Hill+Knowlton Strategies

Yesterday’s Energy and Climate Change Committee report on consumer engagement with energy markets made for interesting reading. From a PR perspective the section on media reporting on energy costs was particularly compelling. The rising cost of energy and impact of ‘green’ policy has been one of the hot topics of 2012 – capturing the attention of the trades, broadsheets and the tabloids alike. And for a sector that’s traditionally not the topic of pub chat, this is the year that the country got talking. With squeezed wallets and fluctuating weather conditions, combined with the challenge of global warming and carbon reduction, the public is taking notice.

Depending on your newspaper of choice you will likely read very different views on how serious our energy challenge is – both in terms of dwindling resources, and environmentally sustainable sources. Yesterday’s report states that “It is likely that consumers get a lot of their information about energy issues from the media.” So with increased, and often emotive, attention now focused on energy it becomes even more important to know where our media stand on the issues, and crucially – how accurate their reporting is.

The Energy and Climate Change Committee is troubled by concerns raised over media reporting on energy matters. The report points to several witnesses who have suggested that media reporting of the cost to consumers of DECC’s environmental and social policies may be misleading. The Carbon Brief says that a series of newspaper articles have overstated the current impact of green policies on energy bills, either through error or selective research. Scottish Renewables suggested that the media preferred to rely on figures that fitted with their editorial line on energy and climate issues – relying on “unverifiable leaked reports or skewed research by think-tanks and individual consultants”. RWE npower said of media reporting, “Very often, it is a case of ‘not letting the facts get in the way of a good story’”.

The Committee wrote to the print media requesting responses to the evidence it has received on media reporting of these issues. Whilst only 6 of the 17 publications replied, the answers are telling. The Sunday Times decided its coverage has been “very balanced”, focused on the science, while The Financial Times put responsibility with the reporter. The Daily Telegraph and The Sunday Telegraph responded that the costs of green energy were “hotly disputed” but that they reported “all sides of the debate”. The Daily Mail and The Mail on Sunday acknowledged that “mistakes are occasionally made” – hmm…

One national newspaper responded that they were “uneasy that a Committee of the House of Commons appears to be asking a newspaper to justify its reporting on a particular issue based on vague, partisan criticisms from lobby groups with an interest in the issue”. That same paper failed to print a letter from the Committee’s Chair highlighting factual inaccuracies about an article on the effect that investment in renewables would have on consumers’ bills. No coincidence then that such disdain comes from the paper with perhaps the most supportive line on fossil fuels, with anti-rhetoric towards wind energy? I’ll leave it you to work out the paper in question…

Of course, in the fast paced world of journalism mistakes from time-to-time are inevitable. But the Government must do everything in its power to make facts and figures on the cost of going green transparent. It is all too easy for the media to hide behind confusing and conflicting data so they may follow an editorial line that misguides an already bewildered public. Renewable technologies and environmentally sustainable practices are a necessity not a choice for our long-term energy future. Isn’t it better that now the public’s attention is caught they get a full, accurate and honest picture?

On 22 May 2012, the Government published its draft Energy Bill – you can read my colleague Chris’ analysis of the key points here. The landmark piece of legislation is intended to establish a legislative framework for delivering secure, affordable and low carbon energy. Ahead of its expected introduction this autumn, the Energy and Climate Change Select Committee are currently scrutinising the details of the Bill. As part of this inquiry, yesterday the committee held a public evidence session with key representatives from the energy industry.

The first session comprised of Sara Vaughan, Director of Strategy & Regulation for E.ON UK; Keith Anderson, Chief Corporate Officer of ScottishPower; and Ian Marchant, Chief Executive of SSE. They were followed by Vincent de Rivaz, Chief Executive Officer for EDF Energy; John McElroy, Director of Policy and Public Affairs at RWEnpower; and Sarwjit Sambhi, Managing Director Power Generation at Centrica. Each group were asked the same questions, centred on Part 1, Chapters 1-7 of the draft Bill. The particular focus was Contracts for Difference (CfD), the UK’s investment incentives vis-à-vis other markets, and the proposed Emissions Performance Standard.

