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CONSULTING INTERNATIONALLY: 10 TIPS FOR SUCCESS

East Isn’t East Anymore

Just like their engineering counterparts in the aerospace, automotive and advanced manufacturing sectors, innovative British nuclear companies are increasingly looking towards new overseas markets in order to sell their hard-earned consulting expertise. Look closely at the financial accounts of Britain’s biggest FTSE professional service firms and you will see that most large consulting practices quietly earn over half of their revenues abroad. Indeed the UK market is generally too small to support multinational firms alone. Even smaller domestic nuclear SMEs are eyeing foreign markets, as much for post BREXIT survival as for growth. Sooner rather than later nuclear professionals tend to find themselves working in foreign lands. This modern-day nuclear Gold Rush lies in Eastern Europe, the Middle East and South East Asia, where civil nuclear electricity programmes are needed to power their rapidly growing industrial economies.

How to Compete and Win

British firms have a reputation for high quality. But also high cost. The simple fact is that local professional labour is often much cheaper in Eastern and Asian countries with their budget priced nuclear power programmes. How can British firms compete? The answer lies in offering a mix of technical expertise, outstanding customer service and – most importantly – a finely tuned sense of cultural awareness upon which to build effective business relationships. In short, knowing your customer is key. And this means stepping outside of your cultural comfort zone, by looking at things from a different viewpoint. Travel does indeed broaden the mind.

My experience of working overseas as a nuclear consultant has been overwhelmingly positive. Here are 10 quick tips for fame and hopefully fortune for those nuclear experts brave enough to venture abroad with their laptops.

Rules of Thumb for Working Internationally 

Tip # 1.  Walk in their shoes. The major difference between doing business in the East and the West is that personal relationships matter much more in the East than tender submissions. All other things being equal, clients would sooner do business with a trusted friend. In fact even if things are not quite equal, clients will still prefer to work with a friend rather than gamble on a cheaper but unknown alternative. Always try to see problems from the other person’s point of view – not your own. Put yourself in the client’s shoes. Understand the wider foreign context and the internal pressures that they may be facing. What motivates them? What does success look like for them? What outcomes really matter and what are less important? How can you genuinely help improve your client’s situation? Take the time to get to know your client deeply. The answers may surprise you.

Tip # 2.  Deals are based on trust, not contract documents. Contracts tend to be regarded as the minimum level of performance. Foreign clients will usually expect you to deliver more than what the contract says. Going above and beyond without complaint is the norm for expat Brits. Besides, it is very difficult to legally enforce contracts in foreign jurisdictions. Nuclear energy projects are invariably closely linked to State governments, who can tie you up in red tape delaying payments indefinitely when displeased by under-performance. Getting paid mostly depends on whether the client thinks you have done a good job. Don’t get hung up on legal details in contracts. Arguing over small points sends the customer the wrong signal, that you don’t trust them. And trust is essential for doing business overseas.

Tip # 3.  Be polite and courteous in all circumstances. The British have a reputation for politeness, courtesy, integrity and honesty. Live up to it. Overseas clients will respect and admire your Britishness, even in difficult situations. Your softer people handling skills will ultimately determine how successful you become overseas. A willingness to help is always a big plus.

Tip # 4.  Avoid the hard sell. Hard sell is really a form of grovelling. Brashness hints at desperation which is never attractive for buyers of professional consulting services. They will wonder why you are quite so desperate. Professionals never grovel. So don’t hard sell under any circumstances, even if you lose to competitors sometimes. The customer may eventually come back to you when they realise why that cut-price deal they bought was so cheap or the consulting solutions didn’t work. Also, confrontational management styles rarely work in consultancy business situations. Collaborative diplomacy and people skills are the way to get things done abroad.

Tip # 5.  Ask questions rather than give opinions. Gently asking your future client questions will give you much deeper insight into the underlying problems and issues that your client is really trying to solve. These may not be immediately apparent from a translated contract scope or tender document. For example, technical consultancy on the chemical composition of steel in nuclear transport flasks might reflect wider systemic difficulties with the regulatory safety case for spent fuel dry cask storage. The client’s real problem might be running out of spent fuel storage capacity, not chemical analysis of steels. But if you don’t ask “why?” you may never know. Avoid silo mentality. Try to experience a wide range of different technical and situational challenges. Develop crossover skills. Nuclear power projects are never undertaken in isolation. Many different people and skills must be brought together as a team. Understanding your client’s project in this way will lead to new business opportunities.

