What’s in this report?
Utility Week’s new CEO Insight research series will provide regular access to the sentiment of industry chief executives on key themes and developments impacting the sector, and their businesses individually.
Our analysis of the findings from the first iteration of this research will be published in easy to digest instalments, however, a complete research report will also be made available.
This instalment of research analysis focuses on CEO views of the macro political and economic environment in which they are operating.
Future instalments will cover
A special subsector report, focussing on research findings emanating from leaders in the UK water sector has also been published alongside this initial research installment.
Executive Summary
As utilities grapple with the transformational change sweeping the sector, company chief executives face challenges on many fronts. In the first of a new, regular series of research reports – CEO Insight – Utility Week surveyed the leaders of the UK’s major utilities, to understand their views on the political and economic climate their organisations are operating in, the regulatory and policy landscape surrounding them and what the future holds in terms of change and challenge.
The results paint a picture of chief executives poised for sector disruption. They expect radical changes to business models, even in the short term; are dissatisfied with or lukewarm to the regulatory regimes they operate under and express concern in relation to wider economic and political factors impacting their businesses.
Key findings
Utility Week’s first CEO Insight research, conducted by Utility Week’s independent market research partner Insight Advantage, shows:
- Policy and regulatory instability are the highest rated factors impacting businesses today, receiving scores of 7.9 and 7.5 out of ten for impact respectively. The third highest rated impact factor was change and uncertainty relating to new technologies and commercial models (7.2).
- Brexit is currently relatively low on CEOs’ agendas, with respondents scoring its impact at just 4.5 out of a possible 10. However, this varies considerably by sector, with vertically integrated energy companies scoring it much higher than average (7 out of 10) and water retailers much lower (1.5 out of 10).
- More than half (57 per cent) of CEOs believe the regulatory regime under which they currently operate is not fit for purpose, with water retailers and challenger energy supply brands most likely to take this view, and power and gas networks least likely to. Even with water retailers and challenger suppliers taken out of the equation however, nearly half of CEOs say their current regulatory regime is not fit for purpose.
- Even in the next five years, CEOs expect considerable change in their business models, with respondents rating the expected scale of change at 6.7 out of ten in the next five years. This rises to 8.7 out of ten in the next ten years, and a transformational 9.3 out of 10 in the next 15 years.
- Respondents expressed a strong appetite for M&A, with 81 per cent of CEOs saying their organisation would be a “buyer” in an M&A scenario. At the same time though, there was little expectation of significant M&A activity in the next 12 months, with 67 per cent of CEOs saying they expect “very little” M&A and a further 19 per cent expecting “moderate” levels of M&A.
While responses to some questions show significant variation in opinion between different utilities subsectors, qualitative commentary on the survey findings, provided by sector leaders, showed the findings generally resonate with chief executives across the board.
Even in areas where a single subsector stands out from the crowd – for example with regards to networks’ support for their regulatory regime – qualified comment shows there are significant and growing concerns about the direction of travel for the future, and the influence that political interventions are having on this.
In this first iteration of our CEO research, respondents from the water sector – spanning wholesale and water retail – provided especially robust responses to questions about satisfaction levels with the regulatory and market structures which envelope company operations and profitability.
To acknowledge this, as well as including observations on water responses in our general commentary, we have broken them out in a special subsector focus chapter.
The next iteration of our CEO Insight series will gather evidence over spring 2018, with a second report appearing in the summer.
The macro-view
In an attempt to understand the wider context in which utilities operate, we asked our CEOs to identify the factors most heavily impacting their businesses today, as well as exploring their level of confidence in the political and economic environment the UK can offer them.
Their responses resoundingly identified change and uncertainty relating to regulatory regimes and policy frameworks as the highest impact factors for today, followed by the effects of new technologies and commercial models.
Meanwhile, the impact of international politics (excluding Brexit) was considered irrelevant to current business interests. And, perhaps surprisingly, even Brexit was rated low in term of its business impact, receiving a score of just 4.5 out of a possible ten.
Scrutinising CEO confidence levels in the government and the UK economy, responses generally exposed scepticism. Confidence in the UK economy to provide a stable environment for their businesses was rated at 4.5 out of a possible 10 and confidence in the ability of government to provide a coherent policy framework, in turn supporting effective investment planning, was rated at just 4.2 out of 10.
It should be acknowledged that confidence levels and appreciation of business impact factors varied significantly according to utilities subsector however.
On Brexit, for example, water retailers scored its impact much lower than the average (1.5 vs 4.5), while large vertically integrated energy companies scored it much higher (7 vs 4.5). Doubtless, this reflects the nature of the markets these different utilities operate in: the domestic nature of water retail, where the UK is one of the only competitive water markets in the world; versus the global, and particularly European, nature of many energy generation and retail businesses, especially those with sizeable energy trading arms.
The impact of macro-economic factors, including rising inflation and a sustained low interest rate environment, also varied widely by sector. While the overall average score of 5.3 out of a possible 10 shows CEOs consider these factors to be broadly manageable, challenger energy brands found macro-economic factors more problematic and water retailers significantly less so than the average.
This likely reflects what one commentator described as the “start-up” nature of many energy retail new entrants and their need to secure funding for expansion. This contrasts with the business models of most water retailers, which have largely spun out of larger, more established companies and have little need to raise finance.
Taking the CEO responses as a whole however, commentators said they empathised with the overall impression of CEO sentiment. Several commentators reflected on their own experiences of the impact that policy uncertainty has on their ability to plan investment and secure financing – and therefore their ability to move for advantage in upcoming technology and commercial fields, referenced as the third largest business impact factor.
Recent efforts on the part of government to increase long term visibility of the direction of travel for utilities policy frameworks were welcomed. The publication of the Department for Business, Energy and Industrial Strategy’s (BEIS’s) Clean Growth Strategy, as well as its smart systems and flexibility plan, Upgrading our Energy System, were particularly lauded for showing a clear understanding of big picture industry issues and the need to support investment to tackle these.
However, one chief executive cautioned that these positive signs of long term thinking in policy creation are still being undermined in the immediate environment by “knee-jerk” interventions in the market, from feed-in tariff and subsidy alterations to price caps. Another warned that an apparently growing appetite for intervention in price setting regimes is damaging the independence of regulators, and the industry’s relationship with these bodies.
While none were under any illusions that continued industry and technological change, combined with political volatility, can be done away with, there was a strong feeling that policy makers could work harder to avoid creating unintended market consequences in the short term.
On Brexit, commentators qualified the survey results, clarifying that Brexit is by no means considered immaterial at board level. Rather, its impacts are viewed as less immediate.
Peter Emery, chief executive of power distribution company Electricity North West observed: “I agree with what other CEOs have said here. Most of the impact we can currently understand from Brexit is what I would describe a ‘second order’ for our sector. For example, the things we think Brexit is likely to mean for us is a tightening in the availability of skilled contractors and employees at the margin and potential increases to the cost and lead time for plant and equipment.”
Emery also said Electricity North West is alert to the fact that Brexit could have an impact on UK economic growth, and therefore the pace of change in some strategically important areas. “For example, if the UK economy struggles post-Brexit, the transition to electric vehicles may be slower than currently anticipated. If the economy is buoyant, the pace of change may be quicker.
“Equally, Brexit could have significant implications for the attractiveness of the UK to debt and equity providers – again due to economic buoyancy or volatility, and the changes to the valuation of the pound which might impact the real value of their investment returns. But these are not issues for our business today, whereas some of the higher rated impact factors in the survey are more immediate.”
Read on….
The next installment of Utility Week’s CEO Insight research review covers chief executive sentiment relating to regulation.