Powering the UK 2013
Empowering UK growth, jobs and energy
users through continued investment
November 2013
Foreword
Powering the UK sets out the energy sector’s contribution to
the UK economy. Unlike many other industries, energy...
Contents
Executive summary

1

01

The sector’s contribution to the UK economy

2

02

Creating jobs and empowering the UK...
Executive summary
The energy sector continues to play a vital role in the UK
economy. In 2012, it provided £24b in direct ...
The sector’s contribution to the
UK economy

Highlights:
►► The energy sector is a large consistent contributor to UK
GDP....
The sector’s contribution to the UK economy

Chart 2: Indirect to direct GVA multiplier across selected sectors
4.00

Indi...
The sector’s contribution to the UK economy

Sectoral productivity

Large tax contribution to the exchequer

The energy se...
Creating jobs and empowering the UK
A stable employer supporting 1 in 45 jobs across the UK

►► Direct employment within t...
Creating jobs and empowering the UK

Indirect impact
The indirect economic impact of activity in the energy sector also
su...
Creating jobs and empowering the UK

Supporting the regions hit the hardest
by the recession
Unlike other sectors, such as...
Creating jobs and empowering the UK

An investor in skills, training and a new
generation of employees
The energy sector r...
Creating jobs and empowering the UK

Chart 9: Age profile of the workforce in 2013, GB electricity distribution companies....
Creating jobs and empowering the UK

Graduate trainee schemes
Most large companies in the energy sector have formal
gradua...
Investing in future growth

Investment to secure the UK’s energy supplies

Highlights:
►► In 2012, private sector investme...
Investing in future growth

These projects and others combine to represent a level of
investment equivalent to build 20 Ol...
Investing in future growth

How does the UK fare relative to other countries as an investment destination?
According to th...
Investing in future growth

Chart 12: UK renewable investment and jobs from January 2010 to April 2013, by region

14,000
...
Investing in future growth

Networks
A significant level of investment in the energy network is required
across the countr...
Investing in future growth

Investments in conventional
energy sources
Gas generation
Compared with the rate of investment...
Investing in future growth

A nuclear renaissance? New nuclear
generation and its economic impact
EDF Energy is progressin...
Investing in future growth

Changes in UK energy prices compared with other markets and the
link to investment

Constituen...
Investing in future growth

Changes in UK energy prices compared with other markets and the link
to investment
Compared wi...
Investing in future growth

Residential end-user gas prices across Europe, inclusive of taxes, in 2011 in €per kilowatt-ho...
Investing in future growth

Scottish independence referendum
On 18 September 2014, Scotland will hold a referendum
on whet...
Empowering energy consumers

Highlights:
►► Average energy usage reduced by 12% 20 between 2007
to 2012 after accounting f...
Empowering energy consumers

Lighting
Lighting accounts for 5% of overall UK electricity demand and up
to 20% of domestic ...
Empowering energy consumers

Chart 15: Historical and forecast changes in the make-up of light-bulb types in the UK; and l...
Empowering energy consumers

Why the fifth fuel is as important as conventional energy for supply businesses
Energy effici...
Empowering energy consumers

Similar but less material benefits could also be achieved through
low or no-cost improvements...
Empowering energy consumers

Although VSD designs vary, they all offer the same basic
functionality. The motor speed can b...
Empowering energy consumers

Contribution of solar PV to the UK economy
According to the Renewable Energy Association (REA...
Glossary
DECC

The UK Government’s Department for Energy and Climate Change.
www.decc.gov.uk

Direct impact

Value added d...
Glossary

ONS

The Office for National Statistics is responsible for the production of a wide range of economic
and social...
Authors
Tony Ward
Partner, Head of
Power  Utilities UKI, EY
T
 : + 44 121 535 2921
E: tward1@uk.ey.com

Frances Warburton
...
About
Energy UK
Energy UK is the trade association for the gas and electricity sector. With
over 70 members, we represent ...
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory ...
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E&Y - Powering the UK 2013: Empowering UK growth, jobs and energy users through continued investment - November 2013

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E&Y - Powering the UK 2013: Empowering UK growth, jobs and energy users through continued investment - November 2013

The energy sector continues to play a vital role in the UK economy. In 2012, it provided £24b in direct economic contribution, an increase of £3b compared with 2011. It also contributed an additional £78b indirectly through the supply chain activities it supports, providing total gross value added of £102b. Moreover, the sector continues to be a large and consistent employer, directly employing 125,000 people in 2012 compared with 90,000 in 2008, a boost during an extended
recession. It additionally supported an estimated 539,000 jobs through supply chain activities for a total of 664,000, or 1 in 45.
UK jobs in 2012. This recent performance in terms of economic contribution and jobs growth highlights the critical role that the sector continues to play in the UK’s economic recovery.
Unlike other prominent sectors, such as financial services, the energy sector continues to create new jobs across the country, many of which cover a wide range of engineering and technical
skills. In addition, 86% of energy sector job growth between 2008 and 2013 has been outside London and Southern and Eastern England, compared with 53% for other sectors.
The energy sector has maintained high levels of investment.
Momentum from previous years has carried the industry forward, delivering new assets for the UK at a scale not seen for decades. Private sector investment in 2012 was £11.6b, which is higher than private sector investment in transport or public investment in health or education. Renewable-energy investment accounted for 31% of the total. There is also a pipeline of projects ready to build enough additional conventional power stations to replace ageing power stations and to power 25 to 30 million
homes (27 gigawatts) over the next decade. Many of these projects are awaiting implementation of Government policy decisions, such as the Electricity Market Reform packages, before committing to construction.
Despite the uncertainties, the sector is delivering a quiet energy revolution through the growth in lower-carbon generation and an increased focus on efficiency and technology at the consumer level. Thus the skills and workforce makeup it requires is also changing. As the industry’s existing workforce matures, the sector is investing in the future generation of engineers and operators, providing exciting and rewarding opportunities to graduate trainees and apprentices alike. Annual
apprentice enrolment increased from 970 to 1,430 between 2010 and 2011.
2012 was potentially an inflexion year for the energy sector. Growing awareness of and public debate around, major energy issues such as taxes and prices, as well as the role of and continued support for renewables, has intensified. Coupled with new issues such as the emergence of shale gas, the
progress being made in novel technologies and the decline i

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E&Y - Powering the UK 2013: Empowering UK growth, jobs and energy users through continued investment - November 2013

