Following the successful Free Trade Agreement with Japan the UK Government’s Department for International Trade is undertaking a series of business focused UK-Japan Trade Missions commencing with the launch event on 2^nd March.  Given Japan is the worlds third largest economy and relies heavily on nuclear power this is a market that UK companies should positively explore. 

Click here for further details.

Click here for free registration.

About Prospect Law

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

We have experts with extensive experience of both risk management through insurance and also business development in the nuclear sector in Japan.

For more information or assistance with a particular query, please in the first instance contact Edward de la Billiere on 020 7947 5354 or by email on edlb@prospectlaw.co.uk.

Prospect Law welcomes the Confiscation Order in the sum of £739,263 which Her Honour Judge Lana Wood made against Mohammed Mehdi Ali at Harrow Crown Court on 12^th February. As Brent Council’s press release explains, the Confiscation Order, which was made under the provisions of the Proceeds of Crime Act 2002, reflects the gravity of criminal offences committed by Mr Ali over the course of many years, by his unlawful use of two properties in North London where he crammed vulnerable tenants into unsuitable and crowded accommodation with no apparent regard either to their own living conditions or of the impact on the conditions of neighbours. Prospect Law was delighted to advise and represent the Council on this important case – the largest such order made by the Courts in 2021.

Click here to read Brent London Borough Council’s press release

About Prospect Law

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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

Oil

Energy prices continued to climb across the board with petroleum leading the field as crude prices rose by over 28%. The relatively modest price environment over 2016 to 2020, followed by the sharp price fall once the pandemic took hold last April, has compromised investment in many North American shale projects, which generally require frequent re-evaluation and investment compared to conventional drilling. Such projects must soon contend with the harsher operating environment expected for oil & gas producers. In particular, subsidies embedded deep within the US tax code, which had helped marginal fracking projects over the line in recent years, look set to be repealed soon. The ‘Green Chapter’ promised by the incoming Biden Administration may well thwart any renaissance in future US exports, even if oil prices do recover significantly from this point on.

Further to the last update, the investment famine in key oil producing countries including Iraq and Libya, across the production, transport, storage and export terminal supply chain, appears to be worsening. New investment has been hampered by comparatively low oil prices, heightened regulatory & financial uncertainties facing international lenders and energy majors and the general perception of mismanagement, political turmoil and civil unrest. All of these have served to thwart a much-needed influx of overseas management & engineering expertise as well as capital itself.   

Finally, before the sharp price collapse last April when the pandemic struck home, several reputable research houses had been predicting a long-term recovery in oil prices, or “commodities super-cycle” as one Wall Street investment bank coined.  If such predictions hold water and the cost of newly-maintained or recoverable does rise sharply, then the current pandemic may simply be delaying the ‘day of reckoning’ for oil prices, provided this research remains valid today and the market has yet to adopt or discount these expectations into the forward prices.  

Natural Gas

Taking its cue from petroleum, forward gas prices rebounded 24% over the period and have continued to strengthen going to press. Inventory levels at almost every major gas storage facility on the Continent are now reported well below last year’ levels and below 70% capacity in some instances. Colder Siberian weather was recently forecast by a consensus of meteorological offices and with North European Prompt and Forward markets both on the rise since. On the home front, the UK system may look robust, certainly on paper with a gas input-mix consisting of circa 45% UK Continental Shelf supply, 10% Norwegian North Sea, 5%+ LNG imports and some 40% from a variety of major sources via interconnectors from the Continent. However, there are caveats which are relevant now. First up, the mere existence of LNG import terminals and  gas interconnectors is no guarantee that the gas volume needed will finally arrive. Today the GB system has no high-volume gas storage facility to fall back on following the closure of the Rough field in 2017. So, when it comes to finding marginal supplies, the extra gas needed to balance the GB system, the spot or Day-Ahead Market price is ultimately set by the highest international bidders. This task is managed by traders and utilities alike but the associated costs and risk-premiums are increasing, inevitably passing down to the consumer.

The last three months also witnessed economic activity ticking up across South East Asia. Shipping charter rates hitting historic highs and spot LNG prices climbed significantly. But the outlook for the GB gas prices needs to be seen in context of foreseen changes in demand. In the background is the undoubted government effort to wean domestic consumers off gas altogether, now with a ban on the sale of domestic gas boilers as soon as 1^st January, 2025. Although how soon such measures will cut gas demand remains to be seen.

