Energy: Sixth Edition

Energy
2018
Sixth Edition
Contributing Editors:
Philip Thomson & Julia Derrick
GLOBAL LEGAL INSIGHTS – ENERGY
2018, SIXTH EDITION
Contributing Editors
Production Editor
Andrew Schofield
Senior Editor
Rachel Williams
Group Consulting Editor

Alan Falach
Group Publisher
Rory Smith
We are extremely grateful for all contributions to this edition.

Special thanks are reserved for Philip Thomson and Julia Derrick for all their assistance.
Published by Global Legal Group Ltd.

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October 2017
CONTENTS
Preface Philip Thomson & Julia Derrick, Ashurst LLP
Australia Graeme Gamble & Chelsea Herman, Herbert Smith Freehills 1

Austria Thomas Starlinger, Anita Trenkwalder & Eva Kubr,
Starlinger Mayer Attorneys at Law 11
Benin Jeffrey Gouhizoun, OTL Conseils 16
Bulgaria Mariya Derelieva, Georgiev, Todorov & Co. 20
Canada Ken Pearce, Sharon Wong & Bryson Stokes, Blake, Cassels & Graydon LLP 27
Chile Rodrigo Ochagavia, Ariel Mihovilovic & Gerardo Otero,
Claro & Cía. Abogados 34
Colombia Adriana Martínez-Villegas, Martinez Cordoba & Abogados Asociados 45
Cyprus Michael Damianos & Christina Aloupa, Michael Damianos & Co LLC 50
Finland Andrew Cotton, Björn Nykvist & Laura Leino, HPP Attorneys Limited 60
Germany Matthias Hirschmann & Alexander Koch, Hogan Lovells International LLP 72
Ghana David Addo-Ashong & Johnnie Klutse, Ashong Benjamin & Associates 80
Japan Hajime Kanagawa, Kanagawa International Law office 96
Kenya Rubin Mukkam-Owuor & Elizabeth Kageni, JMiles & Co. 107
Macedonia Dragan Dameski, Debarliev, Dameski & Kelesoska, Attorneys at Law 117
Mozambique Ilidio Bambo & Taciana Peão Lopes,
TPLA – Taciana Peão Lopes & Advogados Associados 126
Pakistan Aemen Zulfikar Maluka & Pir Abdul Wahid, Josh & Mak International 134
Portugal Mónica Carneiro Pacheco & João Marques Mendes, CMS Rui Pena & Arnaut 140
Serbia Đorđe Popović, Petrikić & Partneri AOD in cooperation with
CMS Reich-Rohrwig Hainz 150
Slovenia Matjaž Ulčar & Polona Božičko, Ulčar & Partners 158
South Africa Lara Bezuidenhoudt, Katy-Lynne Kay & Margo-Ann Werner,
Fasken Martineau (incorporated in South Africa as Bell Dewar Inc.) 167
Switzerland Phyllis Scholl & Jean-François Mayoraz, Bär & Karrer AG 173
Tanzania Lucy Sondo, Edwin Kidiffu & Henry Sondo, Abenry & Company, Advocates 180
Turkey Omer Kesikli, Kesikli Law Firm 187
Ukraine Dmytro Fedoruk, Zoryana Sozanska-Matviychuk & Yulia Brusko,
Redcliffe Partners 205
United Kingdom Julia Derrick & Justyna Bremen, Ashurst LLP 218
USA Robert A. James & Stella Pulman, Pillsbury Winthrop Shaw Pittman LLP 238
Uzbekistan Umid Aripdjanov, Centil Law Firm 249
Venezuela Juan Carlos Garantón-Blanco & Federico Araujo, Torres, Plaz & Araujo 259
PREFACE
W
e are pleased to present the sixth edition of Global
Legal Insights – Energy. The book contains 28 country
chapters, spanning the six major continents of the world
and providing a truly international and far-reaching snapshot of energy
policy, industry and regulation across the globe.
The book is designed to provide general counsel, financial institutions,

government agencies and private practice lawyers with a comprehensive
insight into the most important trends and developments in the energy
market across a range of key jurisdictions. As usual, there are common
themes, such as efforts by countries that have petroleum reserves
to develop or maintain a successful oil and gas industry against the
backdrop of lower oil prices, an increasing focus on renewable and
cleaner energy, and ambitious energy infrastructure projects designed
to maintain energy security.
In producing Global Legal Insights, we have gathered together the

views and opinions of a group of leading energy practitioners from
around the world in a unique volume. The authors were asked to
provide personal views on practical issues, policy issues, strategic
issues, and legal and regulatory issues in their own jurisdiction, with a
free rein to decide the focus of their own chapter.
One of the attractions of comparative analysis is that developments in

one jurisdiction can inform understanding and practice in another.
Our thanks to all the authors for their contributions, and particular thanks
to our colleague Justyna Bremen for her invaluable help. We hope that
this book will prove interesting and stimulating reading for you.

Ashurst LLP
Australia
Graeme Gamble & Chelsea Herman
Herbert Smith Freehills
Overview of the current energy mix, and the place in the market of different
energy sources
Current energy market
The Australian energy and resources market has undergone significant change in recent
years. Previous investment in the LNG industry has positioned Australia to become the
world’s largest exporter of liquefied natural gas (LNG) by 2019. Investment in the mining
industry has resulted in material growth in iron ore production and export. However,
investor confidence has been affected by volatility in commodity prices across the globe
and changes in both domestic and international supply and demand. Australia is also
in the process of transitioning to a lower-emissions economy. This has led to shortages
in gas supply and increases in electricity prices as aging, high-emissions, coal-fired
power stations are decommissioned and renewable and other new energy infrastructure
is constructed.
Overall, economic activity in Australia has increased in 2017, reflecting a gradual rise in
commodity prices and increased demand.
According to the Australian Energy Update for 2017 published by the federal Department
of Environment and Energy (Energy Update 2017), Australian energy consumption and
production rose by approximately 2% and 3% respectively in 2015–16. Notably:
• oil production fell by 3%, continuing its long-term decline;
• black coal production decreased by 1%;
• natural gas production increased by 27%, largely due to the increase in coal seam gas
production in Queensland (QLD); and
• renewable generation increased by 12% in 2015-16, largely due to strong growth in
hydropower. Renewables comprised 16% of Australia’s total generation in the 2016
calendar year.
Rapid growth in LNG export markets has driven an increase in gas production and energy
use across the nation. Natural gas production increased significantly more than other
fuel types, with an annual average growth of 27% in 2015–16. Coal seam gas production
accounted for more than 60% of east coast gas production in 2015–16. The growth of
coal seam gas is largely due to demand for feed gas from the three exporting QLD, LNG
projects.
Australian energy exports grew by 4% in 2015–16. Energy imports increased by 1% due
to a growth in the imports of refined oil products, despite a 20% fall in imports of crude
oil and refinery feedstocks.
GLI - Energy 2018, Sixth Edition 1 www.globallegalinsights.com

© Published and reproduced with kind permission by Global Legal Group Ltd, London
Herbert Smith Freehills Australia
The Australian mining sector has experienced an economic upturn in 2017 due to increased
commodity prices, increased output and new capital investment throughout the nation.
Increased global demand for lithium fuelled investment and drove M&A activity. One of
the largest mining M&A transactions in Australia for several years took place in September
2017, with Yancoal acquiring Rio Tinto’s Hunter Valley mines for US$2.69 billion.
The BMI Research’s Australian Oil and Gas Report for the fourth quarter of 2017 (BMI
Report) notes the following key proponents in Australia’s energy industry:
• Woodside is the largest producer of liquids in Australia, accounting for approximately
56% of the market share. Santos ranks second (with a market share of 34%);
• Santos is the largest gas producer in Australia (49%), largely due to strong production
growth from its Gladstone LNG project. Woodside has a market share of 23%; and
• BP holds the largest share of the downstream sector (32.3%), owning the largest
refinery in Perth. The other major international proponents include Viva Energy
(26.5%), Caltex (23.4%) and ExxonMobil (17.8%).
Future energy market
It is difficult to predict future trends in the Australian energy market given global volatility
in recent years. Notwithstanding this, the BMI Report forecasts that:
• Australia’s natural gas consumption will grow at a rate of 1.5–2% per annum over
the next 10 years;
• Australia’s natural gas production will increase at an average rate of 18% over the
next two years, noting that three new large LNG export projects will drive growth and
consequently increase output from feed gas fields;
• refined fuels consumption in Australia is expected to grow by 1–2% per annum over
the next 10 years, primarily driven by an increase in vehicle numbers and demand
from domestic mining and agricultural sectors; and
• Australia is on target to overtake Qatar to become the largest exporter of LNG by 2019.
Given Australia is transitioning to a lower-emissions economy and future government
policy is likely to support investment in renewables, we expect to see an increase in
investment in renewable energy in the future.
Despite slowing global demand for commodities and declining iron ore prices, emerging
technologies present an opportunity for the Australian mining sector. According to
Australia’s Chief Economist, Mark Cully, the Australian mining industry may capitalise on
the rapid growth of global battery markets (which are growing at a rate of approximately
15% per year). With the fourth-highest reserves of lithium and cobalt in the world,
Australia is well placed to meet the increasing global demand for battery commodities.
Strong demand for lithium is expected over the next 10 years, as more electric vehicles
and energy storage applications are manufactured globally.
Changes in the energy situation in the last 12 months which are likely to have an
impact on future direction or policy
Australian energy crisis
As mentioned above, Australia is transitioning to a lower-emissions economy. This has
led to shortages in gas supply and increases in electricity prices as aging, high-emissions,
coal-fired power stations are decommissioned before replacement renewable infrastructure
or other new energy infrastructure is constructed.

Australia’s residential electricity prices increased by 39% between 2011 and 2017, with
peak grid demand rising in Queensland and New South Wales. The closure of the Northern
power station in 2016 and Hazelwood power station in 2017 significantly reduced the
amount of electricity available to the market, and increased pressure on existing sources.
These closures withdrew the equivalent of approximately 50% of South Australia’s
generation capacity from the Australian domestic electricity market. In September
2016, South Australia experienced a state-wide blackout that left 1.7 million people and
businesses without power. The event triggered national discourse on the importance of
securing supply, despite price concerns.
Australia’s residential gas prices have risen by 41% over the last six years while supply
has been reduced to meet LNG export commitments. LNG exports increased by 46%
from 2015–16 with Queensland LNG projects drawing on southern Australian reserves.
As concerns over a shortage of domestic gas supply and rising prices continue to grow,
the Commonwealth Government has come under increasing pressure to intervene and take
steps to minimise the impact of a potential shortfall in the domestic gas market. This has
led to the introduction of the Australian Domestic Gas Security Mechanism (see below).
Financial assistance to encourage exploration activity
Mineral exploration spending has dropped dramatically since its $1 billion peak in the June
quarter of 2012. However, the June quarter of 2017 has seen a 9.9% jump in spending,
restoring optimism to the market.
In order to encourage exploration investment in Australia’s resources sector, the Federal
Government announced in the 2016–17 Budget that $100m in funding would be provided
over four years for the ‘Exploring for the Future’ programme. In a statement announcing
its Exploring for the Future programme, the Government recognised the risks posed by
the accelerated depletion of known deposits of non-bulk commodities leading to forecast
production declines over the next 15 to 20 years. The Exploring for the Future programme
funds geotechnical data acquisition and analysis by Geoscience Australia, and is aimed at,
among other matters, assisting the resources sector in targeting exploration to areas likely
to contain the next significant oil, gas and mineral deposits. The programme is focused on
northern Australia and some parts of South Australia.
The Exploring for the Future programme supplements the Australian Taxation Office’s
‘Exploration Development Incentive’, under which investors are incentivised through
certain tax benefits to invest in small exploration companies undertaking greenfield
mineral exploration in Australia.
Following the 2016–17 Budget announcement, the Australian Petroleum Production and
Exploration Association (APPEA), Australia’s national body representing Australia’s
oil and gas industry, released a statement noting that due to the challenging conditions
facing both the global and Australian industry, it is more important than ever to ensure the
policy and regulatory framework governing the oil and gas industry in Australia remains
competitive and encourages further exploration and development activity. APPEA opined
further that leveraging investments to support industry growth should be a key feature of
future Government policy.
In September 2017, the Government announced a new Junior Mineral Exploration Tax
Credit (JMETC) to replace the Exploration Development Incentive credit regime.
The JMETC will provide tax incentives for exploration companies to encourage future
investment in the resources sector, particularly in greenfield minerals exploration, which
has declined by almost 70% in the last five years.

Developments in government policy/strategy/approach

The Finkel Review
Australia is in the process of transitioning to a lower-emissions economy. This process
creates certain challenges in relation to the security of energy supply. The Council of
Australian Governments (COAG) is the peak intergovernmental forum in Australia and
is responsible for managing matters of national significance. In October 2016, the COAG
Energy Ministers commissioned an independent review into the future of the national
electricity market in order to identify these challenges and provide recommendations for
overcoming them. The report is commonly known as ‘the Finkel Review’, named after
the Chair of the Review Panel, Dr Alan Finkel. The final Finkel Review was released on 9
June 2017 and recommended that a ‘Clean Energy Target’ be introduced to lower electricity
prices and reduce emissions. The Clean Energy Target requires electricity companies to
provide a set amount of power from low-emission sources, such as renewables. This
would operate in a similar way to the existing Renewable Energy Target (RET) scheme
which aims to generate 20% of Australia’s energy from renewable sources by 2020. The
Finkel Review recommends that the RET should continue in its current form until the end
of 2030 with the Clean Energy Target operating alongside it from 2020 as a supplementary
policy. There are a number of additional recommendations in the Finkel Review, including
increasing the Australian Energy Market Operator’s role to gather information on supply
contracts to increase gas market efficiency, and limiting the life of coal-fired plants.
Renewable energy regulatory bodies and funding
The Australian Renewable Energy Agency (ARENA) was established in July 2012
under the Australian Renewable Energy Agency Act 2011 (Cth), with the objective of
improving the competitiveness of renewable energy technologies and increasing the
supply of renewable energy in Australia. ARENA has $2bn in funding to facilitate the
commercialisation of renewable energy projects until 2022.
The Clean Energy Finance Corporation (CEFC) was allocated funding and established in
2012 under the Clean Energy Finance Corporation Act 2012 with the stated objective of
facilitating “increased flows of finance into the clean energy sector”.
In March 2016, the Australian Government announced the establishment of a Clean Energy
Innovation Fund (CEIF). The $200 million CEIF will be jointly managed by ARENA and
CEFC. The CEIF will invest debt, equity, or debt and equity in emerging clean-energy
technologies that have moved beyond the research and development stage but that are
not yet commercially ready to attract sufficient private sector capital. ‘Clean energy’
technology includes renewable energy, energy efficiency and low-emissions technologies.
Target projects for the CEIF will include large-scale solar with storage, off-shore energy,
biofuels and smart grids. According to Australian Government policy guidance materials,
investments “will have the primary purpose of earning income or a profitable return”.
The FIRB Ausgrid decision
Under Australian foreign investment laws, proposals by foreign entities to acquire
material interests in Australian land, assets and companies generally requires approval of
the Treasurer of the Commonwealth of Australia, who acts on the advice of the Foreign
Investment Review Board (FIRB) established under the Foreign Acquisitions and Trade
Act 1975.
On 19 August 2016, the Treasurer, Hon. Scott Morrison MP, blocked the proposed
acquisition of a 50.4% interest in the lessee of the network assets of Ausgrid, the New

South Wales electricity transmission and distribution business, by investors from

mainland China and Hong Kong. The Treasurer, on the advice of FIRB, concluded that
the acquisition would be contrary to Australia’s national interest. The Treasurer’s decision
drew widespread media attention and comments from the Chinese Ministry of Commerce.
The Ausgrid decision is an example of increased scrutiny by FIRB of foreign acquisitions
of critical infrastructure in Australia; however, it should be noted that there have only been
five prohibitions of foreign investment proposals by the Treasurer since 2000.
Developments in legislation or regulation

Australian Domestic Gas Security Mechanism
On 27 April 2017, the Australian Government announced the introduction of export
restrictions on LNG. The measures are implemented through an ‘Australian Domestic
Gas Security Mechanism’ (Mechanism) which came into effect on 1 July 2017. The
Mechanism gives the Government the power to restrict exports of LNG when there is
a shortfall of gas supply to Australian consumers and intends to restore certainty to the
market.
The Mechanism does not automatically impose export restrictions or licensing requirements,
but only comes into effect following the extensive review of the market by the Minister for
Resources. The Minister first needs to be satisfied, on reasonable grounds, that there will
not be a secure supply of natural gas available for Australian consumers over the next 12
months. In order to determine whether there will be sufficient gas available, the Minister
will consult with relevant market bodies and government agencies, relevant exporters of
LNG from Australia, stakeholders and selected Australian Government Ministers, including
the Prime Minister and the Ministers for Energy, Trade and Industry.
Based on information obtained from relevant market bodies and consultations with LNG
projects, if the Minister determines that the next year will be a shortfall year, the Minister
will determine the amount of gas required in addition to gas currently contracted for
domestic supply to the market to guarantee an adequate supply to Australian consumers.
This figure reflects that part of the shortfall that the export of LNG has contributed to
and which can be remedied by imposing export controls on net-deficit LNG projects.
Concurrently with determining this figure, the Minister determines each LNG project’s net
market position. This process involves assessing each LNG project to determine whether
the LNG project is drawing from, or adding to, the quantity of gas in the domestic market.
A LNG project that is assessed as being in ‘net-deficit’ may be subject to export restrictions.
Alternatively, where a LNG project is assessed as either having no effect on or that is
positively supplying the domestic market, it will be considered a ‘net contributor’ and may
not be subject to export restrictions. Export restrictions are imposed by issued ‘export
permissions’, which will either allow for an unlimited volume of LNG to be exported or
only allow export of LNG up to a maximum capped volume.
The Minister formally issued notification of his intention to consider whether to determine
2018 as being a domestic shortfall year on 24 July 2017. Following the Minister’s
announcement, the Australian Competition and Consumer Commission issued a report
projecting an expected gas shortfall of 54 petajoules in 2018 and 48 petajoules in 2019.
On 27 September 2017, the three largest gas companies in Australia signed a deal with
Prime Minister Malcolm Turnbull guaranteeing that gas will be diverted to the Australian
domestic market to fill the expected demand shortfall. Origin, Santos and Shell have
also agreed to provide regular reporting to the Australian Competition and Consumer

Commission on sales, offers and bids. As a result, the Mechanism will not be triggered
for 2018, with the three exporters agreeing to provide up to 107 petajoules to fill the
anticipated shortfall over the next two years.
Fracking
Following a pre-existing moratorium imposed by the State of Victoria in August 2012, on
7 March 2017 the Victorian State Government passed legislation banning the exploration
and development of all onshore unconventional gas in Victoria, including hydraulic
fracturing and coal seam gas. In addition, the existing moratorium on the exploration and
development of conventional onshore gas was extended to 30 June 2020.
The introduction of this legislation closely followed the COAG Energy Council’s call
to end State moratoria on unconventional gas development, and claims made by both
the Australian Energy Market Regulator and the Australian Competition and Consumer
Commission that the east coast of Australia is at risk of a supply shortfall as early as 2019.
The announcement has since prompted warnings by APPEA that a perpetuated ban on
conventional gas extraction would further stifle competition in Victoria’s gas industry,
with adverse consequences for consumers.
The Northern Territory Government in September 2016 also imposed a moratorium on
hydraulic fracturing of unconventional gas resources within the Northern Territory. This
moratorium is expected to remain in place until the completion of an inquiry and further
consultation with Northern Territory stakeholders.
In September 2017, the Western Australian Government announced the implementation
of a ban of hydraulic fracturing of unconventional gas resources for petroleum titles
in a designated ‘fracking ban area’ across the South-West of the State, Peel and Perth
metropolitan area. In addition, the State Government announced a state-wide moratorium
on fracking across Western Australia. This moratorium may be lifted subject to the results
of a State Government-ordered, independent scientific inquiry to assess the level of risk
and implications of fracking. It is worth noting that a similar inquiry was conducted by the
Western Australian Parliament’s Standing Committee on Environment and Public Affairs
in November 2015, which ultimately concluded that the exploration and production of
unconventional gas through hydraulic fracturing could produce numerous benefits to WA,
with negligible risks to the environment and community.
International and domestic climate change developments
In April 2016 under the United Nations Framework Convention on Climate Change,
Australia, along with over 150 other countries, signed the Paris Agreement on climate
change (Paris Agreement). The primary objective of the Paris Agreement is to reduce net
increases in man-made greenhouse gas emissions.
Following ratification on 9 November 2016, the Australian Government has indicated
that Australia targets a reduction in emissions to 26–28% on 2005 levels by 2030. In this
regard, the Australian Government has commenced implementation of the ‘Direct Action
Plan’, which has two main elements:
1. emissions reduction: accrediting emissions reduction and abatement projects to
earn ‘Australian carbon credit units’, which can be purchased by the Government at
auction through the Emissions Reduction Fund; and
2. safeguard mechanism: large emitting facilities must comply with reporting obligations
and will be held accountable to baseline emissions levels, which they must not exceed
except by surrendering prescribed carbon units.

The Safeguard Mechanism is relevant for any business which operates, or which has
commercial arrangements involving, facilities in Australia with material greenhouse gas
emissions. This includes electricity, gas and coal facilities.
Reform of Australian foreign investment law
On 1 December 2015, a package of new foreign investment legislation (Amended Foreign
Investment Law) commenced operation, representing the most significant reform of
the Australian foreign investment legislative framework since it was introduced. The
stated purpose of the Amended Foreign Investment Law is to strengthen the integrity
of Australia’s foreign investment framework, ensuring Australia maintains a welcoming
environment for foreign investment that is not contrary to Australia’s national interest.
The Amended Foreign Investment Law has a significant impact on the energy sector. In
particular, under the Amended Foreign Investment Law:
• exploration tenements and permits are generally exempt from FIRB approval;
• distinct approval regimes apply for acquisitions by foreign persons, agreement country
investors and foreign government investors in operational and producing mining and
petroleum projects;
• exemption certificates are available for acquisitions that are part of a programme to
acquire mining tenure; and
• up-front, non-refundable fees for applications to FIRB now apply.
Changes to disclosure requirements for mining companies
Companies listed on the Australian Securities Exchange (ASX) are required to keep the
market informed by disclosing information in relation to their mining projects when
material changes occur. There are a number of disclosure obligations imposed by the
ASX, including: the prompt reporting of any changes in mineral resources or ore reserves;
any mining, exploration or tenement activities; and estimates for material projects.
In late 2016, the Australian Investment Securities Commission released guidance
material on forward-looking statements in relation to financial information associated
with production targets. The guidance required mining companies considering a
new investment to have ‘reasonable grounds’ that funding for that project would be
available before publishing a production target. The increased obligation imposed
significantly more onerous requirements on ASX-listed mining companies, and following
industry consultation, guidelines were re-issued in October 2016 which broadened the
circumstances in which disclosure will be permitted. Relevant assumptions must also be
disclosed.
Judicial decisions, court judgments, results of public inquiries

Apache v Santos
In the first decision of its kind in Australia, the Supreme Court of WA has ruled on a non-
operator’s power to remove a joint venture operator for material breach.
The Supreme Court held in Apache Oil Australia P/L & Ord v Santos Offshore P/L
[2015] WASC 318 that the Operator committed material breaches of the joint operating
agreement by taking steps to develop a discovery of offshore petroleum in advance of
operating committee approval.
The decision is instructive for all joint venture participants in clarifying the nature of the
joint venture relationship and the boundaries within which operators must act.

Nuclear Fuel Cycle Royal Commission

The South Australian Nuclear Fuel Cycle Royal Commission (Commission) was
established by the South Australian Government on 19 May 2015 to undertake an
independent investigation into the potential for increasing South Australia’s (SA)
participation in the nuclear fuel cycle. The Royal Commission delivered its report to the
Governor of South Australia on 6 May 2016.
SA does not currently participate in the traditional nuclear fuel cycle, but does extract and
mill minerals containing naturally occurring radioactive materials for shipment and sale,
and stores limited quantities of industrial and scientific radioactive wastes.
The Commission found that SA can safely increase its participation in nuclear activities,
which will be of economic benefit to the State. Whilst the Commission’s findings indicate
it is not economically viable for SA to develop all aspects of the nuclear fuel cycle at
this time, the storage and disposal of radioactive nuclear waste will provide significant
economic return for the State.
The Commission found that it is likely that commercial uranium deposits exist in SA,
however like any mineral, there are significant barriers to successful exploration for those
deposits, including the cost of drilling activities, particularly in a low-uranium price
environment.
Major events or developments

Northern Gas Pipeline
Northern Australia contains large natural gas reserves which have historically been isolated
as the Northern Territory gas market is not connected to the east coast gas markets.
In early 2017 the Northern Territory government awarded Jemena (a company which owns
and operates an extensive network of pipelines and energy infrastructure in Australia) a
contract to construct an $800 million pipeline (known as the Northern Gas Pipeline).
Jemena commenced construction of the 623km Northern Gas Pipeline in September 2017.
The Northern Gas Pipeline will transport gas from Tennant Creek to Mount Isa across the
Northern Territory of Australia to Queensland and is expected to fast-track development
of the Northern Territory gas industry as it will connect the Northern Territory to the east
coast gas markets. Jemena Managing Director, Paul Adams confirmed in July 2017 that
gas transportation contracts for the pipeline have already been signed and that there have
been expressions of interest in moving more conventional offshore gas. There is potential
for future expansion and an increase in the transport of unconventional gas if the Northern
Territory fracking moratorium is lifted.
Construction of the pipeline is due to be completed in mid-2018, with gas expected to flow
from late 2018.
M&A market
Energy sector M&A has been impacted by global volatility in commodity prices in recent
years. Brent crude fell by 47% in 2015 and hit further lows early in 2016. However, the
market has steadily increased to around US$50 per barrel at the beginning of 2017. In
April 2017, the World Bank adjusted its forecast for 2018 crude oil prices to US$60 per
barrel.
Increased commodity prices and capital expenditure across the nation have restored
investor optimism. In FY17 there was significant private M&A activity in the energy and
resources sector as major companies divested east coast coal assets. Public M&A in the

sector was relatively subdued. Offshore investment and consolidation in gold and rare
metals continued as key M&A trends in the mining sector. Yancoal’s acquisition of Rio
Tinto’s Hunter Valley thermal coal mines for US$2.69 billion in September 2017 was the
largest mining M&A transaction in Australia for several years.
China’s economic slowdown
China’s perceived economic slowdown has perpetuated levels of uncertainty. There is
continued concern surrounding the slowing of China’s real GDP growth (to under 5% in the
next 10 years) which could impact the Australian energy sector, given that China is a key
export market. The Australian mining industry, in particular, will be exposed to China’s
economic slowdown due to potential over-supply of iron ore and other commodities.
Proposals for changes in laws or regulations

It is estimated that around 100 offshore oil and gas production installations will need to
be decommissioned in Australia in the next 25 years, with an anticipated cost in excess
of $1.2bn. Australia has limited experience in decommissioning activities and, to date,
no major project has been decommissioned. Having regard to ongoing international
activity, growing interest in this area and the scale of the works required to decommission
Australia’s facilities, there will inevitably be a discussion between Government, industry
and stakeholders as to the suitability of Australia’s decommissioning law and regulation.
One of the critical considerations for the Australian Government will be the extent to
which partial removal of installations will be permitted in Australia or whether complete
removal is required.

Graeme Gamble
Tel: +61 8 9211 7627 / Email: graeme.gamble@hsf.com
Graeme is a Partner in the energy and resources group of Herbert Smith
Freehills, based in the Perth office. He has a particular focus on the upstream
oil & gas sector.
He specialises in upstream mergers and acquisitions, project development
structuring and associated key documents as well as marketing, offtake and
transportation arrangements.
Prior to joining Herbert Smith Freehills, Graeme was Senior Legal Counsel at
Centrica Energy in the UK.
Chelsea Herman
Tel: +61 8 9211 7803 / Email: chelsea.herman@hsf.com
Chelsea is a Senior Associate in the energy and resources group of Herbert
Smith Freehills, based in the Perth office, and practises in the oil and gas sector.
Chelsea specialises in upstream transactions, LNG sale and purchase contracts,
FPSO charter contracts, production-sharing contracts, joint operating
agreements and gas sale agreements.
Prior to joining Herbert Smith Freehills, Chelsea worked as in-house legal
counsel for Eni Australia Limited.
Herbert Smith Freehills

36/250 St Georges Terrace, Perth WA 6000, Australia
Tel: +61 8 9211 7777 / Fax: +61 8 9211 7878 / URL: www.herbertsmithfreehills.com

Austria
Thomas Starlinger, Anita Trenkwalder & Eva Kubr
Starlinger Mayer Attorneys at Law
energy sources
The Austrian internal energy supply is based on a balanced mix of energy sources.
The following numbers represent the energy consumption of 2016, which are in total:
approximately 36.4% oil; 21.1% gas; 29.5% renewable energies; 9.0% coal; and 2.2%
combustible waste. The remaining part, namely 1.8%, comprises net imports of energy
from aboard. The production of nuclear energy has been banned since 1978 according to
the Federal Law for a non-nuclear Austria.
Oil has been the most consumed primary energy source in Austria so far. There are two
Austrian companies in charge of the exploration and production of oil which are covering
about 8% of the annual consumption. For the rest, Austria relies on the import of raw oil
whereby Kazakhstan, Saudi Arabia and Libya are listed as the most important delivering
countries. The import of raw oil has stagnated over the last years and the import of petroleum
products has decreased. The highest percentage of final consumption of oil is related to the
transport sector with an amount of almost 80%.
Among renewable energies, the internal consumption of hydropower is most prominent
with about 34.7% (among all energy sources about 10.2%). Biomass is also traditionally
exploited in high amounts – mostly for heating, but also increasingly for electricity
production and CHP plants. Due to political efforts and the promotion of renewable energy,
there are several other renewable sources which have gained importance over the last few
years. Next to hydropower, there has been an ongoing increase of the consumption of wind
energy, geothermal energy and solar energy.
In addition to the oil and the renewable sector, natural gas is another source which should
be highlighted. Over 50% of natural gas is imported from Russia, followed by Norway and
Germany. The internal consumption has decreased compared to other energy sources in
the past years mainly due to a reduction of using natural gas in thermal power generation.
During the past year, there has been a conflict concerning restrictions to the electricity
transmission capacity across the German-Austrian border. Germany and Austria have had
a common bidding zone since 2001. In the past years, low wholesale prices in Germany
have resulted from increased electricity production (North Sea wind power) in the north of
Germany and triggered rising demand of transmission capacity in the south of the price zone
to Austria and via Austria to neighbouring countries. Capacity restrictions within Germany
from north to south led to diverse electricity flow via Poland and Czechia to Austria. That is

Starlinger Mayer Attorneys at Law Austria
why the Agency for the Cooperation of Energy Regulators (ACER) published an opinion in
favour of separating the common bidding zone. After Austria had unsuccessfully contested
this opinion at the European courts, the regulatory authorities for energy of Germany and
Austria came to the following agreement in May 2017.
The common price zone will be split up in October 2018. Nevertheless, free cross-border
electricity trade will not come to a complete stop. 4,900 MW long-term cross-border
capacity will continue to be available without prior capacity booking. It is anticipated
that, after construction of additional power lines planned between Austria and Germany,
free available capacities will increase to up to 7,000 MW. What is more, there will also be
short-term capacities allocated in the central western region which comprises Germany, the
Netherlands, Belgium, Luxembourg, France and Austria, thereby further increasing cross-
border transmission capacities. In return for these concessions, Austrian authorities agreed
to supply German transmission system operators with redispatch capacities from caloric
power plants of up to 1,500 MW.
The Austrian regulatory authority E-control is convinced that this agreement will preserve
cross-border electricity trade between Germany and Austria. It is predicted that this measure
will keep price increases resulting from the separation of the bidding zones to a minimum.
The regulatory authority anticipates an increase of about 5% for wholesale electricity and
very little impact for private customers.

Many countries including the European Union agreed in 2015 on a global climate treaty
to reduce greenhouse gas emissions on the United Nations Climate Change Conference,
COP21, in Paris and thus to limit the global temperature increase. Based on that, the
European Commission presented its climate and energy policy in November 2016, under
which all EU Member States are required to reduce their greenhouse gas emissions by
a specific amount and to increase energy efficiency by 2030. By the end of the century,
oil, gas and coal may even no longer be used. Therefore, the European Union has passed
several laws to meet the Commission’s aims.
Austria passed a minor green electricity amendment package in 2017, which includes several
amendments to various Austrian laws. This package simplifies administrative procedures
and increases its efficiency. It also focuses on promotion of solar systems by adjusting
rules and regulations enabling the joint construction and operation of solar system plants
at apartment houses that represent an independent electricity power plant for the multiple
households living in such buildings. Moreover, additional funds will be made available for
wind power plants, solar systems plants, small hydropower plants and biogas plants.
This amendment package does not aim at an overall adjustment to the guidelines of
environmental state protection and energy aid nor at responding to structural problems.
Therefore, a major amendment package should restructure the green electricity funds
system. Cost efficiency and competitiveness are to be established as the crucial factors
for getting funds. However, as federal elections are planned for fall 2017, this major
amendment package will likely not even be proposed before 2018.

Green Electricity – Amendment Package 2017
In June 2017, the long-awaited amendment of the Green Electricity Act passed the Austrian
parliament. Through amendments of the Green Electricity Act and various other laws,

renewable sources of energy have been promoted. Additional state funding will go especially
into wind plants and photovoltaics. However, as there are already many applications for
subsidies on wind plants, additional funds will mostly only serve to reduce the waiting
queue. As far as photovoltaic is concerned, new regulations will facilitate the construction
of solar power modules on apartment buildings, enabling consumers to actively participate
in the market and feed excess power into the grid.
Gas market
In order to further optimise the gas market for customers, the tasks of the market area
manager (MAM) are now integrated with those of the distribution area manager (DAM),
combining these two functions in one administrative unit. The bundling of responsibilities
creates synergies and a one-stop-shop for market participants. AGGM Austrian Gas Grid
Management AG, the Austrian independent DAM, was therefore also nominated as MAM
by the two transmission system operators Gas Connect Austria GmbH and Trans-Austria
Gasleitung GmbH, which was confirmed by decree of E-Control in March 2017. AGGM
has been exercising the functions of MAM since June 2017. As DAM, AGGM has already
had important tasks in the areas of security of supply, network access, capacity management,
conducting gas flows, optimising balance energy and network planning in the distribution
network. These tasks have been extended to the transmission grid.
Judicial decisions, court judgments, results of public enquiries

We are not aware of any major decisions or enquiries in the energy sector in the recent past.

The increased inflow of renewable electricity from Germany, which led to critical situations
on the interconnecting lines within Germany and Austria, encountered interruptions from
nuclear plants in France during the past winter, which led to increased operations of gas-
fired power plants that otherwise would not be on stream due to low wholesale prices.
Expansion measures were needed to be implemented in the electricity transmission grid
of Austrian Power Grid AG. These measures include completing the 380-kV ring, the
long-term secure connection of densely populated areas, facilitating the integration of wind
energy and the connection of new hydropower and pumped-storage power plants as well as
enhancing the grid connections to neighbouring countries. The Austrian high voltage grid
is characterised by its ring structure, which enables customers to be supplied with power
from both sides. Within the framework of European transport grids provisions, the 380-kV
ring was classified as being “of Community interest” and worthy of funding. Projects were
financed in part by the European Union from the budget of the trans-European energy grids.
However, complicated permitting procedures have put this project on hold.
New challenges are waiting for the Austrian energy sector in connection with the further
increase in electric cars. It is envisaged that this will lead to an increase of electricity
consumption by about a third within the next few decades. Furthermore, oil-fired heating
systems are being transposed to electricity-based systems. Therefore, an increase of the
domestic electricity production is deemed necessary. By 2030, €50bn will be invested into
the electricity sector: €35bn thereof into network expansion; and €15bn thereof into the
expansion of renewable energy. For this to happen, representatives of the energy sector
demand briefer permitting procedures and fewer regulations.


“Clean energy for all Europeans”: the European Commission presented its draft programme
of the EU Energy Package in November 2016, which has a strong impact on its Member
States. The Winter Package aims to: (i) give priority to energy efficiency; (ii) reinforce
renewable energy; (iii) give fair supply to consumers; and (iv) progressively implement
the EU internal market by establishing regional markets and Regional Operational Centers
(ROCs). Negotiations are already being held by the EU Member States to change energy
efficiency rules. This should be achieved by reducing CO2 emissions and further expanding
renewable energies. Wind and solar power should not be given priority in the case of
subsidies against coal, gas and nuclear power. The EU Energy Package will be finalised in
the second half of 2018 when Austria presides over the EU Council and will then have to be
implemented into Austrian law.
Decarbonisation is also being discussed in Austria. Whereas some political parties demand
the abolishment of the diesel tax privilege and raising the cost of CO2 emissions, others ask
for decarbonisation, decentralisation and democratisation of the energy sector by further
promotion of renewables and decentralised electricity production. It seems to be clear that
the second green electricity package, which is expected in 2018, will introduce market-
based funding of renewable energy, thereby promoting competition and reducing financial
incentives.

Thomas Starlinger
Tel: +43 1 383 60 10 / Email: t.starlinger@starlinger-mayer.at
Thomas Starlinger is a named partner of Starlinger Mayer Attorneys at Law.
He advises national and international clients on all aspects of energy law.
His expertise covers a wide range of regulatory and industry questions, price
revisions and arbitration, as well as proceedings before national regulatory
authorities and the European Commission.
Thomas gained 20 years of industry experience at OMV, a leading European oil
and gas company, where he became head of legal of its natural gas operations
in 2001. Later, he was Chief Executive Officer of AGGM, an independent
distribution system operator and then chaired the committee on legal affairs
of the Association of Gas and District Heating Supply Companies. Thomas
was ranked as leading individual in the project and energy section of Austria
of The Legal 500 in 2016 and 2017.
Anita Trenkwalder
Tel: +43 1 383 60 22 / Email: a.trenkwalder@starlinger-mayer.at
Anita Trenkwalder is junior associate at Starlinger Mayer Attorneys at Law.
She studied business law at Vienna University of Economics and Business.
While studying, Anita took the opportunity to study abroad twice, at Meiji
University in Tokyo, Japan and at DePaul University in Chicago, USA. She
also gained valuable experiences in various law firms as legal assistance
as well as at the Institute for Austrian and European Public Law at Vienna
University of Economics and Business as research assistant. After University,
she started working with Starlinger Mayer Attorneys at Law. Her main areas
of practice now include energy law as well as civil law with a special interest
in real estate.
Eva Kubr
Tel: +43 1 383 60 / Email: e.kubr@starlinger-mayer.at
Eva Kubr is an intern at Starlinger Mayer Attorneys at Law who finished her
legal and Slavonic studies at the University of Vienna in 2017. During her
studies, she spent time abroad in Canada and Poland, where she studied at the
Jagiellonian University of Cracow and gained experience in an international
law firm in Warsaw. Her main areas of practice include civil law and
European law with a special interest in climate regulations and environmental
protection laws.
Starlinger Mayer Attorneys at Law

Am Heumarkt 10, A-1030, Vienna, Austria
Tel: +43 1 383 60 / Fax: +43 1 383 60 60 / URL: www.starlinger-mayer.at

Benin
Jeffrey Gouhizoun
OTL Conseils
energy sources
The Republic of Benin presents a picture of low energy consumption. Indeed, access to
electricity is not covered on the whole national territory, especially for people in rural
areas, in spite of high energy dependence on the outside world.
So in several areas of Benin, traditional biomass energy is mainly used.
For the future, however, Benin presents great potential in nondeveloped renewable
energies.
The sources of energy in Benin consist of: electrical energy; petroleum energy such as
kerosene; fuel; natural gas; firewood; charcoal; and the emergent solar energy.
A statistic revealed that in 2016, the consumption of electrical power was about 350 MW
to 450 MW, while the state provided less than 200 MW.
Due to the low production capacity of the country, the government draws energy from
neighbouring countries such as Nigeria, Ghana, and Ivory Coast.
Thus, the deficit of regional power, the relatively high rate of losses of energy
on the national grid, and the poor technical and financial performance of CEB
(Communauté Electrique du Bénin, a subregional electricity organisation, whose members
are Benin and Togo), and Société Beninoise d’Énergie Electrique (SBEE), led to a serious
and unprecedented crisis in this sector in the first six months of 2016.
To overcome these difficulties, the new government took emergency measures, including
negotiating power with Nigeria.
Furthermore, the growth of solar energy should be noted, and the interest of companies
in manufacturing solar panels.

Firstly, the government has adopted approaches in order to:
• state the legal and institutional framework through the adoption of a national law on
electricity;
• increase national power production capacity;
• strengthen electricity distribution networks in the major cities of the country;

OTL Conseils Benin
• establish an enabling legal and institutional framework for private investment;

• secure external supplies;
• develop a pricing and funding policy for electricity;
• improve the reliability of electricity transportation networks;
• reduce energy losses on these networks; and
• proceed with electrification of the country’s towns and villages.
On the other hand, the government has tried to develop national capacities for the
production of renewable energies by setting up an institutional and incentive framework
for promotion of the development of renewable energies and deepening of regional and
international cooperation in the area of development of these energies.

The activities of energy are divided into the subsectors of electricity; oil & gas; and
renewable energies.
Electricity
From 1973 to 2005:
The energy sector was governed by the Benin–Togo electricity code, which conferred on
the Electricity Community of Benin, CEB, the monopoly for electricity supply in Benin,
under an international electricity agreement entered into between Dahomey and Togo, on
July 27, 1968.
From 2005 to 2006:
A new institutional and regulatory framework was set up and the framework agreement
on the Benin–Togo Electricity Code was revised by Bill No. 200501 of January 12, 2005,
ratified by Benin on July 3, 2006 and published in the Official Gazette No.14A of July
19, 2007.
In 2007:
Adoption by Benin of Bill No. 200616 of March 27, 2007 on the Electricity Code of
Republic of Benin, published in the Official Gazette No. 18118 of September 15, 2007.
This law grants to the company SBEE the monopoly for energy distribution.
The decision A/DEC.5/12/99 of the ECOWAS Conference of Heads of State and
Government of December 10, 1999 on the setting up of the West Africa Power Pool
(WAPP).
Oil & Gas
Bill 200618 of October 17, 2006 on the Petroleum Code of Republic of Benin, governs
exploration, production and processing of oil & gas. Decrees and orders define the
distribution activities of petroleum products and the conditions for the conduct of such
activities, as well as aspects relating to their monitoring and control by the relevant
government departments.
Renewable energies
There is no specific text which governs renewable energies. However, the area of biomass
energy is governed at the level of use of wood resources for various purposes, including
firewood, by the forestry legislation and Bill No. 98030 of February 12, 1999 relating to
the Framework Bill on the Environment.

OTL Conseils Benin

There are a very few judicial decisions or court judgments in the energy sector in Benin.

Major developments are still slow.
The adoption and implementation of the national policy document on energy control, as
well as the promotion of modern biofuel sectors like bioethanol and biodiesel from the
use of various agricultural raw materials, can be mentioned.
Furthermore, a draft bill on biofuels is being written, and the National Agency for the
Development of Renewable Energies has been created.
The government is still working on the bill on renewable energies and energy control in
Benin.

As proposals, it is very necessary for the new government to:
• adopt a new regulation on investment incentives and the integration of independent
production into the Beninese electrical system;
• develop the sub-sectors of oil & gas and renewable energies;
• take legal and fiscal decisions to facilitate the attraction of private investment into the
subsector through public-private partnership contracts;
• create a new sector-based regulation consolidating the principles of access to public
service and adapted to current constraints and future developments; and
• design the regulatory function of the electricity subsector.

OTL Conseils Benin
Barrister Jeffrey Gouhizoun

Tel: +229 97 50 58 73 / Email: roslandos@yahoo.fr / jgouhizoun@gmail.
com / j.gouhizoun@otlconseils.com
Jeffrey R. Gouhizoun is a lawyer at the Bar of Benin and has been in the
Department of Business Law at OTL Conseils since 2012.
He is a young corporate lawyer with great expertise in OHADA rules and
International Arbitration.
He advises in connection with financing and structuring projects in Africa
and assists investors in Africa in areas such as mergers and acquisitions,
private equity, banking regulation, oil & gas, energy and mining, and public-
private partnerships.
He works with big law firms like DLA Piper LLP (US), ASAR − Al Ruwayeh
& Partners, and Norton Rose Fulbright.
Jeffrey R. Gouhizoun holds a Masters degree in Private Law and a Masters II
Research at Chaire UNESCO at the University of Abomey-Calavi (Benin).
He is preparing his thesis on the topic of: “Arbitrability of disputes in
OHADA, case of a State party against a private company or an individual”.
OTL Conseils
Lot 202, Patte d’Oie 01 BP, 2202 RP Cotonou, Benin
Tel: +229 97 50 58 73 / Fax: +229 21 30 06 61 / URL: www.otlconseils.com

Bulgaria
Mariya Derelieva
Georgiev, Todorov & Co.
Overview of the current energy mix, and the place in the market of different energy
sources
The primary source of energy in Bulgaria remains electricity while the trend is towards
increased natural gas consumption. The Bulgarian electricity market is divided into regulated
and free market segments. Pursuant to the report of the Energy and Water Regulatory
Commission (EWRC), the structure of the electricity market for 2016 shows that the ratio of
the regulated to free market is equal, with each segment holding a 37% share, with export of
17% and 9% technological costs of transmission and distribution.
In 2016, gross electric power generation was 45 TWh, with the commercial export of electricity
dropping from 10 TWh in 2015 to 6 TWh in 2016 (13% of all generated electricity). Pursuant to
the official data of the Bulgarian Electricity System Operator EAD (ESO), the share of nuclear,
thermal power and renewable power generation stood at 35%, 48% and 17% respectively.
Statistics regarding the share of renewable energy in gross final energy consumption for 2016
are not published yet, but it is expected that 2016 will surpass 2015, which was Bulgaria’s
greenest year to date with 18.2% (over-fulfilment of the EU binding target of 16%).
The natural gas market is subject to the regulation of EWRC as currently, the basic requirements
for competitiveness and free market conditions are not met. The market share of the public
provider Bulgargaz EAD for 2016 is 98%, whereby the quantities of natural gas are sold under
regulated prices to the gas distribution companies and consumers, directly connected to the
gas transmission network. The other 2% are the quantities sold by traders to gas distribution
companies and to clients at negotiated prices.
For 2016, an increase of natural gas imports and reduction of local production were registered.
In 2016 the realised quantity of natural gas from Bulgargaz EAD on the Bulgarian market
was 3,028 bcm, with the structure of consumption by individual industries as follows: energy
– 918 bcm or 30%; chemical industry – 1,107 bcm or 37%; other industries – 546 bcm or
18%; and distribution companies – 457 bcm or 15%.
During the last 12 months, due to legislative amendments introduced in 2015–2016 and
regulatory politics, the long anticipated and required stabilisation of the energy sector in
Bulgaria was commenced. The Bulgarian Government and the Bulgarian energy watchdog
– the Energy and Water Regulatory Commission (EWRC) – have taken firm steps on the road
to transition from high deficit to financial recovery and market liberalisation. However, there
is a long way ahead.

Georgiev, Todorov & Co. Bulgaria
One of the significant steps towards liberalisation of the energy market has been the
incorporation and licensing of the Independent Bulgarian Energy Exchange EAD (IBEE).
With a tentative start, as of 2016 the exchange electricity volumes continue to be low, albeit
the volatility of prices around the average has increased to some extent. The day-ahead
market and the centralised market for sale and purchase of electricity through bilateral
contracts have been successfully introduced. The implementation of the intraday market
is expected with the support of the strategic partner Nord Pool, Europe’s leading power
market. The energy regulator has adopted amendments in the electricity market rules, thus
simplifying the switching of supplier for small business and household consumers, and
strictly monitors electricity traders for fair and transparent contract clauses.
The financial stabilisation of the electricity sector was based on legislative amendments in
the energy legislation introduced in 2015–2016, enabling EWRC to regulate the quantities
for mandatory feed-in tariffs purchase from renewable (RES) and cogeneration producers.
The high historical volumes purchased by the state-owned Bulgarian National Electricity
Company EAD (NEC) acting as public supplier, and the lack of regulatory powers over the
volumes, accumulated significant losses at NEC. Further, the renegotiation of the long-
term power purchase contracts (PPC) between NEC and the coal power plants AES Maritsa
East 1 and Contour Global Maritsa East 3, initiated and approved in 2015 by the energy
regulator, led to a reduction of the electricity availability component price by 14% and 15%
respectively. The newly introduced power of EWRC to regulate RES and cogeneration
mandatory purchase, and the appropriate price regulation, stabilised the financial status of
the state-owned company. However, the status quo still needs improvement.
After the South Stream was dropped, gas interconnections with neighbouring countries
were boosted. The construction of the interconnection between Bulgaria and Romania
was finally finished at the end of 2016 due to good coordination between the transmission
system operators – Bulgartransgaz EAD and Transgaz S.A. The interconnector has a
total length of 25 km and maximum capacity of 1.5 bcm/y. The interconnection between
Bulgaria and Greece (IGB) is deemed a strategic gas transportation infrastructure in order
to provide diversification of gas supply to the Bulgarian and South East Europe gas market.
The project company ICGB AD is incorporated under Bulgarian law by Bulgarian Energy
Holding EAD (BEH) and IGI Poseidon SA, with each shareholder owning 50%.
The IGB pipeline will have an overall length of 182 km and transportation capacity of
3 bcm/y with technical design enabling upgrade to 5 bcm/y. The project is receiving
EU financial support through the European Energy Program for Recovery. The project
company has launched two market tests, recording increasing market interest along the
way. The announced construction is to be commenced and completed in 2018. Efforts
have been made for development of the gas interconnections Bulgaria–Serbia (IBS) and
Bulgaria–Macedonia. In February 2017, a memorandum of understanding was signed for
the development of IBS in order to re-energise the project with a total length of 150 km,
capacity of 1.8 bcm/y of natural gas in both directions, and with the opportunity to further
increase volumes up to 4.5 bcm/y. The discussion of the gas interconnection Bulgaria–
Macedonia is at an early stage as in June 2017, a working group is proposed to commence
analysis on the feasibility and market interest in the interconnector.
The interconnection efforts could eventually lead to the development of a bigger gas
infrastructure project of common interest – the Vertical Gas Corridor. A memorandum
of understanding on the realisation of the Vertical Gas Corridor has been signed by
representatives of the gas companies – Bulgartransgaz EAD (Bulgaria), ICGB AD (Bulgaria),

DESFA S.A. (Greece), FGSZ LTD (Hungary) and SNTGN TRANSGAZ S.A. (Romania).
The aim of the document is cooperation between the gas companies for the realisation of a
corridor for bi-directional natural gas transport, interconnecting the networks of Bulgaria,
Greece, Romania and Hungary.
The interconnection projects, and Bulgaria’s strategic location, have inspired the Balkan
Gas Hub concept. The concept is based on the idea of bringing significant gas quantities
from various sources (natural gas from Russia through the existing pipelines and the
Turkish Stream; natural gas, extracted in Romania and in Bulgaria; natural gas from the
South gas corridor; and LNG from terminals in Greece and Turkey) to enter a physical
point in the region of Varna, Bulgaria for further transportation and trade through a gas hub.
The objective is to bring new gas to South-Eastern Europe in order to enhance security of
supply. The Balkan Gas Hub is now the subject of a feasibility study.
In regard to interconnection infrastructure, it is worth mentioning that the Bulgarian
Electricity System Operator EAD (ESO) was granted co-funding by the Connecting Europe
Facility to build a new 400 kV overhead line between Dobrudzha and Bourgas. This
line is part of PCI Cluster Bulgaria–Romania Capacity Increase (known as the Black Sea
Corridor), also including the construction of two more lines on Romanian territory, which
are needed in order to complete the South-North priority energy corridor and to build the
trans-European energy infrastructure.
In 2016, the energy regulator adopted amendments in the Rules for granting access to gas
transmission and gas distribution networks and access to natural gas storage, thus enabling
the procedure for capacity reservation in points of the gas transmission network to the
benefit of all network users from Bulgaria and other EU member states on equal terms
of access. The Bulgarian gas transmission operator, Bulgartransgaz EAD, introduced
Regional Capacity Reservation Platform (Regional booking platform RBP, developed by the
Hungarian gas transmission operator FGSZ) for allocation of capacity. The implementation
of a capacity reservation platform is deemed to positively impact the natural gas market, as
it will facilitate and simplify the reservation of gas.

The Bulgarian Government has commenced and is committed to stabilisation of the energy
sector. The Government, through the Minister of Energy, has engaged in the drafting of a
long-term National Energy Strategy until 2030, with a horizon up to 2050. The preparation
of the strategic document is to be based on the participation of all interested parties and the
Government is aware that the Strategy must be in compliance with the forthcoming 2030
Climate & Energy EU framework. In this regard, the Bulgarian Government through the
Minister for the Environment, backed up by the coal and mining branch, has announced its
intention to request exemption from the European Commission after the implementation
of the new EU coal emissions legislation. The position of the Government is that the new
emission levels are unachievable from the economic and social perspective of Bulgaria.
The considerations of the Bulgarian position lie in the circumstances that the thermal power
plants located in the Maritsa East lignite coal mining complex in southern Bulgaria constitute
30% of installed electricity generation, whereas the local lignite coal is characterised by a
high content of sulphur. The new binding target to cut emissions would pose a risk to the
security of energy supplies and hit the competitiveness of Bulgaria’s small economy.
In order to support the stabilisation and market liberalisation of the energy sector, the
Government has commissioned a report by the World Bank on reimbursable technical

assistance financed by the Bulgarian Energy Holding (BEH). The findings of the World
Bank’s report have been announced by the Minister of Energy and are intended to provide
a platform for discussion in order to identify and assess options to improve the sector’s
financial standing and move forward with the liberalisation of the power market. The
report confirmed that the measures introduced by the Bulgarian Government and EWRC
significantly reduced the yearly deficit and balanced the sector’s financial position.

As elaborated above, the financial stabilisation of the energy sector was based on legislation
amendments in the energy laws introduced in 2015–2016. The first amendment introduced
in the Renewable Energy Act envisaged the power of the energy regulator to regulate the
net specific production of electricity, subject to mandatory purchase from renewable (RES)
producers. The quantities are regulated on the basis of the forecast made by the regulator when
fixing the feed-in tariffs. The second amendment introduced in the Energy Act stipulated
regulatory powers towards cogeneration electricity production. Thus, the regulation was
based on feasible and sustainable grounds.
Furthermore, the establishment of a “Security of Electrical Power System” Fund was
envisaged. Contributions to the Fund, amounting to 5% of income, are made on a monthly
basis by electricity producers, electricity traders, the operator of the electric transmission
network and the operators of the gas transmission networks. The aim of the Fund is to cover
the costs incurred and accumulated by NEC due to the fulfilment of the mandatory purchase
obligations (under PPCs, RES and cogeneration mandatory feed-in tariffs purchase). It is
arguable whether the establishment of the Fund and the contribution obligations are compliant
with the Bulgarian Constitution and EU antitrust rules, as the collected monetary funds are
used to cover the losses of state-owned public electricity supplier NEC.
The Bulgarian energy regulator adopted amendments for improvement and fine-tuning of the
regulatory framework. More concretely, amendments were adopted in the ordinances and
by-laws for price regulation in the regulated segment of the electricity market and of the gas
market, and in the market rules for trade of electricity and of gas, as well as in the rules for
access of the gas systems.

Without a doubt, the major judicial decision of the year 2016 was the award on the “Belene”
nuclear power plant arbitration. The dispute was brought by Atomstroyexport JSC against the
state-owned Bulgarian National Electricity Company EAD (NEC) before the International
Court of Arbitration at the International Chamber of Commerce in Geneva. The final
judgment, as of June 2016, was awarded in favour of Atomstroyexport JSC. An agreement
was signed in October 2016, stipulating that no daily penalty interest shall be owed, provided
NEC pays the principal until December 2016. NEC complied with the agreement and paid
€601.6 million to Atomstroyexport on December 9, 2016, using a separate loan from the
Ministry of Energy.
The ongoing proceedings opened by the European Commission in July 2013 to investigate
whether the state-owned Bulgarian Energy Holding EAD (BEH), with its subsidiaries
Bulgargaz and Bulgartransgaz, has abused its dominant market position, may have a
significant impact on the Bulgarian gas market. The concerns of the Commission are that
BEH and its subsidiaries may be preventing competitors from gaining access to the gas
transmission network and the gas storage facility. If, after the parties have exercised their

rights of defence, the Commission concludes that there is evidence of an infringement, it

can issue a decision prohibiting the conduct and impose a fine of up to 10% of a company’s
annual worldwide turnover.
Another ongoing proceeding before the European Commission was, interestingly enough,
initiated upon notification in 2014 by the Bulgarian energy regulator regarding the long-
term PPCs between NEC and the coal power plants AES Maritsa East 1 and Contour Global
Maritsa East 3. The Commission is investigating whether the contracts constitute unregulated
state aid. It is said that the Commission has suggested re-negotiation of the PPCs.
The Bulgarian state is party to several arbitration disputes initiated by foreign investors with
a stake in the Bulgarian grid and supply electricity companies. The disputes are pending and
the awards will surely have an impact on the electricity market. More concretely, according
to the report of the Ministry of Finance, which acts as representative of the state in the
proceedings, the disputes are as follows:
• Case EVN AG versus Republic of Bulgaria, ICSID Arbitration Court, size of claims:
over €750 million – pending;
• Case ENERGO-PRO a.s. versus Republic of Bulgaria, ICSID Arbitration Court, size of
claims: over €140 million – pending; and
• Case CEZ a.s. versus Republic of Bulgaria – request of arbitration filed, particular size
of the claim is not specified yet.

One of the significant events with the potential to have a major beneficial impact on the
Bulgarian gas market is the proceeding opened by the European Commission to investigate
Gazprom’s dominant market position in upstream gas supply markets in Central and Eastern
European Member States. In March 2017, the Commission invited comments from all
interested parties, among which is Bulgaria, on the commitments submitted by Gazprom to
address the competition concerns. The commitments aim to enable cross-border gas flows at
competitive prices. It is said that within the proceedings the idea of restarting the cancelled
South Stream project is being floated amongst the Russian producer of natural gas on the
one hand, and the interested parties, including Bulgaria, on the other hand. As the Turkish
Stream is under construction, the concept of another pipeline under the Black Sea to reach
EU territory seems to be a speculative hot topic. Whether the South Stream is re-emerging
and being redesigned, only time will tell.
The announced withdrawal of Czech utility CEZ from its Bulgarian investments is another
significant event in the energy market. CEZ is negotiating the sale of all its investments in
Bulgaria: electricity supply and distribution in North-western Bulgaria, including the capital
city of Sofia; its electricity trading subsidiary; two renewable energy generation facilities;
and the defunct Varna thermal power station. CEZ is the largest electricity supplier and
distributor in Bulgaria with over three million customers and annual revenues of about €720
million. The shortlisted bidders are said to be from Central and Eastern Europe, amongst
them a Sofia-based consortium, Czech energy company Energo-Pro, Romanian company
Electrica, and a consortium between Turkish engineering holding STFA Yatirim and a
Bulgarian-based motor oils producer. Unquestionably, upon its completion the deal will be
the biggest M&A deal in the Bulgarian energy sector in recent years.
Another M&A deal in the Bulgarian energy sector is the transfer of the ownership of the
Independent Bulgarian Energy Exchange. Currently, the shares are held by the Bulgarian

Energy Holding (BEH). In July 2017, a due diligence report was conducted by the
eventual buyer, the Bulgarian Stock Exchange. The acquisition is deemed to guarantee
the independence of the energy exchange as one of the commitments of BEH towards the
European Commission, which shall be notified for the transfer.

The report of the World Bank on the financial recovery and market liberalisation of the
Bulgarian energy market proposed Contracts for Difference (CfD) as the key recommended
transitional mechanism to implement market liberalisation. Upon the findings of the report,
the Minister of Energy initiated public discussions with the interested parties and all market
participants, including regarding the CfD. The CfD are financial instruments for energy
supply, allowing generators and retailers to hedge the price volatility. It is a financial
contract between two parties that reduces exposure to volatile energy prices. At a pre-agreed
frequency, the CfD seller will pay (receive) to (from) the CfD buyer the difference between
the contracted price (strike) and the actual market price. The implementation of the CfD will
require legislative initiative and the position of the Bulgarian Government is still not settled.
However, this is the key mechanism recommended by the experts from the World Bank, and
the discussion on its implementation is ongoing.

Mariya Derelieva
Tel: +359 2 937 65 22 / Email: mderelieva@georg-tod.com
Mariya Derelieva is a Senior Associate at Georgiev, Todorov & Co. law firm
and part of its energy team. Before joining the firm, Mariya was a regulatory
expert with the Energy Regulatory Commission where she was consulted on
licence proceedings, price regulation and provided court representation. As
a regulatory expert she was involved with the implementation of the Third
Energy Package in Bulgarian legislation. Mariya also worked as legal counsel
at the Ministry of Finance where she handled international arbitration cases
initiated under the ICC, UNICITRAL rules and the Energy Charter. At the
law firm Mariya represents large energy producers such as TEC Bobov dol
and Brikel, cogeneration and renewable producers before courts for appeal
of price decisions and other administrative acts, as well as in commercial
disputes for unpaid energy prices.
Georgiev, Todorov & Co.

27 Parchevich Str., Sofia 1000, Bulgaria
Tel: +359 2 937 65 00 / Fax: +359 2 937 65 25 / URL: www.georg-tod.com

Canada
Ken Pearce, Sharon Wong and Bryson Stokes
Blake, Cassels & Graydon LLP
Overview of the current energy mix and the place in the market of different energy
sources
Electricity is regulated on a province-by-province basis in Canada, with each province
selecting its supply mix based on policy considerations and available resources.
Canada is blessed with significant hydroelectric resources, and hydroelectric generation
accounts for a meaningful portion of electricity production in Quebec, Manitoba, British
Columbia, Newfoundland and, to some extent, Ontario, Alberta and other provinces. Quebec,
Manitoba, British Columbia and Ontario have significant heritage hydroelectric assets, which
are regulated and supply electricity to local ratepayers at below market rates. Newfoundland,
British Columbia and Manitoba are undertaking significant new hydroelectric development,
and Ontario has been redeveloping some of its hydroelectric projects in northern Ontario. In
particular, Newfoundland is undertaking the 3,074 megawatt (“MW”) Lower Churchill Project.
Nuclear generation supplies a portion of the baseload requirements in Ontario and New
Brunswick. New Brunswick has refurbished its nuclear facility (Point Lepreau), and the Bruce
A site in Ontario has also been refurbished. Ontario was considering adding approximately
2,000 MW of new nuclear generation, but shelved this initiative due to the high price of the
bids received and the reduced need for power in the province. However, Ontario Power
Generation is refurbishing its Darlington nuclear facility, and Bruce Power will be refurbishing
its Bruce B site, such that the Ontario supply mix will remain approximately 50% nuclear. At
the opposite end of the spectrum, British Columbia’s policy expressly excludes nuclear energy
development. Quebec’s only nuclear plant, Gentilly, needed to be repaired in 2012, but the
Quebec government decided not to proceed and shut the plant down. A challenge for the
Canadian nuclear industry is that previous and current nuclear refurbishments have failed to
be completed on time and on budget (for example, Pickering A (Ontario), Bruce A (Ontario)
and Point Lepreau (New Brunswick)). As noted above, Darlington (Ontario) is currently
under refurbishment and agreements have been reached to refurbish Bruce B (Ontario).
Canada is also blessed with significant natural gas and coal resources. As a result, natural
gas-fired and coal-fired generation can be found in most Canadian provinces. The ability
to quickly ramp-up or ramp-down natural gas-fired generation often means that it is used to
support other intermittent forms of generation, such as wind and solar. However, Ontario
decided to phase out all coal-fired generation, and Ontario’s last coal-fired generators closed
in 2014. Both Nova Scotia and Alberta are also moving away from using coal, and Alberta
plans to decommission all of its coal-fired generation by 2030.
Every province has indicated its intention to support more generation from renewable sources,
primarily wind and solar. Each has set its own renewable energy targets and how it proposes

Blake, Cassels & Graydon LLP Canada
to achieve those targets. In most cases, this has taken the form of government support by
offering long-term power purchase agreements at favourable prices to encourage renewable
energy development, including through standard offer programmes, requests for proposals
(“RFPs”) and feed-in-tariff (“FIT”) programmes.
There are also a small number of biomass-fired, geothermal, storage and tidal projects under
development.
Recent changes
While Canada weathered the global recession in 2007/2008 better than most countries, the
manufacturing sector was hard hit and has been slow to rebound. For example, a number
of pulp and paper producers have closed operations and/or sold their captive hydroelectric
generating assets. Some, such as Boralex and Kruger, have pursued renewable energy
strategies and are actively involved in wind generation development. There has also been
renewed interest in biomass-fired generation, including from wood chips and wood pellets.
For example, Ontario Power Generation converted its coal-fired Atikokan generating facility
to burn wood pellets. While long-term projections still forecast growth in demand, in the
short term there is excess generating capacity, which is driving down prices. For example, in
Ontario, surplus baseload generation (“SBG”) from “must run” nuclear and large hydroelectric
generators has resulted, from time to time, in a negative price for electricity in the province’s
wholesale electricity market.
While every provincial government has been supportive of renewable energy, it comes with
a price. The impact of adding higher-priced renewables to the supply mix is beginning to be
felt and, as more and more renewable generation comes on line, ratepayers are beginning to
see ever-increasing electricity prices.
In addition, provincial governments are struggling to manage their budget deficits, and we
expect there will be increasingly less appetite to provide subsidies to renewable energy
generators through attractively priced power purchase agreements. As in Europe, there has
also been a focus on reducing the subsidies, not only due to budget constraints, but also due to
technological innovation, as the cost of solar panels and wind turbines continues to decrease.
While the impact of the previous global recession on demand, and the construction of new
generating capacity, has eased concerns regarding supply in the near term, the development of
new generation, especially renewables, which are often not located near cities or load centres,
has resulted in the need for the construction of new transmission capacity. This is especially
true in Ontario and Alberta. Transmission constraints are still having a negative effect on the
ability to add additional generating capacity in many jurisdictions.
Traditionally, the development of large, publicly owned generating projects was the norm.
Beginning in the 1980s, independent power producers were allowed to participate through
the issuance of long-term power purchase agreements by government entities. Most resulted
in the development of large generating projects. More recently, the trend is to build smaller
projects (such as solar rooftop and district energy), resulting in more distributed generation,
and to focus on demand management and conservation.
Developments in government policy and legislation

The politics of energy is an extremely important consideration. With the exception of
Alberta, which is essentially an open market, additional generation development will
generally not proceed without government support in the form of long-term power purchase

agreements with attractive pricing. Any change in a province’s government can, and
often does, result in policy changes affecting the energy portfolio. By way of example,
in British Columbia, the newly elected New Democratic Party government has requested
the British Columbia Utilities Commission to review the CAD$8.8 billion, 1,100 MW Site
C hydroelectric project and recommend whether it should be delayed or cancelled. BC
Hydro advised that CAD$1.8 billion has already been spent on the project, and the report
submitted for the commission’s review by the auditing firm Deloitte LLP concluded that
putting the project on hold until 2025 would cost about CAD$1.4 billion, and cancelling it
would cost CAD$1.2 billion.
While voters generally support clean and renewable energy, politicians have learned that
ever-increasing electricity prices attract voter attention and can result in the failure to be
re-elected. The Ontario government recently passed legislation known as the Fair Hydro
Plan which will lower electricity bills by 25% on average for all residential consumers
in the province. Between 2005 and 2015, Ontario invested more than CAD$50 billion
in the electricity system, including CAD$35 billion in electricity generation. The cost of
these investments was funded in part through a charge known as the Global Adjustment
(“GA”). To relieve the current burden on ratepayers and share costs more fairly, a portion
of the GA is being refinanced. Refinancing the GA will provide significant and immediate
rate relief by spreading the cost of electricity investments over the expected life cycle of
the infrastructure that is being built. In the early years, a portion of the costs covered
by the GA would be refinanced to reduce pressure on current electricity ratepayers. In
later years, the cost of refinancing would be recovered from ratepayers. Under current
forecasts, the immediate reduction in the GA would be about CAD$2.5 billion per year on
average over the first ten years, with annual interest costs not exceeding CAD$1.4 billion.
The government intends to introduce legislation that would, if passed, enable Ontario’s
Independent Electricity System Operator (the “IESO”) and Ontario Power Generation to
work together to refinance the GA over a longer period of time.
There is also the “not in my backyard” (“NIMBY”) syndrome when it comes to electricity-
generating facilities and transmission lines, let alone waste disposal sites. In Ontario, the
Liberal government passed the Green Energy Act in 2009 which essentially removed the right
of municipalities to veto renewable energy projects under the province’s FIT programme.
The Ontario government had become frustrated at the ability of a few local landowners to
secure the support of local municipal councils to block such projects and thereby thwart the
province’s energy policy. The main objection of local landowners appears to be a concern
about a decrease in their property values as a result of a renewable energy generating project
being constructed nearby. However, in many cases the objections also included references
to concerns about health, the environment and endangered species, among others.
Since the Liberal government was concerned about loss of voter support, the feed-in-tariff
rules were subsequently revised to provide that municipalities have to be consulted, but
do not have a veto right, and that projects with local municipal support or support from
indigenous/aboriginal peoples (known in Canada as First Nations) will be favoured.
In some cases, landowners, municipalities and/or aboriginal bands/First Nations have
used the environmental approvals process to block the development of projects or obtain
financial compensation. This has been especially true with respect to wind projects in
Ontario. A number of local groups have organised to fight to block wind projects, and
these groups have often worked together to support each other in their efforts. In addition,
a provincial group called Wind Concerns Ontario was formed to advocate on a province-

wide basis. These groups usually argue that individuals living near a wind turbine are
suffering significant health impacts, even though the province has mandated that all wind
turbines must be set back at least 550 metres from any dwelling. Most projects have been
able to obtain the required permits, including environmental permits, although the process
has often been much more time-consuming and expensive than initially thought, often as a
result of objections and appeals by municipalities and other stakeholder groups.
In many provinces, the government has sought to streamline the environmental approval
process so that its energy policy is not frustrated. In British Columbia, the concept of a “one-
stop” window has been implemented so that a developer does not have to coordinate with
numerous governmental departments in order to obtain necessary permits and approvals.
In Ontario, the government implemented a process for obtaining environmental approvals
for renewable energy projects called the Renewable Energy Approval, or REA process. To
date, this has not had the desired effect, and the appeal process under the REA legislation
has resulted in significant delays for a number of projects.
Government policy instruments are also evolving. Most provinces typically use a request
for proposals or RFP process when procuring new generation. These were often very
complex procedures, requiring bidders to expend significant time and expense to prepare
applications. Often, it was economical only for larger projects to be submitted. In
response, standard offer programmes were developed whereby generators could develop
projects with certainty as to price and other contractual terms without the need to incur
significant expense. Some of these programmes proved to be extremely successful, and
were withdrawn or curtailed earlier than anticipated. Another policy development has been
the use of feed-in-tariff programmes. Ontario has had such a programme since 2009. Nova
Scotia had the ComFIT programme (Community Feed-In-Tariff programme) from 2011 to
2016, but it is no longer accepting applications. The jury is out on whether FIT programmes
will ultimately be successful and whether they are sustainable. Other jurisdictions, such
as Italy, Germany, the United Kingdom, Spain and Japan, have all encountered problems,
reduced pricing and/or cancelled the programmes.
Major events and developments

In many provinces, power purchase agreements have been awarded to developers, and they
are in the process of arranging project financing. The majority of these are wind projects in
Ontario, Manitoba and Saskatchewan, with a number of solar projects in Ontario and some
hydroelectric projects in Ontario and British Columbia.
The provinces attracting the most interest at the moment are Alberta and Saskatchewan.
Alberta has set a target of 30% renewable energy by 2030 which, pursuant to Alberta’s
Renewable Electricity Program, will support the development of 5,000 MW of renewable
electricity. The first RFP is under way with a total of 29 projects qualified to bid for 400
MW of renewable electricity. In Saskatchewan, SaskPower’s competitive process for 200
MW of wind capacity has moved to the RFP phase. Wind currently makes up a total of 5%
of the province’s available generating capacity, and the plan is to increase this to 30% by
2030. In Ontario, the FIT 5 procurement has concluded, and the IESO is prepared to offer
390 new FIT contracts representing approximately 150 MW of renewable energy.
The types of project finance lenders participating in the Canadian marketplace continue to
change. In the last several years, Canadian life insurance companies, Canadian pension
funds and European banks have been prominent. Some European banks have been exiting,
with some European, US and Japanese banks entering. Canadian banks have had more

limited involvement due to their difficulty in matching short-term deposits with long-term
loans preferred by developers. There are also a number of fund managers for investment
funds with pension funds, life insurance companies and high net-worth individuals as
investors who are providing financing or who are involved in the M&A space, such as
Axium Infrustructure, Fengate Capital Management, Northleaf Capital Partners and
Stonepeak Infrastructure Partners. For larger projects, there have been a number of bank/
bond financings. In addition, some developers have the financial capability to finance off
their own balance sheets.
Some issues of concern to project finance lenders (and developers) are: (i) whether the project
will be completed and achieve commercial operation by the date specified in the power
purchase agreement (these agreements often provide that if the project is not completed by
an outside date, the agreement may be terminated or the developer may incur significant
liquidated damages for each day of delay); and (ii) in Ontario, the IESO, which operates the
transmission grid, has imposed market rules which in times of surplus baseload generation
can require wind and solar generators to cease operation without compensation; various
groups holding power purchase agreements with the IESO have negotiated compensation
for curtailment, but the IESO is not making them entirely whole.
Mergers and acquisitions activity continues to be strong, as a number of the smaller
developers struggle to obtain project financing or meet timelines under their power purchase
agreements to achieve commercial operation. There is also a concern about the sustainability
of the development pipeline. This stems from the fact that requests for proposals tend to be
infrequent, there is a lack of certainty as to ongoing government support, and the fact that
near-term increases in demand are anticipated to be modest.
Most of Canada is subject to treaties between the federal government and aboriginal
peoples/First Nations. The one notable exception is British Columbia. Some would
argue that the First Nations are a third level of government in Canada (federal, provincial,
First Nations). In any event, the Supreme Court of Canada has imposed a duty on the
federal and provincial governments to consult with First Nations with respect to matters
that affect First Nations. In connection with mining projects and energy projects being
developed in areas where First Nations have reserves, treaty rights or traditional use of
the lands, governments have often left it to private parties, such as developers, to fulfil
the duty to consult. Developers have entered into what have come to be known as impact
benefit agreements (“IBAs”) with First Nations that are affected by the projects. IBAs deal
with such matters as participation in the project (fixed payments or royalties), training,
employment, construction and services contracts and funding for community projects.
More recently, First Nations have sought equity participation in the projects and, in some
cases, have sought to develop the projects themselves. Under the Ontario FIT programme,
projects which have First Nations participation receive more attractive pricing. There are
also government programmes to provide financial assistance to First Nations, enabling them
to participate in the projects. For example, in Ontario, there is the aboriginal loan guarantee
programme which permits qualifying First Nations to obtain loan guarantees from the
province in respect of their borrowing of equity funding for generating projects. Ontario
Power Generation entered into partnership agreements with First Nations concerning
several of its hydroelectric development and redevelopment projects in northern Ontario,
pursuant to which the First Nations acquired equity interests in the projects. There have
been several recent decisions in favour of First Nations concerning aboriginal land title and
the duty to consult/accommodate which are worthy of note.

Unlike in other jurisdictions, such as Germany and Hawaii, the advent of additional
distributed generation, such as from rooftop solar projects, and demand management
programmes are, thus far, only having a modest impact on the revenues of local distribution
companies (“LDCs”) in Canada. While LDCs include the cost of electricity used by
customers in their revenues, it is a pass-through cost for LDCs. Most LDCs in Canada
earn their returns based on regulated rates for the distribution of electricity. When setting
rates, regulators consider the return required by the LDCs on their capital investment, and,
ultimately, customers consuming less net electricity will begin to put pressure on distribution
rates on a per kilowatt-hour basis.

Electricity generation in most provinces is dominated by the provincial utility, such as
BC Hydro, SaskPower, Manitoba Hydro, Ontario Power Generation Inc., Hydro Quebec
and Nova Scotia Power. Several years ago, in order to access US markets for power
export purposes, in compliance with Federal Energy Regulatory Commission (“FERC”)
requirements, these utilities were typically split up to separate generation from transmission
and other activities. For example, Ontario Hydro was split into Ontario Power Generation
Inc. (generation), Hydro One Networks Inc. (transmission), the Independent Electricity
System Operator (grid management), and the Electrical Safety Authority, among others.
In an effort to reduce costs and achieve synergies, several provincial governments are now
merging some of these entities. A few years ago, the BC provincial government merged BC
Hydro (generation) with British Columbia Transmission Corporation (transmission) so that
they are one legal entity again, but are managed separately for FERC compliance purposes.
Manitoba has followed a similar process. The Ontario government also merged the Ontario
Power Authority, (the entity that was charged with entering into long-term power purchase
agreements with generators in the province) with the IESO. We expect that the cost savings
from implementing such initiatives will be relatively modest.
Both Ontario and Quebec have concluded that in order for the industry to be sustainable for
both developers and manufacturers, annual procurements are critical.
In Ontario, the IESO is currently considering Market Renewal to address known
inefficiencies with the current design of Ontario’s wholesale electricity market. This may
involve the implementation of an incremental capacity auction, among other things. In
addition, the Alberta government has announced that it plans to restructure the province’s
electricity market to include a capacity market that will operate alongside the present
wholesale electricity market.

