ENERGY – The Challenges Ahead – Energy and the Legal Sector Winter 2015

The energy industry is being disrupted.The future is unclear. The only certainty is that a wide range of stakeholders will face new challenges that will affect us all and the legal sector will play an important role.

The World Meteorological Organization recently stated that climate change has broken “symbolic thresholds,” just days before international climate talks in Paris. It is clear that we are on the cusp of a critical period, the decisions made by global leaders and industry will have far reaching ramifications for us all and, in particular, our future generations. Legal firms that operate in the energy and investment markets will need to skilfully navigate some huge challenges on behalf of their clients.

The energy sector has been receiving a battering, causing a prick in the ear of Wall Street, as reported recently in Business Insider. They report that a number of oil and gas companies are under pressure and edging towards default and big banks are reducing their appetite to lend within the industry. Michael Sage, co-chair of Dechert LLP’s business restructuring and reorganization practice said “We’re seeing more restructuring, already.” Back in the UK, there are fears that Britain is facing an energy crisis with blackouts and energy losses possibly being a reality this winter. National Grid published its winter outlook in October; their figures show that the gap between supply and demand was the smallest in a decade, as low as 1.2% during peak times; they did state that emergency measures are in place but not everyone is convinced.

In an interview with the Financial Times prior to the release of the National Grid data, the boss of Scottish Power, Keith Anderson, warned that National Grid would “start going to various industries or large users at certain times of the year or on certain days, or at certain times of the day”, requesting they “switch off energy please, because we don’t have enough.” For the sake of the planet and our children’s future, it is clear that we all have a responsibility to use energy more efficiently. However, often of more pressing concern to many households businesses, is the cost of gas and electricity.

The prices that we pay are affected by the wholesale price of energy, which is the cost to companies in respect of the gas or electricity they sell on to the end user. Aiming to protect against volatility in the international markets and secure enough energy to feed our ever expanding needs, energy companies buy a proportion of their supplies ahead of time. Purchasing ahead like this is called hedging. International events fluctuate unexpectedly, with a big impact on energy prices. Companies buy wholesale energy weeks, months or years in advance and even the day of use. Electricity is traded on different platforms depending on the date of delivery.

Most of the trading for longer-term delivery is done via brokers: intermediaries who match buyers and sellers. When choosing the right package and supplier for your business energy it can be frustrating and complicated trying to navigate the modern fluid energy market. The good news is that changes are underway to simplify the market and regulators are working hard to drive good practice. Many businesses dedicate resources and time to research and source their own supply, many others prefer to employ a reputable energy broker to help them achieve a competitive advantage. During a time when climate change and efficient use of the planet’s resources has never been more relevant, let’s hope that, for all of our sakes, global leaders make good decisions. There is hope, as evidenced by examples of smaller nations achieving magnificent feats of energy efficiency. For example Costa Rica met the full demand of its nation’s power usage, purely relying on renewable energy for 75 days straight earlier this year.

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