assets,
energy-based products.
On the OMIP trading platform, all elements of the futures contracts are
standardised (e.g., volume, underlying asset and minimum price variation). Therefore,
when an agent opens a position, it need only choose the contract it will trade, the
respective quantity and the price (except if it is a market offer). A key characteristic of
these contracts is that they have daily mark-to-market.
The operations carried out on OMIP are registered in trading accounts and
simultaneously registered in clearing accounts through which the financial settlement of
the contracts is assured.
Portugal and Spain are also in the process of developing a similar Iberian market
for natural gas.
ii
The legal framework for the organisation of MIBEL is based on the MIBEL Agreement,11
signed on 1 October 2004. It establishes the general principles for the organisation and
management of MIBEL and, in particular, the framework for the organisation of the
spot market and the derivatives market.
The MIBEL derivatives market is directly subject to Portuguese law and
jurisdiction, being, due to its financial nature, subject to the legislation applicable to this
type of market, mainly:
a
the Securities Code;
b
the Securities Market Commission (CMVM) Regulations; and
c
the CMVM Instructions.
The derivatives market is under the direct supervision and regulation of the CMVM, in
coordination with ERSE.
Notwithstanding the powers granted to the Portuguese authorities, the regulation
and supervision of the derivatives market is carried out in conjunction with the equivalent
Spanish authorities, the National Energy Commission and the National Securities
Market Commission.
In addition, regulation of MIBEL takes place through market rules developed by
the market operators, OMIE and OMIP, which have the duty of developing and jointly
applying all the market rules.
11
The Agreement between the Portuguese Republic and the Kingdom of Spain relative to the
constitution of an Iberian Electrical Energy Market.
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iii
Any entity (producers, suppliers, consumers or other agents from the organised market)
registered as a market agent may enter into a bilateral agreement, either for electricity or
natural gas.
With respect to the legal and regulatory applicable provisions, the terms of such
contracts are dependent upon each market agents agreement. The market agents must
notify the transmission network operator (as global system manager) of the completion
of such agreement and indicate the time periods for which it is executed.
iv
Market developments
The process of phasing out of end-user regulated electricity and natural gas tariffs is
currently under way. Decree-Law No. 75/2012 of 26 March approved the timetable for
the gradual phasing out of such tariffs for normal low-voltage electricity consumers, and
Decree-Law No. 74/2012 of 26 March also established that for natural gas.
The process must be completed by 31 December 2014 or 31 December 2015,
depending on whether:
a
electricity consumers have contracted power equal to or over 10.35kVA or less
than 10.35kVA, respectively; and
b
natural gas consumers have an annual consumption equal to or over 500 cubic
metres or less than 500 cubic metres, respectively.
During this period, transitory tariffs with a gradually increasing premium component
will apply and also be updated quarterly by ERSE.
Decree-Law No. 13/2014, of 22 January, extended the period of application
of the regulated transitory end-user tariff for large clients until 31 December 2014, in
accordance with Order No. 27/2014 of 4 February (the former period of application of
the regulated transitory end-user tariff for large clients ended on 31 December 2013).
This extension is only applicable to clients supplied in high, medium and special low
voltage, thus excluding the clients supplied in very high voltage and in normal low
voltage.
V
In February 2013, the Council of Ministers approved the National Action Plan for
Energy Efficiency for the period 20132016 (PNAEE) and the National Action Plan
for Renewable Energy for the period 20132020 (PNAER). The main objective of
the PNAEE is to envisage new actions and targets for 2016, integrating the concerns
regarding the reduction of primary energy for 2020 contained in the EU policy on
energy efficiency.
The PNAER was also defined according to the current situation of oversupply
of electricity generation due to lower demand, in order to adapt and mitigate costs. The
plan continues to focus on renewable energy sources very relevant in the promotion of
a balanced energy mix to enhance security of supply and reduce the risk of the price
variability of certain commodities and respective implications for the national energy
bill.
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Portugal
i
In 2010, the Portuguese state granted Enondas, Energia das Ondas SA, a concession
for electric power generation using the energy from sea waves. The concession is given
for a determined pilot zone, for 45 years, and includes authorisation to install the
necessary infrastructure and connect the generation unit to the public electricity grid.
The Portuguese pilot zone covers an area of around 320 square kilometres close to So
Pedro de Moel between Figueira da Foz and Nazar. The main goal is to become an open
space on the Atlantic coast devoted to the development of marine energy, especially wave
power.
Given the economic and financial crisis Portugal is suffering, and following the
signing of the memorandum of understanding with the International Monetary Fund,
the European Central Bank and the European Commission in 2011, the government
decided to reduce the tariffs paid to producers using micro and mini-generation units.
The power guarantee mechanism, designed to avoid power supply interruptions,
was abolished and substituted by a different mechanism, with the same purpose, but
structured in more efficient and economical terms: incentives to power guarantee. This
mechanism divides itself into two distinct incentives: incentives for availability, which
aims to support the producers using heat to generate electricity in order for them to
be on standby for emergency cases of need for power, while helping to face inherent
inactivity costs; and incentives to investment, which are monetary incentives related to
investments in new hydroelectric generation capacity.
In light of these circumstances, and in order to re-monitor the efficiency of the
facilities that generate power using the heat originated by their production processes
of goods (commonly called cogeneration),12 Decree No. 139/2012 determined some
factors used to calculate the remuneration of such activity introducing a cap on the
maximum amount to be paid as an efficiency benefit and created a new remuneration
regime, making the transitory process permanent.
Decree-Law No. 35/2013 of 28 February reduced the term during which special
regime generators have the right to receive the respective feed-in-tariff. Alternatively,
the Decree also established the possibility of special regime generators (except for small
hydropower plants) to adhere to certain alternative remuneration mechanisms which,
generally, allow for the extension of the period by which such special regime generators
receive a special tariff or guarantee remuneration.
ii
In 2008, the government introduced the PNAEE, a plan of action that establishes the
main policies and energy-efficiency measures to be developed in order to achieve a target
of a 10 per cent reduction in the countrys energy consumption. Recently, the PNAEE
was revised and the government set new goals to be achieved in matters of energy
efficiency until 2016.13
12
13
Glass, for instance.

Council of Ministers Resolution No. 20/2013 of 10 April.
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Portugal
After the establishment of the PNAEE, the Energy Efficiency Fund was created,14
which finances the programmes and measures provided for in the plan.
In 2011, the government, by Decree-Law No. 29/2011 of 28 February, created a
specific public tender procedure to expedite and facilitate the formation and execution of
energy efficiency contracts, to be entered into by the public administration and private
companies to implement measures improving energy efficiency in public buildings.
ERSE has tried to ensure that regulation of the sector galvanises actions that
contribute to the promotion of energy efficiency. In the Tariffs Regulation for the
electricity sector, a competitive mechanism called the Consumption Efficiency Promotion
Plan (PPEC) has been established to promote measures for managing demand. In
the electricity PPEC, incentives are awarded for the promotion of measures aimed at
improving efficiency in electricity consumption through measures taken by suppliers,
network operators and organisations that promote and protect the interests of electricity
consumers in mainland Portugal and in the autonomous regions, and that are aimed
at consumers in different market segments. The actions result from specific measures
proposed, subject to a selection process, whose criteria are defined in the Rules for the
Consumption Efficiency Promotion Plan. This process allows the selection of the most
promising measures for energy efficiency to be implemented by the aforementioned
promoters, taking into account the amount available in the PPEC annual budget, which
is approved at the start of each regulation period for each one of its years.
Decree-Law No. 38/2013 of 15 March transposed into national law a set of
provisions relating to the greenhouse gas emission allowance trading scheme, namely
Directive 2009/29/EC of the European Parliament and of Council of 23 April 2009. In
particular, this Decree states that from 2013 onwards the emission allowances that are
not allocated free of charge shall be auctioned and the revenues from such auctions shall
be applied in measures that contribute to the development of a competitive low-carbon
economy. It is also established that the amounts to be transferred to the SEN should
be used to offset the over costs incurred with respect to the purchase of electricity from
special regime generators.
iii
Driven by the growing dependence on oil for energy and by the environmental impact
of the use of fossil fuels, Portugal is investing in new energy models for mobility that aim
to improve quality of life and reduce pollution.
This has led to the creation of the Electric Mobility Network, an integrated
network linking 1,300 charging stations in Portugal, managed by MOBI.E, which will
enable electric vehicles to recharge, using a charge card.
14
More information about energy efficiency in Portugal can be found at: www.portaleficienciaenergetica.com.pt/nacional.html;
http://fee.adene.pt/o-que-e/Paginas/default.
aspx; and www.erse.pt/pt/planodepromocaodaeficiencianoconsumoppec/Paginas/default.
aspx.
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Portugal
Its main goal is to contribute to a more sustainable mobility model, promoting
the integration of electric power coming from renewable sources into the functioning
and development of cities, and maximising its advantages.15
In March 2011, Portugal initiated the large-scale implementation of the Electric
Smart Grid, in charge of a consortium headed by EDP Distribuio SA.
The first phase of the project consists in the implementation, in the city of vora,
of 30,000 electric power meters, or energy boxes. This project seeks to promote energy
efficiency, microgeneration and electric mobility. Consumers will have new services, new
billing methods and innovative price plans at their disposal, which will allow greater
flexibility of choice, so consumers can adjust their needs to match their consumption
requirements. Speed, transparency and convenience are the concepts underpinning the
new services on offer.16 It is expected that by 2020 smart grids will represent 80 per cent
of European power distribution networks.
VI
THE YEAR IN REVIEW
Despite the current complex financial and economic situation in Portugal, 2013 has
been a year with considerable activity in the electricity and natural gas sectors.
The memorandum of understanding underwritten by the Portuguese
government, the European Union, the International Monetary Fund and the European
Central Bank has led the government to effect a significant number of changes to the
legislation governing the electricity and natural gas sectors, and is aimed at ensuring the
sustainability of these two sectors for the future. The resulting legislative instruments
have provided mechanisms that, without affecting financial decisions or legitimate
expectations of private players in these sectors, are designed to reduce costs and increase
the overall efficiency of the electricity and natural gas systems.
In 2013 the Portuguese government has also implemented the so-called
extraordinary contribution over the energy sector (contribuio extraordinria sobre o
sector energtico), the revenues of which are primarily destined to reducing the current
tariff deficits being generated in the electricity sector.
VII
The Portuguese power market is currently a mature market with a generation mix in
which green energies have a significant weight both in terms of installed capacity and
power output. The natural gas market has room for expansion considering that there are
still interior regions that do not have distribution networks.
The main challenges in the energy market in Portugal relate to the completion of
the liberalisation of the electricity and natural gas industries. Although market efficiency
is expected to increase and competition within the market should benefit end-users, the
full effects of liberalisation are not yet certain.
15
16
More details at www.mobie.pt/en/mobilidade-electrica.

More information on this project can be found at www.inovcity.pt/en/Pages/homepage.aspx.
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Chapter 31
ROMANIA
Lucian Caruceriu and Anca Mitocaru1
I OVERVIEW
In 2013 there were significant changes in the regulations applicable to the energy sector
in Romania.
Some of the changes have materially reshaped the framework applicable to the
renewable energy sector, limiting financial and political support, increasing regulatory and
business risks and ultimately bringing to a halt new investments in green projects.
Other changes have been implemented at the level of substantial secondary
regulations, with a view to bringing them in line with the provisions of the Electricity
and Gas Law No. 123 of 2012 (the Energy Law) and to continue the liberalisation of the
electricity and gas markets.
Privatisation of the major state-owned companies in the energy sector and the
liberalisation of the electricity and gas markets are expected to continue to be drivers of
changes in the regulations, prompted by the express obligations assumed in these respects
by Romania, under the standby agreement with the International Monetary Fund.
The official rhetoric has pointed favourably to a return to conventional energy
sources, encouraged by the positive findings in the onshore and particularly offshore
Black Sea explorations. Encouraging and securing access to these natural resources might
form the core of the long-awaited sector strategy of Romania and ultimately might
deliver on the national objective of energy security and autonomy. Shale gas may add
steam to this direction, although shale gas is not yet a comfortable political topic, due to
concerns voiced by certain local communities and green NGOs.
Lucian Caruceriu and Anca Mitocaru are associates at PeliFilip.
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Romania
II REGULATION
i
The regulators
Regulators
In addition to the Parliament and the government, which have the main legislative and
regulatory powers in any field, there are several regulatory authorities with power within
various energy sectors. The main authorities are:
a
the Energy Field Regulatory Authority (ANRE), an autonomous public body
controlled by Parliament, with powers in the electricity, heat and gas sectors;
b
the National Natural Resources Authority (ANRM), a specialist body under the
coordination of the Romanian government, regulating the activities related to
natural resources, oil and shale gas; and
c
the National Authority for the Regulation of Public Community Services
(ANRSC), a public institution of national interest subordinated to the Ministry
of Regional Development and Public Administration, regulating and monitoring
the activities of public utilities (central thermal energy).
A separate specialist regulator deals with nuclear power plants. The Ministry of Economy
is also involved in the energy field, supervising the privatisation process of state-owned
companies, also being the representative of the state holding the state participation
in companies in the sector. A special department for energy has been created, which
supervises the overall implementation of the governments objectives in this field by
preparing the national energy sector strategy.
Legal and regulatory field
The legal and regulatory framework in the energy field comprises several categories of
enactments:
a
laws, passed by the Parliament;
b
ordinances (which essentially have a force equivalent to that of laws), passed by
the government;
c
decisions issued by the government in relation to the implementation of various
laws and ordinances; and
d
orders, decisions and other similar acts issued by the relevant ministries and
regulatory authorities.
ii
The development, construction and operation of projects in the energy field require
various authorisations and permits. Activities such as the sale of electricity and gas may,
in principle, be carried out only by licensed entities. Similarly, various activities in the
fields of mining and exploration and exploitation of natural resources require permission,
a concession or a licence.
The permissions procedure especially for the more complex projects tends
to be intricate and time-consuming, with a substantial number of permits having to
be obtained. Moreover, due to a lack of centralisation, several regulatory authorities (in
addition to those relevant to the energy sector) are usually involved. By way of example,
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the development, construction and operation of a power plant typically requires a rather
extensive set of permits, authorisations and licences. In the development and construction
phase, these include:
a
urbanism certificates and building permits issued by local administrative
authorities (city hall or county council);
b
environmental approvals issued by the specialist environmental authority;
c
various permits and approvals issued by entities such as the Romanian Intelligence
Service, the Ministry of Defence and the Aeronautical Authority;
d
grid connection permits; and
e
setting-up authorisations.
The permits relevant for the development and construction phase are issued within a
certain period (typically 30 to 60 days) from the submission by the applicant of the
complete authorisation file. In the event the authorities are not satisfied with the
documents received, they may ask for further information and clarifications. The
documents to be submitted differ from a permit to another. For example, for the civil
construction permits (i.e., building permits), the applicant must submit evidence of in
rem rights secured over the plots of land on which the power plant project is to be
developed.
The issuance of the relevant permits is subject to the payment of tariffs, the
amount of which varies from a certain fixed value set by the authorities (such as for the
setting-up authorisation) to a percentage of the value of the intended construction works
(as is the case for building permits).
Additional permits must be obtained for the operations phase, including a licence
for the production of electricity and an environmental authorisation. The relevant
entity may apply for the licence after completion of the construction works and the
connection of the project to the electricity grid, but before commencing the commercial
exploitation of the power plant. Typically, regulatory authorities would issue the licences
and authorisations for the operation phase within 30 to 90 days of the date the complete
documentation is filed and the relevant fee is paid.
In addition, producers of electricity from renewable sources must comply with
formalities in order to be accredited for being granted green certificates in accordance
with the support scheme.
Activities in the electricity and gas fields also require specific permits, such as
supply, distribution, transmission and storage (of gas) licences. These energy-specific
permits are issued by ANRE to entities fulfilling certain criteria, usually within 60 days
as of submission of the complete application documentation.
Activities involving mineral resources are performed on the basis of various licences
and permits issued by ANRM, depending on the type of activity (e.g., exploration and
exploitation). In principle, exploration and exploitation permits and licences are granted
following a public tender procedure, with the possibility of the direct award of licences
or permits in certain circumstances.
Obtaining mining licences in relation to which tender procedures must be
followed usually takes a longer time (e.g., several months).
The holder of an exploration licence can automatically benefit from an exploitation
licence for any or all of the mineral resources detected on the exploration perimeter.
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Exploitation permits are granted on a first-come first-served basis, subject to
the regulatory conditions being met. Obtaining an exploitation permit on a different
perimeter is conditional upon fulfilling the environmental rehabilitation duties in the
previously exploited perimeter(s).
Moreover, the holder of a prospection permit benefits from an additional benefit
when attending a public tender for the issuance of an exploration licence (but only for
the perimeter where such applicant performed the prospection activity).
iii
Certain requirements of Romanian law may to a certain extent limit the direct access of
foreign entities to the Romanian energy market. Thus, for example, Romanian legislation
envisages the possibility of a foreign company holding an electricity supply licence issued
in its home state to perform electricity supply activities in Romania on the basis of that
licence (without having to obtain another licence in Romania). However, this possibility
is available only if a bilateral agreement regarding the mutual recognition of the validity
of supply licences exists between Romania and the respective foreign state. No such
bilateral agreements appear to have yet been concluded by Romania and therefore the
access to certain activities on the Romanian electricity market is still conditional upon
obtaining a licence locally.
Following an investigation, the European Commission has concluded that the
operator of the centralised electricity markets (Opcom) abused its dominant position
by requiring that foreign entities that wanted to register on the market had to obtain a
Romanian VAT number. The European Commission concluded that Opcom has abused
its dominant position on the electricity market, due to the fact that it had discriminated
between national and foreign companies, and applied a fine of 10 million. Following
this sanction, Opcom is in the course of changing its practice.
New legal provisions passed in 2013 prohibited the development of new
photovoltaic parks on agricultural land for which permission was not obtained before
31 December 2013.
iv
A change of control over a company performing a licensed activity may trigger the
obligation to notify certain regulatory authorities. The transfer of (material) relevant
assets would entail the prior written approval of the regulatory authority that issued the
sector-specific licence. In general, the transfer of licences cannot be performed without
the consent of the issuing authority, which sometimes actually involves the re-issuance of
the licence. These aspects are relevant in several scenarios, including in a project financing
context, with respect to the enforcement of mortgages over the relevant assets or licences
created in favour of a financing party.
In the case of corporate restructuring processes (e.g., mergers or spin-offs), such
regulatory approvals may also need to be obtained and, in certain cases, the applicable
legislation expressly provides that the relevant licences or permits must be amended as
an effect of corporate restructuring, or the licences can be actually transferred to the new
entity resulting from the corporate restructuring process. Typically, this procedure may
last up to several months.
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In addition to the sector-specific regulatory requirements, a change of control in
or sale of assets by entities that carry out activities subject to environmental authorisations
have to be notified to the environmental authority, together with any arrangements
entered into between the selling and purchasing entities with regard to the allocation
among them of the environmental obligations. On this basis, the environmental
authority may then decide whether any authorisations or permits already issued to the
relevant entities need to be amended.
The sale of shares or assets may also be subject to Competition Council clearance.
III

SERVICES
The energy sector has undergone multiple changes in recent years, many affecting the
energy infrastructure, mainly due to the reforms needed to adapt Romanian legislation
to incorporate EU norms. Thus, in the field of electricity, Romania authorised a single,
majority state-owned transmission system operator (TSO), responsible for providing
system services, drafting grid investment plans and cooperation with other European
TSOs.
Distribution activities are undertaken by eight different companies that have been
granted concession agreements in eight main distribution areas. Three are still controlled
by the Romanian state. The subject of privatisation with respect to these distribution
companies has recently resurfaced, prompted by the commitments in the standby
agreement with the IMF.
In the natural gas sector, Romania also authorised a single state-owned transport
operator responsible, inter alia, for the elaboration of development and investment plans
and ensuring interconnection with European and international gas corridors. Natural
gas distribution is carried out on the basis of concession agreements. Currently, 55
companies are active in the distribution sector.
In the oil sector, the major players are private entities, except for the company
that manages the state pipeline infrastructure for transport, which is still majority stateowned.
Refining activities, along with the distribution of oil products and LPG, are
mainly undertaken by companies or groups of companies active in several sectors in the
field, including exploitation, refining and the sale of oil products.
In line with the EU rules, the Romanian legislation imposes the obligation of
unbundling distribution of electricity and other electricity activities. In the field of
natural gas, the same unbundling principle applies.
Apart from the oil transport operator, which only undertakes transport activity,
the rest of the companies active in the oil sector are typically vertically integrated.
In the electricity sector, certain changes have occurred as a result of the increasing
interest of investors in renewable energy capacities, which has resulted in limited and
rather local investment in transmission and distributions capacities.
In the gas sector, after the failure of the plans regarding the Nabucco project,
Romania turned its attention towards funding from the EU for developing interconnection
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Romania
corridors with neighbourhood countries and creation of an LNG terminal in one of the
harbours at the Black Sea.
ii
Romanian legislation regulates the principles of transparent, non-discriminatory and

regulated access to transport and distribution grids. In reality, however, access may in some
cases be limited by the capacity of the relevant grid. For example, the limited capacity of
the electricity distribution and transmission grids has already been overbooked due to an
impressive number of grid connection permits having been issued for renewable projects.
In addition, the current physical status of distribution and transmission electricity grids
results in some cases in the need to implement rather costly grid reinforcement works
in order to ensure the connection of new projects. In practice, the developers of the
respective projects are expected to bear (at least temporarily) a substantial part of these
costs.
Competition is required and sustained in all energy sectors in Romania, but
transmission activities largely remain a monopoly, in line with the practice in other EU
states.
Usually, transmission and transportation and distribution services are carried out
on the basis of concession agreements granting exclusive rights in the relevant area or in
relation to certain infrastructure assets. In the electricity distribution sector, for example,
distribution licences may be granted to third parties only with the consent of the entity
holding an exclusive concession in the respective area.
On the electricity and gas distribution side, some competition has emerged
following the privatisation of some of the incumbent operators. However, this is limited
due to the separation of various concession areas and the fact that tariffs are regulated.
iii
Romanian legislation provides for the creation of underground storage facilities for gas
as well as the possibility of exploitation licence holders in the oil sector to hold storage
capabilities, based on a special licence. The storage of natural gas is the responsibility
of licensed operators that have to fulfil a series of obligations, such as granting nondiscriminatory access to storage facilities on a first-come, first-served basis to operators
included on a priority list, and not to block the quantities stored. Natural gas transport
operators also have the obligation to hold and maintain sufficient quantities of natural
gas in order to ensure the balance of the national transport system.
The processing and treatment of natural gas is regulated, including through a
technical code setting out the conditions for the operation of companies active in this
field, the technical requirements for treatment operations and safety requirements.
Oil storage can take place on the basis of an oil storage licence.
Romania has also established an obligation for producers and other operators
that sell or buy oil products to establish minimum stocks. The minimum stocks are
determined each year by the Ministry of Economy and the operators concerned may
delegate the responsibility for at least 10 per cent of the storage to other parties.
In 2013 a new LNG technical code entered into force, regulating the design
and construction of LNG facilities. It determines, inter alia, the location, testing and
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Romania
operation principles, as well as the design and construction methods and techniques.
Alongside this technical code, several pieces of secondary legislation and international
technical standards are used in order to assess the proper functioning of LNG facilities.
The operation of these facilities is a licensed activity.
The tariff for natural gas storage is also regulated. It is set annually by ANRE, based
on a predetermined regulated income for the storage operator. The national regulator can
take into account the development of the open market in order to determine prices for
certain geographical areas. The national regulator can adjust the regulated prices, based
on the usual economic factors, such as inflation and contingencies, or based on specific
factors, such as the total quantity of stored gas.
The operation of storage facilities is also regulated with respect to access to storage
facilities (e.g., a list is set up on a first-come, first-served basis), the level of the reserved
capacity, and safety requirements.
iv Rates
ANRE determines the tariff for transport and distribution of electricity and gas, based
on a predicted and approved regulated income for transport and distribution operators.
For the electricity sector the tariffs and costs associated to transport, distribution
and supply services are determined by the national regulator, for each voltage level,
taking into consideration the providers costs plus a reasonable rate of return, based on
a methodology that aims to ensure compliance with principles such as the prevention
of unreasonable advantages and efficient use of the existing infrastructure. In addition,
the national regulator can choose to establish different tariffs for each geographical area
or administrative unit. Following an infringement procedure initiated by the European
Commission, ANRE has eliminated the tariffs for import and export of electricity inside
the EU.
For the gas sector, tariffs for the underground storageof natural gas cover three
main regulated components: the price for reserving the storage capacity, the price for the
injection of natural gas in the underground facility, and the price for the extraction of
the stored quantity. The tariffs for transport and distribution services are determined by
the national regulator in order to reflect the costs for reserving transport capacity and for
effective transport service and maintenance of the transport system.
Tariffs for the transport of oil are regulated by ANRM, while tariffs for storage
and distribution of oil are not regulated and therefore depend on market factors.
v
Romania developed a national strategy for the protection of critical infrastructure in

order to comply with its obligations at EU level. This strategy considers the substantial
risk posed by potential terrorist actions but also the possible impact of a lack of supply
independence on the overall functioning of society.
Each operator of critical infrastructure, identified as such by competent public
authorities, must have an internal department charged with outlining and implementing
its own emergency plan. This emergency plan must be tested every two years in
cooperation with public authorities and adapted to latest security methods.
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Romania
Following a series of cyber attacks, at the beginning of 2013 Romania adopted
a national cybersecurity strategy to identify possible cyber attacks against critical
infrastructure. The strategy intends to clearly identify potential threats, educate the
personnel in charge of protecting critical infrastructure from cyber attacks, and promote
cooperation at EU and international level. The measures (including the creation of a
Cyber Security Attacks Reply National Centre) have been adopted only recently, so
further secondary legislation needs to be adopted in order to implement the strategy.
IV
ENERGY MARKETS
Each of the electricity and natural gas sectors cover a regulated market and a competitive
market. As the liberalisation efforts continue, the competitive markets should continue
to expand. The competitive market itself comprises a retail market and the wholesale
market.
Following certain changes in legislation come into effect in 2012, electricity may
be traded only on the centralised platforms operated by Opcom (a subsidiary of the
TSO). No bilateral electricity trading agreements may be concluded over-the-counter
(OTC). The centralised electricity trading platforms comprise the day-ahead market, the
intra-day market, the centralised market for bilateral contracts (itself with two separate
sub-platforms) and the centralised market for bilateral contracts with double continuing
negotiation (a platform meant to somewhat cover the needs created by the prohibition
of OTC transactions). On these markets, prices are usually determined on the basis of
purchase and sale offers and on the day ahead market Opcom acts as central counterparty
and settlement agent.
While these rules have been passed with the public intention of making the
electricity trading market more transparent and competitive, the immediate effects
actually included increased difficulties in financing new electricity production projects
(such as renewable projects) due to the impossibility to conclude long-term electricity
purchase agreements. Moreover, some of the platforms have not reached the expected
liquidity levels and in general were rather slow to adapt to the needs of the market
participants which no longer had access to bilateral electricity purchase agreements.
Participants to the electricity market must undertake financial responsibility towards the
TSO for any imbalances their activity potentially generates in the National Electricity
System by registering as balancing-responsible parties or transferring the balancing
responsibility to already established balancing responsible parties.
On the competitive wholesale natural market, gas may be traded either on the
basis of OTC bilateral agreements or on two new centralised trading platforms managed
by Opcom and the Romanian Commodities Exchange Market (RCEM). Recently,
certain legislative proposals have been filed with the Parliament, seeking to introduce the
prohibition to trade gas outside of the centralised markets (similar with the restrictions
applicable to electricity trading). No definitive formal decision has been yet taken in this
respect.
Oil and coal may be traded through bilateral agreements concluded on the
RCEM.
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Romania
ii
The rules applicable to electricity trading on the competitive markets are set by ANRE and
Opcom. The import and export of electricity is possible subject to the prior allocation of
interconnection capacity based on public auctions organised pursuant to an operational
procedure prepared by the TSO and approved by ANRE.
In the gas field, specific regulations are applicable with respect to matters such as
the obligation of Romanian gas producers to allocate part of their production for internal
regulated consumption and the obligation of gas suppliers to purchase and sell to end
consumers a mix of gas from import and internal production according to certain quotas
approved or endorsed by ANRE.
On the retail electricity and natural gas markets, suppliers sell electricity to
customers by concluding bilateral agreements at negotiated or regulated prices, depending
on whether the relevant customer has exercised its eligibility right. The regulated prices
determined by ANRE will apply until complete liberalisation of the market.
The national regulator supervises the overall functioning of the electricity and gas
market and may impose sanctions on operators that fail to comply with the obligations
set out in the authorisations or licences. In the event of a major breach, ANRE can
suspend or even withdraw the authorisation or licence. It can also impose safeguarding
measures for the energy market in cases that threaten the overall functioning of the
national electricity system, and even the European electricity system.
iii
Market developments
The RCEM initiated court proceedings against Opcom and the national regulator for
recognising the RCEMs right to hold a licence for energy market operator. Since the
coming into force of the Energy Law, Opcom is the sole licensed operator of centralised
trading platforms, which prevented RCEM from operating a platform for electricity
trading and excluded RCEM from the electricity trading.
In 2013, RCEM secured a licence for the operation of natural gas trading
platforms, in an attempt to prevent its exclusion from natural gas trading, in the event
the trading rules for gas would change so as to impose exclusive trading on centralised
platforms, similarly to the rules for electricity.
V
In line with the EU 2020 agenda, Romania undertook that by 2020, 24 per cent of
its entire energy consumption will be produced from renewable energy resources. Due
to the appealing support scheme for renewable energy generation, numerous foreign
companies, especially European companies, have shown an interest in investing in
Romania in the field of renewable energy (in particular wind and solar).
The Romanian renewable energy sector has been boosted by the enactment in
2008 of a support mechanism whereby each producer receives a certain number of
green certificates (depending upon the technology) for each megawatt produced from
renewable sources and fed into the electricity system. Correspondingly, a green certificate
acquisition obligation has been imposed upon suppliers for end-consumers, depending
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upon their respective actual deliveries. The support scheme only became effective in its
current form in 2011, after approval by the European Commission.
Green certificates are traded only on a centralised trading market, via two trading
platforms, operated by an independent trading operator, where producers can sell their
green certificates to suppliers that have to demonstrate fulfilment of their acquisition
quota.
The trading of green certificates is subject to a regulated price band (the trading
value is set between a floor of 27 and a cap of 55 per green certificate, subject to annual
indexation). Possible legislative changes regarding the decrease of the maximum value
of the green certificates have been announced, although no legislative proposal has yet
been approved to this end. As the green certificates are currently traded at floor price, the
initiative seems irrelevant.
In its current form, the support scheme will apply for a 15-year period for each
producer and cover producers that commission their projects by 31 December 2016 at the
latest. The actual number of green certificates per technology may be adjusted depending
upon certain factors, such as overcompensation, by reference to an approved internal rate
of return communicated to and being approved by the European Commission during
the process of approving the support scheme.
Although not confirmed by the European Commission, the Romanian
government and ANRE announced at the beginning of 2014 that Romania attained
its objective of having 24 per cent of its entire energy consumption produced from
renewable energy resources.
Driven by the governments intention to lighten the financial burden created
on large industrial consumers as well as end-consumers due to them bearing the green
certificates prices, in 2013 and early 2014 several changes to the support scheme were
implemented. Among others, a certain number of green certificates have been suspended
from trading until 2017 at the earliest and also the number of green certificates granted
per certain technologies has been decreased due to compensation. In addition, the
quotas of electricity benefiting from the support scheme, on the basis of which the actual
number of green certificates the suppliers had to acquire, have been lowered and are no
longer set out in the law.
These changes, as well as discussions about potential further amendments to
the support scheme (e.g., potential exemptions for big industrial consumers from the
obligation to bear the costs of green certificates) caused a substantial decrease in the
activity in the renewable electricity sector, for the first time in years. In addition to
specific negative consequences on projects under development or even operational, these
changes, as well as the manner in which they have been proposed for public consultation
and approved insinuated a certain degree of lack of confidence of the investors in the
sector as of late.
However, the current legislative environment may also be seen as an opportunity
for certain investors who may be interested in acquiring projects at substantially
discounted values.
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ii
The National Energy Efficiency Action Plan presents the main actions to be taken by
the government in this respect. EU co-funding was used for projects improving energy
efficiency of residential buildings and those designed to ensure the improvement of
industrial energy efficiency. Public municipalities were responsible for promoting energy
efficient lighting and public investments were made in order to promote cleaner urban
transport. Some of them managed to attract financing from the EU, although this
alternative is still not used at its full potential.
Legislative measures were taken to implement these energy-efficiency measures.
Incentives are provided for promoting the use of energy-efficient materials at household
level and a national plan was introduced to stimulate the Rabla programme for used cars
and the promotion of biofuels for transport.
According to the 2013 report of the European Commission on the overall progress
of Member States in the energy efficiency sector, Romania has exceeded the EU average
for overall energy efficiency gains, and is ranked fifth. In industry and in households,
Romania is ranked eighth and second, respectively, at EU level. In the transport sector,
however, it is one of the less successful countries as regards energy efficiency gains.
In line with the new EU Energy Efficiency Directive, Romania seems to be taking
steps for preparing a new National Action Plan and related implementing legislation.
The current draft of the energy efficiency law is merely a copy of the provisions of the
Directive, but it has not yet even been sent to the Parliament for debate and approval.
Thus, taking into account that the national implementing legislation is subject to the
European Commissions assessment, it is hard to see in which circumstances this draft
law will enter into force prior to the deadline established for June 2014.
iii
Thanks to the support scheme in the field of renewable energy, Romania has witnessed a
substantial improvement in the technology used for electricity production, although the
main components are imported. At the same time, numerous actions have been taken to
refurbish cogeneration and hydroelectric power plants. Hidroelectrica, the state-owned
hydroelectric power company has initiated a large auction procedure for selling many of
its old micro hydropower plants, altough some of the sales were unsuccessful. Transport
and distribution operators improved their capabilities, but mainly local investments
have been made, and large investments are still needed to allow increased connection
capacity reliability. Investments in conventional production facilities are also necessary
to improve the balancing of services.
A few investments in new hydro and coal-based power plants, the promotion of
a new hydroelectric power plant operated together with Bulgaria and a submarine cable
for electricity export to Turkey are some of the projects announced by the Romanian
government as envisaged to be initiated in the near future.
Also, in the field of natural gas, following an infringement procedure initiated
by the European Commission, Romania allowed the export of gas from Romania and
at the beginning of 2014 a new reverse flow export capacity towards Hungary became
operational. There are several projects in different development stages seeking to ensure
the export of natural gas towards Bulgaria and the Republic of Moldova.
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In 2013 the national regulator introduced an obligation for distribution operators
to implement during 2014 at least four pilot projects for smart metering systems and
between 2015 and 2020 the smart metering systems will have to be implemented at
national level. However, there is no secondary legislation establishing the manner in
which these systems will be implemented.
VI
THE YEAR IN REVIEW
2013 has been a year of major changes to the support scheme for renewable electricity.
This means that the most active sector of the energy field slowed down substantially.
On the trading side, the participants in the electricity market sought to further adapt to
the centralised trading platforms and pushed for the further adaptation of some of the
platforms.
On the gas trading side, the opening up of the market to export transactions sent
a positive signal, although the actual implementation of such trades is still limited due to
physical constraints of the interconnection capacities.
Although discussions about some major investment in the energy field have
continued or have been resumed (e.g., in relation to the Cernavoda nuclear power plant,
the Tarnita pumping and storage power plant and the submarine electricity cable to
Turkey), none of these major projects has actually been initiated. Some are expected to be
launched in 2014, but whether the plans will actually come to fruition will also depend
on whether the government manages to secure financing or investors.
The efforts for the privatisation of companies active in the energy field continued,
with a focus on capital markets methods rather than investments by strategic investors.
VII
The Romanian energy sector may yet be full of opportunities, but political and regulatory
ways of reboosting the investors trust in the energy field must be found and appropriately
implemented.
While changes occur frequently, particularly in certain areas, the regulatory
framework may be deemed stable and reliable due to the EU commitments, which seem
to have been embraced by the government. It is hoped that episodes of political and
regulatory instability, such as those witnessed in 2013, remain isolated and, in general, a
clearer delineation between politics and economics is obvious.
There are still numerous technical barriers to competition, as well as areas in which
it cannot properly function. The trading of electricity and gas must improve further and
the impact of competition on the oil sector should barely be seen in the final prices.
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Chapter 32
SPAIN
Antonio Morales1
I OVERVIEW
In Spain the energy sector is highly regulated. Its strategic and technical importance
requires a strong regulatory framework that ensures a constant supply of energy at the
lowest possible cost and meets all local and European environmental requirements.
This regulatory framework has undergone significant changes in the past decade,
mainly imposed by European legislation, with the introduction of the directives for the
internal electricity market in 1996 and 20092 and for the gas market in 1998 and 2009.3
During 2013, however, the Spanish government accomplished a structural reform of
the energy industry to establish a new regulatory framework in order to reduce and
control one of the main problems of the Spanish energy sector: the tariff deficit, which
is the divergence between the electricity costs and the income obtained from regulated
electricity activities.
The reform started with the enactment of Royal Decree-Law 9/2013 of 13 July,
whereby certain urgent measures are taken to ensure the financial stability of Spains
electrical system. The main changes aim to provide the industry with a uniform,
transparent and stable regulatory framework as well as to give economic and financial
sustainability to the electricity system and avoid the generation of tariff deficit.
Furthermore, on 27 December 2013, the new Electricity Sector Law 24/2013, of 26
December, was published in the Spanish Official State Gazette.
The reform is being completed with a number of already approved royal decrees
and further regulations currently passing through Parliament and expected to be approved
during 2014. Thus far, the Spanish government has passed the following regulations:
1
2
3
Antonio Morales is a partner at Latham & Watkins LLP.

2009/72 of 13 July.
2009/73 of 13 July.
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a
b
Royal Decree 1047/2013, of 27 December, which establishes the methodology

for calculating the remuneration for electricity transmission; and
Royal Decree 1048/2013, of 27 December, which establishes the methodology
for calculating the remuneration for electricity distribution.
II REGULATION
i
The regulators
The framework for power distribution between the state and the autonomous regions
is directly established in Article 149(1)(22) and (25) of the Spanish Constitution. The
former reserves the authorisation of electrical installations when their use affects another
region or the transport of energy out of its territorial scope to the states exclusive
jurisdiction. The latter provides that the state has jurisdiction over establishing the basis
of the energy regime. According to this framework, facilities within each region are also
authorised, and the legal bases of the energy sector have developed.
The states broad jurisdiction in this area is reflected in the basic state legislation,
which establishes the sectors regulatory framework: the new Electricity Act 24/2013
replaces and repeals the Electricity Act 54/1997 and amends the Hydrocarbon Law
34/1998. Since these two laws (as enacted and as amended) are very comprehensive and
wide-ranging, there is little space in practice for the autonomous regions to regulate.
The new Electricity Act 24/2013 consists of 80 articles and is divided into 10
titles, 20 additional provisions, 16 transitional provisions, a repealing provision and six
final provisions, and has introduced, among others, the following legislation:
a
The principle of economic and financial sustainability of the electricity system.
b
Article 14 of the Electricity Act 24/2013 regulates the remuneration of the
different activities involved in the supply of electricity. The new remuneration
system will be financed by means of the income obtained from regulated activities
and will be based on objective, transparent and non-discriminatory criteria.
Additionally, Section 7 determines that the Spanish government may established
a specific remuneration for the promotion of production from renewable sources,
cogeneration and waste.
c
With regard to the generation activity, Law 24/2013 has eliminated the former
distinction between an ordinary and a special regime, establishing different
economic regimes in accordance with the technology and the capacity of the
generation facilities.
d
Specific rules on Voluntary Price for the Small Consumer (PVPC) are set out in
this new regulation. As this reform seeks to guarantee the supply of electricity
at the lowest possible price, PVPC is the highest price that the major electricity
retailers may bill to certain consumers.
In addition to the above, Act 3/2013, of 4 June, has created a new regulatory body, the
National Markets and Competition Commission (CNMC), which encompasses different
supervisory authorities in different sectors: the former National Energy Commission, the
National Competition Commission, the Telecommunications Market Commission, the
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Rail Regulation Committee, the Airport Economic Regulation Commission, and the
National Postal Industry Commission.
Within energy matters, Act 3/2013 has transferred certain functions, originally
developed by the former National Energy Commission, to the Ministry of Industry,
Energy and Tourism, such as inspecting, initiating and conducting certain penalty
proceedings, responding to claims made by consumers and informing them about their
rights and dispute resolution methods, among others.
ii
The main activities involved in the supply of energy are the following: generation,
transportation, distribution, and supply (or commercialisation). As natural monopolies,
transportation and distribution are considered regulated activities; whereas generation
and supply operate in a free market system.
Royal Decree 1955/2000, as amended by Law 24/2013, regulates the applicable
regime to transportation, distribution, commercialisation and supply activities. The
management of the transport activity, as a regulated activity, is entrusted to Red Elctrica
de Espaa, which is also the system operator.
Additionally, Royal Decree 1955/2000 states that the construction, expansion,
modification and operation of production facilities, transportation and distribution
require certain permissions.
An administrative authorisation is needed for the draft technical installation
document to be processed in conjunction with the environmental study. An application
must be filed with the Directorate-General for Energy Policy and Mining, which is then
forwarded with the required documentation to the Ministry of Industry, which makes
the decision. If the application is approved the Ministry will indicate the time in which
the application must be submitted for project implementation approval, which once
approved allows the owner to construct or establish the installation. The application
must be submitted to the industry and energy sub-office where the facility is located. A
decision must be arrived at within three months by the Directorate-General for Energy
Policy and Mining, specifying a deadline for the construction of the facility.
Once a project is duly implemented, an operating authorisation allows energy to
be transmitted to the facilities for commercial exploitation. The application to operate
must be submitted to the industry and energy sub-office and should be accompanied by
the final certificate of work.
Some autonomous regions have specific regulations for electrical installations, but
they follow basically the same administrative procedure as established by the foregoing
state regulations.
iii
Electricity network operation (transmission and distribution) is subject to significant

economies of scale, which gives them an element of natural monopoly, as it is inefficient
to introduce competition into these activities. The Electricity Act 24/2013 (formerly
Law 54/1997) establishes an obligation to separate legal and accounting matters within
regulated electric activities (transportation and distribution) that are provided under
a financial regime. Deregulated activities (generation and supply) are carried out by
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operators in a free market, their remuneration being governed by the laws of supply and
demand.
Directive 2009/72/CE and its subsequent incorporation into Spanish law go into
greater detail on this aspect and impose an obligation on vertically integrated groups to
functionally separate their activities to ensure the autonomy of management and decisions
of those responsible for the transportation and distribution networks. In addition, it
purports to preserve the confidentiality of commercially sensitive information available
to those responsible so as not to compromise competition in deregulated activities.
Former Law 54/1997 and the new Electricity Act 24/2013 and subsequent
legislative developments establish and define the role of the different participants in the
electricity sector:
a
Power producers are individuals or legal entities that have the function of generating
electricity, as well as building, operating and maintaining generating plants. The
distinction between ordinary producers and special regime producers has been
eliminated. The new Electricity Act 24/2013 establishes a unified regulation for
the ordinary regime and for the production of electricity from renewable sources,
cogeneration and waste. Additionally, producers are entitled to temporarily close
their production facilities, subject to an administrative authorisation regime, this
being one of the main legislative innovations of the new Law 24/2013.
b
Electricity transporters are companies that have the function of transporting
electricity and construction, maintenance and transportation of transformer
facilities.
c
Distributors are those companies that have the function of distributing power,
and also building, maintaining and operating distribution facilities designed to
establish energy consumption points.
d
Sellers are legal persons who, by accessing transportation or distribution, have the
function of selling electricity to consumers. Among them are last resort sellers,
appointed by the regulator, which are functionally and legally separate from other
companies operating in the sector, and which are responsible for providing energy
to consumers benefiting from the tariff of last resort set by the government. As
noted above, the new regulation sets out specific and new rules on PVPC.
e
Consumers are individuals or corporations who buy energy for their own
consumption. Consumers who purchase energy directly in the production market
are referred to as direct market consumers.
f
The market operator (OMEL) is the company that assumes the management of
the bids for and sale of electricity in the daily power market in exchange for a
regulated fixed fee.
g
The system operator (Red Elctrica de Espaa) is the company whose main
function is to perform activities associated with the technical operation of the
electricity system, ensuring the continuity and security of the electricity supply
and proper coordination of production and transportation systems.
iv
Royal Decree 1955/2000 also establishes the authorisation process for the transfer of
installations. The request for authorisation for facilities transfer must be sent to the
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Directorate-General for Energy Policy and Mining, enclosing supporting documentation
about the applicants. A decision must be rendered by this department within three
months (failure to respond positively within three months means the application is
deemed rejected), prior to the report of the CNE. The applicant then has six months to
confirm the transfer.
III