  1. 1. Powering the UK 2013 Empowering UK growth, jobs and energy users through continued investment November 2013
  2. 2. Foreword Powering the UK sets out the energy sector’s contribution to the UK economy. Unlike many other industries, energy is not concentrated in the South East but spread across all regions, supporting parts of the country hardest hit by recession. 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. Highlights of the year include how the energy sector: ►► Contributed £102b of economic value to the economy through direct activities and the supply chain, making energy one of the biggest industrial contributors ►► Established a major programme to improve the skills of its staff and doubled the number of new apprentices to over 1400 a year ►► Invested £11.6b, or around 10% of the total UK investment in 2012 — the equivalent to building 20 Olympic stadiums, to secure power and gas supplies. This is more than private sector investment in transport or public investment in health or education ►► Boosted investment in renewables with most spent in Scotland ►► Paid £3b in tax with more on business rates, the climate change levy, the renewable obligation and the carbon price floor However, there is still uncertainty about energy policy. This puts on hold the majority of conventional Combined Cycle Gas Turbine Generators (CCGT) required for base load and to back up renewables. Greater certainty in legislation and regulation is clearly essential. The economic climate is still difficult with households and businesses increasingly concerned about rising prices. Energy costs are driven by a mix of world energy prices, investment to meet our climate change commitments and other policy and network charges that flow through on to the bill. UK electricity and gas prices remain lower than average in other European countries but affordability is now at the top of most peoples’ agenda. Policy makers — and the industry — must take that into account in everything we do. Today, the industry is urgently seeking an honest and open debate on energy. The debate will improve decision making, establish the long-term certainty needed by investors and help public understanding of this complex and complicated issue. Powering the UK is a contribution to that debate. Angela Knight, CBE Chief Executive
  3. 3. Contents Executive summary 1 01 The sector’s contribution to the UK economy 2 02 Creating jobs and empowering the UK 5 03 Investing in future growth 11 04 Empowering energy consumers 22 Glossary29 Sources30
  4. 4. Executive summary The energy sector continues to play a vital role in the UK economy. In 2012, it provided £24b in direct economic contribution, an increase of £3b compared with 2011. It also contributed an additional £78b indirectly through the supply chain activities it supports, providing total gross value added of £102b. Moreover, the sector continues to be a large and consistent employer, directly employing 125,000 people in 2012 compared with 90,000 in 2008, a boost during an extended recession. It additionally supported an estimated 539,000 jobs through supply chain activities for a total of 664,000, or 1 in 45. UK jobs in 2012. This recent performance in terms of economic contribution and jobs growth highlights the critical role that the sector continues to play in the UK’s economic recovery. Unlike other prominent sectors, such as financial services, the energy sector continues to create new jobs across the country, many of which cover a wide range of engineering and technical skills. In addition, 86% of energy sector job growth between 2008 and 2013 has been outside London and Southern and Eastern England, compared with 53% for other sectors. The energy sector has maintained high levels of investment. Momentum from previous years has carried the industry forward, delivering new assets for the UK at a scale not seen for decades. Private sector investment in 2012 was £11.6b, which is higher than private sector investment in transport or public investment in health or education. Renewable-energy investment accounted for 31% of the total. There is also a pipeline of projects ready to build enough additional conventional power stations to replace ageing power stations and to power 25 to 30 million homes (27 gigawatts) over the next decade. Many of these projects are awaiting implementation of Government policy decisions, such as the Electricity Market Reform packages, before committing to construction. Despite the uncertainties, the sector is delivering a quiet energy revolution through the growth in lower-carbon generation and an increased focus on efficiency and technology at the consumer level. Thus the skills and workforce makeup it requires is also changing. As the industry’s existing workforce matures, the sector is investing in the future generation of In 2012, the energy sector contributed £102b to the UK economy engineers and operators, providing exciting and rewarding opportunities to graduate trainees and apprentices alike. Annual apprentice enrolment increased from 970 to 1,430 between 2010 and 2011. 2012 was potentially an inflexion year for the energy sector. Growing awareness of and public debate around, major energy issues such as taxes and prices, as well as the role of and continued support for renewables, has intensified. Coupled with new issues such as the emergence of shale gas, the progress being made in novel technologies and the decline in live conventional energy capital projects progressing to the first stages of construction, this suggests that the investment certainties that have underpinned the momentum in the market are changing, and although the overarching policy objectives of the Government are clear, the level and timing of future investments are far from certain. Households and businesses are beginning to change their consumption patterns saving increasing amounts of energy. Domestic energy use fell by 12% between 2007 and 2012 (after accounting for temperature differences). This was due, in part, to energy efficiency investments and also to consumers taking greater control over their usage, including low-energy lighting and industrial energy-saving technologies. In addition, more than 250,000 households and businesses have cut their energy bills by producing their own electricity, installing solar panels or wind turbines. The energy system we have today is the result of many bold decisions made over the last generation and more. By their very nature, the capitally intensive parts of the UK’s energy system cannot be reshaped as quickly as the priorities of either the markets and users of energy. However, that is not a reason for inaction or decision making based on short-term expediency. The need today is to remain focussed on 2020 and beyond and to continue to make bold and wise investment and policy choices on behalf of the future generation of energy users and the people who will commit their working lives to delivering that energy. Last year the sector supported a total 664,000 jobs — for the period 2008 to 2013 86% of sector job growth of has been outside London, southern and eastern England 1 Powering the UK 2013 Households are changing consumption patterns, with domestic energy consumption reducing by between 2007 to 2012 12%
  5. 5. The sector’s contribution to the UK economy Highlights: ►► The energy sector is a large consistent contributor to UK GDP. The sector provided £24b in direct contribution to the UK economy in 2012, an increase from £21b in 2011. ►► The energy sector contributed an additional £78b indirectly through its supply chain activities for a total economic value added £102b. ►► The energy sector paid £3b in taxes to the Exchequer, 40% of which was in the form of corporation tax payments. 1 A large, consistent contributor to the UK economy Direct impact The energy sector is composed of many distinct parts, each of which add value and contribute directly to UK GDP. In 2012, the contribution as measured by gross value added 1 or GVA of the organisations operating in the energy sector was an estimated £23.8b, an increase of £3.1b compared with 2011. Chart 1: Energy sector contribution to the UK economy (GDP) in 2012 120 GVA impact £bn 100 80 60 40 20 Direct Total Indirect Indirect Total Direct Source: EY analysis, ONS data 1 The gross value added (GVA) is the difference between the value of the goods and services produced and the cost of the inputs such as raw materials and energy consumed, as well as the goods and services purchased as intermediate inputs. The GVA generated by all sectors of an economy adds up (with some adjustments) to the country’s gross domestic product (GDP). Powering the UK 2013 2
  6. 6. The sector’s contribution to the UK economy Chart 2: Indirect to direct GVA multiplier across selected sectors 4.00 Indirect to direct GVA multiplier 3.50 3.00 2.50 2.00 1.50 1.00 0.50 Electricity, Gas; distribution of gaseous fuels through transmission and distribution mains; steam and air conditioning supply Air transport services Land transport services Telecommunications and transport services services via pipelines, excluding rail transport Human health services Education services Source: EY analysis, ONS data Indirect impact The energy sector is dependent on many other sectors of the UK economy for its supply chain. For example, it purchases intermediate fuel inputs (e.g., gas and biomass) on a daily basis. It also purchases, on a longer-term basis, capital goods and services such as construction services for new infrastructure and manufactured industrial goods for use in energy networks. As a result of these activities it adds further value indirectly across the rest of the UK economy. In 2012, the indirect contribution of the energy sector is estimated at £78.3b, up from £68.1b in 2011. 2 The energy sector has a larger and positive impact on its supply chain activities compared with other capital-intensive/infrastructure sectors. For every £1 of value added in the energy sector, roughly £3 is created in other areas of the economy, including key areas such as construction and manufactured goods, as well as basic fuel inputs. The ratio of indirect to direct value added, is referred to as ‘the indirect to direct GVA multiplier’. This multiplier is £3 for the energy sector whilst in many other sectors it is approximately £1–£2. A higher GVA multiplier means that, controlling for size (as measured by value added); the supply chain of the energy industry adds more value to the economy than that of other sectors. In other words, it circulates a higher amount of money through its supply chain that benefits other sectors. In general, sectors with a relatively higher capital-to-labour ratio, such as the UK energy sector, tend to have higher multipliers as they tend to purchase a higher volume of goods and services from other sectors. Definition of gross value added (GVA) There are several ways to measure the value of a company, industry sector or economy. One method is to determine its size in terms or output or turnover (total sales). Another key measure is the contribution that is made, often defined as the ‘gross value added’. This is the difference between the value of the goods and services produced and the costs of the inputs, such as raw materials and energy consumed, as well as the goods and services purchased as intermediate inputs. 2 Based on latest available ONS data 3 Powering the UK 2013 The Gross Value Added (or GVA) generated by all the sectors of an economy adds up, with some adjustments (e.g., for taxes and subsidies), to that country’s gross domestic product (GDP). As such, in this publication we use the terms GVA and contribution to GDP interchangeably.
