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    United Kingdom Energy & Utilities Infrastructure Forecast


    September 26, 2022 - Fitch Solutions Sector Intelligence

     

      • Infrastructure
      • United Kingdom
      • Industry Forecast
      • Fitch Solutions

      United Kingdom Energy & Utilities Infrastructure Forecast

      • 23 Sep 2022
      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Key View: The UK's energy and utilities infrastructure sector will see sustained growth over our forecast period due to the UK government’s strategy to further decarbonise the power sector. Attracting private sector investment is a key component of the government's strategy, primarily for non-hydropower renewables and nascent hydrogen development.

      Latest Developments
      • We forecast that the UK's energy and utilities infrastructure sector will grow by a robust 5.6% y-o-y in 2022, following 5.5% y-o-y in 2021.
      • On April 7 2022, the UK’s latest energy strategy was launched and is designed to reduce energy costs, increase low carbon power generation and increase energy security against the backdrop of the Russian invasion of Ukraine. The plans place a heavy emphasis on increasing offshore wind, solar and nuclear power with a more moderate approach to onshore wind, a new target mix of 95% low carbon technology’s and a reduction of gas-fired power.
      • The tax generated by the UK's new windfall tax on oil and gas producers could vary greatly depending on the industries response, given the large and generous tax relief loophole that has been presented concurrently. The impact on UK investment, therefore, remains to be seen.
      • We expect to see the private sector take a much more leading role in delivering the future of the UK’s nuclear programmes while also becoming the driving force behind renewables growth as the UK looks to support private enterprise.
      • As intermittent renewables generation increases its share of the UK power mix, the need for added grid stability will increase, and our research demonstrates that the UK will risk reaching the thresholds of grid flexibility. The UK will emerge as an ever-increasing trend creating new investment opportunities.
      Energy And Utilities Infrastructure Data (UK 2021-2031)
      Indicator 2021e 2022f 2023f 2024f 2025f 2026f 2027f 2028f 2029f 2030f 2031f
      Energy and utilities infrastructure industry value real growth, % y-o-y 5.5 5.6 4.0 6.8 7.1 7.3 7.6 7.9 8.1 8.4 8.7
      Power plants and transmission grids infrastructure industry value real growth, % y-o-y 6.1 6.5 7.0 8.0 8.2 8.4 8.6 8.8 9.0 9.2 9.4
      Oil and gas pipelines infrastructure industry value real growth, % y-o-y -0.9 -1.1 -1.0 -1.5 -1.5 -1.5 -1.5 -1.5 -1.5 -1.5 -1.5
      Water infrastructure industry value real growth, % y-o-y 3.1 1.0 -12.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0
      e/f = Fitch Solutions estimate/forecast. Source: ONS, Fitch Solutions
      Structural Trends

      Decarbonisation Characterising Developments In Sector

      Our Power team notes sustained capacity growth in the non-hydropower renewables sector in the medium term, which will offer concurrent opportunities for grid infrastructure investment. The UK power sector will continue on a path towards net zero emissions. The UK government has outlined its investment priorities to support the market’s continued decarbonisation, highlighting offshore wind, hydrogen, electric vehicles and the energy efficiency of buildings as key areas for investment in the medium term. Dubbed the Ten Point Plan for a Green Industrial Revolution, the plan elaborates on existing government commitments to materially raise public infrastructure and renewables investment, not least to support the UK’s transition to net zero greenhouse gas emissions by 2050 (carbon neutrality). The plan aims to mobilise GBP12bn in public sector financing while seeking to generate an estimated GBP42bn in private investment by 2030.

