Articles by Matthew Duhan on the GC Blog and GC analysis
A key challenge for the European Union’s 2019-2024 policy cycle will be to secure a larger share of the economic opportunities offered by new technologies, in a more explicit race with the United States and China. Hopes in the previous cycle that this could be secured by a new generation of start-ups and by establishing the EU as a global regulator are being replaced by a renewed emphasis on building from existing industrial strengths. This will become most obvious during the German Presidency in the second half of 2020, but is already informing the policy agenda and power balance of the incoming European Commission and European Parliament, as well as driving domestic policy decisions in member states. The first components of this pivot towards interventionism have been a set of competing proposals, including from France and Germany, on how to regulate and support the integration of specific technologies, such as artificial intelligence, batteries for electric vehicles and the internet of things. Global Counsel’s team of policy advisers anticipate, however, that this eventually will be complemented by a focus on the enabling infrastructure for this modernisation. Given the importance of infrastructure in investment portfolios and in corporate planning, the economic impact of these choices will be even greater than the explicit industrial policy agenda. Most obviously, this will require the delivery of superfast internet connectivity, on which the adoption and application of new technologies will depend, but also on the rules that drive adoption of process innovations such as the re-use of waste. Decisions in these areas also take place alongside more urgent pressures for common standards for zero emission transport options and for a clear pathway towards decarbonisation of the energy mix. In this publication, we assess some of the choices that policymakers face or will face in these areas, and the consequences for business and investors that stand to win or lose from a changing regulatory and funding landscape.
The critical CO2 shortage experienced by the UK last summer was caused by a combination of increased demand – with England’s progress at the World Cup and an unprecedented heat wave in part to blame – and outages at key production facilities. But characterisation of the shortage as “a perfect storm” risks ignoring a structural fragility in the UK’s CO2 supply chain that has been exposed by events. Global Counsel explores the systemic reasons for this shortage and outlines proposals for how to avoid it in future, in its latest report “Falling flat: lessons from the 2018 UK CO2 shortage” commissioned by Food and Drink Federation.
Last week, the UK government’s Digital Competition Experts Panel published its report ‘Unlocking digital competition’, addressing the role and economic power of large tech firms. The report, also known as the Furman review after lead author Jason Furman, may not have been obvious reading for the energy sector on a day when the Chancellor announced several climate measures in his Spring statement. But the digitalisation of the energy sector has made these the new frontiers of policy, and the review deserves close reading.
New York congresswoman, Alexandria Ocasio-Cortez (widely known as AOC), has once again captured headlines with a resolution in the House of Representatives calling on the US government to undertake a “10 year mobilization” to create a ‘Green New Deal’ (known by its own initials GND). Two weeks on and the resolution is now scheduled to go to the floor of the Senate where it was proposed by Democrat Senator Ed Markey. It will fail, but it has reinvigorated the debate on climate action within the Democratic Party. And in its alignment of climate action with a radical agenda of economic transformation it is raising the political stakes for business climate activism.
UK: Global Counsel team members Rishi Patel, Matthew Duhan and Adam Terry discuss the prospects for a Labour government, and what it could mean for businesses and investors, particularly in the energy and financial services sectors.
On Monday, the International Panel on Climate Change released its most important report in recent years: the prosaically titled Summary for Policymakers of the Special Report on Global Warming of 1.5°C. The good news is that the report’s authors conclude that limiting warming to 1.5°C is still technically possible. Otherwise, the news is mostly bad. The report outlines both how urgently and how radically policymakers would need to act to meet the 1.5°C target. Time is running out, so why is climate change struggling to get a hearing? There is a plethora of reasons, but an age of populism is arguably bringing three to the fore: problems of association, communication and prescription.
Complex, arcane and underperforming, the EU Emissions Trading Scheme has emerged as Brexit’s unlikely first billion euro problem. Superficially, the challenge is a technical one; how to manage the uncertainty over what might arise from a disorderly UK exit from the EU ETS, including the future of UK allowances worth almost €1 billion to UK government and industry in 2018 alone. But attempts to find a solution have revealed the difficulty of isolating seemingly technical issues from the broader politics of the Brexit negotiation. The UK has proposed a feasible solution which should be able to address the EU’s concerns, for 2018 at least. But with time running short, the challenge now lies in convincing those on both the UK and EU sides to act with the trust, imagination, and flexibility that will be required to make it work.
