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Power Law: Editorial August 2023

Friday 11 August 2023

John Vellone

Borden Ladner Gervais, Toronto

jvellone@blg.com

During our last in-person meeting of the Power Law Committee in Miami on 1 November 2022, following President Zelenskyy’s opening address, a representative of the Ukrainian bar led a moving discussion of the severe impact the illegal Russian invasion has had on Ukraine’s power and energy infrastructure.

That discussion provided the impetus for this Power Law Committee newsletter: exploring the impact of the Russo-Ukrainian war on the power sector in various jurisdictions worldwide.

As expected, the impacts have been most acutely felt in neighbouring European Union countries.

From Poland, Krzysztof Cichcoki (Communications Officer) explores the shortcomings of the EU’s energy market architecture regarding its vulnerability to price shocks. He delves into the potential of new legislation designed to promote long-term corporate power purchase agreements (PPAs) as instruments to stabilise energy costs for end-users and facilitate new investments in renewable energy sources.

However, regulation by contract comes with risks. It delegates to the parties negotiating the PPAs considerable power to allocate risk between consumers and producers.

This is illustrated in the article from Peru, where Paul Súmar Gilt and Roberto Santivanez (Scholarship Officer) share the unexpected impact of the conflict on a country that is otherwise a net exporter of natural gas. While power production costs remained stable, power prices for end consumers increased due to the operation of power supply agreements that link the price paid to, inter alia, inflation, international prices of petroleum and coal, and local prices of natural gas.

By contrast, in my article from Canada, I illustrate how the war resulted in two very different impacts in the provinces of Ontario and Alberta. Alberta’s energy-only market saw the highest-ever power pool prices in nominal terms, while in Ontario, consumers saw a 23 per cent decrease in commodity costs due in large part to the prevalence of PPAs that use contract-for-differences methodologies that acted as a structural hedge on increasing marginal costs.

Often, crises can illustrate market failures and demonstrate tools that can be used by governments and regulators to address those failures. One such tool that facilitates this is the imposition of price caps.

From Portugal, Nuno Antunes (Special Projects Officer) details the war’s impact on energy prices, namely via the introduction of a time-limited natural gas price cap known as the ‘Iberian Exception’.

By contrast, David Beckstead (Diversity and Inclusion Officer) explains how, in Thailand, the war has accelerated the promotion of further market liberalisation and increased renewable energy development.

Finally, from Pakistan, Sahar Iqbal explains how the Russo-Ukrainian war has exacerbated an energy crisis driven by inefficient energy policies, which has challenged diplomatic alliances and a general inability to develop new energy-producing infrastructure. Iqbal explores the opportunity for new investments in renewable energy production as a path towards energy and climate security.

While none of these countries are struggling to address the wholescale infrastructure deficit we learned about in Ukraine, which is driving calls for a new $40bn ‘Green Marshall Plan’, it is clear that the war and the resulting sanctions have impacted power pricing globally, illustrating both the limits of liberalised energy markets and the risks and benefits of pursuing price regulation by contract, whether through PPAs or other contractual hedge instruments.