SERVICES
Energy (electricity or natural gas) is transported from the point where it is generated to
the point of consumption by large industrial consumers which are directly connected to
the transmission system and to the point of intersection with the distribution networks
(substations), through which power is carried to the remaining consumers.
The electricity transmission network is made up of lines of voltage equal to or
greater than 220kV, international connections lines regardless of its voltage, transformers
of 400/220kV, transformers compounds of voltage equal to or greater than 220kV and
other elements of voltage equal to or greater than 220kV. There are also international
interconnection facilities connecting Spain with other Spanish territories, which have a
voltage transport function lower than 220kV.
Transport networks are developed when new investment is periodically approved
by the Ministry of Industry. The construction of network sections included in this
planning is regulated, and remuneration is calculated by the regulator in accordance
with the approved methodology contained in the regulations, recently defined in Royal
Decree 1047/2013. Law 17/2007 established the single-carrier model, with Red Elctrica
de Espaa as the owner of the entire transportation network. As a system operator, it
must comply with the relevant instructions by filing investment plans for future years.
ii
Power distribution brings the energy from the output of transport networks (electricity
or gas) to the final consumer. Electrical distribution facilities comprise voltage lines lower
than 220kV, which are not considered part of the transport network.
Prior to June 2009, distribution companies were also responsible for servicing
a regulated tariff supply to consumers. Since then, regulated supply has disappeared,
creating a last resort supply (TUR) which will be managed by suppliers of last resort,
who must supply electricity at a price no higher than that fixed by the government.
Currently, new specific rules on the current PVPC have been set out in the Electricity
Act 24/2013. The new regulation restricts the new tariffs to two groups of consumers:
(i) consumers considered vulnerable; and (ii) consumers who temporarily do not have
a supply contract with a free market retailer and are not entitled to be applied PVPCs.
Therefore, the Spanish government will establish by regulations the provisions required
to determine PVPCs and last resort supply, being configured as new regulated tariffs.
Distributors must build, maintain and operate power grids linking transport to
consumption centres. For the proper development of these functions, distributors have
the obligation to expand distribution facilities when needed to meet new demands for
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electricity, at all times ensuring an adequate service quality level, and differentiating
by type of consumption and area. Furthermore, distributors are responsible for supply
measurement, applying consumer tolls or access fees.
Distributors are required to keep a points-of-supply database, always maintaining
confidentiality. They must send the required customer information to the Supplier
Switching Office and provide reports to the transporter about their network incidence
and maintenance plans to ensure certainty of supply.
Finally, distribution companies must also provide information to clients, the
Ministry of Industry, Tourism and Trade, autonomous communities, the Supplier
Switching Office, and the system operator. They must also submit their investment
plans annually. Distribution companies, in the exercise of their activities, are entitled to
payment by the administration.
Notwithstanding the foregoing, prior to the approval of Royal Decree 222/2008,
laying down the emoluments of electricity distribution activity, electricity distributors
with fewer than 100,000 customers were covered by a special regulation (established
in Transitional Provision 11 of Law 54/1997) with a different financial and regulatory
regime from other distributors. Approval of Royal Decree 222/2008 meant that all
distribution companies were subject to the same remuneration and policy, therefore
removing the previous size differentiation. Recently, Royal Decree 222/2008 has been
repealed by Royal Decree 1048/2013, which establishes the methodology for calculating
the remuneration of distribution activities.
iii
The Hydrocarbons Law laid the foundations for a reorganisation of the gas system,
far removed from the monopoly in which Gas Natural SDG group performed all the
activities within the natural gas industry. This Law introduced (1) separation of regulated
activities and competition activities, (2) free access for third parties to gas infrastructure,
(3) establishment of regulated access charges, (4) progressive full-trade wholesale and
retail liberalisation, and (5) regulation of minimum security and strategy.
The Hydrocarbons Law was amended in 2007 by Law 12/2007 of 2 July, which
transposed the major changes to the rules of European Union Directive 2003/55/
EC (subsequently repealed by Directive 2009/73/CE), to promote the creation of a
competitive internal energy market:
a
rearrangement of the powers of the different regulatory authorities;
b
development of the rules governing access to networks;
c
the functional separation of regulated activities;
d
regulating the activity supply of last resort;
e
creation of the Supplier Switching Office; and
f
establishing a schedule of tariff system adaptation and natural gas supply for the
supply of last resort.
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Directive 2009/73/CE concerning common rules for the internal natural gas market
aimed at making a definite contribution to the creation of an internal energy market
through the following principles:
a
effective separation of network activities from supply and production activities;
b
increase of the powers and independence of the national regulators, who must
cooperate across a network of energy regulators, but who have the capacity to
make binding decisions and impose sanctions;
c
the creation of supranational transmission system operators by achieving EU-wide
market integration; and
d
improvement of the functioning of the gas market and, specifically, greater
transparency and access to free storage facilities and LNG terminals.
Furthermore, the Spanish Hydrocarbons Act has also been amended by Act 11/2013,
of 26 July, concerning measures to support entrepreneurship and stimulate growth
and job creation. This regulation introduced several amendments by virtue of which
distribution agreements are more strictly regulated. Therefore, sale agreements within the
sector cannot contain exclusivity clauses which [] set, recommend or affect, directly
or indirectly, the retail price of fuel and clauses that determine the sale price of fuel
with reference to a particular fixed, maximum or recommended price, or any others
that contribute to indirect fixing of the sale price shall be void and deemed deleted.
Additionally, the new Electricity Act 24/2013 repeals Article 83-bis of the Spanish
Hydrocarbons Law.
iv Rates
Remuneration for transportation and distribution are administratively established in
response to investment costs, operation and maintenance, and network management,
according to a calculation model defined by the regulator by royal decree and in
accordance with provisions established in the former Law 54/1997, current Electricity
Act 24/2013 (Article 14.8). Thus, the remuneration will be established by reference
to the costs required to build, operate and maintain the facilities complying with
the principle of covering the electricity supply at the lowest cost. Accordingly, Royal
Decrees 1047/2013 and 1048/2013 establishing the methodologies for calculating the
remuneration for transportation and distribution activities have been implemented.
This remuneration methodology is based on the following remunerative principles:
a
the accrual and collection of the remuneration generated by transmission and
distribution facilities placed into service in year n will start from 1 January of
year n+2;
b
the remuneration for investment will consist of assets in operation that have not
been depreciated. The basis for their financial return will be the net value of the
assets;
c
the financial rate of return on the assets eligible for remuneration out of the
electricity system for transportation and distribution companies will be linked to
the yield on 10-year government debt securities on the secondary market plus a
suitable spread; and
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d
the remuneration is determined for each regulatory period which will last for six
years but the remuneration parameters can be reviewed before the start of each
regulatory period.
The remuneration methodology of transportation activity should comprise economic

incentives for the improvement of the availability of the facilities and any other goal. In
the case of distribution, the remuneration methodology must include the formula for
remunerating other regulated functions performed by distribution companies, as well
as any incentives that may be appropriate for the improvement of the supplys quality,
reduction of losses, combating fraud, innovating technology and any other goals.
v
Security in relation to transportation facilities of electrical energy is relevant from the

perspectives of both industrial safety and security of supply.
Industrial safety is dealt with by Law 21/1992 of 16 July and the Electricity Act
24/2013, understood as safety aimed at risk prevention and control, as well as protection
against accidents and disasters capable of causing harm to the population or damage to
flora, fauna, property or the environment. Security of supply is dealt with under the
sector-specific regulations. The new Electricity Act 24/2013 states in this regard that
few basic technical rules needed will be established to ensure the reliability of electricity
supply and installations of transport network.
IV
ENERGY MARKETS
According to the Electricity Act 24/2013, electricity production takes place in the
electrical power production market in a free competition regime. The electricity
production market is composed of all business transactions of purchase and sale of
energy and other services related to the supply of electricity. It includes forward markets,
a daily market, an intraday market, the resolution of technical constraints of the system,
ancillary services, and the management of deviations.
The Spanish electricity market has historically competitive prices for end-users
compared with other European markets. The Iberian Electricity Market was started in
2007, and the results of this integration in the market have been obvious: while in the
second half of 2007 the average price differential between the Portuguese and Spanish
electricity systems was 10 per MWh, this difference fell to 0.3 per MWh by 2010,
with identical rates on both sides of the border for the majority of the time.
The operation of the wholesale market at any given time is determined by the
mix of generation structure, import capacity, the imperfect meshing of the network, the
inelasticity of demand and the system reserve margin. The market design rules can make
this operation more or less efficient, but cannot make up for significant deviations in
these factors.
From the opening to competition of the generation market in January 1998 to
2005, almost all of the transactions in wholesale energy were carried out in the pool.
Forward markets and bilateral contracts have been developed gradually with the evolution
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of the regulations. Thus, in recent years, the energy involved in the daily market run by
the Iberian Electricity Market Operator, OMIE, has ranged between 45 and 55 per cent
of demand, with the remainder opting for bilateral transactions.
Despite the reduction in the quantities traded in the daily market, its price still
represents the main visible energy price reference and the underlying settlement of
bilateral contracts, the over-the-counter (OTC) market and forward markets organised
by Iberian Market Operator Portugal, OMIP.
In this context the significant increase in OTC negotiations on the financial
market should also be noted. The volume of energy traded in this market went from 6
per cent of domestic demand in 2007 to 10 per cent in 2010.
The low prices in the Spanish wholesale market compared with their European
counterparts have reflected the influence of generation technologys price takers. As an
illustrative example, in the period from December 2009 to March 2010 the market price
showed a very substantial fall even below fuel price, reaching an average of 19.6 per
MWh in March 2010, reflecting, inter alia, prices of 0 per MWh for almost 300 hours.
One of the main causes of this was a 1.91 per cent reduction in demand, along with
growth in wind production coinciding with intense rainfall.
ii
Since 1998, the Spanish electricity sector has undergone a major transformation as a
result of regulation changes resulting from the adoption of Directive 96/92/EC, the
main objective of which was to create an internal market for electricity in the EU by
liberalising electricity generation and sale.
The electricity markets are regulated by:
a
a market operator, responsible for the preparation of the daily operation of the
system, matching offers and demands, supervised by a committee of representatives
of producers, distributors, traders and qualified consumers;
b
a system operator, ensuring continuity and security of supply (Red Elctrica de
Espaa);
c
the Electricity System Commission, which protects consumer interests and
ensures the transparency of the whole system;
d
the Industry and Energy Ministry must supervise the correct operation of
production activities and consumption of electricity;
e
autonomous communities, which also have direct responsibilities in regulating
their electrical systems; and
f
the European Union, which establishes the general framework of the electrical
system in all countries of the Union through directives and legal regulations.
Royal Decree 949/2001, which regulates third-party access to gas infrastructure and
establishes an integrated economic system of the natural gas for regulated activities paid
under rates, tolls and regulated fees, also sets out the basic criteria for remuneration of
regulated activities, setting tariffs and fees to be paid by individuals for the use of gas
installations.
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iii
Participants in the energy market may freely agree the terms of contracts for the sale
of electricity to subscribe, subject to the terms and minimum content, under the new
Electricity Act 24/2013 and its implementing regulations.
Electricity traded through daily and intraday markets is remunerated on the
basis of the prices resulting from the balance between supply and demand of electricity
offered. Electricity traded through bilateral contracts or the physical or term market is
remunerated on the basis of the price of the firms contracted operations in those markets.
iv
Market developments
Historically, the energy market has functioned properly, but in recent years a technologydriven influx of price takers has distorted its proper functioning. This has caused a
reduction in the wholesale market price, which, together with a reduction in the thermal
gap, is not sending the right economic signals to garner investment in new capacity.
This situation will only deteriorate in the future, as the progressive decarbonisation
production mix forecasts a greater presence of non-renewables, relegating thermal
technologies main role as back-up power with only a residual role as contributor energy,
jeopardising the recovery of investment. Incentives for investment and the availability of
service, recently established in Order ITC/3127/2011, have not sent sufficient economic
signals to encourage investment in new back-up power in the region of 500 hours per
year, which highlights the need to revise that target.
In particular, a procedure to assist supply security was introduced in 2011 with
the aim of ensuring a level of domestic coal consumption according to the provisions
of the National Coal Plan (which justifies the operation of these plants for security of
supply and capacity for each state to give priority to indigenous sources for up to 15 per
cent of production). This regulatory change involves the generation of coal that is paid
(10 plants totalling 4,700MW) at a regulated price, while production in the process of
withdrawal of the production-demand balance (imported coal and combined cycle) does
not receive any compensation.
V
As stated above, the new Electricity Act 24/2013 has eliminated the former distinction
between ordinary and special regime installations and has substituted them by a new
remuneration system based on the technology and the capacity of the generation
facilities. Under the former remuneration system, special regime installations, which
include renewable energy sources, were not subsidised in the state budget. Instead, they
were included in electricity rates, causing a tariff deficit; however, not only do renewable
energy premiums generate a tariff deficit, so do other items such as regulated tariff billing.
In fact, the special regime premiums cause only one-third of the tariff deficit.
Royal Decree 6/2009, dated 30 April, had previously attempted to limit the
increase of the aforementioned general tariff deficit; however, it was not sufficient, given
that only a year later further steps needed to be taken by the government: a new Royal
Decree-Law 14/2010 was passed, for the same purpose. In this context, the purpose of
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Royal Decree-Law 1/2012 was to limit the impact of renewable premiums in the tariff
deficit, thus reducing costs; in similar terms, Royal Decree-Law 2/2013 aimed to mitigate
the tariff deficit by modifying the remuneration system of regulated activities as well as the
remuneration formula of the special regime facilities.
In addition, there have been several regulatory changes during 2012 and specially
during 2013 in relation to energy production from renewable sources, cogeneration and
waste.
As stated above, the Spanish government has accomplished a structural reform
of the Spanish energy sector starting with the enactment of Royal Decree-Law 9/2013.
This new regulation is focused at addressing the pressing need to immediately adopt a
series of urgent measures that will ensure the financial stability of the national electrical
grid and, likewise, the advisability of overhauling the regulatory framework so that it can
adapt to the events and situation that define the electricity sector at any given period,
with the objective of maintaining the sustainability of the electrical system.
The new regulation abolished the former remunerative system based on a
regulated tariff (the only one in existence since Royal Decree-Law 2/2013 was enacted),
even for generation facilities in operation at the time this new regulation entered into
force. It replaces such regime by a system where the power plants producing electricity
from renewable energy sources, cogeneration and residual waste will receive: a specific
remuneration that is composed of an amount per installed power unit/facility (which
covers, where applicable, the investment costs for a standard plant that cannot be
recovered from the sale of electrical power), in addition to an amount for the operation
itself (which covers, where applicable, the difference between operating costs and the
revenue obtained from the market by said standard power plant).
This specific remuneration is calculated on the basis of a standard power plant,
over the useful regulatory life thereof and based on the business activity that would be
carried out by an efficient and well-managed company. Thus, production facilities will
receive a reasonable profitability based on standardised costs and revenues for a standard
power plant.
The provisions contained in Royal Decree-Law 9/2013 relating to the remunerative
system of energy producers from renewable sources, cogeneration and waste have basically
been passed to the new Electricity Act 24/2013. Accordingly, Section 5 of Article 14
of the Act determines that the remuneration for generation activities will include the
following concepts:
a
the correspondent remuneration for the participation in the generation daily and
intraday market;
b
the system adjustment services required to guarantee a suitable supply to the
consumer;
c
when applicable, the remuneration for the capacity mechanism;
d
when applicable, the additional remuneration for the generation activities carried
on in the electricity systems of non-peninsular territories; and
e
when applicable, the specific remuneration for the generation of electricity using
renewable energy sources, cogeneration and waste.
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Spain
ii
Objectives and actions on energy efficiency in Spain are part of the policy objectives
and progress set by the regions institutions. Also, in addition to the objectives approved
in the European Council in spring 2007 of reducing greenhouse gas emissions and
increasing renewable energy, a target was included of improving energy efficiency by
20 per cent in 2020 in the EU compared with the baseline scenario (the target block is
commonly called 20-20-20 targets). Unlike the target for 20 per cent renewables and 20
per cent reduction of carbon dioxide emissions, the efficiency target is not binding and
has been distributed by Member States.
In line with European objectives, the only public reference in a Spanish context
has been the 20 per cent target of improving energy efficiency in the governments
Strategy for a Sustainable Economy in December 2009, which includes a target of 20
per cent reduction in energy usage by 2020 compared with the current scenario.
At a national level, the main energy efficiency measures are based on the Spanish
Energy Efficiency Strategy (E4) for the period 20042012, which has developed in
several plans: Plan of Action 20052007, Plan of Action 20082012 and Plan of Action
20112020.
The 20082012 Action Plan includes a significant number of structured activities
and strategic sectors. The measures carried out are divided into the following categories:
a
legislative actions, generally far-reaching, and representing a complex set of
recommendations, regulations, rules of functioning, constraints and generally
binding rules;
b
incentive measures for carrying out audits and analysis of consumption of the
technologies used, and promoting investment in equipment to increase energy
efficiency; and
c
training in good practices, knowledge of available technology, advances and new
techniques of management demand, consumption and, in general, the correct use
of energy.
Alongside this plan, some of the key energy-efficiency measures stated in the Spanish
Action Plan 20112020 include those in the transportation, building, utilities and
cogeneration sectors.
iii
Royal Decree 1565/2010, dated 19 November, which modifies some aspects of the
special energy production regime in order to promote innovative investment, stated that
the Ministry of Industry could grant additional compensation for solar thermoelectric
projects installations with a high level of innovation by means of a tender. Through a
resolution dated 24 June 2011 of the State Secretary for Energy, the tender was granted
to Termosolar Alcazar SL. However, this has been challenged by other energy companies
before the Spanish courts and its resolution is still pending.
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Spain
VI
THE YEAR IN REVIEW
As described above, in recent months the Spanish energy sector has suffered a broad
reform as a consequence of the governments attempts to reduce the tariff deficit and to
re-establish the divergence between the electricity costs and the income obtained from
regulated electricity activities. There were several reforms during 2013:
a
Royal Decree-Law 2/2013, of 1 February, which implements urgent measures
in the electricity and financial sectors. It focused on the modification of the
remuneration system of regulated activities, the remuneration formula of the
special regime facilities by which the intention is to avoid an increase in the
tariff deficit, and the higher electric tariffs through which consumers will bear
some of the costs. This regulation eliminated the premium to the special regime
power generation facilities that sold power on the electricity generation market,
instead of releasing it to the system through the transportation or distribution
grid, thus achieving a single regulated tariff. In other words, renewable generators
will not have the possibility of choosing between market price plus premium and
regulated tariffs. By contrast, all renewable generators will be subject to regulated
tariffs unless they choose to sell at market price without a premium.
b
Royal Decree-Law 9/2013 of 13 July, whereby certain urgent measures are taken
to ensure the financial stability of Spains electrical system. This regulation aimed
to mitigate the tariff deficit in order to ensure the financial stability of the energy
system. To this end, it repealed (1) Royal Decree 661/2007, of 25 May, which
regulates the electricity production activity under the special regime; (2) Royal
Decree 1578/2008, of 26 September, on the remuneration for the production
of electricity using solar photovoltaic technology for installations post-dating the
deadline for maintaining the remuneration established in Royal Decree 661/2007,
of 15 May, for such technology; and (3) Article 4 of Royal Decree-Law 6/2009,
of 30 April, approving the subsidy rate. One of the main issues concerning this
regulation is the fact that until further regulation has been approved, all payment
collection rights and settlements paid to the producers from 13 July 2013 shall be
on account of the definitive regularisation and pending such regularisation.
c
The new Electricity Act 24/2013, of 26 December, repeals the former Electrical
Sector Law 54/1997 and modifies a great number of energy implementing
regulations.
VII
Spain depends heavily on foreign energy and needs all available resources. Its system is still
in a state of revision, which creates uncertainty for international investors, who demand
safe, predictable and transparent markets. The main objectives for the government in
the short term are to shore up the markets for this purpose, but it is also important to
definitively outline the energy mix that is wanted for the next 20 years; once defined, this
plan should remain in place for that period of time.
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Chapter 33
SWEDEN
Hans Andrasson, Martin Gynnerstedt and Malin Hkansson1
I OVERVIEW
Swedish energy policy shares a common basis with energy policy developed at the EU
level and aims at ecological sustainability, fair competition and security of supply. The
policy strives to create conditions for efficient, sustainable energy consumption and a
cost-efficient energy supply involving a reduced negative impact on peoples health, the
environment and the climate, and enabling the transition to an ecologically sustainable
society.
More than half of the electricity produced in Sweden comes from renewable
energy sources (e.g., hydropower, biofuels and wind power, hydropower being the main
source in this category, amounting to approximately 48 per cent), whereas around 38 per
cent is generated by nuclear power.
Electric power and natural gas are bought and sold on an open and free competitive
market and no authorisation is required for the sale of electric power or natural gas to
customers.
Although the Swedish electricity and natural gas markets have been deregulated,
they are still characterised by high market concentration and a limited number of large
operators.
Sweden is part of an integrated Nordic power market. In recent years, there has been
an increase in the amount of electricity exchanged between Sweden and other countries,
including the other Nordic countries.
Hans Andrasson is a partner, and Martin Gynnerstedt and Malin Hkansson are senior
associates at Mannheimer Swartling.
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Sweden
II REGULATION
i
The regulators
The main regulatory body for the Swedish energy markets is the Swedish Energy Markets
Inspectorate (the Inspectorate), an authority under the Ministry of Enterprise, Energy
and Communications. It supervises the Swedish electricity, natural gas and district
heating markets. One of the main responsibilities of the Inspectorate is to improve the
functioning and efficiency of these markets. The Swedish parliament and the government
decide on the assignments and budget of the Inspectorate.
Svenska Kraftnt, which owns and operates the national grid, is a state-owned
public utility, responsible for transmitting electricity from the major power stations to
regional electrical grids via the national grids. Svenska Kraftnt is also the system operator
under the Electricity Act,2 which means that it has overall responsibility for ensuring
that electrical plants work together in an operationally reliable way so that the balance
between the production and consumption of electricity is maintained throughout the
country. Svenska Kraftnt is also responsible for the Swedish natural gas system and the
coordination of dam safety.
The Swedish Radiation Safety Authority is an authority under the Ministry of the
Environment with national responsibility within the areas of nuclear safety, radiation
protection and nuclear non-proliferation, and it is tasked with ensuring that the parties
or licensees engaged in activities that may involve radiation do so in a safe manner.
Key legislation for the energy markets are the Electricity and the Natural Gas
Acts,3 the District Heating Act4 and, for nuclear energy, the Nuclear Activities Act5 and
the Radiation Protection Act.6 Sweden has implemented the EUs Third Energy Package,
including the Directive 2009/72/EC concerning electricity and the Directive 2009/73/
EC concerning natural gas, mainly as part of the Electricity Act and the Natural Gas Act.7
The relevant EU regulations, part of the Third Energy Package, are directly applicable in
Sweden.
ii
The establishment and construction of energy production facilities may involve different
types of land or water use and therefore requires permits and regulatory approvals
under traditional property law including building permits and other issues under the
Planning and Building Act, and environmental permits under the Environmental Code.
2
3
4
5
6
7
SFS 1997:857.
SFS 2005:403.
SFS 2008:263.
SFS 1984:3.
SFS 1988:220.
Directive 2009/72/EC of the European Parliament and the Council of 13 July 2009 concerning
common rules for the internal market in electricity and repealing Directive 2003/54/EC and
Directive 2009/73/EC of the European Parliament and the Council of 13 July 2009 concerning
common rules for the internal market in natural gas and repealing Directive 2003/55/EC.
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Sweden
These application processes may be both lengthy and complex in nature and require
environmental investigations and impact analyses to be carried out in order to obtain the
necessary approvals. Additionally, in most cases a permit is needed for the operation of
an energy facility.
The purchase and sale of electricity in Sweden takes place on a deregulated market
with competition between the parties involved.
A high-voltage electrical power line may not, with limited exceptions, be built
(or operated) without a permit a network concession covering either a specific line
or an area. A network concession may be granted provided that the line is considered
appropriate from a general point of view and that it meets certain other requirements,
including specific environmental qualifications. Network concessions will be granted
only to legal persons that are suitable to conduct network operations. As a rule, a network
concession for interconnectors may only be granted to a stamntsfretag, a legal entity
that holds network concessions for the national grid (currently only Svenska Kraftnt) or
to legal entities that are controlled by a stamntsfretag.
The rule regarding network concessions for the establishment of a high-voltage
power line also applies (more or less) to the natural gas segment with regards to the
establishment of high-pressure pipelines and storage and LNG facilities, provided such
facilities are connected to the transmission or distribution network.
iii
Foreign investors can participate on equal terms with Swedish investors on the energy
market.
iv
An electric network or a natural gas concession may not be transferred without the
permission of the Inspectorate. Such permission will only be granted to a party considered
suitable to engage in network operations from a public perspective.
Mergers and acquisitions and joint ventures in the energy market may also require
approvals from the Swedish Competition Authority. The thresholds applicable to the
energy industry, regardless of the segment, are the same as those that apply under the
Competition Act.8
Transactions leading to a significant impediment to effective competition,
in particular through the creation or strengthening of a dominant position, are not
permitted.
III

SERVICES
One of the main objectives of the Electricity Act with respect to vertically integrated
companies is to create a clear separation between the transmission or distribution
SFS 2008:579.
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of electricity (i.e., network operations) on the one hand, and activities concerning
production or generation of, or trade in, electricity, on the other hand. Legal entities
carrying out network operations (i.e., the holders of the network concession) are not
allowed to engage in generation or trade in electricity: structural unbundling is required
for all legal entities conducting network operations. Notwithstanding this restriction,
such legal entities may generate electricity if such generation is exclusively intended to
compensate for losses in the network, or if it is performed by mobile reserve plants
intended for occasional use during power outages. Furthermore, legal entities conducting
network operations whose network systems, together with the total network system of
the group of companies of which they are a part, have at least 100,000 electricity users,
must also be functionally unbundled. As a result, the Electricity Act forbids legal entities
that conduct generation from having the same board members, managing directors or
authorised signatories as undertakings that trade in electricity, or vice versa. Legal entities
must also have the necessary assets to be able to make decisions independently of any
group of companies to which they belong.
With Directive 2009/72/EC and Directive 2009/73/EC, new rules were
introduced on unbundling for transmission system operators (TSOs). The unbundling
regime provides for three models: the ownership unbundling model (TSO model), the
independent system operator model, and the independent transmission operator model.
The models are intended to, inter alia, remove the incentive for vertically integrated
undertakings to discriminate against competitors as regards access to the network, and
commercially relevant information and investments in the network. Sweden chose the
TSO model for both the electricity market and the gas market.
The ownership unbundling requirements of the TSO model apply to only one
legal entity in Sweden: Svenska Kraftnt, the owner and operator of the national grid.
In view of the Directives definition of transmission system operator, the national grid
appears to be the only network system that meets the criteria of being a transmission
system.
The Natural Gas Act includes somewhat different regulation than the Electricity
Act. The Swedish natural gas network system extends from south of Malm in southwest Sweden and along the west coast to north of Gothenburg. Due to the limited
network system extension and low number of participants the Swedish gas market is
rather limited, which appears to be one of the reasons for the different approach to
regulation in the Natural Gas Act as compared with regulation in the Electricity Act
(although the EU legislation is in many respects the same for electricity and natural gas).
All Swedish high-pressure pipelines are currently owned by a privately owned company,
Swedegas AB. Accordingly, the ownership unbundling requirements of the TSO model
apply to Swedegas AB. Legal entities carrying out distribution of natural gas may not
also be engaged in trade in natural gas, but are not subject to any functional unbundling
requirements.
ii
Transmission or transportation and distribution access
The Swedish electricity legislation makes no clear distinction between transmission and
distribution. The only network system that appears to meet the definition of transmission
system of Directive 2009/72/EC is the national grid, which is owned, administered and
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Sweden
operated by Svenska Kraftnt. The ownership and operation of the regional distribution
systems are concentrated in three large business groups, Vattenfall, E.ON and Fortum.
Several of the local distribution networks are owned and operated by local municipalities.
Since 2011, Swedegas AB has been the owner of all high-pressure pipelines in the
natural gas sector in Sweden.
A holder of a network concession is required to connect, on reasonable terms and
conditions, an electrical installation to the grid, unless there are specific reasons not to
do so (e.g., insufficient grid capacity). Thus, generators may be connected to the national
grid or a regional or local network as agreed with the respective network owner. The
entire set of terms and conditions for the connection must be reasonable, including the
allocation of the connection costs. A network owner is, however, not normally expected
to make heavy investments to enable a connection. Disputes relating to the conditions
of the connection, including the tariffs charged by the concession holder, are settled
in the first instance by the Inspectorate, the supervising authority under the electricity
legislation.
A holder of a network concession is furthermore obliged to allow the transmission
and distribution of electricity through its power lines to any person or company on
reasonable terms and conditions with respect to tariffs, payment terms, contract terms,
termination, energy volume and effect (the regulations with respect to tariffs are further
described below). The holder of the network concession may not, however, enter into
agreements with customers until the method for determining its terms and conditions
for granting access to the network has been approved by the Inspectorate.
The aforementioned principles also apply in all material respects to the gas market.
iii
Storage facilities and LNG facilities are only subject to the network concession
requirements and the third-party access and tariff regulations in the Natural Gas Act if
the facilities are connected to the transmission system (see Sections II.ii and III.ii, supra).
The owner of a storage facility, a transmission pipeline or an LNG facility is
obliged to grant third parties access to the storage facility, line pack or LNG facility upon
reasonable terms, except where it lacks capacity or has other specific reasons. The tariffs
for such access are regulated (see Section III.iv, infra).
Legal entities that own or operate storage facilities may not be engaged in
production, or trade in natural gas. Certain functional unbundling requirements
(independent organisation and decision-making) apply where such legal entities are part
of vertically integrated undertakings. It may be noted that the unbundling requirements
(except for certain rules regarding preservation of the confidentiality of commercially
sensitive information) do not apply to legal entities that solely own or operate LNG
facilities.
iv Rates
The tariffs charged by network operators for the transmission or distribution of electricity
on the networks must be objective and non-discriminatory.
Through changes in the Electricity Act that entered into force on 1 January 2012,
Sweden has gone from a network tariff system where the tariffs were regulated on an
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Sweden
ex post basis to a system of ex ante regulation. The ex post regulation involved tariffs
being set by the network operators without any prior approval of the Inspectorate, who
monitored the tariffs as they were applied and intervened only where the tariffs were
considered unreasonable. One of the purposes of changing to ex ante regulation was to
bring Swedish legislation in line with the EU directives.
The Inspectorate will now determine, in advance, that the total revenues collected
by the network operator during the regulatory period four years as a rule do not exceed
a certain income cap. At the end of the regulatory period, the Inspectorate will assess to
what extent the network operators actual total revenue deviates from the income cap.
Any amounts in excess of the cap will reduce the income cap to be determined for the
subsequent regulatory period, whereas any amounts below the income cap will increase
the income cap. If the income cap is exceeded by more than five per cent, the cap for the
subsequent regulatory period will also be reduced by an overcharge fine. The Inspectorate
can, upon application by the network operator, under certain circumstances revise the
income cap during or after the regulatory period.
The first regulatory period for the new system began on 1 January 2012. The
income cap must cover reasonable costs for operation of the network operations during
the regulatory period and provide a reasonable rate of return on the capital expenditure
required to operate the network; the quality of the network operations must be taken
into account. The network operators submitted their applications for the income caps
in early autumn 2011. Those eventually approved by the Inspectorate were much lower
than the income caps for which many of the network operators had applied. A number
of network operators appealed the Inspectorates decisions to the administrative court.
The courts judgments were published on 11 December 2013 and the Administrative
Court ruled substantially in favour of the grid operators. The Inspectorate has appealed
against the rulings of the Administrative Court.
On the natural gas market, the tariffs for transmission and storage of natural
gas and access to LNG facilities have until recently been regulated on an ex post basis.
The legislation was amended to an ex ante regulation in 2012 in order to bring tariff
regulation in Swedish natural gas legislation in line with tariff regulation on the Swedish
electricity market.
v
The Energy Agency is the administrative authority for the supply and use of energy in
Sweden and as such safeguards the maintenance of electricity and other energy in both
the short and long term. The Agency has developed a planning system for the supply
of electricity in case of shortage and has been authorised by the government to make
decisions with respect to how the limitation or discontinuation of electricity supply may
be planned.9 Changes have been made to the Electricity Act so that disconnection in case
of shortage will no longer be made in a way that is as fair as possible, but will instead be
made so that critical infrastructure electricity users are prioritised.
Decree on Planning for Prioritising of Critical Infrastructure Electricity Users (SFS 2011:931).
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Sweden
According to this structure, electricity users will maintain their supply in
accordance with their ranking on a list of prioritised critical infrastructure electricity
users. The principles and basis for the prioritisation is to divide users of electricity in
Sweden into eight groups, the first being users that, within hours of shortage, have a large
impact on peoples lives and health. The new system for prioritising which formally
came into effect in January 2012 is designed on the assumption that disconnection can
be made on a local grid level, whereby existing electricity may be directed to prioritised
users, whereas other users are disconnected.
In the event of a future electricity shortage, Svenska Kraftnt, operator of the
national grid, may thus order the power supply companies to disconnect users in
accordance with plans prepared by the principle of ranking critical infrastructure
electricity users. Users of specific importance may include railways, larger airports and
structures used by the Swedish armed forces or for electronic communication.
IV
ENERGY MARKETS
The deregulation of the electricity markets of the Nordic countries in the mid-1990s
was followed by an integration of the Nordic markets and the establishment of a Nordic
electricity exchange, the Oslo-based Nord Pool. Today, the trading in physical electricity
contracts is organised by Nord Pool Spot, which is owned jointly by the transmission
system operators of Norway (28.2 per cent), Sweden (28.2 per cent), Denmark (18.8 per
cent), Finland (18.8 per cent), Estonia (2 per cent), Lithuania (2 per cent) and Latvia
(2 per cent), whereas the trading in financial (i.e., cash-settled) electricity contracts is
organised by NASDAQ OMX Commodities, a division of the NASDAQ OMX group.
Nord Pool Spot offers day-ahead auctions (the Elspot market) and continuous
intraday trading (the Elbas market).
On the day-ahead market, which covers the Nordic and Baltic region, Nord Pool
Spot participants enter into contracts for sale and purchase of electricity for delivery
hour-by-hour the next day. Bids and offers must be entered into the trading system
before noon on the day prior to delivery.
As soon as the deadline to submit orders has expired, all purchase and sell orders
are aggregated into two curves for each delivery hour: a demand curve and a supply
curve. The system price for each hour is determined by the intersection of the demand
and supply curves representing all bids and offers made in the Nord Pool Spot area. In
connection with the publishing of the prices for the next day, each participant receives a
report on how much electricity it has bought or sold for each hour of the next day. The
net positions of the participants are also sent to the TSOs of the Nord Pool Spot area,
who use the information to calculate the balancing power for each participant.
The intraday market Elbas, which is available in the Nordic countries, the Baltic
region and Germany, serves as an adjustment market where members can trade contracts
until one hour before delivery.
As a complement to the market for physical contracts, NASDAQ OMX
Commodities organises trading and clearing in standardised cash-settled financial
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Sweden
electricity contracts. The contracts include future, forward and option contracts, and
contracts for price area difference, of a duration of up to six years.
ii
Trading in energy contracts may be subject to general Swedish insider trading regulations,10
which impose certain restrictions on dealings in energy contracts if considered financial
instruments.11 This will apply to, inter alia, financial electricity contracts traded on
NASDAQ OMX. In addition, the European Market Infrastructure Regulation (EMIR),
which entered into force on 4 July 2012, is directly applicable in Sweden.
EU Regulation 1227/2011 on wholesale energy market integrity and transparency
(REMIT), which entered into force on 28 December 2011, is directly applicable in
Sweden and introduces insider dealing restrictions specifically covering trading in
wholesale energy products. The Regulation involves a system of disclosure, registration and
enforcement to be overseen by the EU Agency for the Cooperation of Energy Regulators
in cooperation with the national regulatory authorities. It applies to transactions in
wholesale energy products (electricity and gas only), both actual contracts and derivatives.
Among the obligations that are now in force are prohibitions of insider trading and
market manipulation, and obligations to publish inside information. A new Swedish act,
complementing REMIT, came into force on 29 June 2013. The act introduces criminal
liability for insider trading, market abuse and failure to meet reporting requirements, in
relation to wholesale energy products. In addition, the act introduces the Inspectorate as
the regulating authority for REMIT and the complementing act. As of early 2014, the
Inspectorate will require registration of market participants, as well as current reports on
transactions made and information that may affect the market.
iii
Approximately 77 per cent of the consumption of electricity in the Nordic countries was
traded on Nord Pool Spot.12 Market participants may also sell power, as well as natural
gas, by entering into individual contracts.
There are no specific regulatory requirements that govern the contractual terms
for energy sales as long as the end-user is not a consumer. A company supplying
electricity, however, must conclude an agreement with Svenska Kraftnt, which operates
the national grid, for the balancing responsibility or have entered into an agreement
with another company for the balancing responsibility as a service. The aforementioned
principles also apply in all material respects to the gas market.
10
The Swedish Market Abuse Act (SFS 2005:377) implementing EU Directive 2003/6/EC on
insider dealing and market manipulation.
11
Financial instrument, as defined under the Swedish Securities Market Act (SFS 2007:528)
implementing EU Directive 2004/39/EC on markets in financial instruments.
12 www.nordpoolspot.com.
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iv
Market developments
Since 1 January 2012, Sweden and Norway have a joint electricity certificate market. The
aim for the two countries is to increase their production of electricity from renewable
energy sources by 26.4TWh by 2020. A common market allows trading in both Swedish
and Norwegian certificates, and certificates to be received for renewable electricity
production in either country.
V
A new climate and energy policy was adopted by the Swedish parliament in 2009.13 It set
a target for the consumption of energy from renewable sources, which by 2020 should
account for at least 50 per cent of total energy consumption, as compared to the 20 per
cent target that applies at the EU level.
Traditionally, the tax system has been the means to reach energy and climate
policy goals in Sweden. In connection with the tax reform in 19901991, Sweden began
the process of a green tax exchange. Under the green tax exchange scheme, energy taxes
have been increased and the revenues from those taxed used for other purposes, for
example, decreasing income tax. The idea is to put a price on the environment by, for
example, making pollution more expensive, thereby influencing people to make more
energy-smart choices. The main legal framework with respect to energy taxation is laid
down in the Act on Excise Duties on Energy,14 which contains provisions on energy tax,
carbon dioxide tax, sulphur tax on fuels, and energy tax on electricity.15
Nowadays, there is an increased interest in market-based instruments such as
emission trading rights and electricity certificates. The EUs emission trading system was
implemented in Sweden by the Act on Trade in Emission Rights16 and the Ordinance on
Trade in Emissions Rights.17 The Energy Agency is the National Registry administrator
for Sweden and the National Registry has been operational since the beginning of 2005.
The Electricity Certificates Act entered into force in 2003.18 The purpose of the
Act is to promote the production of electricity from renewable energy resources through
the use of the competitive mechanisms of the market. A market supply of electricity
13
14
15
16
17
18
Government Bill, prop. 2008/09:163.

SFS 1994:1776.
Directive 2003/96/EC restructuring the Community framework for the taxation of energy
products and electricity has been implemented into this Act.
SFS 2004:1199.
SFS 2004:1205. Inter alia, Directive 2003/87/EC of the European Parliament and of the
Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance
trading within the Community as well as the subsequent amendments to this Directive,
including but not limited to Directive 2004/101/EC amending Directive 2003/87/EC
establishing a scheme for greenhouse gas emission allowance trading within the Community,
in respect of the Kyoto Protocols project mechanisms.
The 2003 Act has now been replaced by the new Electricity Certificates Act (SFS 2011:1200).
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certificates is created by the state issuing tradeable certificates to the producers for
every megawatt hour of electricity produced from renewable energy resources such as
wind power, small-scale hydropower, certain biofuels, solar power, geothermal power,
wave power and peat used in combined heat and power plants. A market demand for
certificates is created by imposing an obligation on electricity suppliers to purchase
and keep an annual stock of certificates corresponding to a certain proportion of the
electricity that they sell in the relevant year a quota obligation. Should the electricity
supplier not keep the necessary number of certificates, a fee will have to be paid. The
cost of the electricity certificates to the supplier is transferred to the energy customers as
part of the price of the electricity. As the costs of the electricity certificates are transferred
to the customers, the electricity prices for electricity that is not green will rise, giving
customers an incentive to purchase green electricity. Electricity-intensive companies,
which are registered at the Energy Agency, are obliged to handle the quota obligation
themselves. Such companies are to some extent also exempt from the quota obligation in
order to avoid costs relating to the purchase of electricity certificates getting too high and
thereby risking harm to such companies competitiveness on the international market.
The Renewable Energy Directive19 has also been transposed into Swedish law
by, inter alia, the Act Concerning Sustainability Criteria for Biofuels and Bioliquids.20
The Act includes specific requirements concerning sustainability criteria for biofuels
and bioliquids. These sustainability criteria have to be fulfilled in order to attain tax
exemptions for the relevant biofuels and bioliquids.
Other means of reaching the energy policy goals include various restrictions as
regards emissions, which are imposed on industries through the environmental legislation,
energy efficiency programmes (see Section V.ii, infra) and the support through, inter
alia, grants distributed by the Energy Agency to research and development projects
concerning supply, transformation, distribution and use of energy.
ii
Various measures have been undertaken within the area of energy efficiency, mainly
aiming to improve the efficiency within the Swedish industries and the building sector.
On 25 October 2012, the EU adopted Directive 2012/27/EU on energy efficiency.
The Directive establishes a common framework of measures for the promotion of energy
efficiency within the EU in order to, inter alia, ensure that the EUs 2020 headline
target on energy efficiency is met. The Directive will be implemented in Sweden at the
beginning of June 2014.
iii
The Energy Agency provides support to Swedish energy research and innovation projects.
Currently the Agency gives priority to six areas: studies in energy systems, the power
19
20
Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on
the promotion of the use of energy from renewable sources and amending and subsequently
repealing Directives 2001/77/EC and 2003/30/EC.
SFS 2010:598.
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system, the transport sector, fuel-based energy systems, the building as an energy system,
and energy-intensive industry. Support is given by way of grants to, inter alia, basic
research projects, development of new energy technology, business development and
innovations.
VI
THE YEAR IN REVIEW
Swedegas AB, Gteborgs Hamn AB (Port of Gothenburg) and Vopak LNG (a subsidiary
of Royal Vopak) are planning to build an LNG terminal in the port of Gothenburg,
which will be the first in Sweden. It will operate according to the open access principle,
which makes it possible for any company that is interested in supplying LNG to the
Swedish market to contract capacity at the terminal. The terminal is expected to become
operational in 2015.
Swedens first wave energy park is due to open in the municipality of Sotens,
located on the western coast of Sweden. When fully scaled, it is expected to be the worlds
largest with over 400 interconnected wave energy units. The cable, which has already
been drawn, is designed for a park of 10MW. The park is the result of a cooperation
between Seabased AB, which has developed the technology, and Fortum, one of the
largest energy producers in Sweden. The project is made possible partly by an investment
grant of 139 million kronor from the Swedish Energy Agency. If the activities progress
according to plan, the construction of the park will be completed in 2015.
VII
For several years there has been discussion in Sweden about the lack of competition
on the district heating market. As a consequence, the government set up a third-party
access (TPA) inquiry tasked with drawing up a regulatory framework for TPA to district
heating networks. Based on the inquiry, the government has now referred a proposal to
the council on legislation, which entails an obligation for network owners to allow access
to producers or network owners wishing to distribute district heating production. The
bill is expected to enter into force on 1 August 2014.
In December 2013, the government issued a draft bill in which it proposes
amendments to the Electricity Act with regard to determination of electricity tariffs.
The proposal amends the Electricity Act in two respects. It introduces the possibility
for the government to authorise the Inspectorate to issue regulations for how the tariffs
are determined (i.e., sub-delegation). Further, the authorisation to issue regulations is
expanded.
An interesting topic that is currently subject to discussions in Sweden is how
the electrical power system should be developed to meet the demands of the increasing
share of renewable electricity production of the total electricity production.21 This is
21
See for example the debate article Our Electricity: What Really Lies Ahead, Mechanisms
of tomorrows electricity system and its new regulatory framework a Nordic perspective,
published by Sweden Energy, March 2014.
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Sweden
not just a Swedish matter but involves other countries as well. At the EU level the
focus is on establishing an internal market for energy, as expressed in the Third Energy
Package. Whereas on the national levels, following the financial crisis, there appears to
be a tendency to move towards a more nationalistic approach to the development of the
systems. The discussions concerning this matter will continue in the years to come.
The Finnish energy company Fortum is selling its electricity grid business in
the Nordic region to allow it to focus on generating power. In December 2013 the
company announced that it had sold its electricity grid in Finland and in April 2014 it
announced the sale of the electricity grid in Norway. Fortum has also declared that it
is preparing for a possible sale of its electricity grid in Sweden as well. An explanation
of Fortums decision to divest its electricity grids may be that the profits from the grid
business, which are based on regulated tariffs (see Section III.iv, supra), do not meet
Fortums profit requirements. Infrastructure assets are attracting increasing interest from
institutional investors and pension funds thanks to their stable, predictable returns. It
can be expected that other grid owners will follow Fortums example and sell their grids
in order to increase profits.
439
Chapter 34
SWITZERLAND
Georges P Racine1
I OVERVIEW
The Swiss energy sector has its own distinctiveness. Switzerland has been referred to as
the Water Tower of Europe; indeed, hydropower accounts for about 54 per cent of
electricity production in the country, while nuclear power accounts for about 39 per
cent. Other conventional thermal and new renewable energies, including solar, wood,
biomass, wind, geothermal and ambient heat, account for about 5 per cent.2
Despite the countrys high dependence on nuclear energy, the Federal Council
has decided to gradually phase out nuclear power. The safe operational lifespan of the
existing nuclear power plants is expected to be about 50 years. On this basis, the last of
Switzerlands nuclear power plants will be taken offline in 2034.
The Swiss electricity market has also been described as highly fragmented due to
the number of market participants. Such a high number is peculiar considering the size
and population of the country.
Electricity represents approximately 24.1 per cent of Swiss energy consumption,
while oil and gas represent about 53.3 per cent and 12.9 per cent respectively. Coal, wood,
industrial waste and other renewable energies constitute the remaining 9.7 per cent.3
As a landlocked mountainous country and non-EU member, which is located at
the heart of Europe, Switzerland must implement its energy policy wisely. At the same
Georges P Racine is a partner at Lalive and a director of Lalive in Qatar LLC. The author
would like to thank Leonor Daz de Crdova for her assistance in researching materials for this
chapter.
2 www.bfe.admin.ch/themen/00526/00541/00542/00631/index.html?lang=fr&dossier_
id00867.
id00867.
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Switzerland
time, certain decisions may naturally impose themselves despite any political opposition
and the tendency towards renewable forms of energy.
Switzerland produces neither oil nor gas. Despite the fact that there are indications
that the exploitation of shale gas could be possible in certain parts of the country, this
chapter on Switzerland focuses on the electricity industry.
II REGULATION
i Policy
The Swiss Federal Constitution, the Energy Act, the CO2 Act, the Nuclear Energy Act and
the Electricity Supply Act are all integral parts of the instruments defining a sustainable
and modern Swiss energy policy. In addition to legal instruments, the energy policies
of the federal government and the cantons are also based on the presentation of energy
perspectives as well as on strategies, implementation programmes and the evaluation of
energy-related measures at the municipal, cantonal and federal levels.
Energy policy was only anchored in the Swiss Federal Constitution in 1990,
when provisions were added stipulating that the federal government and the cantons are
obliged to use their competences to ensure an adequate, broad-based, secure, economical
and ecological energy supply, and the economical and efficient use of energy. This
comprehensive list of requirements places high demands on energy policy at the federal
and cantonal levels, and simultaneously demonstrates how difficult it is to find suitable
solutions.
Since 1990, all cantons have drawn up their own energy legislation and regulations,
and with the enactment of the Federal Energy Act and the Federal Energy Ordinance on
1 January 1999, the Federal Council fulfilled the mandate it had received following the
approval by the electorate of the energy provisions in 1990.
The energy perspectives as drawn up by the Federal Council have served as a
basis for all political decisions in the energy field and have been reviewed and updated
regularly since the establishment of the General Energy Plan in the mid-1970s.
The Energy Perspectives 2050 have been updated after choosing between
three options for the provision of electricity. In 2011, the Federal Council decided to
follow option 2 (no replacement of existing nuclear power plants at the end of their safe
operational lifespan).
Non-replacement of older nuclear power plants restricts the options for future
electricity production. After the safe operating period expires nuclear power plants will
not be replaced and will be decommissioned (Beznau I: 2019; Beznau II and Mhleberg:
2022; Gsgen: 2029; Leibstadt: 2034). The shortfall is expected to be covered with an
optimised mixture of hydropower, new renewable energies, cogeneration facilities, gas
combined cycle and electricity imports. Hydropower becomes very significant and will
have to be expanded correspondingly.
As thermal generation using fossil fuels will increase, additional emissions of
1.09 to 11.92 million tonnes of carbon dioxide are anticipated by 2050, depending
on the proportion of cogeneration and gas combined cycle. The government is hopeful
that carbon dioxide emissions from the energy sector will be reduced by 14.4 million
tonnes compared with 2009 by pursuing measures in todays energy policy until 2050,
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Switzerland
which means that overall emissions will not increase despite increased generation using
fossil fuels. Electricity grids will have to be extended and rebuilt and transformation of
distribution grids to smart grids will become compulsory. Optimal connection to the
European grid will have to be guaranteed.
According to initial calculations, the cost to the economy for modernising and
constructing power plants and measures to reduce electricity demand amount to about
0.4 to 0.7 per cent of gross domestic product.
In order to cover the shortfall in the electricity supply caused by the decision not
to replace the nuclear power plants, Switzerlands energy strategy has to be revised. The
Federal Council has therefore set the following priorities:
a
Reduction in energy consumption: the new energy outlook shows that the
demand for energy could rise to around 90 billion kWh a year by 2050 if tighter
measures are not put in place (2010: around 60 billion kWh). The main reasons
for this are population growth, increasing duplication of household appliances,
new appliances and applications, greater living space per person, but also the
increasing electrification of transport. The Federal Council therefore intends to
encourage the economical use of energy in general, and of electricity in particular.
Enhanced efficiency measures include minimum requirements for appliances (best
practice, energy label) and other regulations, bonus-malus mechanisms (efficiency
bonus), measures to raise public awareness (strengthening of SwissEnergy) and
measures regarding the production of heat.
b
Broadening of electricity supply: hydropower and new renewable energies
should be bolstered in particular. Their share in the current energy mix needs to
be expanded significantly. That is the main aim of cost-covering remuneration
for feed-in to the electricity grid. However, in order to meet demand there
also needs to be an expansion of fossil fuel-based electricity production with
cogeneration (combined heat and power) (firstly) and gas-fired combined-cycle
power plants (secondly). The Federal Council is retaining its climate policy
objectives. The increasing share of irregular power production (wind, solar)
requires a restructuring of the pool of power plants to ensure the necessary
storage and reserve capacities. Furthermore, the conflict of interests between
efforts to protect the climate, waterways and countryside and spatial planning
has to be resolved constructively.
c
Maintaining electricity imports: imports will continue to be necessary to
ensure security of supply and to cover temporary fluctuations; however, the
Federal Council is of the opinion that Switzerland should continue to remain as
independent as possible in terms of electricity production.
d
Expansion of electricity transmission grid: the rapid expansion of the electricity
transmission grid and the transformation of transmission networks into smart
grids is essential for future domestic production infrastructures and electricity
imports. These intelligent grids allow direct interaction between consumers, the
network and power producers and offer great potential with regard to optimising
the electricity system, delivering energy savings and consequently bringing down
costs. Switzerlands power grid should be optimally integrated into the European
grid and the future European supergrid.
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Switzerland
e
ii
Strengthening energy research: the restructuring of the energy system needs to

be supported by the strengthening of energy research. To that end, the energy
research portfolio in the ETH4 Domain and at the universities of applied
sciences should be reviewed and cooperation between universities, business and
centres of technological expertise encouraged. A plan of action on Coordinated
Energy Research Switzerland with relevant roadmaps should be drawn up for
efficiency enhancing technologies, power grids and the storage and distribution
of electricity. The necessary federal funding for pilot schemes and demonstration
facilities should also be provided. These efforts are to be coordinated with measures
contained in the Cleantech Masterplan.
Confederation, cantons, cities and communes set the example: the Confederation,
the cantons, cities and communes will lead by example. They should meet their
own electricity and heating needs through renewable sources of energy and apply
the principle of best practice in all fields. The private sector should also play its
part in taking measures to reduce commercial energy consumption and strengthen
Switzerlands position as a location for business by coming up with innovative,
energy-saving products. The energy industry should seize the opportunity to play
an active part in reshaping the national energy system and make the necessary
investments.
Beacon projects guide the way: pilot and demonstration projects developed by
various industries and groups should provide valuable experience for Switzerlands
future in terms of energy. The fields of smart buildings, smart cities, smart grids and
district heating networks are key in achieving an optimisation of the energy system,
and thus contributing to a reduction in energy consumption, emissions and costs.
Encouraging international cooperation: international cooperation in the field
of energy should be further intensified. Efforts should be made to conclude an
agreement on electricity with the European Union. In addition, contacts with
neighbouring countries should be intensified. Furthermore, Switzerland will
actively participate in the international debate on the future role and direction
of the International Atomic Energy Agency and take part in the relevant political
and technical conferences.
Regulatory framework
Articles 76 and 89 to 91 of the Swiss Federal Constitution address energy matters and
bind the Confederation and the cantons to provide a satisfactory, diversified, secure,
economic and environmentally compatible energy supply.
According to the Constitution, the Confederation is in charge of determining
the principles of the use of domestic and renewable energies, as well as legislating in
certain specific areas such as nuclear energy, hydropower generation and transmission
and delivery of electricity. Legislation concerning all other areas is to be provided by the
cantons. Consequently, energy can vary considerably among cantons.
The Swiss Federal Institute of Technology.
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Switzerland
a
b
c
d
e
f
At the federal level, the principal pieces of legislation are:

