Powering the UK. Empowering UK growth, jobs and energy users through continued investment Executive summary

Transcription

1 Powering the UK Empowering UK growth, jobs and energy users through continued investment Executive summary 2015

2 Foreword It s always there at the touch of a switch. But this ease disguises the huge scale of the contribution Britain s energy industry makes to our national life and the innovation and investment which keeps light and power flowing to millions of homes and businesses all over Britain. The industry provides life-long, quality employment for more than 1 in 50 people in the UK and is committed to the development of the next generation of energy leaders. At a time when some industries have contracted and others struggled to cement the economic recovery, the many and diverse members of Energy UK continue to work the length and breadth of the country, providing jobs in the North, South, East and West. Our members also continue to underpin massive national infrastructure programmes, investing 15.1b in 2014 alone. And they pay their way in tax, rates and wages, contributing 6b to the Exchequer last year. Energy UK is the voice of the whole industry, speaking up for the broad spread of companies we represent from smaller generators to the major companies, from household names to emerging suppliers. It is vital for our future, and the future of our children, to use that voice to work with policymakers and regulators to tackle the challenges we face. Even our politics are changing, with a distinctly different House of Commons returned after this year s General Election. The country is at a cross-roads. Britain cannot duck the need to reform in this, our collective and individual response to the outcome of the CMA review of the energy industry will be crucial. It will set the tone and pace of the way forward. With a focus on affordability, the Government is scrutinising all costs and developing new policies to meet environmental targets. With industry looking to commit billions of pounds of investment over the next decade, we must have a robust policy framework that will continue to support the massive investment needed. The energy sector is pledged to work constructively with all policymakers across the UK and in Europe. I firmly believe this must not be an adversarial relationship but a true partnership. There are no simple solutions. But I am sure, by pulling together, Britain s energy industry can continue investing in cleaner technology and deliver affordable power keeping people warm this and every winter while playing a pivotal role in the continuing economic recovery of the country. Lawrence Slade Chief Executive, Energy UK 32 Powering the UK 2015

3 Powering the UK: At a glance Powering the UK sets out the energy sector s contribution to the UK economy. Powering the UK shows how the energy sector creates jobs, both directly and through the supply chain. How energy is engaged in huge investment. And how energy takes its responsibilities to business, communities and individuals seriously. This report makes it clear that energy is a large and consistent contributor to the UK. In 2014, energy firms contributed 83b in GVA to the UK economy, equal to about... GDP 5 % This activity supports 619,000 jobs across the country Equivalent to 1 in every 48 jobs in the UK. In addition, the energy sector contributed around 6.0b... in taxes to the UK Exchequer. The sector needs to decarbonise whilst maintaining secure and affordable supplies of energy. This transition involves a set of complex choices. Implementation of EMR appears to have provided some regulatory stability. However, recent policy changes have eroded some of this progress. Choices around our generation mix today and over time will require both sustained investment and a focus on innovation. Record number of firms serving the domestic market points to the investment the sector has made to increase choice for consumers. In 2014, the sector invested a record 15.1b in infrastructure. an amount equivalent to 560 for every household in the UK. Firms are also investing in their workforce helping to create greater choice for people considering pursuing a career in energy. Powering the UK

