Episode 69 - Recharging the energy transition

Quentin Cole: Welcome to the Business in Focus podcast. I'm Quentin Cole, Head of Industries and member of our UK management board at PwC. And I'm about to host another podcast episode where we've been talking about some of the trends we're seeing across the business world, including digitisation, changing consumer behaviours, cost pressures and a growing emphasis on ESG and purpose. Having been so much in the spotlight these past months it was only a matter of time before we tackled the energy, utilities and resources industry. The industry has long been grappling with the realities and complexities of transitioning to a greener, net zero future and recent events have only made it clearer the parallel issues around energy security and, of course, the societal impact on cost of living. There are some really big questions. What does the current cost of living crisis mean for the energy transition agenda? How do we collaboratively avoid the risk of progress in one area creating bigger challenges in another? Joining me today is Dhara Vyas, Deputy Chief Executive of Energy UK. Energy UK is the trade association for the energy industry, so Dhara will be sharing her insight from what she's seeing across a membership that includes established FTSE 100 companies, right through to new, growing suppliers. Generators and service providers across energy, transport, heat and technology. We're also joined by Drew Stevenson, who leads our Energy Utilities and Resources Industry here at PwC. Dhara, Drew, great to have you with us.

Dhara Vyas: Thanks for having us.

Drew Stevenson: Yes, thanks Quentin, great to join.

Quentin: So, let's get into it. We can't really kick off any discussion around energy markets without taking a proper look at how much of the headlines and events we've seen over the last eighteen months have affected the pace and path towards energy transition. We've recently published our CEO survey here at PwC and it's fair to say that there is a sense that it's a tough climate out there for everyone. Dhara, turning to you first, given the breadth of the Energy UK membership, it'd be really great to start with your thoughts on where the industry is at with energy transition.

Dhara: Thanks, Quentin, and you're right. You know, it's a really, really crucial point, I think the beginning of 2023 does feel slightly make or break for a lot of companies in our industry. Energy UK represents around 80% of UK generation and around 95% of supply to homes and buildings across the country, so we have a pretty good look at what's happening across the industry. I think turning first to the, sort of, generation side. The investment landscape for UK renewables has deteriorated a lot over the last few months. And I think that that matters greatly because it's due to domestic factors, like there's been a windfall tax on low carbon generation, the mini budget, the politics, but it is also fuelled by international drivers like inflation and supply chain difficulties, but what it means is that building new low carbon generation in the UK is around 20-30% more expensive than it has been historically and you have to think about that in the context of a cost of living crisis that's been driven by high energy prices and scarcity of supply and security of supply. So, on that power generation side, you know, the decisions made by politicians in the coming months will really set the scene for the landscape, for investment and making sure that we do have secure energy supply and we are not reliant on imported gas in the way we have been in the past. So, that's, sort of, one side of the coin, as it were. On the other side of the coin, you know, people are struggling with their energy bills, despite significant support from government. Bills are still nearly double what they were eighteen months ago and more than, you know, more than they were pre-pandemic, so the reality is for far too many people in this country it's unaffordable.

We're in an affordability crisis. And under current plans and projections bills are set to increase significantly in April 2023. And we're in January 2023 now and the regulator recently wrote saying, you know, bills are 2.5 billion to a bad debt across the industry, £2.5 billion across the retail side of things. So that is really worrying and what it does is it is signifies just how much households and businesses are struggling across the country.

Quentin: That's brilliant, Dhara, thanks for that insight. And Drew, just bringing you in here, I mean, it's a good point, I think, to consider some of the organisational impacts. So, what are we seeing more specifically in these issues playing out in the organisations themselves?

Drew: Thanks, Quentin. I mean, it's not a single answer to that given the breadth of businesses, you know, we deal with. Clearly depends on the nature of each organisation, whether they're part of the energy supply system, demand side, consumers or indeed increasingly, you know, we find businesses increasingly on both sides of that equation. Just to frame it, I mean, companies in the energy sector have faced enormous challenges so far this decade. You know, they've been on transition journeys for years but just as the, sort of, bolder net zero commitments were being socialised, the pandemic took hold. And what we saw then was, you know, commodity prices hit extreme lows, you know, back in spring, summer 2020. Dial that forward just a year and we've got record high and record volatility in gas pricing since the autumn of 2021. And that's the environment we face today, it's obviously supercharged by the crisis in Ukraine. You know, and as we know across industries, businesses are getting to grips with that environment and the interventions by government and regulators. Dhara's just touched on that, and particularly here in the UK and across Europe we've got the price cap, price support to consumers and businesses. And then the energy levies that have been implemented in many countries. So, for many EU&R, particularly energy businesses, really the biggest challenge on the transition has been round, sort of, widening tramlines on the assumptions they feed into the models when setting strategy and planning for long-term capital investment decisions, including M&A. That's needed to rewire our energy systems so the more we can do going forward to give clarity and to give consistency to that analysis, you know, the better.