Tip # 6.  Negotiate with patience. Foreign business deals usually require several rounds of downward negotiation to agree a final “best price”. But beware the technical scope will always remain fixed and in any case the consultant will be expected to exceed the contracted delivery terms. I have watched senior Arab officials quite literally throw a consulting proposal out of the room in feigned anger, but then minutes later be utterly charming when the price was halved for the same scope. Keep calm and carry on. Negotiate with patience.

Tip # 7.  Don’t worry about IP. The British are above all else good innovators. Conventional wisdom has it that Eastern countries will steal your nuclear intellectual property in a heartbeat. British companies focus far too much corporate effort on vain attempts to protect their IP through complex commercial and legal contracts. For most practical purposes enforcing these in a foreign jurisdiction is impossible. You might win in Court but the process will take years and bankrupt you. Instead nuclear consulting companies should not worry too much about IP. Firstly because this misunderstands Eastern buyers. They want the very latest nuclear technology for their money, not older recycled background IP. In any case the raison d’être for using a high value British consultant is precisely to generate valuable foreground IP for the client. This should be part of the consultant’s value proposition and helps justify high consulting fees. Secondly, IP should be less of a worry because the added value that nuclear consultants bring to nuclear projects is largely in their heads – it is the expert ability of British consultants to solve complex nuclear problems facing a client here and now – and this can’t be copied. That is why British consultants are highly valued problem solvers. Although they do talk about the weather too much, which always puzzles foreigners.

Tip # 8.  Be sensitive to wage disparities. Large disparities between expat and local wages can cause tensions on projects. Even quite senior nuclear officials can earn relatively low incomes by Western standards. While running a nuclear training course for some energy executives in South East Asia, I once complained about the high cost of my household gas bill. “Ian, that is more than my monthly income” my client gently chided me. I was mortified. Developing countries build civil nuclear energy programmes because they need them to boost their economy. By the same token these countries are not always rich. Beware of the social effects of wage disparities and always treat your clients with dignity and respect. They will do the same for you.

Tip # 9.  Reach out to Commonwealth Countries. It is generally easier working in foreign countries that have a strong cultural association with Britain or were once part of the British Commonwealth. For example, Australia, Hong Kong, India, Malaysia, Singapore, New Zealand and some Middle Eastern States are all undeniably foreign but have inherited some aspects of Britishness. Vietnam was once closely linked to France and retains its Western European cultural and architectural feel. Doing business in these countries is much easier than places with zero British heritage.

Tip # 10.  Remember how lucky you are. Working abroad is a privilege. Think about your colleagues stuck in a City office, as you watch the sun slowly rise over the Arabian Desert at Barakah or fly low over the green jungle of Vietnam into DaLat. I’ve done both and they definitely beat life sat in an open plan corporate office near the M6.

About The Author

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

Ian Jackson is a nuclear energy consultant at Prospect Advisory with 30 years’ experience working in both the public and private nuclear sectors. He has worked from Manchester to Vietnam, and everywhere in between. Ian joined Prospect Advisory from the UK National Nuclear Laboratory where he led international business development. Prior to that, Ian was an Associate Fellow at the Royal Institute of International Affairs, Chatham House, London.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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WHOLESALE ENERGY PRICES: JULY – AUGUST 2017:

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Forward and spot markets across energy commodities increased over the summer. This was led by crude, which rose over 7% with the futures market buoyed by reports of progress in quota compliance amongst OPEC and OPEC-Alliance producing countries. The geo-political concerns highlighted in July’s issue are also taking hold. Although Latin American tensions have eased, those in the Korean Peninsula remain foremost in peoples’ minds. Indeed, the oil market may be driven higher if more investors view hard commodities as a safe haven.

The refined products markets rose ahead of crude prices amid reports of increased military stocking (chiefly jet-kerosene). Meanwhile, US storms and emergency draws on the Strategic Petroleum Reserve, and also served to drive crude and petroleum products prices up.

Long term hopes for shale took a knock in confidence with an announcement from BHP Billiton that it was selling investments in the US to stem losses on its fracking venture. This news was compounded by comments by the CEO of Total, perhaps the one energy major with the most significant shale involvement, asserting that oil prices will need to stabilise well over $80/bl before any significant new investments can be justified.

Natural Gas

Gas finished the period up more than 3p per therm.

The spectre of North American refiners converging on the Rotterdam spot market drove up European prices for all petroleum products, notably middle distillates. This had a knock-on effect on gas, which is often contractually-indexed to heating oil. It is also a naturally interchangeable refinery product which is frequently blended with kerosene at refineries, hence the strong price correlation notwithstanding the supply basis. This factor and the rise in energy prices across the board perhaps best explains the recent run in gas prices, a market which is otherwise very well supplied, with talk of some LNG cargoes hitherto destined for South Asia now being diverted to European terminals.