KEY POINTS

• Industry must find a common voice: It quickly became apparent that the key industry players have divergent views on what is needed to optimise the UK’s energy market. From whether the Energy Bill is needed at all, to ministers’ role and responsibilities, to the need for capacity mechanisms, some clear differences in position were set out. SEE’s Ian Marchant described himself as being at “one end of the industry”, acknowledging substantial differences of opinions with his competitors. Tim Yeo MP, who chaired the session, stressed that the more industry is able to find agreement, the more likely their views and points will be accepted by Government.

• One thing they do agree on is transparency: If one word stood out in each of the sessions, and by each witness, it was the desire for transparency. Keith Anderson of ScottishPower was particularly forthright in his desire for transparency and the creation of a robust long-term framework to achieve investor confidence, create jobs, and ultimately restart the UK’s economy. Vincent de Rivaz from EDF Energy stated that the Government has a clear responsibility to ensure fairness and transparency.

• The UK is an attractive investment market: Those giving evidence do not believe incentives on renewables lead to excessive return on investment. SEE’s Ian Marchant stated that without market mechanisms, a mixed generation portfolio simply won’t be realised. However, he added that there is not currently enough liquidity in the wholesale electricity market to support CfD mechanisms. RWEnpower’s John McElroy voiced concern for clarity over budgets and how the Government intends to manage the levy control framework.

• But the current period of uncertainty must be resolved as quickly as possible: Concerns over slippage on the timeframe were raised by Sara Vaughan from E.ON UK. The lack of detail in the Bill and a centralisation of decision making power among ministers were perceived as a risk, compounding uncertainty in the market and therefore investor confidence. In the second session, EDF Energy’s Vincent de Rivaz, reiterated the need to maintain momentum and ensure Government sticks to its timetable.

• The counterparty issue must be resolved: The key industry players had previously registered their desire that the Government act as the counterparty so as to ensure CfDs are legally robust, with the power to raise money. However, it was noted that there seems to be hesitation on the Government’s part and potential problems with standards of State Aid set by the EU.

• There is no agreement on emissions performance standards: Dan Byles MP began his question in the second session by suggesting that the first session’s witnesses were in agreement over Emissions Performance Standards, but was quickly caught out by Centrica’s representative, Sarwjit Sambhi, who had attended both. Sambhi agreed with SEE’s Ian Marchant that the standards were unnecessary, but Sara Vaughan thought quite the opposite. John McElroy agreed, noting that gas has a key role in the transition to a low carbon economy, so certainty around emissions performance is vital.

CONCLUSIONS

The current state of the energy market in the UK is one of uncertainty. Until a clear and comprehensive framework is in place investors will remain shy, and if timeframes are not met there is the possibility that confidence will ebb away. To this end, industry believes that the Government must move swiftly in its reforms and be open in its processes. There is much to be clarified and worked through, and as John McElroy noted: the devil is in the detail. One thing is clear – if the industry wishes to see swift reforms they must be forthright on the issues they agree on, presenting a united voice wherever possible.

WHAT THE MEDIA HAVE TO SAY

• The Financial Times (Pilita Clark) - Energy groups attack ill-defined reforms
• The Daily Telegraph (Emily Gosden) – SSE attacks secrecy of nuclear subsidy talks

So, it seems there will be an announcement tomorrow morning on whether the Energy Secretary Chris Huhne will be prosecuted. This bring to an end months of speculation over allegations that Huhne asked his former wife to take speeding points on his behalf.

Nick Clegg has already made it clear that if charged, Huhne will have to step down, prompting speculation on who will replace him on the energy and climate change brief. The quota of Liberal Democrat ministers will of course need to be maintained, narrowing it down somewhat. Junior business minister Ed Davey appears to be the front runner, with junior Foreign Office Minister Jeremy Browne and former Treasury Secretary David Laws also mentioned in passing.

The Coalition Government has been under fire recently for backsliding on environmental policy, with even key initiatives such as the Green Investment Bank, feed-in tariffs and the Green Deal falling victim to a strong Treasury keen to keep public spending to a minimum wherever possible.