As Global Counsel and Herbert Smith Freehills convene a discussion on the UK’s future relationship with Euratom, this paper provides an overview of the legal and political background. The paper also identifies some of the potential options for mitigating the impact on the UK. Lastly, the paper identifies the six next steps the UK must undertake if it is to minimise disruption from ‘Brexatom’.
Prime Minister Theresa May restarted the UK energy bills debate last week, announcing a draft Energy Bill which would allow Ofgem – the UK national energy regulator – to cap household energy bills in the form of the time-limited introduction of a ‘safeguard tariff’. While the GC energy practice watched from afar in Rome, some unexpected lessons from the Italian market emerged in discussions we were having with Italian policymakers and market participants.
As part of its long-awaited clean air plan, the UK government today announced its intention to ban conventional petrol and diesel engines in new cars and vans by 2040. Arguably, they need not have bothered. Many analysts now predict that, in terms of total cost of ownership, electric vehicles (EVs) will be the most affordable on the market by the early to mid-2020s. In that sense, the announcement fits with the UK government’s commitment to exit coal-fired power generation by 2025; while neither is as important as they first appear, both are undoubtedly landmark decisions.
In collaboration with Herbert Smith Freehills and The Boston Consulting Group, Global Counsel has co-authored a paper looking at the impact of Brexit on the energy sector in the UK and the EU. The paper identifies key energy and climate change policy implications as well as highlighting the role of business in shaping post-Brexit outcomes for the sector.
On Thursday, self-proclaimed deal maker Donald Trump turned ‘deal breaker’, as he announced his decision to withdraw from the Paris Agreement. The decision provoked condemnation from an extraordinary spectrum of political and business leaders, and the US now appears on course to leave at some point towards the end of 2020. Soon after the announcement, some European commentators made the counterintuitive case that the Trump decision may actually be an opportunity for European climate leadership. Do they have a point?
When it finally came, UK Prime Minister Theresa May’s announcement that she would introduce a cap on energy prices if re-elected was made more in anger than in sorrow. Declaring in the Sun newspaper that she is “fed up with rip-off energy prices” May promised to cap the ‘standard variable tariffs’ (SVT), through which most UK households buy their energy. The cap will be put in place by the regulator Ofgem, and although not all details are yet clear, May’s expectation that it would “save families on poor value tariffs as much as £100” strongly suggests the imposition of a cash limit.
Today, the BEIS Select Committee released its report on the UK government’s Brexit negotiating priorities on energy and climate change. The report highlights important issues, including the need for a delay in the UK’s exit from nuclear cooperation agreement Euratom, potential “special arrangements” to maintain a single Irish energy market, and the view that the UK should not leave the EU-ETS before 2020, but should consider alternatives if the EU-ETS cannot be reformed. But largely it is a plea for the status quo, reflecting both the economic benefits of membership of the internal energy market and the views of a sector which mostly believes that Brexit’s energy challenges can be separated from its turbulent politics.
Yesterday’s government White Paper on Brexit confirmed that the UK will leave the European nuclear research and cooperation framework Euratom. Having concluded that Euratom is “uniquely legally joined” with the EU, the government argues that Brexit will require the UK to leave Euratom when it leaves the EU. While Euratom has its own treaty status, it is the central role of EU institutions – specifically the European Commission and European Court of Justice - in Euratom which appear to have determined the government’s position. The timing is unfortunate for a UK nuclear industry which has been progressing – albeit slowly - towards new build projects at Hinkley Point C, Wylfa and Moorside, but will now be caught in a wave of new uncertainty.
As the Davos elite gather in the shadow of the Trump inauguration, much of the talk is of uncertainty over the future of globalisation. Davos sessions with titles such as ‘Climate change: COP out?’ highlight the very real fears that the new mood could see politicians privilege the national and local at the expense of the multilateral and global, with damaging impacts on future climate policy.
