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Energy Update 30 April 2014



United Kingdom

Welcome to this month's edition of Field Fisher Waterhouse's Energy Update.

Welcome to this month's edition of Field Fisher Waterhouse's Energy Update. In this issue we look at the energy market competition enquiry announced by the UK regulator Ofgem.  We consider the proposed new UK disclosure regulations for companies in extractive industries. We examine the findings of a report into the UK shale gas industry and a joint UK-Polish study on the potential of shale gas in Europe.  Finally, we review recent equity investments by the UK's Green Investment Bank into offshore wind farm assets.

We hope you find this to be of interest.

UK energy regulator Ofgem announces competition enquiry

Energy regulator Ofgem has recently announced it will make a referral to the Competition and Markets Authority (CMA) for an investigation by the CMA into the UK energy market.  Recent state of the market findings by Ofgem prepared jointly with the Office of Fair Trading (OFT) and CMA have shown that there is: (1) declining consumer confidence with 43 per cent distrusting energy companies; (2) continuing uncertainty over whether the vertical integration of the large energy companies is in consumers’ interests; (3) no clear evidence of suppliers becoming more efficient in reducing their own costs as retail profits have increased from £233 million in 2009 to £1.1 billion in 2012; and (4) a trend of suppliers consistently setting higher prices for consumers who have not switched.

Ofgem believes that CMA’s more extensive powers can address any long-term structural barriers to competition.  A market investigation would conclusively determine whether vertical integration is in consumers’ interests or whether there should be more separation between the largest companies’ supply businesses and generation arms and with the increased roll-out of smart meters, a CMA investigation will ensure that there are no further barriers that prevent consumers from making the most of the transformation smart meters will bring to the energy market.

The CMA investigation could take up to two years to complete but Ofgem warned of much higher fines amounting to "tens of millions of pounds" against power companies if they break rules in the meantime.  Ofgem's referral to the CMA is subject to a two-month consultation period to let the industry and interested groups have their say.

Click here for the announcement.

New Disclosure Regulations for Extractive Companies – BIS Consultation

As part of a global initiative to increase transparency in the extractive sectors (mining, oil, gas, etc.), the EU stated last year that it would introduce new accounting and disclosure rules that would make it compulsory for listed or certain other large extractive companies to disclose any payment over £100,000 (£84,800) to the governments in the countries in which they operate.  The proposed rules would aim to provide investors and other stakeholders information about the payments made to governments of resource-rich countries for the exploitation of natural resources.  Click here for our previous coverage of this ("Show Me the Money").

On 28 March 2014, a consultation paper was published by the UK government's department for Business, Initiatives and Skills (BIS) proposing UK regulations for implementing these rules made under Chapter 10 of the new the Accountancy Directive (2013/34/EU) and Article 6 of the Transparency Directive (2004/109/EC) into national law in advance of the EU deadline of 20 July 2015.

BIS's proposed new regulations (The Reports on Payments to Governments Regulations 2014) will apply to all large or listed extractives companies registered in the UK and require them to electronically submit a separate report to Companies House every year, starting on 1 January 2015, detailing the relevant amounts paid to governments and relevant amounts paid on a project-by-project basis. This report would be due two months after the deadline for publishing the annual financial statements for listed UK companies or eleven months of the end of the financial year if not listed.  There will be penalties for failing to prepare or deliver the report including making it a criminal offence for directors.  UK subsidiaries of UK parent companies will be exempt from the new rules if the parent company has complied, however, UK subsidiaries of overseas companies will not benefit from the exemption until their parent company fulfils the obligation in either the UK or another EU Member State.  The consultation paper also includes a proposed format for the report.

Responses to the consultation paper must be submitted by 16 May 2014.

Click here for the BIS consultation paper.

Fracking could spur investments of billions in UK – UKOOG Report

According to a report (“Getting Ready for UK Shale Gas”) commissioned by UK Onshore Operators Group (UKOOG) - the representative body for the UK onshore oil & gas industry, the development of shale gas in the UK could create a £33bn investment opportunity for British business with the potential to create over 64,000 jobs, if, as expected, the drilling of an estimated 4,000 horizontal shale gas wells over an 18-year period goes ahead.  However, the study warns that the UK needs to work now to lay the foundations for the necessary infrastructure, supply chain standards and skills requirements before developers look overseas.

Click here for more.

Joint UK-Polish research into potential of shale gas commissioned

Michael Fallon MP, Minister of State for Energy in the Department of Energy and Climate Change (DECC) recently announced a joint UK-Polish study into European produced shale gas and its potential to contribute to energy security, deliver economic benefits, create jobs and investment along the supply chain and help to reduce greenhouse gas emissions.  Currently, Europe imports 70% of its gas.  European shale gas exploration is at an early stage and both Poland and the UK are at the forefront of this new sector.  However, such exploration needs to be carried out safely, under robust regulatory frameworks.  Independent analysis will be carried out looking into these potential benefits and issues specifically in Poland and the UK and the implications for the wider EU.  It is expected that this study will be completed and published before the end of 2014.

For more information click here.

UK Green Investment Bank’s £461m Offshore Wind Farm Investments

Green Investment Bank (GIB) has underlined the UK's world leading position in offshore wind with two equity investments. In the past month, the GIB has, together Japan's Marubeni Corporation purchased a 50% stake in the Westermost Rough Project in Yorkshire from DONG Energy. GIB is to commit £241m to the £500m transaction.  It is in the early stages of construction with Siemens' next generation wind turbines twice as large as the current wind turbines in UK waters.  Once operational, Westermost Rough will generate over 800 gigawatt-hours (GWh) of net renewable electricity.

GIB will also acquire a 10% stake in the North Wales Gwynt y Môr offshore wind farm for £220m from RWE Innogy.  The project, off the coast of north Wales, is in the late stages of construction and is the largest offshore wind farm under development in Europe. Once operational, it will generate over 1,700 GWh of net renewable electricity each year.

For more information click here.

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