JONES DAY TALKS®: Real Assets Roundup – Episode 5: European Energy Transition, Investment and Security

Dave Dalton:

We're just a couple months into Jones Day's Real Assets Roundup. The response and feedback have been great, and we're grateful that you're enjoying the information and programming that Brian Sedlak and his panelists have brought to the program.

Today's focus is on the future of energy and energy transition in the United Kingdom. That's a lot to unpack, but Brian has partnered with Michelle Davies, Paul Jones, and Vica Irani to sort it all out. Stay here. I'm Dave Dalton, you are listening to JONES DAY TALKS®.

Brian Sedlak:

Well, welcome to the Real Assets Roundup, the podcast where we bring you the latest insights into the world of real estate, infrastructure and energy. I'm your host, Brian Sedlak. In today's episode, we're tackling one of the most pressing issues in Europe, and that is the future of energy in the UK. War in Ukraine, global energy supply disruptions and the drive towards net-zero have created both challenges and opportunities for investors, policymakers, and industry leaders.

I'm joined today in London by three fantastic guests. Michelle Davies, a leader in energy transition law advising governments and corporates; Paul Jones, an experienced energy lawyer with deep expertise in regulation in markets; and Vica Irani, an infrastructure M&A lawyer who focuses on energy and infrastructure transactions. We'll explore how the UK is addressing energy security, the opportunities and risks of the energy transition, and what the future holds for investors and stakeholders.

Vica and Paul, you've been a longtime guest on the show. Michelle, you're new here. Why don't you give us a few seconds description of your practice?

Michelle Davies:

I'd be delighted to, Brian. So, I've been in this sector energy transition for over 25 years now. It makes me feel a little bit old. I focus on the entire energy transition landscape, all the technologies, whether they are renewable, whether they are carbon abatement or what have you. And I have been advising clients across the entire project life cycle for many years. So, live and breathe the energy transition. And I love the sector, because it is so dynamic and it is changing all the time. And right now we are in the perfect storm.

Brian Sedlak:

Well, I'm really happy that Paul and Vica, you could make some time for this podcast today. I know time is tight because you all have meetings and calls, so we'll try to jam in a short report here as long as I'm over in London.

Yesterday evening, the London office held another remarkable event organized by Vica, by you, Michelle and Paul, regarding the future of energy in the UK, with a number of panels presenting various viewpoints. Now, a good deal of the dialogue at the events seem to be around energy security. And to me, leads to this American, it seems to be code for not relying on imported energy, and that's driving the UK to utilize renewables for home-grown energy.

Michelle, can you take us through and let us know whether I was even remotely correct in what I heard, and maybe give us your views on what you thought the lessons or the main message coming out the correct dialogue is?

Michelle Davies:

Sure, Brian. There was three key main messages, and that energy security pieces is part of the first one. So, the question we were asking the panel on the session either is, "Is the UK a go investment opposition for energy in the fight for global capital?" And without a doubt, the messaging that's coming across is, yes, it is. And this actually reflects the conversations we've been having with clients in different geographies about the world. The UK is a top destination. Why? Because it has got all the key ingredients necessary, and energy security actually is one of them.

There is a problem: it needs to be fixed, it has to be fixed. It's not something that can't be fixed. So that immediately attracts capital. We have a reasonably stable regulatory regime overall the UK to see as a relatively stable market. And until now, there is this caveat, until now, whichever political party was in power, they've more or less been on the same trajectory. In terms of the transition. What's concerning people, and this came across on the panels with a number of the participants on big utilities to funds, is there is a concern about what happens in 2029 in the next election. That is impacting the decision-making that is being made now.

Vica Irani:

And Michelle, I guess one point that is very relevant and particularly on the transactional side where investors coming into projects now, are thinking and having to think in terms of decades, not in election cycles. The UK has traditionally very much been that bastion of pragmatism and stability, which is fracturing now, right? And I thought yesterday's event and all of the panelists did a wonderful job in the sense that there are clearly diverging views, and there was genuine debate over direction of travel and what's required.

One of the things that's so interesting is we do seem to be at a little bit of a crossroads potentially about whether we're going to reclaim that ground that we once held for so long as being stable, secure, pragmatic, or whether we are going to move into more volatile times. Now, you've obviously been involved in the energy transaction sector before really before it was a thing that had a name. What do you think? Do you think we will effectively remain the stable ship we've historically been? Or do you think we are going to enter into more volatile type?

