Investing in UK Energy: Buy, twist, stick or bust?

With another two suppliers hitting the buffers in the last month, government and policy at a standstill, regulatory change cauterising investor confidence and the SMART meter roll out way behind schedule, there is an argument to say forget the UK energy market and go and look elsewhere to invest.

But it is not all as bad as it may appear.

Despite the barriers that are created through a vacuum of policy, the fundamentals are all pointing to a world of opportunity.

  • We know now, even with today’s generation mix, that the need for flexibility in demand and supply is growing;
  • We know that the electrification of transport will create increased demand, generating the need for new generation assets;
  • We know that developments in AI and data analytics will only improve the operational efficiency of buildings and assets;
  • We know that to achieve anything near to net zero by 2050 we need fundamental change to how we heat our buildings;
  • And the big one- climate change and the need for action are not going to go away and the drive for change is more likely to accelerate than decelerate in the UK;

Whilst hunkering down with existing assets and waiting for circumstances to change may feel like the least risk option, it is also likely to deliver lowest returns. Policy and regulation change will always follow not lead markets. So how, in a world of opportunity, do investors navigate policy vacuums and uncertainty?

There are three key ingredients which if put in place can help deliver an investible and future proofed investment strategy:

  • Maintain optionality: As we have seen time and again, a reliance on revenues delivered through regulated schemes can be a fools game. Whilst, initially returns may be good, when the hatchet goes down, businesses can be left floundering for a new business model or replacement revenues. Lessons should be learned from the experience of FITs, embedded benefits, Capacity Market and CfDs, rapid changes to which have resulted in both loss of investor confidence, but also the need to replace lost revenues quickly. Going forward, investors should ensure that there is at least a strategy for a ‘plan B’ and preparedness to pivot quickly if required.
  • Understand the full risk landscape: Everyone knows that energy is complex. The need to reconcile a physical market to a paper market when demand and supply are only known after the event, and sometimes a long time after the event, creates the complexity. All parts of the energy value chain are impacted to a greater or lesser degree by this characteristic and it is imperative that investors understand how. By understanding the full risk landscape, it is possible to create and manage plans to mitigate those risks. As a rule, over the last five years, the drivers of value shrinkage could have been foreseen and planned for.
  • Maintain the quality of people: There is a need to both understand underpinning market structures, regulations and policy but also commercial and operational reality of how business dynamics actually work in the market. Assumptions on either need to be robustly validated and it is people with experience and knowledge who can support investors in making decisions and appointing suitably skilled teams.

It is not an easy time for investors but by applying rigour and expertise to decision making there is a way through. It is not straight forward, but as a sector, the underlying fundamentals should be sufficiently attractive for investments to be made with confidence.

EnergyBridge helps businesses and investors navigate the complexity of the UK market with a combination of market and operational expertise and experience. www.energybridge.co.uk

 

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