The power of confidence

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The power and utilities sector makes a far broader positive impact on the UK economy than is recognized. But will uncertainty surrounding energy policy threaten future investment? Tony Ward reports.

Energizing the UK

The direct benefit of the power and gas sector to the UK economy, in terms of gross value added (GVA), was around £21b in 2011 — 1.6% of UK total GVA.

Energy companies have invested more than £8b a year in the UK over the last five years. Investment reached a 20-year high in 2011 at £10b, a figure expected to be surpassed again in 2012.

The indirect effects of this investment are particularly impressive — a pound invested in the power and gas sector has a larger indirect effect on the rest of the economy than a pound invested in most other sectors.

The sector also contributes relatively more to the UK’s various regions than most others. It is one of the few sectors to have created jobs evenly around the UK over the past two years – a time when employment as a whole was contracting.

Between 2008 and 2011, employment in the sector rose from 83,000 to 137,000 full- and part-time highly skilled roles, across a diverse range of capabilities. Many of these jobs were created in the North East and North West of England and in Scotland.

Challenges remain

Despite its economic contribution, volume growth in the sector has stalled in recent years, partly due to the global economic downturn. Across Europe, declining GDP over the past four years has seen demand for gas and power fall.

Against this backdrop, the UK industry faces imminent commitments to invest billions in new assets needed to deliver sufficient low-carbon capacity for 2020 and beyond.

While challenging, this economic slowdown offers opportunities. Reduced demand has:

  • Given utilities extra time to drive down build costs and reduce the total cost of projects, while ensuring future projects are best placed to deliver on national and European targets for renewable energy and carbon emissions
  • Allowed for the early closure of some of Europe’s older, more heavily emitting assets
  • Helped mitigate the impact of the restricted availability of acceptably priced finance

Certainty needed

As the UK continues its shift toward a low-carbon economy, the need for investment particularly in renewable, nuclear and energy efficiency technologies is unprecedented.

Our October 2010 publication, Capitalising the Green Investment Bank: sowing the seeds of success, noted that up to £250b will be needed over the next 15 years or so — equivalent to an average of £15b to £16b per annum.

Attracting this investment will require providing confidence to investors. While the UK’s long-term stability and clear regulations have traditionally underpinned that confidence, the country’s recent extended period of energy policy review has created a high level of uncertainty.

Power and utilities projects are typically long-term, taking many years to come to fruition and yield returns. Investors will need time to understand the new Energy Bill and build confidence that the future policy framework, political environment and consumer sentiment will be favorable toward achieving a return on their investment.

While changes within the wider energy world will inevitably impact the UK market, it is nevertheless important that the bill progresses to the statute book largely as it is, without any sudden changes that may create doubts as to the sector’s consistent, long-term direction.

Investing for the future

While its continued strength will make it crucial to the UK’s long-term growth, the power and gas sector requires significant investment soon to continue to grow and meet targets surrounding future capacity and renewables.

Investors still have plans for UK-based projects that have the potential to make a considerable contribution to the economy, but confidence is needed if they are to commit to these opportunities – or move their capital to other locations.

Getting the message across

As consumers’ energy bills rise, UK utilities must work harder to communicate their significant contribution to the country’s economy.

Telling the story of how the sector is “powering the UK” will demonstrate the value offered by utilities in a wider context at a time of significant investment in the sector and potentially higher energy bills for consumers.

It would also be valuable for the UK Government to publicly acknowledge the important role played by utilities in the country’s economy as we transition to a low-carbon future.

For more information, read our Powering the UK report.

All data used in this article is from publicly available sources, in particular the UK Office for National Statistics, and previously published EY reports.

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