4 Executive summary The importance of the energy sector in driving the growth and prosperity of the UK economy can often be underestimated. The work of energy firms to generate, transport and supply energy is not only a key enabler of the activities of all homes and businesses across the country but also creates significant economic value in its own right. In 2014, energy firms directly contributed 23 billion to the UK economy in terms of gross value added (GVA) and an additional 60 billion of economic value generated elsewhere in the economy. This means that the sector which ranks as one of the most productive in the economy contributed a total of 83 billion in GVA in 2014, which is equal to about 5% of total UK gross domestic product (GDP). This activity supports a large number of jobs across all regions of the country. In 2014, the sector supported around 619,000 jobs within energy firms and across the supply chain, which means that 1 in every 48 jobs in the UK was related to the energy sector. The energy sector also makes a significant contribution to the UK Exchequer. We estimate that the sector contributed around 6 billion in direct and indirect taxes in 2014, as well as substantial sums paid to local authorities through property rates. While energy firms continue to make a significant contribution to the UK economy, it is clear that the sector is in a period of transition. Over the recent past, we have seen the emergence of a range of new and disruptive trends for example, in terms of energy policy and technology that have challenged conventional business models within the sector. In this report, we set out some of the ways in which the sector is adapting and innovating in response. Perhaps the most significant of these trends is the need to decarbonise the energy sector in line with the UK s greenhouse gas (GHG) reduction targets. In delivering this objective alongside the other pillars of UK energy policy, maintaining secure and affordable supplies of energy the energy sector faces a range of choices around the precise timing and pathway of the transition. These choices are not straightforward, particularly given the existence of tensions between different policy objectives. For example, gas generation offers a relatively low-cost and secure means of generating electricity, but the emissions generated during the combustion of the fuel will mean that gas plants will increasingly have to run as backup to low-carbon sources if the UK is to meet its GHG targets. Low-carbon generation such as renewable energy and nuclear provide options for reducing the carbon intensity of the generation mix but currently rely on some form of support, which puts pressure on energy prices. What is clear is that the choices that need to be made around our generation mix both for today and over time are complex and will require both sustained investment and a focus on innovation and research and development (R&D). What is also clear is that the energy sector is rising to this challenge, both in terms of the level of investment being made and the range of technologies being developed and deployed. In 2014, the sector invested 15.1 billion in new generation, network and supply infrastructure. This means that energy firms invested an amount equivalent to 560 for every household in the UK, which represents a record level of energy sector investment. Moreover, a reexamination of the latest investment data for 2013 suggests that investment was higher than previously thought. Rather than the plateauing evident at the time of Powering the UK 2014, what we are seeing is a level of capital investment that has continued growing year-on-year. 4 Powering the UK 2015

5 Whether investment continues to increase further towards a pathway consistent with meeting our energy objectives will depend to a large extent on the stability of the regulatory and policy landscape. In 2014, we saw the first round of allocation for both the Contract for Difference and the Capacity Market mechanism, which are the key pillars of the Government s Electricity Market Reform (EMR) framework to incentivise investment in low-carbon and conventional generation capacity. These policies were designed to allow a greater role for the market in setting the energy mix and to create greater choice and certainty for energy firms and investors. In Powering the UK 2014, we posed the question in the context of EMR of whether the Government would hold its nerve and allow markets to adjust, learn and deliver in order to create the conditions for investor certainty. The implementation of EMR does appear to have provided a measure of regulatory stability, and the first round of auctions has suggested that EMR policies can help to deliver investment at a relatively low cost to consumers. However, recent government actions and proposals to adjust the rules for a range of low-carbon policies have brought the issue of policy certainty back into sharp focus. Given the importance to investors of a stable and predictable policy framework, these changes could serve to erode some of the progress made through EMR and potentially undermine efforts to transform the sector. The ability of energy firms to continue the current transformation in the way that energy is generated and consumed will depend in part on the sector s ability to attract and retain a highly skilled workforce. In Powering the UK 2014, we presented the results of a survey that suggested that firms faced a range of recruitment challenges associated with the evolving requirements of the industry and that this was exacerbated by the expected number of retirees across the sector in the near future. It is clear that firms are taking action on a number of fronts to address this issue. For example, through initiatives such as mentoring schemes, apprenticeships and professional networks, firms are helping to create greater choice for people considering pursuing a career in energy. Furthermore, the focus of many of these activities on groups that have typically been underrepresented within energy firms should help to ensure that the sector draws on the best talents from across society to create a workforce that is better equipped to tackle the challenges ahead. Over the past year, we have also seen clear signs of the investment that energy firms have made to increase the level of choice for consumers with regard to purchasing, managing and generating energy. New entrants to the industry mean that customers have a growing number of options as to where they purchase their electricity and gas, and we are also seeing the emergence of more bespoke energy tariffs designed to appeal to specific segments of consumers. We would expect this trend to continue over the coming years as the rollout of smart meters gathers pace and if, as expected, the constraints imposed by the regulator around the number of tariffs suppliers are able to offer are eased as a result of the investigation by the CMA. Powering the UK

