Powering Trade

The energy market is being radically reshaped by economic and technological change.  Against this backdrop, Prospect have recently convened a series of round tables with Centrica to discuss how the future might evolve and to examine the prospects for UK exports at a time when Brexit is focusing minds upon the UK’s balance of payments.

Three major factors are driving change. Firstly, consumer choice is on the rise. Compared to the situation a couple of decades ago, consumers are now more likely to shop around and switch energy provider.

Compounding this is the second driver, the rapid advance of digital technology and the growth of “smart home” devices and the wider “internet of things.” Increasing numbers of consumers are taking far more control over their energy usage and are much better able to monitor. Taken together, this represents a potential large rise in consumer power.

Alongside this change in consumption patterns is a change in production. The growth of renewables and the wider awareness of climate change targets combined with new technologies on the production side are beginning to drive a shift away from asset heavy, legacy methods of generating power and towards smaller, more asset light, more local types of power generation.

The potential growth of battery storage capacity could push more generation down this route.  An even bigger potential catalyst for change could come with the more wide spread use of electronic vehicles.

At time of flux, regulation and policy is often struggling to keep up with the pace of change.

Centrica believe there is a large potential for the UK to grow exports in this changing market. This is less about manufacturing and more about expertise and technical know-how. In some of the larger emerging markets, there is the potential that energy grids will leap frog those of the more mature economies. An economy which never really developed the asset heavy, centralised grids (still common in the West) may instead move straight to the stage of more local, smaller grids and markets.

The UK, alongside its developed market peers, is well placed to offer the technical guidance to run and design such systems. Whilst the UK is unlikely to able to compete on manufacturing costs, it can certainly compete much higher up the value chain.

As with other sectors, Brexit complicates the picture somewhat. It is still unclear exactly what type of trading relationship we will have both with the EU-27 and the wider world after 2019.

But the picture for energy is not entirely bleak. The exports of such services are rarely covered by traditional free trade deals anyway. In reality the major barriers to exporting such services tend to come down to worries over intellectual property rights and the regulatory environment. Compared to many other sectors, the industry’s exports are better insulated from a direct Brexit impact.

The regulatory issues are particular acute in some of these newer markets as the technology itself is so new. They touch upon wide areas of public policy from privacy rights and data protection through to traditional competition and consumer protection regimes.  Navigating this complex environment is a challenge both the industry and for policy makers.

Nowadays, it is becoming harder and harder to even identify who the corporate players in this market are. Twenty years ago in the UK, Virgin was a company providing mobile phone plans, Sky provided paid television content and BT was provider of fixed line telecoms services and the internet. Today though all three firms compete in the market for broadband, telecoms and television content against each other and myriad of others.

Something similar may be happening in energy with the traditional operators increasingly seeing other firms—from large tech companies (via their “smart home” offerings) to car manufacturers interested in electric vehicles beginning to enter the same market space.

At the same time, traditional energy firms such as Centrica are increasingly themselves entering lines of business that even a decade ago would have been regarded as the traditional domain of a technology company.

With the market in flux and much regulation struggling to keep up with technological change, the UK government has the opportunity to take the lead in establishing a new framework. One which recognised the shift towards consumer choice, the increasingly digitalisation of energy use and the shift towards new methods of production and renewables.

With energy markets being reshaped across the developed economies, and with the possibilities for large scale growth and change in emerging economy energy markets the potential is there for the UK to expand its global market share in providing the high value add services that digital and decentralised energy demands.  In the 1990s many countries  looked to the UK’s experience of liberalising energy markets as an example to follow, there is a potential to repeat this with the new changes in energy provision. Whatever happens with Brexit, it is an aim worth pursuing.