Disruption in the power sector: challenging the Big 6?

At this week’s energy seminar Ioanna Ketsopoulou of the UK Energy Research Centre discussed their recent study exploring the strategies of the large vertically integrated energy companies in the UK power system (the Big 6). She has very kindly provided us with this blog post to cover the same topic. You may also download her slides as a PDF.

A changing landscape

The power sector has a key role to play in the UK’s energy transformation. While significant change has already occurred further progress is needed, particularly if the UK is to transition to a net zero economy. While the UK’s ‘Big 6’ utility companies, i.e. EDF, RWE npower, E.On, Scottish Power, Scottish and Southern Energy (SSE) and Centrica, are still the key players in the sector, their market share has been decreasing due to the rise of a number of newer, more agile suppliers that have been entering the market. At the global level, investment in low carbon power capacity has been increasing and technology costs have been falling.

It’s been argued that the required level of change can present a challenge and can be fundamentally disruptive to the traditional vertically-integrated utility business model. As part of the wider UK Energy Research Centre ‘Disruption and Continuity in Energy Systems’ project we’ve explored the extend to which the Big 6 have adapted their strategies in face of disruption and whether they are compatible with the UK’s long term climate change mitigation goals. The focus is on the period from 2008, when the Climate Change Act was adopted.

Responding to challenges

Three key trends have been identified as potential major disruptors to the UK power system; decarbonisation, digitalisation and decentralisation. While they’ve all undergone significant change, each of the Big 6 has responded differently to these pressures.

With the exception of EDF we see a decline in overall generation capacity owned by the Big 6. Some, like SSE and Scottish Power, have shifted towards large scale renewables. EDF has focused on nuclear. Centrica has restructured its strategy towards its retail operations and significantly reduced its fossil fuels portfolio. EON has also divested away from its fossil fuel assets. RWE currently owns the highest level of fossil fuel capacity out of the Big 6.

Their response towards decentralisation is also varied. While some remain geared towards large centralised plant, others, like Centrica and RWE Npower, have undergone significant restructuring to gradually become more aligned with a decentralised future. Similarly, the response to digitalisation is mixed. Centrica in particular appears to have revised its retail strategy towards smart energy products and services. For others, while digitalisation is recognised as a key trend, their level of commitment and investment remains unclear.

Looking forward

It’s clear that in the period from 2008 all of the Big 6 companies have substantially adjusted their strategies. This has been in response to various landscape pressures, both in the UK and internationally. Examples of such pressures include changing UK policy, the EU Large Combustion Plan directive, falling costs of low carbon technologies, the rise of alternative suppliers, as well as unexpected global events like the Fukushima nuclear accident of 2011 that greatly affected policy at the European level.

However there has been significant differentiation between the Big 6’s responses to those pressures, which points towards different levels of disruption of their traditional business model. While they have all shown a degree of flexibility in the face of disruption it remains to be seen whether they will continue to adapt or whether they’ll be overtaken by new entrants.

Research background

This research is part of the UK Energy Research Centre ‘Disruption and Continuity in Energy Systems’ project.  The project’s final report ‘Disrupting the UK energy system: causes, impacts and policy implications’ will be launched on the 19th June in central London. You can sign up to attend the launch here.

Ioanna Ketsopoulou

Ioanna has been working in the low carbon sector for almost a decade. She has a background in engineering, holding degrees in civil engineering and sustainable building technology. She initially worked in the built environment sector and in consultancy, focusing on low carbon buildings.

She joined the UK Energy Research Centre in 2012 and currently works as a researcher, as well as the Centre’s coordinator. Her research focuses on analysing the implications of distinct future pathways for the UK energy system and identifying the synergies and trade-offs between different choices and options.

Recent research includes the implications of different futures for national energy security, the effects of potential disruptive or continuity based changes on the UK energy system and the implications of the transition to a low carbon power system for incumbent utility companies.

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