COVID-19 UK: Energy – Key Takeaways from the Energy Sector under Lockdown: Weeks 5 and 6 – Update


Continuing with our series of looking at how the energy sector is being impacted by, and managing, the on-going effects of COVID-19 and the UK lockdown, we review the key updates from the last two weeks.

Oil & Gas

Falling oil prices have made recent headlines as the value of the US benchmark West Texas Intermediate crude settled on negative prices last month for the first time in history.  A steadily declining price, driven by a prolonged period of over-supply by OPEC+, was exacerbated by a global collapse in demand caused by COVID-19.  With storage at a premium due to the oversupply, and the deadline for May deliveries fast approaching, traders sought to offload their holdings in WTI crude futures in significant numbers causing the price to tumble dramatically.  The price of Brent crude followed a similar trajectory, dropping around 40% to its lowest price in two decades to below $20 per barrel.

Prices have started to show signs of recovery amid optimism that the agreed OPEC+ production cuts taking effect this month (coupled with significant reductions in non-OPEC+ production and the decision by producers to lock in production and higher prices in the futures market rather than sell at current prices) may start to alleviate the situation, although there are concerns that the production cut must go further to restore balance, given the ongoing travel restrictions, lockdowns and high storage inventories.

The developments have impacted the whole supply chain and one particular consequence of the reduced US oil production is that US gas prices have been increasing, as associated gas production has fallen.  As a result, last week US Henry Hub prices rose above UK natural gas prices for the first time since 2011 which is a remarkable development in the context of the US shale revolution.  The challenges for US source LNG sales are clear.  The tolling model adopted by many US developers provides them with insulation from commodity price risks.   However, US source LNG has to compete in the global LNG / natural gas market and creative commercial solutions will need to be explored to ensure market share.  To this end, the importance of long-term relationships and the need for stability in the market should stimulate collaboration to support a relatively swift recovery.  Natural gas and LNG are fundamental to the clean-energy transition and the hope amongst market participants is that current challenges could present an opportunity to displace other fuel sources and develop a larger market share for gas.

One of the other key fallouts from prices going negative was how this would impact physically and financially settled OTC and exchanged-based trading contracts.  A number of exchanges were quick to announce that negative pricing would apply whilst participants and associations in the market started to pick apart and interpret contractual arrangements that had never contemplated a world of negative prices.  A public response from the International Swaps and Derivatives Association (ISDA) is eagerly awaited by the swap wholesale market, particularly those who are keen to ensure that OTC and exchanged-based contracts are treated in the same way for hedging purposes.  What is clear is that future contracts will expressly provide for negative pricing by way of express provision or the imposition of zero price floors. 


Records broken by solar generation

There was good news on the climate change front as the UK surpassed its all-time peak solar generation in April. At its peak, 9.68GW was generating, meeting almost 30% of the UK electricity demand. This contributed to the longest coal-free period in the UK since the industrial revolution and climate activists will be encouraged that the UK's aim to close its last coal plants by 2024 may be readily achievable. As the good weather continues, the UK's Solar Trade Association forecasts that further solar generation records will be broken.

Market outlook for lockdown exit

As has been widely reported (including in our last regular update), COVID-19 and the lockdown have caused a fall in power demand, and in turn impacted prices. However, the medium-term outlook for the power sector looks more optimistic. The UK government has announced a further relaxation on rules to assist businesses, as well as the launch of the Coronavirus Large Business Interruption Loan Scheme (for private equity owned companies and companies with an annual turnover greater than £45 million) and the Future Fund (to provide financing to UK start-ups and scale-ups). This will contribute to optimism that businesses may begin opening their doors once again relatively soon and that the recovery will be strong (and by consequence, power demand and prices should then be on the rise).  This is expected to be the case notwithstanding any continued suppression of international trade and air travel.

Until such time, merchant projects remain more exposed to price drops as compared to projects which benefit from subsidy or revenue stabilisation in the form of feed-in tariffs, ROCs, Contracts for Difference (CfDs), Capacity Market Agreements (CM Agreements) or floor price PPAs.


BEIS announced that it would make a one-off interest-free loan to the Low Carbon Contracts Company (LCCC) (i.e., the CfD counterparty). The loan is being made so that LCCC can make CfD payments to generators in May without increasing the levy on suppliers – some of whom are already financially stretched and facing increased customer debt and default.

LCCC has also announced that AR3 projects (i.e., projects granted CfDs in the third allocation round) would have the various deadlines and milestones extended by 6 months. This was not – however – due to COVID-19. The changes were made following the withdrawal of a judicial review challenge which had created uncertainty in relation to AR3 CfDs. Projects which can show that the judicial review caused longer delays are invited to engage with LCCC regarding a further extension.