Electricity

Base-load electricity was the more settled commodity of the three but still finished 18% up over the quarter. The power market shares many issues just mentioned in relation to gas and it is set to become more volatile as conventional gas and coal generation is replaced by less-dependable supplies of renewable or imported electricity. Interconnectors will play an increasing role. The GB market already has three major import cables in place and three under construction plus a potentially very long, 1.2 GW wire linking Scotland to Iceland after 2025.

Again, while these import capacity figures may look promising on paper, on-the-day reality can be different. In fact, the reliability questions that surround renewables can also apply to interconnectors. To take one example, in the midst of the current cold snap, the state-of-the-art 1.0 GW BritNed interconnector linking the UK to Holland remains closed for repair until mid-February. Not an isolated example: there are frequent, unavoidable issues with sub-sea cables generally, be they old or new. This is another issue for traders, utilities and end-users to contend with as UK dependence of marginal imports increases. Consequently, Annual Contracts may have higher risk-premiums factored into them as company supply pools become riskier and more expensive to manage.   

Another issue, one specific to the Forward Market itself, is weak liquidity. This will only sharpen price volatility and lead to more opaque, untrustworthy OTC market prices, which is a problem for buyers because Annual Contacts are priced against them. The problem is not new. The exodus started with the collapse of Enron and fellow US energy merchants. Their ‘liquidity providing’ role was not taken up in the main by the surviving utilities who took their place. That was followed by the financial crisis and was exacerbated further by strengthening MiFID legislation. The EU’s Market in Financial Instruments directives has made cross-commodity hedging, trading and compliance alike a riskier, more complex and expensive affair, inducing many of the remaining players to exit the Forward Market. This looks unlikely to change post-Brexit, in spite of a deal excluding Financial Services. We may yet see energy majors, now investing in electricity supply & trading operations, move in to fill the void. But there is no evidence of this yet. Barring government intervention, which looks doubtful, the UK power market looks set to remain illiquid for some while. Consequently, OTC prices in the Forward Market could be disproportionately influenced by short-term issues by taking their cue from the Prompt. So, hardly a very efficient-looking market but one which industrial & commercial buyers will be navigating with the April Year 2021 Buying Round now well underway.

About the Author

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.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

This is the third in a series of articles on the NEC standard form of contract, this time dealing with the requirement for Project Manager impartiality.

The NEC standard form stipulates that the main contributors to the Project shall behave in a particular manner.  This is contained within Clause 10.1, which states:

“The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation.”

The Project Manager administers the contract as a manager, gives instructions, assesses and implements Compensation Events and approves the Contractor’s submitted Programme.  The Employer will clearly expect his interests to be protected through this process.  The Project Manager is appointed by the Employer and in some cases may also be a direct employee of the Employer’s organisation.  This can clearly lead to the Project Manager feeling they sit squarely in the Employer’s camp and presents the risk of the contract being administered in the interests of the Employer, whilst at the same time to the detriment of the Contractor, especially in cases where the Project Manager feels pressure to comply with the wishes of his/her paymaster.  The question in such cases, should the Project Manager exhibit bias, is whether he/she is fulfilling their obligations under the contract and at law.  The simple answer is a resounding no.

The issue was already clarified for JCT forms of contract in Sutcliffe v Thackrah [1974] AC 727, where the court stated that the Architect had two strictly separate functions, one under which they are bound to act upon their client’s instructions and one under which they must act upon their own opinion, the latter being under their role as Contract Administrator.  The NEC standard form had, however, been sold to a large degree on the fact that the Project Manager was acting solely in the interests of the Employer and it took many years for the court to expressly clarify that this was not the case.

Clarification came in the decision handed down by Mr Justice Jackson in Costain Ltd v Bechtel Ltd [2005] EWHC 1018. The decision in this case was that the principles regarding impartiality in acting as a contract administrator brought out in Sutcliffe v Thackrah were just as relevant under NEC as they were under JCT.