Petroleum markets aside, the effects of the weakness of Sterling vs. the Euro, with the determining €/MWh price converting into p/therm, needs to be considered too. The North European gas market is essentially a single, inter-connected supply pool, with the UK price at the National Balancing Point (NBP) essentially ‘set’ by trans-European deliveries cleared in and out of the Title Transfer Facility (TTF) in Holland. A sustained or further weakening in Sterling could put upwards pressure on prices in the UK therefore, especially if regional European spot markets start to tighten once winter takes a hold or we see outages at key power stations requiring an uptake in gas or coal.

Electricity

Wholesale power prices saw the strongest gains of all, with the annual 2017 base-load contract and the spark spread rising 6% and 11% respectively.

Nuclear power stations in France and Benelux, which represent the backbone of the Continent’s supply, had come under increasing safety/decommissioning authority scrutiny, with considerable uncertainty and lack of information on the long-term future of key generators unnerving the forward market.

Industrial electricity prices in the United Kingdom, meanwhile, increased further, partly in unison with steep rises in domestic tariffs and rising input wholesale costs. The impending Energy Intensive Industry (EII) exemption surcharge will soon be affecting end-users on both new and existing long-term contracts from next April. There is some consternation amongst buyers, not just in relation to the justice of the tax itself (which exists chiefly to pay for a tax exemption for larger energy-intensive buyers) but to the uncertainty it is causing as well. Whilst the surcharge will apply from April 2018, buyers still remain in the dark as to what the actual tax rate will be – a case of Whitehall ‘delaying’ bad news, perhaps. Some suppliers have been offering premium-rated ‘insured tariffs’ in response to these end-user concerns.

But perhaps the real ‘elephant in the room’ is inflation. Not so much headline RPI or CPI, but leading-indictor of Producer/Factory Gate prices, with some industry trade associations telling us that such indices are already heading into double figures. Were this to be the case, there are contractual clauses and statutory measures in place to trigger automatic rises across wholesale, industrial and commercial prices. The same inflation-related factors affect the gas market, and in both cases, EUA carbon prices (up by more than 15% over the two month period according to Gazprom Research) could also chase industrial energy costs higher, unless such inflation can be kept in check.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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DECOMMISSIONING LARGE SCALE ENERGY PLANTS: DISCHARGING LIABILITIES SAFELY AND COST EFFECTIVELY

PART II: THE DECOMMISSIONING PLAN

In the first article of this series we pointed out the desirability of having a robust and appropriately underpinned plan to discharge any liabilities arising from the operation of a facility, whether it be nuclear, conventionally hazardous, or physically complex, and the importance of a rigorous risk and uncertainty analysis, and the advisability of having independent verification of the plan. This article looks at the other key elements contributing to a robust plan.

Any plan has to be technically sound and should be developed against appropriate base case assumptions. The assumptions should be clearly stated and justified. Current good or accepted and internationally benchmarked practice need applying to the proposed decommissioning technologies and techniques. Quantities and metrics must be stated and justified, eg with regard to waste arisings.

Scope must be adequately defined with bounding assumptions and exclusions clearly stated. All work necessary to successfully deliver the proposed end state needs explaining and justifying. In particular the scope of work must be fully understood, with plan describing ‘how’ it will be carried out and not ‘what’ is required – its surprising how often this aspect is overlooked. A programmatic approach should normally be adopted pulling together inter-related elements of scope and allowing work packages or projects to be expressed in the context of an overall end state objective.

Schedules must be logically linked and reflect all the scope and assumptions needed to successfully deliver the plan: durations are reasonable, and there is a clearly described critical path through to the proposed end state. Interdependencies and milestones should be clear and realistic and schedules need to tie in with risk mitigation measures (see part 1 of this article).

Cost estimates must be as robust as possible at that stage of the plans maturity and must reflect the totality of the scope required, being phased according to scope and schedule. The techniques used to estimate cost and uncertainty should be appropriate and reflect good international practice. Cost and quantity data sets must be appropriately robust and wherever possible benchmarked. Where uncertainty exists, eg with regard to waste disposal, this should be made clear and appropriate contingency values applied.

It is important to fully consult regulators with consent milestones clearly articulated and demonstrably deliverable. In the latter regard adequate allowance in terms of time and effort should be made for developing appropriate cases and the iteration of these with the regulator before consent is granted. Stakeholders are also an important part of this process and should be engaged during the development of the decommissioning plan, and where appropriate their responses captured in the plan.

