5EnergyNews from Brussels

June 2011

Welcome to Hill & Knowlton’s monthly update on key European regulatory developments that will directly impact businesses in the energy sector.

Nuclear Energy Latest Developments

Following the Fukushima events, the European Commission and the European Nuclear Safety Regulators Group (ENSREG) agreed on 25 May the criteria for the “stress tests” of the 143 nuclear power stations across the EU.

From 1 June, nuclear power plant operators are to answer the stress tests questionnaire, also providing supporting docu-ments, studies and plans. National regulators will then draw up a national report assessing whether operators’ questionnaire answers are credible, and these reports will then be peer-re-viewed by multinational teams consisting of a European Com-mission representative and six members from other national regulators. The peer review may also consist of site inspections.

The scope of the stress tests will cover the risk from earthquake and flooding; risk from loss of electrical power, including a station blackout; loss of the ultimate heat sink; the means to

protect from and to manage loss of core cooling function; the means to protect from and manage loss of cooling function in the fuel storage pool; and the means to protect from and to manage loss of containment integrity. Indirect threats such as disturbance from the power grid impacting AC power distri-bution, forest fires, or plane crashes are also included.

Despite pressure from the Energy Commissioner, Günther Oet-tinger, and countries such as Germany and Austria, the scope was not widened to include preventive measures for terrorist attacks. This was resisted by most Member States, especially the UK, France and Sweden, who argued that the EU does not have a mandate for nuclear security, and that the requirement to make the results public may endanger security of the sites. These issues will be dealt with separately, and a working group has been set up to further discuss.

In terms of next steps, a progress report will be presented to the summit of national heads of state and government in December, followed by the final report in June 2012 once the peer review process is completed.

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It should also be noted that the G8 has called for more stringent international nuclear safety regulations. European Commission President Jose Manuel Barroso has suggested that this could consist of a review of the IAEA’s nuclear safety convention, while Russia wants the IAEA’s standards to become mandatory.

Impact & OpportunitiesThe compromise deal on the stress tests would appear to sat-isfy many industry demands, including giving responsibility to operators for completing the tests, and excluding terror-ism from the scope of the tests. It remains to be seen how the peer review process will work in practice, and this should be watched carefully.

It is important for industry to be seen as open, transparent and cooperative, but should be wary of ‘rocking the boat’ too much. Any large-scale campaign at this stage pushing the benefits of nuclear leaves the industry open to allegations of spin from anti-nuclear campaigners; instead the focus at this stage should be on stressing cooperation in conducting the tests, and once these are complete a proper ‘relaunch’ can take place. There does remain, however, scope for engagement in events and campaigns regarding the energy mix, to discuss objectively the continued role for nuclear power in Europe.

Biofuels Latest DevelopmentsEarly conclusions of an EU commissioned study on the ef-fects of EU biofuel policy on land-use patterns have called into question the EU target of sourcing 10% of transport fuel from renewable energy sources by 2020. The study, which has not yet been officially published, indicates that the in-direct land-use change effect of cultivating biofuel feedstock can be “very strong” and may entail more serious unintended consequences than initially thought.

According to the findings, the increase demand for biofuels places an additional strain on current agricultural production for resources. Besides the ethical considerations associated with growing fuel sources at the expense of food corps, the environmental impact of converting additional natural land into agricultural soil is believed to be exacerbating global warming as farmers continue to destroy rainforests, needed to store carbon dioxide, in an effort to feed expanding global biofuel markets.

A similar conclusion was put forward in a 2010 EU commis-sioned study which also acknowledged that indirect land use change contributes to greenhouse gas output.

To date the EU has undertaken more than 15 studies on different biofuel crops; most have concluded that over the next decade, Europe’s biofuels policies might have an indirect impact equal to 4.5 million hectares of land, an area the size of Denmark. In a more international context, these sentiments were also ech-oed in a 2010 UN report which acknowledged that the growth of bioenergy has been a cause for concern because of its po-tential negative impact on food security through crowding out of staple food production and on the environment due to natural resource scarcity and intensive agriculture production. Having long been presented as one of the most credible and sustainable solutions for breaking Europe’s dependence on fossil fuel (especially in the transport sector), the growing body of evidence questioning its green credentials may prove sig-nificant in shaping how the EU will continue to pursue its 2020

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renewable energy target. On the basis of these recent assess-ments, the European Commission will have to decide this July whether or not EU laws governing biofuel sustainability need to be changed.

