Power & Utilities
Sector trends & challenges
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.
Power demand and mix
Restricted activity and the subsequent recession saw material reductions in power demand. Losing system load impacted cost and source of marginal supply, and even efficient coal plants became uncompetitive on account of cheap gas.
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, the mothballing of some CCGT generation capacity and coal plant economics becoming ever more challenging versus 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 power sector has seen a shift in energy usage during the COVID-19 pandemic. Commercial premises have seen marked declines in consumption whilst home usage has increased. The infrastructure has proven sufficiently resilient to accommodate this marked change in consumption.
As the economy enters the ‘new normal’, there are a number of headwinds facing utility companies:
Increased bad debts. There’s an expectation that, as the economy emerges from the pandemic, there may be an increase in business failure, resulting in an increase in bad debts and working capital pressure. Across the B2C market, there is potential for arrears to increase should unemployment rates rise or further consumer protections be ordered by regulators.
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. Exemptions from certain obligations are enjoyed by smaller providers e.g. Home Warm Discount
Competition. Particularly in the B2C energy supply sector, intense competition and increased acceleration of customer switching continues to place downward pressure on margins.
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 dynamics, utility providers of all sizes have needed to become increasingly agile and cost-focused. Managing liquidity is essential, and 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.
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