  7. 7. The sector’s contribution to the UK economy Sectoral productivity Large tax contribution to the exchequer The energy sector not only contributes around 3% of UK GDP, but it is also one of the most productive sectors in the economy, as is indicated by GVA per direct employee. As Chart 3 highlights, at £164,000 per employee, this is almost double the value added per employee in the finance and insurance sector and almost five times the contribution per employee in the wholesale and retail trading sector. In 2012 the energy sector directly contributed central Government tax revenues equal to about £3b, broken down as follows: A key reason for the productivity observed is the high level of capital investment in the energy sector compared with other sectors of the UK economy, which elevates the value added per employee. By contrast, growth in the service sector creates jobs that add less value, albeit sometimes in greater numbers of jobs. Chart 3: GVA per employee across sectors, 2012 GVA per employee in £ 180,000 160,000 140,000 120,000 100,000 80,000 60,000 ►► £1.2b in corporation tax. ►► £760m and £460m income tax and employee National Insurance contributions respectively, largely collected by the energy sector on the behalf of Her Majesty’s Royalties Customs and (HMRC). ►► £530m via employer National Insurance contributions. The corporation taxes paid by the sector were again approximately 3% of total HMRC corporation tax receipts in 2012, yielding a consistent and substantial contribution to the Exchequer. The fact that the sector is making large investments in capital construction programmes would generally be expected to reduce corporation tax paid as the tax reliefs given by HMRC reduce taxable profits. But, those capital investment projects also drive additional tax take in the form of, for example, employment taxes from the construction sector, reflecting the high proportion of the capital costs that is in practice made up of labour. Chart 4: Corporation tax receipts from the energy sector in 2012 40,000 20,000 Corporation tax, £1,200mn En W Fi at er na er gy na se se ce wa ct an ra or d ge In In fo an su rm d ra at wa nc io st e n es an er d co vic m es m un ica M tio an n uf ac tu rin Pr Co g ns an ofe tru ss d te io ct W ch na io ho ni l, s n le Tr ca cie sa an la le, nt sp c re or tivi ific ta ti ta il t nd es ra St de or ,V ag eh e icl er ep air 0 Employer National Insurance contributions, £530mn Source: ONS data Employee National Insurance contributions, £460mn Income tax (employees), £760mn Source: ONS Data In addition to these payments, the energy sector pays other contributions or levies under the EU Emissions Trading Scheme (EU-ETS), the climate change levy, Renewables Obligations, the carbon price floor and the Energy Company Obligation (ECO). The industry also pays business rates to local authorities across the UK. Powering the UK 2013 4
  8. 8. Creating jobs and empowering the UK A stable employer supporting 1 in 45 jobs across the UK ►► Direct employment within the energy sector grew from 90,000 to 125,000 between 2008 and 2012, providing an employment boost during an extended recession. In 2012, it supported an estimated additional 539,000 jobs through supply chain activities. In total, the sector supported around 1 in 45, or 664,000, UK jobs in 2012. ►► The sector is supporting regional employment growth far more than other sectors. Of energy sector job growth between 2008 and 2013, 86% has been outside London and Southern and Eastern England, compared with 53% for other sectors. ►► The sector has stepped up its recruitment and investment in the next generation of trainees and apprentices who are joining the industry to replace the increasing number of retirees, but also to deliver to consumers the emerging range of new technologies such as smart meters. Between 2010-11, annual apprentice recruitment increased from 970 to 1,430. 3 A stable employer supporting 1 in 45 jobs in the UK Direct impact The energy sector is a major employer in the UK. In 2012, the sector employed an estimated 125,000 people directly, which has increased from 90,000 in 2008. This increase in employment over a five-year period has occurred against a backdrop of recession and a prolonged delay in economic recovery. Chart 5: Employment in the energy sector in 2012 700 Jobs Impact (000's) Highlights: 2 600 500 400 300 200 100 Direct Total Indirect Indirect Total Direct Source: ONS data, EY analysis 3 “Sector Skills Insights: Energy,” Evidence Report 51, UK Commission for Employment and Skills, www.ukces.org.uk/assets/ukces/docs/publications/ evidence-report-51-energy.pdf, July 2012. 5 Powering the UK 2013
  9. 9. Creating jobs and empowering the UK Indirect impact The indirect economic impact of activity in the energy sector also supports additional jobs in those parts of the market that supply and support the industry. This is because the extra demand for their goods and services generated by the energy sector requires additional workers. This effect is estimated at 539,000 jobs. Together with the jobs created for those directly employed in the energy sector, the total employment supported is 664,000 jobs, equivalent to 1 in 45 jobs in the UK. 4 These indirect jobs are created across a broad range of sectors. However, a substantial proportion is concentrated in a number of key sectors, including employment services, construction, retail and employment-related services (as illustrated below). Chart 6: Indirect jobs supported in key sectors in 2012 60,000 Indirect Jobs Supported 50,000 40,000 30,000 20,000 10,000 0 Employment services Wholesale, retail trade, vehicle repair Electrical equipment Fabricated metal products Specialised Architectural, engineering, construction works technical testing and analysis services Source: ONS data, EY analysis 4 Based on 29.7m total UK jobs. “Labour Market Statistics, July 2013,”ONS, www.ons.gov.uk/ons/rel/lms/labour-market-statistics/july-2013/index. html. 17 July 2013. Powering the UK 2013 6
  10. 10. Creating jobs and empowering the UK Supporting the regions hit the hardest by the recession Unlike other sectors, such as financial services, that are concentrated in London and the South East, the energy sector is relatively spread out across all regions. Between 2008 and 2013, direct energy sector employment has grown by around 30%. Of this growth, 86% has been outside of London and Southern and Eastern England. In the same period across other sectors, job growth as shown in Chart 8 has been higher in London and Southern and Eastern England (290,000 jobs) than other regions for example, Northern England (4,000 jobs) and the Midlands (12,000 jobs). Chart 7: Energy sector net job growth, 2008–13 Highest Scotland, 6,000 Lowest Northern England, 10,000 Midlands, 3,000 Wales, 5,000 London, Southern and Eastern England, 4,000 Source: ONS data; totals may not sum due to rounding. ONS recorded Source: ONS data Totals may not sum due to rounding. no change in jobs in Norther Ireland (to the nearest thousand) ONS recorded no change in jobs in Northern Ireland (to the nearest thousand) 7 Powering the UK 2013
  11. 11. Creating jobs and empowering the UK An investor in skills, training and a new generation of employees The energy sector recruited heavily in the 1970s and 1980s as it built new nuclear and coal-fired power stations and supported the shift to North Sea gas. A significant number of staff are therefore expected to retire over the next 10 years, and need to be replaced. The energy sector has traditionally been a secure employer, reflecting the ever-present need for its assets and services. As a result, many thousands of its key skilled employees have committed their entire careers to the industry. A consequence of this commitment and longevity in the industry is that significant numbers of experienced staff now in senior or vital roles will be retiring in the coming decade. This is creating a need to bring in to the industry growing numbers of young engineers and skilled workers to achieve a seamless transition to a new generation. Electricity distribution network operators (DNOs) 5 illustrate many of the sector’s key challenges and opportunities. DNOs and their contractors employ 14,100 and 6,200, respectively, or a total of 20,500 people in technical, engineering and specialist roles. However, as Chart 9 (see page 9) highlights, more than half of employees are over 40 years old (up to 26% of the DNO workforce and 13% of contractors are 53 years of age or older). In addition, 47%, or 9,700, of employees and contractors are expected to retire in the next decade. Chart 8: Non-Energy Sector Net Job Growth 2008–13 Highest Scotland, 70,000 Northern Ireland 156,000 Lowest Northern England, 4,000 Midlands, 12,000 Wales, 87,000 London, Southern and Eastern England, 290,000 Source: ONS data Totals may not sum due to rounding. Source: ONS 5 DNOs are responsible for the local electricity distribution network within each region. Powering the UK 2013 8
  12. 12. Creating jobs and empowering the UK Chart 9: Age profile of the workforce in 2013, GB electricity distribution companies. 600 500 FTEs 400 300 200 100 0 65 65 64 63 62 61 60 59 58 57 56 55 54 53 52 51 50 49 48 47 46 45 44 43 42 41 40 39 38 37 36 35 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 19 18 17 Level 1 Level 2 Level 3 Level 4 Level 5 Level 6–8 Source: “RIIO-ED1 Workforce Requirements: A report to Ofgem on the workforce requirements of DNOs during RIIO-ED1 and RIIO-ED2, Phase 3 — Final Report,” National Skills Academy for Power, May 2013. This challenge also presents a significant opportunity. To maintain their current workforce levels, DNOs will need to employ 15,200 new staff, or 74% of current workforce levels, over the next decade. This is expected to cost DNOs and their contractors £290m and £75m, respectively, representing a tangible investment in employment and training. Moreover, a third of the vacancies are predicted to be filled by recruiting apprentices. 6 The same picture is to a less pronounced extent, replicated across other parts of the energy sector. The energy sector is expected to respond by recruiting and investing at much higher rates. In the remainder of this section we highlight some of the ongoing investment to ensure that the sector brings in and retains highly skilled employees. Upskilling and training On average, 89% of UK electricity, gas and water supply employers provide on-the-job training compared with an EU average of 79%. 7 This is defined as pre-arranged training that is at least partially funded by the organisation or training taking place during employees’ paid working time, but excluding apprentices and trainees for employees. British Gas Generation Green programme British Gas runs an education programme for Key Stage 1 to Key Stage 3 pupils and teachers, providing classroom resources, educational experiences and sustainable energy technologies, all for free to more than 13,000 schools across the UK. The aim is to teach children about sustainability and to inspire them to be curious about future energy challenges with a view to helping to create a generation of energy innovators. Investing in local schools, colleges to upgrade skills The energy sector has a history of investing in developing skills in local schools and colleges. These investments include safety and sustainability skills for primary and secondary schools, funding technical training programmes and scholarships at colleges and universities (see example of the British Gas Generation Green Programme). 6 “RIIO-ED1 Workforce Requirements: A report to Ofgem on the workforce requirements of DNOs during RIIO-ED1 and RIIO-ED2, Phase 3 — Final Report,” National Skills Academy for Power, www.yourfutureenergynetwork.co.uk/documents/WFR.pdf, May 2013. 7 “UK Energy Production and Utilities: Sector Skills Assessment 2012,” Evidence Report 62, UK Commission for Employment and Skills, www.ukces.org.uk/assets/ukces/docs/publications/evidence-report-62-energy.pdf, October 2012. 9 Powering the UK 2013
