Power industries: structures and legal frameworks

Marianne Anton Munir Hassan CMS London Dalia Majumder-Russell Linklaters

1. Introduction

Many power sectors around the world have walked down the path of market liberalisation, restructuring, independent regulation, private sector investment and privatisation to varying extents and with varying degrees of success. Wherever they have ended up on that scale, the tramlines of reliable regulatory structures guide the sector in this endeavour. Ultimately the success of the sector in any jurisdiction or sphere will depend partly on the political will of the state governments to put in the necessary legislative and regulatory architecture and respond to the changes in the sector, as well as on the buy-in from the industry. Contracts are by their nature agreed positions of different stakeholders and laws, while ostensibly dictated by the Executive, in practice reflect a consensus reached by those regulating and being regulated.

The power sector is far from static and the law has had to keep pace with each transformational turn in the sector. Governments have had to adapt their legal and regulatory frameworks time and again, recognising that decisions being made now on how to replace ageing infrastructure or support the ravenous hunger for electricity of fast-developing economies will define the sector, and lock in technology choices, for decades. Market reforms are back in vogue in some places, but often look little like the economics-driven liberalisation programmes of the 1990s. Legal forms have diverged and the sector's approach has become increasingly fragmented, with often very different legal, regulatory and contractual arrangements being adopted for sub-sectors in the sector. And of course projects continue to have to deal with each country's specific industry arrangements, with each market change leaving behind a legacy of quirks and esoteric approaches that then frame the debate for the next change. Nevertheless, there are common component parts and general trends that can be identified across many jurisdictions. As noted, the structure of and drivers for power industries across the world varies, but there are also many comparable elements. This chapter provides an overview of the main elements and considerations in looking at legal and regulatory frameworks describing the key regulatory bodies involved, contracting and licensing structures and market arrangements. It could be considered as describing a kind of norm that may need to be adjusted to respond to the specific issues arising in any particular context.

2. Key bodies

Several key bodies play essential roles in the power industry. Because of the historically perceived nature of power networks as a natural monopoly, and with the sector in many countries being dominated by an incumbent utility, the power sector is a regulated industry (see the chapter on Regulating monopoly infrastructure). Governments usually set energy policy, environmental and planning bodies set out requirements that must be met for development of power networks and generation, regulators monitor and enforce compliance with laws and industry codes, system operators balance power networks, and industry bodies (generators, network owners, distributors, retailers) must comply with the legal framework to participate in power markets. Of course, there are many variations on this basic structure.

2.1 Government

The government ministry or department responsible for overseeing power normally sets the policy, targets and programmes to deliver the energy needs of the jurisdiction. This usually includes consulting with industry and economic experts, carrying out public consultations, and drafting laws. In the power industry, laws regulate participation (usually by granting licences or exceptions), applicable safety and security standards and measures, environmental protection measures, emissions targets and the government's and/or the sectoral regulator's powers to intervene in the market.

While governments are generally cautious about changing energy policy too frequently, there are examples around the world which serve as cautionary tales. The regulatory uncertainty engendered by too frequent or retrospective changes can deter investment in vital infrastructure, and undercut market confidence, leading to increasing power prices across all sections of consumption.

Case study: UK – Gone with the wind

The Renewables Obligation was introduced in 2002 by the UK government to provide incentives for the deployment of large-scale renewable electricity in the UK, and was due to operate between 2002 and 2017. However, in June 2015, the government announced an end to new subsidies for onshore wind farms by legislating to close the scheme across Great Britain (but not Northern Ireland) one year early from 1 April 2016. The reasoning for this was:

We want to help technologies stand on their own two feet, not encourage a reliance on public subsidies. So we are driving forward our commitment to end new onshore wind subsidies and give local communities the final say over any new windfarms.

This change will likely have an impact on wind farm developments which have been held up through persistent litigations and continuous court appeals. This will have a particular impact in Scotland where there is a significant onshore wind energy sector, highlighting the tension between local political priorities which are supportive of onshore wind and national political agendas which prioritise budget control.

The full impact of the swift about-face on the UK power sector remains to be seen. However, when balancing costs the government has the power to 'pick the winners', with the impact on solar and wind technologies being to deter future deployment.

2.2 Environmental and planning bodies

In addition to energy ministries and laws specifically designed to implement energy policy and regulation, government environmental and planning bodies (whether at national, regional or local levels) also have a role to play in the development of power markets. As with all major infrastructure projects, power generation projects and network expansions or reinforcements must obtain environmental and planning...