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 approvals.

Case study: European projects of common interest

In EU Member States, there has been an effort to ease the planning burden on key energy infrastructure projects (called projects of common interest or PCIs). According to the European Commission, PCIs may benefit from "accelerated planning and permit granting, a single national authority for obtaining permits, improved regulatory conditions, [and] lower administrative costs due to streamlined environmental assessment processes".

PCIs are key infrastructure projects that will help EU Member States to physically integrate their energy markets, enable them to diversify their energy sources and help bring an end to the energy isolation some of them are facing. PCIs are expected to increase competition in energy markets and strengthen energy security while contributing to climate and energy goals by integrating renewables.

Updated every two years, the first list of PCIs chosen by the European Commission was published in 2013, with the next one due in 2017. The European Commission selects projects which it considers will "enable the EU to meet its energy policy objectives of market integration and sustainability through an integration of renewable energy", "boost security of supply through an increased grid resilience and flexibility", and "allow for the attainment of the 10% electricity interconnection target".

2.3 Regulators

Before addressing the role of regulation in the power sector, it is worth considering briefly why power markets are regulated and the extent to which they are regulated (see the chapter on Regulating monopoly infrastructure). Power is a universal need, but the transmission and distribution networks are natural monopolies. Without regulation, the owners of these networks would potentially be able to affect entire economies, distort competition, limit access to the sector by competitors and make undeserved profits or at least operate to an extent independently of normal market forces. In addition, many generation technologies are inherently dangerous, andtherefore generators must adhere to technical and safety standards to keep the system safe. These considerations all feed in to the goal of protecting consumers' interests in:

• cost: keeping consumer bills as low as possible;

• access: making power accessible to all and ensuring secure supply through investment in maintaining and developing infrastructure; and

• safety: setting and enforcing safety standards.

While the detailed role of the regulator and its powers vary from jurisdiction to jurisdiction, in general, its role is to sit between the government, industry participants and consumers:

• implementing government policy;

• licensing and monitoring industry participants; and

• protecting the interests of consumers.

This is done through various measures, but can include monitoring, investigating and addressing anticompetitive behaviour, and assessing and reporting on risks to future security of supply to inform government decisions. Such powers are set out in sector specific laws, in licences and in quasi-statutory market participation rules. In some jurisdictions these functions could be split between a number of bodies.

Effective regulators, whether fully independent or a government department, share similar characteristics in that they are independent from industry, are fair and transparent, are clear in decision making (giving reasons and good justifications for actions), and are stable and predictable.

2.4 System operators

The role of a system operator can be undertaken by an independent entity, the owner of the power networks, a government entity, or an entity falling somewhere within the spectrum between fully government owned and fully independent.

Of its various functions, two functions of the system operator are considered particularly key: real time management of the system and long term planning (the latter role sometimes also involving other relevant entities such as network owner, regulator, or the government). Real time management entails balancing supply and demand on the network by despatching or constraining generation and by calling on a range of balancing services to maintain the frequency of the system within a specified safe range. A key task of the system operator is to avoid fluctuations or interruptions of power on the system both on a real time basis and also in the long term. Therefore, the system operator must also take a long term view, and carry out forecasting of demand and system planning, ensuring that investment is made where it is needed. This includes making provision for contingencies and emergencies, for example being able to call on reserves in case of high unanticipated demand, and by making arrangements for black start in case of widespread outages.

Case study: India's July 2012 blackouts

The network management function in India is carried out by Power System Operation Corporation Ltd, a wholly owned subsidiary company of Power Grid Corporation of India Ltd, the state-owned central transmission utility. Grid management in India is carried out on a regional basis, with a regional load despatch centre in each of the five regions, and a national load despatch centre operating at the national level for overall coordination.

At the end of July 2012, more than 700 million people in India were left without power in "the world's worst blackout of recent times". Three of India's five electricity grids failed at lunchtime, with power cuts affecting 20 of India's 28 states, along with the capital, New Delhi. The first grid to fail was the northern grid, which had also collapsed the previous day, quickly followed by the eastern grid, then the north-eastern grid.

The blackout caused widespread chaos, and led to fears that protests and even riots could follow if the country's electricity supply continued to fail to meet growing demand. The power minister blamed the collapse on states taking more than their allotted share of electricity.

An analysis compiled from investigation reports set out the circumstances that led to the outages. A large number of lines were out of service near the interface between the western grid and the northern grid before the outage, resulting in system insecurity. Instructions from the northern grid load despatch centre to shed loads were not followed by states in the northern region.

The blackouts highlighted the need for India to invest in its power infrastructure to meet the needs of its 1.2 billion people. The situation may also have been avoided if the system operator had effective powers to incentivise 'good' behaviour and penalise 'bad' behaviour.

Generally, market participants will have to provide a range of balancing services, some mandatory and others optional. These are set out in industry codes that participants must accede to or in bilateral contracts, depending on the type of service being provided.

The system operator role is generally 'revenue neutral' whether or not it carries out other roles as well. This means that it does not itself bear the prudent costs of managing the system but recovers its costs through mechanisms in its licence, industry codes or bilateral contracts, either directly from the state and/or from users through network usage charges.

Where a market operator is needed, the role may be taken on by the system operator, or by a separate entity. The role of a market operator is to balance the system in real time against contracted positions made by participants. Where participants do not adhere to forecast or contracted positions and therefore use or consume too much or too little power, the market operator must take action tobalance the system. Again, the market operator does not bear the costs of taking such actions, instead charging participants who caused the imbalance.

2.5 Industry participants

Finally, the power industry would not function without the key industry stakeholders which are regulated by the bodies described above where they are not all stateowned. Generators provide the required power, with investment in new stations carried out either by government or by private investors, depending on the structure of the market.

Network owners and distributors own the transmission and distribution lines. The distinction between transmission and distribution can vary and is not always clear cut; the distinction is sometimes made by reference to high voltage and low voltage lines, to regions or to function and purpose. As natural monopolies, these are key assets that are usually kept separate to varying degrees from generation and retail interests in order to avoid market distortion, for example through more favourable terms for companies related to the network owners.

Interconnectors are essentially network lines that carry power across borders, whether internationally (for example, across Europe) or across state lines (for example, across American states). Interconnectors are developed and operated either by independent companies or by network owners.

Finally, retailers purchase power from generators and sell it to end consumers. The power is conveyed across lines owned by networks owners who generally charge generators for use of the lines.

While there are usually exceptions or exemptions for small companies, each of these participants must usually hold a licence to carry out its activities. Regulators monitor compliance with licence obligations, carrying out investigations where necessary and taking enforcement action when breaches are discovered.

Case study: UK privatisation

The UK was at the forefront of liberalising its electricity sector starting from the mid-1980s when the Energy Act 1983 opened the supply market to beyond the 12 area boards existing at that time. In the privatisation programmes that followed in the 1980s and 1990s England and Wales were also pioneers in creating a wholesale market where electricity generators could sell the electricity in near real time to match demand on the supply side (the 'pool' system operated in England and Wales between 1990 and 2001). The privatisation programmes were carried out along jurisdictional lines:

• England and Wales. The restructuring and privatisation programme started in the early 1990s, and saw retail market opening introduced in phases in the period up to 1999.

• Scotland. The vertically integrated energy boards were privatised in 1991 and nuclear interests were privatised in 1996.

• Northern Ireland. The electricity industry was privatised between 1992 and 1993.

Following privatisation, the landscape of the UK electricity market has changed for a variety of reasons, not least to stay in line with changes arising out of EU legislation and in particular the principles of:

• free competition;

• transparency;

• free access to the network; and

• security of supply.