Energy: the Energy Act 1998;
Hydropower: the Hydropower Act 1916 and the Water Protection Act 1991;
Electricity: the Electricity Act on Electric Facilities for Low and High Voltage
1902 and the Electricity Supply Act 2007;
Nuclear: the Nuclear Energy Act 2003, the Federal Inspectorate Nuclear Security
Act 2007 and the Liability in Nuclear Matters Act 1983;
CO2: the CO2 Emission Reduction Act 1999; and
Pipelines: the Pipelines Act 1963.
The Federal Electricity Supply Act, which was adopted by Parliament in 2007, provides
for an opening of the market in two stages starting on 1 January 2009. In the first five
years (2009 to 2013), only end-consumers with an annual consumption of more than
100,000kWh per site were granted free access to the market. Households and other
small-scale end consumers were also supposed to be able to freely choose their electricity
supplier as of 1 January 2014, but that full market liberalisation has been delayed. The
high-voltage network must be operated by the national transmission system operator
(Swissgrid) with a majority Swiss holding.
The main objective of market liberalisation the creation of a competitive and
secure electricity supply with transparent pricing has not been achieved to date. A
lack of market transparency, non-competitive behaviour by the involved players and
the continued threat of sharply rising electricity tariffs, endangering the international
competitive capacity of energy-intensive companies, indicate that a thorough analysis
of the applicable legislation is called for (Swiss legislators did not expect European
electricity prices to increase to a level that would make it more attractive to remain
captive than to purchase electricity at market prices). A revision of the Act was initiated
at the end of 2009. It is expected that the EU Third Energy Package will be factored into
the revision. The introduction of incentive regulation is also being considered. The initial
aim of having the revised Act enter into force in 2014 to coincide with the second stage
of market liberalisation has been postponed.
Since the end of 2007, negotiations between the EU and Switzerland to enter into
a comprehensive long-term energy treaty have been ongoing. The primary aim of such an
accord (obtaining this agreement is considered one of the top priorities for Switzerland)
would be the mutual access to the free energy market. The legal developments within the
EU will be taken into consideration, namely the Third Energy Package, in relation to
which Switzerland is aspiring to become a member of newly established organisations such
as the European Network of Transmission System Operators for Electricity (ENTSO-E),
the European Network of Transmission System Operators for Gas (ENTSO-G) and the
Agency for the Cooperation of Energy Regulators (ACER). In addition, safety standards
will be harmonised and there will be negotiations regarding mutual recognition of
guarantees of origin for electricity from renewable sources and of carbon dioxide emission
rights. Switzerland would have to commit to binding national targets in relation to the
share of renewable energy.5
www.admin.ch/ch/f/rs/73.html; Legal Framework v2.docx.
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Switzerland
The negotiations between the EU and Switzerland, which were at an advance stage,
came to a halt immediately following the adoption by the Swiss People (9 February 2014)
of the so-called Swiss popular initiative Against Mass Immigration.
iii
Institutional framework
The Swiss energy institutional framework comprises a number of federal offices,

regulatory authorities and specialised agencies. The Federal Office of Energy (FOE) is the
office responsible for all questions relating to energy supply and energy use. It sits under
the Federal Department of the Environment, Transport, Energy and Communications
(DETEC), which is responsible for ensuring sustainable development and the provision
of basic public services in the interests of society, the environment and the economy.
The FOE pursues the following objectives:
a
it creates the necessary conditions for ensuring a sufficient, well diversified and
secure energy supply that is both economical and ecologically sustainable;
b
it imposes high safety standards in the areas of production, transportation and
distribution of energy;
c
it sets out to promote efficient energy use, increase the proportion of renewable
energy in the overall energy mix and reduce the level of carbon dioxide emissions;
and
d
it promotes and coordinates energy research and supports the development of
new markets for the sustainable supply and use of energy.
A number of commissions support the FOE, including the Energy Research
Commission (CORE), the Commission for Radioactive Waste Disposal (CRW), the
Administrative Commission of the Decommissioning Fund and the Disposal Fund for
Nuclear Installations (ACDFDFNI), the Nuclear Safety Commission (NSC) and the
Commission for Connection Conditions for Renewables Energies (CCRE).
The CORE assists with the formulation of guidelines governing energy research
and the implementation of research findings. Its members represent the industrial sector,
the energy industry, universities and various energy agencies and research institutions in
Switzerland.
The CRW is an independent body that is responsible for advising the FOE and
the Federal Nuclear Safety Inspectorate (ENSI) (see below) on geological aspects of
nuclear waste disposal.
The two funds administered by the ACDFDFNI were established for the purpose
of securing the necessary financing for the disposal of radioactive waste and spent-fuel
elements, and the decommissioning of nuclear installations after their shutdown.
As an advisory body for the Federal Council, DETEC and ENSI, the NSC
examines fundamental issues relating to nuclear safety and may submit comments for
the attention of the Federal Council and DETEC regarding reports by ENSI on nuclear
safety. It took over the duties of the former Federal Commission for the Safety of Nuclear
Facilities on 1 January 2008.
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Switzerland
The CCRE advises cantonal authorities and the FOE on the formulation
of recommendations and enforcement tools for the implementation of connection
conditions for independent producers.6
The Federal Office for the Environment (FOEN), which also sits under DETEC,
plays an important role alongside the FOE. It is responsible for ensuring that natural
resources are used sustainably, that the public is protected against natural hazards, and
that the environment is protected from unacceptable adverse impacts.
In accordance with DETECs sustainability strategy, the FOEN pursues the
following goals:
a
long-term preservation and sustainable use of natural resources (land, water,
forests, air, climate, biological and landscape diversity) and elimination of existing
damage;
b
protection of the public against excessive pollution (noise, harmful organisms
and substances, non-ionising radiation, wastes, contaminated land and major
incidents); and
c
protection of people and significant assets against hydrological and geological
hazards (flooding, earthquakes, avalanches, landslides, erosion and rock falls).
In order to achieve these goals, the FOEN has been assigned the following responsibilities:
a
environmental monitoring, to provide a sound basis for the management of
resources;
b
preparation of decisions, to secure a comprehensive and coherent policy of
sustainable management of natural resources and prevention of natural hazards;
and
c
implementing the legal foundations, supporting enforcement partners and
providing information on the state of the environment and on the appropriate
use and protection of natural resources.7
The Federal Electricity Commission (ElCom) is the independent regulatory authority
for the electricity sector. It is responsible for monitoring compliance with the Federal
Electricity Act and the Federal Energy Act, taking all necessary related decisions and
pronouncing rulings where required.
When the new Electricity Supply Act entered into force on 1 January 2008, ElCom
was formally entrusted with the task of supervising the liberalisation of Switzerlands
electricity market. As an independent regulatory authority at the federal level, ElCom
is responsible for securing the smooth transition from a monopoly situation in the
electricity supply sector to an electricity market based on the principles of competition.
ElComs duty is to ensure that the liberalisation of the market does not result in excessive
tariff increases and that the network infrastructure is properly maintained and expanded
in order to guarantee an adequate supply of electricity.
6
www.uvek.admin.ch/index.html?lang=en; www.bfe.admin.ch/index.html?lang=en.
7 www.bafu.admin.ch/?lang=en.
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Switzerland
ElCom has been entrusted with extensive judicial powers so that it can effectively
perform its various duties. It monitors compliance with the provisions of the Electricity
Supply Act and the Energy Act, and can pronounce legally binding decisions and rulings
as necessary.
The specific duties of ElCom are to:
a
verify the electricity tariffs of customers who do not have free access to the
network, as well as remuneration paid for the input of electricity into the grid. It
is authorised to prohibit unjustified increases in electricity prices, or may order the
reduction of excessively high tariffs. It may take action on the basis of complaints
or in its official capacity;
b
mediate and pronounce rulings on disputes relating to free access to the electricity
network. Since 1 January 2009, large-scale consumers can freely choose their
electricity supplier. Full market liberalisation, which will allow households and
other small-scale end consumers to freely choose their electricity supplier, has
been delayed;
c
rule on disputes relating to cost-covering remuneration of input of electricity that
is to be paid to producers of electricity from renewable energy sources with effect
from 2009;
d
monitor the situation with respect to supply security and the condition of the
electricity networks;
e
in the case of shortfalls in cross-border transmission lines, to regulate the allocation
of network capacities and coordinate its activities with the European electricity
market regulators; and
f
ensure that the transmission network is handed over to the national system
operator (Swissgrid) according to schedule.
There are no specific regulatory authorities for oil and gas as Switzerland does not
produce any.8
Two other key institutional players (specialist agencies) are the Federal Pipeline
Inspectorate (FPI) and ENSI.
The FPI supervises the planning, construction and operation of pipelines for the
transmission of gas and liquid fuels that are subject to the Pipelines Act. The FPI aims to
put the protection of human life and the environment above profitability.9
ENSI is the national regulatory body with responsibility for the nuclear safety and
security of Swiss nuclear facilities. It is the successor body to HSK from whom it took
over on 1 January 2009. Whereas HSK was part of the FOE, ENSI is an independent
body constituted under public law. By passing the Federal Act on ENSI on 22 June
2007, the two parliamentary chambers in Switzerland resolved to turn HSK into an
agency of federal government constituted under public law and so complied with the
requirements of the Nuclear Energy Act and the International Convention on Nuclear
Safety that regulators should be independent bodies.
8 www.elcom.admin.ch/index.html?lang=en.
9 www.uvek.admin.ch/org/00469/02946/02960/index.html?lang=fr.
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Switzerland
ENSI is supervised by an independent board who is elected by the Federal
Council and reports directly to it. It is responsible for the supervision of nuclear facilities.
Its regulatory remit covers the entire life of a facility, from initial planning, through
operation to final decommissioning including the disposal of radioactive waste. Its
remit also includes the safety of staff and the public and their protection from radiation,
sabotage and terrorism. ENSI is also involved in the transport of radioactive materials to
and from nuclear facilities and in the continuing geo-scientific investigations to identify
a suitable location for the deep geological disposal of radioactive waste.10
III
ENERGY MARKETS
Partial liberalisation
The Swiss electricity market has been partially liberalised since 1 January 2009. Only
larger consumers with an annual consumption of more than 100MWh, representing
more or less 50 per cent of the electricity demand in Switzerland, have so far benefited
from the market opening.
The separation of the transmission network is one of the key criteria in the
liberalisation of Switzerlands electricity market. This concerns the network of highvoltage transmission lines for transporting electricity over great distances. The aim here
is that ownership and operation of this network (monopoly) are to be separated from
other business activities such as electricity production and trading (market).
In practical terms, this means that companies which had held stakes in the
transmission network until now were required to assign these to the national transmission
system operator (Swissgrid). This process took place in three stages:
a
separation of the accounts of the network owner or operator from other activities;
b
legal separation, for example outsourcing of the network to a separate subsidiary;
and
c
transfer of network ownership to Swissgrid, which is also responsible for its
operation, maintenance, upgrade and expansion.
Swissgrid is the national grid company, and in its capacity as transmission system
operator it operates under the supervision of Elcom. As a member of ENTSO-E, it is also
responsible for coordination and grid usage in the cross-border exchange of electricity
in Europe.
After originally being owned by Swiss electricity companies Alpiq AG, Alpiq Suisse
AG, Axpo Power AG, Axpo Trading AG, BKW FMB Energie AG, Centralschweizerische
Kraftwerke AG, Elektrizittswerk der Stadt Zrich and Repower AG, Swissgrid is now
owned by several Swiss electricity companies. The companies are directly or indirectly
majority-owned by the cantons and the municipalities.11
The Swiss energy market comprises several hundreds of players, including a small
number of major consortia with vertically integrated operations, and about 80 power
10 www.bfe.admin.ch/radioaktiveabfaelle/01275/01292/index.html?lang=en.
11 www.swissgrid.ch/swissgrid/en/home.html.
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Switzerland
producers, who differ considerably in terms of size and operations. The vast majority of
market players are publicly owned regional and local utilities that distribute electricity to
their local municipalities. Only some of these regional and local distributors can produce
electricity. The largest utilities are responsible for approximately 80 per cent of the power
production and 90 per cent of the energy supplied in the country.
The liberalisation of the Swiss electricity market and integration with the European
market is expected to lead to a rapprochement of the Swiss electricity players.
ii
Electricity trading
Cross-border trading of electricity is important for Switzerland due to its location in the
heart of Europe.
As there is no power exchange in Switzerland, Swiss trading companies trade on
the Powernext in Paris, the Energy Exchange in Austria (EXAA) and the Leipzig-based
European Energy Exchange (EEX).
The Dow Jones Swiss Electricity Price Index (SWEP), which was initiated by
Aare-Tessin AG fr Elektrizitt (ATEL) and Elektrizitts-Gesellschaft Laufenburg AG
(EGL), and launched in cooperation with Dow Jones in March 1998, provides price
indications for over-the-counter electricity trading in Switzerland for next-day delivery.
The SWEP is the volume-weighted average of the profile adjusted price for hour 12 of
all transactions having an impact on hour 11am to 12pm, also taking into account the
Index for the past 20 days.12
On 30 October 2013, Elcom gave its green light to an accord between Swissgrid
and the European power exchange EPEX Spot. This accord paves the way to the
introduction of market coupling at the Swiss border, which is expected to make power
trading more efficient. As a power exchange, EPEX Spot is already overseeing short-term
electricity wholesale trade in Switzerland.
IV
Historically, Switzerlands longest-serving and most important source of renewable

energy has been hydropower, but the new renewables including solar, wood, biomass,
wind, geothermal and ambient heat also play an increasingly important role in todays
Swiss energy mix. The long-term potential of domestic renewable energy indicate that,
for all forms, the prospects for electricity and heat are sound; however, it is also clear that,
primarily for economic reasons, it will only be possible to fully utilise the major potential
of photovoltaic or geothermal energy in approximately 30 years time. Other renewables
such as wood and biomass, ambient heat, electricity from small-scale hydropower plants
and, to a modest extent, wind are available now and in some cases are also already
economically attractive.
With the introduction of remuneration at cost for input into the grid, one of the
goals of Switzerlands energy policy is to increase the proportion of electricity produced
12 www.djindexes.com/mdsidx/?event=ene.
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Switzerland
from renewable energy by 5,400GWh (or 10 per cent of the countrys present-day
electricity consumption) by 2030. At 2007, approximately 55.6 per cent of Switzerlands
overall electricity production came from renewable sources, with hydropower by far
the biggest contributor (96.5 per cent). About 380 electricity supply companies now
offer certified electricity products from renewable energy, which meet 4.5 per cent of
Switzerlands electricity demand.
New forms of renewable energy currently contribute around 5 per cent towards
Switzerlands electricity production today. Of the latter, about 1.65 per cent comes from
waste, followed by solar energy (about 0.49 per cent), biomass (about 0.48 per cent)),
biogas (about 0.20 per cent) and wind energy (about 0.13 per cent).13
Since 1 January 2009, operators of new facilities producing electricity from
renewable energy small-scale hydropower plants with a capacity up to 10MW, and
facilities using solar energy, geothermal energy, wind energy, biomass and waste from
biomass have received an additional combined total of approximately 320 million Swiss
francs per annum. The aim here is to promote the use of environmental technologies for
the production of electricity. Remuneration for the input of electricity into the grid is
financed through a surcharge of 0.006 per kilowatt hour (currently 0.0045 per kWh)
on the electricity tariff.
Swissgrid is part of this initiative, which promotes effective integration of 100
per cent of electricity produced from renewable energy sources. It advocates national
and EU authorities to strive for an efficient, sustainable, clean and socially accepted
development of the European network infrastructure for both decentralised and largescale renewable energies.
The Swiss government is looking into tax reforms to encourage green activities
such as energy conservation and anti-pollution measures. The hope is that such tax
reforms could help reduce energy consumption and eliminate Switzerlands dependence
on nuclear energy by 2050. The goal is not to increase tax volume; rather, the idea is to
reform the tax system without creating a tax burden on businesses or households.
On 14 March 2014, the National Council allowed the Federal Council to increase
the green tax to 1.5 c./kWh. The necessary amendments to the Energy Act and to its
Ordinance came into force on 1 January and 1 April 2014 respectively. Green parties and
organisations, the centre-left Social Democrats and the centre-right Christian Democrats
generally welcomed moves to reform the tax system to benefit the environment, although
some found the plans too tame. But the centre-right radicals said the government lacked
a clear energy strategy, and the right-wing Peoples Party said ecotaxes would overburden
energy-intensive industries.
ii
Energy efficiency and conservation is at the forefront of the Energy Strategy 2050.
Switzerland has to confront in the coming years not only the problem of excessive
greenhouse gas emissions, but also a shortage of available energy.
id00867.
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Switzerland
Improving energy efficiency is the main tool to reduce energy consumption without
loss of benefits. Greater energy efficiency helps to achieve a desired value (e.g., generation
of light, providing heat, driving a motor) with less energy expenditure. Increasing the
energy efficiency brings three main benefits: increased economic efficiency, reduce energy
shortages and reduce the energy consumption linked to greenhouse gas emissions.
Reducing energy consumption through increased energy efficiency will allow only that it
will be realistic in the future to cover a substantial portion of the Swiss energy consumption
through renewable energy.
In this sense, the FOE supports the development, dissemination and application
of technologies to improve energy efficiency and measures to counteract the lack of
information in households and industry on energy efficiency. In addition, the FOE will
contribute to the promotion of energy production from renewable resources so that the
remaining requirements can largely be met on renewable energy in the future.
V OUTLOOK
The three oldest Swiss nuclear power plants were to be retired around 2020 after some 50
years of operation. Before the Fukushima disaster, three permit applications for new (i.e.,
replacement) nuclear power plants had been filed. Legislation mandates parliamentary
approval for new nuclear power plant permits. Any parliamentary decision may be
challenged in a referendum. On 13 February 2011, in a consultative ballot, the people
of the Canton of Bern had approved a new nuclear power plant to replace the ageing
Mhleberg nuclear power plant with a 51.2 per cent majority.
After the Fukushima disaster, however, the application procedures for the three
new nuclear power plants were suspended. Polls indicated that more than 80 per cent
of the population had turned against nuclear, thereby thwarting any new nuclear power
plant project. Two months later, the Federal Council made public its decision to phase
out nuclear power and not replace the existing nuclear power plants.
Since then, the Federal Council and the electricity market participants have been
at odds over how best to achieve the ambitious goals of the Energy Strategy 2050. The
markets players primary concern is that the proposed measures are not sufficient to
guarantee security of supply in the future.
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Chapter 35
TURKEY
Okan Demirkan, Zeynep Buharal and Burak Eryiit1
I OVERVIEW
Over the past decade, Turkeys energy consumption has substantially increased. At the
beginning of 2013, Turkey was ranked second in the list of countries with the worlds
highest energy consumption increases. According to the International Energy Agency,
energy consumption in Turkey is expected to double over the next decade, while
electricity demand growth is expected to increase at an even faster pace.2 The Energy
Minister declared that approximately US$128 billion of investment (more than double
the total amount invested in the past decade) will be needed to meet energy demands
by 2023.
Turkeys strategy and targets for 2023 are:3
a
increasing installed power to 120,000MW;
b
increasing the share of renewable energy sources from 25 to 30 per cent;
c
maximising the use of hydropower;
d
increasing wind-power installed capacity to 20,000MW;
e
installing power plants with 600MW of geothermal and 3,000MW of solar
energy;
f
extending the length of electricity transmission lines to 60,717km;
g
reaching a power distribution unit capacity of 158,460MVA;
h
extending the use of smart grids;
i
raising the natural gas storage capacity to 5 billion m3;
1
2
3
Okan Demirkan is a partner and Zeynep Buharal and Burak Eryiit are associates at Kolcuolu
Demirkan Koakl Attorneys at Law.
US Energy Information Administration, Countries, Turkey, Full Report: www.eia.gov/
countries/analysisbriefs/Turkey/turkey.pdf.
Invest in Turkey, Energy: www.invest.gov.tr/en-US/sectors/Pages/Energy.aspx.
452
Turkey
j
k
l
establishing an energy exchange;

commissioning at least two nuclear power plants;
building a coal-fired power plant with a capacity of 18,500MW; and
eliminating its costs for importing petroleum and gas, currently as high as
US$56 billion.
Among these targets, establishment of an energy exchange will only support market
liberalisation but also ensure transparency and help maintain a healthy balance between
supply and demand. Turkey enacted the new Electricity Market Law4 (EML) in
2013.5 The EML stipulates the creation of an electricity exchange market, which will
be administered through a newly incorporated company, EPA. EMRA6 completed
the preparation of EPAs draft articles of association. According to the draft, EPAs
shareholding structure will be as follows: 30 per cent will be owned by TEA;7
30 per cent will be owned by the Istanbul Stock Exchange (ISE); and 30 per cent will be
owned by private energy companies. The ISE will own the remaining 10 per cent, on the
condition that it will transfer this 10 per cent to a strategic purchaser.
The Turkish electricity market is one of the fastest-growing in the world, with an
approximately 9 per cent annual increase on average. Natural gas consumption in Turkey
is increasing as well. According to the MENR,8 natural gas demand is expected to increase
with a growth rate of 2.9 per cent until 2020. Due to insufficient petroleum and natural
gas sources, Turkey is dependent on imports. It imports petroleum mainly from Iran,
Russia, Iraq, Saudi Arabia and Kazakhstan and natural gas from Russia, Turkmenistan,
Azerbaijan and Iran, in addition to LNG imports from Nigeria and Algeria.
With the enactment of the Natural Gas Market Law9 (NGML) in 2001, BOTA10
lost its monopoly rights on natural gas imports, distribution and sales. However, BOTA
remains a key player in the market, as it owns and operates the gas transmission network
and still imports approximately 80 per cent of the natural gas consumed in Turkey.
After BOTAs natural gas agreement with Russia expired in 2011, four privately owned
companies Enerco, BosphorusGaz, Avrasya Gaz and Shell Gaz signed agreements
with Gazprom and obtained import licences.
4
5
6
7
8
9
10
Entered into force on 30 March 2013.

In addition to the EML, many long-awaited regulations entered into force in the last quarter
of 2013 and in early 2014, such as the Electricity Market Licence Regulation, the Electricity
Market Distribution Regulation and the Electricity Market Connection and Use of the System
Regulation.
The Energy Market Regulatory Authority.
TEA is the state transmission entity.
The Ministry of Energy and Natural Resources.
Entered into force on 2 May 2001.
The Petroleum Pipeline Corporation. BOTA is a state-owned company.
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Turkey
Turkey enacted the new Turkish Petroleum Law11 (TPL) in 2013. Then, the
Turkish Petroleum Law Implementation Regulation12 entered into force in early 2014.
An amendment law proposing substantive amendments to the Natural Gas Market Law
(the Draft Amendment Law) was also prepared in 2013. However, at the time of writing,
these amendments have not been enacted.
In line with Turkeys substantial potential and its renewable energy targets, in
2013 Turkey also introduced the Regulation Regarding Generating Electricity without
a Licence;13 the Regulation on Documentation and Support of Renewable Energy;14 the
Regulation on Technical Evaluation of Solar Energy Based Licence Applications;15 the
Contest Regulation on Pre-Licence Applications Regarding Generation Facility Based
on Solar and Wind Energy;16 and the Regulation on Renewable Energy Resources For
Electricity Generation.17
II REGULATION
i
The regulators
The MENR is ultimately responsible for preparing and implementing energy policies,
plans and programmes in coordination with its affiliated institutions. The national
regulatory authority, EMRA, is responsible for the regulation and supervision of the
operation of the electricity, downstream petroleum and downstream natural gas markets.18
It exercises its powers through the EMRA Board.19 With its capacity to regulate and
supervise the energy markets, EMRA has the following duties:20
a
issuing licences;
b
drafting, amending, enforcing and auditing performance standards, as well as
distribution and customer services;
c
setting out the pricing principles indicated in the law; and
d
ensuring the development and implementation of an infrastructure.
11
12
13
14
15
16
17
18
19
20
Entered into force on 11 June 2013.

Entered into force on 22 January 2014.
Entered into force on 2 October 2013.
Entered into force on 6 December 2013.
Entered into force on 27 November 2013.
The General Directorate of Petroleum Affairs is the regulatory authority responsible for
upstream market.
The Energy Market Regulatory Board.
Invest in Turkey, The Energy Sector: A Quick Tour for the Investor: www.invest.gov.tr/en-US/
infocenter/publications/Documents/ENERGY.INDUSTRY.PDF.
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Turkey
The primary legislation for the electricity market is the EML and the Electricity Market
Licence Regulation.21 While the Petroleum Market Law,22 the Liquefied Petroleum Gas
Market Law23 and the Petroleum Market Licence Regulation24 govern downstream
petroleum activities, the NGML and the Natural Gas Market Licence Regulation25
govern downstream natural gas activities. As for the upstream market, the TPL governs
upstream oil and gas activities,26 and the Law on Transit Passage through Petroleum
Pipelines27 (the Transit Law) governs the transit passage of oil and gas.
ii
Electricity
In order to conduct any one of the following market activities, companies must obtain
a licence from EMRA:
a
generation;
b
transmission;
c
distribution;
d
wholesale;
e
retail;
f
trade;
g
import; and
h
export.
The recently enacted EML abolished the auto-production licence system. Existing
auto-producer licences are going to be ex officio converted to generation licences.
However, individuals or legal entities (1) generating electricity for their own needs, and
(2) having facilities or equipment that are not operating in parallel to the transmission
and distribution network, are not required to obtain a licence, as long as they remain
disconnected from the transmission and distribution networks and do not engage in
wholesale or retail activities.
The EML introduces a new type of licence, called the supply licence, which
combines wholesale and retail sale licences. The EML also introduces the preliminary
licence mechanism for generation licence applications. A preliminary licence is issued
for a specified term, to those having submitted an application to EMRA to conduct
electricity generation activities.
21
22
23
24
25
26
27
Entered into force on 2 November 2013.

Entered into force on 20 December 2003.
Entered into force on 7 September 2002.
Under the TPL, the definition of petroleum includes both crude oil and natural gas.
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Turkey
Under the Regulation on Generating Electricity without a Licence,28 generation
facilities with an installed capacity of up to 1MW based on renewable energy resources
are exempt from the requirement to obtain a licence.
Downstream petroleum and natural gas
The following downstream petroleum market activities require a licence:
a
refining;
b
processing;
c
lube oil production;
d
storage;
e
transmission;
f
eligible consumer;
g
bunker delivery;
h
distribution;
i
transportation; and
j
dealership.
Under the NGML, the following activities require a licence:
a
import;
b
export;
c
transmission;
d
storage;
e
wholesale;
f
distribution; and
g
sale, distribution and transmission of CNG.
iii
Market restrictions
Petroleum
In the downstream petroleum market, a distributors market share cannot exceed 45 per
cent of the total domestic market and a distributors sales through dealers under their
ownership cannot exceed 15 per cent of the distributors total domestic market share.
Another restriction regarding distributors and dealers derives from the
Competition Boards interventions. Non-compete undertakings for indefinite terms
or terms exceeding five years can no longer be granted a block exemption from the
prohibition of agreements, concerted practices or decisions that restrict competition in
a specific market. According to the Competition Boards latest decisions, all personal or
real rights such as loan contracts, equipment contracts and long-term lease contracts and
long-term usufructs, which relate to dealership agreements, must be limited to five years.
Natural gas
Under the NGML, import companies cannot conclude new natural gas purchase
agreements (except for LNG) with countries that currently have existing natural gas
28
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Turkey
sale and purchase agreements with BOTA. The barrier to market entry is actually even
higher, because under EMRA Board Decree No. 725 (Decree No. 725), EMRA must
obtain BOTAs opinion on whether such import activity will affect the performance
of BOTAs obligations arising out of its existing contracts (in BOTAs gas importer
capacity). In addition, Decree No. 725 requires consultation with BOTA (in its
transmission system operator (TSO) capacity) on the technical suitability of such import.
The NGML imposes storage-related obligations on applicants for import and
wholesale licences. Import licence applicants must obtain commitments and guarantees
from storage licence holders, regarding their capacity to store 10 per cent of the yearly
imported natural gas in Turkey within five years. A similar obligation is imposed on
wholesale licence applicants. Accordingly, wholesale licence holders must take the
required storage-related measures within five years of the licences issuance.
Under the NGML, the MENRs opinion is not required for natural gas market
licences. However, if the Draft Amendment Law is passed as is, then the NGML will
have a provision whereby EMRA will have to obtain the MENRs opinion for granting
import and export licences.
Under the NGML, no company can sell natural gas corresponding to more than
20 per cent of the estimated national consumption determined by EMRA. Moreover,
import companies cannot import natural gas corresponding to more than 20 per cent
of estimated national consumption. The Draft Amendment Law will not change these
market share restrictions.
iv
Licence holders must obtain EMRAs approval for any of the following transactions:
a
transfer of 10 per cent or more (5 per cent or more in publicly held companies)
shares in licence holding companies;
b
any transaction, resulting in the change of control of a licence holding company;
and
c
any transaction resulting in the change of ownership or usage right on licensed
facilities.
III

SERVICES
Electricity
TEA conducts all of Turkeys electricity transmission activities. The distribution
network is divided into 21 regions, with a different distribution company in each region.
All of these companies have recently been privatised. TEDA29 no longer operates any
distribution companies, but continues to own the distribution assets.
The shareholders of distribution utilities can own the newly established retail
sales utilities shares. However, as of 1 January 2016, distribution utilities will not be
29
The state distribution entity.
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Turkey
able to purchase administrative and support services from companies under the parent
companys control.
Natural gas
Under the NGML, market participants active in: more than one market activity or one
market activity in more than one facility, must keep separate accounts for each activity
or facility. Cross-subsidising between accounts is prohibited. In addition to this account
separation, companies holding distribution licences must maintain separate accounts for
their sale and transportation activities.
Although the NGML stipulated that BOTA was to be unbundled starting from
2009, BOTA has not been divided into separate companies. The Draft Amendment Law
includes provisions concerning BOTAs restructuring. The plan is to separate BOTA
into three legal entities: the first for conducting transmission activities; the second for
operating LNG facilities and storage activities; and the third to perform other natural
gas market activities.
ii
Transmission/transportation, distribution and storage access
Electricity transmission and distribution

TEA is required to meet the demands of individuals and companies for connection to
the transmission. In cases where system connection and use of the system by generation
companies are possible, the licence holder and TEA and/or the distribution licence
holder must conclude connection and system usage agreements.30
Petroleum transmission and storage
Companies holding distribution or storage licences cannot discriminate among third
parties of equal status for access to transmission and storage networks. Transmission
and storage licence holders which have spare capacity in their facilities must meet the
transmission and storage demands, provided that these demands meet certain conditions.
Natural gas transmission and distribution
Companies holding distribution or transmission licences cannot discriminate among
third parties of equal status for access to transmission and distribution networks. Licence
holders may only decline third-party access requests based on certain specific grounds.
If an applicant undertakes to cover the expenses to overcome the lack of capacity or
connection situations, access cannot be denied.
Distribution companies must connect all consumers within their region. A
connection agreement must be concluded between the distribution company and
consumers, and the technical connection and service lines must be established.
30
(1) The Electricity Market Grid Regulation; (2) the Electricity Market Tariff Regulation; (3)
the Electricity Market Distribution Regulation; and (4) the Electricity Market Connection and
Use of the System Regulation regulate the terms and conditions regarding the applicable tariffs
for connection to and use of the system.
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Turkey
LNG and natural gas storage
Companies holding storage licences must provide storage services to users in an objective
and fair manner. In principle, except for the exclusive grounds mentioned above for
distribution and transmission networks, companies must accept storage requests. On
the other hand, in practice, there are only six storage licences in force.31 As the current
storage capacity is insufficient, third-party access is practically impossible.32 In order to
increase Turkeys natural gas storage capacity, an agreement was concluded with Chinese
company TCC-China Tianchen Engineering Corporation in 2011 for the construction
of the Tuz Gl natural gas storage facility.
iii Tariffs
Electricity
EMRA is responsible for regulating the connection and use of system tariffs including
transmission and distribution tariffs in the electricity sector. Licence holders must
prepare and submit their tariff proposals to EMRA by the end of October every year.
EMRA must complete the examination and evaluation of these tariff proposals before
31 December of the current year. The tariffs approved will be effective for the tariff
period between 1 January and 31 December of the following year.
Natural gas
As it does in the electricity market, EMRA regulates connection tariffs, storage tariffs and
tariffs pertaining to the control of transmission and dispatch in the natural gas market.
Companies using the gas transmission system are charged connection tariffs. Fees can be
determined freely between the parties, provided that EMRAs connection tariff principles
are reflected in the relevant connection agreements.
iv Security and technology restrictions
There is various legislation in Turkey dealing with the security of energy infrastructure
facilities.33 Turkey is also a party to international agreements and forums regarding the
security of critical infrastructure facilities.34
31
32
33
34
Two new storage licences were issued in February 2014.

EMRA is fully aware of the existing storage conditions in Turkey. Considering the current
circumstances, EMRA does not strictly monitor the performance of storage-related obligations
and, in practice, does not impose penalties on market players even if the obligations are not
met.
i.e., the Transit Law; the General Directorate of BOTA, Technical Security and Environment
Regulation on Construction and Operation of Crude Oil and Natural Gas Facilities; the
Turkish Criminal Code; the Petroleum Market Law; the NGML; and the BOTA Transmission
Network Operation Principles.
e.g., NATO and Critical Infrastructure Facilities; the Convention on Nuclear Safety; the
Energy Charter Treaty; the INOGATE Project (Interstate Oil and Gas Transport to Europe);
the Convention on Cybercrime; the OSCE Strategy Document For the Economic and
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Turkey
IV
ENERGY MARKETS
In Turkey, supply licence holders can conduct electricity trading activities.35 Electricity
traders must either conclude a bilateral electricity purchase agreement with another
licence holder or contribute to the organised markets themselves, in order to participate
in the electricity market. The MFRC36 operates the day-ahead market, as well as the
balancing market.
As for natural gas, since there is no energy exchange in Turkey yet, gas trading is
physical. In Turkey, gas trading is conducted by four types of licence holders:
a
production lease;
b
import licence;
c
export licence; and
d
wholesale licence.
ii
In addition to the EML and the Electricity Market Licence Regulation, regulations on
electricity trading are set forth under the Regulation on Electricity Market Balancing and
Settlement.37 The Regulation on Electricity Market Balancing and Settlement sets forth
the principles and procedures regarding the day-ahead market and real-time balancing of
the active electricity demand and supply, as well as settlement of trade in these markets.
On the other hand, natural gas trading is regulated under the provisions set forth in each
separate licence and the Network Operation Manual of BOTA.
iii
Electricity is traded mostly through bilateral negotiated agreements on an over-thecounter basis. Agreements are not subject to EMRAs approval and, thus, all commercial
terms and conditions are freely negotiable. Electricity can also be traded on a day-ahead
and real-time basis.
As for natural gas, suppliers and consumers must conclude private law contracts
in order to participate in natural gas trading. A natural gas sale agreement is the primary
agreement executed within the framework of natural gas sale and purchase activities.
In addition to a natural gas sale agreement, the following agreements must be
concluded by the parties:
a
operation agreements;
b
system connection agreements; and
c
lease agreements.
35
36
37
Environmental Dimension; and the Decision on Protecting Critical Energy Infrastructure from
Terrorist Attacks.
i.e., wholesale, export, import and retail sales.
The Market Financial Reconciliation Center.
Entered into force on 15 April 2009.
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Turkey
iv
Market developments
Turkey aims to create a liberal and competitive energy sector and increase investment
opportunities by establishing an energy exchange market at the end of this year.38 Aside
from this, Turkeys involvement in international oil and gas pipelines significantly
supports its aim to become a regional energy hub in the next few years.
International oil and gas pipelines
The transit passage of oil and gas through Turkey is governed by the Transit Law. However,
in order for the Transit Law to apply as the legal regime of a transit pipeline, there must
be an international agreement regarding that pipeline. In this event, the Transit Law, the
international agreement (generally an IGA) and the project agreements apply as the legal
regime to the transit pipeline.
In addition to transit pipelines transiting through Turkey (e.g., the BTC Pipeline
and the contemplated TANAP39), there are pipelines that transport oil or gas to or from
Turkey. These are non-transit pipelines, such as the Kirkuk-Yumurtalk Oil Pipeline. The
legal regime applicable to these pipelines is either in the form of a Council of Ministers
Decree (pursuant to the former Petroleum Law40 (PL)) or an IGA signed specifically for
that pipeline.
There are currently two international crude oil pipelines in Turkey:
a
the Baku-Tbilisi-Ceyhan (BTC) Crude Oil Pipeline, transporting crude oil from
the Caspian Sea to Ceyhan, Adana (transit); and
b
the Kirkuk-Yumurtalk Crude Oil Pipeline, transporting crude oil from Iraq to
Adana (import).
Currently, the following pipelines exist for the import or export of natural gas:
a
the Baku-Tbilisi-Erzurum Pipeline, transporting natural gas from Azerbaijans
Shah Deniz gas field (Stage I) to Turkey (import);
b
the Blue Stream Natural Gas Pipeline, transporting natural gas from Russia to
Turkey through the Black Sea (import); and
c
the Interconnector Turkey-Greece, transporting natural gas between Turkey and
Greece (export).
The following contemplated projects will make Turkey a true oil and gas transport hub:
a
TANAP, to transport natural gas from Azerbaijans Shah Deniz gas field (Stage II)
to Europe, through Turkey;
b
the Trans Adriatic Natural Gas Pipeline, to transport natural gas from Turkey to
Southern Italy and further to Europe through Greece and Albania;
c
the South Stream Natural Gas Pipeline Project, to transport natural gas from
Russia to Europe through Turkeys Black Sea territorial waters;
38
39
40
For further information, see Section I, supra.

Trans Anatolian Natural Gas Pipeline.
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Turkey
d
e
f
g
the Trans Caspian Natural Gas Pipeline Project, to transport natural gas from
Turkmenistan to Erzurum, Turkey and possibly to Europe;
the Mashreq-EU Natural Gas Pipeline Project, to transport natural gas from the
Mashreq countries to Turkey, Iraq and the EU;
the Northern Region of Iraq-Turkey Crude Oil Pipeline Project, to transport
crude oil from the Northern Region of Iraq to Turkey; and
the Iran-Germany Natural Gas Pipeline Project, to transport natural gas from
Iran to Germany through Turkey.
In recent years, investments in electricity generation from renewable energy resources

have increased greatly. In the first 10 months of 2013, in terms of total capacity,
54.75 per cent of energy investments were in renewable energy based facilities. One of
Turkeys targets is to increase the share of electricity generated from renewable energy
sources to 30 per cent by 2023. This is expected to entail the increase of wind-power
installed capacity to 20,000MW as well as the installation of new power plants with
600MW of geothermal and 3,000MW of solar energy.
Incentive regime
The Law on the Utilisation of Renewable Energy Resources for the Purpose of Generating
Electrical Energy41 (the RER Law) established a renewable energy support mechanism.
This mechanism includes price, terms, procedures and principles regarding payments,
from which individuals generating energy based on renewable energy resources within
the scope of the RER Law can benefit. The RER Law provides that the prices in Schedule
I (see below) will apply for 10 years for generation licences subject to the RER Support
Mechanism that are commissioned until 31 December 2020.42
Type of facility
Prices applicable (USD cent/kWh)
Hydroelectric
7.3
Wind
7.3
Geothermal
10.5
Biomass (including landfill gas)
13.3
Solar power
13.3
The RER Law further provides that renewable energy facilities can benefit from certain
tax incentives upon a Council of Ministers Decree. Additional incentives are provided if
domestic equipment is used in facilities commissioned before 31 December 2020.
41
42

Although the initial date set in the RER Law was 31 December 2015, a Council of Ministers
Decree dated 18 November 2013 extended the incentive term until 31 December 2020.
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Turkey
ii
Under the Energy Efficiency Law,43 the EECC44 regulates energy efficiency activities.
This law sets forth several mandatory obligations.45 It also includes provisions regarding
energy efficiency education and awareness.
The Energy Efficiency Law requires industrial entities to appoint an energy
efficiency controller. These entities must inform the GDRE46 of their annual energy
consumption. Furthermore, industrial businesses may (1) voluntarily submit projects
that increase efficiency or (2) conclude agreements with the GDRE, undertaking to
reduce their consumption levels by at least 10 per cent, in return for certain incentives.
iii
Renewable energy is a developing sector in Turkey. Although Turkey has remarkable

potential in terms of renewable energy resources, there is currently insufficient legislation
encouraging technological developments in the renewable energy sector.
VI
THE YEAR IN REVIEW
i Privatisations
In 2013, Turkey completed the privatisation of all state-owned electricity distribution
companies, which had been on the PHCs47 agenda since 2004. In addition to distribution
companies, several electricity generation assets have finally been privatised.
The PHC approved the privatisations of four distribution companies on 7 March
2013. Further, final negotiations on the privatisation of four electricity distributor
companies took place on 15 March 2013. Turkey generated US$7.3 billion from these
eight privatisations.48 In addition, Turkey realised 13 privatisations in 2012 and 2013.49
One privatisation50 has been approved and, at the time of writing, is waiting for the
parties signatures. Finally, the final bids for the privatisation of four thermal power
43
44
45
46
47
48
49
50

The Energy Efficiency Coordination Committee.
e.g., the use of labelled equipment in industrial companies and buildings.
The General Directorate of Renewable Energy.
The Privatisation High Council.
The privatised distribution companies are Akdeniz, Gediz, Boazii, Aras, Dicle, Van Gl,
Ayeda and Toroslar.
i.e., (1) Seyitmer Thermal Power Plant (TPP); (2) Kangal TPP; (3) Hamitabat TPP; (4)
Harakl-Hendek, Pazarky-Akyaz, Bozyk Hydroelectric Power Plants (HPP); (5) Engil,
Erci, Hoap HPPs; (6) Kokpr HPP, (7) Ksk HPP; (8) Gksu HPP; (9) Bozkr, Ermenek
HPPs; (10) Hasanlar HPP; (11) Ladik-Bykkzolu, Durucasu HPPs; (12) Arpaay-Telek,
Kiti HPPs; and (13) Berdan HPP.
i.e., Anamur, Bozyaz, Mut-Derinay, Silifke, Zeynel HPPs.
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Turkey
plants51 were submitted to the PHC in April 2014 and final bids for five hydroelectric
power plants52 are required to be submitted to the PHC on 9 May 2014.
With regard to natural gas distribution companies, in 2013, BakentGaz53 was
privatised. The only remaining significant state-owned natural gas distribution company
is GDA.54
ii Takeovers
In addition to above-mentioned privatisations, there have been a number of takeovers
in Turkeys energy market in 2013. Turkish energy company Global Enerji acquired an
80 per cent stake in Geli Madencilik,55 and raised its stake in Galata Enerji to 85 per cent
with the acquisition of an additional 25 per cent stake. Another notable transaction was
Aksa Enerjis acquisition of a 93 per cent stake in Kapda Rzgar56 for approximately
US$32 million.
iii
Significant new installations
While achieving remarkable improvement in market liberalisation, 2013 was also a

year in which several new facilities were put into operation. In August 2013, the RWE
and TURCAS Joint Venture commissioned a gas-fired combined-cycle power plant in
Denizli.57 In September 2013, the inauguration ceremony of the Kzldere-2 geothermal
power plant was held.58 The Kzldere-2 geothermal power plant59 will be the largest in
Turkey after the Kzldere geothermal power plant.
iv
Pending projects
The Akkuyu Nuclear Power Plant, in Mersin, will be the first nuclear power plant in
Turkey. This plant is expected to produce approximately 35GW per year. Following
the approval of the environmental impact assessment report,60 the project will need a
construction licence and a generation licence, which could be in place by mid-2014,
enabling construction to start before 2016 and operation of the first unit in 2020.
In 2013, Turkey signed an IGA with Japan for the construction and operation
of a nuclear power plant in Sinop. This US$20+ billion project will be constructed and
operated by the consortium formed by Mitsubishi Heavy Industries and Areva. The
51
52
53
54
55
56
57
58
59
60
i.e., Kemerky TPP, Yeniky TPP, atalaz TPP and Yataan TPP.
i.e., Esendal, Iklar (Visera), Kayaky, Dere, and vriz.
Ankaras natural gas distribution company.
Istanbuls natural gas distribution company.
Operating in the mining sector.
Operating in the wind energy sector.
With 775MW installed power.
This power plant was constructed by the Zorlu Group in Denizli with an investment totalling
US$250 million.
With a capacity of 600 million kWH/year.
In July 2013, the environmental impact assessment report was submitted to the MENR.
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Turkey
project company and the MENR are currently negotiating the HGA for this project.
This plant is expected to become operational in 2023.
Following the success of the Baku-Tbilisi-Ceyhan Crude Oil Pipeline, Turkey
became the obvious candidate for hosting pipelines transporting petroleum and natural
gas from the Caspian to Europe. In mid-2012, Turkey and Azerbaijan signed an IGA for
the construction and operation of the TANAP. Attached to the IGA is a HGA signed
between Turkey and the TANAP Project Company. Turkey ratified the IGA and HGA
in March 2013. The Turkish government places great importance on this project, which
will be the longest energy pipeline in the region at approximately 2,000km.
In January 2013, Turkey and the UAE signed an IGA for what was going to be
the largest foreign direct investment in Turkey to date, with a value of approximately
US$12 billion. The project entailed the construction and operation of a coal-based
power plant,61 in Turkeys Afin-Elbistan region. The project was initially planned to
start in mid-2013. However, due to other priorities, in August 2013, TAQA decided to
defer its investment decision until 2014.
Additionally, in September 2013, Borusan EnBW Energy commenced the
construction of a wind power plant in the northwestern province Tekirda.62
v
Significant developments
In November 2013 the EU, Turkey, Iraq and the Mashreq countries63 reached a consensus
to connect the Arabian natural gas pipeline to Turkey, Iraq and the EU. The aim is to
develop regional cooperation in the natural gas sector through the Euro-Arab Mashreq
gas market centre and to extend its participation to Iraq and Turkey.
The Northern Region of Iraq-Turkey Natural Gas Pipeline Project has been
among the radical energy (as well as political) developments in Turkey in late 2013.
In November 2013, the Turkish government formally met with the administration of
the Northern Region of Iraq to begin negotiations for the transport of petroleum to
Turkey. Negotiations are likely to continue in 2014, with the participation of the central
government of Iraq.
vi
New discoveries
Turkey has begun to conduct hydraulic fracturing operations, to extract shale gas
from wells in the Thrace and Southeast regions. In the Thrace and Southeast regions,
4.6 trillion m3 of shale gas reserves have been detected.
In November 2011, TPAO64 and Shell signed an agreement to explore for gas
and oil in Diyarbakr and Batman. They began drilling Turkeys first wells for shale gas
exploration in Diyarbakr in October 2013. Shell will be in charge of well operations,
and if shale gas is found, the company plans on drilling over 20 wells in the area.
61
62
63
64
With a capacity of up to 8,000MW.

With 50MW installed power.
Egypt, Jordan, Lebanon and Syria.
The Turkish Petroleum Corporation.
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Turkey
vii
Solar-based energy and wind-based energy generation licence applications
2013 also witnessed significant developments in renewable energy investment. EMRA

received applications for solar-based energy generation licences between 10 and 14
June 2013. Although the designated total capacity for solar-based generation licences is
600MW, applications were submitted for nearly 8,900MW. Thus, several contests will
be organised in different regions to decide who will obtain the generation licence in the
relevant region. The first contest will be held on 12 May 2014 for Elaz and Erzurum
provinces. As for wind-based energy, EMRA will receive applications for generation
licences between 24 and 30 April 2015.
viii
Conversion of auto-production licences
EMRA Board Decree No. 4952-18 sets forth the general principles regarding termination
of current auto-production licences and issuance of generation licences for the relevant
entities. Pursuant to these principles, the EMRA Board issued another Decree No. 4969,
providing that as of 1 May 2014, 260 of 274 auto-production licences will be terminated
and generation licences will be issued to the auto-production licence holders. Due to
their specific circumstances, separate procedures will be carried out for the remaining 14
auto-producion licences.
ix
Turkish Petroleum Law
In 2013, the long-awaited TPL was enacted, replacing the PL after nearly 60 years. The
TPL brings a more liberal and investor-friendly regime than the provisions that the
PL imposed on upstream participants. With this new law, Turkey is now divided into
two petroleum districts, namely onshore and offshore, whereas previously there were
18 petroleum districts.65
Perhaps the most significant change brought by the TPL is the abolition of the
national interest concept. Based on the national interest concept, the TPAO had a
statutory right to obtain exploration licences on behalf of the state, and by virtue of this
right the TPAO had an advantage in respect of exploration licence applications. With the
abolition of this concept, the TPAO no longer has that privilege.66
x
New Electricity Market Law
The new Electricity Market Law entered into force in March 2013. This law aims
to address various new issues that have long been awaited in the market, such as the
introduction of a preliminary licence mechanism for generation licence applications.
65
66
Another novelty of the TPL is the abolition of the restriction on the number of licences a
company can obtain for a single petroleum district. Under the PL, companies were limited to
eight licences per district.
Among some of the other novelties is that the TPL allows petroleum right holders to market
and export natural gas that they have produced to wholesale companies, export companies,
distribution companies or to eligible consumers without being subject to any conditions
regarding storage capacity.
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Turkey
This law also provides for the establishment of an electricity exchange, which will create
a whole new market of its own and become a significant investment opportunity.
VII
Economic expansion, rising per capita income, positive demographic trends and the
rapid pace of urbanisation are the main drivers of Turkeys growing energy demand,
estimated to increase by approximately 7 per cent each year until 2023. Due to this
increase in energy demand, the Turkish energy market has been experiencing vast
changes. These changes include liberalisation, attracting private sector participation and
the establishment of a competitive market.
At present, domestic resources provide approximately 26 per cent of the total
energy demand, the remainder being imported. Due to insufficient domestic energy
generation, Turkeys primary goal is to strengthen its security of supply. Turkey aims to
diversify its energy supply routes and sources, such as nuclear energy, and to increase the
share of renewable energy.
Turkeys importance in the energy markets is not just increasing as a growing
consumer with a huge domestic market, but also as an energy transit hub. Although
Turkey has limited energy resources, its position is critical for petroleum and natural
gas trade between the East and the West, as it lies between energy-demanding European
countries and energy-rich eastern countries. Turkey is a natural transit country for the
maritime and pipeline transportation of gas and oil. Accordingly, international crude
oil and natural gas pipelines and pipeline projects hold great importance and improve
Turkeys role as a reliable transit country.
467
Chapter 36
UKRAINE
Wolfram Rehbock and Maryna Ilchuk1
I OVERVIEW
Because of its unique geographical location and its gas storage capacity, Ukraine plays
a key role both in the European and global fuel and energy markets. On the one hand,
Ukraine is an energy-dependent country with insufficient volume of its own conventional
energy sources (oil and gas). On the other hand, Ukraine is important for the global
energy markets, being a major transit centre for exports of Russian oil and natural gas to
both eastern and western Europe.
The key programme document of Ukraine dealing with energy is the Energy
Strategy for the period up to 2030 (the Energy Strategy),2 which sets out the basis for
the states energy security and determines the main energy policy objectives and tasks, as
well as outlining the major directions, priorities and future development of the energy
sector. On 4 February 2013, the Cabinet of Ministers published the text of the updated
Energy Strategy on its website. The text was approved by Resolution of the Cabinet of
Ministers No. 1071 dated 24 July 2013. According to the Energy Strategy, the main
objectives of the document are to create conditions for reliability and quality in meeting
the demand for energy products; improving energy security of the state; improving the
efficiency of energy use and consumption; reducing the anthropogenic impact on the
environment; and support of civil protection in the field of technological security of the
Fuel and Energy Complex.
Activities under the Energy Strategy will help to achieve the following results:
a
full support of the growing demand for electricity due to urgent modernisation
of thermal power plants, extending the life of nuclear power plants, significant
investments in modernisation, after 2018 due to the introduction of new
generation capacities and reduction of specific costs;
1
2
Wolfram Rehbock is a senior partner and Maryna Ilchuk is a junior associate at Arzinger.
Resolution of the Cabinet of Ministers of Ukraine dated 15 March 2006 No.145-p.
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Ukraine
b
c
d
e
f
g
an increase in gas production to 4045 billion cubic metres per year and output to
ensure 90 per cent of own gas consumption provided that procedures for issuing
licences are revised;
product distribution agreements, taxation and active work to attract investors;
full support of the demand for coal by increasing the cost-effective production of
energy coal to up to 75 million tonnes per year;
considerable reduction of state costs by stopping subsidies to industries while
increasing the efficiency of the fuel and energy sector;
introduction of integrated energy-efficiency programmes to reduce specific energy
consumption in the economy by 3035 per cent by 2030; and
attracting the necessary investment (about US$200 billion) to the fuel and energy
sector.
The updated Energy Strategy provides for increasing energy prices, enhancing control
over monopolies as well as increasing the share of renewable energy with due regard to
hydropower plants and pumped storage power plants in the overall balance of electricity
production to the level of 12.4 per cent by 2030. At the same time, the Energy Strategy
singles out wind power as having the most potential.
The Energy Strategy envisages an increase in the cost-effective production of
thermal coal of up to 75 million tons per year.
To meet the domestic demand, in addition to supplies from Russia, Ukraine plans
to import gas from alternative sources: import of liquefied natural gas from Egypt, Algeria
and Qatar as well as pipeline gas from Azerbaijan. Moreover, Ukraine will continue
to develop the reverse gas supplies from Europe (Germany-Czech Republic-Slovakia or
Turkey-Bulgaria-Romania).
Also, the baseline scenario stipulates that Ukraine will be able to meet about
90 per cent of domestic gas demand through its own production until 2030. Ukraine
expects that the annual production of shale gas through the development of the Black Sea
shelf will be 79 billion cubic metres on the deep shelf and out of solid rock, 611 billion
cubic metres of shale gas and 1.3 billion cubic metres of coalbed methane by 2030. The
possible forms of investment in the power sector include: own funds of enterprises and
organisations, direct funding from the state and local budgets, financing with loan funds
and equity as well as foreign investments.
In time it will become more apparent whether the Energy Strategy will be
achieveable.
II REGULATION
i
The regulators
According to the Law of Ukraine on the Electric Power Industry (the Electric Power
Industry Law),3 the state regulator for activities in the electricity industry is the National
Commission (NERC), which performs state regulation in the energy sector.
No. 575/97-VR, dated 16 October 1997.
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Ukraine
The NERC, inter alia, regulates the activity of the natural monopoly entities in
the electric power industry and business entities operating in adjacent markets. Its main
responsibilities include licensing energy business activities, developing and approving
procedures for access to the Unified Gas Transportation System of Ukraine and
establishing energy tariffs.4
The authority that implements state policy in the sphere of efficient usage of
energy resources, energy efficiency, renewable energy and alternative fuels is the State
Agency of Ukraine on Energy Efficiency and Energy Saving (the Energy Efficiency
Agency).5
ii
Licensing of activities in the electric power industry is regulated by Article 13 of the

Electric Power Industry Law.
Production, transmission and supply of electric power in Ukraine are subject to
obtaining an appropriate licence from the NERC. Electric power production activities
are permitted without a licence by economic entities if their installed capacity value or
power supply is lower than the targets identified in the Rules and Conditions of business
activities for the production of electric power.6
Energy suppliers, which include cogeneration heat and power plants, obtain
licences for types of activity in the electric power sector with regard to the needs of
consumers in the territory in which the licensed activity takes place.
Licences are issued by the NERC for each single type of activity:
a
electricity production (amounts exceeding the level requiring licensing);
b
electricity transmission via main and interstate electric power networks;
c
electricity transmission via native (local) electric power networks;
d
electricity supply at regulated tariffs;
e
electricity supply at non-regulated tariffs;
4
5
6

