'All change' on the Energy Bus

If anyone remained in any doubt that the UK energy landscape is undergoing a fundamental reshaping, the raft of corporate announcements this week should put you right. Individually, none of the announcements would particularly grab attention, but collectively they should.

So in no particular order:

  1. Centrica announces the sale of its two largest CCGT assets (Langage and South Humber- 2.3GW combined) to EPH, a Czech vertically integrated utility with over 50 businesses across Europe.

  2. Centrica also announces the closure of the UK's only long term gas storage facility, Rough

  3. Vattenfall announces the acquisition of iSupply, one of the UK's new entrants with around 120,000 customers.

  4. Foresight buys a 35MW storage plant from RES, pre loaded with EFR and Capacity market contracts.

  5. Wessex Water announces that it plans to buy Flipper, the 'automatic' switching company which came to market with a real fanfare, but entered administration last week.

Five announcements, apparently unconnected, but dig a bit deeper and there are some clear market messages.

  • New Flexible strategies: The government is currently trying its hardest to ensure that the next capacity market auction incentivises investment in large scale CCGTs- so why is Centrica, one of the largest asset owners, selling their existing ones? Irrespective of policy direction, Centrica has seen the writing on the wall and is shifting its strategy to focus on its customer facing business and flexible peaking plants, storage and distributed energy. Offloading costly assets to enable them to build an agile and flexible portfolio is a clear nailing of colours to the mast. Foresight likewise, has historically been focused on asset ownership building an impressive portfolio of solar projects (around 80) and energy from waste projects (around 28), creating around 1GW of output. Adding storage allows the business to really start taking advantage of the value opportunities that a flexible portfolio offers- A more complex but, likely to be, a more profitable strategy. Battery storage, until very recently a concept with a few early adopters, is very quickly becoming mainstream.

  • Overseas confidence in UK markets: Despite Brexit, despite a policy vacuum and despite a weak government, two of the largest European utilities have chosen to invest significantly in the UK. Vattenfall has already invested over £3bn since 2008, predominantly in offshore wind, but increasingly in energy services and decentralised generation. EPH, through its subsidiary EP UK Investments Ltd, adds the two CCGT assets to its already impressive UK asset base, including Eggborough and Lynmouth power plants, making it one of the largest, if not the largest gas asset owner. There is clearly sufficient confidence in UK plc, potentially helped by the weak £ and the opportunities that the energy market present, for overseas investors to shake up the traditional market.

  • Gloves off in the retail markets: If the Big 6 were not already under enough pressure, Vattenfall's entry to the retail markets, rapidly following Engie's announcement that it was doing the same last month, will really shake them. Whilst it is a long road to grow a retail business to scale, both Vattenfall and Engie have the scale and balance sheets to do so at speed, without being burdened by legacy issues or tarred with the 'big 6' media brush. Centrica's shift in strategy to focus on its customer facing business is the right defensive measure, but is it too little too late? It would be surprising if iSupply was the only new entrant that was snaffled up by an asset owner in coming year, as fundamentally the principles supporting a vertically integrated model still hold true, at whatever scale.

  • Multi utilities revisited: The opening of the business water market in England and Wales is beginning to cause ripples in the energy market (no puns intended). Whilst very early days, with the market only opening in April 2017, we've already seen Utilitywise team up with Business Stream, Scottish Power announce a joint utility offering with Castle Water and now Wessex's acquisition of Flipper. Whether teaming up with suppliers or TPIs, water retail companies need more than the water supply margin to thrive and we should expect to see more linkages being formed, whether through partnership or acquisition.

  • Market vs Policy: There is a real policy vacuum at the moment as we wait for clarity on the Levy Control Framework beyond 2021, price cap ping pong between BEIS and OFGEM gathers momentum, and the promised spring, then summer, response to the Smart,Flexible Energy System call for evidence, shows no signs of appearing. However, what is clear is that the market is not waiting. There is enough visible momentum, confidence and opportunity for the market to accelerate without all the policy answers.

In a challenging time for the UK as a whole, the various corporate announcements this week underpin a rapidly shifting energy landscape, and should provide a real boost of confidence to those investing and operating in what is still a tough but exciting market.