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8 Dynamics that Define and Shape the UK Energy Sector

The Energy sector contributes over 4% of UK GDP when you include its construction services and manufactured goods supply chain activities. The industry directly employs over 125,000 people and is a significant employer of engineering and technical skills.

The factors that shape and drive change in the Energy Sector

The sector is in a period of significant change, increasingly operating within an uncertain and complex political, regulatory, technological and competitive environment. The factors that impact on and shape the utility sector include:

​1. The uncertain political environment: The current UK government supports a liberalised energy market with targeted intervention to ensure value for consumers and taxpayers. Utilities do however operate under the threat of governments implementing policies deemed to be in the national interest, for example where rising energy costs become politically controversial. The debate about state versus private ownership of utilities creates uncertainty that potentially disrupts long-term strategic and investment planning.

2. Regulation: The regulatory regime was established to provide benchmarking and incentivisation structures that substitute for competition and drive efficiencies. Regulation is highly complex focusing on issues such as fair pricing, security of supply, environmental performance, for instance reducing CO2 emissions and a general push for better efficiency, economic performance and quality of service. There is a trend for regulators to become more demanding with a move toward incentive-based regulation, reducing costs to customers, and consequently putting pressure on shareholder returns.

3. Competition: The move from monopoly or oligopoly towards more open competitive market structures and interconnectivity with the European electricity grid has opened the market to increasing levels of competition. The UK energy supply market currently has over 30 suppliers with new entrants attempting to gain market share from the previously dominant “big six”. The trend for falling demand, depressed energy prices and new lower cost renewable capacity will continue to put pressure on traditional generation. There is the potential for more distributed energy generation, community-based energy companies and cooperatives to establish themselves in the UK market.

4. Environmental: The energy mix needs to be low carbon in order to limit the global temperature rise caused by Green House Gas emissions. The UK has legally binding carbon targets that reduce emissions by at least 80% by 2050 with an interim target of a 34% cut by 2020. Other environmental considerations include the significant amounts of cooling water required by thermal power plants, the control of pollutants (air pollutants are a particular concern on fossil fuel plants), and the management of wastes, (a particular issue for nuclear radioactive materials).

5. Technology: The rise of renewable energy, new sources such as fracking, distributed generation models including smart meter and smart grid technologies, energy storage, demand response and improved energy efficiency have the potential to dramatically change the energy landscape. Disruptive technologies are pushing utilities to rethink business models and change their value proposition to customers. Utilities need to find a role in an increasingly decentralised energy market, where the focus will increasingly be on flexibility rather than rigid capacity and use of big data to better understand customer’s needs.

6. Investment and Returns: Several countries now experience periods of very low or even below cost (where shutdown and restart of a plant would cost more than maintaining supply) electricity prices on the spot market, leading to some operators to close stations. Renewable energy output is making future prices increasingly difficult to predict. Pressure on returns can be compounded by carbon levies and challenges due to aging infrastructure, which increase the cost of operation and maintenance and can reduce the percentage of time a plant is available to supply power to the grid. A flat-to-declining revenue outlook has been forecast for many utilities creating downward pressure on stock market prices and causing utilities to deleverage, and reduce debt to maintain credit ratings.

Over 60% of the UK’s total infrastructure spend is forecast to be in the energy sector over the next 10 years. The UK requires new investment to replace the 20% of generation capacity lost since 2010 and the further 35% of existing capacity due to be closed down by the end of 2030. No new low carbon capacity can be delivered within the current supply price, in the order of £45 per MWh and recent cuts in the support mechanisms for the renewable market may also deter investment. Securing regulatory approvals, and construction and technology risks create a significant challenge in delivering the projects to time, cost and quality targets. Competing stakeholder demands, a long-term focus, coupled with regulatory and political uncertainty can impact on investor appetite and the ability to secure competitive financing.

Positive investment aspects include the Capacity Market, which provides steady payments to providers (both demand and supply side) in return for the delivery of capacity when needed and Contracts for Difference that fix the future pricing structures creating more certainty and stability for both investors and the consumer. There is also a trend for extending the lives of existing power stations and significant improvements have been achieved in the capacity factor (the % of time power plants feed electricity into the grid).

7. Customer expectations: Utility companies have a social and public welfare obligation to maintain a secure, reliable and affordable supply to customers. Utilities activities can significantly impact on local communities who need to establish the community trust needed to overcome “Not In My Backyard” opposition. Increasing customer expectations and high levels of public scrutiny and debate require utilities to be seen to be efficient and acting with integrity. Competition is extending the scope for customers to vote with their feet. In response energy companies have focused on customer-centricity seeking differentiation through customer service or fair transparent pricing.

8. Human Resources: Historically utilities could be described as being asset oriented and engineering focused with a formalised, structured and procedurally driven culture that discouraged innovation. These legacy and cultural issues associated with the evolution from the public sector have given way to a more outward looking philosophy prioritising the customer along with an increased commerciality. An aging workforce, a lack of STEM skills coming through the education system and the anticipated demand for qualified staff will place a strain on the ability to attract suitable candidates. An increasing focus on diversity, and employee engagement, development and wellbeing will be required to achieve the desired improvements in retention and productivity.

Are utilities prepared for the speed of this transition?

Utilities have to walk a tightrope balancing their social responsibility to keep bills affordable and maintain a reliable supply with the commercial pressures of a private company and the need to attract and motivate a changing workforce. The impact from increasingly competitive environments, more empowered customers, an accelerating rate of regulatory and technology change, and the need to adapt culture and HR practices requires incumbent utilities to transform their current operations to align with this increasingly challenging environment. The jury is still out on the sectors ability to sufficiently transform its business models and attract the required investment.

Despite these uncertainties, the sector is delivering a quiet energy revolution providing lower carbon generation, with greater efficiency and improved levels of service. Energy companies will however need to find ever more innovative ways to remain competitive and sufficiently agile to react quickly to this increasing pace of change.

A2O People

A2O People’s HR Consultancy integrates a range of services to help Employers to Recruit, Engage, Develop, and Retain, your employees. The business is founded on the premise that the utility and construction sectors have their own unique context that needs to be understood in order to source talent with the right cultural fit and to implement and sustain effective HR solutions.

To learn more visit our HR Services Page on our website or call us on 01278 732073.

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