We have just released our global CEO Survey and if you look at that in January, for EU&R businesses you can see the key issues on CEO agendas. 91% of CEOs in the EU&R saw regulation as having a moderate to very large impact on their performance. That's closely followed by both energy transition, as you would expect, and also supply chain. Supply chain disruption, each of those, 86% of CEOs see that as impacting performance. I think you then get to changes in consumer preferences and behaviour. Very high on the list, 82% and then availability of the right labour and skills are almost 79%. I think the silver lining to the challenges we see and the systemic pressures that we continue to face in 2023 and beyond, I think that'll be a real catalyst to accelerate the pace of transition. And I think we'll see that taking shape in the medium term, so going for a positive note to hand back to you on.

Quentin: Yes, I'm glad to hear that optimism because we hear a lot everyday about how difficult it is. And actually, what I like to do is, sort of, turn to that, kind of, the way forward. Because that's important, I think, for businesses and the public, for obvious reasons at the moment. So, perhaps we can, you know, I'll come to you first, Drew, start to pick up what that means for us going forward, and where do we go next. Both you and Dhara have painted quite a picture of the difficult path, specifically for organisations to navigate. We've got energy security, investments, stability or instability, cost, supply chain challenges. But there's also, I think for everybody, a really increasingly strong recognition and hunger that we need to evolve, we need to transition as quickly as possible to a greener, decarbonised future. I mean, I get it but it sounds difficult and quite a daunting, sort of, journey and path to follow. So, perhaps you could just shed a bit more light on that in the context of where we go from here.

Drew: I think you've framed that well.

Quentin: I framed the problem, we now need the answer, don't we.

Drew: Yes. I mean, it is a daunting challenge. It's an opportunity. It's a huge opportunity. Where we are today, we're navigating the balance between, you know, transition to net zero, security of energy supply and affordability. I mean, that's often referred to as the energy trilemma. As I just said, I think those three factors will increasingly as we see greener energy sources as the, sort of, exit route to where we are today. I mean, even before today strains on finances, and that's domestic, business and national, even without that backdrop, rewiring our energy system, you know, was always going to require an unprecedented level of collaboration and that's cross industry, that’s between public and private, and also accessing the funding that that journey's going to require. I think if you look at it in terms of, so back to the EU&R client base, you know, looking at that question in terms of some of the component parts of the energy systems. I think for oil and gas, what we've seen playing out in recent months, it's been a maturing, I think, of the discussion around oil and gas and the critical role that it plays and will continue to play. So, energy security, you know, through doubling down on the right hydrocarbons. So, that's right in terms of cost but also right in terms of ESG footprint. So, carbon intensity, of course, but also social impact and what I refer to those domestic security requirements. And I think, oil and gas in terms of the current strong cash flow is providing the opportunity to accelerate investment, that will include M&A in clean energy. But also, I need to stay focused on performance and that ever, you know, present conundrum of meeting return expectations but that's in the face of an increasing spread of the returns available within the energy systems.

I think our power generation, you know, gas still, today, has the largest share of power generation in the UK. Clearly, there's a huge, huge task in front of us to replace that. But that's from the UK's leading position in off-shore wind and the ambitions that we recently set around on-shore solar and nuclear in the UK's energy strategy review, published in 2022. But accelerating that investment requires a lot of things. It requires investment in the grid infrastructure. Improvements in the planning consent processes and, of course, the power generation sector operators are getting to grips with the impact of the new electricity generator's levy as well. It's going to require real collaboration, so increasingly we see convergence between demand and supply about some of the more nascent segments within our energy system. As I say that I'm thinking about the role of hydrogen, you know, other energy storage systems, batteries and, of course, carbon capture and storage. So, increasingly see the need for demand supply public and private collaboration around those areas and emergence of clusters and emergence of more distributed energy. So, really important areas for innovation and, you know, given the relative immaturity of these markets, you know, important role for funding sources such as venture and private office financing to deal with some of the risks in nascent markets. I think in Dhara's company I'll defer on energy retail. I think the key point in all of this is energy transition needs all of these components to play their part. Demand, supply, public, private and access to capital. And I think reading the recently published net zero review, which was led by Chris Skidmore, I think that was probably one of my key takeaways.