6 Authors Tony Ward Partner Head of Power & Utilities UK&I Ernst & Young LLP UK Tel: tward1@uk.ey.com Jamie Torrens Assistant Director Economic Advisory Ernst & Young LLP UK Tel: jtorrens@uk.ey.com Anthony Tricot Senior Executive Economic Advisory Ernst & Young LLP UK Tel: atricot@uk.ey.com Marketing enquiries: Kevin Corcoran Marketing Associate Director - Energy, EY kcorcoran@uk.ey.com Media enquiries Konstantinos Makrygiannis Media Relations Manager, EY kmakrygiannis@uk.ey.com Energy UK commissioned EY to update the previous Powering the UK reports published in 2011, 2012, 2013 and 2014, incorporating the most recently published data and covering the sector s total economic, investment and employment contribution to the UK. In this report, unless otherwise stated, the term energy sector is used to cover the power and gas sector as defined in previous versions of the report, including: In the electricity sector generation, transmission, distribution and supply (retail) In the gas sector transmission, distribution, storage and supply (i.e., the downstream activities) Other associated services e.g., energy services, such as central heating, air conditioning and steam It does not include the upstream oil and gas or mining sectors (i.e., exploration, extraction and processing). The report examines the energy sector by comparing it with other sectors in the UK economy and by looking at how the contribution of the sector to the economy has changed over time. The data used in the report is taken from publicly available sources. Additional information: EY Energy Hub ey.com/uk/energy EY Power & Utilities ey.com/uk/powerandutilities Follow us on 6 Powering the UK 2015

7 About Energy UK Energy UK is the trade association for the UK energy industry representing over 80 suppliers and generators of electricity and gas for domestic and business consumers. Our members represent the truly diverse nature of the UK s energy industry - from the UK s largest energy firms to new, growing suppliers and generators, now making up over half of our membership. Our members turn renewable energy sources as well as nuclear, gas and coal into electricity for over 26 million homes and every business in Britain. Over 619,000 people in every corner of the country rely on the sector for their jobs with many of our members providing lifelong employment as well as quality apprenticeships and training for those starting their careers. Generation Our generation policy team covers issues across the field of electricity generation and gas markets including securing the role of thermal plant for the future, maintaining the position of renewable energy in our energy mix and ensuring we can do all this while protecting our environment and working within the planning regimes across the various administrations of the UK. Retail Covering all aspects of electricity and gas supply, the retail team leads on our work to develop the policy framework to ensure suppliers can provide the best service to the market, enhance customerbusiness relationships, secure simplicity and value for consumers and promote innovation and initiative in the retail space. Economics and Strategy Providing oversight of all high-level policy and producing analysis of a number of topical and recurring issues, the economics and strategy team brings all our policy work together to offer a strategic view of the direction of the industry and how it can overcome the challenges ahead as well as looking at the numbers which make the industry tick. Communications Communicating our messages to the media, government and stakeholders comes in a variety of different ways including briefings with journalists, press releases and campaigns on issues ranging from renewable energy to energy efficiency campaigns. Working with government and political stakeholders we provide a forum for the industry to provide its insight and information to policymakers in formulating policy. Events and membership In addition to the plethora of in-depth policy work Energy UK undertakes on behalf of its members, the organisation also provides a wealth of information, briefing material and other resources to firms. This ranges from issue-specific briefings, newsletters and activity updates to member-focussed briefing events and public conferences. Contact us

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