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Energy sector outlook: previewing the COP26 agenda

Stuart Preston Stuart Preston

The 26th Conference of the Parties (COP26) kicks off in Glasgow on 31 October, under the UK presidency. The COP26 goals that arise from it will shape the energy sector outlook for decades. Stuart Preston looks at what it means for restructuring in this industry. 

COP26, postponed from 2020 because of COVID-19, will meet at an in-person event in Glasgow. With more than 190 world leaders and thousands of other delegates in attendance, guests will meet to discuss global action on climate change.

COP26 agenda

The UK Presidency of COP26 is likely to be very influential, with awareness of the problems caused by climate change increasing in all corners of the world. From the immediate devastation of flash floods in western Europe to the long term, damaging thaw of permafrost in Russia. There are growing calls for the international community to sign up to meaningful commitments and act against climate change.

The COP26 agenda asks countries to declare their 2030 emissions reduction targets and show how this aligns with global net zero ambitions. A principal COP26 goal is to finalise the details on rules initially agreed at the Paris Climate Conference in 2015 (COP21), collectively called the Paris Agreement.

The aims and ambitions of COP26 will rightly attract a lot of commentary across professional services firms: building on the existing commitment to deliver net zero by 2050 across the entire UK (2045 in Scotland).

COP26 goals

  • Secure global net zero by mid-century and keep 1.5 degrees within reach: countries are being asked to produce ambitious 2030 emission reduction targets that will, collectively, help ensure that warming is restricted to 1.5 degrees by 2100
  • Adapt to protect communities and natural habitats: countries affected by climate change are being supported to protect and restore ecosystems, build defences, implement warning systems and make infrastructure and agriculture more resilient to avoid loss of homes and lives
  • Mobilise finance: countries must deliver on their promise to raise at least $100 billion of climate finance per annum to facilitate the first two goals
  • Work together to deliver: finalising the Paris Rulebook, and look to accelerate collaboration between governments, businesses and society to deliver on climate goals

What will COP26 mean for restructuring in the energy industry?

There are many angles to COP26 and the impact of climate change. As typically happens with significant change, there will inevitably be opportunities for some and challenges for others. With this in mind, we will explore the following themes in more detail in the coming weeks:

Accelerated phase-out of coal

We'll discuss what this will mean for global supply chains. Including the cost of imported goods from countries where reliance on coal-powered production is material, and a driver of lower costs of production.

Many UK lenders have already had a publicly stated position that they will no longer support lending to coal businesses in the UK. Will this unwillingness to support funding to a fossil fuel extend to other perceived non-clean energy sources in the future?

Ensuring sufficient funding is in place for our oil and gas sector to meet current requirements and provide a sustainable energy transition route is critically important.

Encouraging investment in renewables

We have worked on several projects this year where the commercial risk of investment in new, renewables-focused projects was considered financially unviable without a public sector intervention (for example, by way of grant funding at the start-up stage).

What is the role of governments in encouraging investment in renewables, and what will happen to existing renewables businesses who risk failure if sufficient growth funding cannot be accessed? Can the barriers to funding ever be fully removed?

Climate change focus on lending

One area up for discussion at COP26 is the ask for global leaders to have mobilised at least $100 billion of climate finance globally. As Chair of COP26, the UK’s position is clear: to achieve our climate goals, every company, every financial firm, every bank, insurer and investor will need to change. While public finance to develop infrastructure is considered critical, equal weight is placed on the role private finance can play in technology and innovation.

The cost of finance attached to such funding, and ensuring greenwashing is avoided, are two important aspects here. We need to develop credible green finance products that are accessible to UK mid-market businesses that are looking to innovate and benefit from a net zero outlook without it being a business barrier.

We are also increasingly seeing lenders – in both the public and private sector – attach conditionality to proposed lending. They're seeking formal environmental commitments at the outset and for the duration of the lend from new borrowers. This includes things such as sustainability and ESG (Environmental Social and Governance) considerations gaining increasing prominence in term sheets alongside traditional lending covenants.

But what does this mean practically for UK-based SMEs and mid-market companies who may not have traditionally had a strong focus on these areas?

Energy transition

As a team working with many dynamic mid-market energy businesses in Aberdeen (the majority of whom also have business ties to London, Houston and/or the Middle East), we recognise the need for an energy transition focus. One which is just, appropriately planned (and funded), and one that recognises the ongoing importance to the UK’s economy of the current oil and gas sector. In a future article we will do a deep dive on what energy transition means in the context of securing a sustainable future for Aberdeen.

For businesses across the UK operating in the fabrication sector assessing the opportunity from renewables (particularly, in a UK context, offshore wind), how best can they operate on a globally competitive basis in the energy sector?

With global targets to phase out gas boilers as the main source of heating of domestic properties, what does this mean for the existing supply chain? Is the support there to pivot as it is for many in the supply chain for cars as part of the move to EVs (Electric Vehicles)?

Consumer impact

Domestic energy suppliers in the UK continue to face a challenging, highly competitive market – and those challenges have only been heightened by COVID-19. How can energy suppliers avoid a last resort transfer of its customer base (and insolvency), and develop sustainable growth in a competitive market? Particularly with large annual OFGEM liabilities falling due in a matter of months.

The above areas are by no means an exhaustive list of areas relevant to the energy industry in the context of COP26. It shows that the outputs of COP26 at a global, UK and devolved nation level can have a real impact on matters such as access to appropriate, price competitive funding and the underlying viability of business models.

From an energy perspective, we can expect COP26 related announcements to impact businesses across the complete upstream to downstream spectrum of businesses.

As we explore these in more detail in our countdown to COP26 insights series, we hope to draw out the very tangible link between COP26 and our sector considerations.

For more information please contact Stuart Preston, Partner and Energy lead within our UK Restructuring team.

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