On the global stage, some initial steps have already been taken towards ensuring more sustainable biofuel production. In May, the Global Bioenergy Partnership – a collaborative platform composed of countries and international organisations, includ-ing the European Commission, USA, and China – adopted a set of voluntary guidelines for helping countries assess and devel-op sustainable production and use of bioenergy. To reach its self-imposed targets, the EU is likely to resort to more stringent actions. According to sources familiar with the issue, the EU is likely to pursue one of two options. The first would be to pe-nalise biofuels which have been farmed in a manner deemed to invoke in-direct land-use. The second would be to extend existing sustainability standards making it harder for less-green biofuel to qualify.

Impact & OpportunitiesDecisions taken by the EU in the coming months are likely to have a significant bearing on the future of the European biofuel industry. For instance, by raising an EU-wide sustain-ability benchmark, a danger exists that the European biofuel industry may no longer be viable as it may be unable to com-pete with more unregulated foreign imports. As a conse-quence, the EU’s plans to establish an annual biofuel market worth €11.4 billion in Europe may also be put in doubt.

Industry should therefore seize the opportunity of these dis-cussions and seek to input whenever possible, thus ensuring an informed dialogue.

Competition and Energy Latest DevelopmentsThe EU has recently held a public consultation which will feed into the forthcoming guidelines for State aid in the con-text of the EU Emissions Trading Scheme (EU ETS). The new guidelines will define the detailed compatibility criteria of these state aid measures with the internal market.

One would recall that the EU established the EU ETS in or-der to reduce the amount of CO2 emissions produced by European industries. By allocating emission allowances to individual operators, energy efficient industries are now able to trade their surplus CO2 allowance with industries who are unable to remain within their given emission allowance. By attaching economic reward for greener practice, this system should thus incentivise a shift towards a more carbon neutral Europe.

To avoid industry sectors re-locating their operations to non-EU countries, where emissions allowance do not currently ex-ist – a phenomenon known as ‘carbon leakage’ - the scheme was again modified in 2008. Individual Member States are now able to provide state aid to sectors deemed to be par-ticularly exposed to this risk (i.e. energy-intensive industries). In essence, this means that national governments are able to financially support industries to compensate for the costs as-sociated with trying to adhere to the emissions cap.

Ensuring that aid given by Member States to industries does not distort the market (i.e. by giving one industry an unfair advantage over another) or that the provision of aid doesn’t lessen the incentive for industries to pursue greener oper-

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Further information:

Andy Lawrence

Senior Corporate Counsel & Chairman WW Corporate Practice Committee+44 7768 034 000

Glen Hodgson

Director & Head of Energy Practice, Brussels+32 2 737 95 39

ating practices (i.e. using state aid as a crutch rather than a means to address causes for carbon leakage problems) is the focus of the forthcoming state aid guidelines currently be-ing complied by the EU. Once complete, these guidelines will help national governments understand how they may help national industries without interfering with the smooth func-tioning of the internal market or harm the competitiveness of EU companies.

The exact recommendations that will be made by the guide-lines are still unknown as the consultation, on which the core content is likely to be based, has only recently finished. Judg-ing by the questions posed during the consultation, it can however be assumed that providing state might not be an easy option. What’s more, it is clear is that the guidelines will need to strike a delicate balance between reducing potential disadvantages for European industries, on the one hand, and not to undermine the EU ETS, on the other. Equally, guide-lines must be careful to allow for sufficient incentives to be given for investment in more efficient technology.

Impact & Opportunities

Ensuring that the revision of these state aid guidelines is bal-anced will be essential for companies who find themselves heavily reliant on government subsidies in order to meet their CO2 caps. These companies should consider involving themselves in future revision debates, and stress the need of having access to flexible government aid in order to ensure European competitiveness. In addition, with a view towards regulatory certainly, all companies are likely to have an inter-est in seeing the new guidelines being adopted and applied to Member States quickly and evenly across the EU.

The recent consultation provided industry stakeholders with a key opportunity to put forward their case in the de-bate regarding carbon leakage. For companies who believe themselves to be directly impacted by a possible change to these guidelines, but were not able to contribute to the con-sultation, they may still be able to convey their viewpoints through direct outreach to relevant decision-makers.