Ken Pearce
Tel: +1 416 863 3286 / Email: kenneth.pearce@blakes.com
Ken Pearce is a senior partner in the firm’s Business Law Group in Toronto and
is a member of the firm’s National Energy Group. Ken advises domestic and
international corporations on a wide range of energy-related matters, including
mergers and acquisitions, responding to RFPs, project development and engineer,
procure, construct (EPC) agreements, wind turbine, solar panel and equipment
supply agreements, project finance, power purchase and steam off-take agreements
and long-term maintenance contracts. His energy clients include Ontario Power
Generation and Algonquin Power. Ken has acted on wind, solar, hydroelectric,
thermal/gas-fired and nuclear generating projects. He is a member of the Ontario
Energy Association (OEA) and the Association of Power Producers of Ontario
(APPrO). Recognised in Who’s Who Legal: Energy 2017.
Sharon Wong
Tel: +1 416 863 1478 / Email: sharon.wong@blakes.com
Sharon Wong is a partner in Blakes’ Toronto office. She practises energy law
with a focus on regulatory matters and complex commercial arrangements. She
has acted for sophisticated clients throughout the supply chain, including energy
developers and generators, utility companies, energy marketers and wholesalers,
large power users and district energy customers. Sharon advises electricity
industry clients on a comprehensive range of regulatory and commercial issues,
including compliance with the requirements of the Ontario Energy Board Act,
1998 and the Ontario Electricity Act, 1998, and advising with respect to power
supply agreements (including Feed-In Tariff contracts) with the Independent
Electricity System Operator (IESO) and disputes with respect to the IESO
Market Rules. Sharon has vast regulatory experience, having appeared before the
OEB many times. She is a member of the Ontario Energy Association (OEA),
the Ontario Waterpower Association, the Energy Bar Association and she is
recognised in The Best Lawyers in Canada in the field of Energy Regulatory Law.
Bryson Stokes
Tel: +1 416 863 2179 / Email: bryson.stokes@blakes.com
Bryson Stokes is Practice Group Leader of the firm’s Business Law Group
in Toronto, a practice group made up of over 60 lawyers, and one of the Co-
ordinators of the firm’s National Power Group. Bryson advises developers,
government/government agencies and commercial and industrial end-users on
a wide range of energy matters, including power purchase agreements, power
plant developments, energy procurement and operations and maintenance
agreements, and he has extensive experience dealing with M&A transactions
involving companies and projects in the energy sector. Bryson has developed
specialised expertise in the area of district energy, having advised district
energy companies and district energy customers for over 25 years in respect of
all aspects of district energy developments, projects and operations. Bryson is
recognised in The Legal 500 Canada 2017 (Recommended Lawyer – Energy –
Power) and Who’s Who Legal Canada – Energy 2016.
Blake, Cassels & Graydon LLP

Address: Suite 4000, Commerce Court West, Toronto ON, M5L 1A9, Canada
Tel: +1 416 863 2400 / Fax: +1 416 863 2653 / URL: www.blakes.com

Chile
Rodrigo Ochagavia, Ariel Mihovilovic & Gerardo Otero
Claro & Cía. Abogados
energy sources
The most important sources of primary energy consumed in Chile are oil (32.9%), coal
(24.4%), firewood and biomass (23.7%). The most important sources of electricity
generation are coal (41%), natural gas (11%) and hydroelectricity (34%). As of September
2015, renewable sources accounted for 11.41% of the electricity produced in Chile.
Most of the fossil fuel sources are imported (approximately 90%), while biomass is the
main locally produced source of energy. Lithium and hydrocarbons found in liquid or gas
state are not recognised as concessible under Chilean law and thus can only be domestically
exploited either directly by the Chilean State or its companies, or by third parties who have
been awarded administrative concessions or entered into contracts of special operations
with the State (also known as contratos especiales de operación – “CEOPs”), subject to
terms and conditions approved by the President of Chile by means of a supreme decree.
The main consumers of energy in Chile are the industrial and the mining sectors (40%
jointly, 24% and 16% respectively), which are supplied with electricity (33%), diesel
(26%) and biomass (29%). These sectors are followed by the transport sector (33% of
final consumption) which is satisfied almost in its entirety with crude oil derivatives,
and the commercial, public and residential sectors which combined, account for 21% of
the aggregate final consumption. Electricity supplies 22% of the aggregate final energy
consumption in Chile.
Oil
As noted above, oil can only be exploited in Chile either by the State or a State-owned
company, or by a third party that has either been awarded an administrative concession or
has entered into a CEOP with the State. As of this date, Empresa Nacional del Petróleo
(“ENAP”), a state-owned company, and GeoPark, a private company, are the main
domestic producers of crude oil in Chile, and virtually all their oil extraction operations
are conducted in the Magellanean Basin (both onshore and offshore). Domestic oil
production, however, represents a very small fraction of the total amount of oil consumed
in Chile; most of it is imported.
Import, export, storage, refinement, transport, distribution, supply and commercialisation
of oil or oil derivatives in Chile can be conducted by non-State parties. However, as per
Decree with Force of Law No. 1 of 1978, any person conducting such activities has to be
registered with and become subject to the overview of the Superintendence of Electricity
and Fuel (the “SEC”), who monitors and oversees compliance with the laws, regulations
and technical standards governing the generation, production, storage, transportation and

Claro & Cía. Abogados Chile
distribution of liquid fuels, gas and electricity generally. Other than such registration, no
concession or special authorisation is required to conduct any such activity.
As of today, ENAP is virtually the sole refiner of crude oil in Chile through its three
refinery plants: the Biobío Refinery Plant (located near the city of Concepción in Region
VIII), the Concón Refinery Plant (located near the city of Valparaíso in Region V) and
the Gregorio Topping Refinery Plant (located in Region XII, near the domestic crude oil
exploitation and extraction facilities).
As to storage, while ENAP has a significant market share, certain oil products distribution
companies such as Copec, Shell and Petrobras have their own storage facilities as well.
Gas
The gas market is comprised of (i) pipelines that come from Argentina, (ii) domestic
pipelines, and (iii) regasification terminals.
There are six natural gas pipelines that come from Argentina, with two located in the
extreme south of Chile (Gasoducto Posesión and Gasoducto Bandurria), two located
in central Chile (GasAndes and Gas Pacifico), and two located in Northern Chile
(GasAtacama and Norandino).
There are three domestic pipelines, each built to reach specific markets: Electrogas
(downstream of GasAndres and GNL Quintero), Tal-Tal (downstream of GasAtacama)
and Innergy (downstream of Gas Pacifico). The major consumption centres also have local
distribution networks. These include the networks of Metrogas (Santiago Metropolitan
Region and Region VI), GasValpo (Region V), GasSur (Region VIII), Intergas (Region
IX), Gasco Magallanes (Region XII) and Lipigas (Region II).
There are two liquefied natural gas (“LNG”) regasification terminals in Chile: one located
in Region V in the Quintero Bay (GNL Quintero); and the other located in Region II in the
Mejillones Bay (GNL Mejillones).
The gas industry in Chile also includes “satellite regasification plants” which are local
regasification plants that supply gas in areas which are not connected to pipelines. These
plants are supplied by tanker trucks. Customers of these regasification plants include
agriculture-related industries.
Most of Chile’s gas distribution infrastructure was constructed during the 1990s, when
Chile and Argentina executed bilateral agreements to regulate and promote the export
of natural gas from Argentina to Chile. More than US$ 4.6 billion was invested in
natural gas-related infrastructure. Significant investments were also made in natural
gas distribution networks and in the conversion of domestic, commercial and industrial
customers from other sources to natural gas.
In 2004, Argentinean natural gas curtailments began and became increasingly severe over
the next years until natural gas exports to Chile were halted in 2007, with the exception
of residential consumption – which continued, but at significantly higher prices due to the
application of new Argentine export taxes.
When the first natural gas supply restrictions from Argentina took effect, the Chilean
government reacted by promoting the development of LNG terminals in order to restore
gas supplies and enhance diversification and security of the country’s energy matrix. This
resulted in the construction of: (i) GNL Quintero, which started supplying gas in 2009,
which was developed by ENAP, together with British Gas, Endesa Chile and Metrogas;
and (ii) GNL Mejillones, which initiated operations in 2010, which was developed by GDF
Suez S.A. (currently known as Engie Energía Chile S.A.) and Corporación Nacional del

Cobre de Chile (commonly known as Codelco, which is a State-owned mining company

and the largest copper producer in the world).
As noted above, gas can only be exploited and extracted in Chile either by the State or a
State-owned company, or by a third party that has either been awarded an administrative
concession or has entered into a CEOP with the State. Distribution and transport of
gas through pipelines, on the other hand, can be conducted directly by private entities,
provided that they have obtained a permanent concession that allows its holder to: (i)
build, maintain, and conduct distribution activities within a given geographical region; or
(ii) provide gas transport services through a pipeline or integrated network, as applicable.
Chilean law allows the existence of overlapping distribution concessions within a given
geographical region and for multiple transport concessions between the same begin- and
end-nodes. Thus, the relevant authority cannot reject a concession request that complies
with the relevant legal, technical, and economic requirements.
A transport concessionaire must operate under an open access policy, which is understood
as the obligation of each transport company to offer its available capacity under the
same economic, commercial, technical, and informational conditions to any individual
demanding transport services.
Gas transport and distribution prices are freely set through bilateral negotiations between
the parties involved, subject to a general maximum profitability limit up to 6% (Annual
Cost of Capital) plus a 3% spread. Compliance with this limit is monitored annually
by the National Commission of Energy (Comisión Nacional de Energía – “CNE”).
The Annual Cost of Capital is calculated by the CNE every four years, considering the
systemic risk of the activities of public gas distribution concessionaires in relation to the
market, the risk-free rate of return, the market risk premium, and an individual risk factor
per zone of concession.
The gas distribution industry market in Chile is also regulated and monitored by the SEC.
Electricity
In Chile, there are four electricity systems: the systems of Aysén and Magallanes, the
Central Interconnected System (Sistema Interconectado Central – “SIC”), and the
Northern Interconnected System (Sistema Interconectado del Norte – “SING”). The
SIC supplies electricity to approximately 92.2% of the national population. The primary
customers in the SING are mining and industrial companies. The SIC and the SING are
expected to be interconnected by late 2017, thereby creating the new National Electric
System.
In each of the SIC and the SING, electricity generation is coordinated by a system
operator, whose purpose is to minimise operational costs and to ensure the highest
economic efficiency of the system, while meeting all service quality and reliability
requirements established by law. Until 2016, each of the SIC and the SING had its own
system operator. However, pursuant to Law 20,936, enacted in 2016 (see Developments
in legislation and regulation below), such coordinators were replaced by the National
Electricity Coordinator (Coordinador Eléctrico Nacional – the “Coordinator”) who, as
of today, operates both the SIC and the SING. Upon interconnection of the SIC and the
SING, the newly unified grid will be coordinated and operated by the Coordinator.
The electricity sector in Chile is divided into three segments: generation, transmission
and distribution. In general terms, generation is subject to market competition, while
transmission and distribution, given their natural monopoly character, are subject to price

regulation. The goal of the Chilean electricity legal and regulatory framework is to provide
incentives to maximise efficiency and to provide a simplified regulatory scheme and
tariff-setting process that limits the discretionary role of the government by establishing
objective criteria for setting prices. The expected result is an economically efficient
allocation of resources. The regulatory system is designed to provide a competitive rate
of return on investment to stimulate private investment, while ensuring the availability of
electricity service to all who request it.
The generation segment consists of companies that produce electricity and sell their
production to distribution companies, unregulated customers and other generation
companies. The transmission segment consists of companies that transmit the electricity
produced by generation companies at high voltage. The distribution segment includes
electricity supply to final customers at a voltage no greater than 23 kV. In Chile, only
generation and distribution companies may commercialise electricity.
Power generation companies satisfy their contractual sales requirements with dispatched
electricity, whether produced by them or purchased from other generation companies in
the spot market. The principal purpose of the Coordinator in operating the dispatch system
is to ensure that only the most cost-efficient electricity is dispatched to customers. The
Coordinator dispatches plants in the order of their respective variable cost of production,
starting with the lowest-cost plants, such that electricity is supplied at the lowest available
cost. Generators balance their contractual obligations with their dispatches by buying
or selling electricity at the spot market price, which is calculated on an hourly basis by
the Coordinator, based on the marginal cost of production of the most expensive kWh
dispatched.
No concession or approval is required to engage in electricity generation (except for
the development and operation of geothermal generation facilities, which do require a
concession). All generators can commercialise energy through contracts with distribution
companies for their regulated customers and unregulated customers, or directly with
unregulated customers. All contracts executed between generation and distribution
companies for the supply of regulated customers after 2005 must be the result of open,
competitive and transparent auction processes. Generators may also sell energy to other
power generation companies on a spot price basis. Power generation companies may
also engage in contracted sales among themselves at negotiated prices, outside the spot
market. Contract terms are freely determined (except in the case of supply to regulated
customers).
The Chilean electricity legal and regulatory framework does not require an electric
concession to build and operate transmission facilities. However, in case it is difficult to
process and obtain rights to use or occupy third-party land affected by the transmission
facility’s layout, transmission companies may request and obtain electric concession that
grant the possibility of enforcing those easements in exchange for proper compensation
to the owners of the affected land.
The transmission system is divided into the following segments: (i) the National
Transmission System (formerly known as the trunk transmission system); (ii) the Zonal
Systems (formerly known as sub-transmission systems); (iii) the Dedicated Systems
(formerly known as additional systems); (iv) the new Development Zones Systems;
and (v) the new International Systems. Each of these segments is subject to a different
remuneration mechanism.
Concessions are required to engage in electricity distribution.

Due to factors such as lower costs of capital and development, new auction mechanisms and
the existence of regulations that favour the development of non-conventional renewable
energies (“NCRE”) (see Developments in Legislation and Regulation below), the Chilean
electricity system has experienced a massive growth in NCRE generation during the last
few years (installed NCRE capacity grew from 286 MW in 2005 to 2,269 MW in 2015).
Albeit beneficial in many ways, this massive and sudden growth has brought challenges to
the existing electricity infrastructure and regulatory framework. One of the most important
challenges was the lack of transmission facilities to allow and sustain injection from
those sources. For geographic, technical and regulatory reasons, many of these NCRE
sources were located in areas where the existing transmission lines were either saturated,
or owned and operated by generators whose marginal cost of production was higher than
these NCREs, thus delaying their dispatch and ability to inject electricity through their own
transmission facilities. The Chilean Transmission Law was enacted in 2016 to address this
issue (among others), but given its novelty and the deferred effectiveness of some of its
provisions, its full impact is yet to be seen.
Additionally, due to certain features of the new auction mechanisms (basically the
independent tender of separate hourly blocks), the low marginal cost of electricity
production of these NCRE sources and strong competition, electricity prices charged to
distribution companies by generators have fallen significantly in just a few years. In the
SIC, prices fell from US$ 146.6 MW/h in 2014 to US$ 59.2 MW/h in 2017; in the SING,
prices fell from US$ 86.7 MW/h in 2014 to US$ 51.5 MW/h in 2017. As a result, demand
of unregulated customers is adjusting and some generators (mainly NCRE) are struggling
to make the required returns on their capital expenditure.
Some other trends affecting the energy mix include: (i) a growing influx of distributed
generation sources (pequeños medios de generación distribuida – PMGDs); (ii) crossborder
power exchanges (with Argentina); (iii) gas exports to Argentina; and (iv) the growth of the
LNG market generally.

In June 2014, the Ministry of Energy of Chile produced an Energy Agenda (Agenda
Energética) in order to address some of the risks to which the Chilean energy system had
been exposed during the last decade, some of which had manifested in shortages and high
energy prices. The Energy Agenda set the following goals, all of which have already been
met:
1. reduce the marginal cost of electricity by 30% before the end of the Bachelet
Administration (early 2018);
2. reduce the price of electricity supplied to regulated consumers by 20% compared to
previous electricity auctions;
3. boost NCRE development in order to achieve a 20% goal (percentage of all electricity
contractually committed to be supplied by generators) by the year 2025;
4. transform ENAP into a more relevant actor in the energy business with a modern
structure of corporate governance; and
5. develop a comprehensive and socially inclusive, long-term energy policy for a 40-year
horizon.

In furtherance of the Energy Agenda, the Chilean government has called for the design
and execution of a comprehensive long-term energy policy addressing the social, political,
environmental and technical challenges faced by the Chilean energy sector and defining
strategies, goals and milestones that would define the Chilean energy matrix for the years
2035 and 2050. With the participation of the government, several stakeholders, key
participants of the energy sector, universities and the public at large, the Ministry of Energy
produced and issued on September 2015 a document titled “Energy 2050”, which contains
Chile’s long-term energy policy (the “Energy Policy 2050”, which is available at http://
www.energia2050.cl/en/energy-2050/energy-2050-chiles-energy-policy/).
The Energy Policy 2050 is based on four principles identified as: (i) quality and security of
supply (i.e. reliability); (ii) energy as a driving force for development (i.e. inclusiveness and
social sustainability); (iii) environmentally friendly energy (i.e. environmental protection
and sustainability); and (iv) energy efficiency and energy education (i.e. competitiveness,
efficiency and public awareness). The main goals set by the Ministry of Energy in pursuit
of these principles were the following:
(a) For a 20-year horizon (2035):
1. Chile’s electricity grid interconnection with other member countries of the Andean
power interconnection system (SINEA) (i.e. Peru, Colombia, Bolivia & Ecuador),
and other South American nations, especially the members of MERCOSUR, is
achieved;
2. electricity outages are reduced to less than four hours per year in any location in
Chile (excluding cases of force majeure);
3. continuous quality access to energy services to 100% of the homes of low-income
families is secured;
4. all energy projects being developed Chile adopt mechanisms for links between
communities and the private sector, thereby promoting local development;
5. Chile becomes one of the five OECD countries with the lowest average residential
and industrial electricity prices;
6. at least 60% of the electricity generated in Chile comes from renewable energy
sources;
7. Chile reduces its GHG emissions by at least 30% compared to 2007;
8. 100% of the large consumers of energy (industrial, mining and transportation
sectors) make efficient use of energy, with proactive energy management systems
and the implementation of energy efficiency measures;
9. all municipalities adopt regulations classifying forest biomass as a solid fuel; and
10. energy efficiency is considered as an element to be assessed in tenders for all new
vehicles used in public transportation systems.
(b) For a 35-year horizon (2050):
1. electricity outages are reduced to less than one hour per year in any location in
Chile, excluding cases of force majeure;
2. the GHG emissions of Chile’s energy sector are consistent with the thresholds
defined by international guidelines and with the corresponding national emissions
reduction goal;
3. universal and equitable access is secured to modern, reliable and affordable energy
services for the entire Chilean population;

4. regional and local territorial planning and land-use instruments are in line with the
guidelines of the Energy Policy 2050;
5. Chile becomes one of the three OECD countries with the lowest average residential
and industrial electricity prices;
6. at least 70% of the electricity generated in Chile comes from renewable energy
sources;
7. growth of energy consumption in Chile is decoupled from Chile’s GDP growth;
8. 100% of new buildings in Chile meet OECD standards for efficient construction,
and are fitted with intelligent energy control and management systems;
9. 100% of the major categories of appliances and equipment sold in Chile are energy
efficient; and
10. energy culture is installed at all levels of society, including energy producers,
distributors, consumers and users.

Some of the most significant recent developments in legislation and regulation regarding
the energy sector are the following:
• Gas Services Law: Law No. 20,999, published on February 9, 2017, amended the
General Gas Services Law (Decree with Force of Law No. 323 of 1931, of the Ministry
of Internal Affairs) setting forth new criteria to be used in the methodology to establish
the maximum profitability of the concession gas distribution networks. Law No.
20,999 mainly provides for:
• Prices freely set through bilateral negotiations between the parties involved,
subject to a maximum profitability limit up to 6% (Annual Cost of Capital) plus a
3% spread.
• Automatic fixed price regime in the event a concessionary exceeds the above
profitability limit, and a mechanism setting forth consumers’ compensation in case
a concessionaire exceeds the maximum profitability limit.
• A Panel of Experts to resolve controversies between concessionaires and authorities.
• New regulation to gas distribution companies that do not require gas concessions.
• Chilean Transmission Law: Law No. 20,936, published on July 20, 2016 (the “Chilean
Transmission Law”) significantly amended the Chilean General Electricity Services
Law (Decree with Force of Law No. 4 of 2007 issued by the Ministry of Economy)
with regard to electricity transmission regulations. While some of its provisions were
effective upon its publication, other provisions will become effective later in time as
provided in the transitory articles thereof.
The Chilean Transmission Law seeks to optimise the system’s operations and ensure
the safety and quality of transmission services by enhancing the transmission tariff
calculation mechanism for the use of different kinds of transmission facilities, and
promoting the expansion of the transmission system in order to secure the connection of
power generation plants fuelled by different sources to a single grid and avoid curtailment
issues arising from the existence of uneven demand in different sections of the grid. In
this context, the Chilean Transmission Law made the following changes (among others):
• Modified the transmission return rate business model to a capital-asset-pricing
model methodology, establishing a floor of 7% and a cap of 10% as a range for an

after-tax return to be applied starting in 2020. It also revised the methodology to

determine the transmission tariff (“VATT”) for the facilities subject to the four-
year tariff valorisation process.
• Created the Coordinator.
• Recategorised the electricity transmission sub-systems into the following, each
subject to a different regime: the National Transmission System; the Zonal
Systems; the Dedicated Systems; the new Development Zones Systems; and the
new International System.
• Recognised universal open access to all the facilities of transmission systems,
including National, Zonal and Dedicated Systems. Under previous regulations,
open access was mandatory just for the National System and Zonal Systems. It
applied to Dedicated Systems only in certain specific cases.
• Provided new formulas and standards to calculate compensation to be paid by
transmission companies for outages due to unavailability of transmission lines.
• Expanded the electricity transmission planning horizon from 10 to 20 years and
established a new centralised proceeding to determine and plan the expansion of
the transmission systems. As per the Chilean Transmission Law, the CNE will
annually conduct a participatory process of transmission planning for a time horizon
of 20 years to identify the necessary works to either expand existing facilities or
to construct new facilities in each of the National, Zonal, Development Zone and
Dedicated Systems. The construction of such facilities shall be tendered by the
Coordinator and their remuneration for five tariff periods of four years each (i.e.
20 years) will be determined considering the VATT set according to their awarded
investment value and an indexation formula set in the tender documents.
• Provided governmental authorities with new planning tools and mechanisms in
order to foster the development of a more competitive market, guarantee proper
conditions for the execution of new projects and valuing existing facilities, and to
incorporate public participation. As an example, some of the new transmission
projects deemed necessary pursuant to the studies described above may be part
of a strip study (estudio de franja), to be carried out by the Ministry of Energy
who will intervene in the layout design and location of new transmission systems
considered strategic for national development, through a process that includes
citizen participation. Based on the strip study, the Ministry of Energy shall submit
a report containing a strip proposal for approval of the Council of Ministers for
Sustainability. The procedure will conclude with a decree of the Ministry of
Energy to set the preliminary strip, which may eventually be encumbered with
electric easements.
• Starting on January 1, 2019, the new regulations that will take effect pursuant to
the Chilean Transmission Law will require VATT to be paid by the regulated and
unregulated customers. This payment will be composed of two items: (i) a tariff
revenue; and (ii) a mandatory flat charge. The tariff revenue is the difference
between the value of injections and withdrawals of power and energy in each
section of system. The mandatory flat charge supplements the tariff revenue to
amount to the VATT. Tariff revenue will be paid by the generators according to
their injections and withdrawals of energy and power. The mandatory flat charge
will be paid by generating companies (for the portion of sales covering unregulated
clients) or distribution companies (for the portion of the energy sold to both

regulated clients and unregulated clients), according to the pro rata defined by the
Coordinator. Generators and distribution companies are entitled to pass through
the mandatory flat charge to regulated and unregulated clients.
• The transmission companies shall be entitled to provide the rights of execution
and exploitation of new works and expansion works as collateral for obtaining
financing for the construction and execution of such works.
• New complementary services planning and procedure: The complementary
services are those resources and facilities that permit the coordination of the
electrical system operation, in accordance with applicable safety and quality
regulations. The Chilean Transmission Law established a new proceeding
pursuant to which the CNE and the Coordinator shall: (i) determine what resources
and services shall be considered as complementary services; (ii) who will provide
them; and (iii) set the compensation to be paid to such providers, as determined
based on several efficiency factors.
• Power auctions: Law No. 20,805, enacted in 2015, set mandatory bidding processes
for the supply of electricity to regulated customers by means of power purchase
agreements to be entered into by the generator-bidder with the distribution companies
supplying such customers. The law provides that the CNE designs the bidding
conditions and the terms of the supply contracts to be awarded pursuant thereto, and
awards the bid winners. The law defines short- and long-term auctions with hidden
ceiling prices. Some auctions conducted under these rules have tendered the supply
of hourly blocks, which has encouraged bids by NCRE generators relying on solar and
wind generation sources.
This law also grants the CNE authority to conduct extraordinary auctions subject to
special rules in case shortages or deficits are identified.
• Tax on emissions: Law No. 20,780, published on September 29, 2014, established a
new annual tax on emissions of particulate matter, nitrogen oxide, sulphur dioxide, and
carbon dioxide (“Taxed Emissions”) by facilities whose fixed sources, such as boilers
or turbines, have individually or in the aggregate, thermal power over or equal to 50
MW. This tax will become effective (payable) in 2018 for the emissions incurred during
the previous commercial year.
In the case of carbon dioxide emissions, the tax is equivalent to US$ 5 for each ton
emitted. In the case of the remainder of Taxed Emissions, the taxes will be the equivalent
of US$ 0.1 per ton emitted, which is further adjusted depending on the social cost of
pollution, as calculated in accordance with formulae set forth in the law and its regulation.
In order to determine the tax burden, the Chilean Environmental Superintendency will
certify in March of each year the amount of emissions by each tax payer or contributor
during the previous calendar year.
• NCRE injection goals: Law No. 20,257, enacted in 2008, as amended by Law No.
20,698 in 2013, requires electricity generation companies operating in systems with
more than 200 MW of operational capacity to generate 20% of their total contractual
supply obligations from NCRE by year 2025 (for contracts executed after July 1, 2013;
contracts executed between August 31, 2007 and June 30, 2013 have a 10% NCRE
requirement, which shall be satisfied by year 2024).
A generator can meet this requirement, which percentage increases over time until it
reaches 20% in year 2025, by developing its own NCRE generation capacity (wind,

solar, biomass, geothermal, and small hydro technology), purchasing NCRE Certificates
locally (similar to carbon bonds) or paying the applicable fines for non-compliance.
• Residential generation: Law No. 20,571, enacted in year 2012, regulates and promotes
residential distributed generation by electricity customers subject to regulated prices
(i.e. domestic and small-scale industrial customers) by: (i) allowing them to sell their
surplus of electricity to the grid at a regulated price; and (ii) establishing a simplified
summary proceeding specially designed to make such customers obtain authorisation
to interconnect small-scale distributed generation facilities (up to 100kW) to the grid.

• “Asociacion Indigena Koñintu Lafken-Mapu Penco v. Serv. De Evaluacion Ambiental
Reg. Bio Bio Y Comision De Evaluacion Ambiental Reg. Bio Bio” (Supreme Court
of Chile, Index No. 35,649-2016): On January 30, 2017 the Supreme Court of Chile
revoked the environmental approval (RCA) of the Penco-Lirquén offshore LNG
regasification terminal (including a FSRU terminal) planned to be located in the
central-southern part of Chile (Region VIII) and expected to be operational by 2019.
The decision provided relief to a complaint filed by an indigenous association based
on alleged procedural violations incurred by the environmental assessment authorities
during the indigenous consultation phase of the environmental assessment proceeding.
• “Compañía Minera Arbiondo Chile Limitada v. Fisco de Chile” (Supreme Court of Chile,
Index 8,133-2015): On September 5, 2016, the Supreme Court of Chile recognised that
a particular mining concessionaire was not entitled to obtain and exercise easements
over State-owned land that had been destined for the development of a wind farm in
favour of a mining concession that was not being used for mining purposes. Albeit
a single decision that is not generally binding, this is the first ruling that addresses a
long-lasting debate about the priority between a mining concessionaire and a project
developer that has rights to use the surface that overlaps with such concession.

Cerro Pabellón, a 48MW geothermal power plant developed by ENAP and Enel, was
officially inaugurated in September 2017. Cerro Pabellón, located in the north of Chile,
is the first geothermal power plant in South America and the world’s first large-scale
geothermal facility of this kind to be built at 4,500 metres above sea level.

No bill or proposal has been formally filed or submitted or become law during the last 12
months. Please note, however, that the media has reported that the government plans to
introduce a bill towards the end of the year to make changes to the framework applicable to
electricity distribution.

Rodrigo Ochagavia
Tel: +56 2 2367 3047 / Email: rochagavia@claro.cl
Rodrigo Ochagavía is a partner in Claro y Cía. since 2001 and leads the
firm’s practice in Project Financing. He has extensive experience in projects,
particularly in regulated sectors such as energy, ports and concessions, as well as a
broad practice in M&A and Banking & Finance. His longstanding relationships
with key players in the energy sector and the financing industry give him a deep
understanding of the issues at stake in Project Finance transactions.
He has been chosen as a leading Chilean practitioner in Projects, Banking and
Finance, Energy and M&A by Chambers and Partners, Latin Lawyer, IFLR,
PLC and The Legal 500, among other publications.
He is admitted to practice in Chile (1994).
Education: Pontificia Universidad Católica de Chile (LL.B. 1993), University
of Chicago Law School (LL.M. 1996).
Ariel Mihovilovic
Tel: +56 2 2367 3002 / Email: amihovilovic@claro.cl
Ariel Mihovilovic joined Claro y Cía. in 2007 and became partner in 2017.
He concentrates his practice in the Energy Industry and Project Finance.
He has extensive experience negotiating power purchase agreements for
both generators and customers, participating in energy auctions sponsored
by the Government or private companies and doing project development,
where he has advised sponsors and lenders. He also has experience in the
water desalination industry and has participated in several corporate and
M&A transactions (including the acquisition and financing of renewable and
conventional energy projects).
He is admitted to practice in Chile (2008) and in New York (2011), where he
worked with Skadden, Arps, Slate, Meagher & Flom (2010–2011).
Education: Pontificia Universidad Católica de Chile (LL.B. 2006), Harvard
Law School (LL.M. 2010).
Gerardo Otero
Tel: +56 2 2367 3412 / Email: gotero@claro.cl
Gerardo Otero joined Claro y Cía. in 2012. Although he concentrates his practice
in Project Finance, M&A and Banking & Finance, he also has experience in
Commercial Arbitration and Bankruptcy. He has extensive experience in the
financing of PV projects in Chile, and has participated in complex projects
such as Alto Maipo and Transmisora Eléctrica del Norte (the interconnection
of the SIC and the SING, which are the two main electricity systems in Chile).
He has also participated in several corporate and M&A transactions, including
prominent deals such as the Banco Itaú-Corpbanca merger.
He is admitted to practice in Chile (2013).
He worked with White & Case LLP at their New York office (2016–2017).
Education: Pontificia Universidad Católica de Chile (LL.B. 2012), Harvard
Law School (LL.M. 2016).
Claro & Cía. Abogados

Avenida Apoquindo 3721, 13th Floor, Santiago, Chile
Tel: +56 2 2367 3000 / Fax: +56 2 2367 3003 / URL: www.claro.cl

Colombia
Adriana Martínez-Villegas
Martinez, Cordoba & Abogados Asociados
energy sources
The Colombian electricity sector has an installed capacity of 16,500 MW, in which 66%
is produced with water resources, 28% with thermal resources and the remaining 6% with
smaller, cogenerated and self-generating generation plants.
Installed generation capacity (MW)

Resources 2015 (MW) 2016 (MW) Participation Variation (%)
(%)
Hydraulic 10,892 10,963 66.06% 0.65%
Thermic 4,743 4,728 28.49% -0.32%
Gas 1,548 2,128 37.47%
Coal 1,339 1,329 0,75%
Fuel-Oil -- -- 0.00%
Combustoil 299 187 -37.46%
Diesel fuel 1,247 774 -37.93%
Jet 1 46 46 0.00%
Gas Jet 1 264 264 0.00%
Minors 698.42 771.52 4.65% 10%
Hydraulic 608.55 648.10 6.50%
Thermal 71.45 105 46.96%
Eolic 18.42 18.42 0.00%
Cogenerators 86.60 99.60 0.60% 15.01%
Autogenerators -- 32 .020% 100%
Total 16,420.02 16,594.52 100% 1.06%
The transport sector is the largest energy consumer and the fuel basket is basically
concentrated in fossil fuels (oil, kerosene, gasoline and diesel).
In this sector, only 6% of energy sources come from alternative sources such as biofuels and
electricity (see chart below).

Martinez, Cordoba & Abogados Asociados Colombia
Transport sector: Energy balance 2012
Gasoline
Diesel
Jet fuel
Natural gas
Petroleum
Bio-diesel
Ethanol Data source: UPME
There really has not been anything extraordinary in the last 12 months. In terms of electricity
generation, the country is highly dependent on hydroelectricity, particularly in years with
abundant rainfall: up to 80% of the electricity generated comes from water resources.
However, in years of drought (El Niño phenomenon), this relationship is reversed and it is
the thermal generation plants that deliver up to 55% of the total electricity demanded by the
national market.
Towards the future, the Energy & Mining Planning Unit – UPME (Ministry of Mines
and Energy) hopes to maintain diversity in generation sources, linking non-conventional
renewable sources (wind and solar). In the next 10 years, it is planned to add 5,100 MW
of new capacity. It is expected to be equally divided between hydro, thermal and non-
conventional renewable energy.

The provisions of Laws 142 and 143 of 1994 govern energy generation activity in Colombia.
In accordance with the provisions of said laws, this activity is carried out at the risk of
the investor. The regulatory framework developed by the Colombian Energy Regulation
Commission – CREG for generation activity tends to encourage competition among the
agents involved, through general rules that all generators must meet regardless of their
technology, or their operation costs.
In this sense, the commercial mechanisms of the Wholesale Energy Market (MEM) have
been designed so that any generator can participate in them and that in the pursuit of private
interest, efficient allocations are achieved.
It is worth noting that MEM is defined as “the market for large blocks of electric power, in
which generators and marketers sell and buy energy and power in the National Interconnected
System – SIN, subject to the Operating Regulations”; and as such, has different mechanisms
in which buyers and sellers can trade energy.
The first mechanism that is contemplated for the purchase and sale of electricity is the

Wholesale Energy Market (i.e. short-term market), in which generators bid on dispatching
daily, delivering their availability offers and price, which are ordered by merit to determine
the generators that sell their energy in the short-term market.
This first marketing mechanism is complemented by the contract market, in which generators
and marketers can sign long-term contracts bilaterally, which define a price, an amount to be
traded between the parties, as well as a series of terms of payment and supplementary clauses.
Through these two mechanisms, the short-term market or Energy Exchange and the contract
market, generators can secure income from the sale of their energy in the short and medium
term.
In addition to these two commercial mechanisms, the Colombian Energy Regulation
Commission – CREG has designed the “Reliability Charge” scheme. This last option is
one by which new generators are encouraged to ensure future energy supply through the
purchase of a fixed amount of energy for the expected demand, over a period of four years.
Currently this is the way of maintaining a secure and reliable generation capacity.
On the other hand, due to Colombia’s international commitments, much emphasis is being
placed on adapting the energy matrix to the challenges of climate change by reducing
greenhouse gases. Several studies have been carried out to identify strategies to adapt the
energy sector to climate change.
Efforts are being made towards the diversification of generation sources by incorporating
renewable energies. According to the Ministry of Mines and Energy, Colombia’s wind
power potential is 30,000 MW of installed capacity. In La Guajira province alone, it is
close to 15,000 MW. For the Energy & Mining Planning Unit (UPME), the Caribbean coast
has the best wind generation potential. As for solar generation, there is a solar resource for
generation in most of the territory, and there is great potential for small-scale projects. Once
these new possibilities are well developed with the participation of new investors, they will
be added to the energy matrix.
Special mention should be made also of the transport sector due to its importance as energy
consumer. For that reason, the Government is designing a roadmap for the transition
towards zero- and low-emission vehicles, as well as in the formulation of a proposal for
energy-efficiency regulation. As new strategies they are working on tax incentives such as
the elimination of tariffs, income-deduction and VAT-exemption for these environmentally
friendly technologies.

The last law issued for the energy sector is Law 1715 of 2014, enacted to regulate the
integration of renewable energies to the National Interconnected Energy System – SIN. It
seeks to promote the development and use of unconventional sources of energy, mainly
renewable.
The additional regulations issued to develop this Law are Decree 2143 of 2015 and Resolution
0456, which establish the policies for the application of tax incentives for companies that
develop projects with renewable energy sources. Decree 2492 of 2014 explains how the
protocol will be developed in terms of implementation so that non-conventional sources
give a timely response to demand when conventional ones cannot meet it. Finally, the
Colombian Energy Regulation Commission produced Document CREG 161, whose content
develops “the alternatives for the incorporation of generation with unconventional sources
of renewable energy”.

Investors consider this regulation is still insufficient to promote the development of these
renewable energy sources.

According to private company associations, the policy of diversification of the matrix
with the incorporation of renewable energies should take into account that there must be
a balance in the market to be competitive, and “define generation quotas where investors
decide which project to make the bet”.
Currently there is also litigation before the Courts having the “Reliability Charge” as the
main reason for disputes. Tribunals will rule on this matter in the near future.
Finally, several decisions of the Constitutional Court and the State Council have changed the
interpretation of centralisation in government, by saying it is no longer absolute. Therefore
municipalities and district authorities and the national authorities should coordinate their
administrative competences in order to adopt adequate measures to protect the environment,
health, hydrological basins, and economic and cultural development of communities in the
location or region where any project will stand, in compliance with ruling C-123/2014 from
the Constitutional Court.

Important discussions have arisen on the so-called “Reliability Charge” previously explained,
which is a payment to users included in the tariff, meant to guarantee the operation of the
generating reserve during drought seasons.
Before the “Reliability Charge” there was the Capacity Charge, which only remunerated
capacity to provide the service in summer time. In 2006 it was changed to the Reliability
Charge which, in addition, created another figure for new plants, in which an auction is
held. As already explained, this was the way to attract new investment, by assuring the
investor of this payment for 20 years, as well as bring plants into operation through that
figure, guaranteeing energy in summer.
During the last “El Niño phenomenon”, some of those plants had economic problems and
failed in providing energy as the back-up for hydraulic generation. This was the main reason
for the mentioned national discussions, since the public and the supervisory authorities
questioned what happened to the funds raised over the years as the Reliability Charge in
the tariff to users.
Another issue worthy of comment is that some investors in the sector have criticised the
government for delays in issuing sufficient regulations, and delaying the development of
renewable energy sources, despite having passed the law four years ago and repeated in
different forums the national interest in promoting this type of energy.

Although the issuance of additional regulations on the use of non-conventional sources
of energy may be useful in their development, the main problem of the sector is not in
new laws or regulations, but in the pronouncements of the high courts against issues such
as protection of users and constitutionally protected assets, minimum consumption and
subsidies to users. The municipal consultations regarding energy and mining activities are
also impacting the perception of legal stability.

Adriana Martinez Villegas

Tel: +57 1 616 0890 / Email: adrianamartinez@martinezcordoba.com
Adriana Martinez Villegas graduated as a lawyer from the Pontificia Javeriana
University of Bogotá, and followed graduate studies (LL.M.) at the London
School of Economics and Political Sciences, and at the Pontificia Javeriana
University in Companies Legislation. She joined the firm “Martínez Córdoba
& Abogados Asociados” after completing her graduate studies in England.
Her academic experience is due to her performance as Professor in the Master
Program and Specialization in Energy & Mining Law and Oil & Mining Law,
and in the Master Program in the Environmental Law Program at the Externado
ode Colombia University since 1999. She is President of the Mines and Oil
Bar Association. She has been acknowledged as a prestigious attorney in the
mining and energy sector by the Chambers & Partners publication in the UK.
Currently, she is president of the Martínez, Córdoba & Abogados Asociados
firm, specialised in natural resources (mining, oil and environment) legal
counselling. She is also a columnist of the La República, the most important
economic newspaper in Colombia, in their Legal Issues section.
Martinez, Cordoba & Abogados Asociados

Calle 95 No. 11-51 oficina 404, Bogotá, Colombia
Tel: +57 1 616 0890 / Fax: +57 1 218 8707 / URL: www.martinezcordoba.com

Cyprus
Michael Damianos & Christina Aloupa
Michael Damianos & Co LLC
Overview
Cyprus is not currently producing any primary sources of energy (other than renewables).
It is considered a heavily energy-receiving country, as over 90% 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 country’s dominant source of energy in all sectors, including transportation and
electricity generation, is imported petroleum products, which contribute over 90% to
the country’s gross final energy consumption. In relation to electricity generation itself,
approximately 91.6% of it is produced from imported petroleum products. The European
Commission has ranked Cyprus as one of the most vulnerable countries in the EU in terms
of energy dependency and security of energy supply. The import of petroleum products
accounts for approximately 30% of all the country’s imports, which is a heavy burden on its
balance of payments and reveals its vulnerability to potential macroeconomic imbalances.
Since petroleum products dominate the country’s gross final energy consumption, other
sources of energy contribute only marginally to the country’s energy mix. According to
the Energy Service of the Ministry of Energy, Commerce Industry and Tourism, in 2013,
renewable energy sources (“RES”) had, at the time, a share of just over 8% to the country’s
gross final energy consumption. RES, which are now more significant to the country’s
energy mix than they used to be five or ten years ago, are used as follows:
1. Solar energy: Solar energy is used by domestic and industrial solar thermal systems. It
should be noted that Cyprus ranks second in the world in terms of solar water heating
collector capacity per capita. Photovoltaic grids are also used, and they are either
connected to the country’s (currently) sole electricity company, or are stand-alone and
used in other ways.
2. Wind energy: There are currently six wind farms in operation with 155.1 MW installed
capacity and they all generate electricity which they sell in its totality to the country’s
(currently) sole electricity company. Wind energy is also used through wind turbines
for water pumping.
3. Biomass: The total capacity of biomass plants is insignificant, generated through
manure/organic animal waste and, again, sold to the country’s (currently) sole electricity
company.
In relation to the electricity market of Cyprus, this is currently dominated by the state-owned
Electricity Authority of Cyprus (the “EAC”), which is the sole generator and supplier of
electricity. Around 91.6% of electricity is produced from imported petroleum products, and
only around 8.4% from the RES that are mentioned above (according to unofficial sources).

Michael Damianos & Co LLC Cyprus
Natural gas will be a significant source for production of electricity in the next few years, as
will be discussed further in this report.
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
for certain non-domestic consumers. In 2009 the electricity market was fully opened in
relation to all non-domestic consumers, with a view to 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, thereby enjoying a de facto monopoly.
It should be noted that there have been discussions regarding the denationalisation of the
EAC, but there is no definite decision in relation to this.
Even if Cyprus does not currently produce any primary sources of energy, this is likely
to change soon, as it discovered large natural gas reserves in its exclusive economic zone
(“EEZ”) in December 2011. This has been the most significant development in the energy
history of Cyprus, and its overall energy policy has been changing rapidly over the last
few years due to this. The natural gas discoveries have paved the way for the transition of
Cyprus from an energy-receiving country to an energy producer, and potentially exporter.
Changes in the energy situation, the legal regime and government policy
Oil & gas exploration – Legal background
In order to be able to outline the developments in the oil and gas sector, one needs to
understand the legal regime behind this.
As a full member of the EU since 2004, Cyprus has to fully comply with EU law. The
Regulation on the Jurisdiction and the Recognition and Enforcement of Judgments in
Civil and Commercial Matters is directly applicable to Cyprus as an EU Member State.
Cyprus is also a member of the New York Convention; it has an excellent network of double
tax treaties and bilateral investment treaties, and a very favourable tax system, with its
corporation tax rate being the lowest in the eurozone (12.5%).
The legislative regime of Cyprus in relation to hydrocarbons is based on the country’s
obligations derived under both EU and international law. Cyprus is a party to the United
Nations Convention on the Law of the Sea (“UNCLOS”) which, amongst others, outlines
the rights and responsibilities of states in their use of the world’s oceans, establishing
guidelines for businesses and regulating the territorial waters, contiguous zones and
exclusive economic zones of states. Cyprus has ratified UNCLOS in 1988, and it has
passed a law defining and regulating its EEZ in 2004. Part of the EEZ of Cyprus is an
exploration area of 51,000 square kilometres in the south of the island, which is divided
into 13 offshore exploration blocks. The jurisdiction of Cyprus within its EEZ relates to:
the exploration, utilisation and management of all natural resources; the waters, the seabed
and the soil under the seabed; the production of energy; the utilisation of man-made islands,
installations and structures; scientific research; and the protection of the environment.
Agreements on the delimitation of the EEZ of Cyprus exist between Cyprus and respectively
Egypt, Lebanon and Israel in relation to the south and south-east of the country. The
agreement with Egypt has been ratified and is in force; the agreement with Lebanon has
yet to be ratified; and the agreement with Israel has been ratified and is in force (although
disputed by Lebanon in relation to the involvement of Israel).

The hydrocarbon exploration and exploitation activities in Cyprus are subject to the
Hydrocarbons Law (of 2007 to 2015) and Regulations (of 2007, 2009 and 2014) which
were enacted to transpose into national law the EU Directive on the Conditions for Granting
and Using Authorisations for the Exploration and Production of Hydrocarbons. Relevant
sections of the Hydrocarbons Law stipulate that the ownership of hydrocarbons wherever
they are found in Cyprus, including the territorial waters, the continental shelf and the
EEZ of the Republic of Cyprus, shall be deemed to be and always to have been vested
in the Republic. The powers to determine, within the territory of the Republic and the
relevant offshore zones, the areas to be made available for prospecting, exploring for and
exploiting hydrocarbons, and to grant authorisations for the prospection and/or exploration
and/or exploitation of hydrocarbons in a geographical area, after due process set out in the
Hydrocarbons Law, rest with the Council of Ministers.
The Hydrocarbons Law and Regulations set out the criteria for the valuation of the licence
applications and provide for three types of licence/authorisation. A prospecting licence
is valid for a maximum of one year and involves evaluation of potential by identifying
geophysical techniques, and evaluation of offshore potential by carrying out geophysical
surveys such as 2D/3D seismic surveys. Prospecting licences do not allow drilling. An
exploration licence is granted initially for up to three years, and can be renewed twice
for a period of two years for each renewal, providing for a maximum of a seven-year
licence. Upon each renewal, 25% of the initial licence area is relinquished. The licensee
is permitted to carry out gravity and magnetic surveys, as well as 2D/3D seismic surveys
and exploratory drilling. In case of a discovery, the holder has the right to be granted an
exploitation licence for that discovery. An exploitation licence is granted for an initial
period of up to 25 years, with the possibility for one renewal of up to ten years. Conditions
and requirements contained in the authorisation for exploration or exploitation are stated
explicitly in a production-sharing contract (“PSC”) between the state and the licence holder.
An applicant for an exploration licence must carry out an environmental impact assessment,
and has several environmental obligations under international and local law upon being
granted a licence.
What is notable in relation to the Hydrocarbons Law is its transfer and change-of-control
provisions in relation to rights granted under, or deriving from, a licence. In accordance
with section 27 of the Hydrocarbons Law, no holder of an authorisation (meaning any type
of licence) may transfer an authorisation or assign the rights arising from an authorisation
to another entity, except with the consent of the Council of Ministers. The Council of
Ministers may grant such consent: (i) if the transfer or assignment does not endanger national
security; (ii) if the entity to whom the authorisation is to be transferred, or the rights arising
from an authorisation are to be assigned, has sufficient technical knowledge, experience and
financial resources to secure the proper exercise of the activities of prospecting, exploring
for and exploiting hydrocarbons; and (iii) if such entity undertakes to comply with such
other conditions and requirements as the Council of Ministers may deem proper to impose.
In accordance with section 28 of the Hydrocarbons Law, no entity may, after the grant of
an authorisation thereto, come under the direct or indirect control of a third country, or a
national of a third country, without the prior approval of the Council of Ministers.
Oil & gas exploration – Developments
Once Cyprus had defined its EEZ in 2004 and divided the south of the island into 13 offshore
exploration blocks, it announced its first licensing round on 5th February 2007. The first
licensing round related solely to Block 12, which is located next to the Israeli Leviathan

gas field. Houston-based Noble Energy was awarded a three-year exploration licence and
a PSC was signed in October 2008. Noble Energy started drilling in September 2011 and
announced, in December 2011, that it had discovered a natural gas reservoir ranging from
five to eight trillion cubic feet.
The Cyprus government approved the launch of a second licensing round consisting of the
remaining 12 offshore blocks (covering an average area of approximately 4,000 square
kilometres each). The public announcement was made on 11th February 2012 and expired
after a three-month bidding period, on 11th May 2012. Fifteen bids were submitted from five
companies and ten consortia, for 9 of the 12 blocks. On 30th October 2012 the government
announced that it had reached a decision to award Blocks 2, 3, 9 and 11, which are contiguous
blocks (lying north and north-east) to Block 12. Blocks 2 and 3 were to be awarded to a
consortium consisting of Italy’s ENI (80%) and South Korea’s KOGAS (20%). Block 9 was
to be awarded to a consortium consisting of France’s Total (operator), Novatec Overseas
Exploration & Production (of Russia) and GPB Global Resources (again of Russia). Block
11 was to be awarded to Total. Despite the above announcement, negotiations in relation
to Block 9 (which was thought at the time to be the richest block in natural gas) did not
proceed as expected. The government announced on 24th January 2013 that three PSCs had
been signed with the ENI and KOGAS consortium in relation to Blocks 2, 3 and 9 (with
ENI being the operator). On 6th February 2013 the government further announced that it
had signed two PSCs with Total in relation to Blocks 10 and 11. In relation to the signing
of PSCs, it should be noted that the Cyprus government had published a model PSC to form
the basis of negotiations with successful bidders for its offshore blocks in relation to the
second licensing round.
In relation to Block 12, on 11th February 2013 Noble Energy transferred/assigned 30% of
its rights in the PSC to Israel’s Delek Drilling and Anver Oil and Gas Exploration, which
are both subsidiaries of Delek Energy Systems Ltd. In 2016 it further proceeded with
transferring/assigning 35% of its rights in the PSC to BG (now owned by Anglo-Dutch
Royal Dutch Shell), which resulted (presumably) in certain amendments to the PSC being
agreed with the Cyprus government. The rights under the relevant PSC are now held by
Noble Energy at 35%, by BG at 35% and by Delek Drilling and Anver Oil at 15% each.
Noble Energy remains the operator.
The drilling of a second appraisal well in Block 12 was completed in October 2013 in
order to further evaluate the findings of the 2011 natural gas discovery. The appraisal work
confirmed a mean gross natural gas resource of 4.5 trillion cubic feet, in relation to the
Aphrodite field. In June 2015, the Ministry of Energy, Commerce, Industry and Tourism
announced that Noble Energy, Delek Drilling and Anver Oil, had declared the Aphrodite field
to be commercially viable, and the parties to the relevant PSC have now relinquished Block
12 – with, obviously, the exception of the Aphrodite field. The commerciality declaration
is a significant milestone to the transition of Cyprus from the hydrocarbons exploration
phase to that of exploitation. The consortium has submitted to the Cyprus government a
development and production plan in relation to the Aphrodite field and they are currently
assessing regional market options for monetising Aphrodite gas.
In relation to Block 9, after conducting two exploratory drills, the ENI and KOGAS
consortium failed to identify any exploitable amounts of natural gas. A request to extend its
exploration licence was submitted by the consortium to the government in relation to all its
blocks, i.e. Blocks 2, 3 and 9. The consortium’s exploration licence has now been renewed
for two more years, i.e. expiring in 2018.

In relation to Block 11, Total has assessed geological and geophysical data, but not identified
any drillable prospects either. On 18th March 2015, the government signed an agreement
with Total in relation to further exploration works in order for Total to assess further the
exploitability of Block 11 (with drilling to take place within 2017), but 25% of Block 11 has
already been relinquished. In April 2017, Total farmed-out 50% of its rights in Block 11 to
ENI, with Total remaining as the operator.
As far as the remaining blocks are concerned, no licences had been awarded during the
second licensing round and the Cyprus government proceeded with the third licensing
round for offshore exploration of Blocks 6, 8 and 10, which are carbonate reservoirs similar
to the Zohr discovery in Egypt and different to the Aphrodite field in Block 12. Even
though Block 10 was previously awarded to Total, the company relinquished the block in
2015 without drilling any wells, hence the Cyprus government proceeded to include this
block in the third licensing round.
As far as the third licensing round is concerned, the Cyprus government announced on
27th July 2016 that it received the following applications: (1) with respect to Block 6, one
application from a consortium (50/50) consisting of ENI (as the operator) and Total; (2)
with respect to Block 8, two applications, one from a consortium consisting of Capricorn
Oil (as the operator), Delek Drilling and Anver Oil Exploration, and one from ENI; and (3)
with respect to Block 10, three applications, one from a consortium consisting of Eni (as
the operator) and Total, one from a consortium consisting of ExxonMobil (as the operator)
and Qatar Petroleum, and one from Statoil. In relation to the signing of PSCs, it should
be noted that the Cyprus government had again published a model PSC to form the basis
of negotiations with successful bidders for the relevant blocks in the third licensing round.
The results of the third licensing round were announced on 21st December 2016 and
respective PSCs were signed in April 2017 with successful bidders. Block 6 was awarded
to the ENI and Total consortium; Block 8 was awarded to ENI; and Block 10 was awarded
to the ExxonMobil and Qatar Petroleum consortium. It is reported that 12 exploration wells
will be drilled in total, with respect to the three third licensing round blocks.
It should be noted that over the years the Cyprus government has signed several agreements
in order to facilitate its cooperation with other countries in the field of oil and gas. To name
a few recent:
• In September 2014, Cyprus signed a memorandum of understanding with Jordan
which, amongst others, provides for cooperation between the two countries in
exchanging information and expertise with respect to energy matters, and in assessing
the possibility of exporting natural gas from Cyprus to Jordan.
• In February 2015, the Cyprus government further signed a memorandum of
understanding with Egypt which, amongst others, authorises the Egyptian Natural Gas
Holding Company (EGAS) and CHC (as defined below) to examine technical solutions
for natural gas transportation via a direct subsea pipeline from Block 12 to Egypt.
• In August 2016, Cyprus further entered into an exchange of letters with Egypt
concerning the export of natural gas from Cyprus to Egypt.
• Finally, in April 2017, the respective energy ministers of Cyprus, Israel, Greece and
Italy signed a joint declaration, committing to support the application for obtaining EU
funding for the construction of the “EastMed” underwater pipeline for the transportation
of natural gas between Cyprus and Israel to Greece, and from Greece to Italy (the
“EastMed Declaration”).

Natural gas and the energy/electricity market

The energy policy of Cyprus is harmonised with the energy policy of the EU. The Cyprus
Energy Regulatory Authority (“CERA”) was established pursuant to the Law on Regulating
the Electricity Market of 2003, which was enacted for the harmonisation of Cyprus law
with the relevant EU directive concerning common law rules for the internal market in
electricity. CERA was established, aiming to open the electricity market (which has been,
at least legally, fully opened since January 2014), and is the body responsible to ensure that
electricity prices determined by (the current monopoly of) the EAC reflect the actual costs
of the services offered with a reasonable profit.
In addition to the above, by virtue of the Law Regulating the Natural Gas Market of 2004
(which transposes another EU directive into Cyprus law) concerning common rules for
the internal market in natural gas, CERA is responsible for regulating the natural gas
market. The Transmission System Operator (“TSO”) was again established pursuant to
a decision of the government of the Republic of Cyprus for harmonisation of Cyprus law
with another relevant EU directive concerning common rules for the internal electricity
market. The main functions and responsibilities of the TSO are to secure the operation of
the electricity transmission system, and to manage the electricity market on an objective,
non-discriminatory basis in a competitive environment, while at the same time supporting
and promoting electricity generation from renewable energy sources. The TSO ensures
access to the transmission system of all producers and suppliers of electricity. Both CERA
and the TSO have a significant role to play in the energy market of Cyprus, especially in
relation to the electricity market, and their role will be even more significant if electricity
companies do break into the Cyprus market in the next few years.
Even before the discovery of natural gas in the EEZ of Cyprus, the Council of Ministers
decided to import natural gas for the production of (mainly) electricity. Any power station/
unit of considerable capacity should be fuelled with natural gas. Despite the natural gas
discoveries, according to commentary, natural gas from the EEZ of Cyprus will not be
available to the Cyprus market at least until 2020 (at the earliest) and exports are not
expected to commence before 2024. Cyprus therefore needs to import such natural gas if it
is to use any natural gas any time soon.
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 (the “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, amongst 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, be the sole importer and distributor of natural gas in
Cyprus, i.e. making its position a monopoly. It has to proceed with securing the necessary
natural gas quantities, at the most 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, which 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 €65m, and a €10m
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 €500m.

As the NGPC needs to start importing natural gas into Cyprus before the natural gas from
the EEZ of Cyprus is available, as part of an interim solution aimed at reducing the cost of
electricity production for the period until natural gas from the EEZ of Cyprus is available,
the NGPC has twice commenced procedures for expression of interest for the short-term
supply of natural gas (the second one being for a period of up to 10 years commencing 1st
January 2016). Despite such procedures, the NGPC has been unable to reach any agreement,
in accordance with its announcement of February 2016, and it remains to be seen what its
next steps will be.
Natural gas – what will be done with it?
The above section, which deals partly with the future of natural gas in Cyprus, does not deal
with what will be done with the natural gas discovered in the EEZ of Cyprus. The reserves
in the EEZ of Cyprus are estimated to be more than enough to cover the national demand in
natural gas for over 20 years; hence natural gas will be exported.
On 26th June 2013, Cyprus signed a memorandum of understanding with Noble Energy, Delek
Drilling and Anver Oil and Gas Exploration, regarding the construction of an LNG facility.
The proposed facility, which was expected to cost around US$6bn, was to have been located
at the southern coastal industrial site of Vasilikos and would have constituted the biggest
single investment in the history of Cyprus. The idea was that it would initially process natural
gas from the Aphrodite field into LNG for export and delivery to international markets, but
it would also have the ability to expand to accommodate additional natural gas discovered in
other blocks in the EEZ of Cyprus, as well as natural gas from neighbouring countries, such
as Israel and Lebanon. However, following appraisal work in the Aphrodite field, it seems
unlikely that such a project would be financially viable, since the estimated reserve quantities
of the Aphrodite field (which are currently the only proven reserve quantities in the EEZ of
Cyprus) are unlikely to be sufficient on their own to enable the construction of an LNG
facility. In light of this, the Noble Energy, Delek and Anver consortium may be considering
other options such as a floating LNG facility (FLNG) or a compressed natural gas (CNG)
plant, but the government’s preferred option is, and has always been, the construction of
an onshore LNG facility, if sufficient reserves in other blocks of the EEZ of Cyprus are
discovered to make the construction of an onshore LNG facility financially viable.
It should be noted that the construction of a natural gas pipeline to the east, west or south
of Cyprus has also been proposed from time to time. No such plans are currently in place,
mainly due to geopolitical factors, but also since it is questionable whether any such pipeline
would be financially viable. As far as the west is concerned, despite the EastMed Declaration
(as defined above), it is questionable whether such project will indeed be financially viable
and parties are still in the initial stages of its evaluation. Regarding the south, however,
meaning a pipeline to Egypt, this may indeed be financially viable and the Minister of Energy,
Commerce, Industry & Tourism has recently commented that Cyprus, in its capacity as transit
country and future gas producer, will continue to support possible gas export options, such as
the EastMed pipeline and a direct line from the EEZ of Cyprus to Egypt. Commentators do
suggest that a direct line from the EEZ of Cyprus to Egypt is likely to currently be the most
financially viable option for Cyprus, and the transfer/assignment of 35% of the Noble Energy
rights in the PSC for Block 12 to BG (which has substantial interests in Egyptian natural gas)
could facilitate a deal between Cyprus and Egypt.
Cyprus Hydrocarbons Company
In accordance with section 16 of the Hydrocarbons Law, the management of the Republic
of Cyprus’ participation in the activities of prospecting, exploring for and exploiting

hydrocarbons may be assumed by the state itself or by a legal person that the Council
of Ministers may prescribe. Pursuant to the Hydrocarbons Law, therefore, the Council
of Ministers proceeded with the establishment of the Cyprus National Hydrocarbons
Company, which later changed its name to Cyprus Hydrocarbons Company (the “CHC”).
The CHC is a private limited company and has a sole member, namely the Minister of
Energy, Commerce, Industry and Tourism (on behalf of the state) and a seven-member
board appointed in accordance with the provisions of the Hydrocarbons Law.
Pursuant to the memorandum of association of the CHC, the company will have the power
to perform the following activities:
1. commercial exploitation of hydrocarbons that belong to the Republic of Cyprus;
2. commercial participation in infrastructure which is required for the exploitation of
hydrocarbons;
3. participation in the exploration and/or exploitation, production, processing and
transportation of hydrocarbons;
4. participation in the management and operational control of the energy infrastructure for
the exploitation of hydrocarbons on behalf of the Republic of Cyprus;
5. management and/or supervision regarding the execution of any contracts (in relation
to hydrocarbons) that have been in the past, or will be in the future, entered into by the
Republic of Cyprus; and
6. safeguarding of the satisfaction (in priority) of local natural gas needs out of the
reserves that have been or will be discovered in the territory and/or continental shelf
and/or EEZ of the Republic of Cyprus.
It should be noted that following recent developments in the EEZ of Cyprus, the CHC
is currently supporting, for example, the government of Cyprus with the review of the
submitted development and production plan in relation to the Aphrodite gas.
Other energy-related developments

Renewable energy sources
Despite the discovery of hydrocarbons dominating the energy sector in Cyprus, there have
also been developments in relation to renewable energy sources (RES). As mentioned in
the introduction to this report, RES only have a share of less than 9% of the country’s
gross final energy consumption. The energy policy of Cyprus is, however, 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
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. The abovementioned directive aims at ensuring a 20% share of renewable energy
in final energy consumption, and to cut greenhouse gas emissions by 20% as compared to
1990 levels, by 2020 in the EU. Cyprus is obliged to achieve a share of 13% of RES in its
gross final energy consumption (after adjustment for aviation consumption) and a share of
10% of RES in final energy consumption of transport by 2020.
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% 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.
In 2014, the Ministry of Energy, Commerce, Industry and Tourism announced similar
support schemes for the installation of photovoltaic systems of 3kW each by vulnerable
households (with a state grant) and by non-vulnerable households and local government
authorities (without a state grant). Another support scheme was announced in 2014 for
auto-generating photovoltaic systems of 500kW, each to be installed on commercial and
industrial units.
In 2015, the Ministry of Energy, Commerce, Industry and Tourism announced a new scheme
for the promotion of the installation of photovoltaic systems, which was amended in 2016,
in relation to the following three categories:
1. photovoltaic systems of up to 5kW which are connected to the grid of the EAC via
net metering with a total available power of 23MW for: (i) vulnerable households,
to which a grant of €900 per kW is given (1.2MW); (ii) non-vulnerable households,
without the provision of a grant (8.8MW); and (iii) non-domestic consumers, including
businesses in the sectors of agriculture, livestock breeding, fisheries and aquaculture,
without the provision of a grant (13MW);
2. auto-generating photovoltaic systems of up to 10MW each in commercial and industrial
units, with a total available power of 40MW; and
3. auto-generating photovoltaic systems which are not connected to the grid (where every
consumer has a right to submit an application for this category).
Major economic events and developments

The March 2013, Eurogroup decisions resulted in Cyprus going through its worst economic
period since the Turkish invasion of 1974. Severe austerity measures have been imposed,
the country’s banking sector was forced to shrink, and unemployment rates have risen. The
discovery of natural gas in the country’s EEZ will play a major role in the island’s economic
recovery.

Michael Damianos
Tel: +357 22 021212 / Email: michael@damianoslaw.com
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 LL.M. 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.
In Cyprus, his main areas of practice are international and local mergers and
acquisitions, corporate/commercial, energy/projects, and banking.
Christina Aloupa
Tel: +357 22 021212 / Email: caloupa@damianoslaw.com
Christina Aloupa is an associate at Michael Damianos & Co LLC. She is
a law graduate of the University of Leeds and has obtained an LL.M. in
International Law from the University of Nottingham. She is a qualified
Cypriot lawyer and a member of the Cyprus Bar Association. Her practice
focuses on corporate, banking and energy-related matters.
Michael Damianos & Co LLC

2 Dramas Street (Corner with Makariou Avenue), Fourth Floor, Nicosia, P.C. 1077, Cyprus
Tel: +357 22 021212 / Fax: +357 22 021213 / URL: www.damianoslaw.com

Finland
Andrew Cotton, Björn Nykvist & Laura Leino
HPP Attorneys Limited
Overview of the current energy mix, and place in the market of different energy sources
During the first half of 2017, some developments in terms of changes in overall Finnish
energy consumption have been noted, some of which are consistent with trends seen during
2015 and 2016, whereas some developments can be seen as being new directions for the
Finnish energy sector. According to preliminary figures compiled by Statistics Finland for
the period from January to June 2017, the Finnish energy mix was as follows:
Total energy consumption by source (TJ) and CO2 emission (Mt)
Energy source I-II/2017* Annual change Percentage share of total

%* energy consumption
Oil1 151,771 0 22
2
Coal 64,603 -1 9
Natural gas3 39,182 -7 6
4
Nuclear energy 115,435 -5 17
Net imports of electricity5 37,501 11 6
Hydro power5 24,648 -20 4
5
Wind power 8,227 87 1
Peat 31,842 0 5
Wood fuels 183,937 4 27
Others6 29,115 -5 4
TOTAL ENERGY 686,263 -1 100
CONSUMPTION
Bunkers 20,673 8 .
CO2 emissions from 22 0 .
energy sector
* = preliminary
. = category not applicable
1. Oil: includes the bio part of transport fuels.
2. Coal: includes hard coal, coke, blast furnace gas and coke oven gas.
3. The consumption of natural gas does not include raw material use.
4. Conversion of electricity generation into fuel units: Nuclear power: 10.91 TJ/GWh (33% total
efficiency).
5. Conversion of electricity generation into fuel units: Hydro power, wind power and net imports of
electricity: 3.6 TJ/GWh (100%).
6. Others: includes exothermic heat from industry, recovered fuels, heat pumps, hydrogen, biogas,
other bioenergy and solar energy.

HPP Attorneys Limited Finland
Wood-based fuels continue to account for by far the largest share of the overall energy mix
(a slight increase of 4% to 27% share in the first half of 2017), reflecting the significant role
of the forest industry and its side products to the energy sector. The share of oil, of which
the traffic sector uses more than half, in the overall energy mix remains unchanged at 22%
in the first half of 2017.
Of particular interest is the fact that the share of the total consumption of both coal and
natural gas continued to steadily decline whilst the share of wind power, which is still small
in percentage terms in the overall energy mix at only 1%, continued to strongly increase
in terms of its share of produced electricity compared to the previous year, increasing by
5%. The decrease in the consumption of natural gas can be explained to a large extent by
high gas prices compared to the price of energy from other fuel sources and low wholesale
prices. Similarly, low energy prices have led to a significant amount of capacity from coal-
fired condensed power plants being taken out of use (approximately 500MW in 2015, for
example, according to the National Report 2016 of the national energy regulator, the Energy
Authority (‘Energiavirasto’ in Finnish) to the Agency for the Co-operation of Energy
Regulators and to the European Commission dated 8 July 2017) (“2016 National Report”).
The share of nuclear power generation fell slightly in the first half of 2017, but generally
accounts for approximately 30% of the annual electricity production in Finland. However,
with the much-delayed Olkiluoto 3 reactor due to be commissioned in December 2018
(provided that there are no further delays), the share of nuclear energy, both in terms of the
overall energy mix and the percentage of electricity produced from nuclear sources, will
significantly increase from 2019 onwards.
According to the 2016 National Report, during 2015, in spite of the low wholesale
electricity prices in neighbouring Nordic counties, transmission bottlenecks between
Finland and Sweden meant that imports resulted in no significant change in the volume of
imported electricity during 2015 and the first half of 2016. It should be noted that electricity
transmission between Finland and Sweden is among the most congested in Europe. The
import of electricity from Sweden has steadily increased in recent years, and in the past
few years, sufficient cross-border transmission capacity has been available to the electricity
market only around half of the time. According to the Finnish TSO Fingrid, in a press
release from December 2016, a joint project with Swedish TSO Svenska kraftnät will be
launched as a Project of Common Interest at EU level to build a transmission line connection
which will increase the transmission capacity from Sweden to Finland by 800 MW, which
corresponds to around 30% of the current capacity, with an estimated commissioning date
in 2025. The significant increase in the share of imported electricity during 2016 and in
the first half of 2017 came from Russia and the Baltic countries. According to Energy
Finland, electricity imports from Russia (5.9 TWh) grew by almost 50% in 2016, and this
may have continued to be the case during the first half of 2017. The impact of the Estlink
2 underwater transmission cable, which increased the total transmission capacity between
Finland and Estonia to 1,000MW, should also be borne in mind.
In terms of new developments, it can be seen that net imports of electricity increased by
11% in the first half of 2017, and imported electricity accounted for 22.3% of consumed
electricity in the first half of 2017, which was consistent with the same share of the energy
mix in 2016. According to the National Report 2017 of the Energy Authority, 22.3% of
consumption being covered by net electricity import was a record level.
The increase in net imports is explained by an overall increase in the consumption of
electricity, partly as a result of increased economic activity in Finland and the low wholesale

price of electricity from early 2016 onwards. It is widely anticipated that Finland’s net
shortage of electricity will be partially solved by the commissioning of the Olkiluoto 3
nuclear reactor, currently projected for December 2018.
In terms of carbon dioxide emissions, emissions from power generation with coal, natural
gas and peat totalled 6.9 million tonnes of carbon dioxide last year, 8% more than in the
previous year. The increase was due to slightly higher use of coal in both combined heat and
power generation and in separate electricity generation. However, the trend for both coal and
greenhouse gas emissions from electricity production is downwards and further proposed
legislative developments in this area are likely to accelerate the downward trend in coming
years. In 2016, 78% of electricity produced in Finland was greenhouse gas emission-free.
In 2016, the share of renewable energy sources in electricity generation was 45%. At the
end of 2016, the installed wind power capacity totalled 1,533 MW and production amounted
to just over 3 TWh. However, due to changes to the regulatory environment for wind
power specifically, which were implemented by an amendment to the act which established
the Feed-in-Tariff regime (the Act on Production Subsidy for Electricity Produced from
Renewable Energy Sources (1396/2010)) (described in more detail below), during 2017 it is
almost certain that a record amount of wind power capacity will be added to the generation
pool as a result of developers having to construct and commission projects admitted into
the existing Feed-in-Tariff subsidy scheme before the end of 2017 or lose their admittance
to the Feed-in-Tariff. Predictions from Energy Finland, an industry association with
approximately 260 energy industry members, point towards a doubling of the amount of
production of electricity from wind power in 2017 and 2018, and the Energy Authority itself
has confirmed that the goal is for wind power to produce more than 6 TWh of electricity
annually by 2020.
Finally, whilst hydro power still maintains a relatively high share of annual electricity
production (23.6% in 2016), the share varies from year to year due to the impact of drier
weather on production. However, hydro’s relative share of electricity production is likely
to decrease over the coming years given that there is virtually no possibility for significant
capacity increases, due to most undeveloped rivers being protected.
In April 2017, Finland published the National Energy and Climate Strategy which sets out
Finland’s aims and objectives and specific actions in order to achieve the targets set out
in the Government Programme and at an EU level. In summary, the key points from the
strategy are:
• Finland aims to reduce current levels of greenhouse gas emissions by 80% to 95% by
2050.
• Finland will ban the use of coal for energy production, with only minor exceptions. For
example, new power plants cannot be built, or replacements made, that will be based on
burning hard or brown coal. Only one condensing power plant is expected to remain
in operation in 2030.
• The share of transport biofuels will be increased to 30%, and an obligation to blend
light fuel oil used in machinery and heating with 10% biofuels will be introduced.
• Finland aims to have a minimum of 250,000 electric and 50,000 gas-powered vehicles
on the road. It is anticipated that the biggest area of reduction of greenhouse gas

emissions will be in the transport sector and this will be the foundation of the mid-term
climate policy plan for 2017.
• Introduction of a new technology-neutral renewable energy subsidy scheme as a
transition from a subsidy-based renewables sector to a market-based renewables sector
operating entirely without subsidy. The new subsidy scheme is intended to be in place
from 2018 until 2020.
• Improvement in electricity supply and demand and overall system-level energy efficiency.
• The domestic use of oil to be halved.
• Renewable energy share of the overall energy mix to increase to approximately 50%,
and self-sufficiency in energy to 55%.
Given the relatively high level of energy consumption in Finland (and in a broader Nordic
context, given that the Nordic countries are among the highest energy consumers per capita
in the world), Finland’s relatively high share of imported energy, particularly in electricity
and natural gas, is a political and security issue which requires action to secure supply and
improve the share of domestically produced energy. All natural gas is imported for Russia
as Finland has no natural gas production capacity. The current public view on nuclear
energy in Finland ranges from neutral to positive, with the public view that they would
rather support domestic nuclear energy than continue to rely on foreign imported energy. In
addition, nuclear energy is seen as the necessary solution for reducing the greenhouse gas
emissions during the transition period from fossil to renewable energy sources. The current
energy shortfall, which is made up by importing electricity from Russia and elsewhere, will
be partially solved once the third nuclear reactor Olkiluoto 3 on the West Coast of Finland
comes onstream in December 2018. The project has been heavily delayed and the cost has
overrun by several billions of euros but the dispute between the constructor, the French
company Areva and the Finnish nuclear operator TVO, is now drawing to a close with the
awards issued by the ICC Arbitration in Stockholm to date largely favouring TVO.
Against this background, a nuclear newbuild project led by Fennovoima, a Finnish company
set up by 67 industrial and local utilities, to plan, develop and construct a nuclear plant in
the north of Finland, was commenced in 2007. A plant supply agreement was signed with
Rosatom, the Russian State Atomic Energy Corporation, in December 2013 and in March
2014, RAOS Voima Oy, a subsidiary of Rosatom, took up its option to acquire 34% equity
in Fennovoima. The Finnish government approved an application to change the design of
the plant from the original 1600 MWe class approved in principle in 2010 to a 1200 MWe
VVER (Water-Water Energetic Reactor). The government agreed to this in September
2014, conditional upon at least 60% of the company’s shareholders being Finnish or owned
by parties domiciled in the European Union or a member of the European Free Trade
Association when the company applied for a construction licence, and Parliament approved
the project in December 2014. In June 2016, the Regional State Administrative Agency
of Northern Finland granted an environmental permit for the project. The permit covers
all matters regarding activities and emissions during the operation of the plant, back-up
power production and the cooling water outlet structures. In addition, the agency granted
the company a water permit for the seawater intake and use as cooling water, and allowed
Fennovoima to start construction work on the cooling water outlet structures. These
construction works are currently ongoing. With a project value of approximately €6 to €7
billion, it remains to be seen whether the public appetite for nuclear power as a source of
domestic energy will remain where a foreign non EU-domiciled owner holds a third of the
equity and has provided the majority of the project debt.


A major area of policy development has been the change in attitude towards the Feed-in-
Tariff subsidy scheme for producers of renewable energy (”FiT Scheme”). Entering into
force on 1 January 2011, the FiT Scheme was essentially a contract for difference for wind,
biogas and wood fuel power plants which comprised the target price less the three-month
mean market price of electricity (by reference to the average Nordpool spot price for the
Finland price area). The target price is €83.50/MWh. Payment by the Energy Authority of
the amounts earnt by producers accepted into the FiT Scheme was made from the Finnish
State budget, meaning that the FiT Scheme was indirectly funded by Finnish taxpayers.
When the FiT Scheme was introduced in 2011, the Nordpool price for wholesale electricity
was between approximately €50 and €60/MWh but as the Nordpool spot price collapsed to
below €30/MWh in 2015 and 2016, the amount of the subsidy payments effectively more
than doubled, placing a greater burden on the State and, indirectly, the taxpayer. Against
this economic backdrop, the generous nature of the target price, the cost to the taxpayer
and a perception that profit was being made by non Finnish-domiciled investors, meant that
populist political parties and other anti-wind groups raised objections to the FiT Scheme
and the burden on the State and Finnish taxpayer in both Parliament and public debate, and
the issue was widely debated in the Finnish media. As a result, public opinion became less
favourable towards the subsidising of Finnish renewables projects via the FiT Scheme.
As a consequence of political and public pressure, the government announced an amendment
to the FiT Scheme which effectively reduced the available quota from the original 2,500
MVA capacity by preventing reallocation of capacity granted to projects which were never
constructed. In addition, a time limit for construction of projects which had been initially
approved into the FiT Scheme was imposed and no project which has not commenced
operation by 1 January 2018 will be finally accepted into the FiT Scheme. This has had
three primary consequences.
• Firstly, that projects for wind, biomass and wood fuel power plants which were not
initially approved for acceptance into the FiT Scheme before the full allocation of the
2,500 MVA quota capacity have been paused until the Finnish government announces
the details of a new support scheme for renewable energy projects.
• Secondly, that there has been a very active market from early 2016 to around the
summer of 2017 for projects which have received initial FiT Scheme approval.
• Thirdly, that the market for operating renewable energy projects has become more active
as investors seek the certainty and guaranteed returns of operating renewables assets.
The proposal for the new technology-neutral auction-based support scheme for renewable
energy was released for comments on Friday 15 September 2017. A summary of the key
issues contained in the proposal is set out below.
See also above regarding the Government’s National Energy and Climate Strategy, which
sets out Finland’s aims and objectives and specific actions in order to achieve the targets set
out in the Government Programme and at an EU level.

Natural Gas Market Act
A new Natural Gas Market Act is due to enter into force on 1 January 2018. The gas market
is relatively small in size (representing only 6% of the overall energy mix in the first half
of 2017 according to Statistics Finland). In Finland, currently there is only one importer

and wholesaler of gas, Gasum Ltd which, in turn, transfers the natural gas from the Russian
border into Finland. Gasum is 100%-owned by the Finnish State. As a consequence,
natural gas competes with other fuels on currently inequitable terms. According to the
proposal, the wholesale and retail markets for natural gas will be opened for competition in
the beginning of 2020.
The key amendments to be implemented when the Natural Gas Market Act comes into force
are:
• Full opening of the markets for competition on 1 January 2020.
• Terminating the wholesale pricing mechanism.
• Renouncing the derogations in Article 49 of the Natural Gas Market Directive which
have to date been applied in Finland.
The new Natural Gas Market Act should be seen in the context of the Finnish and Estonian
Government’s decision to proceed with the construction of the Balticconnector pipeline
to transmit gas from Estonia to Finland, with a total project value of €250 million. In
October 2016, the project companies Finnish Baltic Connector Oy and Estonian Elering
AS made a final decision to invest in the construction of the Balticconnector gas pipeline
between Finland and Estonia, for commissioning by the end of 2019. Before that decision
was confirmed, the European Commission agreed to grant funding for the construction
of the project in the amount of €187.5 million. The aims of the new pipeline are to allow
development of a regional gas market in Finland and the Baltic states and, when combined
with the improvements in the transmissions systems between Estonia and Latvia and
between Poland and Lithuania, to further market integration towards the European Union’s
common gas market.
New renewable energy subsidy scheme
Perhaps the most eagerly awaited legislative proposal, however, was the announcement on
Friday 15 September 2017 of the proposal for the new subsidy scheme for renewable energy.
According to the Draft Proposal, the new subsidy scheme will apply to wind power, solar
power, wave power, biogas1 and wood fuel power.2 Hydro power is explicitly excluded from
the support scheme. The scheme will comprise a competitive auction process.
1. Validity of the support scheme and capacity
According to the Draft Proposal, the aim is to arrange the auction rounds in 2018 and
2019.
According to the energy and climate strategy for 2030 adopted by the Finnish government
on 24 November 2016, the aggregate annual electricity production to be tendered under
the new support scheme will be 2 TWh. The maximum annual electricity production
to be tendered annually will in due course be set out in the budget (to be approved by
the Parliament) for the relevant year. If the aggregate annual electricity production
submitted by bidders in an auction round does not exceed the allocated annual electricity
production of the relevant auction round by at least 20%, the auction round will be
cancelled.
2. Preconditions for participating in the auction process
In order to be eligible for the scheme, the power plant must be located in Finland or
Finland’s territorial waters (excluding, however, projects located in the Åland Islands).
Furthermore, as in the previous feed-in tariff scheme, in order for the relevant project to
be eligible for the new scheme: (i) each power plant must be completely new; (ii) it must

not previously have received any state aid; and (iii) no final investment decision shall
have been made by the bidder prior to the auction round. No support will be granted to
re-powering of power plants that have previously received support from the government
(either through the feed-in tariff system or otherwise).
Finally, the Draft Proposal includes restrictions relating to the size of the projects. Projects
with an annual electricity production exceeding the annual electricity production being
tendered in the relevant auction round cannot be entered into the scheme. Moreover, in
order for a project to be eligible for the new support scheme, a total annual output of at
least 800 MWh is required. Each bidder may, at its discretion, combine several projects
and/or power plants in the same bid, provided that each power plant included in the bid
is of the same technology and has an annual output of at least 800 MWh but no more
than 10,000 MWh. In this case, it is not required that the grid connection of all power
plants is the same or that the power plants are located in the same area. The upper limit
of 10,000 MWh does not apply to single projects which are bidding in the auction.
The requirement to participate in an auction round is that upon submission of the
application, the project is fully permitted (i.e. that the applicable land use plan (or planning
decision (Fi: suunnittelutarveratkaisu), as the case may be) as well as the building permit
(or deviation decision, as the case may be) are legally binding and remain in force for a
sufficiently long period to enable completion of the project. In addition, a binding grid
connection offer (effectively conditional only upon the bidder being successful in the
auction process),3 valid for a sufficiently long time in order to construct the project and
connect it to the grid, is required. A final grid connection agreement is accepted in lieu
of a grid connection offer, if such agreement has been entered into prior to the entry into
force of the act on the new support scheme, or if the bidder can prove that the grid owner
has refused to make a required grid connection offer to the bidder.
A participation fee (currently estimated to be €2,500 per bid) is payable in connection
with the submission of the bid in the auction process. Since the purpose of the fee is to
cover administrative costs caused by the auction system, it will not be refunded even if
the bidder is unsuccessful in the auction round.
3. Support level and duration of support
According to the Draft Proposal, the support will be determined separately for each bid
in a competitive auction process where the bidders with the lowest offered premium, the
aggregate annual electricity production of which do not exceed the annual electricity
production allocated to the relevant auction round, are approved into the scheme (pay-
as-bid). The maximum duration of the support granted to the project is 12 years. The
approval into the scheme is transferable to third parties in connection with the transfer
of assets of the relevant project(s).
Based on a floor price of €30/MWh, the bidder will in its bid set a premium not exceeding
€53.5,4 which the bidder requires in excess of the floor price in order to implement its
project. This floor price, plus the offered premium, is referred to as the target price.
The support scheme is a combination of a sliding and fixed premium. If the market
price of electricity, which, as in the feed-in tariff system, is determined on the basis of
the average Nordpool area price for the relevant calendar quarter, is the floor price (EUR
30/MWh) or less, the support is fixed at the premium offered by the bidder. If the market
price of electricity exceeds the floor price, a sliding premium will be applied, where
the support equals the difference between the market price and the target price. In this
respect, the Draft Proposal sets out the following two sample calculations:

Table 1. Sample calculation of aid in accordance with the premium per year (€m) for a
power plant where the production of electricity is 0.1 TWh per year
Premium (€/MWh)
The average market price
of electricity (€/MWh) 10 15 20 25 30 35 40
30 1,0 1,5 2,0 2,5 3,0 3,5 4,0
35 0,5 1,0 1,5 2,0 2,5 3,0 3,5
40 0 0,5 1,0 1,5 2,0 2,5 3,0
45 0 0 0,5 1,0 1,5 2,0 2,5
50 0 0 0 0,5 1,0 1,5 2,0
55 0 0 0 0 0,5 1,0 1,5
60 0 0 0 0 0 0,5 1,0
Table 2. Sample calculation of aid in accordance with the premium per year (€m) for a
power plant where the production of electricity is 0.25 TWh per year
Premium (€/MWh)
The average market price
of electricity (€/MWh) 10 15 20 25 30 35 40
30 2,5 3,8 5,0 6,3 7,5 8,8 10,0
35 1,3 2,5 3,8 5,0 6,3 7,5 8,8
40 0 1,3 2,5 3,8 5,0 6,3 7,5
45 0 0 1,3 2,5 3,8 5,0 6,3
50 0 0 0 1,3 2,5 3,8 5,0
55 0 0 0 0 1,3 2,5 3,8
60 0 0 0 0 0 1,3 2,5
4. Requirements relating to the bid

The bid must be made by a due date determined by the Energy Authority using a
form to be produced by it and include: (i) the offered premium; (ii) the offered annual
production volume of electricity; and (iii) information on the generation unit(s) to be
used for the production of electricity. In this respect, the bidder is not allowed to alter
its bid after the said due date.
In addition to the above, the bid must include information on the bidder, evidence of
satisfaction of the preconditions for participation in the auction round as well as the
tariff period (which, as in the feed-in tariff system, corresponds to the calendar quarter
as of which the support period for the project is requested to commence). The said
tariff period must commence within three years of the approval into the scheme.
The number of generation units can be updated later within a range set out in the bid
(provided, however, that this does not affect the offered annual production volume
of electricity). The bidder may also at its discretion include a statement in its bid,
according to which it accepts partial approval into the scheme by providing alternative,
lower annual production volume(s) acceptable to it. Whereas it is unlikely that the
auctioned annual production volume equals the aggregate volume of the successful
bids, a partial acceptance will only be relevant for the last project approved into the
scheme.
A bidder who has been successful in the auction process is required to complete the
construction works of at least one generation unit and connect it to the grid and start
energy production within three years from the approval of the project into the scheme.

In addition, it is required that the entire offered capacity is fully constructed and
connected to the grid within five years from approval of the project into the scheme.
The right to support is forfeited if either of said deadlines is missed.
5. Bid bonds
Participation in the auction process would require provision of a bid bond to the benefit
of the Energy Authority. The amount of the security will be calculated by multiplying
the offered annual production of electricity by €2/MWh. For example, if the annual
electricity offered by the bidder amounts to 0.1 TWh, the security would amount to
€200,000. According to the Draft Proposal, guarantees issued by financial institutions
domiciled in the EEA, cash deposits and policies issued by insurance companies
domiciled in the EEA, would be acceptable as security. The security is released: (i)
if the bidder is unsuccessful in the auction, or (ii) upon granting by the bidder of the
construction security referred to below. If the bidder is successful in the auction process
but does not grant construction security, the Energy Authority will enforce the security
and simultaneously the decision on the approval into the scheme will be cancelled.
If the bidder is successful in the auction process it shall, within one month from approval
into the scheme, grant a construction security to the benefit of the Energy Authority.
The types of security accepted are the same as for the participation security. The
amount of the security will be calculated by multiplying the offered annual production
of electricity by €16/MWh. For example, if the annual electricity production offered
by the bidder amounts to 0.1 TWh, the construction guarantee shall amount to €1.6m.
The construction security is released if and to the extent the relevant power plants are
fully constructed and connected to the grid and producing electricity within three years
from approval of the project into the scheme. To the extent that the offered capacity
is not producing electricity by the said date, the Energy Authority will enforce the
construction security.
6. Payment of the support
The 12-year support period commences from the start of the tariff period set out in
the relevant bidder’s bid (regardless of whether, by the said date, the project has been
connected to the grid or not). There is, however, no restriction preventing the bidder
from starting production and sale of electricity prior to the commencement of the tariff
period from which the right to support starts.
The support is paid on the basis of electricity produced and fed into the grid. Since the
support is restricted to the annual electricity production offered in the bid, support is not
paid in respect of electricity produced in excess of the offered annual production. Since
the electricity production from renewable resources normally varies over time, the Draft
Proposal, however, provides for some flexibility in this respect; the Draft Proposal
provides that the (annual) production-based cap of the support scheme is calculated as
an aggregate cap by applying four-year periods starting from the commencement of the
support period for the relevant project(s). Accordingly, any excess production in the
first three years will, for example, reduce the support payable in the fourth year.
As in the feed-in tariff system, the support is paid quarterly in arrears. The bidder
shall apply for payment within two months from the end of the relevant tariff period.
A precondition for the payments is that a monitoring plan for the project(s) is attached
to the first application for support payment and, subsequently, approved by the Energy
Authority.

7. Underproduction compensation
In order to mitigate the risk of the actual production from a successful project being less
than the annual electricity production offered in the relevant bids, an underproduction
compensation mechanism has been included in the Draft Proposal. For the purpose of
this compensation, the 12-year support period has been split up in three sub-periods of
four years each. The underproduction compensation becomes payable if the electricity
produced annually by the relevant bidder is less than: (i) 75% of the aggregate electricity
production volume offered in the first sub-period; and/or (ii) 80% of the aggregate
electricity production volume offered in the second and third sub-period respectively.
According to the Draft Proposal, the compensation is calculated by multiplying the MWh
deficit in production by the premium approved for the relevant bidder. Accordingly, if
the bidder’s approved premium is €25/MWh and deficiency in production is 60,000
MWh, the underproduction compensation equals €1.5m. According to the Draft
Proposal, the Energy Authority is entitled to set off future support payments against the
underproduction compensation until it has been paid in full.

There is currently an ongoing lobbying effort against an increase in property tax for renewable
energy projects which will significantly increase the tax burden for renewables. The proposal
is that property tax, specific to power plants, would increase from 3.1% to 3.5%, and also a
proposal to amend the definition of projects by reference to capacity, which would mean a
number of projects which currently pay a lower municipality property tax would be subject
to the increased property tax, which would have a significant impact on returns for investors
in renewables projects. As the heat power plants and combined heat power plants (if they
produce more heat than power) are excluded from the property tax specific to power plants,
it is therefore felt by the renewables industry that the proposed tax is a disadvantage to
renewables. It is hoped, however, that lobbying efforts will prevent such amendment.