Decree of the President of Ukraine No. 1059/2011 on Approval of the Regulation on National
Commission, which performs state regulation in the energy sector, dated 23 November 2011.
Decree of the President of Ukraine No. 462/2011 on Approval of the Regulation on the State
Agency of Ukraine on Energy Efficiency and Energy Saving, dated 13 April 2011.
According to Article 2 of the Rules and Conditions of business activities for the production of
electric power, approved by the NERC Resolution No. 3, dated 8 February 1996:
Subject to licensing are activities of business entities producing electricity, which:
have in their ownership or use equipment with the installed capacity of not less than 5MW;
have in their ownership or use equipment that generates electricity using alternative sources (except
for blast furnace and coke oven gas) with the installed capacity of not less than 10MW, or have the
intention to sell the electricity generated by this equipment in the WEM (regardless of the installed
capacity).
The licensee, together with related enterprises can carry out the licensed activity, if the volume
of electricity generated by it is less than 33 per cent (50 per cent for nuclear power plant energy
companies) of the total electric power generated by all electricity producers in Ukraine during
the previous calendar year.
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Ukraine
f
g
h
wholesale electricity supply;

combined heat and power production (CHP) plants; and
heat production at CHP plants and installations using non-traditional or
renewable energy sources.7
Electricity production activities in Ukraine are licensed and carried out in accordance
with the aforementioned Rules and Conditions.
On 16 June 2000,8 Energorynok SE was licensed to carry out business activities
in the wholesale supply of electricity, effective from 1 July 2000.
Pursuant to Article 9 of the Law on Licensing of Certain Types of Economic
Activities,9 the following activities are also subject to licensing:
a
transportation of natural and oil gas via pipelines and allocation thereof;
b
natural gas supply at regulated and non-regulated tariffs; and
c
natural gas storage in the volumes exceeding the level established by licensing
terms.
The NERC is also empowered to license economic activities in the natural gas market,
and approve licensing terms for implementation of certain types of economic activities
within the natural gas market.10 Each activity is licensed separately in the order established
by the NERC, and licences are issued for at least three years. The extraction of coal also
requires a licence under this Law. Under Article 9, the search (prospecting) for minerals
is also subject to state licensing.
The Ministry of Ecology and Natural Recourses of Ukraine has the authority to
grant licences for usage and geological study of subsoils through open auctions. According
to the Resolution of Cabinet of Ministers of Ukraine No. 1698 of 14 November 2000, the
State Geological Service of Ukraine has the authority to grant licences for the extraction
of mineral resources from deposits that have state-level importance and are included in
the State Fund of Mineral Resource Deposits.
iii
Article 6 of the Electric Power Industry Law regulates property rights in the electric
power industry. Power generation facilities may fall under different forms of ownership.
The list of power generation facilities that are not subject to privatisation will be approved
by the Supreme Council of Ukraine upon provision of the Cabinet of Ministers of
7
8
9
10
Instruction on the procedure for issuing licences by NERC for certain business activities,
approved by NERC Order No. 1305, dated 6 October 1999.
NERC Order No. 684.
Law of Ukraine on Licensing of Certain Types of Economic Activities, No. 1775-III, dated 1
June 2000.
Article 4(3) of the Law of Ukraine on the Principles of the Natural Gas Market Operation (the
Natural Gas Market Law).
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Ukraine (CMU). Privatisation of facilities in the electric power industry is performed in
accordance with the laws of Ukraine on privatisation.11
Any property that ensures the integrity of the Unified Energy System of Ukraine
and centralised operational process management, the main and interstate power grids, and
property of research institutions of national importance will not be subject to privatisation.12
Further, the gas pipeline system itself is not subject to privatisation. There are
42 gas supply companies (Oblgas) providing supply and transportation of natural gas
to end-consumers, and these exist in the form of public joint-stock companies (PJSCs);
some Oblgas were privatised in the mid-1990s. Private Oblgas operate gas-distributing
pipelines on lease terms.
In terms of coal, according to Article 24 of the Code on the Subsoil of Ukraine,
legal entities that have the right to use the subsoil are entitled to ownership of useful
extracted mineral resources unless otherwise provided by the law or their licence. As all
mineral resources are initially owned by the state, the owner of a mine has the ownership
both of the mine and its coal resources, but has to pay a fee for usage of mineral resources
on a permanent basis. In this case, the fee is set at a fixed sum per tonne of coal extracted.13
Coal mines are not included on the list of state property that cannot be privatised.
In early June 2010, the President of Ukraine announced a programme of economic
reforms for the 20102014 period, which envisaged the privatisation of regional
electricity distribution companies (Oblenergos) and of energy generation companies.14
As a result, between August and September 2012 the State Property Fund sold stakes
of 16 joint-stock companies for gas supply and gasification (Oblgas). On 17 July 2013,
the Cabinet of Ministers of Ukraine passed the Resolution Some issues of privatisation
of gas distribution and gas supply companies, which provided for the transfer of shares
in 39 joint-stock companies for gas supply and gasification from Naftogaz Ukraine to
the State Property Fund for further privatisation. These included blocking stakes of 37
regional Oblgas and Gorgas companies as well as controlling blocks of shares (50 per
cent +1 share) of two regional Oblgas companies.
In 2013 there were plans to proceed with the privatisation of regional electricity
distribution companies (Oblenergo), whereas state-owned blocks of shares would be
sold as a whole, without reserving controlling blocks of shares. Thus, in August 2013
CJSC Energoinvest Holding (Donetsk) acquired 60.773 per cent of the shares of PJSC
Donbassenergo. Currently the State Property Fund of Ukraine in accordance with the
approved privatisation schedule plans to announce tenders on sale of control share packages
of the six regional electricity distribution companies 50.9 per cent of Ternopiloblenergo,
60,25 per cent Zaporizhzhiaoblenergo, 60.001 per cent Kharkivoblenergo, 65 per
11
12
13
14
Order of the State Property Fund No. 1855/12/263/414 on Approval of the Regulation on the
Procedure of Tenders for Sale of Shares in Energy Companies, dated 7 September 2000.
Law of Ukraine on the list of objects of state property that cannot be privatised, No. 847XIV, dated 7 July 1999; such objects include Ukrenergo, Ukrintenergo, and public research
institutes of thermal power.
Article 263(9) of the Tax Code of Ukraine.
The electricity generation companies currently operating in Ukraine are PJSC Dneproenergo,
PJSC Centrenergo, PJSC Zapadenergo and PJSC Donbassenergo.
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Ukraine
cent Mykolaivoblenergo, 65.009 per cent Khmelnitskoblenergo and 75 per cent
Volynoblenergo.
On 12 April 2012, the Parliament adopted Law No. 9713 of 16 January 2012
on Amendments to Certain Laws of Ukraine on Privatisation. The Law excluded CHP
plants from the list of the state-owned property not subject to privatisation but subject
to corporatisation. In August 2013, the Cabinet of Ministers approved a plan to privatise
three combined heat and power stations in Crimea: the Simferopol combined heat and
power plant, the Kamysh-Burunska combined heat and power plant, and the Saky
Heating Networks. The states 37 per cent stake will be sold as a single package via
an auction-type competition, whereas the state would no longer own stakes in these
combined heat and power plants after their privatisation.
In terms of coal mines, on 11 September 2013 the State Property Fund of Ukraine
approved a list of 42 mines to be prepared for privatisation in 2013. Two more mining
companies were excluded from that list.
Thus, in recent years, Ukraine has taken steps to privatise the energy sector. This
is normal practice in countries with transitional economies that are not able to ensure
the development of industry and to invest in the infrastructure by themselves. Taking
into account, however, that the current state of the infrastructure is quite poor, the
effectiveness of such actions depends on whether private investors invest seriously in the
development of the privatised objects.
iv
The NERC determines compliance of liquidation, reorganisation in the form of a merger,

consolidation, participation in unions as well as acquisition or alienation of more than
25 per cent of shares (stock) in assets of economic entities on the electricity market with
the rules and conditions of exercise of the licensing activity.
The NERC also determines compliance with the licensing conditions of
liquidation, reorganisation in form of consolidation, merger, participation in unions as
well as acquisition or alienation of more than 10 per cent of shares (stocks, equities) of
assets of economic entities on the natural gas market.
III

SERVICES
i
On 16 July 2010, the President signed the Natural Gas Market Law. Among the principles
set out in the Law, and complying with European standards, is separation of functions
regarding the transportation, distribution, supply and storage of natural gas. A transit
operator is not allowed to perform activities concerning production and supply of natural
gas, while a distribution operator may not enter the markets of natural gas production,
supply, storage and transportation. If a transit or a distribution operator is a constituent
part of a vertically integrated company, it must be legally and organisationally separated
from the companys other activities that are not directly connected with transportation
or allocation of natural gas.
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Ukraine
Naftogaz is a leader in the Fuel and Energy Complex and is one of the largest
Ukrainian companies. It combines the largest gas and oil-producing enterprises, and
holds a monopoly on natural gas transit and its underground storage, as well as on
oil piping within the countrys territory. Naftogaz carries out the full operation cycle
for gas exploration and development, operational and test well-drilling, gas and oil
transportation and storage, and consumer supply of natural and liquefied gas. Currently,
the state is the only stockholder of Naftogaz, which has a number of subsidiaries carrying
out operations in the gas industry, including production, transmission, distribution and
technical support. As, a result of this Law, however, Naftogaz must be unbundled.
Independent activities of such operators should be achieved via a prohibition
on holding more than one office in the structure of a vertically integrated company
and by independent decisions regarding current financial and other business operations.
Implementation will be in two stages, the first of which began on 1 January 2012, and
the second will begin on 1 January 2015.
The Presidents National Action Plan for 2013 to implement the Programme
of Economic Reforms 20102014, focuses, inter alia, on launching the reform
programme for Naftogaz and fulfilling the obligations of the Energy Community related
to unbundling. A reorganisation programme is being prepared by Ernst & Young.
Meanwhile, to improve the attractiveness of the Ukrainian oil and gas sector for foreign
investment, the government has developed and submitted a bill to the Verkhovna Rada
to reform NJSC Naftogaz of Ukraine, which provides for the separation of the statecontrolled holding into separate structures according to their activity.
Within its obligations towards the Energy Community, Ukraine must reform its
electricity market in line with Directive 2003/54/EC. Therefore, on 24 October 2013
the Law of Ukraine on Operating Principles of the Electricity Market No. 663-VII (the
Electricity Market Law) was adopted.15 One of the issues, regulated by the document
is unbundling of Oblenergos. In accordance with Article 15 Part 5 of the Electricity
Market Law, electricity distribution companies are not allowed to carry out activities
for the production, transmission and supply of electricity. Such activities shall be legally
and organisationally separated from other activities of the vertically integrated business
organisation, which are not related to the distribution of electricity.
It is important to note that the unbundling of generation, transmission,
distribution functions, and the functions of delivery shall be made on the basis of a
special law regulating the peculiarities of the legal and organisational unbundling
(paragraph 3), Part 2 of Transitional Provisions). However, at this point, there s not even
a draft of such law.
ii
The Natural Gas Market Law implements another significant principle: the opening up
of the gas market the main condition for establishing real competition. Opening the
market means the guarantee of the right of consumers to freely select gas suppliers, which
requires equal access to the market for both companies already existing in the market
15
Law of Ukraine on Operating Principles of the Electricity Market dated 12 December 2012,
http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=45062.
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Ukraine
and those recently appearing therein. Thus, the only restriction on access to the market
would appear to be the licensing system, which admits such activities as transportation,
distribution, supply, storage or production based on objective, transparent and nondiscriminatory criteria determined by the regulator.
Another important principle provided in Natural Gas Market Law is equal
opportunities for third parties to gain access to the gas transmission system and
underground gas storage in Ukraine. According to Article 7, entities operating in the
natural gas market have equal rights of access to the integrated gas transmission system of
Ukraine. The only criteria that allow network infrastructure operators to deny gas market
entities access to the network are absence of free transmission capacity and the customers
violation of any requirements for access to the network infrastructure.
The Draft Electricity Market Law also provides for non-discriminatory and
transparent access to the main, interstate or local power networks, as well as nondiscriminatory access to the electricity market. Access to the network capacity of
interstate power networks is provided to all energy suppliers and producers of electricity.
Energy distribution companies must provide non-discriminatory access to local power
networks on the electricity market.
iii
According to the Natural Gas Market Law, storage (injection, extraction) of natural gas
is carried out based on an agreement under which each gas storage enterprise must store
any natural gas in its storage facilities transferred by the gas owners or by any other
person entitled to transfer the gas for storage, and to return it to the person entitled to
receive such gas on terms stated in the agreement. Obligatory conditions for gas storage
enterprises and consumers of services provided by such enterprises are determined in a
standard agreement on natural gas storage.
Prior to conclusion of the agreement on natural gas storage, the owner has the
right to receive information on request from the gas storage enterprise on availability of
its capacity for storage, prices and payment conditions for such services.
Pursuant to the concluded agreement, gas storage enterprises must ensure:
a
equal access rights to their natural gas storage capacities for all participants of the
natural gas market; and
b
adherence to the requirements as to the storage of natural gas, and certain
regulatory and legal acts and regulatory documents (in particular, fulfilment of
obligations as to volume and terms of injection, storage and extraction of natural
gas, and use of its reserve in the full amount.
iv Rates
Electricity
The NERC regulates the prices (tariffs) for goods (services) of natural monopolies in
the Fuel and Energy Complex of Ukraine, based on the regulatory principles as defined
by the applicable law, mainly addressing the balance between the economic interests
of producers and consumers of their goods and services, as well as the principle of full
compensation by the consumer of reasonable expenses for production, transmission
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Ukraine
and supply of electricity. The market order of price formulation is not differentiated for
consumers within different economic sectors.
The NERC established a system of price regulation that includes a number of
controls over pricing at each stage of the process (production, transmission and supply of
electric energy). The concept adopted in Ukraine, and set out in the Law on the Electric
Power Industry, as well as in many acts of the CMU, provides for market-led pricing of
electricity.
Gas market
The limiting (upper) levels of natural gas prices for all consumer categories are approved
by the NERC in accordance with regulatory documents. These methods provide for the
addition of prospecting, transmission and gas supply costs to overall production costs.
Naftogaz sends the prices to the NERC and the reasoning thereof, which are required for
further revision of tariffs, as well as for revision of tariffs for gas transmission via main
pipelines and for natural gas supply.
At present, there are both regulated and non-regulated natural gas prices for
Ukrainian consumers. The main function of state regulation is the establishment of stateregulated prices and tariffs for services provided by monopolists. Regulated tariffs apply
to the immediate gas supply to consumers16 by licensees pursuant to licensing terms
under established price formulation rules. Non-regulated tariffs apply to the immediate
gas supply to consumers17 made by licensees under licensing terms under contract
principles at free prices and under competitive conditions.18 Therefore, the licensee sets
the price for natural gas at its own discretion, which may not exceed the upper price level
for natural gas established by the NERC. A non-regulated tariff will be introduced to
create a certain competitive environment.
v
The main document providing for security in the energy sector is the National Security
Strategy of Ukraine, approved by Decree of the President of Ukraine No. 105/2007
dated 12 February 2007. The document includes separate articles covering threats to
energy security and strengthening of energy security.
16
A gas consumer is a legal entity (religious organisation) (excluding volumes used for production
and commercial activities), an institution or organisation financed from the state or local
budget, or a natural person (individual) obtaining gas under a gas supply agreement and using
it for individual needs (Item 1.3 of NERC Decree No. 11, on Approval of Licensing Terms
for Exercising Economic Activities on the Natural Gas Supply at Regulated Tariffs, dated 13
January 2010).
17
A gas consumer is a legal entity or an individual entrepreneur that receives gas under a gas
supply agreement and uses it for individual consumption as fuel, raw stock or for production
and processing needs (Item 1.3 of the NERC Decree No. 10, on Approval of Licensing Terms
for Economic Activities on the Natural Gas Supply at Non-regulated Tariffs, dated 13 January
2010).
18 Ibid.
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Ukraine
In addition, in 2006, Law No. 307-V on the Functioning of the Fuel and Energy
Complex during a Specific Period was adopted. This Law regulates relations regarding the
generation, transmission, delivery and use of energy resources over a specific period by
companies, entities and organisations in the Fuel and Energy Complex, without regard
to the form of ownership or their interactions with, among others, government bodies.
In addition, work has intensified in the sector of environmental safety as part
of the National Security Strategy, in particular, in increasing the level of safety at the
Chernobyl nuclear power plant.
IV
ENERGY MARKETS
In Ukraine the electricity market functions separately from the gas market. The CMU
adopted a decree in February 1996, according to which the energy market began
operations on 10 April 1996.19
The wholesale electricity market (WEM) is a market established by business
entities for the purchase and sale of electric energy under contract.20
Today, the WEM operates based on the Electric Power Industry Law, as amended
on 22 June 2000. In accordance with this Law, activities on the energy market are
regulated by wholesale market rules, by agreement between parties (or members) of
the WEM,21 by bilateral contracts on the sale of electricity or by the NERC licence
on production, transmission22 and supply23 of electric energy. Regulation of the energy
market is provided by the NERC, including the establishment of fixed rates for electricity
producers, fixed tariffs on transmission and supply for electricity providers, and the rate
for households. Control over the energy market is also exercised by the Ministry of Fuel
and Energy of Ukraine.
Given that a considerable number of the WEM participants are natural
monopolies, its operation is also based on the Laws of Ukraine on Natural Monopolies,
on Protection of Economic Competition, and on Protection against Unfair Competition.
The WEM operates according to the single-buyer model. All entities forming
the WEM are licensees (producing companies, distribution companies and electricity
suppliers), and the executive body of the WEM administration is the Market Council.
Energorynok SE (State Enterprise) is a commercial WEM operator, and thus a single
buyer therein (it exclusively buys electricity from generating companies and sells it to
distribution companies). Ukrenergo National Energy Company (NEC), owner and
19
20
21
22
23
Resolution of the Cabinet of Ministers of Ukraine No. 3, on Approval of Rules and Regulations
of Entrepreneurial Activity on Production of Electricity, dated 8 February 1996.
Article 1 of the Electric Power Industry Law.
Agreement on the WEM, dated 15 November 1996.
Transmission of energy is transportation of energy through networks based on agreement
(Article 1 of the Electric Power Industry Law).
Supply of electricity is provision of electricity to consumer through technical transmission and
distribution means based on agreement (Article 1 of the Electric Power Industry Law).
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operator of the main network of 220kV to 750kV voltage class, carries out management
tasks as the WEM technical operator.
Energy distribution companies are represented in the WEM according to the
number of regions: 25 regional (Oblenergo companies) and two municipal energy
companies (Kiev, Sevastopol). WEM energy suppliers are divided by licensing rules
into two major groups: suppliers at regulated (fixed) tariffs and suppliers at nonregulated (free) tariffs. Tariffs for electricity suppliers at regulated tariffs are set by the
NERC, whereas tariffs for supply of electricity at unregulated tariffs are determined by
agreements between electricity suppliers and consumers. Consumers buy electricity from
Energorynok SE through electricity suppliers, and Energorynok SE, in its turn, orders
and buys the necessary volume of electricity from generating companies. Physically,
the electricity produced by generating companies reaches consumers via the main and
distribution electric networks based on agreements on the transfer of electricity between
the relevant WEM entities.24
ii
As mentioned above, on 24 October 2013 the Law of Ukraine on Operating Principles

of the Electricity Market No. 663-VII (the Electricity Market Law) was adopted by the
parliament.25 The main purpose of the Law is to liberalise the WEM and create effective
competition within the energy market. The Electricity Market Law also provides for nondiscriminatory and transparent access to the main, interstate or local power networks,
as well as non-discriminatory access to the electricity market. Access to the network
capacity of interstate power networks is provided to all energy suppliers and producers
of electricity. Energy distribution companies must provide non-discriminatory access to
local power networks on the electricity market.
The Law foresees the implementation of a model of operation under direct
agreements on Ukraines electricity market, the market of day-ahead contracts and a
balancing market, which will provide an opportunity to regulate the imbalance that
appears during electricity generation. The document also suggests the creation of a
market of additional services for purchases from peaking power plants.
On the bilateral conditions market, producers sell their generated electricity and
energy suppliers buy it under the agreement of the parties regarding the price, volume
and term of the electricity supply based on the concluded bilateral conditions.
In the day-ahead market the generators and energy suppliers buy and sell
electricity during the organised trading in electric energy for the following day by the
conclusion of relevant agreements with the operator of the market based on the results
of trading.
Prices and volumes of selling and buying of electricity on the following day are
determined in accordance with the rules of the day-ahead market.
24
25
Ukrenergo owns the main networks with the right of economic management (may not sell
them), whereas Oblenergo companies are owners of native (local) distribution networks.
Law of Ukraine on Operating Principles of the Electricity Market dated 12 December 2012
http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=45062.
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Prices for electricity generated based on results of trading in electric energy for the
following day can be used as an indicator in determining the price of purchase and sale
of electricity in the bilateral conditions market and balancing market.
In the retail market of electric energy consumers buy electricity from the energy
suppliers (independent or guaranteed).
It is worth noting that the Law foresees the creation of a Cost Imbalance Allocation
Fund, which is to be formed using funds to be paid by nuclear and hydropower plants.
The fund will also handle settlements for electricity sold at feed-in tariffs, and
compensate for guaranteed suppliers losses from the sale of electricity to consumers at
regulated prices.
The Electricity Market Law provides for the development of a number of
regulations for its implementation, including the Code of Electricity Networks and the
Code of Commercial Accounting.
According to the Law, the new market will be introduced by 1 July 2017.
iii
As previously mentioned, both energy and gas markets are currently undergoing a period
of reform, the main purpose of which is market liberalisation. As a result, qualified
consumers will be free to choose their gas suppliers. The qualification criteria will be
established by the NERC for each specific class of consumer (starting from 1 January
2012). According to the Law, all consumers should be qualified no later than 1 January
2015.
Reformation of the electricity market of Ukraine envisages a gradual transition
from the current system to a bilateral contract model with a balancing market.
iv
Market developments
The main market developments have been described in previous sections and are aimed
at liberalisation of energy and gas markets in accordance with its obligations as a member
of the Energy Community.
V
In 2012 significant amendments to the renewable energy legislation were introduced.

On 20 November 2012 the Law on Amendments to the Law of Ukraine on the Electric
Power Industry (on promoting electricity generation from biogas) was adopted.26
The new Law extends the scope of the Law on the Electric Power Industry. It
introduces a coefficient of 2.3 for the electricity produced from biogas.
The green tariff coefficient rate schedule under the Renewables Law is provided
below. It also includes a 10, 20 and 30 per cent reduction in tariffs for power plants
26
Law No. 5485-VI, the Renewables Law.
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Ukraine
commissioned after 2014, 2019 and 2024 respectively, stipulated by the current
legislation.
1 Jan 2025
31 Dec 2029
1 Jan 2020
31 Dec 2024
1 Jan 2015
31 Dec 2019
Category of renewable energy objects
1 Apr 2013
31 Dec 2014
Before
31 Mar 2013
Tariff coefficients for objects commissioned:
Wind energy, rated capacity <600kW
1.20
Wind energy, rated capacity 600kW2,000 kW
1.40
Wind energy, rated capacity >2,000kW
2.10
Wind energy, installed capacity of the unit <600kW
1.20
1.08
0.96
0.84
Wind energy, installed capacity of the unit 600kW2,000kW
1.40
1.26
1.12
0.98
Wind energy, installed capacity of the unit >2,000kW
2.10
1.89
1.68
1.47
Biomass energy
2.30
2.30
2.07
1.84
1.61
Biogas energy
2.30
2.07
1.84
1.61
Solar energy, surface power facilities
4.80
3.50
3.15
2.80
2.45
Solar energy, power facilities fixed on roofs, rated capacity

<100kW
4.60
3.60
3.24
2.88
2.52
Solar energy, power facilities fixed on roofs, rated capacity

100kW, objects fixed on facades
4.40
3.70
3.33
2.96
2.59
Solar energy, power facilities fixed on roofs of the private

houses, rated capacity <10kW
3.70
3.33
2.96
2.59
Micro-hydropower station, installed capacity <200kW
1.20
2.00
1.80
1.60
1.40
Mini-hydropower station, installed capacity 200kW1MW
1.20
1.60
1.44
1.28
1.12
Small hydropower station, installed capacity >1MW
1.20
1.20
1.08
0.96
0.84
Amendments also concern coefficients for electricity produced by solar objects.

Accordingly, the Law provides for a decrease in the coefficients for solar energy.
Also, the document differentiates between small hydropower stations in
accordance with their installed capacity and increases coefficients for the electricity
produced by small hydropower plants.
An important innovation stipulated by the document is the green tariff for
individuals. The document states the following:
For electricity produced from solar energy by power facilities fixed on roofs of private houses,
rated capacity <10kW, in volumes exceeding consumption by such households, the green tariff
shall be awarded. Such electricity is produced without any licence.[27] The NERC shall define the
procedure for purchase of and payment for such electricity (which shall be done by energy supply
companies).
27
Consequently, such company may not be a member of the WEM either.
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Ukraine
In addition, the Law amends the local content requirement regarding the required share
and calculation procedure.
Law No. 5,485-VI (in force from 1 July 2013)
Definition of local content
Local component share of elements envisaged by this Law for an electric power
industry object (elements of a local component) of Ukrainian origin used in the
establishment of an electric power industry object
15%
objects commissioned before 1 July 13
30%
solar, wind, biomass, commissioned

after 1 July 2013
biogas, commissioned after 1 January

2014
50%
solar, wind, biomass, commissioned

after 1 July 2014
biogas, commissioned after 1 January

2015
The updated version of the Law provides for fixed shares of the local component
elements for each kind or type of objects producing alternative energy. The Law envisages
a number of elements and operations to be performed in Ukraine, which counts towards
the local content requirement. It appears that to achieve an appropriate local content
requirement in a renewable project, a power plant operator applying for a green tariff
must satisfy those combinations of elements, which results in compliance with the
respective requirement.
On 27 March 2014, the Draft Law of Ukraine No. 4,596 On Amendments to
the Law of Ukraine On Electricity regarding Stimulation of Production of Electricity
from Alternative Energy Sources was submitted to the Verkhovna Rada of Ukraine. The
Draft Law suggests different coefficients of green tariff for electricity produced from
energy of solar radiation by surface power facilities with a capacity of less than or equal
to 10MW, and for electricity produced from the energy of solar radiation by surface
power facilities with a capacity of more than 10MW. For surface power facilities with a
capacity of more than 10MW, the green tariff cut shall apply to 50 per cent of the initial
tariff (including those constructed in the course of 20092013). The Draft Law clearly
states that:
The state guarantees that to the entities that generate electricity from alternative energy sources
(except for surface solar power facilities with installed capacity exceeding 10MW) the procedure of
stimulation of electricity production from alternative energy sources shall be applied as determined
pursuant to provisions of this article at the date of commissioning of power plants which produce
electricity from alternative energy sources.
This means the draft law directly excludes surface solar power facilities from the effect of
the guarantee.
On 7 April 2014, the Draft Law of Ukraine No. 4644 On Amendments to
Certain Laws of Ukraine regarding Improvement of Payment for Energy Carriers was
submitted to the Verkhovna Rada of Ukraine by the Cabinet of Ministers. The last draft
law also provides for reduction of green tariffs for solar energy, but such reduction will
be applied only to the solar power facilities commissioned after 1 July 2014.
Both draft laws are aimed at preventing discrimination between different groups
of electricity producers that use different types of alternative energy sources. The working
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Ukraine
group in the Verkhovna Rada was established with the aim of summarising and improving
the provisions of both draft laws.
ii
Energy conservation in Ukraine is governed by the Law of Ukraine on Energy

Conservation.28 This Law stipulates a number of principles in the energy conservation
sphere including:
a
a combination of methods of economic stimulation and financial responsibility
for the purpose of rational and efficient use of fuel and energy resources;
b
popularisation of the economic, ecological and social advantages of energy
conservation; and
c
an increase in public awareness of the subject.
By raising its energy-efficiency level, Ukraine could significantly reduce its dependence
on Russian gas; therefore steps are currently being made towards this goal.
iii
Loss of electricity in Ukraine equates to approximately 15 per cent of output. Therefore,

the issue of implementing smart grids in Ukraine is much discussed. This implementation
measure is being discussed, but currently there are no incentives from the government
for this technology.
Ukraine provides tax and duty incentives for renewable energy equipment. Import
of equipment that runs using non-conventional or renewable energy, equipment and
materials for energy saving, and equipment and materials for manufacturing alternative
energy sources are exempted from VAT and customs duties, if the production is used for
its own manufacturing purposes and no other similar products are produced in Ukraine.
The exemption is also applicable to equipment that is used in the production of any of
the aforementioned goods. In addition, profits gained within the territory of Ukraine are
exempted from corporate profit tax if they result from sale of products such as equipment
that runs with non-conventional or renewable energy, equipment and materials for
energy saving, or equipment for production of alternative fuel, if the equipment is selfproduced.
VI
THE YEAR IN REVIEW
Currently, gas prices, dependence on Russia and the possible sale of the Ukrainian gas
transportation system are the hottest topics in Ukraine. It is obvious that the price of gas
influences almost all areas of the economy, including tariffs for housing and communal
services.
Ukraine is looking for different ways to reduce its gas dependence. In 2012, the
government took serious steps to develop shale gas extraction in Ukraine.
28
Law of Ukraine on Energy Conservation No. 74/94 BP, dated 1 July 1994.
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Ukraine
For a while now, Ukraine has been negotiating with a number of international
oil extractors such as Shell, Chevron and ExxonMobil. Shell won a tender to sign a
production sharing agreement (PSA) for the Yuzivska field (Kharkiv and Donetsk
regions) and Chevron won a tender to sign a PSA for the Oleske field (Lviv and IvanoFrankivsk regions). In August 2012, Exxon Mobil, Royal Dutch Shell, Petrom and NJSC
Nadra Ukraine, bidding jointly, won a PSA for the Skifske oil and gas field on the Black
Sea shelf.
In addition, on 24 January 2013, at the Economic Forum in Davos, Shell, Nadra
Yuzivska LLC and the government of Ukraine signed a PSA concerning unconventional
gas extraction in the Yuzivska field. The 50-year deal envisages the drilling of 15 wells to
exploit the shale gas potential in the area, in the east of the country. The share of the state
in the distribution of profitable hydrocarbon products extracted under a PSA will range
between 31 and 60 per cent. It is notable that in January 2013 the government decided
to substantially decrease its fee for the issuance of special permits for sub-surface use,
granted in order to undertake PSAs; the price for issuing a special permit to perform PSA
will now be 1 per cent of the initial auction price of such special permit (this fee should
have been 100 per cent of its initial value). The PSA signed with Shell provides a number
of additional tax benefits for the company; according to the agreement, the company is
exempted from ecology, pension, land, royalty, property taxes and customs duties. Shell
will, however, pay VAT, income tax and production tax. The income tax rate, fixed in the
agreement, cannot be changed, even if the relevant legislation were amended.
The fact that Ukraine has made such concessions to the company means that it
has a strong interest in shale gas projects in its territory. At the same time in Ukraine, as
well as in the European Union, the use and safe production of natural gas is prominent
in the energy discussion. The discussion about the environmental impact of shale gas
production is ongoing, and in some countries shale gas exploration is on hold until more
is known about the possible environmental impact of shale gas production. The cost of
shale gas production has been significantly reduced by the employment of the method
of fracking (hydraulic fracturing). However, this method is often criticised, citing
the danger of water pollution, damage to human health and the risk of earthquakes
in its application. In October 2013, Frances constitutional court has upheld a ban on
hydraulic fracturing, ruling that the law against the energy exploration technique known
as fracking is a valid means of protecting the environment. Some time ago Bulgaria
also forbade fracking. Nevertheless, the United States continues to produce shale gas.
Extraction of shale gas in the United States has led to a sharp drop in gas prices. Europe
realises that taking this into account, if it does not extract shale gas, such gas-dependent
industries as paper and steel will not be able to compete with those in the United States.
As regards PSAs in Ukraine, on 12 September 2013, Nadra Yuzivska signed an
operating agreement with Shell, as stated Minister of Energy and Coal Industry Eduard
Stavytsky. The operating agreement actually permits commencement of work in the
Yuzivska area.
Moreover, on 30 October 2013, the government approved the draft product
distribution agreement between Chevron Ukraine and Nadra Oleske, which was signed
within the framework of the investment forum on 5 November in Kiev. The PSA foresees
an initial investment of US$350 million by Chevron in exploratory work aimed at
establishing how commercially viable shale reserves are at Oleske field, which covers 5,260
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Ukraine
square kilometres. Total investments, including extraction after exploratory drilling, are
total around US$10 billion. Thus, deputies in western Ukraine cleared the way for a
deal when a majority voted in favour of the governments plans for exploration at Oleske
field, overcoming opposition from local lobby groups concerned with possible ecological
damage from the project. In addition, at the beginning of 2014 some force majeure
events took place in Ukraine, which had a significant influence on energy market of
Ukraine, and tremendous changes with regard to the energy market in the Autonomous
Republic of Crimea occurred. In February 2014 pro-Russian forces gradually took
control of the Crimean peninsula. On 17 March, the Crimean parliament officially
declared its independence from Ukraine and requested to join the Russian Federation.
As a result, on 18 March, President of Russia declared Crimea as a part of Russia. Thus,
annexation of Crimea caused an unprecedented event in the history of modern Ukraine:
Russia extended its jurisdiction to the territory of Ukraine. Recognition of that fact
by the existing political forces in Crimea, and their acquisition of control of certain
infrastructure facilities have substantially affected the rights and obligations of business
entities whose activities are linked to the peninsula.
Currently, the issues of power supply to Crimea, regulation of energy prices, and
operation of energy companies which Crimea attempts to nationalise and, subsequently,
privatise are being actively discussed.
Now the Ukrainian government is considering raising prices for energy sources
for Crimea. The Ministry of Energy announced that it would stop subsidies for the
population in the form of provision of subsidy certificates. If Ukraine does recognise
Crimea as part of the Russian Federation, taking into account that it is not self-sufficient
in terms of electrical power supply, Crimea will receive it from Ukraine at export prices.
An urgent issue is the future operation of energy objects producing electrical power
from alternative energy sources (the majority being, of course, solar power plants). These
stations enjoyed the guaranteed green tariff until 2030 and many investors have bought
the equipment on credits calculated based on the promised tariff. The Minister of Energy
announced that the funding of solar energy generating objects is being suspended in
expectation of the law on occupied territories. And already on 4 April, SE Energorynok
announced that it had officially stopped purchasing all electricity produced in Crimea.
In addition to the issues above, investors are concerned about the status of
agreements of Ukraine with Western oil companies as to gas recovery on the Black Sea
shelf, and whether companies will be able to receive forfeit from the government, as they
have invested a lot of money into exploration and elaboration of documents of shelf
development, or whether the annexation of Crimea will be qualified as force majeure.
VII
The Ukrainian energy sector is undergoing a complex transformation. As a member of

the European Energy Community, it must implement the energy chapter of the EU
aquis communautaire in full, including the Third Energy Package.
Ukraine has huge biomass potential and the largest agricultural market in Europe,
and it also has access to the Black Sea. Its biomass potential could be used for biofuel
production and, further, Ukraine has good conditions for producing wind and solar
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Ukraine
energy, especially in southern Ukraine and Crimea. The Ukrainian government is
encouraging investment into the establishment of bioenergy facilities by offering benefits
to producers, one being the green tariff.
Ukraine also operates one of the worlds largest natural gas transportation
systems, but because of its reputation as an unreliable transit country, its transit business
is in decline. To make matters worse, on 8 November 2011 the first line of the North
Stream pipeline was inaugurated, and the construction of South Stream pipeline should
be completed by 2015. Both pipelines are diversifying Russian gas routes away from
Ukraine, directly connecting Russia with Germany and western Europe. Meanwhile,
Ukraine is trying to negotiate a lower gas price with Russia.
A pending issue is the unbundling of Naftogaz. The company will be divided into
several separate companies, where production will be separated from transportation. The
Draft Law on the Reform of the Oil and Gas Sector is still under consideration.
As part of its obligations under its membership of the Energy Community,
Ukraine will have to implement other elements of EU energy policy that regulate energy
and environment-related issues, introducing transparency and competitiveness in the
energy sector.
Upon results of the hearing on the status of fulfilment of Ukraines international
commitments under the Energy Community Treaty on 15 October 2013, the Energy
Community is satisfied with Ukrainian policy in renewables, at the same time stressing
the need for Ukraine to liberalise urgently its electricity and gas prices and, prior to
that, finally define socially vulnerable customers and put in place adequate measures for
their protection. It is considered that the liberalisation of prices was a key precondition
for much needed investment in energy infrastructure and the removal of unsustainable
energy company losses that threaten the states stability. Also, reform of the gas market
shall be accelerated.
The new Law on the Electricity Market will lead to reform in the electricity
market. The Law shall solve the problem of cross-subsidisation, and the retail electricity
market will be liberalised. Oblenergo will no longer be a monopoly producer as there will
be unbundling of the transportation and supply functions of the companies.
A transparent and competitive market system with a predictable pricing
mechanism will attract investment in the energy sector, which it desperately needs. In
general, some improvements in the energy market are expected in relation to fulfilment
of Ukraines obligations towards the Energy Community and pending signing of the
EU-Ukraine Association Agreement.
In terms of diversification of the gas supply, taking into account the huge
estimated resources of shale gas, Ukraine has an opportunity to overcome its dependence
on natural gas and develop its industries as the United States did.
Obviously, further development of the renewable energy sector will depend on
the investment climate in Ukraine, including how the green tariff legislation will be
amended by pending draft laws. Currently, investors consider local content requirements
to be a serious obstacle to implementing renewable energy projects in Ukraine; investors
still, however, show great interest in the Ukrainian market, since effective legislation
provides them with sufficient incentives and competitive green tariffs.
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Chapter 37
UNITED ARAB EMIRATES

Masood Afridi and Haroon Baryalay1
I OVERVIEW
The United Arab Emirates (UAE) is a federation of the seven emirates of Abu Dhabi,
Dubai, Sharjah, Ajman, Fujairah, Ras al-Khaimah and Umm al-Quwain. The city of
Abu Dhabi in the emirate of Abu Dhabi is the federal capital. Abu Dhabi is the largest
emirate by area (making up about 86 per cent of the countrys area) and the richest in
terms of oil resources. Dubai is the second-largest emirate by size (accounting for about
5 per cent of the countrys total area) and the largest by population. Together, Dubai and
Abu Dhabi account for about two-thirds of the countrys population and form the core
of its economy.
The UAEs economy has traditionally been dominated by the petroleum industry
but successful efforts at economic diversification have reduced the share of the oil and
gas sector in the countrys GDP to 25 per cent. The UAE has an open economy with
one of the highest per capita incomes in the world and a sizeable annual trade surplus.
The currency is freely convertible and funds are freely repatriable. The countrys free
zones offering 100 per cent foreign ownership and zero taxes are a major conduit for
foreign investment in the country. The geographical location of the UAE, situated at the
tip of the Arabian Peninsula, makes it a central trading post connecting the Far Eastern
economies with the Middle East, Africa and Europe. With modern communication and
thriving ports, the UAE has emerged as an important trading hub between the Indian
sub-continent, Europe, Africa and the Middle East.
The powers of the federal and the emirate governments are enumerated in the State
Constitution of 1971. Although the countrys government is based on a federal structure,
the individual emirates enjoy considerable economic and political autonomy and each
emirate largely pursues its own economic policies. Even though Article 120 of the UAE
Masood Afridi is a partner and Haroon Baryalay is an associate at Afridi & Angell.
486
United Arab Emirates

Constitution gives the federal government exclusive legislative and executive jurisdiction
over electricity services in the country, in practice the larger emirates of Dubai and Abu
Dhabi, and to some extent Sharjah, and more recently the northern emirate of Ras
Al Khaymah, formulate and implement their own electricity policies. Hence, although
there is a Federal Ministry of Energy (which formulates and implements the federal
electricity policies), federal legislation on electricity is fairly limited.
Due to the significance of Abu Dhabi and Dubai within the Federation, this
chapter focuses on the electricity sector in these two emirates, in addition to the federal
laws and policies on electricity.
The generation, transmission and distribution of electricity in the UAE is
dominated by five water and power authorities. Four of these authorities are owned by
the governments of the emirates of Dubai, Abu Dhabi, Sharjah and more recently Ras
Al Khaymah, whereas the authority that operates in the smaller northern emirates is
federally controlled. These state-owned authorities serve as the exclusive purchasers and
distributors of electricity in the respective emirates. Whereas the private sector has been
allowed to participate in the generation of electricity, transmission and distribution is
performed exclusively by state-owned authorities.
Abu Dhabi is the only emirate so far that has private sector participants owning
up to a 40 per cent economic interest in a number of electricity generation plants in the
emirate. Dubai has recently enacted legislation to enable private sector participation
in the power generation sector. A privatisation policy has also been announced by the
federal government for the northern emirates.
So far, only Dubai and Abu Dhabi have enacted laws creating specialised regulatory
bodies for the electricity sector. These consist of the relatively recently constituted
Supreme Energy Council (SEC) and the Electricity and Water Sector Regulation and
Control Office (the Office) in Dubai, and the much older Electricity Regulation and
Supervision Bureau of Abu Dhabi (the Bureau). The Federal Ministry of Energy regulates
the sector at the federal level and works in conjunction with the Federal Electricity and
Water Authority (FEWA) to implement the federal governments electricity policy in the
northern emirates.
Increasing population growth and urban development has been responsible for
electricity demand in the UAE to grow at double-digit rates, and demand is expected
to continue to grow at about 10 per cent annually for the next decade due to increasing
population growth and industrial development. There is currently insufficient power
generation capacity in the northern emirates of the UAE, and demand in these emirates
is being met by construction of additional capacity as well as the supply of power from
the larger emirates through the Emirates National Grid (ENG). Some industrial projects
have not been able to secure sufficient power supply and have had to resort to captive
power generation.
A number of major power projects, both in the field of conventional and renewable
energy, are under development to meet the countrys existing and future electricity needs.
487

II REGULATION
i
The regulators
Federal
The UAEs Federal Ministry of Energy, the primary regulator at the federal level, was
formed pursuant to Federal Decree No. 3 of 2004 (the Ministry of Energy Decree)
by merging the Ministry of Petroleum and Mineral Resources with the Ministry of
Electricity and Water. In 2008, the Ministry of Energy was restructured pursuant to
Cabinet Resolution No. 11 of 2008 making it responsible for establishing policies for
the water and electricity sectors in the UAE and ensuring that other authorities and
companies in the state comply with its policies. A separate directorate for the electricity
sector was established within the Ministry, which has been further subdivided into
two departments: (1) the department of electricity and desalinated water; and (2) the
department of electricity and water organisation and control. The restructuring was
intended to create a more specialised and robust central regulatory authority at the
federal level. However, the Ministry has had little influence in directing policy and
implementing projects in the larger emirates of Abu Dhabi and Dubai and remains
focused on assisting the smaller emirates in meeting their growing electricity demand.
FEWA, which was established pursuant to Federal Law No. 31 of 1999 (the FEWA
Law) as amended by Federal Law No. 9 of 2008, is the dominant player in the northern
emirates and engages in all segments of the market, including generation, transmission
and distribution. The Ministry of Energy has announced a strategic energy plan to
develop the federal governments electricity services by attracting private investment in
the sector. Most of the new power projects announced in the northern emirates since the
launch of this policy in 2007 have, however, been in the public sector.
Abu Dhabi
Abu Dhabis electricity sector is regulated under Law No. 2 of 1998 Concerning the
Regulation of Water and Electricity Sector (the Abu Dhabi Electricity Law), as amended
by Law No. 19 of 2007 and Law No. 12 of 2009. The Bureau is the regulatory body
responsible for implementing the legal framework and its authority includes the power
to:
a
issue licences to conduct regulated activities;
b
monitor licensees and ensure compliance with terms of licences issued; and
c
make regulations as it sees fit for the regular, efficient and safe supply of electricity
in the emirate.
The Abu Dhabi Water and Electricity Authority (ADWEA) owns (either wholly or as
majority shareholder) and controls, either directly or indirectly, the entities responsible
for the generation, transmission and distribution of electricity in the emirate. Both the
Bureau and ADWEA were established under the Abu Dhabi Electricity Law.
Dubai
Until recently, Dubais legislation on the electricity sector was limited to Dubai Law
No. 1 of 1992 (the DEWA Law), as amended by Decree No. 13 of 1999 and Decree
No. 9 of 2011, establishing the Dubai Electricity and Water Authority (DEWA). More
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recently, Dubai has enacted a number of laws to modernise and open the sector to private
investment. Two new regulatory bodies have been created: the SEC,2 established under
Dubai Law No. 19 of 2009, as the apex regulator for the energy sector, and the Office,
established pursuant to Dubai Executive Councils Resolution No. 2 of 2010 (the Dubai
Office Resolution), as the specialist regulatory authority for the electricity sector.
The SEC is responsible for all initiatives relating to the energy sector in Dubai,
including in relation to the privatisation of its electricity assets and implementing the
provisions of Dubais Law No. 6 of 2011 Regulating the Participation of the Private
Sector in Electricity and Water Production in the Emirate of Dubai (the Dubai Electricity
Privatisation Law). As the primary regulator of the energy sector, the exploration,
production, storage, transmission and distribution of petroleum products (natural gas,
liquid petroleum, petroleum gases, crude oil) is also regulated by the SEC.
The Office is authorised to regulate the electricity sector subject to supervision of
the SEC. The Office is responsible, inter alia, for:
a
issuing electricity generation licences;
b
proposing legislation governing the electricity sector in Dubai; and
c
determining and establishing standards and controls for electricity generation in
the emirate.
As with the other emirates, the main player in the electricity market is DEWA, Dubais
state-owned integrated power generation, transmission and distribution authority.
ii
All activities connected to the generation, transmission and distribution of electricity

in the UAE are regulated and require specific licences from the relevant regulatory
authorities.
Under the Abu Dhabi Electricity Law, regulated activities include electricity
generation, transmission, distribution and supply to premises. Any person or entity
intending to carry out these activities is required to be licensed by the Bureau.
Under the Dubai Electricity Privatisation Law, regulated activities include
any activity related to generating electricity [] for the purpose of supplying to the
Transmission System with produced electricity (the transmission system is owned
and operated by DEWA). All activities relating to electricity generation, transmission,
distribution and supply of electricity are considered regulated activities in Dubai and
require a licence from the Office.
iii
So far, only Abu Dhabi has allowed private sector participation of up to 40 per cent in its
power generation sector. Even though there are laws and policies in place in Dubai and
at the federal level to enable private sector participation, these have yet to materialise.
Member organisations of the SEC include DEWA, Dubai Aluminum Company Ltd (DUBAL),
Emirates National Oil Company, Dubai Supply Authority, Dubai Petroleum Corp, Dubai
Nuclear Energy Committee and Dubai Municipality.
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Under the UAEs Commercial Companies Law 1984 (the Companies Law),3
foreigners are restricted to own up to a maximum of 49 per cent of a UAE company
(other than in the free zones) with the majority 51 per cent required to be owned by
UAE nationals. The power sector is no exception to this requirement and even if 100 per
cent private ownership were to be allowed in the power sector, a privately owned power
generation, transmission or distribution company would need to be majority locally
owned.
Although this restriction is a deterrent to foreign investment, it is not an
insurmountable hurdle as informal arrangements exist to enable the foreigner investors
to transfer 100 per cent beneficial interest in local companies to themselves. It is
common for foreign investors to enter into side agreements with the local majorityowning partners by virtue of which the foreign shareholders assume management powers
and at the same time transfer to themselves the economic interest in the shares held by
the local. The local shareholder is usually paid a fixed fee as part of this arrangement for
acting as a local sponsor. The authorities in the UAE have so far tolerated this practice,
and as long as there is no dispute between the parties, the arrangement works to the
benefit of all shareholders. The enforceability of these side agreements is questionable
and untested in the local courts. Although the local partner could, in theory, take over
the business by revoking the side agreements, the arrangement works well in the vast
majority of cases and offers a practical way forward for foreign investors wishing to do
business in the UAE.
Although the UAE free zones allow for 100 per cent foreign ownership, the
free zone companies are not allowed to conduct business outside of the free zones and
within UAE proper. To date, there are no power generation, transmission or distribution
companies in any of the free zones in the UAE. Electricity rates are subsidised throughout
the UAE and it is therefore not viable for private producers to construct power plants
within the free zones. Furthermore, the state-owned authorities in the emirates of Dubai
and Abu Dhabi have sufficient capacity to meet present and anticipated future needs,
and this has therefore not necessitated private investment in the sector in the free zones.
The UAEs electricity laws themselves do not impose any specific ownership
restriction on foreign investors in the UAE, nor do they necessarily require government
participation in the sector. As a matter of policy, in Abu Dhabi, although two or more
foreign joint venture partners are permitted to own up to 40 per cent of a project
company, the Bureau ensures that a foreign entity does not own more than 25 per cent
of the market by capacity.
Most power companies in the UAE (with some exceptions such as UTICO) are
either wholly or majority owned by the federal or respective emirates governments,
and the sector is dominated by the state-owned water and electricity authorities. Of
these, the DEWA and ADEWA, being the largest two, account for about 87 per cent
of the UAEs entire installed capacity. As of the figures available for 2012, ADWEA
accounts for approximately 52 per cent of the UAEs entire power generation capacity
Federal Law No. 8 of 1984, as amended.
490

(at 13,849MW), DEWA for 35 per cent (at 9,646MW), SEWA for 9 per cent (at
2,400MW) and FEWA for about 4 per cent (at 1,150MW).
Abu Dhabi
ADWEA was established pursuant to the Abu Dhabi Electricity Law, and is responsible
for all matters relating to formulation, development and implementation of policies for
the electricity sector in Abu Dhabi,4 including privatisation. ADWEA is managed by a
board and headed by a chairman, appointed by royal decree (emiri decree). In addition
to managing the public sector entities, ADWEA has established joint ventures with
private sector companies.
ADWEA is the owner of the Abu Dhabi Power Corporation (ADPC), a holding
company established to own shares in operating-level companies that generate, transmit
and distribute water and electricity in the emirate. ADPC in turn owns the Abu Dhabi
Water and Electricity Company (ADWEC), the single buyer of water and electricity in
Abu Dhabi, and the Abu Dhabi Transmission and Dispatch Company (TRANSCO),
the main transmission company in the emirate.
ADWEA has established a long-term programme for the privatisation of the
electricity sector. To date, a number of independent water and power producers (IWPPs)
have been established as joint venture arrangements between ADWEA and various
international power companies as BOO (build-operate-own) projects. In accordance with
long-term arrangements, IWPPs are committed to selling their production to ADWEC.
The major IWPPs include:
a
Al Mirfa Power Company;
b
Arabian Power Company;
c
Emirates CMS Power Company;
d
Emirates SembCorp Water and Power Company;
e
Fujairah Asia Power Company;
f
Gulf Total Tractebel Power Company;
g
Ruwais Power Company;
h
Shuweihat Asia Power Company PJSC;5
i
Shuweihat CMS International Power Company;
Under the Abu Dhabi Electricity Law, ADPC was established with the following subsidiaries:
(1) Abu Dhabi Water and Electricity Company (ADWEC); (2) Abu Dhabi Transmission and
Dispatch Company (TRANSCO); (3) Al Taweelah Power Company; (4) Al Mirfa Power
Company; (5) Umm Al Nar Power Company; (6) Bainounah Power Company; (7) Abu
Dhabi Distribution Company (ADDC); (8) Al Ain Distribution Company (AADC); (9) Abu
Dhabi Company for Servicing Remote Areas (RASCO); (10) Al Wathba Company for Central
Services; (11) Industrial Security Company; and (12) Central Workshop Company.
In February 2011, a PPA was signed between ADWEC and Shuweihat Asia Power Investment
BV, a company owned 60 per cent by ADEWA and 40 per cent by Sumitomo Corporation
of Japan and Korea Electric Company (KEPCO) (each holding 20.4 per cent and 19.6 per
cent respectively). The plant, with a generation capacity of 1,600MW, was scheduled to be
completed by the first quarter of 2014.
491

j
k
Shams Power Company PJSC; and

Taweelah Asia Power Company.
The ownership of the IWPPs is split 60:40 between ADWEA (or its subsidiaries) and the
foreign investor. The project companies are usually structured as joint-stock companies
incorporated in Abu Dhabi. The most common ownership structure is one in which
ADWEA incorporates an intermediate holding company to own a 60 per cent stake,
which is in turn held 10 per cent by ADWEA and 90 per cent by the Abu Dhabi
National Energy Company PJSC (also known as TAQA).6 A few project companies have
other ownership structures.
The Shuweihat S2 power plant7 was commissioned in October 2013, adding a
further 1,510MW to Abu Dhabis power generation capacity and 100 million imperial
gallons of potable water each day. The electricity and water supply from Shuweihat
S2 plant will be purchased by ADWEC under a 25-year power and water purchase
agreement.
Dubai
DEWA was established as an independent public authority owned by the government of
Dubai, responsible for the development and provision of utilities in the emirate. DEWA
is managed by a board of directors whose members are appointed by emiri decree.
DEWA is an integrated supplier owning and operating in all segments of the
electricity market in Dubai. DEWA owns and operates 11 plants in the emirate whose
individual capacities vary between 400MW to 1400MW, with a total installed capacity of
over 9,600MW. Although the Dubai government wants to promote private investment
in its electricity generation sector, to date, all of the power generation capacity of Dubai,
except for captive power produced by certain entities (e.g., DUBAL), is owned by
DEWA.
Dubai has only recently passed legislation allowing the private sector to participate
in electricity generation. The Dubai Electricity Privatisation Law is broadly modelled
on the Abu Dhabi Electricity Law. The Dubai Electricity Privatisation Law authorises
Delmon, Jeffery and Delmon, Victoria Rigby, International Project Finance and PPPs A Guide
to Key Growth Markets 2012, Chapter 16, p. 26 (2012). TAQA, in which ADWEA owns a 51
per cent ownership stake, was established under Abu Dhabi Decree No. 16 of 2005 and serves
as ADWEAs investment arm in the emirate and abroad. Other Abu Dhabi government entities
own a further 21.5 per cent of TAQA with the total government shareholding being 72.5 per
cent. The remaining 27.5 per cent of TAQA is owned privately. The shareholding of TAQA
provided on its website is not consistent. The shareholding is also stated as follows: ADWEA
52.4 per cent, other government entities 22.1 per cent and non-government shareholding 25.6
per cent.
Shuweihat 2 is owned by Ruwais Power Company, a joint venture of TAQA (54 per cent),
ADWEA (6 per cent), GDF SUEZ (20 per cent), Marubeni (10 per cent) and Osaka Gas (10
per cent).
492

