UK: Energy Update - 27 March 2013

Last Updated: 9 April 2013
Article by David Wilkinson

The Enthusisasm for Shale Gas continues to grow

The Chancellor has certainly caught the shale bug.  In the Budget he announced that shale gas was "part of the future” and that the Government “will make it happen”.

As trailed back in the 2012 Autumn Statement, the Government will consult over the course of the year on measures to promote investment in the exploration and production of shale gas.   The consultation will include proposals for a new shale gas field tax allowance (to reduce the effective tax rate on shale gas production) and the extension of the Ring Fence Expenditure Supplement from 6 to 10 years.  The plan is to consult over this summer and to implement legislation as part of Finance Bill 2014.

In the budget the Chancellor also focused on some of the planning issues and the need to ensure that local communities benefit.

This is a topical area.  For comment on the Budget click here.  For comment on some of the real estate issues associated with fracking click here.

Industry is Delighted with George Osborne's comment on Shale

Cuadrilla commented: "Cuadrilla warmly welcomes today’s Budget announcements concerning shale gas…the Government’s decision to introduce tax reforms for shale gas will greatly incentivise companies such as Cuadrilla that are undertaking and investing in exploration work….We also support the Government’s decision to accelerate the provision of planning guidance for local authorities. The country needs to move forward with vital exploration activities, so we can begin establishing the value of our significant onshore gas resources."

Lord Browne, Chairman of Cuadrilla and former BP Chief executive, said "Now this is the moment – this is where our future lies, this is where we have to get infrastructure
(built). As a nation, we are searching for our future – our source of competitive advantage. I feel very strongly we should not discard this advantage. We did the North Sea very well. This nation can do extraordinary things."

Estimates of how much shale gas there is in the UK vary widely, but it could amount to trillions of cubic feet of gas. If Cuadrilla is successful liberating gas from dense shale rocks and piping it to the surface there is potential for considerable profit stretching into the billions for decades to come.

For further comments from an interview with Lord Browne please click here and for Cuadrilla's comments on the Budget please click here.

Gas Storage – Will its time come?

On 15th March, FFW hosted a lunch for those with an interest in gas storage to consider some of the challenges being experienced by those looking to develop gas storage in the UK and the challenges for this which are created by increasing regulation and the lack of consistency across regulators.  The lunch provoked lively debate between those who thought government needs to do more to promote storage and those who believe that it would be better to let the market operate with minimal regulation.  This was a timely debate, bearing in mind the impact of the cold spell last week and supply difficulties which saw gas prices for same day delivery spike at 150p a therm.

The press are now increasingly focusing on the inadequacies of Britain's gas storage capabilities and even speculating about the possibilities of Britain's gas supplies running out and industrial users being paid to scale back usage.

We wait with interest to hear what the government says in its promised statement on storage.

German Gas Suppliers and Unfair Terms in Consumer Contracts

Consumer contracts with gas suppliers were recently tested for unfair terms in  Germany. The questions for the courts was whether a German gas supplier had the right to unilaterally amend the price charged to its customers when those customers are on a special tariff. The ECJ found that unilaterally changing the price charged to consumer could be in breach of the law. Further, the ECJ dismissed applications for a limit on the financial effects of acting in an unfair way.  German gas suppliers in breach of this could now have to reimburse consumers.

Please click here for FFW's summary of the judgment and potential effects.

Ofgem Consultation for New Regulatory regime for Electricity Interconnector between GB and Belgium

Following the European Commission's decision on BritNed (where the Commission imposed additional conditions on the exemption decision), the Ofgem consultation paper notes that developers may perceive the BritNed decision as an indication that the Commission sees exemptions as exceptions. Ofgem therefore saw a need to develop a regime that offers a predictable and stable framework within which investment in interconnectors can be made. Ofgem proposed regime is of a 20 or 25 year duration, with the levels of the cap and floor, flat in real terms, being set ex-ante and remaining fixed for the regime duration.

For a link to the consultation paper click here

Smart Meters – A force for good but with legal traps

A number of the FFW Energy Team attended the Future of Utilities conference in London last week.  A key discussion point was how smart meters provide utility companies with a way to get closer to their customers both to better promote their services and to help to promote energy efficiency.  This is definitely the way things will go.  However, the introduction of smart meters raises numerous data protection and privacy issues.  Click here for and overview of issues in this area

Ofgem Publishes Effect Of Regulation On Wholesaling

On 15 March 2013, Ofgem published an open letter outlining the effect of the Regulation on wholesale energy market integrity and transparency (REMIT) on market participants and other stakeholders. The open letter also asks questions on a range of issues related to the implementation and application of REMIT in Great Britain. These include for example, requirements of the registration process, use of transparency platform, and the threshold for inside information disclosure.

For a link to the open letter click here

Recovering VAT on fees on M&A transactions  - think before you start

With M&A activity holding up well in the energy sector, buyers need to remember to think about their ability to recover VAT on fees incurred.  Although not in the energy sector, BAA's recent loss in the Court of Appeal helps point the way as to the steps which need to be thought about early on in a transaction.   

Please click here for FFW's commentary on the case.

Energy Demand to Rise by One Third by 2040 and Electricity the Future Dominant Energy Consumed

ExxonMobil, the supermajor, has published it's findings in relation to energy demand, supply and emissions to 2040. The report states that: that energy greenhouse gases will plateau in 2030 and then fall; demand for energy between 2010 and 2040 will rise by one third; that oil demand will grow, albeit comparatively modestly due to fuel efficiency and non-oil transport fuels; and that electricity will be the future dominant form of energy consumed.  It is interesting to compare the ExxonMobil projections with BP's projections which were published in January 2013.

Click here for a link to the ExxonMobil projections and here for a link to BP's

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