Arguments were put forward by counsel in this case that as any dispute between the Parties could be referred to adjudication, then the adjudicator would redress the balance through his/her impartiality, suggesting there was no requirement for a Project Manager to be unbiased.  This was not accepted by Mr Justice Jackson, who stated that there were many instances within the NEC standard form where the Project Manager was required to exercise their own independent judgement and as such there was no reason why the use of such discretion should exclude the principles brought out in Sutcliffe v Thackrah.

And so at last clarity.  In administering an NEC standard form the Project Manager is under an obligation to administer on behalf of the Employer but in the interests of both the Employer and the Contractor, equally and fairly.  Clause 10.1 confers an obligation on the Parties to work together and effectively upon the Employer not to interfere with the Project Manager’s duty of impartiality in administering the contract.  It may however still be difficult for some Project Managers to separate the two clear functions and refuse to comply with certain express wishes of the Employer.  Any Employer and/or Project Manager working within a framework where there is a real danger of bias being evident should not take this lightly.  Should bias be proven there is a real risk that all previous decisions of the Project Manager could be challenged, resulting in the Project Manager’s position being no longer tenable and potentially throwing a project into chaos.  The moral of this tale is that sometimes “sitting on the fence” is not such a bad place to be.

About the Author

John Blackshaw is a dual qualified specialist construction law lawyer who worked as a commercial manager, project/programme manager and contracts manager before qualifying as a solicitor. John has worked internationally for in excess of 25 years in North America, South America, and in Western, Central and Eastern Europe on a wide range of projects across the energy, nuclear, roads, rail, marine, infrastructure, automotive, industrial, residential and commercial sectors, both with Employers, and with Tier 1/Tier 2 Contractors as well as in-house.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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

Oil

Oil markets rebounded. Brent prices rose over 20% at one point although the spot contract gave up some of its gains recently as worries over the 2nd wave pandemic weighed on the market. In the background, geo-political and upstream investment concerns over Middle Eastern supply remain. There is no end in sight for the shut-in of Iranian exports and there is rising concern over the export capacity of Iraq, Libya and Angola, where mounting political tensions and worsening infighting have thwarted efforts to reinforce war-damaged and aging infrastructure across the supply chain, from well-head production, pipeline transport, storage and offshore loading facilities. The sharp reduction in global demand this year has led to unprecedented oil inventories at or near full capacity, with a glut of crude cargoes still looking for a home. However, oil supply in non-OPEC regions has been curtailed and demand generally could see a rebound in years ahead, much of it within the region itself. Simply to illustrate, Egypt recorded a population eclipsing 100 million this year, just one example of rapid population growth across the North African and Middle Eastern region, which are on a steep oil demand trajectory. Should global demand pick up, the crude market may turn out to be tighter than the current headlines or short-term prices suggest.  

Natural Gas

Gas markets across Northern Europe recovered strongly up 28% over the period, in spite of the market going into winter with storage facilities across the Continent 85% full or higher still in some cases. Prices were said to have climbed amid agreed US-EU sanctions against Russia, which would threaten to delay or possibly block the completion of the huge Nord Stream 2 pipeline to Germany. However, with just 350 km to be finished, it is doubtful if this latest spat with Russia will finally affect the supply outlook for long. Gas prices traded at the National Balancing Point (NBP) may also be affected by any further weakening of Sterling versus the Euro. UK gas prices, traded in pence per therm, are strongly influenced by the arbitrage play between the NBP and Dutch TTF (Title Transfer Facility), which is the principal hub for the North European gas corridor and which is used to clear traded volumes in €/MWh. There are many factors in the mix. However were Sterling to fall to parity with the Euro, say, this would certainly feed through to the wholesale market and immediately to commercial prices here in the UK.

It is possible that the summer months may have been used to re-evaluate need for a new wave of gas-fired power stations, to counteract the impact of more intermittent renewable generation in the years ahead. We are already seeing evidence of this on the Continent with new coal/lignite-fired as well gas-fired generation projects being sanctioned to meet the expected demand for peak-demand electricity. Looking at just the few months ahead, wholesale gas prices will be most sensitive to demand (pandemic, general economy and weather-related – equally unpredictable); Sterling currency movements; background oil & gas prices and available supply from major North Sea, Russian and global LNG producers, among many other factors.