  13. 13. Creating jobs and empowering the UK Graduate trainee schemes Most large companies in the energy sector have formal graduate trainee schemes. These are structured learning/ development programme aimed primarily at those recently graduated from universities. The schemes in place are generally aimed at recruiting and developing new employees with technical competences. Apprenticeship schemes Apprenticeship programmes are a vital point of entry because of the specialist skills needed in the sector. Apprentices typically spend two to five years on structured programmes, after which the likelihood of finding a follow-on job with the same or another energy employer is nearly 100% (see example of the Drax power station apprentice scheme). To respond to its ageing workforce, the sector is investing in recruiting and training young people increasing numbers of apprentices. Between the financial years ending 2010–11, annual apprentice recruitment increased from 970 to 1,430. 8 This growing recruitment of apprentices is supported by employers who, working with Government across all sectors (including energy), have increased annual apprentice recruitment in the UK from 239,900 to 520,600 between 2008-09 and 2011-12. 9 However, given the number of retirements and the level of skills and experience retirees have, it will be a considerable challenge to recruit sufficient staff to replace those who will be retiring. Meeting the skills gap The workforce planning model of Energy Utility Skills monitors the skills base of around half the technical energy workforce in Great Britain. This covers energy networks, generation and energy/home services companies but excludes administrative or customer-serviceorientated roles. Its retirement projections indicate that around 27% of the technical workforce will retire by 2024; 80% of these will be at skill level 3 or above. Retirements 2013–24 Level 1 7% 12% Level 2 14% 10% Level 3 Level 4 17% Level 5 40% Level 6 Replacing retirees will require recruiting new workers with lower skill levels (1–2). However, a significant number of higher-skilled (level 3) workers will also be needed to replace retirements at this level. Drax power station apprentice scheme Required recruitment 2013–24 Drax Group Plc has been running an apprenticeship scheme at Drax Power Station for the last ten years, during which time the programme has taken on 78 apprentices. 4% 8% 0% 11% There are currently 33 apprentices in the programme, or about 4% of employees at the power station, with an annual intake of between six and eight apprentices each year. The scheme lasts for four years, with two years working towards a BTEC National certificate at college, followed by two years of skill training at Drax Power Station and completing an NVQ Level 3. Source: Drax Group plc Level 1 Level 2 Level 3 36% 41% Level 4 Level 5 Level 6 Source: Energy Utility Skills 8 “Sector Skills Insights: Energy,” Evidence Report 51, UK Commission for Employment and Skills, www.ukces.org.uk/assets/ukces/docs/publications/ evidence-report-51-energy.pdf, July 2012. 9 “Apprenticeship Programme Starts by Sector Subject Area, Level and Age,” The Data Service/Skills Funding Agency, www.thedataservice.org.uk/ Statistics/fe_data_library/Apprenticeships, June 2013. Powering the UK 2013 10
  14. 14. Investing in future growth Investment to secure the UK’s energy supplies Highlights: ►► In 2012, private sector investment in the energy sector rose to £11.6b, representing about 10% of UK capital investment in 2012, or the equivalent to building 20 Olympic stadiums. This was more than private sector investment in transport or public investment in health or education. ►► Renewable energy is an important component of energy sector investment. Between January 2010 and April 2013, £29b in renewable investments was announced, expected to support 30,000 jobs. 10 ►► Energy sector companies have proposed investing in enough additional combined cycle gas turbine (CCGT) plants and nuclear power stations to power 25– to30 million homes (27 gigawatts),11 over the next decade, but many projects are awaiting Government policy decisions before committing to construction. ►► Although electricity and gas prices have increased by 5% and 7%, respectively, over the last two years, according to the latest Ofgem Supply Market Indicators (September 2013), the increase is, in part, funding the level of investment required to replace ageing network infrastructure and thermal power plants, as well as in renewables to meet decarbonisation and renewable targets. 3 Continuing investment to secure the UK’s energy supplies The energy sector faces significant challenges over the next decade as it seeks to balance the competing objectives of providing secure supplies, meeting renewable energy and decarbonisation targets and maintaining affordability for consumers. The immediate picture looks challenging. The rate of investment amongst private companies in the energy sector averaged £8b per year over 2007–11, which accelerated to reach about £11.6b in 2012. 12 Examples of major projects completed or investment decisions made in 2012 include: ►► Completion of Phase I of the London Array project, currently the largest offshore wind farm in the world, which officially opened in June 2013. The project is jointly owned by DONG Energy (50%), E.ON (30%) and Masdar (20%) it has an installed capacity so far of 630 megawatts (MW) which about £2b. When complete, the project will be produce enough electricity (1 gigawatts) to power up to 700,000 homes. ►► Completion of the East-West Interconnector in October 2012, a 500MW sub-sea electricity cable linking Wales with the Republic of Ireland built at a cost of €500m. This is the first direct physical connection with the electricity system in the Republic of Ireland. ►► Network companies 13 have agreed binding plans with Ofgem, the energy regulator to invest up to £31.8b over the next eight years to maintain, upgrade and build new transmission and distribution networks across the country. Key projects include a new sub-sea electricity cable linking England and Wales with Scotland. 10 “Davey announces £29 billion boost to economy and makes the case for Scotland to remain in the United Kingdom,” Press Notice: 2013/050, DECC, www.gov.uk/government/news/davey-announces-29-billion-boost-to-economy-and-makes-the-case-for-scotland-to-remain-in-the-united-kingdom, 22 May 2013. 11 Data from Platts UK Power Tracker 2013, comprising 22-gigawatt combined cycle gas turbine (CCGT) and 5-gigawatt nuclear classified as proposed, approved, under construction or suspended. 12 ONS; investment includes electricity, gas and water sector investment. We have used Ofwat PR09 accounts to apportion water-related investment from power and gas. 13 Network companies are defined as gas and electricity transmission and distribution companies. 11 Powering the UK 2013
  15. 15. Investing in future growth These projects and others combine to represent a level of investment equivalent to build 20 Olympic stadiums or about 10% of all capital invested in the UK economy in 2012. Renewable energy now accounts for around a third of energy sector investment, with the remainder split roughly evenly between networks and CCGT investment. As Chart 10 highlights, private companies in the energy sector committed more to the UK economy than other major sectors, such as transport, construction and financial services As Chart 11 highlights, much of the investment over the last year has been made in renewable generation. The share of capital invested in networks has also increased as networks businesses replace ageing infrastructure and build new cables linking renewable generation offshore or in remote areas to major towns and cities. Network investment rose to about £2.8b 14 in the 2013 financial year, an increase of 34% from the previous year. Chart 10: Public and private capital investment in 2012 across major economic sectors 14 2012 Investment £bn 12 Chart 11: Composition of investment in the energy sector investment in 2012 10 8 21% 29% 6 4 12% 8% 30% Gas networks Others Sources: National Grid; Department of Energy Climate Change (DECC); developers Pr iva te: Pr iva te: ele ctr tra Pr ici iva ns ty po te: an rta dg inf tio or as na ma nd tio na sto nd ra ge co mm un Pr ica iva tio te: ns co ns tru cti on Pu bli c: de fen Pr iva ce Pu te: bli c: fin tra an ns cia po la rt nd ins .a cti vit ies Pu bli c: ed uc at ion Conventional thermal generation Electricity networks 2 0 Large scale renewable generation Source: ONS business statistics; Ofwat; Her Majesty’s Treasury (HMT) capital expenditure accrued to calendar year 2012 14 egulatory accounts for the four electricity and gas R transmission licensees Powering the UK 2013 12
  16. 16. Investing in future growth How does the UK fare relative to other countries as an investment destination? According to the latest EY Renewable energy country attractiveness index (RECAI), published in August 2013, the UK is the second-most-attractive renewable market in Europe after Germany. The UK was fourth out of 40 countries ranked on the attractiveness of their renewable-energy investment and deployment opportunities, based on selected macro, energy market and technology-specific indicators. The UK is particularly strong in offshore wind and biomass ranking first and second globally, respectively. include crucial announcements such as the proposed contracts for difference (CfD) strike prices, new borrowing powers and an additional £800m for the Green Investment Bank, as well as the Energy Bill securing its passage through to the House of Lords. However, many of these announcements were already overdue and do not go far enough in order to sustain current high levels of investors’ activity or to attract investment in the long term. Source: http://www.ey.com/UK/en/Industries/Cleantech/RenewableEnergy-Country-Attractiveness-Index According to the report, a series of Government announcements over the summer may have improved prospects and contributed to increased levels of activity in the UK renewables sector. These Investment in renewables and energy networks Renewable generation Between 2007 and 2013, the share of renewable energy within total energy sector capacity investment grew to 28%. Between the first quarters of 2010 and 2013, total installed renewable capacity has increased from 9.6 to 17.5 gigawatts (GW). This increase is equivalent to adding the capacity up to three or four large power stations, or enough power generation to meet demand from 8m homes. The growth in renewable-electricity capacity has varied by technology. Wind accounts for roughly 55% of the total, with the remainder split roughly evenly between solar, biomass energy from waste, and water (hydro, tidal and wave). Of these, the fastest-growing segment is solar, which has 50 times as much as it did in 2010. We discuss solar energy in section 4. Between January 2010 and April 2013, £29b worth of investments in renewable-energy capacity was announced, with the potential to support up to 30,000 jobs. 15 Chart 12 (see page 14) illustrates renewable-energy investment and jobs from 2010 to 2013 by region. 15 “Davey announces £29 billion boost to economy and makes the case for Scotland to remain in the United Kingdom,” Press Notice: 2013/050, DECC, www.gov.uk/government/news/davey-announces-29-billion-boost-to-economy-and-makes-the-case-for-scotland-to-remain-in-the-united-kingdom, 22 May 2013. 13 Powering the UK 2013