The above is of course predicated on the operator having a mature quality management system in place to provide oversight and governance during development of the plan and this should also be documented in the plan. Many operators back this up with independent verification of the plan’s quality during and after its drafting, with the operator documenting how the verifier’s findings have been incorporated into the finished product. Such verification is particularly valued if the operator is dealing with highly politicised or heavily regulated decommissioning programmes, providing authorities and the public with assurance that the programme is being or will be delivered safely, cost effectively and in an environmentally responsible manner.

Funding the plan is a separate but very important matter and clearly the two are closely inter-related, for which several models exist. These will be discussed in a future article.

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.       

Chris Kaye is a nuclear specialist and senior commercial executive with over 40 years experience in negotiating, managing, and assuring the performance of multi-billion pound strategically and technically complex contracts, to Board and Ministerial level, within Government and private sectors. From 2006 and prior to joining Prospect Group in 2017 Chris was a function head of a major UK Non-Departmental Public Body. There he was responsible for assurance and oversight of all the UK private sector nuclear operators’ decommissioning strategies, plans and costings on behalf of the UK Government where a third party or the taxpayer has an interest in funding and risk.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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FACTORS TO CONSIDER BEFORE INVESTING IN BATTERY STORAGE: PART II

This new series of blogs highlights the factors which a prospective end-user should weigh up before deciding whether and how to invest in electric storage.

In terms of optimisation, such energy management can be done in-house or outsourced. Although there is no hard and fast rule, outsourcing can bring efficiency and expertise that can far out-weight its cost in commissioning. Fortunately, there are various ways of going about this task and the use of third party agents or an Agency Trader is fairy well established and several firms can offer Agency Trading services.

Although much of the financial model can be prepared by the user’s agent, supplier or prospective manufacturer, the question of intangibles comes up again. Only the user can really determine what the value of continuity and ‘security of supply’ to the business will be: the resilience value overall. It is important, therefore, for the user to be involved in the modelling process.

The cost of modelling varies, as does the quality of much of the work; not always in tandem. In some cases, the cost of modelling should be deducted from the cost of any purchase, if charged. Reputable manufacturers will also inform the prospective buyer of cheaper leasing options which they may have on offer, as well as other alternatives which the user may wish to explore if the financials begin to look marginal.

To clarify, the visible savings of a financial model should include:

  1. Reductions in annual electricity bills: potentially over 50% through Power Purchase Agreement (PPA) tariff reductions or under a bespoke Storage PPA agreed with the supplier.
  1. Future income from Frequency Response services to local distribution networks under private-wire agreements or, in the majority of cases, services to National Grid under reverse auctions.
  1. Optimisation using the battery: This task could be outsourced to an Agency Trader, e.g. a Big Six, independent generator or other energy merchant, who will optimise the battery through their own supply pool and access to the Elexon, OTC, Nord Pool, APX and other markets. This task is less complex than it may sound. Like the battery itself, once in place the process requires little resource from the user, and there are various energy merchants who already offer Agency Trading services, some paid on performance only.
  1. Peak Shifting: the ability of the user or embedded generator to ‘time’ their exports of the electricity they sell into the system and so attract higher ‘peak’ prices in trading markets. Again, an Agency Trader could facilitate if the end user does not wish to becoming involved in trading directly, as many may not.
  1. Enhanced Plant Efficiency: alleviating excess loads, avoiding ‘cold starts’ and mitigating other impacts to prolong the life and reliability of turbines, minimise wear on machinery and preclude erroneous reset of control systems which some ‘black box’ DSR systems might place at risk.

It is worth adding here that larger businesses have the option of a Guest Battery. The business will not buy the battery nor pay for anything related to it, but will simply make land available and allow the Provider to install and operate the Guest Battery. The user receives pretty much the same electricity bill savings outlined in paragraph 1 above and the Guest Battery also adds a valuable degree of ‘free resilience’ as well. To compensate the Provider for such benefits, which entail practically zero cost and zero risk, the user must agree to share any resultant cost savings with the Provider.

In evaluating the resilience benefit for the company, it is important to consider:

  • The cost to the business of any ‘worst case scenario’ occurring within five, ten or fifteen years without any emergency cover or 100% dependable back-up. These will include direct contractual losses and/or consequential damages relating to any power outage, whether it was caused internally or by an outside issue with the local distribution, high-voltage transmission grid or generator: be it human error, one of the cyber attacks targeting grids of late, a force majeure or any other unforeseen event, which may or may not lie within the user’s control but remain his financial responsibility.
  • The alternative cost of buying ‘critical loss’ cover or very high premium catastrophe insurance (if it is available) that may be sure to protect the business from damages resulting from short-term or prolonged outages.

