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?

It was the most famous cardigan in world energy policy. On a bright winter’s day in February 1977, less than two weeks after his inauguration as US President, Jimmy Carter settled into an armchair (casually dressed) for his first ‘fireside chat’ with the nation. In the address, Carter revealed that his ‘strategic priority’ as president would be to implement the US’s first long-term energy strategy. The address was well received. Only a few years before, in 1973, the Arab oil embargo had sent oil prices soaring. Americans and Europeans remembered long queues at petrol stations and soaring gas prices fuelling high inflation and economic malaise all round. Back in 1973 Richard Nixon had become the first American president to call for the US to become energy independent – the first in a unbroken chain of presidents and presidential candidates who have called for the same since, Mitt Romney becoming the latest last week.

 Several months after his first report in 1977, Carter returned to the airwaves for an “unpleasant talk” with the American people on the “the energy crisis”. His national energy strategy would require “considerable sacrifices” from them he said. It would be the “moral equivalent of war” (or MEOW, as its critics labelled it). It was a disaster. 

 Carter’s plan was underscored by a genuine belief that the world was rapidly running out of oil and gas. In 1977 oil and gas prices had dropped significantly from their 1973 peak – but Carter was convinced by evidence of “peak oil” that suggested that oil supply would be unlikely to peak much beyond its then current level of around 60mbd (it’s now at around 90mbd) and gradually drop off in the early 1980s. Carter’s plan was threefold: re-energise the American coal industry, launch a massive push on energy conservation, and plough investment into renewables, with a headline target for the US to be 20% solar-powered by 2000.

 To a large extent the Carter presidency launched the renewables industry in the US and the world. Huge sums of money were invested in solar, ‘synfuels’ and other technologies, the Department for Energy was created and Carter even had a solar water heater installed on the White House roof to much media fanfare. But the American people didn’t buy it. For many Americans the message on energy conservation and scarcity was just too gloomy and the complex subsidy regime set up to support renewables ended up being inefficient and costly.

 In 1980 – after the Iranian revolution had wreaked further havoc on world energy markets – Ronald Reagan defeated Carter on a ticket to deregulate the market and end federal support for renewables. The infant renewables industry practically collapsed in the US while a huge market based drive for domestic fossil fuel production began.

 35 years later and energy policy is back as a strategic, government directed, priority for presidents, prime ministers and chancellors.

 As the US Presidential election itself approaches, the candidates’ energy narratives closely mirror those of Decision 1980 with a Republican challenger accusing a sitting Democrat of reigning in domestic production through (among other things) burdensome environmental regulation and costly renewables subsidies. How it will all play out is, of course, difficult to say.

 However, it would appear that the current (unnamed) White House adviser quoted by Daniel Yergin in his magisterial new book The Quest might be right: “these walls are still haunted by Jimmy Carter’s sweater”.  

 Now watch the sweater in action

http://www.youtube.com/watch?v=MmlcLNA8Zhc

Later this month I will be cycling the length of the UK, a distance of nearly 1,000 miles from Lands End in Cornwall to John O Groats in Scotland. En route I’m looking forward to seeing parts of the country that I have never visited before and to re-discovering places that I have travelled through before, but at a slower pace . . . a much slower pace!

As I considered what to blog about this week it struck me that the route will also take me past some of the great sources of power – hydro in Scotland, some of the larger wind farms in the South West, Wales, Scotland and the Midlands, the nuclear power station at Hinkley and some of the large coal and gas plants. I haven’t mapped this out against my route, but I’m sure there will be many energy vistas to enjoy along the way.

Now of course I’m an energy geek and I find this stuff interesting, or even beautiful, to look at, but it made me wonder how many people actually participate in energy tourism and what, if anything you can visit. I suppose the ultimate energy tourists map is this one put together by Deloitte. For those looking for something a bit more organised though, I thought I would save you the time and provide some links to the top energy tourist destinations in the UK!!

1. Whitelee Wind Farm - Just outside Glasgow this wind farm has it’s own visitor centre and visitors can tour around one of the largest onshore wind farms in Europe. There are also nature tours, cycling and the various visiting attractions as well as the opportunity for younger visitors to make their own turbines in craft workshops.

2. Electric Mountain - Not a new ride at Thorpe Park, but a visitor centre for a hydro electric power station in Snowdonia, Wales. More specifically the Dinorwig Power Station, which incorporates a guided tour of the massive turbine hall for any visitor that pays the entrance fee, is of appropriate age and wearing the right head gear and foot wear.