Electricity

Base-load power prices climbed by a fifth; almost in tandem with energy markets generally. However the increase was muted, cut back in its tracks amid renewed uncertainty over the economy and electricity demand itself, which has fallen substantially across the UK and the Continent this year.   

Supporting very long-term prices perhaps was the confirmed shut-down of the Advanced Gas-cooled Reactor at Hunterston B in Scotland, with other AGR closures now expected to happen sooner as a result. All of the UK’s currently operating nuclear power stations bar one employ the same AGR design and will have the same safe-operating design life; and most were built at around the same time during the 1980s. It is quite plausible a scenario for the UK to have just two nuclear power stations, at Sellafield and Hinkley Point, operating by 2029. It is not just an issue here but a concern on the Continent as well, typified again with one dominant design in a nuclear fleet which is older still, with many such plants having begun to be constructed in the wake of the Oil Crisis of 1974.

The medium-term supply outlook for electricity is stable and the market looks well-supplied for the time being, although a growing array of factors is at play which could influence base-load prices either way. Further, the Forward Market for electricity remains illiquid. This makes it difficult (and expensive, due to the high risk premiums resulting) for I&C buyers to lock into a forward contract price beyond a year or so. Prices along the forward curve are lacking in transparency and are also prone to sharp fluctuation. Equally, the intra-day Elexon and day-ahead/N2EX balancing markets have been exceptionally volatile of late, a trend that looks set to continue into the future as more renewable generation gradually comes online, requiring ever more urgent balancing actions by the system operator (National Grid) using its appointed market operator Elexon to requisition power from spinning reserve power stations and electric storage, all of which will come at a cost which will feed to consumers.  

Consequently, more commercial users could be looking to install on-site generation and energy storage in future: to mitigate increasing brownout/supply-disruption risks, reduce net power purchases and buy the residual electricity on more favourable price terms than otherwise. This together with improved energy conservation, demand management and purchasing strategy will each have a role to play in mitigating rising non-commodity costs which already make up circa 65% of a typical business electricity bill. Such pass-through charges, the Climate Change Levy in particular, will continue rising, possibly on a much sharper trend, in order to support the new nuclear power station at Hinkley Point and future low-carbon projects.

About the Author

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.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

We are pleased to announce that we will be joining with US law firm K&L Gates in a webinar addressing how Governments are approaching risk and regulation when it comes to the commercial production of energy from nuclear fusion (as distinct from nuclear fission).

For nearly 100 years, scientists and engineers, as well as science fiction authors and fans, have dreamt of harnessing fusion reactions to power our economy. Despite daunting technical challenges, fusion energy may become a technically viable and economic energy source in the coming years, as an attractive carbon-free baseload alternative to conventional energy sources.

As the energy sector progresses towards commercial fusion, governmental regulators around the world are considering how they should treat fusion facilities. Two of the most active jurisdictions for commercial fusion development are the United States and the United Kingdom. Along with Fire Energy and Prospect Law, K&L Gates’ fusion energy team will provide an update on the regulatory approaches to fusion that the US and UK are taking, the prospects for differentiating regulations for future fusion facilities from those applicable to existing fission-powered nuclear plants and next steps in developing regulatory certainty for the emerging fusion power sectors in these nations, as well as  a section on risk and the management of risk through insurance.

Panellists:

• Tim L. Peckinpaugh, K&L Gates
• Michael L. O’Neill, K&L Gates
• Francis E. Iyayi, K&L Gates
• Fiona Reilly, Fire Energy
• Mark Tetley, Prospect Law

The Webinar will be hosted on Thursday 1^st October at 5pm BST.

If you are interested in attending, please click here to register or contact Adam Mikula on adm@prospectlaw.co.uk if you have any questions or problems.                      

We are pleased to announce that we will be hosting an Employment Law webinar addressing how businesses can get back on track and re-adjust post Covid-19.

This webinar will consider how businesses can cope with getting employees back to work after furlough, dealing with the challenges of changed employer/employee relationships and the way people work. New working from home arrangements, changed terms and conditions of employment, possible redundancies and Employment Tribunal claims for unfair dismissal and discrimination will also be considered.

The Webinar will be hosted via Zoom on Wednesday 30th September 2020, at 11.00 – 11.45 BST.