Quentin: That's fantastic, Drew. A lot in that. And Dhara, I know this is an area you're passionate about as we really start to talk about evolving the market to a greener and more sustainable position. And, of course, the framework of support that's going to need to sit around that, kind of, umbrella term of energy transition decarbonisation. So, with that in mind, are we seeing the beginning of more sophisticated conversations around how this is going to happen, and at what pace?

Dhara: So, I think, I was listening to Drew and I was thinking he's covering all the bases. He's talking about absolutely everything, from distributed energy to, you know, capital allowances to allow despite the energy generator's levy, despite the windfall tax on clean generators, allow more investment and encourage more investment. We are talking about investment in the context of a global economy, where America has their inflation reduction act. Europe has just agreed to create its version of the same. What is happening in the UK? That doesn't mean I'm all doom and gloom, I do share some of Drew's optimism, I certainly do. And I absolutely think it's the right direction we need to be on to continue to meet those ambitious net zero targets. There is a job of work for politics and politicians to do here. There's a job of being brave and making some bold decisions to unlock the potential and make sure that the UK continues to be a world leader in this space. And I won't repeat what Drew said but what I will say is that there is a conversation between where we're building more generation, what's happening with it and who it's for. And then what we do with all the excess, lovely clean electricity that we're going to be building. That, you know, you could take this conversation in any direction. We could talk and have a huge conversation about, you know, how do we have an investment in energy as infrastructure. And we're talking about, you know, what is a good, public, smart charging EV system? What does it look like, how do we make sure it's distributed properly and fairly? What does good local area energy planning look like? How do we make sure it's fair across the entire country?

How do we make sure people, citizens, communities, businesses locally all have a say and get involved in what their, kind of, local energy system might look like and how to make sure it serves them best. And we could be talking about improving the energy efficiency of homes as an infrastructure issue as well, so I suppose we could take this conversation in any direction. The last point I think is worth making is about people in their homes and about the, sort of, trilemma that our homes and buildings are facing right now because we're in an affordability crisis and we're in a decarbonisation crisis. And we need to decarbonise the heat that we use to heat our homes and buildings across the country. That's a huge job. We need to make these buildings our, you know, really, kind of, hugely mixed housing stock compared to most of the rest of Europe. We need to make sure that we are improving the efficiency because as everybody, I think, agrees the cheapest kilowatt of energy is the one that you don't use. So, you know, it's about improving energy efficiency, it's about decarbonising homes but it's also making sure that we are doing everything we can to enable the uptake of demand-side reduction. To make sure we can use energy when it is cheapest and most available, and using it flexibly to suit everyone. So, it's a massive task but I think we are on the way. The six carbon budget, you know, we are on the way. There are really strong options and choices but it comes back to this political point. The decisions we make now will affect this industry for the next two to three decades.

Quentin: I mean, the challenges are really significant, aren't they, today. You've both touched on it, whether it's business and clearly, for people in their homes with the cost of living implications. Some of the things that we can do look significant as well, in terms of their potential but they feel like a long way away and feel complicated and, you know, requiring lots of decisions made by lots of people over a long period of time to execute. So, with that context in mind, and this is to you, Dhara, initially, where are the pace setters around moving to greener, more sustainable market? Where are those, sort of, points of optimism that in all of that context you go, yes, look what's happening here and become the exemplars for other organisations? And potentially other countries to follow. That, sort of, helps us feel that this isn't as far out of reach as it sometimes sounds?

