Utilities and the modern industrial strategy

Jane Gray explores what government's recently launched consultation on its industrial strategy means for UK utilities.

For many, the words “industrial strategy” still conjure memories of the fiasco which attended government intervention in British Leyland and other private firms during the 1970s.

The ghost of such misadventure has haunted Whitehall for decades, causing successive administrations to distance themselves from the fortunes of private industry.

Now however, industrial strategy is back in vogue and bigger than ever. On Monday 23 January, prime minster Theresa May took personal charge of the launch of her government’s modern take on the concept. The document, is broad ranging, ambitious and has many implications for the utilities sector.

This fresh approach to industrial strategy has not leapt from a standing start. Under the coalition government of 2010-2014, the now defunct Department for Business, Innovation and Skills, with leadership from its secretary of state Vince Cable, made a robust effort to rehabilitate the term.

It enjoyed some success – especially with regards to the aerospace and automotive industries – but its vision failed to encompass a broad swathe of the economy and was never truly endorsed by central government.

May’s role in the launch of the new industrial strategy, in addition to the much wider portfolio of the new Department for Business, Energy, and Industrial Strategy, make it a weightier and, at least theoretically, more joined-up plan.

The chapter of the industrial strategy green paper which will likely be pored over most thoroughly by energy sector executives is the one dedicated to reducing energy costs while promoting clean growth.

This sets out government’s belief that it is time to update our approach to addressing the energy “trilemma”. It is confident that the interests of sustainability have now been enshrined in legally binding commitments. Equally, the “foundational” security of supply challenge is considered to be well cared for under the aegis of the capacity auctions and Contracts for Difference.

This leaves the affordability of energy for households and businesses as the policy focus for the current administration. It is of the foremost importance, says the document, that “the shift to a low carbon economy is done in a way that minimises the cost to UK businesses, taxpayers and consumers.”

The implications of this ambition for energy suppliers are unclear in the green paper, though the smart meter roll out is expected to play a part and delivering energy efficiency is considered highly important.

This will no doubt influence updates to the Energy Company Obligation and the Green Deal which are in the pipeline and a long-term roadmap for energy efficiency will be published by government later this year, following the industrial strategy consultation.

It is the role of energy networks, however, which is positioned with greater significance within government’s plan for a cost-effective energy transition. The outcomes of the Smart Systems Call for Evidence, which closed to submissions in January, are keenly anticipated by government which is keen to seize the “prize of bringing prices down by making more flexible alignment of demand and supply”.

Government’s recognition of the key role to be played by networks in the energy transition should be welcome to many – including shadow energy minister Alan Whitehead, who has previously set out his belief that smart grids are a “public good investment”.

The commitment to accelerating the benefits of smart grids is woven throughout the proposed industrial strategy, prompting offers of funding for the development of energy storage and demand side response technologies as well as electric vehicle charging infrastructure. If approved in consultation, this will add to other pledges recently made by government for the advancement of smart energy technologies – including a £28 million fund announced on 25 January.

It is not only new approaches to network management however, which get mentions for their role in delivering a cost effective low carbon transition. Finding ways to further reduce the costs of key low carbon generation technologies is also central. Offshore wind and nuclear feature most prominently.

Aside from support for smart and green energy technologies, it is also notable that the proposed industrial strategy dedicates a lot of space to the UK’s skills and labour requirements. This fact was welcomed by the sector skills organisation Energy and Utility Skills Group – which is shortly to release its sector strategy for skills and workforce renewal.

However, the group’s chief executive, Nick Ellins, while optimistic about the implications of the industrial strategy for sector skills support, is also concerned that the green paper’s plans to reform technical education in the UK focus heavily on advanced manufacturing and construction capabilities, but do not make any direct reference to the other skills which utilities will need if they are to be a driving force behind a sustainable industrial revolution. “We would like to see a more overt recognition of the needs of the energy and utilities sector – which will deliver almost 60 per cent of the National Infrastructure Pipeline,” he tells Utility Week.

There are many other elements of the industrial strategy green paper which could influence the future of energy and utility companies (see points below) – not least the government’s expectations for increased productivity across the whole economy and increased visibility of trickle down benefits for UK SMEs via procurement for key public sector and infrastructure contracts. Water companies should also note that the “upgrading infrastructure” chapter identifies the challenges ahead for resilient water supplies in the UK and the need to revisit approaches to flood defence.

The full impact of government’s rehabilitation of industrial strategy will not become clear until the current consultation is complete and more detailed implementation plans are shared, including a framework for adoption across the devolved nations. But the green paper has placed energy utilities front and centre of the government’s plans for economic resilience post-Brexit and the industry must now take the opportunity to set out its stall – detailing both its willingness to take a leading role, and the things it will require if it is to live up to government’s expectations.

The deadline for submissions to the industrial strategy consultation is 17 April.

Beyond the headlines

The government’s proposed industrial strategy sets out growth ambitions across a broad spectrum of the UK economy. Many of the most pertinent points for utilities leaders relate to its pillar for reducing energy costs while promoting clean growth. However, other strategy pillars have implications for utilities too:

Boosts for R&D The government proposes that smart and clean energy technologies including energy storage and demand-side response will share in a new £4.7 billion Industrial Chal­lenge Strategy Fund. The government’s chief scientific officer Sir Mark Walport has also been asked to assess the case for setting up a new research institution for the advance of battery technology.

Addressing skills gaps Government has recognised the challenges posed by deficiencies in basic literacy and numeracy in the UK and, more specifically, by shortfalls in the availability of robust talent in science, technology and maths subjects. To improve the talent pool for British industry, it has put forward plans to set up a new system of technical educa­tion in the UK similar to those in Germany and Norway.

Achieving best practice in procurement Government wants to see public sector procurement work more effectively as a means to boost economic activity. It is rolling out a “balanced scorecard” approach to procurement across all construction, infrastructure and capital investment projects worth more than £10 million – including those projects detailed in the National Infrastructure and Construction Pipeline. A significant proportion of these are utilities schemes.

Joining up infrastructure planning To redress the negative effects of historical misalignment between different infrastructure ambitions, government wants to further empower the National Infrastructure Commission and Infrastructure Projects Authority to ensure that required upgrades to energy, transport and water systems, as well as flood defence and digital infrastructure, marry up. It also specifically identifies the need to ensure resilient water supplies as essential to wider industrial ambitions.

Making sector deals Government wants to develop special frameworks to support sectors it deems to be particularly important to the UK’s future competitiveness and productivity. Five sectors have been selected to benefit from early sector deals, including the nuclear industry. Development of its sector deal will be led by Lord Hutton.

Getting institutional support right Government has recognised that sectoral and regional institutions can play a major role in enabling growth and transformation in key sectors. It has asked which institutions could be created or strengthened to acceler­ate the realisation of industrial and economic ambitions.