This week’s ‘Winter Package’ of new energy and climate change legislation was described by an effusive European Commission Vice President Maroš Šefčovič as “a Christmas present” for MEPs on the ITRE and ENVI committees. They will now be the envy of their legislation-starved peers. At well over 1000 pages it is a monster, with 11 main documents and a plethora of supporting technical and risk assessment documents. However, within a complex package of measures, headlines jump out: the Commission’s proposal to increase the EU’s 2030 energy efficiency target from at least 27% to a binding 30% target; the removal of renewable energy’s priority access to the grid; and the failure to ban subsidies for food-based energy crops. The latter two have already been the target of NGO fire.
In his time, Pravin Gordhan has played many roles: pharmacist; anti-apartheid activist; prisoner; chief taxman; and finance minister not once, but twice. In South Africa’s current political morality play, he is cast as the martyr – fending off what many see as politically motivated accusations of fraud from the National Prosecuting Authority (NPA) to prevent him exposing unsavoury dealings between President Jacob Zuma and the Gupta family. What happens next will almost certainly have big consequences for the ANC and South Africa.
In the end, the energy wonks were disappointed. Weeks of speculation about Hinkley Point C nuclear power plant were ended by the go-ahead for a deal which looks remarkably similar to the one previously on the table. The changes, and where they came from, were not about energy but security. The proposals which accompanied the decision are something of a glimpse into the post-Brexit future. However, some of the bolder claims, that they mark a serious retrenchment from Britain’s status as the most open of economies, should be treated with caution, as should any attempt to link the proposals directly to Brexit.
Brexit has the potential to increase significantly the UK’s autonomy in making energy and climate change policy. How much will largely depend on the prior question of what, if any, relationship the UK has with the EU’s internal energy market. Broadly, there are three options: membership, access and exit. While access without membership looks the most plausible outcome, where the UK and EU end up will have important consequences for investment in UK energy infrastructure, how the UK meets its decarbonisation goals, and both the cost and security of its energy supplies. Ultimately, the heart of the negotiation on energy will be the extent to which the UK is willing to become a ‘rule-taker’ in order to maintain access to the European energy market.
In the midst of some of the most tumultuous events ever seen in UK politics, Energy Minister Andrea Leadsom’s appearance yesterday before the Energy and Climate Change Committee received little attention. But Leadsom, now a Tory Party leadership contender, trailed today’s decision by the government to back the Committee on Climate Change recommendation for the Fifth Carbon Budget of a 57% cut in emissions from 1990 levels by 2032 and thus confirmed a major pillar of UK energy policy. With DECC estimating that the UK needs around £100 billion of investment in energy infrastructure by 2020, this will be a welcome point of clarity and continuity at a time when much else in UK politics and public policy looks deeply uncertain.
Last week’s Global Status Report from the Renewable Energy Policy Network for the 21st Century (REN21) makes for striking reading. In 2015 global new investment in renewable energy hit a new record at over $285 billion. Of that figure $265 billion went into renewable power, more than double the amount invested in new coal and gas-fired power generation. Led by China, India and Brazil, for the first time ever investment in renewable power in developing countries exceeded that in developed countries. The figures demonstrate the accelerating growth in decarbonised power generation around the world.
Yesterday the price of carbon in the EU Emissions Trading Scheme (EU ETS) – the carbon market the EU describes as its principal policy tool for decarbonisation - hovered around €6 per tonne of carbon (€/tCO2), far below the €30/tCO2 analysts consider the minimum price for driving emissions reductions and low carbon investment. That morning Conservative MEP Ian Duncan released his draft report for the European Parliament’s Environment Committee on the European Commission’s reform proposals for the EU ETS in the period 2021 to 2030. The price barely moved. In seeking to ensure his draft emerges from the European Parliament in (something like) one piece, Duncan has sacrificed ambition for compromise.
On Monday 9 May 2016 at 23:10 something remarkable happened. For the first time since 1882 coal made no contribution to UK electricity generation. At the same moment, Germany, Europe’s leader in renewable energy and home to the Energiewende (‘energy transition’), was generating three quarters of its electricity from a mixture of hard coal and even more polluting lignite (see Figure 1).
