The entrepreneurial landscape of power - Investec Comment

Renewables can be located on top of demand, making them less capital intensive than other power sources
The British power and electricity landscape is changing, and the business of power is changing too. Partly this is down to the growth of renewables. Renewable energy generation had a record quarter this year, accounting for 22.3 per cent of total electricity generation. We’ve seen the emergence of a new wave of independent suppliers – the likes of Ovo and Good Energy – that are challenging the Big Six utility companies. But it’s also about the rise of new technology – notably smart meters, as they arrive, and the services they will be able to offer consumers and businesses. There is a very significant entrepreneurial element to all this, and disruptive technology is one of the factors common to these trends. But what is driving this entrepreneurialism in the power market?

Power generation was traditionally highly capital intensive and technologically complex, with stations located close to the power source (coal mines, for example). Modern technology, including wind and solar, is much smaller in scale and can be located closer to demand. In solar-intensive regions like California and Australia, generation can be located quite literally over the demand. Since you don’t need large amounts of infrastructure to deliver such power, it is easier for entrepreneurs to enter these markets. Indeed, many wind and solar entrepreneurs have come from property development backgrounds.

The government focuses on three big issues in energy terms: renewables, security of supply, and price. The more renewables you add, the greater the effect on prices. Given recent political pressure, incentives and subsidies for renewable generation have been scaled back after huge growth in the last few years. But the interesting thing is that the industry has not stopped. Companies in the UK are likely to adapt and there will probably be some consolidation. A few UK firms are also looking at diversifying internationally. Moreover, there are still independent forecasts projecting UK renewable generation rising to over 75 per cent over the next 25 years.

Second, while suggestions that markets were in some manner coordinated by the Big Six vertically-integrated utility companies (which both generate and supply power) haven’t been supported by investigations, public surveys on utilities show customer satisfaction levels fuelling the growth of newer “independent” suppliers. There is no clear answer to whether the latter have a clear economic advantage, though some independents seem to score well in satisfaction surveys. Their advantages versus the Big Six include being unencumbered by older legacy IT systems and potentially a fresher culture and mindset. Against that, some are less well known. But the variety and choice, and the fact that new challengers will bring new product offerings, is good for the market. The likes of Ovo, founded by Stephen Fitzpatrick, are highly entrepreneurial and disruptive.

Finally, we’re hoping to see more widespread roll-out of smart meters across the UK, which could be a potentially very significant development, with implications for innovation in the power market. This next generation of meter technology will provide far more information for both consumers and suppliers of power. It will therefore allow for the provision of more sophisticated and tailored tariffs that are better suited to individual consumers (also likely to receive a warmer reception from the regulator after the provisional findings of the recent Competition and Markets Authority review of the energy market). It’s a little too early to say who the prime movers will be in this sphere, but entrepreneurs and private equity are at work.

This article is provided for information purposes only and should not be construed as advice of any nature. The views and opinions expressed are subject to change without notice.

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