3. Eon Visitors Site - Eon have not one, but seven sites that people – mostly students by the look of it – can visit. Sites including the Ironbridge Coal Power Station in Telford and the Scroby Sands Wind Farm Visitor Centre in Great Yarmouth.

OK I admit this will not be everyone’s cup of tea, but hopefully there are a few young visitors that will be inspired by these vital installations, and I will try to take some pictures during my journey to capture some of them along the way.

By the way if you are interested in sponsoring the journey – we are raising money for the Royal National Institute of Blind People and the fund raising page is at http://www.justgiving.com/ChrisPratt-LEJOG

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

Following the Queen’s Speech, today the Government publishes its landmark piece of legislation to reform the electricity generation market in the UK. The draft Energy Bill contains the long-awaited Electricity Market Reforms, which are intended to provide the support necessary to balance future electricity generation over a mix of energy sources in order to reduce dependence on any one source and to meet carbon reduction targets. Against a challenging economic backdrop and with a fifth of existing generating capacity due to be retired from the grid in the next decade, these reforms are critical to ensuring the lights stay on while meeting our commitments to cut carbon emissions.

Overview

The key part of the Electricity Market Reform (EMR) are ‘market mechanisms’ designed to transform our generating capacity. The first of these is the introduction of Feed-in-Tariffs with Contracts for Difference (CfDs), long-term instruments designed to provide stable and predictable incentives for companies to invest in low-carbon generation. This will replace the system of Renewables Obligations (RO), which is due to end in 2017.  DECC has also committed to working with industry on Final Investment Decisions (FID) Enabling to enable some investment to begin in advance of the CfD regime coming into force. The second is an Emissions Performance Standard (EPS) that will limit carbon dioxide emissions from fossil fuel power stations by setting emissions standards for all new fossil fuel powered generation. This will prevent the construction of new coal plants which emit more than 450g/kWh.

Further support for the market mechanisms is the introduction of a Carbon Price Floor. This was announced by the Chancellor in the 2011 Budget and was introduced in the Finance Bill. This provides a clear economic signal to move away from high carbon technologies by increasing the price paid for emitting carbon dioxide. It places an initial value on the price of carbon of around £16/tCO2 (2009 prices) in 2013, which will rise to £30/tCO2 (2009 prices) by 2020. This will be complemented by a Capacity Market that will, if required, provide security of electricity supply by ensuring sufficient reliable capacity is available.

The measures are set to increase consumer bills, although the Government argues the rises will be less than if the UK carries on without reforms. The Department of Energy and Climate Change estimates the average bill will increase by GBP160 by 2030 instead of the GBP200 rise predicted if the market is left as it is. The costs of this investment will preoccupy media interest today and in the coming weeks, especially as consumer bills continue to rise and incomes tend to fall. One aspect of energy policy that will be critical to ensure that the cost increases stay within Government targets is the drive to improve the energy efficiency of the UK’s housing stock, and therefore reduce energy usage. The Green Deal is not part of the Energy Bill, but will be very important to achieving the Government’s affordability ambitions.

In addition to EMR, the Energy Bill also aims to ensure that Government and regulator Ofgem are aligned at a strategic level through a Strategy and Policy Statement (SPS). The Bill also establishes a new nuclear regulator, the Office for Nuclear Regulation, to regulate the building of new nuclear power stations. Finally, the Bill contains provisions that will enable the sale of the Government Pipeline and Storage System (GPSS). The Parliamentary Under Secretary of State for Defence Equipment, Support and Technology, at the Ministry of Defence provided a separate Written Ministerial Statement about this.

Gas

The Government have said that gas will continue to play an important role in the transition to a low-carbon economy, to provide flexibility and help maintain security of supply. A separate strategy on the role of gas will be published in autumn 2012. This is the subject of a public consultation and the deadline for submissions is 28^th June 2012. Also the Government announced earlier this year that the Emission Performance Standard for gas fired power stations in the UK that will allow them to continue to operate until 2045. Gas may well play a critical role in filling any gaps in supply created by a delayed roll out of the EMR.

Nuclear

The introduction of CfD for nuclear, together with other forms of low-carbon generation, is an important part of the Government’s plans to support the construction of new nuclear capacity. Some commentators have suggested that the EMR has been designed firstly to accommodate the nuclear consortia that are bidding to build new nuclear reactors, to the detriment of other energy sources. This is primarily because the Government have stuck to their no subsidy line for nuclear. This appears to provide very positive reading for nuclear and DECC appear very ready to engage with project developers in the short term before CfD comes into force. This will be welcomed by EDF Energy, who today suggested that they may apply to extend the life of their existing nuclear power stations.

