Talk of an electrical blackout is an increasingly familiar news story with such occurrences appearing to no longer be the exclusive domain of developing economies with an under invested energy network. Once viewed as a theoretical risk for the UK, blackouts are now a real possibility with Ofgem forecasting spare electricity capacity of a mere 4.1% this winter and less than 2% next year. Three years ago the margin was 17%1.
The UK is facing a perfect storm as falling domestic energy supply, 15 power plants having been closed or partially closed in the last 4 years, is met by increasing demand from a recovering economy and an electricity hungry population. The UK energy industry is simply unable to meet domestic demand with the UK increasingly dependent upon importing energy from overseas – 60% energy import dependency is anticipated by as soon as 2020. This growing reliance upon other countries for power is leading some to ask what can be done to rebalance domestic demand and supply.
The basic law of economics would suggest that in order to achieve equilibrium you need to either increase supply or reduce demand. The UK is currently trying to do both, resulting in a healthy environment for new sustainable technologies to flourish. We continue to monitor this growth trend with interest and are actively looking to back good management teams who are well positioned to take advantage of these positive market dynamics.
Sustainable technology encompasses a range of products designed to provide energy that meets the needs of the present without compromising the ability of future generations to meet their own needs. The market can be broken down into two key components – renewable energy sources focussed on increasing energy supply and technologies that promote energy efficiency focussed on reducing energy demand.
Renewable energy sources
The cost of renewable energy sources, such as hydro, solar, wind and wave power have fallen dramatically in recent years, and continue to fall. Whilst these technologies have historically relied upon government policies to be economically viable they are now beginning, in certain circumstances, to become economically competitive in their own right. As a result there is an increasing level of investment in the sector which is supporting the energy transition from fossil fuels to renewable energy.
Investment in the renewable energy market has historically taken the form of long term infrastructure projects but this is now changing. The market is maturing as infrastructure providers increasingly focus on their core activity of energy generation by outsourcing mission critical support services to third party providers. This shift from in-house provision to outsourcing is providing service businesses with an exciting market opportunity and one which we believe represents an attractive investment proposition.
Technologies that promote energy efficiency
In 2007 the UK committed to the European Union climate and energy package – a set of binding legislation aimed at ensuring ambitious climate and energy targets are achieved by 2020. One of the three core strands of this legislation is that a 20% improvement in energy efficiency is achieved. This legislation has provided a supportive backdrop to the rapidly evolving energy efficiency market.
Innovation is increasing awareness of energy consumption at both a domestic and industrial level and subsequently changing the way in which consumers behave. The demand for increasingly energy efficient technologies is driving investment in new product development, with reducing payback periods now justifying consumer spend on both economic and environmental grounds. The concept of individual households having intelligent appliances or supermarkets controlling light and temperature via wireless controls may have seemed far fetched only a few years ago but these concepts are now a reality.
In light of the market drivers outlined above, we believe that the sustainable energy sector will present attractive investment opportunities with UK businesses being at the forefront of this rapidly evolving market. Indeed, one of ECI’s current portfolio businesses operates in this market, Clarke Energy. The combination of strong demand drivers, supported by government legislation and regulation provide an extremely positive market backdrop. As such we continue to seek opportunities to invest in businesses which are well positioned to capitalise upon the exciting opportunities available within the sustainable energy market.
2 European Commission Energy & Transport Trends to 2030
Please contact Mark Keeley for further information.