If you are interested in attending, please contact Adam Mikula on adm@prospectlaw.co.uk or +44 (0) 20 7947 5354 to request joining instructions.

A short talk will be given by Philippa Wood, Senior Employment Lawyer, who will guide the audience through getting back on track post Covid-19, outlining the necessary steps and issues to look out for. There will be a question and answer session at the end of the Webinar which will aim to deal with individual queries.

Click here to see the webinar flyer

It is very clear we are not out of the COVID-19 woods just yet. With the UK formally in the steepest recession in its history, New Zealand back in partial lockdown and spikes being seen across Europe, never mind the dreadful toll being seen across the Americas, the impact on trade will be far reaching and sustained.

The nuclear industry, whilst not immune, is enjoying some good news stories. In the UAE the Barakah nuclear power plant Unit 1 has achieved its criticality, with construction of Unit 2 officially completed in July.  Reactors in both China and India have achieved key milestones.  Work at Hinkley Point C also continues too, with Unit 2 following the footsteps of Unit 1.  Whilst revised working practices have been put into place to cope with COVID-19 restrictions, the resilience shown demonstrates the drive to ensure this key UK infrastructure project be completed as close to schedule as possible.

Romania is to undertake a major refurbishment of Cernavoda Unit 1 from 2026. Whilst the major portion of the critical reactor components will come from Canada, Romania is keen to achieve ‘value for money’ and therefore opportunities will occur for those keen to develop this interesting and exciting market.  By way of example, specialist US/UK companies are already in closing negotiation discussions.  The door remains open and in accordance with EU Procurement contracts will be announced through the EU Procurement portal, Tenders Electronic Daily.  Romania has again declared its intention to complete the CANDU type Units 3 & 4 at Cernavoda, and, for those with rather deep pockets, a negotiated settlement is available.  Opportunities to support the development of Romania’s waste repository also exist.

Japan and China are amongst a number of vibrant markets for those who can make the personal long-term commitment, however, with the current travel restrictions unlikely to be eased much before Q4 2020, companies should look to refine their product offering and market presentations. 

It is interesting to note that in markets that historically have relied upon ‘collective consensus in decision-making’, the internet meeting has found a role.  Whilst the lack of personal contact has created stress, business is taking place albeit with considerable added caution. Given the lack of opportunities for face-to-face meetings, including those at informal gatherings and trade conferences, businesses should seriously investigate the value of agents and client-based partnerships.

In closing this short piece on trade in the new COVID driven business environment, remember that the nuclear market is very buoyant, with approval or construction of over 100 new reactors already granted, reactor life extension underway to ensure climate change obligations are achieved at minimal cost, and radioactive waste management and disposal providing the ultimate world-class environmental solution to our global and vital nuclear industry.

About the Author

John Ireland is an internationally experienced energy specialist and senior business executive skilled in the development, negotiation, and management of businesses and technically complex contracts within both the Government and private sectors. John, a Chartered Engineer and Fellow of the Institution of Chemical Engineers, has been Chief Engineer advising clients on nuclear new build in Romania and investigating opportunities in Saudi Arabia, Jordan and Turkey, and Project Manager for the treatment and management of toxic and radio-toxic chemical wastes in the UK, Japan, and the EU.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

In this, the second in a series of articles on the NEC standard form of contract, we again look at a situation where the NEC standard form attempts to be user-friendly but:

• uses non-explicit language to describe obligations placed upon the Project Manager
• does not provide a solution in the case of default by the Project Manager

Unlike some other forms of contract, the intention with NEC is to make the programme not only a contract document but also a working tool, to be used by the Parties to evaluate progress and as the basis for the calculation of any extension of time granted.

Under NEC, Clause 31 sets out in detail the requirements to be complied with by the Contractor for an Accepted Programme.  These provide a list of inclusions to decide whether a programme can be accepted by the Project Manager and should provide clarity as they are contractually agreed.

Across the various Options, Clause 31 is split into three sub-clauses, for Options administered using a Bill of Quantities (see a to c) and four sub-clauses (see a to d) for Options administered using an Activity Schedule.  These sub-clauses deal with:

• 31.1 – The first Programme
• 31.2 – Detailed requirements for inclusion within the Programme
• 31.3 – Acceptance by the Project Manager and grounds for non-acceptance
• 31.4 – Requirements for a link between the Activity Schedule and the Programme

Clause 32 then deals with items additional to Clause 31.2 required for revised programmes.

