What Changes Will the Energy Sector Face?

With your comprehensive knowledge of the electrical industry, which aspect poses the biggest legal challenges?

The biggest legal challenges are created by uncertainty and the time required to mitigate, or at least manage, the risks arising from that uncertainty. Industry participants and stakeholders are now faced with changing legal and regulatory frameworks, changes in government and policy, shifting public opinion around climate change and renewable energy, increasing stakeholder engagement and activism, and fluctuating market prices for power and underlying resources. In this environment, it can seem impossible to get projects developed on time and on budget (or at all). In the time it takes to navigate through this complex maze, the market window may have closed, or the business case may have changed. And in some cases, our legal and regulatory frameworks have not yet changed enough to keep up with our pace of technological innovation. Going forward we will need these to accommodate advances in storage, electric vehicles, distributed generation and community energy systems, among others. The way we produce and consume power is changing. As lawyers in this sector, we help our clients identify and bridge these gaps by providing practical and timely advice, so they can understand the current landscape, how it is evolving, and take advantage of opportunities when they arise.

 

As energy demands rise, and investment within the energy industry increases, what obstacles lie ahead for your clients?

Increased demands and investment means new projects and infrastructure.  Any new project these days, and for the foreseeable future, faces obstacles, but perhaps none greater than securing social license.  Simply put, social license refers to the level of support for the project from local communities, Indigenous Peoples and stakeholders.  Without sufficient support, any project faces an uphill battle for permits, or at best significant delays because of lengthy and contested permitting proceedings.  Even if a proponent is initially successful, there are often appeals or other legal challenges that follow, that can cause further delay.  All of this contributes to increased project risk and a general reticence on the part of industry to undertake new projects, particularly in jurisdictions where social license is more difficult to secure. A well-structured and comprehensive engagement strategy is critical for project execution, and the support of experienced professional advisors can significantly contribute to the success of the endeavour.

 

How is this affected by the growing concern for the environment and its resources?

The energy mix is shifting towards lower carbon sources, driven by technology and growing environmental concerns. In certain jurisdictions, energy generation is a major source of carbon emissions, so switching to renewable energy sources like solar and wind will mean less greenhouse gas emissions. However, the integration of intermittent energy sources on the grid poses some challenges, such as reliability of the transmission network, lack of capacity storage technology and balance between electricity supply and demand. Moreover, the energy efficiency of our infrastructure for the coming years is determined by the construction and building efficiency regulations in place today. Investments in new cost-effective energy efficiency technologies for buildings should be supported by well-developed policy and regulatory frameworks.

 

Having practised in the carbon markets for over 15 years, how have you seen this trade change for your clients?

Fifteen years ago, carbon markets were very much in their infancy in North America.  Market-based compliance mechanisms had the support of many economists, of course, and, looking back on it, from a surprising number of businesses and individual politicians (at both ends of the political spectrum).  But policymakers, especially at the federal level in the US and Canada, were just not yet ready to provide the kind of institutional certainty that would have allowed carbon markets to fully emerge then.  Notwithstanding the uncertainty, or perhaps because of it, the past 15 years has seen a tremendous amount of learning and innovation in the carbon market space: energy-intensive businesses, offset project developers and state and provincial policymakers have all been exploring different models, finding out what works and what doesn’t, getting comfortable with the mechanics and the risks associated with carbon markets.  A lot of our early work in the area was helping businesses and industry groups engage in small, voluntary transactions for carbon offsets.  At the time, a lot of these deals were criticised as cosmetic.  But that missed the point.  These tentative first steps laid the foundation for what followed, helping industry to learn what was involved in carbon transactions and to familiarise themselves with a fundamentally new type of market.  And we, as lawyers, were learning right alongside our clients – adapting or inventing new contractual tools to allocate novel types of risk, discovering what kinds of issues typically arise in carbon market transactions and how best to address these issues in advance.  Over the past fifteen years, compliance markets have spread in North America at the level of states and provinces, and in Canada, the federal government is now also making moves that will encourage provinces to harmonise their carbon pricing policies. But even without a final consensus emerging, it has been interesting to see how even a modest narrowing of the range of likely policy outcomes has been enough to dramatically change the environment for carbon market participants.  Carbon markets are growing, and have shifted almost entirely from voluntary to compliance transactions. The linkage of California’s cap-and-trade system with cap-and-trade systems in Canada’s largest provinces, Quebec and Ontario, was an especially important milestone for us.    We are seeing more carbon market transactions, for more clients, at higher overall valuations.  Carbon offsets are increasingly backed by sophisticated and well-financed developers.  We are seeing more complex, cross-border business structures, which in turn raise new and challenging issues for lawyers.  It has really ratcheted up the stakes for lawyers on each transaction, and has put a premium on experienced lawyers who understand both the regulatory and the commercial aspects of carbon deals.  It is an exciting time.