Michelle Davies:

Brilliant question. And we were both in a meeting with a fund this morning, Vica, where somebody said we have to start having discussions with certain political parties to make sure that they really do understand that this is a transition, there's room for everybody. There was some real consistency yesterday that we'll come back to, but this is a transition. The trailers left the station, and certainly political parties need to understand that for the UK to be competitive now and remotely, this has to continue. If you listen to what people were saying yesterday about investment decisions being taken, provided they don't necessarily commit beyond 2029, that there is a genuine concern.

You're right in what you said. I can't say at the moment nobody is making that call, but what was good to hear yesterday was this clarity and consistency amongst everybody. There was only really one area of disagreement. Everybody accepted that this is a transition. No one technology is better than the others. That gas is going to be critical because the way that energy consumption and demand is increasing gas is going to have to play a role, and have to be as clean as possible. The only real area of divergence I thought, and I'd be interested, Paul, in what you said, because you chaired the panel that was leading this particular debate, was whether the UK should be utilizing its own gas resources, or not.

Paul Jones:

Completely. I would say overall the consensus was very much it needs to be, and rather than or. So it's a question of needing additional gas resource. The reality in the UK is that we import about 45% of our gas from external sources already. So we're already an importer when it comes to gas. What needs to change to make gas more viable? That's something that the government is looking at, changes to the fiscal framework to make the taxation policy around North Sea oil and gas much more predictable.

So currently the headline tax raise is about 78%, which someone described as probably the most onerous fiscal regime on the planet for oil and gas. So, it's really not favorable. I think it also has an impact as well as the need to get the gas for our growing energy needs. It's also starting to have an impact on the Treasury as well, because we've now had the lack of investments over the last decade because of the high taxation, has meant that we're actually losing an awful loss of the tax revenues that we used to receive from the industry. That's starting to bite on Treasury as well. So Treasury are now looking at this and saying, "Hang on, where's that 10-billion pounds gone?"

Michelle Davies:

But what I'm just going to say, Paul, what do you say though to those people who would say, "We've only got 13 years left of gas left in the UK, and secondly, by 2035, 50% of our generating gas assets are going to be out of operation"?

Paul Jones:

Yes, I would say that that reflects the existing position if we were to develop new assets. And so what we have at the moment are a number of large projects which are awaiting final investment decisions, and still require more government support as well. So that's another aspect of the government policy. One angle of it is the fiscal regime and the taxation to incentivize further investment. And then the other side of it is also how we go about permitting and consenting these projects, which do have a big impact as well. And certainly in the UK this has become quite a contentious course legal issue as well.

So we've had decisions which have now required companies to take into account scope three emissions as part of their environmental impact assessments. And the governments have recently released guidance to give companies clarity on what they need and those new impact assessments to be able to get these projects to move forward. So, a loss of this will start to be clarified in the coming months as well. So, from an oil and gas perspective in the UK, obviously oil is a really not a huge focus. We are still heavily dependent on refined products here, but the reality is most of the oil we produce is exports, and we import refined products from elsewhere. And then from a gas perspective, we need that clarity on the fiscal regime, and also the reporting basis to allow new projects to proceed.

Brian Sedlak:

That's helpful, Paul and Michelle, thanks for helping us understand. It seems like there is a bit of uncertainty in the market. What I heard yesterday, on the one hand, I heard one speaker basically say that the renewables will breathe new life into the industrial heartland, employment has increased 10% because the real projects never heard another side of that which was, hey, shutting down the North Sea is hurting employment. So there is a little bit of uncertainty or dislocation here. And Vica, I know you're very active in the infrastructure M&A space and PE space. What do you think? Is there opportunities here in the market for funds in terms of this uncertainty or dislocation, or if somebody's willing to take a position and have conviction that come in and it makes sense to do it at this time?

Vica Irani:

I mean, look, there's always opportunity, right? There's always opportunity amidst uncertainty, and there's always opportunity amidst potential kind of dislocation. There is for sure opportunity on both sides of that divide. Now obviously setting aside kind of an old sea traditional gas, whether that's going to continue in a state of limbo or not. Overall, the need for energy and the need for power in whatever form it takes is so great that there is always opportunity. And the theme that kind of comes through whoever you talk to is that it's always got to be an and not an all, right? Because the overall need is immense. And whether that's need because of new kind of demand from data centers or AI, whether that's need just because the existing fleet is aging. Wherever you come from. Or whether it's pure energy transition and decarbonization, the need is huge, and therefore there will always be opportunities for investment, opportunities for transactional activity.