The NEC makes securing an Accepted Programme a priority, but whilst placing obligations upon both the Contractor and the Project Manager to do this, the Contract effectively only provides real consequences for default in respect of the Contractor.

The First Programme

Clause 31.1 stipulates the requirements for a first Accepted Programme.  Clause 50 deals with payments due to the Contractor.  Under Clause 50.2:

“The amount due is:

1. the Price for Work Done to Date
2. plus other amounts to be paid to the Contractor
3. less amounts to be paid by or retained from the Contractor”

The last bullet point carrying most relevance in regard to an Accepted Programme.

Further Clause 50.3 states:

“If no programme is identified in the Contract Data, one quarter of the Price for Work Done to Date is retained in assessments of the amount due until the Contractor has submitted a first programme to the Project Manager for acceptance showing the information which this contract requires.”

This demonstrates a clear and potentially substantial financial consequence for the Contractor in not submitting a timely first programme.

It should be noted that obligations are placed upon the Project Manager to accept this first programme. However, the provisions could be abused by the Project Manager, thereby unfairly punishing the Contractor.

The Project Manager‘s obligations are contained under 31.3, which states:

“Within two weeks of the Contractor submitting a programme to him for acceptance, the Project Manager either accepts the programme or notifies the Contractor of his reasons for not accepting it. A reason for not accepting a programme is that:

1. the Contractor’s plans which it shows are not practicable
2. it does not show the information which this contract requires,
3. it does not represent the Contractor’s plans realistically or
4. it does not comply with the Works Information.”

But what if the Project Manager does not accept the Programme, stating one of the above reasons, and the Contractor does not agree?  The reasons are, after all, fairly unspecific in nature. And what if the Project Manager is silent or provides no grounds for not accepting the Programme?

The guidance notes only provide consequences for the Project Manager in regard to the first programme submission, classifying this situation as “a late reply” and stating that in this event a compensation event is triggered under Clause 60.1(6): “The Project Manager or Supervisor does not reply to a communication from the Contractor within the period required by this contract”.  It could be argued additionally that a compensation event is triggered under Clause 60.1(9) in the event the Contractor has complied in full with the requirements of Clause 31 in regard to content.  This clause states: “The Project Manager withholds an acceptance (other than an acceptance of a quotation for acceleration or for not correcting a defect) for a reason not stated in this contract”.

The problem is that subsequently the Contractor may notify a compensation event under Clause 61.3, but then potentially a “difference of opinion” arises, prompting a “game of ping-pong” as to whether there is in fact a compensation event or that the Contractor has not complied with the requirements stated within Clause 31.3.  The consequence to the Contractor will be the 25% deduction applied to payments and so any default on the part of the Project Manager has real consequences.  This being the case, many Project Managers will accept the first programme to avoid suggestion that they are in breach of Clause 10.1: “The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation”  and any suggestion that the Project Manager is not “administering the contract impartially and in the interests of both the Employer and the Contractor equally”, which would potentially amount to bias in favour of the Employer.

Revised Programme Submissions

Revised Programme submissions under Clause 32 are handled slightly differently in that the guidance notes do not this time account for or suggest a compensation event being triggered in the event the Project Manager does not reply within the period for submission.  The Contractor effectively must “think for himself” and apply the contract provisions as in the case of default by the Project Manager in regard to acceptance of the first programme. 

The big difference this time is that even if there is a compensation event triggered through Clauses 60.1(6) or 60.1(9), there may be little or no initial financial or temporal consequence to the Contractor through the programme not being accepted.  This being the case there is a lot of effort on the part of the Contractor to try to secure acceptance and little consequence for the Project Manager in not providing acceptance.  The main route open to the Contractor is, in this case, to ensure that good records are kept and notifications are issued to demonstrate the Project Manager’s default.  This would then potentially lead to an argument that the Project Manager is not complying with Clause 10.1 (“The Employer, the Contractor, the Project Manager and the Supervisor shall act as stated in this contract and in a spirit of mutual trust and co-operation”) and in addition that the Project Manager is not “administering the contract impartially and in the interests of both the Employer and the Contractor equally“.  Effectively, as above, the Project Manager is showing bias in favour of the Employer.