  17. 17. Investing in future growth Chart 12: UK renewable investment and jobs from January 2010 to April 2013, by region 14,000 10,000 9,000 12,000 Recorded investment in £m 10,000 7,000 6,000 8,000 5,000 6,000 4,000 3,000 4,000 Estimated no of jobs suported 8,000 2,000 2,000 1,000 - Recorded investment W es tM id la nd s Ea st So ut h Lo nd on N Ire ort la her nd n Ea st M id la nd s No rt h W es t Ea st No rt h W al es W es t So ut h Yo rk sh ire Ea st Sc ot la nd - Jobs supported Source: “Renewable electricity capacity and generation 2013,” DECC The impact of renewables on electricity system operation in 2020 and beyond The increased investment and deployment of renewables is expected to fundamentally transform the electricity system by 2020, from predictable generation and demand to more variable generation and less predictable demand (due to embedded distributed generation and heat pumps). By 2020, approximately 28% (26.7GW) of the transmissionconnected generation capacity in GB will consist of wind and other renewables. The increased deployment will play an important role in decarbonising energy supply in GB. Assuming an average 30% load factor for wind, approximately 20% (70 terawatts-hours) of average GB demand (320 terawattshours) will be met by wind, compared with 3% in 2011. The increase in intermittent renewable generation creates a greater envelope of uncertainty for balancing the electricity system across all timescales and increases the challenge of ensuring that generation is sufficient to meet demand. It also implies a greater need for additional flexible reserve capacity for when the wind is not blowing. Potential mitigants include the capacity market, part of the Government’s Electricity Market Reform, which is intended to ensure adequate capacity by providing payments to plants to be available during times of system stress. However, intermittency could also provide room for innovation and greater deployment of smart-meter-related technologies and demand-side response, as well as improved forecasting accuracy of wind output, limiting the need for large reserves. Source: National Grid Operating the Electricity Transmission Networks in 2020 — Update June 2011 Powering the UK 2013 14
  18. 18. Investing in future growth Networks A significant level of investment in the energy network is required across the country to replace and maintain existing ageing and obsolescent infrastructure, to improve energy security (through more interconnection) and to support the increased levels of projected renewable energy deployment. Network investment rose to over £2.8b 16 in the 2013 financial year, an increase of 34% from the previous year. Part of this investment is required to provide new connections to the electricity grid for locations, often remote, which produce much of the UK’s renewable power. Investment is also required to increase the capacity of the existing long-distance transmission grid to transport power to oftendistant population centres. Similar upgrades will be required for all types of power plant as the system develops. Transmission and distribution costs are regulated and are ‘passed through’ directly to consumers as part of the energy bill sent by the energy company to households and to business. New investment in Britain’s energy networks: the next eight years Following agreement on network price controls with the energy regulator Ofgem, gas distribution and transmission companies have committed to substantial increases in investment in the current regulatory period from 2013–21. The eight low-pressure gas distribution network (GDN) companies covering GB will invest £8.7b to upgrade their infrastructure over an eight-year period (from 2013–21). Scottish Power and SSE have committed to invest £7.6b in Scotland’s electricity transmission networks over the next eight years. Key projects include a potential new sub-sea link from Scotland’s islands to the mainland. The funding is expected to create over 1,500 jobs. South of the border, National Grid will spend £15.5b on its electricity and gas transmission networks. Key projects include building a new sub-sea electricity cable linking England/Wales and Scotland. The funding is expected to create up to 7,000 jobs, primarily in the construction supply chain. Electricity DNO companies in England and Wales have not yet finalised their plans for the 2015–23 regulatory period. However, they are expected to maintain if not increase, current levels of investment which were £13b over five years (from 2010–15). This would imply at least £21b over the eight-year period to maintain and upgrade their networks. 16 Regulatory accounts for the four electricity and gas transmission licensees 15 Powering the UK 2013
  19. 19. Investing in future growth Investments in conventional energy sources Gas generation Compared with the rate of investment in renewables, investment in conventional energy has slowed. The number of proposed CCGT and nuclear power plants in the pipeline is substantial.17 Howerver only 4% of this capacity is under construction. As part of the Electricity Market Reform (EMR) package (discussed below) the Government has proposed a ‘capacity market’ payment mechanism for existing and new power stations to ensure sufficient investment in reliable capacity. Successful bidders in the market will receive regular payments and, in return, must be available and generate (or reduce demand) when the system is tight, or face penalties. CCGTs are the most economic and flexible plant for providing service when it is most needed, but gas plants are increasingly un-economic to build and operate in a market where other forms of (low carbon) generation receive long-term support in the form of the Renewables Obligation or CfD payments under the proposed reforms. Until finalised, however, investors remain uncertain, meaning that the vast majority of planned gas power stations have not progressed from the drawing board.  18 As Chart 13 highlights, of the 23GW in the pipeline that has received planning permission, 25% has been suspended, whilst 71% is on hold, with owners waiting to see whether the economic and policy environment become more favourable. Chart 13: UK CCGT pipeline 4% 25% 71% Approved Suspended Under Construction Source: Plats, New Power and respective developers. Figures reflect capacity. If 26GW of additional gas generation capacity were built, as DECC estimates is required,19 a substantial number of new jobs could be created, particularly during the construction phase. These direct jobs would be supplemented by additional indirect jobs in the supply chain of the construction sector. Our high-level estimates suggest that up to 60,000 jobs could be created during the construction phase, with around 4,500 of them permanent. Though not all are ‘shovel-ready’, the construction of many CCGT plants could be started within a relatively modest time period (within one to two years). Unlocking investment in these plants could provide a timely boost to the civil engineering and construction industries alongside the wider UK economic revovery. Chart 14: Estimated impact on jobs of constructing 26GW in new CCGT capacity Region Construction Permanent jobs Direct 16,752 853 Indirect 45,788 3,655 Total 62,540 4,508 Source: EY analysis, developer-proposed recruitment numbers Nuclear generation The UK currently has 16 nuclear reactors with a total generating capacity of 10 GW generating up to a sixth of the UK’s electricity. However, most of the reactors are expected to be retired by 2023. To fill the gap, EDF Energy has proposed to build two nuclear reactors at Hinkley Point, Somerset, and an additional two reactors at Sizewell, Suffolk. EDF Energy is anticipated to make an investment decision on Hinkley C in the coming months. Other companies proposing to build new nuclear include Horizon Nuclear Power (formerly owned by RWE and E.ON but now owned by Hitachi). It plans to build two or three 1.3GW reactors at Wylfa, Anglesey, and Oldbury, Gloucestershire. Similarly, NuGen, a joint venture between Iberdrola and GDF Suez, plans to build up to 3.6GW in new nuclear capacity at Sellafield, Cumbria. Should all of these projects be developed, they would replace over half the UK’s current nuclear generating capacity. 17 The Government estimates that 26GW of gas-generating capacity will be required to secure electricity supplies. 18 This includes suspended and approved power stations. 19 “Gas Generation Strategy,” DECC, www.gov.uk/government/uploads/system/uploads/attachment_data/file/65654/7165-gas-generation-strategy. pdf, December 2012. Powering the UK 2013 16
  20. 20. Investing in future growth A nuclear renaissance? New nuclear generation and its economic impact EDF Energy is progressing with its plans to develop Hinkley Point C, the UK’s first new nuclear power station for a generation. EDF and the UK Government signed a commercial agreement in October 2013 on the key terms of a proposed investment contract for the Hinkley Point C nuclear power station setting out a strike price for the electricity generated from the plant. A final investment decision requires agreement of the full investment contract, finalising agreements with industrial partners for equity funding, and a decision from the European Commission on state aid. Construction of Hinkley Point C will represent an investment in UK infrastructure similar in scale to the construction undertaken to support the London 2012 Olympic Games. The project will generate around 25,000 jobs during construction and 900 permanent ones once the new power station goes into operation. Once built, the company estimates that Hinkley Point C will add £144m each year to the UK’s GDP, including £100m each year in the regional economy during the peak construction phase and then £40m annually during the 60 years that the plant will be operational. Recently released figures from EDF Energy report that it has agreed new contracts with over 300 UK companies supporting its plans for new, low carbon, nuclear worth in excess of £650m. A new build programme would therefore be a major boost for the UK economy. Source: EDF Energy Overall, there are substantial proposed conventional projects in the pipeline to ensure continued diversity of energy sources in the UK and with the potential in the next decade of creating further jobs and value added to the UK economy. The impact of policy Electricity Market Reform National Grid and Ofgem have recently warned of increased risk of potential power shortages, particularly in 2015/16. To comply with the EU Large Combustion Plan Directive (LCPD), a significant number of coal-and oil-fired power plants are due to close by the end of 2015. Some of these plants have already closed, and few new power plants have been largely