Finland’s first commercial offshore wind site, a 40MW project in Tahkoluoto, near Pori on
the west coast of Finland, has been completed and is operational. A consortium of eight
Finnish utility shareholders, led by Suomen Hyötytuuli, financed around 85% of the project,
with an additional €20 million ($23.7 million) from the government. The project consists
of ten 4MW Siemens Gamesa, sitting on rock-filled granite foundations, with a conical top
designed to withstand ice ridges with heights of up to 25 metres. Such ridges, formed from
pressed drifting ice, are common in the Gulf during the winter.
The project’s performance in extreme cold and ice conditions will be closely monitored
by other offshore wind developers and there has already been an increase in applications
for spatial planning for other large-scale offshore wind farms. Offshore wind may be the
next big sector for development in the Finnish renewables sector, given that Finland has
significant stretches of undeveloped coastline, although the impact of maritime protection
zones may limit the pace and scope of development.
Solar PV remains challenging in Finland due to balancing constraints but, with the
improvement of long-term battery storage, Finland could become an attractive option
in future years. Some small-scale pilot projects have been commenced although large
industrial-scale solar PV farms are some way off.


See above, re. abolition of coal and a new proposal for a renewable energy subsidy scheme.
***
Endnotes
1. In order to qualify as a biogas plant, at least 90% of electricity produced in the plant
has to be produced by biogas.
2. Wood fuel power refers to combined heat and power plants that are fuelled by wooden
side or waste products from the forest industry. In fuel power plants, 90% of the energy
has to be produced with different fuel than wood chips; 10% of the energy can be
produced with different fuels than wood.
3. A template for such offer is currently being prepared by Finnish Energy (Fi:
Energiateollisuus).
4. According to the Draft Proposal, the maximum level may be reduced by a government
decree.

Andrew Cotton
Tel: +358 45 657 5758 / Email: andrew.cotton@hpp.fi
Andrew Cotton is a Corporate Partner with a particular focus on advising
clients acquiring or investing in energy & infrastructure assets. Andrew is a
member of HPP’s sector-specific Energy team. He has significant experience
of advising on the acquisition and project financing of Finnish renewables
projects and has advised equity sponsors, fund investors and foreign utilities
as well as local project developers on the acquisition and divestment
of Finnish renewables projects at all stages of the project development
lifecycle. On buy-side mandates, Andrew’s clients are almost exclusively
international investors and funds particularly in the UK, US, Central Europe
and, increasingly, Asia. As a dual-qualified Finnish attorney and English
solicitor, Andrew is well-placed to guide international investors through the
nuances and differences from a legal, cultural and language perspective when
executing projects and investments in Finland.
Laura Leino
Tel: +358 50 412 0869 / Email: laura.leino@hpp.fi
Laura Leino is a Senior Associate in HPP’s Environmental Team and also a
member of the firm’s sector-specific Energy team. Laura advises clients who
plan, construct, operate or maintain some of the largest energy & infrastructure
projects in the Finnish market on land use, permitting and environmental issues
involved in such projects. She has significant experience of advising clients
developing or investing in Finnish renewable energy projects, which is reflected
in the fact that Laura is a Board member of the Finnish Wind Power Association.
Before joining HPP, Laura worked as a senior consultant at an international
consulting company and as an environmental biologist at an energy company.
She also worked as a Junior Professional Officer for the secretariat to the Espoo
Convention at the UN Economic Commission for Europe.
Björn Nykvist
Tel: +358 40 753 7387 / Email: bjorn.nykvist@hpp.fi
Björn Nykvist is a Corporate Partner and a member of HPP’s sector-specific
Energy team with significant experience of advising a diverse range of clients
on energy projects and transactions including Finnish and international banks,
project developers, major corporates and utilities, infrastructure funds and
private equity houses. Björn’s transactional experience covers the full range
of renewable energy sources from wind to biogas to wave power, as well
as more traditional energy sources such as peat. He is an expert in the legal
issues arising from project financing Finnish development projects, including
advising on Finnish security packages put in place to secure senior debt
provided by foreign banks. Björn is head of HPP’s German desk and advises
his clients in Finnish, Swedish, English and German.
HPP Attorneys Limited

Bulevardi 1A, Helsinki, Finland
Tel: +358 9 474 21 / Fax: +358 9 474 2222 / URL: www.hpp.fi

Germany
Matthias Hirschmann & Alexander Koch
Hogan Lovells International LLP
energy sources
The so-called “energy turnaround” (Energiewende) is still an ongoing process in Germany.
In 2016, the renewables sector contributed 29.0% to gross electricity generation in Germany,
whereas it was 25.8% in 2014.1 Wind power remains the main source of renewable energy,
supplying 11.9% of gross electricity production in Germany. The shares of natural gas
(12.4%), hard coal (17.2%), lignite (23.1%) and nuclear energy (13.0%) have decreased
marginally in the last two years.
With regard to gross electricity consumption, the Energiewende remains on track. Again,
renewable energies were the main source of electricity at 31.7% of total supply.2 Onshore
and offshore wind energy continued to expand. Wind power now accounts for about 12%
of the German power supply. Besides an increased expansion of suitable rural locations
and the replacement of older, smaller turbines with new and more powerful turbines – also
known as repowering – offshore wind energy plays a growing role. The offshore wind
power capacity in the grid reached about 4,100 MW by the end of 2016. The German
government’s aim is to bring the capacity up to 15,000 MW by 2030.3
By 2025 the government also intends to increase the share of renewable energies in total
energy consumption to 40–45%. To reach this goal, as part of the 2017 Renewable Energy
Sources Act (Erneuerbare-Energien-Gesetz, “EEG 2017”), renewable energies are now
set to compete based on market-based conditions. Beginning in 2017, funding rates for
renewable energy installations in Germany are determined via a competitive auction
procedure in which the plant operators submit bids for funding.

From 2017 onwards, each year 5% of newly installed renewables capacity will be opened
up to installations from other EU Member States. This innovation was kicked-off in pilot
auctions for ground-mounted PV installations in the second half of 2016. These auctions
were held by the German Federal Network Agency and the Danish Energy Agency and were
the first cross-border auctions in Europe open to bidders with installations in Germany or
Denmark. Further auctions are planned for 2017, also involving other technologies.4 The
process is intended to anchor the energy transition on a cross-border basis and to harmonise
the funding systems for renewable energy throughout the EU.
To receive funding as an installation from another European Member State pursuant to the
EEG 2017, certain conditions must be fulfilled. Firstly, the principle of reciprocity must be
observed; meaning that installations in another Member State can only receive funding in

Hogan Lovells International LLP Germany
accordance with the EEG 2017 if the other Member State opens up its national auctions for
German installations in exchange. Secondly, foreign energy shall be physically imported,
i.e. funded electricity must actually be able to reach Germany. Thirdly, a bilateral agreement
governed under international law between the Member States, which implements the details
of the cooperation, must be in place.
Germany signed a cooperation agreement with Denmark, the first of its kind, on the mutual
opening of auctions for PV installations in July 2016. This agreement set the framework for
a pilot auction round that was held in Denmark and Germany in 2016, allowing for cross-
border participation of installations. According to the agreement, Germany opened one
auction round for ground-mounted PV projects with a capacity of 50 MW to installations
located in Denmark, while in exchange Denmark partially opened one auction round with
a total capacity of 20 MW by dedicating up to 2.4 MW to bids for ground-mounted PV
projects located in Germany. Due to the lack of bids for installations located in Germany,
only installations in Denmark were awarded.5

The German government has very recently adopted the 2017 Renewable Energy Sources Act.
The EEG 2017, which came into force on 1 January 2017, marks the beginning of a new stage
of the Energiewende, based on new rules. The EEG 2017 provides for a paradigm shift: future
rates of renewables funding will be determined by the market by means of dedicated auction
schemes, rather than being fixed by the government. The new auction scheme shall ensure
that the expansion of renewables proceeds at a steady and controlled pace and at low cost.
Setting the funding level (i.e. the fixed funding value) by way of an auction process is
not completely new to the German market. The first pilot auctions for ground-mounted
photovoltaic installations took place in 2015. Now that these pilot auctions have been
successfully tested, the new competition-based system is extended to cover funding for other
green technologies such as wind energy.
Under the EEG 2017, funding rates (i.e. the so-called fixed funding value) for certain
renewable energy sources will no longer be fixed by the law itself, but will be determined
by a competition-based auction system in which the plant operators submit bids for funding.
The auction determines the fixed funding value for the entire funding period for 20 years
upon commissioning of the facility. The EEG 2017 stipulates the rules for this new system.
Generally, the promotion under the EEG 2017 is remitted as the market premium. The
market premium is determined as the difference between the respective fixed funding value
and the monthly average market value for electricity generated by the renewable energy
source, e.g. offshore wind farms, on the spot market of the EPEX Spot SE energy exchange
in Paris in Ct/kWh. By way of example, an offshore wind farm operator may tender a bid for
a fixed funding value of 10.0 Ct/kWh. If this bid is awarded under the auction, the market
premium is calculated based on this bid value. Accordingly, if the monthly average spot
market price is 5.4 Ct/kWh, the operator of the wind farm would be eligible for a market
premium of 4.6 Ct/kWh.
In April 2017, EnBW Energie Baden-Württemberg AG was successful against other bidders
in the first offshore auction with its bid for the “He Dreiht” wind farm by renouncing EEG
subsidies, as it tendered a bid for a fixed funding value of 0 Ct/kWh.
The restructuring of the funding regime is designed to focus on funding in favour of those
technologies which are intended to make the greatest contribution to green electricity in the
foreseeable future.

Against this background, the following technologies will be affected by the new auction
mechanism:6
• For onshore wind energy, a gross amount of 2,800 MW is to be auctioned each year
over the next three years (2017, 2018 and 2019).
• According to the 2017 Renewable Energy Sources Act, offshore wind energy is to be
expanded to reach 6.5 GW by 2020 and 15 GW by 2030. In order to achieve a steady
expansion curve, the amounts up for auction equally over the years 2021 to 2030 will be
distributed. The annual volume for the years 2021 and 2022 will be 500 MW; for the years
2023 through 2025 it will be 700 MW; and from 2026 on it will be 840 MW per year.
• In case of photovoltaic (“PV”), 600 MW will be auctioned each year. In addition to
ground-mounted installations, other large PV installations (with a minimum of 750 kW)
will be included.
• With regard to biomass installations (both new and existing ones), an amount of 150
MW is to be auctioned each year between 2017 and 2019. Between 2020 and 2022, the
annual auction volume will rise to 200 MW.
Other technologies (such as hydropower, geothermal energy) are not affected by the EEG
2017. In addition, small installations with a capacity of less than 750 kW (biomass: 150 kW),
will be exempted from the auction process.
In principle, all renewable energy installations commissioned on or after 1 January 2017 are
subject to the new EEG 2017. However, certain exceptions apply. All facilities which have
been commissioned before this cut-off date will be grandfathered from changes under the
EEG 2017. The law provides for two major transition periods. Any onshore wind turbine (i)
with a permit granted prior to 1 January 2017, and (ii) which has been put into service prior
to 1 January 2019, will be exempted from the auction mechanism. The same rule applies
to offshore wind turbines with a binding grid connection pledge or grid connection capacity
granted prior to 1 January 2017 at the latest and commissioned prior to 1 January 2021. Such
onshore and offshore installations will be governed by fixed funding values set by law.
The EEG 2017 provides for specific auction designs for each different green technology. The
main reason for different auction designs is that an auction scheme for large-scale offshore
wind farms needs to be designed differently from an auction scheme for solar power plants.
But, despite the differences, all auction designs are based on the same common principles.
Any State funding depends on an acceptance granted by the Federal Network Agency after
each auction. For onshore wind and PV, three to four auctions will be organised by the
Federal Network Agency per year. The Federal Network Agency will thereby determine
the capacity (in MWh) to be auctioned and will set a cap for the bids. Both parameters
will be published prior to an auction. Each bidder can make only one tender per auction.
All auctions follow the pay-as-bid principle, i.e. the amount of funding corresponds to the
individual (fixed funding value) bid placed and each bidder has to provide security for its
bid. Bids are awarded starting with the lowest bid made until the capacity is completely
allocated to the bidders. Finally, after a bid is awarded, the winning bidder is obliged to
realise its project within a certain time limit. Alongside adopting the EEG 2017, the German
government has also passed the Offshore Wind Act (Wind-auf-See-Gesetz). The purpose
of this law is to steadily and cost-efficiently expand the usage of offshore wind energy in
the interests of climate and environment protection. The Offshore Wind Act introduces a
so-called central model. This means that the areas of the land development plan which are
considered, are pre-examined by the Federal Agency for Sea Shipping and Hydrography at
first, and then tendered. This shall serve the goal that not every applicant needs to examine

the land himself. Also, the market premium is determined for each piece of land through
this process. Through the land development plan as the key planning instrument for the
period after 2025, the departmental planning stipulations for the exclusive economic zone
of the Federal Republic of Germany in the North Sea and the Baltic Sea will be conducted.
This is how the expansion of wind energy facilities and offshore connection lines shall be
synchronised in the best possible way.7

In December 2013, the European Commission initiated a procedure in accordance with
Article 108 para. 2 of the Treaty on the Functioning of the European Union (TFEU) to
analyse whether or not State aid was involved in the financing mechanisms covered by
the former EEG 2012, which had been in force from 1 January 2012 until 31 July 2014.
On 25 November 2014, the Commission finally delivered its decision. It concluded that
the EEG 2012 (i.e. the predecessor of the EEG 2014) involved State aid. However, in
the Commission’s view, aid granted for the production of energy from renewable energy
sources under the EEG 2012 was in line with EU State aid rules. Only some reductions for
energy-intensive users (EIU) exceeded what was permitted. Therefore, the aid should be
recovered to the extent that it was incompatible with the internal market.
The Commission assessed, in particular, the capped EEG-surcharge for an EIU and the so-
called green electricity privilege. According to the EEG 2012, electricity suppliers were
obliged to pay the so-called EEG-surcharge to the transmission system operators (TSO),
depending on the amount of electricity delivered to their final consumers. The EEG-
surcharge serves to finance the support to electricity production from renewable energy
sources. Its level was determined by the TSOs in accordance with detailed legal guidelines
which allowed no discretion to the TSOs. Energy suppliers were entitled to pass the EEG-
surcharge on to their customers.
The green electricity privilege stands for a reduction of the EEG-surcharge for electricity
suppliers provided that certain conditions are met. In particular, at least 50% of the
electricity delivered to all of their final customers had to be domestically produced from
renewable sources or mine gas, and purchased by way of direct marketing. The Commission
underlined that support under the EEG 2012 may be limited to national production but
must not, however, introduce discriminatory charges. Although still arguing that the green
electricity privilege does not constitute a discriminatory charge, Germany provided a
commitment to invest in interconnectors and similar European energy projects amounting
to the estimated amount of alleged discrimination. The Commission accepted this offer as
a suitable remedy to historical potential discrimination.
Furthermore, an EIU could apply for a limitation of the EEG-surcharge if, inter alia, its energy
consumption exceeds 1 GWh and the ratio of electricity costs to gross value added exceeds
14%. The Commission assessed the possibility of limitation as an economic advantage,
because the EIU may be relieved from a cost burden which it would have to bear under
normal conditions. Germany considered that there was no State aid involved, because the
EEG support mechanism only involved private undertakings, while public authorities had
no control over either the collection or use of the surcharge, nor did they determine its level.
The Commission found that the mere fact that the advantage was not financed directly from
the State budget did not exclude the existence of State aid. It emphasised, in contrast, that
electricity suppliers did not pay the EEG-surcharge voluntarily but were obliged to do so by
law. In its view, it is sufficient that the State had set the purpose of the EEG-surcharge and

regulated the method of calculation in detail. Furthermore, public authorities were involved
in the monitoring of the system and were responsible for approving surcharge reductions.
With regard to compatibility with the internal market, the Commission applied the
“Guidelines on State aid for environmental protection and energy 2014–2020”, which
include provisions on aid in the form of reductions in funding support for electricity from
renewable sources. As a general rule, undertakings belonging to the sectors listed in the
guidelines must pay at least 15% of the EEG-surcharge. The amount can be reduced to 4%
of the gross value added of the undertaking concerned, or even to 0.5% of its gross value
added, if electro-intensity is at least 20%. The Commission concluded that the reductions
for an EIU according to the EEG 2012 only partially met those rules. Advantages granted
beyond the guidelines should be recovered.
Nevertheless, according to the guidelines, all aid granted to reduce the burden related to
funding support for electricity from renewable sources in respect of the years preceding
2019 can be declared compatible with the internal market to the extent that it complies
with an adjustment plan. Germany has submitted such an adjustment plan, providing that
the adjusted EEG-surcharge must not exceed 125% (for 2013) or 150% (for 2014) of the
surcharge the EIU actually paid in 2013. Therefore, the Commission ruled that recovery
should be limited accordingly. The German Federal Ministry for Economic Affairs and
Energy (Bundesministerium für Wirtschaft und Energie) assumes that recovery will only
amount to approximately €40m in total, while the combined reductions in 2013 and 2014
for EIUs amounted to approximately €11bn.
Germany was not willing to accept the Commission’s decision and brought the case before
the European Court of Justice in February 2015.
Germany relies on three grounds in law:
• First, Germany claims that the Commission misunderstood the financial flow system
under the EEG 2012 and the role of ‘the State’ as legislator and as the body with
responsibility for supervision, and incorrectly deduced a situation of control therefrom.
• Second, EIUs were not favoured by the EEG 2012 according to the case-law of the
Court of Justice.
• Third, public authorities had no control over the assets of the various private companies
participating in the regime of the EEG 2012.
The General Court (Third Chamber) recently dismissed the action confirming that the
German EEG 2012 did, in fact, involve State aid. The Court ruled that the Commission
was correct in taking the view that the reduction in the EEG surcharge for EIU granted
them an advantage within the meaning of EU law on State aid. The reduction released
them from a charge which they would normally have had to bear. The grounds underlying
an aid measure are not adequate to exclude the measure at the outset from classification as
aid. The Commission was also correct in taking the view that the EEG 2012 involved State
resources, the Court said.
The mechanisms under the EEG 2012 result principally from the implementation of a public
policy, adopted by the State through the EEG 2012, to support producers of EEG electricity.
Firstly, the funds generated by the EEG surcharge and administered collectively by the
TSOs remain under the dominant influence of German authorities. Secondly, the amounts
in question are funds which involve a State resource and can be compared to a levy. Finally,
it may be concluded from the powers and tasks given to the TSOs that they do not act freely
and on their own behalf, but as administrators of aid granted through State funds.

Since Germany is not willing to accept the judgment of the General Court (Case T-47/15), it
appealed against the decision. The appeal will now be sent to the European Court of Justice
(Case C-405/16P).8 However, the appeal does not affect the legality of the EEG 2014 and
the EEG 2017.

To better integrate renewable energies into the market and to react against rising energy
prices for end users, market premiums shall not be paid in adverse market situations.
Additionally to Section 51 para. 1 EEG 2017, which stipulates that if the value of the hourly
contracts for the Germany/Austria price zone on the spot market of the EPEX Spot SE
electricity exchange in Paris is negative for at least six consecutive hours, the value for the
market premium shall be reduced to zero for the entire period in which the hourly contracts
are negative without interruption; Section 51 para. 1 EEG 2017, implements an information
obligation for installation operators, ruling that if electricity is sold with the feed-in tariff
in a calendar month in which the preconditions pursuant to subsection 1 are fulfilled at
least once, the installation operator must inform the grid system operator of the quantity of
electricity which it fed in during the period in which the hourly contracts were negative.
Otherwise, if the installation operator fails to inform the system operator, its entitlement
will be reduced in the relevant calendar month by 5% for each calendar day in which this
period wholly or partly lies.
Due to the German government’s policy mandating an accelerated exit from nuclear power
RWE, Eon and Vattenfall have lodged numerous cases at the German Federal Constitutional
Court (Bundesverfassungsgericht) in Karlsruhe. The energy companies argued that the
mandate equals an expropriation without compensation, which would be unconstitutional.
Eight out of 17 functioning nuclear power plants in Germany were shut down in the
immediate aftermath of Fukushima, and the remaining nine plants will have to be shut
down by 2022 according to a government timeline. The German Federal Constitutional
Court decided that the acceleration of the phase-out of the peaceful use of nuclear energy
was not unconstitutional.9 Nevertheless, the Federal Constitutional Court found that it is
incompatible with the German constitution that the law does not provide for any settlement
with regard to investments made in legitimate expectation of the additional electricity
output allowances granted in 2010 and that were devalued as a result of amendment to the
Atomic Energy Act. The Federal Constitutional Court urged the legislature to draw up new
provisions by 30 June 2018.
The energy companies were also successful at another front: the German Federal
Constitutional Court decided that the nuclear fuel tax was unconstitutional and that the tax
collection in the years 2011 through 2016 in the amount of more than €6bn was unlawful.10
In 2016, the European Commission presented a package of measures regarding the
European energy market (so-called Winterpaket). This package included legislative
proposals covering energy efficiency, renewable energies, the electricity market’s design
and the security of electricity supply. It also included actions to accelerate clean energy
innovation and provided measures to encourage public and private investment.11

With a growing proportion of intermittent renewable energy, there is a higher need for the
energy system to become more flexible, while remaining stabile and reliable. Therefore,
energy storage is one option to increase the flexibility of the power supply. In order to

promote new storage projects, further regulatory relief, including a clear legal qualification
of electricity storage, is needed. Additionally, better regulations for grid expansion as
well as a compromise with the German federal states (Bundesländer) remain an ongoing
challenge in Germany. Power lines which transfer wind power from the north to industrial
regions in the south are still a major pillar of the success of the Energiewende. While public
support for the shift to clean energy is high, there is determined opposition to the perceived
blight of power cables and pylons straddling the country.
The Offshore Wind Act will potentially also influence the way projects are developed.
Since the Federal Agency for Sea Shipping and Hydrography will pre-examine potential
areas and then initiate a tender process in the central model (applies for offshore wind farms
to be commissioned from 2025 onwards), tasks formerly executed via project developers
are now under governmental control.
***
Endnotes
1. Cf. for the figures, Federal Ministry of Economic Affairs and Energy (BMWi): http://
www.bmwi.de/Redaktion/EN/Dossier/renewable-energy.html.
2. Cf. for the figures, Federal Ministry of Economic Affairs and Energy (BMWi): http://
www.erneuerbare-energien.de/EE/Redaktion/DE/Bilderstrecken/entwicklung-der-
erneuerbaren-energien-in-deutschland-im-jahr-englisch.html.
3. http://www.bmwi.de/Redaktion/EN/Dossier/renewable-energy.html.
4. http://www.bmwi.de/Redaktion/EN/Artikel/Energy/auctions-involving-other-eu-
states.html.
5. http://www.erneuerbare-energien.de/EE/Navigation/DE/Recht-Politik/EEG-
Ausschreibungen/Oeffnung-PV-Ausschreibungen/Ausschreibungen-EU-Staaten.html.
6. http://www.bmwi.de/Redaktion/DE/Downloads/E/eeg-novelle-2017-eckpunkte-
praesentation.html.
7. http://www.bmwi.de/Redaktion/DE/Downloads/E/eeg-novelle-2017-eckpunkte-
praesentation.html.
8. http://curia.europa.eu/juris/liste.jsf?language=de&jur=C,T,F&num=T-47/15&td
=ALL.
9. https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2016/
bvg16-088.html.
10. http://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/DE/2017/
bvg17-042.html.
11. http://europa.eu/rapid/press-release_IP-16-4009_en.htm.

Matthias Hirschmann
Tel: +49 40 419 930 / Email: matthias.hirschmann@hoganlovells.com
Matthias Hirschmann is a partner in Hogan Lovells’ Hamburg office and head
of the German energy, natural resources and infrastructure (ENRI) group
practice. During a secondment to the legal department of an oil major, he
gained in-depth energy industry expertise (in particular in the oil and gas
sector) and has, ever since, specialised in legal advice to the energy sector.
He specialises in all energy sector-related legal issues, in particular energy
sector-related domestic and cross-border mergers and acquisitions, takeovers,
joint ventures and general energy law and regulatory advice. He also has
substantial expertise in the development of energy supply and transportation
agreements of all kinds (in particular, gas) and regulatory compliance aspects
(including meetings with the Bundesnetzagentur).
Dr. Alexander Koch

Tel: +49 40 419 930 / Email: alexander.koch@hoganlovells.com
Alexander Koch supports clients in mergers, acquisitions and other
transactions with an emphasis on highly regulated industries. He is senior
associate in Hogan Lovells’ office in Hamburg. In recent years he has helped
several companies to let our electricity become “greener”. He has assisted
utilities, investors and banks in developing, investing and financing renewable
energy projects and state-of-the-art conventional power plants.
Alexander has substantial experience with regulatory topics such as
remuneration schemes, grid connection and complex permit procedures
based on various onshore and offshore wind transaction as well as solar
power projects. He is a lecturer for European and German energy law at the
University of Applied Sciences HTW Chur (Switzerland).
Hogan Lovells International LLP

Alstertor 21, 22769 Hamburg, Germany
Tel: +49 40 419 93 0 / Fax: +49 40 419 93 200 / URL: www.hoganlovells.com

Ghana
David Addo-Ashong & Johnnie Klutse
Ashong Benjamin & Associates
energy sources
The National Energy Policy Paper, prepared by the Ministry of Energy and the Energy
Commission in 2010, identifies the energy components of Ghana as including the following
sectors:
• Power sub-sector.
• Petroleum sub-sector.
• Renewable energy sub-sector.
• Waste-to-energy.
• Energy efficiency and conservation.
Power sub-sector
The focus of the policy is on expanding energy production to meet the needs of consumers of
electricity and ensuring the extension of electricity to all areas of the country; the development
of the newly discovered oil and gas sector; and the identification and development of renewable
energy sources to boost energy supply in Ghana. Also, there has been significant encouragement
in the use of LPG as a substitute for wood fuel (charcoal), as part of the programme to preserve
national forests and halt the advance of desertification and climate change.
Government agencies and wholly State-owned companies are the main operators in the
energy sector. The electricity sector is dominated by the government triumvirate of: Volta
River Authority (VRA), in charge of the generation of power and which also controls
distribution in the northern part of the country through the Northern Electricity Distribution
Company (NEDCo), a wholly owned subsidiary; the Ghana Grid Company (GRIDCO),
which is the owner and manager of the national transmission network and responsible also
for the interconnection of the national grid to the regional transmission backbone currently
being developed by the West Africa Power Pool (WAPP) as part of the development of the
West African Regional Electricity Market; and finally, the Electricity Company of Ghana
(ECG), which is the state monopoly in charge of the distribution of power to final consumers,
predominantly in the southern sector of Ghana. ECG, which remains the main distributor
and NEDCo have maintained the duopoly on retailing of power. GRIDCO remains the sole
owner of the distribution lines. However, the power generation sector is seeing some changes
with the introduction of the Independent Power Producers (IPPs), and this development will
continue to impact the power production sector.
In this unbundled system of power management, the VRA wholly operates the Akosombo
Hydro Power Station, the Kpong Hydro Power Station and the Takoradi Thermal Power Plant

Ashong Benjamin & Associates Ghana
(TAPCO) at Aboadze in the Western Region of Ghana. It is also a minority joint partner with
TAQA, a private sector company which owns and operates the Takoradi International Power
Company (TICO) thermal power plant, also located at Aboadze.
The Bui Power Authority (BPA), another state-owned authority, is charged with the
implementation and operation of the Bui Hydroelectric Power Project. It was established in
2007 under the Bui Power Authority Act, 2007 (Act 740) to run the Bui Dam, thus increasing
the number of government power entities to four. The dam itself was inaugurated in December,
2013 and is currently operational. Bui was designed as a peaking plant although increasingly,
because of the power shortages being experienced nationally, it is being run as base load.
In addition to the foregoing, various IPPs have been licensed to build, own and operate power
plants to help augment the power supply and address the deficiencies in the country. These
IPP projects are at various stages of development.1 Some of the IPPs have since commenced
production and have been supplying power to the State for a few years now. Some of the
major IPPs include CENIT Energy, Sunon-Asogli Power, Karpower and AMERI.
GRIDCO operates the National Interconnected Transmission System (NITS) for electricity.
This is the national grid through which power is distributed to the ECG for onward distribution
to final consumers.
In terms of actual distribution of the power to the consumer, ECG supplies to the southern
sector of the country, while the NEDCo distributes to the three northern regions and some
other parts of the Brong Ahafo Region.
The VRA was set up under the Volta River Development Act, 1961 (Act 46) to, among
other things, generate electricity for the country. ECG, on the other hand, started out as
the Electricity Division of the Ministry in 1947 before being converted into the Electricity
Corporation in 1967 under NLCD 125. Subsequently, it was converted into a limited liability
company in 1997 under the Statutory Corporations (Conversion to Companies) Act, 1993
(Act 461) in a bid to make it self-sufficient and profit-oriented.
In the area of renewable energy, the legislature of Ghana passed a law in 2011, the Renewable
Energy Act 2011 (Act 832), to guide the development of the sector. The Act identifies
renewable energy to include energy derived from solar sources, wind, biomass, bio-fuel,
hydro, landfill, ocean, geothermal, etc. The current target of policy is to achieve a renewable
energy generating capacity equal to 10% of overall installed capacity, encouraged by various
levels of feed-in tariffs allocated to each renewable energy source.
The Energy Commission and the Public Utilities Regulatory Commission (PURC) are the
principal regulators of the energy sector. The Energy Commission regulates and manages
the development and utilisation of energy resources in Ghana as well as providing the legal,
regulatory and supervisory framework for all providers of energy in the country, specifically
by granting licences for the transmission, wholesale supply, distribution and sale of electricity
and natural gas and related matters.
The PURC, on the other hand, is an independent regulator mandated to regulate the provision
of utilities including electricity. Its activities and regulatory oversight role are governed
by the Public Utilities Regulatory Act, 1997 (Act 538). The PURC currently regulates the
VRA, ECG, NEDCo, and GRIDCO. The PURC has powers that cover the setting of tariffs,
maintaining standards in the sector through licensing of utility providers, providing guidelines
for fixing of rates, among other duties. The PURC can enforce its decision by applying to the
High Court for an order to enforce its decisions where they have not been complied with by
the sanctioned entity. It also has powers over other utility providers outside the power sector.

In terms of electricity production currently, the installed capacity for Ghana is 3,794.6 MW.
Of this capacity, 3,525.1 MW is reported to be generated daily for supply to consumers.2
However, the actual electricity distributed is often less than the dependable capacity, as became
apparent during the recent power crisis that bedevilled the country between 2013 and 2016.
In summary, according to the Ghana Energy Commission, the installed electricity generation
capacity for Ghana as at 31st December, 2016 was as follows:
Installed plants Installed Capacity (MW)
Hydro plants
Akosombo Dam 1,020
Kpong 160
Bui Dam 400
Sub-total 1,580
Renewables
Safisana Biogas 0.1
VRA Solar 2.5
BXC Solar 20
Sub-total 22.6
Thermal
Takoradi Power Company (TAPCO) 330
Takoradi International Company (TICO) 340
Sunon-Asogli Power (Ghana) Limited (SAPP) 200
Sunon-Asogli Power (Ghana) Limited (SAPP2) 180
CENIT 126
Tema Thermal Power Plant (TT1PP) 126
Tema Thermal Power Plant (TT2PP) 50
Mines Reserve Plant 80
Kpone Thermal Power Plant 220
Karpower 235
Ameri 250
Trojan 25
Genser 30
Sub-total 2,192
TOTAL 3,794.6
Of the total power produced, the VRA contributes approximately 67%, while Bui and IPPs
produce the other 33%.3
Petroleum sub-sector
Another component of the energy mix is the fossil fuel component of the energy sector. This
area covers fuels such as petroleum, coal, natural gases, etc. Ghana has gradually become
a significant exporter of petroleum products after discovering oil and gas products. The
development of these fuels as major exports is still an ongoing process, as new discoveries

of oil and gas are being developed for commercial production, which should boost national
output and income. The decline in oil prices has led to sharp revisions in the expected income
to be derived from these new developments, even though they still represent important and
significant contributions to GDP growth and expansion of the Ghanaian economy. Exploration
and production agreements have been entered into between Ghana and various international
companies with respect to the following blocks, and several discoveries have been made:
1. Jubilee Oil Fields.
2. Expanded Shallow Water Tano.
3. Shallow Tano (relinquished).
4. Deepwater Tano.
5. West Cape Three Points.
6. Offshore Cape Three Points.
7. Deepwater Tano Cape Three Points.
8. Deepwater Cape Three Points.4
9. Tweneboa, Enyenra and Ntomme (TEN) oil and gas field.
In making these discoveries, Ghana has worked with some well-known operators in the oil and
gas industry such as Anadarko, Kosmos Energy, Tullow Oil, ENI, Lukoil, and Hess among others.
The discoveries made so far have uncovered various grades of hydrocarbons such as oil (light
and heavy crudes), gas condensates, associated gas and non-associated free gas.
The fields and blocks are currently at various stages of development, with Jubilee Oil being
the only major producing field, which has been followed by the TEN field, which started
production in August 2016 after the arrival of the Floating Production Storage and Off-
loading facility (FPSO), John Evans Atta Mills in March 2016. The Jubilee Field has been
producing oil, and associated gases, which has complemented the importation of natural gas
from Nigeria for the firing of various thermal plants operated by the VRA situated in the
Aboadze Power Enclave in the Western Region of Ghana.
The TEN oil field is being projected to produce around 50,000 bopd (net: 23,600 bopd) in
2017, according to Tullow.5 The TEN was earmarked for 24 wells but currently only 11 are
being tested and the other 13 will be delayed, as the boundary dispute affects the development
of those wells presently. From the half-year report of Tullow Oil, the capacity of the FPSO is
reported to be 80,000 bopd, and it is reported to be producing a net bopd of 35,000.6
The Sankofa Gye Nyame oil fields have also commenced production. According to the Ghana
National Petroleum Company’s website, the field was commissioned two months ahead of
schedule and is expected to produce 30,000 barrels of oil per day and 180 million cubic feet
of gas when it is fully operational.7
Some of the blocks in Ghana’s total oil and gas discovery are currently the subject matter of
a maritime delimitation dispute between Ghana and Côte d’Ivoire which is being adjudicated
by a special tribunal of the International Tribunal for the Law of the Sea (ITLOS) and is
expected to be determined in September 2017. In the meantime, ITLOS has made provisional
orders which limit the nature of activity that may be undertaken in the affected area. This is
discussed in a later chapter.
Key local players in the oil and gas industry include the Ghana National Petroleum Corporation
(GNPC) and its recently established subsidiary, GNPC Exploration and Production Company
(GNPC Explorco). Under the Petroleum Law, GNPC remains the corporation through which
the government enters into petroleum agreements on behalf of the nation. Another key

subsidiary of GNPC is the Ghana National Gas Company Limited (Ghana Gas), which has
the responsibility of building, owning and operating the infrastructure required for gathering,
processing, transporting and marketing the natural gas resources in the country. It currently
supplies the gas obtained from the Jubilee field to the VRA for its operations. The company
became a subsidiary of GNPC in the second quarter of 2016 following a successful takeover.
The key regulatory body in this sector is the Petroleum Commission. This body is created
under the Petroleum Commission Act, 2011 (Act 821) with the mandate to regulate and
manage the utilisation of petroleum resources, and coordinate policies in the upstream
petroleum sector. The Commission has been engaged in a major effort to develop and enforce
a local content policy as envisioned by government and articulated in the repealed Petroleum
(Exploration and Production) Act, 1984 (PNDCL 84) and also the Petroleum (Local Content
and Local Participation) Regulations of 2013 made pursuant to the Petroleum Commission
Act. PNDCL 84 has since been repealed and replaced by the Petroleum (Exploration And
Production) Act, 2016 (Act 919).
Renewable energy sub-sector
The renewable energy sector is gradually growing to help increase power generation output.
The government is committed to increasing the use of renewables to provide power in
Ghana. The Renewable Energy Act, 2011 (Act 832) was enacted to enable Ghana achieve a
sustainable renewable energy mix and reduce our dependence on other sources of generation.
The Energy Minister recently announced the government’s intention to set up a Renewable
Energy Authority to promote, manage and regulate the proliferation of renewable energy in
the future. The Act defines renewable energy to include wind, solar, hydro, ocean energy
among others. The government has also set a goal of producing 10% of Ghana’s total
energy from renewable sources by 2030. The VRA is seeking to develop between 100
and 150 MW of wind farm capacity at two sites through joint ventures and has identified
two prospective developers that it may be able to partner with within the next three years.
In addition to the wind farm, they are also presently pursuing the Navrongo Solar Power
Plant project which is set to produce 2.5 MW of power when it becomes operational. Also
introduced into the generation chain is BXC Ghana Limited (BXC), whose BXC Solar Plant
is presently listed as producing 20 MW of power. BXC Ghana Limited is a subsidiary of
Xiaocheng Electronic Technology Stock Co. Ltd.
Ghana continues to discover oil and gas in commercial quantities. The cooperation between
the GNPC and its various partners has yielded several discoveries which are in various stages
of readiness for commercialisation. Since production commenced on 28th November 2010,
there has been a total extraction of 161,084,916 million barrels of Jubilee Crude, with Ghana
Group’s share being 29,065,882 million barrels, which represents 18.0% as at 31st December
2015. The delivery of gas from the Jubilee Field to Ghana National Gas Corporation (GNGC)
commenced on 8th November 2014. Since delivery commenced, a total of about 26,117.44
million standard cubic feet (mmscf) of gas had been delivered to the Atuabo Gas Processing
Plant as at 31st December 2015.
During 2015, average production on the FPSO Kwame Nkrumah was 102,600 bopd. This
is below the 120,000 bopd capacity of the FPSO, and which capacity it was envisioned
could be met when production began in December, 2010. During the first quarter of 2016,
Jubilee production averaged 80,300 bopd. According to the half-year report8 of Tullow Oil,

net production has further reduced and is currently 40,000 bopd. This decline has been due
to increased downtime associated with the implementation of revised operating procedures
following a problem being identified with the FPSO turret bearing. This has also affected the
amount of gas being delivered to the GNGC and, by extension, has affected the production
of power in the country as a whole.9 However, the power crisis that bedevilled the nation
between 2013 and late 2016 has largely been resolved and the shortfall of gas production is
not impacting as much as it was previously.
As indicated earlier, a major development that could potentially have had an impact on the
industry was the boundary dispute that arose between Ghana and its western neighbour, Côte
d’Ivoire, concerning the delimitation of the maritime boundary between the two states. The
dispute affected several blocks in the Tweneboa, Enyenra and Ntomme (TEN) oil and gas
field catchment area and the decision made by the International Tribunal on Law of the Sea
(ITLOS) could have a major impact on petroleum exploration and production in the entire
area for Ghana. On 25th April 2015, ITLOS made provisional orders in a bid to maintain the
status quo pending the determination of the action. The orders made were as follows:
1. Ghana shall take all necessary steps to ensure that no new drilling, either by Ghana or
under its control, takes place in the disputed area as defined in paragraph 60;
2. Ghana shall take all necessary steps to prevent information resulting from past, ongoing or
future exploration activities conducted by Ghana, or with its authorisation, in the disputed
area that is not already in the public domain, from being used in any way whatsoever to
the detriment of Côte d’Ivoire;
3. Ghana shall carry out strict and continuous monitoring of all activities undertaken by
Ghana or with its authorisation in the disputed area with a view to ensuring the prevention
of serious harm to the marine environment;
4. the Parties shall take all necessary steps to prevent serious harm to the marine environment,
including the continental shelf and its superjacent waters, in the disputed area and shall
cooperate to that end; and
5. the Parties shall pursue cooperation and refrain from any unilateral action that might lead
to aggravating the dispute.10
This order severely hindered the projected developments of several blocks, some of which had
been the subject of petroleum agreements made prior to the commencement of the dispute.
The orders made therefore halted certain aspects of exploration until the dispute was resolved.
Submissions by both parties on the nature of their rights were concluded on 16th February 2017.
The Special Chamber rendered its decision on 23rd September 2017. In its judgment, ITLOS
accepted Ghana’s arguments inter alia, that the equidistance approach was the proper approach
to be adopted in delimiting the maritime boundary between the two countries in the maritime
dispute with Cote d’Ivoire. Ghana’s argument that Cote d’Ivoire was estopped from making a
claim for the disputed territory due to its prior conduct, which conduct in Ghana’s view meant
that Cote d’Ivoire had tacitly accepted the boundary proposed by Ghana, was rejected.
Cote d’Ivoire’s claim that a meridian measurement was the appropriate methodology to be
adopted, and further, its claim for reparation for what it claimed were losses incurred as a
result of breaches by Ghana of the provisional rulings imposed by ITLOS in respect of the
disputed territory, were rejected.
In a unanimous decision, the Tribunal then proceeded to unanimously delimit the boundary by
applying the equidistance principle having established a proper starting point, thus upholding
Ghana’s argument as to the proper methodology to be employed. The effect of this has

therefore granted Ghana jurisdiction over almost the entire disputed territory and removed
any uncertainty over the allocations that had been made by Ghana in the disputed territory.
The Gas to Power complex has further been given a significant boost with the conclusion of
negotiations between GNPC and ENI, which will lead to the development and commercial
production of ENI’s non-associated gas discovery in the Cape Three Points offshore basin
(about 1.5 trillion cubic feet) destined for use by power plants in the Western Corridor. This
$7 billion development is being fully supported by the World Bank and IFC through various
offtaker (GNPC) credit support instruments such as a Partial Risk Guarantee to backstop
GNPC’s payment obligations. The first gas from the plant is expected to be produced in
February 2018, while the plant is expected to reach full capacity in the last quarter of 2019.
One additional well will come on stream in 2028 when the plant will be fully operational.11
The impact of the IPPs in the production of power has been of tremendous value to ending
the power crisis that gripped the nation for about two years. CENIT Energy Ghana Limited
and Sunon-Asogli have been especially helpful. In addition to these two, the powerships of
Karpower, which has entered into a power purchase agreement with ECG, has added about
225 MW of power and is expected to increase that figure to 450 MW with the arrival of a
second vessel in 2017.
Another source of energy being considered is Liquified Petroleum Gas (LNG). The Ghana
National Petroleum Corporation (GNPC) has entered into an agreement with Quantum
Power to construct the Tema Project, a storage facility for the storage of LNG for use by the
various power companies to aid their acquisition of the much-needed fuel for their plants.
Other projects are also being promoted which will seek to create the infrastructure for the
use of LNG as a supplement to existing fuel sources. The Quantum project was scheduled
to commence in 2016.12 This timetable has not been met but reports have it that in 2017 the
sod was cut to commence construction on the project. In a related development also, the
government of Ghana has reached an agreement with Equatorial Guinea for the supply of
LNG to Ghana for a five-year duration. To this end, the two governments will be expected to
sign a government-to-government Heads of Agreement to realise their intentions.13

The government has made some effort to promote the use of more energy-efficient
appliances by homes and small business owners. In pursuit of these policies, the Energy
Efficiency Standards and Labelling (Household Refrigerating Appliances) Regulations,
2009 (L.I. 1958) has been issued to promote the enforcement of minimum energy efficiency
for household refrigerating appliances, as well as regulating the labelling of household
refrigerating appliances. With this regulation the star system, which was created under
the Energy Efficiency Standards and Labelling (Non-Ducted Air Conditioners and Self-
Ballasted Fluorescent Lamps) Regulations, 2005 (L.I. 1815), for the monitoring of the
energy efficiency of refrigeration units that are either manufactured in Ghana or imported
into the country, was applied to refrigeration appliances as well.
Furthermore, the Renewable Energy Act was enacted in 2011 to fast-track the development
of renewable energy sources to take the pressure off the hydro generators as water levels
were becoming more erratic. The Energy Commission is the body directly responsible for
the creation of policies that will implement the provisions of this legislation. The Energy
Commission has commenced the implementation of its “rooftop solar policy” policy
whereby it aims to enable individuals, hospitality businesses and small businesses to be
self-generating and sustaining in their energy needs. That policy, now called the “National

Rooftop Solar Policy”, is seeking to generate about 200 MW from this source. While the
Universal Merchant Bank seemed to be the bank expressing an interest in partnering the
Energy Commission to implement the programme, the Commission now lists 11 banks that
are partnering the programme, with a note stating that other banks may be willing to provide
the facilities necessary for individuals to acquire solar panels to set up the systems.14 Further,
while the programme earlier targeted residential as well as hospitality providers, the current
implementation is restricted to domestic occupation only.15
In the petroleum sector, the Petroleum Commission has been very active in ensuring that
restricted areas under the local content policy enacted by L.I. 2204 are kept solely for
Ghanaians to take advantage of. It has organised several seminars for Ghanaian participants
in the industry to educate them on the opportunities available in the sector for Ghanaian
businesses and how to avoid the pitfalls that would result in losses to their businesses. One
such seminar was organised in September 2015, primarily to warn delegates of the dangers of
engaging in “fronting” schemes where a Ghanaian is only participating in a joint venture with
a foreign participant in the petroleum transaction without actually being a part of the business.
This level of enforcement is expected to enable Ghanaians to gain a hands-on insight into the
operations of the petroleum sector. The petroleum legislation and regulations also require that
certain non-executive positions in such joint ventures should be held entirely by a Ghanaian
workforce, and executive positions should be assisted by Ghanaians who would be allowed to
study and perform those functions when called upon to do so.

The energy sector was previously overseen by the Ministry for Energy and Petroleum. That
Ministry was in charge of the country’s various petroleum resources as well as management
of the power and other energy needs of the country. Upon the onset of a crippling power crisis
in early 2013, however, the government felt there was a need to pay particular attention to the
power sector to address the staggering deficiency of power. To this end, a new Ministry of
Power was created out of the existing Ministry of Energy and Petroleum. The 2016 general
elections saw the election of a new government and this government has reverted to having
one ministry handing matters concerning energy and power. To that end, the Ministry of
Power has been rolled back into the Energy Ministry.
There are also several pieces of legislation, and regulations other than those previously
mentioned, that impact on power, petroleum and energy. Some of these are:
• Petroleum (Exploration and Production) Act, 2016
The Petroleum (Exploration and Production) Act, 1984 (PNDCL 84) was the principal
legislation that regulated the exploration and production of oil and gas in Ghana for over
two decades. The law provided a stable and predictable environment for the exploration
and final discovery of commercial quantities of petroleum. It also governed all contracts
in the sector, complemented by the Petroleum Income Tax Act, 1987 (PNDCL 188),
which governed taxation of petroleum operations until it was repealed by the Income
Tax Act, 2015. The Act also promoted local content participation in the exploration and
production of petroleum and upstream services industry. In line with this, there has been
the recent passage of regulations in support of this policy called the Petroleum (Local
Content and Local Participation) Regulations, 2013 (L.I. 2204) to help properly define
the scope of local content participation. However, PNDCL 84 was finally repealed
with the coming into force of the Petroleum (Exploration and Production) Act, 2016
(Act 919). Act 919 is more detailed and seeks to protect the interest of Ghana as well

as increased the local content requirements. In addition to that, there is required to

be approval from Parliament where there is the need to borrow any sums of money
exceeding US$ 30 million (or its cedi equivalent) for the purposes of exploration,
development and production of oil and gas products.16
A further innovation is the right of pre-emption granted to the Ghana National Petroleum
Corporation (GNPC). The Act provides that where a party to a petroleum agreement
enters into an agreement to assign all or part of its interests under the agreement, the
GNPC may step in and acquire those interests under the terms agreed between the
assignor of the interest and the party acquiring those interests.17 This was not covered
under the previous Act, is forward-looking, and could enable the GNPC to eventually
become self-sufficient.
Also of importance are the conditions for review of petroleum agreements. Under this
Act, the parties to the petroleum agreement can review the terms of the agreement at
their convenience, and this can be done even where the review will result in a substantial
change to the agreement. However, that review of terms is not valid until the agreement
has been returned to Parliament and ratified in accordance with article 268 of the 1992
Constitution of Ghana.18
There is a severe restriction on flaring under the new Act. A contractor shall not flare
any gas unless they have obtained approval from the Minister of Energy, who shall
make this determination after establishing that it is necessary for operational safety
or expediency or to fulfil the terms under the agreement. In emergency situations, a
contractor may flare gas for safety reasons. In such a situation, however, the contractor
must immediately inform the minister as well as the Environmental Protection Agency
and the Petroleum Commission.19
Other new introductions by the Act include the powers of the minister to order a
petroleum agreement between contractors of adjoining blocks where there is an overlap
of their operations.20 Where this happens, the minister shall provide the timelines within
which such agreement is to be made. The Petroleum Commission may also direct that
equipment belonging to a contractor or the GNPC be used by a third party where it is in
the best interest of the parties, the community or expedient to make such an order.21
Data and information generation towards the operationalisation of a petroleum agreement
shall remain the property of the Republic of Ghana, just as it was under the repealed Act.
However, the data will now be stored by the Petroleum Commission and no longer by the
GNPC as was the case previously.
The Act has also established a Local Content Fund for the purpose of providing financial
aid to “citizens and indigenous Ghanaian companies”. These funds will be utilised in
the training of Ghanaians and granting of loans to small and medium scale businesses
in the industry. The funds shall be sourced from various sources including agreed sums
payable by a contractor under a petroleum agreement, payments by sub-contractors, fines
and other administrative penalties, monies approved by Parliament, etc. The funds will
be under the supervision of the Minister of Energy and the Local Content Committee.22
• Income Tax Act, 2015 (Act 896)
The petroleum sector is impacted by Part VI (Special Industries) of the Income Tax Act,
2015 (Act 896). This Act now regulates all matters relating to taxation of the petroleum
industry. It thus repealed the Petroleum Income Tax Act, 1987 (PNDCL 188). Under
PNDCL 188, the operator of a petroleum operation was allowed certain advantages.

Several petroleum operations were allowed to operate as subsidiaries and file their taxes
as one with the parent company. This is no longer allowed under Act 896, which requires
that each petroleum business should be treated as a separate entity for the purposes of tax
payment. Similarly, where the concession is obtained by separate entities, the calculation
of tax is required to be conducted for each entity separately.
Under PNDCL 188 the deductible allowances in tax calculations included, among
other things: rentals and expenses for the repair of the properties of the concessionary
business; educational funds for education employees in petroleum operations; proven
bad or doubtful debts; and payments into pension and provident funds. Under Act 896
also, some of these have been maintained while new additions have been made. For
instance, expenses incurred from closing a petroleum operation are allowed as deductions.
Similarly, certain capital allowances granted in accordance with the Act are allowed, as are
expenses incurred in respect of some decommissioning funds. Research and development
expenses are not deductible but the cost of improving on assets is still allowed.
Under Act 896, all participants in the petroleum sector are now required to separate the
petroleum aspects of their business from all other components of their business for tax
purposes.23 The section applies to exploration and development operations conducted
as part of a separate petroleum operation but prior to the commencement of production.
Petroleum Operations are defined under the Petroleum Management Act, 2011 (Act
815) as “authorised activities under a petroleum authorisation”.24
• Public Utilities Regulatory Commission Act, 1997 (Act 538)
The Public Utilities Regulatory Commission Act, 1997 (Act 538) is the legislation that
created and gives the Public Utilities Regulatory Commission (PURC) the mandate to
carry out its operations. The PURC is an independent body devoid of the control of any
person or body25 and has the objective of, among other duties, regulating the landscape
relating to the provision of utilities. It is thus entrusted with ensuring that all utility
providers, including the VRA, GRIDCO and ECG, are fair in the provision of services
to consumers and that they set the rates at which those services are delivered to the final
consumers.
Act 538 further gives the PURC the powers necessary for the making of the regulations
it needs for the implementation of its mandate under the said act. Two such sets of
regulations have been issued by the Commission. They are: the Public Utilities
(Termination of Service) Regulations 1999, (L.I. 1651), which set out the circumstances
under which utility service to consumers may be terminated; and the Public Utilities
(Complaints Procedure) Regulations 1999, (L.I. 1651) which specifies the procedures
by which any person (utility or consumer) may lodge a complaint with the Commission
for redress. Through these regulations the Commission has made some remarkable
decisions, especially against power producers in the last 12 months, which have
significantly impacted all stakeholders in the power sector.
• Petroleum Commission Act, 2011 (Act 821)
The Petroleum Commission Act, 2011 (Act 821) was enacted in 2011 and set up the
Petroleum Commission. The Act makes the Petroleum Commission the regulator of the
petroleum sector. The Act thus freed the GNPC to enter into full exploration mode to
be able to participate fully in exploration, development and production full-time, and it
has done this effectively without the added burden of being the regulator of the sector.
The data gathered by contractors in their petroleum activities will now be stored by the
Petroleum Commission instead of the GNPC which stored it previously.

• Energy Commission Act, 1997

The Energy Commission Act, 1997 (Act 541) is the legislation that established the
Energy Commission and gave it all the powers it possesses, including but not limited to:
the regulation, management, development and utilisation of energy resources in Ghana;
the grant of licences for the transmission, wholesale supply, distribution and sale of
electricity and natural gas; as well as other related matters. The Act was forward-looking
because it was enacted at a time when Ghana was only an importer of natural gas, but
has been able to transition with the discovery of Ghana’s own oil and gas resources. It
also gives certain powers to the PURC in relation to the oversight of renewable energy
sources and the suppliers of such energy. The Energy Commission is under the Ministry
of Energy and is thus not independent like the PURC.
The Energy Commission (Amendment) Act, 2016 (Act 933) amends the Energy
Commission Act, 1997 (Act 541) by incorporating provisions on encouraging the
participation of local authorities and private enterprise in the supply of energy in the
country. The revised law empowers the Minister for Power to provide for the creation of
local cooperation systems that will ensure that the use of local financial capital, expertise
and goods/services is maximised to create employment opportunities and develop local
enterprise. The Act seeks to increase the utilisation of Ghanaian human capital and
businesses in energy production in order to enhance electricity capacity and develop the
national economy. It also seeks to increase Ghanaian equity ownership of energy projects.
• Energy Sector Levies Act, 2015
In response to debts incurred by power suppliers and the Tema Oil Refinery Company,
the Energy Sector Levies Act, 2015 (Act 899) was enacted in December 2015. The
Act placed a levy on petrol, diesel and other fuels in Ghana, the proceeds of which
are collected in an Energy Debt Service Account. From this account, money is to be
channelled into servicing the debts accrued by the Tema Oil Refinery Company and
the Volta River Authority, which have built up through shortfalls occurring as a result
of foreign exchange fluctuations, debts incurred as a result of non-payment by power
suppliers, and the cost of the development of infrastructure support for power generation.
It is hoped these measures will alleviate the negative impact of debt in the sector, increase
the reliability of the power supply, and take pressure off bank lenders. There was,
however, some backlash on the high rates of the levies introduced. To alleviate the impact
on the populace, the Act was amended by the Energy Sector Levies (Amendment) Act,
2017 (Act 946). The new Act reduced the levies payable on the National Electrification
Scheme and Public Lighting from 5% for both schemes, to 3% and 2% respectively.
• Ghana Investment Promotion Centre Act, 2013 (Act 865)
The previous Act, the Ghana Investment Promotion Centre Act, 1994 (Act 478) had
specifically excluded enterprises involved in the mining and petroleum sectors from
the provisions of that Act.26 However, Act 865 simply provides that the Act applies to
enterprises in Ghana. The exclusion of certain specialised sectors has been omitted, and
this means that operators in the petroleum sector are also covered by the Act.
The Act requires that any company with foreign participation must complete registration
with the Investment Promotion Centre before it can commence operations in Ghana.27
Registration with the Centre is in addition to incorporation with the companies’ registry
and other registrations such as those required with the Petroleum Commission and the
Ghana Revenue Authority. Registration with the Centre provides some incentives to
the companies that undertake such registration. The benefits under Act 865 are not

automatic, as they are subject to the discretion of the Centre.28 They may, however,
include exemptions on tax for certain equipment and machinery that may be required for
the operations for which the registered company is seeking to import them.
Per section 28 of the Act, the capital requirement for a joint venture with a Ghanaian
is set at US$ 200,000 in cash or capital goods. In addition to this provision, a non-
Ghanaian may also set up a venture alone with an investment of at least US$ 500,000 in
cash or capital goods. The joint venture must have a Ghanaian holding of at least 10%
of the shares in the company.
As discussed above, the local content laws of Ghana require that all petroleum operations
must of necessity be joint ventures and thus, under Act 865, any such company must be
registered as a joint venture company.
The Act also protects foreign companies against discrimination from the Centre or any
other government agencies,29 expropriation,30 the right to freely transfer capital, profits,
dividends and personal remittances.31
Where a company enters into a technology transfer agreement as part of its operation, it
is required under the Act to register that agreement with the Centre.32 The component of
this provision is that until such an agreement is registered with the Centre, it is deemed
as non-effectual and the consequences of this may be that it may not be enforceable
under Ghanaian law.

The Bureau of Consumer Services (BCS) is a department of the PURC Secretariat and is
generally responsible for investigating and resolving the complaints received by the PURC
from disgruntled customers. Tariff fluctuations have been a sore point between the ECG (in the
south) and VRA-NEDCo (in the north) and their customers. Most of these complaints do go
before the Commission for resolution, although some customers also go to the courts. There
have been several tariff increases which have hiked the cost of electricity very significantly.
To improve efficiency in bill collection and revenue out-turn, these tariff increases have gone
hand in hand with the mass installation of prepaid meters. These meters are used in billing
customers and have been met with hostility due to the often inaccurate readings they submit,
which have led to mass protests over billings. Some of these complaints were sent to the
PURC in 2016 for resolution.
On 24th May 2016 the Commission, after due consultation and review with all stakeholders,
issued a press release33 in which it ordered the ECG to suspend the use of its billing software
due to the discovery of several breaches in the permitted modalities for the billing of
customers. Among the most blatant violations were the billing of customers over a 43-
day cycle rather than the permitted 28-day cycle. The PURC enquiries also revealed the
implementation of charges above the approved tariffs set by the Commission. These factors
led to enormous increases in the number of complaints received by the PURC (62% in the
first quarter against 18% for 2015), motivating its intervention and cease-and-desist order to
ECG. This decision by the PURC has been hailed by many observers of the industry.

The major events in the sector have been the catastrophic recurring blackouts that have plagued
the country since early 2013, and some of the resulting consequences. This problem has been
termed “dumsor” by the populace. The causes for the blackout have been varied. The three

main generators of power are hydro dams which depend on constant water flow. However,
the Akosombo dam especially has seen a steady decline in water levels over the last few years,
due primarily to erratic rainfall patterns and human activity, resulting in the deforestation of
land in the catchment areas. Similarly, since its assumption of full operations, the Bui dam
has not been able to receive and store the amount of water needed to run at its full potential.
The Akosombo dam has six (6) operating units (each producing 170 MW of power) with a
maximum reserve of 278 feet and a minimum reserve of 240 feet. Below the minimum level,
it can operate with several units shut off. However, below 235 feet, which is the extreme
minimum level, only two (2) units with the design capacity to operate at this water level or
below can be operated.34 The water levels have risen above the minimum 240 feet in light of
the recent rains, and there is no immediate fear of it falling any time soon.
Another cause of the crisis is the tariff system, which does not permit the payment of realistic
tariffs by consumers. Under this system, the government has subsidised the actual cost of
power that consumers pay for power supplied by ECG. Often times, however, the government
has paid these subsidies and, as a result, the government debt to ECG has continued to mount.
The lack of payment to ECG meant in turn that it could not pay its supplier, the VRA, and by
extension the VRA defaulted in payments to its suppliers, the Bulk Distribution Companies,
who were supplying crude to fire up the various thermal plants of the VRA. These debts still
exist and are referred to as legacy debts. To aid ECG in recovering some of these debts, the
government of Ghana recently entered into the Millennium Challenge Corporation’s Ghana
Power Compact to help streamline its activities and make it more efficient. The purpose of
this agreement is to allow a private entity to take over the management of the company to
enable it recover from the slump that it has seen due to the failure to collect payments for
services it provides.
Another cause of power problems is the unreliability of supply from the thermal plants, due
to the frequent unavailability of fuel to power them. Some of these shortages are the result
of the indebtedness of the VRA to providers of oil and natural gas such as the West African
Gas Pipeline (WAGP) and Ghana Gas, providers of indigenous gas from the Jubilee Field
through the Atuabo gas pipeline.35 There was the need to switch from the use of crude oil
to gas for powering these thermal units and this, and the fact that some of the debts owed to
some of those BDCs are still outstanding, is a further cause of the drain on the VRA’s budget.
According to the Energy Commission’s Outlook document for 2016, the projected cost of
acquiring fuel for the various plants is approximately US$ 1.18bn.36 Other instances have
been disruptions in the flow of gas through the WAGP along the Nigerian sections, which
have been quite frequent.
A recent power generation deal between the government and an Independent Power
Producer has come under parliamentary scrutiny. In February 2015, the government signed
an emergency Build, Own, Operate and Transfer (BOOT) agreement with UAE-based Africa
and Middle East Resources Investment Group (AMERI Energy) to install and operate 10 gas
turbines at the Aboadze power enclave near Takoradi in Western Region. The project is set
to cost the government US$ 510 million over a five-year period, during which AMERI would
rent 300 MW of capacity to the government. Ownership of the project would be transferred
to the government at the conclusion of the period.
The deal was originally approved by the Ghana Parliament in March 2015, however,
with the change of government after the December 2016 election, calls have grown for
the renegotiation or cancellation of the deal from politicians and the general public. An
investigative committee was commissioned by the Energy Minister in early 2017. It found

financial and technical discrepancies in the contract, opining that the government had
overpaid AMERI by US$ 150 million. It recommended that either AMERI be invited back
to negotiation or the entire agreement be abrogated. By July 2017, a corruption controversy
emerged, with allegations that the committee’s fact-finding missions had been funded by
AMERI Energy. Whilst production still continues at the AMERI plant, the scrutiny has
created uncertainty over the future operation of several gas turbines and has raised questions
over how future contracts may be negotiated and awarded. The matter has recently assumed
criminal proportions as former government officials involved in the transaction are being
questioned by various security agencies to help the government reach a conclusion.

Nuclear energy is a source of generating power that is being seriously considered. To this
end, Parliament has passed the Nuclear Authority Act, 2015, (Act 895). The aim of the Act is
to “provide for the regulation and management of activities and practices for the peaceful use
of nuclear material or energy, radioactive material or radiation; to provide for the protection
of persons and the environment against the harmful effects of radiation hazards; to ensure the
effective implementation of the country’s international obligations and for related matters”.
This Act seeks to create the proper structures to develop and maintain peaceful uses for
any nuclear energy produced, and to further ensure that the product poses no danger to the
populace and environment at large.
Under the Renewable Energy Act, 2011 (Act 832) there are various other energy sources that
will be utilised. The drive to produce solar energy is quite massive. There is some progress
being made under the same statute to develop the Mere Nzema Project. This is expected to
produce 155 MW of power and should ease the pressure on the other sources of power. This
is a project announced in 2012 by the developer, Blue Energy, and as at 5th August, 2015, it
confirms that the project is still viable and being developed. It will purportedly be the fourth
largest photo-voltaic solar generator in the world, and the largest in Africa.
Other renewable sources being pursued include wind, biomass, geothermal and bio energy.
There is also a Supercritical Coal-Fired Power Plant being considered. The scoping report
for this plant is currently available on the VRA’s website. It is a 2 × 350 MW facility to be
developed along the coast of Ghana.
There is also a Liquified Natural Gas (LNG) regasification project that is currently being
studied by the government for the construction of an Energy Bridge Regasification Vessel
(EBRV) to vapourise LNG and deliver it as high-pressured natural gas. This option is being
considered with a look at the duration for the construction and delivery of such vessels
(usually within 12 months). There is also the plan to build a more permanent regasification
structure, as the vessels have a lifespan of approximately 25 years on average. This is a
long-term prospect.
***
Endnotes
1. Culled from the National Energy Policy Paper, 2010.
2. See http://energycom.gov.gh/files/ENERGY_STATISTICS_2017.pdf at page 5.
3. Business and Financial Times (Ghana), Thursday 3rd August 2017.
4. From the Petroleum Commission website.

5. Copy available here: http://www.tullowoil.com/operations/west-africa/ghana/ten-field.

6. See http://www.tullowoil.com/Media/docs/default-source/3_investors/2017-half-year-
results/tullow-oil-2017-half-year-results-presentation.pdf?sfvrsn=2.
7. See http://www.gnpcghana.com/news27.html.
8. See http://www.tullowoil.com/Media/docs/default-source/3_investors/2017-half-year-
results/tullow-oil-2017-half-year-results-presentation.pdf?sfvrsn=2.
9. Information available on Tullow Oil website.
10. Ruling from the ITLOS interim orders made 25th April 2015.
11. See http://www.offshore-technology.com/projects/sankofa-gas-project-tano-basin/.
12. See http://www.gnpcghana.com/press3.html.
13. See https://www.ghanaweb.com/GhanaHomePage/business/Ghana-to-sign-5-year-
liquefied-natural-gas-supply-agreement-with-Equatorial-Guinea-571597.
14. See http://rooftopsolar.energycom.gov.gh/partners/list-of-banks.
15. See http://rooftopsolar.energycom.gov.gh/about-nrp.
16. Section 10(15) of Act 919.
17. Section 18 of Act 919.
22. Section 64–66 of Act 919.
23. Section 64 of the Income Tax Act, 2015 (Act 896).
24. Same definition is adopted under Section 76 of Act 896.
28. See Section 26 of Act 865.
32. See Section 37 of Act 865.
33. Copy available here: http://www.purc.com.gh/purc/sites/default/files/directive_on_ecg_
billing_system.pdf.
34. 2016 Energy (Supply and Demand) Outlook for Ghana.

David Addo-Ashong
Tel: +233 302 774378 / Email: david@ashongbenjamin.com
David Addo-Ashong is a founding Partner of Ashong Benjamin and Associates
and brings extensive experience from a legal, investment and corporate
banking career spanning 32 years. During this period, he has been engaged as
a lawyer and investment banker in the growth and development of the capital
markets and the corporate finance and banking industries in Ghana.
After a career spanning 32 years in the banking sector as a lawyer and
corporate finance professional during which he became one of the founders
of and Deputy Managing Director of First Atlantic Bank, he became a
founding Partner in Ashong Benjamin and Associates. In his practice he has
continued to focus on corporate law, providing advice to a range of corporates
with an emphasis on corporate and investment issues including advice on
inward-bound investments, due diligence and the structuring of investments
on behalf of strategic investors as well as private equity and infrastructure
funds. He has also been actively involved in the oil and gas and energy
sectors, providing advice and representation to a number of companies which
are engaged in Ghana’s recently established and fast-developing oil and
gas industry, and also in the rapidly growing energy sector which has seen
significant investment in recent years following the opening of the market to
Independent Power Producers.
Johnnie Klutse
Tel: +233 206 916193 / Email: johnnie@ashongbenjamin.com
Johnnie Klutse is an associate in the firm of Ashong Benjamin & Associates
and a member of the Ghana Bar Association.
Johnnie has specialised in corporate work and has advised multinational
corporations in matters ranging from banking regulations to labour and
corporate governance compliance. He has helped clients navigate the legal
landscape in the incorporation of multinational corporations and been part of
the team that has drafted various commercial agreements. He has also had a
lot of practice in litigation in the areas of banking and labour law. He gained
admission to the Ghana Bar in 2011 and has engaged mainly in commercial
litigation and advisory services.
Ashong Benjamin & Associates

6 4th Norla Street, Accra | P.O. Box CT 6265, Cantonments, Accra, Ghana
Tel: +233 302 774378 / URL: www.ashongbenjamin.com

Japan
Hajime Kanagawa
Kanagawa International Law office
energy sources
Since the wake of the first oil shock in 1973, Japan has sought to decrease its dependency on
oil by promoting nuclear power, natural gas and coal as alternative energy resources. As a
result, Japan had successfully diversified primary energy sources ranging from coal (22.5%)
and natural gas (19.2%) to nuclear (11.1%) and in FY 2010, dependency on oil as a primary
energy source was reduced to 39.8% from 75.5% in FY 1973. However, as a result of the
Great East Japan Earthquake and nuclear accident at Fukushima Daiichi Nuclear Power
Plant in March 2011, imports of fossil fuels as alternative power sources to nuclear power
have increased, resulting in dependency on oil as primary energy sources surged again
significantly. On the other hand, due to the restart of two nuclear power plants in FY 2015
and increase of renewable energy (particularly solar power), demand for fossil fuels as a
power source has gradually decreased in the last few years.
Although the FY 2016 figure is not available for now, the following tables show the latest
status of primary energy domestic supply and power source mix.
Table 1: Primary Energy Domestic Supply (FY2012–2015)
Year Oil Coal Natural Nuclear Hydro Renewable Energy
Gas Power Power (excluding hydro power)
2012 44.1% 23.3% 24.5% 0.7% 3.1% 4.3%
2013 42.7% 25.1% 24.2% 0.4% 3.2% 4.4%
2014 41.5% 25.2% 25.2% 0.0% 3.4% 4.7%
2015 41.0% 25.9% 24.3% 0.4% 3.6% 4.9%
(Source: Agency for Natural Resources and Energy, energy demand and supply result in FY
2015 (confirmed report) dated April 2017)
Table 2: Power Source Mix (FY2012–2015)

Year Oil Coal LNG LPG, etc. Nuclear Hydro Renewable Energy
(excluding hydro power)
2012 16.2% 27.6% 42.4% 2.1% 1.7% 8.4% 1.6%
2013 13.3% 30.3% 43.2% 1.6% 1.0% 8.5% 2.2%
2014 9.3% 31.0% 46.2% 1.3% 0.0% 9.0% 3.2%
2015 7.7% 31.6% 44.0% 1.3% 1.1% 9.6% 4.7%
(Source: The Federation of Electric Power Companies of Japan, FEPC INFOBASE 2016)

Kanagawa International Law office Japan
Energy mix plan

In April 2014, the 4th Strategic Energy Plan was approved by the Japanese Cabinet for the
purpose of setting future direction of Japanese energy policy. This new plan was affected
by the significant impact on Japan’s energy environment caused by the Great East Japan
Earthquake and nuclear accident at Fukushima Daiichi Nuclear Power Plant (“Fukushima
Nuclear Accident”) in March 2011. For example, under the 3rd Strategic Energy Plan
approved in June 2010, it was described as the target for FY2030 that zero-emission power
sources consisting of nuclear powers and renewable energies should be approximately
70%. However, given the tremendous disaster caused by the Fukushima Nuclear Accident,
Japan reconsidered its energy strategy from scratch and the 4th Strategic Energy Plan
declared that Japan will minimise its dependency on nuclear power. Furthermore, the 4th
Strategic Energy Plan confirmed so-called “3E + S” policy, meaning that Japan will pursue
“Energy Security” (i.e. to ensure stable supply of energy), “Economic Efficiency” (i.e.
to realise low-cost energy supply by enhancing efficiency), “Environment” (i.e. to make
maximum efforts to pursue environment suitability), and “Safety”.
In July 2015, based upon targets established to realise “3E + S” policy confirmed in the 4th
Strategic Energy Plan, the Ministry of Economy, Trade and Industry (“METI”) publicised
the Long Term Energy Supply and Demand Outlook (“2015 Outlook”) where the primary
energy supply structure and the electric power supply-demand structure in FY 2030 were
declared as follows:
Table 3: Primary energy supply in FY 2030
Oil LPG Coal Natural Gas Nuclear Power Renewable Energy
30% 3% 25% 18% 10–11% 13–14%
Table 4: Power Source Mix in FY 2030
Oil Coal LNG Nuclear Renewable Energy (22–24%)
Hydroelectric Solar Wind Biomass Geothermal
3% 26% 27% 20–22% Power Power Power Power Power
8.8–9.2% 7.0% 1.7% 3.7–4.6% 1.0–1.1%
As you can see from the above, it was expected in the 2015 Outlook that as a source
of electricity generation, renewable energy would be significantly increased from around
12.2% in FY 2014 to around 22–24% in FY 2030, while it was also expected that the
dependency on nuclear power, which was around 30% before the Great East Japan
Earthquake, would decrease to around 20 to 22%. As a result, it is expected that zero-
emission power sources consisting of nuclear power and renewable energy in FY 2030
should be approximately 44% and the base load rate consisting of hydropower, coal-fired
thermal power and nuclear power etc. will be around 56%.
As three years have passed since the 4th Strategic Energy Plan was approved in 2014,
formal review of the 4th Strategic Energy Plan started in this August 2017 at the Advisory
Committee for Natural Resources and Energy, where the review of energy mix target at
FY 2030 is contemplated and concrete measures to achieve such target will be discussed.
In addition, in response to the Paris Agreement being effective from November 2016,
the Round Table for Studying the Energy Situation was newly introduced in August
2017 to discuss and study how to realise very ambitious, high-level goals for decreasing
greenhouse gas emissions by 2050. Therefore, it is expected that the discussion at this

Round Table will also affect the energy mix discussion at the Advisory Committee for
Natural Resources and Energy.
Introduction of Feed-in Tariff system

To achieve the target raised in the energy mix plan declared in the 2015 Outlook, one of the
key factors is how to introduce and expand renewable energy to the maximum extent while
minimising the public burden. As the driving force for promoting renewable energy, the Feed-
in Tariff system was introduced in Japan in July 2012 and many issues have been identified
and many counter-measures to adjust the system have been implemented since then. The
details of these developments of the Feed-in Tariff system in Japan are set out below.
A Feed-in Tariff system for renewable energy power plants (solar, wind, hydro, geothermal
and biomass) came into effect in Japan on July 1, 2012 under the Act on Special Measures
Concerning Procurement of Renewable Electric Energy by Operators of Electric Utilities
(“Old Feed-in Tariff Act”). For a power producer to be entitled to sell electricity at a certain
fixed price (the “Tariff”) for a certain period (“Tariff Period”) under the Old Feed-in Tariff
Act, it was generally required to (i) obtain certification of power generation facilities from
METI (“Facility Certification”), (ii) apply for grid connection to a general transmission
and distribution operator and enter into the grid connection agreement1 with them, and (iii)
enter into a power purchase agreement with an electricity retailer.
Under the Old Feed-in Tariff Act, METI could set different Tariffs and Tariff Periods
annually or semi-annually, depending on the renewable energy category, installation
method and scale of the generation facilities, by taking into account various factors (e.g.
(i) costs to be ordinarily incurred by power producers on the basis that renewable energy is
supplied in an efficient manner, (ii) whether renewable energy power producers can obtain
an appropriate level of profits, (iii) volume of supply of renewable energy-based electricity
nationwide, and (iv) public burden (i.e. amount of surcharge)).
Issues identified during the initial phase of the Feed-in Tariff system
As a result of introduction of the Feed-in Tariff system in Japan, renewable energy generation
increased by more than 2.5 times during the initial four years. However, total acquisition
costs for renewable electricity under the Feed-in Tariff system had reached 2.3 trillion yen
in FY 2016, while the total acquisition cost in FY 2030 estimated under the energy mix plan
declared in the 2015 Outlook is around 3.7–4.0 trillion yen. Therefore, how to introduce
renewable energy in a cost-efficient way going forward was highlighted as the major issue
under the Feed-in Tariff system in Japan.
In addition, the introduction of additional capacity of renewable energy during the initial
four years had been heavily tilted toward solar power generation, as 90% of capacity certified
under the Feed-in Tariff system was solar power. However, unlike geothermal, hydro and
biomass, which can be operated stably in any weather conditions and therefore can be
expected to replace nuclear power as base load capacities, solar power, which fluctuates
greatly in output depending on the natural conditions, is required to be accompanied by
thermal power as the adjusting power source. Accordingly, diversification among various
types of renewable energy has been recognised as the most important factor to achieve the
energy mix plan declared in the 2015 Outlook.
Furthermore, it was reported that around 340,000 solar power projects having Facility
Certifications issued during FY 2012 and 2013 had not started commercial operation as
of December 31, 2015, while those non-operating projects were keeping priority over grid

connection rights, which may cause opportunity losses by other projects with high potential.
In addition, as Japan’s grid system had been developed for a long time on the basis that
the locations of power sources were limited (e.g. thermal power and nuclear power, whose
locations are relatively concentrated in certain limited areas), rapid expansion of renewable
energy power, whose locations are de-centralised nationwide, have caused many issues for
the grid system, including limitation of capacity. As a result, how to prevent such non-
operating projects from holding up grid capacity, and how to make future investment in
the grid system in an efficient manner, had also been highlighted as material issues to be
resolved under the Feed-in Tariff system.
New Feed-in Tariff Act

In response to various issues identified during the initial phase of the Feed-in Tariff system,
in order to introduce renewable energy to the maximum extent while curbing the public
burden, revisions to the Old Feed-in Tariff Act were submitted to the Diet in February 2016
and passed the Diet on May 25, 2016 (such revised Feed-in Tariff Act hereunder, “New
Feed-in Tariff Act”). The New Feed-in Tariff Act came into force as from April 1, 2017.
The main purposes to revise the Old Feed-in Tariff Act were:
(a) establishment of a new approval system where (i) existing non-operating projects can
be eliminated, (ii) non-operating projects can be prevented going forward, and (iii)
introducing a system to ensure only feasible projects can obtain certification;
(b) introducing additional renewable energy in cost-efficient way by (i) starting an auction
system for large-scale solar power generation, and (ii) setting mid- and long-term target
for the Tariff;
(c) introduction of power sources with a long lead time required for development, such as
geothermal, wind and hydro power, by announcing the multi-year Tariff in advance,
thus providing better visibility about the future applicable Tariff for power sources with
a long lead time; and
(d) change of the purchaser of electricity under the Feed-in Tariff system from electricity
retailers to transmission and distribution business operators.
The details of the measures introduced under the New Feed-in Tariff Act to realise the
above purposes are set out below.
1. Introduction of new approval system
Under the New Feed-in Tariff Act, METI shall grant certifications to “business plans”
(not to the facilities) (“Business Plan Certification”) for renewable energy-based
power projects. For this purpose, METI shall confirm whether: (i) a business plan
complies with certain prescribed standards; (ii) the contemplated business will be
smoothly and certainly implemented; and (iii) specification of the renewable power
facility is appropriate from the viewpoint of stable and efficient power production.
For example, in connection with (i) above, METI will confirm whether it is contemplated
in the business plan to properly install a system enabling maintenance check-up and
O&M, and whether the business plan includes a plan for disposal of the facility upon
the end of the commercial operation. In connection with (ii) above, METI will examine
if: (a) the grid connection agreement has been executed with a general transmission and
distribution operator; (b) the land has been secured (or is certain to be secured) for the
installation of the facility; and (c) the applicant has checked applicable laws and local
ordinances with the relevant local government.

Even after Business Plan Certification is issued, METI will monitor the project on an
ongoing basis to check if the project is properly developed and operated pursuant to the
certified business plan and if any violation is identified, METI can issue an instruction
and an order for improvement to a power producer and eventually cancel the Business
Plan Certification unless such power producer follows the said instruction/order. Note
that the Agency for Natural Resources and Energy published guidelines for a business
plan with respect to each category of power source (i.e. solar, wind, hydro, geothermal
and biomass) in March 2017 and if power producers fail to follow the rules to be observed
under the guideline, METI may issue an instruction or an order for improvement. If
power producers still fail to follow such instruction/order, the Business Plan Certification
may be cancelled. Accordingly, power producers should carefully check and follow the
applicable guideline.
On the other hand, a power producer with Facility Certification issued under the Old
Feed-in Tariff Act may be “deemed” to have Business Plan Certification as from April 1,
2017 by keeping the applicable Tariff granted under the Old Feed-In Tariff Law as long
as such power producer entered into the grid connection agreement with the operator of
transmission line (e.g. a general transmission and distribution operator) by March 31,
2017.2 The whole purpose of requiring execution of the grid connection agreement was
to prevent non-operating projects surviving under the New Feed-in Tariff Act3.
Note that a power producer with a “deemed” Business Plan Certification shall submit
its business plan to METI by September 30, 2017 to keep its status as the holder of
the Business Plan Certification. METI should confirm the completion of “transitional
process” for such operators to the new system under the New Feed-In Tariff Act if their
business plans are duly submitted by those power producers, with the evidence showing
that the grid connection agreement was executed by March 31, 2017. In the case that a
power producer fails to submit its business plan to METI by the said deadline, METI may
rescind the “deemed” Business Plan Certification after holding a hearing (chomon).
In order to reduce non-operating projects as much as possible, the rule for deadline
of the commercial operation was newly introduced for solar power projects with an
output capacity of more than 10kW, as long as such solar power project entered into
the grid connection agreement with the operator of a transmission line (e.g. a general
transmission and distribution operator) on or after August 1, 2016. Under this new rule,
if a power producer fails to commence commercial operation within three years from
the date when the Business Plan Certification is granted (or from April 1, 2017 in case of
the project originally having Facility Certification and being transited to the new system
under the New Feed-in Tariff Act), the purchase period shall be shortened by the days
corresponding to the period starting after the end of the said three years until the date of
commercial operation of its project.
2. Introduction of auction process
Under the New Feed-in Tariff Act, in case an auction process could be deemed to be
useful in order to decrease the amount of surcharge to be imposed on the consumer public,
METI can designate the category and the scale of powers subject to the auction process.
For the initial trial period (i.e. FY 2017 and 2018), three auction processes are contemplated
for solar power projects having output capacity of 2MW or more4 where it is expected
that the total capacity to be allocated among successful bidders is 1.5GW in total for those
three auction processes. Actually, the bidding process for the first auction starts from
October 27, 2017 and auction result will be announced on November 21, 2017.

3. Mid- and long-term targets concerning the price level

Under the New Feed-in Tariff Act, with a view to decreasing the public burden by
encouraging business operators’ efforts and industry innovation, it is contemplated to
set mid- and long-term targets concerning the price level applicable to each category of
powers. In response to this requirement, the Procurement Price Calculation Committee
announced in December 2016 the following targets for each category of powers:
(a) Solar power:
Pursuing independence from the Feed-in Tariff system by achieving the following
targets.
• Non-residential use:
Power generation cost should be JPY 14 / kWh at FY 2020; and
Power generation cost should be JPY 7 / kWh at FY 2030.
• Residential use:
Applicable Tariff at FY 2019 should be equivalent to electric rates for home
use; and
Applicable Tariff after FY 2020 should be equivalent to market price on the
electricity market.
(b) Wind power:
• Onshore wind with the capacity of 20kW or more:
Power generation cost should be JPY 8–9 / kWh by pursuing independence
from the Feed-in Tariff system by FY 2030.
• Small wind with a capacity of less than 20kW:
Pursuing independence from the Feed-in Tariff system on a mid- and long-term
basis by encouraging decrease of costs, while assessing the trend of introduction
of small wind power.
• Offshore wind:
Pursuing independence from the Feed-in Tariff system on a mid- and long-term
basis by promoting improvement of the environment for the introduction of
offshore wind power.5
(c) Geothermal power:
For the time being, in addition to the Feed-in Tariff, facilitating development of
large-scale projects through promoting understanding from the local communities
and accelerating the Environmental Impact Assessment process; and
On a mid- and long-term basis, pursuing independence from the Feed-in Tariff
system by reducing development risk and costs through technical innovation.
(d) Mid- to small-sized hydro
For the time being, in addition to the Feed-in Tariff, facilitating development of new
places, while trying to decrease risk through research on the flow of water; and
On a mid- and long-term basis, pursuing independence from the Feed-in Tariff by
reducing costs through technical innovation.
(e) Biomass
Pursuing independence from the Feed-in Tariff in collaboration with the policy
where procurement of materials is streamlined.