If the Contractor is sure that the requirements of Clause 31 have been complied with in full and the Project Manager still does not accept a revised programme, then it could cast a shadow over the Project Manager in the event the Contractor then took a dispute to adjudication in regard to the acceptance of the programme.

About the Author

John Blackshaw is a dual qualified specialist construction law lawyer who worked as a commercial manager, project/programme manager and contracts manager before qualifying as a solicitor. John has worked internationally for in excess of 25 years in North America, South America, and in Western, Central and Eastern Europe on a wide range of projects across the energy, nuclear, roads, rail, marine, infrastructure, automotive, industrial, residential and commercial sectors, both with Employers, and with Tier 1/Tier 2 Contractors as well as in-house.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

In the last article in this series we looked at the design and deployment basics of Small Modular Reactors (SMRs). In this piece we will be looking at SMR financing and in particular the prospect of them being deployed in the UK.

Background to SMR Financing

As a generality, new nuclear power plants (NNP) are highly capital intensive even before they start generating, and the financing for new projects is perhaps their greatest challenge, perhaps even more so than gaining public acceptance. The payback time is very long compared to more conventional investment opportunities, meaning there is little or no appetite for the more “conventional” financial markets to become involved.

Nuclear preconstruction activities are a significant cost component, and can take many years to achieve. These include regulatory engagements (design assessment and licensing), the siting and planning process (including Environmental Impact Assessment and stakeholder engagement) and initial site preparation. The major cost, of course, is the actual construction, not just of the station itself, but also of the associated infrastructure and the cost of the first load of fuel. Decommissioning and long-term waste management is also taken into account at this stage with many countries, including the UK, requiring funding arrangements to be established before a licence is issued.

SMR’s are attractive from the financial perspective as they are somewhat cheaper than the larger commercial reactors. For example, the latest published cost estimate for the UK’s new 3,260MW(e) Hinkley Point C is £22.5bn ($28bn, 2019 m.v.), whereas in our previous article we mentioned that Rolls-Royce had said they would get the cost of their 440 MW(e) reactor design to £1.5bn. This would give respective construction costs of £6.9m per MW(e) and £3.5m per MW(e), albeit such comparisons are in practice much more complicated than that.

Financial Risk

Financial risk is also an important factor to consider, and in particular how this would be shared between the various stakeholders: government, the reactor vendor, other investors, the operating utility and last, but not least, the ultimate consumer. New NNP projects, like many large infrastructure projects, are renowned for cost and schedule overruns. SMRs have yet to be deployed in earnest but have the benefit of lower production costs, shorter construction periods and better construction certainty, with modules built in the factory rather than on site, but still there are many unknowns in producing first-of-a-kind (FOAK) versions.

Other financial risks to consider would be those arising during the operational period such as accidents (nuclear or non-nuclear) which may permanently close the plant and mean no further income, either for the utility and/or investors, which would also lead to a shortfall in the decommissioning and waste management funds.

The electricity market may be influenced by other cheaper forms of generation leading to lack of competitiveness for nuclear; older plants were financed and constructed when regulated markets were in place, but many countries today have de-regulated markets. Political factors may change nuclear policy, as we have seen happen in many countries following the Fukushima-Daiichi accident, and there could be other risks, such as changes in safety regulations which may be too onerous to implement, or the utility may become bankrupt.

Each of the abovementioned risks can be mitigated to a greater or lesser extent and on balance it is thought SMR’s are a more favourable investment opportunity than the larger scale products. There are many financing models associated with new NNPs and they are often a combination of debt and equity. Debt financing is typically a conventional loan from a bank or other lender which is repaid with interest; equity involves the investor taking a stake in the project and at the same time taking on the commercial risks and rewards associated with that. Self-evidently, the model chosen will have an impact on the overall economics of the project concerned.

The Operational Period of any Reactor

In simplistic terms, the preconstruction and construction costs and interest have to be paid for during the operational period of the reactor, when it is earning income. The income received also pays for the ongoing operating and maintenance costs and the cost of new fuel. In addition, decommissioning, spent fuel and radioactive waste management has to be taken into account. The utility itself will be looking to make a profit and all of these components will be factored into the ultimate cost of the electricity generated and the price paid by the consumer.