Whether or not a battery is finally purchased or leased, the process of exploring this investment can be useful as it will focus attention on optimisation options for the plant itself. The exercise can serve as a ‘de facto’ energy heath check and is offered free by some providers. This exercise must also establish what battery chemistry is best suited for the user, the size and performance specification of any battery, as well as the exact type of long-term warranty on offer, with questions pertaining to its operational life, the number of complete and partial cycles; its flexibility, its depth of discharge, specified breeches and allowed tolerances that may void a guarantee.

The forward service provision is just as important as the battery itself. It is another key question which the agent, supplier or manufacturer will need to be asked.

This article has analysed the visible savings a financial model should include, and has also introduced factors to take into account when evaluating the resilience benefit for a company. Click here to read Part I, which discussed the importance of valuing benefits, visible and intangible, and including them in a financial mode.

By Dominic Whittome 

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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US AND KOREAN NUCLEAR PLANT CANCELLATIONS: IMPLICATIONS FOR UK NEW NUCLEAR BUILD

The US currently has 100 nuclear power plants in operation supplying about 20% of its power needs. A further four were under construction, two each in Georgia and South Carolina, until the owners of the South Carolina plants recently announced the cancellation of construction of its two Westinghouse AP1000 units, Summer 2 and 3.

Summer 2 and 3 had been under construction since 2013, with original operational dates of late 2019 and late 2020.  However, due to construction delays and cost overruns, these were later revised to December 2022 for Summer 2 and March 2024 for Summer 3.  The finances were a key factor in the decision to cancel construction, with the original estimate of $11.5 bn having more than doubling to $25 bn. The reasons behind this are no doubt complex, but as the US has not constructed a new reactor since the 1970s, the loss of nuclear expertise must be a factor.

Summer 2 and 3 were intended to showcase advanced nuclear technology and pave the way, along with the Georgia plants – also Westinghouse AP1000s, for a nuclear renaissance in the US.  A further four AP1000s and 12 SMRs (Small Modular Reactors) are currently proposed and several more are in the early stages of planning. The fate of these and the two Georgia plants remains to be seen.

The economics of nuclear have always been the subject of much debate, but what seems to have swayed the South Carolina decision to cut losses is the availability cheap natural gas, enabled by the more liberal attitude to fracking in the US, and a flat energy demand due to improved energy efficiency. Ironically, the cancellation of Summer 2 and 3 will mean South Carolina’s coal plants will need to run for longer, whereas they were originally intended to be shutdowns upon the nuclear units coming online. A decision to proceed or not with the Georgia plants is expected soon.

The Westinghouse bankruptcy has also complicated the picture in the US, with its AP1000 design being used for the South Carolina and Georgia projects and its role being reduced to a vendor supporting the EPC. Their situation has also had an effect in the UK, with Toshiba’s stake in Nu-Gen now being considered by KEPCO. Rather than utilise the Westinghouse design, which was approved by the UK nuclear regulator, ONR, in March this year, KEPCO wants to use its own technology, which will cause a delay in construction of the Moorside plant while the necessary regulatory design assessment is undertaken.

The South Korean nuclear industry is also in difficulty, with the new anti-nuclear government suspending construction of the Shin Kori 5 and 6 nuclear plants for several months while it undertakes a public consultation on their future. This decision has generated much debate in the country and is seen as a threat to its nuclear exports, and KEPCO’s future Nu-Gen.

Decisions to be taken in the next few months will be crucial for the future of nuclear in the US and Korea. The Korean decision in particular will have an impact on the Moorside project in the UK, and may put the government’s climate change targets in jeopardy. Unlike the US, it is doubtful that the supply of natural gas from fracking will be a welcome alternative.

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.       

Edward de la Billiere is a Solicitor and co-founder of Prospect Law. He was educated at Newcastle University and trained at the leading Middle East firm Trowers and Hamlins, working in both their London and Dubai offices, predominantly in the oil sector. On qualification, Edward moved to Magnox Electric, which was taken over by the nuclear operator BNFL. He has retained a strong interest in infrastructure and, in particular, energy related projects and has advised recently in respect of energy and waste projects for corporate, local authority and private clients across the UK and internationally.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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DECOMMISSIONING LARGE SCALE ENERGY PLANTS: DISCHARGING LIABILITIES SAFELY AND COST EFFECTIVELY

PART I: EFFECTIVE DECOMMISSIONING PLANNING

A robust plan for discharging the liabilities associated with a facility’s operation is important not just for compliance with legislation but to establish the correct basis for funding and implementing safe, environmentally sound, and cost effective decommissioning for that facility whether it be nuclear, conventionally hazardous, or physically complex. The plan will form the basis on which work is presented to market and, once contracted, performance monitored.

