Changing Energy Market Dynamics- Scale, speed, specialisation & surprise

Anyone who has worked in the UK energy market for any length of time, will recognise that the pace of change in the last 12-24 months has been faster than at any time in history and taken the market, to a large extent by surprise.

Post privatisation the so called ‘incumbents’ or Big 6, enjoyed a virtual market monopoly in generation and supply, for a good 10-15 years. Whilst they were joined by some new entrant challenger brands from around 2008 onwards, they worried little about competition outside their peers.

The ‘surprise’ element has been characterised by three S’s- scale, speed and specialisation. The accelerating market is now characterised by increasing numbers of new entrants, whether focused on supply, generation, aggregation, storage or any combination thereof. These new entrants are small and fleet of foot, lead in the main by entrepreneurs either with or without industry experience. By their nature they are hard to keep track of and buzz like flies until there are enough of them to form a swarm and make their presence felt.

Around the new entrants there are a growing number of supply chain businesses, whether providing systems, advice or in many cases solutions to sort out operational issues which have resulted from rapid growth or lack of industry expertise.

The innovative nature of the businesses, increasing focus on technology and market conditions have attracted increasing numbers of large and small scale investors, investigating if not investing in, new and evolving market sectors. All in all, the market has rapidly become very busy, fragmented, but immensely exciting.

So what comes next?

Re-invention: The big boys, who have been operating in the market for a long time, have the toughest challenge. The Big 6 suppliers, National Grid as the Transmission System Operator and the fifteen Distribution Network Operators are looking down the barrel at the need to reinvent themselves to survive. Cultural change is probably the biggest challenge, but leadership, operations, agility and shareholder expectations all need to be radically addressed, and addressed quickly if they are to maintain and protect their positions. Market reputation, whether deserved or not, will work against the big 6 players which, with diminishing balance sheets, may restrict their options to buy their way out of trouble.

Convergence: Many of the small specialist organisations, don’t in their own right control sufficient value in the energy supply chain to thrive alone. They will need to combine with other companies in order to survive and thrive. As balance sheets and bank balances get increasingly stressed, we can expect to see the evolution of new but strengthened business models delivered through mergers, acquisitions and investment.

Consolidation: There are many companies now competing for limited market opportunity, whether as suppliers, aggregators, brokers, asset owners or developers. Scale and the ability to leverage value from combined assets, whether customers, generation assets or a combination of both will drive consolidation in the market. Again an opportunity for those with balance sheets or appetite to invest.

Innovation: The rapidly accelerating pipeline of innovation, whether through battery technologies, storage schemes, generation efficiency, blockchain and data solutions will not stop. And as the innovation becomes mainstream, we can expect the continued development, consolidation and convergence cycles to continue. In addition, there is room for innovation in business models- moving from specialist functions to integrated value chains will make a lot of sense in seeking value. We can expect to see increasing development of micro-grid solutions, local markets and small scale vertical integration.

Changing rule book: OFGEM and BEIS have recognised the need for radical change in the governance and regulation of the industry, whilst maintaining the need to protect consumer interests. Inevitably change here will be slow, however the need to manage any investments and business development in the context of existing and future policy and regulatory change, is critical to success, and it is not a simple landscape. Most of the recent casualties in the industry have been as a consequence of one way regulatory bets- not a sustainable strategy.

So change is here to stay- and exciting times are ahead. However, the past is no basis for predicting the future and it will be the fleet of foot and well informed who win.

Jo Butlin is CEO of EnergyBridge (UK) Limited, a business focused on helping investors and businesses navigate the changing UK energy market

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