Of the three contenders named above, two contributed to the Orange Book of 2004, widely regarded as the manifesto of the right wing of the Liberal Democrats. If tomorrow does mark the end of Chris Huhne’s cabinet career, all eyes will be on his successor for any hint that the ‘greenest government ever’ is not living up to its name…

The sun shone on Monday during my visit to Aberdeen to meet with representatives of the offshore energy industry in the Granite City, but the general mood of the industry appeared more glum under the gathering rainclouds of increased regulation and the changes to the offshore production levy.

The current consultation by the European Commission into offshore drilling may well be a pre-cursor to additional regulations for an industry still integrating learnings from the fallout of last year’s Gulf of Mexico spill. The key question will be the extent to which any new regulations place additional burdens (and costs) on an industry that has for many years set the bar for world offshore HSE standards.

There was an encouraging appetite for making contributions to the consultation among those that I met with, but evidence too that many were planning to make only collective submissions, which often has the effect of watering them down. What is clear is that DG ENER at the Commission are keen to review offshore drilling regulations and that such a consultation regularly results in regulatory changes. Now is the opportunity to engage in the process to avoid any nasty surprises.

Speaking of which it is clear that the energy industry operating on the UK Continental Shelf is still reeling from the changes to the offshore production levy introduced in April’s Budget. It seems that there are fresh headlines every day as different organisations up the ante and review investment decisions as a result of the changes. Certainly Energy Secretary Chris Huhne’s meeting with the Energy and Climate Change Committee yesterday has done little to settle industry concerns at the apparent intrasigence of the Government on this issue, especially when it comes to gas production and marginal fields. Although according to some the result of the AV referendum could bring about some changes.

This is an issue that we expect to run and run in the coming months, but I hope the storm clouds lift for long enough that we can enjoy some of the beautiful sunshine that is forecast.

This week I attended a seminar regarding the Bribery Act, which featured a panel including Richard Alderman of the Serious Fraud Office, some lawyers and a corporate investigator. The room was filled with other lawyers and quite a few large corporates keen to know what the impact of this gold-plated British version of the  Foreign Corrupt Practice Act might be for their business and their clients. 

There has been a lot of speculation in the media about the impact of this legislation and perhaps some scaremongering, but for organisations in the oil, gas and mining sectors the risks are clear. These are industries that as a matter of routine work in far flung parts of the world that have very different standards of governance and transparency to what they are accustomed to in say the UK. Of course the act will only apply to organisations with interests in the UK, but given that London’s capital markets have been popular for a long time with natural resource companies, we can expect this to impact a significant portion of the industry.

There is an absolute defence available for firms that can demonstrate ‘adequate procedures’ and although what constitutes adequate has not yet been defined by the Ministry of Justice or the Serious Fraud Office, I suspect that many larger firms in the energy and mining sector will already have the ‘”gold standard” of procedures that Mr Alderman referenced frequently during the discussion. 

That said there are other reasons that the impact of the Bribery Act should be of concern to businesses. Perhaps most significantly because we are currently experiencing a boom in merger and acquisition activity. It is important to note that the act will not apply retrospectively, but the glut of deals that we have seen so far since the start of the year are unlikely to end anytime soon and one wonders if the organisations buying assets in the UK fully comprehend the liabilities for their other operations that they are acquiring with the asset as a result of the Act.

The other aspect worth bearing in mind for businesses as a whole, but the natural resource industries especially, is the use of agents and the extent of liability for joint venture operations. Joint ventures are a regular feature of the natural resource landscape and very often firms based in the UK will use them as a means to enter a market where foreign stakes are limited. I’m not sure what the extent of the risk of liability is for these corporate structures, but am going to ask the question at the next seminar I attend on this subject.

Of course it is also worth noting that the SFO has been handed a paltry sum of only £2m for enforcement and the likely cost of a trial, if it comes to it, will put the prosecution rate fairly low, but as any organisation prosecuted under FCPA will tell you, reputations are expensive things to lose and the SFO is not shy of pursuing trophy prosecutions, especially when Mr Alderman moves on and his successor is looking to make a name for him/herself.

