Very high

Power & Utilities

Evolving business models, consumer tastes, technology and regulation combined with wholesale price volatility means weaker players could struggle.

Sector trends & challenges

  • Regulatory requirements

    New rules aimed at supporting consumers, improving infrastructure and enhancing environmental protection have the potential to limit price rises, increase operating costs or increase risk of sanction.

  • Wholesale energy prices

    We’ve seen renewed whole price volatility as the global economy recovers from COVID-19. With many consumers on fixed tariffs, this may place pressure on inadequately hedged B2B/B2C providers.

  • Decarbonisation

    Falling costs of renewable generation are helping decarbonise the electricity sector. Ambitious policies are likely to accelerate following COP26. Potential for hydrogen to help meet the needs of a low/zero-carbon energy system.

Sector rating profile

The stress level in the sector has increased in recent years with a wave of failures amongst challengers in the energy supply space, mothballing of some CCGT generation capacity and coal plant economics becoming ever more challenging vs current forward curves. In the water sector, PR19 has imposed significant cost challenges on water companies and slashed their permitted returns on capital.

Power & Utilities

The UK’s power infrastructure proved resilient to the changes in consumption patterns experienced during the COVID-19 pandemic. As we emerge from the pandemic and both commercial and retail consumers return to something akin to ‘business as usual’ it’s likely the sector will have a number of challenges to manage. These include:

Increased bad debts. Across both B2B and B2C customers, there’s a real risk of increased bad debts as struggling businesses fold and some consumers struggle to pay on time. In December 2020 Citizens Advice Bureau claimed that 1 in 7 households were already falling behind on their utility bills – a figure that has the potential to grow still further as energy prices rise and government support schemes such as Universal Credit uplift cease. With very tight margins, any material uplift in bad debt provisions have the potential to cause significant cash and profitability issues for suppliers.
We’ve already seen Ofwat agree to permit a temporary increase in prices to non-residential consumers to allow for growth in anticipated bad debts, whilst Ofgem are currently assessing options for managing increased bad debts across the electricity sector.

Wholesale price volatility. Wholesale energy prices have become increasingly volatile in recent months – a product of the somewhat uneven global economic recovery and continued supply-side issues. With many energy customers on fixed-rate deals, increased spot price volatility may be a challenge for suppliers with less sophisticated hedging arrangements.

Increased regulation. Both the power and water markets are tightly regulated on principles of consumer protection. The energy price cap looks likely to remain in place for the foreseeable future and Ofgem licensing requirements and complaints scrutiny are likely to tighten. In addition, regulation around the provision of smart meters, Renewable Obligation Certificates (ROCs) and wider infrastructure improvements are likely to intensify – increasing costs and operational complexity.

Competition. Particularly in the B2C energy supply sector, intense competition and increased acceleration of customer switching continues to place downward pressure on margins. Despite the failure of a number of suppliers in recent months, there continues to be new players on the market which maintains a highly competitive environment.

Decarbonisation. The move towards renewable energy has required major changes to both production and distribution of energy across the National Grid. This is likely to remain a key focus for utility providers over the long-term. The UK is rapidly losing large volumes of baseload (nuclear) & flexible (coal & older gas) generation capacity as its capacity mix pivots towards low/zero-carbon alternatives. Major investment means that the UK already benefits from a large renewables resource base (in particular offshore wind) and an effective CfD support mechanism.

In light of these, utility providers of all sizes have needed to become increasingly agile, and cost focused. Managing liquidity is essential, as well as taking a prudent approach to bad debts.

Calon Energy Limited in administration

We were appointed as administrators over this leading Independent Power Producer in the UK, with a 2.3GW system-Critical Combined Cycle Gas Turbine (CCGT) portfolio across three sites. The power stations were placed into a 'deep preservation’ state and we worked alongside management to develop new business plans for the operating companies.

Spark Energy Supply Limited in administration

Initially engaged to assess strategic options following withdrawal of major funder support, we helped identify a buyer, but this required the insolvency of the trading business. This preserved 440 jobs and we facilitated the transfer of supply for 280,000 customers, representing the largest retail supplier to go through a SoLR process to date.

Project Rolstad

We reviewed the business plan and advised on options for a syndicate of lenders to a developer/operator of standby and flexible power capacity. This included a full IBR and contingency plan. We negotiated amendments to the facility agreement alongside a fresh equity injection and introduced a new chairman to address governance/control issues.

Energy Wholesaler

We helped an energy wholesaler evaluate its options following a spike in wholesale prices. Using our transformation expertise and specialist energy sector, we developed and implemented a strategic turnaround of the business. Our work retained shareholder value, preserved jobs and avoided disruption to energy retailers and their customers.

Find Your Expert

James Fagan is Interpath Lead for the ENR sector, which includes Power & Utilities as one of four core segments. James Camp leads our approach to Power & Utilities nationally, with transactional and advisory support from Alan Flower. For a full list of our senior people with experience in the sector use the button below.

Our senior team