      The UK’s latest energy strategy launched on April 7 2022 has been designed to reduce energy costs, increase low carbon power generation and increase energy security against the backdrop of the Russian invasion of Ukraine. The plans place a heavy emphasis on increasing offshore wind, solar and nuclear power with a more moderate approach to onshore wind, a new target mix of 95% low carbon technology’s and a reduction of gas-fired power. We also highlight the heavy involvement of major oil and gas companies in the UK’s renewable market. BP announced over May 2022 that the firm would invest GBP18bn on UK’s energy transition by 2030 in order to help the company boost the UK’s energy security and reach its own net zero targets. This will predominantly be spent on increasing offshore wind capacity and hydrogen production facilities across the market.

      In April 2021 the UK government proposed its latest set of climate legislation, aiming to reduce emissions by 78% by 2035, to 1990 levels. The move was met by cross-party support, and the ambitious and aggressive climate action sets a global standard. This move towards power sector decarbonisation and more stringent emissions standards will remain the driving force behind the UK’s power sector trends. The non-hydropower renewables sector will continue its rapid capacity expansion and is set to install 37GW over the decade at an average annual growth rate of 6.5%. This development reinforces other efforts by the UK government to materially raise the level of public infrastructure investment and increase its role in the UK infrastructure market more broadly, and we expect this latest announcement to sustain support for green infrastructure projects.

      We note that upside risks remain to increased levels of low-carbon generation over the long term from new nuclear power capacity, wind and solar power. However, the UK will still have a large share of thermal generation over the coming decade. We expect that the coal phase-out will occur by 2025, leaving natural gas representing 99.5% of the thermal power sector onwards. The gas-fired power segment will remain a key part of the UK’s energy mix, representing 33.5% of total generation by the end of the decade. Gas plays a key role in adding flexible generation to the UK’s power supply, supplementing the intermittency from renewables.

      Sizable Value Increase Over Decade
      UK - Energy And Utilities Infrastructure Industry Value By Sub-Sector (2021-2031)

      e/f = Fitch Solutions estimate/forecast. Source: ONS, Fitch Solutions

      Offshore Wind A Sub-Sector Outperformer

      The UK has set a new target to build 50GW of offshore wind by 2030, previously set for 40GW with a floating technology to comprise 5GW, up from 1GW previously. In order to realise this growth, the targets will be supported by new planning measures which will reduce the planning time for new projects from four years to one. If applied successfully, these new measures could have a significant impact on our wind outlook for the market in which we forecast 35GW of new capacity over the coming decade of which 83% is set to be offshore wind. Plans are also under way to support the offshore industry via GBP160mn of public funds for ports and manufacturing infrastructure to enhance supply chains and development capacity. The government is seeking to develop complementary transmission infrastructure coordinated with the offshore wind industry and has awarded approval for an additional 3GW of offshore capacity connection extensions. As a result, we expect the offshore wind segment to be a healthy space for private funding. This conducive industrial environment led to total installed wind capacity in the market of an estimated 25GW in 2020.

      Nascent Hydrogen Infrastructure Set For Growth

      We note the potential for investment in hydrogen infrastructure over the decade to 2031, with the UK government, in particular, keen to offer initial funding support for efforts. As part of a broader GBP350mn package, announced in July 2020, to support industry efforts to decarbonise, the package stipulated its support for projects supportive of switching from gas to green hydrogen in industry, alongside other projects in nascent technologies, including carbon capture and storage. Similarly, the UK Committee on Climate Change has previously called on the government to unveil additional support for pilot projects involving low-emission hydrogen production in order to further demonstrate hydrogen's use case and application across industry.