London always likes to think it is a step ahead of Brussels. In electricity generation policy it may just be. EU Energy and Climate Change Commissioner Miguel Arias Canete has just given a speech to the European Electricity Regulatory Forum in Florence on completing the internal market for electricity in Europe. He set out both an ambitious and pro-market program, calling for the need for “price signals for investment in adequate capacity or demand response”. So far, so anglo saxon.
Investors in Africa routinely worry about the scope for politics to destabilise markets and undermine growth. Last week’s election in Burundi was a case in point. President Pierre Nkurunziza claimed an election victory for what many both in the country and outside believe to be an unconstitutional third term amid opposition boycotts, violent suppression of civil society and the flight of over 170,000 refugees. The Burundian crisis is very much a product of its own history and politics, but it also highlights three features which are important for thinking about political risk in Africa: a wave of presidential ‘third-termism’ animating debates about the democratic process; a strengthening set of formal and informal political mechanisms constraining governments and politicians; and a wave of demographic change that is radically reshaping African electorates.
As Europe steps towards Energy Union, this week saw evidence that distinct and divergent policy models for how member states should generate and supply electricity are emerging. UK Secretary of State for Energy and Climate Change Amber Rudd’s energy policy “reset” coincided with the inaugural State of the Energy Union report in Brussels and the release of the German energy ministry’s annual monitoring report on the Energiewende in Berlin. Rudd’s speech was the most significant, recalibrating the UK energy policy paradigm of the past several years. While pro-market and tough on subsidies it is committed to decarbonisation and included a landmark decision for the UK to exit unabated coal-powered generation by 2025. This note looks at the UK’s emerging ‘Rudd Model’ and its potential to provide an alternative to an Energiewende which may have lost its some of its lustre as a model for fellow members of the Energy Union.
The UK election campaign may have been boring, but it has revealed quite a bit about the current state of British politics and the prospects for the next government regardless of who wins. This note identifies eight important takeaways. Some of these are about policy. We now know a lot more about what we do not know about fiscal policy, which is one of the main divides between the parties. We have seen a rise in grey power, with policies targeting older voters, but no hint yet of a backlash from the young. We have seen a marked rise in appetite for market interventions, but not only by Labour. And on Europe what is most striking is how this has not really featured as a central issue. There are also some important takeaways that are not so much about policy, but about political debate and political stability in the UK. One is the sharp divide between Scotland and England, most obviously manifested in the rise of the Scottish National Party, but running much more deeply than that. Another is the hollowing out of the centre ground of British politics, with the rise of parties in the margins producing the first campaign in over a generation that has not been fought on the centre ground. A third is the decline in influence of the traditional media, most profoundly at the national level. Finally, and on a somewhat more positive note, we draw the conclusion that, despite all of the angst and the accusations about who may be in whose pocket, a minority government might not turn out to be as unstable as some predict.
One year on from the downfall of Viktor Yanukovich, Ukraine remains in a state of chronic crisis. The mood in Kiev is bleak, however the last twelve months have seen the emergence of a small but potentially important set of individuals across government, politics and civil society who are taking on the old problems of bureaucratic inertia, incapacity and corruption. They are a minority, and face the daunting task of overcoming Ukraine’s severe institutional weaknesses with little cover from a weak and compromised judiciary. Their success in bringing about reform will be important not only for Ukraine’s economic future but also in signaling progress to a Ukrainian public which is impatient for change. Ultimately, the reformers will be reliant on Ukraine’s politicians to allow them the political space to make the tough but necessary decisions, even as populist voices grow louder. Whilst it is hard to say what success will look like, we will know when we see failure.
After only two months in office, the Social Democrats’ precarious minority government in Sweden is already facing a crisis over their first budget. The government is likely to prevail, but the fragmented parliament, destabilised by the rise of the insurgent xenophobic Swedish Democrat party, may be a sign of things to come across northern Europe. Their success in flushing out anxieties among voters about the impact of immigration on Swedish culture and disenchantment with the political elite is being replicated by parties such as the Front National and UKIP and is pulling the political mainstream off the political centre ground of pre-2008 Europe. The rising salience of culture and identity politics marks both a serious challenge for the political establishment, and a stepchange in political risk for cross-border businesses and investors in Europe.