4. Multi-year tariff
Under the New Feed-in Tariff Act, it is possible to set a multi-year Tariff in advance to
increase foreseeability by power producers. Especially with regard to power sources
requiring a long lead time (e.g. wind, geothermal, hydro and biomass), it is appropriate
to set a multi-year Tariff. For example, many large-scale wind power projects and
geothermal power projects are likely to trigger Environmental Impact Assessments, in
which case it used to take around three to four years in total before obtaining Facility
Certifications after a power producer commenced its initial step for an Environmental
Impact Assessment (i.e. process for Preliminary Environmental Impact Consideration)
under the previous METI practice, although the period required for the whole process
should shorten as METI has recently6 changed its former practice and permitted
applications for Facility Certification/Business Plan Certification to be accepted at a
relatively earlier stage (i.e. commencement of Scoping Document process). By taking
into account these regulatory environments as well as the necessity of coordination with
local society, METI decided to announce a multi-year Tariff for a period of three years
in connection with large-scale wind power7 and geothermal power.
On the other hand, with regard to mid- to small-sized hydro and biomass, it takes around
two years before obtaining Facility Certifications/Business Plan Certifications after a
power producer starts development work. However, given the possibility of requiring a
longer period for coordination with local society and clearance of applicable regulations,
METI also announced a multi-year Tariff for a period of three years in connection with
mid- to small-sized hydro and biomass.
Finally, with regard to solar power for residential use (with a capacity of less than
10kW), though the lead time itself is very short, a multi-year Tariff for a period of three
years was also announced for the purpose of promoting reduction of costs by presenting
the Tariff requiring the level of reduction on system costs for a top runner.
For the details of a multi-year Tariff, please see the following table:
Table 5: Multiple-Year Tariff (JPY) per kWh8

FY 2017 FY 2018 FY 2019
Solar for residential use 28 26 24
(30*) (28*) (26*)
Onshore Wind with a capacity of 20kW or more 22 21 20 19
Offshore Wind 36 36 36
Geothermal with a capacity of 15 MW or more 26 26 26
Geothermal with a capacity of less than 15 MW 40 40 40
Hydro with a capacity between 5 MW and less than 30 MW 24 20 20 20
Hydro with a capacity between 1 MW and less than 5 MW 27 27 27
Hydro with a capacity between 200 kW and less than 1 MW 29 29 29
Hydro with a capacity of less than 200 kW 34 34 34
Biomass (methane fermentation gas) 39 39 39
Biomass (woody biomass using thinned wood) 40 40 40
(32**) (32**) (32**)
Biomass (woody biomass using general wood and 24 21 21 21
remnant of field crops) (24***) (24***)

FY 2017 FY 2018 FY 2019

Biomass (waste of construction material) 13 13 13
Biomass (other waste) 17 17 17
*Output curtailment enabled-device is required to be installed.
**with the capacity of 2MW or more.
***with the capacity of less than 20MW.
5. Change of purchaser of FIT Electricity
Under the Old Feed-in Tariff Act, purchasers of electricity under the Feed-in Tariff
system were electricity retailers. However, under the New Feed-in Tariff Act, the
purchaser should be changed to transmission and distribution business operators.9
In order to promote expansion of renewable energy in the future through nationwide
operation of the grid system (e.g. demand and supply adjustment nationwide), it was
considered that transmission and distribution business operators who are responsible for
operation of the grid system and demand and supply adjustment are most appropriate
to assume the obligation to purchase electricity generated under the Feed-in Tariff
system. Power producers who need to enter into power purchase agreements with
transmission and distribution business operators pursuant to the New Feed-in Tariff
Act shall enter into such agreements pursuant to adhesive terms and conditions of the
relevant transmission and distribution business operators.10
Additional change after new Feed-in Tariff Act came into force
After the New Feed-in Tariff Act took effect as from April 1, 2017, additional amendments
were introduced pursuant to the new FIT Law Enforcement Ordinance11 and the new
Notification for the Feed-in Tariff Price12 as from August 31, 2017. Such revisions are
targeted only to solar power projects, and the most relevant changes thereunder which
may significantly affect existing projects are that the following changes13 could trigger the
change in the applicable Tariff:14
(a) change of panel manufacturer, category of panels or panels causing decrease of
conversion efficiency;15
(b) increase of output capacity;
(c) decrease of output capacity by 20% or more;16
(d) increase of the total DC capacity of solar panels by 3 kW or more; and
(e) decrease of the total DC capacity of solar panels by 20% or more.
In addition to the above changes related to panels, the following change could also trigger
the change in the applicable Tariff:
(f) change in “major items” requiring the consent of the relevant transmission and
distribution business operator in connection with interconnection with the grid system
maintained and used thereby.
According to METI’s website,17 “major items” means important matters which constitute
the basis of the grid connection agreement, including the following, and once the grid
connection agreement is re-executed as a result of a change of such “major item”, the
applicable Tariff could be lowered:
(i) In case when the grid connection agreement is re-executed after the termination
thereof due to reasons such that: (i) a power producer fails to pay a certain part of

the construction cost required for construction by the transmission and distribution
business operator; or (ii) the power producer fails to satisfy the output curtailment
requirement pursuant to the output curtailment rule.
(ii) In case when the grid connection agreement is re-executed after a new study of
interconnection is conducted due to the power producer’s request of any of the
following:
• change of transmission system (network) to which the power generation facility is
interconnected;18
• change of method of installation of the transmission line by the power producer
from overhead line method to underground cable method, and vice versa; and
• change of the constructor of the transmission line from the power producer to the
transmission and distribution business operator.
Addendum
Formal review of the 4th Strategic Energy Plan started at the Advisory Committee for
Natural Resources and Energy this August, where we expect that the energy mix plan will
be reviewed and discussed by taking into account recent developments in the energy market
in Japan, including the amendments to the Feed-in Tariff system summarised in the above.
As we believe that one of the key factors to achieve a targeted energy mix plan may be how
to expand renewable energy to the maximum extent while curbing the public burden, we
plan to pay close attention to further developments in Feed-in Tariff system.
***
Endnotes
1. “Grid connection agreement” comprises an agreement to interconnect with the grid
point and an agreement to bear the construction costs required for the construction
conducted by the operator of the transmission line.
2. There are two exceptions to the deadline for entering into a grid connection agreement.
Firstly, if a power producer obtained its Facility Certification after July 1, 2016, the
deadline will be nine months from the date of such Facility Certification. Secondly,
in the case that a power producer participates in an auction process for certain joint
enhancement construction projects related to the grid system and/or facilities thereof,
such power producer shall enter into the grid connection agreement within six months
after the said auction process is completed and the deadline for submission of its
business plan is six months after the grid connection agreement is executed.
3. Once the grid connection agreement is executed, a power producer owes an obligation
to bear a certain part of the construction cost required for the construction conducted
by the operator of transmission line. Accordingly, it seems that many non-operating
solar projects with low feasibility of successful completion of development abandoned
entering into grid connection agreements before March 31, 2017 and therefore, Facility
Certification thereof should have been cancelled.
4. Existing solar projects whose capacity becomes 2 MW or more as a result of increase
of its capacity shall also be subject to this auction process.

5. For the purpose of increasing visibility on the regulatory aspects for developers of
offshore wind projects, the Agency for Natural Resources and Agency published the
Guideline for Land Use Control over General Territorial Water on March 31, 2017.
This is good evidence showing that METI is supportive of offshore wind projects in the
course of diversification of renewable energy sources.
6. METI announced this new practice on December 5, 2016.
7. Small-scale wind powers with a capacity of less than 20 kW are excluded.
8. Multi-year Tariffs for replacement of existing power projects are omitted from this
table.
9. Provided that power producers who entered into power purchase agreements with
electricity retailers can keep such agreements even under the New Feed-in Tariff Act.
10. As a result, the so-called METI form of power purchase agreement has been abolished.
11. The Enforcement Ordinance of Act on Special Measures Concerning the Procurement
of Renewable Electric Energy by Operators of Electric Utilities (METI Ministerial
Ordinance No. 46 of 2012, as amended).
12. Notification related to determine the FIT Price etc. pursuant to Act on Special Measures
Concerning the Procurement of Renewable Electric Energy by Operators of Electric
Utilities (METI Notification No. 35 of 2017, as amended).
13. We summarise the events triggering change in the Feed-in Tariff Price in connection
with projects which: (i) have been deemed “Certified Business Plans” as of April 1,
2017; (ii) are not subject to the Three Years Rule; and (iii) have not started commercial
operation.
14. Applicable Tariff should be generally lowered to JPY 21 kWh this year, while the
applicable Tariff is unknown in case of increase of output capacity, as this is subject to
the auction process introduced under the New Feed-in Tariff Act (as a result, JPY 21
per kWh or less).
15. Except for the case where a panel change is required as a result of a panel manufacturer’s
cessation of manufacturing panels originally contemplated under the old certification.
16. Except for the case where such decrease is required due to the result of the system
impact study conducted by the transmission and distribution business operators.
17. http://www.enecho.meti.go.jp/category/saving_and_new/saiene/kaitori/fit_point.html.
18. Except for “relocation”. Relocation means change of the location of the point of
interconnection after commercial operation, and is limited to cases with unavoidable
reasons such as house-moving.

Hajime Kanagawa
Tel: +81 3 6206 6651 / Email: hajimekanagawa@k-ilo.com
Hajime Kanagawa is the founding partner of the Kanagawa International
Law office (“KILO”). He represents Japanese and multinational clients
in a broad range of corporate and financial matters, including mergers and
acquisitions, project finance transactions, acquisition finance transactions
and corporate finance transactions. He also has extensive experience in
acquisition and financing of multiple renewable power projects under the
Feed-in Tariff regime in Japan. Education: The University of Tokyo (LL.B.,
1995), University of Southern California (LL.M., 2004). Bar Admissions:
Japan and New York.
Kanagawa International Law office

7F, Urban Toranomon Building, 1-16-4 Toranomon, Minato-ku, Tokyo, 105-0001, Japan
Tel: +81 3 6206 6652 / Fax: +81 3 6206 6653 / URL: www.k-ilo.com

Kenya
Rubin Mukkam-Owuor & Elizabeth Kageni
JMiles & Co.
energy sources
There are three main sources of energy in Kenya – biomass, petroleum and electricity; at
69%, 22% and 9% respectively of total energy consumption in Kenya.1
Biomass
Biomass, in the form of wood fuel and charcoal, is used extensively in rural areas, mostly
by poor households for cooking and heating. It is estimated that 83% of the population
relies on biomass, though accurate figures are near-impossible to obtain since biomass
exists mainly in the informal sector. Kenya’s overreliance on biomass as a source of
energy is perpetuated by poor rural electrification.
There has been a recent push towards the use of ethanol, biogas and solar energy as
alternative sources of energy due to greater awareness of the adverse impact which using
biomass has on the environment, such as deforestation and pollution.
Petroleum
Currently, Kenya imports 100% of its petroleum needs. However, economically exploitable
oil deposits were discovered in north-western Kenya in 2012; Africa Oil and its partner
Tullow Oil, who made the discovery, were slated to start small-scale production of crude
oil, and transport it by road and rail to the Kenyan port of Mombasa, in 2017. However,
this has not happened. The Ministry of Energy has advised that the government has
deferred the commissioning of its Early Oil Pilot Programme to allow the new parliament2
to address the issues raised in the Presidential Memorandum on Assent to the Petroleum
(Exploration, Development & Production) Bill 2015. This Bill, if passed, will regulate oil
production.
Other impediments to the Early Oil Pilot Programme include low oil prices; a recent dip in
Kenya’s economy; and Uganda’s decision in 2016 to withdraw support from the Kenyan-
led construction of a port and transport corridor known as LAPSSET (the Lamu Port and
South Sudan Ethiopia Transport) for the transportation of oil by pipeline. Uganda decided
to build the pipeline through Tanzania instead. Consequently, the Kenyan Ministry of
Energy was forced to chart an alternative route through Ethiopia and, in 2016, signed a
Memorandum of Understanding with Ethiopia on the joint construction of a pipeline from
Lamu which would supply oil to Moyale (a border town between Kenya and Ethiopia), and
Hawassa and Addis Ababa (in Ethiopia).
Following the discovery of oil, Kenya is looking at developing facilities and infrastructure
to support the oil industry. Currently, the only facilities in the country are a 70,000-barrels-

JMiles & Co. Kenya
per-day refinery in Mombasa named the Kenya Petroleum Refinery Limited, and a pipeline
transporting oil from Mombasa to the south-western part of the country via Nairobi. In
2016, the government finalised its acquisition of a 50% stake (previously held by India’s
Essar Energy) in the refinery, giving the government 100% control of the refinery. The
refinery has since been converted into an oil storage facility.
Electricity
Electricity in Kenya is generated from geothermal (47% of consumption), hydropower
(39%), thermal (13%) and wind (0.4%). Kenya’s current installed electricity capacity is
estimated at 2.4GW, 1.5GW of which is grid-connected and 500MW of which has come
online since mid-2014. Since hydropower accounts for a large percentage of this capacity
and is reliant on unpredictable weather conditions, the frequency of power outages is high
at 33% (compared to an average of 1% for Mexico, China and South Africa). The cost of
energy in Kenya is also high at US$0.150 per kWh, almost four times the cost of energy
in South Africa (US$0.040).3
Electricity consumption reached 6,581GWh in 2012/13, increasing by 73% from 2007/8.
Large and medium companies are the largest consumers, consuming about twice as much
power as domestic consumers. It should be noted that the current tariff pattern favours
large firms, compared to small firms and households. This is evident from revenue
collection – large and medium companies yielded 48% less revenue than households, and
79% less revenue than small commercial consumers respectively.4
Despite increasing installed capacity, the demand for power in Kenya is rising at a faster
pace than supply, and consumption of electricity per consumer is decreasing. This may
be attributable to inadequate expansion of the network that connects individuals with low
demand for electricity, including delays by the Kenya Electricity Transmission Company
(KETRACO) in constructing power lines; or unmatched demand due to slow increase in
generation compared to rise in consumers.
Whilst electricity generation in Kenya is still entirely operated by one state-owned
company – KenGen Limited – the participation of independent power producers (IPPs) is
growing. There are approximately 10 IPPs in operation5 and they account for about 24%
of the country’s installed capacity, up from 11% in 2008. One of the key components
of the Kenyan government’s energy strategy is a strong emphasis on the participation of
private investors in the development of the electricity sector, so the current trend is likely
to continue, at least in the medium term. However, there are concerns about the low
efficiency of power production by IPPs.
The cost of the current plan of electrification is estimated at US$1.3bn over the next 3−4
years, highlighting the need for private investors in the sector. However, the number of
IPPs interested in investing is low and those that indicate interest demand high generation
tariffs, government guarantees and letters of credit covering several months of payment for
both capital and energy charges.
Kenya also imports electricity from Uganda (accounting for 95% of power imports) and
Ethiopia. Power from Ethiopia is not connected to the Kenyan national grid, and only
serves the border town of Moyale. Kenya imported 131.6 million kWh from Uganda in
the first half of 2017, compared to 34.5 million units in the same period in 2016, marking
a 281% growth. The reason for this stratospheric increase is a drought which took place
in early 2017, which cut local generation of hydro-electric power by a third, or 615.69
million kWh.

JMiles & Co. Kenya
Geothermal
Kenya has great potential in the geothermal sphere, accounting for 7 of the 15 gigawatts
of potential geothermal energy in Africa. In fact, it is the world’s 8th largest producer of
geothermal energy. Additionally, high subsurface temperatures make it cheaper to produce
geothermal energy here.
Kenya’s national geothermal potential is estimated between 7,000 to 10,000MW.
Wind
Kenya is home to Africa’s largest wind power project (the 310MW Lake Turkana Wind
Farm) as well as a further 900MW in development or online.
Coal
The energy mix in Kenya may change with the exploitation of a 400 million tonne coal mine
discovered in the Mui Basin, which is expected to power the operations of a 750MW power
plant. However, this has been put on hold pending the outcome of a constitutional petition
filed by the local community, in relation to the adverse environmental impact of the plant.
There is also a proposed coal power station in Lamu owned by AMU Power, which is
expected to generate 1,050MW using coal imported from South Africa. However, this
project also faces environmental litigation by a local conservation group named ‘Save
Lamu’, UNESCO, Greenpeace and the local community, amongst others. Additionally,
there has been some concern over the economic viability of the plant.
The first solar power system with a power purchase agreement (PPA) to supply electricity to
the grid under the current feed-in-tariff was realised in 2015 in the shape of a 600kW project
at Strathmore Business School in Nairobi.
While Kenya’s decision to unbundle its power delivery process and separate generation,
transmission and distribution responsibilities will allow diversification in the energy sector,
it has made the negotiation of PPAs by IPPs more difficult, not only due to push-back
from the off-taker, but also because the requisite transmission and distribution infrastructure
needs to be put in place simultaneously to avoid a situation where a generation facility
becomes a stranded asset.

With a 20-year feed-in-tariff for renewable resources established, as well as a zero rating
of export duty and a removal of VAT on renewable equipment, the Kenyan government is
actively facilitating renewable energy growth at utility scale, commercial and industrial
(C&I) scale, and as an off-grid solution.6
Kenya Vision 2030 and the Second Medium Plan 2013–2017 identify energy as one of the
infrastructure enablers for Kenya’s transformation into “a newly-industrialising, middle-
income country providing a high quality of life to all its citizens in a clean and secure
environment”. Access to competitively-priced, reliable, quality, safe and sustainable energy
is essential for achievement of the Vision.
Although hydropower accounts for a large proportion of energy production in Kenya, its
unreliability has pushed the government to favour wind, thermal and geothermal generation
in its current plans for the energy sector. Indeed, the Kenyan government has planned to

JMiles & Co. Kenya
raise total installed capacity to 6,762MW by 2017, most of which will be produced by
geothermal and thermal. By 2031, geothermal energy is intended to be the main contributor
to the grid, followed by nuclear.7 In line with this strategy, geothermal capacity nearly
doubled between 2008 and 2013.
The Least-Cost Power Development Plan 2013–33 has set an ambitious target to raise
installed electricity capacity to 22.7GW by 2033.
The government has also formulated strategies whose objectives are to rapidly expand
installed electricity capacity, expand and upgrade the transmission and distribution networks,
and develop renewable sources of energy such as geothermal, solar, wind, biomass and
small hydro power, among others. For example, the VAT (Amendment) Act 2014 provides
that certain solar products will be exempted from VAT. This is an effort by the government
to encourage investment, particularly in the field of on-grid generation.
Recent focus in the electricity market has centred on connecting more of Kenya’s population
to the grid, to which it is estimated 50% currently have access. Notably KETRACO is
currently constructing 27 lines (over 4,000 KM) of high-voltage transmission lines.
Costing US$1.3bn over the next 3–4 years, the project will make affordable electricity
readily accessible to a significant number of Kenyans who were previously not connected
to the grid. It is also said that initial moves to develop infrastructure enabling the importing
and exporting of electricity on a significant scale are being made.
The government also aims to address weak power transmission and distribution
infrastructure due to limited investments in power system upgrading. It is engaged in a
Rural Electrification Programme in partnership with its development partners, which
include the government of France.
Most indicative of a clear and active campaign to improve grid infrastructure and access
to electricity, as well as growing electricity demand and effective government support, has
been the Kenya Power and Lighting Company (KPLC)’s 11.24% rise in pre-tax profits for
the year ending June 2015. KPLC cited increased sales as a result of improved distribution
efficiency and tariff reviews starting in 2013 as the key factor in its profit rise.8

Despite the appeal of Kenya’s resources, investors in the energy sector must overcome the
hurdles posed by outdated and overlapping legislation and regulations, the unclear mandate
of national and county governments, and contradictory policy frameworks.
In January 2015, the Ministry of Energy and Petroleum released an updated National
Energy and Petroleum Policy featuring a proposed new regulatory agency and coordination
structure for upstream petroleum production, coal, renewable energy and framework
legislation on natural resources revenue management, which will include the creation of a
sovereign wealth fund.
The Draft National Energy and Petroleum Policy notes the need to review Kenya’s existing
feed-in-tariff policy and adjust it upwards to enable sustainable returns from various projects
and emerging technologies.
Alongside the 2015 draft policy, the Energy Bill 2015 and the Petroleum (Exploration
Development and Production) Bill 2015 were published. Both bills are intended to align the
current regulatory framework in the energy sector to the devolved structure of government
outlined in the Constitution, and implement the recommendations contained in the 2015
draft policy. If enacted, the Energy Bill will repeal the Energy Act and the Geothermal

JMiles & Co. Kenya
Resources Act and consolidate the regulation of electricity and renewable energy under
one framework, while the Petroleum (Exploration Development and Production) Bill
2015 will update the regulatory framework established under the Petroleum (Exploration
and Production) Act, establishing a new Upstream Petroleum Regulatory Authority and
providing the terms of a new model production-sharing contract (PSC).9
Currently, state-owned corporations dominate generation, transmission and distribution
of electricity, with modest participation in power generation activities by IPPs. State-
owned corporations also oversee exploitation, appraisal, development and management of
geothermal resources. The Energy Bill 2015 intends to unbundle electricity transmission
and distribution while liberalising licensing of electricity generation, transmission and
distribution.10
The Energy Bill 2015 reflects the changing environment of energy regulation in Kenya. For
instance, it recognises different sources of renewable energy and creates the corresponding
licensing and regulatory agencies. These include the introduction of an energy and petroleum
institute (which shall be responsible for the nuclear energy programme) and regulation of
mid-stream petroleum, areas which do not exist under the current regulatory regime.
However, the Energy Bill 2015 also creates a plethora of regulatory bodies, all of which have
different incorporation identities such as an “Authority” (the Energy Regulatory Authority),
a “Corporation” (the Rural Electrification and Renewal Energy Corporation), an “Institute”
(the Energy and Petroleum Institute), a “Tribunal” (the Energy and Petroleum Tribunal) and
a number of advisory committees. While each of these entities has its own legal personality
and is capable of suing and being sued, it may have been more effective to have a homogenous
set of regulatory bodies with similar corporate structures but different functions. Further, the
addition of so many regulatory bodies defeats the overarching purpose of the Energy Bill
2015 to streamline energy regulation and ensure that red-tape is eliminated.
National and county governments have various and sometimes overlapping mandates
when it comes to licensing, so investors will need to engage both levels of government
when pursuing public-private partnerships in the energy sector. Far from reducing the
considerable lag time between project conception and an operations start date, this may
well only add to delays in project implementation.
Both the Energy Bill 2015 and the Petroleum (Exploration Development and Production)
Bill 2015 contain identical provisions mandating that investors comply with local content
requirements in all operations. This includes a provision for investors to submit annual
and long-term local content plans with information on employment and training, research
and development, legal services, financial services and insurance services, to the Energy
Regulatory Authority and the Upstream Petroleum Regulatory Authority, respectively. First
consideration should be given to suitably skilled and trained Kenyan citizens in matters
of employment, and to goods manufactured in Kenya and in the specific county where a
project is being implemented.
One of the criticisms levelled against the Petroleum (Exploration Development and
Production) Bill 2015 is that the capital gains tax (CGT), which will be applicable once it
is enacted, is too high, and may deter foreign investment in the oil and gas sector and cause
delays in exploration and development activity. The CGT guidelines issued by the Kenya
Revenue Authority for the oil, gas and mining industry stipulate that the rate for resident
firms is 30%, while the rate for non-resident companies is 37.5%, effective 1 January 2015.
The Kenya Oil and Gas Association has suggested that the CGT needs to be revised down
to 5%.

JMiles & Co. Kenya
Mining Act 2016

The Mining Act 2016 came into force on 27 May 2016, while the Mining Regulations and
Guidelines came into force on 19 May 2017. The Act applies to coal and coal seam gas,
though it does not apply to matters relating to petroleum and hydrocarbon gases.
In the new Act, the definition of a person who is eligible to be issued a prospecting right has
been expanded. This provision seems to be aimed at reducing the incidences of speculation
in the mining sector.
The new Act sets out the obligations of the state with regards to the environment; in particular,
the use of the environment in a sustainable manner. Artisanal Miners have also been legalised
under the new Act. Transparency and accountability are promoted through use of the Online
Mining Cadastre portal for licensing and management of mineral rights and permits.
The new Act creates separate licensing regimes for small-scale and large-scale mining
operations, with streamlined application processes and approval timeframes. Small-scale
operations are defined as those covering less than 25,000 cu metres, and are subject to
relatively simple application procedures with regard to granting reconnaissance, prospecting
or mining permits. Large-scale operations cover areas over 25,000 cu metres and are subject
to more stringent licence application requirements. Licences for large-scale operations
may be issued to both local and foreign investors, while persons eligible for permits for
small-scale operations must be local investors who are citizens of Kenya or body corporates
wholly owned by Kenyan citizens.
The mining legislation ensures that investments in property benefit local communities and
their economies. All types of licence applications require submission of a local employment
plan and a plan for local procurement of goods and services.11 The new Act also introduces
Community Development Agreements,12 mandatory for all holders of large-scale mining
rights, and sharing of royalties among the national government, the county governments
and the local communities.13
The Cabinet Secretary shall prescribe limits on capital expenditure in mining companies.
Mining companies whose planned expenditure falls over the prescribed limits shall, within
four years of obtaining a mining licence, offload at least 20% of the company’s equity at
the local stock exchange. These listing requirements present a challenge since, in practice,
low liquidity on the local stock exchange would make it difficult for firms holding a mining
licence to satisfy the mandatory listing requirement.
Additionally, under the new Act, holders of reconnaissance and prospecting licences will
be required to forfeit amounts budgeted for, but not spent, in carrying out reconnaissance or
prospecting works, whichever the case may be, to the Ministry of Mines.
The proposed royalty rate of 8% for coal under the new Act, is also higher than that in
comparable jurisdictions.
The new Act has created new institutional bodies and streamlined licensing and compliance
requirements. The Act creates a number of new institutions: the Mineral Rights Board,
whose mandate includes reviewing licence applications and recommending them for
approval to the Cabinet secretary; Directorates of Mining and Geology, with mandates for
monitoring compliance and enforcement of mining regulations, and managing geological
surveys and cadastres respectively; and the National Mining Corporation, which will
undertake government investments in mining operations.
Unfortunately, investors in the energy sector in Kenya have to deal with a lack of coordination
between national government regulators and local authorities, and a bewildering array of

JMiles & Co. Kenya
existing and proposed legislation governing access, enforcement of standards, and permits,
including the Environmental Management and Coordination Act, the Water Act, the Forests
Act, the Wildlife Conservation and Management Act, the Community Land Act 2014 and
the Natural Resources Benefit Sharing Bill 2014.14
Tax exemptions
The Kenyan government has granted various tax exemptions in order to encourage
investment in the energy sector for the purpose of lowering the cost of energy. For example,
in June 2015, the Cabinet Secretary for the National Treasury issued Legal Notice 91 of 2015
which exempts interest on loans advanced from foreign sources from tax, provided the funds
are utilised for investing in infrastructure. Additionally, Legal Notice 106 of 2015 (also
issued in June 2015) granted an exemption from stamp duty on the registration of security
documents relating to loans from foreign sources utilised in investing in infrastructure.
The Cabinet Secretary for the National Treasury also granted an exemption from withholding
tax on payments made to a non-resident person for services rendered under a PPA in Legal
Notice 165 of 2015, issued in August 2015. Withholding tax is normally charged at the rate
of 15% on interest and 20% on management/professional fees, when paid to a non-resident
person and in the absence of a double tax treaty.

Judicial decisions in the energy sector in the last three years have brought to the fore land
disputes that typically accompany energy development efforts, due to the clashing rights of
stakeholders. The Maasai community, a pastoral community that has communal ownership
of land, has been affected by geothermal resource exploration activities, which have seen
them displaced and evicted from land which they have occupied for generations. The
community, through representatives, has taken proper court action in these situations, and
lost and won in equal measure. The courts have refused to uphold Maasai claims to land
based on the fact that the land is ancestral and that they have been in occupation of it since
birth, stating unequivocally that in so far as the right to property is concerned, occupation is
immaterial, and they must demonstrate that they have a right over the property, which may
then be protected.15
Oil exploration in Turkana, and coal exploration in the Mui Basin, have also seen protests
from local communities. Sadly, the courts have evaded the responsibility of setting clear
requirements for involving the community in energy projects, stating instead that “it is not
possible to come up with an arithmetic formula or litmus test for categorically determining
when a Court can conclude there was adequate public participation”.16
The Community Land Act was assented to law on 31 August 2016, and came into effect on
21 September 2016. However, the regulations under the said Act, which would clear up
the ambiguities in the Act, have not yet been enacted by Parliament. The Act specifically
provides for the recognition, protection and registration of community land rights,
management and administration of community land, and the role of county governments
in relation to unregistered community land. It provides that all current lands held in trust
by county governments will be registered, and the communities issued with title deeds to
secure and preserve their land from arbitrary excisions and allocations without the consent
of the community.17
The protection of foreign investors and foreign oil companies has also been highlighted
in recent court decisions. This was evident in the quashing of a gazettement compulsorily
acquiring the property held by an oil company, by the National Land Commission.18 The

JMiles & Co. Kenya
courts continue to enforce diligently the provisions of the different instruments regulating
the sector, maintaining a balance between public policy/interest and individual rights.
Another issue, which has come to the fore in a few recent court decisions, is the court’s
refusal to hear matters which should rightly be heard by institutions or other bodies mandated
by statute to handle the relevant complaints. This may be attributed to the confusing array
of legislation and administrative bodies, which has also led to court decisions in which
the High Court assumes jurisdiction in a matter, notwithstanding the existence of an
administrative body specifically set up to deal with such matters.19 This reflects either a
lacuna in the powers given to that body, and/or a gap in the regulations.

Kenya signed a nuclear power deal with China in 2015 which will enable Kenya to obtain
expertise from China by way of training and skills development, and technical support in
areas such as site selection for Kenya’s nuclear power plants and feasibility studies. Kenya
has also signed nuclear power cooperation agreements with Russia and Slovakia.
In September 2016, Kenya signed a partnership agreement with three top South Korean
nuclear power entities, which will help Kenya to obtain important knowledge and expertise
from Korea, the world’s fifth-biggest user of nuclear power. This will enable capacity-
building, specialised training and skills development, as well as technical support for its
intended nuclear power programme. As part of the partnership, 16 Kenyan students have
been enrolled over the past three years at the Korea Electric Power Corporation International
Nuclear Graduate School to undertake Masters Degree courses in nuclear power engineering.
Kenya plans to set up its first nuclear power plant with a capacity of 1,000MW by 2027.
This is expected to rise to a total of 4,000MW by 2033, making nuclear energy a key
component of the Kenyan energy mix.

While the existing energy sector reforms develop newly discovered energy sources, they should
go a step further and institute an investment framework that encourages the diversification of
energy sources and promotes renewable sources by making them competitive in the energy
matrix. The legislature also ought to streamline all the laws which govern the various aspects
of energy in the country, to avoid inconsistency and promote certainty.
In the meantime, given the popularity of biomass as a source of energy, the government
ought to ensure sustainable use of biomass either through reforestation or reducing/
changing consumption patterns. While demand for biomass is estimated at 40.5 million
tonnes, Kenya’s resources are currently only able to supply 16 million tonnes. Steps should
be taken to address this mismatch between demand and supply.
***
Endnotes
1. Institute of Economic Affairs, Situational Analysis of Energy Industry, Policy and
Strategy for Kenya, 2015.
2. The 11th Parliament’s term came to an end on 15 June 2017, and the General Elections
were held on 8 August 2017.

JMiles & Co. Kenya
3. Ibid.
4. Ibid.
5. Energy Regulatory Commission Annual Report 2014–2015, Kenya.
6. Green Power, Renewable Energy Opportunities in Kenya: A Snapshot, April 2016.
7. Above n.1
8. Above n.5
9. Oxford Business Group, Kenya seeks to make the most of its resources, The Report:
Kenya 2016.
10. Ibid.
11. s. 61(3) of the Mining Act (No. 12 of 2016)
12. Ibid s. 109(i)
13. Ibid s. 183(5)
14. Ibid.
15. Parkire Stephen Munkasio & 14 others (suing on their own behalf and behalf of their
families and all the members of the Maasai community living on land reference no.8396
(i.r 11977) situated in Kedong) v Kedong Ranch Limited & 8 others [2015] eKLR.
16. In the Matter of the Mui Coal Basin Local Community [2015] eKLR.
17. s. 6 of the Community Land Act.
18. Republic v National Land Commission & 3 others Ex-Parte Vivo Energy Kenya Limited
(Formerly B.P Kenya Limited) [2015] eKLR.
19. HCIG-Energy Investment Co. Ltd and Liketh Investment Kenya Limited (HCIG
Consortium) v Ministry of Energy & Petroleum Contracting Authority & 5 others
[2014] eKLR.

JMiles & Co. Kenya
Rubin Mukkam-Owuor
Tel: +254 708 034 215 / Email: rpm@jmilesarbitration.com
Rubin is a Senior Associate at JMiles & Co. specialising in international
arbitration. She represents private clients in both advisory and dispute-
resolution matters, specifically in the energy and natural resource sectors.
She is qualified as an Advocate and Solicitor in Singapore.
Elizabeth Kageni
Tel: +254 798 484 801 / Email: ek@jmilesarbitration.com
Elizabeth is an Associate at JMiles & Co., and specialises in international
arbitration, dispute resolution, fraud investigations and advisory work. She
is qualified as an Advocate in Kenya and has a background in corporate and
commercial law; real estate and finance; and civil litigation in Kenya.
JMiles & Co.

5th Floor, The Oval, Westlands, Nairobi, Kenya
Tel: +254 20 434 3159 / URL: www.jmilesarbitration.com

Macedonia
Dragan Dameski
Debarliev, Dameski & Kelesoska, Attorneys at Law
energy sources
The Republic of Macedonia, being a candidate country for EU membership, is facing the
challenges of harmonising its laws with EU Directives and complying with the Stabilisation
and Association Agreement. The Republic of Macedonia is a signatory to the Energy Charter
Treaty and Energy Community Treaty, which further harmonises its energy legislation with
the EU acquis communautaire with regard to the energy sector, environment, and renewable
sources of energy, energy efficiency and oil reserves.
Since its independence in 1991, Macedonia has signed and ratified major international energy
sector documents such as the Agreement of the Energy Charter, the Energy Community
Agreement, and the United Nations Framework Convention on Climate Change and Kyoto
Protocol, which led to important changes in the legal regime governing the energy market.
The changes aimed at achieving further harmonisation with the Energy Community
Treaty, with the ultimate goal of further liberalisation of the energy market and providing
for a sustainable energy sector. The Energy Law has achieved high compliance with the
EU Directives in the energy sector. It has managed to partially delegate the secondary
regulations to the system operators (with the grid rules). The Law also deals with issues
that will apply once full EU membership is achieved.
In that direction, the Macedonian Government, through the Ministry of Economy, has
enacted the long-term Energy Strategy 2030 which defines the most favourable long-term
development of the energy sector in the country in order to provide for the safe and quality
supply of consumers with energy.
Macedonia is strongly dependent on energy imports. It does not have any sources of
crude oil or natural gas, and in recent years it has faced ever-increasing electricity imports.
Increasing fuel imports and increasing fuel prices on the global market have greatly
contributed to the growth of the trade deficit of the Republic of Macedonia.
The energy infrastructure of the Republic of Macedonia enables the exploitation of domestic
primary energy, the import and export of primary energy, the processing of primary energy
and the production of final energy, its transport and distribution. The energy infrastructure
of the Republic of Macedonia comprises the electricity sector, coal, oil and petroleum
products and natural gas sectors, and the heat production sector.
Electricity sector
The structure of the electricity system of Macedonia comprises:
• hydropower plants, with total installed power of 580 MW;

Debarliev, Dameski & Kelesoska, Attorneys at Law Macedonia
• lignite thermal power plants with total installed power of 800 MW and heavy fuel oil-
fired thermal power plants with total installed power of 210 MW;
• renewable energy resources including small hydropower plants up to 10 MW with
potential of 400 locations for construction of small HPPs, with total installed power
of 255 MW and estimated annual production of approximately 1,100 GWh, and wind
farms; and
• the electricity transmission and distribution system.
The electricity sector of Macedonia is operated by four (out of which three are state-owned)
entities, namely:
• AD ЕLEM – Skopje (Power Plants of Macedonia), a state-owned shareholding company
for the production and supply of electricity;
• AD MEPSO – Skopje (Macedonia Electricity Transmission System Operator), a state-
owned shareholding company for the transmission of electricity and management with
the electricity and power system of Macedonia;
• the distribution company EVN Macedonia AD, a privately owned shareholding
company for the distribution of electricity; and
• AD TPP Negotino, a state-owned shareholding company for the production of
electricity.
The shareholding company for electricity production and supply, Power Plants of
Macedonia, AD ELEM Skopje, includes production and supply via large hydropower plants
in Macedonia and lignite thermal power plants. AD ELEM owns most of the generation in
Macedonia and provides 96% of domestic electricity production, which, in turn, supplies
65% of total supply in the country.
The Macedonian Electricity Transmission System, AD MEPSO, is a shareholding company
for transmission and management of the electricity sector, including the dispatching
system. The transmission grid of Macedonia, which is managed, maintained, planned and
constructed by AD MEPSO, comprises power lines with voltage levels of 400 kV (594
km), 220 kV (103 km) and 110 kV (1,480 km). Macedonia is connected to the transmission
lines of Greece, Bulgaria and Kosovo through 400 kV power lines. AD MEPSO is also the
electricity market operator on the territory of the Republic of Macedonia.
EVN Macedonia AD is a privately owned shareholding company for electricity distribution,
management of the distribution system and supply to tariff customers connected to its
distribution network in the territory of the Republic of Macedonia. EVN Macedonia AD
also owns 11 small hydropower plants with 25 production units with a total power of 45
MW. The distribution network in Macedonia is privately owned by EVN Macedonia AD.
This company owns 150km of the distribution network at a voltage level of 110 kV; 1,000
km at 35 kV; 720 km at 20 kV; 8,900 km at 10 kV; and 11,600 km at 0.4 kV.
EVN Macedonia AD supplies a total of 720,000 consumers with electricity.
The only heavy fuel oil-fired TPP in Macedonia, Negotino, functions as a separate entity
within the electricity sector of Macedonia. This production capacity uses heavy fuel oil,
for which there is a transport railway infrastructure. The installed power of this capacity is
210 MW and it has the possibility to work either with one or two boilers: in the range from
70 MW to 105 MW it works with one boiler; and in the range from 140 MW to 210 MW it
works with two boilers.
Currently, there are 75 registered electricity traders and 28 electricity suppliers with valid
licences issued by the ERC.

Coal sector
In respect of fossil fuels, the Republic of Macedonia has available only low-calorie coal – of
the type lignite. All other types of fossil fuels (oil, natural gas and other types of coal) are
provided from imports.
According to their purpose, the existing sites can be subdivided into two groups: mines
for the production of lignite for the purposes of state-owned thermal power plants mainly
operated by AD ELEM of Macedonia (surface mines Suvodol and Oslomej); and mines for
the production of lignite for wide consumption (surface mines BRIK Berovo and Drimkol
− lignites) which are exploited by concessionaires, which are privately owned shareholding
companies. Other major coal sites that could be used for electricity are Zhivojno, Mariovo,
Popovjani and Negotino.
The surface mine Suvodol is the most important coal mine in the Republic of Macedonia,
which, since 1982, has supplied lignite type coal continuously to TPP Bitola. According to
the Energy Strategy 2030 of the Ministry of Economy, the annual production of coal in the
Suvodol mine ranges between six and seven million tons. The total remaining exploitation
reserves of the surface mine Suvodol – main coal seam – are about 36 million tons (as of 30
June 2008).
The coal demand of TPP Oslomej is satisfied by the exploitation of the surface mine Oslomej
– West. According to the energy balance of the Republic of Macedonia, during the period
from 1996 to 2007, annual coal production from SM Oslomej – East and SM Oslomej – West
(after 2002/2003), ranged from 530,000 to 1.07 million tons of coal. The remaining total
exploitation reserves of coal from SM Oslomej – West are estimated at approximately 11
million tons of coal.
The surface mine BRIK Berovo is located in close proximity to the city of Berovo. The
total exploitation reserves are estimated at approximately one million tons. The annual
exploitation is a function of the requirements, and now ranges from 35,000 to 70,000 tons
annually. The lignite is crushed and separated and used for industrial purposes and enjoys
wide consumption.
The surface mine Drimkol – Ligniti is located in the west and close to the dam on the Globochica
reservoir. Annual exploitation is almost identical to that of BRIK Berovo and ranges from
40,000 to 70,000 tons of coal. The coal is lignite with a significantly higher carbonification
level in comparison to the other lignite types in the Republic of Macedonia, which brings it
closer to brown coals. The total quantities of coal extracted are crushed and separated into
separate classes, which are used for industrial purposes and general consumption.
Oil and petroleum products sector
This sector involves the import and export of crude oil and petroleum products, processing
of crude oil, production of bio-fuels, distribution and sale of petroleum products. Macedonia
does not have any oil and gas deposits. The Republic of Macedonia imports all of its needs
for oil and oil products.
Since 2004 there has been an increase in consumption as well as import of crude oil in
comparison to oil products. Most oil products are used as final energy sources, mostly
in the traffic sector. There is one crude oil refinery in Skopje. Oil is transported via the
212 km Thessaloniki − Skopje pipeline. The refinery has a total capacity of 2.5 million
tons annually and produces heavy oil (mazut), unleaded gasoline, diesel fuel, heating fuel
and liquefied petroleum gas (“LPG”). Annual oil production ranges from approximately
1–1.2 million tons, depending on domestic demand. Refined crude oil is also available

for export, mainly to the southern parts of Serbia and Kosovo. OKTA AD Skopje refinery
has a nominal refining capacity of 2.5 million tons per annum and a storage capacity of
330,000 m3 which covers most of the Macedonia’s fuel market and that of Kosovo. OKTA’s
production is mostly gasoline, diesels and fuel oils; LPG is also produced but in small
quantities. Demand for products for which OKTA’s production does not suffice is met with
imports from the Thessaloniki refinery.
According to the data that can be found in the Energy Strategy 2030 of the Ministry of
Economy, in Macedonia there are currently about 260 petrol pumping stations. Despite
the fact that today the ownership structure of the retail sector is significantly diverse, still
Makpetrol dominates both by the number of petrol stations (116), as well as by the scope of
sales of those petrol stations (44%). It is followed by OKTA Brand with 36 petrol stations
and 14% of sales, and Lukoil Makedonija with 10 petrol stations and 4% of sales. The
remaining 99 petrol stations with 38% of the sales are privately owned by multiple domestic
small companies.
Macedonia has available a refinery for production of bio-diesel fuel with a capacity of
30,000 tons per year, owned by the company Makpetrol AD. The production of bio-diesel
fuel started in 2007 and uses unrefined beet oil. At this stage the unrefined oil is imported.
The storage reservoir capacities of the Republic of Macedonia are sufficient to sustain 90
days of current average consumption of all types of petroleum products. These capacities
comprise: the storage reservoir area of OKTA Refinery; the storage reservoir area of
Makpetrol; the storage reservoir area of the company Lukoil Macedonia; the storage reservoir
area of the state commodity reserves of the Republic of Macedonia; and the storage reservoir
area of smaller private and state-owned companies. The formation, storage, renewal and
utilisation of the mandatory oil and petroleum products reserves is regulated by the Law on
Mandatory Reserves of Oil and Petroleum products and the EU directives. The formation,
storage, renewal and utilisation refer to crude oil, all types of engine and avionic fuels, all
types of diesel fuels and kerosene, EL-household oil, LPG and heavy fuel oil.
Natural gas sector
Within this sector, transmission, distribution and sale of natural gas is performed.
Macedonia does not have any gas sites and is connected only with one main gas pipeline.
There are no domestic sources for production of natural gas and the supply of natural gas
comes from imports. The entire quantity of natural gas is imported from Russia through
international corridor 8 which passes through Ukraine, Moldavia, Romania and Bulgaria.
The main gas pipeline enters Macedonia at Deve Bair on the border with Bulgaria and
runs over Kriva Palanka, Kratovo and Kumanovo to Skopje with a total length of 98 km.
The main gas pipeline has a capacity of 800 million Nm3 per year with the possibility to
increase up to 1,200 million Nm3 per year after the construction of a compression station
at the beginning of the main gas pipeline. This would certainly mean additional costs
for the transport of gas. The maximal permeability of the main gas pipeline is 145,000
Nm3/h. There are five main measuring and control stations constructed on the main gas
pipeline. In addition, connecting points for distribution gas pipelines to Veles, South
Serbia, Romanovce and Gostivar are constructed on the main gas pipeline.
In addition to the main gas pipeline there are six distribution branches (Kriva Palanka,
Ginovce, Kratovo, Kumanovo, Skopje – South and Skopje – North) with a total length
of 25 km. In this stage of development of the gasification of the Republic of Macedonia,
parts of city distribution networks have been constructed in Skopje, Kumanovo, Kratovo
and Kriva Palanka. Most of the gas infrastructure in the country was built in the period

between 1993 and 1997. The utilisation of natural gas began in the Republic of Macedonia
in October 1997. As per data set out in the Energy Strategy by the Ministry of Economy, the
gas pipeline in the past 11 years has used less than 10% of its capacity, and in 2008 the level
of transport reached 15% of full capacity. The largest percentage of gas is used by industrial
customers directly connected to the transmission system and for district heat generation, and
in a smaller percentage by industrial customers connected to the distribution system.
Currently the transmission network is operated by AD GAMA, according to a licence
issued by the Energy Regulatory Commission (ERC). AD GAMA is a shareholding
company with two shareholders, each having 50% of the shares. One of the shareholders
is the state, and the other is AD Makpetrol. The company GAMA AD Skopje is holds
a licence for performing the energy activities of natural gas transmission and operation
of the transmission system; and the companies Direction for Technological Industrial
Development Zones – Skopje (DTIDZ), public company Kumanovo Gas – Kumanovo
and public company Strumica Gas – Strumica holds licences for performing the energy
activities of natural gas distribution, operation of the distribution system and supply with
natural gas for tariff customers connected to the natural gas distribution system. In this
stage of development of the gasification in the Republic of Macedonia, there are practically
no distribution networks; only a certain number of direct consumers are connected directly
to the transmission network. According to the ERC, total consumption of natural gas in
2014 was approximately 135 Nm3, and the usage of the transmission capacity remains
minor, approximately 18%.
Heating sector
According to the Energy Strategy, in 2006 heat was produced by: heating plants (55%);
individual boiler plants producing heat for their own purposes (37%); and combined heat
and power plants generating heat and electricity for their own needs (8%). The fuel used
included petroleum products (71%), natural gas (19%), coal (8%) and biomass (2%). A
large proportion of boiler plants are obsolete with a low efficiency coefficient. In the past
few years, two newly built plants have changed the above picture: TE-TO AD Skopje
shareholding, a privately owned company, holds a licence for performing combined
generation of electricity and heat; and KOGEL AD Skopje shareholding, a privately
owned company, also holds a licence for the combined generation of electricity and heat.
Central heating systems
The total heating consumption connected to central heating systems in the Republic of
Macedonia and delivered to end users is about 630 MW. The biggest central heating
system is the system operated by Toplifikacija AD, which supplies about 550 MW. Several
smaller systems, two of which are out of Skopje, connect about 80 MW. Considering this
level of connectivity, we can say that about 10% of users in the country are connected to
central heating systems. The central heating system of the city of Skopje during recent
years has been expanded and satisfies the heating demand of more than 40% of the city.
The heat produced in heating plants is realised by using boilers that use mostly natural gas
or heavy fuel oil. The heating service is paid for on the basis of the measured delivered
energy at the entry point of the building. The regulation and metering of the delivered
energy to every building are performed by a central dispatching system. From the point of
view of the ownership structure of the central heating systems, it is important to mention
that in most cases, these capacities are privatised, with Toplifikacija AD controlling more
than 90% of the central heating systems in the country.

According to the Energy Strategy, the total constructed length of the central heating
distribution network (length of channel distribution including supply and return pipelines)
which is owned by the Republic of Macedonia is about 185 km (as of 1 January 2008).
The total installed heat consumption connected to the network is about 650 MW. There
is a total of almost 3,000 buildings connected, with a total heated surface of about 4.5
million m2. The total active heat consumption connected to the network is about 550 MW.
Renewable energy sources
In respect to renewable energy sources, Macedonia uses primarily hydro-power, biomass,
geothermal energy, wind and solar energy.
Hydropower
Depending on hydrological conditions in the year, 15 to 18% of the annual electricity
production in Macedonia comes from hydro-power plants. Macedonia has a significant
potential for construction of small hydro-power plants (with installed capacity of less than
5 MW in size) located at approximately 400 sites throughout the country which have been
already identified, and may meet over 10% of the country’s current electricity needs. An
estimated 1,088 GWh could be generated annually from this resource, 17.5% of the total
theoretical potential of the country’s hydro resource.
Here should be noted the hydro system of Crna River comprising three hydro-power
plants: HPP Cebren, HPP Galiste and the existing one – HPP Tikves. The construction
of HPP Cebren and HPP Galiste is considered as one of the priorities in the energy sector
and their annual production is expected to be 840.3 GWh and 262.5 GWh, respectively.
Geothermal energy
Geothermal energy accounts for 2.4% of total production in the heat production sector.
There are possibilities for increasing the exploitation of existing and new geothermal
sources. Macedonia is quite rich in geothermal sources suitable for uses other than the
production of electricity. Proven thermal potential is estimated to be 220 MW. The
Macedonian Geothermal Association has identified eight existing geothermal projects for
expansion and rehabilitation, mainly those used for geothermal heat in greenhouses, and for
space heating.
Solar energy
Solar energy is being used at a symbolic level for domestic water heating. But the
geographical position and climate in Macedonia offer a very good prospect to intensify the
use of solar collectors, with the country having one of the most favourable solar regimes
in Europe. The annual average for daily solar radiation varies between 3.4 kWh/m2 in the
northern part of the country (Skopje) and 4.2 kWh/m2 in the south-western part (Bitola).
The first private photovoltaic plant in Macedonia opened in 2009, a 10.2 kW installation
near Skopje.
Biomass energy
There is relatively high potential in the country for utilising biogas from animal manure
for energy generation purposes, as well as growing crops for the production of biofuel.
There is also a significant potential for wood pellet use over firewood in the residential
heating sector. An estimated 180,000 cubic metres of wood waste are produced annually, a
potential which is entirely unutilised.
Wind energy
According to the Wind Energy Resource Atlas and Site Screening of the Republic of
Macedonia, 15 possible locations with sufficient energy potential for the construction of

wind power plants with foreseen installed capacity of 25 MW to 33 MW were identified.

Average wind speeds of 6.5–8.5 m/s at 80m have been recorded in mountainous regions,
with an average of 7 m/s in the south-eastern regions of Macedonia.
There have been no significant changes in the energy situation in the last 12 months
that might have an impact on future direction or policy. The Energy Strategy 2030 of
the Ministry of Economy is a valid document upon which the Republic of Macedonia is
undertaking actions in the energy sector. According to the Energy Balance of the Republic
of Macedonia 2015–2019, increasing consumption is foreseen in all types of energy, with
the highest increase expected in natural gas consumption (44.1%) and geothermal energy
(15.8%), and consumption of other energy types increasing by less than 5%. It is expected
in the coming years that there will be a stable and continuous supply to consumers of all
types of energy.

Government policy has been constant in recent years committed to fulfilling EU standards
and regulations in the field of energy, establishing competitive national markets and active
participation in the regional energy market, as well as liberalising the markets in electricity,
natural gas and thermal energy. The overarching aim of the reforms for establishing a
consistent energy system upon EU recommendation is harmonisation with the energy
community of South Eastern Europe, with the final purpose of integration into the energy
market of the EU. The development of the energy sector will be based on the following
principles and priorities:
• market liberalisation;
• energy security;
• increase in energy production;
• diversification of energy resources;
• progressing relations with other countries in the region and the international transport
corridor;
• efficiency growth in the energy sector; and
• growth of the energy capacities of renewable sources.
In addition to the above long-term strategy, the new government defines in its program that
it will be focused on tackling the problem of the increasing energy poverty of the population.
In relation to this, the Energy Regulatory Commission of the Republic of Macedonia has to
prepare an analysis for reintroduction of the daily cheap tariff for electricity for households
and modification of the Tariff System for selling electricity to households and small
consumers, as a measure in battling the energy poverty.

The existing Energy Law provides an adequate legal framework for the energy efficiency
policy of Macedonia. There are ongoing efforts for developing and adopting the secondary
legislation and technical regulations.
The ERC issued the Action Plan for liberalisation of the electricity market in the Republic
of Macedonia, in which 1 April 2014 was stated as the start date for the liberalisation of the
electricity market for all electricity consumers except households, and the start date for the

liberalisation of the electricity market for all consumers, including households (1 January
2015) was postponed. The percentage of real liberalisation of the market is approximately
45%. According to the data available at the ERC, the second phase of the liberalisation
was successful and the costs for consumers were decreased due to the avoidance of crossed
subvention.
The ERC on 24 August 2017 adopted a Decision by which the Tariff System for selling
electricity to households and small consumers was amended. With the changes in the Tariff
System for sale of electricity to households and small consumers, a daily low-priced tariff
was introduced for consumers from the group of households in the period from 14:00 to
16:00 from Monday to Saturday.
Since 1 January 2015, the natural gas market has been liberalised, wherein the regulator has
issued 15 trade licences for natural gas and two licences for supply of natural gas.

In general there have been no crucial decisions or judgments in the energy sector.
There is only one decision from the Competition Committee of Republic of Macedonia,
against EVN Macedonia for abuse of dominant position on the relevant market, which
has been confirmed by the Supreme Court of Macedonia. Decisions were also made by
the Competition Committee stating that the concentrations are in accordance with the
provisions of the Law on protection of competition.
It should also be noted that the Constitutional Court of the Republic of Macedonia has
abolished part of an article of the Energy Law which prescribed that the acts of the Energy
Regulatory Commission could be appealed within a term of 15 days from the date of
their publication. It was determined that the said wording was not in accordance with
the governing law and legal safety prescribed in the Constitution of the Republic of
Macedonia. The court determined that such provision is not in accordance with the Law on
administrative procedure as lex specialis and that the term for filing appeals against acts of
the Energy Regulatory Commission must be calculated from the day of delivering of the act
to the relevant subjects.

Major events and developments that have taken place in the recent past include the
liberalisation of the natural gas market in 2015, as well as the postponing of the liberalisation
of the electricity and heat markets.
The Ministerial Council of the Energy Community negatively noted the postponing of
liberalisation and requested compliance with the Energy Community Law.

There are no substantial changes in law or regulations foreseen for the next period. The
constant improvement of the laws and regulations is an ongoing process. The main
legislation challenge in the next period will be the implementation of the Third Package of
EU legislation on the internal energy market, i.e. liberalisation.
However, the government will have to comply with the Energy Community law sooner
rather than later, because the country may face the suspension of voting rights and exclusion
from meetings or mechanisms provided within the Energy Community Treaty, which will
be very costly for an economy such as Macedonia’s.

Dragan Dameski
Tel: +389 2 313 6530 / Email: dameski@ddklaw.com.mk
Dragan Dameski is one of the founders and the head of the foreign investments
department at Debarliev, Dameski & Kelesoska Attorneys at Law. He works
mostly for foreign clients and has been involved as legal counsel in practically
all important projects in Macedonia, especially in energy, capital markets
and real estate. Dragan is a member of the Macedonian Bar Association,
Association of Mediators, the International Union of Lawyers (UIA), and the
International Bar Association (IBA). His areas of expertise include M&A,
foreign investments, real estate, energy, securities and finance.
Debarliev, Dameski & Kelesoska, Attorneys at Law

Str. Mirce Acev 2nd/3rd Floor, 1000 Skopje, Macedonia
Tel: +389 2 3215 471 / Fax: +389 2 3215 470 / URL: www.ddklaw.com.mk

Mozambique
Ilidio Bambo & Taciana Peão Lopes
TPLA – Taciana Peão Lopes & Advogados Associados
energy sources
Between 1996 and 2009, Mozambique was the fastest-growing non-oil economy in sub-
Saharan Africa and, from 2010 to 2015, showed average GDP growth of 7.5% per year. In
2010, per capita GDP stood at US$458 compared to US$137 in 1993, right after the end of
the civil war. In 2016 GDP growth totalled US$11.05 billion, down to 3.3% from 6.6% in
2015. However, according to the World Bank’s latest figures, GDP growth reached 2.9% in
the first three months of 2017 (year-on-year), after having slowed down to 1.1% in the last
quarter of 2016.
In the period ranging from 1990 to 2016,1 the country’s overall population increased and basic
indicators, such as access to health, education and water have improved significantly over
the last 26 years. One of the indicators which grew the most was electricity consumption,
probably driven by the electrification projects developed by Electricidade de Moçambique
E.P. (“EDM”) and the National Energy Fund (“FUNAE”) over the past 15 years.
Mozambique’s energy potential is one of the highest in Africa, with installed generation
capacity of around 2,475 MW, and substantial energy resources, ranging from fossil fuels
(natural gas and coal) to renewables (solar, hydro, wind, geothermal and tidal sources of
power). Since 2000, annual energy production has increased by approximately 6%. This
expansion is largely driven by developments in the natural gas and electricity markets.
Energy resources in power generation (2014)
Diesel oil – 1%
Gas
7%
Hydro – 93%
Source: RECP 2014 and EDM Annual Report 2014

TPLA – Taciana Peão Lopes & Advogados Associados Mozambique
This rapid progress is likely to continue in the next few years as a result of the development
of Mozambique’s extensive coal and natural gas resources:
(i) Coal reserves are among the largest undeveloped resources of their kind in the world,
and major international mining companies are in the process of developing world-scale
thermal and coking coal mines.
(ii) Recent offshore gas finds put Mozambique on the map as one of the world’s largest
exporters of natural gas. If estimates prove correct, the cumulative natural gas reserves
will rank Mozambique fourth in the world for natural gas reserves, behind the three
giants of Russia, Iran and Qatar.
(iii) The Cahora Bassa dam (“HCB”), with 2,075 MW of capacity, is one of the largest
hydropower installations in Africa; Mozambique could build another 5,000 MW of
hydropower.
However, the exploitation of these resources for national use is limited. In fact, most of
Mozambique’s primary energy demand is met by traditional biofuels such as wood, charcoal
and agro/animal waste, which in 2011 accounted for 64% of energy production and 77% of
final energy consumption, while the rate of access to electricity among the population is still
very low: 26.3% (urban areas 82% and rural areas 1%).2
Less than 5% of households in Mozambique use a modern form of energy for cooking at
home, the remainder use charcoal and wood fuel (INE, 2009; INE, 2010a). In rural areas,
where the majority of the population lives, 97% of households rely on daily wood-fetching
for their energy needs. In urban areas charcoal has rapidly become the prevailing fuel of
choice, accounting for approximately 50% of all energy consumption expenditure.
According to the Energy Strategy (“EE”) approved by the Government through Resolution
10/2009 of 4th June, Mozambique is endowed with considerable hydropower potential,
which has been broadly estimated at 12,500 MW, with a corresponding annual energy
generation potential of 60,000 Gwh per year.
One of the essential instruments towards the social and economic development of
Mozambique, which is in line with the view of the Government of Mozambique (“GoM”)
in the fight to reduce poverty, and the policies associated with economic development,
sustainability, management of resources, science and technology, is the Energy Strategy
(“EE”), which establishes guidelines for the sectors of electricity, oil and gas, liquid fuels
and biomass.
The EE establishes policy guidelines and relevant principles for the development of the
country’s vast energy resources:
• increase sustainable access to electricity and liquid fuels;
• sustainable utilisation of wood fuel;
• promotion of new and renewable sources of energy;
• diversification of the energy matrix;
• joint planning and integration of energy initiatives with development plans and
programmes of other sectors;
• sustainable development and environmental protection;
• tariffs reflecting real costs and the incorporation of mitigation measures to protect the
environment;
• promotion of the concept of the productive use of energy and expanding the approach to
energy supply to include the supply of systems and tools;

• institutional coordination and consultation with relevant stakeholders for better

development of the energy sector;
• active participation in international cooperation forums, including the Southern African
Development Community (“SADC”); and
• efficient use of energy.
The electric energy subsector is considered fundamental in the context of the EE, given the
potential of Mozambique in this subsector, of which South Cahora Bassa (2,075 MW), North
Central (1,245 MW), Mphanda Nkuwa (2,400 MW), the Moatize coal plant (1,500 MW) and
the Moamba natural gas power plant are examples.
The level of national production capacity referred to above, and the energy deficit in the
SADC region of approximately 4,000 MW, are important incentives to increase energy
production capacity in Mozambique; the energy production plan should, first, satisfy the
growing national needs and, secondly, promote exports to the regional market, preferably to
the Southern African Power Pool – SAPP.
The liquefied natural gas project of the Rovuma Basin (“LNG Project”) in northern
Mozambique, continues to be of particular importance for the development of the energy
market and industry in Mozambique. In this context, the legislative changes brought by
the New Petroleum Law, approved via Law No. 21/2014, of 18th August (“NPL”), give
particular relevance to domestic gas allocation and the contribution of local content.
The Gas Master Plan (“Plano Director do Gás Natural”), approved by the Council of
Ministers in June 2014, also states that “this is a unique opportunity for the industrialisation
of the country”, and [it is essential that the gas] “be used to industrialise the country at a
price that permits the viability and competitiveness of industries”.
Several projects based on gas have been presented to the Ministry of Mineral Resources and
Energy (“MIREME”), and the National Institute of Petroleum (“INP”) and the National Oil
Company (Empresa Nacional de Hidrocarbonetos E.P. – “ENH”) have been involved in
the analysis and selection of the more sustainable projects to be implemented pursuant to
the availability of natural gas from the upstream projects. Amongst the selected projects are
a fertilizer plant, a GTL plant and a power plant. At the beginning of 2016, Sasol, operator
and concessionaire of the Temane and Pande Blocks, submitted and obtained approval for
its Development Plan, which also provides for a 400 MW gas-fired plant3 to be located in
Temane and to serve the south of Mozambique.
On the renewables side, there are currently two solar projects4 being implemented that
have already received approval from the GoM, one of which – Mocuba Solar Plant with
a generation of 40 MW – has already obtained the respective concession contract and is
reaching financial close.

The appointment of the new Executive at the beginning of 2015, resulting in the merger of the
former Ministry of Energy and Ministry of Mineral Resources into a “super” Ministry – the
Ministry of Mineral Resources and Energy (“MIREME”), brought more focus to governmental
authorities in respect to the composition, generation and allocation of energy sources and has
been actively involved in promoting the development of renewables in Mozambique.

At the same time, the Policy and Strategy for the Development of New and Renewable
Energies for the period 2011–2025,5 established as specific measures to be developed the
mapping of hydro, wind, solar, biomass, geothermal and wave potential, as well as the
identification and mapping of the sites.
In 2014, the GoM published the Renewable Energy Atlas of Mozambique which provides
mapping of several hundred projects on a technical and economic prefeasibility level.
Pursuant to the Atlas, the potential of the renewable sources is the following:
• Solar PV: 23GW;
• Hydro: 10 GW;
• Wind: 5 GW; and
• Biomass: 2 GW.
Due to the competitiveness characteristics of the hydro projects, the GoM decided to
pay particular attention to investment in some of the dams, and the reactivation of the
Hydroelectric Project Implementation Technical Unit, to increase the speed at which
investment projects in the areas of power production and transmission are being
implemented, and announced the decision had been made to advance projects considered
to be of vital importance by the Government, such as the Tete-Maputo transmission line.
Another interesting fact is related to the possibility of implementing Coalbed Methane
(“CBM”) projects, which are provided for in the Petroleum Law and the Petroleum Law
Regulations. At the beginning of the year, MIREME decided to start the negotiations,
and the drafting of a new Engineering, Procurement, Construction and Commissioning
(“EPCC”) agreement to cover CBM activities in partnership with some investors and some
of the existing coal mining title-holders from the Moatize Basin.

Mozambique’s Constitution, last revised in 2004, contains several important mandates for
the energy sector, including oil and gas exploration and exploitation, which influence all
sector legislation. One of the most important provisions is Article 98 (“State Property and
Public Domain”), providing that natural resources in the soil and the subsoil, in inland
waters, in the territorial sea, on the continental shelf and in the exclusive economic zone,
shall be the property of the State. The law regulates the legal regime of property in the
public domain, as well as its management and conservation, and shall distinguish between
the public domain of the State, the public domain of local authorities and the public domain
of communities, with due respect for the principles of imprescriptibility and immunity
from seizure.
The energy sector is primarily regulated by the Council of Ministers, the highest
governmental body in Mozambique which includes the President, the Prime Minister and
all the other Government Ministers, which is responsible for creating the main legislation
for the sector and ultimate responsibility for decrees, policy development, concession-
granting and royalty collection.
The Ministry of Mineral Resources and Energy (“MIREME”) is responsible for
implementing Government policy in the energy, hydrocarbons and mining sector and
oversees the activities of the other State and public institutions. A number of institutions
have regulatory functions with respect to power, petroleum and the mining sector including,
respectively, the National Directorate of Electricity, EDM, INP, ENH, the National
Directorate of Mines (Direcção Nacional de Minas – “NDM”) and EMEM – Empresa

Moçambicana de Exploração Mineira S.A. Mozambique, have put in place a modern

legislative framework for the energy sector in general, and the power sector in particular.
But some aspects are still unclear, particularly the contribution that the energy sector is to
make to poverty reduction. While the legislative framework is considered to be largely
in place, implementation and enforcement appear to lag behind considerably. The 1997
Electricity Act No. 21/97 of 1st October 1997 opened up all aspects of electricity production,
distribution and sale to private operators through concession contracts. Decree No. 8/2000
of 20th April 2000 determined the legal and financial autonomy of public companies and
stipulated that they should function on a commercial basis and be financially viable. But
responsibility for the management of the national grid is reserved to EDM.
More recently, the Council of Ministers approved, on 17th October 2014, the Act on New
and Renewable Energies Feed-in Regime (“REFIT”). This Act defines the feed-in model
for new and renewable energies produced by biomass power plants, wind power plants,
hydropower plants and solar power generation plants. In order to face the challenges of the
sector, the Electricity Law is currently under review.
According to the petroleum governance structure, INP has core regulatory functions relating
to the sector. While being a separate institute, the body is not wholly independent, as it remains
subordinate to MIREME and hence subject to political control and management. Petroleum
operations are regulated by the New Petroleum Law, approved via Law No. 21/2014, of 18th
August (“NPL”). The Petroleum Law Regulations are still under discussion and have not yet
been approved, although a draft of the referred regulations is publicly available at the INP
website (http://www.inp-mz.com/). The EPCC agreements signed by Anadarko and ENI in
2006 allow exploration, development and at least 25 years of natural gas production in the
Rovuma fields. However, the original contract did not anticipate the possibility of production
in a local LNG plant for export. Therefore, the GoM submitted to Parliament an Enabling
Law, which authorised the issuance of a Decree Law to establish a special regime for the
Rovuma LNG Projects (Special Regime) no later than 31st December 2014. This was an
adequate and constructive approach, corresponding to modern legislative methodology. The
Enabling Law No. 25/2014 of 23rd September was approved by Parliament, and Decree Law
for Offshore Areas 1 and 4 was published on 2nd December 2014 (Decree Law No. 2/2014).
It provides a clear and comprehensive legal framework for their development, and includes
significant concessions on many regulatory issues.
A new Mining Law (“NML”) was approved by Law 20/2014, 18th July, which came into
force on 18th August 2014, repealing Law 14/2002 of 26th June (2002 Mining Law), or any
other pre-existent inconsistent legislation. The respective regulations were to be approved
within 90 days of the new Mining Law taking effect, which to date has not yet happened and
the draft of the New Mining Law Regulations is still under discussion.
Some of the highlights of the new petroleum legislation are:
(i) From an institutional perspective, the creation of the High Authority for the Extractive
Industry (“Alta Autoridade da Indústria Extractiva”), responsible for both mining and
petroleum, with responsibilities still to be defined by the Council of Ministers.
(ii) From a local content perspective:
• strengthened requirements for local content;
• a new requirement for association with Mozambican entities to compete in public
tenders; and
• an obligation for foreign companies to register on the Mozambique Stock Exchange.


A recent discussion was brought to public attention, following a legal opinion requested
by an organisation of the civil society – Centro Terra Viva, a Maputo-based Environmental
Research Advocacy – in relation to the process of land acquisition for the area for the
implementation of the LNG project in Northern Mozambique. Some of the main findings
relate to the process of acquisition of the land, the environmental impact study and public
consultations with the local communities.

The major developments in the energy sector are connected with the implementation of
the natural gas projects, on the one hand, but on the other, with the implementation of
renewable energy projects.
In terms of available renewable energy resources, the Renewable Energy Atlas of
Mozambique (2014) indicates that the country holds a diversified theoretical spectrum of
23,026 GW; the most abundant energy source is solar (23,000 GW) followed by hydro (19
GW), wind (5 GW), biomass (2 GW) and finally, geothermal (0.1 GW).
Hydro power projects are the main power generation source, which is sold both to the
national market and abroad. Large-scale projects installed capacity is estimated to be
2,183.85 MW and that of small-scale projects should amount to 2.32 MW. Estimated
potential of priority projects is 5.6 GW. The market is controlled by HCB followed by
EDM, but there are also a number of small-scale initiatives developed by FUNAE, the
private sector and cooperation agencies.
The solar market is expanding slowly but it is gaining weight since 2009, driven by projects
and initiatives carried out by foreign cooperation agencies and by the Government through
FUNAE, with the participation of the private sector as subcontractors. The country’s solar
power installed capacity is estimated to be 2.250 kWp. In addition to various small-scale
projects, there are two solar power projects currently being developed for the centre and north
of the country, operated by public-private partnerships between the foreign private sector
and EDM. The construction of the first large solar power plant in Mozambique, in Mocuba,
which will help increase the resilience of the energy sector and the supply of energy to rural
areas, has a capacity of 40.5 MW with a total value of the investment of US$76 million.
This public-private project is being developed in a partnership between Scatec Solar, an
independent energy producer based in Norway, Norway’s Norfund development finance
agency, and EDM. Funding is being mobilised from the African Emerging Infrastructure
Fund, which supports private sector infrastructure projects in sub-Saharan Africa.6
Moreover, Mozambique has had a solar panel factory since 2013.

Electricity is a key issue for all existing and future large energy projects in Mozambique.
Industrial and mining projects all depend on the availability of cheap electricity in large
quantities, while other projects are engaged in the production of electricity. The energy
sector in Mozambique is growing rapidly and the country’s energy and mineral resources
can contribute to reduce absolute poverty and promote growth, including the development
of domestic energy infrastructure within and across regions.
The Government is conducting analysis of the options for using renewable energy sources
domestically that could help to reduce energy costs and environmental impacts. It has

said that electricity must reach all Mozambicans at affordable prices and be subsidised if
necessary, by means of a combination of public, private and donor funds.
On the other hand, Mozambique’s natural gas reserves should be seen as a unique opportunity
to spur industrialisation and development. In fact, natural gas could be used to promote
industrialisation and rural development. The Gas Master Plan says that “Mozambique
cannot be just an exporter of raw materials”, and that “Priority must be given to projects
that add value to the gas and assure the greatest benefits for Mozambican development.”
The opportunity to negotiate with investors for the use of gas for domestic industry and
jobs should not be missed. In this context, the new governmental policies should realise
and apply the provisions in the Gas Master Plan developed by MIREME. Clear policy and
analytical tools that inform policymakers’ decisions in a transparent manner will promote
the efficient use of gas and optimise the development of related industries. Further, the
Government must ensure that the exploration of natural resources and implementation
of projects based on natural resources benefit the communities closest to those projects.
Mozambique shall continue to comply with its obligations under the Extractive Industries
Transparency Initiative (“EITI”), as EITI remains the best mechanism in place for ensuring
that there is clarity and transparency in the primary extractives industry.
As a final remark, the Government of Mozambique is exploring the possibility of creating a
national ‘content task force’ to coordinate the efforts of the public, private and local business
sectors to generate a consistent and informed dialogue on national content.
***
Endnotes
1. Source: World Bank, 2015, 2017b; EDM, 2014, 2015.
2. Source RECP 2014.
3. A partnership between Sasol and EDM.
4. One in the Province of Zambézia and the other in the Province of Nampula.
5. Approved respectively in 2009 and 2011.
6. http://www.edm.co.mz/index.php?option=com_content&view=article&id=786%
3A2017-06-09-14-54-56&catid=53%3Anoticias&Itemid=78&lang=en, last accessed
on 2 October 2017.

Ilidio Bambo
Tel: +258 21 496 852 / Email: ibambo@hotmail.com
Ilidio Bambo is a Mozambican lawyer with more than 20 years of experience
in the energy sector, where he has been the Ministry of Energy Advisor.
Ilidio Bambo has been appointed recently as the Director for the Ministry of
Mineral Resources and Energy Legal Department.
Taciana Peão Lopes

Tel: +258 21 496 852 / Email: taciana@tpla.co.mz
Taciana Peão Lopes, registered at the Mozambican Bar Association and
with the Association of International Petroleum Negotiators, has 17 years of
experience advising developers, sponsors, investors, multinational lenders and
commercial banks to develop, construct and fi nance power plants ranging in
size from 30 MW to 600 MW, utilising diverse technologies such as natural
gas, coal and hydroelectric, as well as alternative technologies such as solar
and wind, by guiding the clients through a challenging regulatory regime.
She has been representing the major upstream oil & gas companies based in
Mozambique.
Taciana has been involved in the first LNG export project in Mozambique, one
of the largest LNG projects worldwide. Her expertise in LNG includes the
drafting and negotiation with the Government of the Republic Mozambique
of the legal instruments required for the creation of a new legal framework
for the implementation and financing for LNG in Mozambique. Taciana has
been involved in the major infrastructure projects in Mozambique, ranging
investments over US$3bn, namely public-infrastructure projects and other
forms of public-private collaboration and private finance initiatives, having
advised the two first PPP concessions in the country after the approval of the
PPP Law and the PPP Law Regulations.
TPLA – Taciana Peão Lopes & Advogados Associados

Rua Francisco Orlando Magumbwe, 32 Maputo, Mozambique
Tel: +258 21 496 852 / Fax: +258 21 496 853 / URL: www.tpla.co.mz

Pakistan
Aemen Zulfikar Maluka & Pir Abdul Wahid
Josh & Mak International
Introduction
In the past decade, numerous changes have taken place, and not only in the regulatory
framework pertaining directly to the energy industry based on the Constitution of Pakistan.
This change is a result of the constantly evolving political fabric of Pakistan, particularly
after a democratically elected government came into power again after military rule. While
Pakistan is still one of the key locations for setting up an energy or mining business, the lack
of a solid legal framework results in a nuanced situation for foreign investors.
The primary issue is the lack of any modern property legislation to deal with the red tape
of the local government authorities and their failure to appreciate the need for proper R&D,
enforced in a legal manner and duly backed by the action of a parliament. However, what
we do have is a set of various procedural laws and policies made by respective federal and
provincial governments, and many new policies which arise due to the scattered nature of
such procedures, while most of these piecemeal mining regulations currently exist in the
form of promulgated notifications. As most of these laws have not gone through the proper
process of parliamentary debates and procedures for validation, there is a growing concern
that they may be a product of bureaucratic and political manipulation, which may affect the
interests of foreign investors seeking to invest in the energy industry of Pakistan.

Oil and gas safety laws have been the subject of much criticism lately owing to their bad
condition especially during transport, after the alarming incident in Bahawalpur on June
25 where a Shell tanker overturned and more than 130 local people died collecting spilt
gasoline.1 As per the recent Pakistan Oil (Refining, Blending, Transportation, Storage and
Marketing) Rules, 20162 the maximum fine is Rs10 million, which gives an unfair advantage
to foreign oil firms earning billions of dollars in profit every year.
Rule 69 of these Rules state: “A person, who contravenes any provisions of the Ordinance,
these rules, terms and conditions of the licence, or the decisions of the Authority (OGRA, Oil
& Gas Regulatory Authority), shall be punishable with a fine which may extend to Rs10m, and
in case of a continuing contravention, with a further fine which may extend to Rs1m for every
day during which such contravention continues”. After the recent incident in Bahawalpur,
the OGRA exercised its powers under these Rules and imposed a penalty of Rs10m on Shell
Pakistan Limited for failing to fulfil its legal responsibilities (which led to the Bahawalpur
accident and oil spill on June 25). A current issue therefore in Pakistan is non-compliance
with laws, rules and standards so serious that it can lead to the revocation of the oil marketing
licences of companies and a penalty for each violation, including suspension from business.

Josh & Mak International Pakistan
A major accusation is that companies like Shell tend to avoid compliance with the
Petroleum Rules 1937 read with the Petroleum Act 1934. Rules 63–76 and 78–82 govern
the health and safety regime of transport of oil and gas by energy companies and define all
the safety requirements, from the type of tank to procedure of filling, decanting of tanks,
transportation, prevention of accidents and prevention of escape of petroleum.
The past few months have also seen a pretty disturbing war of words between oil tanker
owners and the OGRA, showing that health and safety is seen as a ‘cost’ rather than a
proper requirement by the former. As of this August 2017 more strikes are threatened by
the oil tanker operators, as they see implementation of proper taxes and health and safety
as a violation of their rights.
Gas Infrastructure Development Cess (2017)

Rising gas prices, as well as the taxes levied on gas producers, is a key concern. On
August 22nd a two-member court bench comprising Justice Muhammad Ibrahim Khan
and Justice Ijaz Anwar restrained Sui Northern Gas Pipelines Limited (SNGPL) from
collecting arrears payable to the Gujarat Industrial Development Corporation (GIDC)
through monthly gas bills from CNG stations and industrial units of the province until
the next order. This is yet another taxation battle, i.e. where the bench has issued notice
to the OGRA, SNGPL and federal government through the Ministry of Petroleum and
Natural Gas to submit its reply on next hearing. The plea made by the CNG stations and
unit owners is that the provisions of the GIDC Act, 2015 are not “self-executing” and thus
cannot be given effect without necessary subordinate legislation in the shape of Rules in
the KPK province of Pakistan.
Gas theft
The new Gas Theft and Recovery Act 2016 and Gas Theft Control and Recovery Act 2016
brings new hope to the government in order to prevent the tampering of gas pipelines
which has also been noted as an offence, in a very welcome decision in Raza Muhammad
v State (2017 PCrLJN 47 Karachi High Court Sindh). Another similar case targeting
energy theft is Zahir Shah v State (2017 MLD 1076 Karachi High Court Sindh). These
steps are very much welcome as they stop the theft of gas facilities.
Signature bonuses
Tex Gas (Private Limited) v OGRA 2017 PLD 111 Lahore High Court Lahore, legality
of charging signature bonus by OGRA, has been discussed. It is likely this case will be
taken to Supreme Court for appeal. This is a relatively new case; we have yet to see how
it will affect future decisions.
Ownership of natural resources

The years 2015–2017 have been a continuation of on-going debates on the interpretation
and effect of the 18th Amendment upon Article 172(3). The oil and gas producing provinces
are entitled to have 50% ownership and management control over mineral resources in
their respective regions. There is an on-going tussle of interpretation between provinces
and the Federal Ministry of Petroleum and Natural Resources on Article 172(3). This
is because the confusion has caused Sindh to claim its exclusive right in the extension
of exploration licences to oil and gas companies, while Baluchistan has demanded that

the Ministry of Petroleum and Natural Resources be abolished. This has halted many
hydrocarbon and mining projects in the past year; hence a consensus framework between
the federal Petroleum Ministry and respective provinces is long overdue.
“Qualified Persons”
In 2015, an interesting matter came to light. Internationally renowned geologist, Fuzail
Siddiqui, approached Josh and Mak in 2015 for the filing of an interesting writ petition. The
background of the matter was that the geologist had advised the then-secretary of Mines
and Minerals, Punjab to help with transposing international accounting standards in the
implementation of the National Mineral Policy in 2013. International standards now have a
legal requirement that conduct of mineral exploration and reporting of results must be done
by a ‘Qualified Person’ who has at least a BSc degree in geology, experience in the type of
mineralisation, and membership of an authorised professional organisation. However, this
aspect of the National Mineral Policy implementation has remained in abeyance so far, and
Fuzail Siddiqui is now leading a writ petition to ask the courts to order the implementation.
He is convinced that adaptation of the legal concept of Qualified Person is one change that
will trigger the much-desired process of efficient and effective increase in the contribution of
minerals to the betterment of the economy of Pakistan. The unfortunate part is that despite
its national importance, the matter is still pending hearing at the court. Once decided, the
matter would bring a much-needed breath of fresh air of properly qualified persons in the
energy and mining state organisations, and not self-serving bureaucrats with little or no
knowledge of geology.
National Mineral Policy 2013 and its ongoing case law

This was a rather promising policy and it seems that despite its promising text, it is still
causing confusion as far as its implementation is concerned. It did give rise to some
interesting cases, such as Irfan Khan Bangash v the Government 2015 YLR, which was an
Article 199 Constitutional petition pertaining to mining concessions and grant of prospecting
licences, as per the new policy and its retrospective effect. In this case, the Petitioner
applied for grant of a prospecting licence and before issuance of the same, the new Policy
was introduced and petitioner was directed to reduce the applied area according to the new
Policy. The court held that he was entitled to keep his rights as his matter pertained to a time
before introduction of the new policy.
Oil and Gas Regulatory Authority (OGRA) Rules, 2016

Recently, Oil Marketing Companies have taken the matter to court after OGRA promulgated
the Oil and Gas Regulatory Authority (OGRA) Rules 2016 for companies in the downstream
oil sector. These are the Pakistan Oil (Refining, Blending, Transportation, Storage and
Marketing) Rules 2016. The matter is being argued and pending.
As a result of these rules, all the oil refineries, marketing and oil pipeline companies
are required to pay a Rs2 million non-refundable fee for grant, renewal, modification,
extension, assignment, review, transfer, amendment, relocation or re-issuance of a licence.
Oil blending or reclamation or grease plants are to pay a Rs50,000 fee, while lubricant
marketing companies are required to pay a Rs1m fee. Oil storage and testing facilities are
required to pay Rs100,000 and Rs500,000 fees, respectively.
Additionally:

1. All of these entities are also required to pay 50% of the licence fee for modification,
extension, transfer or review of their licences.
2. Every refinery, OMC, lubricant marketing company and pipeline is also required to pay
0.005% of gross sales.
Supply of natural gas as a constitutional right?
Another interesting case came up in 2016, where energy supply was seen as a constitutional
right for local companies.
In 2016 PLD 32, as per Arts. 158 & 199, a constitutional petition was made regarding
the Supply of Natural Gas on priority. The Petitioner Company raised the plea that in
view of Art.158 of the Constitution, failure to supply natural gas to its plant was illegal.
It was noted that the Province of Khyber Pakhtunkhwa had surplus gas over and above
its own consumption but, on principle, priority should still have been given to cement-
manufacturing plants in the province. The High Court declared the conduct of authorities
in delaying the provision and supply of gas connection to the petitioner company to be
illegal, arbitrary, unreasonable, discriminatory, without lawful authority and jurisdiction
and also violative of constitutional guarantees enshrined in the Constitution, and directed
the authorities to act in accordance with law and Constitution and forthwith supply gas to
the cement manufacturing unit of the petitioner. The petition was allowed accordingly.
Procurement in the energy sector

In 2016 PLD 207, as per Rr. 33, 34, 35, 36, 41 & 48(5) of the Procurement Rules 2004 were
put to the test in a gas supply tender. Disqualification attributed to both the participants
in an abandoned bidding process would not come their way in any manner in the new
process of bidding. This is a good precedent for energy supply companies bidding in the
procurement process, as it brings fairness to both sides. This case led to Pld Pakistan Gas
Port Ltd V Sui Southern Gas Co. Ltd 2016, where the right of the second-highest bidder to
be awarded a contract was debated if the main qualifying participant became disqualified.
The bidder company’s decision to rebid the whole process did not suffer from any illegality
warranting interference from High Court but, on the contrary, it was set to improve public
confidence over the workings of the bidder company and was the most appropriate step to
avoid long litigation. Furthermore, the lowest bidder could not claim its right to the contract
to be absolute and unquestionable until acceptance of its bid and signing of the contract.
Energy shortage and gas supply

After a tumultuous legal battle (see above), Pakistan Gasport Pvt Limited won the tender
for Gas Supply – as of 2017, the Pakistan Gasport LNG terminal that was supposed to be
brought online in July 2017, has been delayed. The legal repercussions for Pakistan Gasport
Ltd in the future will be debatable. The government has been postponing shipments of
LNG secured in January through competitive bidding from Gunner and ENI because of the
infrastructure shortfalls created by Pakistan Gasport Private Limited. It has already delayed
four LNG cargoes to October. These were originally planned for July 2017.
Pakistan is expected to have an LNG import capacity of 20 mtpa by 2020 and has the
potential to become one of the biggest importers of the fuel in the world. However, these
delays now seem to place a question mark over how the gas shortage will be addressed.
***

Endnotes
1. Bahawalpur tragedy: why and what now? https://www.dawn.com/news/1342015.
2. Safe transport of oil and gas is also governed by the Ogra Ordinance 2002, the Pakistan
Oil (Refining, Blending, Transportation, Storage and Marketing) Rules 2016, Petroleum
Rules 1937, Ogra’s notified technical standards (for road transport vehicle, container
equipment for transportation of petroleum), National Highway Safety Ordinance
(NHSO) 2000, Motor Vehicles Ordinance 1965 and Motor Vehicle Rules 1969.