      With our broad expectation for significant growth in low-carbon hydrogen production over the decade across Europe, concurrent investment in hydrogen infrastructure networks also presents a significant opportunity. Such infrastructure will likely be developed in two distinct phases, driven by the need to create a ready market to drive further investment in production. The transport of hydrogen gas from the production facility to demand centre is a core cost component of the gas, and as such, initially efforts will be made to invest in infrastructure that satisfies immediate demand, such as around petrochemical and gas reformation facilities. Broadly, a phased approach to the developments will likely be taken:

      • Phase One: A focus on the linking of supply and demand into clusters with smaller-scale local infrastructure development. We highlight that smaller-scale investments in local pipeline infrastructure between industrial demand centres and supply will be key. This phase may also seek to utilise offshore wind and electrolysis to supply pure hydrogen to petrochemical producers, oil refiners, industrial heating, local gas networks to displace natural gas and smaller-scale storage located at industrial centres.
      • Phase Two: As low-cost hydrogen production expands and meets the needs of the hydrogen hubs, more distant markets will lead to a larger-scale transport hurdle, linking expanded demand cases through long-range networks. We expect this to take the form of transport, via pipelines or road and rail networks and most likely through re-purposing of existing infrastructure. Currently, the capability of blending hydrogen gas into the existing network varies greatly between markets, with displacement ranging between 0% and 20%. However, there are currently a number of projects looking to trial greater volumes of gas, aiming to highlight the cost-effectiveness of retrofitting.

      Windfall Tax To Dampen Investor Sentiment

      The tax generated by the UK's new windfall tax on oil & gas producers could vary greatly depending on the industries response, given the large and generous tax relief loophole that has been presented concurrently. The UK government has announced the ‘Energy Profits Levy’, a windfall tax on oil & gas producers and has not ruled out its application to the electricity generation sector in the future. The levy is a new 25% surcharge on profits made from the oil & gas sector and is on top of the 40% tax already paid by the industry. To offset the Levy, a new investment allowance will be introduced with the goal of incentivising reinvestment into the UK. This raises the effective tax relief on money invested from GBP46 to GBP91 per GBP100 invested. The UK government expects the levy to generate GBP5bn in its first year.

      In our view, the unclear timeline for removing the windfall tax is more damaging than its implementation, which had already been priced in by markets. The legislation is to contain a sunset clause, effective at the end of December 2025, but could also be phased out if “oil and gas prices return to historically more normal levels”. Given that our view is for oil and gas prices to remain elevated for the foreseeable future and the timing of the next general election at the end of 2024, its feasible that the levy remains in place until the sunset clause is triggered by 2025. Regardless, the uncertainty on the timeline is particularly damaging for investor sentiment.

      We expect the effect of the tax to be felt mostly on UK independents, rather than on the major’s such as BP and Shell, despite specific restrictions on offsetting previous years’ losses against the tax bill. Expensive decommissioning costs have allowed larger majors with ageing asset bases to negate most or all of their tax bill in recent years, often leading to negative tax bills that can be carried over. The windfall tax specifically blocks the use of previous years negative tax bills carried over to offset the tax impact, which mostly greatly impacts the majors. But due to their diversification, majors will still be less impact by the tax than UK independents.