DEWA to establish project companies, by itself or in collaboration with third parties, for
the generation of electricity.
The only independent power project (IPP) launched in Dubai to date is the
Al Hassyan 1 IPP, a 1,600MW gas-fired power plant, for which bids were solicited
in December 2011. DEWA proposes to retain a 51 per cent ownership share in the
project, which is the first of six planned IWPPs in Dubai forming part of a power and
water complex with total capacity of 9,000MW. The project has, however, been deferred
indefinitely. According to a recent press release from DEWA, the authority has awarded
a contract for consultancy services in relation to the Al Hassyan project, suggesting
rebidding of the project may be on the cards. The authority will need to reassure investors
of its commitment to the project given its previous last minute deferral.
DEWA added a further 900MW to its installed capacity in 2012 through an
expansion of the Jebel Ali Power and Desalination Station M plant from 1,135MW
to 2,060MW. A further expansion of the M-station is now proposed which will add a
further 400MW to its installed capacity.
Northern emirates
FEWA is responsible for the generation, transmission and distribution of electricity in
the northern emirates of Ajman, Ras al-Khaimah (please also see below), Fujairah and
Umm al-Quwain. The growing demand for electricity in the northern emirates is being
fulfilled by the announcement of a number of new projects sponsored by FEWA. In
addition, the government of Abu Dhabi is assisting these emirates in the short term by
supplying electricity through expansion of its own power sector.
FEWA is governed by a board of directors whose members hold office for a term
of three years. FEWA is authorised under the FEWA Law to establish private power
generation plants in the northern emirates. A number of projects are presently under
development in these emirates but these are primarily owned in the public sector.
FEWA acts as the single point of sale for all power generated in the northern
emirates. Electricity transmission and distribution networks within the northern emirates
are also primarily owned and operated by FEWA. However, recently, TRANSCO has
expanded its operations to assist FEWA in planning, developing and operating its water
and electricity transmission assets in the northern emirates. In addition to FEWA, certain
private power companies such as UTICO are involved in the generation, transmission
and distribution of power in the emirate of Ras Al Khaymah.
Sharjah
Sharjah created its own electricity authority in 1995, known as the Sharjah Electricity and
Water Authority (SEWA) (established pursuant to Sharjah Emiri Decree No. 1 of 1995,
as amended by Emiri Decrees No. 46 of 2006 and No. 20 of 2008), which is authorised
to own, manage, operate and maintain power stations and electricity transmission lines.
As with the other emirates, SEWA is responsible for the generation, transmission and
distribution of electricity in Sharjah. SEWA is authorised to determine electricity prices
and connection fees, which are subject to approval by the Ruler of Sharjah.
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Ras Al Khaymah
On 10 March 2013, the Ruler of Ras Al Khaymah issued Emiri Decree No. 4 of 2013 on
the Establishment of the Ras Al Khaymah Electricity and Water Authority (RAKEWA)
(the RAKEWA Law). This authority is tasked with the regulation, management,
operation and maintenance of power stations, water desalination plants, electricity
distribution and transport networks in the emirate. The new authority is also responsible
for controlling prices of electricity and water in the emirate. Most importantly, the
authority is responsible for fulfilling the electricity needs of the emirate, planning for
the generation, transport and distribution of electricity in the emirate and managing the
governments investments in the sector.
RAKEWA is to be managed by a board appointed by the Ruler of Ras Al Khaymah,
to be headed by a chairman. The board is authorised to issue regulations relating to the
electricity sector, which shall be binding on all entities involved in the electricity and
water sectors in the emirate.
Despite the establishment of RAKEWA, practically FEWA continues to own,
manage and operate the electricity resources situated in the emirate and is the de facto
authority on ground. The RAKEWA Law does not contain any provisions for the transfer
of assets from FEWA to RAKEWA and it is presently unclear whether RAKEWA will
replace FEWA in Ras Al Khaymah or if the two authorities will operate jointly in the
emirate.
iv
Any transfer of control or assignment of an interest in an IWPP requires the consent of

the relevant regulator.
Under the Abu Dhabi Electricity Law, a licence may not be transferred unless it
specifically permits its transfer. Prior consent of the Bureau is required for any transfer
(including the creation of security over assets of the licence holder), which consent may
be subject to such conditions as the Bureau may consider appropriate.
Under the Dubai Electricity Privatisation Law, licensed entities are not permitted
to transfer or assign their licences without the prior approval of the Office. In addition,
licensed entities may not dispose of, sell, lease or otherwise transfer, including granting of
a security interest over, their main assets without prior approval from the Office. Main
assets are those moveable and immoveable assets necessary to conduct the regulated
activities and operate the electricity generation facilities.
In addition, the Companies Law contains a statutory pre-emptive right in favour
of existing shareholders in the case of limited liability companies. Pre-emptive rights do
not apply to shares of joint-stock companies.
III

SERVICES
The electricity transmission and distribution networks in the UAE are firmly owned
and controlled by the state-owned water and power authorities, each of which enjoys a
494

monopoly in its particular area of operation. These authorities are vertically integrated
and operate in all three segments of the market.
Abu Dhabi
ADWEAs wholly-owned subsidiary TRANSCO operates Abu Dhabis transmission
networks. TRANSCO supplies electricity from the generation companies to the two
distribution companies of Abu Dhabi, each of which is also wholly-owned by ADWEA.
These are:
a
the Abu Dhabi Distribution Company (ADDC), which operates in the city of
Abu Dhabi and the western region of the emirate; and
b
the Al Ain Distribution Company (AADC), which operates in Al Ain city and the
surrounding areas.
Recently, in response to the power shortages faced in some of the smaller emirates,
TRANSCO has become involved in the planning, development and operation of
electricity transmission networks in the northern emirates. TRANSCOs involvement,
given its resources and experience, coupled with ADEWAs supply of its excess power, has
largely alleviated the power problems faced by these emirates in the past.
Dubai
DEWA is the sole purchaser of electricity in Dubai and presently owns all the generation,
transmission and distribution capacity of the emirate.8 DEWAs transmission and
distribution network is constantly being expanded as new real estate and industrial
projects are set up across Dubai.
Northern emirates
FEWA performs much of the same functions in the northern emirates with respect to
electricity distribution and transmission as TRANSCO in Abu Dhabi and DEWA in
Dubai.9
DEWA operates a network of overhead lines (876 kilometres of 400kV, 437 kilometres of
132kV and 113 kilometres of 33kV lines) and underground cables (1,486 kilometres of 400kV,
1,992 kilometres of 33kV and 24,942 kilometres of 6.6 and 11kV lines) that are, in turn,
connected to a distribution system of lower voltage substations and distribution lines. Over the
past few years, DEWA has further enhanced the electricity transmission networks of the emirate.
This includes construction of substations at Jebel Ali (December 2012), the International
Media Production zone (February 2013), the Dubai Marina (May 2013) and Seih Al Dahl
(February 2014). In March 2013, DEWA has signed a contract to supply, extend and activate
a new 132kV underground transmission cable network to redistribute the electricity load. This
300 million dirham project is expected to be completed by December 2014.
In May 2013, FEWA signed two contracts with the Saudi National Contracting Company
Limited to commission a 33/11kV transmission station and upgrade a number of 33/11kV
and 132/33/11kV stations in the western region (Ajman and Umm Al Quwain), the central
495

Emirates National Grid
The ENG project was launched in 2001 under a Cabinet Resolution No. 79/4 of 2001
On the National Project of Linking the Power Grids to connect and enable sharing of
power between the UAEs seven emirates. The ENG project was launched by the Ministry
of Energy with the purpose of enhancing integration between the various electricity and
water authorities in the UAE, each of which contributed proportionately to the capital
investment required to build the ENG. The ENG is owned by the following authorities
in the proportions stated below:
a
ADWEA: 40 per cent;
b
DEWA: 30 per cent;
c
FEWA: 20 per cent; and
d
SEWA: 10 per cent.
Dubai and Abu Dhabis power grids were connected by the ENG in the middle of 2006,
whereas SEWAs connection to ENG was completed in May 2007. Connection to the
remaining northern emirates transmission networks was completed in April 2008.
Due to its larger production capacity and extensive distribution network,
ADWEA has increasingly been assisting the other emirates in meeting their power
demand. ADWEA exported about 13,664GWh of electricity to other emirates via the
ENG in 2012, up from 12,228GWh in 2011.
The GCC Grid
The UAE is also connected to the rest of the GCC through the GCC Grid, through
which it can trade electricity with the remaining GCC countries. About 56MW (peak
time) of electricity was exported by Abu Dhabi to the GCC Grid in 2011 whereas 7MW
(peak time) was imported in 2012.
ii
Abu Dhabi
The Abu Dhabi Electricity Law requires ADWEC to purchase all power produced within
the emirate. Although the Abu Dhabi Electricity Law contemplates private ownership
in all segments of the electricity supply chain, so far private ownership has been limited
to generation only.
Dubai
The Dubai Electricity Privatisation Law prohibits a licensed entity from selling electricity
to any entity other than DEWA.
and eastern region (Fujairah and Dibba) and the northern region (Ras Al Khaimah). This work
worth 850 million dirhams is expected to be completed by August 2014.
496

iii Rates
Abu Dhabi
ADWEC, being the single buyer of electricity in the emirate of Abu Dhabi, purchases
electricity from the power producers under long-term power and water purchase
agreements (PWPAs) and sells it to the distribution companies via annual bulk supply
tariff (BST) agreements. The distribution companies pay ADWEC the BST for the
electricity purchased and receive revenue from their customers and a subsidy from the
government. TRANSCO is paid a transmission use of system (TUoS) charge by the
distribution companies.
The components making up the electricity tariff in Abu Dhabi are the following:
a
BST, which is the charge paid by the distribution companies to ADWEC for its
generation costs (in turn paid by ADWEC to power producers).
b
TUoS, which is the charge paid by the distribution companies to TRANSCO for
use of its transmission network.
c
Distribution use of system (DUoS), which is the fee that the distribution
companies charge for use of their distribution network.
d
Sales cost, or the cost incurred by the distribution companies for serving customers
for meter reading and billing.
e
Government subsidy, consisting of direct payments from the government to the
distribution companies. The quantum of the subsidy allows the government to
determine the electricity tariffs for different classes of consumers. The higher the
subsidy, the lower the tariff charged.
The electricity tariff is determined by adding components (a) to (d) and subtracting (e).
The rates charged by the state-owned power companies (ADWEC, TRANSCO,
ADDC and AADC) are subject to government control, exercised via the Bureau. The
Bureau sets their revenue target on the basis of which the control prices are determined.
The remainder of the revenue is paid as a subsidy by the government to the distribution
companies. All transactions between the power sector companies and any related tariffs
are required to take place on the basis of their economic costs. This helps the government
keep subsidies to a minimum.
The BST is calculated for each calendar year on the basis of parameters prescribed
by the Bureau. The calculation of BST requires the estimation of the costs for procuring
and dispatching electricity generation to meet the forecasted demand. Starting 2012, the
structure of the BST comprises three components (expressed in fils per kWh) charged
on an hourly basis for electricity purchased at different times of the day, for Fridays and
non-Fridays and in different months of the calendar year. These three components are:
a
a system marginal price charge estimated to indicate the short-term marginal
costs (excluding back-up fuel (BUF) costs) of providing units at different times of
the day;
b
a BUF levy charge estimated to reflect the additional costs associated with the
burning of back-up fuel rather than primary fuel; and
c
a high-peak period charge assessed to cover the costs associated with the estimated
capacity payments and charged only in the peak demand occurring months of
June to September, inclusive.
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The TUoS charge paid to TRANSCO covers the investment, operation and maintenance
costs of the infrastructure of the transmission systems, excluding assets that are dedicated
entirely to a particular customer. These include substations, overhead lines, cables and
associated equipment. TUoS charges also cover the costs of the economic scheduling and
dispatching of electricity generation.
The rates payable to the power generation companies are determined on the basis
of the PWPAs entered by them with ADWEC. These PWPAs are further discussed below.
Contracts for power generation are awarded based on a competitive bidding process
after the government invites tenders to meet the emirates power generation requirements.
The bidding process is managed by ADWEA starting from pre-qualification of bidders
and issuance of request for proposals through to selection of the successful bidder.
Electricity rates paid by consumers in Abu Dhabi are subsidised. In fact, UAE
nationals benefit from even greater subsidies than those given to expatriate workers.
The rates payable in Abu Dhabi as published by the Bureau on its website are divided
according to consumer categories as follows:
a
UAE nationals domestic (remote areas): 3 fils per kWh;
b
UAE nationals domestic (other areas): 5 fils per kWh;
c
non-UAE nationals domestic: 15 fils per kWh;
d
industrial/commercial: 15 fils per kWh;
e
governmental and schools: 15 fils per kWh; and
f
farms: 3 fils per kWh.
The government subsidy for water and electricity in Abu Dhabi accounts for nearly 86
per cent of the cost of a unit of electricity for nationals and 50 per cent for expatriates.
Dubai
The DEWA Law empowers the board of directors of DEWA to control electricity prices
charged by DEWA, subject to the Rulers approval; however, since the promulgation of
the SEC Law, the electricity prices have been determined by the SEC and DEWA now
sets its prices in accordance with the SECs directives. The SEC Law empowers the SEC
to impose a definite tariff based on cost when necessary. The SEC is also authorised to
approve fees and tariffs on the services offered to the public by energy service providers
(meaning the power generation, transmission and distribution companies).
In 2011, Dubai passed Executive Council Decision No. 16 of 2011 on the
Approval of the Electricity and Water Tariff in the Emirate of Dubai (the Dubai Tariff
Decision), which sets out the electricity and water tariffs for Dubai. The Dubai Tariff
Decision provides for a slab tariff scheme and authorises DEWA to add the the fuel price
difference to the electricity tariffs charged to consumers. The consumers are divided into
(1) industrial (2) residential (3) commercial (4) governmental, charitable, public utility,
etc. and (5) houses and farms of nationals. UAE nationals are subject to tariff rates equal
to roughly one-third of the rate applied to other residential consumers.
DEWA has since 2011 increased electricity rates and pursuant to the Dubai Tariff
Decision, introduced a variable fuel surcharge in its electricity tariff. The electricity tariff
in Dubai now comprises the electricity consumption charges, the fuel surcharge and
meter charge. The fuel surcharge component requires consumers to pay for any fuel
cost increases using 2010 fuel prices as the benchmark, thereby passing on the risk of
498

international fuel price fluctuations to the consumer. This has enabled the company to
increase revenues, reduce demand growth and earn higher profits.
As with Abu Dhabi, power projects in Dubai are proposed to be awarded on the
basis of a competitive bidding process. DEWA is responsible for managing the bidding
process in the emirate (bids for the Al Hassyan project were solicited through DEWA).
IWPPs, once established in the emirate, will enter into PWPAs with DEWA for the
offtake of their power production capacity.
IV
ENERGY MARKETS
The electricity market for private power producers in the UAE is composed of the stateowned water and power authorities each of which act as the single point of sale in their
respective areas of operation.
Contracts for power generation are awarded on the basis of a competitive bidding
process, administered by ADWEA in Abu Dhabi, DEWA in Dubai and FEWA in the
northern emirates. To date, only Abu Dhabi has permitted up to 40 per cent private
ownership in the generation of electricity. Although Dubai has enacted new legislation
permitting private sector participation in the electricity sector, as at the date of writing
no private sector company has yet established a power generation plant in Dubai.
ii
Under the Abu Dhabi Electricity Law, ADWEC is required to contract with power
producers for the purchase of all production capacity from licensed operators in the
emirate. ADWEA is authorised to allow by-pass sales from power producers directly to
eligible consumers provided that:
a
the first independent commercial power generation project in the emirates shall
have commenced commercial operations;
b
the majority of the shares in such company are privately owned; and
c
the Bureau issues a report stating that the energy market in the country is stable
enough for it to be in the public interest that the sale of electricity by producers
to eligible consumers be permitted.
To date, no by-pass sales of electricity have been allowed by ADWEA in Abu Dhabi
and all existing producers in the emirate are required to sell their production exclusively
to ADWEC.
Similarly, power producers in Dubai are obligated by law to sell their entire
production capacity to DEWA.
All power generation companies in the northern emirates and Sharjah are required
to sell their power production to FEWA or SEWA respectively. With the establishment
of RAKEWA, the functions presently being performed by FEWA in Ras Al Khaymah
may be taken over by RAKEWA in the future. FEWA is, however, presently the principal
authority for the electricity sector in the emirate. The government of Ras Al Khaymah
is the only emirate thus far to have allowed a private sector utility company, UTICO, to
participate in the generation, transmission and distribution of electricity in the emirate.
499

iii
ADWEC pays the generation companies the tariff agreed under the PWPAs. The PWPA
serves both as a grant of concession and offtake agreement.10
The PWPAs usually have a term of about 20 to 25 years from the commencement
of commercial operations. Payments to IWPPs by ADWEC under PWPAs comprise
three main components:
a
capacity (or availability) payments covering the fixed costs of the plant (return on
capital, depreciation and fixed operating and maintenance costs);
b
operation and maintenance costs, paid when plant is available for production
irrespective of whether and how much the plant produces; and
c
output (or energy) payments for variable operation and maintenance costs,
payable only for the electricity actually produced by the plant and dispatched.
The primary fuel used in the power generation sector in the UAE is natural gas, accounting
for 90 per cent of all production. As is often the case in such models, fuel costs are passthrough, and ADWEC is required to procure and supply fuel to the electricity producers
under the Abu Dhabi Electricity Law. ADWEC acquires the natural gas from two sources,
the Abu Dhabi National Oil Company and Dolphin Energy Limited (purchased from
Qatar via a pipeline connecting both states) for onward supply to the power producers.
Power plants are required to stock diesel oil and crude oil as back-up fuel.
According to the standard PWPAs, generation companies have to stock up enough backup fuel for their plants to run at full capacity for seven days.
PWPA payment rates under some of the agreements are subject to annual
indexation against US and UAE inflation or the US dollor to dirham exchange rate.
ADWEC is required by the standard PWPAs to pay certain other supplemental
payments to the IWPPs, such as start-up, shut-down costs and back-up fuel costs. Some
PWPAs may also have provisions for payment by the relevant party of liquidated damages
for delay in performance and of interest on late payments.
To date, Dubai does not have a standard power purchase agreement in place.
DEWAs first proposed joint venture with the private sector, Al Hassyan 1, has been
deferred until further notice. Any agreements entered with IWPPs in Dubai are likely to
be modelled on the existing PWPAs signed by ADWEC.
V
High energy use, encouraged by subsidised energy prices and the construction of energy
intensive industries such as aluminium smelting has resulted in the UAE having one of
the highest per capita carbon footprints in the world. The development of renewable
energy is therefore crucial in reducing the countrys carbon footprint and diversification
10
Delmon, Jeffery and Delmon, Victoria Rigby, International Project Finance and PPPs A
Guide to Key Growth Markets 2012, p. 26 (2012).
500

of its economy away from fossil fuels. The UAE has announced that it aims to produce
7 per cent of electricity from renewable sources by 2020.
A number of showcase projects have been launched in Abu Dhabi and Dubai to
kick-start the development of renewable energy in the country.
Abu Dhabi
Abu Dhabi has established the Abu Dhabi Future Energy Company (Masdar)11 to
spearhead the emirates renewable energy initiative. Masdar City, a project of Masdar on
the outskirts of Abu Dhabi City, is proposed to be run entirely on renewable energy as a
zero carbon emissions city. Masdar City has also won the rights to host the headquarters
of the International Renewable Energy Agency.
Masdar currently produces 10MW of electricity at its solar photovoltaic power
plant located at the Masdar City for supply of clean power to the project. It has also
launched a carbon capture and storage project in the UAE.
Most significant is Masdars 100MW solar power plant12 at Madinat Zayed,
which was inaugurated on 17 March 2013. Known as Shams 1, it is one the largest
parabolic trough power stations in the world. This project is expected to be followed
by the Shams 2 and Shams 3 solar power projects. Among other sustainable projects
launched by Masdar in the UAE include Masdar Citys 10MW solar PV array in Abu
Dhabi, Masdar Citys 1MW rooftop installations, 100MW photovoltaic plan in Al Ain,
and a 30MW onshore wind farm on Sir Bani Yas Island.
Masdar is also actively expanding its international investments in clean renewable
energy; some of its projects include the Seychelles wind power project (6MW), the
Mauritania solar power project (15 MW), and Spains Gemasolar (20MW) and Valle 1 &
2 solar power projects (100MW). Masdar is also a 20 per cent stakeholder in the London
Array wind farm in the United Kingdom, which produces 630MW of electricity.
E.ON Masdar Integrated Carbon, a joint venture between E.ON and Masdar,
develops and invests in carbon abatement projects in industry, power and oil and gas
across Africa, Asia and the Middle East under the UNs clean development programme.
Dubai
In 2010 the SEC developed the Dubai Integrated Energy Strategy 2030, according to
which Dubai will diversify its energy sources so that by 2030 it can fulfil 5 per cent of
its energy demand from solar energy, 12 per cent from nuclear energy, 12 per cent from
clean coal and 71 per cent from natural gas.
As part of this strategy, in January 2012, Shaikh Mohammad Bin Rashid Al
Maktoum, the Ruler of Dubai, launched a 12 billion dirham solar power project, known
as the Mohammad Bin Rashid Al Maktoum Solar Park. This solar park is expected to have
a total installed capacity of 1,000MW. The projected capacity of 1,000MW is expected
11
12
Masdar is a wholly-owned subsidiary of Mubadala Development Company, one of the Abu

Dhabi governments main investment arms.
The project company, Shams Power Company, is 60 per cent owned by Masdar, 20 per cent by
Total SA and 20 per cent by Abengoa Solar.
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to be reached by 2030. The project is being implemented by the SEC in Dubai and is
being managed and operated by DEWA. In the first phase, scheduled to be completed by
October 2013, the SEC approved the construction of a 13MW solar photovoltaic power
plant and a sub-station to connect the facility directly to DEWAs power grid. The plant
is being constructed under joint partnership between the six members of the SEC at a
project cost of $33.8 million. The second stage, a 100MW photovoltaic plant, is under
way based on the independent power producer model.
In July 2013, Dubai launched a waste-to-energy conversion project through a
landfill gas recovery plant at the waste collection site in Al-Qusais. To date, this is the first
land fill in the region to run its entire operation with electricity generated from landfill
gas. In due course, the plant is expected to increase capacity from its current 1MW to
20MW by 2020.
Dubai has also established the Dubai Carbon Centre of Excellence (DCCE),
responsible for encouraging and developing strategies towards reducing the emirates
dependence on carbon fuels and reducing carbon emissions.
UTICO, a privately owned utility company, is in the process of tendering the
construction of a new 40MW solar plant in Ras Al Khaimah. This same company is
also collaborating with Shanghai Electric to set up a 1.5 billion dirham coal power plant
project to be set up in Ras Al Khaimah. This coal power plant is expected to generate
270MW of clean coal power once completed in 2015.
Although the UAEs recent steps towards developing more renewable energy
projects in the country are commendable, the projects launched so far will fulfil only
a small part of the countrys total energy requirements. Despite the announcement to
produce 7 per cent of the countrys total energy requirements from renewable sources
by 2020, the UAE has not set itself a mandatory renewable energy target. The UAEs
electricity demand is expected to grow at close to 10 per cent for the next decade,
which will require a substantial increase in conventional gas and diesel-powered plants.
Furthermore, most conventional power plants in the UAE also host water desalination
plants, making the development of such additional capacity crucial in fulfilling the
countrys growing water requirements. The countrys primary focus is therefore expected
to continue to remain in developing conventional power and water desalination plants.
In order to encourage private investment in renewable energy, the government
needs to enact formal legislation to regulate the development of renewable energy. A
subsidy for renewable energy sources combined with a feed-in tariff that guarantees that
electricity generated from renewable sources will be purchased for a minimum price can
be introduced as a further incentive.
Nonetheless, recent initiatives in the field of renewable energy launched in
Dubai and Abu Dhabi, along with creation of specialised entities to further develop the
renewable energy projects, have made the UAE one of the most dynamic and exciting
markets for renewable energy in the region.
Nuclear energy
The UAE is signatory to the Treaty on Non-Proliferation of Nuclear Weapons 1968
(signed in 1996), the Comprehensive Nuclear Test Ban Treaty 1996 (signed in 2000),
and the Convention on the Physical Protection of Nuclear Material (signed in 2003).
In addition, the UAE has signed an agreement with the International Atomic Energy
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Agency (IAEA) for the application of safeguards in connection with the Treaty on NonProliferation of Nuclear Weapons.
The UAE aims to produce a significant part (approximately 9 per cent) of its
electricity from nuclear technology. The UAE released a nuclear policy in 2008 and
has since then promulgated a regulatory framework for development of nuclear energy
in the country. In addition to collaborating with the IAEA and the World Association
of Nuclear Operators, the UAE has signed cooperation agreements with Korea (2009),
the United States (2009), France (2008) and the United Kingdom (2008) for the
development of peaceful use of nuclear energy.
The Federal Authority for Nuclear Regulation (FANR), the federal nuclear energy
regulator headquartered in Abu Dhabi, was established in 2009 under Federal Law
No. 6 of 2009 Concerning the Peaceful Use of Nuclear Energy. The FANR is tasked
with the responsibility of setting up the procedures and measures to be followed for
the development of nuclear technology in the UAE. The FANR has issued regulations
governing, inter alia, licensing, site location, design, construction, commissioning and
operation, as well as standards for safety, transportation and storage facilities, radioactive
waste management and physical protection of nuclear materials. The UAE has also created
the International Advisory Board (IAB), an independent body consisting of independent
international experts on nuclear energy who will offer guidance to the countrys nuclear
program on compliance with international safety, security and proliferation standards.
The IAB is presently chaired by Hans Blix, the former IAEA Director General.
The UAE has been making rapid strides in establishing its first nuclear power
station. The Emirates Nuclear Energy Corporation (ENEC), an Abu Dhabi government
owned company established by Federal Law No. 21 of 2009, is constructing the Barakah
nuclear power plant in Abu Dhabi with a total capacity of 5,600MW. The project
consists of the construction and installation of four 1,400MW reactors with the first
reactor scheduled to be completed in May 2017 and the fourth by 2020. Barakah is the
first of four nuclear plants planned to be constructed in the country.
ii
The UAE has one of the highest rates of electricity consumption per capita. This high
usage is encouraged by the electricity and water subsidies given by the government to its
citizens and in certain emirates to foreign expatriates. Dubai has progressively reduced
and removed most of its electricity subsidies and Abu Dhabi is contemplating similar
measures. Efficiency in energy usage is now being recognised as one of the key issues in
trying to meet the countrys growing energy needs in a sustainable manner.
In 2010, Abu Dhabi imposed a mandatory rating system for construction of
energy-efficient buildings in the emirate under the Estidama initiative. Starting from
September 2010, all new development communities, private buildings and villas in
the emirate are required to meet the minimum of one-pearl rating. All government led
projects have been mandated to meet a two-pearl rating (the highest being a five-pearl
rating).
The Dubai government has also enacted the Green Buildings Regulations to
encourage sustainable building practices. These regulations are enforced by the Dubai
Municipality and apply to all new buildings constructed (including changes or additions
to existing buildings) in the emirate.
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In order to attract foreign private investment in the sector, Dubai has created a
free zone dedicated towards development of green technologies and energy conservation
known as the Energy and Environment Park (EnPark). EnPark is also Dubais first
master-planned community built on sustainable principles.
Through recent investment in its transmission system, DEWA succeeded in
reducing the percentage of line losses in its electrical network to 3.49 per cent in 2011
from 6.28 per cent in 2001. As part of its demand growth management strategy, DEWA
has introduced a slab tariff that has been successful in reducing demand growth to 3 per
cent despite a 5 per cent growth in end users in 2011. FEWA also has a slab tariff in
place for the northern emirates whereas ADWEA is proposing to launch a similar tariff
structure in the near future.
iii
Masdar has established the Masdar Institute of Science and Technology (MIST), a stateof-the-art research centre and university, in partnership with Massachusetts Institute of
Technology. MIST is a graduate-level university that aims to provide solutions to issues
of sustainability, focusing on advanced energy and sustainable technologies, through
research.
Although it is a brand new institute, according to its website, over 30 research
projects are currently under way, covering solar beamdown, innovation ecosystems,
smartgrids and aviation biofuels. In addition, according to its website, a number of
patents are already pending registration.
MIST is likely to play a leading role in development of advanced technologies in
the UAE in the coming years.
VI
THE YEAR IN REVIEW
The UAE has seen a double-digit increase in the demand for electricity in recent years
and is expected to continue seeing rapid growth in the coming years.
In order to meet this growing demand, Abu Dhabi has allowed private power
companies to participate in its energy sector for a number of years. More recently, due to
the rapid growth in demand for power in the country, Dubai and the federal government
have both launched initiatives to permit private sector participation in the generation of
electricity. The government of Ras Al Khaymah has established its own electricity and
water authority to meet its growing power demand. The rise in property prices in Dubai
has caused a spillover of residents into the smaller emirates of Shariah, Ras Al Khaymah
and Ajman, thereby fuelling demand for power and putting pressure on the electricity
infrastructure of the smaller emirates. Dubai enacted the Dubai Electricity Privatisation
Law and the FEWA Law was amended in 2008 to enable private investment in the sector.
Recent press reports suggest that it may take some time before the electricity markets in
Dubai and the northern emirates are opened to foreign investors, but if energy demand
continues to grow at current rates, these emirates would need to resort to private investment
in the sector to increase output. Transmission and distribution networks continue to be
owned by the state owned monopolies and the status there is unlikely to change in the
foreseeable future.
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The need for specialised regulation is recognised and Dubai has enacted a number
of laws to modernise its regulatory framework. Two specialist regulators for the energy
sector, the SEC and the Office, have been established, with the latter focusing primarily
on electricity. The enactment of the Dubai Electricity Privatisation Law can be directly
attributed to the creation of these specialist regulatory bodies. The electricity sector in
Dubai, however, continues to be dominated by DEWA.
High subsidies and heavy reliance on fossil fuels for generation have resulted in
the UAE having one of the highest per capita carbon footprints in the world. Rising fuel
prices have created a growing recognition that the energy demand cannot be met only
with investment on the supply side but that demand-side management programmes and
energy conservation measures are equally important in matching demand with supply.
Increases in electricity tariffs coupled with the introduction of slab tariffs in Dubai and
the northern emirates have helped curb demand growth in these areas and relieved
pressure on the sector. Due to the effectiveness of the slab tariff introduced by DEWA,
Abu Dhabi is also proposing to introduce a slab tariff in the near future.
Green building regulations and a mandatory rating scheme have been introduced
in Dubai and Abu Dhabi respectively to encourage energy conservation.
The country has set itself the goal of ensuring 7 per cent of its energy requirements
in 2020 are met from renewable sources. Dubai has set itself a target of generating about
one-third of its energy from clean, renewable or nuclear sources by 2030. To meet these
targets, a number of projects have been launched.
Dubai has recently inaugurated a solar energy park that will, on completion in
2030, have the capacity to produce 1,000MW of electricity.
Abu Dhabi has launched the zero carbon emissions and zero waste Masdar City
project to be powered exclusively by renewable energy sources. Masdar, the owner of
the project, has started work on development of a number of renewable energy projects,
including solar and wind.
A specialist regulatory body for the nuclear energy sector has been created. New
regulations governing various segments of the nuclear chain are being developed and
issued. Construction work on a nuclear power plant is currently under way at Barakah in
the emirate of Abu Dhabi, and commissioning is expected in 2017.
Although efforts at diversification are commendable, the sector looks set to
continue to be dominated by the existing players and the primary focus is likely to
remain on the development of conventional water and desalination plants. With the
growing demand for electricity across the UAE, the authorities are continuing to invest
significantly in hydrocarbon based power generation facilities, which are increasingly
being supplemented by development of alternative and renewable energy.
VII
As seen above, in addition to the drive towards privatisation, notable developments

towards energy diversification and introduction of renewable sources have taken place.
These developments, however, remain restricted to the government sector and more
needs to be done to encourage private sector participation both in conventional and
renewable energy.
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The state-owned monopolies in the various emirates are likely to continue to
dominate the sector in the foreseeable future. The requirement under the Companies
Law to maintain majority ownership in local hands means that foreign private investors
will have to work with the local water and power authorities as junior partners or, when
full private ownership is permitted within the sector, with local partners as the majority
shareholders.
Although Abu Dhabi has seen foreign investment in the electricity sector for a
number of years, the other emirates are increasingly beginning to recognise the benefits
of encouraging private sector participation. This change in attitudes is driven principally
by necessity as electricity demand continues to grow at a rapid pace, driven by increasing
population and economic growth.
The energy sector in the UAE is likely to continue seeing rapid changes and as
the economy continues to grow, demand is likely to create opportunities for private
investment in the sector. In addition, the nearing completion of the GCC Grid will create
further opportunities for private sector investment in the sector by enabling cross-border
trading of power. The governments of Dubai and Abu Dhabi are continuing to take a
number of measures to diversify their power production by encouraging investment in
alternative and renewable energies. For the time being however, investment in the sector
looks likely to continue to be led by the state-owned water and power authorities.
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Chapter 38
UNITED KINGDOM
Elisabeth Blunsdon1
I OVERVIEW
Great Britains gas and electricity markets were among the first in the European Union
to be liberalised and unbundled. Much of the experience gained from this process has
been influential in the development of unbundling in the rest of the EU. Now, however,
the markets face significant change as the government seeks to achieve binding carbon
reduction targets against a backdrop of supply uncertainty and continued political
pressure over rising energy bills. The enactment of the Energy Act 2013 was a key
milestone in the electricity market reform process, bringing welcome stability to the
market, but there remains a good deal of uncertainty, not least as a result of the energy
market investigation launched by the Office of Gas and Electricity Markets (Ofgem) in
spring 2014.
II REGULATION
i
The regulators
There is a single regulator for the electricity and gas sectors in mainland Great Britain.2
GEMA, the Gas and Electricity Markets Authority, was established by the Utilities Act
2000 (as amended)3 and transferred the functions previously undertaken by the Director
General of Gas Supply, acting through the Office for Gas Regulation (OFGAS) and
the Director General for Electricity Supply, acting through the Office for Electricity
Regulation (OFFER) into a single body. GEMA is entrusted with various statutory
1
2
3
Elisabeth Blunsdon is of counsel at Hogan Lovells.

Mainland Great Britain means England, Wales and Scotland. Northern Irelands energy
markets are regulated separately.
Section 1 of the Utilities Act 2000.
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United Kingdom
duties, of which more later, but acts through Ofgem. Participants in the gas and
electricity markets deal with Ofgem on a day-to-day basis and Ofgem is referred to as
the Regulator.
GEMAs powers and duties largely derive from statute, principally the Gas Act
1986 and the Electricity Act 1989, which have been substantially amended over time.4
Detailed provisions are set out in statutory instruments. Ofgem also publishes guidance
documents,5 which provide practical information. This guidance is not legally binding.
There have been subtle shifts in the definition of the regulators powers and duties
over time. Emphasis has moved from an initial focus solely on competition, through
taking into account the interests of consumers to recognising the need for sustainability.6
At present GEMAs principle objective is to protect the interests of existing and future
consumers in relation to gas conveyed through pipes and electricity conveyed by
distribution or transmission systems. The interests of such consumers are their interests
taken as a whole, including their interest in the reduction of greenhouse gases and in
the security of the supply of gas and electricity to them. GEMA is generally required
to carry out its functions in the manner it considers is best calculated to further the
principal objective, wherever appropriate by promoting effective competition between
persons engaged in regulated activities. GEMA has powers under the Competition Act
to investigate anti-competitive activity, and has concurrent powers with the Office of Fair
Trading in respect of market investigation references to the Competition Commission.
In performing its duties, GEMA must also have regard to security of supply,
a licensees ability to finance its licensed activities, the achievement of sustainable
development and to the interests of individuals who are disabled, chronically sick, of
pensionable age, with low incomes or residing in rural areas.7 Subject to the former,
GEMA must carry out its functions in the manner it considers is best calculated to
promote efficiency and economy on the part of licensed entities, protect the public
from dangers arising from the transportation and use of gas and electricity and secure
a diverse and viable long-term energy supply, with regard to the effect the carrying out
of its functions has on the environment. GEMA must also have regard to upholding
the best regulatory practice (in particular with regard to transparency, accountability,
proportionality and consistency) and to statutory guidance on social and environmental
matters issued by the government.
ii
Both the Electricity Act and the Gas Act are structured along the same lines, namely that
it is an offence under either act to carry out a licensable activity without authorisation.
Authorisation under both acts takes the form of either a licence or an exemption.
4
5
6
7
Consolidated and as enacted versions of these Acts are available at www.legislation.gov.uk.

See www.ofgem.gov.uk.
These changes can be seen in the successive changes to Sections 4AA of the Gas Act and 3A of
the Electricity Act.
There is a specific set of licence conditions relating to these special classes of individuals in the
licence of suppliers who supply domestic customers.
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United Kingdom
Licences are issued by the Secretary of State pursuant to the relevant act and
are administered on a day-to-day basis by Ofgem. Exemptions are made by statutory
instrument and may take the form of a class exemption or a specific exemption which
is personal to a particular company. Licences are granted to persons (companies), not
assets. They do not, therefore, attach to an asset, or the land on which an asset is situated,
and they do not transfer on a sale of the asset or land.
Section 6 of the Electricity Act provides that the Secretary of State may issue a
licence in respect of the following licensable activities:
a
the generation of electricity for the purpose of supplying premises;
b
the transmission of electricity;
c
the distribution of electricity;
d
the supply of electricity to premises; and
e
the operation of an electricity interconnector.
Supply, distribution and transmission licences may be limited in geographical area if the
licensee agrees. Supply licences may also differentiate between supply to domestic and
non-domestic (industrial and commercial (I&C)) premises.
The same legal person may not hold a transmission, distribution or interconnector
licence together with any other licence.
There are fewer licences granted for supply to domestic premises (even though,
by numbers, these customers form the largest single group in the supply market) because
licences for supply to domestic premises include conditions relating to provision of
particular services to customers, including those who are vulnerable or have special needs
(see above).
The Electricity (Class Exemptions from Requirement for a Licence) Order 2001 sets
out class exemptions from the requirement to hold a licence. Any person that falls within
a specific class need not obtain a licence if it wishes to conduct a licensable activity. Two of
the more commonly used class exemptions are the exemption for generating stations with
a capacity of less than 50MW, and the exemption for on-site supply to premises, which is
available to embedded generators supplying direct to the site where the generating station
is situated. Specific exemptions may be granted by application to the Secretary of State.
Section 7 of the Gas Act provides that the Secretary of State may issue a licence in
respect of the following licensable activities:
a
transportation the conveyance of gas through pipes to premises or to a pipeline
system operated by another gas transporter;
b
shipping the making of arrangements with a gas transporter for gas to be put
into, conveyed through or taken out of that gas transporters pipeline system;
c
supply the supply to premises of any gas conveyed to premises through those
pipes; and
d
interconnector the operation of a gas interconnector.
As with electricity licences, gas licences may be limited in geographical area and supply
licences are divided into those in respect of domestic and non-domestic customers.
Exemptions from the requirement for a licence in the gas sector are set out in the Gas
(Exemptions) Order 2011. The Secretary of State may also issue specific exemption by
statutory instrument.
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United Kingdom
Production of natural gas is regulated under a separate regime, which was
consolidated by the Petroleum Act 1989 and is administered by the Department for
Energy and Climate Change. The regime is outside the scope of this chapter but further
information can be found on the DECC website.8
Applications for licences are made in accordance with the relevant application
regulation.9 Further information and guidance is provided on the Ofgem website. A fee
is payable with each application and the information that must be provided is set out in
the relevant application regulation. Once Ofgem has received the completed application
(at which point it is said to be duly made) the applicant must complete and return the
form of notice provided by Ofgem within 10 working days. A notice is then published for
at least 28 days, usually on Ofgems website. Assuming the applicant meets the necessary
criteria, Ofgem aims to process applications within 45 working days of confirmation that
the application is duly made. This period may be extended where further information
is required, or where an applicant is seeking exemption from certain standard licence
conditions. Ofgem carries out various checks as to the solvency of an applicant, whether
any individuals associated with the applicant are disqualified directors or have unspent
convictions, and whether the applicant has previously had a licence revoked or refused.
Ofgem will also take into account any representations received during the notice period
described above. Ofgem may also request further information from an applicant and
failure to provide such information may result in a licence being refused. In the event
that a licence application is refused, the applicant has 21 days to appeal the decision.
The grant of a licence under the Electricity Act or Gas Act authorises the carrying out
of the activity specified in the licence but it does not convey any other rights. Construction
of assets such as power stations, gas pipelines or electricity networks requires the developer
to obtain the relevant rights to land (by buying or leasing the land) together with access
rights, planning permission, (or for generating stations with a capacity of greater than
50MW, a consent to construct a power station under Section 36 of the Electricity Act)10
and all necessary environmental permits. Access routes for electricity lines and gas pipelines
can be obtained by compulsory purchase if landowner consent is not forthcoming.
Licences in both sectors are subject to standard licence conditions,11 which are
published on the Ofgem website. The standard licence conditions apply to all licensees
and may be changed from time to time. The change procedure is set out in the Utilities
Act 2000 and requires publication of proposed changes and a public consultation period
of at least 28 days. If a given proportion of licensees object, GEMA may not make the
modification. It may, however, refer the matter to the Competition Commission.12
8
9
10
11
12
See www.gov.uk/government/organisations/department-of-energy-climate-change.
The Gas (Applications for Licences and Extension and Restriction of Licences) Regulations
2010 (SI No. 2155) and The Electricity (Applications for Licences and Extension and
Restriction of Licences) Regulations 2010 (SI No. 2154).
A power station that burns gas also requires a consent to burn gas under Section 14 of the
Energy Act 1976.
Section 8 of the Gas Act 1986, Section 8A of the Electricity Act 1989.
Sections 23, 24 of the Gas Act 1986, and Sections 11, 12 of the Electricity Act 1989.
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United Kingdom
Licences may be granted subject to special conditions, or have certain standard
licence conditions disapplied or amended there is, for example, a specific section
relating to domestic customers in both gas and electricity supply licences, which is
disapplied if the supplier is only supplying non-domestic customers and there are some
interconnector licences where the conditions requiring third-party access are relaxed.
Codes
The standard licence conditions require licensees to be party to various codes that set
out the operating rules and procedures for the relevant activity. The principal codes are
the Uniform Network Code (UNC) in the gas sector and the Balancing and Settlement
Code (BSC), Connection and Use of System Code (CUSC), Grid Code and Master
Registration Agreement (MRA) in the electricity sector.
In the gas sector, each transporter is required by its licence to publish a network
code. The Joint Office of Gas Transporters was established to administer a single code
for all licensed transporters and thus reduce administrative complexity and regulatory
burden. All licences, other than the transporter licence, issued under the Gas Act require
a licensee to become party to the UNC. Whereas previously gas traders13 were required to
be licensed shippers, it is now the case that entities that only trade gas within this system
do not need a shipper licence. These Gas-Trader Users do, however, have to sign up to
the UNC. XoServe is the company that provides transportation transactional services,
including balancing services, to all signatories.
In the electricity sector the BSC contains the rules for wholesale trading and
settlement of electricity, and is administered by Elexon. All licensees must sign the
BSC, as well as any non-physical traders who are not licensed. The CUSC and Grid
Code set out the technical rules governing the electricity system. All licensed generators
are required to sign both codes, as is the transmission operator. The MRA governs the
registration of electricity meters and is administered by Gemserv as agent for the MRA
Service Company (MRASCo).
All the codes have the same legal architecture. Each takes the form of a framework
agreement by which the parties agree to be bound by the terms of the relevant code, and
the codes themselves. New parties are added by them signing an accession agreement.
The codes are subject to modification under a prescribed modification procedure which
requires industry consultation and Ofgem consent before a change can be made.
Licences are granted for an indefinite term. They may be revoked by the Secretary
of State on notice of not less than 25 years, to be served not earlier than the date that is
10 years after the licence came into force or in accordance with the revocation provisions
that provide for revocation by the Secretary of State on 24 hours notice if the licensee
becomes insolvent, or on not less than 30 days notice where:
a
the licensee agrees in writing that the licence should be revoked;
b
the licensee has failed to pay the licence fee;
13
These are traders who only undertake within system trading. They do not hold physical entry
or exit capacity.
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United Kingdom
c
d
iii
the licensee has failed to comply with an enforcement order issued by GEMA, the
Competition Commission or the Secretary of State under relevant legislation, or
pay any financial penalty within the specified time frame; or
the licensee has not commenced the licensable activity within a specified time or
has ceased to carry out the licensed activity within the specified area.
Transfers of regulated assets are most commonly effected by the sale of the company
that owns the assets rather than a sale of the asset, because while all licences contain a
provision permitting assignment, such assignment requires the prior written consent of
the Secretary of State and in practice obtaining such consent involves an almost identical
procedure to that required when applying for a new licence. Licences in the gas and
electricity sectors do not contain provisions regarding change of control per se; however,
electricity distribution licences, electricity transmission licences and gas transportation
licences do contain provisions that create a regulatory ring fence around the regulated
asset. In the event of deterioration in a companys creditworthiness, or on a sale to an
entity that does not meet the required creditworthiness threshold, Ofgem may tighten
the ring fence and ultimately place the business into energy administration.14
III

SERVICES
The British market was one of the first in Europe to be unbundled. At privatisation
the electricity industry was split into generators, transmission companies and public
electricity suppliers that performed the functions of distribution and supply. The public
electricity suppliers were further unbundled and distribution became a licensable activity
in its own right under the Utilities Act 2000. In 2001, with the introduction of NETA
(New Electricity Trading Arrangements), the structure of the electricity market changed
from the old Pool model to a bilateral trading model. Further structural change occurred
in 2005 on the implementation of BETTA (British Electricity Trading Transmission
Arrangements) when the operation of the three transmission networks15 in mainland
Great Britain was taken over by National Grid group. The gas industry was split into
public gas transporters and shippers. Public gas transporters have now been replaced by
gas transporters.
14
15
Energy administration is a specific administration scheme for companies operating energy

networks. It is designed to ensure continuity of supply in the event of a network operator
suffering financial difficulties.
The three networks were those in England and Wales, owned and operated by National Grid,
and the two in Scotland owned and operated by Scottish and Southern and Scottish Power.
Following the implementation of BETTA, operatorship of the two Scottish networks passed to
National Grid. Ownership remains unchanged.
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United Kingdom
It is prohibited by statute for licensed operators of transportation, transmission,
distribution and interconnector assets to hold any other licence under either of the Acts.
This ensures that these businesses remain fully independent and unbundled within
the relevant sector. That said, it should be noted that the energy supply markets are
dominated by vertically integrated groups of energy companies. There is some concern
about this vertical integration and Ofgem has recently launched several investigations.
ii
As a general matter of policy, it is considered preferable to have monopoly providers of

network services within a given area, rather than a proliferation of networks competing
against each other. The quid pro quo for the grant of monopoly rights is that the network
operator must provide regulated third-party access and that it is subject to price control.
In terms of specific geographical areas, National Grid Electricity Transmission plc
(NGET) holds a transmission licence in respect of the electricity national grid that covers
the whole of Great Britain. There are other transmission licensees, but all have licences
limited to a particular area. National Grid Gas plc (NGG) holds a gas transportation
licence which similarly covers the whole of the National Transmission System (the NTS)
in Great Britain. There is no licensable activity analogous to distribution in the gas sector,
even though there is a high-pressure system (NTS) and a lower-pressure system (local
distribution zones or LDZs). All transportation of gas, whether it be through the NTS
or LDZs, requires a transporters licence. The grant of a licence does not confer exclusive
rights, although the rights of licensees may be restricted to a certain area. In any event,
duplication of network assets in an area where there is access to existing infrastructure
would face challenges from local planning authorities.
Consumers have been free to choose their energy supplier for over 10 years. Ofgem
monitors the retail, and in particular the domestic, market very closely. Recent years have
seen increasing concern surrounding the retail market, and in particular the dominance of
the big six energy suppliers,16 who according to Ofgem share 99 per cent of the domestic
supply market between them.17 As a result there have been several initiatives including
a retail market review, which resulted in measures designed to improve transparency so
that consumers can compare tariffs more easily. Despite Ofgems initiatives, problems in
the market have persisted, and in some cases worsened. As a result, in early 2014 Ofgem
launched a consultation on a proposal to make a market investigation reference18 to the
Competition and Markets Authority, the UK competition regulator. It is expected that
this reference will go ahead during 2014.
iii Rates
As previously mentioned, network assets are subject to price control, which is implemented
by licence conditions specific to each licensee.
16
17
18
IPPR The True Cost of Energy April 2012.

Ofgem The Retail Market Review Findings and Initial Proposals 2011.
Consultation on a proposal to make a market investigation reference in respect of the supply
and acquisition of energy in Great Britain.
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Historically, price control used the RIP-x model, but following a review this was
changed to the RIIO model revenue set to deliver strong incentives, innovation and
outputs.
Revenue that can be earned by a regulated entity is limited in order to ensure timely
and efficient delivery, the ongoing financeability of network companies, transparency
and predictability and a balance between costs paid by current and future consumers.
Entities will be incentivised to deliver outputs efficiently over time, with a focus on the
longer term including eight-year price control periods, rewards and penalties for output
delivery performance, an upfront efficiency incentive rate for all costs and uncertainty
mechanisms where they add value for customers.
Innovation will be encouraged through the use of core incentives in the price
control package, the ability to pass responsibility for delivery to third parties and stimulus
for innovation, building on the Low Carbon Networks Fund. Outputs will be set out
in the licence, so consumers will know what they are paying for. Outputs will reflect
enhanced engagement with stakeholders. The first RIIO price control is now in place for
electricity and gas transmission, gas distribution and electricity distribution.
iv
Unlike in the United States, where the US Grid Reliability and Infrastructure Defense
Act has been enacted to bolster the national grid against threats, including terrorist and
cyber attacks, there is no specific legislation addressing cybersecurity concerns in respect
of infrastructure; however, that is not to say that there are no measures in place. If a
cybersecurity threat were to affect an energy utility companys operational capability,
and this led to security-of-supply concerns, the government has existing powers to take
control of fuel and electricity supplies under Sections 1 and 2 of the Energy Act 1976.
In addition, in 2010, the UK government put in place a 650 million National Cyber
Security Programme to combat cyber threats, with 20 per cent of that being directed
towards the cyber-protection of critical infrastructure. This has more recently been
followed up with the launch of the Cyber Information Sharing Partnership (CISP) in
March 2013 involving firms from many sectors, including the energy sector.
The Centre for the Protection of National Infrastructure (CPNI) is the main
government authority in this area, working to identify and mitigate vulnerabilities in
the national infrastructure that could be exploited by cybersecurity threats. As much
of the UKs infrastructure is not in government hands, part of CPNIs role is to
provide protective security advice to businesses and organisations across the national
infrastructure, including critical national infrastructure organisations such as the national
grid, public utilities and financial centres.
Another significant area of concern relates to the roll-out of smart electricity and
gas meters as highlighted in the Committee of Public Accounts report in early 2012.19
Despite opposition from some quarters the roll out process continues. Installation for
most customers is due to start in 2015 and will finish in late 2020. As part of the process
Smart DCC Ltd was awarded a Smart Meter Communication Licence in September
19
HC Committee of Public Accounts, Preparations for the roll-out of smart meters, Sixty-third
Report of Session 20102012, HC 1617, January 2012.
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2013 under which it is required to manage the data and communication functions
associated with smart metering.
IV
ENERGY MARKETS
The wholesale gas and electricity markets in Great Britain are well established. The
markets for both commodities operate on the basis of bilateral contracts between market
participants. Parties are free to choose the terms on which they trade and the price at
which they trade. There is no compulsory price disclosure, although there are various
entities that produce price indices from aggregated market data.
Gas trading
Gas can be traded at entry points, within the NTS and at exit points. It is also possible
to trade capacity rights for entry on to the NTS and gas in storage. Gas being traded at
entry points is generally referred to as being traded at the beach a reference to the fact
that Great Britains physical gas supplies are sourced from the North Sea and the beach
is the point where the offshore pipeline makes landfall, just before the entry point to the
NTS. Gas traded at entry points may be traded under the Beach 2000 terms, which are
a standard set of terms and conditions, or on bespoke gas sales agreements. There are no
specific regulatory requirements as to the terms on which trades take place. Trading at the
beach involves a physical transfer of title to the gas, hence the Beach 2000 terms contain
provisions relating to title, quality and pressure as well as provisions for determining the
damages payable where either party fails to perform.
Only licensed shippers may put gas into the NTS (Shipper Users). As of 1 January
2013 shippers who only trade gas within the NTS (Trader Users) no longer need to hold
a shipping licence. Previously licensed shippers benefited from an exemption from the
authorisation requirements of the Financial Services and Markets Act (FSMA). Trader
Users will no longer be licensed and will therefore need to review their position under
FSMA. Physical title to all gas within the system vests with the relevant transporter.
Shippers have a right to volumes of gas on an energy equivalence basis, not a right to
specific molecules of gas. Trades within the NTS are deemed to occur at a notional point
called the national balancing point (NBP).20 Trades are made between shippers by way
of trade nominations under the UNC. One party makes an acquiring trade nomination
and the other makes a disposing trade nomination for an equal volume of gas. The
nominations must match otherwise both will be rejected by NGG.
When a trade is made the total amount of gas in the system remains the same,
but the volume allocated to each partys balance is altered. Shippers must balance their
positions each day.21 Nominations may be made and adjusted prior to the beginning of
20
21
The NBP is also the point at which NGG calculates transportation charges.
Day is defined in the UNC and each day runs from 6am to 6am. From 1 October 2015, the
definition of day will be aligned with the EU network codes and each day will run from 5am
to 5am.
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a day and may be renominated throughout the day (subject to rules on deemed flow
rates). Trade nominations may also be made throughout the day. Following the end of
each day, the system operator collates the physical flows and trade nominations of each
shipper and compares inputs and outputs to determine whether each shipper is balanced.
If a shipper is out of balance, it is deemed to buy sufficient gas from the system if it is
short or sell sufficient gas to the system if it is long to cancel the imbalance. The price at
which the deemed purchase is made can be very high and the price at which the deemed
sale is made can be very low, to incentivise shippers to balance. The vast majority of
NBP trades are made subject to the NBP 97 terms, or under an ISDA master agreement
with an NBP annex that sets out the requirements for nominations, etc. The NBP 97
terms have very limited credit support provisions, so it is common to see them amended,
particularly with regard to credit.
Trades downstream of the exit points to the NTS are usually between shippers
and licensed suppliers, although many suppliers are also shippers, enabling a single entity
to offtake gas from the NTS and supply it to premises.
NGG is responsible for maintaining physical and operational balance on the
NTS, so will assess nominations prior to the day and during the day against actual supply
and demand. NGG have various tools available to ensure system balance, including the
use of linepack22 and interruptible contracts with offtakers.23
NGG also has access to the balancing market, which is an independently operated,
cleared market where shippers can make bids or offers in respect of volumes of gas. Bids
or offers may be within-system (title) trades or physical or locational trades that involve
entry or exit of gas. NGG may accept bids or offers in the balancing market to achieve
physical balance. It is incentivised under its transmission licence to take such actions as
efficiently as possible. The prices that it pays in respect of balancing actions determine
the cash-out charges for shippers that are out of balance.
Electricity trading
Electricity is traded across the national grid between generators, suppliers and trading
entities.
Any entity that has a licence granted under the Electricity Act is required to
become a party to the BSC, however, it is also possible for parties who do not hold a
licence to be party to the BSC. These are non-physical traders (i.e., only trading within
system) such as banks and trading houses. All parties to the BSC each have two energy
accounts: a to-energy account and a from-energy account. The market operator (Elexon
Limited (Elexon)) credits and debits these accounts with traded volumes in each halfhourly settlement period and with physical flows onto and off the system where parties
are licensed. Energy trades take the form of notifications which are made to Elexon
in respect of each settlement period. Elexon then aggregates all the volumes traded or
flowed by each party in each settlement period and determines whether or not each party
22
23
NGGs use of linepack is subject to regulatory constraints.