Aemen Zulfikar Maluka

Tel: +92 51 844 2922 / Email: aemen@joshandmak.com
Barrister Aemen Zulfikar Maluka (a member of Lincoln’s Inn) has an LL.M.
in Oil and Gas from the University of Aberdeen in Scotland, and another
LL.M. in Corporate and Media Law from the University of London. She
is a member of the Islamabad Bar Association and an advocate of the High
Court, Punjab Bar Council. She has drafted and advised several local and
international companies and organisations regarding hydrocarbon, mining
and energy projects. Her area of expertise is the vetting, editing and drafting
of legal and technical energy and mining documents.
Pir Abdul Wahid

Tel: +92 300 507 5993 / Email: pirwahid@joshandmak.com
Mr. Pir Abdul Wahid (Advocate High Court) is a Senior Lawyer heading the
Islamabad (Pakistan) office of Josh and Mak International. He has extensive
and international experience advising on a broad range of matters. Mr. Wahid
has vast experience in representing clients in trade remedy investigations (anti-
dumping and countervailing) in Pakistan as well as before various international
trade regulatory bodies. Mr. Wahid has advised clients in corporate matters
and has regularly represented clients before various regulatory authorities of
Pakistan. His areas of expertise include Employment Laws, Trade Remedy
Laws, Project Finance & Corporate Finance, Banking, Energy and Power,
Constitutional Law, Corporate and Civil Litigation. His practice is currently
focused on dealing with multi-jurisdictional transactions, and dispute
resolution and mergers and acquisitions in the energy and corporate sector.
Josh & Mak International

GF-13, Tower A, The Centaurus, Plot 1 Jinnah Avenue, F-8 Islamabad, Pakistan, 44000
Tel: +92 51 844 2922 / URL: www.joshandmakinternational.com

Portugal
Mónica Carneiro Pacheco & João Marques Mendes
CMS Rui Pena & Arnaut
energy sources
Portugal’s dependence on imported energy has been historically high, since the country
does not produce oil or natural gas. However, due to an increasing amount of renewable
energy in the generation mix, total energy dependence has been declining.
In 2016, energy was produced from biofuels and waste (5%), hydro power plants (30%),
wind (22%) and solar (1%). Wind and solar power have been the main drivers in growing
energy production in Portugal. National production of 55.9 TWh reached its highest figure
ever in 2016, 12% above the previous maximum of 2010, due to the high export balance.
This export balance, the first since 1999, is the highest ever and equivalent to 10% of
national consumption.
Sources (anti-
clockwise from top):
Fig. 1: Production of electricity by source 2016 (source: REN analysis APREN)

CMS Rui Pena & Arnaut Portugal
Installed power in the national electricity system, as well as the number of power stations
connected to the public grid, continued to grow. At the end of 2016, the total was 19,518
MW, with 14,504 MW connected to the transmission network and 5,015 MW connected to
the distribution network, an increase of 950 MW over last year. Renewable energy sources
account for 13,644 MW of this capacity.
Sources
(descending
from top):
Fig.2: Evolution of installed power (source: DGEG analysis APREN)

The national production peak exceeded the previous historic maximum recorded in 2015.
On 18 February at 20:00, it reached 11,488 MW. At this time, the national system supplied
national consumption and also exported around 3,400 MW. Peak national consumption of
8,141 MW was on 17 February at 19:30, 480 MW below last year’s maximum.
In 2016, Portugal broke the record for the most number of hours running straight on 100%
renewable electricity energy sources. The country ran on wind and hydro energy for
107-hours straight, from 6:45 a.m. on May 7 to 5:45 p.m. on May 11. Throughout this four-
day period, Portugal managed to provide 575 GWh of electricity without the contribution
of any non-renewable sources, such as gas and coal.
In 2016, renewable production supplied 57% of consumption (including the export balance),
compared with 47% in the last year. Considering only the national scenario, renewable
production would account for 63% of consumption. Under average weather conditions,
renewable production currently accounts for around 55% of national consumption. The
high levels of renewable energy seen in 2016 were due to particularly favourable hydro
conditions, which were around 33% above normal values.
In terms of energy balance, according to the General Directorate for Energy and Geology
data from June 2017, in 2016, primary energy consumption decreased 1.2% compared
with 2015, mainly due to a reduction of 13% in coal consumption.
Final energy consumption in 2016 increased by 1%, mainly due to the increase in
consumption of oil products and electricity.
Final consumption of oil products increased by 1.3% when compared with 2015. The
consumption of natural gas increased by 6% due to the contribution of thermoelectric
plants, while the final consumption of this source of energy decreased by 0.9%. Final
consumption of electricity increased by 1%.

The reduction by 5.3% of the energy importer balance of energy products, compensated
by the increase of 35% in production of electrical energy from renewable sources, has
allowed energy dependence to decrease 3.5%, from 78.3% in 2015 to 74.8% in 2016.
In June 2014, Portugal exited the bailout funding programme it had to undergo in the previous
three years. Within the bailout package, Portugal had to take measures of adjustment of costs
in the energy sector. The new energy model subsequent to the bailout package is based on
economic rationality and sustainability.
On 26 November 2016, a new Government took office, establishing as priorities: promoting
energy efficiency; giving a new impetus to renewable energy sources; reducing the tariff
deficit through the implementation of new measures to reduce energy costs; and promoting
competition in the energy sector.
The current Government’s agenda for the energy sector is based on six pillars:
a) For Portugal to claim a role as a relevant energy supplier for Europe
The affirmation of Portugal as a relevant energy supplier for Europe, seeks to take
advantage of the country’s situation as an already major producer of wind energy, and
of its great potential for the production of solar energy, due to being the country with
the highest number of sun exposure hours in the whole of Europe.
On the other hand, Portugal has a storage capacity of liquefied natural gas which may
give it a relevant role as an alternate gateway of natural gas for Europe, reducing
Europe’s dependency on Russia as a supplier of natural gas.
b) Resuming the strategy of investing in generation from renewable energy sources
Portugal’s objective is to achieve a goal of total production of energy from renewable
sources accounting for 40% of energy consumed in the country up to 2030.
Most of the new renewable energy projects to be developed will be focused on small
generation, self-consumption generation, solar photovoltaic energy, as well as biomass.
Offshore wind energy may also have a boost in the medium/long term, if the Windfloat
Atlantic pre-commercial project in development is successful.
c) Lowering energy prices and the tariff deficit
The third pillar consists in the production of cheaper energy, allowing the reduction
of the tariff deficit, which in 2016 was still around €5bn. Some measures taken this
year are aimed at this objective, notably the determination of return of alleged excess
funds received by renewable energy projects promoters, and the review of the power
guarantee system.
d) Stimulating competition and competitiveness
In order to promote competition, the Government strategy undertakes to: stimulate
the emergence of new market agents, notably suppliers of energy; enhance the
comparability of market offers; ensure the achievement of a unitary wholesale natural
gas market for the Iberian Peninsula (the MIBGAS); and continue with the unbundling
of energy markets, notably in the oil sector.
e) Promoting energy efficiency
The Government strategy also makes a strong commitment to promoting energy
efficiency, namely leveraging the development of smart grids and the installation of

smart meters, elevating efficiency patterns of buildings and fleets, and promoting
electro-mobility.
f) Developing a technology cluster in the energy sector
Finally, the Government undertakes to encourage the emergence of a cluster of solar
energy and electro-mobility in Portugal, similar to that of wind energy.

The general overview of last year shows us continuity in the approach of the current
Government’s policy as to the energy sector, above characterised. Nevertheless, there are
relevant developments, especially in the electricity and oil sectors, which are worth mentioning.
New renewable energy projects, notably solar photovoltaic
In the past, almost every project of renewable power plants benefited from feed-in-tariffs.
The feed-in-tariff scheme was revoked in 2012 (except for small generation units and self-
consumption units), but was maintained for ongoing projects.
Recently, however, Portugal has entered a new stage, characterised by the proliferation of
projects – specifically solar photovoltaic – without subsidised tariffs, and whose electricity
will be sold and remunerated through market prices, currently around 45 € / MWh, through
power purchase or similar agreements negotiated with private investors. These projects
benefit from the downward trend of technology prices.
The General Directorate for Energy and Geology has already licensed projects which
amount to an estimated total of around 400 MW capacity of solar photovoltaic plants,
without subsidised tariffs. These solar plants, currently in the financing or construction
stage (some of which are being sold to investors), will almost duplicate Portugal’s solar
photovoltaic installed capacity, which in 2017 amounted to 470 MW.
Although these new projects are mostly solar, there are also projects of other technologies,
notably biomass, which are also in development.
Competition in the oil sector
This year saw new measures for the promotion of competition in the oil sector in Portugal,
with the declaration of public interest of two major infrastructures of storage and
transportation of liquefied petroleum gas (LPG), owned by Sigás and Pergás, in Sines and
Perafita, both mostly owned by Galp.
According to Ministerial Order no. 5382/2017, of 20 June, of the Secretary of State of
Energy, the joint capacity of the infrastructures of Sigás and Pergás and that of CLC –
Companhia Logística de Combustíveis, S.A. – account for 82% of the total storage capacity
of LPG, and access thereto by third parties is decisive to guarantee access to competitive
imports and to promote competition.
The declaration of public interest of these infrastructures requires their owners to ensure
non-discriminatory access to third parties, pursuant to technical and economic conditions
which shall be transparent and objective, and prices which shall be made public.
This declaration of public interest follows the declaration of public interest of CLC, the
major logistics operator in the area of storage and transportation of oil products in Portugal,
in October 2015.
With this measure, the Government expects, notably, to reduce the price of bottled gas.
Other relevant measures are expected still to be taken to achieve more competition and
regulation in the oil sector, as described below.


Some relevant pieces of new legislation or regulation were approved in Portugal during
2016 and the beginning of 2017. An overview of some of those of most relevance is set
forth below.
Special tax regime for fuel for professional road transport
Portugal approved, in August 2016, a special tax regime for fuel for professional road
transport, aiming to benefit professional freight transport operators who fill their fuel tanks
in Portugal, and protect Portugal’s competitiveness regarding fuel consumption.
The new regime, approved by Law no. 24/2016, of 22 August, and implemented by
Ordinance no. 246-A/2016, of 8 September, foresees the reimbursement to freight transport
operators of the amount of taxes paid which is above the minimum tax level provided for
in the European law (article 7 of Directive no. 2003/96/CE, of 27 October), excluding VAT.
Delay in the extinction of liberalised tariffs of electricity and natural gas
The liberalised market of electricity and natural gas already has a large relative weight in
Portugal, having represented 90% of consumption in the electricity sector and 96% in the
natural gas sector.
However, there are still a significant number of domestic consumers who remain in the
regulated market, which account for nearly 35% of clients in the natural gas sector and 23%
in the electricity sector.
The term for the conclusion of the liberalised market in Portugal has met successive
extensions. Initially, the term was 2011, which was extended to 2017.
However, in 2017, following the State Budget Law, which committed the Government to
extending the term of regulated tariffs in the electricity market, the Government, through
Ordinances no. 39/2017, of 26 January, and 144/2017, of 24 April, extended the term for
domestic clients to move to the liberalised markets of electricity and natural gas and contract
their market supplier, until 31 December 2020.
Possibility for customers to return to the regulated market in the electricity sector
Moreover, the Assembly of the Republic recently approved Law no. 105/2017, of 30 August,
which allows clients who have moved to the liberalised market in the electricity sector to
return to the regulated market, thus ending the principle of irreversibility of change to the
liberalised market which existed in Portugal, as explained above.
This law also prevents the application of any aggravating factor to the regulated or transitory
tariffs applicable in the regulated market. This eliminates an incentive which had been set
for clients to move to the liberalised market.
This law puts more pressure on private suppliers to be competitive and, if their offers are not
competitive, it may lead to a setback in the liberalisation process of the energy market, with
the possible return of a great number of clients to the regulated market.
Security of supply: reformulation of the power guarantee scheme
Since 2010, a regime of power guarantee has been in force in Portugal, as a way to ensure
security of supply in the electricity sector. Power plants (thermoelectric and hydroelectric)
commit to make their power generation capacity at the disposal of the National Electric
System against the payment of a given price (payments for capacity). This prevents the
blackout of the system if there is a sudden drop in supply, notably of electricity from
renewable sources.

In the scheme in force until 2017, payments for capacity were predetermined in law in a
given fixed amount for each thermoelectric or hydroelectric plant, which was linked to
the technical and economic characteristics of the investment made in each of those plants.
The amount of the payments for capacity had been reduced in 2012, within the Program of
Economic and Financial Assistance that Portugal had to go through.
On 28 December 2016, article 169 of Law no. 42/2016, which approved the State Budget for
2017, suspended the incentive to availability payable to thermal plants as of 1 January 2017
and commissioned the Government to create a market mechanism to exclusively remunerate
the availability services provisioned by electricity generators.
The new scheme on availability services was approved by Ministerial Order no. 41/2017,
of 27 January. It foresees that the provision of availability services is awarded after a
competitive and transparent annual auction to which all power plants with net capacity
equal or higher than 10 MW which sell their electricity according to market prices (as well
as, in some circumstances, other market agents which aggregate demand or the supplier
of last resort), may bid. The price of the availability services is determined through the
meeting of supply and demand in the auction.
Annually, before each auction, the member of the Government responsible for the energy
sector determines the megawatts of capacity which competitors should bid for (1,766 MW
in 2017, according to Dispatch no. 1823-A/2017, of 1 March, of the Secretary of State for
Energy) and maximum price per MW (in 2017, 3,600 € / MWh for the remainder of the
year).
The winners of the auction shall enter into an availability contract with the global system
managers (REN – Rede Eléctrica Nacional, S.A.) pursuant to which they shall permanently
maintain the capacity they undertake to guarantee and accept penalties for non-compliance
with such obligation.
Return of alleged excess support funds received by RES projects promoters
By means of Ordinance no. 69/2017, of 16 February, the Secretary of State of Energy
approved a regime addressed to power plants included in the special regime which, in
addition to feed-in-tariffs, have received public support funds for the promotion and
development of renewable energy in the past.
The ordinance establishes that the promoters of these power plants are required to return
to the National Electric System the “excessive” amounts received due to the accumulation
of feed-in-tariffs and public support funds. These include mostly promoters of projects of
wind, small hydro and cogeneration projects.
This measure is supported in article 171 (4) of Law no. 42/2016, of 28 December, which
approved the State Budget for 2017.
Regarding the reasoning for the reimbursement of such amounts, the preamble of the
ordinance says that this measure “is in response to the priorities assumed by the XXI
Constitutional Government, whose Program gives priority to the reduction of the electricity
price, the tariff deficit and, as a consequence, the reduction of the costs with the tariff debt
inherited, as well as the objective of reduction of the charges with the additional costs
in order to obtain the best results in the sense of sustainability of the National Electric
System”.
The reimbursement of the amounts which are mentioned to have been unduly received will
take effect through the deduction of the amount to be returned in the feed-in-tariff to be
paid by the supplier of last resort, as quickly as possible.

The calculation, for each power plant, of the excessive amounts received and which
should be corrected in favour of the National Electric System, will be made by order of
the member of the Government responsible for the energy area, by proposal of the General
Directorate for Energy and Geology and following consultation with the Energy Services
Regulatory Authority, which has not yet been approved.
The amount corresponding to 50% of the global amount to be corrected in favour of the
National Electric System through the supplier of last resort should be deducted to tariff
debt.
It is expected that this measure shall be implemented within 2017.
Creation of independent operator for switching suppliers
Decree-Law no. 38/2017, of 31 March, materialises a project which was announced more
than 10 years ago and which creates an independent logistics operator for switching
suppliers of electricity and natural gas.
The existence of such an operator is a cornerstone of a liberalised electricity and natural gas
market, in which customers must have the possibility of switching suppliers in a quick and
seamless way.
Up to this point, the operator in charge of the process of switching suppliers was REN (the
transmission system operator) in the gas sector, and EDP (the distribution system operator)
in the electricity sector.
This decree-law determines that the duties of logistics operator for switching suppliers are
assumed by ADENE – Agency for Energy, a non-profit association which aggregates a
multiplicity of public entities and private companies.
According to this regime, ADENE shall comply, in the management of the process of
switching suppliers, with the principles of free competition, protection of customers and
rational use of resources.
This decree-law also opens the possibility that this operator carries out functions relating
to the reading and collection of consumption date, including the management of measuring
equipment, which are currently carried out by distribution system operators.
Low voltage electricity distribution networks
In Portugal, the distribution of low-voltage electricity is under the charge of municipalities,
which may – and usually do – assign the development of this activity to companies by
means of a public service concession agreement. Current concession agreements were
awarded to EDP. Some of these concessions have come to an end in 2016 or 2017; some of
them will terminate in 2021 and 2022, and a small number are valid until 2026.
Considering the large number of municipalities of Continental Portugal – 278 – the
Government studied ways to promote a synchronisation of the procedures for awarding
new concessions.
As a result, Decree-Law no. 31/2017, of 31 May, approved the general principles for the
organisation of tendering procedures for the attribution of public service concessions of the
low-voltage electricity distribution networks.
In the interests of territorial cohesion and promotion of tariff uniformity in the country,
this decree-law requires municipalities which opt not to directly carry out the low-
voltage electricity distribution activity to jointly launch the tendering procedures, at the
intermunicipal level (on the basis of the existing intermunicipal communities and pursuant
to a proposal of the regulator, ERSE).

Municipalities may only choose not to do so if they demonstrate that there are powerful
reasons, technically or economically, which support or recommend a different aggregation
of municipalities or the non-aggregation and the separate launching of a tender for the
municipality in question, which shall be based on technical and economic studies.
Also, the decision of the municipality not to aggregate the procedure for the awarding of
the concessions depends on a demonstration that this does not result in global losses of
efficiency, equity and territorial cohesion.
Tendering procedures for the awarding of the concessions will be launched in 2019 and
will certainly will be very attractive to utilities and private investors.
Mandatory consultation of municipalities in upstream oil operations
According to a law enacted by the Assembly of Republic in August 2017, administrative
procedures regarding the research and exploration of oil (upstream) become subject to
mandatory consultation of the concerned municipalities, which may be the municipalities
in which area the operation is carried out (in the case of onshore operations) or the
municipalities located in the coastline of the areas in which the operation is carried out
(in the case of offshore operations).
Municipalities shall be heard as regards the conditions for the development of upstream
activities and their consultation shall be promoted by DGEG, being made publicly
available.

Ending of the dispute between windfarm promoters and the tax authorities
A landmark decision was issued in March 2017 regarding a judicial procedure between a
windfarm promoter and the Portuguese tax authorities as to whether a windfarm should
be subject to property tax.
In this decision, the Supreme Administrative Court concluded that the components of a
windfarm (towers, connecting cables, substation, etc.) should not be considered real estate
property, as they are elements which are not economically independent, meaning that they
do not have the ability to, by themselves, develop the economic activity of generation of
electricity. The court consequently considers that these elements do not have economic
autonomy from the whole they are part of, and as such may not be subject to property tax.
As such, the court upheld the appeal of the applicant and revoked the tax assessment of
the property tax.

Sale by EDP and Galp of assets in the natural gas sector
The previous year also saw two major transactions in the natural gas distribution sector.
At the end of 2016, Galp sold a 22.5% stake in the share capital of Galp Gás Natural
Distribuição, holding company of the regional and local natural gas distribution network
concessionaires held by the Galp group (which owns the majority of distribution network
concessionaires) to a Japanese consortium held in 50% by the Marubeni Corporation and
50% by Toho Gas.
Already in 2017, EDP sold the natural gas distribution concessionaire of the Oporto and
Minho regions to REN, the Portuguese transportation network concessionaire, excluding
the supply business, which remains in EDP.

Electric interconnection Portugal – Morocco

Portugal and Morocco are also in the final stage of the study of a first electric interconnection
between the two countries. The viability study of this interconnection was commissioned
in the first quarter of 2017 and the expectation is that the construction may be commenced
in 2018. This project is expected to be financed through funds from the European Union.
This interconnection will allow Portugal to expand and diversify its energy production
capacity, which currently has a surplus as to its domestic energy needs, also reducing
Portugal’s dependence on Spain for energy exports, which is aggravated by the fact that
the interconnection capacity between Spain and France is still residual.
Development of the Windfloat Atlantic project
Further steps for the installation of a pre-commercial project of offshore wind energy
generation were taken in the last year.
According to Resolution of the Council of Ministers no. 81-A/2016, of 9 December, the
production licence to the Windfloat Atlantic project should be issued up to 18 December
2016, and the transmission grid operator should proceed with the studies, and construction
of the project’s underwater interconnector cable to the public grid.
This resolution also foresees the development of infrastructures of connection to the
public grid which may allow the creation of an offshore renewable energy park in the
region off the cost of Viana do Castelo, where the Windfloat Atlantic is to be developed,
with support from European innovation funds.
The WindFloat Atlantic is a project, promoted by EDP Renewables (EDPR), Mitsubishi
Corporation (through its subsidiary Diamond Generating Europe), Chiyoda Corporation
(through its subsidiary Chiyoda Generating Europe), Engie and Repsol, consisting of
three or four wind turbines on floating foundations, accounting for a total capacity of 25
MW. The project is expected to be constructed and operational in 2018.

Reformulation of the regulatory structure of the energy sector
The State Budget Law for 2017 foresees a reformulation of the regulatory structure of the
energy sector, supported in three measures:
The sector of oil products, biofuels and liquefied petroleum gas (LPG) will become
subject to ERSE regulation. Thus, ERSE, which is regulatory entity for the electricity
and natural gas markets, will accumulate these duties with the regulation of the LPG
markets.
The National Entity for the Oil Markets (ENMC) shall become extinct and its duties
assumed by ERSE, as regards downstream markets and biofuel, and by DGEG, regarding
upstream operations.
The structure of supervision and monitoring of the energy sector will be modified, with
the creation of a supervision authority which shall be vested in the competences currently
dispersed among a number of entities with supervision powers in a number of areas in this
sector, notably the Authority for Economic and Food Safety (ASAE), ENMC and DGEG,
without prejudice to ERSE’s competences in the areas of natural gas and electricity.
The legislation implementing this reformulation is still to be published, although the term
thereto (90 days as of the Budget State Law) has already been exceeded.

Mónica Carneiro Pacheco

Tel: +351 210 958 136 / Email: monica.carneiropacheco@cms-rpa.com
Mónica Carneiro Pacheco works primarily in the areas of Public Law, with
an emphasis on Energy, PPP projects, Public Procurement, Concessions and
Environmental law. Mónica has been heavily involved with work in the
energy sector including projects in the renewables area. She is also involved
in innovative renewable energy projects. She is recognised by the main
international directories as a leader in her field.
A Partner since 2007, Mónica has a strong and well-known professional
carrier as a lawyer. She is the co-author of the first publication launched in
Portugal with comments to the Natural Gas Legislation enacted in 2008, and
frequently publishes opinion articles.
João Marques Mendes

Tel: +351 210 958 123 / Email: joao.mendes@cms-rpa.com
João Marques Mendes has been practising mostly Public Law, with a special
focus on Energy Law, Regulation and administrative litigation areas. He
has been working on several energy projects, including the production of
electricity by means of renewable sources (windfarms). João has also been
involved in expropriation processes and the negotiation of administrative
contracts.
João joined CMS Rui Pena & Arnaut in 2009.
CMS Rui Pena & Arnaut

Rua Sousa Martins, n.º 10, 1050-218, Lisbon, Portugal
Tel: +351 210 958 100 / Fax: +351 210 958 155 / URL: www.cms-rpa.com

Serbia
Đorđe Popović
Petrikić & Partneri AOD in cooperation with CMS Reich-Rohrwig Hainz
energy sources
Energy is one of the largest sectors of the Serbian economy, accounting for more than 10%
of Serbia’s GDP.
Gross electricity generation in 2017 is estimated to be in the region of 38,821 GWh,
which is slightly lower than the estimated generation in 2016. This generation comes
primarily from lignite-fuelled thermal plants with an estimated 28,489.59 GWh or 73%
of total production, and hydro plants with an estimated 9,505.819 GWh or 24% of total
production. The rest is shared by the oil fuel- and natural gas-operated thermal generating
stations managed by district heating companies, as well as industrial power plants and
renewable energy sources.
When it comes to heating energy, estimated production in 2017 amounts to 38,749 TJ,
representing roughly 9% more than in 2016. The structure of the planned production
involves heating plants with a 62% share, industrial power plants with a 30% share,
thermo-electrical power plants with a 6% share, and thermal power plants with a 2% share.
Compared to the previous year, the energy market is expected to stay roughly unchanged in
final consumption, whereas net imports of primary energy are expected to be 12% higher.
Overall, the energy market is still to a notable extent dominated by state-owned public
companies and continues to be characterised by a lack of full liberalisation and the
absence of significant participation by private companies. The main three players are
unquestionably public companies Elektroprivreda Srbije (“EPS”), the main generation
incumbent; Elektromreža Srbije, the Serbian transmission system and market operator
(“EMS”); and Srbijagas, the incumbent in the transportation, distribution, storage and trade
of natural gas (“Srbijagas”). Importantly, the existing infrastructure in the mainstream
energy sectors is rather old and outdated, thus requiring reconstruction and modernisation.
Producing energy from renewable sources has been topping the Government’s agenda
during the last couple of years, with Serbia pledging under the Energy Community Treaty’s
documents to reach the 27% of renewables’ share in the gross final consumption of energy by
2020. Currently, renewable energy accounts for approximately 18% of total generation of
primary energy, where the highest share belongs to solid biomass 59%; 40% to hydropower
potential; while biogas, wind, solar and geothermal energy currently account for less than
1%. In 2017, it is planned to increase production of primary energy from wind, solar and
biogas but it is also planned to reduce the primary energy produced from hydropower. For
example, the planned production of energy from wind sources is estimated at 68,093 GWh,
which is significantly higher than the less than 20 GWh estimated for the previous year.

Petrikić & Partneri AOD in cooperation with CMS Reich-Rohrwig Hainz Serbia
This is primarily a consequence of the fact that wind farms are finally becoming operational
in Serbia, and are supported by a comprehensive set of regulations.
To increase the overall share of renewables in both generation and consumption of energy,
the Government has adopted the necessary policy documents for the Energy Community
Treaty’s rules, introduced incentive schemes and finally amended the relevant legislation
to a significant extent to allow for projects’ feasibility and bankability. However, the
incentive schemes for renewable heating energy have not yet been implemented.
The energy efficiency market in Serbia is gradually, but consistently, growing. With
model agreements for energy services companies (“ESCOs”) now being in full force and
effect, the implementation of the first PPP projects involving public and private sectors has
already begun and the market appears to have started recognising the new opportunities
that energy-saving schemes may bring about.
State of the market and recent developments

Natural gas
The natural gas market has been formally liberalised, and all buyers, including households,
are entitled to purchase gas on the open market. Again, households have opted for public
supply under regulated tariffs instead of supply from the market.
Srbijagas, the state-owned incumbent and the largest gas transmission system operator, has
long-term sustainability issues, primarily due to an inefficient management system, bad
debt-collection and low prices. It is still subject to financial and corporate restructuring,
with the aim to improve its overall poor financial position and comply with the requirements
of the Third Energy Package.
Despite national legislation reaching in-principle compliance with the EU acquis in this
area, the fulfilment of prescribed obligations and adoption of the necessary implementing
legislation are not yet fully achieved.
In this regard, some of the key outstanding issues (recognised as such by the Energy
Community) include:
• non-achievement of the functional unbundling of Srbijagas and Jugorosgaz;
• failure to adopt all necessary by-laws within the time limits provided under law;
• delay of application of the EU Directive relating to a reduction in the sulphur content
of certain liquid fuels;
• prospective restriction of competition in the sector, due to so-called ‘destination
clauses’ in the international agreement concluded between Serbia and the Russian
Federation, which results in limitations of gas trade; and
• improper regulation of access to the major gas storage facility, Banatski Dvor.
On the bright side, an improvement of the secondary legislation can be reported in terms of
adoption of the following two necessary by-laws: (i) Decision on the price of access to the
gas transport Jugorosgaz–Transport Ltd. Niš; and (ii) Rules on change of supplier (based
on which the end user is allowed to change a supplier of natural gas, which must have the
appropriate licence).
In addition, the start of negotiations on the conclusion of interconnection agreements
with the transmission system operator in Hungary is a positive development, especially
in the context of the existing deadline for conclusion of other interconnection agreements
envisaged by the Action Plan 2.0 CESEC by 1 January 2018.

Electricity
In this conventional energy sector, a major step forward has been the launch of the
electricity spot market operated by SEEPEX A.D. in 2016. The said entity is a joint stock
company established by EMS, holding 75% shares; and EPEX SPOT (European Power
Exchange), holding 25% shares. The maximum tenor of the trades available on SEEPEX
are day-ahead, provided that the intention is to gradually introduce new products.
Coal is still the single-most significant resource for generation of electricity, since
approximately three-quarters of annual generation comes from coal-fired power plants,
as mentioned above.
Coal mines are in relatively poor shape and need extensive modernisation. For years
now, Serbia has failed to make sufficient investment in coal production. As a result, the
production of coal in the first two months of 2017 decreased by 9.8% officially, and the
direct consequence of such decrease was the necessity for EPS to import 48 million kWh
in the first quarter of 2017.
The major state-owned companies (EPS being the prominent example) still lack
professional management at both middle and higher levels.
Renewables
Ever since the adoption of the new Energy Law back in 2014, which aimed to harmonise
Serbian energy legislation with the Third EU Package, the Serbian market has been
awaiting the adoption of the necessary by-laws to allow for the full implementation of
renewable projects. On 13 June 2016, this finally happened as the Government of Serbia
adopted the set of regulations governing the renewables sector and fostering further
development of the entire energy market.
In particular, the set of newly adopted regulations – often referred to as the “PPA Package”
– consists of the following three decrees:
1. Decree on Incentive Measures for Electricity Generation from Renewable Energy
Sources and High-Efficiency Cogeneration of Electricity and Heat (“Incentive
Decree”);
2. Decree on Conditions of and Procedure for Obtaining of the Status of a Privileged
Power Producer, Preliminary Privileged Power Producer and Producer from
Renewable Energy Sources (“Status Decree”); and
3. Decree on the Power Purchase Agreement (“PPA Decree”).
The PPA Package came in several months after the statutory deadline for its adoption
had expired. Although the Ministry of Mining and Energy published the drafts of these
decrees in September 2015, it took the Government almost a year to finalise the wording.
This is not, however, a major surprise knowing how important these pieces of legislation
actually are for projects’ feasibility; the mentioned drafts were the subject of thorough and
detail-oriented discussions among the relevant stakeholders, including public authorities,
equity, sponsors and international lenders.
It was worth the wait. The result is a consistent, comprehensive and, at least on the face
of it, bankable set of regulations to govern the renewable sector in Serbia in a manner
which appears to be unmatched in the entire Western Balkan region in terms of both the
quality of drafting and the completeness of the solutions implemented.
A year following adoption of the PPA Package, most of the major renewable projects
on the market have reached the construction phase and some of them, even the financial

close. There are two minor wind farms that are fully operational and produce electricity
(having approximately 17 MW in power in total) but the years 2017 and 2018 should
witness significant increase of power produced from wind – another 170 MW at least (or
even higher).
On another hand, some of the sub-sectors were a failure. This predominantly relates
to solar, where the Government allowed for only minor capacities to be the subject of
incentive measures (less than 20 MW overall). It therefore remains to be seen how the
Government will tackle solar projects in the following year, with Serbia surely not lacking
any potential in that regard.
Biomass is becoming an emerging sector too, with a notable number of projects being
currently in the preparation phase. The same holds true for co-generation coming from
waste-for-energy projects, where the facilities are expected to produce both electricity
and heat from waste treatment operations.
In June 2017, the PPA Package was further slightly improved in the following manner:
• Political risk insurance is no longer required as a condition for political risk-related
termination events under the PPA.
• The change in legal protections refers to changes which result in an increase of costs,
instead of changes introduced with the aim to increase costs.
• In addition to a substitute, lenders may appoint a representative as well.
• The step-in period is increased from 90 to 360 days.
• The step-in agreement is in bilingual form (Serbian prevailing).
These amendments are expected to further ease the bankability of renewable projects.
Energy efficiency
The Law on Efficient Use of Energy, adopted back in 2013, explicitly defines the energy
services company (“ESCO”) and sets rules for energy performance contracting in line
with the EU acquis, with the aim to provide an overall legal framework for energy
efficiency arrangements.
To enable implementation of these general possibilities, the Rulebook on Model Energy
Service Contracts for the Implementation of Energy Efficiency when Users are from Public
Sector (ESCO By-Law) was finally adopted in May 2015, following the completion of
the year-long work of the National Working Group under the guidance of the Ministry of
Mining and Energy (with the support of EBRD and external advisors, in a project funded
by the European Union).
The ESCO By-Law prescribes two models of ESCO agreements; one for public buildings
and one for public lighting. It requires public-private partnerships to be established
between the relevant public partner (e.g. a municipality, a public company, state) and the
relevant private partner (i.e. ESCO company) on a long-term basis. The concept of this
approach is that a private partner installs, manages and finances the energy efficiency
measures, at the same time guaranteeing to the public partner that a pre-agreed amount
of financial savings will be achieved, based on which the project can be fully financed –
without creating a public debt.
Two years after the ESCO By-Law’s adoption, the energy efficiency market is still in
the early stages of development. With a few energy performance contracting (“EnPC”)
projects awarded to private investors in the area of public lighting (examples being the
award of PPP projects in the municipalities of Ada and Žabalj) and a couple of bigger

ones in the preparation phase in large cities (Belgrade and Novi Sad), the market is yet to
see successful cooperation of public and private sectors in the area of public buildings.
Also, energy supply contracting (ESC) started to function recently, with the public
sector’s assets such as schools and hospitals being the main point of interest. Unlike
EnPC, ESC arrangements are currently not governed by any specific by-law, nor is there
a prescribed model available. The most notable difference between ESC and EnPC is
that EnPC implies backing of the project by guaranteed savings, unlike the ESC which
is focused on rearranging the energy supply where the private partner guarantees the
continuous provision of a certain minimum amount of energy. It is expected that, once
the ESC model is regulated too, much-needed certainty will be brought to the sector and
allow for successful cooperation between public and private sectors.
Expected changes in practices and regulations

Natural gas
A notable number of the remaining secondary legislation necessary for full implementation
of the Energy Law in the relevant sector, which had to be adopted by the end of 2015, has
not been adopted to date.
Also, although the Serbian Government declared a clear position on the need to restructure
Srbijagas as long ago as 2014, such restructuring and complete functional unbundling of
transport system operators from suppliers of natural gas has not been fully implemented.
This is one of the main reasons for extremely unfavourable assessment of conformity of
the Serbian system with the EU acquis in this area, and as long as Srbijagas is performing
all of the relevant functions in reality, the implementation of the Third Energy Package
will likely be far from reality.
As a result, there is still not an appropriate level of investment in the current transport
infrastructure or the development of a new one; there is still a clear need to enable access
to the transport system on a non-discriminatory basis and to achieve transparency in the
field of supply and transport of natural gas in the territory of Serbia.
Therefore, in this sector the following are principally needed (and generally expected) to
be executed in the forthcoming period:
• State-owned companies to be led by a professional management.
• Adoption of the outstanding by-laws.
• Functional unbundling of state-owned incumbent(s).
• Full harmonisation with the EU acquis.
Electricity
At present, households and small consumers may still opt to be supplied under regulated
tariffs (unlike other consumers which do not have the right to regulated tariffs). The
intention of the Energy Law is to phase out the regulated supply of electricity, once
the competent regulator (i.e. Energy Agency) finds that there is no more need for the
regulation of the electricity prices. Even though the decision to terminate regulated
supply may be issued as early as in 2017, it is unlikely that this will happen in the next
few years.
Regulation of electricity prices for households and small customers should, therefore, be
abandoned as soon as possible, assuming that the increased proceeds are exclusively used
for investments in new power infrastructure or revitalisation of the existing one.

Also, coal/lignite power generation capacities need to be developed in conformity with

the EU acquis and, specifically, in accordance with the newly adopted BREF Directive
by the EU/BAT (Best Available Techniques) standards (i.e. Ultra-Supercritical Steam
parameters technologies and Air Quality Control Systems technologies are enabling
coal-fired plants to meet all EU emission regulations including the newly adopted, more
stringent EC Directive based on BREF) in both greenfield and modernisation projects.
As is the case with the natural gas sector, there is also an urgent need for state-owned
electricity companies to be led by a professional management. In addition, new
investments in the modernisation and revitalisation of coal production are very much
needed and expected and, as mentioned above, the funds may well become subject to de-
regulation of electricity prices.
Renewables
Although significant progress in this important emerging sector can indeed be reported,
there are a couple of steps that have yet to be taken in order to achieve the desired results
and meet the Serbian targets under the Energy Community Treaty.
This includes further simplification and coordination of procedures for authorisation,
licensing and network connections for new renewables projects. Additionally, the PPA
package should be further adjusted to address the remaining stakeholders’ concerns.
In terms of practices under currently existing regulations, they should be advanced too
and properly reflect legal provisions (examples including actual indexation of feed-in-
tariffs, which is yet to be done despite the expiry of the statutory deadlines).
Energy efficiency
When it comes to energy performance contracting, apart from the need to have consistent
practices in terms of the formal preparation of projects being fully in line with the ESCO
By-Law and the relevant PPP legislation, the challenges ahead also include the need to
reduce subsidies, which keep energy prices at an artificially low level, and rather introduce
further sector-specific incentives for energy efficiency projects in the relevant legislation
(notably, in real estate legislation and in tax-related areas), a gradual raising of financiers’
awareness of the practical feasibility of ESCO and related projects, and increasing the
energy tariff to a cost-reflective level.
As regards energy supply contracting, the adoption of the model contract by the relevant
authorities (i.e. Ministry of Mining and Energy) would be very helpful to tackle projects
involving both public and private sector, and remove the existing ambiguities in practice.
At present, noting the novelty of this specific market, the public sector is still overly
careful in considering prospective projects, while the understanding of the very concept
and its practical implementation is still lacking on the authorities’ side. In this regard,
it is encouraging that the said Ministry is currently considering preparing a model ESC
contract and allowing for greater transparency and feasibility of projects on the market.
The further steps attributable to both EnPC and ESC arrangements include the following:
• The capacities of the PPP Commission should be further improved (including better
understanding of EnPC and ESC projects’ specifics). This is largely expected
following further amendments to the PPP legislation, expected to be adopted in the
first half of 2018.
• The sharing of knowledge and existing know-how among various public entities
would need to be further strengthened and supported (this is particularly the case
with minor Serbian municipalities).

• Practical implementation of the rules relevant for determining the project value
that are PPP-specific needs to be improved, and the capacities of the public sector
strengthened to fully delineate such projects from purely public procurement projects.
• New rules on subsequently adapting PPP contracts at the request of funders are yet
to be fully tested in practice and, in this respect, knowledge-sharing and capacity-
building on the basis of best international practice would be highly welcome.

Đorđe Popović
Tel: +381 11 3208 900 / Email: Djordje.Popovic@cms-rrh.com
Đorđe Popović is a Partner at CMS Belgrade with more than a decade of
relevant experience. He leads the Firm’s energy and infrastructure team and
the regulatory practices. His primary focus over the last couple of years
has been on infrastructure, energy and regulated industries projects, where
he successfully represented both equity and lenders as well as public sector,
manufacturers and EPC contractors in some of the most prominent projects
on the market.
Equally, Đorđe Popović has significantly contributed to the development of
the Serbian legislation governing these sectors, by means of his lead in the
projects mandated by EU and EBRD to harmonise the country’s legislation
with EU acquis.
Petrikić & Partneri AOD

in cooperation with CMS Reich-Rohrwig Hainz
Cincar Jankova No. 3, Belgrade, Serbia
Tel: +381 11 3208 900 / Fax: +381 11 3208 930 / URL: https://cms.law/en/SRB/Office/Belgrade

Slovenia
Matjaž Ulčar & Polona Božičko
Ulčar & Partners
energy sources
Over the last decade, the Slovenian energy sector underwent major structural changes due
to the liberalisation of the electricity and natural gas markets. Moreover, because of the
environmental requirements and development of new technologies, the energy sector is
changing faster than in the past and is facing many new challenges.
The Slovenian economy has largely recovered from the recent crisis and is expected to
strengthen further and stabilise, mainly due to export and domestic consumption growth (a
4.4% growth in GDP has been recently forecast for 2017 by the Institute of Macroeconomic
Analysis and Development). Consequently, overall energy demand is increasing and this
reflects through all energy markets.
In 2016, 15,233 GWh of electricity was delivered to the transmission and distribution
system, which is 1,279 GWh more than in 2015. The delivery from generating plants using
renewable energy sources was 5,221 GWh, which is 626 GWh more than the previous
year; generating plants using fossil fuels contributed 4,589 GWh, or 592 GWh more than
the year before. The only Slovenian nuclear power plant, Krško, delivered 5,423 GWh to
the transmission system, or 61 GWh more than in 2015. Half of electricity produced in the
nuclear power plant Krško (approximately 2,711 GWh) was transmitted to the Republic of
Croatia based on the bilateral treaty; 36% of electricity was generated in the only Slovenian
nuclear plant Krško; renewable energy sources contributed 34% (water power, wind power,
solar power, biomass) and fossil fuels 30% of generated electricity. Domestic production
covers 88% of the Slovenian electricity consumption and its import dependence is 12%.1
The Slovenian electricity market is transparent and well-integrated in the wholesale energy
markets. In 2016, the electricity market reached a record number of switches of supplier,
as it included approximately 7% of all electricity consumers (945,442 as of the end of
2016). Significant progress was also made in the field of cross-border market coupling,
with the successful implementation of a project for day-ahead market coupling on the
Slovenian-Italian and Slovenian-Austrian border, and implicit intraday market coupling
on the Slovenian-Italian border.2
In 2016, 2,147 million Sm3 (or 23,112 GWh) of natural gas was transferred through the
transmission system, which is almost 15% more than in 2015. The consumption of natural
gas increased for the second consecutive year and amounted to 865 million Sm3 (or 9,309
GWh).3
As a Member State of the European Union, Slovenia has committed itself to promote the
use of renewable sources for energy consumption, and especially for electricity generation.

Ulčar & Partners Slovenia
The use of renewable energy sources (hereinafter: “RES”) has an important role in the
national energy policy. In recent years, the ambitions in this area have been increasing.
Energy efficiency improvements and increased use of energy from RES bring significant
direct and indirect benefits: reduced greenhouse gas emissions; improved security of
supply; technological development and innovations; and opportunities for employment
and regional development. The EU Renewable Energy Directive 2009/28/EC4 sets a
mandatory national target for each Member State, stating the overall share of gross energy
consumption that must come from renewable energy sources by 2020. For Slovenia, this
target has been set at 25%. In 2016, 21.2% of estimated gross energy consumption in
Slovenia came from renewable energy sources.5

In 2016 and 2017, the adoption of further key acts for implementation of the Energy Act6
(and implementation of the EU Third Package of energy legislation)7 continued, inter alia,
by adopting the following acts:
• a Decree on the operation of the natural gas market,8 which governs the operation
of the natural gas market, calculation of balancing, transfer of natural gas, switch of
supplier and other issues in connection with the natural gas market on the transmission
system and distribution systems of natural gas;
• a Decree on renewable energy sources in transport,9 which governs methods of
measures and controlling of fuel distributors with respect to biofuels and other
renewable sources of energy;
• Rules on support for electricity generated from renewable energy sources and from
high-efficiency cogeneration,10 which govern technology of generation units for
production of electricity from renewable energy sources and from high-efficiency
cogeneration entitled to the support, amount and duration of the support, conditions
for the support, procedure of granting the support and other questions with respect to
granting and use of the support;
• Rules amending the Rules on the balancing of the electricity market,11 which
govern organisation of the balancing market, membership on the balancing market,
participation on the balancing market, reports and notifications on the balancing
market and financial settlement of the transactions on the balancing market; and
• a Decree establishing the infrastructure for alternative transport fuels12 which governs
alternative transport fuels and provision of infrastructure for alternative transport
fuels.

Under the EU Renewable Energy Directive 2009/28/EC, Slovenia has a renewables target
of 25% of gross electricity consumed in Slovenia by 2020. The operation of the electricity
support scheme, “Support for production of electricity from renewable energy sources and
in co-generation installations”, which was approved in European Commission decision
SA.28799,13 achieved approximately 21% of renewable energy by the end of 2014 and it
is expected that the amended version of the electricity support scheme will allow the 25%
target to be reached. The Slovenian authorities thus notified an amendment of a support
scheme to the European Commission on May 27, 2015 pursuant to Article 108(3) of the
Treaty on the Functioning of the European Union.14

In its notification, Slovenia proposed the following amendments to the support scheme:
• amendment to the approved RES and combined heat & power (hereinafter: “CHP”)
support scheme’s structure in the form of: (i) the introduction of competitive tenders to
select beneficiaries rather than automatic eligibility; (ii) the introduction of a payment
mechanism based on market premium for installations with an installed capacity over
1MW rather than the previous feed-in tariff model; and (iii) the introduction of an
option to offer support to wood biomass facilities that are depreciated and would for
this reason otherwise not be eligible under the scheme if, owing to the price of wood
biomass, their production costs exceed the market price for electricity (extending the
scope of the eligible beneficiaries); and
• amendment to the approved scheme through the introduction of a reduction in the
contribution to the support scheme for companies whose principal activity is in an electro-
intensive sector (contained in Annex 3 of the European Commission’s Guidelines on
state aid for environmental protection and energy 2014-2020 (hereinafter: “EEAG”)),
which will receive a 70% reduction on their support scheme contribution, and for the
companies in the sectors contained in Annex 5 of the EEAG whose electro-intensity
exceeds 20%, for which the contributions to the support scheme will be limited to 4%
gross value added.
One of the most significant amendments to the scheme is the introduction of a tender
process to select beneficiaries to receive support under the support scheme and determine
the appropriate level of that support. In particular, Slovenia has introduced a two-round
public tender process designed to increase competition between potential beneficiaries
and ensure that support is granted to the best value projects. This change is in line with
the EEAG, which requires that, from January 2017, such aid is granted on the basis of a
clear, transparent, non-discriminatory competitive bidding process open to all producers of
renewable electricity.
Furthermore, the amended scheme introduces a market premium for operators above
500kW. In line with the EEAG, operators of installations above this threshold will have to
offer their electricity on the market and will receive their support in the form of a premium
paid on top of the market price. Operators below 500kW can continue to receive a feed-in
tariff.
This support scheme is financed by a surcharge levied on electricity consumers. Slovenia
has also notified to the European Commission plans to lower the financial burden on
undertakings in certain energy-intensive sectors, which will benefit from a reduced levy.
The European Commission has found that these reductions are in line with the EEAG,
which allow Member States to provide reductions to undertakings in certain sectors that are
particularly energy-intensive and exposed to international competition, in order to ensure
their competitiveness.
The European Commission has assessed the notified aid scheme on the basis of Article
107(3) TFEU and on the basis of the EEAG, in particular Sections: 3.3 (Aid to energy from
renewable sources); 3.4 (Energy efficiency measures, including cogeneration and district
heating and district cooling); 3.7.2 (Aid in the form of reductions in the funding of support
for energy from renewable sources); 3.2.7 (Aid in the form of reductions in funding support
for electricity from renewable sources); and on October 10, 2016, a decision SA.4199815
concluded that the measure is compatible with the internal market pursuant to Article 107(3)
(c) TFEU. The notified measure will expire on December 31, 2019.


The RES and CHP support scheme
The national legal basis for the RES and SCH support scheme is regulated by the Energy
Act, Decree on the method of determining and calculating the contribution for ensuring
support for the production of electricity from high-efficiency cogeneration and renewable
energy sources,16 and Decree on support for electricity generated from renewable energy
sources and from high-efficiency cogeneration.17 The support scheme had to be harmonised
with the EU legislation on granting state aids and was successfully notified and approved by
the European Commission as a permitted form of state aid.
At the end of 2016, approximately 2,400 producers with 3,888 production facilities were
included in the support scheme (85% of them were solar power plants). All these production
facilities involved in the support scheme fall under the terms which were in force before the
enforcement of the Energy Act.18
Under the initial support scheme (approved by European Commission decision no.
SA.28799), operators of eligible installations were automatically entitled to the support.
However, after January 1, 2017, all beneficiaries will be selected through a competitive
tender.
Beneficiaries under the support scheme for RES installations include: energy potential of
watercourses; wind energy used in generating plants on land; solar energy used in photovoltaic
power plants; energy from biogas obtained from biomass and biodegradable waste; energy
from landfill gas; energy from gas obtained from sludge produced in wastewater purification
plants; energy from biodegradable waste; and, most recently, operators of depreciated wood
biomass installations that are depreciated and would for this reason otherwise not be eligible
under the support scheme if, owing to the price of wood biomass, their production costs
exceed the market price for electricity.19 For CHP installations, aid may only be granted to
high-efficiency co-generation installations as defined in the EEAG.20 Eligible beneficiaries
under the Energy Act are limited to a maximum nominal installed capacity of 50 MW for
wind installations, 20 MW for CHP and 10 MW for all other RES.
On December 15, 2016, the Energy Agency published the first competitive tender for the
support scheme with available funding in the amount of €10 million. The tender was
divided to target certain technologies, namely:
• 10% for hydroelectric plants of 1MW or less;
• 30% for wood biomass plants of 1MW or less;
• 10% for CHP installations using natural gas of 50kW or less;
• 30% for renovated CHP installations operating in district heating systems; and
• 20% for all other installations, including those which were unsuccessful in the other
four categories.
The first public tender was completed in June 2017 by funding 78 projects (of which 30
hydroelectric plants, 28 internal combustion engines, 2 steam backpressure extraction
turbines, 7 solar power plants and 11 wind power plants) with total rated electrical power
of 61.36 MW.21
From January 2017, beneficiaries will be selected based on a two-phase tender regime. In
general, the first round will allocate between 70–90% of the overall available budget in any
given year and is open to new installations falling into two ‘pots’. Pot 1 will be open to RES
generators operating technologies based on the exploitation of resources which do not need

to be purchased, i.e. non-fuelled technologies including solar, wind and hydropower. Pot
2 will be available to technologies which are less competitive or bear higher risks during
the preparation phase, i.e. fuelled or less competitive technologies including CHP, biomass,
biogas and geothermal. Projects from both pots which fail to be selected in this first round
will be eligible to compete in the second round. If the number of applicants in pot 1 and/
or pot 2 is insufficient to use all of the funding allocated to that pot, any unused budget
will be added to the available budget for the second round. The second round will be open
to all projects including renovated installations and depreciated wood biomass facilities
that are otherwise too old to be deemed eligible under the scheme if, owing to the price of
wood biomass, their production costs exceed the market price for electricity. This round
will be run on a technology-neutral basis with the most cost-effective projects of whatever
technology being selected.
The first such two-phase tender for the support scheme, with available funding in the amount
of €10 million, was published on September 5, 2017.22 In the first round, funds in the amount
of €9 million are available for new RES and CHP production facilities, namely: €7 million
for the RES generators operating technologies based on the exploitation of resources which
do not need to be purchased (solar, wind and hydropower); and €2 million for RES and
CHP production facilities based on resources that need to be purchased or produced (i.e.,
fuelled or less competitive technologies including CHP, biomass, biogas and geothermal).
In the second phase, the remaining funds in the amount of €1 million will be available for
distribution for renovated RES and CHP production facilities, depreciated wood biomass
facilities that are otherwise too old to be deemed eligible under the scheme owing to the
price of wood biomass, and RES and CHP production facilities which were not successful
in the first round. The deadline for the application of the projects is November 6, 2017.
The beneficiaries of a reduction in the contribution to the support scheme are companies in
the sectors indicated in Annex 3 of the EEAG whose electro-intensity exceeds 5% (which
shall receive a 70% reduction on their support scheme contribution) and companies in the
sectors indicated in Annex 5 of the EEAG whose electro-intensity exceeds 20% (these
beneficiaries’ contributions to the support scheme will be limited to 4% of their gross value
added). In addition, prospective beneficiaries also need to satisfy the following cumulative
requirements:
• the average annual off-take of electricity of the beneficiary in the last three years at the
point of consumption exceeds 1 GWh;
• the average electro-intensity of the beneficiary exceeds 5% in the previous three years;
• the beneficiary is not a firm in difficulty as defined in the Guidelines on State aid for
rescuing and restructuring firms in difficulty; and
• the beneficiary does not have any unrecovered or outstanding debts within the meaning
of a European Commission decision declaring aid unlawful or incompatible with the
internal market.
Installations with a nominal installed capacity up to 500kW may continue to receive the
feed-in tariff as approved in the European Commission decision SA.28799. For installations
above this threshold, support will be paid in the form of a market premium on top of the
market price. The market premium awarded to projects which succeed in tender is based
on the difference between the reference costs of electricity and the actual market price of
electricity (calculated on the basis of the reference market price).
With respect to wood biomass facilities which, due to their age, would not ordinarily qualify

for support, these installations are still remunerated via a market premium, but the quantum
of that premium will only take into account the ‘variable’ aspect of the reference costs,
excluding any investment costs which, owing to their age, it would be expected that the
installation had already recouped through operation.
The support scheme for eligible RES and CHP producers is funded through the imposition
of a “para-fiscal” levy on electricity consumers in Slovenia. The funds are paid as lump
sum payments on connection. The level of contribution is based on the power of the
connection (fuse rating) and the voltage level at which a particular consumer or consumer
group is connected. Contributions are then payable annually. For energy-intensive users
(hereinafter: “EIUs”) in the sectors listed in Annex 3 of the EEAG with an electro-intensity
which exceeds 5%, a 70% reduction on their support scheme contributions will be made
available, and for the companies in the sectors listed in Annex 5 of the EEAG, their overall
annual contributions will be limited to 4% of their average gross value added.
At the level of individual beneficiaries, the aid is granted for a period of 15 years for RES
installations. CHP installations using biomass will receive aid for 15 years, and those using
biogas for 10 years. Furthermore, for the renovated installations the period of support will
be shorter, with the deduction of the period of time which has elapsed since the renovation
from the applicable period for support (10 or 15 years, as applicable).
The Ministry of Energy acts as granting authority. The eligibility for aid is assessed by the
Energy Agency, which is also responsible for ensuring compliance with the cumulating
rules.
The funds to provide support to RES producers under the support scheme, the RES and
CHP support scheme, are sourced from a combination of:
• the RES and CHP contributions paid by all final consumers of electricity, natural gas,
and other gases used in grid and district heating;
• contributions levied on solid and liquid fossil fuels, liquid petroleum and liquefied
natural gas and heat from district heating systems; and
• revenues which the Centre for RES/CHP Support receives through the sale of electricity
it is obligated to purchase from recipients of the feed-in tariff.
The expected budget for new RES and CHP installations under the support scheme over the
lifetime of the scheme is estimated at €600 million and, for the reductions in RES levies
granted to EIUs, to total €242.5 million over the lifetime of the scheme.23
Cross-border market coupling as a step towards a single integrated European power market
Market coupling is the use of an implicit auctioning system, where transmission capacity
represents an input parameter in the exchange of offers between two or more power
exchanges.
The first cooperation project of market coupling on the Slovenian-Italian border, which
enabled the implicit auctioning system for allocation of physical daily cross-border
transmission capacities (hereinafter “CBTCs”), started already in the beginning of 2011
and was carried out by bilateral market coupling of Slovenia and Italy. Significant progress
was made on February 24, 2015 when the bilateral market coupling was replaced with
interregional market coupling covering the area from Scandinavia to the Iberian peninsula.24
In 2016, BSP SouthPool Energy Exchange, designated as a nominated electricity market
operator (hereinafter: “NEMO”)25 for the trading area of Slovenia, in cooperation with other
European Power Exchanges and system operators, successfully implemented a project of
day-ahead market coupling on the Slovenian-Italian and on the Slovenian-Austrian borders.

On June 21, 2016, the Italian and Slovenian power exchanges GME and BSP SouthPool,
together with the transmission system operators (TERNA and ELES) operationally launched
the cross-border intraday implicit allocation project, which has significantly improved the
intraday capacity allocation process on the Italian-Slovenian electricity border. In this
respect, the Italian implicit intraday auctions (intraday market 2 and 6) were coupled with
the corresponding sessions of the Slovenian intraday auctions. The total traded volume of
the BSP intraday market, in the first year since launch of the project (from June 2016 to
June 2017), amounted to 745,364.921 MWh. The traded volume on the intraday market
sessions accumulated to 496,652.921 MWh, while on the intraday continuous market they
amounted to 275,712 MWh.
On July 21, 2016, the day-ahead market coupling on the Austrian-Slovenian border was
launched. The day-ahead capacity for the Austrian-Slovenian border is implicitly allocated
through the Price Coupling of Regions (hereinafter: “PCR”) solution, a set of harmonised
procedures already in operation across Europe, making this border a part of the pan-European
Multi-Regional Coupling (hereinafter: “MRC”)26. At the time of launched coupling, the
combined day-ahead markets of MRC covered 19 European countries, accounting for about
2,800 TWh of yearly electricity consumption.27 Expectations of achieving higher efficiency
in the daily allocation process have been confirmed already in the first year, since adverse
flows have disappeared and hours with converged prices between Slovenian and Austrian
coupled markets have increased, while the number of hours with converged prices between
Slovenian and Austrian markets grew by 682%.28
In June 2017, BSP SouthPool announced plans for the coupling of the Slovenian and
Croatian markets. It is expected that the day-ahead market coupling on the Slovenian-
Croatian border will be launched in the second quarter of 2018.29
***
Endnotes
1. Report on the energy sector for 2016, of the Energy Agency, pp. 28–30.
2. Report on the energy sector for 2016, of the Energy Agency, p. 7.
4. 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.
6. Official Gazette of the Republic of Slovenia, no. 17/14 et seq.
7. The EU Third Package of energy legislation covers: (i) unbundling energy suppliers
from network operators; (ii) strengthening the independence of regulators; (iii)
establishment of the Agency for the Cooperation of Energy Regulators (ACER); and
(iv) cross-border cooperation between transmission system operators and the creation
of European Networks for Transmission System Operators and increased transparency
in retail markets to benefit consumers.
8. Official Gazette of the Republic of Slovenia, no. 61/16.


13. Official Journal C 285, 26/11/2009.
14. Official Journal C 326, 26/10/2012; hereinafter: “TFEU”.
15. http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_
SA_41998.
19. Article 4 of the Decree on support for electricity generated from renewable energy
sources and from high-efficiency cogeneration.
20. Pursuant to Article 5 of the Decree on support for electricity generated from renewable
energy sources and from high-efficiency cogeneration, the following technologies are
eligible for support: combined cycle gas turbines with heat recovery; steam backpressure
turbines; steam-condensing extraction turbines; gas turbines with heat recovery; internal
combustion engines; steam engines; micro-turbines; Stirling engines; fuel cells; engines
with organic Rankine cycles; and any other type of co-generation technology.
21. https://www.agen-rs.si/web/portal/-/izbor-prijavljenih-projektov.
22. https://www.agen-rs.si/web/portal/-/javni-poziv-za-vstop-v-podporno-shemo-
september-2017.
23. Commission decision SA.41998, paras. 70 and 71.
25. On December 21, 2015, BSP was designated by the Slovenian Energy Agency in
accordance with article 4 of the Commission Regulation (EU) No 2015/1222 (“CACM
Regulation”) as NEMO for a period of four years, in order to perform the single day-
ahead and intraday coupling within the Slovenian territory.
26. MRC is a cooperation between the power exchanges APX, BelPex, EPEX SPOT,
Nord Pool, GME, BSP and OMIE, and the transmission system operators 50Hertz,
Amprion, Creos, Elia, Energinet.dk, Fingrid, National Grid, REE, REN, RTE, Statnett,
SvenskaKraftnät, TenneT TSO B.V. (Netherlands), TenneT TSO GmbH (Germany),
TransnetBW, Terna and Eles.
27. http://www.bsp-southpool.com/news-item/items/austrian-slovenian-border-
successfully-coupled.html.
28. http://www.bsp-southpool.com/news-item/items/number-of-hours-with-converged-
prices-on-si-at-da-coupled-markets-grew-for-682.html.
29. http://www.bsp-southpool.com/news-item/items/the-coupling-of-the-slovenian-and-
croatian-markets-430.html.

Matjaž Ulčar
Tel: +386 1 56 05 300 / Email: matjaz@ulcar-op.si
Matjaž is the firm’s founding and managing partner, specialising in corporate
and commercial law.
Over the past 10 years Matjaž has been actively involved in several high-
profile Slovenian and regional M&A transactions. His expertise includes
advising clients on large-scale privatisation projects, private M&A
transactions, investment projects and financial and corporative restructurings.
With significant experience in the energy industry, Matjaž has advised
several leading Slovenian energy companies in connection with regulatory
matters and investment projects, in recent years mainly related to energy
infrastructure and investments into renewable energy.
Polona Božičko
Tel: +386 1 56 05 300 / Email: polona.bozicko@ulcar-op.si
Polona is senior associate in the firm’s corporate practice. Polona joined the
firm in 2009 and is admitted to the Slovenian Bar. Her work focuses on M&A
transactions, commercial and corporate law and related dispute resolution
proceedings.
Polona has provided legal advisory services to domestic and foreign clients
in connection with several high-profile M&A transactions, including in the
energy field. In addition, Polona has noteworthy experience in state aid law
and was, inter alia, a member of the legal team representing the European
Commission in a state aid related proceeding before the Court of Justice of
the EU.
Ulčar & Partners

Šlandrova ulica 4, 1231 Ljubljana-Črnuče, Slovenia
Tel: +386 1 56 05 300 / Fax: +386 1 56 05 304 / URL: www.ulcar-op.si

South Africa
Lara Bezuidenhoudt, Katy-Lynne Kay & Margo-Ann Werner
Fasken Martineau (incorporated in South Africa as Bell Dewar Inc.)
energy sources
Introduction
South Africa relies heavily on electricity generation from coal-fired power stations. The
Department of Energy’s website states that 77% of South Africa’s primary energy needs
are reliant on coal. In an attempt to reduce the carbon emissions produced by the coal-
fired power stations, South Africa is seeking to diversify its energy mix, to include gas,
renewables and nuclear power.
We have chosen to focus on electricity generation and not the prospecting, winning or
extraction of energy resources such as coal or gas, as these were covered in last year’s
submission from South Africa.
Coal
The Department of Energy has introduced various initiatives to alleviate certain constraints
in electricity supply that have been experienced in South Africa and to secure the provision
of electricity into the future. In achieving its strategic overview and detailed plans for
delivering on the Government’s commitments on energy and to achieve the objectives
of the Integrated Resource Plan (“IRP”) 2010, the Department of Energy announced a
determination for additional base-load generation capacity of 7,761 MW, comprising, inter
alia, 2,500 MW of energy from coal for connection to the grid between 2014 and 2024
(“Coal Baseload IPP Procurement Programme”).
To date, two preferred bidders have been selected in terms of the Coal Baseload IPP
Procurement Programme. However, both projects have been subject to objections by non-
governmental organisations who have challenged a number of authorisations that projects
of this nature require, such as electricity generation licences, environmental authorisation
and water use licences.
The result of one such objection has seen the suspension of a preferred bidder’s environmental
authorisation, pending the consideration of the Department of Environmental Affairs
review of a climate-change impact-assessment report. Please refer to the Earthlife Africa
Johannesburg v Minister of Environmental Affairs and Others in this regard.
Renewable energy
The Department of Energy’s renewable energy independent power producer procurement
programme (“REIPPPP”) has largely been successful; as at April 2016, 6,400 MW
of renewable energy had been awarded to various independent power producers. The
following technologies have made up the allocation: wind, solar, hydro, biomass and

Fasken Martineau (incorporated in South Africa as Bell Dewar Inc.) South Africa
biogas. As a result, various countries have adopted the South African REIPPPP model
and have used almost exact replicas of a number of the documents, including the template
power purchase agreement and transmission agreement.
Nuclear energy
Renewable energy is not the only source of emission-free electricity. Nuclear energy is
considered to be more efficient and cost-effective than renewable energy.
Currently, South Africa is home to the only nuclear power plant on the African Continent
(contributing 2,000 MW to the grid) and the Government of South Africa seems to be
committed to the procurement of a new 9,600 MW nuclear power plant.
Eskom Holdings SOC Limited (“Eskom”) issued a Request for Information relating to
the nuclear build programme and was expected to issue a Request for Proposal at the
end of 2016 but this process was postponed, it appears until Treasury has further clarity
on the costs and benefits. Furthermore, in April 2017, in the matter of Earthlife Africa
Johannesburg and Another v Minister of Energy and Others 2017 3 All SA 187 (WCC) the
Cape Town High Court effectively suspended the nuclear build programme, as it declared
that:
• the Minister of Energy’s decision on or about 10 June 2015 to table nuclear inter-
governmental agreements with the United States of America, Russia and South Korea
before Parliament were declared unconstitutional and unlawful;
• the determination under sec 34(1) of the Electricity Regulation Act, gazetted on 21
December 2015 (GN 1268, GG 39541) in relation to the requirement and procurement
of nuclear new generation capacity, made by the Minister of Energy on 11 November
2013, with the concurrence of NERSA given on 17 December 2013, was unlawful and
unconstitutional, and was reviewed and set aside;
• the determination under sec 34(1) of Electricity Regulation Act gazetted on 14
December 2016 (GNR 1557, GG 40494) in relation to the requirement and procurement
of nuclear new generation capacity, signed by the Minister of Energy on 5 December
2016, with the concurrence of NERSA given on 8 December 2016, was unlawful and
unconstitutional, and was reviewed and set aside; and
• any Request for Proposals or Request for Information issued pursuant to the
determinations referred to above were set aside.
The Department of Energy announced that it would not appeal the judgment of the Cape
Town High Court but that it would rather reassess the nuclear build programme and ensure
that it is a transparent process. Accordingly, the nuclear build programme is still on the
Government’s agenda and will most likely contribute to South Africa’s future energy mix,
despite a large part of the South African public being strongly opposed to it. However,
due to the slow economic growth of the economy and the decline in electricity demand, the
Government is unlikely to announce any such decisions in the near future.
Gas
Gas is an important component to a diversified energy mix, particularly as it supplements
the variable nature of renewables. The Department of Energy is in the process of finalising
the Gas Utilisation Master Plan.
The gas-to-power programme has played second fiddle to the much-prioritised nuclear
build programme. Nonetheless, with the Cape Town High Court temporarily halting
the nuclear build programme, the development of the gas economy might become the
frontrunner.

The Department of Energy is intending to procure the LNG-to-Power IPP Procurement

Programme pursuant to two determinations in terms of section 34 of the Electricity
Regulation Act, No 4 of 2006, which provide for 3,726 MW of new gas-fired generation
capacity from various gas sources.
Similar to REIPPPP, Eskom is intended to purchase the energy generated by the gas-to-
power generation plants pursuant to power-purchase agreements. Richards Bay and Coega
have been selected in the first phase as the two initial ports for the gas power plants, as both
of these ports have existing transmission grid infrastructure. The Department of Energy
has planned a 2,000 MW plant at Richards Bay and a 1,000 MW plant at Coega.
The Preliminary Information Memorandum and the Information Memorandum were
released by the Department of Energy at the Gas Options Conference on 3 October 2016.
The Department of Energy announced that it will not release the Request for Qualification
or the Request for Proposal until the updated IRP has been finalised.
Off-grid solutions
As a result of political uncertainty, the lack of reliable energy solutions in various areas
and the high prices of on-grid energy, consumers (both residential and big business) with
specific energy needs are already moving to off-grid energy solutions. A reliable electricity
supply is vital to ensuring uninterrupted production in the operations of many consumers.
Apartment blocks, hospitals, shopping malls, mining and manufacturing plants were some
of the first electricity users to opt for off-grid energy solutions and they have since been
followed by body corporates, homeowners’ associations and office parks.
Traditionally, when confronted with load-shedding and other electricity supply
interruptions, consumers were forced to choose between the less than desirable options
of either reducing operations or turning to other costly energy solutions, such as diesel
generators. However, more and more, consumers are considering and implementing long-
term off-grid solutions.
There is much uncertainty on the future of the REIPPPP as, despite various news briefings
and statements given by the Minister of Energy, the national utility company in South
Africa, Eskom, has been and continues to seem reluctant to sign any further power-
purchase agreements with independent power producers.
Since mid-2016, Eskom has openly defied government policy regarding the procurement
of the projects, citing lack of visibility over the cost-recovery mechanism and an excess
generation capacity of electricity. As highlighted above, Eskom’s resistance to signing
power-purchase agreements for renewable energy projects came as a surprise to many,
in light of the undeniable success of the competitive-bidding model pursued by the
Department of Energy which stimulated approximately R190 billion worth of investment
and facilitated a dramatic fall in solar and wind energy prices.
Despite a commitment by President Jacob Zuma in his State of the Nation address that all
of the power-purchase agreements would be signed, further setbacks were experienced
when the signing scheduled to take place on 11 April 2017 was postponed to enable the
newly appointed Minister of Energy, Minister Mmamoloko Kubayi (“the Minister”), to
become fully informed on the progress made under the REIPPPP.
In a media conference held on 1 September 2017, the Minister announced that due to

current demands, Eskom has an excess generation capacity of electricity and that it is
likely to remain that way until 2021. Notwithstanding the excess generation capacity, the
Minister stipulated that Eskom must have all the power purchase agreements for Round
3.5 and Round 4 of the REIPPPP ready for signature on 28 October 2017. It is debatable
as to whether or not these agreements will be executed.
In addition to the political uncertainty regarding the REIPPPP, the inherent nature
of renewable energy and the technology required to support it has resulted in its own
challenges. Although renewable energy is sustainable, the technology has traditionally
been somewhat costly and, due to its reliance on unpredictable environmental factors such
as the sun shining and the wind blowing, the generation is not continuous and uninterrupted.

The IRP2010 was promulgated under Government Notice R400 in Government Gazette
34263 of 6 May 2011. It is described as a “living plan” which is intended to be revised by
the Department of Energy every two years. The IRP2010 is considered as indicative of
our country’s long-term energy needs. The primary objective of the IRP is to determine
the long-term electricity demand in South Africa and sets out how this demand should
be met in terms of generating capacity, type, timing and cost, and serves as an input to
other planning functions and policies (such as economic development and environmental
and social policy formulation). The plan does not deal with the overall energy and/or
infrastructure needs of the country.
The Minister has said that the IRP2010 “merely outlines South Africa’s policy aspirations
relating to power generation technology mix for the next 20 years”, thus confirming the
status of the IRP as a policy document.
Updates on the IRP2010 were published in November 2013 and November 2016,
respectively. However, the 2013 update report clearly states that the IRP2010 “remains
the official plan for new generation capacity until replaced by a full iteration”. The latest
proposed update to the IRP2010 was published in November 2016 for input and comment
through a public participation process before promulgation. Comments in relation to this
iteration of the IRP closed in March 2017; however, there has been no indication from the
Department of Energy as to when we can expect promulgation of an updated IRP.
In terms of section 34 of the Electricity Regulation Act 4 of 2006, the Minister has the
legislative power to publish a determination when new generation capacity is needed, so as
to ensure the continued supply of electricity. The development of new generation capacity
is thus, in part, steered by the IRP2010 and given effect by means of the Minister’s section
34 determinations, which are in turn informed by the capacity allocations outlined in the
IRP2010. The Minister has noted that a revised IRP should first be promulgated before any
additional section 34 determinations can be made. Accordingly, the delays in publishing a
revised IRP are a cause for concern, as no further bidding rounds can take place until such
time as the revised IRP has been finalised, which may thwart South Africa’s ability to meet
the long-term energy supply goals contemplated in the IRP2010.

There have been no major developments in the legislative/regulatory space to our
knowledge, other than case law as set out below and the proposed update to the IRP2010
that is discussed above.


• Earthlife Africa Johannesburg v Minister of Environmental Affairs and Others
(65662/16) [2017] ZAGPPHC 58; [2017] 2 All SA 519 (GP) (8 March 2017).
• Earthlife Africa Johannesburg and Another v Minister of Energy and Others
(19529/2015) [2017] ZAWCHC 50; [2017] 3 All SA 187 (WCC) (26 April 2017).
• City of Cape Town v The National Energy Regulator of South Africa and the Minister
of Energy (26 July 2017).

Lara Bezuidenhoudt
Tel: +27 11 586 6038 / Email: lbezuidenhoudt@fasken.com
Lara specialises in banking and finance transactions, with a focus on project
finance. She has particular expertise in the financing of infrastructure
development in the energy, telecommunications, transport and mining sectors.
Her expertise spans a number of African jurisdictions and she has also acted
as the South African adviser on numerous offshore financings, where she has
advised on the local law aspects, including security and exchange control.
Lara has extensive experience in advising both lenders and sponsors within
the project finance arena, as well as government agencies.
Katy-Lynne Kay
Tel: +27 11 586 6024 / Email: kkay@fasken.com
Katy-Lynne is a senior associate in the finance and projects department in
the Johannesburg office of Fasken Martineau. She has experience in various
energy and infrastructure project finance deals including renewables. She
assists and advises both Lenders and Sponsors on the structuring and debt
re-structuring of transactions, joint ventures, secured lending, cross-border
financing and syndicated lending. She also has experience in various
litigation matters, mining disputes and the drafting of company agreements,
construction contracts (including engineering, procurement and construction
contracts and OEM contracts) and the sale of business transactions.
Margo-Ann Werner
Tel: +27 11 586 6026 / Email: mwerner@fasken.com
Margo-Ann is an associate at Fasken Martineau and is a member of the firm’s
Project Finance practice group. Her experience includes environmental
due diligence investigations, opinion-drafting and advice on environmental
compliance with all environmental legislation and licences; administrative
appeals and judicial reviews; general litigation drafting; carbon trading;
drafting of company agreements; and commercial due diligence investigations.
Fasken Martineau (incorporated in South Africa as Bell Dewar Inc.)

Inanda Greens, 54 Wierda Road West, Sandton, Johannesburg 2196, South Africa
Tel: +27 11 586 6000 / Fax: +27 11 586 6104/5 / URL: www.fasken.com

Switzerland
Phyllis Scholl & Jean-François Mayoraz
Bär & Karrer AG
energy sources
Switzerland’s final energy consumption totalled 854,300 Terajoules (TJ) in 2016. The
energy mix consisted of motor fuels (34.2%), stationary fuels (16.1%), electricity (24.5%),
gas (13.7%) and other (11.5%). The final sectoral consumption was split between transport
(36.0%), households (28.2%), industry (18.2%) and services (16.6%).
While electricity demand in Switzerland can be met by domestic production, Swiss oil
and gas demands fully depend on imports. This is due to the fact that Switzerland has no
domestic production of crude oil and natural gas. Therefore, energy-related regulations in
Switzerland are mainly focused on the electricity sector.
Electricity consumption reached 58.24 billion kWh (or 62.6 billion kWh, taking into account
the losses due to transport and pumping for pump storage plants) in 2016. On the supply side,
national production amounted to 58.7 billion kWh. For the first time in history, Switzerland
had a net import surplus of electricity in 2016. The main source for electricity production is
hydropower, which represented 59.0% of production in Switzerland. Moreover, electricity
production in Switzerland consists of nuclear power (32.8%), non-renewable conventional
thermal power (3.1%) and renewable energy other than hydropower (5.1%).
Switzerland aims to phase out nuclear power and to increase its electricity production from
renewable energy sources, in particular from solar power. This process is known as the
“Energy Strategy 2050”. Renewable energy sources therefore benefit from state support.
The main instrument for the promotion of electricity production from renewable energy
sources is a feed-in tariff system, which has been revised recently as described below. The
government’s intention to “green” the national electricity production has been leading to
a significant increase of electricity production from solar power since 2012. Today, solar
power is the most important renewable energy source other than hydropower. However,
solar power accounts for only 2.2% of the total electricity production in Switzerland and
therefore still plays a minor role.
In general, Switzerland has a stable energy mix and the shares of oil, electricity and gas
alter only slightly from year to year. With regard to electricity production, however,
hydropower is under increasing pressure. There are external and internal reasons for the
increasing pressure on hydropower.
Externally, overcapacities due to subsidies for renewable energy sources in several EU

Bär & Karrer AG Switzerland
Member States (in particular, Germany), as well as faltering demand, have led to low
prices in European electricity trading. The low electricity prices in the European electricity
market have put Swiss hydropower producers in financial difficulties, as they are no longer
able to cover their production costs. Since hydropower is a mainstay of Swiss electricity
supply, the financial difficulties of hydropower producers calls for state support, which has
been granted as described below.
Internally, a reform of the “water royalty” (i.e. a compensation paid to the communities
for the use of water), which accounts for up to 25% of production costs, is not going to be
decided before 2019. Moreover, duties and taxes such as a ‘renaturation tax’ have been
increased or newly introduced through federal legislation, which increases the financial
burden for hydropower producers. Lastly, some cantons and communities refuse to renew
water concessions and intend to take over electricity production from hydropower from
private producers.
These developments in the field of hydropower may have various policy impacts
in the future, in particular in the field of trade policy. Internally, it is generally agreed
that hydropower shall remain the mainstay of Swiss electricity supply and thus shall be
supported accordingly. However, there is disagreement on which measures suit best, as
e.g., the revision on the “water royalty” shows. With regard to the external perspective,
it remains open, to what extent Switzerland may keep up with the subsidy race in Europe,
as EU Member States have been increasing subsidies for renewable energy sources (in
particular, Germany). In order to protect its hydropower producers from low electricity
prices in Europe, Switzerland may take trade measures (such as an import tax on electricity
produced from fossil energy sources). Moreover, Switzerland may question the consistency
of certain EU subsidies for renewable energy sources with international trade agreements by
invoking the state aid provision under the Swiss-EU Free Trade Agreement (art. 23), or by
submitting a complaint with the World Trade Organization (WTO) against the EU regarding
a violation of the Agreement on Subsidies and Countervailing Measures. However, whether
Switzerland will use these options depends on political feasibility and opportunity.
Nevertheless, hydropower producers in Switzerland, in particular pumped-storage plants,
may also benefit from the increasing electricity production from renewable energy sources
in Europe. The restructuring of the electricity supply infrastructure throughout Europe,
with increasingly irregular and distributed sources of supply, is leading to a Europe-
wide increase of demand for storage. Pumped storage power stations allow spontaneous
compensation for over-production or under-production from wind and solar energy
sources and, if necessary, permit the temporary storage of electricity for days or weeks. In
Switzerland, hydropower producers are able to provide a substantial number of pumped
storage power stations. Moreover, a number of pumped storage power stations are under
construction as well. Still, the total Swiss storage capacity can only meet a fraction of the
Europe-wide demand for storage.

In 2011, the Federal Council and Parliament, triggered by the Fukushima nuclear incident,
decided to progressively abandon nuclear electricity production in Switzerland. As nuclear
energy provides around 30% of total electricity production, the decision to phase out nuclear
electricity production means a complete restructuring of the Swiss energy mix with regard
to electricity production. This restructuring process is called the “Energy Strategy 2050”.
The Energy Strategy 2050 aims at replacing nuclear electricity production with renewable

energy sources and will be implemented in phases. An initial package of measures that aim to
reduce energy consumption, increase energy efficiency and promote renewable energies such
as water, solar, wind and geothermal power, and biomass fuels, has been introduced by the
Parliament. In this regard, the Parliament has adopted new legislation, which was endorsed
in a referendum on 21 May 2017. The new legislation will be described in more detail below.
The further phases have yet to be elaborated, but it is intended to phase out the promotion of
renewable energy.
As an essential link between production and consumption, networks are pivotal for electricity
supply. Together with the Energy Strategy 2050, the Federal Council developed an “Electricity
Grid Strategy”. This strategy introduces a new legal framework for grid development. It aims
at ensuring that grids are timely developed in order to secure a sufficient energy supply at all
times. The Federal Council submitted the draft legislation to the Parliament on 13 April 2016.
The draft legislation is currently the subject of parliamentary debate.
With regard to gas, the Federal Council stated in early 2014 that it will examine the opening of
the Swiss gas market. Moreover, the Federal Council intends to present a draft gas supply act
within the current legislative period (i.e. 2015–2019) in order to update the existing Federal
Act on Pipeline Systems for the Transport of Liquid or Gas Fuel, and to seek compliance with
EU standards.
Lastly, Switzerland is interested in participating in the EU energy market, in particular in
the electricity market. A mutual free market access would strengthen the position of Swiss
electricity producers in the European electricity market and increase the security of supply.
The integration of Switzerland into the EU electricity market is also important for a successful
implementation of the Energy Strategy 2050. Therefore, Switzerland and the EU started
negotiations on an electricity agreement in 2007. In 2010, the negotiations were extended and
other energy sources such as gas were included. However, the conclusion of the electricity
agreement is uncertain. In order to grant further market access to Switzerland, the EU insists
on concluding an institutional agreement, which should establish a general legal framework
for Switzerland’s participation in the EU market. However, this agreement is controversial
in Switzerland as it requires Switzerland to adopt EU legislation. Therefore, the institutional
agreement has not been concluded yet.

In the context of the Energy Strategy 2050, the Federal Energy Act has been completely
revised in order to introduce initial measures aimed at implementing the Energy Strategy
2050. The new Energy Act and the required amendments in related legislations were endorsed
in a referendum on 21 May 2017. The new Energy Act will therefore enter into force on 1
January 2018.
The new Energy Act introduces measures to reduce energy consumption, increase energy
efficiency and promote renewable energies. Moreover, temporary support is granted to
existing large-scale hydropower plants due to their financial pressure.
The new Act sets indicative consumption, production and emissions targets. Compared to
2000, energy consumption per capita should diminish by 16% in 2020 and 43% in 2035.
With regard to electricity, consumption per capita should diminish by 3% in 2020 and by 13%
in 2035. On the production side, electricity production from renewable energies other than
hydropower should rise from 2,830 GWh in 2015 to 4,400 GWh in 2020 and 11,400 GWh in
2035. Hydropower production should diminish slightly from 39,500 GWh in 2015 to 37,400
GWh in 2035.

The intended increase of electricity production from renewable energies other than
hydropower requires state support. In Switzerland, the main instrument for the promotion
of electricity production from renewable energy sources is a feed-in tariff (FIT), which was
introduced in 2009. The Swiss FIT is available for hydropower with a capacity of up to
10 MW, solar energy, wind energy, geothermal energy as well as energy from biomass and
biological waste. It is paid directly to the producers as a fixed remuneration at a cost that
covers the difference between the production cost and the market price. This guarantees
the producers of electricity from renewable energies a price that covers their production
costs. The FIT is financed through a grid surcharge imposed on electricity consumers. The
maximum amount of the grid surcharge is defined in the Energy Act. The Federal Council
may define the exact amount of the grid surcharge within this maximum amount. In 2017,
the grid surcharge amounted to CHF 1.5 cents/kWh.
The revision of the Energy Act has also led to amendments of the Swiss FIT system. The
FIT will be replaced by feed-in premiums. Eligible producers are required to market their
electricity themselves. The difference between the market price and the production costs
will still be compensated. However, producers are responsible to sell their electricity directly
on the market. They should sell their electricity when demand is high, which gives them
an incentive to produce electricity when supply is short and prices are high. The feed-in
premium system is of limited duration and will only be granted for up to five years after the
entry into force of the new Energy Act. The new Energy Act also raises the grid surcharge to
CHF 2.3 cent/kWh, which increases the financial resources for the promotion of renewable
energies significantly. For electricity consumers, this means an additional financial burden
of CHF 40.00 per year based on the consumption of a four-person family household.
For photovoltaic installations, the new Energy Act alternatively provides for an investment
aid. The one-time subsidy covers a maximum of 30% of the investment costs of a reference
installation. This applies to new hydropower stations with a capacity of more than 10 MW,
and significant extensions of existing hydropower stations as well.
Due to the low European wholesale electricity prices and the resulting financial pressure on
the existing hydropower plants in Switzerland (as mentioned above), the new Energy Act
also provides for support to existing hydropower stations. Existing large-scale hydropower
stations (i.e. with a capacity of more than 10 MW) will be able to claim a market premium
for electricity, which must be sold for less than the cost of production. The premium is
capped to CHF 1.0 cent/kWh and the total available financial resources are limited, as CHF
0.3 cent/kWh of the grid surcharge will be used for this support. This measure is valid for
a period of five years.