completed or are expected to open within that period. In the midst of this tightening in supply, investors in conventional power plants have held back investing until the policy framework is more certain. EMR is the Government’s flagship policy to ensure continued and long-term investment in the power sector. It consists of four main policies: a CfD feed-in tariff scheme to provide support for low-carbon generation; a capacity market to ensure adequate capacity; a Carbon Price Support, which ensures a minimum and a stable price for carbon to ensure that both investors in both renewable-energy and conventional plants fully factor in the long-run price of carbon; and finally the Emissions Performance Standard which is a backstop to ensure future investments are in line with the Government’s decarbonisation trajectories. In July 2013, DECC announced draft strike prices that renewable investors will receive. These are broadly based on payments currently received under the Renewable Obligations scheme but with a discount as it is deemed to be more secure. EMR does signal a long-term commitment by the Government to supporting the transition to a low-carbon energy system whilst securing supply. However, the jury is still out on its likely impact on investment and a stronger commitment beyond 2020 may be necessary to secure the longer term benefits of the transition to a low carbon energy system. Electricity Market Reform in brief: The main elements of EMR are CfDs and the capacity market. CfDs are aimed at stimulating investment in low-carbon technologies — including renewables, nuclear and carbon capture and storage (CCS) — by providing predictable revenue streams that will encourage investment by reducing risks to investors and by making it easier and cheaper to secure finance. The capacity market is aimed at helping to secure the UK’s energy supply by giving power plants financial incentives to provide reliable capacity — making sure the lights stay on at times of peak demand. 17 Powering the UK 2013
  21. 21. Investing in future growth Changes in UK energy prices compared with other markets and the link to investment Constituents of annual retail electricity customer bill, as of September 2011, 2012 and 2013 Constituents of electricity bill. in £ 700 600 500 400 Gas prices have also increased by 5%, driven by an increase in wholesale energy costs, as well as VAT, network charges and cost of obligations as shown. Constituents of annual retail gas customer bill, as of September 2011, 2012 and 2013 800 Constituents of gas bill. in £ According to Ofgem’s Supply Market Indicators (SMIs), published on September 2013, electricity prices have increased over the last two years by 7%, driven primarily by a 17% increase in taxes, network charges, social and environmental obligations, as shown below. As highlighted elsewhere in this report, the energy sector is investing significantly to replace ageing electricity and gas networks and to reinforce the network to accommodate the increased investment in renewable energy, often in remote parts of the country. 700 600 500 400 300 200 100 0 300 Sep 11 Wholesale costs Customer bill 200 100 0 Sep 11 Wholesale costs Customer bill Sep 12 Sep 13 VAT and other costs Snapshot net margin Operating costs Rolling net margin Sep 12 Sep 13 VAT and other costs Snapshot net margin Operating costs Rolling net margin Source: Ofgem Supplier Index. The SMI shows trends in costs suppliers face and the bills they charge and, it is an up-to-date estimate of the annual costs per customer a representative supplier incurs for delivering electricity and gas. The SMI also provides an indicative annual net margin, which is the difference between the customers’ retail bills and the suppliers’ costs. This is presented as a ‘snapshot’ margin for the year ahead and as a rolling average that smoothes fluctuations in the ‘snapshot’ margin with the latter approach illustrating trends over time Powering the UK 2013 18
  22. 22. Investing in future growth Changes in UK energy prices compared with other markets and the link to investment Compared with other markets in Europe, residential enduser electricity prices GB electricity prices are below average (median) despite the significant amount spent in investment in recent years, which is driving the increase in network charges. Gas prices are the lowest in the sample of countries analysed by VaasaETT, whilst electricity prices are in the lowest quartile. However, this is in part due to low energy taxes paid in GB relative to other markets. Residential end-user electricity prices across Europe, (inclusive of taxes), in 2011 in € per kilowatt-hour Residential end-user electricity prices, 2011 in c€/KWh 35 30 25 20 15 10 5 Energy Distribution Energy taxes VAT Source: European Residential Energy Price Report, 2012, VaasaETT Global energy Think Tank 19 Powering the UK 2013 Av era ge Gr ee ce Fra nc e Fin lan d rit ain Gr ea tB Ita ly Lu xe mb ou rgh Ne the rla nd s Sw ed en Po rtu ga l Au str ia Ire lan d Sp ain Be lgi um Ge rm an y De nm ark 0
  23. 23. Investing in future growth Residential end-user gas prices across Europe, inclusive of taxes, in 2011 in €per kilowatt-hour Residential end-user gas prices, 2011 in c€/KWh 14 12 10 8 6 4 2 Energy Distribution Energy taxes Av era ge Gr ee ce Fra nc e rit ain Gr ea tB Ita ly Lu xe mb ou rgh Ne the rla nd s Po rtu ga l Au str ia Ire lan d Sp ain Be lgi um Ge rm an y De nm ark 0 VAT Source: “European Residential Energy Price Report,” VaasaETT global energy think tank, 2012. Powering the UK 2013 20
  24. 24. Investing in future growth Scottish independence referendum On 18 September 2014, Scotland will hold a referendum on whether to become an independent country. Scotland is an important destination for UK renewable investments, as highlighted in Chart 12, (see page 14). As such, the referendum decision has the potential to have a significant impact on overall UK energy sector investments. Impact of European policies in the UK The East-West Interconnector, a 500MW sub-sea cable connecting Ireland and Wales, became operational in October 2012, providing additional physical interconnection between the UK and neighbouring countries. Similarly, the impact of the Third Energy Package, transposed into UK law in March 2011, is increasingly shaping electricity and gas market arrangements. The Third Energy Package is a major legislative package to create an internal gas and electricity market in the EU. Key features include ownership unbundling (regulations on separation of networks from supply and production of energy); the establishment of national regulatory authorities and the creation of the Agency for the Cooperation of Energy Regulators (ACER) to coordinate work amongst regulators. Additionally, the package also sets the legal basis for enactment of a set of rules (network codes) governing gas and electricity markets across the EU. It is this package of laws that is expected to shape the GB market in the near term. 21 Powering the UK 2013 Network codes are binding common rules setting out the functioning of the single market. They cover common requirements for generators, demand connection, capacity allocation and congestion management, operational planning and scheduling, forward capacity allocation, system balancing, and frequency control and reserves. These rules are intended to remove obstacles to cross-border trading, but they are also increasingly beginning to change how electricity and gas markets operate within GB. Their implementation in GB is likely to require and accelerate the development of liquidity in the day-ahead market, leading to a robust and trusted reference price, for GB; and consideration of appropriate price zones to manage internal constraints most efficiently. In general, the changes proposed have material interactions with on-going GB reforms, being carried out by DECC and Ofgem.
  25. 25. Empowering energy consumers Highlights: ►► Average energy usage reduced by 12% 20 between 2007 to 2012 after accounting for temperature differences. This was supported by energy efficiency investments and consumers taking greater control over their usage. ►► As part of this, technology improvements have improved the energy efficiency of lighting. Electricity demand for lighting has declined by 30% over the last eight years, despite a 12% increase in the number of bulbs. ►► Businesses can cut energy usage using a variety of specialist technologies, including voltage optimisation devices and variable speed drives. ►► More than 250,000 21 households and businesses have also cut their energy bills by producing their own electricity. Installing solar panels or wind turbines has helped create jobs, whilst providing a valuable source of energy located close to demand. 4 The fifth fuel Fossil fuels, wind, solar and nuclear are expected to meet most of our future energy needs. However, reducing demand for energy is an important but often underutilised ‘fifth fuel.’ The fifth fuel can make a significant contribution to securing energy supplies (by limiting the demand for new sources), meeting renewable energy and decarbonisation targets, and easing the pressure on energy affordability for consumers. Domestic energy use fell by 12% between 2007 and 2012 (after accounting for temperature differences). A major reason for this fall is the increase in energy efficiency deployment by households. For instance, the share of homes with loft and cavity wall insulation rose from 44% to 60% between 2008 and 2011. Other drivers include energy ratings for properties, growing consumer awareness of the environment and increasingly efficient home appliances. Other regions in the UK and across Europe have experienced similar trends as the role of energy efficiency as a major resource has gained prominence. In this report we profile several technologies enabling domestic and commercial consumers to take charge of their energy consumption. We also highlight examples of innovation that are driving reduced energy consumption and providing a fifth fuel, as a means for meeting decarbonisation targets, and for security of supply and affordability. 20 Usage fell from (2007) 48,995 to (2012) 43,096 thousand tonnes of oil equivalent, Source: DECC DUKES Domestic Temperature adjusted Energy consumption; ONS household estimates 21 “Feed-in Tariff (FIT): Annual Report 2011-12,” Annual Report to the Secretary of State for Energy and Climate Change, Ofgem, www.ofgem.gov.uk/ ofgem-publications/58860/fits-annual-report-2011-2012.pdf, 19 December 2012. Powering the UK 2013 22