This will be an interesting one to watch as the guidance is published and the Act comes into force.

What a busy start to the New Year it has been, so much so that my attempts to blog have been thwarted by a desire to see my wife for a little more than a handful of waking hours during the week.

With so much having happened, we thought it worthwhile taking a little review of January in the world of energy.

To The Moon

First off we had President Obama’s ‘Sputnik moment’ . His suggestion that America needed to seize the moment and take the lead in the technological race for dominance in renewable energy and sustainable technologies. His state of the union address was widely regarded as being well delivered, though his policies and narrative  have been called into question. Ultimately though I’m not sure the Sputnik analogy is an accurate one. Sure there is a long way to go for renewable energy technologies to become competitive with traditional sources, but in many ways the technology is available, it is the infrastructure and subsidy that needs to be set in order for renewables to ‘take off’. China moved ahead of the U.S. by adding a larger installed based during 2010 than anywhere else, by providing long term policies. The control economy will provide the sort of certainty that investors in the U.S. sadly lack, particularly as Congress missed the opportunity to provide long-term certainty and rolled over subsidy levels for just one year.

Like Rabbits

It was the Chinese and other ‘BRIC’ based investors who took the lions share of deal-making since the start of the year. Of course there was the BP Rosneft tie-up, though more on that later. As well we saw Petrochina take a stake in the Grangemouth assets of Ineos and Sinopec looks to extend its relationship with Repsol YPF in Brazil and CNOOC increase its interests in U.S. shale gas assets. 2011 is almost certain to witness a surge in merger and acquisition activity as the war chests are further swollen by rising oil prices and if the start of the year is anything to go by the BRIC players will be at the deal table as much as the traditional majors. The 3rd of February marks the start of the Chinese new year – the year of the rabbit – which if the year bears any resemblance to the well-known attributes of our furry friends could bode well for the M&A advisory community.

Creative Energy

So far at least it appears to be an excellent first quarter for many of the oil majors despite BP’s first loss in 20 years. Although the FT’s Lex column  was quick to criticise the lack of ‘creativity’ shown by the majors is addressing the longer term threats to their business model simply summarised as declining reserves.

It was this threat that was well in evidence in the results of PFC Energy’s annual Top 50 energy company ‘league table’, which was perhaps notable most for the state owned companies not on the list. This list is compiled based upon market capitalisation of listed organisations, but the many NOCs missed off the list are the power brokers of the industry and it seems somewhat incomplete without them.

The Tip of the Iceberg

This is especially true in light of BP’s recently inked deal with Rosneft. Of course the AAR consortium will do all it can to ensure that this deal never sees the light of dayas it seeks to protect its investment in TNK-BP, however, assuming this does go through this will provide an example of one of the more creative ways that IOCs will be directing their strategies in moving forward (remembering my earlier reference to Lex). Unfortunately though this sort of investment represents a communications challenge on the same sort of scale as the Gulf of Mexico spill that BP struggled through last year. Exploring the Russian arctic is certain to redraw battle lines with environmental activists and a wide range of stakeholders that believe this represents an unacceptable risk. I saw Bruce Parry’s programme last night about the impact of the Alberta Oil Sands on the lives indigenous people of that region. I expect there to be many similar programmes in the future and BP will no doubt be making preparations for reputational fallout, or so we hope.

Wakey, Wakey!

BP also took the limelight with its recent release of its 20 year outlook , an annual event, which has been closely watched by the industry for years. The results as you may expect are not wholly surprising, but I did find Bob Dudley’s frank response to projections on the reduction of carbon emissions refreshing. “Overall, for me personally, it is a wake-up call”, is how he referred to the less optimistic view of political commitment to reducing emissions. What this means for BP’s policies remains to be seen.