Costs of system services
In a recent ruling, the Federal Supreme Court stated that power plant operators are not
obliged to pay a portion of the costs for the procurement of system services, and declared
that the corresponding provision in the ESO (as defined above) is not applicable. In view of
this, in its own ruling dated 4 July 2013, ElCom instructed the Swiss transmission system
operator (i.e. Swissgrid) to refund all outstanding payments for system services for 2010
to the involved power plants. In the meantime, all power plants have received a refund of
the amounts paid for system services in 2009 and 2010. Some power plant operators also
claimed late payment compensation, and ElCom ruled that Swissgrid has to pay them 5%
interest with effect from the date of the reminder.

In two other rulings, the Federal Administrative Court stated that the balance groups to
which the Gösgen and Leibstadt nuclear power plants are allocated may not be billed for
the costs arising in association with the retention of positive tertiary reserve capacity, and it
thus repealed the corresponding order issued by ElCom in 2010. As a consequence of this,
ElCom reassessed another, similar case. In accordance with another ruling by the Federal
Administrative Court, owners of a cross-border connecting line cannot be billed for costs
associated with idle energy. The Court did not rule on the question of whether a sufficient
legal basis exists for billing individual system services to parties that are not end consumers.
Ownership unbundling
Per January 2015, the majority of the transmission system grid was sold to Swissgrid.
Swissgrid has taken over additional transmission system grid facilities per January 2016.
Prior to the transmission network transaction, ElCom had specified the method of valuation
of the facilities to be transferred. The associated ruling of September 2012 stipulated that the
valuation of the various transmission network components was to be based on the regulatory
criteria which are applicable for pricing in the electricity supply legislation. This would
have amounted to a value of around CHF 2bn. Various companies lodged appeals against
this ruling, so at the end of 2013 the Federal Administrative Court upheld these appeals and
referred the matter back to ElCom for reconsideration. At the same time, it specified a variety
of criteria regarding the valuation method to be applied.
In August 2013, ElCom also ruled that stub lines (with and without supply character) that are
operated at the 220/380 kV level belong to the transmission network and have to be transferred
to the ownership of Swissgrid. This ruling has become legally binding. This means that
uniform criteria are applicable throughout the country with respect to the allocation of stub
lines to the transmission network, which now encompasses all lines and installations at the
220/380 kV level.
Right of appeal by end consumers
Tariff audit proceedings may be opened on the basis of a report, or by ElCom in its capacity
as regulator. In two rulings, the Federal Administrative Court found that ElCom was not
authorised to rule in a specific case upon petition of end consumers regarding tariffs. While
an end consumer is entitled to lodge a complaint with ElCom, it is ElCom which has to open
proceedings in its capacity as regulator. As complainant, an end consumer does not have the
rights of a party in the proceedings. The Federal Administrative Court subsequently qualified
this ruling in a decision in which it noted, somewhat vaguely, that this restrictive description
of the authority of ElCom was not binding. Thus the authority of ElCom and the status of
end consumers in such proceedings will have to be defined more specifically in future rulings.
Water royalty
In June 2017, the Federal Council opened public consultations on the revision of the Federal
Act on the use of hydraulic power. The Federal Council proposes to reduce the maximum
amount of the “water royalty” and, in a later stage, to replace the current system with a more
flexible model that takes into account market conditions. This revision is to be seen as further
support in favour of hydropower electricity producers, which suffer from low prices in the
European electricity market.

Currently, only industrial consumers with consumption of over 100,000 kWh a year may
choose their electricity provider freely. A full liberalisation of the electricity market was

planned for January 2018. However, following a public consultation, on 4 May 2016 the
Federal Council decided to suspend indefinitely the full liberalisation of the electricity market.
The Federal Council indicated that full liberalisation will depend on the following factors:
• conclusion of negotiations regarding an electricity agreement with the EU;
• progress achieved by the Energy Strategy 2050;
• prevailing market conditions; and
• revision of the Federal Electricity Supply Act.
On 16 August 2017, Switzerland and the EU took a step forward in linking the Swiss and
European emissions trading system. Both parties agreed to sign a linking agreement, which
has already been technically finalised one year ago and was on hold during the implementation
of the “Stop Mass Immigration” in Switzerland. The agreement will be signed in 2017, and
has to be ratified by the Swiss and European Parliaments. In this regard, the Federal Council
will submit a parliamentary dispatch on the approval of the agreement and the necessary
partial revision of the CO2 Act to the Parliament. The linkage of both emissions trading
systems enables Swiss companies to access a bigger and more liquid market and to benefit
from same competition conditions. In compliance with the EU, Switzerland will also include
emissions generated by aviation in its system upon entry into force of the agreement.

In February 2014, the Swiss Federal Office of Energy (“SFOE”) resumed work on revising the
Energy Supply Act which was suspended in 2011. The aim of the revision is to coordinate the
Energy Supply Act and the Energy Strategy 2050, to close existing gaps in legislation and to
examine new regulations for conformity with the changing industry conditions. The revision
has no effect on the full liberalisation of the electricity market as a separate schedule has been
established for this matter (see above).
Moreover, planning works with regard to legislation for the further implementation phases of
the Energy Strategy 2050 are currently in progress.

Phyllis Scholl
Tel: +41 58 261 50 00 / Email: phyllis.scholl@baerkarrer.ch
Phyllis Scholl’s practice focuses on advising companies active in the energy &
natural resources industry on general corporate and regulatory matters, M&A
transactions as well as representing them in litigation and administrative
proceedings.
She has unique experience with M&A transactions in the energy sector and,
with more than 10 years of experience in the field, has gathered very broad
industry knowledge in all areas of energy production and transportation
(mainly electricity and gas). She is further a board member of Energiedienst
Holding AG and in a Swiss electricity company.
Phyllis Scholl is also admitted to trading on the EEX (European Energy
Exchange).
In the Euromoney LMG European Women in Business Law Awards in June
2014, Phyllis Scholl was shortlisted for the title “Rising Star Corporateˮ.
Jean-François Mayoraz
Tel: +41 58 261 50 00 / Email: jean-francois.mayoraz@baerkarrer.ch
Jean-François Mayoraz advises companies on corporate, regulatory and
litigious matters. The main focus of his practice lies on advice to clients
active in the energy & natural resources and the life sciences industries.
Jean-Francois Mayoraz completed his legal studies at the University of
Zurich (BLaw) and at the University of Neuchâtel (MLaw). Before joining
Bär & Karrer as a trainee, he worked at the Swiss Federal Department of
Foreign Affairs and as a Research Assistant at the University of Zurich.
Bär & Karrer AG

Brandschenkestrasse 90, CH-8027 Zurich, Switzerland
Tel: +41 58 261 50 00 / Fax: +41 58 261 50 01 / URL: www.baerkarrer.ch

Tanzania
Lucy Sondo, Edwin Kidiffu & Henry Sondo
Abenry & Company, Advocates
energy sources
As is the case with most developing countries, the main source of energy in Tanzania is
biomass in the form of firewood and charcoal, which accounts for the majority of the total
energy consumption in both rural and urban areas. Biomass is followed by hydro with a
total installed capacity in the grid of around 1,516.24 MW. It is expected that with the huge
discoveries of natural gas and geothermal reserves, the mix will change as natural gas and
geothermal are expected to be the future preferred sources of energy.
The aforesaid notwithstanding, Tanzania retains a wide range of energy sources which are
generally untapped including coal, renewables and uranium.
The energy market in Tanzania hasn’t changed much in the last 12 months. It still has the
same balance in the energy mix. However, there is now more emphasis on establishing
infrastructure to push the use of natural gas as the major source of energy in Tanzania.
Natural gas
For the past few years, Tanzania has witnessed massive discoveries of natural gas, both
onshore and offshore. About 58 Tcf has been discovered as recoverable gas across the
nation. This volume is expected to rise over the next few years as there is potential for more
natural gas discoveries.
The next challenge will be the extraction of the gas. The Government’s approach is to
first use it domestically before making it an export commodity. As a result, the discovery
of natural gas is expected to trigger a shift in the country’s commercial future, as natural
gas not only has the potential to become Tanzania’s major source of energy consumption
domestically and as an export commodity, but also to contribute to the development of
manufacturing industries, particularly petrochemicals industries.
The Government is currently involved in talks with six oil companies including Statoil,
Exxon Mobil and Royal Dutch Shell as well as the Tanzania Petroleum Development
Corporation, the Petroleum Upstream Regulatory Authority (PURA) and the Tanzania
Electric Supply Company. The finalisation of a land deal in Likong’o Village in Lindi,
where the plant is to be built, is at an advanced stage.
Biomass
Biomass is the major source of energy in Tanzania. It is primarily used domestically, in

Abenry & Company, Advocates Tanzania
the form of charcoal and firewood. However, other forms of biomass that are being used
in Tanzania include agricultural wastes (sisal, rice and sugarcane husks) and wood chips.
Despite being the largest energy source, biomass is produced in unsustainable ways.
Biomass has been used for the generation of power on a small scale, and predominantly in
rural areas. Some Small Power Purchase agreements (SPPAs) have resulted in supplying
power to Tanzania Electric Supply Company Limited (TANESCO).
Small-scale uses of biomass for energy generation in rural areas are taking off. Under the
Small Power Projects (SPP) programme, two biomass power plants are supplying power
to TANESCO, which are: TPC in Kilimanjaro Region with an SPPA with a capacity
for 9 MW; and TANWAT in Njombe Region with an SPPA with a capacity of 1.5 MW.
A third SPPA for 1 MW, at Ngombeni project, on Mafia Island, was commissioned in
February 2014 to supply power to TANESCO’s isolated grid in Mafia Island. TANESCO
has signed SPPAs for three additional biomass projects with a total capacity of 9.6 MW.
Hydropower
Hydropower is the main source of electricity in Tanzania but over the years, reliability has
been declining due to hydrological factors. The major sources of hydro generation power
plants are located in the southern parts of Tanzania, in the Iringa and Morogoro regions.
Other plants are located in the Dodoma, Tanga and Kilimanjaro regions. Under the SPP
framework, there are some mini-hydros which have been developed or are in the process
of being developed in different parts of the country.
The Government has also decided to develop the 2,100-MW Stiegler’s Gorge hydropower
project. Although impediments have emerged, the Government is implementing the
project. The project will cover 1,350 km², representing 3% of the Selous Game Reserve’s
45,000 km². As explained above, the country has a total installed capacity in the grid of
around 1,516 MW of electricity, but Stiegler’s Gorge will produce 2,100 MW to support
the country’s industrialisation drive.
Solar and wind
Tanzania has potential for wind energy as well as solar energy. Large areas have average
wind speeds to allow generation, and hence a technical potential for electricity generation
from wind energy.
Tanzania has promising levels of solar energy, having 2,800 and 3,500 hours of sunshine
per year. Solar radiation is particularly high in the central region of the country.
To date, not much MW of solar off-grid PV has been installed countrywide. PV
installations are generally used in villages, schools, hospitals, health centres, police
stations, small telecommunications enterprises and households, as well as for lighting,
street lighting and basic electricity needs. The government, through the Rural Energy
Agency and various donors, has supported a number of solar PV expansion programmes.
One grid-connected PV plant has been commissioned. The 1 MW-plant will produce
about 1,800 MWh/year. The potential for grid-connected solar PV is estimated to amount
to 800 MW.
In the short term, the Power System Master Plan (PSPM) 2007–2031 envisages the
construction of 120 MW of PV capacity by 2018. Several private companies have
expressed an interest in developing 1–10MW grid-connected solar plants.
Geothermal
Situated within the East African Rift Valley System, Tanzania is thought to be endowed
with geothermal potential that has not yet been tapped. Resources have not been properly

assessed but theoretical estimates vary widely, from 650 to 5,000 MW, reflecting the
limited surface exploration carried out to date.
Recognising the importance of geothermal energy in improving the country’s energy mix, the
Government has taken and is taking necessary measures to stimulate geothermal development.
It has recently established the Tanzania Geothermal Development Company Limited (TGDC)
to oversee and expedite geothermal development and guide geothermal energy development
and utilisation in the country. In addition, the government has also prioritised a geothermal
project under the Scaling up Renewable Energy Program (SREP), aiming to reach the target
of realising 100 MW of installed geothermal capacity by 2020, but the Electricity Supply
Industry Reform Strategy and Roadmap 2014–2025, which was published by the Government,
set the target of 200 MW from geothermal to be generated by 2025.
TGDC is a subsidiary company of Tanzania Electric Supply Company Limited (TANESCO).
With 100% state ownership, TGDC aims to bring online about 200 MW by 2020, 500 MW by
2022 and 800 MW by 2025 from geothermal resources, but these figures are being adjusted
to fit the Power System Master Plan (currently under review) and the Electricity Supply
Industry Reform Strategy and Roadmap 2014–2025. TGDC has already received several
Prospecting Licences (Energy Mineral) from the Ministry of Energy and Minerals to explore
for geothermal energy sources, and is actively planning surface exploration studies in several
areas including Kisaki, Luhoi, Lake Natron, etc. in collaboration with development partners.
The most detailed surface exploration work in Tanzania to date has been carried out in
the Lake Ngozi area in Mbeya region, and TGDC is currently preparing to carry out
exploratory drilling at the site. This is the most advanced project in terms of geoscientific
studies conducted so far, whereby huge potential for electricity generation and direct use of
geothermal resources are suggested.
There is currently some exploration work being done for the Kisaki project which is
located in the Morogoro region. The exploration work is currently under way to unlock
and develop geothermal potential.

The United Republic of Tanzania has a population of around 44.9 million according to the
2012 census, growing at a rate of 2.7%, with an average growth of 6.7% per annum over
the period 2007–2016. According to the Tanzania Development Vision 2025, the country
envisages becoming a middle-income country by 2025. In order to achieve this goal,
energy development and provision has been identified as one of the key vehicles that will
drive growth and underpin socioeconomic development. It is anticipated that the expected
level of economic development by 2025 will require an addition of about 10,000 MW of
power generation capacity.
At the moment, the Government is still in the process of implementing the Electricity
Supply Industry-Reform Strategy and Roadmap (ESI–RSR), which was approved by the
cabinet in June 2014. The said document provides for the electricity sector reforms, and
further provides the required roadmap.
Currently the Government has commissioned the preparation of a Geothermal Strategy,
Legal, Institutional, Regulatory Framework and Risk Guarantee for Geothermal Resources
Development. We understand this work is at an advanced stage.
There are still discussions around Renewable Energy Policy and the Government has
already taken steps towards putting in place a legal framework for geothermal energy.

None of these attempts have reached an advanced stage at which one can say something
is about to happen soon.
The Government has also decided to develop the 2,100-MW Stieglers Gorge hydropower
project. The project has been on the drawing board as part of Tanzania’s master power
plan, which envisions Stieglers Gorge helping interconnect the grids of Tanzania, Kenya,
Uganda and Zambia. Tanzania is working with Ethiopia to develop the project.

There have not been any major developments in the laws regulating the energy sector per
se in the past year. However, there have been some changes in the rules and regulations
surrounding the energy sector. Parliament passed two laws during the Budget Session
which will have an impact on the conduct of projects in the energy sector.
During the Budget Session July 2017, the Parliament passed the Natural Wealth and
Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) Act, 2017
and the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017.
The Natural Wealth and Resources Contracts (Review and Re-Negotiation of Unconscionable
Terms) Act, 2017 provides for a mechanism, through the National Assembly, to review
arrangements or agreements made by the Government. The mechanism for review is
included to ensure that the terms and conditions of such arrangements or agreements are in
line with the interest of the People of Tanzania and the United Republic.
The law implements the provisions of Articles 8, 9 and 27 of the Constitution of the United
Republic, which charge every Tanzanian with the responsibility of protecting natural
resources of the United Republic, the property of the state authority and all property
collectively owned by the People and the United Republic. The law gives powers to
the National Assembly, where necessary, to direct the Government to re-negotiate any
unconscionable terms identified. The law provides a procedure for the initiation of re-
negotiation of unconscionable terms and provides a yardstick for unconstitutionality.
The law could impact the implementation of the various agreements or arrangements
reached between the Government and investors.
The Natural Wealth and Resources (Permanent Sovereignty) Act, 2017 makes provisions
for the integration of regional and international agreements on the country’s permanent
sovereignty over natural wealth and resources. The law seeks to ensure that any measure
taken in investments in natural and strategic resources must be based on the recognition of
the inalienable right of the country freely to dispose of its natural wealth and resources in
accordance with its national interests.
The law seeks to implement the provision of Article 27 of the Constitution of the United
Republic, which asserts the duty of every person to protect the natural resources of the
United Republic, the property of the state authority and all property collectively owned
by the People of the United Republic. The measures stipulated in the Bill are aimed at
safeguarding the property of the state authority and all property collectively owned by
the People of the United Republic. The law also states that permanent sovereignty over
natural wealth and resources shall not be a subject of proceedings in any foreign court or
tribunal.
Rules and regulations
In the past 12 months, various rules relevant to the energy sector have been approved and
published. These instruments are:

(a) The Electricity (Market Re-Organization and Promotion of Competition) Regulations,

2016;
(b) The Electricity (Tariff Setting) Rules, 2016;
(c) The Electricity (Procurement of Power Projects and Approval of Power Purchase
Agreements) Rules, 2017;
(d) The Electricity (Licensing Fees) Rules, 2016;
(e) The Electricity (System Operations) Rules, 2016;
(f) The Electricity (Market Operations) Rules, 2016; and
(g) The Electricity (Development of Small Power Projects) Rules, 2016.
The Electricity (Procurement of Power Projects and Approval of Power Purchase
Agreements) Rules, 2017 exist to govern the regulatory processes related to the initiation
and procurement of power projects and the approval of Power Purchase Agreements in
Tanzania. However, these Rules will not apply to, amongst others: (a) the procurement of
electricity transmission or distribution infrastructure, unless directly related to the purchase
of power; (b) procurement and approval of Power Purchase Agreements related to Small
Power Projects; and (c) electricity purchase and sale in markets determined by the Authority
to be competitive.
The Electricity (Market Re-Organization and Promotion of Competition) Regulations, 2016,
on the other hand, apply to: (a) re-organisation of the electricity market; (b) promotion of
competition in generation, transmission and distribution of electricity; and (c) promotion of
competition in consumer services and private sector participation in the electricity sub-sector.
The regulations also provide for the reorganisation of the electricity sector by paving
the way for the unbundling of activities within the sector. The unbundling of generation
activities from transmission and distribution activities has to be accomplished by December
2017; designation of the system operator by June 2018; establishment of a mechanism of
setting/determining wheeling charges by June 2018; unbundling of distribution activities
from transmission activities by June 2018; designation of the market operator by June 2018;
establishment of a mechanism of setting/determining retail tariffs by June 2021; unbundling
of distribution activities into several zonal distribution companies June 2025; and listing of
generation companies and distribution companies to stock markets by June 2015.
In addition to the already published Rules and Regulations mentioned above, EWURA also
has rules that are still in the reviewing stages, awaiting approval. These include:
(a) The Petroleum (Wholesale, Retail, Consumer Installation Operations) Rules, 2017;
(b) The Petroleum (Liquefied Petroleum Gas Operations) Rules, 2017;
(c) The Electricity (Generation, Transmission Distribution Activities) Rules, 2017;
(d) The Electricity (Lubricant Operations) Rules, 2017; and
(e) The Petroleum (Refinery Operations) Rules, 2017.

There have not been any significant judicial decisions within the last 12 months.

In August 2017, Uganda and Tanzania entered into an agreement to construct a 1,145km
oil pipeline. The pipeline will be used for the transportation of crude oil from Hoima in

Uganda to Tanga in Tanzania. Uganda will use the port of Tanga to transport the crude oil
to international markets. The construction phase of the US$4bn pipeline is estimated to be
completed by 2020. This is projected to provide employment and, in turn, to translate into
jobs for over 10,000 locals. The companies involved include Total, Tullow Oil and China
National Offshore Oil Cooperation (CNOOC).
Also, Independent Power Tanzania (IPTL) has asked for its licence to be renewed until
2022. Although the licence has already expired, the application is still with the Energy
Regulator for consideration. However, IPTL is no longer operating pending the application
which is under consideration.
On 15th June 2017, EWURA issued a public notice following an application by IPTL
requesting an extension to the term of its licence for a further 55 months from 15th July
2017. Following consultations with various stakeholders, EWURA put on hold the inquiry
process until further notice. In effect, IPTL does not hold any licence for the time being and
is not generating any electricity. This has an impact on the MW that are going into the main
grid. IPTL had been operating at 100 MW installed capacity.

The Petroleum Act (PA), 2015 addresses, inter alia, the local content issue and its
requirements. The Act put in place stricter local content requirements, in the hope of
increasing local capacity and the market for domestic goods. For example, the Act states
that a licence holder shall give preference to Tanzanian goods and services. But where
the goods and services are not available, such goods and services shall be provided by a
company which has entered into a joint venture with a local company. It also requires that
the local company hold no less than 25% of shares in the JV. Some have criticised that the
local company needs to hold a higher proportion of shares if the Government is to promote
domestic products and companies. The PA also requires that the participating interest of the
National Oil Company (NOC) in every project be no less than 25% unless the NOC decides
otherwise, thus giving the NOC discretion to decide. We have yet to see the impact, if any,
this will make.
In addition to the Local Content Policy 2013, the Petroleum (Local Contents) Regulations,
2016 have been published, addressing local content issues with regard to petroleum
activities. The Local Contents Regulations reflect the same standard of requirements as
the PA 2015.

Lucy Sondo
Tel: +255 22 212 9461 / Email: lucy.sondo@abenry.com
Lucy Sondo is the founding partner of Abenry. She worked as a partner with
Adept Chambers and with Mkono & Co. Advocates. She also worked as a
State Attorney. She is holder of a Master’s degree in drafting. Lucy is an
expert in energy, PPP, project finance, M&A, corporate law, capital markets
and legislative drafting.
Lucy is regarded as a “top-league lawyer” who is very well respected in the
market for her work in M&A matters. Clients say: “She is a very good and
outgoing lawyer and knows how to manage relationships. She takes a great
personal interest in following up with the client.” She has particular expertise
advising both public and private bodies including the Government and financial
institutions on securities matters, among others – Global Chambers 2017.
Edwin Kidiffu
Tel: +255 78 211 0070 / Email: kidiffu@gmail.com
Edwin Kidiffu holds a Master of Laws degree from the University of Dar-
es-Salaam. Edwin masters banking and finance law, business law, energy
law, and regulatory law. He also has expertise in compliance monitoring and
evaluation of PPP projects and in matters related to the energy industry.
Edwin has attended trainings on the regulation of electricity and water
utilities; power purchase agreements; and on compliance, monitoring and
evaluation of public-private partnership projects.
He has worked as a Tutorial Assistant at the Institute of Social Work and
the Institute of Finance Management. He has also worked at M.A Ismail &
Co. Advocates as a Legal Officer. He joined the Energy and Water Utilities
Regulatory Authority (EWURA) in February 2007 as the Principal Legal
Counsel, and later as the Manager of Legal Services.
Henry Sondo
Tel: +255 22 212 9461 / Email: henry.sondo@abenry.com
Henry Sondo is an associate in the corporate department of Abenry. He holds
an LL.M. (Oil, Gas and Mining Law), Nottingham Trent University, UK, 2015
and an LL.B, Swansea University, UK, 2014. Henry advises on energy matters
as well as mining issues. He has also participated in advising clients on a
financing matter on an initial pilot project in respect of two containers which
are expected to have a generation capacity of approximately 90 kWp each.
Henry has participated in the legal due diligence exercise for a permitting
plan for a Tanzanian offshore project. He has also successfully incorporated
a company that will render services to gas exploration activities.
Abenry & Company, Advocates

3rd Floor, Golden Jubilee Towers, Ohio Street/ Kibo Street, P.O. Box 3167, Dar-es-Salaam, Tanzania
Tel: +255 22 212 9461 / Fax: +255 22 212 9463 / URL: www.abenry.com

Turkey
Omer Kesikli
Kesikli Law Firm
energy sources
Turkey is a rapidly growing, emerging energy market with a wide array of investment
opportunities. The country has led significant restructuring of its energy market through
legislative and regulatory activities, promoting the active participation of private entities in the
energy market in a more effective way, and thus creating a transparent, reliable and competitive
energy market to help Turkey meet its ambitious long-term goals. These developments
have resulted in a sharp increase in the share of private entities in the electricity generation
sector. While the Turkish economy has been beset by several domestic and foreign political
difficulties and handicaps, the country retains its attractiveness for foreign energy investments
due to its need for enormous levels of investment in the fields of electricity, natural gas and
oil. The Turkish Government has allowed the private sector to take the lead in financing these
investments while creating a favourable investment environment for them.
An overview of Turkey’s electrical energy market is outlined in the table below, in accordance
with the information gathered from the Energy and Natural Resources Overview of the
Turkish Ministry of Energy and Natural Resources (“Ministry”) dated May 17, 2017 and
numbered 15 (“Ministry’s Overview”):
Chart 1.1 – Overview of Turkey’s Electrical Energy (in GWh)
Year Generation Import Export Consumption Generation Consumption
Increase Rate Increase Rate
(%) (%)
2002 129,400 3,588 435 132,553 5.4 4.5
2003 140,581 1,158 588 141,151 8.6 6.5
2004 150,698 464 1,144 150,018 7.2 6.3
2005 161,956 636 1,798 160,794 7.5 7.2
2006 176,300 573 2,236 174,637 8.9 8.6
2007 191,558 864 2,422 190,000 8.7 8.8
2008 198,418 789 1,122 198,085 3.6 4.3
2009 194,813 812 1,546 194,079 -1.8 -2.0
2010 211,208 1,144 1,918 210,434 8.4 8.4
2011 229,395 4,556 3,645 230,306 8.6 9.4
2012 239,497 5,826 2,954 242,370 4.4 5.2
2013 240,154 7,429 1,227 246,357 0.3 1.6

Kesikli Law Firm Turkey
Year Generation Import Export Consumption Generation Consumption

Increase Rate Increase Rate
(%) (%)
2014 251,963 7,953 2,696 257,220 4.9 4.4
2015 259,690 7,411 2,951 264,150 3.1 2.7
2016 273,387 6,400 1,442 278,345 4.4 4.7
As clearly reflected by the above chart, Turkey’s electricity demand rate decreased between
the years 2014 and 2015 probably due to temporary economic and political instability in
the Turkish economy. By the end of 2016 the electricity demand started to increase again,
indicating a revitalisation in the economy.
Chart 1.2 – Allocation of Installed Power between Public and Private Sectors (in MW)
Year Total Public Private Sector Share of Public Share of Private
Sector (%) Sector (%)
2002 31,846 21,058 10,788 66.1 33.9
2003 35,587 20,113 15,474 56.5 43.5
2004 36,824 20,110 16,714 54.61 45.4
2005 38,820 20,905 17,415 53.85 46.1
2006 40,502 23,716 16,786 58.56 41.4
2007 40,836 23,875 16,961 58.47 41.5
2008 41,817 23,981 17,836 57.35 42.7
2009 44,761 24,203 20,559 54.07 45.9
2010 49,524 24,203 25,321 48.87 51.1
2011 52,911 24,150 28,761 45.64 54.4
2012 57,071 24,775 32,296 43.41 56.6
2013 64,007 23,781 40,227 37.15 62.8
2014 69,520 21,879 47,641 31.47 68.53
2015 74,147 20,323 52,824 27.8 72.2
2016 78,497 20,105 58,392 25.6 74.4
Electricity: The hydro portfolio of the public utility Electricity Generation Company
(EUAS), with a total capacity of 6,000 MW, has begun to be privatised through transfer of
operational rights of the hydro power plants, as the transfer of their ownership is prohibited
based on several Constitutional Court precedents expressing constitutional restrictions on
transfer of ownership.
While gross electricity consumption in 2010 was 210,434 GWh, this figure rose by 4.7%
in 2016, reaching 278,345 GWh. Turkey imported 6,400 GWh of electricity and exported
1,442 GWh in 2016. These figures show that the Turkish energy market is still in need of
substantial energy investments.
As per the data obtained from the Energy Market Regulatory Authority (EMRA), the
percentages of energy sources used for electricity generation in 2016 were: natural gas
and LNG (32.1%); coal (33.7%); hydro (24.6%); wind (5.6%); fuel oil, diesel and naphtha
(1.6%); geothermal (1.7%); and biogas (0.8%).

Power generation percentages based on energy source are shown in the chart below, derived
from the information gathered from the Ministry’s Overview:
Chart 1.3 – Power Generation in Turkey Based on Energy Source (GWh)
Year Thermic Hydraulic Geothermic + Total Increase (%)
Wind + Solar
2002 95,563 33,684 153 129,400 5.4
2003 105,101 35,330 150 140,581 8.6
2004 104,464 46,084 151 150,698 7.2
2005 122,242 39,561 153 161,956 7.5
2006 131,835 44,244 221 176,300 8.9
2007 155,196 35,851 511 191,558 8.7
2008 164,139 33,270 1,009 198,418 3.6
2009 156,923 35,958 1,931 194,813 -1.8
2010 155,828 51,796 3,585 211,208 8.4
2011 171,638 52,339 5,418 229,395 8.6
2012 174,872 57,865 6,760 239,497 4.4
2013 171,812 59,420 8,921 240,154 0.3
2014 200,417 40,645 10,901 251,963 4.9
2015 179,366 67,146 15,271 261,783 3.9
2016 184,889 67,268 21,230 273,387 4.4
Renewables: While Turkey has abundant potential for power generation through renewable
sources, the required infrastructure investments have not been made, preventing the country
from exploiting its full potential. In addition, dependence on oil and gas is still a big
problem, causing the widening of the current deficit. Accordingly, Turkey’s energy strategy
aims to establish energy supply security for the forthcoming years, decrease dependence
on imported energy sources, and improve energy efficiency. Turkey’s energy strategy also
aims to improve the investment climate for foreign investors, as a result of which certain
global market players have already established their positions in the market. If the targets
set forth in the Energy Ministry’s 2015–2019 Strategic Plan are met, the energy mix in
terms of resources would be approximately 40% natural gas, 25% hydro, 25% coal and 10%
renewables by 2019.
Solar: Turkey is a sun-rich country which has enormous potential for solar energy
production. Two separate procedures have been designed for investors willing to construct
and operate solar power plants: Unlicensed Generation (allowed for projects not exceeding
1 MW capacity); and Licensed Generation.
Interestingly, unlicensed solar projects became very popular and attractive due to the fact
that these projects are subject to a simplified procedure which is not as complicated as
the licensing procedures, and no tender process is required for such applications. While
the unlicensed option was intended to encourage cogeneration projects to balance their
uncontrolled production and to primarily meet their own power needs and sell the rest
on the spot markets, unlicensed generation became a substitute for licensed projects, with
even more feasible conditions. Investors not willing to proceed with the time-consuming
and bureaucratic licensing steps and conditions of large-scale licensed projects were drawn
to unlicensed projects, especially in the solar market. This trend does not seem to be

continuing, however, due to grid restrictions and the unavailability of new capacities to be
allocated for new applications. The lifting of the incentives over imported solar panels is
another handicap for solar investors, but this is also an opportunity for those who are willing
to invest in the manufacturing of equipment in Turkey.
As per the estimates of the Ministry of Energy, solar installed capacity is expected to be
increased in stages in the coming years, to a minimum amount of 3,000 MW by 2023, which
requires an approximate total of US$7 billion of investment.
Biomass: Biomass energy generation has quite a high potential in Turkey, based on Turkey’s
geographical structure and the availability of livestock farming. Biomass potential is
around 8.6 million TEP, of which 6 million TEPs are used for heating purposes. Although
the potential for biomass energy is promising, the number of realised projects is still low.
At the end of 2016, EMRA’s licence list showed 78 licensed biomass projects, with 398,611
MWe installed and 269,246 MWe operational capacity.
In Turkey, landfill gas projects carry the bulk of biomass power, with 77% of installed and
80% of operational capacity. Thermal biomass technologies like gasification and high-
performance combustion have the next-biggest share of installed capacity with 28%, but
projects in operation are quite low in ratio (2%). Energy generation through biogas production
from solid wastes like animal manure or agricultural residues has gained pace in the last
five years. Their share of installed and operational capacity are 14% and 15% respectively,
increasing gradually. Wastewater treatment plants are generally built to eliminate corporate
wastewaters, and therefore have 3% in installed and operated capacity. It is expected that
the share of biomass and biogas-based electricity production will rise significantly in the
coming years – up to 700 MW in 2019 according to the Energy Ministry’s 2015–2019
Strategic Plan – with the support of new incentives, and once the business environment
becomes more aware of the feasibility and sustainability of these projects.
Wind: Turkey’s wind energy potential has started to be realised in recent years through
investments. The first attempt was made in 2007, when a total of 75 GW of licence
applications were made in one day and many licences were granted to the applicants. Many
of those projects could not be realised due to the licensees’ lack of finance, which resulted
in a failure to meet the targeted capacity. Many of those licensees attempted to transfer
their licences indirectly through the sale of the applicants’ shares; as the trade of licences
was banned, however, only a few of them were able to carry out this plan. This experience
prompted the legislators to set forth certain financial criteria to be met by the applicants for
licences, and a pre-licence procedure was introduced recently. Between April 24 and 30,
2015, 1,095 applicants applied to EMRA for a total of 42,273.65 MW capacity, while the
allocated capacity was limited to 3,000 MW. According to the Ministry’s Overview, at the
end of 2016, the percentage of wind power in total electricity generation was 5.67% with
15.492 GWh. The Regulation on the establishment of renewable energy source regions
(“YEKA Regulation”) is also expected to boost investment in wind power.
Geothermal: Studies have identified more than 227 geothermal fields which could be useful
at economic scale, and about 2,000 hot and mineral water resources with temperatures
ranging from 20 to 287°C. Approximately 1,200 geothermal exploratory, production and
reinjection wells have been drilled. While the share of geothermal energy represents a
relatively small portion of Turkey’s energy mix compared to other sources (1.74% as of
the end of 2016), it is expected to rise considerably in the near future due to technological
developments and investments that are intended to be made in exploration for the resources,
partly given the fact that the electricity which can be potentially generated through geothermal

energy in Turkey has been estimated at 2,000 MW. Studies are being conducted by the
Energy Ministry to introduce new incentives supporting investors’ early-stage explorations
such as exploratory drilling and required examinations. Governmental authorities are also
considering setting out additional Feed-in Tariffs to promote investments in geothermal
energy.
Coal: Turkish energy policy welcomes the use of domestic energy sources, supporting this
with an investment incentive system that favours utilising coal and lignite, both abundant
in Turkey. The Government of Turkey has encouraged coal-fired power plant investments
through the enactment of a temporary immunity for coal-fired power plants from the
applicable environmental legislation, which significantly reduces the required investments
and the repayment of the investment itself. One of the goals which this incentive aims to
achieve is the reduction of Turkey’s current deficit. Coal-fired power generation accounted
for 33.74% of electricity production in Turkey by the end of 2016. Turkey’s coal potential
is still being exploited and new coal plants are being built.
Natural gas: Turkey is one of the largest gas markets in Europe in terms of its annual
consumption rates, and unlike many other European countries, Turkey’s natural gas
consumption grew robustly until the end of 2015 (47,999 billion cubic metres in 2015)
while it stabilised at the level of 46,146 billion cubic metres in 2016. In terms of an increase
in demand for natural gas and electricity, Turkey is second only to China. As Turkey’s
natural gas reserves are very limited, it imports approximately 98% of its natural gas from
countries like Russia, Azerbaijan, Algeria, Iran and Nigeria, mainly through the state-owned
company Petroleum Pipeline Corporation (Boru Hatları ile Petrol Tasima Anonim Şirketi)
(“BOTAS”), which dominates the natural gas sector in Turkey. Turkey’s unique geographic
location, surrounded by the world’s leading oil and gas reserves (Russian Federation, the
Caspian region, Mediterranean, North Africa and the Middle Eastern countries), makes it
one of the major natural transit countries for maritime and pipeline transportation of gas
and oil.
The controlling legislation of the natural gas market is the Natural Gas Market Law
numbered 4646, enacted with the objective of liberalising the natural gas market. The
dominant gas market player, state-owned BOTAS, is required by such law to reduce its
market share in the import, wholesale and distribution fields, and subsequently BOTAS’s
import contracts are being gradually transferred to other market players through tenders.
However, the current market share of BOTAS with regard to imports still represents a high
proportion of the natural gas import market.
While Turkey’s power is substantially dependent on natural gas, its gas storage facilities are
still very limited (approximately 3 billion m3). Further investments into the construction of
gas storage facilities are crucial to prevent seasonal imbalances in natural gas demand, and
to reduce the financial losses due to “take or pay” contracts. The Natural Gas Market Law
requires importers to provide guarantees to arrange available storage areas for at least 10% of
their gas imports. The Government has also taken the initiative to cover the aforementioned
concerns with the ongoing construction of the Salt Lake Natural Gas Underground Storage
Facility (“Storage Facility”), with the objective (amongst general concerns) of optimising
the operation of the natural gas pipeline network in Central Anatolia. The plan is to reach a
capacity of 1 billion m3 working gas capacity when the second phase is completed in 2019.
When the project is completed, a maximum of 40 million m3 of natural gas will be able to
be distributed to the Turkish natural gas network per day. The facility is planned to be fully
operational by 2019. Construction of the first phase of the Storage Facility was completed

in February 2017, and the first phase of the Storage Facility, comprising six wells, was put
into service on February 10, 2017.
Another important initiative taken by the Government for storage of the natural gas is
supporting investments of Floating Storage Regasification Units (“FSRU”). By using this
technology, the Government aims to strengthen the security of natural gas supply. The first
FSRU, “GDF Suez Neptune”, was commissioned in Aliağa, Izmir at the end of 2016. The
unit has a 145,000 cubic-metre LNG capacity and is able to store 85,000 cubic metres of
natural gas. With this facility, 20 million cubic metres of natural gas per day can be supplied
to the national gas grid system and natural gas demand can be met for 50,000 households.
According to the declarations of the Government officials, second and third FSRUs are
planned to be in operation by the end of 2017.
Turkey is associated with four international gas pipelines, namely: the Russia-Turkey
West Gas Pipeline; the Russia-Turkey Blue Stream; the Iran-Turkey Pipeline; and the
Baku-Tbilisi-Erzurum Pipeline. Natural gas also enters the main BOTAS transportation
system through LNG terminals at Marmara Ereglisi and Aliaga; from the Turkish Petroleum
Anonim Ortakligi (“TPAO”) store at Marmara Degirmenkoy; and from two production sites
in Turkey.
The current natural gas import figures of Turkey for the years 2002–2016 by country are
outlined in the table below, based upon information gathered from the Ministry’s Overview:
Chart 1.4 – Natural Gas Import by Country (million m3)
Year Russia Iran Azerbaijan Algeria Nigeria Spot LNG Total
2002 1,574 660 - 3,722 1,139 - 17,095
2003 12,460 3,461 - 3,795 1,107 - 20,823
2004 14,102 3,498 - 3,182 1,016 - 21,798
2005 17,524 4,248 - 3,786 1,013 - 26,571
2006 19,316 5,594 - 4,132 1,100 79 30,221
2007 22,762 6,054 1,258 4,205 1,396 167 35,842
2008 23,159 4,113 4,580 4,148 1,017 333 37,350
2009 19,473 5,252 4,960 4,487 903 781 35,856
2010 17,576 7,765 4,521 3,906 1,189 3,079 38,036
2011 25,406 8,190 3,806 4,156 1,248 1,069 43,874
2012 26,491 8,215 3,354 4,076 1,322 2,464 45,922
2013 26,212 8,730 4,245 3,917 1,274 892 45,270
2014 26,975 8,933 6,074 4,179 1,414 1,598 9,173
2015 26,783 7,826 6,169 3,916 1,240 2,493 48,427
2016 24,740 7,705 6,480 4,193 1,120 1,692 46,200
Petroleum: Turkey’s oil reserves are located in the Batman, Adiyaman and Thrace regions.
Turkey produces 61,000 b/d of petroleum and other liquids in Turkey, which accounts for
approximately 9% of its oil consumption. According to the Ministry’s publications, in first
five months of 2017 Turkey fulfilled only 7.7% of its oil consumption by using domestic
resources. State-owned TPAO is the controlling exploration and production entity in Turkey,
holding privileged rights in exploration and production activities. TPAO collaborates with
foreign players such as Shell, in the form of joint ventures for certain upstream activities.

The real potential of Turkey’s petroleum reserves has not been discovered yet, due to the
requirement for high-value investments and certain international political reasons.
Regarding oil transportation, Turkey is already an important transit state. Large volumes of
oil are transported by the Baku-Tbilisi-Ceyhan pipeline and the Kerkuk-Ceyhan pipeline,
as well as oil tankers sailing through the Dardanelles Strait. However, geopolitical and
security issues affecting the pipelines need to be addressed by Turkey if it is to function as
a secure transit state and energy hub.
The current crude petroleum and natural gas consumption overview of Turkey is shown
below (based upon information gathered from the Ministry’s Overview):
Chart 1.5 – Crude Petroleum and Natural Gas Consumption
Year Crude Petroleum Consumption (million tons) Natural Gas Consumption (million m3)
2002 26.1 17,065
2003 29.5 21,384
2004 30.6 22,505
2005 29.3 27,467
2006 29.9 31,128
2007 27.7 34,600
2008 27.0 36,100
2009 22.3 34,400
2010 23.8 36,900
2011 25.0 43,800
2012 22.1 45,242
2013 20.8 45,270

2014 19.8 48.717
2015 27.2 47,999
2016 27.6 46,146
While Turkey is an oil and natural gas producer, its level of output is not substantial enough
to make the country self-sufficient. Under the pressure of growing energy consumption
and dependence on imported gas, Turkey has restructured its energy strategy in line with its
potential for power generation, especially through renewable sources, in order to lower its
dependence on imported energy sources. It is expected that new incentive packages will be
announced by the regulatory bodies sooner or later, whereby renewable energy investments
will be more effectively encouraged. In particular, biomass and waste-to-energy facilities
are expected to receive a significant portion from the expected incentive scheme. On the
other hand, Turkey is also aiming to repair and strengthen its ties with Russia and Israel
to cooperate on several energy matters. The messages given in the summit held between
Presidents Erdogan and Putin on August 9 aim to end a period of high tension and trade
sanctions after Turkey downed a Russian jet in November 2015.
Regarding natural gas, Turkey must work to secure its natural gas imports by expanding
gas storage facilities in order to avoid shortages. Expanding gas storage facilities will also
strengthen Turkey‘s position when negotiating contracts on a “take or pay” basis. The

country has experienced financial losses in the past, due to the obligation to buy prearranged
amounts of gas that might have been excessive at the time of trade. After seeking a solution,
Turkey’s Natural Gas Market Law set the requirement for gas importers to arrange storage
facilities for at least 10% of their imports. There are also Government-led gas storage
projects as stated above, the Salt Lake Natural Gas Underground Storage facility being the
most important.
On the other hand, while Turkey has successfully privatised the distribution sector, it still
needs to complete its structural action plan to liberalise the natural gas market. Transparency
and competition must be established, and the unbundling of BOTAS must be secured to
realise a more liberalised natural gas market. Successful integration of the natural gas
market to EPİAŞ, Turkey’s new energy trading platform, would also be a desirable step to
establish an open and transparent market, together with the privatisation of the İstanbul Gas
Distribution Company (“IGDAS”).
Apart from the domestic solutions to the aforementioned issues, it is also expected that the
Turkish energy market will benefit from the second part of the Southern Gas Corridor Project
(“SGC”), namely the Trans-Anatolian Pipeline (“TANAP”) Project that runs through Turkey
from the Turkey-Georgia border to the Turkey-Greece border. TANAP will be operated by
SOCAR, which currently holds a 58% stake in the project. Southern Gas Corridor Closed
Joint Stock Company (“SGC” – 58%), BOTAS (30%) and BP (12%) are the partners in
developing the project. SGC is 51% state-owned and 49% owned by SOCAR. The overall
investment in the TANAP project is estimated to reach US$11.7 billion and is expected to
bring more than 15,000 direct, and thousands of indirect, jobs. Permanent direct jobs will
be created as well. Local companies are expected to be engaged in implementation works
amounting to US$5–6 billion in total. It will be one of the world’s longest gas pipelines upon
finalisation. Turkey will receive more natural gas supplies through TANAP, which will lead
to an increase in competition in the market and boost Turkey’s bargaining power against
other gas suppliers who will be forced to reduce their gas prices. Additionally, Turkey will
have the right to re-export the natural gas it imports through TANAP to Europe, which will
have the effect of increasing revenues. TANAP’s route represents the most cost-efficient
way of transporting natural gas from this region to Europe. While Azerbaijan is currently the
only supplier of the project, other gas-rich countries in the region such as Turkmenistan, Iran,
Iraq and Israel might be willing to use this corridor to deliver their natural gas to Europe,
which greatly increases the potential for Turkey to become an important transit country and
an influential player in the European energy market.
Regarding to the current situation of the TANAP Project, Turkish Minister of Energy and
Natural Resources Berat Albayrak indicated, during his speech dated February 28, 2017,
that 65% of the construction works of the TANAP Project have been completed, and that
the rest of the work would be completed by the end of 2018.
Developments in Government policy/strategy/approach

The Government’s strategic plan for the years 2015 to 2019 is based on: (i) good governance
and shareholder interaction; (ii) regional and international effectiveness; (iii) technology,
R&D (research and development) and innovation; and (iv) improvement of the investment
environment in the field of energy and natural resources. In accordance with this strategic
plan and in the name of improving the investment environment in the energy generation
sector, the Government clearly has taken substantial steps to put its strategy into effect
through recent legislative amendments.

Amendments were made on unlicensed electricity generation, the most influential being the
restrictions on share transfers until the provisional acceptance of the facility. As with the
licensed electricity generation sector, Government policy lies behind this amendment, to prevent
so-called commissioners who applied from obtaining invitation letters for the connection
agreements (with the grid) without sufficient economic capacity to realise the projects, and
solely for the purpose of trading their invitation letters at higher market prices. Therefore, with
this recent amendment it was aimed to encourage real investors who intend to invest in the
unlicensed renewable energy sector and have the economic capacity to finalise their projects.
On the other hand, certain amendments to Electricity Market Code numbered 6446, and to
several other codes, have been published recently. There are two notable amendments reflecting
the Government’s strategy in the electricity generation sector: (i) privatisation of the EUAS,
its affiliates and assets; and (ii) encouraging the use of local products in generation plants to
be constructed in the renewables sector. The amendment regarding privatisation of EUAS and
its affiliates, sets forth a different and simplified privatisation procedure and immunity, for a
certain period of time, from the requirements of environmental legislation. This amendment
clearly implies that privatisation of EUAS is a priority in the Government’s agenda, and that
to ensure successful privatisation of the generation sector, the Government is ready to take
substantial steps. The other notable amendment with respect to use of local products envisages
a requirement to use local products to be constructed in the renewables sector. In conjunction
with the policy of increasing energy generation from renewable resources, it appears that the
Turkish Government is seeking to boost the market by imposing such requirement.

On June 4, 2016, the Turkish Grand National Assembly approved an amending code, which
was proposed by the Justice and Development Party’s parliamentary group, envisaging
certain amendments to the Electricity Market Code numbered 6446 and to several other
codes (“Amending Code”). The Amending Code has been published in the Official
Gazette (29745) on June 17, 2016. Major changes brought by that Amending Code can be
summarised as follows:
Mineral research activities to be carried out abroad
The Amending Code authorises the General Directorate of Mineral Research and Exploration
(“General Directorate”) to carry out prospection operations abroad, to incorporate companies
in foreign countries for conducting these operations, to enter into partnership in foreign
countries with legal entities/natural persons (regardless of whether they are Turkish citizens
or not), to be a privileged shareholder, to buy and sell all sorts of shares, stock certificates
and other partnership shares, and to open an agency office in a foreign country with the
permission of the Ministry to which it is affiliated. Accordingly, the General Directorate has
announced, on its website, that it will be involved in several projects which are to be carried
out in various foreign countries.
Immunity for nuclear power plants from zoning legislation
The Amending Code provides that, for all buildings to be constructed in nuclear power plant
sites, Zoning Code numbered 3194 and dated May 3, 1985, and the provisions of Building
Superintendence Code numbered 4708 and dated June 29, 2001 concerning building permits,
a building superintendence and occupancy permit, will not be applied, subject to certain
requirements. Permissions to be given and supervision activities to be conducted relating to
these buildings will be included in a regulation which will be enacted by the Turkish Atomic
Institution.

In the preamble, it has been stated that, as nuclear plants require different security measures
from other power plants, their location licence, construction licence and operation licence
will be regulated by the Turkish Atomic Institution.
Natural gas storage and limitation on number of licences
(a) Natural gas storage
Natural Gas Market Code numbered 4646 and dated May 2, 2001 already contains
a provision contemplating the storage of natural gas. In specific terms, entities
seeking to obtain an import licence are required to guarantee that they possess storage
facilities to store natural gas in the proportion that EMRA prescribes. The Amending
Code stipulates that storage facilities shall be underground. Additionally, when the
Amending Code enters into force, EMRA will have the authority to set the storage
obligations for natural gas importers, provided that it does not exceed 20% of the gas
that they import in a given year. It also articulates that procedure and provisions as to
storage obligations will be established by EMRA.
The rationale of the amendment is to ensure security of supply in the natural gas sector
by increasing natural gas storage on Turkish soil, to be able to utilise it to cover daily
natural gas consumption in case the supply of natural gas is interrupted.
(b) Number of distribution licences
The Amending Code provides that EMRA may, by taking into consideration the
development stage, number of consumers, consumption capacities and similar factors,
expand and re-designate distribution companies’ distribution zones without issuing any
tenders, provided that a distribution zone may not exceed the frontiers of its relevant
province. When a distribution company operating within a province which is not
included in its distribution zone, does not have an expansion demand of its distribution
zone to that province, and if EMRA finds it appropriate, a tender may be conducted
for a distribution licence in relation to that area. If multiple companies request the
expansion of their distribution zones for the same province, EMRA will give priority
to the company which has more consumers in its entire distribution zone. EMRA
may divide a province into multiple distribution zones by taking population into
consideration. Natural gas distribution companies are authorised to operate within
distribution zones which are designated in their licences and required to operate in all
improved lands of the provinces which are included in their distribution zones.
It needs to be underlined that the provision setting forth that natural gas distribution
companies may possess distribution licences only in two provinces, and that EMRA
may increase this number, has remained intact. However, the preamble states that this
amendment stands for the abolition of the limitation on the number of licences that a
natural gas distribution company may possess. In that regard, there is a big question
mark as to how a distribution company may operate in a province which is not included
in its distribution zone, whilst the Natural Gas Market Code states that distribution
companies are authorised to operate within distribution zones which are designated
in their licences. It appears that this amendment may give rise to possible disputes
between EMRA and energy distribution companies.
Usage of local products
The Amending Code envisages that the Ministry of Energy and Natural Resources
(“Ministry”) will enact a regulation regarding the requirements to be sought by entities
using renewable energy source sites which are to be designated as per Article 4 of the Code

Concerning Usage of Renewables for Energy Generation numbered 5346 and dated May 5,
2005 (“Connection opinion to be granted by Turkish Electricity Transmission Corporation,
running of contests, allocation of the renewable energy source sites, guarantees to be sought,
registration of guarantees as income when the obligations are not fulfilled, generation
in Turkey and/or requirement of usage of local products and other matters concerning
implication”). Furthermore, the equipment to be used in the renewable energy source sites
will thereafter require use of local products, as per the regulation to be enacted by the
Ministry.
Zoning plans not to hinder operation and effectiveness of renewable energy plants
The Amending Code prohibits the issuance of zoning plans which may have a detrimental
effect over the use and effectiveness of renewable energy source sites, regardless of whether
they are located on state or Treasury property or on an individual’s property, which are to
be designated under Article 4 of the Code Concerning Usage of Renewables for Energy
Generation numbered 5346 and dated May 10, 2005. Furthermore, if an individual’s
property has been designated as a renewable energy source site, that property may be
expropriated as per the urgent expropriation procedure (a simplified and fast expropriation
process), as set forth under Article 27 of the Expropriation Code, numbered 2942.
New deadline for submission of required permits for nuclear power plants
The Amending Code has introduced a new deadline for the submission of certain documents,
which were otherwise required to be submitted at the pre-licence stage. According to
the relevant Article of the Amending Code, building certificates and permits, approvals,
licence certificates and like documents which are required to be obtained with respect to the
construction, under relevant legislation, and documents indicating that the usage right has
been obtained, are to be submitted to EMRA after a generation licence has been granted,
within the time to be prescribed by EMRA. If the licence-holder fails to submit those
documents within the prescribed time, its generation licence will be terminated unless this
failure is caused by force majeure or valid reasons not caused by the licence-holder.
Share transfer restrictions as to the unlicensed generation sector
Before this Amending Code, the amending regulation published in the Official
Gazette (29662) on March 23, 2016 had already imposed share transfer restrictions over the
unlicensed generation sector. Now, with this Amending Code, these restrictions will also be
incorporated into Electricity Market Code numbered 6446. With respect to the unlicensed
solar and wind power plants based on renewables with a maximum installed capacity of 1
MW, no share transfers are allowed, subject to the exceptions prescribed by EMRA in the
regulation, from the application date until the provisional acceptance for the entire power
plant has been made. If an entity makes a share transfer against the principle set forth in
the said provision, that entity’s invitation letter will be terminated, meaning that the project
would no longer be allowed to proceed.
New procedure for privatisation
The Amending Code envisages a different procedure for the privatisation of assets of the
Electricity Generation Corporation, or assets of its affiliates, or shares of those affiliates,
in relation to power plants based on renewables or on natural resources. When a request is
made for privatisation of these, as per Article 18 of Electricity Market Law (as amended),
valuation will not be conducted over the assets which are to be privatised. Furthermore,
the privatisations are to be made as per negotiation procedure, and thus no tender will be
conducted with regard thereto.

The preamble does not offer any substantial explanation as to why valuation and tender
procedures, which are the ordinary methods for privatisation, are discarded from the
process for privatising such public assets. Therefore, their implications will be observed
when privatisations under this provision commence.
Temporary immunity from environmental legislation
The Provisional Article 8, added to Electricity Market Code by the Amending Code,
stipulates that the Electricity Generation Corporation or its affiliates, subsidiaries,
businesses, business units and public generation corporations, which are to be incorporated
as per the Code numbered 4046 (Privatisation Code), and generation plants possessed by
these public generation facilities, the ones among the aforesaid which have been privatised
before entry into force of this Article, and which are to be privatised after its entry into
force, will be granted time until December 31, 2019 for making investments to comply with
environmental legislation and to obtain required permits as per environmental legislation.
Until December 31, 2019, the aforesaid entities’ or businesses’ generation operations cannot
be halted and nor can they be fined an administrative fee. The Provisional Article 8 further
contemplates that the Energy and Natural Resources Ministry will issue a regulation with
respect to procedure, and provisions as to investments to be made for compliance with
environmental legislation and for obtaining the required permits under that legislation.
The Preamble states that the fact that Provisional Article 8 of Energy Market Code has
been invalidated by the Supreme Court, with its decision numbered E 2013/65 K 2014/93,
dated May 22, 2014 and which was published as R.G. 24.06.2015-29396, has created
a legal gap which is detrimental for privatisations. Therefore, it is understood that the
draftsman’s intention is to cover that legal gap. However, this matter requires further
attention.
The Supreme Court contended, in the said decision, that the Provisional Article 8 creates
a period within which it becomes impossible for the Government to control generation
activities with respect to environmental compliance. The right to live in a healthy
environment is not a right which can be waived for such a long time, due to the fact that
it creates unnecessary bureaucracy and hinders generation operations. In this regard, it
needs to be underlined that the new Provisional Article 8 is nearly identical, except the
new Article does not allow the Council of Ministers to extend the said period with one
which the Supreme Court has annulled by the aforementioned decision. Considering the
justification that the Supreme Court put forward when it annulled the previous Provisional
Article 8, there is a high probability that the new Provisional Article 8 may also be annulled.
Usage of methane gas to be drained from coal mines
With Article 25 of the Amending Code amending Article 8 of the Turkish Petrol Code
numbered 6491, coal mine owners may be granted a licence allowing them to use methane
gas which they drain from their mines. However, to be granted this licence, the amount of
methane gas contained in a given coal mine shall be five cubic metres per ton. Therefore
methane gas is to be supplied to the energy market as “natural gas”, which will increase
the productivity of coal mines.
Regulation on Unlicensed Electricity Generation in the Electricity Market
The Regulation on Unlicensed Electricity Generation in the Electricity Market was
amended by the enactment of the Amendments to the Regulation on Unlicensed Electricity
Generation in the Electricity Market as published in the Official Gazette (29662) on March
23, 2016. Major changes brought by that amendment can be summarised as follows:

Distance to grid: The Amending Regulation introduced limitations on the distance to the grid
to which generation plants can be connected. For generation plants with installed power of
up to 0.499 MW, the air distance between the plant and the grid cannot be greater than 5 km,
and the distance to the grid on which the design of the generation plant is based cannot be
greater than 6 km. For generation plants with installed power of between 0.5 or 1 MW, those
limits are 10 km and 12 km respectively.
Capacity limitations for wind and solar energy: The amending regulation provides that –
except for rooftop applications – a maximum of 1 MW capacity within a transformer station
can be allocated to an applicant (real person or legal entity), including any legal entity owned
(even partially) or controlled by an applicant, regardless of the number of consumption
facilities for which such applications are made.
The applicants’ declarations are assumed to be correct during the evaluation stage. However,
if a declaration is proven to be incorrect, incomplete or misleading, the connection agreement
with the related entity or individual will be terminated. The amending regulation introduces
an exception regarding cooperative entities that make applications for capacities between 1
to 5 MW under certain conditions, provided that the installed capacity of each generation
plant cannot exceed 1 MW.
Further, with the recent amendments, the installed capacity of a generation plant cannot
be more than 30 times the contracted consumption capacity of the consumption facility
associated with the generation plant, as per the Regulation on Unlicensed Electricity
Generation in the Electricity Market.
Report on wind power: Following a technical assessment, the Renewable Energy Head
Office (“YEGM”) publishes the technical assessment reports of successful applications on its
website. Applications that relate to wind power are now required to apply to the Scientific and
Technological Research Council of Turkey (“TÜBİTAK”) for technical interaction permission.
A certificate indicating that this application has been made on time must be submitted to the
YEGM within 30 days of the publication date of a successful application. If the documents
are not submitted to the YEGM within the prescribed time period, it will notify the relevant
system operator that the application has not been made and the system operator will refuse
the application. If an application is made on time, the YEGM will notify the relevant system
operator accordingly. Pending finalisation, the applied capacity will be reserved.
Priority of applications: The amending regulation provides that unlicensed generation
applications made for sites for which licence or pre-licence applications are also made, will
be rejected. Pre-licence applications made for wind and solar energy-sourced facilities will
be evaluated as per the applicable legislation, and concluded if the technical assessment
report is positive. If the YEGM concludes that a licence application and an unlicensed
generation application are detrimental to each other, the unlicensed generation application
– other than one granted with an invitation letter – will be rejected. If an applicant for
unlicensed generation has an invitation letter and the licence or pre-licence application
cannot be revised, the licence and pre-licence applications will be rejected. The same rule
also applies to licence and pre-licence applications concerning other energy resources;
however, if an unlicensed generation applicant becomes entitled to an invitation letter and a
licence or a pre-licence application is made for the same site on the same day, the application
for unlicensed generation will be rejected.
Merger, demerger and share transfer restrictions: An entity that owns an unlicensed
electricity generation plant may merge with entities that are wholly owned by such an
entity, on condition that the wholly owned entities merge into the entity which owns the

generation plant. An entity owning an unlicensed electricity generation plant may also
merge into entities that are wholly owned by it, to the extent that the wholly owned entity
owns an unlicensed electricity generation plant. In any event, the merger may take place
only after provisional acceptance has been made. The system operator must be notified
one month before the merger transaction. The merger transaction and other transactions
required by the applicable legislation should be conducted simultaneously.
If the entity owning an unlicensed generation plant is to be demerged, this transaction may
be carried out only if provisional acceptance for all of the entity’s unlicensed generation
plants has been made, and to the extent that the entity fully owns the shares of the new
corporation which will emerge from the demerger.
Share transfers are prohibited for companies that have applied for unlicensed wind or solar
energy generation, until the provisional acceptance for such generation plants has been
granted. Following provisional acceptance, the relevant system operator must be notified
one month before the share transfer transaction. In case of a share transfer in breach of this
restriction, an invitation letter to the connection agreement will be terminated.
The Electricity Market Law
Article 4 of the Electricity Market Law numbered 6446, which entered into force on March
30, 2013, provides the following incentives aimed at creating the required electricity supply
capacity in the short term, for electricity generation companies that began operation on or
before January 31, 2015:
• a 50% discount on transmission system use prices for five years from the date of the
commissioning of generation facilities; and
• an exemption from charges for work carried out during the investment period of
electricity generating facilities, and an exemption from stamp duty for papers executed
in that context.
In line with the main aim of this incentive and Turkey’s general energy strategy, this deadline
was first extended to December 31, 2020, and subsequently extended to December 31, 2025
with the decision of the Council of Ministers numbered 2017/10451 and dated June 5, 2017.
The State Aid for Investments Decision numbered 12/3305
As per the Council of Minister’s Decision Regarding State Aid for Investments numbered
12/3305, Turkey is divided into six regions to optimise the incentives and supporting
instruments to be provided to investors in accordance with the regional potential and scale
of the local economy. The incentives provided under the scheme include:
• a value-added tax exemption;
• customs duty;
• an exemption tax reduction;
• social security premium support (employer’s share);
• income tax withholding support;
• social security premium support (employee’s share);
• interest support; and
• land allocation.
The Decision states that the abovementioned incentives are to be applicable to investments in
accordance with the cities, sectors and conditions of the incentives which are set forth under
Annex 2A and 2B of the Decision. The Decision, published by the Council of Ministers

in the Official Gazette on November 19, 2015, extends the scope of the abovementioned
regional incentive scheme and includes “investments for the production of turbines and
generators to be used in renewable energy generation, and investments for the production
of wings to be used in wind energy generation” in its scope. As per the latent Decision, the
said investments will be deemed privileged investment areas and will be supported by the
incentive instruments applicable in region five, unless the investment is made in region six.
Regulation on Documentation and Support of Renewable Energy Resources
Under the Regulation on Documentation and Support of Renewable Energy Resources
(“YEKDEM Regulation”), an incentive mechanism (“Renewable Energy Support
Mechanism” or “YEKDEM”) is set out for electricity generation licence-holders generating
electricity using renewable energy resources, and the real persons and legal entities
which generate electricity using renewable energy resources without generation licences
(“Beneficiaries”). The Beneficiaries, who do not hold an electricity generation licence, can
benefit from this incentive mechanism through the authorised distribution companies within
their region. The Renewable Energy Support Mechanism provides the Beneficiaries a
guarantee to purchase the electricity generated by them. The Beneficiaries can benefit from
the feed-in tariffs designated under the tables attached to the YEKDEM Regulation for 10
years, and the applicable feed-in tariffs’ calculation is subject to the formula set forth in the
YEKDEM Regulation. On April 29, 2016, a regulation amending the YEKDEM Regulation
was published and some significant amendments made to the YEKDEM Regulation. As per
the amending regulation, the YEKDEM Regulation enables the sale of electricity through
bilateral energy sales agreements with consumers at mutually agreed prices. This new
amendment aims: (i) to compensate or redistribute the burden of imbalances caused by
renewable energy facilities; and (ii) to encourage the owners of renewable energy facilities
to sell their generated energy to the market at higher prices. Upon the expiration of the
10-year period, no further FIT will apply and the owners of the Unlicensed Facilities are
supposed to operate within the market at market prices.
It is also important to mention that, while the number of Beneficiaries to YEKDEM was
234 companies in 2015 with a total of 5,423.63 MW installed capacity, this number has
increased drastically to 556 companies with a total 15,082.72 MW installed capacity in
2016, as mentioned in EMRA’s Energy Market Progress Report of 2016.
Regulation on Renewable Resources Regions
The Ministry of Energy and Natural Resources of the Republic of Turkey published the
YEKA Regulation in the Official Gazette dated October 9, 2016. It is set forth under the
regulation that the establishment of the renewable energy source regions can be developed
in two different ways: the General Directorate of Renewable Energy can develop the
regions by their own works and procedures; or regions can be developed by private sector
firms after being permitted to do so at the end of the competition process conducted by the
Ministry. The competition is for electricity generation in developed regions, which is also
be determined by the Ministry. Briefly, after determination of the regions, the Ministry will
prepare Conditions of Contract and applicants shall submit their proposals according to
such Conditions for the full capacity of the determined region.
The private sector firms’ involvement into the process of development of the regions would
expedite the commissioning of the electricity generation plants and their connection to
the electricity distribution systems.
The competition process for the first YEKA project that involves 1,000 MW wind power
electricity generation ended on August 3, 2017. The competition was for five city regions:

Kayseri and Niğde; Sivas; Edirne, Kırklareli and Tekirdağ, Ankara, Çankırı and Kırıkkale;
and Bilecik, Kütahya and Eskişehir. A consortium consisting of Siemens, Türkerler and
Kalyon won the competition with an offer of 4.48 US$/KWh. It is contemplated for the
project that the factory for the manufacture of the wind turbines shall be constructed by the
Consortium in Turkey within 21 months, and upon the commissioning of the turbines the
Consortium will have the right to sell the electricity to the distribution network, supported
by a purchase guarantee for 15 years. The awarding Consortium is also supposed to
obtain a 30-year licence for the project.
Turkey is planning to develop other YEKAs in the area of renewable energy sources in
the coming years, in parallel with the the Energy Ministry’s 2015–2019 Strategic Plan, to
increase domestic production, to create employment opportunities for Turkish citizens,
and to improve research and development activity.

It is the common view of the business environment that Turkey’s role as a crucial
strategic energy actor in the region has not sustained much negative impact from the
July 15 failed coup attempt. Turkey and Europe had aimed to minimise dependency on
Russian supplies by diversifying gas sources through the TANAP Project (a part of the
Southern Gas Corridor), which is expected to become operational by 2018. On the other
hand, resetting the tense relations between Turkey and Russia would have an effect on
the vitality of this plan. As a consequence of rebuilding relations between Turkey and
Russia, the Turkish Minister of Energy and National Resources, Berat Albayrak, and
the Russian Minister of Energy, Alexander Novak, signed a Bilateral Treaty (“Bilateral
Treaty”) for the Turkish Stream Pipeline Project (“Turkish Stream”) on October 10, 2016.
The resumed Turkish Stream Pipeline Project is expected to revitalise and re-establish
Russia and Turkey’s strong ties, and Turkish Stream will enable Russia to bring its gas
to Europe through a different route, which would probably not be a desired consequence
for Europe. Turkish Stream will directly connect the large gas reserves in Russia to the
Turkish gas transportation network, to provide reliable energy supplies for Turkey and
south-eastern Europe.
As detailed under the Bilateral Treaty, the offshore pipeline will consist of two parallel
pipelines running through the Black Sea. The pipelines will enter the water near Anapa,
on the Russian coast, and arrive ashore on the Turkish coast some 100 km west of Istanbul,
near the village of Kiyikoy, Kırklareli. The planned construction process for the project
is over two years and the transfer capacity of the pipelines is 31.5 billion cubic metres per
year. Additionally, an annual capacity of 31.5 billion cubic metres means that Turkish
Stream will further help Turkey to boost its geostrategic importance. As a bridge between
East and West, Turkey is increasingly becoming a key regional energy hub for the region
and will become a key supply link for south-eastern Europe through Turkish Stream.
Another advantage of Turkish Stream for the Turkish economy and the Turkish energy
sector is the planned pipeline’s capability of storage of the gas. The importance of the
ability to store natural gas in Turkey via the project’s pipelines will make Turkey’s position
stronger, not only for gas trade businesses, but also politically. Turkish Stream would
strengthen Turkey’s position associated with the gas trade negotiations with other countries.
Another major event that could have a material impact on the Turkish energy market
is the effect of lifting the embargoes on Iran. As a newly opened energy market, Iran
attracts attention from Turkish, European, Chinese and US-based corporations.

Iran, having the world’s second-largest natural gas reserve and world’s fourth-largest oil
reserve, had faced a substantial decrease in its oil supply due to the embargoes. Lifting of
the embargoes over such a big energy market will have inevitable consequences, not only
over the Turkish energy market but also over international energy strategies and energy
trade. Iran is also considering becoming a party to the International Energy Charter Treaty,
which would be a very important step for liberalisation of Iran’s energy market and its
integration with the global markets, if achieved.
Despite the supply excess in the global markets, it is expected that Iran will increase
its exports and raw oil production activities, and therefore will need to make or attract
substantial investments in expansion or rehabilitation of refineries, both in terms of the
modernisation of facilities and technology transfer. Europe-, US- and China-based
technology providers have already taken their positions for those opportunities. On the
other hand, players in Turkey’s energy market may also have a crucial role due to their
contracting capabilities, development activities and their familiarity with the Iranian
cultural and business environment.
While Iran is a fossil-fuel-rich country, it also supports renewables and aims to substitute a
certain part of its fossil fuel power plants with renewable energy facilities, as the country has
an estimated potential capacity of 10 GW in solar and 30 GW in wind power. Along with
its simplified licensing procedures and attractive incentive scheme, this goal is considered
doable.
The installed capacity in Iran is approximately 75 GW, and its target is 100 GW capacity
within the next 20 years, with more than 800 projects planned. This means a wealth of
opportunities for investors, contractors and equipment & technology suppliers. Turkish
and Iranian companies, together with US- and Europe-based players, may cooperate,
particularly on downstream oil and gas operations as well as renewable investments in this
lucrative market.

Omer Kesikli
Tel: +90 216 348 2924 / Email: omer@omerkesikli.av.tr
Omer Kesikli is the founding partner of Kesikli Law Firm. His practice
is largely devoted to Energy, EPC and Infrastructure Projects, Corporate,
Construction, Competition and Intellectual Property matters at the Firm.
Before the inception of the Firm, he worked for reputable energy and
contracting companies as their legal advisor and in-house legal counsel.
His past experience as the legal advisor of both investor and contractor
companies, coupled with his legal educational background, enable him to
deeply understand his clients’ concerns and to advise them on the effective
allocation of the relevant risks of their businesses. Throughout his professional
career, Mr. Kesikli has advised a number of local and foreign corporations
and handled a broad range of corporate, commercial and regulatory matters,
internationally and locally, regarding various aspects of Turkish law. He
speaks Turkish and English.
Education:
Galatasaray University Faculty of Law, Juris Doctorate (J.D.) – thesis phase.
Istanbul Bilgi University, Master of Business Law, Istanbul (LL.M.).
Samford University, Cumberland School of Law, Birmingham, Alabama,
Master of Comparative Law (M.C.L.) Program.
Marmara University, Faculty of Law, Bachelor of Law, Istanbul (LL.B.).
Kesikli Law Firm

Bağdat Caddesi, 149/5 Kadıköy, Selamiçeşme 34724 İstanbul, Turkey
Tel: +90 216 348 29 24 / Fax: +90 216 337 74 90 / URL: www.kesikli.com

Ukraine
Dmytro Fedoruk, Zoryana Sozanska-Matviychuk & Yulia Brusko
Redcliffe Partners
Overview of the current energy mix and place in the market of different energy sources
In terms of electricity generation, Ukraine currently has a varied generation mix. Nuclear
energy remains the main source of electricity in Ukraine and accounts for 57.94% of all
electricity produced, as of May 2017. Coal, oil, fuel oil and gas together constitute 32.74%;
hydroelectric power stations – 7.2%; renewables – 1.25%; and 0.87% – block stations.
Coal
During the last seven months, the volume of coal production was 6.9% less than during the
same period in 2016. In particular, the production of steam coal was reduced by 3.6% and
coking coal by 18.5%.
Oil and gas
The volume of oil with gas liquids production was reduced by 3.1% during the period from
January until July 2017. This production index includes reduction of production by 5.1% by
the companies of the National Joint Stock Company “Naftogaz of Ukraine” (“Naftogaz”).
The volume of gas production increased by 7.3% relative to the same period in 2016,
including expansion of production by 2.3% by the companies of the Naftogaz group.
Renewables
According to the Ukrainian Association of Renewable Energy, the percentage of electricity
generated from renewable energy sources in 2016 remained low and was about 1.25%. In
particular, wind power stations constituted 48% of this volume; solar power station – 31%;
small hydroelectric power stations – 12%; and the remaining 9% came from other sources.
This is a very low indicator compared to most EU countries.
Nevertheless, 79 new renewable energy sources were built in Ukraine within the last six
months, including 67 new solar power stations. Experts at IB Centre (ibcentre.org) expect
that by the end of 2017, the percentage of electricity generated from renewable energy
sources will increase to 4.3%.
Nuclear energy
Nuclear energy is a critical and strategic source of electricity in Ukraine. Currently, it
accounts for approximately 50% of overall electricity produced in the country. There are
four active nuclear power stations in Ukraine with 15 power blocks.
Changes in the energy situation in the last 12 months

Based on the fact that the Ukrainian Government does not control certain parts of the Donetsk
and Luhansk regions, Ukraine faces the risks of loss of its transit status and of loss of a part

Redcliffe Partners Ukraine
of the energy system, but has an opportunity to reduce dependence on Russian oil and gas.
Blockade of coal supplied from occupied Donbas
Based on the current situation in the East of Ukraine, there are discussions concerning blocking
the purchase of anthracite coal produced in Donbas. Main coal resources (approximately
92.4%), including anthracite, are produced in Donbas. At the same time, Ukrainian industry
is heavily dependent on anthracite coal. This is because half of the power plants in Ukraine
use anthracite coal (as opposed to gas coal). These two types are not interchangeable, and a
change of energy source will require repurposing of the existing facilities.
In this regard, Ukraine has extended temporary emergency measures in the energy sector
caused by a lack of anthracite coal. These measures include, by way of example, the
following:
• restrictions on energy prices;
• establishment of specific conditions of energy sale and purchase for market participants;
• establishment of mandatory requirements of energy production, supply or sale and
purchase for market participants; and
• establishment of special electricity export and import conditions.
As an alternative, anthracite could be imported, particularly from the Republic of South
Africa, Australia, the U.S. and Vietnam. As of mid-2017, it was reported that anthracite had
been successfully supplied from the Republic of South Africa and the U.S.
Reduction in the supply of Russian gas
Ukrainian authorities claim that Ukraine has decreased the level of gas import from Russia.
As per information from Naftogaz, Ukraine imports gas from, in particular, Slovak Republic,
Hungary and Poland.
Energy strategy of Ukraine until 2035
In August 2017, the Cabinet of Ministers of Ukraine adopted a new Energy Strategy of Ukraine
for the period until 2035. The new energy strategy is a programme that defines a whole range of
large-scale reforms in the energy sector and sets goals to be achieved by 2035. It also includes
high-level steps necessary, in the Government’s view, to achieve those goals. According
to that programme, the target structure of electric power production in 2035 is as follows:
nuclear power – 50% of the country’s electricity; renewable sources – 25%; hydropower –
13%; with the rest to be covered by thermal power plants. An essential component of that
energy strategy is the reduction of energy consumption in Ukraine’s economy by half by
2030, boosting the Ukrainian production of both traditional and alternative energy sources.
Potential cooperation with other countries
In September 2017, Ihor Nasalyk, the Minister for Energy and Coal Industry of Ukraine, met
with the Minister for Energy of the Republic of Kazakhstan. During that meeting, the parties
agreed to draft and sign an Agreement for cooperation in the following areas:
• the supply of enriched uranium product for Ukrainian nuclear power stations;
• the production of uranium in Ukraine;
• joint production of nuclear fuel; and
• the involvement of specialists from Kazakhstan in geological exploration of wells.
Also, Ukraine and Australia have signed an agreement on cooperation in the use of nuclear
energy, which came into force in June 2017. Based on this agreement, the two countries
contemplate cooperation with regards to:

• the development of nuclear fuel cycle components;

• a gradual increase of uranium exploration; and
• a decrease of dependence on imports of nuclear fuels to Ukrainian nuclear plants.

Electricity market
Integration with the EU energy system
Ukraine has a long history of cooperation with the EU in the energy sector. In 2005 Ukraine
and the EU, together with the European Atomic Energy Community (EURATOM), signed
the Memorandum of Understanding on a Strategic Energy Partnership. In late 2016, the
Memorandum was renewed by the parties. Although the Memorandum itself is declarative
and does not impose obligations, it frames the basic directions of cooperation, such as
energy safety, gas and oil transit, integration of energy markets, and development of a low-
carbon policy. In 2011 Ukraine joined the European Energy Community, which imposed
certain obligations on the country in the energy sector.
In 2014 Ukraine entered into the Association Agreement with the EU, taking on additional
obligations in the energy sector. The obligations include, among others, the following:
• to encourage energy efficiency and energy safety;
• to develop and support renewable energy;
• to create a favourable investment climate;
• to modernise and improve its energy infrastructure;
• to develop a competitive and non-discriminatory energy market; and
• to decrease emissions of carbons through energy efficiency and renewable energy
projects.
These obligations came into force in November 2014, and Ukraine has been gradually
implementing changes in its legislation in this regard. Partially the obligations come down
to implementing provisions of the existing EU Directives and Regulations into Ukrainian
law. For instance, the following EU Directives are to be implemented in Ukraine:
• Directive 2006/32/EC on energy end-use efficiency and energy services;
• Directive 2010/31/EC on energy performance of buildings; and
• Directive 2010/30/EC (Energy Labelling Directive).
In connection with the signing of the Association Agreement, Ukraine has adopted numerous
strategic documents and plans outlining further steps, both organisational and technical, in
the energy sector. In 2015 Ukraine adopted a Sustainable Development Strategy of Ukraine
– 2020, setting the following main goals of the state policy for the energy sector:
• to decrease the GDP energy intensity through shifting to energy-efficient technologies
and equipment, and use of alternative energy resources;
• to diversify sources of supply of initial energy resources, and to increase exploration of
energy resources from deposits located in Ukraine;
• to establish competitive markets of electrical and thermal energy;
• to synchronise the Integrated Power System of Ukraine (the “IPS”) with the European
energy system ENTSO-E; and
• to implement basic provisions of Directives and Regulations of the EU Second and

Third Energy Packages. The latter is aimed at increasing competition in the market,
allowing new participants to come to the market and reducing energy prices.
Integration with ENTSO-E
In June 2017, the Ukrainian state-owned operator of the Ukrainian power grid, “Ukrenergo”,
signed the Agreement on the terms of Ukraine’s accession to the European Network of
Transmission System Operators (“ENTSO-E”) (Connection Agreement). Integration with
ENTSO-E was also one of the obligations of Ukraine under the Association Agreement.
As of now, only a small part of the Ukrainian IPS operates synchronously with ENTSO-Е.
It is represented by the Burshtynska CHP (Combined Heat and Power) station. Integration
with ENTSO-E would allow Ukraine to synchronise its energy system with that of
continental Europe. It is expected that such integration will be achieved by 2025, and that
will increase the independence of the Ukrainian energy sector, attract new foreign investors
and suppliers to the Ukrainian market, and result in a decrease in electricity prices. In
order to benefit from the agreement and from the eventual synchronisation with ENTSO-E,
Ukraine will bring its energy system in line with EU standards.
The Ukrainian Government has recently approved an Action Plan with regard to
implementing the Ukraine-EU Energy Bridge, which would allow Ukraine to export
electric energy from the Khmelnytska CHP station to Poland, Hungary and other EU states.
It has been reported that European companies, such as Westinghouse Electric Sweden AB,
Polenergia International S.àr.l. and EDF Trading Limited, may be willing to participate in
this project.
Electricity market reform
The electricity market in Ukraine is currently very bureaucratic, which is unattractive for
investors. However, recently a new market concept has been adopted by the Ukrainian
Parliament through passing the Law of Ukraine, “On Electricity Market”. Ukraine is
expected to completely shift to the new operating rules from 1 July 2019.
The new electricity market model provides a multi-subject diversified market which
includes both a contractual form of electricity purchase, and day-ahead, intraday and
balancing markets.
Also, the new law provides that entities involved in, e.g., transmission of energy, cannot be
affiliated with entities involved in other activities in this market. This measure is aimed at
enhancing competition in the energy market.
The law also extends the number of participants in the electricity market, which will include
the following:
• manufacturers;
• suppliers;
• the transmission system operator (i.e., a legal entity responsible for managing the
energy transfer system, and for interstate powerlines, currently – the State Enterprise
“Ukrenergo”);
• the energy distribution system operator (i.e., a legal entity responsible for maintenance
and technical service of the energy distribution system, currently – the oblenergos);
• traders (new participants who will be reselling energy, thus increasing competition);
• guaranteed buyers (i.e., those obliged to purchase green energy from wind and solar
stations, in the current version of the law –the State Enterprise “Ukrenergo”); and
• consumers (i.e., end users).

Moreover, the law establishes liability for participants in the energy market for imbalance
of the system (i.e., absence of balance between production and consumption of energy in
real-time mode).
Nevertheless, the new law is a framework act with many declarative provisions. In order
to make the new electricity market work, the regulatory authorities are required to adopt a
large number of secondary legislative acts. The implementation of the law can also prove
difficult for a number of other reasons. For instance, Ukrainian authorities and courts would
have to consider the law enforcement practice of the Energy Community and the EU. This
encompasses numerous documents in a foreign language which the Ukrainian authorities
would have to check in their day-to-day work.
It is expected that as a result of the energy reform, the following improvements will take
place:
• it will become possible to abandon the Rotterdam+ methodology (i.e., the methodology
that is currently used to calculate wholesale and retail energy prices), given that prices
for electricity will depend solely on consumer demand; thus, there will be a shift to the
market model of electricity pricing;
• the market will become attractive for investors and participants;
• the artificial monopoly of manufacturers and suppliers will cease to exist;
• a new market of supplementary services (e.g., maintenance of electricity quality and
regulation of its periodicity) will emerge;
• energy supply terms will become more flexible (in particular, the market participants
will between themselves define production and consumption schedules);
• the electricity deficit risk will be mitigated; and
• up to 90% of energy will be supplied under direct contracts between manufacturers and
suppliers/consumers.
A few preparatory steps will be required before the new electricity market concept can
be implemented; this includes the settlement of the existing debts for electricity supply,
abandonment of cross-subsidies for population and dotation certificates, and unbundling of
the major state-run energy companies.
Privatisation of oblenergos
In July 2017 the State Property Fund announced privatisation of eight state-owned
oblenergos which are currently responsible for energy distribution and are monopolists in
this area in Ukraine. As of September 2017, two oblenergos have been purchased by one of
the existing energy companies of the Ukrainian businessman Rinat Akhmetov.
This is one of the steps aimed at increasing competition in the future electricity market,
which is set to come to exist in 2019.
Introduction of RAB tariffs
As far back as 2016, the Government announced its plans on shifting to the RAB (Regulatory
Asset Base) tariffs. The recent draft presented by the National Regulatory Commission for
Energy and Utilities was not supported by the Government.
RAB tariffs are expected to attract potential investors, increase energy efficiency, quality
of services provided and decrease tariffs in the future. Implementation of RAB tariffs is
envisaged by the Association Agreement in part of the implementation of provisions of
Directive 2009/72/EC, as well as by the 2035 Energy Strategy.

