Hill+Knowlton Strategies

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

I think I should start this post by telling you what’s special about the photo above. At first glance it may look like a really dry and boring snap of a Commons select committee hearing. However, if you look closely you can see me! Isn’t that exciting? I may need a haircut, but I’m still pretty pleased to have been caught on camera, given how exciting a trip to Parliament always is.

In any case, this shot was taken at the Energy and Climate Change Committee hearing this morning. The Committee was continuing its inquiry into new-build nuclear programmes in the UK following the withdrawal of RWE npower and EON from the Horizon project. Today, the chiefs of these companies – Volker Beckers and Dr Tony Cocker, respectively – gave evidence. This was followed by evidence from DECC Minister Charles Hendry and Hergen Haye, DECC’s Head of New Nuclear & Strategy.

The hearing was interesting for a couple of reasons. Firstly, it was fascinating to hear first-hand the precise reasons for RWE and EON’s withdrawal from their plans. It was interesting to hear both companies state that there is no way that they’ll be reversing their decision to withdraw. However, they said that they feel the UK has one of the best investment frameworks around. They praised both the current government and the previous Labour government for their efforts to encourage investment in the sector, and singled out Contracts for Difference (CFD) as a particularly promising aspect of the Electricity Market Reform. Dr Cocker even went so far in his praise for the notion of the CFD as to say that EON felt so confident that the CFD would resolve the issue of uncertainty around electricity prices that it didn’t feature in the decision to withdraw.

It was also interesting to hear that both EON and RWE, and the Government feel confident that they will find a buyer for Horizon. The Committee expressed concerns that have been shared in the media recently about the possibility of foreign (read Russian or Chinese) ownership of a piece of the UK’s energy infrastructure. However, neither company, nor the Government shared these worries. Rather, they said nationality is of secondary concern in such dealings, with the primary factors being a candidate’s prior nuclear experience, safety and security practices, and financial viability.

We’ll certainly be following this issue very closely. If you’d like to watch today’s proceedings for yourself, you can do so here.

Hill & Knowlton will be hosting a breakfast meeting next month (November 2nd) on the future for the UK nuclear industry.  

Organized by the British American Business Energy and Law Forum, the event will welcome an expert panel including Tim Yeo MP and Keith Parker from the Nuclear Industry Association.  Discussion will look at likely domestic demand in the decades ahead, the financial challenges inherent in major nuclear projects, the policy environment for the nuclear sector in a period of rising energy and carbon costs as well as renewed safety concerns about the sector in parts of Europe and Asia, and, the opportunities for UK businesses in overseas markets for developing and supporting nuclear projects.

If you wish to register, you can do so here, or contact the Energy and Industrials team in London.

In the immediate aftermath of events at Fukushima, facts occasionally took a back seat in the global rush to reassess  nuclear power.

Today’s interim report on the implications of events at Fukushima goes some way to redressing the balance, pointing out the obvious, and less obvious reasons why a a similar situation in the UK would be extremely unlikely. Aside from the most glaring point – the UK is a long way from any major fault lines – Chief Nuclear Inspector Mike Weightman also pointed out that reactors in the UK are a different type to those used in Japan.

That’s not to say that everyone can sit back however. Weightman’s report also identifies 25 recommended areas for review by a mixture of industry, the Government and regulators. These include reviews of the layout of UK power plants, emergency response arrangements, dealing with prolonged loss of power supplies and the risks associated with flooding.

To stop any of this work ending up in the long grass, Weightman has called for plans on how each area will be addressed by the middle of June. It will be a busy month for some people, but the end result will be an interesting insight into the true level of preparedness in this country…

Today’s announcement by Vestas that it will be building its new 7 MW offshore wind turbine is being broadly trumpeted, particularly by Greenpeace and Friends of the Earth.

The company said the plan was reliant on market and regulatory certainty and public investment to reduce the risk of building a facility of such a size. In other words, Vestas needs both an order pipeline and government backing sufficient to move forward.

These are significant caveats. Ongoing efforts by the government to reform the electricity market could end up making the UK a less attractive location for wind farm developers than it has been to date. And just this week the Committee on Climate Change argued for nuclear over offshore wind as the more cost-effective way to decarbonise the economy.

Our team in Brussels will next week play host to the Director General of the European Commission’s Energy DG, Philip Lowe. The event is organised in conjunction with the British Chamber of Commerce and will take place on 5th April. It comes at an interesting time for European policy makers and energy business leaders.

People wishing to register can do so here, or contact our team in Brussels.

On a related note, saw some great infographics by European energy statistics. The navigation can be a bit frustrating and there’s no sharing tabs for the beautiful stats, but it’s a great way to present the data in an easy to understand format.

As the saying goes, ’Trust is hard to earn and easily lost’. Equally its value is hard to quantify until it is lost (see the impact of GOM on BP’s brand value), which can sometimes make it difficult to invest in.

However, just because something is difficult both to do and then to test, does not mean we shouldn’t do it. As David Prosser notes in The Independent this morning the big six power generators have earned themselves an ignominious reputation, being less trusted than banks at the moment. That should be seen as a problem that needs to be addressed, not as an inconvenient truth.

One of the things that Ofgem has suggested in its reforms is that the big six sell off 20% of their generating capacity to increase competition and this is where the lack of trust could become a serious business issue. Just because customers have shown a reticence to switch in the past does not mean that an organisation who is very effective at communicating with customers and winning their trust will not come along and start to take share from the big six operators in the future. PA Cover Ofgem Announcement

These firms have a plethora of communications and policy issues to overcome at the moment, but a good start would be to simplify customer propositions, provide greater clarity about their operations, explain and educate about complexities of their business and engage in a better dialogue with customers and prospects. The low-carbon energy challenge in particular is one that I think most people would happily be more active in addressing and new-nuclear must now engage with a much wider group of stakeholders than it has until now to avoid the NIMBY reaction of people after the disaster in Japan.

First things first will be some research to test what has impacted trust historically and what influences different stakeholders trust.

Originally planned for the autumn, the Government’s long-awaited proposals for the reform of the electricity market have finally arrived today. As the months went by, it emerged that the Government was using today’s announcement as a vehicle to address a broader and broader range of issues. This, combined with the late involvement of the Treasury, has held up work. Has it also meant an incoherent package of measures?  

Energy Secretary’s Huhne’s statement underlined the dilemma facing the Government – on the one hand it wants to attract inward investment in low-carbon energy, but has to balance this with keeping the cost of electricity low for consumers. In other words, incentivise developers, but not over-incentivise them…

Let’s take one of the principal elements of today’s package, a proposed carbon price floor. It is not surprising that the Treasury is leading on this. From a public spending perspective, it is win-win – the nuclear sector is incentivised, and the Government can publicly say it has stuck to its pledge of no public subsidy for nuclear new-build. However, generators will have to re-coup the huge cost somehow – higher customer bills would be the easiest way to do so…

A move away from the current Renewables Obligation (RO) to a system of Feed-In Tariffs (FIT) is another of today’s proposals. Whilst this may well result in lower consumer energy bills, in the case of offshore wind it may not incentivise investment. FIT systems favour small developers, yet the sites that have most recently been leased are far from shore, deep, with rough sea conditions. Only large developers will have deep enough pockets to develop these sites, and they are used to the RO…

Interested parties have until mid-March to give their opinions on the proposals; DECC can expect a full inbox…

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…

‘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.