In light of the EU carbon trading debacle and the reported €30 million plus theft that is alleged to have taken place, BP’s pessimistic projections are looking fairly accurate. The system for trading credits remains down, with no immediate end in sight. For a trading platform to work traders need liquidity and trust. Both have been killed off and will take a long time and a lot of cost to rebuild. Industry calls to speed up the process of creating a single platform for Europe have so far not generated any concessions. Based on the performance of the UK trading platform, which appears to have far better standards of governance and compliance than some of its European peers, London may prove a popular home for the EU system.  

Pumped Up Prices

The retail sector in the UK has also been the subject of many headlines since the start of the year as prices at the fuel pump and retail electricity and gas prices have also risen. It will be interesting to see whether an OFGEM price review will yield any results (unlike previous inquiries) and if the Chancellor will capitulate and halt plans to raise fuel duty. The Coalition government has since Q4 GDP figures were released (and to some extent beforehand) been challenged to unveil plans to support economic growth and this duty may well have to be conceded if there are no specific policies in the pipeline.

Egypt

Finally would like to sign off this post by wishing that our friends, colleagues and clients in Egypt stay safe in these troubled times.

One area where the Coalition government has stuck to its guns has been the issue of public subsidy for a new-generation of nuclear power stations – there will be no money.

The cost of decommissioning nuclear plants, and disposing of nuclear waste, has become a huge financal millstone around the neck of the government, as Chris Huhne made clear in his speech to the Liberal Democrat conference this year.

The Government’s mantra was continued in the consultation launched this week by DECC. In it, DECC sets out detailed proposals aimed at ensuring that the taxpayer is not on the hook for the cost of decomissioning or waste disposal in the future. In a nutshell, nuclear plant operators will be expected to make sufficient financial provision for decommissioning and disposal of waste from day one.

The question remains whether any potential operator has deep enough pockets to go ahead on this basis or whether, with energy security concerns becoming ever more pressing, the Government will fudge the issue by e.g. setting a minimum price for carbon. DECC is expected to launch a wide-ranging consultation on electricity market reform next week, which is likely to address a floor price for carbon among other issues; the small print will be keenly scrutinised…

According to the No Hot Air Blog the Department for Energy and Climate Change has today launched an inquiry into the future of shale gas in the UK.

Full details over at NHA, but in brief the DECC are looking for written submissions before Thursday 13 January 2011, in the following areas:

• What are the prospects for shale gas in the UK, and what are the risks of rapid depletion of shale gas resources?
• What are the implications of large discoveries of shale gas around the world for UK energy and climate change policy?
• What are the risks and hazards associated with drilling for shale gas?
• How does the carbon footprint of shale gas compare to other fossil fuels?

After watching the $30bn Blowout – A Money Programme Special looking at the BP Spill last night, I was compelled to watch Newsnight after a trailer gave the news about Councils planning to turn off street lights to save money as the public sector cuts start to bite.

Judging from the reaction in this morning’s print media, most notably the Daily Mail (up to 75% of councils dimming lights for new Dark Age) and Daily Telegraph  (Half of Councils cut back on Street Lights) this is an issue that concerns many, although personally speaking (and as a person who is predominantly a pedestrian or cyclist) I don’t see this being too much of a problem from a security or safety perspective. Who knows, maybe this will see a new dawn of slower, safer driving on unlit roads as a result.

It strikes me as a move that may well save money and save energy, although you can bet that those against will be flagging the first fatality, tragic though it will be, as evidence that these plans need to be rolled back at the sake of a few more council worker jobs. Overlooking of course the all too frequent fatalities on Britain’s roads and perhaps the other contributory factors. 

What was also interesting about last night’s programme was that this could be an issue which will strain the relationship of the coalition parties in the weeks and months to come. This will be an interesting one to watch played out. Am also wondering what will be the impact in terms of freeing up grid capacity. I haven’t seen anyone yet try to quantify the impact in terms of Megawatts, but would be interesting to know.

‘We are in the game!!!’ roared Simon Hughes, very excitedly, as he tried (perhaps a little too hard) to convince the Lib Dem conference (and the media, no doubt!) that he is, in fact, a ‘rock solid’ supporter of the coalition. It is this sense of being ‘in the game’ after 65 years in opposition that has gone a long way to appease Hughes and many-a-concerned party activist’s worries about the coalition government over the last six months.