Renewables

The CfD is seen by many commentators as favouring developers of larger renewables projects, but as an industry the EMR will be welcomed as a first step to providing the investment certainty required to build new capacity, especially the third round of offshore wind. For developers though the devil will be in the details and there remain some questions about issues like the tenure of CfDs, the details about contracting parties on CfDs, but perhaps most importantly around the proposed timeline for implementing EMR. The industry suggests these timelines look ambitious. The CfD must be in place to support investment decisions before the end of the RO, which currently expires in 2017.

Although we were bewitched by the glorious pomp and ceremony surrounding the Queen’s Speech today (I particularly liked the tour of  John Bercow’s magnificent bed chamber on the BBC) we did capture the key mesaures for the energy sector and the intial reaction of stakeholders and the media.

Key Bills announced:

• Energy Bill

• This is the Bill which will implement key elements of the EMR package
• The aim of the Bill is to enable large-scale investment in low-carbon generation capacity in the UK and deliver security of supply, in a cost-effective way.
• The Bill will cover three of the four main elements of EMR:
  • Introducing a feed-in tariff with Contracts for Difference (FiT-CfD), a system of low-carbon generation revenue support. The Government’s hope is that the FiT-CfD will provide more certainty of revenues for low-carbon generation and make investment in clean energy more attractive;
  • Introducing an Emissions Performance Standard (EPS) to prevent construction of new coal plants which emit more than 450g/kWh (the most carbon-intensive form of electricity generation);
  • Introducing a capacity mechanism to ensure security of supply, making sure there is sufficient reliable and diverse capacity to meet demand.
• The fourth element, a Carbon Floor Price, has already been legislated for through last year’s Finance Bill.
• The Bill will also create an independent, industry-financed statutory regulator, the Office for Nuclear Regulation, and enable the sale of the Government Pipeline and Storage System (GPSS) (currently a Ministry of Defence asset). The GPSS is a network of pipes and storage depots serving defence installations – see map here: http://www.linewatch.co.uk/pipeline_network.php

• Enterprise and Regulatory Reform Bill

• A wide-ranging Bill covering competition, employment disputes, directors’ pay and regulatory reform.
• It will also establish the Green Investment Bank in law, and equip it with the powers it needs to operate.

Initial stakeholder reactions

1. Business

CBI

John Cridland, CBI Director-General, said: “The test for this Queen’s Speech is whether it will help businesses to grow. Two Bills stand out for me: energy and regulatory reform. The first should help, but the jury’s out on the second.”

On energy: “Let’s be clear, electricity market reform is about keeping the lights on. Business investment in low-carbon will only happen when the detailed market framework is in place. Today’s announcements are an important stepping stone.”

Trade associations

Renewable Energy Association

Gaynor Hartnell, Chief Executive of the Renewable Energy Association – “Four years ago David Cameron said that we can’t afford not to go green and nowhere is that truer than the energy sector. Energy investors are demanding a strong policy framework in support of renewables and a decisive shift away from fossil fuels – so this Bill simply has to deliver. “While it is great that the Government have accepted the principle of legislating for carbon emissions; the way it is currently drawn up simply won’t work. You are not on a diet if you allow yourself 5,000 calories a day. You shouldn’t be surprised if it has no effect.”

UK Green Building Council

Paul King, Chief Executive of the UK Green Building Council – “By reforming regulation of the electricity market, the Government will be able to reduce uncertainty about the future returns from the tens of billions of pounds that must be invested, and will boost the confidence of the private sector. Private investors will also welcome plans to include the establishment of the Green Investment Bank in the proposed Enterprise Bill. However, the Government should recognise that it will slow down investment by the private sector, and hence hinder growth, if it delays giving the Bank powers to borrow.”

Environmental NGOs

The Climate Group

Mark Kenber, Chief Executive of The Climate Group- “Let’s be clear, electricity market reform is about keeping the lights on. Business investment in low-carbon will only happen when the detailed market framework is in place. Today’s announcements are an important stepping stone.”

