UK Industry Asks for Certainty from Government Ahead of Autumn Statement
On the eve of the Autumn Statement on Thursday, the Government is playing its cards to defuse tensions about energy security in Great Britain. Investors are following the debate with open eyes, already pondering the different options to benefit from the coming political decisions. After GDF Suez stepped into the British shale gas industry in October, other heavyweights could soon follow, with Barclays Bank already at the forefront.
THE INDUSTRY ASKS FOR CERTAINTIES
The coalition government seems intentioned not to take another blow and accommodate the requests of the industry. British oil and gas companies complain about an alleged lack of political coordination.
“The UK needs to invest around £110 billion over the next seven years in new energy infrastructure so it is vitally important we have a mature political debate about the future of energy and how we pay for it. The current uncertainty over policy risks discouraging necessary investment,” said Lesley McLeod, Director of Communications and Public Affairs at Energy UK, the trade association for the energy industry.
McLeod highlighted a lack of consistent decisions, suggesting Britain’s hands are bound by too many ties. Firstly, it is the only European countries that set emissions reduction targets for 2050 (-80% with respect to the 1990 levels). Secondly, the government and the opposition are fighting a battle that resembles a political campaign. If the Climate Change Act decreases the leeway of the Government, the political bickering further creates confusion.
This situation can be a source of risk, preventing an appropriate debate between politicians and investors, McLeod argued.
“The UK is committed to a greener energy future and has set taxing targets but with energy policy currently a politically contentious issue and the major parties vying for popular support, the real decisions which need to be taken can risk being shelved. There is also the issue of the looming Scottish independence vote where both nuclear and renewable power are in the political mix,” suggested McLeod to Natural Gas Europe.
ENERGY ISSUES ESCALATING IN THE BRITISH POLITICAL AGENDA
Energy policies became increasingly relevant in the political arena. As explained by Centrica’s CEO Sam Laidlaw in its recent speech at Spectator Energy Conference in London, the three main parties shared similar concerns in their 2010 election manifestos. They all endorsed a decarbonisation paid for by levies on household energy bills.
“Today, there is much more obvious political tension over energy policy. Domestic prices may be amongst the lowest in Europe but with household incomes remaining stagnant, affordability has understandably become the major immediate concern,” said Laidlaw.
Despite all the delays and the inconsistent policies, the UK is trying to solve a complex “trilemma.” It has to create the conditions to maintain energy available and affordable, while making serious cuts in carbon emission.
Ed Miliband, leader of the opposition and former Secretary of State for Energy and Climate Change, recently set out energy pledges for UK in case of a Labour win in the 2015 general elections. On Friday, Labour’s leader said he would replace Ofgem, the energy regulator, to break the dominance of the “big six” and improve transparency. Previously, he pledged a 20-month price freeze similar to the one agreed by British biggest energy companies on Monday.
The companies said that they would rein in price hikes until the next elections, accepting the conditions presented by the Government. Ministers decided to scale back the Energy Company Obligation scheme, while funding another subsidy out of taxation. The measure is expected to result in a £50 saving in energy bills for each household.
But energy security remains the main problem. As said by Energy Minister Michael Fallon in occasion of the Spectator Energy Conference, security of supply is the top priority.
“Decarbonisation must not mean deindustrialisation,” commented Fallon on Tuesday.
OFFSHORE LICENCES AND ONSHORE SHALE GAS
The Government is trying to walk in the direction of energy security. Last week, it awarded a record number of licences in the 27th offshore licensing round. It also announced the 28th offshore licensing round and the 14th tender for onshore oil and gas to take place next year.
The record number of licences awarded could be a mixed blessing. Most of the licences are in Scottish waters and an eventual independence of Glasgow could hamper UK efforts. It would stand out as a clear example of short-sighted policies. In this sense, the British attempt to rekindle industry’s investments is a mix of risks and good prospects.
Similarly, British shale gas created opportunities, which are difficult to reap. Despite all the hindrances, unconventional gas explorations are slowly taking ground in the UK.
In the past months, for example, two south Wales councils have backed exploratory gas drilling and companies highlighted substantial opportunities.
At the same time, Barclays Bank could be another important player. As disclosed by The Sunday Telegraph, it could soon fund fracking in Yorkshire through its equity arm Barclays Natural Resource Investment.
The three companies with more shale assets in the UK are equally moving toward commercial production. Dart Energy completed the farm-out agreement with GDF Suez E&P last week, while Cuadrilla Resources and iGas are investing in local community engagement to avoid major protests that could also stop preliminary operations.
In this sense, the industry is moving. Capital investments in the UK’s oil and gas reserves reached a £11.4 billion in 2012 and a rise is predicted. According to Oil & Gas UK, “this year investment will reach a record £13.5 billion (in 2013)”.
It comes as no surprise that the industry is ready for further supportive measures from politicians. Ministers have the opportunity to set the tone with the Autumn Statement and then to follow with additional measures. After numerous delays, the government now needs to prove consistency, a virtue that is rare in contemporary European politics.
Sergio Matalucci