Projects update

Ofgem announced its provisional approval for a 600MW subsea electricity transmission link from Shetland to mainland Scotland (approval subject to evidence being received before the end of this year that the Viking Energy Wind Farm project will proceed). This follows a revised proposal submitted by Scottish and Southern Electricity Networks (SSEN) earlier in the year following a rejection of SSEN's original proposal in 2019, when the Viking project failed to win a subsidy in the last CfD auction round. Citing its continued focus to support the energy industry during COVID-19, Ofgem views this step as one which will assist the economic recovery from COVID-19, which would enable new wind farms on Shetland to export electricity to the rest of Great Britain, ensuring the supply of electricity.

Highlighting some other positive deal activity in the market last week:

  • Adding to its report of a 27% rise in Q1 profit, Ørsted signed the largest fixed price corporate PPA in the UK with Nestle, which will see Nestle purchasing the output of 31 MW of the Race Bank offshore wind farm.
  • Copenhagen Infrastructure Partners agreed to acquire a 50% stake in SSE Thermal's Slough Multifuel energy-from-waste project.
  • Greencoat UK Wind agreed to acquire the 240 MW South Kyle wind farm in Scotland, which will have capacity to power 170,000 homes.

Regulatory updates


Ofgem published a letter last week which indicated that the joint Ofgem/BEIS energy codes review would be delayed, but that the two organisations would continue to engage. The letter welcomed the initiatives to adapt the code framework during the COVID-19 pandemic which had been brought forward by core bodies and the industry, including on the topics of mitigation and force majeure.

Ofgem also highlighted that, during the COVID-19 pandemic, it would be seeking to make timely decisions on the most urgent code changes.

However, following its publication of information for energy licensees on 16 April 2020, it is also the case that some areas of work will be less critical at this time, including its consultation on the Capacity Market Advisory Group, and its decision following the consultation (which closed in early April) proposing to modify standard licence conditions of onshore electricity distributors and transmission owners to include an obligation to undertake electricity system actions and processes.


BEIS recently closed its consultation proposing temporary modifications relaxing the Capacity Market Rules during COVID-19 to minimise the likelihood of terminations arising from restrictions imposed by the current rules. Proposals included:

  • a 12-month extension of the long stop date for both new build Capacity Market Units (CMUs) awarded T-1 agreements for the delivery year 2020/21 and refurbishing CMUs with multi-year agreements for the delivery year 2020/21;
  • a change in the Satisfactory Performance Day requirements;
  • the reduction of administrative and operational burdens;
  • allowing capacity providers more time to appeal, and providing the Secretary of State with greater discretion to extend time to achieve compliance; and
  • the creation of a new ground for termination of capacity agreements where non-compliance by a capacity provider arises from the effects of COVID-19 or related restrictions, which does not carry the ordinary termination fee.

Despite the regulatory flexibility offered elsewhere in the sector, BEIS made it clear last week that the deadline of 30 April 2020 for UK operators to surrender allowances equivalent to their 2019 verified emissions and thereby satisfy their EU ETS compliance obligations, would remain unchanged despite COVID-19.

A green recovery plan

There have been widespread hopes of a "green recovery" following lockdown exit. Last week, the UK Business Secretary and COP26 President Alok Sharma stressed efforts to accelerate decarbonisation were continuing despite the postponement of COP26. Sharma encouraged governments to use the postponement time to mount efforts on a global scale, and to ensure that plans to rebuild the global economy post COVID-19 were focused on the principles set out in the Paris Agreement and the Sustainable Development Goals. To achieve this, the UK and Italy have called on governments to submit updated Nationally Determined Contributions ahead of COP26 which improve on current targets and strategies to hit net zero.

Echoing this message, the International Renewable Energy Agency (IRENA) has suggested that renewable energy could stimulate an economic recovery from COVID-19 and lead to GDP gains of almost £80 trillion between now and 2050. IRENA has urged governments to accelerate investment in renewable energy as part of COVID-19 economic recovery measures.

Coinciding with the 50th anniversary of Earth Day, Google unveiled its carbon intelligent computing platform for use at its data centres. The platform utilises forecasts on day-ahead information on estimated grid carbon intensity, and shifts the timing of non-urgent computer tasks to when low-carbon sources are plentiful, reducing its carbon footprint on the grid.


Amidst the drama of the last few weeks, there are certainly reasons to be positive on the climate change front and there are a few glimpses of light at the end of the lockdown tunnel. 

The power sector has proved to be relatively resilient so far and the combined effect of this and recent government interventions will provide optimism in the sector. What remains to be seen is whether the UK government makes good on its word to include clean and sustainable investment in its economic recovery plans - this will be an interesting area to watch over the coming weeks.

The road to recovery may be a little more challenging for the oil & gas sector although there are clearly opportunities arising out of the current circumstances.