Hill+Knowlton Strategies

While the Chancellor’s freeze on fuel duty is likely to grab the headlines, on deeper reflection this afternoon’s Budget announcement is indicative of the Coalition Government’s struggle to fulfil its goal of reducing emissions at the same time as it looks to squeeze spending.

With DECC and the Treasury having fought a running battle over the Green Investment Bank’s ability to raise funds, it looks – as had been anticipated – as though the Treasury has got its way. This will undoubtedly be viewed as a setback for Secretary of State for Energy and Climate Change Chris Huhne, and his Liberal Democrat colleagues.

So much for ducks quacking and banks borrowing eh?

Worries about rising energy prices are also behind the decision to slash the CCS Levy, while the Government has clearly taken note of the need to incentivise the Green Deal at a time when most consumers are more concerned with making ends meet than lowering their carbon footprint (a subject that Huhne spoke about at the launch of the CBI report ‘Making the Consumer Case for Low Carbon’ which was held at H&K 2 weeks ago)

In this context, green campaigners and investors in green technology look set to be disappointed. Many have already begun to argue that the carbon floor price will not drive investment into the more conceptual forms of clean energy or improved efficiency at the proposed level. Nuclear looks like the winner in this regard at the moment, but events in Japan may well put the brakes on the new build programme in the UK as they have elsewhere.

Ultimately for all those involved in the energy sector, whatever their sentiment towards today’s announcements, the 2011 Budget serves as a stark reminder of the difficulties that lie ahead for the Coalition in its quest to become ‘the greenest government ever’ in an age of austerity.

Expanding unrest in the Middle East has jolted the oil market, sending crude to $119 a barrel since Egyptians first took to the streets in January. The oil market doesn’t like uncertainty, and nothing could be more uncertain than the volatility spreading to Libya, Africa’s third-largest oil supplier, and Tunisia. Some analysts are even concerned about Saudi Arabia.
Rising oil prices mean rising gasoline prices, which have surged to an average of about $3.13 a gallon at the pump in the U.S. This comes on the cusp of the summer driving season, when prices usually peak as Americans hit the roads.
Some analysts say oil could reach $220 a barrel if Libya and Algeria halt exports. The U.S. Energy Information Administration said Feb. 8 that the monthly average retail price for regular gasoline could exceed $3.50 a gallon during summer 2011. And that was before the Libyan situation developed.
What typically follows these price upticks is a round of Congressional hearings as indignant constituents’ wallets are squeezed.
Surging oil prices usually bring a fresh look at renewables too, so green energy companies should be prepared to seize the moment. Companies involved in alternative fuels such solar and wind can use this time of high oil prices to once again showcase their offerings.
This would also be an opportune time for oil companies to press for Gulf of Mexico drilling permits, long stymied by the ghost of Macondo.
Times of unrest often call for times of new beginnings.

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.

‘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.

As conference season kicks off with the Liberal Democrats in Liverpool, there’s something in particular that I am looking for in the multitude tweets and updates from colleagues and others that are on the sidelines this week. That is the coalition intentions with regards renewable energy subsidies and support.

On Thursday this week the FT tells us that energy minister Chris Huhne will be launching the world’s largest wind farm. The London Array will eventually consist of 341 turbines generating 1,000 megawatts of electricity off the coasts of Kent and Essex in the South East of England, paid for in part by Masdar, the Abu Dhabi government’s initiative to encourage development of green technologies. No doubt the launch will be subject to a fanfare celebrating the UK’s leadership in renewable technologies. However, as Christopher Booker’s editorial in yesterday’s Daily Telegraph suggests there will be many others lamenting the cost that subsidies place upon  energy users at a time that they can least afford it.

The next few quarters will be critical to the success of maintaining existing energy policy. As the spending review is rolled out and cuts begin to bite, taxpayers may well start to question their inflated energy bills, which the DECC expect to increase by 33% by 2020, and their commitment to some of the most ambitious renewable targets in the developed world. Let’s hope for the coalition’s sake that this is not compounded by a harsh winter.

Now if this was April 1st, I would have sworn that the story about the Volkswagen Beetle powered by human waste was an April Fools’ Day joke. However, it’s not April and this is not a joke. As reviewed by The Telegraph’s Harry Wallop, the clever people at GENeco, a Wessex Water subsidiary have converted a good old VW Beetle and made it run on biogas.

How we get and use fuel is an ever increasing hot topic with fuel companies looking at how wind and solar power can power our homes and car manufacturers looking at hybrid and electric engines. It seems we have become a nation obsessed with finding new ways of powering our homes and cars.