Offtakers have the option of entering into interruptible contracts under which supply may be
interrupted to a specified number of times each year, in return for paying reduced fees.
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was in balance or not. If the party is not in balance, it is deemed to buy from the system
if it is short or sell to the system if it is long to cancel the imbalance. The price at which
the deemed purchase is made can be very high and the price of the deemed sale can be
very low, or even negative, which incentivises parties to balance. Most trades are effected
either under the industry standard grid trade master agreement (GTMA) or under an
ISDA master agreement with a GTMA annex. Bespoke power purchase agreements
(PPAs) are also used, particularly for longer-term structured arrangements.
In parallel with the electricity trading activities, NGET is responsible for ensuring
physical balance of the system in real time. Physical participants must submit a final
physical notification (FPN)24 no later than one hour before the start of each settlement
period (known as gate closure). Trades must also be notified, via notifications, within the
same time frame. Parties may not adjust their position once gate closure has occurred
although they are free to do so up to this point. At gate closure NGET assesses the
overall balance of supply and demand against FPNs and notifications. If it needs to
take balancing actions it will assess the bids and offers made in the balancing market by
physical players and accept the most appropriate. It continues to monitor the market and
take appropriate action to maintain physical balance throughout the settlement period.
After each settlement period each partys actual position is determined and if there is an
imbalance, cash out occurs as described above.
The balancing market is completely separate from the general trading market.
The balancing market is there to provide a physical balancing tool to NGET. Physical
players are required under the BSC to submit bid offers into the balancing market and
are required to either dispatch25 or curtail demand if instructed to do so. The operation
of the balancing market is regulated to ensure that any balancing actions are as efficient
as possible. Prices in the balancing market are used to derive the imbalance price at which
out-of-balance parties are cashed out.
Credit support
For completeness, mention should be made of credit support as it is credit considerations
that typically dominate discussions between trading counterparties. Credit support of
some sort in respect of the mark-to-market value of each counterpartys relative position
is often required, the nature of which will depend on the creditworthiness of each entity.
Counterparties with a poor credit rating may find themselves having to post daily
cash collateral under margining arrangements. More modern forms of standard form
contracts such as ISDA and the GTMA contain material adverse change (MAC) clauses
that allow one party to call for additional credit support if there is a deterioration in the
creditworthiness of the other party. In the older forms of contract such as the NBP 97
it is very unusual not to see an amendment incorporating similar language. It is also
common to see cross-commodity master netting agreements in place in respect of gas,
electricity and carbon positions.
24
25
FPNs are submitted under the Grid Code rather than BSC.
There is no concept of central dispatch. Each party is responsible for self-dispatch.
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ii
As previously described, participants in the energy markets need to be party to the

relevant industry codes. Depending on the nature of a particular entity and its particular
activities it may also fall within the jurisdiction of financial regulation. Traditionally,
own-account energy trading was largely without the realms of financial regulation, but
particularly in the EU, we have seen an increasing trend towards financial regulation of
energy trading. A detailed analysis of this issue is outside the scope of this review.
Another area of increasing influence from Brussels is in the area of market
manipulation. Until recently general antitrust law was used where market manipulation
was suspected. However in 2011 the EU enacted the Regulation on Energy Market
Integrity and Transparency (REMIT),26 which is aimed specifically at the wholesale
energy markets. Again, the details of REMIT and its application are outside the scope
of this review, save to say that REMIT substantially increases the regulators powers in
this area.
iii
Market developments
The electricity supply market is dominated by the big six suppliers,27 all of whom
are vertically integrated groups of companies with at least 2 million customers. As
previously mentioned, there is concern that this may be harmful to competition.
Ofgem has undertaken a retail market review in which has introduced stringent new
standards of conduct to reform the sector, especially at the retail consumer level. It has
also conducted an energy supply probe to investigate the issue of liquidity in wholesale
markets. This has resulted in obligations on large suppliers in relation to their trading
strategies. Despite these actions by Ofgem, concern about the level of competition in
the market has continued, resulting in the launch of the Market Investigation Reference
(MIR) mentioned above. The main issues which have lead Ofgem to launch the MIR are
weak customer response, continued evidence of incumbency advantages, possible tacit
coordination between suppliers, the effect of vertical integration and barriers to entry
and increased supplier profits. MIR will determine whether there are market features
which are having an adverse effect on competition and if so whether there are reforms,
including those outside Ofgems current powers, which would make competition in the
market more effective. Ofgem will continue with its other policy initiatives while the
MIR continues.
The government is currently undertaking a major project in the electricity market
under its electricity market reform (EMR) process. Broadly, EMR will introduce a
capacity market, a feed-in-tariff with contract for difference (FiT CfD) for renewable
and nuclear generation, a carbon price floor, which will take the form of an input tax
on fuel for electricity generation, and an energy performance standard, which will limit
the carbon output of new plant, effectively preventing the building of any further coal
26
27
Council Regulation (EU) No. 1227/2011 on Wholesale Energy Market Integrity and
Transparency.
Scottish Power, Scottish and Southern, EDF, E.ON, RWE (nPower) and Centrica (British
Gas).
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plant that is not fitted with carbon capture and storage capability. These measures will
sit alongside existing market arrangements. The possible impact of EMR is discussed in
greater detail in Section VII, infra.
V
Renewable technologies have benefited from government support since the early 1990s
when the Non-Fossil Fuel Obligation (NFFO) came into effect. The NFFO was replaced
by the current Renewables Obligation (RO) in 2002. The RO places an obligation on
suppliers to source a minimum percentage of the volume that they supply each year from
renewable sources.28 At the end of each year suppliers must submit sufficient renewable
obligation certificates (ROCs) to Ofgem, or they can pay the buyout price29 as set out in
the relevant renewables obligation order (ROO)30 to the extent that they have a shortfall
of ROCs. A ROC represents a volume of electricity generated by an accredited renewable
generator. Initially, one ROC was issued for 1MWh of electricity; however, in order
to incentivise the development of new, but riskier and more expensive technologies,
banding was introduced in 2009. A further banding review was instigated in 2011,
which proposed more granular banding. Those proposals came into force on 1 April
2013, with the most significant changes being for biomass and solar, where a number
of new sub-divisions were created and a ramp-down in the number of ROCs received
per MWh to 2017 was put in place. ROCs are issued to accredited generators by Ofgem
and generators then sell them on either to traders or suppliers. Buyout payments paid
to Ofgem go into a buyout fund, which is distributed among suppliers in proportion
to the number of ROCs they have presented against the total number of ROCs in that
compliance period. ROC support is available for 20 years for eligible projects. As a result
of the EMR process, ROC accreditation will not be available after 1 April 2017. From
that date renewables support will be delivered via the FiT CfD mechanism. Projects
accredited prior to 1 April 2017 will continue to receive support under the ROC scheme
for 20 years, with consequential amendments to the existing scheme to take account
of the removal of the Renewables Obligation.31 The FiT CfD mechanism is due to be
introduced on 1 April 2014 and during the period 1 April 2014 to 31 March 2017
project developers may choose whether they wish to receive ROCs or enter into a FiT
CfD arrangement.
FiT CfDs are a central tenet of the EMT process. FiT CfDs will provide a
steady income stream for eligible generators (broadly, renewables and nuclear) by
paying difference payments against a predetermined strike price. The FiT CfD will be
28
29
30
31
Currently 0.244 ROCs per MWh generated (compliance period 20142015).

Currently 43.30 per ROC (compliance period 20142015).
The Renewables Obligation is implemented in a slightly different form in each of England and
Wales, Scotland and Northern Ireland, so there are separate orders for each jurisdiction.
See the Department of Energy and Climate Changes Planning our electric future: technical
update, December 2011, for further information.
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United Kingdom
referenced against the market price, so that if the market price is below the strike price
the generator will receive an amount equal to the difference between the strike price and
the market price, and if the market price is above the strike price the generator will pay
the difference between the strike price and the market price. Strike prices will initially
be set centrally by technology type. The reference price will be the year ahead market
price for baseload generators such as nuclear and day ahead for intermittent generators.
FiT CfDs will be entered into between generators and the CfD Counterparty, a limited
company owned by the government, which will enter into the private law bilateral
contracts with generators. Funding for FiT CfDs will come from a supplier obligation
(not dissimilar to the current renewables obligation) whereby suppliers will be required
to make payments to the CfD counterparty so that it can meet its obligations under the
FiT CfDs. The CfD counterparty is described as being insolvency remote because it will
not be obliged to pay generators under the CfDs until it has itself been paid under the
supplier obligation. While this gives generators some comfort about the insolvency risk
of the CfD counterparty, it does little to help them with cash flow.
In order to prevent an investment hiatus certain eligible projects are being offered
contracts in advance of the final FiT CfDs being ready. These arrangements are called
investment contracts and will convert to FiT CfDs once the latter are in place. Nine such
contracts were announced in early 2014, the most high profile being the contract for
Hinkley Point nuclear project.
Feed-in tariffs (FiTs) were introduced in 2010 as a means of supporting smallscale (sub-5MW) generation. Owners of eligible small-scale generation plant receive a
payment from their electricity supplier for each unit of electricity that they generate
for own use, as well as a guaranteed payment for any surplus electricity that is sold
back to the grid. The level of payment depends on the technology used for generation.
Large electricity suppliers are obliged to enter into FiT arrangements with FiT eligible
generators. Smaller suppliers may elect to do so if they wish.
Following the introduction of the FiT scheme, there was a higher than expected
take up of FiTs for solar photovoltaic (PV) generation. The government subsequently
took the decision to reduce the solar PV FiT but the implementation was successfully
challenged by legal action as the reduction was to be applied retrospectively. Ultimately,
the reduction in FiT was put in place by statutory instrument but the legal wrangles have
caused confusion and uncertainty in a business which was already nervous due to EMR.
The Renewable Heat Incentive (RHI) is designed to support the generation of heat
from renewable sources at all scales. The non-domestic scheme went live in November
2011, and the scheme was expanded in April 2014 to cover domestic installations. The
take up of RHI has been low so far with few accreditations.
The Climate Change Levy (CCL) was introduced in the Finance Act 2000 as
an end-user tax on energy consumption. Renewable and combined heat and power
(CHP) electricity is CCL-exempt and accredited generators of CCL-exempt electricity
receive levy exemption certificates (LECs) issued by Ofgem. Unlike ROCs, LECs are not
tradeable separately from the electricity to which they relate. The two must therefore be
sold together in order that the ultimate end user of the electricity can redeem the LECs
and claim exemption from CCL. Given the nature of electricity, proving the physical
path of such electricity is impossible. Her Majestys Revenue and Customs (HMRC)
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therefore looks for an unbroken contractual chain to establish the link from generator
to end-user.
CHP plants no longer receive LECs as of 1 April 2013 (although direct on-site
supplies will remain exempt). The ability to transfer CHP LECs issued on or before 31
March 2013 on the Renewables and CHP Register will remain until March 2018. Such
plants will, however, receive favourable treatment of their fuel inputs under the carbon
price floor arrangements.
ii
The CRC Energy Efficiency Scheme is a mandatory cap and trade scheme that applies
to large non-energy-intensive organisations in the public and private sector and which is
designed to improve energy efficiency. The Scheme came into force on 1 April 2010 and
will be developed over several phases.
Participants buy emission allowances based on what they predict their carbon
dioxide emissions will be during the relevant year, and are allowed to buy or sell the
allowances from each other in the secondary market. At the end of each compliance year,
participants are obliged to surrender sufficient allowances to cover the amount of carbon
dioxide they have emitted. In order to incentivise participants to improve their energy
efficiency, participants will be ranked annually in a league table according to the action
they have taken to improve their energy efficiency. The government then recycles the
revenue raised from the sale of allowances back to participants, applying either a bonus
or penalty the size of which is based on the participants position in the league table.
The scheme has been criticised for being too complicated, so the implementation
of Phase II was postponed and, following consultation simplifications were introduced
which came into effect in 2013.
The government has also established the Green Deal, which was launched in
October 2012. Under the Green Deal, private firms make loans to occupiers (domestic
and non-domestic) and private landlords for the purpose of making energy-efficiency
improvements to properties.
The key principle is that energy efficiency improvements should pay for themselves.
The Energy Company Obligation (ECO) will be integrated with the Green Deal, and
will require energy companies to assist in cases were the this is not the case, but there are
strong policy reasons for promoting energy efficiency measures (for example, supporting
the upfront costs of basic heating and insulation for those on low incomes).
Liability to repay Green Deal finance will attach to a propertys energy bill. Thus,
when a person ceases to be the billpayer, liability for any debt under the plan will pass to
the next billpayer.
iii
The roll-out of smart meters has been identified by the government as an important
part of the transition to a low-carbon economy. Energy suppliers will be responsible for
replacing gas and electricity meters with smart meters during the roll-out programme
due to start in 2015 and complete in 2020. DECC is managing the implementation of
the programme.
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Another key technology identified by the government is CCS. In early April
2012 the government relaunched its competition for CCS at the same time as it released
its CCS roadmap. The CCS competition will provide 1 billion across two projects
to reduce the costs of CCS so that it can be deployed during the 2020s. Two projects
(White Rose in North Yorkshire and Peterhead in Aberdeenshire) were selected to receive
funding for front-end engineering and design (FEED) work with a view to concluding
a project contract for the construction and operation of the full-chain CCS project by
September 2014.
Shale gas was also given a boost with the United Kingdoms moratorium on
fracking having been lifted in December 2012, subject to the imposition of controls to
ensure that seismic risks are reduced. This was followed up in the 2013 Budget by the
introduction of a new shale gas field allowance, alongside other measures to promote
investment in the area.
VI
THE YEAR IN REVIEW
EMR policy continued to develop with significant levels of detail emerging in relation to
FiT CfDs and the capacity mechanism.
A final draft of the FiT CfD has been issued. The contract takes the form of a 40page agreement to which is annexed nearly 400 pages of standard terms and conditions.
DECC has made it clear that the terms and conditions will not be negotiable. The market
has welcomed the certainty afforded by having the draft forms but there is still concern
about risk allocation and the sheer size and complexity of the document. Originally FiT
CfDs were to have been available from 1 April 2014, but the timetable has slipped and
it is envisages that FiT CfDs will be available later in 2014. DECC has also published
proposals for an Offtaker of Last Resort (OLR) mechanism, recognising the need for
generators to have a power purchase agreement alongside their FiT CfD. The OLR will
impose an obligation on suppliers to offer PPA terms to eligible generators at a fixed
discount to market price whenever those generators need a PPA.
Detailed Capacity Market proposals have been published during the year.
Generators with a capacity over 2MW will be eligible to bid for capacity agreements in
auctions to be organised and run by the Delivery Body (NGET). Generators will be paid
for delivering energy during pre-notified periods of system stress. Penalties will be charged
if a generator fails to deliver. The level of these penalties is not yet known, although they
will be calculated as the Value of Lost Load or VOLL. All licensed generators will be
obliged to prequalify for the capacity auctions, although they may elect not to take part
in the auctions themselves. The plan is still to hold auctions in 2014 for delivery in 2018,
with annual auctions for four-year ahead and year-ahead capacity being held thereafter.
Broadly speaking existing generators will be price takers in the auctions and new entrants
will be price makers, the idea being that the new entrants will be setting the prices at
which they can take forward the building the of new capacity, based on the security of
a capacity agreement. The Market Investigation Reference was also a significant event
during the year.
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VII
We now know with reasonable certainty what the FiT CfD will look like, and the nine
investment contracts announced by DECC early in 2014 are currently under negotiation.
Despite this improved certainty, investors are still wary of FiT CfDs, particularly for
smaller projects and there is ongoing concern about risk allocation under the proposed
contractual structure. UKs nuclear plans were given a much needed boost by the signing
of a 35 year FiT CfD, which contains a price adjustment mechanism if a second plant is
developed at Sizewell C.
The publication of concrete proposals for the capacity market has also been
welcome, although there is significant detailed work required, particularly if the first
auctions are to go ahead in 2014.
That said, the market remains uncertain. The launch of the Market Investigation
Reference means that there is potential for significant market restructuring, not only at
the retail level but also at the wholesale level. This could have profound effects on the
EMR process, which is just nearing implementation. There has also been significant
political comment on the energy markets, and various pledges as to what may or may not
happen after the general election in 2015 have been made. Whatever happens, we can be
sure that we have not seen the end of changes in the energy market yet.
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Chapter 39
UNITED STATES
Michael J Gergen, Natasha Gianvecchio, Kenneth M Simon
and David L Schwartz1
I OVERVIEW
Energy regulation in the United States is complex, broad and enforced by a variety of
federal and state governmental entities. Further, it is continually evolving in response
to global and national events, market shifts, political dynamics and priorities, and
technological advances. As such, this chapter is intended to be an overview of the nature
and scope of energy regulation and markets.
II REGULATION
i
The regulators
Multiple federal and state agencies, departments and other governmental entities regulate
US energy development, and the ownership, control and operation of electric energy,
natural gas and oil production, transmission/transportation and distribution of energy
resources, including with respect to the rates, terms and conditions of wholesale and
retail services, as well as energy market rules.
The Federal Energy Regulatory Commission (FERC) is an independent federal
regulatory agency established by the United States Congress initially to regulate wholesale
sales of electric energy and natural gas and the transmission of electric energy or
transportation by pipeline of natural gas in interstate commerce. Subsequently, FERCs
authority was expanded to include the regulation of interstate shipments of certain liquid
fossil fuels via pipelines, including crude oil, petroleum products and natural gas liquids,
such as propane and ethane. FERCs authority is granted, and limited, by statutes,
including the Federal Power Act, as amended, the Natural Gas Act, as amended, the
Michael J Gergen, Natasha Gianvecchio, Kenneth M Simon and David L Schwartz are partners
at Latham & Watkins LLP.
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United States
Natural Gas Policy Act of 1978, as amended, the Interstate Commerce Act, as amended,
the Energy Policy Act of 2005, and the Public Utility Holding Company Act of 2005.
The Nuclear Regulatory Commission (NRC) is an independent federal regulatory
agency established by Congress to formulate policies and regulations governing nuclear
reactor and materials licensing and safety. The NRCs authority is also granted, and
limited, by statutes, including the Atomic Energy Act of 1954, as amended, and the
Energy Reorganization Act of 1974, as amended.
The Department of Energy (DOE) is an executive department created in 1977
whose current mission is to ensure Americas security and prosperity by addressing
its energy, environmental and nuclear challenges through transformative science and
technology solutions. The DOE is responsible for issuing authorisations to import and
export natural gas to and from the US, including liquefied natural gas (LNG). The DOE
is led by the Secretary of Energy, a member of the Presidents cabinet.
Numerous other federal agencies and departments regulate certain aspects of the
US energy industry, including the Environmental Protection Agency, the Commodities
Futures Trading Commission, the Federal Trade Commission, and the United States
Departments of Agriculture, the Interior, State, Commerce and Justice. The production
and gathering of crude oil and natural gas, the siting of energy facilities, and the
distribution and retail sale of electric energy and natural gas are generally governed by
individual state regulatory agencies. In many states, public utility regulation is carried
out by public service commissions or public utility commissions (PUCs) or municipal
agencies (or both). The jurisdiction of these state-based regulatory agencies over energy
companies is created by state constitutions and statutes and, like most state regulation
in the United States, is also subject to the supremacy of the US government under the
United States Constitution and federal statutes, except in certain limited circumstances.
ii
Many aspects of energy development, generation, production, transmission/

transportation, and distribution in the United States are subject to some type of federal
or state regulation.
FERC regulates the rates, terms and conditions of wholesale sales of electric energy
in interstate commerce and the transmission of electric energy in interstate commerce.
FERC also regulates the rates, terms and conditions of natural gas and oil pipeline
transportation services. Entities making sales of jurisdictional products or services obtain
rate approval from FERC. FERC rates for electric transmission and interstate natural gas
transportation are typically either cost-based (i.e., based on the costs of providing the
product or service including a reasonable return on equity investment) or market-based
(i.e., negotiated or market-determined). Rates for petroleum pipeline transportation
services may be based on historical charges and typically are adjusted based on changes
in a producer price index that measures the average change over time in the selling prices
received by US producers for their output (plus a FERC-specified upward adjustment).
FERC also regulates entities subject to its jurisdiction with respect to matters that may
affect rates, including with respect to accounting, record-keeping and reporting, and,
with respect to companies regulated under the Federal Power Act, issuances of securities
and direct and indirect transfers of regulated assets.
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Under the Natural Gas Act, FERC is authorised to approve the construction
and operation of new interstate natural gas pipeline and storage facilities and LNG
import and export terminals. Owners of natural gas and LNG facilities authorised by
FERC may call on a federal power of eminent domain to condemn land on which to
site approved facilities. As a condition to the construction of new natural gas pipeline
and storage facilities, FERC may require natural gas companies to conduct an open
season, during which potential customers may subscribe to transportation or storage
capacity on a non-discriminatory basis or turn back capacity that may result in the
downsizing or elimination of the new facilities. In exercising its rate jurisdiction over
electric transmission facilities and oil pipelines, and in conjunction with its open access
requirements, FERC has also required open seasons for some or all capacity on certain
new electric transmission and oil pipeline facilities.
The Natural Gas Act was amended in 2005 to expedite the licensing process for
the construction of interstate natural gas pipelines and storage facilities, and to clarify
and modify FERCs review and approval of the construction and operation of LNG
import and export terminals. The 2005 amendments prohibit FERC from regulating the
rates, terms, and conditions of service for LNG terminals, but only until January 2015,
at which time FERCs authority over LNG terminals will be the same as its authority
over interstate natural gas pipelines. FERC also has siting approval authority with respect
to hydroelectric generating facilities to be constructed on navigable waterways. In 2005,
Congress also gave FERC backstop siting authority to issue permits for the construction
of transmission lines when the DOE designates important national interest electric
transmission corridors (NIETC) for geographical areas experiencing transmission
constraints or congestion that adversely affects consumers, although the scope of FERCs
backstop siting authority and DOEs NIETC designation authority remains unclear as a
result of judicial decisions in the US Courts of Appeals.
Pipelines located in US waters on the Continental Shelf are subject to regulation
by the US Department of Interior. Prior to the Deepwater Horizon oil spill in the Gulf of
Mexico, the Department of Interiors offshore pipeline responsibilities were to be carried
out by the Mineral Management Service; however, in 2010, these responsibilities were
transferred to a new agency, the Bureau of Ocean Energy Management, Regulation and
Enforcement, and then transferred again in 2011 to two new bureaux: the Bureau of Ocean
Energy Management and Bureau of Safety and Environmental Enforcement. Offshore
pipelines located within three miles of the United States are often subject to state regulation.
State PUCs generally regulate the distribution and delivery of electricity and
natural gas to retail customers, including rates, terms and conditions for retail sales
and distribution of electric energy and natural gas, and the safe and reliable delivery of
electricity and natural gas to retail customers in the state. State PUCs may also regulate rates
and operating conditions for intrastate natural gas pipelines and storage services and for
intrastate deliveries of liquid fossil fuels by pipeline. Siting approvals for the development
and construction of new energy facilities are often required at state or local government
level.
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iii
Gathering, terminalling, processing, and treatment of natural gas and oil
In states where natural gas and oil exploration and development is active, state
agencies often possess regulatory authority over gathering (typically the collection and
transportation of resources from production wells to a centralised processing station
or other central collection point) of natural gas and oil. Many states have adopted
rateable take and common purchaser statutes, which generally require gatherers to take
or purchase, without undue discrimination, production that may be tendered to the
gatherer for handling or sale. These statutes are generally enforced by PUCs only when
a complaint is filed. The processing and treatment of natural gas and the storage and
terminalling of oil are generally not regulated.
iv
Ownership, market access restrictions and transfers of control
The Committee on Foreign Investment in the United States oversees foreign investment
in existing companies and assets in the United States, with the President having ultimate
authority to deny foreign investment that may adversely affect national security. Other
than with respect to nuclear energy, there is little restriction on foreign ownership of
energy assets in the United States under US energy-specific laws and regulations. FERC
approval is generally required for the direct transfer of natural gas facilities subject to
FERCs jurisdiction. FERC also regulates the direct and indirect transfer of ownership
interests or control over electric transmission and generation facilities. In reviewing a
proposed transfer of electric transmission or generation facilities, FERC must determine
whether the transaction is consistent with the public interest, including the effect on
competition, the effect on rates and the effect on regulation. FERC also considers
whether the transaction would result in the cross-subsidisation of a non-utility affiliate
of a public utility. or the pledge or encumbrance of utility assets for the benefit of a nonutility affiliate of a public utility. In reviewing the proposed transfer of interstate natural
gas assets, FERC must determine whether the abandonment of the facilities by the
transferor is permitted by, and the ownership and operation of the facilities is required
by the present of future public convenience and necessity, which in both cases is a
public interest test that considers matters such as the effect of the transfer on competitive
conditions and existing services, including rates.
Certain states also require that entities obtain PUC approval prior to the
direct and, in some jurisdictions, indirect transfer of assets subject to the jurisdiction
of the PUC. While many state statutes require PUCs to evaluate whether a proposed
transaction is consistent with the public interest, PUCs vary as to whether they interpret
their jurisdiction as requiring a showing that the transaction will not result in net harm
to the public or a showing that the transaction will provide net benefits to the public.
III

SERVICES
Vertical integration, unbundling and open access
Over the past four decades, the federal government and many state governments have
sought to replace traditional forms of cost-based regulation of services provided by
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vertically integrated monopolies with regulation designed to promote open access and
competitive market forces.
Prior to the mid-1980s, the natural gas industry was fairly rigidly structured into
three parts:
a
producers that sold natural gas to pipeline companies;
b
pipeline companies that resold and delivered that natural gas to distributors on a
bundled basis (combining the commodity cost of the natural gas with the cost
of transportation service); and
c
distributors that sold natural gas to retail customers.
Certain large industrial and electrical generating companies bought natural gas directly
from producers or pipelines. To begin to open natural gas markets to widespread
competition, FERC initially voided contractual requirements that distributors purchase
minimum quantities of natural gas from pipelines. These orders were followed by new
open access rules requiring interstate pipelines to offer unbundled transportation
services (i.e., transportation services not tied to purchases of natural gas from the
transporting pipeline or its affiliates) at tariff rates on non-discriminatory terms and
conditions set by FERC for all pipelines, and requiring compliance with new standards
of conduct that prohibit pipeline transportation personnel from communicating nonpublic competitively sensitive information to marketing personnel. FERC also required
interstate natural gas pipelines to establish internet-based information systems to
facilitate reporting and use of available pipeline capacity, as well as secondary markets for
transportation services, market centres and customers rights to segment transportation
capacity into forward and backward hauls and to use secondary receipt and delivery
points on pipeline systems on a non-firm basis. In 1989, Congress deregulated first sales
of natural gas by producers and FERC then adopted rules that effectively deregulated
the price of all other wholesale sales of natural gas. Many states also modified the
exclusive retail franchises of distributors to permit open access competition in the retail
sale of natural gas, while continuing to regulate natural gas utility distribution services
provided under exclusive franchises. The reforms led to highly competitive natural gas
sales markets in the United States, where only pipeline transportation and distribution
services and certain storage services are subject to rate regulation.
The electric sector in the United States was also dominated by franchised
monopolies. Prior to the early 1990s, vertically integrated electric utilities with monopoly
retail franchises owned and controlled most of the facilities used for the generation,
transmission and distribution of electricity within their franchised service territories. Many
vertically integrated utilities were widely traded stock corporations, although some were
owned by the US or state governments. Numerous municipally owned or cooperatively
owned utilities also distributed electricity at retail, although these publicly owned utilities
were typically smaller and more likely to be dependent on investor-owned utilities for
transmission services to access generation located outside of their service territories.
In 1978, Congress enacted legislation to encourage the deployment of renewable
and energy-efficient technologies by requiring electric utilities to purchase electric power
from generating sources using advanced technologies and eliminating all restrictions on
the ownership of qualifying generating facilities. Non-utility companies demonstrated
a high level of interest in building new power plants, which led in 1992 to Congresss
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United States
elimination of all ownership restrictions on generating facilities generating electricity for
sale at wholesale. At the same time, both the federal government and many states began
to liberalise the wholesale and retail electricity markets, including state efforts to have
state-regulated public utilities divest some or all of their electric generation and federal
efforts to make bulk power transmission facilities and distribution facilities available to
others on an open access basis.
As part of the 1992 legislation, Congress amended the FPA to authorise FERC to
order interstate transmission-owning public utilities to provide any electric utility, federal
power marketing agency, or any other person generating electric energy for wholesale
sales open and non-discriminatory access to their transmission facilities. As envisioned
by Congress, such open access would allow bulk power consumers and suppliers to enjoy
the benefits of competition in bulk power markets, as well as in those downstream retail
power markets liberalised by states.
In 1996, FERC issued Order Nos. 888 and 889 to establish the foundation
for the development of competitive bulk power markets by directing that bulk power
transmission services be provided on an open access basis that is just, reasonable and not
unduly discriminatory or preferential. Order No. 888 required that all FERC jurisdictional
transmitting utilities in the United States file a pro forma open access transmission tariff
(OATT) and functionally unbundle their wholesale power services from their wholesale
and retail transmission services. Order No. 888 also encouraged transmitting utilities
to convey operational control of their transmission facilities to independent system
operators (ISOs) or other independent regional transmission organisations (RTOs),
which led to the formation of ISOs and RTOs in regions including the large majority of
electrical load in the United States.
The pro forma OATT requires transmitting utilities to provide open, not unduly
discriminatory, access to their transmission system to transmission customers and
addresses the terms of transmission service, including the terms for scheduling service,
curtailments and the provision of ancillary services. Transmitting utilities are permitted
to vary from the required pro forma terms of service if FERC finds that their proposed
variations are equally or more conducive to the OATTs open access objectives. Order
No. 889 required codes of conduct governing how participants in the wholesale power
markets should interact with transmission service providers and the establishment of
electronic bulletin boards (open access same-time information systems) for the posting
of details regarding available transmission capacity.
Since Order Nos. 888 and 889, FERC has issued a range of major orders updating
and expanding its open access policies to address such matters as: the formation of and
participation in RTOs; pro forma procedures and agreements for interconnection of
generation to the bulk power grid; changes to the pro forma generator interconnection
procedures and agreements to facilitate interconnection of wind generators; general rules to
facilitate more open and transparent planning and use of wholesale transmission facilities;
and most recently, general rules regarding transmission planning and cost allocation.
FERC is currently considering whether reforms to its open access policies are necessary
to eliminate possible barriers to the integration of wind, solar and other variable energy
generation resources, including proposed reforms to its pro forma generator interconnection
procedures, to respond to market changes, including the growing deployment of small
distributed generation resources, such as solar photovoltaic installations.
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ii Rates
Economic regulation of most of the bulk power transmission system is administered
by FERC, including regulation of the rates, terms and conditions for the transmission
of electric energy in interstate commerce. Most FERC-regulated transmission services
are provided at embedded cost-of-service rates that provide a return of investment as
well as a FERC-determined reasonable rate of return on common equity. FERC also
has permitted so-called merchant transmission projects (i.e., transmission that is not
included in a cost-of-service rate base) to charge negotiated rates for transmission service.
In 2005, Congress amended the FPA to direct FERC to develop rate incentives
to encourage certain transmission development. In 2006, FERC issued regulations
to provide on a case-by-case basis a variety of cost-of-service rate incentives for new
transmission projects that improve reliability or reduce cost. These incentives include
incentive rates of return on equity for new investment, use of a hypothetical capital
structure during construction, full recovery of prudently incurred construction work
in progress in rate base during construction, full recovery of prudently incurred costs
of abandoned projects, and accelerated depreciation. To obtain one or more of these
incentives an applicant must show that there is a nexus between the incentive being
sought and the investment being made. FERC currently is considering potential changes
to the scope and implementation of its transmission incentives regulations and policies.
Since 2000, FERC has permitted certain merchant transmission projects to
charge negotiated rates for transmission service under OATT-based transmission service
agreements. Initially, FERC required merchant transmission facilities to hold open
seasons for the full capacity of a planned project. Since 2009, FERC has permitted certain
merchant transmission project developers to allow anchor customers to pre-subscribe
some percentage (to date, typically not more than 50 per cent) of the capacity of a
proposed project through long-term transmission service agreements that can provide
for up-front payments by the anchor customer to facilitate project construction. The
remaining project capacity not committed to anchor customers will be made available to
later customers selected through an open season process detailed in the projects OATT
and these customers will be entitled to obtain service under terms and conditions generally
comparable to those available to anchor customers. Earlier this year, FERC issued a final
policy statement that allows merchant transmission developers to avoid formal open
season requirements by engaging in an open solicitation of interest in their projects,
including widespread advertising or marketing efforts before allocating transmission
capacity to individual customers through individually negotiated arrangements.
Interstate natural gas pipelines and storage companies are permitted to offer
rate discounts and negotiate rates. Any rate discounts offered by an interstate natural
gas company must be offered on a non-discriminatory basis to all similarly situated
customers, and the natural gas company must bear the cost of any revenue shortfalls
attributable to discounts (i.e., it cannot charge higher rates to other customers in order
to make up revenues lost due to discounting). Interstate pipelines and storage companies
may also negotiate rates for services if they either offer the customer the option to take
service under a FERC-approved cost-of-service rate, known as a recourse rate, or they
demonstrate to FERC that competition is sufficient to prevent the exercise of market
power. Storage companies are often permitted to charge competitive market-based rates.
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For interstate deliveries, FERC jurisdictional pipelines that transport fossil fuel
liquids may charge cost-of service rates, historical rates (where applicable) or market rates
if adequate competition is proven to exist. Unlike natural gas and electric companies,
oil pipeline rates may change annually based on the US Producer Price Index, plus a
margin established by FERC every five years (currently 2.65 per cent). If, however, oil
pipeline rates become significantly higher than a cost-based rate or any annual increase is
substantially greater than actual cost increases, FERC may adjust the rates.
iii
Prior to 2005, the United States relied on voluntary compliance by participants in the
bulk power industry with reliability requirements for operating and planning the bulk
power system coordinated through the North American Electric Reliability Corporation
(NERC) and various related regional entities. In 2005, Congress responded to the
previously mentioned August 2003 blackout by amending the FPA to provide for a
system of mandatory, enforceable reliability standards to be developed by a FERCcertified electric reliability organisation or ERO, subject to review and approval by
FERC. For purposes of approving and enforcing compliance with reliability standards,
FERC has jurisdiction over the FERC-certified ERO, any regional reliability entities,
and all users, owners and operators of the bulk power system, including public and
governmental entities not otherwise subject to FERC jurisdiction under the FPA. FERC
certified NERC as the ERO and in various subsequent orders has defined the bulk power
system and approved a number of reliability standards proposed by NERC.
The safety and security of natural gas and liquids pipelines is regulated by the
Department of Transportation through its Pipeline and Hazardous Materials Safety
Administration (PHMSA), and, for interstate pipelines, if certified by the PHMSA, state
PUCs. The United States has not currently adopted mandatory cyber-security standards
for pipelines, storage facilities or LNG terminals, although in response to growing
concerns about cybersecurity and recently reported cyber attacks on major pipelines,
new legislation and new rules are being considered. In the meantime, the natural gas
and oil industries are voluntarily implementing measures to maintain security and are
cooperating with federal agencies to develop and implement safeguards.
IV
ENERGY MARKETS
Development of electric energy markets
Throughout certain regions in the United States, ISOs and RTOs operate transmission
facilities and administer organised wholesale electric energy markets. FERC has prohibited
any one set of market participants (including transmission owners) from controlling
decision making within an ISO or RTO. FERCs Order No. 2000 imposed significant
regulatory requirements upon ISOs and RTOs regarding the independence of an energy
market administrator, the performance of the energy markets and the elimination of
discrimination. FERC left considerable discretion to market participants to determine
an ISOs or RTOs governance structure, geographical scope and type of market services.
The following ISOs and RTOs are currently operating: PJM Interconnection,
LLC, New York Independent System Operator, ISO New England Inc, Midwest
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Independent Transmission System Operator Inc, Electric Reliability Council of Texas
(ERCOT), Southwest Power Pool and California Independent System Operator Corp.
Of these RTOs, only ERCOT is not subject to FERCs regulatory oversight, as ERCOT
is deemed to be electrically isolated from the rest of the transmission grid.
Each ISO and RTO offers different energy products in its organised markets.
While all of the existing ISOs and RTOs administer some form of bid-based markets
for one or more energy products (i.e., where the highest price bid in any hour sets the
market price for the product within that applicable region, node or zone), some provide
real-time and day-ahead markets, while others do not. In addition, some of the ISOs and
RTOs offer markets for the sale of capacity (i.e., the ability to produce electric energy)
separate from other energy products. Such forward capacity markets are structured
differently in each RTO and ISO and the details associated with the ancillary service
markets for these ISOs and RTOs differ as well. Each market has an independent market
monitor, as FERC required by Order No. 719, but the nature and scope of the market
monitors roles differ.
ii
Each RTO and ISO develops its own market rules through the market participants
stakeholder approval process. Market rules for all RTOs and ISOs must be filed with
and approved by FERC prior to implementation, except for ERCOT, which is subject to
the exclusive jurisdiction of the Public Utilities Commission of Texas. The independent
market monitor within each RTO and ISO provides independent oversight over certain
market issues, including with respect to market concentration issues.
iii
Contracts for sale of electric energy
The US electricity markets have a long history with bilateral power purchase and sale
contracting at wholesale. Even where market participants are located within an applicable
RTO or ISO (i.e., bidding in the organised wholesale markets and scheduling flows
through the RTO or ISO), market participants often enter into bilateral energy and
capacity contracts as a means of hedging the volatility of market prices or providing a
reliable source of supply. Bilateral contracts can be in the form of physical purchases and
sales or financial settlements. Some contracting parties use standardised industry form
agreements, such as those developed by the Edison Electric Institute or the International
Swap and Derivatives Association, and others negotiate individualised contracts. Physical
sales of energy, capacity and ancillary services products in the wholesale markets are
subject to FERC jurisdiction and associated contracts must either be filed with FERC or
reported through electric quarterly reports.
iv
Natural gas and oil markets
FERC has not established formal market mechanisms, such as organised wholesale
markets, for oil and natural gas, although generally interstate natural gas pipelines
are required to operate secondary markets for the transportation services they offer.
Under FERCs rules, any shipper that has contracted for firm transportation service
on a natural gas pipeline may release its contracted capacity to other shippers, either
by publicly posting the availability of the pipeline capacity on an electronic bulletin
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board maintained by the pipeline and accepting bids for it, or, if certain criteria are
met, in a privately negotiated, but publicly posted, transaction with prices capped at the
pipelines tariff rate. Also, to facilitate the development of natural gas markets, FERC has
liberalised some of its rules designed to prevent shippers from capitalising on a pipelines
market power. Generally FERC requires shippers to hold title to the natural gas they ship
on interstate pipelines and prohibits shippers from buying natural gas at a receipt point
and reselling the natural gas to the same company at the delivery point in a prearranged
buy-sell transaction. To allow brokers to aggregate transportation capacity and natural
gas supplies, and to more efficiently use transportation services, FERC allows exceptions
to its shipper-must-have-title rule under qualifying energy management agreements. No
similar rules, requirements or exceptions apply to pipelines that transport other fossil
fuel liquids.
V
The United States does not have comprehensive policies regarding the development
of renewable energy. Rather, the federal government provides or has provided various
targeted tax incentives and financing support programmes, while a large number of states
have implemented renewable portfolio or clean energy standards and net metering, tax
incentives and installation cost rebate programmes for distributed renewable generation
resources. There have been a series of unsuccessful efforts by Congress to mandate a
federal renewable or clean energy standard, most notably in the comprehensive
greenhouse gas (GHG) cap and trade and clean energy legislation that passed in the
House of Representatives in 2009.
The federal government provides various tax incentives for renewable energy,
including:
a
a production tax credit (PTC) (per energy generated) for wind, geothermal,
biomass and some other renewable energy resources (not including solar and fuel
cells);
b
an investment tax credit (ITC) (based on qualified project costs) for a wide range
of renewable energy resources (including solar and fuel cells) and for combined
heat and power generation; and
c
special accelerated depreciation rules that provided five-year depreciation for a
range of renewable energy resources placed in service from 2008 to 2012.
The PTC was first implemented under the Energy Policy Act (the EP Act) of 1992, and
was most recently extended to include projects that commence construction prior to
1 January 2014. The ITC was first implemented under the EP Act of 2005 and was
most recently extended until 2016. Moreover, the American Recovery and Reinvestment
Act (ARRA) allowed taxpayers eligible for the PTC to take the ITC in lieu of the PTC
for projects installed in 2009 through 2013 (2009 through 2012 for wind). ARRA also
allowed taxpayers eligible for the ITC (including those taking the ITC in lieu of the PTC)
to receive a cash grant from the United States Treasury Department in lieu of the ITC for
projects for whose construction commenced by the end of 2011, although projects not
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yet placed in service are subject to reduced cash grants under an automatic sequestration
law that took effect in early 2013, affecting expenditures by the federal government. The
federal government estimates that as of July 2012 it provided approximately $13 billion
in cash grants for over 45,000 renewable energy projects, although the majority of the
funding was awarded to larger wind projects.
The DOE operates various loan guarantee programmes for clean energy projects
established under Title XVII of the EP Act of 2005 and ARRA. ARRA provided DOE
with guarantee authority for commercial projects employing renewable energy systems,
electric power transmission systems, or leading-edge biofuels, and appropriations to
cover federal credit subsidy costs (i.e., loan loss reserves) of up to $2.5 billion for projects
that commenced construction by 30 September 2011. Accordingly, the DOE issued
approximately $13 billion in full or partial guarantees for 19 renewable energy projects
(predominantly solar projects) between September 2010 and September 2011. The DOE
has not closed on a loan or loan guarantee or conditionally committed to do so since
September 2011, although the federal government reported that as of January 2013, the
DOE had $2.3 billion in remaining loan guarantee authority for energy-efficiency and
renewable energy projects and was considering using $2 billion of this loan guarantee
authority for loan guarantees requested by eight active applications. In December 2013,
as part of the US Presidents Climate Action Plan, the DOE issued a solicitation making
available up to $8 billion in loan guarantees to support innovative advanced fossil energy
projects that avoid, reduce or sequester GHGs.
Twenty-nine states and the District of Columbia have renewable energy portfolio
standards requiring retail electric utilities to deliver a certain amount of electricity from
renewable or clean energy resources. These standards vary greatly across the states, both
in terms of their levels and target dates (generally between 10 per cent and 30 per cent
by no later than 2020) and what types of energy resources qualify (e.g., fuel cells, waste
energy, combined heat and power (CHP), in-state versus out-of-state resources). Some
states also have specific requirements or carve-outs for specific energy resources such as
solar or distributed generation. Many of these states also allow utilities to comply with their
standards through the purchase of tradable renewable energy credits (though there are no
national or regional markets for these credits because of differences across states standards).
More than 40 states and the District of Columbia have established net metering policies
that allow retail electricity consumers who own or host distributed renewable generation
resources (predominantly solar electric systems) to supply excess generation to their retail
electricity supplier in exchange for credits against their retail electricity bills over 12-month
and sometimes longer periods. Typically, generation resources eligible for net metering
arrangements cannot be sized at levels greatly in excess of a retail consumers peak demand.
During 2013, a few states, most notably Arizona, took steps to revisit or revise their net
metering policies in response to concerns by retail electricity suppliers that crediting excess
generation supplied back to them at their full retail rate did not accurately reflect the
costs and benefits to their other retail customers of distributed solar electric systems being
interconnected to their retail transmission and distribution systems. A number of states
offer various tax incentive and rebate programmes for distributed renewable generation
resources. Most notably, California provides a property tax exclusion for certain solar
resources as well as installation cost rebates or performance-based payments for solar and
certain other renewable resources (e.g., wind, fuel cells and CHP).
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As discussed above, many of the federal tax incentive and financing support
programmes have ended or will soon end, though some of these programmes could
be extended by Congress, as has been the case in past years, and has been proposed
in various legislation. However, given current fiscal concerns and related political
disagreements over the nature and role of federal financial support for clean energy,
the prospects for such legislation during 2012 remain unclear. At the same time, statebased renewable portfolio standards, as well as net metering, tax incentive and rebate
programmes for distributed renewable generation resources appear poised to remain in
place for the foreseeable future (and as discussed in Section VI, infra, California not only
strengthened its renewable portfolio standard during 2011, it also took major steps to
begin implementing its own GHG cap and trade programme, which is intended, in part,
to support greater deployment of renewable generation resources). Moreover, a number
of states are actively considering establishing, and since 2011 three states, most recently
New York, have established, public-private partnership clean energy financing entities to
support deployment of renewable energy and energy efficiency projects.
ii
The United States has a limited set of comprehensive policies regarding promotion
of energy efficiency for electric appliances and energy efficiency standards for federal
buildings and properties. In addition, the federal government has various targeted
grants and financing support programmes as well as tax incentives for energy efficiency
investments.
A large number of states have similar types of programmes (many of which are
supported in whole or in part by funds provided by the federal government) and a large
number of states have energy efficiency portfolio standards, similar in concept to a
renewable energy portfolio standard, that require retail electric utilities to reduce their
total retail sales, peak retail sales, or both, by certain amounts by target dates. Some states
combine their renewable and energy efficiency portfolio standards. A number of states
have also combined their energy efficiency portfolio standards with retail utility rate
decoupling policies to allow utilities to recover of and on their fixed costs regardless of
reduced retail sales resulting from energy saving efforts. Certain states have implemented
or will soon implement financing support programmes for end-use energy efficiency
investments, including on-bill financing or repayment programmes that allow retail
utilities or third parties to finance the full cost of end-use efficiency investments for
a retail utility customer and then recover of and on these investments through special
charges included on the customers retail utility bill. A similar type financing arrangement
is possible under federally authorised property-assessed clean energy (PACE) bonding
authority for local governments, which use PACE bond proceeds to finance the upfront
costs of energy efficiency investments in homes and small businesses and have the loans
secured by an annual assessment on the home or business property tax bill, although this
programme has so far been limited to commercial properties because of federal home
mortgage insurance policies.
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VI
THE YEAR IN REVIEW
i Electricity
Over the past several years, the US electricity industry has evolved to become more
dependent on natural gas caused by relative decreases in natural gas prices along with
increasing environmental regulations under various federal laws leading to coal plant
retirements. Environmental regulation of fossil fuel-fired generation, especially coal-fired
generation, is expected to increase significantly by 2016. Of particular significance, the
US Presidents Climate Action Plan issued in June 2013 directs federal environmental
regulators to propose and finalise regulations by mid-2015 limiting GHG emissions
from new and existing electric generating facilities. In addition, the increasing rate of
penetration of intermittent renewable generation resources often requires natural gas
fuelled generation as a reliability backstop. The increasing reliance on natural gas for
electricity generation, together with severe weather experiences across the US in 2012
2014, have put pressure on the existing natural gas transportation infrastructure and
highlighted several issues with respect to how the natural gas and electric industries
interact. After two years of technical conferences and public comments on these issues, in
early 2014, FERC issued a set of orders designed to improve electric-natural gas industry
coordination. Specifically, FERC issued: (1) a notice of proposed rulemaking to revise
its regulations [] to better coordinate the scheduling of natural gas and electricity
markets in light of increased reliance on natural gas for electric generation, as well as to
provide additional flexibility to all shippers on interstate natural gas pipelines; (2) an
order initiating an investigation and hearing into RTO and ISO scheduling practices;
and (3) an order to show cause issued to all interstate natural gas pipelines requiring
the pipelines to demonstrate that they are in compliance with FERC capacity release
requirements or revising their tariffs to ensure such compliance. Revised rules and tariffs
are expected to follow in 2014.
FERCs Order No. 1000 adopted significant reforms of FERCs transmission
planning and cost-allocation rules established previously in Order No. 890. Order No.
1,000 seeks to address significant recent changes in the bulk power industry, including
an increased emphasis on integrating renewable generation and reducing congestion,
by implementing new policies to push transmission providers and planners to seek the
most reliable, efficient and cost-efficient solutions. The major reforms of Order No. 1000
include:
a
requiring each public utility transmission provider to participate in a regional
transmission planning process that produces a regional transmission plan and
regional and interregional cost allocation methods for planned projects;
b
requiring each public utility transmission provider to amend its OATT to
describe procedures for considering transmission needs driven by public policy
requirements established by state or federal laws or regulations, such as state
renewable portfolio standards;
c
removing from FERC-approved tariffs and agreements any federal right of first
refusal for incumbent utilities to build and own certain new transmission facilities;
and
d
improving coordination between neighbouring transmission planning regions.
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FERC required public utility transmission providers to begin making filings with FERC
during 2012 that proposed revisions to their transmission planning processes under their
respective OATTs to comply with Order No. 1000. Throughout 2013 FERC issued
orders regarding some of the these compliance filings in which it accepted and rejected
various proposed revisions, including rejecting a number of proposals to retain certain
types of rights of first refusal for incumbent transmission providers to build-and-own
transmission projects eligible for socialised cost recovery. Various aspects of Order No.
1000, including its directives on cost allocation and rights of first refusal, were appealed
to the US Court of Appeals and briefed before that court during 2013 and early 2014.
Oral argument of these appeals was scheduled to be heard in March 2014 and a decision
by the court is expected by the end of 2014.
FERCs Order No. 745 was adopted in 2011 to encourage demand responsiveness
through market pricing mechanisms. In Order No. 745 FERC required that the RTO
energy markets adopt market rules that treat demand reduction (i.e., Negawatts) in the
same way as supply alternatives (i.e., Megawatts) for the purpose of bidding into the
energy markets; however, the RTOs were still given flexibility as to how to implement
these market incentives. RTOs began proposing revisions to their market rules to FERC
during 2011 to comply with Order No. 745 and FERC acted on a number of these
compliance filings during 2011 and 2012. Order No. 745 is, however, being challenged
(and remains pending) before the US Court of Appeals by a wide range of parties on
a variety of grounds, including that the substance of Order No. 745 exceeds FERCs
jurisdiction under the FPA, as it seeks to regulate retail sales of electricity by requiring
RTOs to pay retail customers for not consuming electricity at retail.
In April 2011, the California legislature approved Senate Bill 2, which codified
Californias ambitious renewable portfolio standard (RPS) requirement of 33 per cent
by the end of 2020 (and 20 per cent by the end of 2013, and 25 per cent by the end
of 2016). Originally enacted in 2002, Californias RPS previously set a 20 per cent
requirement by 2010. The 33 per cent RPS requirement applies to both investor-owned
and publicly owned utilities (which were not subject to the prior requirement). Eligible
technologies include solar, wind, geothermal, ocean wave, thermal and tidal energy, fuel
cells using renewable fuels, landfill gas, municipal solid waste conversion, and certain
biomass and hydroelectric resources. California also allows utilities to comply with its
standard through tradeable renewable energy credits, though a utilitys use of these credits
is capped at 25 per cent of its applicable requirements. In a related development, in
September 2010, the California legislature approved Assembly Bill 2514, which directed
regulators in California to establish a procurement programme for energy storage systems
(which includes batteries, flywheels, hydroelectric pumped storage, and thermal energy
storage) to help the state in accommodating the increased deployment of renewable
energy resources under the states RPS requirement. In response to this directive, in
October 2013, regulators in California ordered the states three largest investor-owned
utilities to procure 1,325MW of energy storage for the years 2014 through 2020.
In other related developments in California, in November 2012, the state held
its first auction of GHG allowances for vintage years 2013 and 2015 (an allowance
can be used in its vintage year or any year thereafter) under its GHG cap and trade
programme previously authorised under Assembly Bill 32 in 2006. Since February 2013
a series of auctions and reserve sales have been held for vintage years through 2017.
537
United States
This programme, the largest GHG cap and trade programme in the United States (a
number of states in the northeastern US jointly developed and implemented a marketbased mechanism, the Regional Greenhouse Gas Initiative, to cap and reduce carbon
dioxide emissions from the power sector that has been in operation since 2009) will
require California to reduce GHG emissions to 1990 levels by 2020. This is of particular
significance to the renewable generation sector as when a first deliverer of electricity
replaces conventionally sourced generation with renewable generation, it will reduce its
GHG compliance obligations. Moreover, the cap and trade programme allows RPSbased renewable energy credits to be used to satisfy GHG compliance obligations
under the cap and trade programme (although credits used in this way cannot also be
used to be meet the RPS requirement). Also of significance, Assembly Bill 32 directs
regulators in California to facilitate the development of integrated regional, national,
and international GHG emission reduction programmes, and as part of this effort,
California and the Province of Quebec, Canada entered into an agreement in October
2013 to fully harmonise and integrate their GHG cap and trade programmes and to link
their programmes as of 1 January 2014.
Certain ISOs and RTOs that have forward auction markets for the sale of electric
capacity (distinct from the sale of electric energy) have implemented some version of a
minimum offer price rule, which imposes a minimum bid price for capacity to send
appropriate price signals for the future development of new generation and transmission
facilities. Some states located in those ISOs and RTOs have sought to use alternative
non-market procurement mechanisms to encourage the construction of new electricgenerating facilities in their respective states through long-term power purchase
arrangements or related financial contracts. Under these state procurement mechanisms
(including in New Jersey and Maryland), the generator that wins a contract effectively
must agree to offer capacity into the forward auction market at a price lower than its
actual cost to develop and construct net of revenues from other RTO or ISO markets,
which would have the effect of decreasing market clearing prices for capacity in the
forward auction market.
In 2011 and 2012, some of these affected ISOs and RTOs (including PJM and ISONE) sought changes to their MOPRs in order to mitigate possible artificial suppression
of capacity prices in their forward auction markets by capacity buyers, including as a
result of state procurement mechanisms. FERC has generally approved these revisions,
finding that if a generator entering the marketplace offers into the market at a relatively
lower price, not due to lower net costs, but due to external non-market revenue sources
(e.g., financial hedges provided through a state procurement mechanisms) that are
not available to other potential new entrants to the market, then prices in the forward
auction markets for capacity will be artificially suppressed. However, many states and
consumer-oriented market participants strongly object to these revisions arguing that
they unlawfully or unfairly constrain the ability of states to encourage the development
and construction of new generation to meet public policy goals.
During 2013 and early 2014 there were a variety of state and federal regulatory
and litigation proceedings on these matters, including decisions by federal district courts
in Maryland and New Jersey which held that procurement mechanisms in those two
states for the construction of new generation capacity violated the Supremacy Clause of
the US Constitution because they constituted wholesale ratemaking over which FERC
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United States
has exclusive jurisdiction under the FPA, and a decision by the US Court of Appeals for
the Third Circuit denying an appeal by state regulators in New Jersey and Maryland and
others in which they argued that changes to the MOPR in PJM as approved by FERC
exceeded FERCs ratemaking jurisdiction under the FPA.
ii
Natural gas and fossil fuel liquids pipelines and LNG terminals
The Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 was signed
into law on 5 January 2012. This Act reauthorises funding for federal pipeline safety
programmes, increases penalties for safety violations, establishes additional safety
requirements for newly constructed pipelines, and requires studies of certain safety issues
that could result in the adoption of new regulatory requirements for existing pipelines.
Effective 25 October 2013, the PHMSA adopted new rules increasing the maximum
administrative civil penalties for violation of the pipeline safety laws and regulations
after 3 January 2012 to $200,000 per violation per day, with a maximum of $2 million
for a related series of violations. The PHMSA has also published advanced notice of
proposed rulemakings to solicit comments on the need for changes to its natural gas and
liquid pipeline safety regulations, including whether to revise the integrity management
requirements and add new regulations governing the safety of gathering lines. In addition,
the PHMSA recently issued a final rule applying safety regulations to certain rural lowstress hazardous liquid pipelines that were not covered previously by some of its safety
regulations. The PHMSA also issued an advisory bulletin informing pipeline operators of
the need to maintain complete and accurate records if the maximum allowable operating
pressure or maximum operating pressure of regulated pipelines is determined without
pressure testing.
In October 2011, the US Court of Appeals for the Fifth Circuit ruled that FERC
exceeded its authority when it attempted to require intrastate and other pipelines not subject
to FERCs rate-making jurisdiction to post publicly certain scheduled flow and receipt and
delivery point information. Although the courts rulings are binding in only three states
(Texas, Louisiana and Mississippi) and it is only one of 11 circuits for the US Courts of
Appeals, FERC has taken no further steps to require intrastate natural gas pipelines and
other non-jurisdictional pipelines to comply with these posting requirements.
In February 2012, FERC opened an inquiry into means to promote coordination
between the electric and natural gas industries. FERCs consideration of electric-natural
gas coordination is continuing and included a technical conference in April 2013. Also,
in November 2012, FERC issued a notice of inquiry seeking comments on whether to
require quarterly reporting of every natural gas transaction within the Commissions
jurisdiction under the Natural Gas Act that entails physical delivery for the next day
or for the next month. In July 2013, FERC issued a notice that it was sending data
requests to certain natural gas marketers in order to better assess whether the reporting
requirement described in the notice of inquiry would enhance natural gas transparency.
In November 2013, FERC issued Order No. 787, which set forth a final rule amending
its regulations in order to provide explicit authority to interstate natural gas pipelines and
public utilities that own, operate, or control facilities used for the transmission of electric
energy in interstate commerce to share non-public, operational information with each
other for the purpose of promoting reliable service or operational planning on either
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United States
the public utilitys or pipelines system. However, several parties requested rehearing
or clarification of certain elements of Order No. 787 and their rehearing requests are
pending before FERC.
In 2013, FERC continued to allow greater flexibility in rates and terms and
conditions of service for newly constructed oil pipelines and pipeline expansions.
Traditionally, oil pipelines operated as common carriers providing unreserved
transportation service. To facilitate the construction of new pipelines, FERC has permitted
oil pipelines to offer priority service for part of the pipelines capacity if shippers pay a
premium rate and all shippers have an opportunity to subscribe to capacity in an open
season. FERC also permits pipelines to offer unreserved capacity at discounted rates
through an open season offering. In addition, FERC has recently approved proposals
which allow committed shippers to pay discounted rates for transportation of their
committed volumes, but during periods of prorationing, also allow them the option
to receive priority service by paying a premium rate. FERC also approved a pipelines
proposal designed to alleviate oversubscription on its system by instituting a lottery
process for allocating uncommitted capacity.
FERC approved the construction and operation of the first LNG terminal for
LNG exports from natural gas produced in the continental United States, a project being
developed by Sabine Pass Liquefaction LLC in Louisiana. Sabine Pass Liquefaction also
received authorisation from the Department of Energy to export LNG to all countries,
including countries without free trade agreements to which the US is a party, which
require national treatment for trade in natural gas. Numerous other companies that have
proposed to develop LNG export projects have applied to FERC and DOE for similar
authority and their applications are pending.
VII
Energy regulation in the United States is complex and multi-layered and will continue to
evolve for the foreseeable future. Competing economic and political interests (including
effects on ratepayers and taxpayers) cause conflict surrounding jurisdictional issues,
energy security, transmission system planning, cost allocation, renewable development
and integration and many other issues. The variety of energy industry participants and
regulators, as well as the geographical differences across the United States, can provide
an opportunity for the development of innovative policies, but such hegemony may also
lead to disjointed or overlapping regulatory obligations and may ultimately undermine
national energy policy.
540
Chapter 40
UZBEKISTAN
Eldor Mannopov, Shuhrat Yunusov, Anna Snejkova and Ulugbek Abdullaev1
I OVERVIEW
Uzbekistan is a unitary republic with a continental legal system. The head of state is the
president, the legislative branch is a two-chamber parliament and the executive functions
are carried out by the Cabinet of Ministers.
Energy regulation and energy market rules in Uzbekistan are significantly affected
by a number of factors, most importantly their strategic importance for the country and
the major state ownership in the sector.
The state joint-stock company Uzbekenergo is responsible for managing the
national grid, coordinating the activities of specialised state-owned enterprises (SOEs)
that are in the business of power generation and distribution. Established in 2001, it is
the successor of the Ministry of Energy and Electrification. As Uzbekenergo is a jointstock company, its shares can be bought by private investors, provided that at least 50
per cent of the company shares remain in government ownership; the state currently
owns the majority shareholding in the company. Uzbekenergo owns 53 more enterprises
and organisations, including 39 open joint-stock companies and 11 unitary enterprises
(Uzbekenergo companies). They annually generate up to 48 billion kWh of electric
energy and more than 10 million gigacalories of thermal power. The nameplate capacity
of the power plants is in excess of 12.3GW.
Similarly, national holding company Uzbekneftegaz (UNG) is the authorised
state management company that coordinates and directs the activities of all SOEs in
upstream and downstream activities in the oil and gas sector. UNG is an open jointstock company (99.8 per cent shares owned by the state (2011)). The UNG corporate
structure is approved by the government of Uzbekistan. In the early 1990s, its functions
Eldor Mannopov is a managing partner, Shuhrat Yunusov and Anna Snejkova are associates and
Ulugbek Abdullaev is a junior associate at Avent Advokat.
541
Uzbekistan
were fulfilled by a state committee. UNG manages the national gas networks and supplies
gas to consumers through the network of SOEs headed by Uztransgaz (a subsidiary of
UNG). UNG manages the main gas networks and supplies gas to consumers through its
subsidiary company Uztransgaz.
The main feedstock for Uzbekistans energy sector comes from hydrocarbons. The
foundation of the power system is thermal power plants (TPPs) producing total power
of 10.6MW, up to 90 per cent of the total electricity production. Primary energy sources
used in TPPs are gas (94 per cent), coal (less than 4 per cent, expected to increase to
11 to 12 per cent) and oil (2 per cent). Hence, Uzbekenergo and UNG work in close
cooperation and coordination in ensuring stable and continuous power generation and
supply of natural gas to consumers.
The third major characteristic of the Uzbek electric energy market is its
participation in the Central Asian Power System (CAPS). As a former Soviet republic,
Uzbekistan was considered to be a part of the central Asian region, and its electricity
network was largely interconnected and dependent on its neighbours. Uzbekistan is the
major CAPS power producer and has, together with the other CAPS countries, good
prospects for exporting electricity to neighbouring countries.
It should also be noted that the electricity production and transportation business
is subject to natural monopoly laws, and the government exercises price-setting and
electric energy sale regulation policies. Gas transportation is subject to natural monopoly
regulations.
II REGULATION
i
The regulators
There are definite similarities in and certain differences between the regulation of natural
gas and electricity in Uzbekistan. The basic legal document regulating electricity is the
Law on Electric Power, adopted on 30 September 2009 (the Electricity Law). There is
currently no single law regulating the gas industry, and it is mainly governed by by-laws;
nevertheless, it is anticipated that the Law on the Gas Supply will be adopted in the near
future. The current bill available for public access seems to be similar to the Electricity
Law in terms of the division of powers, rights and obligations between the state, legal
and natural persons. Both of these sectors, as strategic industries, are under the direct
supervision of the Cabinet of Ministers.
Five main state bodies the Cabinet of Ministers, the Ministry of Finance,
Uzbekenergo, Uzdavenergonazorat (State Inspectorate for Control of Power) and state
bodies at local level influence the development and functioning of the electricity sector.
The Cabinet of Ministers is essentially responsible for arranging the development
programme for the electricity industry, assisting the implementation of projects in the
field, and approving regulations for the use of electric power.2 Electricity is subject
to natural monopoly regulations, and the Ministry of Finance is in charge of tariff
Article 6 of the Electricity Law.
542
Uzbekistan
regulation.3 The tariffs are approved by the Ministry of Finance in collaboration with
Uzbekenergo, which is responsible for the smooth operation of the national electricity
grid, electricity generation and its distribution within and outside Uzbekistan.
Uzbekneftegaz is engaged in the operational management of the natural gas sector
in Uzbekistan, which covers processing, production and distribution.
UNG and Uzbekenergo are directly accountable to the Cabinet of Ministers,
and are empowered to operate the respective network system and are responsible for
reconstruction, modernisation, and development of field facilities and networks.4
Uzdavneftegaz and Uzdavenergonazorat are SOEs assigned with special powers
to oversee compliance with industrial safety standards and health and safety rules related
to the production, operation, transmission and distribution of the gas and electricity to
consumers. These bodies monitor and control activities of all the SOEs in the energy
sector, as well as any other private entities engaged in the production or consumption of
energy.5
There is also a recent initiative at state level to expand the efficient use of alternative
energy sources in Uzbekistan. The Law on Alternative Energy Sources is expected to be
adopted in 2014.
ii
The Cabinet of Ministers is the regulator and licensing body.6 Currently, only gas sector
activities are subject to licensing.
Prior to 1 August 2012, activities related to the production of electricity at
stationary electric plants (i.e., plants connected to the unified power system managed
by Uzbekenergo) were subject to licensing.7 Companies may now produce electricity at
TPPs, cogeneration plants, hydroelectric dams and other power plants that use renewable
energy sources without licensing. Similarly, carrying out energy surveys and examinations
were also subject to licensing before this was repealed by presidential decree.
In the gas sector, Uzbek law permits the performance of activities relating to the
engineering, construction, operation and maintenance of gas pipelines, as well as gas
production, processing and sale, only to legal persons holding a licence. Licences for the
production, processing and sale of natural gas and gas liquids are valid for five years.8
Licences for the purpose of engineering, construction, operation and maintenance of
3
4
5
6
7
Section 3 of the Regulation No. 553 on the Ministry of Finance of the Republic of Uzbekistan,
dated 23 November 1992.
Article 5 of the Law on Licensing of Separate Types of Activities, dated 25 May 2000.
Annex 6 to the Decree of the President No. UP-4453 on the Measures for the Principal
Shortage of Statistic, Tax, Financial Reporting, Licensed Types of Activities and Permissible
Procedures, dated 16 July 2012.
Section 6 of the Annex I to the Decree of the Cabinet of Ministers No. 310 Regulations on the
Licensing of Activity for the Production, Processing and Sale of Oil, Natural Gas and Natural
Gas Liquids, dated 9 July 2003.
543
Uzbekistan
gas pipelines are open-ended.9 Companies wishing to perform these activities must
apply to the special commission at the Cabinet of Ministers. According to the law, the
commission must examine the application within 30 days.10
iii
Electricity and gas production, sale and transportation facilities are owned by SOEs and
such services are also provided by them. The law, however, does permit the privatisation
of state companies involved in the natural gas or electricity sectors. Such companies can
be privatised as a result of direct negotiations with the authorised state bodies or through
tenders. State companies may also be privatised after a decision by the President of the
Republic of Uzbekistan.11
Currently, the electricity market in Uzbekistan falls within Uzbekenergos
monopolistic scope of activity. The law specifies the production and transportation of
electricity as a natural monopoly, as well as natural gas transportation, which is under
the control of UNG.12
iv
The State Committee for Privatisation, Demonopolisation and Competition