Still, with great power inevitably comes great expectation, and with green issues seen as the heartbeat of the party by many, Chris Huhne, the Secretary of State for Energy and Climate Change, addressing conference for the first time in his new role, was always going to be under great scrutiny by the masses In Liverpool this week.

In his speech to conference yesterday, supported by a carefully co-ordinated series of fringe events, Huhne set about outlining the coalition’s plans to tackle what he described as ‘the greatest challenge across Whitehall in peacetime’.

Addressing climate change, he said, is this Government’s most pressing task in the years ahead, while the UK’s overdependence on big oil means future price fluctuations have the capacity to drain billions from the UK economy. The two interrelated threats would be tackled, he said, by the ‘four pillars’ of the coalition’s energy policy:

1. The ‘Green Deal’ will see companies paying to insulate every home in Britain, allowing them to save both energy and money.
2. A ‘third industrial revolution’ of low-carbon renewable growth will wean the UK off fossil fuels and fulfil the country’s need for more electricity going forward (demand for electricity is expected to double by 2050).
3. Nuclear energy, funded entirely by private industry, will give the UK greater energy security.
4. Clean coal and gas will account for renewable energy’s variability and provide the UK with protection from future oil price shocks.

As I wrote yesterday, Huhne had two major challenges as he made his way to Liverpool this week. On the one hand, he needed to simultaneously reassure activists in his own party over their worries about nuclear while appeasing Conservative cabinet colleague’s concerns about the UK’s future energy security. In addition, he, like the rest of the Lib Dem leadership, needed to convince his party that liberalism has not been nullified by conservatism in the coalition.

It was interesting to see how he approached both.

‘A deal is a deal’, he said of nuclear, with a nod and a wink to the Tories during his speech to conference yesterday. Throughout this week, Huhne has spoke off ‘ending the standoff’ on nuclear energy and has insisted that he is ‘entirely comfortable’ with the coalition’s position on the issue. On first glance, it would seem like he has conceded much ground to the Conservatives on the issue, yet, having witnessed his less publicised conversations within small fringe meetings, I’m not sure that all is necessarily what it seems.

Speaking to worried party members in close confines, Huhne has been at pains to point out that £1.7bn of DECC’s £3.2bn annual budget is spent on clearing up after past generations who were lax on attributing responsibility for nuclear decommissioning. This, he says, is damn-right unacceptable. The great worry over nuclear amongst the Lib Dem faithful is that nasty corporate giants will invest in projects in the short term, before swanning off and leaving little old communities and the humble tax payer to pick up the tap for decommissioning. “No hidden subsidies for nuclear!” declared Huhne in his speech to conference yesterday, a pointed hint that he is on top of the issue.

Huhne addressed his second challenge by attempting to give the Lib Dems ownership over green coalition policy, just as Nick Clegg had done with a range of coalition policies in his speech on Monday. By linking energy and climate change policy with wider social issues – such as poverty, unemployment and consumer rights – he was able to relate coalition energy policy to classic Lib Dem values like internationalism, localism, and, most notably, fairness. Discussion of the Green Deal, for example, was hampered with footnotes over how reducing energy waste could help advance society by lifting people out of poverty.

With next year’s local elections approaching fast, Huhne has bolstered Lib Dem party stalwarts green arsenal as they take to the doorsteps, while he has addressed the nuclear issue with enough subtlety and craft to keep a number of competing voices at bay.

Big smiles all round then? Well, yes, but Chris Huhne will know that much more difficult challenges are yet to come. Giving ownership of green issues to a party full of environmentalists was never likely to be an overly hard sell.

Green plans are all well and good, but convincing investors, businesses and consumers to pick up the tab for the transition to a low-carbon economy will be much trickier, especially when the coalition’s spending cuts start to bite.

Departing Liverpool this week, Huhne will have reason to be positive. Equally, he will know that he has hardly scratched the surface of Whitehall’s ‘greatest ever’ peacetime challenge.