Personally, I think what we flush down the toilet is called waste for a reason and shouldn’t end up powering my car to the supermarket or the beach but you have to admit with an ever growing population – projections suggest UK population will exceed 65million by 2018 – it seems there will be an endless supply of ‘suitable materials’ that could be turned into biogas for many years to come.

 Now this is clever. Get the actor most associated with oil to front an ad campaign for solar energy.

J.R.Ewing

Launching last week, SolarWorld make quite a splash with an ad fronted by Mr Oil Baron himself, J.R. Ewing. The ad campaign, with Larry Hagman’s most famous alter ego, has proved a coverage generating hit getting a largely positive and amused response to his perceived u-turn. http://tinyurl.com/33rxxa7

The knowing nod to the bygone days of ‘glamorous’ oil  made me think how hard it actually is for most big energy companies to reconcile the traditional parts of their energy business with the new energy side.

We should be celebrating investment in the world of solar energy and I find it extremely rewarding to work with companies who can communicate positive achievements in renewables. However, the hard fact is that on their own renewables don’t yet provide the solution to all our energy needs. Whilst it would be great to decrease our dependance on the traditional energy sector and completely embrace solar, wind, geothermal etc. etc. we do have to accept that energy companies need to provide energy for today as well as tomorrow. Sadly, renewables don’t yet have all the solutions.

Perhaps instead we should be doing more about our own energy consumption habits so that we can be in a better position to deliver the energy we need to tomorrow.

Perhaps.

It would be good though to know what J.R. has to say about that.

Things are looking bleak. As the Government continues to predict that it will become ‘the greenest ever’, it is increasingly realising that – as Liam Byrne so eloquently put it – ‘there is no money left’.

Yesterday afternoon the Committee on Climate Change (CCC) released details of a new report that claims the UK risks failure in its quest to pioneer a low-carbon future unless it takes measures to protect and increase spending.  Low-carbon initiatives, it said, must continue to get Government support or risk falling into the ‘valley of death’ where they never reach the market.

The timing of both announcements is sure to grate on Chris Huhne and co, who, just last week took steps to cut £34m from the country’s low-carbon technology programme. Difficult questions are sure to be asked.

But this perceived ‘lack’ of investment is nothing new. The CCC claim that Britain already lags behind other developed nations in terms of the proportion of GDP spent on projects to help the country meet its carbon-reduction targets. While Japan invests 0.9% of GDP for example, Britain invests just 0.1%.

Last week I visited the Sustainable Futures exhibition at London Design Museum and witnessed first hand the role innovation and creative thinking has to play in developing the next generation of green technology.

Focussing on using local, natural resources to create and maintain a low-carbon footprint, designs range from those focussing on large communities – such as city developments in Abu Dhabi and Brazil – to ideas that help you monitor your own carbon footprint (Carbon Ration Book anyone?).

(My personal favourites include the ‘Virtual Water Footprint’ and ‘Changing Habbits’ initiatives – worth checking out)

Notably, designs from the UK were in relatively short supply. Those that did begin life in British brains remain pretty much unknown – coincidence? Perhaps. But surely this is a chance we can no longer afford to take.

As Buckminster Fuller once said, ‘the best way to predict the future is to design it’. Britain’s green future rests on giving those with innovative solutions the tools they need to make them fly. Only time will tell whether the Government’s recent cuts will damage its chances of developing a sustainable future for the UK.

You can’t escape the media’s preoccupation with energy at the moment, if it’s not new trans-continental pipelines, it’s wind farms, solar, Carbon Capture Storage and our ‘old friends’ coal and nuclear. On a daily basis we’re presented with a full gamut of energy solutions that will power our ever busy lives.

Energy is even dominating media coverage of the World Cup – from the hot air blasted out by the eardrum splitting and nausea-inducing Vuvuzela to the huge power surges during the half-time of England matches. The Bangladeshi government has even allegedly asked factories to stop production during the evenings to save electricity so that their football-mad countrymen can tune into the World Cup.

Renewables are also playing a part in this World Cup. Some Ghanaians are using solar energy to power their World Cup coverage and a new wind farm has been launched to provide energy for the Nelson Mandela Stadium in Port Elizabeth. More is expected of London in 2012. A key indicator of whether we are able to move to a low-carbon future is our capacity to produce renewable energy for major sporting events as well as for industry and private households.

So as I write this with the next England match only hours away when millions of televisions and radios will be switched on and fridges rammed with six-packs of beer, I’d be interested to know how much energy is used directly or indirectly as a result of the World Cup. Do these figures exist?