Development is the antitrust body in charge of the supervision of natural monopolies,
and mergers or acquisitions of the legal persons regardless their type of activity.13 The
law requires preliminary permission of the antitrust body for a merger or acquisition
in the event that the companies total net asset value or total revenue for the previous
calendar year exceeds 100,000 minimum wages14 or one of the companies holds a
dominant position within the market (which is usually the case with major state-owned
companies).15 Any companies party to the merger or acquisition that are controlled by
the Cabinet of Ministers or the President of the Republic of Uzbekistan do need to
obtain such permission.16 The antitrust body must take a decision upon the companies
application within 10 days; this term may, however, be extended by up to one month if
Section 16 of Annex II to the Decree of the Cabinet of Ministers No. 310 Regulations on the
Licensing of Activity for the Engineering, Construction, Operation and Maintenance of the
Main Gas Pipelines, Oil Pipelines, Oil Products Pipelines, dated 9 July 2003.
10
Section 5 of the Annex I to the Decree of the Cabinet of Ministers No. 310 Regulations on the
Licensing of Activity for the Production, Processing and Sale of Oil, Natural Gas and Natural
Gas Liquids, dated 9 July 2003.
11
Article 4 of the Law on Denationalisation and Privatisation, dated 19 November 1991.
12
Article 4 of the Law on Natural Monopolies, dated 19 August 1999.
13
Section 3 of the Decree of the President No. UP-4483 On Formation of State Committee of the
Republic of Uzbekistan on Privatisation, Demonopolisation and Competition Development
dated 13 November 2012.
14
At 15 December 2013, equivalent to US$4,237,920. The minimum wage is subject to change
on a regular basis upon presidential decree.
15
Article 16 of the Law on Competition, dated 6 January 2012.
16 Ibid.
544
Uzbekistan
the antimonopoly body considers that the merger or acquisition may restrict competition
within the market.17
III

SERVICES
SOEs in the oil and gas sector are part of UNG (a vertically integrated entity made up of
more than 820 companies), and SOEs involved in the production and transportation of
electricity are controlled by Uzbekenergo (a vertically integrated entity made up of more
than 700 companies).
All enterprises are connected to each other, from production, processing,
transmission and distribution to consumers. The entire infrastructure for the production,
processing, storage, transportation and distribution of electricity or gas also belongs to
UNG and Uzbekenergo, respectively.
ii
Foreign companies can participate in various projects with UNG companies in the event
of investment in such areas as exploration, production, processing plants, construction
of plants for the production of finished products from hydrocarbons, construction
of storage facilities, oil and gas production equipment of various types, upgrading oil
and gas facilities, and products under the clean development mechanism of the Kyoto
Protocol.
Foreign companies can also participate in various projects with Uzbekenergo
companies in investments in such areas as construction of hydro and mini-hydro plants,
solar power plants, wind power plants, the production of industrial equipment for the
needs of Uzbekenergo, and upgrading facilities.
Foreign investors may also participate in various projects in the form of joint
ventures (JVs, the most common form of cooperation): in the case of exploration
projects, by signing an exploration agreement and creation of a foreign enterprise (FE
LLC); in the case of production projects, by signing a production sharing agreement and
creating a JV.
iii Rates
The pricing on all services and products of UNG and Uzbekenergo for domestic
consumers includes the cost and (reasonable) profit of the manufacturer; it is also possible
to apply prices on the basis of such formula in the case of export of products or services.
All pricing must be agreed with the Ministry of Finance.
Prices are generally set below their actual costs, which results in government
subsidies for transmission and distribution companies. For this purpose, a multi-year
17
Article 18 of the Law on Competition, dated 6 January 2012.
545
Uzbekistan
tariff is being implemented to close the gap between cost and price (through raising
tariffs and lowering costs simultaneously).
iv
In order to construct and operate a gas storage facility, the legislation requires a licence
from the Geology Committee and a mining allocation. Before the application for the
licence, an applicant must receive approvals from a number of state agencies confirming
that the project complies with Uzbekistan legislation and safety, environmental and
other regulatory standards; approvals required include those from the Nature Committee
and the State Commission on Deposits under the Geology Committee. Licences are
generally issued for five years.
UNG owns and operates all liquefied natural gas (LNG) facilities (e.g., Shurtan
and Mubarek) in Uzbekistan. LNG is sold to a very limited set of buyers through auctions
on the stock exchange and by direct contracts at prices equal to the weighted average of
the most recent quoted prices. The Ministry of Finance and local authorities regulate
domestic retail prices of LNG by imposing price ceilings.
Uztransgas is responsible for every aspect of natural gas distribution, including
distribution networks. Accordingly, the construction and operation of a distribution
network will require an agreement with Uztransgas and approvals from the relevant
government agencies, including the Nature Committee and the Safety Inspection.
Uzstandart, the agency for standardisation, metrology and certification, is
considered to be the body to which the functions for the control over energy efficiency
and its quality are entrusted.18 The law imposes liability on legal and natural persons
involved in non-rational use of energy production and consumption. Therefore, energy
production or consumption, despite its type, must exclude any loss.19
IV
ENERGY MARKETS
Sale of energy (as the whole energy sector) is under the direct control of state-owned
companies (i.e., Uzbekenergo companies).20 As most of the energy sector is subject to
natural monopoly regulations, its sale and price is rather strictly regulated.
One of the Uzbekenergo companies is assigned as the sole buyer of electric energy
in Uzbekistan. In general, the sale and purchase of electric energy is carried out through
this company. For example, electric energy production companies (EEPCs) can only sell
electric energy to the sole buyer, and territorial electric network companies (TENCs)
may only buy electric energy from the sole buyer; furthermore, main electric network
companies (MENCs) are not authorised to contract with EEPCs or TENCs directly,
only via the sole buyer.
18
19
20
Article 6 of the Rational Use of Energy Law, dated 25 April 1997.

Ibid., Article 21.
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Uzbekistan
The Electricity Law also states that legal and natural persons may produce electric
energy for their own use. Furthermore, excess electric energy produced for a persons own
use may also be sold to other persons, but such sale must be carried out through private
electric networks; the unified power system cannot be used for such sale purposes.
ii
Under Uzbek law, production and transportation of electric and thermal energy is
subject to natural monopoly laws.21 Due to its technological peculiarities, it is impossible
or uneconomical to create sufficient competitive conditions in these energy markets to
meet the demand for the named energy sources.22 As such, these markets are subject to
higher state regulation (in particular higher antitrust regulations), which takes the form
of price-setting measures, defining the list of consumers who have to be serviced, and
other measures.
Also, bearing in mind that the majority electric energy producer is Uzbekenergo,
and the Electricity Law empowers one of the Uzbekenergo companies to be the sole
buyer in Uzbekistan, the sale of energy is actually regulated in detail by a number of laws
and by-laws. In particular, the Electricity Law sets out a comprehensive chain system of
energy production, transportation, distribution and sale.
The chain can be illustrated as follows:
a
EEPCs produce electric energy and sell it to the sole buyer;
b
the sole buyer sells the bought product to the TENCs and procures transportation
services of MENCs in order to transport the sold electric energy; and
c
TENCs sell electric energy to end-consumers through their electricity supply
companies (who are TENC subdivisions).23
Such electricity supply companies function all over the country, usually in each district,
city or industrial zone.
Strategic product list
Electric energy, natural gas and coal are included on the list of goods subject to special
sale regulations.24 As such, the sale of electricity and natural gas for public use, servicing
the states strategic reserve or public order, by special limits, and to general consumers
are subject to (declared or fixed) regulated prices. Although other types of sale are not
subject to regulated prices, the number of other sales is very small, and only the export
of electric energy merits attention.
21
22
23
24
Article 4 of the Law on Natural Monopolies (new 1999 edition), dated 24 April 1997 No. 398I. Regulation on the Procedure for the Formation and Maintenance of the State Register of the
Subjects of Natural Monopolies (Annex to the Resolution, registered by the Ministry of Justice
No. 2147, dated 11 October 2010).
Article 3 of the Law on Natural Monopolies.
List of Strategic Types of Logistical Resources Subject to Special Sale Procedures (Annex 2 to
the Decree of the Cabinet of Ministers No. 57, dated 5 February 2004).
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Uzbekistan
In other cases of direct contracting, electricity and natural gas can be sold at the
published average weighted prices of stock exchange quotations on the date of sale.25
Commodity exchange
Electricity and gas can also be sold through commodity exchanges. They can be placed
on the market (auction) trades with a starting price no less than that regulated. The
difference between the starting price and the sale price goes to the seller.
Export and import
Export and import of electricity is carried out through CAPS, which is the interconnection
of the central Asian states energy system, which are connected through transmission
lines within a single energy regime. Through CAPS, electricity transit operations are
also carried out between the countries in the system. Furthermore, export and import
of electricity is overseen at governmental level. Again, Uzbekenergo and UNG are the
executive bodies for export, import and transit within the customs border of Uzbekistan.
As such, a number of customs privileges are granted to Uzbekenergo, for example,
exemption from customs payments when it supplies electricity under intergovernmental
agreements (protocols).26 Also, such supply contracts are not subject to registration with
the Ministry of Foreign Economic Relations, Investments and Trade. Energy flow is
cleared by customs without levying customs payments (except for customs charges) and
there is a simplified procedure for the filing of customs declarations for the flow of
electricity.27
iii
As previously mentioned, Uzbekenergo is the sole buyer of electric energy in Uzbekistan

and, consequently, the only seller. Given such market conditions, the contract for sale of
energy is subject to detailed regulation. In particular, both rates and contractual terms are
regulated by a number of legislative documents.28
iv
Market developments
The energy sector is seen as a strategically vital sector of the economy and, as such, it
seems unlikely that energy markets will be exposed to open market rules in the short
term. Such a conclusion can also be drawn from the strict wording of the Electricity Law.
25
26
27
28
Section 6 of the Regulation on the special order of realisation of strategic logistical resources
(Annex 3 to the Decree of the Cabinet of Ministers No. 57, dated 5 February 2004).
Section 5 of the Decree of the Cabinet of Ministers No. 469, dated 5 December 2000.
Section 1-2 of the Decree of the Cabinet of Ministers No. 172, dated 23 May 2002.
Articles 468-478 of Civil Code, Law on Energy, Rules for Electric Energy Use (Annex 1 to the
Decree of the Cabinet of Ministers No. 245, dated 22 August 2009), Regulation on Mutual
Settlements between the Consumers of Electric Power and Territorial Electrical Network
Companies (Annex 2 to the Decree of the Cabinet of Ministers No. 511, dated 1 November
2004), Rules of Production, Transmission and Distribution of Electric Energy (registered by
the Ministry of Justice No. 1546, dated 18 February 2006), and others.
548
Uzbekistan
In particular, the Electricity Law provides for the possibility of assigning only
certain functions of TENCs to other companies. At present, one of the explicit examples
of such assignment can be illustrated by private payment collection mechanisms. General
consumers owe a huge amount of debt to Uzbekenergo for electricity. In order to resolve
this problem, collection of electricity debts is assigned to both Uzbekenergo and the tax
service, but private operators are also allowed to collect the payments.29
In the medium term, the Uzbek government appears interested in rebuilding
and building new generation facilities, and also exporting electricity to neighbouring
countries (in particular, to Kyrgyzstan, Tajikistan, Afghanistan and Pakistan).
V
There are a number of developments involving renewables in Uzbekistan, almost all with
the Asian Development Bank (ADB) playing a role. In early 2013, the International
Solar Energy Institute was created with financial assistance of the ADB, with the aim
of making the country an international knowledge hub and solar technology exporter.
The biggest renewable project for Uzbekistan to date is being planned by the Uzbek
government, ADB and the Russian company Lukoil for the construction of a solar power
station with 100MW capacity in the first phase (later increasing to 1,000MW or 1GW).
The overall project investment is estimated at more than US$6 billion. A number of
projects for setting up joint ventures for photovoltaic module products are also foreseen.
ii
As previously mentioned, the main source of energy in Uzbekistan is hydrocarbons. It

was estimated in 2011 that coal reserves in Uzbekistan will run out in 40 to 50 years,
oil reserves in 10 to 12 years, and natural gas reserves in 28 to 30 years.30 It is generally
accepted that in order to ensure energy stability, Uzbekistan may have to substitute the
equivalent of 12 to 13 million tonnes of oil a year (21 per cent of the current energy
balance) with renewables after 2030.
It is repeatedly stressed that Uzbekistan has great potential for alternative energy
use. It is estimated that renewable energy sources in Uzbekistan exceed three times the
stock of hydrocarbons and are equal to 51 billion tonnes of oil (with current technologies
allowing for the production of energy equal to 179 million tonnes). The most promising
source of renewable energy in Uzbekistan is solar energy. The country has abundant solar
irradiance of between 1,400 and 1,800kWh per square metre. In fact, Uzbekistan was
selected as the optimum location within the former Soviet Union in which to establish
a solar furnace. At present, however, renewables are not commonly used for a number
29
30
Decree of the Cabinet of Ministers on Measures of Organising the Activities of Private

Operators and Timely Payment for Electric Energy No. 186, dated 4 July 2009.
Uzbekistan: opportunities and perspectives of alternative energy sources, 2011, Centre for
Economic Research, available online at www.cer.uz/upload/iblock/216/one per cent20pages_13_
eng.pdf.
549
Uzbekistan
of reasons, which include the high cost of renewable energy in comparison with nonrenewable sources, the availability of cheap non-renewable energy, and the lack of a
financial mechanism for investing in alternative energy.
iii
The established International Solar Energy Institute is entrusted with implementing the
high-technology, research developments and provision of proposals and solutions for
the practical use of solar, biogas energy and pilot projects for use of alternative energy
sources in the country.31
VI
THE YEAR IN REVIEW
At the end of 2012 a consortium of foreign companies completed an EPC contract for
construction of the first in Uzbekistan combined cycle power plant (478MW) in central
Uzbekistan (Navoi region). In 2013, the tender for a similar combined cycle power plant
in south of Uzbekistan (Kashkadarya region) with a nameplate capacity of 900MW
was awarded to a consortium of foreign companies and the works are expected to be
completed by 2016. Another EPC contract for a 900MW combined cycle power plant
in the east of Uzbekistan was expected to be awarded in 2013. The 6th Meeting of the
Asia Solar Energy Forum attended by senior level officials from Asia-Pacific and other
regions was held in Tashkent in November 2013. The theme of the meeting was Solar
Energy Technology Trends and Opportunities with a focus on Uzbekistans potential in
solar energy.
VII
The Uzbek government is currently carrying out an extensive upgrade programme, which
will result in significant investments in energy-efficient (e.g., combined cycle power
plants) and sustainable production of energy (e.g., solar energy). The upgrade projects
are being implemented in cooperation with international financial institutions (e.g., the
Asian Development Bank and the Islamic Development Bank) and development funds
(e.g., the Japan International Cooperation Agency).
31
Sections 1 and 2 of the Decree of the President No. UP-4512 On Measures for Further
Development of Alternative Energy Sources dated 1 March 2013.
550
Appendix 1
ABOUT THE AUTHORS
ULUGBEK ABDULLAEV
Avent Advokat
Ulugbek Abdullaev is a graduate of the University of Westminster (BA in commercial
law), with a main focus on commercial, M&A, contract and IP law.
MASOOD AFRIDI
Afridi & Angell
Masood Afridi is a partner at Afridi & Angell specialising in the areas of infrastructure
and project finance, corporate and commercial, and energy law.
After working as an associate at the New York offices of the law firm of Sidley &
Austin, he joined the Dubai office of Afridi & Angell in 1993. For several years, he has
been a frontrunner in Pakistans energy sector, and has participated in the development of
numerous thermal and hydel power projects in the country. He has also been nominated
from time to time to resolve other global issues with the power purchaser on behalf of
the industry.
Acting in the capacity of project developers lead counsel, Mr. Afridi has concluded
transactions with a cumulative value of over $3 billion spread over several project finance
transactions.
Mr Afridi has an LLM in international business and trade law from Fordham
University (1990) and an LLB from the University of Bristol. At Fordham University,
Mr Afridi received the Edward J Hawke Prize for graduating with the highest grade point
average in his class.
PASCAL AGBOYIBOR
Orrick, Herrington & Sutcliffe
Pascal Agboyibor is a partner and a member of the Energy and Infrastructure Group of
Orrick, Herrington & Sutcliffe. He currently advises lenders, governments and investors
on major energy, mining and infrastructure projects in Africa.
551
About the Authors

RASHI AHOOJA
Trilegal
Rashi Ahooja is an associate in the energy, projects and infrastructure team of Trilegal.
Her principal area of practice is conventional energy projects. She has primarily advised
conventional energy power generators on tariff based competitively bid projects and
related power purchase agreements. She has also advised on regulatory issues concerning
coal linkages, land acquisition and acquisition of interest in existing power plants.
LUKMAN SHERIFF ALIAS
Zul Rafique & Partners
Lukman Sheriff Alias is a partner in the energy and utilities practice group. He holds
a bachelor of laws (first class) from International Islamic University Malaysia (IIUM),
a master of laws in commercial law from Cambridge University and a postgraduate
diploma in Islamic banking and finance from IIUM. He was the recipient of the IIUM
Best Overall Student Award and Tunku Abdul Rahman Foundation Gold Medal Award
and is a fellow of Cambridge Commonwealth Society. He was called to the Bar in 1993
and has extensive experience in advising on large-scale privatisation, infrastructure and
construction projects.
He was formerly the general manager of one of the largest Islamic funds in
Malaysia in the legal and enforcement division and has advised on various Islamic
investment and financing matters. Previously, he sat as a member on the Bank Negara
Law Review Committee for Islamic Banking and Finance.
He has been involved in various notable energy projects and advised on various
types of energy-related projects documents including power-purchase agreements for
Malaysian and overseas power projects. His experience includes acquisition and operation
of coal mine projects.
Lukman has also advised the government of Malaysia in respect of the water
services industry in Malaysia. He was involved in the drafting of the Constitutional
Amendment Act 2005, the Water Services Industry Bill and the National Water Services
Commission Bill.
RICARDO ANDRADE AMARO
Morais Leito, Galvo Teles, Soares da Silva & Associados, Sociedade de Advogados RL
Ricardo Andrade Amaro joined the firm in 2002. He is a member of the corporate
and commercial and capital markets team. He has great experience in corporate and
commercial law, securities law, as well as in energy law.
In the area of energy law, he was involved in the reorganisation process of the
national energy sector, during 2003 and 2004. Recently, he acted as a legal adviser in the
setting up of securitisations made in Portugal of the right to receive the amounts arising
from tariff adjustments, which were concluded in 2013 and 2014.
PER CONRADI ANDERSEN
Kvale Advokatfirma DA
Per Conradi Andersen is a partner at Kvale in Oslo. He holds an LLM in European legal
studies and is an admitted attorney to the Supreme Court. He has been involved in the
electricity sector from 1990, first as a senior executive officer at the Royal Ministry of
552
About the Authors

Petroleum and Energy, then, after two years as a judge, for the past 19 years as a lawyer
in Oslo-based law firms. He has written a book about the Norwegian Energy Act and
several articles in various publications.
HANS ANDRASSON
Mannheimer Swartling
Hans Andrasson heads Mannheimer Swartlings energy industry group. He has been
active in the sector since the early 1990s and has extensive experience in the production,
distribution and marketing segments and has represented a variety of industry actors,
both public and private, in acquisitions, divestitures, restructurings and has also advised
on key regulatory issues for the energy sector. Mr Andrasson is also a member of the
corporate commercial, private equity, and mergers and acquisition practice groups. He
studied at the University of Stockholm (LLM, 1992). After service in the Swedish courts,
Mr Andrasson joined Mannheimer Swartling in 1994 and became a partner in 2001.
FABIO ARDILA
Gmez-Pinzn Zuleta Abogados SA
Fabio is an associate at Gmez-Pinzn Zuleta Abogados SA. He graduated from
Universidad de los Andes and completed postgraduate studies in mining and energy law
from Universidad Externado de Colombia. His practice is mainly focused on the mining
and oil and gas sectors, providing legal advice in contractual and regulatory issues to
different companies of within these sectors.
PATRICIA ARRZOLA-BUSTILLO
Gmez-Pinzn Zuleta Abogados SA
Patricia Arrzola-Bustillo heads the corporate and the energy and mining practice at
Gmez-Pinzn Zuleta Abogados SA and currently acts as external legal counsel to many
well-renowned multinational companies that operate in Colombia. She graduated as
an attorney from Universidad del Rosario and completed a graduate programme in
corporate law at Universidad Javeriana. She has authored several articles that address
important topics under the energy and corporate laws and has participated in many
panels that discuss relevant issues in those areas. Patricia is currently recognised as a
key practitioner in the corporate law practice and in the energy practice by several
international legal publications.
HAROON BARYALAY
Afridi & Angell
Haroon Baryalay is an associate at Afridi & Angell, having jointed the firm in 2011.
Prior to joining Afridi & Angell, Mr Baryalay worked at Haidermota & Co in Pakistan,
from 2006. His practice areas include project finance, corporate and commercial, and
the energy sector.
Mr Baryalay has an LLM from Harvard Law School (2005), an LLB from the
University of London (2004) and a BSc in economics from the Lahore University of
Management Sciences (LUMS) in Pakistan (2001).
553
About the Authors

ELISABETH BLUNSDON
Hogan Lovells
Elisabeth Blunsdon is of counsel in the infrastructure, energy, resources and projects
practice at Hogan Lovells. She has extensive experience in energy regulation, M&A,
derivatives, structured trading and commercial issues in the energy sector. Ms Blunsdon
has advised project developers, multinational energy and utility companies, investment
banks, commodities trading houses, hedge funds and governments. She has spent several
extended periods on secondment to in-house legal departments in the energy sector. She
has particular experience in the regulation, operation and optimisation of energy assets
in the gas, renewables, power and nuclear sectors.
Ms Blunsdon has an MA from Corpus Christi College, Cambridge, and is a
member of the Law Society, Association of International Petroleum Negotiators and the
Institute of Engineering and Technology. She speaks English and French.
MAURITS BOS
Kennedy Van der Laan
Maurits Bos has been working in the Corporate group of Kennedy Van der Laan since
2007. He mainly deals with business structuring and restructuring operations, commercial
contracting and M&A work, but he also has experience as a trustee in bankruptcies and
in the field of employment law.
Maurits has a passion for the sustainable (energy) sector, and is glad to be of
service to many clients active in that field. He also works a lot with start-up firms in the
technology sector, representing both the start-up firms and the investors participating in
them.
LOUIS BOUCHEZ
Kennedy Van der Laan
Louis Bouchez joined Kennedy van der Laan in August 2006 as a partner in the corporate
department. He specialises in corporate law, mergers and acquisitions, joint ventures,
private equity and corporate governance, with a focus on the energy, clean technology
and food sectors.
Before that he worked for two years as a corporate governance specialist with
the OECD in Paris, France, responsible for policy development in Asian countries.
Louis started his career at Clifford Chance (19942002) in Amsterdam and Madrid
(1996), working in the banking, leasing and corporate practices, and also worked as a
corporate lawyer at Norton Rose in Amsterdam (20022004). Louis publishes regularly
on corporate law issues and energy related topics.
Outside the Netherlands, Louis has worked and lived in London (UK), Madrid
(Spain) and Paris (France). Louis is recommended in Chambers Global, Chambers Europe
and Legal500.
554
About the Authors

MORTEN RUBEN BRAGE
Bruun & Hjejle
Morten Ruben Brage deals with regulatory matters, particularly the regulation and use of
real estate, including issues related to public law and energy law. He is an external lecturer
in environmental law at the University of Copenhagen and co-editor of the Danish legal
publication on environmental decisions and judgments Miljretlige Afgrelser og Domme
(MAD).
ANDREW BROOKES
Minter Ellison
Andrew Brookes specialises in energy and climate change law, including electricity and
gas regulation and carbon pricing. He also has experience in competition and consumer
law, public law, and general commercial law.
Mr Brookes regularly provides regulatory and commercial advice to energy market
participants and government departments, including under the National Electricity Law
and Rules and state electricity industry legislation. His experience also includes acting
on major energy sector sale processes, drafting energy and carbon market contracts, and
advising on the implications of the Clean Energy Act legislative framework on energy
retail, wholesale and transportation, and network contracts.
From 2011 to 2012, Mr Brookes was the Australian American Association
Congressional Fellow and worked in Washington, DC as a legislative adviser to a senior
US senator on energy matters.
ZEYNEP BUHARALI
Kolcuolu Demirkan Koakl Attorneys at Law
After spending two-and-a-half years at one of the big-four audit companies legal services
group, based in Istanbul, Ms Buharal joined Kolcuolu Demirkan Koakl in 2012.
She has experience in mergers and acquisitions and energy law. Her cross-border energy
transaction experience includes a variety of deal types, ranging from joint ventures to
M&A transactions in the energy sector.
Ms Buharal is a member of the KDK team that advised major oil companies in
connection with the shareholders agreement and other corporate structure agreements,
concerning the operation, management and governance of the project entity which will
operate a natural gas pipeline in Turkey (Trans-Anatolian Natural Gas Pipeline Project).
She is also a member of the KDK team that provided legal advice to a Japanese energy
company in relation to the contemplated nuclear power plant in Sinop.
MARK CARKEET
Minter Ellison
Mark Carkeet leads Minter Ellisons national energy and resources industry group and
also heads the practice in the firms Brisbane office. One of Australias most experienced
energy and resources lawyers, Marks private and government sector clients rely on him
for strategic advice and critical matters.
Mark has worked in commercial law since 1983, and focused almost exclusively
on energy and resources since 1992. He has advised on major electricity and gas projects
555
About the Authors

throughout Australia, South East Asia and Mongolia, and his clients include Rio Tinto,
Stanwell Corporation, Ergon Energy and the governments of Queensland and Fiji.
Mark has specific expertise in regulatory matters, in particular where they affect
distribution and transmission entities, and in industrial electricity supply arrangements.
Marks expertise has been consistently recognised by leading legal directories
including Chambers Asia Pacific, The International Whos Who of Energy Lawyers, Doyles
Guide and Asia Pacific Legal 500.
LUCIAN CARUCERIU
PeliFilip
Lucian Carucerius main practice areas are energy and natural resources, and corporate.
His experience is in assisting clients in developing major renewable energy and
cogeneration projects, and various electricity and energy regulatory and permissions
matters. He has also advised clients in relation to various complex corporate matters and
commercial contracts.
Currently, Mr Caruceriu is part of the team assisting certain leading renewable
energy companies in relation to the potential acquisition of several wind farm and
photovoltaic projects.
Prior to joining PeliFilip, Mr Caruceriu acquired experience in various dispute
resolution cases, including administrative, commercial and enforcement litigations. His
previous working experience with the Council of the EU allows him to assist clients
with respect to implications of EU regulatory aspects, as well as current and future
developments of EU energy legislation.
KRZYSZTOF CICHOCKI
Sotysiski Kawecki & Szlzak
Specialises in significant energy, natural resources, infrastructural and industrial projects.
He also represents energy sector companies before courts in regulatory and access rights
matters. Recently he has been advising clients on regulatory and contract matters in
respect of hydrocarbon licensed activities in Poland (shale gas). He has been with SK&S
since 1998, and in 2009 became a partner of the law firm. He is a graduate of the Adam
Mickiewicz University in Pozna, where he obtained a Master of Law degree in 1997.
In the years 19971998 he completed postgraduate studies at the Asser Institute in The
Hague and at the Central European University, where he obtained a Master of Laws
(LLM) degree in International Business Law of the University of the State of New York.
He is fluent in English.
MICHAEL DAMIANOS
Michael Damianos & Co LLC
Michael Damianos is the founder and managing partner of Michael Damianos & Co
LLC. He is a law graduate of the University of Southampton (with first class honours) and
has an LLM from Fitzwilliam College, University of Cambridge. He is dually qualified in
Cyprus and in England & Wales (as a solicitor). Before practising in Cyprus he qualified
as a solicitor at the London office of Simmons & Simmons and then moved on to the
London office of Lovells LLP (now Hogan Lovells), working for the then energy, power,
utilities and infrastructure department.
556
About the Authors

In Cyprus, his main areas of practice are international and local mergers and
acquisitions, general corporate and commercial work, energy/projects, real estate,
banking and capital markets.
He is a council member of the Strovolos Municipality (the second largest
municipality in Cyprus) and a board member of the Sewerage Board of Nicosia.
ENYONAM DEDEY-OKE
REM Law Consultancy
Enyonam Dedey-Oke is a resources and environment law and research expert. She is a
consultant with the firm. She has been involved in research work and drafting regarding
some subsidiary legislation for the petroleum industry. She has also advised on corporate
transactions relating to the legal and regulatory framework of the mining and energy
industries in Ghana. She was educated at the University of Ghana (LLB) and Tulane
University School of Law (LLM in energy and environmental law), and is a member of
the Ghana Bar.
OKAN DEMIRKAN
Mr Demirkan currently leads the firms energy and dispute resolution practices.
Between 2004 and 2010, Mr Demirkan was heavily involved in all legal issues
surrounding the Baku-Tbilisi-Ceyhan Crude Oil Pipeline Project (BTC), where he
played a key role in real estate, employment, litigation and regulatory issues. In addition
to BTC, Mr Demirkan advised clients in connection with the Nabucco Gas Pipeline and
the Samsun-Ceyhan Oil Pipeline.
In 2011, Mr Demirkan took an active role in the Shah Deniz Stage 2 Natural Gas
Pipeline Project, where he led the KDK team advising on the projects legal structure in
Turkey, including intergovernmental agreements, Turkeys natural gas market legislation,
the Transit Law and on related commercial and public international law matters. Mr
Demirkans energy experience also includes advice to an American energy company in its
proposed bid in the privatisation of Turkeys electricity distribution entities.
Between January and June 2012, Mr Demirkan led the KDK team in the
Firms key role in the Trans-Anatolian Natural Gas Pipeline Project (TANAP). In this
multibillion-dollar project, the KDK team drafted the Host Government Agreement
and negotiated it with the Turkish Government, along with the IGA, which was signed
in late June 2012. In 2013 and 2014, Mr Demirkan received the Client Choice Award
for his work in energy and natural resources projects.
Mr Demirkan has also been heavily involved in several international arbitration
proceedings, concerning disputes arising from major infrastructure projects including
build-operate-transfer (BOT) model investments, share purchase agreements,
shareholders agreements, EPC contracts, asset transfer agreements and licensing
contracts.
557
About the Authors

MONALISA C DIMALANTA
PJS Law
Monalisa C Dimalanta heads PJS Laws energy practice. She has been cited in various
international publications as one of the Philippines leading legal advisers in energy
project financing and development, as well as a policy and regulatory expert in the
electric power industry. Ms Dimalanta was also legal counsel to the Philippine Secretary
of Energy from 2005 to 2006. She obtained her master of laws from the University of
Michigan Law School in 2001, where she attended as a DeWitt Fellow, and her bachelor
of laws degree from the University of the Philippines (UP) College of Law in 1997.
Ms. Dimalanta is a professorial lecturer at the UP College of Law and at the Ateneo de
Manila School of Law.
PATRICK DUFFY
Stikeman Elliott LLP
Patrick Duffy is a lawyer in the energy and litigation sections in Toronto. Mr Duffys
practice is focused on energy regulation and environmental litigation. He is a member
of the Bars of Ontario and Alberta and has experience in proceedings before all levels of
court and a variety of administrative tribunals, including the Ontario Energy Board and
the Ontario Municipal Board. He represents both private and public sector clients on
matters related to energy regulation and advises clients on environmental assessments,
permitting, and Aboriginal consultation. Mr Duffy was the clerk for the Federal Court of
Canada, Trial Division, from 2002 to 2003. He also served as counsel for the Independent
Electricity System Operator (IESO) during a one-year secondment in 2007.
BURAK ERYIIT
Mr Eryiit graduated from Bilkent University Faculty of Law in 2012 and was admitted
to the Istanbul Bar Association in 2013. He has been working at Kolcuolu Demirkan
Koakl since 2012.
NAJHA KATRINA J ESTRELLA
PJS Law
Najha Katrina J Estrella is a partner at PJS Law focusing on the areas of renewable
energy, oil and gas, and natural resources. Her client portfolio includes Aboitiz Power
Corporation and the SN Aboitiz Power group of companies, as well as Quezon Power
(Philippines) Ltd, owned by Thailands EGCO. Ms Estrellas practice builds on her
extensive knowledge of regulatory processes at the Energy Regulatory Commission as
well as market trading issues in the Philippine WESM. She graduated from the University
of the Philippines College of Law in 2005.
KEN ETIM
Banwo & Ighodalo
Ken Etim is the managing partner and a partner in the energy practice at Banwo &
Ighodalo. He has almost 20 years experience of advising on, negotiating and closing
intricate and highly challenging multimillion-dollar transactions. He specialises
in Nigerian and international oil, gas and electricity work and is also experienced in
558
About the Authors

corporate, commercial and project finance transactions and has been involved in almost
all of the firms energy and project finance transactions. He regularly acts for a crosssection of companies and governments and is recognised in international guides as one of
the worlds leading energy lawyers. He is a member of the Nigerian Bar Association, the
Association of International Petroleum Negotiators (AIPN), the Nigerian Maritime Law
Association and the Commercial Law & Taxation Committee of the Lagos Chamber of
Commerce & Industry, among other associations.
FABRICE FAGES
Latham & Watkins AARPI
Fabrice Fages is a partner with a focus on litigation and arbitration. He has also developed
strong experience in regulatory and public policy, notably in regulated sectors such as the
energy sector. Prior to joining Latham & Watkins, Mr Fages has worked for the French
Senate and the French National Assembly on various law drafts. He is a regular speaker
at professional conferences related to energy. Mr Fages is also a lecturer at the University
of Paris I (Sorbonne University), cole Centrale de Paris and the University of Cairo.
MARIAM FAHMY
Shalakany Law Office
Mariam Fahmy obtained an LLB from Cairo University in 2007 and an LLM from
Indiana University in August 2010. Mariam is a member of the firms banking and capital
markets department. She is involved in providing advice on equity, debt and derivative
instruments and drafting and reviewing syndicated loan documentation. Mariam
recently acted for the EBRD on the financing of two separate Egyptian manufacturing
projects each with a value of US$25 million. She is also involved in providing advice
on securitisation, convertible bonds, derivatives and structured products. She is also a
member of the firms projects group, handling several PPP projects, acting for both the
procuring entity and the bidders. She is involved in Rod El Farag PPP as part of the
group full legal advice on behalf of the Ministry of Finance Central PPP Unit. She is
also involved in wind farm projects; acting for two sponsors for the design, building,
financing and operation of two landmark wind farm projects. Furthermore, Mariam
is involved in drafting and reviewing the full suite of documents related to company
incorporation, corporate agreements, property sales, lease agreements and due diligence
reports and regularly advises on employee-related issues.
GABIN GABAS
Gabin Gabas is an associate of the Energy and Infrastructure Group of Orrick, Herrington
& Sutcliffe. His practice focuses on projects in the field of energy and extractive industries,
mainly within Europe and Africa.
BRUNO GAY
Bruno Gay is of counsel of the Energy and Infrastructure Group of Orrick, Herrington
& Sutcliffe. His practice focuses on corporate, commercial and regulatory advice within
the energy sector, in particular on mining and oil and gas projects in Africa.
559
About the Authors

MICHAEL J GERGEN
Latham partner Michael Gergen has extensive experience developing practical
applications of economics, finance and regulatory law to assist clients in the electric,
natural gas and other network industries to compete successfully in an environment of
market-based, open-access competition. Mr Gergen is recognised as a leading energy
lawyer by Chambers USA and by The Best Lawyers in America.
NATASHA GIANVECCHIO
Latham partner Natasha Gianvecchio focuses her practice on the regulatory and regional
energy market developments that impact clients in the electric and natural gas industries.
Her representations involve a broad range of issues under various federal and state
energy statutes and regulations and regional energy market rules affecting the domestic
energy industry. Ms Gianvecchio is consistently recognised as a leading energy lawyer by
Chambers USA.
BRAD GRANT
Brad Grant is a partner in Stikeman Elliotts commercial energy group in Calgary, whose
practice focuses on commercial arrangements, primarily in the petroleum and natural gas
and power sectors. Mr Grants clients include petroleum and natural gas producers and
midstream companies, energy trading companies, power generation and transmission
companies, chemical companies and infrastructure companies. He is also actively
involved in the firms emissions trading and climate change group.
Mr Grant advises clients on matters including private share and asset purchases and
sales, joint venture arrangements, supply contracts, service contracts, operating contracts,
transportation and storage contracts, trading contracts, engineering, procurement and
construction contracts and numerous other transactional matters. A significant portion
of his practice involves advising on derivatives and derivative-related matters. He is listed
and recognised by The Canadian Legal Lexpert Directory 2011 as a leading practitioner
in the area of derivatives. Mr Grant is a member of the Law Society of Alberta and the
Calgary and Canadian Bar Associations. He is also vice chair for Inn from the Cold in
Calgary.
MARTIN GYNNERSTEDT
Martin Gynnerstedt is a senior associate in Mannheimer Swartlings corporate
commercial practice group and he is also the secretary of the firms energy industry
group. Mr Gynnerstedt specialises in energy law and contract law, and has experience
from numerous international and Swedish transactions. He studied at the University of
Lund (LLM, 2000; MBA 2001). After service in the Swedish courts and work as a legal
officer at the Ministry of Industry, Mr Gynnerstedt joined Mannheimer Swartling in
2008.
560
About the Authors

