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Tackling the Increasing Pressures in the Energy Sector

Square One Law was recently invited to participate in a debate, hosted by the North East Chamber of Commerce, relating to the concerns and challenges facing participants in the energy industry. This was a wide ranging debate attended by significant participants from across the industry. The overriding concerns of developers and owners of energy assets focussed on two major areas.

Continuing regulatory uncertainty

Despite a progressive year in relation to energy market reforms, many investors continue to take a cautious approach to financing capital intensive projects, due to both volatility in the financing market couple with a lack of certainty around the regulatory regime.

After months of scrutiny and media coverage the Energy Act received Royal Assent on 18 December 2013. Covering many sectors of the energy industry, this act sets out UK policy for decarbonisation targets, the promotion of renewable energy projects and the basis for reforming the electricity market. In the ‘Electricity Market Reform Delivery Plan’ published 19 December 2013, the Government predicts that the reforms will attract an additional £40 billion of investment into renewable energy projects and a further 10GW capacity for offshore wind projects by 2020.

It was hoped that the reforms set out in the Energy Act would bring a measure of certainty to the industry, and indeed they have been largely welcomed. However, there are concerns that the lack of clarity surrounding aspects of the new regime are deterring investors due to the absence of a scheduled time frame for implementation of the reforms and lack of clarity surrounding how the ‘Contracts for Difference’ (CfD) mechanisms will operate in practice.

Further the complexity of the legislation, and the uncertainty surrounding proposed secondary legislation due to be put before parliament in the second quarter of 2014, has resulted in many investors delaying investment decisions in order to understand how the reforms will be implemented.

The nervousness in committing to offshore wind projects due to regulatory volatility may have a significant effect on the government’s target to produce over 30% of the UK’s renewable energy from renewable electricity by 2020. In order to meet this ambitious electricity generation target, the industry would require rapid increase in offshore wind project construction which would in turn require substantial investment in large scale capital projects.

Skills Gap

Coupled with the uncertainty surrounding the legislative regime , further perceived risk to investors relates to concerns that a skills gap is developing in the UK that may result in the industry struggling to meet the construction demands of new wind development projects.

A decline in the UK offshore industry’s ability to recruit highly skilled and experienced engineering, technical and operational experts to support development projects may lead to critical operational risks including construction delays, downsizing and in some cases cancellation of offshore wind projects altogether.

As the wind and renewable industries mature and progress towards no longer being reliant on central government initiatives, it is imperative that the industry develops the ability to recruit and train the key personnel required to deliver and operate renewable projects.

To find out more about how the new Energy regime and reforms may effect your business, or to discuss any other matter, please contact James Bryce, Energy Team Partner at Square One Law LLP on 0843 2224 7938 or Lucy Bailey, Solicitor on 0843 224 7905 to discuss your query further.

This story featured in the Feb/Mar 2014 edition of Wind Energy Network which is now available online.

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