Utility Week

UTILITY WEEK | MARCH 2022 | 15 Energy retail the need to build renewable generation over the longer term and provide stable rev- enue streams for investors. These instruments have allowed the sector to attract investment far faster than would have otherwise been the case. Every CfD auction has been oversubscribed and materially lowered the cost of new low carbon energy sources ahead of time, so this has to be seen as a success. However, we have to build at a far greater rate to compensate for coal and gas replacement, which is currently slowed by obstacles such as delays to planning and consents. The challenge with wholesale mar- kets is that they were designed at a time when generation was large scale, centrally planned, carbon-intensive, and largely pre- dictable in their output. pus Group, is very robust. Indeed, one of the group's former funds, Octopus Renewables and Infrastructure, has a quoted value of over £600 million. In terms of market share, First Utility – now Shell Energy – has done well. It has one colossal advantage in being owned by Shell, with a market value of over £140 billion. It reputedly paid around $200 million for the business. For many years, Shell has talked up its green aspirations, but cash returns are mod- est. It is still highly dependent on its explo- ration and production returns, the weakness of which caused its historic 67% dividend cut in 2020 – its first reduction since WW2. With the electric vehicle (EV) market potential being talked up, along with its re- charging requirements, there are various scenarios that could lead to far greater UK retail involvement beyond its existing petrol station forecourt operations. BP withdrew from its only exposure to the UK retail market when Pure Planet energy market? As renewables become an ever-larger part of our energy mix, the way energy is priced needs to evolve. We used to know how much demand there would be for energy with relative certainty, and we had a system with additional capacity that could respond to demand or supply shocks. With the proposed electrification of transport and heat it is harder to predict where and when demand will arise. It is harder to forecast when generation will run, as it is affected by weather patterns, and we are more vulnerable to global political and macro-economic factors. This is all further exacerbated by the delay to new-build nuclear, which means that having the right, cheap, energy avail- able when it's needed in the location required is a more complex undertaking now than has ever been the case. Together, these factors highlight that we need system- atic reform – we need to re-evaluate the risk and return across the energy value chain from generators to retailers. System reform can help us to address the problems outlined here, but it takes time. Time to design, time to plan, and will no doubt need legislation to underpin whatever interventions prove necessary which will then need time to pass into law. Recent events show us that legislation can be implemented rapidly in times of crisis, and it is clear to all that we face a crisis in energy. The price pressures from the global mar- ket fundamentals will continue for many years to come. We can prepare ourselves to emerge stronger by taking action to reform the whole energy system from generation through to wholesale markets, retail and infrastructure provision, recognising that each of these parts are intrinsically linked. Without that action, we will be storing up problems for future generations. ceased trading last year. However, that does not necessarily spell the end of its interest in the sector. BP certainly has strong aspi- rations to be less dependent on exploration and production, and specifically, the quest to identify rich oil seams, many of which are in highly unsuitable locations. Following National Grid's unexpected £7.8 billion acquisition of Western Power Distribution last year, it is reasonable to ask whether it may go further and invest in the UK energy supply market. However, this seems unlikely. Ažer all, National Grid has a raž of other challenges to address, in terms of the power requirements of the long-term EV rollout, a very large investment programme and piv- otal price regulation issues (R110-ED2) with Ofgem – a key driver of its finances. In the meantime, the temporarily nation- alised Bulb's future remains unresolved. Its finances are so distressed that the quoted Sequoia Economic Infrastructure has – tem- porarily at least – written off £55 million of its senior debt. Bulb may either be absorbed by an exist- ing player – perhaps as part of sector consol- idation – or simply exit the stage. The most plausible outcome for the future of the UK energy supply market is a new four-pillar structure led by Centrica secur- ing a much-enhanced market share under a far higher price cap. The other participants would be the foreign-owned big six mem- bers – winding down their UK involvement – Ovo/Octopus and Big Oil. Where is our energy going to come from in the future? And who will be selling it to us?

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