Political

DECC

As part of her speech the Queen announced that the Government will propose reforms to the electricity market. These reforms will be laid out in the Energy Bill, scheduled for publication on 22 May. Commentating on the forthcoming Energy Bill, a DECC spokeswoman said: “This is crucial legislation. The Energy Bill would reform the electricity market to keep the lights on and emissions down in a more cost-effective way, while reaping the economic benefits.  It is designed to provide investors with long-term certainty and incentives to invest in low-carbon. We will shortly publish a draft Bill for pre-legislative scrutiny, to enable swift passage of well-considered legislation this session. This legislation would reach the statute book by 2013 so that the first low-carbon projects can be supported under its provisions in 2014”.

Caroline Lucas, MP, Green Party

“This is of immense importance to project developers in renewables, as the measures it puts in place will eventually replace the Renewables Obligation. Many of the projects in development now are working to a timescale that takes them into the new regime, and they need to know the detail as soon as possible. If all works as intended, it should make project development less risky and means that the public pays no more than it needs to for green power.”

Academics

Grantham Research Institute on Climate Change and the Environment at London School of Economics

Professor Sam Fankhauser, co-director of the Grantham Research Institute on Climate Change and the Environment at London School of Economics

“We recognise that mechanisms to encourage investment in low carbon electricity generation are necessary, but the cost to the consumer should be the Government’s overriding concern when they are negotiating contracts.

“Transparent and robust processes must be put in place to ensure value for money. Badly- designed policies like the Carbon Price Floor, the Green Deal and the smart meter rollout could cost the consumer billions, it is imperative that this is not allowed to happen with electricity market reform.

WWF

Margaret Ounsley, Head of Public Affairs at WWF-UK, said “There is much that is encouraging here, with legislation to help green the power sector, and to protect our precious rivers and streams; we now just need to make sure that what is being suggested will work.”

Commenting on the Energy Bill, Keith Allott, Head of Climate Change at WWF-UK, said: “Reform of the UK energy market should be one of the Government’s highest priorities. Backing jobs and investment in the renewable energy sector is also a golden opportunity for growth that the government should be grabbing with both hands.”

Initial media reactions

• The Financial Times, Kiran Stacey

Business forms heart of Queen’s Speech

David Cameron and Nick Clegg have pledged to make the UK “one of the most business-friendly countries in the world”, as the Queen outlines dozens of new bills set to dominate the next session of parliament.The prime minister and deputy prime minister said in a statement: “We will continue to extend opportunity in our economy – with an enterprise and regulatory reform bill that will make Britain one of the most business-friendly countries in the world.” They added: “[There will be] a banking reform bill that will clear up the regulatory mess and protect our economy and Britain’s families from the sort of risky activity that led to the recession.” The enterprise bill will encourage employers and employees to go through conciliation rather than legal tribunals as the government looks to help relieve businesses of the burden of some of employment law. The moves fall far short of those advocated by Adrian Beecroft, the Tory donor and venture capitalist, who has said there should be no right for employees to claim unfair dismissal. The bill would make shareholder votes on directors’ pay binding but again falls short of some more radical proposals, which would have forced companies to achieve a 75 per cent majority to approve pay packages.

• BusinessGreen, James Murray

‘Legislation to enable launch of Green Investment Bank also confirmed in annual agenda for next year of parliament’

Setting out her government’s agenda for the next parliamentary year, the Queen said the government would bring forward an Energy Bill that will “propose reform of the electricity market to deliver secure, clean, and affordable electricity, and ensure prices are fair”. She also confirmed plans to introduce legislation that will enable the launch of the government’s promised Green Investment Bank, and plans for a draft water bill to better manage water resources and rivers. There had been reports, strongly denied by the Department of Energy and Climate Change (DECC), that the Energy Bill could be delayed or downgraded as the coalition sought to make room for alternative legislation, such as controversial reforms to the House of Lords. However, the bill was included in the speech as expected and is now set to be put before Parliament in the coming months. The speech did not confirm the precise timetable for the next wave of bills and as such speculation will continue over when the Energy Bill will be finalised, although DECC sources have revealed they remain confident it will be formally published before the end of the calendar year.

