Energy lawyers are on the verge of making big money
24 July 2006
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The Government's energy review report has been long awaited and has generated many headlines off the back of its approval for new-build nuclear projects in the UK.
It has been met with welcome arms by the energy industry, hailing the opportunities for investment it promises, and reaffirming the Government's commitment to scrubbing up the planning system.
But behind the hype, and inevitable outcry, about nuclear projects, there is a wide range of implications for the City's energy lawyers, particularly for the somewhat niche renewable energy practices.
From wind farms and wave power to bio-fuels, the Government has signalled a green light for renewable energy sources, through hinting at big incentives for investment in new technologies for them. The expected boom in activity is sending many energy lawyers rushing to swot up on the subject.
While UK firms, led by the likes of CMS Cameron McKenna, Denton Wilde Sapte and Herbert Smith, have formidable energy practices, there are sure to be more than a few firms with cursory energy practices looking to ramp up their offering.
However, not everyone agrees that the Government's report is all it is cracked up to be.
"It's clearly very waffly and rather cumbersome in parts," laments one City energy partner. "There needs to be a lot more detail yet, but the net tale is the Government is behind trying to kick start the energy industry, and there is going to be a lot of work out of this."
But all these developments will take time - lawyers and industry analysts alike predict that it will be another dozen or so years before the UK sees the first electricity generated by the new-build nuclear programme.
Herbert Smith corporate partner Henry Davey, who specialises in the energy sector, says: "How renewables interact with nuclear is going to be very interesting, there are lots of emerging technologies that could work alongside nuclear, but the emphasis they will be given remains unknown."
Domestically, wind farms are dotted throughout Cornwall and Wales, and the South West firms have had the lion's share of the work from that. The tight margins have kept City firms away for the main. But wind farms, seen as the most reliable, cost effective and technologically advanced of the clean or renewable sources, will continue to have their day.
Onshore wind farms have been making money hand over fist for investors because of Government subsidies, with sites given planning permission attracting up to £500,000 per megawatt. The Government has moved to cut those subsidies and, while that will inevitably lead to a lessening of demand from the investors, it is hoping that it will increase investor activity in offshore wind farms.
There is still yet to be a project financing for an offshore wind farm in the UK, but if the proposed improved subsidies come online, it will not take long.
Hunton & Williams renewable energy partner John Deacon says: "The theory is to structure the market so it finds a solution for green issues. In the longer term, the assurances given can only mean thoroughly good things."
Camerons energy partner Robert Lane says: "The report underlines renewables and calls for a mix of generation sources. It also sets the scene for the development that the City and industry have been calling for."
One area running hot right now is emissions trading. At least it was until the price crashed earlier this year. But this is a market still very much in its infancy and one that is certain to rebound.
"It has been a bit of a bumpy ride for some investors who got burnt, but the market will be refined and improved upon, and I have no doubt it has an important future," says Davey.
Firms involved in emissions trading claim it to be their fastest growing part of the energy practice. In 2005, the first year of the EU Emissions Trading Scheme (ETS), there was some E7.2bn (£4.93bn) of trading, which is big business in anyone's books.
"There is undeniable increasing sophistication and size of the international carbon market," says Deacon.
Emissions trading is not pure energy law as such and, as the sophistication of the market develops, the need for a quality finance practice that understands the sector will become more critical to a firm's chances of winning the mandates.
Deacon says: "It's still an energy trading document - you're trading credit and using the financial structure of the trade to fund projects, new technologies, or just boost the bottom line."
Baker & McKenzie was the first law firm to move into emissions trading, and reaped the benefits. The practice was largely built around the talents of Anthony Hobley, who left the firm as a senior associate in August 2005 to take up the position of director of legal policy at Climate Change Capital, a specialist merchant banking group that focuses on businesses affected by regulations and policies on energy and the environment.
But can any firm sustain a purely domestic energy practice? Lawyers candidly admit that in the present conditions, the answer is a resolute 'no'.
"The deals are smaller, and very often you're doing the same amount of work, but the deals just don't carry the fees of some other project financings or core practice areas," says one City energy lawyer.
Another says: "You've got to have a broad base to your practice to sustain it at the moment. There's always work to be had somewhere in the world, but you've got to go chase it."
In the short term, consultation periods on issues raised in the energy review are now open and lawyers will be looking to advise their clients on lobbying strategies.
The hope for energy lawyers is that the incentives and financial rewards to be gained as the market achieves some stability will attract the big names, which will bring consolidation to the marketplace as portfolios of energy assets are accumulated.
Indeed, it is already starting to happen. The acquisitive Australian bank Macquarie, which seems intent on having a finger in every available pie on the planet, has a £100m fund for investing in energy assets. Small fry compared to the multi-billion-pound portfolios for real estate funds, but it is a start.
Indeed, even the likes of JP Morgan and Goldman Sachs are starting to trade in emissions credits.
"As these things usually do, it starts off with a few bearded tree huggers, then people start to realise there's money to be made. That's when the business gets serious," says a source.
Bearded tree huggers aside, increasing emphasis on renewable energy sources and the race to cut emissions and slow global warming mean only one thing - there is big money to be made here. And where there's big money to be made, there's always going to be a pack of hungry lawyers fighting for the clients.