Oil and gas

Taxation
In 2017, tax rates for rent payments for oil exploration were reduced. Thus, extraction
of oil from deposits over 5,000 m is now taxed at a rate of 29% (previously, 45%), and
extraction of oil from deposits below 5,000 m is now taxed at a rate of 14% (previously,
21%).
Moreover, a portion of the rent payments (namely 5%) for extraction of oil, natural gas
and gas condensate will be allocated to the local budgets of respective municipalities
where mineral deposits are located. This is expected to have two main positive outcomes:
• increase the income to local budgets; and
• stimulate local authorities to issue special permits for subsoil use in order to receive
additional rent payments.
Another liberalisation step made by the Parliament was amending the Tax Code of
Ukraine regarding rent payment rates for parties to production-sharing agreements (each,
a “PSA”). Earlier parties to a PSA could set the rate in the PSA but such rate could not be
lower than the rate established by law. As of today, parties are entitled to envisage a rent
payment rate at any level, including lower than that provided by the Tax Code of Ukraine.
Establishment of a gas hub in Ukraine
Recently eight companies have signed agreements with PJSC “Ukrtransgaz” regarding
gas storage in a customs warehouse regime. This will allow gas traders to store natural gas
in Ukrainian warehouses for up to three years without paying custom duties. This became
possible due to lack of natural gas in Ukrainian gas storage facilities. The mentioned
agreements can be the basis for Ukraine to become one of the largest European gas hubs.
Such approach would also benefit traders themselves, as it will allow the stored gas to be
used in winter when its price typically increases.
Plans for creating a gas hub in Ukraine were also jointly announced by the Ukrainian and
Polish governments in June 2017 in order to increase the energy independence of both
states from Russia. The planned hub may be established on the Ukrainian-Polish border,
and it is stated that both parties have sufficient infrastructure for this purpose.
Unbundling of Naftogaz
The EU Commission requires Ukraine to unbundle Naftogaz. The proposed unbundling
would include separation of functions of Naftogaz in the area of extraction and
transportation of energy sources, and in the area of provision of access to gas pipelines
and other infrastructure to third parties.
As part of the unbundling, Naftogaz will transfer a part of its assets to a newly established
PJSC “Mahistralni Gazoprovody Ukrainy”, which would be responsible for transporting
gas through main gas pipelines, and gas storage. Some steps towards the unbundling
have been made but this process is largely yet to be completed.
Alternative energy
There are a number of laws that govern the use of alternative energy in Ukraine, including:
• the Law of Ukraine “On Alternative Energy Sources”;
• the Law of Ukraine “On Alternative Fuels” (which governs production and use of
alternative fuels and is aimed at increasing the share of alternative fuels to 20% of
the total amount of fuels consumed in Ukraine by 2020);

• the Law of Ukraine “On Combined Production of Heat and Electric Energy
(Cogeneration) and Utilization of Waste Power Potential”; and
• the 2020 National Action Plan on Renewable Energy (wind, solar and hydro energy
have been identified as priority areas).
In May 2016, Ukraine applied to the International Renewable Energy Agency (IRENA).
As of today, it has the status of the state in the process of becoming a member of IRENA.
Joining IRENA would benefit Ukraine through:
• cooperation with developed countries on renewable energy;
• use of foreign countries’ experience and progressive mechanisms for project
financing; and
• the option to apply to the Abu-Dhabi Fund for Development (ADFD) for loans for
implementation of “green” projects.
Implementation of EU Directives
Ukraine is required to implement the following EU Directives regarding alternative
energy:
• EU Directive 2003/30/EC on the promotion of the use of biofuels or other renewable
fuels for transport;
• EU Directive 2001/77/EC on electricity production from renewable energy sources;
and
• EU Directive 2009/28/EC on the promotion of the use of energy from renewable
sources.
‘Warm loans’ for the private sector for using energy efficiently and for using alternative
energy
The Government has established a programme of so-called ‘warm loans’ for individuals
and households. Under this programme, state-owned banks subsidise private sector
consumers by covering:
• 20% of monies borrowed for the acquisition of gas-free/non-electric boilers for
individual houses (up to UAH 12,000);
• 35% of monies borrowed for the acquisition of energy-efficient equipment/materials
for individual houses (up to UAH 14,000); and
• 40% of monies borrowed for communal energy measures for multi-apartment houses
(up to UAH 14,000 per apartment).
Carbon emissions
Ukraine ratified the Paris Climate Agreement in 2016. Based on this, in December 2016
the Government adopted the Concept of implementation of state policy regarding climate
change for the period up to 2030.
Additionally, Ukraine is obliged to implement provisions of EU Directives 2010/75/EU
and 2001/80/EU on emissions. Ukraine has made a commitment under the Association
Agreement to implement provisions of the Directive 2003/87/EC establishing a scheme
for greenhouse gas emission allowance trading into its national legislation by the end of
2016. However, as of now, the legislation on carbon emissions trading has not yet been
developed.
Along with that, Ukraine uses administrative measures for decreasing the level of carbon
emissions, which include the environmental tax.

In 2018, the National plan for reducing emissions from large burning stations is planned
to be implemented.

Recent strategic regulatory changes
The Ukrainian Parliament, Government and sectoral authorities have recently adopted a
number of strategic documents, including:
• the Energy Strategy till 2035, adopted by the Government in August 2017;
• the Concept for the development of gas producing industry, adopted in December 2016;
it contemplates the implementation of measures for increasing energy independence
from gas imports;
• the Plan for the development of the power distribution network for 2016–2025,
adopted by the Ministry of Energy and Coal Industry in September 2016; and
• the Programme for the development of major and interstate electrical networks of the
IPS of Ukraine for the period until 2023, approved in mid-2016.
Mining
In 2017 the Ministry for Environment and Natural Resources of Ukraine adopted the Rules
for the extraction of oil and gas deposits, which came into force on 30 June 2017. The
Rules are focused on extraction of deposits of unconventional hydrocarbon systems. The
newly adopted Rules replace the rules adopted in the 80s.
Electricity market
In addition to the new Law of Ukraine “On Electricity Market”, the new licensing rules for
electricity distribution were adopted in July 2017.
Environmental impact assessment
Earlier this year the Parliament adopted the Law of Ukraine “On Environment Impact
Assessment”. The newly adopted Law requires mandatory assessment of impact (both
direct and indirect) on the environment of certain industrial objects and activities, such as,
among others:
• oil and gas processing plants;
• CHP stations;
• facilities for the production and enrichment of nuclear fuel;
• the extraction of oil and natural gas from the continental shelf;
• pipelines for transporting oil and gas with a diameter of over 800 mm and having a
length of over 40 km;
• facilities for oil and petrochemicals storage;
• the construction of overhead transmission lines with a voltage of over 220 kV having
a length of over 15 km;
• the extraction of mineral resources;
• the storage and processing of hydrocarbon crude;
• hydro-power plants; and
• wind-power plants with two or more turbines with the height of over 50 m.
The operation of the above objects, and conduct of the above activities, may not be

commenced until their impact on the environment has been assessed in accordance with the
Law and until a positive decision is received from the relevant authorities. As part of the
assessment process, the environmental authorities need to be provided with an assessment
of the environmental impact, and such report becomes subject to public discussion. Based
on this, environmental authorities provide their opinion on the assessment. A report on
the environmental impact assessment, a report for public discussion and an opinion of
environmental authorities forms the basis for local authorities to issue a relevant permit.
The Law also provides for the establishment of a single register on the environmental
impact assessment. The Law is expected to start being implemented from December 2017.
Alternative energy
Recent developments and amendments in the alternative energy sector include the
following:
• amendments to the Law of Ukraine “On Alternative Fuels” regarding the
implementation of regulation of alternative fuels production;
• amendments to the taxation laws allowing enterprises producing electric energy by
a specialised cogeneration plant and/or from renewable energy sources, to opt for a
so-called simplified taxation system (which generally offers beneficial tax treatment
compared to the general tax treatment);
• the 2017 Law of Ukraine “On Electricity Market” (which provides for a preferential
regulatory regime for the renewable energy industry until 2030);
• the Law of Ukraine “On Energy Efficiency of Buildings”, adopted in line with the
obligations of Ukraine related to cooperation with the Energy Community. The draft
law was assessed by the Secretariat of the Energy Community and was recognised
as conforming with the provisions of Directive 2010/31/EC. The newly adopted law
introduces certification of buildings’ energy efficiency and is aimed at decreasing
energy consumption in buildings;
• the 2017 amendments to the Law of Ukraine “On Heat Energy”, which simplified
tariff-setting for producers of alternative heat; and
• the 2016 amendments to the Law of Ukraine “On Alternative Energy”, cancelling
state registration of producers of alternative fuels, with a view to simplifying and
encouraging the use of alternative energy.
Also, earlier this year the Law of Ukraine “On Energy Efficiency Fund” was adopted. Once
established, the Energy Efficiency Fund will perform the following functions, in particular:
• partial reimbursement of costs of energy efficiency measures;
• providing grants to legal entities and individuals;
• providing financial estimates of energy efficiency projects;
• implementation of energy efficiency practices; and
• technical evaluation of energy efficiency projects.

National court proceedings
Gazprom vs. Antimonopoly Committee of Ukraine
The Supreme Court of Ukraine rejected a motion by Russia’s Gazprom to reverse a ruling
of the Higher Commercial Court of Ukraine of May 2017, which upheld rulings of lower

courts regarding a fine of UAH 172 billion (or approximately US$ 6.6 billion) imposed
against Gazprom.
In January 2016, the Anti-monopoly Committee of Ukraine (the “AMCU”) imposed a fine
on Gazprom in the amount of UAH 85 billion for abuse of its monopoly status in the
Ukrainian gas transit market. This decision was upheld on several occasions by Ukrainian
courts. In its latest ruling, the Higher Commercial Court of Ukraine upheld the ruling of the
appellate court confirming obligation of Gazprom to pay the fine, which had already grown
to UAH 172 billion (or approximately US$ 6.6 billion), with the inclusion of penalties for
non-payment.
The panel of judges regarded reasoning of the court of the first instance as being consistent
with the legislation and factual circumstances of the case. It was held that Gazprom’s
application to the Supreme Court of Ukraine was groundless.
Enforcement proceedings against Gazprom for the collection of this fine and the seizure of
its property in Ukraine have been commenced.
Naftogaz vs. the Cabinet of Ministers of Ukraine (“CMU”)
In July 2017 the Kyiv District Administrative Court ruled in favour of Naftogaz and obliged
the Government to develop a reimbursement procedure aimed at providing compensation
of expenses sustained by Naftogaz with regard to sales of natural gas at a fixed price.
However, this ruling does not require the CMU to pay any compensation for losses already
incurred by Naftogaz.
According to the Law of Ukraine “On Natural Gas Market”, the CMU had to establish a
mechanism to compensate the difference between the purchase and the selling prices of
natural gas. Yet the CMU not only did not provide funds for such compensation, but also
failed to implement a reimbursement procedure. Naftogaz asked the court to recognise the
inactivity of the Government as illegal and to oblige the latter to determine the sources and
mechanism for such compensation arrangement. The Kyiv District Administrative Court
ruled that by imposing additional obligations on Naftogaz, the CMU had to put in place a
compensation arrangement for Naftogaz.
This matter also came to the attention of the Secretariat of the Energy Community.
Subsequently proceedings have been initiated as, in the opinion of the Secretariat of the
Energy Community, the CMU’s resolution imposition of additional obligations for market
participants contradicts the respective EU Directives.
Foreign court proceedings
Naftogaz vs. Merchant International Company Ltd.
The dispute between Naftogaz and the U.S. company Merchant International Company
Ltd. (“Merchant”) started in 2006, when Ukrainian courts ruled that Naftogaz had to pay
Merchant around US$ 25 million. In this regard Merchant received a default judgement
from an English court for the amount of money lent to Naftogaz.
However, in 2011 Ukrainian courts revoked previous judgments and rejected Merchant’s
appeal. Naftogaz later attempted to set aside the default judgement of the English court, but
was not successful. Moreover, the English court refused to recognise the recent judgements
of the Ukrainian courts. Naftogaz followed with a complaint against the UK to the European
Court of Human Rights (the “ECHR”) seeking cancellation of the default judgement on the
grounds that it infringed Naftogaz’s property rights.
In June 2017, the ECHR handed down a judgment in favour of the UK, rejecting Naftogaz’s
claims.

Commercial arbitration
Naftogaz vs. Gazprom
On 31 May 2017 the Arbitration Institute of the Stockholm Chamber of Commerce (the
“SCC”) delivered one of its first rulings in the dispute between Naftogaz and Gazprom
relating to Naftogaz’s purchases of gas from Gazprom.
The SCC has not only abolished the “take or pay” principle in its entirety, but has also lifted
the ban on re-export of gas purchased from Russia and allowed the gas price to be adjusted
for Ukraine. The SCC held that the “take or pay” principle was not market-oriented. The
price of gas for Ukraine is to be adjusted as from 2014. The arbitration award itself does
not contain a formula to calculate the daily gas price in the adjustment period, and no
calculation has yet been prepared.
At the same time, the SCC has rejected a key financial claim of Naftogaz, namely, that
the excess amounts paid by Ukraine for Russian gas during the period from May 2011 to
October 2014, be returned.
Investment arbitration
JKX Oil & Gas vs. Ukraine
In February 2017, a long-running dispute between the UK-based energy company, JKX
Oil & Gas, and its Dutch and Ukrainian subsidiaries, Poltava Gas B.V. and JV Poltava
Petroleum Company respectively, was finally resolved by the SCC.
In its arbitration award, which was based on the 1993 UK-Ukraine BIT and the UNCITRAL
Arbitration Rules, the SCC rejected most of the investor’s claims and awarded US$ 11.8
million only as compensation payable to the investor by Ukraine (out of US$ 168 million
sought by the investor in its statement of claims). As per the investor’s public statement on
this matter, the arbitrators did not find Ukraine liable for alleged excessive levying of taxes
and satisfied only its subsidiary claims.
An earlier emergency arbitration award in favour of the investor in related proceedings
could not be enforced in Ukraine. The Kyiv Appellate Court held that the emergency award
would violate the public order of Ukraine, given the fact that its enforcement would reduce
the royalty rate for the claimant to 28%, whilst any reduction in tax rates may only be
implemented by law and specifically, as prescribed by the Tax Code of Ukraine.

In March 2017 there was a major mining accident, as a result of which eight coalminers
died at a coal mine in the Lviv region. Mining accidents are not uncommon in Ukraine due
to outdated equipment used at the mines and underfunding, which commonly leads to low
health and safety standards.
See ‘Changes in the energy situation in the last 12 months’ regarding the shortage of
anthracite coal and its impact on the Ukrainian energy sector.

There are several draft laws being discussed that are relevant to the energy sector, including
the following:
• Draft law No. 2529а “On Amending Certain Legislative Acts Regarding Simplifying
the Procedure for Land Allocation for Construction of Objects for Manufacturing Heat
and/or Electrical Energy Using Renewable Sources of Energy and/or Biological Fuels”,

which would permit construction of energy-producing facilities using renewable energy

sources and/or biological fuels on lands regardless of their designated use;
• Draft law No. 6229 “On Ensuring Transparency in Mining Sectors”, aimed at
implementing international standards of information disclosure in the mining sector, in
particular, as regards information regarding taxes, duties and other payments;
• Draft law No. 7059 “On Energy Ombudsman”, which will create the office of the
Energy Ombudsman, in charge of protecting and representing the interests of the
consumers in their relations with state energy authorities;
• Draft law No. 3096 “On Amending Certain Legislative Acts for Simplifying Certain
Aspects of Oil and Gas Industry”, which proposes to abolish mining allotments for
exploration of oil and gas, and also to cancel the requirement to register oil and gas
production facilities as urban objects; and
• Draft law No. 7062 “On Amending the Budget Code of Ukraine Regarding
Implementation of Payment for Using Oil and Gas Subsoil Areas”, which would
introduce payments for the use of oil and gas subsoil areas in order to encourage holders
of special permits for subsoil use to efficiently explore their respective subsoil areas.
It has also been proposed that Ukraine’s 1994 Subsoil Code be replaced with a more
contemporary law. As of today, no such draft law is at a stage of being actively considered.

Dmytro Fedoruk
Tel: +38 044 390 2246 / Email: dmytro.fedoruk@redcliffe-partners.com
Dmytro is a partner and the Head of the M&A and Energy practices.
Dmytro has strong industry expertise in energy. He is frequently called upon
to advise and represent multinational corporations, oil and mining companies,
on transactional and regulatory issues across a broad spectrum of the energy
industry, including the natural gas, oil pipeline and electric power industries.
He is a member of the Steering Committee for Ukraine with the Association
of International Petroleum Negotiators (AIPN).
Dmytro is recommended for Energy and Natural Resources in Ukraine by
Chambers Europe 2017. He is listed among the leading lawyers for Energy
and Infrastructure and Oil & Gas by IFLR 1000 2017. He is also featured
in Energy & Natural Resources by Ukrainian Law Firms 2017, a Ukrainian
legal directory.
Zoryana Sozanska-Matviychuk
Tel: +38 044 390 2232 / Email: zoryana.sozanska@redcliffe-partners.com
Zoryana is a counsel of the Corporate and M&A practices.
Zoryana has extensive experience in M&A and private equity, gained in
Ukraine and abroad, particularly in Australia. Her experience includes
advising clients on acquisitions and disposals of upstream oil and gas assets,
joint ventures and other strategic arrangements.
Zoryana is recommended for Corporate and M&A work in Ukraine by
Chambers Global 2017 and Chambers Europe 2017.
Yulia Brusko
Tel: +38 044 390 2282 / Email: yulia.brusko@redcliffe-partners.com
Yulia Brusko is a junior associate in the Compliance practice of Redcliffe
Partners, and is one of the members of the Energy practice.
Yulia focuses on compliance, corporate, commercial and tax law matters,
particularly those related to the energy, infrastructure, and natural resource
projects. Her experience includes conducting due diligence and research on
compliance programmes and policies, development of compliance standards,
and the preparation of memoranda covering commercial and tax law issues.
Redcliffe Partners
75 Zhylyanska Street, Kyiv, 01032, Ukraine
Tel: +38 044 390 5885 / Fax: +38 044 390 5886 / URL: www.redcliffe-partners.com

United Kingdom
Julia Derrick & Justyna Bremen
Ashurst LLP
energy sources
Fossil fuels, in the form of natural gas, oil and coal, are still the dominant source of
energy in the UK, although the UK’s reliance on fossil fuels has been slowly but steadily
decreasing. In 2016, fossil fuels accounted for 81.5% of supply, which, as in the previous
year, was the lowest figure on record (down from 82% in 2015 and 84.5% in 2014). The
balance of energy supply comes from low-carbon sources, including nuclear energy and
renewables such as wind, solar, hydro and biofuels. If analysed by fuel type, then based
on 2016 figures, petroleum products, such as petrol, top the list at 47.5% of all fuel used
by final consumers, followed by natural gas at 29.4%, and electricity at 17.5%.1 These
figures remain, to a large extent, unchanged from 2015.
In terms of electricity generation, the UK currently has a varied generation mix. As
discussed in more detail below, one of the most notable developments in 2016 in the context
of electricity generation was the significant shift from coal generation to gas generation:
generation from coal fell from 22% in 2015 to 9% in 2016 (note that as recently as 2013
it was 36.4%). Coal’s share was taken by gas, which rose from 29% of generation in
2015 to 42% in 2016. There has been less movement in renewables generation: in 2015,
a record 24.6% of electricity was generated from renewables (up from 19.2% in 2014) but
this figure has remained stable, at 24.5% in 2016. Similarly, the share of generation from
nuclear remained at 21% in 2016. See Figure 1. As discussed in more detail below, the
current Government’s energy policy continues to favour investment in new power plants
that are a mix of gas, nuclear and renewables, although there is an even greater focus on
controlling the cost of support mechanisms for new-build power projects.
Figure 1: Shares of electricity generation in 2015 and 20162

Ashurst LLP United Kingdom
The UK continues to produce substantial volumes of oil and gas from its petroleum
resources in the North Sea, and in 2015 it was the 21st largest producer in the world for
both oil and gas, accounting for 1.1% of global production.3
The decline in coal generation
As mentioned above, there has been a significant reduction in the use of coal as a fuel:
only 9% of electricity was generated from coal in 2016, and overall, coal accounted for
only 6% of primary energy consumption. In fact, 21 April 2017 was the first continuous
24-hour period, since the industrial revolution, during which the UK’s electricity needs
were met without any reliance on coal. While the most recent reduction in the use of
coal as a fuel has been the most dramatic, there has been a steady decline in its use in
recent years, as a direct result of government policies aimed at eradicating the use of coal
without carbon abatement technologies.
As discussed in earlier editions of this chapter, in 2012, coal generation reached a peak
not seen since 1996, while gas generation decreased significantly. The increase in coal
generation was attributed to cheaper coal, more expensive gas and plummeting carbon
prices. However, this position has changed over a relatively short period of time, with a
large number of coal-fired plant closing or converting to biomass.
The first wave of closures came as a result of the EU’s Large Combustion Plant Directive,
which entered into force in November 2001, and was introduced to limit the emission
of pollutants other than carbon dioxide: in particular, Nitrogen Oxides, Sulphur Dioxide
and particulate matter. The Directive meant that large coal-fired and oil-fired generation
plants had to close by 1 January 2008 if they could not comply with the standards set
by the Directive, or, if they opted out of the Directive, they could continue to operate
until the end of 2015 or until they used up their allowance of 20,000 hours of operation.
The Industrial Emissions Directive, which came into force in 2011 and has superseded
the Large Combustion Plant Directive, imposes even stricter pollution standards on
large coal-fired plant, subject to some limited exceptions and transitional arrangements,
resulting in a second wave of closures. However, in addition to implementing these
Directives, the UK Government has also independently taken direct action to phase out
coal-fired generation.
A new Emissions Performance Standard, introduced in 2014 as part of the Government’s
Electricity Market Reform (EMR) package of policies, means that no new unabated
coal-fired power stations are permitted to be built in the UK, although the Emissions
Performance Standard has been set at a level which will allow unabated gas-fired power
stations to operate until the end of 2044. The UK’s Carbon Price Floor (discussed in
more detail below) has also played a role in reducing the level of coal-fired generation,
by increasing the cost of emitting carbon.
Most significantly, in November 2015 the Government announced that all coal-fired
power stations would be closed by 2025, thereby confirming that unabated coal-fired
power will no longer be part of the UK’s energy mix post 2025. This announcement was
followed, 12 months later, with the publication in November 2016 of a consultation4 on
the transition away from unabated coal-fired generation. The consultation proposes two
possible options for dealing with existing coal-fired plant:
• Option 1 would involve applying the existing regime for new coal-fired plant to
existing plant from 2025. This would require existing stations to do three things:
• demonstrate carbon capture and storage (CCS) technology;

• undertake any necessary modification or action to ensure that the remainder of

the plant could be retrofitted with CCS in the future; and
• comply with the existing Emissions Performance Standard.
• Option 2 would involve modifying the existing Emissions Performance Standard to
apply a concentration-based limit on emissions per unit of generated electricity at any
point in time, rather than setting an annual limit on emissions, taking effect from 2025.
The consultation notes that this would prevent coal-generating units from operating
without investment to reduce carbon emissions, but would not specifically mandate
CCS technology to be retro-fitted if generating units were able to find other ways to
reduce their carbon intensity.
As at August 2017, the Government has not announced which option it would be pursuing to
phase out coal generation by 2025, but either way the clock is ticking for the UK’s remaining
coal-fired power stations.
Oil and gas: a mixed picture
In the past, the large majority of the UK’s energy needs were met by its own oil and gas
resources in the North Sea. However, after four decades of production, oil and gas reserves
in the UK Continental Shelf are declining. Following years as a net exporter of crude oil
and natural gas, the UK became a net importer of both fuels in 2004 and 2005, respectively.5
Nonetheless, the current outlook for the United Kingdom Continental Shelf (UKCS)
industry is relatively optimistic. In particular, the trend towards declining production figures
has been reversed in recent years. In 2016, production of crude oil and natural gas liquids
increased by 4.8%, and natural gas production was up 2.4%.
However, in line with global trends, the lower oil price has had a negative impact on the
UKCS industry, despite the industry making great gains in increasing efficiency. According
to industry body, Oil and Gas UK, exploration activity has declined by one third in the three
years from 2013 to 2016. Investment is also down: in 2016, £8.3 billion was invested in the
UKCS, down from £11.6 billion in 2015, and less than £7 billion of capital expenditure is
expected in 2017.6
While the UKCS continues to play an important role in contributing to the UK’s economy
and its energy needs, the UK is increasingly reliant on oil and gas imports. In particular,
the UK imports natural gas by pipeline from Norway, Belgium and the Netherlands, and
Liquefied Natural Gas (LNG) by ship. In 2016 there was a considerable reduction in LNG
imports, down a fifth compared to 2015. The reason for this was that higher demand in Japan
and elsewhere in the world increased prices and affected volumes supplied into Europe and
the UK. In the UK, the shortfall was made up by an increase in pipeline imports.7
Renewable energy: also a mixed picture
In 2016, 8.9% of total energy consumption came from renewable sources; up from 8.2% in
2015.8 Moreover, as mentioned above, in 2016, renewables’ share of electricity generation
was 24.5%. In terms of total renewables capacity in 2016, solar PV had the highest share
of capacity (33.3%), followed by onshore wind (30.6%), thermal renewables (bioenergy,
such as plant biomass and landfill gas) (16.1%), offshore wind (14.8%), and hydro (5.1%).
The renewables industry celebrated a milestone when, on 7 June 2017, power from wind,
solar, hydro and biomass supplied over 50% of the UK’s electricity. However, the UK
renewable energy industry is currently facing some uncertainty, resulting in a reduction in
the amount of new capacity being installed. In 2016, 3,289 MW of new renewable energy
capacity was installed, compared to 5,765 MW in 2015. There are a number of factors that

have contributed to this reduction in new capacity: the prospect of changes flowing from
the implementation of Brexit (the term Brexit refers to the UK exiting the EU, following
the referendum of 23 June 2016 on whether the UK should remain in or leave the European
Union, in which the UK public voted in favour of the UK leaving the EU); changes to the
financial incentives available; and a reduction in the levels of financial incentives for new
capacity.
It is unclear at this stage what impact the UK’s withdrawal from the EU will have on the
renewables industry, but there has been some speculation that the Government may scrap
the targets currently imposed on the UK under the 2009 Renewable Energy Directive.
Currently the Directive sets a target for the UK to achieve 15% of its energy consumption
from renewable sources by 2020. The UK does have some domestic targets – in particular,
the Climate Change Act 2008 commits the Government to meeting a legally binding target
to cut greenhouse gas emissions by 2050 by at least 80%, compared with 1990 levels. The
Government has said that it remains fully committed to the Climate Change Act 2008 and
the targets under it.9 The Committee on Climate Change (a statutory body established under
the Climate Change Act 2008) has said that to meet future carbon budgets set under the Act
and the 80% target for 2050, the UK will need to reduce emissions by at least 3% a year,
from now on, and that this will require the Government to apply more challenging measures.
To fulfil its obligations under the Climate Change Act 2008, the Government is obliged to
publish an Emissions Reduction Plan, setting out how the Government intends to meet the
fifth carbon budget, which seeks to limit the UK’s annual emissions to 57% below 1990
levels by the year 2032. The publication of the plan was originally scheduled for late 2016,
but was postponed as a result of the EU referendum. It has now been further postponed as
a result of the 2017 general election. Concern has been voiced that further delays in the
publication of the plan will deter potential investors in low-carbon technologies in the UK.
Nuclear energy
As mentioned in previous editions of this chapter, all but one of Britain’s existing nuclear
energy stations are scheduled to close by 2023 if their lifetimes are not extended. The last
new nuclear plant was completed in 1995. After a hiatus of over two decades, the Labour
Government published its nuclear white paper in 2008,10 setting out a policy that new
nuclear power stations should have a role to play in the UK’s energy mix. While this policy
has continued to be supported by subsequent governments, no new nuclear power stations
have yet been constructed, although there are a few at different stages of development. The
most advanced of those is the Hinkley Point C power station.
The Hinkley Point C project, being developed by NNB Generation Company (HPC)
Limited (NNBG) (owned 66.5% by EDF and 33.5% by China General Nuclear Power
Group) reached a significant milestone in September 2016, when the Government signed
the Contract for Difference (CfD) in relation to the project. The CfD was granted under
the new CfD regime, discussed in more detail below, which provides financial support for
low-carbon generation projects. Under the CfD, NNBG will receive £92.50 (in 2012 prices)
for each megawatt hour of electricity that it sells into the market for 35 years. The £92.50
amount is referred to as the strike price, and the way the CfD works is that if the market price
is lower than the strike price, NNBG will receive top-up payments up to the strike price from
the CfD counterparty, and conversely, if the market price is higher, then NNBG will pay the
difference between the market price and the strike price back to the CfD counterparty. It is
intended that other new nuclear power projects will also be supported by CfDs, although the
Hinkley Point C CfD is the only nuclear power CfD signed to date.

A June 2017 report prepared by the National Audit Office in relation to the project notes
that significant reductions in fossil fuel prices since the key commercial terms for the
CfD were agreed between the Government and EDF mean that the present value of the
expected cost of top-up payments under the CfD increased from £6 billion to £30 billion.
Given that under the CfD regime the costs of the financial support given under CfDs are
passed down to electricity consumers, it may be that the Government will consider different
terms, including options such as sharing in the construction risk (as referred to in the report
mentioned above), to try to lower the strike price, when the time comes to negotiate the
support to be given to other new-build nuclear projects.
In addition to Hinkley Point C, there are currently five other nuclear projects in development,
as follows:
• Sizewell C: EDF Energy’s second UK EPR project (3.2 GW) in Suffolk.
• Moorside: being developed by NuGen, near Sellafield, for up to 3.6 GW of capacity
using Westinghouse’s AP 1000 technology. NuGen is owned by Toshiba.
• Bradwell B: being developed by China General Nuclear Power Group and EDF Energy
(2.4 GW).
• Wylfa Newydd: being developed by Horizon Nuclear Power (a wholly owned
subsidiary of Hitachi Ltd), using Hitachi’s advanced boiling water reactor (ABWR)
technology (2.7 GW).
• Oldbury: also being developed by Horizon Nuclear Power (2.7 GW).
All the projects are at sites adjacent to existing reactors.
Gas-fired generation
In the short to medium-term, gas is expected to play a significant role in the UK’s energy
mix. Gas is being seen as an even more important ingredient in the UK’s energy mix since
the UK Government announced that all unabated coal-fired generation must cease by 2025.
The new Capacity Market, implemented in 2014 as part of the EMR initiative, is seen as
being key to attracting investment in new-build, gas-fired plant. However, to date, very few
new-build Combined Cycle Gas Turbine (CCGT) projects have been successful in winning
capacity agreements. One key reason identified by the industry for this is the fact that the
design of the regime means that so far, the clearing price in the main auctions held has been
too low for most new-build CCGT projects.
The 884 MW Carrington CCGT power plant, officially opened in March 2017, is the first
new large-scale gas plant to be commissioned since 2013. However, the plant did not
secure a capacity agreement in the first T-4 (i.e. four years ahead of delivery) auction despite
already being under construction. Since then, Carrington has gained one-year capacity
agreements in subsequent auctions.
The proposed 1.9 GW Trafford Power CCGT plant was awarded a capacity agreement in
the first T-4 auction but in December 2016 it was confirmed that its capacity agreement had
been terminated because it had failed to satisfy its “Financial Commitment Milestone”.
In the most recent T-4 auction, 15-year capacity agreements were awarded to Centrica’s
King’s Lynn CCGT project (370 MW) and InterGen’s Spalding Open Cycle Gas Turbine
project (299 MW). It is expected that regulatory interventions, such as regulator Ofgem’s
decision to withdraw certain so-called “embedded benefits” from distributed generation
(discussed in more detail below), will create more favourable conditions for large-scale
new-build CCGT in future auctions.

The Conservative Party’s 2017 election manifesto
In 2017, one of the most significant events that is shaping the UK’s energy policy was the
calling of a “snap” general election, which took place on 8 June 2017. The Prime Minister,
Theresa May, called the election three years ahead of schedule. The Prime Minister called
the election in the hope that it would result in giving her Conservative party an even greater
majority in Parliament, thereby making it easier for the Government to implement a “hard”
Brexit. The Conservatives’ election manifesto pledged the following approach to energy
policy:
• an express acknowledgment of the importance of the UKCS oil and gas industry, and
a promise to support the upstream industry, including the development of a “world-
leading” decommissioning industry;
• a continued commitment to getting a shale gas industry off the ground in the UK, with
a number of significant initiatives announced in their manifesto: further reforms to the
planning regime; changes to the Government’s proposed shale wealth fund so that more
money is paid to local communities, including individuals; and the creation of a new
shale gas environmental regulator;
• an energy “tariff safeguard cap” for consumers, flowing from the continued concern
about rising energy prices in the retail energy market; and
• an independent review into the “cost of energy”, which would be asked to make
recommendations as to how the UK can make energy costs as low as possible, while
ensuring a reliable supply and meeting the UK’s 2050 carbon reduction objective. It
is to be noted that in pledging the review, the Conservative Party reserved its position
on the future role of specific technologies – notably, the manifesto included no specific
reference to expensive technologies such as nuclear and tidal lagoon, although there
was an express commitment to offshore wind, and confirmation that no support will be
given to onshore wind in England.
Since the election, the Government appears to have put on hold its proposals for an energy
tariff cap, and instead, in June 2017 the Secretary of State for Business, Energy and Industrial
Strategy wrote an official letter to Ofgem (the gas and electricity markets regulator) calling
on Ofgem to advise him on how Ofgem intends to safeguard customers “on the poorest
value tariffs”.
The Conservative Party manifesto also included plans for controls on foreign investment
into the UK. No details of these plans have yet been published, but the limited statements
in the manifesto broadly confirm intentions which had already been signalled in September
2016 by the Department for Business, Energy and Industrial Strategy (BEIS) relating to
new government controls focused on inward investment in critical UK infrastructure. Civil
nuclear energy generation had already been identified by BEIS as a key area of focus, to
which the manifesto expressly adds telecoms, defence and energy more generally.
The “cost of energy” review was officially launched on 6 August 2017, with the intention
that the recommendations flowing from the review would be published at the end of October
2017. The review will be headed by University of Oxford economist, Professor Dieter
Helm. The review terms of reference note that the aim of the review is to report and make
recommendations on how the objectives of achieving carbon targets, whilst concurrently
ensuring security of supply, can be met in the power sector at minimum cost. There is a

degree of déjà vu about the review, given that EMR, first tabled as a policy in 2010, was
intended to address the “energy trilemma”: reducing carbon emissions, while “keeping the
lights on” and keeping the costs down.
The Labour Party election manifesto: radical proposals
While the June 2017 general election resulted in the incumbent Prime Minister, Theresa May,
being able to form a Government with the support of Northern Ireland’s Democratic Unionist
Party, the fact that the Labour Party was very close behind the Conservative Party means
that it is pertinent to note the key energy policies outlined in the Labour Party manifesto.
Most notably, the Labour Party pledged that it would nationalise key utility infrastructure.
Specifically, the manifesto stated that in the longer-term, all electricity and gas distribution
and transmission infrastructure would be brought back into State ownership. In addition,
Labour said it wanted to create publicly-owned, “locally accountable” energy companies
and co-operatives, to compete with private energy companies. The rising cost of energy was
cited as a key reason for these radical proposals. As a short-term measure, Labour also said
it intended to introduce an emergency energy price cap for consumers.
Labour’s manifesto also contemplated a target of 60% of energy to come from renewable
or low-carbon energy sources by 2030, to be achieved through support for renewables (with
express reference to tidal lagoon projects), nuclear power and emerging technologies, such
as carbon capture and storage. The Labour Party also pledged to introduce a ban on shale
gas development.
Impact of Brexit
While the EU referendum has no immediate impact on the UK’s legal standing as a member
of the EU, the UK Government has commenced steps to implement the outcome of the
referendum. The withdrawal process was formally commenced on 29 March 2017, when the
UK Government served notice under Article 50 of the Treaty on European Union of the UK’s
intention to withdraw from the EU. This was followed by the publication of a White Paper
which set out proposals for a “Great Repeal Bill”: legislation which will have the effect of
removing the supremacy of EU law over UK domestic law following the UK’s withdrawal
from the EU. It is, nonetheless, intended that existing EU law will be removed but then
reimported as domestic UK law (subject to adaptations as required), to ensure that are no
immediate gaps in regulation.
Another important step took place in July 2017, with the publication of the “Great Repeal
Bill”, (formally titled the European Union (Withdrawal) Bill) and associated legislation.
As outlined in the fifth edition of this chapter, it is, to a large extent, still unclear what impact
Brexit will have on the energy sector in the UK. The position has not been greatly clarified
over the last 12 months, although the Government has addressed a handful of issues. In
particular, the Government has confirmed that the UK will be withdrawing from the European
Atomic Energy Community (EURATOM). Instead, the Government intends to enact new
legislation, in the form of the Nuclear Safeguards Bill, to establish a UK nuclear safeguards
regime and ensure that the UK continues to meet its international obligations relating to
nuclear safeguards. However, commentators, including the UK Nuclear Industry Association,
have expressed concerns about the implications of the UK leaving EURATOM, including
the fact that as part of EURATOM the UK has access to a number of Nuclear Co-operation
Agreements (NCAs) agreed on behalf of member states, which has helped facilitate trade
between the UK and a number of nuclear markets outside the EU.11 Once the UK leaves the
EURATOM, it will have to negotiate its own NCAs with those countries.

In May 2017, the House of Commons Business, Energy and Industrial Strategy Committee
published a report on the implications of Brexit for energy and climate change policy. The
report made a number of recommendations, including that:
• the Government should seek continued access to the Internal Energy Market, with no
accompanying tariffs or barriers to trade. This should include continued participation in
the trading arrangements established by the European Network Codes to ensure the most
efficient operation of UK interconnectors;
• the Government should not seek to leave the EU Emissions Trading Scheme until it has
established clear and well-tested alternative approaches;
• the Government should seek to avoid disruption to the energy sector and the domestic
climate change agenda. Arrangements mirroring the status quo should be implemented
as far as possible. Furthermore, the Government should seek to provide clarity, stability
and foresight on domestic policy to support investment.
Gas storage
On 20 June 2017 Centrica, the operator of the Rough gas storage facility, announced its
intention to permanently close the facility. This is quite a significant development, because
compared to continental Europe, the UK has very low levels of gas storage capacity.
The Rough gas storage facility
The Rough gas storage facility is the largest gas storage facility in the UK, representing more
than 70% of the UK’s current gas storage capacity. It is used by capacity-holders to store gas
in the summer and deliver that gas to meet peak demand in the winter – the facility has the
capacity to meet approximately 10% of the UK’s peak day demand.
The facility itself is an offshore depleted gas field, which was converted into a gas storage
facility in 1985. The decision to permanently close the facility has been made on the basis
that the wells and facilities are at the end of their design life and can no longer be operated
safely. The costs of refurbishment or rebuilding the facility and replacing the wells would not
be economic.
Other gas storage in the UK
Compared to continental Europe, the UK has very low levels of gas storage capacity. There
are currently nine storage facilities (see Figure 2) serving the UK gas market, including Rough.
However, as noted above, Rough is by far the largest, having a capacity that is greater than
the other eight facilities combined. Rough’s other notable feature is the fact that it is the only
long-range storage (LRS) facility – all the other facilities are medium-range storage (MRS).
Figure 2: Gas storage facilities in the UK (Source: National Grid)
Owner Site Space Withdrawal Injection Number of Type and Status
(bcm) (mcm/day) (mcm/ days that start date
day) can be
delivered
from full
capacity
Centrica Rough 3.1 45 28 67 Depleted LRS
Storage field (1985)
SSE Hornsea 0.3 18 2 17 Salt cavern MRS
(1979)
EDF Holehouse 0.05 11 10.8 5 Salt cavern MRS
Farm (2004–2008)

Owner Site Space Withdrawal Injection Number of Type and Status

(bcm) (mcm/day) (mcm/ days that start date
day) can be
delivered
from full
capacity
E.ON Holford 0.2 22 22.1 9 Salt cavern MRS
(2011)
Scottish Hatfield 0.07 2 1.9 35 Depleted MRS
Power Moor field (2000)
SSE & Aldbrough 0.33 40 19.7 8 Salt cavern MRS
Statoil (2009)
Humbly Humbly 0.3 7 8.2 42 Depleted MRS
Grove Grove field (2005)
Energy
Storengy Stublach 0.2 15 29.7 13 Salt Cavern MRS
(ENGIE) (2013)
EDF Hill Top 0.02 2.1 5.5 10 Salt Cavern MRS
Farm (2011)
Lack of investment in new gas storage facilities

Historically, the limited need for gas storage capacity in the UK was driven by the UK having
its own sources of gas supply from the North Sea. However, as discussed above, as the levels
of production in the North Sea decline, the UK is increasingly reliant on gas imports.
It has been noted by various industry experts that, in the absence of a buffer in the form of
a sufficient amount of gas storage, the UK is vulnerable to high spikes in the price of gas at
times of high demand.
However, there has been very little investment in new gas storage facilities. One of the
challenges for investors in new UK gas storage projects has been an uncertainty surrounding
long-term stable revenues. The competitive and liberalised nature of the UK gas market is
such that potential customers of gas storage facilities will generally only enter into short-term
contracts for gas storage services, reflecting the short-term nature of their gas supply contracts
with gas supply customers. In addition, investment in new gas storage facilities is more
attractive when seasonal price spreads are wide, but the seasonal price spread (not just in the
UK but across Europe) has been narrow in recent years, further disincentivising investment.
The UK winter-summer price spread is currently around 5 pence per therm, down from 50
pence per therm 10 years ago.
The UK’s increasing dependence on gas imports led the Government to launch, in late 2011, a
review of the UK’s gas security of supply arrangements. The review, involving Ofgem (the gas
and electricity markets regulator) examined various potential regulatory interventions in the gas
market. One of the possible interventions considered was a gas storage obligation. However,
this was firmly rejected by the Government in September 2013, with an announcement that
the Government would not intervene to incentivise further gas storage, based on a cost-benefit
analysis study by independent consultants, which concluded that the costs of intervening
largely outweigh the possible costs of low storage levels in the event of a gas deficit.
Implications of the closure of Rough
Reduced gas storage capacity on the scale of the Rough facility poses a significant risk of
greater price spikes at times of peak demand for gas. The fact that such a large LRS facility

will no longer be available will clearly have an impact on the UK’s ability to soften the blow
of seasonal price variations (to the extent that spreads create a need for this).
However, the closure of Rough will also have an impact on shorter-term variations. As
noted by Timera Energy in its April 2016 report on the potential closure of Rough, while
Rough’s 70% gas storage capacity may be missed in the future, it is the absence of Rough’s
25% contribution to the UK’s daily gas storage deliverability that is more critical. The report
states that a 25% fall in deliverability reduces the ability of the UK market to respond to
short-term swings in the supply/demand balance (e.g. import infrastructure outages, cold
snaps) over a one-to-two week horizon.
Looking forward, one key question is whether investment in gas storage capacity is likely
to increase as a consequence of the closure of Rough. On the one hand, it would seem an
obvious response to invest in new gas storage to replace (at least part of) Rough, but the
increased flexibility of the UK’s gas supply that has developed over recent years does not
make this straightforward. So, for example, we may see returns on investment in UK LNG
receiving terminals improve, rather than the construction of new (or expansion of existing)
gas storage facilities.
Leaving price spikes aside, the question also arises whether the closure of Rough will
threaten the UK’s security of supply. In its October 2016 Winter Outlook Report, National
Grid “stress-tested” a scenario where the Rough facility may not be available, and concluded
that “although it is difficult to predict precisely how supply sources will respond, we believe
that Norway, LNG and IUK [Interconnector UK], in addition to our baseload supply from the
UKCS, are capable of making up any potential shortfall”.
The Oxford Institute for Energy Studies noted in a May 2017 report that, while Norway and
UKCS supplies might not be particularly flexible, those from Europe (which include access
to European storage capacity) and LNG are. However, the report also notes the inescapable
fact that LNG deliveries are influenced by global market dynamics and significant LNG
shipments may not coincide with periods of high demand.
If, against current expectations, a gas deficit does arise, there are regulatory mechanisms
in place to deal with this, at least on a short-term basis. Among these are recent changes
to so-called “cash-out” arrangements, which help National Grid (as System Operator) to
balance the gas system. Ofgem recently carried out a review of these arrangements, as
part of its “Significant Code Review” (Gas SCR), which was carried out in response to the
Government’s concerns about security of supply, mentioned above.
Cash-out charges are imbalance charges that gas shippers pay if they do not take the same
amount of gas off the system as they put in. Cash-out charges reflect the costs to the system
operator of balancing the system, and give gas shippers an incentive to match supply and
demand.
Before the review, cash-out prices were frozen during a gas deficit emergency – a period when
the supply of available gas is not sufficient to meet Great British demand. The outcomes of
the Gas SCR included unfreezing cash-out prices so that they can reflect market conditions
during an emergency, with no cap on prices. These changes to cash-out arrangements came
into effect on 1 October 2015.
As part of the Gas SCR, Ofgem also determined that the gas market would benefit from the
introduction of a new Demand Side Response (DSR) mechanism, whereby certain gas consumers
offer to enter an agreement to reduce their demand, during the build-up to a gas emergency, in
return for payment. While the gas DSR mechanism has now been fully implemented, during

winter 2016/17 the gas market did not meet the conditions required to issue a gas deficit warning,
and therefore the gas DSR service was not needed to stabilise the market.
It seems likely that the removal of the Rough gas storage facility’s capacity from the UK market
will have an impact, at least in terms of the UK’s exposure to price volatility. The potential
impact on security of supply is less clear, but it is one that may compel the Government
to reconsider the role of gas storage in the security of supply mix; National Grid may be
equipped to deal with short-term deficits, but a longer-term deficit is a different matter.
It is perhaps relevant in this context to contrast the Government’s approach to electricity
security of supply, and its recent introduction of the capacity market mechanism, which aims
to incentivise investment in new capacity, including battery storage. While an immediate
response is unlikely, gas market participants will be closely monitoring the regulatory
approach to gas storage in the UK in the medium to long term.
Embedded benefits review
A recent change of approach to so-called “embedded benefits” has significant implications for
many electricity generators connected to the distribution network.
On 29 July 2016 Ofgem published an open letter proposing changes to the charging
arrangements for “smaller” (i.e. those below 100 MW) embedded electricity generators.
Embedded generators (EG) are power stations that are directly connected to a distribution
network, as opposed to the transmission network. So-called “embedded benefits” come in
the form of both payments that smaller EG receive for helping suppliers to avoid transmission
charges, and also avoided transmission generation charges that these generators do not pay.
See Figure 3 for more detail of these charges. As discussed in Figure 3, because so-called Triad
periods (the three half-hours of highest demand on the GB electricity transmission system
between November and February each year) are used to calculate the level of Transmission
Network Use of System (TNUoS) demand charges, these charges are often referred to as
Triad charges, and the payments that EG receives in return for helping suppliers avoid them
are referred to as Triad payments.
Figure 3 – What are the embedded benefits?
Transmission network charges comprise TNUoS, which recover the cost of providing and maintaining
transmission network assets, and Balancing Services Use of System (BSUoS) charges, which recover
the cost of system operation. Both TNUoS and BSUoS are levied partly on generation and partly on
demand (i.e. suppliers).
TNUoS charges
TNUoS charges for both demand and generation consist of two elements:
• locational signal – this is a forward-looking locational signal that should broadly reflect the
costs and benefits of embedded generation and transmission-connected generation on the
transmission system in different locations; and
• residual – this element is used to recover the remaining costs of the transmission network, which are
largely fixed and sunk costs, as well as some additional costs such as network innovation funding.
Suppliers are charged demand TNUoS on the basis of their net demand, i.e. gross demand minus
the export from any connected embedded generation. Triads are used to determine the demand
TNUoS charges. The charges are based on how much electricity is being consumed by the suppliers’
customers during Triad periods, but based on net demand. Therefore, if suppliers are able to reduce
their transmission system demand using embedded generation during these peak periods, their
TNUoS charges will reduce. For this reason, embedded generation has a value to suppliers equal to
the saving they create in demand TNUoS charges. This value forms the first part of the embedded
benefit arising from TNUoS charges. Typically, under a power-purchase agreement, suppliers will pass
on a large proportion of this saving to the embedded generator. One part of these payments is related
to the TNUoS demand residual, which Ofgem refers to as “TNUoS demand residual (TDR) payments”.

In addition, with the exception of licensable generation with a capacity greater than 100 MW, embedded
generators do not pay generation TNUoS charges. The avoidance of this charge could result in a
competitive advantage for the embedded generator over a transmission-connected generator. This
forms the second part of the embedded benefit arising from TNUoS charges.
BSUoS charges
Finally, savings made by avoiding BSUoS charges constitute the third main form of embedded
benefits. Suppliers are charged BSUoS on a net basis, and therefore the output of EG is included in
the supplier volume as a negative demand, thus reducing the overall value of the demand, and the
amount of BSUoS charges for which the supplier is liable.
Transmission losses
An embedded benefit can also be realised in relation to transmission losses, resulting from the
netting-off of supplier’s demand due to the output from embedded generation, as only the net value
is used to calculate transmission losses. The transmission losses-related benefit was outside the
scope of Ofgem’s review, because it is being removed as a result of recommendations made by
the Competition and Markets Authority. A new, zonal pricing system for transmission losses is to be
implemented from 1 April 2018.
The recent rise in the number of EG, partly as a result of the capacity market (CM)
mechanism as well as other factors, has led to a new focus on these embedded benefits.
The TNUoS charges have a locational element, which varies according to the distribution
network area and a residual element, which is a fixed amount across the GB system. Ofgem
has been particularly concerned about the TNUoS demand residual (TDR) payments. As
mentioned above, Ofgem estimates the current value of TDR payments to be £47.30/kW.
Ofgem has said that with the increase in overall TNUoS charges and the rapid increase in the
volume of EG, the size of TDR payments has grown, as has the number of parties receiving
them. According to Ofgem, this creates a large benefit to connecting to the distribution
network rather than the transmission network. Ofgem is therefore concerned that the size
and increase of the TDR payments may now be distorting the market. Ofgem’s reasoning
is that the locational signal is cost-reflective, while the residual is not, because it relates to
fixed and sunk costs which do not vary with use.
The reduction in the TNUoS TDR payments is being implemented through modifications to
the Connection and Use of System Code.
Practical effect
The practical effect of the modifications will be that the level of TDR payments to smaller
EG will be reduced to the avoided grid supply point (GSP) costs. A GSP is a point at which
the transmission system is connected to a distribution system. It is recognised that EG can
offset the need for reinforcement at that GSP, and therefore Ofgem considers that avoided
GSP costs are a “true” embedded benefit that should continue to be recognised. However,
these GSP costs are quite low – National Grid has calculated the unit cost of the avoided
infrastructure reinforcement at the GSP as being £3 to £7/kW in 2017/18 prices.
The changes will be phased in over a period of three years, from 1 April 2018, with
the TNUoS TDR payments reducing by one-third a year. No grandfathering is being
implemented, so the changes will have an impact on both existing and future projects.
Review of other benefits
As part of its Targeted Charging Review, Ofgem is also considering the other benefits
received by smaller EG, alongside the wider question of how residual/cost recovery charges
should be levied, as well as other matters, such as the treatment of “behind-the-meter”
generation, which is not affected by current changes.


In this section we provide an update on some of the policies that have been implemented by
the Government in recent years.
Electricity Market Reform
The EMR reforms, implemented under the Energy Act 2013, comprise four elements:
• a carbon price floor;
• an emissions performance standard for fossil fuel generating plant;
• a capacity market; and
• contracts for difference (CfDs) for low-carbon generation.
Carbon price floor
The carbon price floor sets a minimum price for the right to pollute with carbon, on the
basis that a stable and sufficiently high carbon price is needed to encourage investment in
renewable energy. The Government’s view is that the carbon price set by the market under
the EU Emissions Trading Scheme (EU ETS) has not been stable, certain or high enough to
encourage sufficient investment in low-carbon electricity generation in the UK. The carbon
price floor is therefore designed to reinforce the underperforming EU ETS.
The carbon floor price consists of two components which are paid for by energy generators
in two different ways:
• The EU ETS allowance price: generators purchase the EU ETS allowances through
regular Government auctions or the carbon markets.
• The Carbon Support Price (CPS): this tops up EU ETS allowance prices, as projected
by the Government, to the carbon floor price target. It is charged through a component
of the Climate Change Levy, in £/kWh, and applied to fuels used for electricity
generation.
The carbon price floor has started at around £15.70 per tonne of CO2 and was originally
intended to increase in a straight line to £30 per tonne of CO2 in 2020, and to £70 per tonne
of CO2 in 2030. However, in its 2014 Budget, the Government announced a freeze on the
CPS rate, capping it at £18 from 2016–17 to 2019–20. In its 2016 Budget the Government
stated that the CPS cap would be maintained and then indexed to inflation in 2020–21. The
Government also stated that in its 2016 Autumn Statement it would set out the “long-term
direction” for CPS, but this has not yet happened.
Emissions performance standard
A new emissions performance standard (EPS) sets an annual limit on carbon emissions from
new fossil fuel power stations, to prevent the most carbon-intensive plant from being built.
The EPS regime applies to any new fossil-fuel plant granted development consent after the
EPS came into force in 2014, and may also apply to existing coal plant that undergo certain
significant upgrades or life extensions after it came into force.
The EPS has initially been set at a level equivalent to 450g CO2/kWh (at baseload) for all
new fossil fuel plant. As mentioned above, at this level the EPS will ensure that no new
unabated coal-fired power station can be built. The EPS will not apply retrospectively
to existing power plant. However, the level of the EPS will be regularly reviewed in the
future, meaning that it could be reduced to a level below the emissions of unabated gas-fired
generation. To address the risk such a review could pose to investors, “grandfathering”
provisions in the legislation ensure that gas-fired power stations approved under the 450g/
kWh-based level will be subject to that level until 2045.

As discussed above, the UK Government is currently considering various options that may
include modifying the EPS so that it applies to existing coal-fired power stations, as a means
of implementing its policy objective of ensuring that all coal-fired generation ceases by 2025.
Capacity Market
A Capacity Market (CM) has been introduced to address concerns about having sufficient
flexibility to deal with fluctuations in electricity demand and available supply. Under the
CM regime, capacity payments will be made to the providers of capacity, including both
generation and non-generation forms of capacity such as demand-side response (DSR) and
storage. This is a significant change to existing electricity market arrangements, which only
reward generators for the electricity generated. The starting point under the new regime is
that, on an annual basis, the Government estimates the total volume of capacity required
4.5 years ahead of the delivery year (running from 1 October to 30 September), and then
the System Operator contracts for the required volume of capacity from providers through a
central auction process. Competitive auctions are held four years (T-4 auction) and one year
(T-1 auction) before each delivery period. In addition, transitional arrangements auctions
were run in 2015 and 2016, for delivery in 2016/17 and 2017/18 respectively, to help DSR
and small-scale generation.
In the December 2016 T-4 auction, the clearing price was £22.50/kW/year, which was
slightly higher than the previous two auctions. A total of 69,777.050 MW entered the
auction, of which 75.13% received capacity agreements for delivery in 2020/21.
As in the 2014 and 2015 CM auctions, the majority (95%) of capacity in the 2016 T-4
auction won one-year agreements, equivalent to 49.8 GW of capacity. This is not surprising
given that existing CMUs make up a large proportion of those taking part in the auction.
Approximately 2.6 GW were awarded 15-year agreements. In terms of the actual number of
CMUs awarded a 15-year term, the number is 124 (out of a total of 483 CMUs), according
to a Provisional Auction Results report published by the Delivery Body.
Ofgem’s Annual Report on the Operation of the Capacity Market in 2016/2017 indicates (see
Figure 4 below, from Ofgem’s report) that the total volume of new-build capacity successful
in being awarded a capacity agreement has increased over time, although, according to
Ofgem, this may partly be explained by the increasing volume of capacity being procured.
Figure 4

Contracts for Difference

As discussed in earlier editions of this chapter, the new CfD regime has replaced the
Renewables Obligation regime (a green certificate system) as the main form of support
for renewable energy projects. The other two noteworthy schemes are the small-scale
Feed-in Tariff regime (applicable to renewable energy projects up to 5MW) and the
Renewable Heat Incentive, which supports heat generated from renewable energy
sources.
Under a CfD, a low-carbon generator is paid a top-up payment above the wholesale price
(the reference price), up to a set strike price. The strike price is intended to be an amount
equal to that needed to make low-carbon power projects commercially viable. The CfD
takes the form of a private law bilateral contract between the CfD counterparty and each
low-carbon generator. A Government-owned limited liability company – the Low Carbon
Contracts Company (LCCC) – has been established to act as the counterparty to CfDs,
and to collect from suppliers a levy to fund CfD payments and administer payments
under CfDs. A key feature of CfDs is that provision is made for a two-way payment
mechanism, so if the wholesale price is higher than the strike price, the generator will be
required to make a payment back to the CfD counterparty.
For the vast majority of renewable energy projects, CfDs are being allocated to projects
through annual allocation rounds. For some low-carbon technologies, where a competitive
allocation process is not appropriate at this stage (e.g. nuclear and tidal lagoon projects),
CfDs are allocated outside of an allocation round. In December 2013, the Government
published a delivery plan, setting out the strike prices applicable to each renewable energy
technology, for each delivery year up to 2018/19. The delivery year, as the name implies,
corresponds to a project’s target commissioning date.
While the CfD allocation rounds for renewables were originally intended to take place
annually, this has not eventuated. The first allocation round commenced in October
2014 and finished in February 2015, resulting in 27 projects being offered a CfD. In
addition, a number of projects were also awarded a so-called “investment contract” – an
early form of the CfD, introduced as a transition measure – before the CfD regime was
fully implemented. The LCCC announced in August 2016 that the first CfD-supported
project (a solar PV project) is now generating electricity and receiving payments under
the CfD. The LCCC also confirmed that it is currently managing 39 CfDs and investment
contracts, with over 6 GW of capacity, and all of these CfDs and investment contracts
have now passed the Financial Commitment Milestone, which requires the project
company to demonstrate that there is a significant financial commitment to complete
the project.
In November 2016 the Government indicated in a draft budget for the second allocation
round that £290m of CfD funding will be available for projects which are planning to
commission in the delivery years 2021/22 and 2022/23. This was confirmed in March
2017, with the publication of the final budget. The £290m figure does not represent a
lump sum covering the cost of the projects over their total CfD term, but rather how much
is available to cover payments to the successful projects on an annual basis. It does not
matter whether a project will be commissioned in 2021/22 or 2022/23 – the Government
has said that CfDs will be allocated to the cheapest projects first, regardless of their start
date, as long as they fit within the budget profile provided.
The first CfD allocation round in 2014 was open to a wide range of renewable energy
technologies, which were split into two groups – “established technologies” (also

referred to as pot 1 technologies) and “less established technologies” (referred to as pot

2 technologies).
BEIS previously indicated that established technologies such as onshore wind, solar PV
and energy from waste with CHP would not be eligible for support in future allocation
rounds. This position has now been confirmed: no established technologies are eligible
to participate in the second allocation round. This means that CfD funding will not be
available in the second allocation round for onshore wind, solar PV, energy from waste
with CHP, hydro (>5MW and <50MW), landfill gas and sewage gas technologies.
The less established technologies that are eligible to participate in the second allocation
round are: offshore wind; advanced conversion technologies (ACT) (with or without
CHP); anaerobic digestion (with or without CHP); dedicated biomass with CHP; wave;
tidal stream and geothermal technologies.
Moreover, for the second CfD allocation round, BEIS has set a “maxima” of 150MW in
relation to fuelled technology projects – that is, dedicated biomass with CHP, ACT and
anaerobic digestion projects. This means that for these technologies the Government
will not award CfDs in the second allocation round for a combined capacity greater
than 150MW, and may in fact award less than 150MW if these technologies are unable
to compete on price with other technologies competing for the same overall budget.
Expressed as a proportion of the budget, BEIS has estimated that 150MW is equivalent
to £70m of CfD funding in each delivery year (i.e. approximately 25% of the budget).
The imposition of the maxima indicates that the majority of the £290m budget will be
made available for offshore wind, wave, tidal stream and geothermal projects. However,
in practice it may be difficult for wave and tidal projects to compete on strike price with
offshore wind projects because, unlike in the first allocation round, BEIS has decided
not to apply a “minima” to ring-fence a proportion of the budget for these emerging
technologies, abandoning the approach taken in the first allocation round. BEIS has
stated that this is because it “does not represent good value for money for consumers”.
Figure 5 sets out the administrative strike prices announced in the budget notice. For
comparison, Figure 5 also includes the strike prices that were originally set for the
2018/2019 delivery year.
These administratively-set strike prices represent the maximum strike prices that can be
awarded to eligible projects participating in the second allocation round. If the CfD
funding that would be required for all such eligible projects (paid at the administrative
strike prices) exceeds the budget available, then a constrained allocation auction will take
place, whereby these projects will bid lower strike prices to compete for the available
budget. This is what happened in the first allocation round.
As can be seen from Figure 5, offshore wind projects are expected to be economically
viable with the benefit of much lower strike prices, with the support offered being at
a much lower level compared to the first allocation round. Indeed, BEIS previously
said that offshore wind farm projects would need to aim to be viable at a strike price
support rate of £85/MWh by 2026. In contrast, the two offshore wind farm projects that
were successful in the first CfD allocation round received strike prices of £114.39 and
£119.89. Modest strike price reductions have been made for ACT, AD, and dedicated
biomass with CHP and marine technologies. Overall, the structure of the allocation
round and strike price per MWh offered for each eligible technology appears to favour
offshore windfarm.

Figure 5
Technology CfD Strike Prices (£/MWh, 2012 prices)
2018/19 (Included here for comparison 2021/22 2022/23
purposes only.)
Offshore wind 140 105 100
ACT (with or without 140 125 115
CHP)
Anaerobic Digestion 140 140 135
(with or without CHP)
(>5MW)
Dedicated Biomass 125 115 115
with CHP
Wave 305 310 300
Tidal 305 300 295
Geothermal 140 140 140
Closure of the Renewables Obligation scheme

The Renewables Obligation (RO) scheme, the predecessor of the CfD regime as an incentive
regime for renewable energy, closed to new entrants on 31 March 2017, subject to some
grace periods for eligible projects that miss the closure deadline for reasons outside of their
own control.
From 1 April 2017, a “vintaged” RO scheme will continue to operate for plant already
accredited under the RO, and will end on 31 March 2037.
Energy storage
The UK Government and industry have recently taken steps to seize the potential offered by
large-scale battery storage. More than 25 MW of capacity has already been deployed in the
UK, including over 35 stand-alone projects and a large number of domestic and small-scale
commercial installations, but a much larger number are in the pipeline. In particular, the
most recent CM auction, the results of which were announced in December 2016, resulted
in around 500 MW of new-build battery storage projects being awarded capacity contracts.
It has been recognised that battery storage has a critical role to play, particularly when
operating alongside renewable energy, but that there are a number of regulatory barriers
that present obstacles to its full deployment. These regulatory obstacles include issues such
as the lack of a regulatory framework for battery storage projects under the Electricity Act
1989, which sets out a licensing regime for various electricity-related activities, and the
planning regime. In response to these regulatory issues, the Government launched a call for
evidence in November 2016, focusing on the future role of battery storage in smart energy
grids. In July 2017, BEIS published a response to the consultation together with a “smart
systems and flexibility plan”12, outlining a number of actions that will be taken forward to
facilitate investment in battery storage. These actions include:
• the Government introducing legislation to define storage as a distinct subset of
generation under the Electricity Act 1989 and related legislation to provide greater
clarity for both electricity licensing and planning consent purposes;
• Ofgem clarifying the regulatory position on ownership and operation of storage by
network operators;

• Ofgem providing guidance to allay fears by some renewable generators receiving

support under the RO, CfD, or Feed-in Tariff schemes that they may put their eligibility
at risk if they apply to install storage assets on the same site; and
• Ofgem, as part of its Targeted Charging Review, considering what network charges
should apply to storage facilities connected to the distribution network.
Upstream oil and gas: a focus on fiscal reforms
The Oil and Gas Authority
As discussed in earlier editions of this chapter, a desire to revitalise the UK’s oil and gas
industry led to the so-called Wood Review, which recommended some key changes to
the current approach. Key amongst the recommendations was the commitment to a new
strategy for maximising economic recovery from the UK Continental Shelf (referred to as
MER UK); the creation of a new “arm’s length” regulator; and the giving of new powers
to that regulator.
As a result of the implementation of the Wood Review, the new oil and gas regulator, the
Oil and Gas Authority (OGA), has been in place as a fully independent regulator since 1
October 2016.
On 25 July 2017 the OGA launched the 30th Offshore Licensing Round with 813 blocks or
part blocks on offer in mature areas of the UKCS, totalling an area of 114,426 km2. Blocks
are on offer in the Southern, Central and Northern North Sea, the West of Shetland and East
Irish Sea, featuring a large inventory of prospects and undeveloped discoveries. The round
will make use of the new Innovate Licence, developed by the OGA in collaboration with
industry, to create more flexible licence terms. A key feature of the innovate licence is that
it retains the initial term of previous licence types, but this initial term can be subdivided
into up to three phases: phase A for carrying out geotechnical studies and geophysical data
reprocessing; phase B for undertaking seismic surveys and acquiring other geophysical
data; and phase C for drilling. The new licence terms will also incorporate other changes
aimed at simplifying the licence terms (referred to as model clauses), to contribute to the
principal objective of maximising economic recovery of UK petroleum.
The fiscal regime
In addition to changes to the regulatory structure for upstream oil and gas, the UK
Government has also been introducing various reforms to the fiscal regime. Arguably, for
the industry at least, these fiscal reforms have been of principal concern. As reported in
earlier editions of this chapter, consecutive changes to the fiscal terms have resulted in the
reduction of the effective marginal rate of tax payable in respect of all fields on the UK
UKCS to 40%.
Most recently, the Government has turned its attention to the application of the tax regime to
assets facing large decommissioning costs in the near future. Given the mature basin status
of the UKCS, issues relating to the decommissioning are a priority area for the Government,
the OGA and industry. In particular, on 20 March 2017 HM Treasury published a formal
discussion paper on the case for allowing transfers of tax history between buyers and sellers
of late-life assets in the UK offshore oil and gas industry in an effort to maximise tax relief
for decommissioning expenses. The issue being addressed is that under the UK oil and gas
fiscal regime, a ring-fence applies to all fields (irrespective of when development consent
was obtained) which prevents profits arising within the ring-fence from being sheltered by
losses arising from activities carried on outside the ring-fence.


Unlike previous years, there was no significant primary legislation relating to energy
enacted in 2016, although there have been various changes, as discussed in this chapter,
enacted through various statutory instruments.

As reported in earlier editions of this chapter, in June 2014 Ofgem referred the energy
market for investigation by the Competition and Markets Authority (CMA) on the basis
that Ofgem’s view was that the market may not be functioning as effectively as it should
be, resulting in higher prices for consumers. The CMA published its final report on 24 June
2016, and since then Ofgem has been coordinating the implementation of the remedies
set out in the CMA’s final report, as set out in its CMA Remedies Implementation Plan,
published in November 2016.
***
Endnotes
1. BEIS, “Digest of United Kingdom Energy Statistics (DUKES)”, July 2017.
3. Oil & Gas UK, 2016 Economic Report.
4. BEIS, “Coal generation in Great Britain – the pathway to a low-carbon future –
consultation document”, November 2016.
5. EIA, Country Analysis Brief: United Kingdom.
6. Oil & Gas UK, Business Outlook 2017.
9. BEIS, “Government response to the Committee on Climate Change – Progress on
meeting carbon budgets”, October 2016.
10. Department for Business, Enterprise & Regulatory Reform, “Meeting the Energy
Challenge: A White Paper on Nuclear Power”, January 2008.
11. Nuclear Industry Association, “Briefing Paper: Euratom”, July 2017.
12. BEIS, “Upgrading our energy system: smart systems and flexibility plan”, 24 July
2017.

Julia Derrick
Tel: +44 20 7859 1117 / Email: julia.derrick@ashurst.com
Julia Derrick is a partner in Ashurst’s resources and utilities team based in
London and has a broad range of experience in corporate and commercial
matters, with a particular focus on the upstream and midstream oil and gas
sectors. Her experience includes advising clients on acquisitions and disposals
of upstream oil and gas assets, development of upstream and midstream oil
and gas projects (including LNG liquefaction and regasification projects),
and sales arrangements for oil, gas and LNG.
Justyna Bremen
Tel: +44 20 7859 1848 / Email: justyna.bremen@ashurst.com
Justyna Bremen is a senior expertise lawyer in Ashurst’s resources and utilities
team based in London. She has extensive experience in the energy sector,
covering both power and oil and gas, with a particular interest in upstream oil
and gas, renewables and downstream gas and electricity market regulation.
Ashurst LLP
Broadwalk House, 5 Appold Street, London EC2A 2HA, United Kingdom
Tel: +44 20 7638 1111 / Fax: +44 20 7638 1112 / URL: www.ashurst.com

USA
Robert A. James & Stella Pulman
Pillsbury Winthrop Shaw Pittman LLP
energy sources
Resilient markets
In 2010, only two years after the 2008–09 economic downturn, the oil and gas industry
basked in crude prices exceeding US$100 per barrel. But by early 2015, prices had
dropped to below US$50. The industry’s response was quick and has been dramatic, with
large staff layoffs, deep cuts to capital budgets, and bankruptcies or sales of challenged
companies. The market itself has stabilised, with prices centring on the high US$40s.
Although there are no expectations of a significant price increase for oil or gas in the near
future, the industry has not experienced either a collapse or a huge cutback in production.
Resilient strategies employed by the industry, including cost reduction, emphasis on
operational efficiency, and new technology adopted especially by producers of shale and
other unconventional resources, ensured survival. Large firms adopted varying strategies
to secure future growth, pursuing short-cycle domestic shale oil projects, engaging in
takeovers of smaller companies, and betting on exploration in new foreign markets.
Shifts in the energy mix
The Energy Information Administration (EIA) reported that total primary energy
consumption in 2016 in the U.S. was 97.4 quadrillion British thermal units (Btu), a slight
increase from 2015 levels. Fossil fuels presently account for the large majority of U.S.
energy consumption (81%), with petroleum and natural gas usage increasing in 2016, but
coal usage steeply declining for the third year in a row. Nuclear energy consumption was
roughly flat, but the rates of growth of renewable sources were high (wind up nearly 20%,
solar 37%, hydro 7%), albeit from lower base levels.
The transportation sector is by far the largest consumer of petroleum in the U.S., while the
largest users of natural gas remain the industrial and electric power sectors. Annual total
electricity consumption in the U.S. decreased in 2016 by 1%, the result of slight declines in
usage by the commercial, industrial, and transportation sectors, while consumption by the
residential sector was slightly up for the year. Natural gas as well as renewable sources saw
the greatest increase in contribution to power generation, with the use of coal and petroleum
decreasing. In the first five months of 2017, hydroelectric was on pace to outperform its
2016 usage for electricity generation by nearly 13%, solar by 46%, and wind by 15%.
Coal’s changing futures
We have seen a significant decline in U.S. coal consumption by the electric power sector
(down 8% from 2015) and the industrial sector (down 11%). Coal use as a product for

Pillsbury Winthrop Shaw Pittman LLP USA
domestic consumption has been trending downward for several years. In addition, total
domestic production of coal declined by 19%, which amounted to the lowest production
level since the 1970s.
However, in 2017, coal experienced an uptick in production, domestic consumption, and
especially exports. U.S. coal has found expanded markets in East Asia and there have
been improvements in the infrastructure required to transport Western coal to Pacific
Ocean ports, although there remain permitting challenges for proposed export facilities on
the West coast. The first eight months of 2017 showed a 14% increase in production as
compared to the same period in 2016. Consumption for the first five months of 2017 was
up by 7%, and exports for the first six months of 2017 were 55% higher than over the same
period in 2016. Time will tell if the overall trend for production and use of coal in the U.S.
remains in decline, as renewables and natural gas become the preferred energy sources, or
if coal-friendly policies by the new administration help boost its outlook.
Nuclear challenges
The U.S. nuclear industry has recently absorbed several setbacks. Of the four new reactors
whose development continued after the Fukushima incident, two in South Carolina stopped
construction and the remaining two in Georgia are the subject of public utility commission
review. In September 2017, the Trump administration issued US$3.7 billion in conditional
loans to backstop the Georgia project. The Westinghouse bankruptcy and potential sale
also mark a change in eras. While construction of new nuclear facilities in the U.S. has
proved challenging, nuclear energy remains an important source of energy in the U.S.
and accounts for approximately 20% of total electricity generated. Although it does not
appear that the market share for nuclear will increase significantly in the near future, given
the costs, it may remain stable through optimising generation at, and relicensing, existing
facilities.
Opening federal lands to energy development
Debate has lasted decades on how to balance the use and the protection of federal lands.
The recent change in administrations has brought these values to the forefront, with new
proposals by President Trump and his cabinet members to increase energy exploration and
development on federal lands.
The extent of public land ownership and control in the U.S. is sometimes forgotten in
discussions of development by private enterprise. The federal government, primarily
through its Department of Interior (DOI), Department of Agriculture (USDA), and
Department of Defense (DOD), owns and manages approximately 260 million hectares of
land onshore in the U.S., as well as approximately 690 million hectares offshore. Depending
on which agency administers the federal land, varying degrees of energy exploration are
permitted. For example, the Bureau of Land Management (BLM), which is part of the
DOI, manages approximately 100 million hectares of public land and has a multiple-use,
sustained-yield mandate that supports a variety of programmes and activities, including
energy exploration and development. On the other end of the spectrum is the National Park
Service (NPS), also part of the DOI, which manages approximately 32 million hectares of
land with a mandate to conserve lands, and which generally prohibits energy exploration.
On March 28, 2017, President Trump signed the Executive Order on Promoting Energy
Independence and Economic Growth, which includes provisions aimed at eliminating or

loosening regulations surrounding energy exploration and development on onshore federal

lands. As part of this Executive Order, President Trump ordered the Secretary of Interior
to lift all moratoria on federal land coal leasing activities, and to suspend, revise, or rescind
rules relating to hydraulic fracturing on federal lands. In addition, President Trump issued
the Executive Order Implementing an America-First Offshore Energy Strategy on April
28, 2017, which included a requirement for the Secretary of Interior to revise the five-year
offshore oil and gas leasing programme currently in effect for 2017–2022 to include lease
sales in additional planning areas, such as the Mid- and South Atlantic, and to increase
the number of scheduled sales under the programme. The Bureau of Ocean Energy
Management (BOEM) is currently taking the administrative steps necessary to implement
a new leasing programme, which will cover the years 2019–2024.
In addition to the Executive Orders, the DOI is advancing policies that would open the
Arctic National Wildlife Refuge (ANWR) to oil exploration. ANWR has long been a point
of energy debate in Congress, with proponents of development arguing that the 8 million
hectare wildlife refuge is a source of potentially significant domestic oil reserves. However,
oil and gas development in ANWR is currently prohibited by law. In a secretarial order
signed in May 2017, and followed up by an internal agency memorandum dated August
2017, the DOI expressed its intent to lift restrictions on oil and gas exploration in ANWR,
although actual development would still require an act of Congress.
While these two Executive Orders and DOI policy indicate a clear shift in overall government
policy for federal land management and use, there remain several administrative hurdles
before the policies can be implemented. For example, the DOI estimates that it will take
two years to put a new offshore oil and gas leasing programme in place, as it requires
a multi-step process that includes multiple decision points and opportunities for public
comment. The same is true with respect to many of the other agency rules and regulations
President Trump has ordered to be reviewed, rescinded, or replaced. Therefore, while the
current administration has taken a very different view than the previous administration
of federal lands and energy exploration and development, there are many administrative
procedures that must be cleared before new policies can actually be implemented.
In addition, US Interior Secretary Ryan Zinke has proposed to shrink the size of six national
monuments, to permit, among other things, energy development. However, it is not clear
that energy development will occur on those lands, even if permitted. About 65% of the
acreage covered by drilling permits in and around such areas has never been used and there
are serious questions as to whether drilling is economic at current prices.
Chinese solar panel tariff petition
In what has been called a case of solar against solar, two solar panel manufacturers with
U.S. facilities filed a petition with the nation’s International Trade Commission (ITC)
seeking to impose a tariff and floor price on imported crystalline silicon photovoltaic solar
panels. The petition has divided the solar industry between domestic solar panel facility
owners that support the request, and developers that oppose it as increased tariffs would
negatively affect much of their business. If tariffs are implemented, some reports suggest
that it may result in the price of imported solar modules almost doubling.
The manufacturers, with support from parts of the steel, labour, and agricultural communities,
have argued that increasing imports have taken market share from the domestic producers
and resulted in bankruptcies, plant shutdowns, layoffs, and deterioration of the financial
performance of the domestic industry. The petition claims that 1,200 manufacturing
jobs have been lost and that wages have fallen by almost 30% between 2012 and 2016.

Without the safeguards they are requesting, the manufacturers predict that their remaining
production operations in the U.S. will be permanently closed.
Those opposing the petition, including the Solar Energy Industries Association and the
State of New York, have argued that thousands of jobs are at stake for solar installers and
developers. Market reports estimate that the approved petition could endanger two-thirds
of utility-scale solar, which is expected to come online in the next five years. Imposing the
tariffs will increase the costs of modules, and consequently, the cost of projects, and may
result in utilities turning to other sources of energy.
In September 2017, the ITC determined that imported panels are injuring domestic
manufacture. It will prepare and submit a report to the President containing findings and
recommendations. The President is then to make a decision to implement, change, or
deny the remedy altogether. Based on President Trump’s election campaign promise of
reviving American manufacturing jobs, he may be inclined to provide the relief sought by
the manufacturers, which could have a large impact on the future market share and growth
of solar in the U.S.
Distributed energy resources
Steadily increasing portions of the new capital expenditures in the sector are being
directed at generation and storage improvements and a range of technologies and services
located at or directly connected to the facilities of major consumers or consumer groups.
Distributed energy resources (DER) include distributed generation, often consisting of
primary generation through solar and wind farms, gas-fired microturbines, combined heat
and power (CHP) or heat exchangers. They also include fuel cells, flywheels, ice storage,
and batteries that can store and convert power. DER also encompasses demand response
mechanisms to enable large customers to shift their peak usage, deferring generation and
transmission investments. Microgrids permit the integration of DER generation, storage,
and energy conservation resources to increase energy efficiency and replicate some of
the reliability benefits of a grid without the same level of investment. The technology
includes smart-grid innovations carried to the ultimate customer for real-time exchange
of information and price signals. DER investments are undertaken to protect against grid
outages, accelerate the shift of generation to greener fuel sources, enhance the stability
of the voltage and frequency of power, and optimise the organisation's energy costs and
utilisation. End-user direct procurement projects accounted for nearly 20% of all new
generation capacity in the U.S. in 2016, and investments of over US$100 billion are
expected by 2025.

Energy policy and presidential power
The energy and environmental policy differences between President Obama and President
Trump are certainly among the greatest that we have seen following any U.S. election.
What President Obama encountered, and what President Trump is experiencing, is that the
U.S. political system has a complex set of checks and balances that affect the ability of
even a President to transform the country’s direction in these fields.
Separation of powers among the executive, legislative and judicial branches of course
restricts the capability of a President to affect legislation (like the National Environmental
Policy Act), court cases or international treaties or conventions already ratified by the
Senate. The Administrative Procedure Act and related laws have detailed procedural
requirements binding departments, agencies and commissions of the President’s own

executive branch. These provisions include requirements for scientific investigations, and
opportunities for notice and public comment, prior to implementation of new or modified
regulations. Thanks to the nation's federal system, Presidents must endure the independent
actions of individual states and local governments that can limit or even counteract the
impact of their own initiatives. And influential private actors and non-governmental
organisations can take their own course in energy and environmental matters or seek
judicial review of the changes.
Oil pipeline approvals
In an example of the new administration’s ability to reverse prior government policy,
one of President Trump’s first actions upon taking office in January 2017 was to push
forward approvals of two major oil pipelines in the U.S. that had been shelved under
the prior Obama administration. The first was TransCanada’s Keystone XL Pipeline,
which would transport Canadian crude oil from Alberta, Canada, to Nebraska, where it
would connect with TransCanada’s existing pipeline system and eventually make its way
to Texas. TransCanada’s initial application was submitted in 2008. In 2014, after years
of study and amendments, the Obama administration denied the border crossing permit
application on the basis that approval would undermine the U.S.’s climate leadership in
the international arena. After his inauguration, President Trump invited TransCanada to
resubmit its application, and directed the State Department to take all actions “necessary
and appropriate” to facilitate its expeditious review, including a final permitting decision
within 60 days. The application was resubmitted by TransCanada on January 26, 2017, and
was granted on March 23, 2017. However, within days after approval, two environmental
groups filed a lawsuit in federal court to stop the project. The litigation is ongoing, and
because of legal uncertainty with respect to pipeline routes in Nebraska, TransCanada will
not be in a position to begin pipeline construction for at least another year.
The other high-profile oil pipeline project, known as the Dakota Access Pipeline, was
also halted under the Obama administration, but has since been approved by President
Trump. The Dakota Access Pipeline will transport crude oil from North Dakota to Illinois,
and was controversial principally due to its close proximity to two Indian reservations
where the pipeline crosses the Missouri River. Challenges to the pipeline had prompted
the Department of Justice and Army Corps of Engineers under President Obama to stop
the project from going forward. However, when President Trump took office, he issued
a Presidential Memorandum directed to the acting secretary of the Army to review the
project and take all appropriate actions to construct and operate it. In February 2017,
the Army Corps of Engineers issued an easement for construction and operation of the
pipeline, foregoing the detailed environmental review that had delayed the project under
President Obama. In late March 2017, the last segment of the pipeline was completed and
it became fully operational in June 2017.

After Paris, or back to Paris?
President Trump has endeavoured to revise or reverse numerous energy-related policies
during his first year in office. Many of his actions relate to initiatives based on concerns
with climate change. In 2015, the U.S. executive branch joined nearly 200 other countries
in adopting the Paris Climate Accord. Under its terms, the U.S. pledged to cut its
greenhouse gas emissions by 26 to 28% below 2005 levels by the year 2025. President
Obama anticipated achieving these goals in large part through implementation of the

Clean Power Plan (CPP). The CPP was a cornerstone regulation developed to cut carbon
emissions from power plants – particularly coal-fired power plants.
In March 2017, President Trump called on the administrator of the Environmental
Protection Agency (EPA) to take steps to dismantle the CPP, and the EPA has since begun
the administrative process to accomplish that task. On June 1, 2017, President Trump
formally announced that he was against proceeding under the negotiated terms of the
Paris Climate Accord, and would attempt either to renegotiate the terms or to enter a new
agreement, reasoning that the Paris Climate Accord disadvantages the U.S. economy. The
U.S.’s pledge under the Paris Climate Accord accounted for 21% of the emissions reduction
that the agreement sought to achieve. Other major signatories of the Paris Climate Accord
have announced that it is not subject to renegotiation.
Without more, the federal government’s actions do not mean that the U.S. will stop
reducing its greenhouse gas emissions. For example, the transition in the U.S. to renewable
energy is likely to continue due to declining costs of renewable technologies such as solar
and wind, as well as state statutes (presently existing in 29 states) that require utilities to
purchase a certain percentage or amount of renewable electricity. In addition, state and
local jurisdictions have committed to continuing their efforts to address climate change,
as evidenced by the commitments expressed by the governors of California, New York
and Washington in the wake of President Trump’s announcement regarding Paris. State
legislatures have taken action to achieve emissions reductions, including legislation in
California requiring a reduction of state-wide greenhouse gas emissions by the year 2020.
In June 2017, Hawaii became the first state to pass legislation which implements parts of
the Paris Climate Accord by setting forth strategies to reduce greenhouse gas emissions
within the state, and explore carbon sequestration techniques.
Finally, numerous large private companies in the U.S. have also made commitments to
reduce their greenhouse gas emissions. Since November 2016, 1,000 companies have
signed the “Business Backs Low-Carbon USA” statement. In addition, nearly half of
the Fortune 500 biggest companies in the U.S. have set targets to shrink their carbon
footprints, including almost two dozen that have pledged to power their operations with
100% renewable energy by set deadlines.
Hydraulic fracturing
The new administration has focused attention on the 2015 BLM hydraulic fracturing rules
regulating hydraulic fracturing operations on federal and Indian lands. The regulations
had been the subject of litigation in federal court and were stayed pending review of the
lower court decision by the Tenth Circuit Court of Appeals. In his Executive Order issued
in March, President Trump directed the Secretary of the Interior to review the rules; in
July 2017, BLM proposed to rescind the regulations. As with other administrative agency
actions, full rescission of these rules could take over a year to complete. In the meantime,
states and local governments continue to regulate hydraulic fracturing, and all 32 states
with federal oil and gas leases have laws or regulations that address hydraulic fracturing
operations. Therefore, even in the absence of federal regulation, operators will still be
required to comply with a host of requirements to conduct their operations.
Offshore oil platform decommissioning
In the offshore oil and gas arena, the Trump administration suspended financial security
requirements that BOEM had attempted to impose through a September 2016 Notice to
Lessees. Because BOEM did not undertake formal rule-making to impose the requirements
in the first instance, the Trump administration was able to unilaterally suspend the Notice

without going through a lengthy administrative process. The new policy had sought to
require offshore oil and gas leaseholders to provide surety bonds or other security to
guarantee future decommissioning obligations. The policy came about as a result of a
government study which found that billions of dollars’ worth of future decommissioning
liability in the Gulf of Mexico was largely unsecured and that the U.S. was therefore at
risk of bearing the costs if operators and lessees defaulted. The Trump administration
promptly suspended the new bonding requirements for most lessees in January 2017, and
is undertaking a review of alternative means of securing the future decommissioning costs
of offshore oil platforms.