However, if the market price of electricity falls, the financial return may not be sufficient and so at the outset of the project, the utility may negotiate a Contract for Difference. In this case the difference between the “strike price” (what the utility needs the price of electricity to be to make a margin) and the market price is met by, say, the government (and consumers) if the difference is negative; if the difference is positive then the utility will credit consumers. These types of contracts are also applicable to other low-carbon power generation projects.

The CfD model was used for Hinkley Point C, but other financing models exist such as Power Purchase Agreements (PPAs), whereby there is a long-term agreement too but at a fixed price which may or may not be guaranteed by the respective government. This has been used in Turkey for the Akkuyu project.

A further approach which is being considered in the UK for new nuclear is the Regulated Asset Base (RAB) model. These are typically used for funding monopoly infrastructure and involve an economic regulator who grants a licence to a company to charge a regulated price to users of that infrastructure. The government says RAB-funded infrastructure has attracted significant investment from private sector capital over the last 20-30 years, with total value of RAB assets in 2018 of c.£160bn. They conclude: “a RAB model has the potential to reduce the cost of raising private finance for new nuclear projects, thereby reducing consumer bills and maximising value for money for consumers and taxpayers”.

The Findings of the Expert Finance Working Group

We don’t have the space here to go into the details of all the various models for financing new NPP projects. But what would be the most appropriate for an SMR new build project? The UK government set up an Expert Finance Working Group (EFWG) in January 2018 comprising experts from the finance community with input from academia and the supply chain, and government (BEIS) observers. Inter alia, one of its roles was to explore a range of potential financial models for SMRs which the government said could “engender market confidence, especially from private sector investors/financiers.”

The EFWG concluded that the UK could be well placed to develop First of a Kind (FOAK) “small reactor projects with overnight costs of less than GBP 2.5 billion by 2030”. They looked at nine potential finance models. Of these, four were derivations of a Project Finance approach (reliance on cash flow for repayment of equity/debt), while others were models/structures previously employed to finance nuclear around the world. They concluded that four potential models/structures could be adapted for financing SMRs in the UK and how the government could potentially feature in each of these. On this they concluded:

“For technologies capable of being commercially deployed by 2030, HMG should focus its resources on bringing FOAK projects to market by reducing the cost of capital and sharing risks through:

• assisting with the financing of small nuclear through a new infrastructure fund (seed funded by HMG) and/or direct equity and/or HMG guarantees; and
• assisting with the financing of small nuclear projects through funding support mechanisms such as a Contract for Difference (CfD)/ Power Purchase Agreement (PPA) or potentially a Regulated Asset Base (RAB) model while maintaining the supply chain plans required for larger low carbon projects.

For NOAK [nth of a kind] projects the market should be self sustaining having learnt the lessons of the large nuclear plant and the small nuclear projects that will have gone before.”

Advanced Modular Reactor Feasibility and Development Project (AMR F&D)

In September 2018, the UK Government announced the Advanced Modular Reactor Feasibility and Development Project (AMR F&D) in which BEIS would invest £44million in Advanced Modular Reactors (those being GEN IV reactors as opposed to GEN III SMRs). Phase 1 consisted of a £4m feasibility study with up to £40 million in Phase 2 which would take forward development activities. Under Phase 1, eight organisations were awarded contracts, but no Phase 2 money has yet been awarded, not helped by the current Covid-19 situation. Additionally, in 2017 the UK nuclear regulators, the Office of Nuclear Regulation and the Environment Agency were awarded £5 million and £2 million respectively to support the regulation of advanced nuclear technologies (i.e. AMRs and SMRs). Further, in October 2019 both regulators and Natural Resources Wales announced new Generic Design Assessment guidance which covered ANTs.  The UK government expects all future designs will go through this process.

As previously reported, new SMR developments have been announced in other countries. In the UK the Rolls-Royce consortium is making headway with its reactor development. We wait to see what progress will be made in the future when the current Covid-19 situation eases.

For further information on SMRs we can refer you to a series of SMR webinars hosted in June by the International Framework for Nuclear Energy Cooperation (IFNEC).

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources sectors, with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

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For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.