Analysis: 2016 - riding a wave of change

As the world tries to digest the tumultous events that have occured during 2016, Mathew Beech looks back at some of the headlines in the world of utilities.

Cast your mind back to the start of 2016 and the UK and its utility sector had some much-needed stability.

We had a Conservative majority government, preparations were on schedule for the opening of the non-domestic English water retail market, major infrastructure projects were starting to happen, and competition in energy saw independents chipping away at the market share of the big brands.

Twelve months on, a lot has changed.

The UK is leaving the European Union, we have a new prime minister and Conservative government (read more on p10). The £18 billion Hinkley Point C project was on, then off, before finally being on again. We’ve seen huge changes in the water sector with major companies exiting the retail market, new companies being created, and mergers taking place.

The CMA has revealed its plans to shake up energy retail, and the smart metering programme has stumbled at the first hurdle. The future of independent suppliers has also been called into question with rising wholesale prices and the collapse of GB Energy Supply.

Making waves in water

With the non-household water retail market due to open in April, preparations have ramped up this year as existing companies decided how to take on the challenge. The high-profile exits of three incumbent water companies – Portsmouth Water, Southern Water and Thames Water – stand out.

Portsmouth was the first to go, announcing its exit at the start of the year. Southern was next, making its announcement on Brexit Day – 24 June 2016 (see box). Its exit was not a huge surprise to the sector. However, Thames Water’s declaration the following month took the industry by surprise because it had committed resources to participate in the Scottish market and seemed geared up to compete in England.

Scottish retailers Castle Water and Business Stream bought the business customer bases of the three exiting incumbents (Castle took Portsmouth’s and Thames’s; Business Stream took on Southern’s business customers).

This year the water sector also witnessed a series of joint ventures, including that between Severn Trent and United Utilities. The two companies merged their business retail arms to create Water Plus, which has the largest market share with about 400,000 customer accounts.

Meanwhile, Pennon announced it is joining forces with South Staffordshire Group to create the fourth-largest retailer in the business market. And in other water consolidation news, an unexpected bidding war broke out between Severn Trent and investment firm Ancala – both of which are after water-only company Dee Valley.

Several of the incumbent water companies have rebranded their business retail arms, led by Northumbrian Water which rebranded as Wave. Some new entrants have emerged, such as the Water Retail Company, headed by Lord Redesdale, with support from the Energy Managers Association.

And, of course, one of the biggest milestones of the year has been the successful opening of the shadow market, which has only suffered from a few minor teething problems. continued p10

Infrastructure installations

Major infrastructure projects continued in 2016, despite a rocky ride created by the ripples of Brexit.

The 884MW Carrington CCGT came fully online in September and forms a crucial part of the UK’s current, and future, generation mix. It is the first gas-fired power station to come online under the government capacity market mechanism.

Carrington coming online followed the saga of Hinkley Point C, which eventually saw EDF make a final investment decision to go ahead with the new nuclear project, which was then called in and reviewed by the new government, before being given final approval – after certain security conditions were met. This paves the way for further new nuclear projects to take place.

Tideway has also begun the major tunnelling for the Thames Tideway Tunnel, confident that it will be able to deliver the “supersewer” ahead of schedule and under budget.

Retail revolution

The year began with independent suppliers continuing their slow but steady encroachment into the big six’s market share. They were boosted by the hope that the CMA would hit the big six with its market “remedies”, which were updated at regular intervals by the competition authority before the big summer reveal.

When that came, it was a bit of a damp squib. The prepayment tariff cap was welcomed because the move will help protect the more vulnerable consumers, but not many were convinced that switching would be helped by compiling a database of non-switchers, or by removing the whole of market requirement from price comparison websites.

Despite this, the industry is keen to get the remedies in place, creating a more competitive market, although the government has begun circling and making threatening sounds (see Lobby, below).

However, from late summer onwards, rumours began circulating that some of the smaller suppliers could struggle this winter in the face of volatile wholesale prices. These grew until GB Energy Supply became the first to admit defeat last month, with its 160,000 customers being transferred to Co-op Energy.

The fear remains that other, poorly hedged and under-capitalised companies could follow, damaging faith in the market, and pushing people back into the “stable” arms of the major retailers.

Tumultuous times

The past 12 months have not gone as expected. There have been a huge political overhauls and testing times for utilities.

This comes on top of a struggling retail sector in energy that is desperately trying to change, while the market in water gets ever closer as players scramble to prepare.

The oft-predicted capacity crunch for this winter appears to have been avoided, with the commissioning of new plant, the use of demand-side response and other flexibility tools at National Grid’s disposal, while future capacity has been secured with the green light for Hinkley Point C.

The year ends in a far from settled state. and this can be expected to endure for some time to come.

Brace for 2017.

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