The UK’s Nuclear Decommissioning Authority terminated a major clean up contract for 12 nuclear sites earlier in 2017 because of the emergent mismatch between the work that was specified in that contract which dated to 2012, and an emerging work that actually needed to be done (click here to see Prospect blog covering Written Statement to Parliament by Energy Secretary Greg Clark on 27 March 2017) While this was no reflection on the performance of the contractor it did illustrate the desirability of having a fully underpinned decommissioning baseline plan prior to any commercial commitment.

Of course the robustness of the baseline will be a function of the time prior to executing the work: while it is self evident that however well you plan, time and the reality on the ground will act to confound that plan, this should not put off the need for proper underpinning at appropriate points through the lifecycle of the facility irrespective of whether that facility is nuclear or conventional.

In that regard treatment of risk and uncertainty is a key factor. While this is recognised, rigorous analysis can often be overlooked when it comes to developing a decommissioning plan.

There are two principle objectives to risk and uncertainty analysis – informing contingency values in the cost estimate and identifying work required to mitigate or to retire each risk.  While the former is well recognised the influence of the latter may not be, especially if budgets are tight. To help address this the UK has implemented a formalised and structured approach to risk mitigation within decommissioning planning, with its own technical baseline specifying for each relevant risk the work needed, timescale, owner and cost. Crucially this approach links execution of the work to the timescale required for the ‘solution’ within the decommissioning plan (which in turn influences, and should reduce, the cost contingency value going forward).  Parking or transferring risk should not normally be an option: the operator should implement measures to address these even if not under its direct control.

For this reason and others there are obvious attractions to both the operator and the regulator in having the facility’s decommissioning plan independently verified in order to provide assurance to regulators, funding bodies, and others that the liabilities attaching to that facility can be discharged safely, cost effectively and in an environmentally responsible manner.

Please click here for an appendix covering factors any decommissioning plan should take into account

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.       

Chris Kaye is a nuclear specialist and senior commercial executive with over 40 years experience in negotiating, managing, and assuring the performance of multi-billion pound strategically and technically complex contracts, to Board and Ministerial level, within Government and private sectors. From 2006 and prior to joining Prospect Group in 2017 Chris was a function head of a major UK Non-Departmental Public Body. There he was responsible for assurance and oversight of all the UK private sector nuclear operators’ decommissioning strategies, plans and costings on behalf of the UK Government where a third party or the taxpayer has an interest in funding and risk.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: MAY – JUNE 2017:

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Brent crude fell $51.75 to $48.85/bbl amid concern that OPEC and OPEC Alliance states have still been struggling to remove the slack from the oil market, also rising exports from Libya (adding over 1 mbd) and from Nigeria (over 1.7 mbd) to world supplies. Neither oil producer is covered by the production accord.

Oil prices fell by just over 5% which seems a comparatively modest fall put in perspective and against recent newswires and headlines on the subject.  Looking at the price upside, markets will be concerned at growing global oil consumption, notably in the automotive sector, the prospect of faltering supplies and the possibility of deeper OPEC Alliance cuts, which may well happen if it is now clear that the existing cuts do not go far enough.

On the downside, the market will be looking at future output increases in Libya, Iraq and North America. Shale exports are clearly having an impact, although longer-term questions about the sustainability and commercial viability of sub $80/bbl production projects outside Africa and the Middle East  are likely to remain. Ongoing political troubles in South America and the South China Sea may also rattle petroleum markets in the weeks ahead. Furthermore, with derivatives now accounting for most of the open positions in the forward markets, physical prices may  be very sensitive indeed to general shifts in perception, even if the market looks calm at the moment with the 15 Day Brent contract seemingly stuck between the same £45/bbl  ‘floor price’ and £55/bbl resistance level mentioned in the last edition of this update.

Natural Gas

Gas prices barely moved over the period, up just 2%. The main news last month was the announcement that Centrica will permanently shut its Rough facility. This is a converted North Sea gas field which, as most articles reported, accounts for 75% of the UK’s storage  capacity. While that percentage is perfectly accurate, in terms of the ‘high-space/low-deliverability’ storage (i.e. the type the market needs to balance on a seasonal basis and to provide cover for prolonged emergencies) the true percentage cover  which is provided by Rough is even higher, possibly over 90%.

The closure of such a strategic asset should be a concern therefore.  The last 15 years have seen new investment in onshore salt-caverns, although these are generally ‘low-space/high-deliverability’ assets. Although they are more flexible, the emergency cover they can provide is limited. They are also likely to be more expensive, certainly once competition hitherto provided by Rough is withdrawn.  The closure of Rough may therefore expose the UK gas balancing market to  technical and market developments relating to these smaller storage facilities, the LNG market and inter-connectors.

