Diversification can deliver a sustainable future for northern energy
Philip Abram, partner and head of energy in the north at KPMG.
The North of England is one of the UK’s most important power generation hubs. Traditional fuels, such as coal, oil and natural gas, have long supported the economies of our towns and cities. And while these sources will continue to play a role, the North’s energy industry must continue to evolve if it’s going to secure a sustainable future.
The UK energy market is changing, propelled forward by new technology and the decarbonisation agenda. In 2017, the government’s clean growth strategy made a sweeping set of commitments to meet its carbon emission targets, backed up by a further £557 million of funding towards Contract for Difference capacity allocation. This move was designed to give less established, low carbon models, such as offshore wind and advanced conversion technologies, access to UK power generation contracts.
More recently, February’s Capacity Market Auction saw an upswing in contracts awarded to decentralised energy – an umbrella term for off-grid power generators, such as solar and biomass – and new international interconnectors that bring energy supply to the UK from overseas. It highlighted the UK’s transition to a power system that is simultaneously more localised and more international, with decreasing dependence on large-scale power generation.
Underpinning this direction of travel is the UK’s Industrial Strategy, which highlights clean growth as an essential consideration for the industries of the future. While such a dramatic shift undoubtedly creates an impetus for further change to Northern energy businesses, this change can also bring opportunity to those with ambition and a willingness to explore the latest technology and innovative new business models.
A place in the new world
Some of the world’s biggest energy businesses are responding to the industry’s evolution by diversifying their position. Shell recently entered the UK’s energy retail market through its acquisition of First Utility. And it wasn’t alone. In the year ending June 2017, 12 new players – including European utilities, international oil companies and grass roots organisations – followed suit.
This diversification will continue to drive the conception of new and differentiated business models in the energy retail market. The North’s traditional energy businesses should take note. There is now a record number of independent energy retailers in the UK to acquire, or partner with. The demand for this end of the supply market is also strong. According to Ofgem, one in five customers now use an independent supplier.
Investment in new technology is another important route to diversification, with renewables being the most obvious innovation for the North’s energy industry to explore. In January, The International Renewable Energy Agency predicted that renewable energy is set to be cheaper than fossil fuels by 2020. Tapping into this market and the overarching trend towards decentralisation could represent a lucrative, long term growth area for businesses currently focused on traditional fuels.
The good news is the North of England is already setting out its stall on this front. For example, in addition oil and gas, the North East has a worldwide reputation for excellence in subsea technology and offshore renewables. According to North East England Works, the region has seen a 60% growth in the number of energy-related companies over the past four years.
Cultivating this pedigree and broadening the region’s renewable credentials requires greater investment, but crucially, it also requires a skilled workforce equipped to use the latest technology to keep Northern energy businesses ahead of the game.
Skills for the future
The specialisms required to leverage new energy technology simply didn’t exist 20 years ago. So as the gap between supply and demand of STEM talent widens and the impact of new technology that uses an increasing amount data sets in, government, industry and educators in the North will need to act quickly to ensure the sector is properly equipped
The region has some of the best higher education institutions in the UK and an array of world-class R&D facilities, including National Centre for Subsea and Offshore Engineering in Wallsend. Energy businesses should look to strengthen their links with these institutions, while investing in skills and continuous development within their own organisations to help gear them for the future.
If the North’s energy industry is successful in this respect, it will be perfectly positioned to power a range of industries that are rapidly moving towards decarbonisation. Automotive is the perfect example. Government and industry are backing the increase in electric and low emission vehicles. In July, The Office for Low Emission Vehicles published its Road to Zero white paper, detailing a 46-point plan with £1.5 billion in funding to support the decarbonisation of road transport.
How this will be delivered from an energy perspective is yet to be determined, but if businesses in the region are able to support the energy supply and infrastructure needed to realise this change, they will be well-placed to benefit. Crucially, they’ll also be able to protect market share in an environment where fossil fuels are less relevant.
UK energy may be changing, but by adopting a forward-thinking approach and considering how best to leverage the opportunities a more technologically driven and less fossil fuel reliant market presents, the North will maintain its standing as a centre for power generation.