  26. 26. Empowering energy consumers Lighting Lighting accounts for 5% of overall UK electricity demand and up to 20% of domestic electricity demand. 22 The amount of electricity used for lighting has declined significantly, from 18 terawatthours (TWh)in 2005 to 12TWh in 2012. This is due to the switch from standard incandescent bulbs, to compact fluorescent (CfL) bulbs to halogens and now to the emergence of light-emitting diode (LED) bulbs. 23 This shift in technology is being driven by the increasingly competitive pricing of LED and halogen lamps becoming more competitive relative to incandescent bulbs as well as the improving perception of the quality of these products to the extent that they are considered substitutes. The shift has also been driven by Government policy, particularly the Carbon Emissions Reduction Target (CERT), which set targets for suppliers on energy efficiency savings. To meet their obligation, suppliers supplied most consumers with free CfL bulbs. At the EU level, the eco design regulation on non-directional household lamps mandated the replacement of inefficient incandescent bulbs by more efficient alternatives, in effect leading to phasing out of incandescent light-bulbs. As the comparison table above highlights, CfLs use about 75% less energy than a traditional incandescent bulb and last at least six times longer. 24 LED lighting uses a different technology that is more efficient than older methods such as halogen lamps or traditional bulbs. LEDs last far longer than any other technology (up to 30 years, depending on use), use 90% less energy than incandescent bulbs, and unlike CfLs, work well in low temperatures and do not contain mercury. 25 Given that up to [40%] of electricity used in non-industrial commercial buildings is used for lighting, the extent of possible savings from change in lighting technology is material. As Chart 15 highlights, the phase-out of incandescent bulbs has led to a 30% decline in electricity demand for lighting since 2005 and is expected to lead to a further halving in demand, even though the number of bulbs sold is expected to double during the same period. Commercial voltage optimisation Voltage optimisation (VO) is a mature form of energy saving technology that has a long history of commercial application. VO devices reduce the voltage current of electrical supply to an optimal level that will maximise the potential of an appliance, leading to a more efficient use of energy. Across Europe, the statutory range of supply is between 207V and 253V. In the UK, the average voltage is around 245V, with an optimal level of 220V. This means that, on average, appliances operated at higher, inefficient voltage levels. This results in higher electricity consumption than is necessary. This in turn puts stress on the appliance due to overheating as the device is operated at a voltage higher than is intended. These fluctuations in the delivered voltage reduce products’ life spans. 22 “Briefing on Lighting,” Carbon Trust, www.carbontrust.com/resources/guides/energy-efficiency/lighting. 23 “FAQ on the regulation phasing out conventional incandescent bulbs,” European Commission, http://ec.europa.eu/energy/lumen/doc/full_faq-en.pdf. 24 “Light Bulbs for Consumers,” US Environmental Protection Agency’s Energy Star Program, www.energystar.gov/index.cfm?fuseaction=find_a_ product.showProductGrouppgw_code=LB. 25 “Light bulbs: LED lights,” Which Consumer Reviews, www.which.co.uk/energy/energy-saving-products/guides/led-lights-explained. 23 Powering the UK 2013
  27. 27. Empowering energy consumers Chart 15: Historical and forecast changes in the make-up of light-bulb types in the UK; and level of electricity demand for lighting 20 1,200 1,000 16 14 Number of light bulbs, mn 800 12 600 10 8 400 6 4 200 Annual electricity demand for lighting, TWh 18 2 0 20 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 1 20 3 1 20 4 1 20 5 1 20 6 1 20 7 1 20 8 1 20 9 2 20 0 2 20 1 2 20 2 2 20 3 2 20 4 2 20 5 2 20 6 2 20 7 2 20 8 2 20 9 3 20 0 3 20 1 3 20 2 3 20 3 3 20 4 35 0 Standard light bulbs Halogens Fluorescent strip lighting CFLs LEDs Electricity demand Source: “UK Future Energy Scenarios Report,” National Grid, July 2013 Powering the UK 2013 24
  28. 28. Empowering energy consumers Why the fifth fuel is as important as conventional energy for supply businesses Energy efficiency is increasingly a major priority for businesses and public organisations. This is driven by high energy costs and sustainability and regulatory requirements to reduce energy demand and greenhouse gas emissions. These changes in how end-users consume energy will increasingly shape the role of energy suppliers of tomorrow. In September 2013, E.ON agreed to acquire Matrix, the UK market leader in energy management and energy efficiency services for commercial buildings. Matrix maintains data connections to customer sites and remotely configures and controls building energy management systems to optimise the use of energy in commercial buildings. The goal of the acquisition is to increase E.ON’s offerings on data-led energy efficiency solutions and energy management services. According to E.ON, the transaction provides an opportunity to combine Matrix’s deep data-led building energy expertise and E.ON’s capital-led energy efficiency and on-site generation capabilities. The same objectives are increasingly seen in other suppliers’ expansions of their energy services offerings. British Gas, for instance, earned £1.74b providing residential services such as boiler repair and installation and energy management services to the domestic sector, compared with £9.2b providing residential energy. This makes it a large and growing part of Centrica’s UK residential energy business. These two examples highlight the opportunities available to suppliers in supporting consumers to manage their consumption. They also highlight the role of the fifth fuel in re-shaping the supplier of tomorrow. Sources: Centrica Plc, Annual Report, and FY 2012 financials; E.ON press release. Chart 16: How voltage optimisation works … Incoming voltage from the national power grid Incoming voltage from the national power grid Source: Carbon Trust 25 Powering the UK 2013 In the UK power is supplied at an average of about 245 volts Voltage optimiser lowers incoming voltage to the operating requirment of appliances Higher voltage results in appliances operating at higher, inefficient voltage levels, resulting in higher electricity consumption and causing stress due to overheating and shorter lifespans Power supplied to appliance at 220 volts Limited voltage related overheating, preventing wear and tear and thus longer lifespans Excessive volts results in greater KVA/power demand, increasing electricity bills Optimisation leads to reduced power demand reduced bills
  29. 29. Empowering energy consumers Similar but less material benefits could also be achieved through low or no-cost improvements, such as tapping down transformers. Alternatively, replacing older transformers will also deliver significant dividends. Commercial studies suggest that optimising supply voltage to 225V or 220V can could save between 5% and 15% in electricity consumption, depending on the equipment being powered. 26 Because the optimisation units are connected in series with the main supply transformers, installation is usually quick, and the benefits can be realised across the whole site’s electrical supply. Variable-speed drives There is a wide array of VO devices currently available in the market targeted at domestic small and medium enterprise (SME) users. The potential savings depend on the size of the home or business, amongst other factors. Installation costs depend on the type of product installed and the environment it will be configured in; however, commonly available domestic or SME models cost £200 to £500. Similar but less material benefits could also be achieved through low or no-cost improvements, such as tapping down transformers or replacing older transformers. Variable-speed drives (VSDs) convert the incoming electrical supply of fixed frequency and voltage into a variable frequency and variable voltage feed to the motor with a corresponding change in the motor speed and torque. VSDs are used in a wide range of devices, including fans, conveyors, air compressors, pumps used across industry and HVAC systems in buildings. Chart 17: How variable speed drives work Incoming voltage from the local electricity distribution network A variable speed drive is an electronic device that controls the characteristics of a motor's eletrical supply Rectifier — change incoming alternating AC power supply to DC Type of rectifier depends on the type of performance required from the drive Intermediate circuit — the rectified DC supply is conditioned in the intermediate circuit by a combination of inductors and capacitors Inverter — converts the rectified and conditioned DC back into an AC supply of variable voltage and frequency. This is normally done with a semiconductor switch Motors Loads driven by motors e.g., Variable torque loads e.g., centrifugal fans and pumps Constant torque applications e.g., conveyors, agitators, crushers, surface winders and positive displacement pumps and air compressors Pumps Conveyor belts Air compressors HVAC systems Compressors Fans Reduced bills Control unit — gives and receives signals to the rectifier, the intermediate circuit and the inverter to correctly operate the equipment Sources: Carbon Trust 26 “Energy Saving Trial Report for the VPhase VX1, Domestic Voltage Optimisation Device,” EA Technology Consulting, www.ofgem.gov.uk/ Sustainability/Environment/EnergyEff/Documents1/Energy%20Saving%20Trial%20Report%20for%20the%20VPhase%20VX1.pdf, June 2011. Powering the UK 2013 26
  30. 30. Empowering energy consumers Although VSD designs vary, they all offer the same basic functionality. The motor speed can be zero through to typically 120% of its full rated speed. Up to 150% rated torque can be achieved at reduced speed. Most VSDs offer computing intelligence and can be connected to a variety of control systems and sensors. Using a VSD-controlled motor enables a better match of the driven machine to the requirements of the process. In applications requiring variable speed and variable torque, such as fans and pumps, using a VSD can save energy and costs. VSDs are particularly beneficial in variable-torque-load applications such as fans and pumps, where the output is controlled by other means, such as inlet or outlet throttling or damper adjustment. For example, energy savings of up to 50% are achievable by reducing the fan or pump motor speed by 20%. The cost of VSDs depends on the load and can range from £20, for a simple fan controller, to thousands of pounds for devices for large heating, ventilation and air-conditioning (HVAC) systems or industrial conveyors. VSDs are usually more expensive than simple motor controls, but in some applications, when applied correctly, they can pay back the cost in less than two years. VSDs can also be beneficial in constant-torque-load applications such as screw or reciprocating compressors, conveyors, grinders, mills or mixers where output varies. The role of smart meters in energy efficiency Between now and 2020, the UK’s energy sector will invest about £12b to install smart meters in every UK household and small and medium-sized enterprise. Smart meters are an advanced type of meter that monitor consumption and communicate automatically with the supplier, putting an end to inaccurate estimated bills for customers. They will enable households to monitor their energy usage and see how much they are spending in real-time, facilitating better-informed energy savings. Smart meters will also enable the transition to the smarter and greener energy grid of the future. As a result, smart meters are expected to bring net benefits of about £7b to the UK. Source: “Helping households to cut their energy bills,” DECC www. gov.uk/government/policies/helping-households-to-cut-theirenergy-bills/supporting-pages/smart-meters. 27 Powering the UK 2013 Distributed energy Distributed energy technologies allow users to generate their own localised, small-scale energy for self-supply and export any surplus to the grid. The most common type of micro-generation technology or distributed local energy source in the UK is solar photovoltaics (PV). The number of distributed generation installations and volume of energy generated increased significantly between 2010 and 2013 with the launch of the micro-generation feed-in tariffs (FiTs) scheme in April 2010. As of June 2013, there were about 400,000 accredited installations with an installed capacity of 1,900MW of capacity. Of these, solar PV accounted for 98.6% of all installations. The deployment of distributed generation is spread broadly across the country, with all regions experiencing significant growth over the last two years. Not only does this enable households and other energy end users across the country to minimise the overall cost of their energy through self-supply and greater control of their energy, but the regional deployment also means that the benefits in terms of jobs and supply chain value added are shared across the country. Other benefits of distributed generation include wider benefits to electricity supply, such as the requirement for fewer power plants during peak demand periods, increased electric system reliability and the ability to use existing installations to provide system stability benefits (ancillary services, including reactive power). Fewer power plants also means a reduction in land-use effects and rights-of-way acquisition costs for new power plants and a reduction in vulnerability to terrorism and improvements in infrastructure resilience.