Consequently the risk-premiums in I&C contracts may rise (due to higher balancing risks), as will valuations of swing flexibility in North Sea gas sales agreements. From a North European perspective, the gas market does look well enough supplied for now. However, the Russian-Ukraine corridor, South East Asian LNG supply, demand and geo-political developments all need watching in the weeks ahead, as well as the oil market itself.

Electricity:

The forward baseload contract finished the period unchanged at £43.00/MWh.  New delays were  announced for the proposed 3,200 MW Hinkley Point C  nuclear power station and the plant now looks unlikely to generate at full capacity until 2027, by which time all of the UK’s remaining reactors, bar Sellafield, may have closed.

Progress on the next new-build site, the 3,600 MW Moorside plant, looks to be in jeopardy altogether, with primary shareholder Toshiba facing  possible insolvency and minor partner Engie (formerly Gaz de France) pulling out of the project altogether.  Power prices are being held down by low oil and gas prices for the time being but the long term outlook is less clear. To ensure the system has adequate volume, National Grid and central government have  embarked on quite an extensive portfolio of new inter-connector projects to import from grids on Continental, Scandinavian countries and potentially Iceland, which has a 1,500 MW wire hoping to get the go-ahead soon.

There are already eleven major inter-connectors, rated between 1,000 MW and 2,000 MW, planned under construction or already live. But whilst the system may have the capacity spare, this is no guarantee that sensibly-priced electricity itself will be available to fill any short-fall. The UK’s price-dependence on European and Nordic power exchanges looks set to increase. The landscape will be different with the current inflation-adjusted Strike Price for the first new-build reactor at Hinkley Point C already weighing in at £110/MWh, much higher than the existing baseload market prices.

Barring a renaissance in gas-fired or other indigenous generation, forward power prices look poised to shift higher. Significant increases in trend are perhaps most likely in the balancing market prices rather than baseload, with the latter fast becoming ‘the residual’ commodity by comparison. As we go to wire, there are reports that half of France’s nuclear power plants are in shut down. It is not clear why or when plants will re-start. Twenty units offline cannot be explained by maintenance although there is a host of possible reasons to explain what has happened and no report yet of any sharp movement in European power prices.

By Dominic Whittome

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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FACTORS TO CONSIDER BEFORE INVESTING IN BATTERY STORAGE: PART I

This new series of blogs highlights the factors which a prospective end-user should weigh up before deciding whether and how to invest in electric storage.

The decision whether or not to invest and, if so, exactly which type of package to go for, will depend on a host of factors. These include the nature and configuration of any embedded generation, the user’s demand profile and the value of ‘security of supply’ to his business.

We should split the ‘all in’ value of electric storage in two parts.

  • Visible benefits: these include the added value to the business through reduced annual power bills; enhanced micro-generation efficiency; improved power quality; energy efficiency and additional plant income, such as Frequency Response revenues from grids or other customers. Each Visible benefit should be quantified and included in the financial model.
  • Intangible benefits: these cover security of supply or ‘resilience’, i.e. the added value to the corporation in the form of ‘business continuity’, ‘catastrophe avoidance’ amongst other liabilities a plant manager may hold responsibility for.

In each case, especially the first, it is important to avoid double counting when valuing benefits and including them in a financial model. For example, if a user employs a battery to sell a specific service to a third party, like a high-flexibility Frequency Response service to National Grid, this could conflict with other uses the battery may be needed for in the event. Fortunately, there are now twenty-seven different Frequency Response categories which National Grid is inviting through its 2017 reverse-auction process, i.e. these include cheaper, less flexible types of service, precisely to address such conflicts and to encourage storage users to free up and sell them any surplus capacity they may have to spare.

Above all, the commercial payoff of a battery will ultimately depend on how well it is specified and installed and how well it is optimised subsequently, both on-site and out in the marketplace.

Some batteries installed recently operate profitably as ‘standalone projects’. Here the visible benefits alone justify the expenditure; resilience is just a bonus. The main benefits involve Frequency Response income and/or annual electricity bills savings of circa 50% to 60% by virtue of an effectively flattened demand-profile, avoiding the Climate Change Levy, TRAID and Red Zone capacity payments to the system.

Other batteries might only be considered worthwhile once visible and intangible benefits are considered together, chiefly in cases where ‘business continuity’ is seen as critical and so resilience becomes the principal value that a battery will provide.

The visible benefits may be of secondary importance. This value still needs to be evaluated separately and be viewed as a way of subsidising the battery.