MALIN HKANSSON
Malin Hkansson is a senior associate in Mannheimer Swartlings infrastructure and
corporate commercial practice group and a member of the firms energy industry group.
She specialises in construction law, energy law, contract law and public procurement
and has experience from numerous international and Swedish infrastructure and project
finance projects. Ms Hkansson studied at the University of Lund (LLM, 1998). After
service in the Swedish courts, she joined Mannheimer Swartling in 2001.
FABRCIA DE ALMEIDA HENRIQUES
Mozambique Legal Circle Advogados
Fabrcia de Almeida Henriques is a partner with MLC Advogados. Having started her
career at Morais Leito, Galvo Teles, Soares da Silva, in an early stage of her career with
the firm she participated in several privatisations involving Portuguese companies, as
well as in transactions in the area of project finance. More recently, her activity has been
primarily focused on assisting national and international clients in M&A operations,
mainly in the energy sector.
Currently she is a consultant of Morais Leito, Galvo Teles, Soares da Silva in all
matters pertaining to Mozambique.
Ms Henriques was a lecturer at the law faculty of the University of Lisbon from
2000 to 2011. Currently, she lectures at the Eduardo Mondlane University and the
Superior Institute of Science and Technology of Mozambique, both located in Maputo.
She has participated in several conferences and seminars on securities, banking,
e-commerce and internet law.
SHUN HIROTA
Anderson Mri & Tomotsune
Shun Hirota is an associate at Anderson Mri & Tomotsune. He studied at the University
of Tokyo (LLB) and the University of Tokyo School of Law (JD) and is a member of the
Dai-ni Tokyo Bar Association.
HENRY HODA
Linklaters LLP
Henry Hoda is an associate of Linklaters LLP and a corporate and energy lawyer in
Berlin. He studied in Berlin, Paris (license en droit, Paris II Panthon-Assas) and London
(LLM in competition law, Kings College) and has been trained as a lawyer in Berlin and
Shanghai.
Henry Hoda is specialised in corporate and regulatory law in the energy sector.
He advised on access to electricity networks and acted for gas storage and power plant
operators in proceedings for adjustment of storage and supply agreements. He also
advised European Energy Exchange AG on its joint venture with the French energy
exchange Powernext as well as BP and Dow Chemical on questions of renewable energies
regulation.
561
About the Authors

MARYNA ILCHUK
Arzinger
Maryna Ilchuk specialises in advising on different issues of energy law (particularly
renewable energy) and public-private partnership issues.
She advises foreign and Ukrainian clients on the implementation of Ukrainian
legislation when entering local energy markets, on the award of green tariffs for electricity
produced from renewable energy sources, licensing, access to grids, and interconnection
of the Ukrainian and foreign grids. Ms Ilchuk consults clients on structuring and
implementing a PPP-type transactions. She has also taken part in a number of large-scale
projects in the area of alternative energy and cooperation of foreign investors with state
enterprises and legal authorities.
Ms Ilchuk actively takes part in preparing publications at Arzinger (Energy Law
Guide (second edition), Biogaserzeugung und -nutzung in der Ukraine), and she is also
author of a number of articles on energy and PPP law.
She graduated from National University of Kyiv-Mohyla Academy in Ukraine,
and has a specialist degree and a masters degree in law.
AKSHAY JAITLY
Trilegal
Akshay Jaitly is a partner in the Delhi office of Trilegal. He heads the firms energy,
projects and infrastructure practice. He has considerable experience in advising on energy
and infrastructure projects, including in sectors such as power, oil and gas, water and
transport (roads and metro rail). He has advised some of the largest infrastructure entities
in the Indian market and also represents major international players with significant oil
and gas interests in India. Mr Jaitly has advised on tenders, regulation and all types of
project development, fuel supply and offtake contracts and particularly so in the oil,
natural gas and petroleum sector including LNG and, more recently, in coal and coal bed
methane related projects in various parts of India. He also advises on renewable energy
and CDM projects and has represented numerous projects including wind, hydro,
biomass and solar.
MEI FERN JOHNSON
Russell McVeagh
Mei Fern Johnson is a partner in the corporate advisory group within Russell McVeagh.
Her energy practice includes advising on mergers and acquisitions, project development
and ongoing supply and offtake arrangements. She acts for the largest electricity generator
(and retailer) in New Zealand on its renewable energy projects in New Zealand and
offshore, as well as the owners and operators of the national grid and other infrastructure
assets such as the national rail network. She also practises in the oil and gas sectors,
advising on upstream and downstream arrangements, including on joint ventures,
acquisitions and divestments, and downstream retailing.
Ms Johnson is named in Chambers Global 2013 and received the Rising Star
award at the IFLR/Euromoney Legal Media Group Australasia Women in Business
Awards 2012. She holds bachelor of laws (honours) and bachelor of commerce degrees
from the University of Auckland.
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About the Authors

MOCHAMAD KASMALI
Soemadipradja & Taher, Advocates
Mochamad Kasmali, who has a Sarjana Hukum (LLB) and an LLM (energy and natural
resources laws and policies), joined S&T in 1996. Since then, Kasmali has also worked
for 10 years with Newmonts Indonesian subsidiary companies and has undertaken a
short internship with one of the leading environmental law firms in Colorado, United
States, Temkin Wielga Hardt & Longenecker LLP. Kasmalis main practice areas include
energy and natural resources, forestry, environmental, general corporate and foreign
investment matters. He is a member of the Indonesian Advocates Association (Peradi).
WONIL KIM
Yoon & Yang LLC
Wonil Kim is a partner at Yoon & Yang LLC, with over 15 years experience in all
areas of intellectual property, including patents, trademarks, designs, copyrights, unfair
competition, trade secrets and telecommunications and broadcasting. Prior to joining
Yoon & Yang LLC, Mr Kim served as a judge at the Inchon District Court. As chair of
the firms cleantech and intellectual property group, Mr Kim has extensive experience in
the areas of energy, copyright, trademark, energy, telecommunications and broadcasting
and regulatory matters in Korea.
NICOLAJ KLEIST
Bruun & Hjejle
Nicolaj Kleist has extensive experience in advising on regulatory matters and public law
issues, especially within the energy sectors where he advises energy and supply utilities
within oil, gas, electricity and heating. He regularly assists in disputes before public
authorities and complaints boards and has assisted in a number of landmark cases
regarding price issues.
KWANG-WOOK LEE
Yoon & Yang LLC
Kwang-Wook Lee is a partner at Yoon & Yang LLC. Mr Lees main areas of practice
include antitrust law, telecommunications and energy, broadcasting and privacy law. Mr
Lee represents a broad range of companies in the energy industry. He also has extensive
experience providing legal advice concerning issues arising from environment and
cleantech business.
ATSUTOSHI MAEDA
Atsutoshi Maeda is a partner at Anderson Mri & Tomotsune. He studied at the
University of Tokyo (LLB) and University College London (LLM) and is a member of
the Dai-ni Tokyo Bar Association.
563
About the Authors

ELDOR MANNOPOV
Avent Advokat
Eldor Mannopov is a managing partner of Avent Advokat in Uzbekistan. He is a graduate
of the University of Durham (LLB in law with economics and an LLM in international
trade and commercial law). His areas of expertise include corporate, commercial, tax,
subsoil and construction law (including EPC contracts). He also teaches law at the
Westminster International University in Tashkent.
NEERAJ MENON
Trilegal
Neeraj Menon is a partner in the energy, projects and infrastructure team of Trilegal. His
primary areas of practice are energy and infrastructure projects and project financing. In
the energy sector, he has experience in advising conventional power generators on tariff
based competitive bid projects, power purchase agreements, fuel supply and transport
arrangements, EPC and O&M contracts and mine developer and operator contracts. He
has acted as lenders legal counsel in financing of various thermal and transmission power
projects. In the renewable energy sector, Mr Menon has extensive experience in advising
clients on all aspects of developing wind and solar power projects. He also advises clients
on regulatory issues concerning coal linkages and captive mining arrangements, land
acquisition and labour welfare legislations. He has also advised clients on development
of mass rapid transport systems, airport development projects and mega-residential
township projects.
ANCA MITOCARU
PeliFilip
Anca Mitocaru is an attorney at law of PeliFilips energy team. Her main practice areas
are energy and natural resources and environment, although her expertise includes areas
such as real estate and corporate matters. She focuses her practice on handling issues
involving renewable energy projects, cogeneration projects, electricity and gas trading,
mining and energy regulatory issues. She has also advised renowned clients active in fields
which imply offering substantial attention towards environmental protection matters.
Ms Mitocaru obtained her law degree from the University of Bucharest, Faculty
of Law in 2011.
TOMASZ MODAWSKI
Sotysiski Kawecki & Szlzak
He joined SK&S as an associate in 2006. Tomasz specialises in energy law with special
emphasis on law of electricity and oil and gas sectors, as well as heating infrastructure.
He advised in several energy projects as well as assisted energy enterprises in regulatory
and court proceedings, including those relating to compensation for stranded costs and
incentive schemes addressed to CHP projects. His practice focuses also on real estate
regulations and industrial projects (greenfield) in special economic zones. He is fluent in
English. He received a masters degree in law at Warsaw University in 2007.
564
About the Authors

SIMONE MONESI
Osborne Clarke
Simone Monesi is a partner in the Milan office. His practice focuses primarily on mergers
and acquisitions (particulary in the real estate and energy sectors) and fund formation.
Prior to joining Osborne Clarke in 2013, Mr Monesi was a partner at Latham & Watkins
from 2008 to 2012, and a partner at Bonelli Erede Pappalardo.
He graduated magna cum laude from Milan State University.
ANTONIO MORALES
Antonio Morales is the deputy office managing partner and the responsible partner for
the regulatory and litigation practice in the Spanish offices of Latham & Watkins, as
well as being part of the environmental, land and resources practice group. Mr Morales
practice focuses on projects and transactions relating to public and administrative law,
including the energy, utility, water and telecommunications sectors.
In 1997, Mr Morales became a state attorney. During his time in the public
administration, he worked at the Government Delegation in Madrid from 1998 to 1999
and from 1999 to 2002 at the Superior Court of Justice of Madrid. From 2002 and 2005
he served as Secretary General of the Spanish Nuclear Safety Council. Prior to joining
Latham & Watkins, Mr Morales was a partner at Hogan Lovells. In 2008, Mr Morales
obtained his PhD at the Universidad Autonoma de Barcelona. He currently sits on the
Legal Commission of the Spanish Olympic Committee.
Mr Morales has been recognised as a leader in administrative and public law
by Chambers Global for the past six years and in the energy sector by Chambers Europe
from 2008 to 2013. Additionally, he was recognised as a leading Iberian energy lawyer
by Iberian Lawyer in June 2006. In 2007 Mr Morales also received a 40 under forty
award presented by Iberian Lawyer. Mr. Morales is commended for being a lawyer with
tremendous expertise and for the ease with which he explains the most complex legal
issues to clients with staggering clarity and simplicity and total dedication to the clients
needs by Chambers Europe in 2011.
BASSAM MOUSSA
Shalakany Law Office
Bassam Moussa obtained an LLB from Ain Shams University in 2002 and an LLM from
Indiana University in August 2012. He joined Shalakany Law Office in 2009. Bassam
has a wealth of experience in infrastructure and energy projects and is currently working
on the Rod El Farag PPP as well as acting for the sponsors on two wind farm projects.
Apart from Bassams high level of expertise in projects/project finance, he has a great deal
of experience in general corporate work and mergers and acquisitions. Bassam was able to
greatly augment his experience by going on a nine-month secondment to Emaar Misr for
Development where he served as in-house legal counsel. Bassam recently acted on behalf
of the sellers in the sale of one of the biggest networks of supermarkets in Egypt. Bassam
provides on regular basis full legal services throughout the life of construction projects
starting from tender and contract drafting phase, through the execution phase and up
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About the Authors

to the handover phase, including advising clients on any claims and disputes arising
out of the projects. Moreover, Bassam is quite experienced in dealing with standard
Construction Contract forms such as the FIDIC forms.
SITESH MUKHERJEE
Trilegal
Sitesh Mukherjee is a partner in the Delhi office of Trilegal. He heads the firms dispute
resolution and competition law practices. He is a member of the Supreme Court Bar
Association, Delhi High Court Bar Association and the American Bar Association. Mr
Mukherjee is experienced in arbitration and economic regulatory matters (specifically
electricity, airports, oils and gas, telecommunications and competition law) in the
Supreme Court of India, various high courts and tribunals.
ALBERT MUMMA
Prof Albert Mumma & Company Advocates
Professor Mumma is lawyer with 25 years of experience in the legal consultancy field,
academia and in the private legal practice. He is a specialist in the legal and policy
arrangements relating to institutional restructuring and the regulation of utilities; publicprivate partnership arrangements in the infrastructure sector and energy sectors; and
environmental and natural resources law. He is an associate professor at the University of
Nairobi where he teaches a course on environmental and natural resources law, physical
planning law and energy law.
Professor Mumma has worked professionally at national, regional, and
international levels. His experience includes assignments in the UK, Eritrea, Somalia,
Kenya, Uganda, Lesotho, Burundi and the Democratic Republic of the Congo. Professor
Mumma has considerable experience undertaking assignments for government ministries
and state corporations. He prepared the initial drafts of the bills which were subsequently
enacted into law.
Professor Mumma has substantial experience providing legal services to multilateral
and intergovernmental organisations. In 2003 he provided transaction advice to the
World Bank for the development of contract documents for provision of water services
for Nairobi Water & Sewage Company Ltd and the leasing of assets and infrastructure.
In 2005 he was a consultant to the World Bank in the revision of the Northern Corridor
Transit Agreement. He also undertook an assignment which involved providing legal
inputs to the IFC as part of the team giving transactions advice for the concession of the
Kenya/Uganda Railways Corporation.
At municipal level Professor Mumma was part of the JICA Study team that
prepared the Solid Waste Management Master Plan for the City Council of Nairobi
in 19961997. Subsequently, he developed draft by-laws on solid waste management
for the City Council of Nairobi, which incorporated mechanisms for private sector
participation in solid waste management in the city of Nairobi. He also prepared for
the City Council of Nairobi a draft policy for public-private partnership in solid waste
management. For the Municipal Council of Kisumu he prepared the Trust Deed for the
management of the Jomo Kenyatta grounds in Kisumu.
Professor Mumma graduated with a first class honours bachelors degree in law
from the University of Nairobi in 1985. He completed a postgraduate diploma in legal
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About the Authors

studies with the Kenya School of Law from 1985 to 1986. He gained his masters degree
in law from Yale University Law School in 1987 and completed his PhD at Cambridge
University in 1991.
DARSHINI NANTHAKUMAR
Minter Ellison
Darshini Nanthakumar advises on commercial and regulatory matters with a particular
focus on the energy and resources sector. Her experience in the government sector
includes advising on a range of matters for both Victorian departments and agencies.
Ms Nanthakumar has previously completed a secondment as in-house counsel
to a state-based government department responsible for energy regulation in Victoria.
AYODELE ONI
Banwo & Ighodalo
Ayodele Oni, a Shell scholar and winner of the young lawyer of the year award at the
inaugural Nigerian Legal Awards, is a senior associate in the energy and natural resources
team of Banwo & Ighodalo. He has a broad range of experience in energy (oil, gas
and power), corporate and commercial matters with particular focus on energy. Ayodele
has acted for a broad range of clients in the energy sector assisting on various energy
transactions. He also writes a column on energy in a Nigerian business newspaper and
recently wrote the first complete text (and practice manual) on the Nigerian electric
power sector.
CATARINA LEVY OSRIO
Angola Legal Circle Advogados
Catarina Levy Osrio is a partner with ALC Advogados. She previously worked at
another law firm as a consultant in the tax department and as a senior tax consultant of
a major international consulting firm.
Ms Osrio is a consultant of Morais Leito, Galvo Teles, Soares da Silva in
all matters pertaining to Angola. She is a member of the Angolan and Portuguese Bar
Associations and has relevant experience in Angolan law, having advised clients on private
investment, tax and labour law in that jurisdiction.
JORGE PAZ DURINI
Paz Horowitz Robalino Garcs Attorneys at Law
Jorge Paz Durini is co-founder and partner of Paz Horowitz Robalino Garcs and leads
its energy and natural resources practice area. He has negotiated acquisition, engineering
and construction contracts for some of the most important electric and hydroelectric
generators and facilities in Ecuador. Mr Paz Durini has provided legal support in the
development of business, financial and legal structure, as well as in regulatory compliance
issues for various renewable energy projects, including photovoltaic generator projects.
He is also known for his in-depth knowledge of the mining sector, having served
as Undersecretary of Mines at the Ecuador Energy and Mines Department and President
of the Ecuador Chamber of Mines.
Mr Paz Durini also practises in the areas of antitrust, arbitration and aviation,
corporate/commercial, real estate and tax. He consistently receives recognition from legal
567
About the Authors

guides such as Chambers and Partners Latin America, Legal 500 Latin America, Latin
Lawyer 250, The International Whos Who of Mining Lawyers and IFLR 1000.
GIOVANNI PENZO
Osborne Clarke
Giovanni Penzo is a partner in the Milan office. His practice focuses primarily on
corporate law and M&A, in the energy sector. He has developed a particular expertise in
assisting public companies (multi-utilities) operating in waste, water, gas and renewables.
SEBASTIAN POOSCHKE
Linklaters LLP
Sebastian Pooschke is a managing associate of Linklaters LLP and a corporate and energy
lawyer in Berlin. He studied law in Berlin, Glasgow and Amsterdam and practised in
Brussels, London and Berlin.
Sebastian Pooschke has specialised experience in corporate and contract law,
M&A and regulation in the energy sector. He has represented GdF Suez on the swap of
a power plant portfolio with E.ON and on joint ventures for generation and supply of
electricity, gas and district heating. He has advised GdF Suez also in farm-in transactions
in Germany and in the sale of shares in its E&P business to China Investment Corp. He
advised on access to oil, gas and electricity networks under regulation and competition
law and acted for gas storage and power plant operators in proceedings for adjustment
of long-term storage and supply agreements. He has also advised financial institutions
on gas trading and storage in Germany as well as on the acquisition of electricity and
gas networks, for example with respect to the former E.ON and RWE gas transmission
networks. Sebastian Pooschke regularly publishes and lectures on energy law.
CHRISTIAN POULSSON
Kvale Advokatfirma DA
Christian Poulsson is a partner at Kvale in Oslo. He has been involved in the electricity
sector since 1996, first as in-house counsel at Norsk Hydro ASA, then, after 15 months
as a judge, for the past 14 years as an attorney in Oslo-based law firms. He has written
several articles in various publications.
HELENA PRATA
Angola Legal Circle Advogados
Helena Prata is a partner with ALC Advogados, with expertise ranging from advisory to
complex corporate and asset financing and restructuring transactions, incorporation of
SPV and structured security arrangements and labour law. She is highly experienced in
corporate law, environment, oil and gas and has accompanied national and international
clients in these areas.
She is the author of several articles published in specialised Angolan magazines
and also teaches business law at the Law Faculty of the Agostinho Neto University. Ms
Prata was recently elected a member of Luandas Provincial Council from the Angolan
Bar Association.
568
About the Authors

KAI PRITZSCHE
Linklaters LLP
Kai Pritzsche is a partner of Linklaters LLP and a corporate and energy lawyer in Berlin.
He studied law and political sciences in Freiburg, Geneva, Bonn, Berkeley (LLM) and
Cologne (Doctor Juris) and practised in Cologne, New York City and Berlin.
Kai Pritzsche has special expertise in M&A transactions, joint ventures, contractual
work and dispute resolution, in particular in the energy industry. He has advised European
Energy Exchange AG on its joint venture with the French energy exchange Powernext,
and the establishment of EPEX European Power Spot Exchange in Paris, advised RWE
and E.ON on the introduction of incentive regulation and unbundling in Germany,
advised seven European transmission system operators and four energy exchanges on
the introduction of the Central Western European market coupling regime, as well as
GdF Suez in several cooperations with municipal utilities in Germany and in other
transactions, represented GdF Suez E&P in farm-in transactions and the sale of oil and
gas licences, advised Dow Chemical in the privatisation of the BUNA works and advised
on several sales and acquisitions of chains of gasoline stations, advised Dow Chemical
in the sale of its hydrocarbon resins business to Arakawa Chemical Industries, as well as
BP on refinery and pipeline projects. Kai Pritzsche regularly publishes and lectures on
questions of corporate law and energy law.
NICOLA PURVIS
Russell McVeagh
Nicola Purvis is a corporate and commercial lawyer with an in-depth knowledge of the
electricity industry in New Zealand. She has advised a major gentailer for over 12 years
on many aspects of its business, including electricity industry regulatory issues, wholesale
and retail contracts (including its contract with its major customer and on contracts for
difference and supply contracts) and on issues and obligations arising during times of
short or low supply (i.e., hydro and thermal fuel shortages).
Ms Purvis also has considerable gas industry experience. For a number of years, she
advised the New Zealand Treasury in the interpretation of, and the Crowns strategy in
relation to, the Maui gas contract and associated downstream contracts. She assisted the
Treasury in complex protracted renegotiations of these contracts with the six commercial
counterparties and drafted the amending agreements.
GEORGES P RACINE
Lalive and Lalive in Qatar LLC
Georges Racine is a partner of Lalive. He is a dual-qualified civil and common law lawyer
with intimate knowledge of Switzerland, developing countries and emerging markets.
He has wide-ranging experience in corporate, commercial and international business
law, with particular emphasis on projects (energy, infrastructure, telecoms and transport),
construction, licensing and concessions, privatisations, mergers and acquisitions, joint
ventures, public-private partnerships (PPPs), foreign investment and public procurement.
Mr Racine has acted as lead counsel in international projects and transactions in over 25
countries worldwide. He was a member of the expert group that advised the Secretariat
of the United Nations Commission on International Trade Law (UNCITRAL) on its
draft Legislative Guide on Privately Financed Infrastructure Projects. He has written
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About the Authors

several articles on energy, infrastructure, telecommunications, PPPs and other subjects
for international publications and attended several international conferences as a speaker.
He has also acted for several international investment banks, international financial
institutions (e.g., World Bank, IFC, EBRD), foreign governments, regulatory authorities,
sponsors, developers, independent power producers, utilities, trading firms, contractors,
service providers, suppliers, investors and consulting, engineering and accounting firms.
WOLFRAM REHBOCK
Arzinger
Wolfram Rehbock has been a senior partner at Arzinger law firm since 2002. He is an
expert on public-private partnership and energy law. He also specialises in international
corporate and tax law matters with local and international background.
He is one of the initiators of the EuropeanUkrainian Energy Agency taking the
lead in supporting and promoting the development of renewable energies and energy
efficiency in Ukraine.
Being head of the Society of German and Ukrainian Lawyers, Mr Rehbock
contributes his professional experience to knowledge exchange programmes, including
lectures to Ukrainian law students.
He is registered with the Superior Court of Berlin and has been admitted to the
Bar since 1999. His experience involves working with an audit company and law firms
in Germany and Russia.
Mr Rehbock is a representative for Europe on the Advisory Board of the
International Bar Association Power Law Committee. He has also written numerous
articles and publications on different law issues.
ERIK RICHER LA FLCHE
Erik Richer La Flche is a partner in the Montreal office of Stikeman Elliott specialising
in commercial transactions in Canada and abroad, including capital and natural resource
projects, PPPs and project finance. He has led large projects in more than 25 countries.
From 1981 to 1984 he was seconded to Anderson Mri Tomostune (Tokyo). He is
currently involved in an aluminum smelter expansion (Canada), wind farms (Canada),
hospitals (Canada), a railway (Asia Minor), central heating and cooling systems (Canada)
and a high-voltage transmission line (CanadaUSA). He is included in Euromoneys Guide
to the Worlds Leading Project Finance Lawyers, The International Whos Who of Public
Procurement Lawyers, Whos Who Legal Canada, Chambers Globals The Worlds Leading
Lawyers for Business and IFLR1000: Guide to the Worlds Leading Financial Law Firms. He
regularly advises governments and lectures on foreign investments, natural resources and
infrastructure. He is a member of the Bars of both Quebec (1979) and Ontario (1986).
DANIEL ROBALINO
Daniel Robalino is an associate at Paz Horowitz Robalino Garcs. His practice areas
include energy, international arbitration, foreign investment, antitrust law and policy,
and mergers and acquisitions.
570
About the Authors

PAULA DUARTE ROCHA
Mozambique Legal Circle Advogados
Paula Duarte Rocha is a partner with MLC Advogados.
Even before finishing her degree in law, she started her career as a legal assistant
and then as a legal assistant to a partner at Pimenta, Dionsio & Associados. From
2000 to 2002 she provided multi-disciplinary legal consultancy at the tax and legal
services department of PricewaterhouseCoopers, cooperating with national and foreign
investors. She was also an associate lawyer and senior legal adviser at MGA Advogados
& Consultores.
More recently, Ms Rocha was managing partner and lawyer at Ferreira Rocha &
Associados, Sociedade de Advogados, involved in all areas of practice advising national
and foreign private companies with respect to public sector laws, public tenders and
contracts, as well as advising foreign entities in the compliance with all Mozambican tax,
labour and commercial obligations.
MYRIA SAARINEN
Myria Saarinen is a partner in the litigation department of the Paris office of Latham &
Watkins.
Ms Saarinens practice focuses on resolving a broad range of complex disputes
through litigation proceedings, mostly in an international context, and in various areas
of business, including in the energy sector.
GUILHERME GUERRA DARRIAGA SCHMIDT
L O Baptista Schmidt Valois Miranda Ferreira Agel
Guilherme Guerra DArriaga Schmidt has an extensive practice in energy, infrastructure,
arbitration, M&A, tax and corporate transactions. From 1990 to 1993, he worked for
Shell in Brazil as a tax lawyer. He joined Veirano Advogados in 1993 and worked until
2000, first as a lawyer and then as a partner acting in commercial contracts, infrastructure
and regulatory law.
He was a former visiting associate at OMelveny & Myers LLP, New York, from
1998 to 1999. For six years he was a partner of Machado, Meyer, Sendacz e Opice
Advogados, responsible for matters involving commercial contracts, infrastructure,
regulatory law and arbitration. He was nominated as a leading lawyer in energy and
natural resources by Chambers and Partners in the 2007, 2008, 2009, 2010, 2011, 2012
and 2013 editions, in corporate/M&A in the 2008, 2009, 2010 and 2011 editions, and
projects in the 2008, 2009, 2011 and 2013 editions. He was listed as one of the leading
lawyers in the area of energy and natural resources by the Expert Guides in 2007, 2009
and 2010. He was also listed in The International Whos Who of Business Lawyers in 2010
and 2011, in the oil and gas sector. Further to this, he was nominated as a most admired
lawyer by Anlise Advocacia 2010, in infrastructure.
Mr Schmidt graduated from the Universidade do Estado do Rio de Janeiro
(UERJ) in 1989 and has a postgraduate degree in tax law from the Universidade Cndido
Mendes (UCAM), under the coordination of the Brazilian Financial Law Association
(ABDF). He is an arbitrator at the Cmara de Arbitragem Empresarial, in the state of
Minas Gerais in Brazil.
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About the Authors

DAVID L SCHWARTZ
David Schwartz is a partner in the finance department of Latham & Watkins Washington,
DC office. He serves as global chair of the energy regulatory and markets practice, is a
member of the project finance group, and is co-chair of the firms global energy power
industry group. He has extensive experience representing entities involved in electricity
generation, transmission and distribution, electricity and gas marketing and trading, and
gas transportation and distribution.
Mr Schwartz has been active in the formation of the developing electricity markets
in the United States, led transactional and regulatory teams in mergers and acquisitions
and divestitures of energy companies and assets, litigated contract, rate and transmission
access disputes, and drafted federal and state energy legislation. He also has extensive
experience in negotiating power purchase and sale agreements, electricity transmission
agreements, natural gas transportation agreements, energy management agreements, and
electricity and gas interconnection agreements.
Mr Schwartz regularly advises clients on energy matters before the Federal Energy
Regulatory Commission (FERC), various state public utility commissions, the US
Department of Justice (DoJ), the Federal Trade Commission (FTC), the Securities and
Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC)
and the Department of Energy (DoE).
Mr Schwartz is regularly named as a leading energy lawyer in Corporate Counsel
Magazine, Best Lawyers in America, The Legal 500 US and both the global and the US
Chambers & Partners Guides to Leading Business Lawyers. Mr Schwartz is a member
of the American Bar Association and has held leadership positions in the Energy Bar
Association.
EMMANUEL SEKOR
REM Law Consultancy
Emmanuel Sekor is an energy and regulatory expert. He is currently a principal consultant
with REM Law Consultancy, which focuses on mining, electricity as well as the oil and
gas sectors. Before joining the firm in 2009, Mr Sekor worked for several years in public
sector energy and regulatory institutions, notably as a legal adviser at the Ministry of
Energy, and the director of legal services at the Public Utilities Regulatory Commission.
He consults for public and private sector clients on electricity and petroleum.
He was involved in Ghanas energy sector reform process and the development of sector
legislation.
Mr Sekor holds an LLB from the University of Ghana and an LLM in natural
resources and environmental law and policy from Denver University.
KENNETH M SIMON
Kenneth Simon is a partner in the finance department and energy regulatory and markets
group of Latham & Watkins Washington, DC office. He represents companies, lenders
and investors engaged in the ownership, operation and financing of electric, natural gas,
and oil pipeline companies and facilities.
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About the Authors

Mr Simon led the effort to develop the first new-build independent power
producer in the United States among other electric generating and pipeline projects, the
first case in which FERC approved charging market rates to an affiliate; the formulation
of transmission pricing policies and regional transmission organisations; litigation
regarding the royalty payments due to the US Office of Natural Resource Revenue and
the reliability of service provided by a major public utility; and the acquisition or sale
of public utilities, electric generating assets, pipelines, and LNG facilities. He has also
assisted lenders and investors with regulatory matters relating to several new LNG export
facilities. Mr Simon has been recognised as an outstanding energy and project finance
lawyer by numerous publications for more than 20 years, and was voted by his peers as
the leading lawyer in energy in Washington, DC in a poll conducted in 2005 by the
Legal Times.
ANNA SNEJKOVA
Avent Advokat
Anna Snejkova is a graduate of the University of Westminster (BA in commercial law)
and a member of Uzbek Bar. She specialises in commercial, labour and civil litigation.
AXEL STRITTER
Engling, Stritter and Partners
Axel Stritter is a partner at Engling, Stritter and Partners who focuses primarily on
mining, corporate and commercial work and has gained extensive experience in mining
projects and associated infrastructure challenges pertaining to power and water, and
relating environmental matters.
He has advised on all aspects of general corporate law, including mergers and
acquisitions and regulatory aspects, and has advised on transactions in various sectors,
including mining, and telecommunications.
Mr Stritter is frequently engaged in conducting due diligence reviews for
petroleum and mineral exploration companies, preparing legal reports and opinions
on petroleum and mineral interests for purposes of acquisitions and takeovers, capital
raisings, and IPOs.
He has also worked on a number of infrastructure transactions, and advised
bidders and lenders in respect thereof, including a bid for a sea water desalination project
in Namibia on a BOOT basis.
Axel has contributed the chapters on Namibia in several publications by Law
Business Research Ltd, including The Energy Regulation and Markets Review, The Foreign
Investment Regulation Review, The Mining Law Review, The International Capital Markets
Review, and Getting the Deal Through Dominance.
Axels expertise has been recognised by leading international research organisations
including Chambers Global, IFLR1000 (Energy and Infrastructure Leading Lawyer,
2014), and The International Whos Who of Mining Lawyers 2014.
573
About the Authors

LEYRE SUREZ
Leyre Surez is an associate at Paz Horowitz Robalino Garcs. Her practice areas include
energy, oil and gas, international arbitration, foreign investment, antitrust, administrative
law, and mergers and acquisitions.
MASATO SUGIHIRO
Masato Sugihiro is an associate at Anderson Mri & Tomotsune. He studied at Tohoku
University (LLB) and the Hitotsubashi University School of Law (JD) and is a member
of the Dai-ni Tokyo Bar Association.
YUKO SUZUKI
Yuko Suzuki is an associate at Anderson Mri & Tomotsune. She studied at the University
of Tokyo (LLB) and the University of Tokyo School of Law (JD) and is a member of the
Dai-ni Tokyo Bar Association.
REIJI TAKAHASHI
Reiji Takahashi is a partner at Anderson Mri & Tomotsune. He studied at the University
of Tokyo (LLB) and the University of Virginia (LLM). He is a lecturer of University of
Tokyo Graduate Schools of Law and Politics and is admitted to the Bar in Japan (Dai-ni
Tokyo Bar Association) and New York.
NUNO GALVO TELES
Morais Leito, Galvo Teles, Soares da Silva & Associados, Sociedade de Advogados RL
Nuno Galvo Teles joined the firm in 1987 and became a partner in 1995. He is the
managing partner of the firm. He coordinates one of the corporate and commercial
and capital markets teams. He also leads the firms energy team, an area in which he has
extensive experience.
His relationship with the Portuguese energy sector goes back to the beginning
of 1990s. During the past 15 years, he has been involved with enterprises in the energy
sector and given support to the Portuguese government on some of the most important
transactions that have occurred in the energy sector in Portugal.
He has advised and assisted several companies and banks with a focus on M&A
and capital markets operations. During recent years he has played an active role in key
M&A transactions in Portugal or carried out overseas by Portuguese companies.
Mr Teles has led the team of lawyers responsible for some of the major privatisation
transactions in Portugal, in the energy, pulp, motorways and cement industries.
ELECTRA THEODOROU
Michael Damianos & Co LLC
Electra Theodorou is an associate at Michael Damianos & Co LLC. Before joining
the firm she trained at Chrysses Demetriades & Co LLC. She is a law graduate of the
University of Leeds, has obtained an LLM in International Commercial Law from the
574
About the Authors

University of Nottingham and graduated from the Legal Practice Course (LPC) at
BPP Law School. She is a qualified Cypriot lawyer and a member of the Cyprus Bar
Association.
Her practice focuses on corporate/banking and energy-related matters.
She has recently lectured at an international conference on cybersecurity in the oil
and gas industry, held under the auspices of the Ministry of Communication and Works
of the Republic of Cyprus.
RAFAEL VALDIVIESO
Rafael Valdivieso is an associate at Paz Horowitz Robalino Garcs. His practice areas
include energy, oil and gas, international arbitration, foreign investment, antitrust law
and mergers and acquisitions.
GONZALO A VARGAS
Gonzlez Calvillo, SC
Gonzalo Vargas is a transactional attorney with over 26 years of experience providing legal
and business advice and counselling to multinational and Mexican companies. He coheads Gonzlez Calvillos energy and real estate and hospitality practice groups. His work
includes active representation of diverse clients involved in a wide variety of projects,
including multimillion-dollar transactions and investments in the areas of joint ventures,
oil service industry, government procurement, real estate and ADR. Recognised as a
business-oriented practitioner, Mr Vargas is an active member on the boards of directors
of several joint-venture companies.
His practice also focuses on M&A, sophisticated corporate structures as well as
issues and disputes between shareholders, hospitality industry, energy industry, crossborder investments, complex agreements, corporate finance, antitrust regulation, private
equity/venture capital transactions, public bids and regulatory issues in general, as well
as arbitration. Mr Vargas is consistently ranked as a foremost practitioner in his fields of
expertise by Chambers & Partners, Whos Who and Latin Lawyer.
PIERO VIGAN
Osborne Clarke
Piero Vigan is a partner in the Milan office and heads the energy and utilities sector
of the Italian offices of Osborne Clarke. His practice focuses primarily on mergers and
acquisitions and regulatory issues in the renewable energy (heat and power) and the
energy-efficiency sectors.
SHUHRAT YUNUSOV
Avent Advokat
Shuhrat Yunusov is a graduate of the University of Durham (LLM in international trade
and commercial law) and a member of Uzbek Bar. His main areas of focus are banking
and finance, capital markets, international investments and arbitration.
575
About the Authors

GLENN ZACHER
Glenn Zacher is a partner in the litigation and energy section in Toronto. His practice
focuses on commercial litigation and energy regulatory law. He was called to the Bars
of Ontario and British Columbia and has appeared before all levels of court in both
provinces. Mr Zacher has also conducted arbitrations and has acted as counsel before
various administrative tribunals, including the Ontario Energy Board, the British
Columbia Utilities Commission and the Ontario Securities Commission.
Mr Zachers energy regulatory practice includes advising and representing public
agencies and private sector companies (generators, marketers, transmitters) before
the Ontario Energy Board and in review and appeal proceedings before the Ontario
Divisional Court and the Ontario Court of Appeal. He also acts for energy clients in
complex commercial litigation disputes. In 2002, Mr Zacher spent a years secondment
at the Independent Electricity System Operator (IESO), where he acted as counsel to the
IESO during the lead-up to and for the first eight months following the opening of the
restructured Ontario electricity market.
Mr Zacher has been recognised in Chambers Global: The Worlds Leading Lawyers
for Business 2012 as a recommended lawyer in energy: power (regulatory) and in LawDay
Leading Lawyers: Energy Regulatory 2009.
576
Appendix 2
CONTRIBUTING LAW FIRMS

CONTACT DETAILS
ANGOLA LEGAL CIRCLE

ADVOGADOS
Edifcio Escom
Av. Marechal Brs Tito
No. 35/37, Piso 11, fraco C
Luanda
Angola
Tel: +244 222 441 935
Fax: +244 222 449 620
catarinaosorio@angolalegalcircle.com
helenaprata@angolalegalcircle.com
www.angolalegalcircle.com
AFRIDI & ANGELL

Emirates Towers Offices Level 35
Sheikh Zayed Road
Dubai
Tel: +971 4 330 3900
Fax: +971 4 330 3800
mafridi@afridi-angell.com
hbaryalay@afridi-angell.com
www.afridi-angell.com
ANDERSON MRI &
TOMOTSUNE
Akasaka K-Tower 2-7, Motoakasaka
1-chome, Minato-ku
Tokyo 107-0051
Japan
Tel: +81 3 6888 1000
reiji.takahashi@amt-law.com
atsutoshi.maeda@amt-law.com
shun.hirota@amt-law.com
yuko.suzuki@amt-law.com
masato.sugihiro@amt-law.com
www.amt-law.com/en/
ARZINGER
Eurasia Business Centre
75 Zhylyanska St, 5th Floor
01032 Kiev
Ukraine
Tel: +38 44 390 55 33
Fax: +38 44 390 55 40
wolfram.rehbock@arzinger.ua
maryna.ilchuk@arzinger.ua
www.arzinger.ua
577
Contact Details
GMEZ-PINZN ZULETA
ABOGADOS SA
Calle 67 No. 7-35
Oficina 1204, Edificio Caracol
Bogot DC
Colombia
Tel: +571 319 29 00
Fax: +571 321 02 95
parrazola@gpzlegal.com
fardila@gpzlegal.com
www.gpzlegal.com
AVENT ADVOKAT
50/59a Oybek Street
Tashkent 100015
Uzbekistan
Tel: +998 71 150 31 05
Fax: +998 71 150 31 04
info@avent.uz
www.avent.uz
BANWO & IGHODALO
98 Awolowo Road
South West Ikoyi
Lagos
Nigeria
Tel: +234 1 4615203 4
Fax: +234 1 4615205
ketim@banwo-ighodalo.com
aoni@banwo-ighodalo.com
www.banwo-ighodalo.com
GONZLEZ CALVILLO, SC
Montes Urales 632, Piso 3
Lomas de Chapultepec
CP 11000 Mexico City
Mexico
Tel: +52 55 5202 7622
Fax: +52 55 5220 7671
gvargas@gcsc.com.mx
www.gcsc.com.mx
BRUUN & HJEJLE

Nrregade 21
1165 Copenhagen K
Denmark
Tel: +45 33 34 50 00
Fax: +45 33 34 50 50
nkl@bruunhjejle.dk
mrb@bruunhjejle.dk
www.bruunhjejle.com
HOGAN LOVELLS
Atlantic House
Holborn Viaduct
London EC1A 2FG
United Kingdom
Tel: +44 20 7296 2000
Fax: +44 20 7296 2001
elisabeth.blunsdon@hoganlovells.com
www.hoganlovells.com
ENGLING, STRITTER AND

PARTNERS
12 Love Street
Windhoek
Namibia
Tel: +264 61 383 300
Fax: +264 61 230 011
axel.stritter@englinglaw.com.na
www. englinglaw.com.na
KENNEDY VAN DER LAAN

Haarlemmerweg 333
1051LH Amsterdam
PO Box 58188
1040 HD Amsterdam
Netherlands
Tel: +31 20 5506 692 / 803
Fax: +31 20 5506 903
louis.bouchez@kvdl.nl
maurits.bos@kvdl.nl
www.kvdl.nl
578
Contact Details
Lalive in Qatar LLC
QFC Tower 1
PO Box 23495
Doha
Qatar
Tel: +974 4496 7247
Fax: +974 4496 7244
gracine@lalive.ch
www.laliveinqatar.com
KOLCUOLU DEMIRKAN
KOAKLI ATTORNEYS AT LAW
Salam Fikir Sok. Kelebek kmaz No. 5
34394 Esentepe
Istanbul
Turkey
Tel: +90 212 355 99 00
Fax: +90 212 355 99 99
odemirkan@kolcuoglu.av.tr
zbuharali@kolcuoglu.av.tr
beryigit@kolcuoglu.av.tr
www.kolcuoglu.av.tr
LATHAM & WATKINS

45 rue Saint-Dominique
Paris 75007
France
Tel: +33 1 4062 2000
Fax: +33 1 4062 2062
fabrice.fages@lw.com
myria.saarinen@lw.com
KVALE ADVOKATFIRMA DA
PO Box 1752 Vika
0122 Oslo
Norway
Tel: +47 22 47 97 00
Fax: +47 21 05 85 85
post@kvale.no
pca@kvale.no
www.kvale.no

Mara de Molina 6, 4th floor
Madrid 28006
Spain
Tel: +34 91 971 5000
Fax: +34 902 882 228
antonio.morales@lw.com
LALIVE
Lalive
35 Rue de la Mairie
PO Box 6569
1211 Geneva 6
Switzerland
Tel: +41 58 105 20 59
Fax: +41 58 105 20 60
gracine@lalive.ch

555 Eleventh Street, NW
Suite 1000
Washington, DC 20004-1304
United States
Tel: +1 202 637 2200
Fax: +1 202 637 2201
michael.gergen@lw.com
natasha.gianvecchio@lw.com
ken.simon@lw.com
david.schwartz@lw.com
Stampfenbachplatz 4
Postfach 212
8042 Zurich
Switzerland
Tel: +41 58 105 21 00
Fax: +41 58 105 21 19
www.lw.com
www.lalive.ch
579
Contact Details
MICHAEL DAMIANOS & CO LLC
Office 401, 42E Arch
Makariou III Avenue
Nicosia, PC 1065
Cyprus
LINKLATERS LLP
Potsdamer Platz 5
10785 Berlin
Germany
Tel: +49 3021 496 262
Fax: +49 3021 496 896 85 / 893 43 /
893 10
kai.pritzsche@linklaters.com
sebastian.pooschke@linklaters.com
henry.hoda@linklaters.com
www.linklaters.de
PO Box 25378
Nicosia 2063
Cyprus
Tel: +357 22 021212
Fax: +357 22 021213
michael@damianoslaw.com
etheodorou@damianoslaw.com
www.damianoslaw.com
L O BAPTISTA SCHMIDT VALOIS

MIRANDA FERREIRA AGEL
Rua da Assemblia 66 17 andar
20011-000 Rio de Janeiro RJ
Brazil
Tel: +55 21 2114 1700
Fax: +55 21 2114 1717
gschmidt@lob-svmfa.com.br
www.lob-svmfa.com.br
MINTER ELLISON
Level 22, Waterfront Place
1 Eagle Street
Brisbane
4000 QLD
Australia
Tel: +61 7 3119 6000
Fax: +61 7 3119 1000
mark.carkeet@minterellison.com
www.minterellison.com
MANNHEIMER SWARTLING
Norrlandsgatan 21
Box 1711
111 87 Stockholm
Sweden
Tel: +46 8 595 060 00
Fax: +46 8 595 060 01
han@msa.se
mgy@msa.se
hak@msa.se
www.mannheimerswartling.se
MORAIS LEITO, GALVO

TELES, SOARES DA SILVA &
ASSOCIADOS, SOCIEDADE DE
ADVOGADOS RL
Rua Castilho 165
1070-050 Lisbon
Portugal
Tel: +351 213 817 400
Fax: +351 213 817 499
ngteles@mlgts
ramaro@mlgts.pt
www.mlgts.pt
580
Contact Details
MOZAMBIQUE LEGAL CIRCLE
ADVOGADOS
Edifcio JAT V-1
Rua dos Desportistas, 833, 6 andar
fraco NN5
Maputo
Mozambique
Tel: +258 21 344000
Fax: +258 21 344099
fahenriques@mlc.co.mz
pdrocha@mlc.co.mz
www.mozambiquelegalcircle.com
PAZ HOROWITZ ROBALINO

GARCS ATTORNEYS AT LAW
Calle del Establo y Calle E
Edificio Site Centre
Tower I, Suite 301
Cumbay, Quito
Ecuador
Tel: +593 2 398 2900
Fax: +593 2 398 2999
jpaz@pazhorowitz.com
drobalino@pazhorowitz.com
www.pazhorowitz.com
ORRICK, HERRINGTON &

SUTCLIFFE
31, avenue Pierre 1er de Serbie
75016 Paris
France
Tel: +33 1 5353 7500
Fax: +33 1 5353 7501
pagboyibor@orrick.com
bgay@orrick.com
ggabas@orrick.com
www.orrick.com
PELIFILIP
169A Calea Floreasca, Building B, 5th
floor
Floreasca Business Park
Bucharest 014459
Romania
Tel: +40 21 527 2000
Fax: +40 21 527 2001
anca.mitocaru@pelifilip.com
lucian.caruceriu@pelifilip.com
www.pelifilip.com
OSBORNE CLARKE
Corso di Porta Vittoria 9
Milan 20122
Italy
Tel: +39 02 5413171
Fax: +39 02 54131766
simone.monesi@osborneclarke.com
piero.vigano@osborneclarke.com
giovanni.penzo@osborneclarke.com
www.osborneclarke.com
PJS LAW
12F VGP Center
6772 Ayala Avenue
Makati City 1226
Philippines
Tel: +632 840 5025
Fax: +632 810 0890
mcdimalanta@pjslaw.com
njestrella@pjslaw.com
www.pjslaw.com
581
Contact Details
SOEMADIPRADJA & TAHER,
ADVOCATES
Wisma GKBI, Level 9
Jl. Jenderal Sudirman No. 28
Jakarta 10210
Indonesia
Tel: +62 21 574 0088
Fax: +62 21 574 0068
m_kasmali@soemath.com
www.soemath.com
PROF ALBERT MUMMA &

COMPANY ADVOCATES
5th Avenue Office Suites
5th Ngong Avenue
Nairobi
Kenya
Tel: +254 20 2730132
amumma@amadvocates.com
www.amadvocates.com
REM LAW CONSULTANCY
No. 15 Kofi Annan Avenue
North Legon Residential Area
Accra
Ghana
Tel: +233 302 522658
esekor@remlawgh.com
ededey@remlawgh.com
info@remlawgh.com
www.remlawgh.com
SOTYSISKI KAWECKI &

SZLZAK
ul. Wawelska 15 B
02-034 Warsaw
Poland
Tel: +48 22 608 7000
Fax: +48 22 608 7070
krzysztof.cichocki@skslegal.pl
tomasz.mlodawski@skslegal.pl
www.skslegal.pl
RUSSELL McVEAGH
Vodafone on the Quay
157 Lambton Quay
PO Box 10-214
Wellington 6143
New Zealand
Tel: +64 4 4999 555
Fax: +64 4 4999 556
meifern.johnson@russellmcveagh.com
nicola.purvis@russellmcveagh.com
www.russellmcveagh.com
STIKEMAN ELLIOTT LLP

5300 Commerce Court West
199 Bay Street
Toronto
Ontario M5L 1B9
Canada
Tel: +1 416 869 5000
Fax: +1 416 947 0866
gzacher@stikeman.com
www.stikeman.com
SHALAKANY LAW OFFICE

12 El Marashly St.
Zamalek
Cairo 11211
Egypt
Tel: +20 2 2728 8888
Fax: +20 2 2737 0661
bassam.moussa@shalakany.com
mariam.fateen@shalakany.com
www.shalakany.com
582
Contact Details
ZUL RAFIQUE & PARTNERS
D3-3-8 Solaris Dutamas
No. 1, Jalan Dutamas 1
50480 Kuala Lumpur
Malaysia
Tel: +603 6209 8228
Fax: +603 6209 8221
lukman@zulrafique.com.my
www.zulrafique.com.my
TRILEGAL
A38 Kailash Colony
New Delhi 110048
India
Tel: +91 11 4163 9393
Fax: +91 11 4163 9292
One Indiabulls Centre
14th Floor, Tower One
Elphinstone Road
Mumbai 400 013
India
Tel: +91 22 4079 1000
Fax: +91 22 4079 1098
YOON & YANG LLC
18th, 19th, 22nd, 23rd, 34th Floors,
ASEM Tower
159 Samsung-Dong, Gangnam-Gu
Seoul 135-798
Korea
Tel: +82 2 6003 7000
Fax: +82 2 6003 7800
wonilkim@yoonyang.com
kwlee@yoonyang.com
www.yoonyang.com
583

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[ Exclusively for: Monalisa Dimalanta | 04-Jul-14, 12:26 PM ]

Law Business Research

The Energy Regulation

The Energy Regulation and Markets Review

Law Business Research Ltd

THE LAW REVIEWS

THE ASSET MANAGEMENT REVIEW

MICHAEL DAMIANOS & CO LLC

OVERVIEW OF CENTRAL AND WEST AFRICA1

UNITED ARAB EMIRATES486

ABOUT THE AUTHORS551

CONTRIBUTING LAW FIRMS CONTACT DETAILS 577

Overview of Central and West Africa

growing demand colliding with a persistent shortfall in production and

Overview of Central and West Africa

Oil and gas sector

Overview of Central and West Africa

National and regional regulators

Overview of Central and West Africa

Overview of Central and West Africa

Overview of Central and West Africa

The public service of electricity delegation is typically governed by a convention,

Overview of Central and West Africa

Overview of Central and West Africa

Overview of Central and West Africa

Ownership, participation and restrictions

Overview of Central and West Africa

Overview of Central and West Africa

Overview of Central and West Africa

TRANSPORT AND DISTRIBUTION

Transmission, transport and distribution access

Overview of Central and West Africa

Terminalling, refining and processing

Oil and gas sector

Overview of Central and West Africa

INTERCONNECTIONS AND REGIONAL POOLS

Oil and gas sector

Besides the Chad-Cameroon pipeline,42 the most significant example of cross-border

The Regional Electricity Regulatory Authority (RERA).

Overview of Central and West Africa

RENEWABLE ENERGY AND CONSERVATION

Development of renewable energy

THE YEAR IN REVIEW/CONCLUSIONS AND OUTLOOK

Projects based on regional initiatives

Overview of Central and West Africa

Overview of Central and West Africa

Oil and gas sector

Exploration for and production of oil and gas

Considering an adequate return on the investment made.

Ownership and market access restrictions

Oil and gas

Transfers of control and assignments

Oil and gas

TRANSMISSION/TRANSPORTATION AND DISTRIBUTION

Vertical integration and unbundling

Currently developed by Sonangol Logstica, EP.

Transmission/transportation and distribution access

Oil and gas

Enacted by Law No. 26/12 of 22 August.

Terminalling, processing and treatment

More information available at www.angolalng.com.

Security and technology restrictions

Contracts for sale of energy

As previously mentioned, only non-tied agents use a market-based approach. Accordingly,

OVERVIEW OF CENTRAL AND WEST AFRICA1

UNITED ARAB EMIRATES486

ABOUT THE AUTHORS551

CONTRIBUTING LAW FIRMS CONTACT DETAILS 577