As Dermot Nolan, chief executive of Ofgem, outlined in a recent Utility Week interview, the energy sector in the UK is undergoing a once-in-a-generation period of transformation. Nolan spoke of his vision for an energy transition that will see innovation disrupt the market entirely.
Engaging with the smart energy revolution as it gathers pace offers a new era of energy provision that incorporates a fresh, technology-driven approach to generation and distribution. Products such as smart meters and battery storage are becoming an everyday feature for both commercial and residential consumers, while global energy companies are adapting their business models to create a more reliable, resilient and sustainable industry. For these businesses and energy-focused investors, the opportunity is significant.
New research from international law firm Pinsent Masons and Mergermarket follows the survey of 250 senior level executives from investment entities, energy generation and distribution companies. The report, “Hungry for Change: Investing in a Smarter Energy Future”, found that key players in the energy sector are pushing for change that allows them to embrace technology to build an energy system that is flexible, resilient, sustainable and profitable.
While smart ecosystems – those that understand consumers better, enhance the customer experience and enable new product and service lines – might be the ultimate goal, they are built one step at a time. In the near term, the majority of respondents (30 per cent of energy companies and 24 per cent of investors) will be investing in smart meter technology, partially due to government-mandated rollout programmes, with data analytics also a priority for the next one to two years.
Cloud-based management systems and virtual power plants are high on the agenda, with 32 per cent believing these technologies will see the biggest rollout over the next six-ten years.
Access to new technology
Energy businesses are taking a pragmatic approach to building new capabilities. Despite the fact that access to new technology is the biggest investment driver for investors (46 per cent) and utilities (30 per cent), energy generation and distribution companies acknowledge that the large size and often international management structure of their business does not make it easy to make dynamic decisions to develop this new technology. Sixty-two per cent say they will not be investing in smart energy research and development in-house, citing reasons ranging from high set-up costs to a scarcity of talent.
Instead, for most in the industry, building new technological capabilities is to be achieved through partnerships or acquisitions, with 90 per cent seeking either a joint venture, acquisition, or both to take the next step in smart energy technology. Acquisitions can help shape future plans for growth in a utility company, helping them adapt the way they operate and how they develop products to aid survival in future markets.
Of those that are opting for in-house research and development, 65 per cent are looking to develop smart meter or end-user communications technology, with 38 per cent planning investments in the complementary field of data analytics.
A time for deals
The research also found 85 per cent of respondents expect mergers and acquisitions to increase in the next 12 months, with the UK, Germany and China named as the top three target countries for smart energy investment. None of the participants expects to see a decline in deal activity.
Respondents identified a number of different factors spurring deals, including the need to adapt to the increasing prevalence of renewables, changing customer expectations, the desire for efficiency gains, and the need to combat competitive pressures. There is also evidence that investors previously focused on fossil fuels are seeking to diversify their portfolios to boost returns in response to continued oil price volatility.
Barriers to investment
Policy and regu latory obstacles are the biggest headaches when it comes to getting smart energy projects off the ground. For investors, a lack of cohesive energy policy and legislation is the primary investment blocker for 28 per cent of respondents, followed by monopolised electricity markets (22 per cent) and inexperienced public officials (14 per cent). Energy companies, by contrast, see monopolised electricity markets as the main barrier to investment (24 per cent).
When asked what they want to see from government to help drive investment in smart energy generation, power companies preferred feed-in-tariffs (18 per cent), capacity markets (16 per cent) and tax breaks (15 per cent). Investors, on the other hand, preferred a market-driven price regime (24 per cent), tax breaks (22 per cent) and opportunities for public-private partnerships (18 per cent).
Overall, the report shows that utilities and investors have demonstrated their hunger to innovate. Given that it is the energy companies, investors and – ultimately – the public, who will foot the bill for energy transformation, governments have far more work to do in creating a stable and predictable regulatory landscape for investment. What is needed now is a favourable regulatory and policy landscape to help satisfy that hunger and take smart energy to the next level.