Vladimir Putin’s letter to European leaders has raised the threat of gas supply disruption in Europe and once again posed the question - how reliant should the EU be on Russian gas imports? However, in European energy security there are 28 different ‘Russia questions’ – one for every member state. As a result a grand European response is unlikely and there are also reasons to doubt Russia’s main energy partners, Germany and Italy, will want to abandon that relationship. However, there are a range of smaller actions linked to greater interconnection, supply diversity and Europe’s antitrust case against Gazprom that should be closely watched. What is less clear is what these actions will add up to and whether this will amount to a significant change in Europe’s energy relationship with Russia.
This week sees the first visit of the IMF country team to Ghana to provide policy and financial assistance to address the country’s fiscal and currency problems. Coming only months after the IMF was called on to provide assistance on similar issues in Zambia, this has led some commentators to question the ‘Africa Rising’ narrative of which Ghana had been one of key examples. Ghanaian events do flag an important fiscal and governance caveat to the African growth story. Understanding the Ghanaian experience can help investors generate a series of tests to look beyond headline growth, and gain a more nuanced understanding of the political and policy risks facing the continent’s star growth performers.
Sunday saw Turkey’s Prime Minister Recep Tayyip Erdogan win election to the Turkish presidency. The outcome was expected, the only real question had been whether Erdogan would require a second round to defeat his main opponent Ekmeleddin Ihsanoğlu. The election marks the closing of a remarkable 14 months in which Erdogan has faced liberal protests, corruption allegations, a bitter fallout with his former allies in the Gülenist movement, and a string of regional foreign policy reversals. His election has reaffirmed his status as the dominant force in Turkish politics. Nevertheless, his ambition to transform the presidency into a powerful executive remains a significant and unpredictable gamble.
Last week’s surprise ECJ judgement on Finnish wind producer Alands Windkraft, went against the opinion of its own advocate general in ruling that member states’ can legally exclude imported energy from renewable subsidy schemes. The decision was celebrated by some European governments keen to retain control over the costs of national renewable energy support schemes. The decision was also welcomed by renewables associations who feared that imported energy would disrupt markets and damage investor confidence. The ECJ has provided member states with a powerful legal tool with which to control the pace of the ‘Europeanisation’ of renewable energy and the broader electricity market.
Six months from today voters in Scotland will be waking up to discover their collective answer to the question “should Scotland be an independent country?” For now polls indicate that answer is likely to be no, but that is unlikely to be the end of the story. In the last two months a noisy debate has made the choices facing Scotland a lot starker and raised questions about how ‘independent’ an independent Scotland would, or indeed could, be. With six months to go it is increasingly clear that Scotland’s real choice may be between ‘independence lite’ and ‘devo more’.
Last week saw the European Commission announce its proposals for new energy and climate change targets. The headlines were a 40% reduction in greenhouse gas emissions from 1990 levels, and for 27% of European energy consumption to come from renewable sources by 2030. The targets were at the higher end of what was politically possible – a reflection of member states’ lowered sights, rather than Commission ambition. The proposal also saw the Commission respond to diverging policy ambitions among member states by adopting an approach which is significantly more flexible and pragmatic than its current strategy. Ultimately, the proposals were the product of a world in which economic downturn has made energy cost and competitiveness critical political issues. It has taken the squeeze five years to work its way to the frontline of European climate policy, but it has arrived.
Last week’s German Coalition agreement produced an agenda which will trim some of the costs and moderate some of the ambition of the Energiewende. What it fails to do is address the fundamental problem that Germany is powered by a mixture of expensive low-carbon renewables and cheap carbon-intensive coal. This policymaking conservatism is the product of a debate on the costs of green energy which cuts across party political lines and is compounded by the politics of the German Grand Coalition. How important are these contradictions? And given Germany’s size and importance, how likely is it that they will be exported into European energy policymaking?