 

How complex is risk management within the energy sector and what are the main considerations you convey to your clients?

Risk management is a critical and complex factor in every aspect of the energy sector, whether it be in relation to the health and safety of people or the environment or in relation to managing legal and business risk in commercial transactions, developing projects or business operations.  Energy is consumed at all levels of society in every country of the world. As such, participants in the energy sector function across both local and global markets and are subject to risks ranging from economic and geo-political volatility to stringent local and national compliance and regulatory regimes. Working with our clients, our principal focus is to identify and mitigate the risks inherent in their business, often by identifying a comprehensive inventory of the risks associated with the particular mandate and developing a comprehensive strategy to manage or eliminate the risks identified. Many elements of a risk mitigation strategy are best managed by our clients own internal risk management functions, such as managing financial risk and insurance. As legal counsel, we tend to focus on the legal and business risks associated with the mandate, paying particular attention to legal and regulatory compliance, contractual terms and dispute resolution. Our extensive experience advising a broad range of clients across all aspects of the energy sector allows us to help our clients successfully anticipate, identify and manage the risks inherent in their business.

 

What regulatory changes do you feel would be beneficial to your clients?

The key industry and regulatory change over the next 20+ years will be driven by the continuing emergence of renewable energy sources. This power shift to wind, solar, geothermal, biomass, hydroelectric and other sources will have a game changing impact on our clients, consumers and society as a whole. New technologies, such as hybrid and electric vehicles and others not yet invented, will place dramatic new demands on the power system. It will require a massive investment in new infrastructure since the current system was never designed for such loads or technologies. Everything is changing, and the regulatory system is not prepared for it. The new generation sources require new transmission lines as the sources of power are dramatically reconfigured based on “good wind” and similar locational characteristics that have not mattered before. Everything will be in the wrong location for the new sources and the grid will need to be reconfigured. Grid technologies need to be invented to cope with intermittent power sources, and the intermittency requires diverse types of standby or base load power to exist, to offset when the renewable sources cannot generate.  This all comes with a cost, requiring new regulatory models to set rates and pricing for these new interdependent renewables dominated grids. The regulators of the power sector must become more nimble and capable of adapting and integrating changing power sources and technology. This is a cultural and generational change for the regulators and industry and there is little time left to prepare for it.

The other key regulatory issue is the slow pace and uncertainty for regulatory and environmental assessment and approvals. In relation to project approvals, Canada trails other countries, especially related to the time spent coming to a decision (even if the decision is to reject the project). Canadian courts have been described as affected by a “culture of delay”. Some of the same issues affect the regulatory system. It is becoming increasingly litigious (before and after the approval) and uncertain. Canada has had a number of projects that required years of public process to approve (or not), more years of judicial process to judicially review and hear appeals, and when it is finally done, the market has moved on. The regulatory system must change if society is to be successful at making the power shift to renewables and a greener grid. Some say this will all change when the approvals are considering beneficial renewables projects, but that has not been the record. Wind farms, solar and hydro projects are as likely, or arguably more likely, to run into a wall of opposition, often based on build-it-anywhere-but-here sentiments. The regulatory and environmental assessment systems must be modernised to cope with these new demands. The processes need to be rigorous and fairly applied to all. There must be timelines that are respected, and new methods to bring Indigenous concerns and local opposition into the process earlier, and dedication to new means to resolve issues. The current hearing oriented system struggles with this, and reinforces those “dug in” to their position, rewarding unwillingness to compromise. It is time to look for better ways.

 

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Amy Carruthers is a corporate/commercial Partner in the Vancouver office with a solid background as a transaction lawyer and extensive experience in the energy industry.

 

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Pierre-Oliver Charlebois is a leading lawyer in the areas of environmental, mining, energy, climate change and corporate social responsibility law.

 

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Fasken is a full-service law firm with offices in Canada, the UK, South Africa and China. We work with clients around the globe, offering expertise in legal issues affecting all types of industry, government and individual objectives. 

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