What’s in store for the UK energy sector? Flux’s predictions for 2023

As always at the beginning of a new year, we turn our minds to what’s ahead and how we can prepare for the opportunities and challenges that may arise. 2022 was an unprecedented year for the European energy market, largely due to the war in Ukraine and the rapid realignment in energy policy that followed. No doubt much of this year’s activities will be in response to those challenges. 

We can expect to see more fluctuations in energy pricing due to decoupling of European gas reliance from Russia and a continued policy focus on mitigating the impact of this on consumers. Technology will play an increasingly vital role in the transition to renewables and providing customers with greater levels of transparency around what they are consuming and being charged for. And the appetite for coal-based power generation is going to increase - all topics to elaborate further on.

The UK Government will continue interventions to offset energy prices, but some businesses may still struggle

The Energy Price Guarantee (EPG), which was introduced last year to cap energy prices for all UK households will continue, albeit with a raise in the cap from £2500 (for a typical consumer) to £3000 per household. This change comes into effect in April, however, this is the point in the year that heating use tends to drop-off and monthly (actual) bills are lower. I’m optimistic about the outlook and my view is that domestic households will ultimately see prices fall below the cap in 2023.

The Government-funded relief scheme for businesses will provide a discount of £6.97 per megawatt hour (MWh) for gas bills and up to £19.61 per MWh for electricity bills. This is a change to the existing scheme structure and a reduction in support which, combined with inflationary pressures on wages will place significant pressure on businesses that don’t have the ability to pass greater energy and staff costs through to consumers.

Energy prices should stabilise and may even trend down later in the year

Towards the end of year, we may start to see some decline in wholesale costs from the current highs - a mild winter has reduced pressure on energy consumption, and European countries have found ways to reduce reliance on Russian energy supply. While wholesale forecasts are challenging at the best of times, there is some suggestion across the sector of a downward trend as the European market starts to adjust. There are predictions by energy market intelligence analysts that energy bills for a typical UK household will drop below the EPG from July.

I expect some return to genuine non-cap offers for consumers in 2023, however the regulator is unlikely to allow unconstrained offers that are significantly cheaper than the effective cost base suppliers will have hedged the majority of their customers at given adherence to the price cap and the risk management behaviour it induces.

Policy will continue to minimise impact to consumers and pave the way for new energy sources

As mentioned above, policies will continue to focus on mitigating the impact on consumers and businesses resulting from the repositioning of European reliance on Russia for gas. 

More widely, the strategic focus of policymakers will be energy security above decarbonisation. Great Britain’s market starts 2023 with nearly 30GW of wind, but also ageing nuclear and expensive gas plants. The focus will likely shift to the build of new nuclear plants - large and small - and exploration into models that better optimise and incentivise the demand-side responsiveness of the market. In December we may even see completion of the Viking Link, improving interconnection with continental grids via a 1400MW link with Denmark. Expect to also see increased comfort with new North Sea oil and gas licences to source 2050 pathway hydrocarbon requirements from closer to home. 

Market stability will be a focus for regulators

When the domestic retail market starts to regain traction as prices begin to fall, it’s likely regulators will enact measures to control how aggressively energy retailers can compete. In the current landscape the domestic market is not fully functioning due to the Government’s price interventions and de facto limit on switching, so any regulations will be to sustain market stability during the transition to active switching.

For the business market, I expect there will likely be increased scrutiny on supplier compliance and transparency of pricing. Smaller, time poor businesses will have an increased focus on energy purchasing as their relative share of the cost base increases. There may even be greater efforts by price comparison services to better serve this segment and disrupt the traditional intermediary model.

Technology plays a vital role in providing greater transparency around costs and meeting evolving customer needs

For domestic customers, transparency, cost, and action will be key - they want to know what they are consuming. A silver lining of the current situation is ten years’ worth of consumer engagement progress on energy efficiency has been concentrated into a four-month window. With smart metering and new technology enabling richer user experiences, greater data capture and feedback loops, retailers can enable consumers to understand how their consumption drives costs and the actions they can take to save money.

Business customers will also want transparency and agency around energy costs. However, they may also take the baton on carbon leadership given consumer demands, legislative and governance requirements. Understanding the environmental impact (particularly carbon) of energy consumption and broader business activities will become key. For some, transparency will quickly give way to action, whether via initiatives to reduce demand and/or procuring lower carbon intensity energy, or even supporting fleet vehicles and employees to electrify. Our mantra at Flux is ‘you can’t sell what you can’t bill’ - the key to mobilising and scaling change, no matter how big or small is utilising highly flexible, adaptable software solutions. 

There is an acute need for flexibility services

Realignment of the broader European market, the accelerated transition to renewables and drive for electrification is creating intermittency challenges, increasing peak electricity demand magnitude while locating generation further from major demand centres. This is all part of the change in physicality of transition toward net zero and means flexibility services are vital.

The value of offering flexibility services is therefore increasing substantially with additional premia for the speed and predictability of services that can be provided. Businesses (and consumers) with the ability to bring on back-up generators or reduce consumption are seeing a real opportunity. Often forgotten is that it can also be valuable to incentivise greater consumption at certain times or locations to support better value system balancing. This is good news for everyone but particularly those that can offer flexibility services to the market.

And finally, coal-based power generation will increase

The broader European market is going to take significant time to restructure and realign to new technologies, resulting primarily from the Merkel Government’s early closure of the nuclear plant as well as increased market and bilateral dependency on Russian gas. This will have a major impact on the European energy market, wholesale gas prices and a negative impact on continent-wide emissions performance in the medium-term.

We’re already seeing increased coal-based power generation across the continent. According to the German statistics office, Destatis, almost 40% of the grid-connected electricity generated in the third quarter of 2022 came from coal-fired power plants. Expect an appetite from governments to allow coal to offset some of the pressure (and cost) of gas at the detriment of emissions levels.

So, finally, stepping-back, I think there will be a period of consolidation and realignment in 2023 as the sector adjusts to policy and regulatory changes, but also innovation as the evolving landscape paves the way for new ideas and improvements. It will be critically important for successful businesses to get ahead of this rapid change. I’m personally excited to see what technology partners such as Flux will bring to the market to underpin transformation and accelerate change in this dynamic environment. Watch this space!