Agency review of downstream climate impacts
The Federal Energy Regulatory Commission (FERC) is responsible for approving major
gas pipeline projects in the U.S., and has previously held the position that the National
Environmental Policy Act (NEPA) does not require it to take into account indirect climate
change impacts as they are too speculative. However, in Sierra Club v. FERC, the federal
D.C. Circuit Court of Appeals held in a 2-1 ruling in August 2017 that FERC’s approvals
must include a detailed analysis of downstream greenhouse gas emission impacts,
including impacts from power plants the pipeline will serve. The Court’s ruling vacated
FERC’s approval of the multi-billion-dollar Southeast Market Project, which includes a
515-mile-long pipeline running from Alabama to Florida.
NEPA requires federal agencies to consider “reasonably foreseeable” indirect effects of
proposed projects, unless the agency approval is not the “legally relevant cause” of such
effects. The majority of the Court’s panel found that the burning of gas and release of
greenhouse gases by power plants that would be serviced by the Southeast Market Project
are indirect effects that are “reasonably foreseeable”. Further, the court emphasised that
under NEPA, analysis of indirect effects includes “educated assumptions” by federal
agencies. Since FERC was able to estimate the Southeast Market Project’s pipeline
capacity, it was not clear to the Court why FERC could not use this data to estimate the
greenhouse gas emissions from the power plants serviced by the pipeline. However, the
Court noted that if downstream greenhouse gas emissions were too speculative to quantify,
FERC could fulfil its obligation under NEPA by providing a specific explanation as to why
estimation of downstream impacts was not feasible.
In September 2017, FERC reissued its approval of the pipeline, determining that while it
was possible to calculate downstream greenhouse gas emissions, there was no appropriate
method to attribute discrete environmental effects to those potential emissions. However,
the Court’s ruling may still have the effect of encouraging future legal challenges to agency
decisions if greenhouse gas emissions and impacts are not appropriately considered,
thereby increasing the costs of projects and delaying approvals.
In a somewhat analogous case, the Tenth Circuit Court of Appeals recently ordered the
BLM to redo its NEPA environmental impact statements and records of decision for
lease extensions on four coal mines in Wyoming, concluding that the agency failed to
appropriately consider how granting the leases would impact coal consumption in the
U.S., and hence, the release of greenhouse gases from coal-fired power plants. The Court
stated that the agency was required to reconsider these impacts and adequately support
its conclusions that extending the leases would not have an effect on the U.S.’s total coal
consumption, and the associated carbon emissions’ effect on climate change.

In addition to the Courts of Appeals, at least one federal district court issued a decision in
2017 that likewise ordered an agency to take into account climate change before granting
a permit. A district judge in Montana required the U.S. Office of Surface Mining and
Enforcement to revisit its approval of a coal mine expansion, finding that the agency had
failed to appropriately consider the project’s indirect and long-term effects on greenhouse
gas emissions. While the agency had calculated the amount of additional greenhouse gas
emissions that would result from the project, the agency had not taken the additional step
of analysing the impact of those emissions on the environment.
Climate change litigation
After several failed attempts by environmental groups to hold the energy industry directly
accountable for climate change issues in court, a new strategy has emerged in which these
groups are suing the federal government to force a change in policy to curb greenhouse
gas emissions. In Juliana v. United States, a case currently pending in federal district court
in Oregon, a group of 21 young people is suing the federal government for violating their
constitutional right to a stable climate. In late 2016, the district court issued a remarkable
ruling in which it recognised that a climate system “capable of sustaining human life” is
a fundamental constitutional right. The Ninth Circuit Court of Appeals has temporarily
stayed the action pending its consideration of the government’s petition.
Despite past failures, there remain groups that continue to file claims against energy
companies, claiming their operations have a causal connection with climate change and
sea level rise. The severe weather events in 2017 (see below) have increased the interest
of these groups in filing lawsuits pursuing climate-related claims. Many recent claims
have been pursued under the Clean Water Act, including one filed in the wake of Hurricane
Harvey alleging that Shell failed to address potential future impacts from climate change
in its stormwater pollution prevention plan (SWPPP). The plaintiffs have alleged that
Shell’s facility has the potential to release toxic chemicals into the Providence River
in the event of a natural disaster, and its SWPPP does not account for this potential.
The same group has filed a similar claim against ExxonMobil in federal district court in
Massachusetts.
In addition to claims under the Clean Water Act, environmental groups in 2017 continued
to file lawsuits against energy companies based on tort law theories like nuisance and
negligence, claiming these companies have knowingly contributed to climate change and
sea level rise. While many similar lawsuits have resulted in dismissals by courts in the
last several years, including claims made in the wake of Hurricane Katrina, plaintiffs
continue to file these types of tort-based lawsuits looking for a different result.
On a state enforcement level, attorneys general from New York and Massachusetts
continued pursuing their investigations into ExxonMobil’s internal documents and public
statements regarding climate change. In 2016, Exxon sued the states of Massachusetts
and New York seeking to halt the state investigations. The case is potentially significant
to the energy industry as it tests the ability of states to use state laws to target producing
companies for their actions relating to climate change policy and laws.
Local governments have also recently brought climate change litigation against major
energy companies. In July and September 2017, a number of cities and counties in
California filed lawsuits against energy companies, arguing that the companies put the
future and health of the communities in jeopardy despite the companies’ long-standing
knowledge of the impact of greenhouse gas emissions.


Natural disasters of 2017
2017 was an extraordinarily active hurricane season in the Gulf of Mexico and Atlantic,
with the landfall of multiple major hurricanes, disrupting important oil refining and nuclear
power generating regions. The first of the hurricanes, Harvey, struck Texas near Corpus
Christi before moving east to Houston and Beaumont, where it stalled and produced a
catastrophic amount of rain for several days. The Gulf Coast between Corpus Christi,
Texas, and Lake Charles, Louisiana, is home to about a third of U.S. refining capacity. In
advance of the storm, 15 refineries were shut down, including the two largest refineries in
the U.S. Following the storm, several refineries reported damage and may take some time
before becoming fully operational again. The storm also shut down offshore platforms
in the Gulf of Mexico, and closed ports all along the Texas coast, proving to be a major
disruption for the industry.
Following closely on the heels of Hurricane Harvey was Hurricane Irma in the Atlantic,
which made landfall in the continental U.S. in Key West, Florida, before moving north
through the length of Florida and up through Georgia. Florida is home to two operating
nuclear power plants, both of which were taken offline as the storm approached. Puerto
Rico also incurred significant damage when Hurricane Maria struck the island and caused a
massive interruption of power and gasoline shortages.
Cybersecurity
Natural disasters are not the only concerns facing the energy industry. More than 80% of the
U.S.’s energy infrastructure is owned by the private sector, leading the federal government
to warn companies responsible for various parts of the energy grid of the need to improve
security and preparedness against cyberattacks. The U.S. Department of Energy’s (DOE)
second instalment of the Quadrennial Energy Review (QER) was released in early 2017,
and in it the agency warned that cyberattacks are rapidly evolving and threaten the reliability
and security of the entire energy sector due to the interdependence of the industry with the
electrical grid. However, the agency also found that the electricity industry in particular
had critical vulnerabilities when it came to cybersecurity. One of the key challenges in
improving the grid’s security is that any operational changes identified must be implemented
by thousands of private companies that own and operate the electricity infrastructure.

Energy regulatory overhaul
As discussed above, President Trump signed a March 2017 Executive Order on Promoting
Energy Independence and Economic Growth, a cornerstone of which was to modify
regulations on the energy sector with the goal of promoting domestic energy development.
In the Order, the President directed agencies to review existing regulations that potentially
burden the development or use of domestic energy resources, and “appropriately” suspend,
revise, or rescind those that are unduly burdensome. In the wake of the Order, numerous
agencies have published notice of proposed changes or rescission of regulations, and have
sought public comment as part of the required administrative process. Many of these
proposed changes are still working their way through the process, so the ultimate outcomes
are presently unclear.
The administration has also sought to undo some of the Obama administration’s energy
policy and regulations by issuing orders to suspend or delay implementation. A primary

example is what is known as the “methane rule”, which was a set of rules intended to limit
the release of methane emissions from wells on federal and tribal lands. In June 2017, the
EPA announced that it was suspending enforcement of the rule for two years. However,
in July 2017, the D.C. Circuit Court of Appeals ruled that the agency could not use this
manoeuvre to essentially revoke a regulation. Rather, the Court said the administration
must undertake a new rule-making process if it wanted to reverse the methane regulations.
As a result, the rule is now in effect and producers must comply with its provisions.
Department of Energy study
In April 2017, Energy Secretary Rick Perry commissioned the DOE to make a study of
the challenges being experienced by baseload coal and nuclear plants. Though framed as
an inquiry to ensure resilience of the electricity grid, the commission was seen by many
as an opportunity to articulate externality costs imposed on the system by clean energy
sources. But when the report came out in August 2017, it stated that stagnant growth in
electricity demand was a large force pushing coal and nuclear power plants offline, and
found that natural gas has been a key factor in pushing nuclear and coal power plants
towards retirement.
While not central to the findings, the study did address the rise of renewables and government
regulations as factors contributing to the early retirement of baseload plants. The study cited
federal regulations like the Mercury and Air Toxics Standards and, if fully implemented,
the CPP, as placing pressure on coal-fired generation. Further, the report concluded that
variable renewable energy has negatively impacted the economics of baseload plants,
including as a result of state-level renewable procurement standards and federal tax credits.
As a result of the study, the DOE issued a proposed rule in September 2017 which directed
FERC to establish rules and rates for wholesale electricity sales, ensuring that baseload
coal and nuclear generation resources “are fully valued”. The proposed regulations would
require significant changes to the way that the wholesale electricity market is regulated
and priced. While the proposal faces opposition from supporters of both natural gas and
renewable power sources, it is a further indication that the Trump administration is focused
on implementing policies supportive of traditional energy resources.
***
These observations are made as of October 2017 and are subject to developments in a
remarkably volatile political environment. The complex relationship among branches of
the federal government, the inherent checks on large-scale changes in administrative agency
practices, and the vocal roles of states, localities, and diverse private actors, all combine to
make it difficult to articulate a common or coherent energy and environmental policy in the
U.S. We expect little in the way of 2018 legislative action by comparison, as the political
process wends its way toward mid-term Congressional elections.

Robert A. James
Tel: +1 415 983 7215 / Email: rob.james@pillsburylaw.com
Rob James is a co-leader of Pillsbury’s Energy & Infrastructure Projects
team, resident in the firm’s San Francisco and Houston offices. His energy
practice spans project development, M&A and joint ventures, construction
and licensing matters in the U.S., Canada, Asia and South America. His
experience extends to oil and gas production, LNG, pipelines, oil refining,
conventional and renewable power generation, chemicals, and mining.
Rob has been recognised in Chambers Global (Energy) and in ‘100 Most
Influential California Attorneys’, San Francisco & Los Angeles Daily
Journal. He is a member of the American Law Institute (ALI) and the State
Bars of Texas and California (including its Public-Private Infrastructure, Real
Estate and Business Law Sections). He received his J.D. from Yale Law
School and his A.B. from Stanford University.
Stella Pulman
Tel: +1 415 983 1269 / Email: stella.pulman@pillsburylaw.com
Stella Pulman’s practice is focused on crisis management, general environmental
compliance, internal investigations, environmental, health and safety (EHS)
management system reviews, and management of complex environmental
liabilities. She regularly advises clients on matters involving environmental
remediation, natural resource damage liabilities and restoration, hazardous
waste management, and compliance with state and federal environmental laws.
Stella also has broad experience in water rights, eminent domain, and general
commercial litigation. She is a graduate of the University of Nevada and the
Tulane University Law School.
Pillsbury Winthrop Shaw Pittman LLP

Four Embarcadero Center, 22nd Floor, San Francisco, CA 94111, USA
Tel: +1 415 983 1000 / Fax: +1 415 983 1200 / URL: www.pillsburylaw.com

Uzbekistan
Umid Aripdjanov
Centil Law Firm
Overview of the current energy mix and place in the market of different energy sources
General notes
Along with Kazakhstan and Turkmenistan, Uzbekistan is one of the few countries in Eurasia
that is totally energy-independent, self-sustaining and rich enough to subsidise domestic
consumption and export energy resources. With abundant gas reserves and a growing gas
production rate, Uzbekistan holds the position of the third-largest natural gas producer in
Eurasia, behind only Russia and Turkmenistan, and eighth-largest in the world. At the
same time, oil production has consistently decreased over the last decade as oil fields are
depleted, and this situation puts pressure on the industry to focus primarily on thermal,
hydropower and alternative power facilities and capacities.
The entire energy sector is still monopolised by the government, held by the state joint
stock power company, Uzbekenergo. Despite efforts, it has never been privatised. Limited
export capacities and obsolete energy infrastructure are major concerns for the government,
which is now trying to coordinate and implement various programmes to diversify the use
of hydrocarbons and their export routes, as well as to encourage alternative energy projects
and energy-saving programmes. Uzbekistan has no nuclear power stations and, despite
much speculation in the media, has denied any plans to construct a nuclear power station in
what is a seismically active area.
The energy composition of Uzbekistan currently rests upon hydrocarbon consumption, as
hydroelectric power is limited by shrinking water resources. Hydrocarbons, mainly gas,
comprise nearly 97% of the country’s energy balance, with the remaining 3% coming in the
form of hydro, coal and charcoal.1 Renovating the power transmission networks owned and
monopolised by the government is one of the energy sector’s priorities.
The installed capacity of Uzbekistan power plants exceeds 12.5 million kW, which
represents more than half of all the generating capacity of the Interconnected Power System
of Central Asia, which includes the power systems of Turkmenistan, Tajikistan, Kyrgyzstan
and southern Kazakhstan. The annual electricity production volume is 55 billion kWh,
which makes Uzbekistan the largest electricity producer in Central Asia and a net exporter.2
Natural gas and electricity are two of Uzbekistan’s largest export items and represent up
to 25% of all exports. The share of annual power consumption across the country is 1,940
kW/h per capita.3
Overview of the hydrocarbon industry
According to the materials made public during the Oil & Gas Exhibition 2015, Uzbekistan’s
recoverable proven hydrocarbon reserves exceeded 2.5 billion metric tonnes of oil equivalent

Centil Law Firm Uzbekistan
as of early 2015, with gas reserves accounting for around 65% of this volume. In 2013, total
crude oil and other liquids production was about 102,000 barrels per day (bbl/d), 30% of
which came from natural gas plant liquids. It is estimated that nearly two-thirds of all known
oil and natural gas fields are located in the Bukhara-Khiva region in the south of Uzbekistan.4
According to the BP Statistical Review of World Energy 2017, Uzbekistan’s proven reserves
of natural gas were 1.1 trillion cubic metres (tcm) as of the end of 2015, effectively making
it the 19th largest proven reserve-holder in the world.5 According to the BP Statistical
Review of World Energy 2017, Uzbekistan produces 62.8 billion cubic metres (bcm) of
natural gas annually, with a steady growth rate. The consumption rate of natural gas in
Uzbekistan was estimated at 51.4 billion cubic metres in 2016, which includes 30 bcm for
consumer consumption. At present, Uzbekistan exports approximately 16 billion cubic
metres (bcm) of its produced natural gas annually, which breaks down into 6 bcm for export
to Gazprom (Russia) and 10 bcm for export to CNPC (China). These figures, however, do
not coincide with statements released by Uzbekneftegaz, whose chairman announced that
production stood at 55 bcm in 2016 and growth to 56.5 bcm is expected in 2017.6
Uzbekistan serves as a transit country for natural gas flowing from Turkmenistan to China
through a strategically important Central Asia-China gas pipeline. This pipeline is also
expected to commence the export of natural gas produced in Uzbekistan. In addition, two
new natural gas pipelines, Gazli-Kagan and Gazli-Nukus, were built to connect the Ustyurt
and Bukhara-Khiva regions with the existing system.
Overview of the coal industry
Uzbekistan’s proven coal reserves were estimated in 2016 at 1,375 million tonnes. The
reserves are particularly represented by anthracite and bituminous types of coal, which
are widely used in a variety of manufacturing processes, as well as in the production of
electricity. The annual production rate, calculated in 2016, is 1.1 million tonnes, and
the consumption rate amount 1.0 million tonnes respectively.7 Four coal enterprises are
engaged in open pit mining, underground mining and underground coal gasification.8 Since
the adoption of the Modernization and Retooling Program for the Coal Industry in 2013,
coal mining is expected to gradually increase in such a way as to replace natural gas and oil
products for the power industry.
Overview of the nuclear industry
Uzbekistan is a party to the Non-proliferation Treaty and ratified an Additional Protocol
Agreement with the IAEA in 1998. It has also ratified the Central Asia Nuclear Weapon
Free Zone treaty, and does not plan to build a nuclear power station. In February 2014,
the State Committee for Geology and Mineral Resources of Uzbekistan reported uranium
resources of 138,800 tonnes of enriched uranium (tU) in sandstone and 47,000 tU in black
shale. Navoi Mining & Metallurgy Combinat (NMMC), as part of the State Holding
Company Kyzylkumredmetzoloto, undertakes all uranium mining in Uzbekistan. NMMC
produces 2,400 tU annually, with exports going mainly to the USA through Nukem Inc.;
South Korea through Kepco; Japan through Itochu Corp.; and now to China through CGN.
On 27 September 2017, a minister of foreign trade of Uzbekistan communicated that
Uzbekistan had agreed to supply uranium concentrate to Nukem Inc. for seven years for the
amount of US$300m.9
Overview of the power industry
With the gigantic power-generation facilities of the Soviet era and an ample supply of natural
gas, Uzbekistan has become the largest electricity producer in Central Asia. Twelve thermal

power plants and 31 hydropower plants annually generate up to 58.9 billion kW/h of electrical
power and more than 10 million Gcal of thermal power, of which 88.5% is provided by natural
gas-powered thermal plants and 11.5% by hydropower plants. Thermal power plants (TPPs)
account for a total capacity of 10.6 million kW; the biggest among them being Talimardjan,
Syr-darya, Novo-Angren and Tashkent TPPs, generating over 85% of electric power. For
power generation at TPPs, the gas share is 90.8%; mazut is 5.3%; and coal is 3.9%.
The electricity is transmitted and distributed through power transmission lines whose voltage
ranges between 0.4 kV and 500 kV, and whose total length currently exceeds 243,000 km.
Uzbekistan’s electricity capacity is expected to increase thanks to the modernisation of old
facilities. Uzbekenergo is currently implementing 28 large-scale investment projects.
The development of the power industry for the period leading up to 2015 was determined by
Presidential Decree No. 1442 dated 15 December 2010, which highlighted 48 investment
projects, including 15 TPP modernisation plans, with the development of an additional
2,329 MW capacity, and nine hydropower projects with an additional 63.8 MW capacity in
small HPPs.
During the last decade, hydropower energy production has been steadily increasing. It is
expected to grow mainly by virtue of the development of mini-hydropower plants with
a capacity of 420–440 MW and the modernisation of existing HPPs, as shrinking water
resources are insufficient for a massive hydropower project. In 2016, the consumption of
hydroelectricity in Uzbekistan amounted to 2.7 million tonnes of oil equivalent.
The Government recently adopted a special five-year program to boost gas production. As
announced during the 2017 Global Oil & Gas Uzbekistan Conference, by 2022 Uzbekistan
plans to increase gas production by 53.5 bcm, oil production by 1.9 million tonnes and gas
condensate production by 1.1 million tonnes.10 It is expected that Uzbekistan and foreign
investors will direct US$3.9bn for energy projects during this period.
Falling oil and gas prices around the world have also affected petrochemical projects
in Uzbekistan, where some investors have decided to pull out, resulting in uncertainty
regarding the future of those projects.
Following the withdrawal of Malaysian Petronas Carigali from all existing petroleum
upstream projects in Uzbekistan, it is becoming clear that Russian Gazprom or its affiliates
have taken over the Production Sharing Agreement (PSA) in Baisun Area, replacing Delta
Oil, another member of the consortium formed for the implementation of the PSA. The
area has been renamed “25 Years of Independence” whose crown jewel is the 10 bcm gas-
condensate field, Jel. It is expected that Delta, Petronas, and Uzbekneftegaz will somehow
sort out the termination of the previous PSA.
The Uzbek Government has been promoting the construction and financing of petrochemical
facilities in an effort to diversify the economy and shift the focus of exports from raw
materials to added-value products. In 2013, NHC Uzbekneftegaz, KOGAZ and Honam
Petrochemical finalised the financing of the construction and operation of a petrochemical
joint venture that will extract US$4.5bn of natural gas from onshore Surgil fields, sell
methane gas locally, and process ethane and condensate for petrochemical production,
high-density polyethylene and polypropylene, to be sold on local and export markets. The
facility was completed and put into commercial operation in 2016.

Uzbekistan’s plans to gradually reduce its oil imports by converting natural gas into other
hydrocarbon products have also been affected by the slump in oil prices. In 2009–2014,
Sasol, Petronas and NHC Uzbekneftegaz signed an agreement to establish a joint venture
for developing the GTL (gas-to-liquid) project on the basis of the Shurtan Gas chemical
facility, which was expected to convert 3.5 bcm of natural gas and condensates into
about 1,743,000 t/y of hydrocarbon products. The US$5bn facility was expected to be
commissioned by 2017.11 However, due to the dramatic changes in oil and gas prices, Sasol
exited the project.12 Uzbekneftegaz acquired Sasol’s interests in the project and awarded
Topsoe the contract for the construction of the plant, with the licence from Sasol.13 The
GTL plant will process 3.5 billion cubic metres of gas and produce 863,000 tonnes of diesel
fuel, 304,000 tonnes of aviation kerosene, 395,000 tonnes of naphtha and 11,200 tonnes of
liquefied gas.14
The government of Uzbekistan is also implementing other projects aimed at developing the
production of energy from alternative sources. The first solar station in the region will be
located near Samarkand and is expected to produce nearly 100 million MW of electricity per
year. It was reported that the German consortium of GOPA International Energy Consultant,
Suntrace GmbH and the Renewables Academy AG signed a contract with “Uzbekenergo”
to provide consultancy services for the construction of this plant.15 It was expected that the
construction of the solar station would be completed by the end of 2016.
There are plans to build five solar stations by 2020 with a total capacity of 500 MW.16 In
addition to the project near Samarkand, two stations of a similar capacity are due to be
located in the Namangan and Surkhandarya regions. The total cost of constructing the
stations is estimated to be US$450m.17
Uzbekistan also plans to build an oil refinery in Jizzak region with US$2.2bn investments
from Russian oil, and to establish an olefin facility in Kashkadarya region with US$2.9bn
investments.18

The Uzbek government has implemented the following policies in the energy sector:
• Renewables: The government of Uzbekistan is aiming to generate approximately 21%
of all its energy needs from renewable sources, including solar, by 2031. It is therefore
contemplating developing a strategy for the use of alternative sources of energy, along
with the very intensive construction of small HPPs in the near future. On 10 August
2016, Uzbek government officials, experts and representatives of business enterprises
attended a roundtable hosted by the Chamber of Commerce and Industry of Uzbekistan
to discuss the prospect of using solar power in Uzbekistan. The decree of the president
of Uzbekistan on a programme of measures aimed at reducing energy intensity and
implementing energy-saving technologies and systems for the period of 2015–2019
dated 5 May 2015, serves as a key instruction in this regard.
• Energy efficiency: There are a number of campaigns that are being carried out to
install modern meters for consumers of natural gas, hot water and electrical power for
households. The efficiency of electricity transmission and distribution is one of the
government’s priorities due to significant losses, estimated to represent 20% of net
generation, with the cost of excess losses estimated at US$340m.19
• Added-value: As noted above, the government is also shifting its focus to diversifying
the economy by building and operating petrochemical facilities that use natural gas as a
raw material to produce petroleum products instead of exporting natural gas.

• Substitution: As highlighted, an Uzbekistan GTL facility is expected to convert gas into

liquid hydrocarbons and decrease the import of crude oil. Consumer vehicles are also
expected to shift from using gasoline to gas-powered engines.
• Modernisation: The government undertakes to modernise and retool existing outdated,
low-efficiency, gas-fired plants, whose efficiency is 40% lower than that of modern
thermal plants, as the country loses approximately US$1.2bn in potential gas export
revenues.
• Utilisation: Uzbekistan is one of the world’s top 20 gas-flaring countries, with 1.8 bcm
flared annually. This is being addressed through the programme on the utilisation of the
associated gas that was developed by NHC Uzbekneftegaz for its subsidiaries.
• Gas exports: To increase and diversify gas exports, the Uzbek government plans
to increase gas production by attracting foreign investors for the exploration and
development of hard-to-recover fields and committing additional volumes for the
Central Asia-China Gas Pipeline.20 In an effort to increase gas exports, the government
also plans to use more coal and alternative energy for TPP and domestic consumption.
• Increase of production: The government plans to significantly increase the production
of oil and gas condensate to keep the country’s economy independent of oil imports that
normally come from Kazakhstan. The government is looking to improve the rate of
oil recovery, conversion and gas processing efficiency to raise product quality to world
standards, and to increase the acreage for the hydrocarbon resource base, primarily liquids,
through new discoveries. Specific privileges and preferences are granted to enterprises
and organisations that use energy from renewable sources in their production.21

The new Regulation No. 164 adopted by the Cabinet of Ministers of the Republic of
Uzbekistan on the use of petroleum products has been in force since June 2014. This
regulation sets the general rules of delivery and acceptance of petroleum products, storage
conditions, and transportation rules. It also specifies environmental and safety requirements.
Additionally, to monitor reserves of mineral resources, companies engaged in the oil
industry must submit annual reports regarding resources reserves used in the past year.
On 14 August 2014, the Uzbek Cabinet of Ministers approved a regulation forming the
exploration programme of the NHC Uzbekneftegaz No. 230. The long-term exploration
programme determines the main directions of development for the geological sector.
The annual exploration programme includes geological exploration to search for oil and
gas reserves given the target parameters (direction, stage, types and exploration volume,
expected outcomes, the amount of the planned appropriations by indicating the sources of
their funding) for each project, as well as the expected timing of their implementation.
On 4 March 2015, a Program of Measures to Secure Structural Reforms, Modernization
and Diversification of Production for 2015–2019 was adopted by Presidential Decree No.
UP-4707. The new programme covers 846 investment projects worth US$40.8bn. It is
expected that the share of the industry in the country’s GDP will increase from the current
24% to 27% in 2020.
According to Decree No. UP-4707, the consistent modernisation of existing facilities and
the creation of new power-generating facilities is expected on the basis of the introduction
of resource-saving and modern combined-cycle plants of solar technologies.22
The Government of Uzbekistan is paying special attention to the development of low-

carbon sectors of the economy. On 5 May 2015, a Programme of Measures was adopted
by Presidential Decree to reduce energy intensity, implement energy-saving technologies
and systems, both in different sectors of the economy and in the social sphere during
2015–2019. The programme outlines key directions for the implementation of energy-
saving technologies and energy-reduction programmes, whilst also promising tax benefits
to entities producing energy from alternative sources.
The New Decree of the President was issued on 9 March 2017 No. PP-2922 that adopted
the five-year program towards increase of hydrocarbon production for years 2017–2021.

Judicial practice is not publicly available in Uzbekistan, and we are not aware of cases
where the Uzbek courts have interpreted matters relating to the energy sector. However, we
should note that electricity tariffs have been escalating over the last decade, raising concerns
on the part of investors regarding increases in production costs. Some foreign investors
whose disputes with the government have been brought before different arbitration forums
intend to file claims for damages relating to the unilateral increase in electricity tariffs.

Key events in the oil and gas sectors in Uzbekistan during the last year include the following:
In June 2017, the Government of Uzbekistan issued the list of strategic state-owned
units that are not subject to privatisation. The list includes NMMC, Uzbekneftegaz and
its specialised companies (such as UzTransGaz, responsible for gas transportation, and
Uzburneftegaz, engaged in upstream operations), and Uzbekenergo.23 Further, on 30 June
2017 the Decree of the President No PP-3107 was issued to reorganise the integrated chain
of companies under Uzbekneftegaz to bring their organisational form into compliance with
the requirements of legislation on stock companies.24
Uzbekistan is also witnessing interest in its upstream and downstream assets from large oil and
gas corporations and banks from Russia. During the joint forum held on 29 September 2017
in Tashkent, several Russian giants revealed plans to invest US$3bn into the hydrocarbon
industry of Uzbekistan through the Russian agency for insurance of export credits and
investments. Plans include the involvement of Gazprombank in financing the GTL project.
Lukoil was also reported to be committing additional financing in the amount of US$ 3bn to
fund its existing upstream PSA projects in Uzbekistan while renegotiating down the royalty
rate, due to the change in the export gas price. On 23 September 2017, Lukoil commenced
commercial production at the Gissar Group of Fields in Uzbekistan with the plan to achieve
annual production of 5 bcm of natural gas.
In April 2017, Gas Project Development Central Asia (a subsidiary of Gazprom
International), Altmax Holding Ltd and Uzbekbeftegaz executed a PSA to conduct appraisal
works and further development of the field “25 Years of Uzbekistan Independence”, with a
view to constructing a Gas Processing Facility with the US$5.8 bln investment plan.25
Uzbekneftegaz decided to invest some US$200m in geological prospecting to find heavy oil
in the south and east of Uzbekistan. Uzbekneftegaz has already started to look for heavy oil
and bitumen in the Korsagly-Dasmamagin area and the Besharcha block in the Surkhandarya
district, as well as in the Fergana area in the east of the country. Uzbekneftegaz believes
that it will be possible to produce at least 100,000 more tonnes of oil per annum in those
areas after the works’ completion.

Uzbekneftegaz opened two fields with hydrocarbon reserves of about 20 million tonnes
of conditional fuel in the first quarter of 2014. According to the holding, recoverable
hydrocarbon reserves in Uzbekistan make up over 2.5 billion tonnes of conditional fuel as
of 1 January 2014, of which 65% pertains to shale gas reserves.
The Russian oil company Lukoil has commenced the implementation of the active phase
of the Kandym Early Gas Project for the construction of a gas processing plant (GPP) and
the arrangement of the Kandym group of deposits in the Bukhara region worth US$2.66bn.
The GPP will be built by 2019 with a projected capacity of 8.1 bcm of gas per year. It is
planned that, in the initial stage of the fields’ operation, 2.2 bcm of gas will be produced
annually and transported to the Mubarek Gas Processing Plant.
Moreover, Lukoil has started testing the operation of two preliminary gas processing
terminals (PGPTs) in the area of North Shady, and deposits in Kuvachi-Alat in the Bukhara
region of Uzbekistan, as part of the “Early Kandym gas” project. The total capacity of
the units is 2.2 bcm of gas per year. The launch of the new facilities will allow Lukoil to
significantly increase the volume of gas produced in Uzbekistan.26
Lukoil has also reported that it is in talks with South Korean agencies to raise US$2bn in
order to finance these projects in Uzbekistan.27
Uzbekneftegaz and Chinese CNPC will begin the construction of the fourth line of the
Uzbek section of the gas pipeline “Central Asia-China”, at a total cost of US$800m. The
gas pipeline, with a capacity of 20 bcm of gas, is planned to be put into operation in 2017.
Uzbekenergo has also completed the construction of the external power supply Ustyurt
gas and natural gas chemical complex, worth about US$45m. The project has involved
the construction of a substation with a capacity of 220 kW. Construction is financed by
Uzbekenergo’s own funds and Uzbek banks. The capacity of the natural gas chemical
complex will allow 4 bcm of natural gas to be processed per year, along with the production
of 400,000 tonnes of polyethylene and 100,000 tonnes of polypropylene. The total cost of
the project is US$4.2bn.
In the power industry, Uzbekenergo continues to enhance existing power stations, construct
new power stations and experiment with renewable energy projects.
For the construction of the new 450 MW Thermal Power Station in Syrdariya Region, the
contract for the feasibility study and project documentation was awarded to EDF (France).
Mitsubishi Corporation and Mitsubishi Hitachi Power Systems, Ltd commenced two turn-
key projects for extension of the Navoi Thermal Power Station with a 450 MW second
turbine and construction of a new 900 MW Thermal Power Station in Namangan Region.
Hyundai Engineering Co. Ltd and Hyundai Engineering & Construction Company Ltd
were awarded a contract for the construction of two turbines of 230–280 MW on Tahiatash
Thermal Power Station.28
The Russian company ‘Power Machines’ was chosen for the modernisation works of three
hydro-generators at Charvak hydropower plant (HPP), which has a capacity of 155 MW,
replacing the stator’s winding on the hydro-generators and installing new feed systems
on them. Earlier this year, it was reported that “Power Machines” had completed the
modernisation of the Charvak hydropower plant (HPP).29 Charvak HPP is the largest
hydropower plant in the Chirchik-Bozsu cascade of hydropower plants.
In addition, the hydro-mechanical parts of the regulators and oil pressure units were
modernised on all four hydraulic units. The capacity of each hydraulic unit is set to increase
from 155 MW to 175 MW, which will provide an opportunity to generate an additional

120 million kilowatt hours of electricity annually. The project is believed to have cost
US$53.79m.
There are plans to explore and extract hydrocarbon deposits in the Uzbek part of the Aral
Sea. The preliminary costs of this project for 2017–2031 amount to US$300m.
In the area of renewable energy, Uzbekenergo announced its plans to deploy five 100 MW
solar plants in 2017–2021. The renewable energy plan also envisages the construction of
eight hydropower plants and expansion of the capacity of 13 existing hydropower stations by
154 MW. The total investment will reach US$1.8bn. 30

As proposals for regulatory reforms are not widely discussed in public, we are not aware of
any reforms in this sector. We may, however, expect new legislation in the area of renewable
energy, particularly solar and wind energy. It is unlikely that Uzbekistan will be in a position
to develop public-private partnership laws or laws in relation to Independent Power Producers
in the short term. There is a proposal to develop the draft of a law on alternative sources of
energy for the parliament to adopt, but this initiative has not yet materialised.
***
Endnotes
1. https://energypedia.info/wiki/Uzbekistan_Energy_Situation.
2. https://www.export.gov/article?id=Uzbekistan-Utilities-Electrical-Power.
3. http://www.uzbekenergo.uz/en/activities/energy/.
4. http://www.eia.gov/countries/country-data.cfm?fips=uz.
5. http://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2016/bp-
statistical-review-of-world-energy-2016-full-report.pdf.
6. https://www.export.gov/article?id=Uzbekistan-Utilities-Electrical-Power.
7. http://www.uzbekenergo.uz/ru/activities/coal-industry/.
8. http://www.lincenergy.com/clean_energy_uzbekistan.php.
9. https://www.gazeta.uz/ru/2017/09/27/uranus/ (in Russian).
10. http://www.review.uz/novosti-main/item/11250-prirost-dobychi-gaza-v-uzbekistane-
k-2022-godu-sostavit-53-5-mlrd-kubov.
11. http://www.colibrilaw.com/sites/default/files/getting_the_deal_through_oil_regulation
_ in_uzbekistan_2013_0.pdf.
12. http://www.platts.com/latest-news/natural-gas/london/sasol-mulls-dropping-out-of-
uzbek-gtl-project-26389757.
14. https://www.uzdaily.com/articles-id-38244.html.
15. http://news.uzreport.uz/news_4_e_133267.html.
16. http://www.gazeta.uz/2015/07/17/solar/.
17. http://www.dhinfrastructure.com/tl_files/denzel/pdfs/Uzbekistan%20Energy%20
Sector%20Issues%20Note_final_eng.pdf.

19. https://my.gov.uz/en/getPublicService/332?item_id=89&action=view.
20. http://www.review.uz/index.php/novosti-main/item/2005-uzbekistan-prinyal-
programmu-razvitiya-promproizvodstva-na-2015-2019-gody.
21. http://tass.ru/ekonomika/2571234.
22. http://ru.sputniknews-uz.com/economy/20160122/1612753.html.
23. http://www.norma.uz/raznoe/edinyy_perechen_strategicheskih_obektov_
gosudarstvennoy_sobstvennosti_ne_podlejashchih_privatizacii (in Russian).
24. http://www.norma.uz/raznoe/o_merah_po_sovershenstvovaniyu_sistemy_
upravleniya_neftegazovoy_otraslyu (in Russian).
25. http://polpred.com/news/?cnt=163&sector=8.
26. http://easttime.info/news/uzbekistan/modernization-uzbekistans-major-hpp-
completed.
27. http://www.unm.uz/ru/press-center/novosti/254-47.
29. http://tass.ru/en/economy/883873.

Umid Aripdjanov
Tel: +998 71 120 4778 / Email: umid.a@centil.law
Umid has 20 years of legal experience in five jurisdictions. As a partner, he
co-heads the firm’s Energy & Subsoil Group and works with inbound foreign
investors and multilateral institutions, providing them with integrated legal,
tax and business services in Central Asia.
Umid has been focusing on the subsoil sector, advising on multi-billion dollar
investment and project finance transactions related to upstream, midstream
and downstream petroleum operations, mining, cement and petrochemical
industries in Uzbekistan, Kazakhstan, Kyrgyzstan, Turkmenistan and
Tajikistan. Umid has also been advising foreign investors on large-scale
automotive, textile and medical/pharmaceutical projects. Recently he has also
been advising foreign clients on investor-state arbitrations.
Umid is recognised as a “top-ranked” or “leading” energy lawyer by Chambers
Global 2006–2016, Legal 500, Who’s Who Legal, PLC: WhichLawyer and
BestLawyers.
Centil Law Firm

32 Shevchenko Str. 100060, Tashkent, Uzbekistan
Tel: +998 71 120 4778 / URL: www.centil.law

Venezuela
Juan Carlos Garantón-Blanco & Federico Araujo
Torres, Plaz & Araujo
energy sources
For the fourth continuous year, there have not been significant changes in Venezuela’s
energy mix. As is well known, during the last few years there has been a reduction in
hydropower generation capacity – mostly attributed by Venezuela’s government to the
climate phenomena known as “El Niño” – which caused mayor blackouts in most cities
in Venezuela, more particularly during parts of 2015 and 2016. Since then, Venezuela’s
hydropower infrastructure, which continues to generate and transmit well below its full
potential, has seen some signs of recovery, resulting from increasing water levels in the
country’s south areas (Guayana). On March 7, 2017, the Electricity Minister, Luis Motta
Domínguez, stated that, on that day, the water level of the Guri Dam was seventeen
metres (17m) higher than it was in March 2016. In any case, Venezuela’s government
remains significantly behind its investment schedule in hydropower generation as well as
with regard to major maintenance of existing facilities.
The main energy sources for internal consumption in Venezuela continue to be hydropower
and fossil fuels (both gas and liquid fuels, such as gasoline and diesel) with virtually no
presence of alternative renewable sources (such as solar energy, wind or bio-fuels). There
are just two wind power projects under way: an Eolic Park in Paraguaná called “Parque
Eólico La Guajíra”, and a second one in Falcón, “Parque Eólico de Paraguaná”; both
projects are, for practical purposes, non-operational at this time.
At the close of 2016, hydropower remains the main power generation source for
Venezuela. State power corporation, Corpoelec continues to post on its website (http://
www.corpoelec.gob.ve/generacion) that electricity generation results from a mix where
62% corresponds to hydropower generation, and the remaining 38% corresponds to
thermal generation. Experts provide different figures, which seem to be more in line with
the current situation, with hydropower generation estimated at 57% of total consumption,
and thermal at 43%. Regrettably, there is little information available from official and
unofficial sources.
Venezuela’s current energy mix is the result of government policies carried through the
first decade of this century aiming at thermal generation as an alternative to the ageing
of the hydropower infrastructure and transmission grid, through ideas such as the use of
distributed generation alternatives (i.e. the use of smaller generating plants fuelled with
diesel or gas) and the inability to carry out significant investment needed to expand, or
even maintain, hydropower generation facilities in place and projects pending completion
for the past two decades.

Torres, Plaz & Araujo Venezuela
During the past year no material advances have been recorded in the most important
projects (completion of the Tocoma dam, in the lower Caroni, which would have added
2,160 MW to the system, remains lagging – the dam was filled but the turbines are not
operational and there seem to be issues with the major contractor, while the Guri dam is not
performing at full capacity in light of technical limitations). Corpoelec has focused more
on shifting to combined cycle power generation facilities (e.g. according to Corpoelec,
India Urquía combined cycle has been fully operational since the end of December 2016,
generating 180 MW, while a replacement of one of the Juan Bautista Arismendi turbines
generating 30 MW is under way) in order to reduce consumption of liquid fuels.
Energy consumption associated with motor vehicles continues to be based exclusively on
fossil fuels, and more particularly fuelled by gasoline and diesel, with little use of gas.
(State-owned Petroleos de Venezuela, PDVSA, reported last for 2015 the completion of
10 gas-fuelling points, and advancing the installation of 27 additional points for a total of
342 points country-wide. There is no news as to said expansion having taken place, let
alone evidence of the same being advanced.) In Venezuela there is no use of bio-fuels or
green fuels.
PDVSA’s financials for FY 2016 indicate that 510 MBD (refined products and LNG) were
sold in the domestic market, evidencing a reduction in the said market. While the report
attributes the reduction to both government measures against hydrocarbons-smuggling
across the border (which some experts estimate at around 30 MBD) and price adjustments
which took place back in February 2016, evidence of an stagnant economy seems closer to
the real reason for a reduction in the domestic market consumption of gasoline. Nevertheless,
consumption remains high for the current size of Venezuela’s economy.
Gasoline prices have remained the same for almost two years (at nominal bolivar terms). With
significant inflation and devaluation in place, the real cost of producing gasoline has increased
and the price remains heavily subsidised. Broadly, current prices translate as follows:
95-octane gasoline at 6 bolivars/litre equals less than 1 U.S. cent a gallon (using applicable
exchange rate DICOM of 3,300 bolivars/US$ as posted by the Central Bank). With inflation
estimated to exceed 1,000% during 2017 and a significant devaluation, a reasonable move
would be to increase the price of gasoline and products to the domestic consumption market,
at least to re-establish real terms prices for February 2016, and reduce the significant loss
for PDVSA and the incentive for smuggling (since the last quarter of 2016 and throughout
2017, PDVSA has been selling gasoline at “international prices” in gas stations located on the
border with Colombia, accepting foreign currency for alternative payment).
There are no developments to report on alternative energy sources.
From the second half of 2015 to date, there has been a significant drop in both production
and export volumes, against a backdrop where the price of oil and oil products in
international markets fell sharply and – while increasing somewhat during the first
half of 2017 – continues to remain low (in light of the substantial budgetary needs of
Venezuela). According to PDVSA’s Financial Statements Management Report for
FY 2016, hydrocarbons exports dropped to 2.189 MBD. This represents a reduction
compared to FY 2015, when Venezuela’s exports were close to 2.425 MBD. OPEC
puts Venezuela’s production during the last quarter of 2016 at 2.021 MBD (according to
secondary sources), and during the second quarter of 2017, at 1.955 MBD.

At the end of 2016, proven reserves stood at 302,250 MMB, according to PDVSA’s
management report for FY 2016. Only 13.56% of the proven reserves (40,995 MMB)
correspond to conventional crude oil (condensates, light, medium and heavy oil) and the
remaining 86.43% to extra-heavy crude oil reserves (261,253 MMB), most of which is
located in the Orinoco Oil Belt (FPO) area. Significant reserves relate mostly to extra-
heavy crude oil, whose cost of extraction and upgrading tends to be significantly higher. In
fact, a closer look reveals that developed reserves stand at 12,944 MMB.
Developing the said reserves requires a significant investment not only in production but
also in upgrading the extra-heavy oil (EHO) to produce synthetic crude oil (SCO) which
may be processed in refineries accepting such a diet, or alternatively, it requires combining
the EHO with light oil in order for the same to be marketed as blend (diluted crude oil or
DCO). Blending avoids the costs and time required for building the facilities needed to
upgrade EHO, but requires buying large amounts of diluent (light crude oil) in order to
blend and sell DCO (at a price lower than the price paid for the diluent), which diluent has
to be bought overseas. As PDVSA is cash-strapped and heavily indebted, purchasing light
oil has proven more troublesome as credit is not readily available. The situation is likely to
worsen in light of the sanctions recently imposed by the Government of the United States of
America on the Government of Venezuela, which would further restrict its ability to finance
operations.
To date, production and exports miss the targets identified in Venezuela’s government mid-
term plan (Plan de la Patria), as the same continued to fall during 2015 and 2016, while the
first half of 2017 has seen additional reductions in production and exports, as evidenced by
OPEC’s production figure of 1.938 MBD for June 2017.
The situation has deteriorated throughout 2016 and the first half of 2017 in light of the
economic crisis in Venezuela and underinvestment, largely associated with heavy debts and
the inability of PDVSA to finance its majority stake in the upstream Empresas Mixtas or
to attract additional investment under the current conditions. A look at PDVSA financials
for 2016 shows a decline in net income of 88.7% to $828m in 2016, due to a decline
in production and low prices, under which PDVSA will not be able to cope with needed
investments in its own operations or the Empresas Mixtas.
The average number of drilling rigs in operation is reported to have increased, at 50 (one
more than last year). Breaking that down, inland-based rigs fell from 47 to just 44 –
Venezuela’s lowest land-based rig number since September of 2004. Offshore rigs went up
from just two in June, to six in July 2017. The increase in offshore rigs is aimed basically
at gas, not oil.
PDVSA continues to struggle with large rig operators such as Halliburton, Schlumberger,
Baker Hughes and San Antonio in light of extended payment issues. The same has led the
companies to scale back their operations in Venezuela, and to re-negotiate the outstanding
receivables into commercial debt (which was done by Schlumberger and Halliburton), which
now may face further risks in light of the recent sanctions issued by the U.S. Government
curtailing the ability of the Venezuelan government (including PDVSA) to pursue finance
extending beyond 90 days’ credit.
At the same time, as expressed in earlier reports, Venezuela’s oil and products exports
continue to shift to a more crude oil-based trade, with fewer products (hence incorporating
less value), while at the same time continuing to export heavier crude oil or DCO.
The price of oil and oil products, which had been low since the second half of 2014 and
continued to drop throughout 2015 (PDVSA reported an average price for the Venezuelan

basket of US$ 44.67/bbl) and most of 2016 (the average price for the first half of 2016
stood below US$ 34/bbl), has been recovering. During the second half of 2016 the average
price for the Venezuelan basket increased to US$ 39.10, and it closed the first half of 2017
at US$ 45.66/bbl. Nonetheless, the fall in production has largely offset price recovery
during the first half of 2017. Such situation clearly affects Venezuela, which remains
heavily indebted and would need far higher prices to achieve a balanced budget.
PDVSA’s total revenues fell 33% to US$ 48.01bn in 2016 (from US$ 72.16bn reported for
2015), its total financial debt standing at US$ 41.1bn, according to its financials. The report
also identifies export and sale revenues at US$ 41.31bn last year. PDVSA’s profit in 2016
is US$ 1.93bn, down from US$ 10.66bn the previous year, barely in the black. The report
shows other pending obligations with suppliers for US$ 19.82bn (down from US$ 20.83bn in
2015), as well as other contingencies with third parties (including payment of participations,
advances from investors, inter alia) amounting to US$ 40.3bn.
To date, PDVSA has been able to honour its debts and restructure part of them through a
bond-swap during August 2016, which allowed bondholders to exchange debt maturing
in 2016 and 2017 for debt due in 2020, having a collateral guarantee of 50.1% of shares
in Citgo Holdings Inc. Additional financing has been obtained from Russia’s Rosneft in
the form of advances on the purchase of oil and products. During 2016 advances totalled
US$ 1.48bn, adding to the US$ 4bn already in place since 2014. In addition, last May
Rosneft lent PDVSA close to US$ 1.5bn with collateral of over 49.9% of the shares of Citgo
Holdings Inc. The move triggered legal action by ConocoPhillips and other interested
parties, and has been targeted for further review in the U.S. by the Committee on Foreign
Investment in the United States (CFIUS).
While such restructuring and support has been key in avoiding a default, their terms are
likely to become a burden limiting PDVSA’s development in the near future, and Venezuela
still has US$ 5bn in debt maturing before end of the year – both in sovereign bonds and in
debt payments by PDVSA. With just over US$ 3bn in cash reserves in Venezuela’s Central
Bank (S&P Global Ratings), a possible default still looms, as October and November show
a combined US$ 3.6bn in debt to be paid to bondholders.
Under such an scenario, it remains clear that Venezuela’s oil and gas future relies on the
ability to attract private investors, which may allow for much-needed investment in oil and
gas production, and also allow Venezuela to release financial resources which are gravely
needed in dealing with restructuring debt service and supplying basic public goods to the
Venezuelan population. A change in the legal framework is critical, but this is secondary to
achieving a nationwide political accord which can guarantee that any legal changes can be
sustained over time.

Oil
The Venezuelan government’s efforts to pursue a recovery in oil prices through OPEC
commitments, and OPEC agreements with third countries such as Russia and Mexico, has
certainly helped in the increase in prices experienced during the second half of 2016 and
the first half of 2017.
Two features are significant for Venezuela, namely: that Venezuela’s OPEC export cap was
set below 2m bbls; and Venezuela’s production and export continues to decline below the
said cap. As such, the price increase is unlikely to deliver material results for PDVSA.
Furthermore, it is not envisaged in the short term that oil prices will continue to spike,

as non-conventional production in the United States has been increasing efficiency and
reducing costs; there remains a surplus inventory of crude, and Iran and Iraq continue to
steadily expand production, while Russia expressed its unwillingness to commit to further
output reductions at the close of the first half of 2017.
Venezuela has continued to express its support for the PetroCaribe energy supply agreement
(18 countries participate in the same, Venezuela being the sole supplier), as well as similar
agreements, in place regardless of the current drop in oil price and production. Under
PetroCaribe and similar agreements, Venezuela supplies crude oil and products at reduced
prices and/or at credit. (Oil purchases can be financed up to 80%, payable over 25 years at
1−2% interest rates and with a two-year grace period. In addition, the part of the bill that is
due in cash can be paid for in kind.) Venezuela sent 32% less oil and fuel to the 18 member
nations of PetroCaribe in 2016 as compared to 2015; an average 84,000 bpd, according
to data from the Ministry of Petroleum and Mining (MPPPM). It dispatched an average
122,800 bpd in 2016. Under Petrocaribe and other arrangements, Cuba alone received
83,700 bpd during 2015, as reported by PDVSA.
Venezuela has maintained its export strategy aimed at Asian countries, mostly the People’s
Republic of China (PRC) and India. The U.S. ranks second in the client list, the PRC being
the top destination of Venezuela’s crude oil. In the case of the PRC, based on PDVSA’s
financials FY 2016, 783 mbpd are sold to China and India, while 734 mbpd are sold to
the U.S. alone. Shipments to Russia, or directed to repay advances by Rosneft, have
continued to grow during 2016 and 2017 (analysts cite that supplies to Rosneft and Lukoil
are averaging 250 mbpd).
The reasons for the said strategy range from political to economic, but most likely short-
term economic reasons are primary, for the following reasons:
Venezuela has been in need of finance in the last few years and has made use of credit
facilities granted through bilateral agreements with the PRC, as well as certain private
agreements with market players. Such agreements have resulted in the commitment of
significant quantities of oil as either a security or as means for payment (in the case of
the PRC, 505 mbpd were supplied in 2016 on the basis of International Commitments of
Venezuela).
More recently, the need for finance has increased and hence alternatives to oil for finance
have expanded; in particular, in the case of Rosneft, the same has continued to finance
PDVSA in exchange for oil payments or, lately, in looking to increase its stake in oil and
gas upstream projects in Venezuela.
As of late, it is likely Venezuela may need to continue to diversify its markets in light of
the U.S. sanctions imposed under the U.S. Executive Order of August 24, 2017. While the
sanctions do not restrict or curtail supply of oil to U.S. marketers (or refineries), the same
do restrict financing transactions extending beyond a 90-day term. As such, no prepayment
alternatives are available for PDVSA in the U.S. market.
PDVSA has continued to pursue supplies of light sweet crudes through one-to-five year
contracts, in order to leverage its much-needed blending strategy. No reliable data is
available and PDVSA financials do not provide any details as to the extent of its imports for
blending during 2016; some analysts indicate imports remained below those of 2015 when
PDVSA imported some 95,000 bpd of heavy naphtha and light crude to dilute its oil. This is
another area that will likely be significantly impacted by the U.S. Executive Order, as most
pre-payment alternatives will be limited.

As reported last year, no additional areas have been awarded in the Orinoco Oil Belt area
(55,000 km), other than the 20 areas where investors can participate through Empresas
Mixtas. While the MPPPM and PDVSA continue to devote efforts to pursuing increased
financing plans with current investors to allow for the recovery and increase in production,
the same have not advanced as expeditiously as expected. Some notable exceptions are
those related to current financings with the PRC and with Rosneft, under which Rosneft
and CNPC are aiming at increasing their participation in Faja projects. Another one is the
PDVSA REPSOL deal signed last October under which Repsol is to provide a credit line of
up to US$ 1.2bn to expand oil production in Petroquiriquire.
The finance structure encompasses an opening-up of the participation of private investors
in the operations of the relevant Empresa Mixta, especially in the areas of procurement and
technical assistance. Under the same, financing is arranged by the private investor, and
secured through the setting-up of an overseas trust where proceeds from the sale of crude
oil (in the case of mature fields) or the sale of diluted crude oil (DCO) (in the case of Faja
investments) are held in order to repay operating investments (and expenses) and certain
capital investments (e.g. dividends). Under the financing agreements, disbursements with
contractors and suppliers are handled in a more balanced manner as regards decision-
making, and the money flows are channelled directly to contractors and suppliers, allowing
for enhanced transparency.
Gas
For 2016 and the first half of 2017, there are a couple of important developments in upstream
gas, in the areas of the former Mariscal Sucre project (four areas located in northern Paria
Peninsula in east Venezuela: Dragón, Patao, Mejillones and Río Caribe).
PDVSA GAS aims to start production in the Dragón Field during the second half of 2017,
with the aim of producing 300 million MMCFPD by early 2019. Most of the pipelining
connecting Dragón to inland facilities is already laid out for supplying the domestic market.
In addition, in March 2017 PDVSA signed a preliminary agreement with Shell and Trinidad
& Tobago’s state-owned National Gas Company (NGC) to export Venezuelan offshore gas
from Dragón to the nearby country. The gas supply agreement includes Shell as a party. A
prior state-to-state agreement signed in December 2016 laid the groundwork for the deal.
Under the project, Shell would ship gas from the wellhead in Venezuela’s shallow-water
Dragón field to the Shell’s Hibiscus field platform off Trinidad, under a build, operate and
maintain structure for a 17km (10.6mi) flowline, and to LNG loadings from Trinidad’s
Atlantic liquefaction complex, in which Shell is the main shareholder. If the agreement
comes through, it will generate much-needed foreign currency for PDVSA.
On the basis of the memorandum of understanding negotiated between PDVSA and Rosneft
back in 2015, to set up a joint venture to develop natural gas off the coast of Paria (over the
Mejillones and Patao areas), the parties advanced towards signing a more formal Heads of
Agreement during 2016 but negotiations are still under way and one or more licences will
need to be issued. Originally each firm was to hold a 50% share in the venture, and there
was an option for including the Rio Caribe field. The project encompasses the erection of
at least one liquefaction facility to develop a world-class, export-oriented LNG project.
There are no changes to the situation of the Gasoducto Transcaribeño running from
Paraguaná to the Ballenas field, as exports to Colombia of about 39 million cubic feet a day
from Venezuela (which corresponds to just over 3% of daily supply in Colombia) through
the pipeline have not been achieved to date (they were to begin on December 2015). There
is no information available as to the reasons for the delay, but it seems production from

Cardón gas field (ENI/Repsol) in north-western Falcón state have not yet been committed
to satisfy the said supply obligations.
As identified last year, the Shell and Rosneft deals evidence PDVSA policy of achieving
monetisation of gas production in the mid-term using Trinidad & Tobago LNG plants for
export, in order to guarantee the feasibility of gas exploration and production (E&P) projects
in the north and eastern seaboards. The same has its grounds in the negotiation during 2015
of bilateral unitisation agreements between the governments of Venezuela and Trinidad
& Tobago, as per the Framework Treaty on the Unitization of Hydrocarbons Reservoirs
Extending along the Delimitation Line between the Bolivarian Republic of Venezuela and
the Republic of Trinidad & Tobago, signed on March 20, 2007.
The said unitisation agreements (the first was signed in 2013) cover three gas reservoirs
located in the common frontier area. Loran-Manatee is the largest, with an estimated 10.25
Tcf of reserves. Venezuela holds a 73.75% ownership interest, and Trinidad & Tobago holds
26.25%. Ownership of the Cocuina-Manakin Field, with an estimated 740 Bcf of reserves,
is 66% held by Trinidad & Tobago and 34% held by Venezuela. The Dorado Kapot Field
has an estimated 310 Bcf of reserves and is 84.1% held by Trinidad & Tobago and 15.9%
by Venezuela. It is our understanding that further developments involving licensees to the
said areas, both in Venezuela and T&T, were advanced throughout the last half of 2016 and
the first half of 2017.
Electricity
In terms of investments, the situation has remained in similar terms as for 2016 in the areas
of energy generation, transmission and consumption, in terms of investments. There are
few advances to be shown in the area of generation, and major investments required by the
hydropower grid are far behind schedule, including conclusion and start-up of the Tocoma
dam as well as maintenance of Guri, Macagua and Caruachi; as well as a much-needed
major overhaul of the transmission grid.
To be sure, there has been a reduction in scheduled and unscheduled rationing and power
outages, as the hydropower generation capacity has been partly restored in light of longer
rainy seasons during 2016 and the first half of 2017, and industrial consumption has been
reduced in light of the economic crisis. In any case, the government has kept in place a
reduction in supply to malls and hotels, among others.

Last year’s report referred to the election of a new Asamblea Nacional filled mostly
with opposition parties, in what could be viewed as a change in trend. As expected, the
Venezuelan government and the Supreme Tribunal of Justice (TSJ) have continued to
prevent any attempts by the Asamblea Nacional (AN) at producing law-making at all
(to date, all laws passed by the AN have been declared unconstitutional by the Supreme
Tribunal of Justice). Furthermore, in an open rejection of its constitutional obligations, the
government has sidelined Congress in the exercise of overview and control powers over the
public administration and PDVSA. In fact, the budget law as well as the public credit law
for 2017 were not sanctioned by the AN but by the Supreme Tribunal of Justice, in a clear
departure from our Constitution.
In the said scenario, Maduro’s government has continued to extend over time a state of
economic emergency with the blessing of the Supreme Tribunal of Justice Constitutional
Chambers (whose members were elected unconstitutionally at the close of 2015), allowing
him to pass laws and regulations without control from the Asamblea Nacional. The Decrees

are to be subject to Asamblea Nacional approval and are to be limited to a two-month span.
All decrees issued have been repeatedly rejected by the AN.
Up to March, the government had made use of the said powers to advance limited-scope
changes to the oil and gas legal and regulatory framework, particularly in areas such as the
signature of international agreements with Russia and the PRC, which treaties serve as an
umbrella for investments by Russian and Chinese companies (mainly, Rosneft and CNPC),
as well as approving increased participation in Empresas Mixtas.
A decision of the Supreme Tribunal of Justice Constitutional Chamber in last March
(Decision 156 of March 29, 2017) dealing with government powers to set up and amend the
conditions for the set-up of oil upstream Empresas Mixtas under Article 33 of the Master
Hydrocarbons Law (Ley Orgánica de Hidrocarburos) sparked wide protests which led to
massive demonstrations during the past 120 days and have resulted in significant violations
of human rights. The decision went so far as to broadly cancel the legislative powers of the
AN and shift law-making powers to the Executive Government and the Supreme Tribunal
of Justice, i.e. a complete breakdown in the rule of law.
While the outcry led to a partial review of the ruling on April 1, 2017, the new ruling (also
issued by the TSJ in Constitutional Chamber) maintains the powers of the government
to set up and amend Empresas Mixtas without the need for the AN to issue or review the
framework of conditions, and without the need for the government to even inform the AN,
but simply the TSJ. Such changes allow the government to advance projects and changes
to Empresas Mixtas without any parliamentary control, but the same add little certainty to
investors in a long-term business as oil E&P.
Changes to the basic framework
Last month the government called for and appointed a Asamblea Nacional Constituyente
(ANC) to draft a new Constitution, with broad powers to pass “constitutional” laws. While
the move is seen as a clear departure from the rule of law (both in light of the opaque
manner in which the representatives were appointed, and as to the powers supposedly
vested in the same), there is an offer as recent as August 2017 to pass new laws to foster
investment in different areas, including oil and gas. So far, how things will evolve is far
from clear. The offer has been broadly rejected by the international community (but for
some stakeholders such as Russia and the PRC, inter alia) and there is a call for sanctions by
the Organization of American States and the European Union, while the U.S. Government
has been advancing sanctions against Venezuela’s government officials, TSJ justices, and
members of the newly “elected” ANC. The said sanctions now extend to PDVSA under an
Executive Order issued on August 24, 2017.
As it refers to lawmaking by the Asamblea Nacional and since the same has been sidelined,
no advances are expected from the same with regard to the framework laws applicable to
hydrocarbons, namely the Ley Orgánica de Hidrocarburos (LOH) and the Ley Orgánica de
Hidrocarburos Gaseosos (LOHG). Last year the Asamblea Nacional had advanced with a
bill for amendment of the LOHG, which was not further advanced after some discussion.
The same applied to a bill for the amendment of the Law reserving to the State the Assets
and Services Related to Oil Primary Activities. While both bills were approved in first
discussion, further advances took place throughout the year.
Foreign currency exchange
Venezuela’s foreign currency exchange system remains very complex. Additional changes
were introduced in the first quarter of 2017 but the system remains opaque, discretionary and

unbalanced, as applicable to companies engaged in hydrocarbons activities and contractors.

Exchange Agreement (CC) 9 remains the cornerstone of the system for oil-producing
companies (e.g. Empresas Mixtas) and the same provides for the mandatory sale to the BCV
of currency proceeds from the sale of hydrocarbons by Empresas Mixtas under the LOH,
and that under such CC, the same may not pursue foreign currency from the competent
authorities (CENCOEX or the BCV) to pay for their obligations in foreign currency.
An advance has been the issue of exchange agreement 35 (CC35) under which the foreign
currency exchange rate under CC14 (Bls 6.28/US$) on mandatory sale of foreign currency
obtained from the sale of hydrocarbons to the BCV was repealed. The downside is that under
the new regime, one of two rates may apply: a lower rate, dubbed ‘DIPRO’, running at 10
Bls/US$, and a much higher rate which may result from the DICOM bidding transactions
system, running at 10,000 Bls/US$. Use of the latter is to result from a programming
and coordination of policies among the Vice-presidency for the Economy, the Ministry of
Banking and Finance and Venezuela’s Central Bank. To date there is no such programming,
but rather decisions on what rate to apply are advanced on a case-by-case basis, and with
significant uncertainty for many projects.
Investors are still debating the use of DIPRO, as the said rate is clearly unrealistic, and
results in major distortions in the handling of the finances of the Empresas Mixtas and their
financials (denominated in functional currency, i.e. US dollars). More recently, the BCV
issued an Official Notice (published in Offcial Gazette of April 4, 2017) of a decision of
its Board under which the same sets the former rate (DIPRO) as the rate applicable for the
computation and payment of taxes for taxpayers engaged in upstream oil and gas activities.
Oil Empresas Mixtas are, nevertheless, vested with rights under CC9 (Article 5) to keep the
amounts they need in order to comply with their obligations in foreign currency (including
payment of dividends to shareholders − which under the Empresa Mixta Agreements are to
be paid in US$).
In the case of foreign investments and financing, under CC35 the bringing of foreign currency
into Venezuela by means of international investments (i.e. capital or other forms of equity
contributions) and financing in foreign currency may be carried out under DIPRO or DICOM,
as identified in the Government programming. CC35 reading would allow the companies
to pursue the purchase of foreign currency to deal with obligations denominated in foreign
currency. It remains to be seen if and how the same will be instrumented in practice.
In May 2016, the Government and the Central Bank issued CC37 to apply to non-associated
gas licensees. Under the same, the licensees may keep any foreign currency received from
any sources (contributions, loans, inter alia) including their export sales or local sales in
foreign currency, in order to pay for any and all investments and costs associated with their
activities. CC37 provides that the same will not get access to foreign currency from the
BCV to pay for their obligations in foreign currency.
In May 2017, the Government and the Central Bank issued CC38. According to CC38,
foreign currency transactions using the DICOM bid system must be advanced through bids
before the Central Bank, natural persons and legal entities. Individuals or entities interested
in offering or acquiring foreign currency, except for a few exceptions, shall submit their bids
directly through the www.dicom.com.ve website. In late May 2017, the Foreign Currency
Auction Committee issued the respective General Rules for Foreign Currency Auctions
through the DICOM System. All oil and gas companies may – at least theoretically – access
the same to maximise the use of their foreign currency investment for Bolivar-denominated
capital and operating costs.

Under the current F/X regulations and CCs, there is no requirement for contributions in
foreign currency, or loans granted to companies incorporated in Venezuela, or to branches
of foreign companies set up in Venezuela, to be brought into Venezuela or transformed into
Bolivars.
Tax changes
As reported for last year, a major amendment of the corporate income tax issued at the close
of 2015 has resulted in oil and gas companies (including Empresas Mixtas) being excluded
from the adjustment per inflation system in ascertaining their income tax liabilities. The
amendment excludes taxpayers characterised as “special taxpayers” from the regime (all oil
companies are characterised as such, as per the Tax Authority regulations), which regime is
aimed at reducing the undue burden of inflation on a nominal accounting basis. The impact
tends to be far more significant in oil and gas projects which have a significantly large asset
basis, more particularly in a country with extremely high inflation rates during 2016 and
2017.
The financial transactions tax remains in place at 0.75%, applicable not only to withdrawals
on accounts held in local banks and financial institutions, but also on the set-off, payment
or settlement of obligations in general. There have been discussions as to the extent of the
tax and whether it would only apply to settlement of financial obligations. Much-needed
guidance remains non-existent.
As of this time, no relevant changes on tax matters have been introduced in Venezuela
during 2017.
Industrialisation / Refinery currents
On November 2, 2016 the MPPPM issued a new ruling N° 130, with the object of setting
new rules dealing with registration of already existing and new projects for industrialisation
of refinery currents (i.e. some products and by-products) and the marketing of industrial
products (it applies to all activities not characterised as petrochemical activities). Under
the same, the Ministry has more control and discretion in terms of approval of the projects
carried out by private parties, the execution of supply agreements with PDVSA affiliates
and the destination of their products, as well as in setting up prices which are linked to the
product destination (overseas or domestic market).

With regard to Exxon-Mobil (ICSID Case No. ARB/07/27) regarding the migration of the
Cerro Negro Asociación Estratégica of the Orinoco Oil Belt and the Sole Risk Exploration
and Production-Sharing Agreement for La Ceiba, the Exxon-Mobil final award received a big
blow after an ad hoc ICSID committee issued a decision on the annulment process requested
by Venezuela (on February 9, 2015). The ad hoc committee issued on March 9, 2017 an
award on the Annulment Request filed by Venezuela. The ICSID committee found that the
arbitration panel exceeded its powers in issuing a US$1.4bn portion of the award, because the
tribunal improperly based its decision on international law, despite a contractual agreement
for the project that stipulated compensation in the case of adverse government action which
would be decided under Venezuelan law. The decision did not affect the awards of $9m and
$179m to Exxon for export curtailments and expropriations of Exxon's investments in the
La Ceiba project. The next steps to be adopted by Exxon-Mobil with regard to the annulled
portion remain to be seen, but as far as the remaining US$ 188m of the award which was
confirmed, plus attached interest (somewhere around US$ 68mm) Exxon has been advancing
court actions to unblock a stay in favour of Venezuela and to produce foreclosure.

In the case of the arbitration award in favour of Tidewater (ICSID Case No. ARB/10/5)
regarding the taking of its assets under the Law Nationalising Oil Services (Ley Orgánica
que Reserva al Estado Bienes y Servicios Conexos a las Actividades Primarias de
Hidrocarburos) of 2009 in breach of the obligations under the Barbados–Venezuela BIT,
a March 20, 2015 application for revision of the award, including a request for stay of
enforcement, was dismissed as inadmissible. Annulment proceedings are being advanced,
and a decision was issued on February 29, 2016, under which the stay of execution was
partially lifted. Hearings before the ad hoc committee took place in early July 2016. A
decision on the annulment was issued on December 27, 2016, by which a portion of the
award was annulled. Nevertheless, Venezuela still has to pay US$ 36.4m to claimant.
The situation remains entangled in the case of Conoco-Phillips (ICSID Case No.
ARB/07/30). As it may be recalled, a decision on jurisdiction and the merits was issued
on September 3, 2013. In its decision, the arbitration panel upheld the request for
compensation for breach of Article 6(c) of the BIT as the expropriation was unlawful,
as Venezuela had not negotiated compensation in good faith. While the decision on the
merits was final, the same did not constitute the final award, as a determination on the
quantum was, and remains, pending.
After the decision and pending the determination of the amount of compensation, Venezuela
submitted a request for reconsideration, which request was rejected, with the dissenting
opinion of arbitrator Abi-Saab. The same led to a request by Venezuela before ICSID’s
Administrative Counsel to disqualify the majority of the Tribunal, which request was
declined on May 5, 2014 by ICSID Chairman of the Administrative Council. While the
parties proceeded to file their writs (memorials, counter memorials, et alia) on quantum,
from February, 2015 the process has been mostly halted as arbitrator Abi-Saab resigned
from the panel in February; a new arbitrator was appointed, Mr Andreas Bucher; another
arbitrator, Kenneth Keith, resigned; and Mr Eduardo Zuleta was appointed. Finally,
hearings on quantum determination were held in mid-August 2016.
On January 17, 2017, an interim decision was issued. Under the same, the tribunal
decided that Venezuela had breached Article 6 of the BIT, by unlawfully expropriating
the claimants’ investments in three projects in the Orinoco Belt in Venezuela. After such
decision, two more quantum hearings have been held. The first of these meetings was held
in February, while the other hearing took place in March. After the last hearing, lawyers
filed their briefs. Even if an award is issued during the remainder of 2017, it is very likely
Venezuela will pursue its revision, and later annulment.
Conoco-Phillips also filed a complaint before the U.S. District Court of the District of
Delaware against PDVSA, PDV Holding, Inc., Citgo Holding, Inc. and Citgo Petroleum
Corporation, for fraudulent transfer, removal and/or encumbering of assets that could
otherwise be subject to collection on eventual judgments confirming the arbitration awards.
The complaint was filed on October 16, 2016. On January 6, 2017, PDVSA filed a motion
to dismiss the case. However, on April 10, 2017, the plaintiff filed an Answering Brief to
PDVSA’s motion to dismiss. A decision is pending.
As a result of the award issued on April 4, 2016 on the Crystallex International Corporation
vs. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/11/2) arbitration procedure,
Venezuela must pay Crystallex the equivalent of US$ 1.4bn. On March 25, 2017, a Federal
Court in Washington D.C. registered the US$ 1.4bn award against Venezuela. Crystallex
has also had the award acknowledged and registered in Canada. On May 1, 2017, the U.S.
Federal Court granted PDVSA’s motion to be dismissed as a Party to the Enforcement

Proceedings. On August 8, 2017, the Court issued a memorandum denying the respondent’s
motion to stay execution of judgment, pending appeal.

To date, Venezuela has borrowed over US$ 60bn from China, repaid with oil shipments from
PDVSA (according to commentaries from MPPPM, up to US$ 32.2bn has already been
repaid). Exports to China during 2016 to meet obligations under the same are identified by
PDVSA as below 600,000 bpd. Said repayment schedules placed significant pressure on
PDVSA’s finances, even when the same were renegotiated and rescheduled last year.
Oil
Rosneft continues to advance its investments in Venezuela at a steady pace. It took an
important step by buying US$ 500m stock from PDVSA in Petromonagas (Anzoátegui
state), raising its stake from 16.67% to 40%, which went through without AN approval (in
fact, the AN Energy Committee rejected the deal in February 2017), and which may have
prompted the request for and issuance by the Supreme Tribunal of Justice Constitutional
Chamber of ruling 156 of March 29, 2017, referred to earlier in this report.
PDVSA and Rosneft have continued to advance their agreement for the joint development
of Carabobo 2 Norte block of the Orinoco Faja, with Rosneft having a 40% stake, and
PDVSA the remaining 60%. The agreement calls for the construction of a 10mm tpy
refinery/upgrader to improve the quality of crude oil for export.
Field evidence and the new Rosneft loan of US$ 1bn in April (US$ 6bn having been advanced
in total over the last three years) show Rosneft looking to swap debt for investment for other
Orinoco Faja projects, including Petrosucre (the most productive Faja area in Venezuela),
Petroanzoategui and Petropiar.
PDVSA negotiations with Chevron for an increase of its stake in Petropiar, from 30% to
40%, did not advance significantly during 2016, hence PDVSA’s turning to Rosneft for
involvement in the said project.
Chevron reported in its financial statement for FY 2016 that income from equity affiliates
decreased in 2016 from 2015, primarily due to lower upstream-related earnings from
operations in Kazakhstan and Petroboscan in Venezuela. However, Chevron also reported
higher earnings from Petropiar.
Gas projects
North of Paria Projects. A Heads of Agreement was signed with Rosneft to advance
projects in the Patao and Mejillones areas, under which PDVSA would only invite other
potential investors into the project with the consent of Rosneft. There are still many items
to be identified and solved in the agenda before a final agreement is in place and a licence is
issued. According to PDVSA, the aim is for the project to generate somewhere around 950
million cubic feet per day (mcf/d) of natural gas, with a target of incorporating 300 mcf/d
during 2016, and the remaining 650 mcf/d before the end of 2018. The Project would aim
at building liquefaction facilities to export LNG.
In addition, during 2016 the erection of the Dragón-CIGMA gas pipeline was completed,
while there have been no significant advances in the construction of the PAGMI plant.
Based on PDVSA’s management report for FY 2016, an Accelerated Production Framework
(APF) is being implemented in Project Mariscal Sucre – which is a project that seeks the
introduction of offshore natural gas into the internal market and the development of 70% of
the non-associated natural gas and condensed liquids in the Dragón, Patao, Mejillones and

Río Caribe fields, in order to produce 1.250 mcf/d and 28 mbpd. According to the official
data, the APF is showing an advance of 90.72% as of December 31, 2016.
In late 2016, an agreement was reached between Venezuela and Trinidad & Tobago to
execute a Natural Gas Supply Project from Venezuela to Trinidad & Tobago through a gas
interconnection starting from Dragón Field. In March 2017, PDVSA signed a preliminary
agreement with Shell and Trinidad & Tobago’s state-owned National Gas Company (NGC)
to export Venezuelan offshore gas from Dragón to the nearby country. Under the project,
Shell would ship gas from the wellhead in Venezuela’s Dragón field to Shell’s Hibiscus
platform off Trinidad.
Cardón IV. Repsol and ENI have continued to produce gas from the Cardón IV block,
located 50 kilometres (31 miles) offshore the coast of Falcón state in north-west Venezuela.
As of 2016, based on the PDVSA’s management report, Cardón IV produces 508 mmcf/d
and 15 mbpd of condensate. The block has proven gas reserves of 17 trillion cubic feet
(TCF). The operating licence for the gas field is held by the Cardón IV-SA joint venture, in
which REPSOL holds a 50% stake and ENI holds the remaining 50% interest. PDVSA has
yet to decide whether it will exercise a 35% back-in right to date. Discussions are under way
regarding Phase II of the project which may lead to 950 mmcf/d of natural gas in the first
two years, with a subsequent boost to 1.2 mmcf/d of gas and 38 mbpd barrel of condensate.

In light of the current standing of the Asamblea Nacional, it is unlikely any changes will
result from the same in the short- to mid-term. The bills for an amendment of the LOHG and
for the amendment of the Ley Organica que reserva al Estado bienes y servicios conexos a
las actividades primarias de Hidrocarburos, i.e., the operating services reserve law, in order
to allow private contractors to engage directly in services aimed at primary (E&P) activities
in Lake Maracaibo and across Venezuela, will not be advanced any time soon.
On the other hand, the newly constituted Asamblea Nacional Constituyente (ANC) holds
open powers which may be used to change the oil and gas framework broadly. Whether
such changes will be advanced and the same will result in attracting foreign investments,
remains still sketchy at best. The fact that the ANC is in place and there is no set schedule
for its dealings, or the timing for crafting a new Constitution, is a clear deterrent to new
investments in Venezuela. As previously stated, the ANC may change the game rules at
any time.
A whole system change needs to be introduced to the Empresa Mixta participation agreements
to allow for balanced control over operations, securing investor financing and recovery
under transparent rules, while at the same time allowing the financial burden to shift to
the private investor. Chief among the changes would be for private investors to secure
their return by having the Empresa Mixta marketing (selling) its production directly in the
international market rather than keeping the same obliged to sell to a PDVSA affiliate. No
other alternatives seem feasible from a financial viewpoint, as PDVSA lacks the resources
to advance any investments required.
No changes are needed at this time, nor are any such changes desirable with regard to gas
activities under the Ley Orgánica de Hidrocarburos Gaseosos, as the same encompasses a
very straightforward framework for investments in upstream and downstream gas activities
in Venezuela.

Juan C. Garantón-Blanco
Tel: +58 212 905 0239 / Email: jgaranton@tpa.com.ve
Juan Carlos Garantón is a senior partner of Torres, Plaz & Araujo (TPA).
His practice focuses primarily on energy (oil, gas, petrochemicals), mining,
electricity and infrastructure projects, covering project corporate, tax and
public law structuring and advising, as well as advice on project and corporate
financing.
Mr. Garantón has acted as counsel to oil companies in projects in Venezuela
on regulatory matters, as well as corporate and tax structuring for ventures
under Empresas Mixtas and gas licences. He has also advised sponsors on
project and corporate financing, including the set-up of the local financial
arrangements and security package and the review and implementation of the
financial arrangements in Venezuela, to follow-up on completion.
Mr. Garantón received his J.D. from Universidad Católica Andrés Bello in
1991, his LL.M. from Universidad Católica Andrés Bello in 1993, and his
LL.M. from New York University in 2003.
Languages: Spanish and English.
Federico Araujo
Tel: +58 212 905 0239 / Email: faraujo@tpa.com.ve
Federico Araujo is a founding partner of Torres, Plaz & Araujo (TPA). His
practice focuses primarily on oil and gas, project structuring and financing
in a wide range of areas, including oil, gas, petrochemicals, mining,
pharmaceuticals and manufacturing.
Federico Araujo has acted as counsel to commercial and institutional financiers
as well as sponsors in project and corporate financing, advising from initial
structuring of the project to the preparation and support of project documents and
negotiation with EPC contractors and other suppliers, to the set-up of the local
financial arrangements and security package, to the review and implementation
of the financial arrangements in Venezuela and their restructuring.
Mr. Araujo received his J.D. from Universidad Católica Andrés Bello in 1974,
and finalised his LL.M. credits in Universidad Central de Venezuela in 1979.
Languages: Spanish and English.
Torres, Plaz & Araujo

Torre Europa, p. 2, Av. Fco. de Miranda, Campo Alegre, Caracas, 1060, Venezuela
Tel: +58 212 905 0239 / Fax: +58 212 905 0245 / URL: www.tpa.com.ve

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• Commercial Real Estate
• Corporate Tax
• Employment & Labour Law
• Fund Finance
• Initial Public Oﬀerings
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• Litigation & Dispute Resolution
• Merger Control
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We are extremely grateful for all contributions to this edition.

Published by Global Legal Group Ltd.

Preface Philip Thomson & Julia Derrick, Ashurst LLP

Australia Graeme Gamble & Chelsea Herman, Herbert Smith Freehills 1

The book is designed to provide general counsel, financial institutions,

In producing Global Legal Insights, we have gathered together the

One of the attractions of comparative analysis is that developments in

Philip Thomson & Julia Derrick

GLI - Energy 2018, Sixth Edition 1 www.globallegalinsights.com

GLI - Energy 2018, Sixth Edition 2 www.globallegalinsights.com

GLI - Energy 2018, Sixth Edition 3 www.globallegalinsights.com

Developments in government policy/strategy/approach

GLI - Energy 2018, Sixth Edition 4 www.globallegalinsights.com

South Wales electricity transmission and distribution business, by investors from

Developments in legislation or regulation

GLI - Energy 2018, Sixth Edition 5 www.globallegalinsights.com

GLI - Energy 2018, Sixth Edition 6 www.globallegalinsights.com

Judicial decisions, court judgments, results of public inquiries

GLI - Energy 2018, Sixth Edition 7 www.globallegalinsights.com

Nuclear Fuel Cycle Royal Commission

Major events or developments

GLI - Energy 2018, Sixth Edition 8 www.globallegalinsights.com

Proposals for changes in laws or regulations

GLI - Energy 2018, Sixth Edition 9 www.globallegalinsights.com

Herbert Smith Freehills

GLI - Energy 2018, Sixth Edition 10 www.globallegalinsights.com

GLI - Energy 2018, Sixth Edition 11 www.globallegalinsights.com

Developments in government policy/strategy/approach

Developments in legislation or regulation

GLI - Energy 2018, Sixth Edition 12 www.globallegalinsights.com

Judicial decisions, court judgments, results of public enquiries

Major events or developments

GLI - Energy 2018, Sixth Edition 13 www.globallegalinsights.com

Proposals for changes in laws or regulations

GLI - Energy 2018, Sixth Edition 14 www.globallegalinsights.com

Starlinger Mayer Attorneys at Law

GLI - Energy 2018, Sixth Edition 15 www.globallegalinsights.com

Developments in government policy/strategy/approach

GLI - Energy 2018, Sixth Edition 16 www.globallegalinsights.com

• establish an enabling legal and institutional framework for private investment;

Developments in legislation or regulation

GLI - Energy 2018, Sixth Edition 17 www.globallegalinsights.com

Judicial decisions, court judgments, results of public inquiries

Major events or developments

Proposals for changes in laws or regulations

GLI - Energy 2018, Sixth Edition 18 www.globallegalinsights.com

Barrister Jeffrey Gouhizoun

GLI - Energy 2018, Sixth Edition 19 www.globallegalinsights.com

GLI - Energy 2018, Sixth Edition 20 www.globallegalinsights.com

GLI - Energy 2018, Sixth Edition 21 www.globallegalinsights.com

Developments in government policy/strategy/approach

GLI - Energy 2018, Sixth Edition 22 www.globallegalinsights.com

Developments in legislation or regulation

Judicial decisions, court judgments, results of public enquiries

GLI - Energy 2018, Sixth Edition 23 www.globallegalinsights.com

rights of defence, the Commission concludes that there is evidence of an infringement, it

Major events or developments

GLI - Energy 2018, Sixth Edition 24 www.globallegalinsights.com

Proposals for changes in laws or regulations

GLI - Energy 2018, Sixth Edition 25 www.globallegalinsights.com

Georgiev, Todorov & Co.