• Edie Energy

Queen’s Speech promises commitment on GIB, EMR and water resources

The commitment to introduce legislation to ‘establish’ the GIB is in line with business secretary Vince Cable’s announcement in March this year that the new bank will be headquartered in Edinburgh and that it will be “in a position to be fully operational this Autumn”. The timetable for the GIB to achieve full borrowing status, however, is scheduled to take until April 2015, a date which, even then, is subject to public sector net debt falling as a percentage of GDP. The EMR commitment upholds a previous Government pledge that it would legislate for the key elements of this package in the second session of this Parliament, starting in May 2012. The intention is to ensure that such legislation reaches the statute book by spring 2013, allowing the first low-carbon projects to be supported under its provisions ‘around 2014′. There has, of course, been growing impatience in some industry sectors with the slow progress of the EMR process, including a warning given to Emily Bourne, head of the EMR programme team, when she addressed the Scottish Renewables annual conference in Edinburgh in March this year. Simon Christian, UK managing director of ScottishPower Renewables, said at the time that uncertainty over EMR was effectively blocking projects timed to start beyond 2017, due to future revenue uncertainties. The Queen’s Speech declaration on EMR today, however, went no further that to confirm that legislation would be introduced to “deliver secure, clean and affordable electricity and ensure prices as fair”. The commitment on water resources was equally brief, committing to the publication of a draft bill to “reform the water industry in England and Wales

Welcome to Hill+Knowlton Strategies’ regular update on key European regulatory developments that will directly impact businesses in the energy sector.

This edition of the H+K Strategies Brussels Energy Newsletter looks that the energy priorities of the new Danish Presidency of the EU Council of Minsters and the energy roadmap 2050.

Read on for the latest developments, impacts and opportunities surround these issues in Europe.  

Danish Presidency of the EU Council – Energy Priorities

Latest Developments

On 1st January, Denmark assumed the rotating presidency of the EU Council of Ministers, taking over from Poland for a period of six months. As holder of the Council Presidency, Denmark is responsible for setting the agenda for intergovernmental discussions and leading the negotiations with the other EU institutions. At the same time, however, its priorities are closely linked to the European Commission work programme for 2012.

While the ongoing Euro-area debt crisis will continue to preoccupy meetings of heads of state and government, at ministerial level the Danish government intends to advance its agenda of a responsible, dynamic, green and safe Europe. Indeed, energy issues form a substantial part of the Green Europe focus area, with many policy proposals which were introduced in 2011 still on the table and at crucial stages in their negotiation.

First, the proposed new energy efficiency directive, intended to set a common framework to promote energy efficiency across the EU, is a major priority, with the Danish Presidency aiming for an agreement before the end of June. This ambition may be thwarted by delays in the European Parliament adopting its position due to the vast number of conflicting positions being put forward by MEPs, while the national delegations in the Council have proposed limiting the scope of the public building renovation requirement to buildings owned by central governments.

The proposed infrastructure package is the Presidency’s second priority, where it will work for the development of an effective and intelligent transmission network, so as to enable the integration of large-scale renewable energy into the EU’s energy supply. The proposed new legislation will enable a streamlined mechanism for identifying cross-border “projects of European interest”, within a set of strategic corridors and priorities, which will benefit from a shorter permitting period and streamlined administrative procedures. Third, negotiations on the proposed regulation on the safety of offshore oil & gas activities will be a further focus of the Presidency. As an oil and gas producing nation, Denmark has a clear interest in this proposal, particularly as it seeks to extend the regulatory approach of the North Sea nations to all European waters. While it is fairly unlikely that an agreement be reached before the summer, the Presidency will work to ensure that discussions get off to a good start and seek to make its mark building on the expertise which comes from decades of exploration and production in Danish waters.

All this is set against the backdrop of the debate on deepening the EU’s CO2 emissions reduction targets. Discussions over a possible move to a 30% target for 2020 (up from 20%, compared to 1990 levels) were put on ice under Poland’s presidency, due to that country’s objections to such a move given its high share of energy-intensive industries and reliance on coal. While Denmark has traditionally been supportive of stricter emissions targets, the new Presidency has mollified its stance in order to garner Polish support for a draft resolution on the Commission’s recent roadmap to a low-carbon economy in 2050. The text now before national delegations refers to the fact that if the EU achieves its 20% energy efficiency objective in 2020, then 25% emissions cut may be possible, without referring to this as a target. The Danish presidency has similarly been careful to ensure that references to deeper cuts between 2020 and 2050 are portrayed as possible milestones, rather than explicit targets. This debate will also feed into attempts to find agreement on endorsing the 2050 Energy Roadmap (see article below).

Impact & Opportunities

The six-month Presidency term is an important opportunity for Denmark to present itself as an influential EU Member State capable of assuming leadership in a new institutional set-up (since December 2009, the European Council has a permanent president chairing the meetings of the 27 heads of state and government, which clearly weakened the role of the EU Council Presidency). This is especially important given that Denmark is a small country which remains outside the Eurozone, and is one of the few EU states to currently have a left-of-centre government in the current climate of economic austerity. While the sovereign debt crisis in the Eurozone is dominating EU strategic decision-making, Denmark will be keen to push forward on the above energy objectives, not least because the investments required to deliver energy effi¬ciency improvements and infrastructure connections are seen as a means to create jobs and growth.