      UK - Major Energy & Utilities Infrastructure Projects
      Project Name Project Risk Metric Value (USDmn) Size Companies Status
      Hinkley Point C Nuclear Power Station, Somerset, South West 9.7 31,487 3,260MW Bilfinger[Construction]{Germany}, Weir Services[Equipment]{Australia}, China General Nuclear Power Corporation [Sponsor]{China}, Wintime Energy[Sponsor]{China}, KSB Group[Equipment]{Germany}, General Electric[Equipment]{US}, Schneider Electric[Equipment]{France}, ABB Group[Construction]{Switzerland}, Turner and Townsend[Consultant/Project Management]{UK}, Mace Group[Consultant/Project Management]{UK}, Faithful+Gould[Consultant/Project Management]{United Kingdom}, Gleeds[Consultant/Project Management]{UK}, Jacobs Engineering Company[Consultant/Project Management]{US}, KBR GROUP[Consultant/Project Management]{Germany}, Boccard[Construction]{France}, Cavendish Nuclear[Construction]{UK}, Rolls-Royce[Equipment]{UK}, TUNZINI Nucleaire[Equipment]{France}, Axima Concept[Equipment]{Belgium}, Doosan Babcock[Equipment]{UK}, NG Bailey[Construction]{UK}, AMEC[Consultant/Project Management]{UK}, Laing O'Rourke[Construction]{UK}, Bouygues Construction[Construction]{France}, Balfour Beatty[Construction]{UK}, China National Nuclear Corporation[Sponsor]{China}, Areva[Sponsor]{France}, EDF Energies Nouvelles[Sponsor]{France} Under construction
      Sizewell C Nuclear Plant, Suffolk, East 5.3 24,839 3,200MW China General Nuclear Power Corporation[Sponsor]{China}, EDF Energies Nouvelles[Sponsor]{France} At planning stage
      Cardiff Tidal Lagoon Power Plant, Wales 0.0 10,555 3,240MW Tidal Lagoon Power[Sponsor]{UK} At planning stage
      Triton Knoll Wind Farm, Lincolnshire, East 10.0 6,000 860MW National Westminster Bank (NatWest)[Financier]{UK}, RWE Group[Sponsor]{Germany}, J-Power Company[Sponsor]{Japan}, Kansai Electric Power Company[Sponsor]{Japan}, J Murphy & Sons[Construction]{UK}, Nexans[Equipment]{France}, K2 Management[Consultant/Project Management]{Denmark}, MHI Vestas Offshore Wind[Equipment]{Denmark}, Banco Santander[Financier]{Spain}, Landesbank Baden-Wurttemberg[Financier]{Germany}, BNP Paribas[Financier]{France}, Commerzbank[Financier]{Germany}, Skandinaviska Enskilda Banken[Financier]{Sweden}, Lloyds Bank[Financier]{UK}, Bayerische Landesbank[Financier]{Germany}, Natixis[Financier]{France},Helaba[Financier]{Germany}, ING Group[Financier]{Netherlands}, KfW IPEX-Bank[Financier]{Germany}, MUFG Bank[Financier]{Japan}, ABN AMRO Bank[Financier]{Netherlands}, Sumitomo Mitsui Bank[Financier]{Japan}, MPI Offshore[Construction]{UK}, Siemens AG[Construction]{Germany}, Subsea 7[Construction]{UK} Under construction
      Thames Tideway Sewer Tunnel Project, London 10.0 5,405 25km BAM Nuttall[Construction]{UK}, UBS[Consultant/Project Management]{Switzerland}, Ferrovial Agroman[Construction]{Spain}, Arup Engineering firm[Consultant/Project Management]{UK}, Atkins[Consultant/Project Management]{UK}, Balfour Beatty[Construction]{UK}, Morgan Sindall Group[Construction]{UK}, Mott MacDonald[Design/Architect]{UK},Costain[Construction]{UK}, Bachy Soletanche[Construction]{UK}, Vinci[Construction]{France}, Ch2m Hill[Consultant/Project Management]{US}, AECOM[Consultant/Project Management]{US}, Laing O'Rourke[Construction]{UK}, Swiss Life Asset Managers[Sponsor]{Switzerland}, International Public Partnership[Sponsor]{UK}, Dalmore Capital[Sponsor]{UK}, Amber Infrastructure[Sponsor]{UK}, Allianz[Sponsor]{Germany}, DIF Infrastructure[Sponsor]{Netherlands}, European Investment Bank[Financier]{Luxembourg}, Thames Water[Sponsor]{UK}, Rubicon Capital Advisors[Financier]{Ireland}, Sumitomo Mitsui Banking Corporation[Financier]{Japan}, The Bank of Tokyo-Mitsubishi UFJ[Financier]{Japan}, Royal Bank of Canada[Financier]{Canada}, Lloyds Bank[Financier]{UK}, Groupe Credit Agricole[Financier]{France}, Banco Santander[Financier]{Spain} Under construction
      Note: Top five projects by value. na = not available. Project Risk Metric scores out of 10; higher score = lower risk. Source: Fitch Solutions Infrastructure Key Projects Database
      This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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