Analysis: Happy new year?

The fallout from 2016 combined with anticipated events this year are going to keep industry leaders on their toes. Mathew Beech sums up the year ahead.

If you thought 2016 was a bad year, the next is likely to be worse. Over the next 12 months, the ramifications of the major disruptions of last year will make themselves apparent and challenges arising from this will be compounded by 2017’s own key milestones for utilities. The sector as a whole is set to continue with efforts to deregulate, innovate, improve performance and adopt new technologies. Taken in total – it doesn’t look like industry executives can expect much respite in the coming months.

For water, the obvious looming event is the official opening of the non-domestic water market.

The date of April 2017 has been ingrained into the psyche of the water sector for more than half a decade, and now we are just a few months away from a historic moment in the sector’s development. Some final testing of systems is still to take place at MOSL and the water companies before this momentous date, but the weight of activity among new retailers and the market operator has now shifted away from technical preparations towards customer engagement and building competitive advantage.

For some, competition will undoubtedly raise perennial utility strategy questions over the merits of bundling. Some have already tied their colours to this pan-utility mast, for instance Utilitywise and Business Stream who have partnered to offer combined water and energy deals. More enterprises of this nature are expected to follow.

Also expected this year is clarification on government’s intention to press ahead with plans to open the domestic water market to competition.

On the regulated front for the water companies, things are expected to carry on in a stable fashion due to low interest rates and the fact the sector is in the middle of an AMP. The major development will be around early glimpses of the shape the PR19 price review. The regulator will reveal its methodology for this in June or July.

In energy, the regulated networks will also benefit from the stability of the mid-period environment and low interest rates, which will offset returns that are predicted to modestly decline over the next few years (see above).

Strategically, however, 2017 is set to be a much less comfortable year. Both gas and electricity network operators face fundamental challenges around the future of their businesses and will be looking forward to further insight into the thoughts of government and the regulator on questions such as the role of gas networks in a decarbonised future and the interface between electricity distribution and transmission in a smart, flexible energy system.

Energy retailers also have their part to play in this smart future, although in 2017 it is possible that broader smart product offerings may be swamped by the immediate pressure to roll out smart meters.

This enormous national programme has been beset by problems. It is likely this year will bring fresh ones as SMETS2 meters make their debut and rumoured issues around the interchangeability of’ SMETS1 meters between different suppliers emerge.

The burden of the smart meter rollout will fall heavily on the shoulders of smaller suppliers already struggling with a volatile market that led to the demise of GB Energy Supply and Northern Ireland’s Open Electric before Christmas. But it is not just energy suppliers who are set to square up to some existential threats in 2017. Organisations engaged in the governance of industry codes will need to be nimble in adapting to incoming requirements for competitive tendering.

In terms of infrastructure, the back end of 2017 should see the first delivery of capacity secured via the capacity auction, supposedly plugging future supply gaps. We should also see the start of construction work on infrastructure mega-projects such as the Thames Tideway Tunnel and Hinkley Point C.

In short, 2017 is set to be a fast-paced year, with market developments that will change the face of utility businesses of all stripes both in the immediate and longer term.