Energy Roadmap 2050

Latest Developments

On 15 December 2011, the European Commission adopted the “Energy Roadmap 2050” Communication which explores the challenges posed by delivering the EU’s objective of 80- 95% decarbonisation by 2050, while ensuring at the same time competitiveness and security of supply. The sectoral roadmap is one of several that follow the Commission’s all-sector “Low carbon economy roadmap”, released in March 2011, which compares a scenario of global action with a unilateral scenario.

The analysis set out in the long-awaited Energy roadmap explores five scenarios created by different combinations of the four main decarbonisation routes – renewables, energy efficiency, nuclear and carbon capture and storage technologies (CCS) and contrasts these with a ‘business-as-usual’ approach.

In outline, the projections include a scenario in which the EU improves its energy efficiency, enabling renewables to provide 64% of electricity consumption by 2050, and a ‘high renewables uptake’ scenario where they would provide 97% of electricity consumption, with nuclear power and coal almost eliminated from final energy use. A third scenario would see no energy source preferred, with each competing on a market basis. Decarbonisation would instead be driven by carbon pricing.

The two other scenarios explore a “low-nuclear” scenario where coal power plants using carbon capture and storage (CCS) technology make up the difference along with renewables and a scenario with the highest share of nuclear energy at 18%, which would still be a decrease from today’s 20%. Inclusion of a sixth scenario, which combined energy efficiency and increased use of renewables, was being urged by the Commission’s Climate Action department. This was, however, opposed by Energy Commissioner Günther Oettinger, on the grounds that such a scenario can only be considered after Member State support for the proposed new energy efficiency directive becomes clear.

All in all, the roadmap finds that, although the decarbonisation routes would demand large upfront capital expenditure until 2030, by 2050 investment costs would be roughly the same owing to increasing fuel costs. Continuing current policies would bring total energy system cost to 14.6% of European gross domestic product (GDP) in 2050, roughly the same as the other scenarios. This compares to the 10.5% of GDP spent in 2005.

However, according to Mr Oettinger, the final configuration is likely to be a mix of the projections, following a debate with a wide range of stakeholders. As a result, he expects to “achieve clarity with investors” on what future strategies are worth pursuing by 2013 or 2014 at latest. He expressed his wish for the adoption of a new EU binding renewables target for 2030 by 2014 to give low carbon investors long-term certainty. The roadmap currently suggests a renewables share of about 30%.

The roadmap is more careful in its wording and, arguably, less ambitious in its scope than previous leaked drafts. The final version stops short of recommending targets, a key source of controversy, while it recognizes that EU Member States and investors need milestones.

While some Commission officials expressed criticism over the Roadmap’s lack of ambition, Green groups praised the roadmap’s demonstration that a high uptake of renewables would come at little extra cost compared to a business-as-usual scenario. But they maintain that the Commission has purposefully underestimated renewables potential.

The Danish Presidency of the EU Council is to prioritise the reaching of an agreement between Member States on endorsing the Roadmap, although discussions are likely to be impeded by disagreements between Member States over interim targets to 2050.

Impact & Opportunities

The debate over further targets and milestones for the years to 2050 will be a key element of continued discussions around the Roadmap. An earlier draft said that “further renewables targets for 2030 could be an option since Europe is currently on the right track to achieve the targets for 2020”. In the same paragraph, which has since been scrapped, interim targets on CCS and energy infrastructure were envisaged as a possibility. But the roadmap says that the modelling for these scenarios is dependent on a global climate deal, which could be many years away. The Commission consultation on a post-2020 renewable energy strategy, running from 6 December 2011 until 7 February, has been an opportunity for stakeholders to voice their views on whether there is a role for further renewable targets and the findings will feed into the discussions. The upcoming Communications on CCS (by the summer) and energy technologies (in Q1 2013) should also be closely monitored.

 Industry in general has been strongly pushing the need for regulatory certainty and clarity over whether there will be further targets, in order to be able to make necessary investments, a point which is readily accepted by Commissioner Oettinger. The coming months will therefore offer the opportunity to make such arguments to policy-makers, and to offer suggestions as to what the policy framework should look like post-2020.

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.