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Investors will be seeking clarity in forthcoming energy law reforms say experts

Energy companies and potential investors will be seeking clarity from the Government with regards to its future energy policy as part of various announcements widely expected this week, according to legal experts.21 May 2012

Energy law experts at Pinsent Masons, the law firm behind Out-Law.com, said that the Government was likely to provide further details about its electricity market reform (EMR) programme and changes to the Renewables Obligation Certificates (ROCs) regime on Tuesday. It could also publish the long-awaited draft Energy Bill, which was confirmed as part of the Queen's Speech earlier this month.

"There are a number of matters which require resolution in order to increase the deal pipeline and, ultimately, speed up the much-needed development of new energy infrastructure in the UK," said Euan McVicar of Pinsent Masons, the law firm behind Out-Law.com. "If we get the clarifications that some are expecting this week, Tuesday could prove to be a red letter day for the UK's energy policy."

The package of measures is intended to help provide the UK with long-term secure, sustainable energy supplies; however critics have argued that the programme could lead to higher energy bills. The EMR White Paper (142-page / 1.8MB PDF), which was published in July 2011, proposed various measures aimed at decarbonisation in addition to a 'capacity mechanism' designed to ensure that sufficient generating capacity will be available when needed.

Paul Rice of Pinsent Masons said whether the Treasury would be able to underwrite proposed Feed in Tariffs with Contracts for Difference (FiT CfDs), which will offer nuclear power stations and renewable energy sources a fixed price for energy supplied into the National Grid, was an area of particular concern for the industry. Speaking to the Energy and Climate Change Select Committee last week, Energy Minister Charles Hendry warned that backing from the Government could fall foul of European Commission state aid rules.

"The current thinking is that payments made under the CfD regime could legitimately go through a ring-fenced regulated National Grid entity," Rice said. "Legally speaking that would seem a reasonable compromise and give investors the assurances and familiarity they need. The level of detail we get remains to be seen, but investors will be scrutinising the draft legislation and related package of announcements."

FiT CfDs will be set up between energy providers and a central counterparty, with payments made by reference to a technology-dependent 'strike price' and a market reference price. The payments are intended to replace existing subsidies and incentives such as the Renewables Obligation from 2017. Energy law expert McVicar said that the level this 'strike price' would be set at was the main area of concern for investors.

"Investors have generally assumed that a price would be set, but there has been speculation in recent weeks that the government may give an earlier introduction to a complex auctioning system than had been anticipated," he said. "That could introduce an additional element of uncertainty which is unlikely to be welcomed in an already very uncertain operating environment."

The Renewables Obligation (RO) is the main financial support mechanism used by the Government to encourage the development of large-scale renewable electricity generation projects. It places an obligation on suppliers to source an increasing proportion of the electricity they supply to customers from renewable sources. Banded ROCs were introduced in 2009, changing the RO from offering a single level of support for all renewable technologies to one where support levels vary in relation to the cost of developing that technology and its future potential.

McVicar added that investors were "eagerly awaiting" confirmation of the levels of ROCs banding that would be available up until 2017. "Details of the grace periods that will apply for qualification are also important, and could have a significant impact on deal flow," he said. "A number of operators have concerns about meeting the March 2013 deadline and will be seeking reassurances."

The Government has been criticised in recent months over its perceived lack of commitment to renewable energy. Earlier this year the heads of some of the world's biggest wind companies told a national newspaper that they were reviewing investments or seeking clarification from the Department of Energy and Climate Change (DECC) on future energy policy, while energy companies E.ON and RWE npower recently announced that they were seeking alternative investors for their Horizon Nuclear Power joint venture. It is also currently consulting on the introduction of a cost control mechanism for its Renewable Heat Incentive (RHI) after its programme of feed-in tariffs for solar PV projects went disastrously over-budget.

"The Government had to convince investors that it will not move the goal posts," said Rice. "Without that, the UK's creaking energy infrastructure will not get the investment it needs."

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