  31. 31. Empowering energy consumers Contribution of solar PV to the UK economy According to the Renewable Energy Association (REA), the UK solar sector employs 25,000 across its supply chain. This includes 4,000 registered installers as at the end of 2011. There are over 2,000 companies working in the supply chain with an estimated sector turnover of £5.4b in 2011/12. UK solar PV related exports are estimated at £315m. These benefits as evident from the regional deployment pattern are spread across the country. The clean energy cashback/micro-generation feed-in tariff scheme Under the FiT scheme launched in April 2010, households or other energy users installing small-scale renewable technologies receive payment for every unit of electricity generated. The payments are based on individual tariff rates assigned, depending on the technology, size; and eligibility of the installation. A separate export tariff is paid for any electricity exported to the national grid, which is a flat rate across all technologies and sizes. The scheme covers various technology types including solar PV, anaerobic digestion, wind, and hydro up to 5MW of total installed capacity (TIC) and micro combined heat and power (CHP) up to 2KW of TIC. Chart 18: Number of micro-generation installations and total installed capacity by region in MW, supported by feed-in tariff as of 30 June 2013 70,000 300 50,000 200 40,000 150 30,000 100 Total installed capacity in MW 250 20,000 50 10,000 0 Microgeneration installations Yo Th rks e hi Hu re m an be d r W es tm id la nd s W al es we st So ut h ea st So ut h Sc ot la nd we st No rt h ea st No rt h Lo nd on Ea st of En gl an d 0 Ea st m id la nd s No of generation installations 60,000 Installed capacity Source: “Feed-in Tariff (FIT): Annual Report 2011-12,” Ofgem, 19 December 2012 Powering the UK 2013 28
  32. 32. Glossary DECC The UK Government’s Department for Energy and Climate Change. www.decc.gov.uk Direct impact Value added directly by a sector Downstream gas sector Sector incorporating gas transmission, distribution and retail. Electricity Sector Sector incorporating electricity generation, transmission and distribution, and retail. GDP Gross domestic product is an indicator of economic contribution. It measures the market value of all final goods and services produced within a sector and/or economy during a given period. It is calculated by adding taxes on products and deducting subsidies on products from GVA. The change in GDP over time can be used to measure the growth of a sector and/or economy. See Box 1 for more detail GVA Gross value added is an indicator of economic contribution. It measures the market value of all final goods and services produced within a sector and/or economy during a given period. It is calculated by adding taxes on products and deducting subsidies on products from GVA. The change in GDP over time can be used to measure the growth of a sector and/or economy. See Box 1 for more detail HMRC HM Revenue and Customs — the organisation responsible for collecting taxes. Indirect effect The contribution that a sector makes through the consumption of intermediate goods and products in the supply chain. For example, supply chain businesses may work fully or partially with the energy sector, and cover a wide range of sectors, including consultancy, engineering, human resources, legal, finance, education and research. Induced effect Increased consumer spending owing to the initial direct and indirect effects, which may include spending on housing, food, transport, clothing, education and entertainment. Multiplier A measure of the extent to which an endogenous variable changes in response to a change in an exogenous variable. For example, suppose a one-unit change in some variable X causes another variable Y to change by M units. Then the multiplier is M. In other words, the multiplier attempts to quantify the additional effects of a change in one variable beyond those that are immediately measurable (the direct effect). M can also be defined as a ‘carry-through effect’. The general method for calculating long-run multipliers is called ‘comparative statics’. That is, comparative statics calculate how much one or more endogenous variable changes in the long run, given a permanent change in one or more exogenous variables. Office of Gas and Electricity Markets (Ofgem) 29 Powering the UK 2013 The energy regulator for Great Britain www.ofgem.gov.uk (http://www.ofgem.gov.uk)
  33. 33. Glossary ONS The Office for National Statistics is responsible for the production of a wide range of economic and social statistics, in both electronic and hardcopy format. They cover topics such as the UK’s national accounts (such as gross domestic product, national income and expenditure); UK Balance of Payments; population, demography and migration; Government output and activity; business output and activity; prices (such as for consumers and producers); the labour market (such as employment, unemployment and earnings); vital events (such as births, marriages, morbidity and deaths); and social statistics (for example statistics about neighbourhoods and families). The ONS collects information from various sources including the Annual Business Survey, the Labour Market Survey and the National Census. It gathers information about all sectors, including the Power and gas sector. We have presented ONS data throughout the report, and it has provided us with a basis for much of our analysis. www.statistics.gov.uk PG The power and gas sector incorporates electricity generation, transmission, distribution and supply, and gas transportation and supply. It does not include upstream gas (searching for and the recovery and production of crude oil and natural gas). TD Transmission and distribution refers to the transmission and distribution component of the electricity sector. Value added The difference between the value of outputs and the costs of inputs for a company, industry, or economy. See Box 1 for more detail. Sources Renewable Energy Country Attractiveness Index: August 2013 ►► Carbon Trust Established in 2003, our global quarterly publication ranks 40 countries on the attractiveness of their renewable energy investment and deployment opportunities, based on a number of macro, energy market and technology-specific indicators. ►► Department of Energy and Climate Change (DECC) ►► National Grid, UK Future Energy Scenarios ►► National Skills Academy for Power ►► Office of Gas and Electricity Markets (Ofgem) ►► Office for National Statistics (ONS) ►► UK Commission for Employment and Skills ►► VaasaETT Global Energy Think-Tank, European Residential Energy Price Report For more information please visit www.ey.com/recai Powering the UK 2013 30
  34. 34. Authors Tony Ward Partner, Head of Power Utilities UKI, EY T : + 44 121 535 2921 E: tward1@uk.ey.com Frances Warburton Director, EY David Omom Manager, EY T: + 44 20 7951 6306 E: fwarburton@uk.ey.com T: + 44 20 778 30071 E: domom@uk.ey.com Marketing enquiries: Media Enquiries Kevin Corcoran Senior Marketing manager kcorcoran@uk.ey.com Konstantinos Makrygiannis Media Relations manager kmakrygiannies@uk.ey.com Energy UK commissioned EY to update the previous ‘Powering the UK’ reports published in 2011 and 2012, incorporating the most recently published data and covering the sector’s total economic, investment and employment contribution to the UK. This 2013 report also includes new sections on the sector’s investment in skills and training and innovative technologies that are giving domestic and commercial consumers greater control over their energy use. In this report, except where otherwise stated, we use the term energy sector to cover the power and gas sector as defined in previous versions of this report which includes: ►► 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 (i.e., energy services such as central heating services, air-conditioning and steam). It does not include the upstream oil and gas activities or the mining sector (i.e., exploration, extraction and processing). The report examines the energy sector by comparing it to other sectors of the UK economy and by looking at how its contribution has changed over time. The data used in this report is taken from publicly available sources — in particular we have made extensive use of data from the UK Office for National Statistics (ONS). The opinions of third parties set out in this publication are not necessarily the opinions of the global EY organisation or its member firms. Moreover, they should be viewed in the context of the time they were expressed. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. Neither Ernst Young LLP nor any other member of the global EY organisation can accept any responsibility for loss occasioned to any person acting or retaining from action as a result of any material in this publication. For further information: EY Energy Hub at www.uk.ey.com/uk/energy EY Power Utilities at www.uk.ey.com/uk/powerandutilities Follow us on Twitter @ey_uk_energy For all marketing inquiries please contact: kcorcoran@uk.ey.com 31 Powering the UK 2013
  35. 35. About Energy UK Energy UK is the trade association for the gas and electricity sector. With over 70 members, we represent small, medium and large companies working in electricity generation, energy networks and gas and electricity supply, as well as a number of businesses that provide equipment and services to the industry. Our members generate more than 90% of UK electricity and supply up to 26m homes. For further information: • Energy UK at www.energy-uk.org.uk • Follow us on Twitter @energyukcomms • Energy UK press office at press@energy-uk.org.uk • Telephone: + 44 20 7930 9390 Powering the UK 2013 32
  36. 36. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst  Young Global Limited, each of which is a separate legal entity. Ernst  Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2013 EYGM Limited. All Rights Reserved. EYG No.  DX0217 1375380.indd (UK) 11/13. Artwork by Creative Services Group Design. ED None In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

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