What's new with the Transmission Access Review?

Background
The UK Government's Energy White Paper published in May 2007 announced a review to be led jointly by Ofgem and the Department for Business, Enterprise and Regulatory Reform (BERR, formerly DTI), into the present technical, commercial and regulatory framework for access to the electricity transmission system in Great Britain (the Transmission Access Review or TAR).

In July 2007, Ofgem published Terms of Reference for the review in an open letter to the industry which set out the objectives, background and scope of the review. This was followed by a call for evidence outlining a range of models for discussion and seeking industry input. Three stakeholder events followed between September and November, allowing further engagement with relevant industry members.

Ofgem and BERR's interim report to the Secretary of State, published in January 2008, set out key findings and the intended process going forward. In response to these proposals, industry leaders submitted their views which were discussed at an industry seminar hosted by National Grid on 18 March 2008.

In April, National Grid proposed a suite of Connection and Use of System Code ("CUSC") amendment proposals and Transmission Network Use of System (TNUoS) charging methodology modifications which were designed to cover the key areas for review. The CUSC Amendment Panel meeting, held on 25 April 2008, considered the CUSC amendment proposals and it was agreed that the proposals should be divided into three working groups. Ofgem and BERR's final views and recommendations were then submitted to the Secretary of State in their Final Report published in June 2008. The working groups held a series of meetings, between May and September 2008, culminating in the following consultations being published on 3 October 2008:

• CAP161: System Operator release of short-term access rights;
• CAP162: Entry Overrun;
• CAP163: Entry Capacity Sharing;
• CAP164: Connect and Manage;
• CAP165: Finite long-term entry rights; and
• CAP 167: Definition of a threshold(s) associated with the request for a Statement of Works.

The final consultation for CAP166 (long-term entry capacity auctions) was published on 17 October 2008 (140 page PDF).

Current position
The response dates for CAP161-165 passed on 31 October 2008 and the industry only has until 14 November 2008 to respond to the consultation on CAP166. There have been fears that despite the two-month extension to the CUSC working group timescales, this still might not leave sufficient time for the working groups to develop comprehensive modification proposals.

What's next?
After 14 November 2008, working group reports will be submitted to the CUSC Panel. This will be followed by CUSC National Grid led consultations for a period of 2 weeks. The Amendments Panel will then consider whether to refer the Amendment Proposals back to the Working Group for further analysis, or issue an Amendment Report to Ofgem containing it's recommendations. Ofgem then has the final decision making role.

Legislative challenge
National Grid and Ofgem have worked hard to limit the likelihood of legal challenge by consulting the industry as widely as possible through extensive workshops to try to protect themselves from legal challenge. However, Ofgem's decision is still open to review, either by the Competition Commission (CC) or (in limited circumstances) through the judicial review process.

Looking Forward
Ofgem have commented that "We are facing a challenging programme of work but we cannot delay any longer. We have said the regime will be in by April 2010, and we do not intend to miss this. BERR has the option to legislate if it believes insufficient progress is being made. A lot is still left to be done, so we need to ensure we are working together as efficiently as possible"¹.

Hopefully, the extensive consultation undertaken will be sufficient to limit the possibility of challenge of Ofgem's conclusions. The prize for the electricity sector is an updated transmission access regime that provides more responsive signals to those investing in renewable projects. This is a complex area, however, and there will be winners and losers as a result of any decisions taken by Ofgem. Whether any industry player will consider legal challenge remains to be seen – even with changes in legislation that provide a much clearer and quicker process for CC references when compared with judicial review, any legal challenge will have a delaying impact on the underlying proposals for transmission access reform.

¹Click to access BERR / Ofgem Transmission Access Review Dissemination Event, 31 July 2008 (7 page PDF).

04 November 2008

The renewables capital of Europe

Is Scotland running the risk of deterring renewable energy companies instead of attracting them? That question is perhaps surprising given the almost daily headlines in our newspapers confirming the Scottish government's commitment to making Scotland the "renewables capital of Europe". Is it possible that things are not as clear cut as they would first appear?

Under the Scotland Act, energy is a reserved matter and energy policy and regulation is therefore driven by Westminster. Renewables projects, however, bring that into sharp focus given that planning for projects (including nuclear) is a devolved matter and (somewhat oddly) Scotland has its own Renewable Obligation Certificate (ROC) accreditation legislation. What this means at a practical level is that there is scope for the Scottish government to act in a manner that has a material impact on developers of renewables projects albeit that key aspects of energy policy will be decided at a UK level.

Given the drive to support renewables in Scotland, this can be very positive for developers. A good example comes from the Scottish government's banding proposals for ROCs on wave and tidal projects. ROCs are the government subsidy afforded to developers that generate electricity from renewable energy sources. Current proposals in England and Wales propose a move from 1 ROC per MWh of electricity generated by wave or tidal projects, to 2 ROCs per MWh . In Scotland, the proposals are for 5 ROCs per MWh for wave projects and 3 ROCs for tidal projects. With ROCs trading at significant values (e.g. £35 to £40 per MWh ) this step change in the subsidy available to emerging marine technologies in Scottish waters must be an important influencer for developers seeking to select the right location for investment.