Dhara: I mean, that really is an excellent question and I think, particularly working in this world right now, it's good to stop and think about where are those positive points? And there really are so many. So, one of those I'm going to, sort of, talk about which isn't actually technology related, it's about people. So, we run something called the Young Energy Professionals network and it is amazing to talk to some of the people involved in this network. They are full of optimism because they joined this industry because they want to deliver net zero. My first response is going to be there are so many ideas and there is so much enthusiasm for change. And that's not just the young people who are in the industry today, it's also about the jobs and skills potential that this industry can create as well. So, I think that's the, sort of, first point is that there's huge enthusiasm and appetite for getting involved in the transition and for taking an active part, you know. These are jobs and skills that will be across the country so it does speak to that levelling up agenda too. So, there's that, kind of, basket of people and enthusiasm, and that's going to be great because there's a real will, I think, to change things and to be part of that. There's also so much exciting, new innovative technology, from the, sort of, you know, drive over the pad to charge your car to, you know, using information about personal home energy usage in health-related apps and things like that. So, there's really exciting, new, novel, testing ideas space, I think, there as well. One of the things, I think, that we want to do is to make sure that innovation has the space to grow. And where, I think, we've made that harder in this industry is the, sort of, regulatory boundaries and barriers around the retail space.

I think we really do need proper retail market reform in order to unlock the potential of energy usage in our homes. Good place to start is the smart meter roll out, you know, it's absolutely had its troubles over the last ten years. It's been an expensive programme. The reality is we're moving an analogue industry into the digital world. We've gone through Covid and now this cost of living affordability crisis. That shouldn't falter moving this industry and digitising the way that we use energy. It's why the future system operator that's proposed in the current energy bill is so important, because we need to get moving on modernising this market. It is 2023 and Great Britain should continue to be a world leader, as we have been with off-shore wind we should continue to be across the system.

Quentin: That's really heartening to hear, particularly, I think, that, sort of, next generation of people and also the innovation required. I think that gives a lot of comfort for things that are really going to be quite essential to drive change, as you say. Perhaps, Drew, just to bring in some reflections from yourself on that same question?

Drew: Yes. I mean, those were, sort of, great responses. I mean, just to, sort of, add a couple of builds to those, I think that point on job creation and the skill base. I mean, there really is something to be proud of within the UK in terms of the off-shore sector. Both oil and gas and increasingly in the achievements in off-shore wind. There's a real opportunity, I think, to harness the skills in that environment to make this happen, so I think that's a great point to build on. I think possibly the other point I'd just raise is around the important role of finance and the financial services sector, in working with the industry. I think that's a really important point. Working towards transition I think is something that's going to be really key and obviously in the UK our leading position in the, sort of, financial services sector, I think that's definitely something that we should be pretty focused on.

Quentin: Thanks Drew. Look, we're nearly out of time and it's been a whistle-stop tour but we've had a fascinating and I think really insightful discussion, so thanks very much for your contributions. I guess, before we wrap up, we have a wide-range of listeners to these podcasts. Majority, I think, are sitting here from a business perspective but not solely. Just thinking about advice that you would give to people sat in a boardroom, either in the industry or an organisation wrestling with, kind of, the various energy challenges we've talked about. Perhaps turning to you, Dhara, first. What advice would you give to who sat in a boardroom today, on this topic?

Dhara: I think I would take it back to the point around there was a period during which we were always being reminded to have a relentless focus on the end-user, on the end customer. And I still think that's important, I still think that's really true. And I think sometimes because of the complexities of the market and because of the complexities of the investment landscape and politics over the last eighteen months, that's been difficult, and that's wavered, I think, sometimes for understandable reasons. But a relentless focus on the experience of the end-user or the customer is going to be crucial. We are not out of the woods yet when it comes to this recession. And although we are all customers, if you're at the boardroom you are not experiencing it in the same way as the average person or the person who's struggling the most. So, remembering compassion and remembering that, you know, there are real people who are using these products and services at the end of the day is just really important.

Quentin: That's fantastic and a really strong point. Drew, turning to you, action in the boardroom? Question in the boardroom?

Drew: Really, really focus on demand-side measures and particularly around energy efficiency and load shifting, reducing load at peak periods. I mean, that comment clearly applies equally to consumers, but from a business perspective that would be top of my list, Quentin.

Quentin: Understood, thanks Drew. So, that brings us to the end of another ‘In Conversation’ episode of our Business in Focus podcast. Thank you, of course, to Dhara and Drew for taking part and being such fascinating and insightful guests. You can discover more insights from our experts about the trends affecting industries and some of the practical steps to take on our website, pwc.co.uk/industry. And also, please don't forget to subscribe to keep up to date with future episodes of the podcast series. And finally, thank you to everybody for listening and please tune in again soon.

Participants

• Quentin Cole
• Dhara Vyas
  
• Drew Stevenson