Sector Spotlight: Energy (pt 1) – the rise and rise of an industry

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In response to a new Ofgem report, warning that the high level of spare capacity in the UK electricity market is “set to end quite rapidly over the next few years”, UK Energy providers have begun to hike their prices, spurring the UK governments interest around Energy conservation.

The Ofgem report shows that spare electricity margins might fall from the current 14 percent average today to just 4 percent by 2015/16, increasing the uncertainty surrounding wholesale fuel prices and leading to potential blackouts for some boroughs by 2015.

Led by four of the Britain’s largest energy companies in the recent weeks, these above-inflation winter increases in gas and electricity prices will add between £80 and £110 to the typical annual household bill.

British Prime Minister, David Cameron, has told MPs during a recent Prime Minister's Questions that he will ‘tackle the problem’, announcing that “we [UK Government] will be legislating so that energy companies have to give the lowest tariff to their customers". However, the UK government is still backing investment new energy generation - primarily coal driven (given the lack of alternative investment uptick into gas) – resulting in the UK inevitably missing its carbon targets.

The rise of the (green) machines

On the other side of the proverbial Energy coin, as the race to ensure sustainable energy supply continues, Moody’s (the rating agency) has recently reported that renewable energy sources such as wind and solar are “having a profound negative impact on Europe’s gas and coal generators”. The FT has recently reported that renewable energy accounts for “more than a third of Europe’s total installed capacity base, a proportion set to rise to 50 per cent by 2020”.

Overall due to the low marginal costs associated with wind and solar power generation sources, providers of these renewable energies will quickly disrupt traditional energy providers and ultimately push down prices for the consumer.

Early movers towards renewable energies, such as E.ON, have invested upwards of €8bn, increasing its renewable capacity tenfold since 2007 resulting in a “Massive” contribution to overall company earnings.

Although the Big Six energy firms have told industry analysts they are “squeezing competition”, why aren't we seeing basic economic principals being applied i.e. in a competitive marketplace, more competition usually results in lower prices for the consumer – so why are we seeing the opposite?

Perhaps an effective oligopoly is forming, which the regulators need to address with stiff action. One hope this brings is that it will drive forward investment into sources of renewable energy – but that’s not going to have any effect in the short to medium term.