You get the sense at the moment as well that the UK is very acutely aware of the need for investment and the need for growth. And so there are for sure opportunities for investors to try and shape the narrative, as well as respond to it. One of the tricky things though, coming back to the point I made earlier, and feels like I'm a bit on kind of repeat every time this topic comes up, is where you are looking at these transactions, and they often take the form of joint ventures, right? With kind of financial sponsors, strategic partners, whatever it may be, you are trying to plan for decades in a world where things will change with political moods and election cycles. That's the challenge. That's the real challenge, which is kind of creating a transactional framework or an investment framework that survives for the life of a project, whatever that might be. And therefore, that has to sustain swings in sentiment, swings and mood, swings in regulation. I mean, from lawyering perspective, it's kind of what makes it fun, but that is the challenge.

And so there is always opportunity, but it's not necessarily one where the deals are kind of cookie cutter straightforward. There is a degree of complexity that investors are just having to grapple with. But for those who can cope with that complexity, I mean, I do think the opportunities are huge.

Brian Sedlak:

That's very helpful, Vica, thanks for that insight. I know we're limited on time here. Does anybody dare make any predictions as to either reach net-zero in the UK by 2030, or whether SMRs will come about in our lifetime? Or anything that you want to be bold and predict at this time?

Michelle Davies:

I would love the you UK to get to net-zero by 2030, but we're not going to. I don't think it's going to happen. SMRs are interesting. It depends who you speak to, right? Somebody yesterday, he said, "Oh, no, no, no, SMRs will happen within the next five years, but just not in the UK. They're going to happen in other markets." But then you'll speak to others and they'll say, "No, no, they're not going to happen viably within the next 10 years, because what the market needs are modular pieces of kit, and at the moment is still financially, costly, the [inaudible 00:14:40]." So, on SMRs, I genuinely don't know what the answer is, but on net-zero, it's going to be a real struggle for us to get there.

Brian Sedlak:

Thank you for being bold providing that. Should we lead it there?

Vica Irani:

So, unless you want to share your observations on your trip to the UK. The weather, it hasn't really cooperated.

Brian Sedlak:

Yeah, yeah. No, it's met expectations in terms of the British weather, I was in Madrid on Sunday and it was bright and sunny at 7:00 P.M.

Vica Irani:

You don't need to rub it. You don't need to compare and contrast.

Brian Sedlak:

No, but London has a fantastic charm, and the people are certainly charming. And speaking of the people, I know, Michelle, you have to run it in one second, but we have a tradition here, it's on the Roundup. And that is when we have a new guest who's from Wales, as you are. We asked them this question. In terms of the top three most famous people from Wales, in my list it would be David Lloyd George, is number one; Tom Jones, number two; and Ian Woosnam, the golfer.

Michelle Davies:

Oh, right.

Vica Irani:

No one knows who the third one is, by the way. Brian always has to explain numbers.

Brian Sedlak:

The [inaudible 00:15:53] of this day, Nick Faldo, everybody knows him, loves him. In your view, is there anybody that should be in that top three that I've missed?

Michelle Davies:

Dylan Thomas.

Brian Sedlak:

Dylan Thomas.

Michelle Davies:

Richard Burton, and Shirley Bassey.

Brian Sedlak:

Shirley Bassey.

Vica Irani:

Do you now Catherine Zeta-Jones?

Brian Sedlak:

Yeah.

Michelle Davies:

Shirley Bassey for me.

Vica Irani:

Anyway, there's a long list between whatever his name was, the golfer that you mentioned, that comes at three.

Paul Jones:

He's in not the top 10 on this list.

Brian Sedlak:

He's not top 10?

Vica Irani:

No.

Brian Sedlak:

Maybe in the show notes, we can go up with a list of your top 10, and we'll use that. But thank you all. I know time is tight for you all. You're all running to meetings. Thank you again for joining the Roundup. We're headed to Pittsburgh on November 12th to talk about digital infrastructure, and Pennsylvania is the next digital infrastructure frontier. Somewhere in there we're going to have a discussion regarding hospitality and another one regarding District Energy. Until then, I'm Brian Sedlak. Thank you for joining the Roundup, and we will see you next time.

Dave Dalton:

Well, the Real Assets Roundup keeps getting better. Thanks, Brian.

For complete bios and contact information for Brian, Michelle, Paul and Vica, please visit jonesday.com. While you're there, check out our insights page, where you'll find more podcasts, videos, publications, and other pertinent content. Subscribe to JONES DAY TALKS® at Apple Podcasts, wherever else you find your podcast programming. JONES DAY TALKS® is produced by Tom Kondylis. Thanks for listening. I'm Dave Dalton, we'll talk to you next time.

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