Financial modelling relies on detailed user profile, power market data and complex forecasting techniques. The storage arena is relatively new and highly sophisticated, even by power generation industry standards. However, some robust financial models have been developed, prepared by a prospective end user’s own agent, battery supplier or manufacturer. Although not perfect, certain models should give a prospective buyer a good ‘feel’ of the investment return they can expect, also flag up whether or not storage itself is a sensible option, and if not what alternative optimisation or Resilience options may be worth looking at.

This article has discussed the importance of valuing benefits, visible and intangible, and including them in a financial model. Part II of this series will analyse, in greater detail, the visible savings a financial model should include, and will also introduce factors to take into account when evaluating the resilience benefit for a company.

By Dominic Whittome 

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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CHRIS KAYE JOINS PROSPECT’S NUCLEAR TEAM

Prospect is pleased to announce the further development of its multi-disciplinary infrastructure practice through Chris Kaye joining the firm as an expert on the negotiation and management of multi-billion pound infrastructure projects, particularly in the nuclear sector. On behalf of the Department of Energy, Chris led the review of Hinkley Point C’s waste and decommissioning plans, providing advice to the Secretary of State on the approvability of the power station’s Funded Decommissioning Programme, and liaising with private and public sector advisory bodies.

Prospect remains the only regulated firm to offer combined legal and technical services to clients in the infrastructure sector and its position is further strengthened by the addition of Chris Kaye.

Chris has over 40 years experience in negotiating, managing, and assuring the performance of multi-billion pound strategically and technically complex contracts within Government and private sectors. From 2006 to 2016 and prior to joining Prospect Group, Chris was a function head of a major UK Non-Departmental Public Body, where he was responsible for assurance and oversight of the private sector nuclear operator’s decommissioning strategy, planning and costing where the Government has an interest in its funding and risks. This work was primarily directed at assuring the robustness of detailed plans for decommissioning the UK’s most modern nuclear power station fleet and associated spent fuel liabilities, with a total value of c. $25bn.

Chris has also led the assurance, on behalf of the UK’s Department of Energy, of all three of the UK’s new nuclear power plants’ decommissioning plans and cost estimates, in order to support the UK Government’s decision on whether or not to approve the operator’s liabilities funding arrangements for this first of a kind development. This included Hinkley Point C.

Outside the UK, Chris also led assurance reviews of Canadian, Swedish and Swiss nuclear facilities’ decommissioning plans on behalf of their respective governments and has provided consultancy advice to the Taiwanese and Chinese governments and private enterprises. Prior to 2006, Chris worked as an independent consultant on various technical assignments for major clients including the UK Atomic Energy Authority, Arthur D Little and the UK Government, significantly influencing the eventual decision to create the Nuclear Decommissioning Authority (NDA).

Chris also participated in reviews of private sector companies’ performance as part of the UK Business Excellence Award process utilising the European Foundation for Quality Management Business Excellence model. He has also worked in a variety of roles in the UK electricity supply industry. Initially covering waste management R&D and policy, for 12 years Chris led the negotiation and management of all contracts for the supply of uranium, new fuel, and spent fuel management services for the UK’s private sector nuclear fleet. Chris has also been a ‘high risk projects’ reviewer for the UK Cabinet Office Infrastructure and Projects Authority, participating in major government infrastructure projects in overseas construction, justice, immigration, rail franchise and national emergency planning. He is a Member of the Chartered Institute of Purchasing & Supply.

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.       

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

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EURATOM

Despite rumours to the contrary, the UK government is now set in its declared determination to leave Euratom at the same time as departing from the EU.

On a political level, maintaining membership of Euratom would entail accepting jurisdiction of the ECJ.

The Government has not demonstrated that it has any desire to consider the absence of legal necessity to leave Euratom at the same time as leaving the EU, or at all. On the other hand, there does also appear to be a gradual recognition of the implications of Euratom exit, including various implications relating to energy security, management of the UK’s nuclear legacy and continued supply of medical isotopes.

It is to be hoped that a sufficient number of Euratom members will have an interest in maintaining a relatively stable UK nuclear industry and will agree to practicable transitional arrangements, allowing the UK sufficient time to develop its own adequate safeguarding arrangements as a basis for negotiation of bilateral nuclear cooperation agreements with the partners on whom the UK relies.

Prospect Law and Prospect Advisory provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article is not intended to constitute legal advice and Prospect Law and Prospect Advisory accepts no responsibility for loss or damage incurred as a result of reliance on its content. Specific legal advice should be taken in relation to any issues or concerns of readers which are raised by this article. 

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

For more information, please contact Jonathan Leech and Rupert Cowen on jrl@prospectlaw.co.uk and rcc@prospectlaw.co.uk, or by telephone on 020 7947 5354.

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