March.31.2020
With the UK Government announcing a nationwide lockdown last week due to the COVID-19 outbreak, businesses and households alike have faced an unprecedented challenge dealing with its impact. As we move into the second week of the lockdown, we have highlighted the key messages and trends that are arising in the UK energy sector.
The UK Government has classified the electricity sector as a 'critical industry' during the COVID-19 emergency, in a time where the reliability and security of the supply of electricity and gas is more important than ever to ensure the continuance of key sectors and businesses.
The general message coming from the regulators and industry bodies is one of calm. Ofgem has issued a statement that all current rules and regulations shall remain firmly in place signalling a 'business-as-usual' approach. Having said that, Ofgem are reviewing its work plans for 2020 and delays should be expected, with precedence being given to legally required publications that will affect the industry relating to COVID-19.
Likewise, National Grid has provided reassurances on the reliability and stability of the UK's electricity and gas network. The topic of energy security has been thrown back into the limelight in recent weeks, highlighting the importance of having not only flexible sources of energy, but also a varied mix of energy available to be called upon.
The UK Department for Business, Energy & Industrial Strategy (BEIS) is continuing its work on the policy front, and remains committed, despite the prioritisation of parliamentary resources, to publish the white paper setting out the UK's road map to achieve net zero in Spring 2020.
Power demand has decreased in the industrial and commercial sector, due primarily to the implementation of the UK Government's emergency powers to close non-essential businesses under the Coronavirus Act 2020. On the flip side, domestic demand has seen an increase as a result of masses working remotely and self-isolating. National Grid ESO's key role in managing system frequency continues uninterrupted, encouraged by the news that the monthly firm frequency response tenders will go ahead.
While the advantage of many operational renewable projects is that they can continue operating unmanned, the same cannot easily be said for projects in construction. Hurdles have presented in the form of (i) the lack of workers due to the increasing number of people in self-isolation, (ii) delays in obtaining requisite permits and permissions for projects due to the closure of non-essential businesses, and (iii) supply chain disruptions, which have, in turn, triggered a whole array of contractual claims for reasons of force majeure.
For projects working towards commissioning deadlines driven by industry subsidies in the form of Feed-in-Tariffs, Renewable Obligations and Contracts for Difference, this may drive an increase in the prices of key components in the short term. Industry bodies have so far been silent on whether any consideration will be given to projects benefitting from subsidies in the form of time extensions required to meet the relevant commissioning deadlines as a result of delays caused by COVID-19. But it is likely that any such concessions will need to be delivered by the policymakers once the impact of COVID-19 on the delivery date of projects is better known.
Government institutions and banks have stepped in to lend a helping hand to many businesses facing working capital difficulties. As the majority of these packages are short-term in nature, the longer term outlook on the availability of finance for energy projects will depend on the performance of current portfolios being financed. To the extent there are widespread default events being triggered, this will inevitably dampen the confidence of investors and increase the costs of taking on risks, thereby increasing the financing costs of projects.
While foreign exchange risk is already a key consideration for many projects, whether domestic or international, COVID-19 will continue to influence the global economy over the coming weeks which could well impact on the cost of hedging services to mitigate such risks.
For reference, Orrick has released some recent coverage on financing-related considerations in maintaining liquidity and capital during the pandemic and protecting Directors from personal liability during these uncertain times.
As with the rest of the world, the UK energy sector is adjusting to a new norm (at least in the short to mid-term). So far, it is clear to see that the authorities are keen to take control whilst in general, market players seem to be taking stock of the situation and showing a degree of tolerance towards each other. As the sector is further tested over the coming weeks and months, both of these things will be critical to ensuring stability.
To access Orrick's global COVID-19 resource toolkit, please click here.