COVID-19 UK: Energy – Key Takeaways from the Energy Sector under Lockdown: Week 2 – Update

April.06.2020

Moving into Q2, it is apparent that COVID-19 is far from behind us, as countries across the world continue to fight the pandemic and attempt to counter the negative impact it has had on economies. The pandemic is beginning to show its first signs of impact on the UK energy sector and we take a look below at the key trends and developments from week two of the UK lockdown.

Key Company Announcements

Key announcements were made by some of the UK's biggest energy companies last week. These included:

  • Centrica (owner of British Gas) – who announced the cancellation of its 2019 dividend, furloughing of staff and slashing its 2020 cash expenditure by around £400m.
  • EDF Energy – who decided to halve the number of workers at its Hinkley Point C nuclear power plant development as a response to the COVID-19 pandemic.
  • OVO Energy, Britain's second largest energy supplier – who announced that it has furloughed over a third of its workforce due to constraints on their operations caused by the government lockdown. Support will be granted to furloughed employees through the Coronavirus Job Retention Scheme.

Supply Market – Government Intervention Proposed

The UK supply market is braced for increases in customer debt and default, and may face particular strain. Energy UK, the industry body, has made a proposal to Government for a £100m loan scheme aimed at supporting energy customers affected by the pandemic.

Oil and Gas

A key impact of COVID-19 has been a steep drop in oil demand. Goldman Sachs has estimated that global oil demand has fallen 25% in the wake of the COVID-19 outbreak and the consensus is that this will continue.

Decreased demand will continue to test storage capacity in the coming weeks and months – but it was not all doom and gloom in the oil and gas industry. Oil prices were driven to a weekly high at the end of last week following an aspirational tweet by Donald Trump indicating that a pact could be reached between Saudi Arabia and Russia to cut production by 10 to 15 million barrels per day. Bloomberg has calculated that the decline in crude prices has priced the global crude benchmark below the most widely traded coal contract on an energy-equivalent basis, putting coal in direct competition with cheaper alternatives such as natural gas and renewable sources of energy.

Carbon Markets

The spot EUA price (€/tonne) fell by almost 30% in March, due to the sharp decrease in demand for credits across the aviation and industrial sectors. The UK has cancelled its 2020 EU Aviation Allowance auction, citing Article 7(5) of the EU Auctioning Regulation (No 1031/2010) which permits cancellation on the grounds that the total volume of bids has failed to exceed the volume of spot carbon units on offer. However, the EU has maintained its deadline for reporting of ETS emissions by 31 March and surrender of carbon permits by 30 April.

Business Support Schemes

More generally, the UK government continues to work on its business response through business support schemes, as well as its suspension of wrongful trading provisions to protect directors in a time where the interests of the business and of creditors must be delicately considered.

Energy Projects

For projects, consideration of potential Force Majeure claims continued to dominate the agenda as many contractors continued to explore the protection their current contractual arrangements offer, as well as exploring commercially viable ways to deal with COVID-19 where contracts are still being negotiated. See Orrick's commentary on force majeure and frustration under English law pursuant to the COVID-19 pandemic.

In addition, the newly revised version of the Site Operating Procedures guidance during the COVID-19 outbreak has been withdrawn following feedback from the construction industry, with an updated version expected this week. The procedures set out the regime under which construction operators can operate. The last version had the effect of many sites needing to close which, it has been argued, is inconsistent with the government's position. Greater clarity and direction is expected which will in turn affect the ongoing construction of energy projects.

Regulatory and Policy Progress

BEIS and Ofgem have signalled that, while COVID-19 considerations remain at the forefront of their efforts, they remain committed to delivering on key publications for the benefit of the sector.

BEIS has led the way on addressing the impact of delays faced by projects impacted by COVID-19, coupled with the risk of losing financial investment injected into projects. The Feed-in Tariffs (Amendment) (Coronavirus) Order 2020 was passed on 31 March to extend the accreditation deadlines for affected projects as follows:

  • MCS and ROO-FiT solar PV pre-registered between 1-31 March 2019: 30 September 2020;
  • ROO-FiT wind and AD installations (declared net capacity over 50kW) whose preliminary accreditation validity period ends between 1-31 March 2019: The later of 30 September 2020 or 24 months; and
  • ROO-FiT hydro installations (declared net capacity over 50kW) that received preliminary accreditation between 1-30 September 2018: The later of 30 September 2020 or 36 months.

Further news on possible amendments to the Capacity Market Rules – to address project delays caused by COVID-19 – is anticipated, perhaps as soon as this week.

2020 – Year of Climate Action?

Despite the intense global effort being put in to tackle COVID-19, the International Energy Agency has said that the opportunity must nevertheless be seized to accelerate the global transition to clean energy.  Many have commented on the positive effect which the slow-down in heavy industry and indeed, the number of flights, has had on the environment and that this should add impetus to carbon reduction efforts.

In a positive step towards neutralising the carbon impact of LNG, Pavilion Energy – in its tender for LNG supply to Singapore – has requested suppliers to contribute towards developing an industry standard to measure LNG's greenhouse gas emissions and develop a standardised method to measure, report and offset emissions.

However, it was announced on 1 April 2020 that the COP26 UN Climate Change Summit scheduled to take place in Glasgow this November would be delayed until 2021 because of the pandemic, with no new date specified yet. It is widely recognised that the current commitments set out under the Paris Agreement need to ramp up in respect of greenhouse gas emissions in order to curb the rise in temperature at no more than 2°C. Although the delay impacts on the delivery of the Paris Agreement, participating countries aim to utilise this delay productively to recover from the COVID-19 crisis, in order to be able to create a new approach to low-carbon economic growth.

Whether the delay of the COP26 summit will have an impact on the timing of the EU's proposals on its 2030 emissions target to cut greenhouse gas emissions by up to 55% from the current 40% remains to be seen. The consultation being held by the European Commission will be open until 23 June 2020, with the new target aiming to be proposed this September in order to guide the Commission's regulatory changes in the energy markets to realise the European Green Deal to be climate neutral by 2050.

Summary

The sector response from regulators and authorities has been largely positive over the last week, with some welcome news to those in the sector worried about the impact of COVID-19 on existing investment in projects. The uncertain duration of the lockdown continues to pose more questions than answers on the sector as its impact is increasingly felt, and developments over the next week will be key.