The same banding regime has, however, started to throw up some divergence between Scotland and the rest of Great Britain which has the potential to detract from Scotland as a location for some specific types of project. In the Energy from Waste sphere, the England and Wales banding proposals allocate Combined Heat and Power (CHP) plant to the 1 ROC per MWh banding. Advanced conversion technologies or ACT (defined as gasification, pyrolysis and anaerobic digestion) are allocated to the emerging technology band which would earn 2 ROCs per MWh.

In Scotland, by contrast, an informal consultation in April 2008 proposed that ACT would only be eligible for 2 ROCs per MWh if such plants were also fitted with good quality CHP or met specific efficiency criteria. Whilst this proposal has been softened there is still a spectre of Scotland adopting legislation that requires something more of ACT plant before it will attract 2 ROCs per MWh compared with the position in England and Wales.

The interaction of the Scottish marine bill with the UK marine bill is also a very interesting area for scrutiny. With Marine Scotland responsible for Scottish territorial waters and the (UK) Marine Management Organisation responsible for the offshore waters around the UK including outwith Scottish territorial waters, there is major scope for inconsistent treatment of the seas off Scottish coasts unless these two bodies work together very closely. Exploiting our waters is absolutely critical to the UK meeting its EU driven mandatory target for renewable energy. Simplifying the consents process has been central to the reforms in both England and Wales and Scotland in order to facilitate that. It is not clear if two independent statutory bodies will be capable of the degree of joined up policy and administration that will be needed from them.

04 November 2008

OPEC to the rescue?

The price of oil has been subject to some dramatic changes this year, with July seeing the price of a barrel of Brent crude oil reach the historic high of $147. This was short-lived, however, and in September the price dropped to $92 per barrel in response to troubles in the economy with the price continuing to fall and going below $60 per barrel. This may be good news for motorists but it is bad news for UK oil companies already affected by the financial squeeze of the credit crunch.

The fact that oil prices have more than halved since July, in response to decreased demand, means that UK oil companies have less money available to invest in exploration and production projects. The profit gained from extracting oil from difficult locations may not be sufficient to make such projects worthwhile. This could in time have long term effects on the security of oil supplies in the UK continental shelf (UKCS).

Furthermore, the share price of smaller oil companies is much more dependent on the fluctuations in the price of oil than that of larger more established companies. Small companies could be squeezed out of the market. The current climate may also force some to consolidate in order to survive and leave others vulnerable to takeover bids.

Current outlook for the oil industry:

UK – Oil companies in the UK are facing a period of uncertainty. It is not clear how long the credit crunch will continue or how bad things will get. The energy industry is likely to see consolidation of smaller companies in their attempts to survive and it remains to be seen whether the larger players will take opportunities to buy up assets at a knock-down price or whether they will cut back on spending until the future of the economy becomes a little clearer.

US – The US is in the eye of the financial storm. Record low share prices have hit the energy industry in a similar way to other business sectors. Smaller players have found it difficult to finance exploration and production spending and there have been reports of spending cutbacks.

Norway – The Oslo Stock Exchange is especially vulnerable to fluctuations in oil prices. Norway has a relatively large number of new oil companies which may be vulnerable to takeover if the economic downturn becomes too great to bear. Several of the smaller drilling companies have already been taken over. The economic slowdown has also had an impact on the latest licensing round in Norway, with the Energy Ministry requesting more detailed financial information from applicants.

Asia – The fall in oil prices was good news for countries such as India and China which import large amounts of the commodity. This helped to lower inflation and to increase the profits of oil refiners. China's economy has been doing relatively well. However, there are fears that a decrease in exports as a result of the global slowdown could hinder economic growth. Concerns about a global recession have led to a fall in the share prices of Chinese oil companies.

In response to the falling oil price, the Organisation of Petroleum Exporting Countries (OPEC) held an emergency meeting on 24th October. The cartel agreed to cut production by around 5% (1.5million barrels a day).

OPEC has 13 members including Iran, Venezuela, the United Arab Emirates and Iraq. Member countries rely heavily on oil for the stability of their economies. It has been reported that Iran and Venezuela are unable to make a profit from the production of oil at the current price.

By restricting supplies of oil, OPEC aims to create greater demand, which it hopes will in turn push up prices. OPEC does have considerable power - its member countries produce about 45% of the world's crude oil and 55% of the oil that is traded internationally. Decisions made by this organisation should therefore have a global impact.

Responses to this development have been mixed. Early reports stated that the announcement has had little impact on oil prices. However, production was not due to be curtailed until 1st November. Even if oil prices do increase to the satisfaction of oil producers, there are fears that this may have a detrimental effect on the rest of the economy as lower oil prices are said to reduce the pressure of inflation.

Moreover, if prices increase too much in response to decreased production, this may stifle demand, the very reason why the cutbacks were deemed necessary by OPEC. Gordon Brown has expressed his disappointment about OPEC's decision, having previously called the suggestion "absolutely scandalous", making clear his disapproval of the attempted price manipulation. The effectiveness of OPEC's cutback is uncertain given the possibility of non-compliance by its members, yet even if the move does have the desired effect on oil prices, it remains to be seen whether this will do anything to alleviate the impact of the credit crunch. We will just have to wait and see whether OPEC is indeed coming to the rescue of troubled companies or whether it is more concerned with serving the interests of its members.

04 November 2008