UK Utility Capital Expenditure Industry Report 2019

Overview

• What you need to know
• Covered in this Report
• Water & Sewerage
• Electricity Transmission
• Electricity Distribution
• Gas Distribution
• Gas Transmission

Executive Summary

• Capital expenditure in water and sewerage sector
• Gross capital expenditure in water and sewerage industry up by 8% in 2018/19
  • Figure 1: UK capital expenditure on water and sewerage services, 2015/16-2018/19
• English water companies plan to spend a record £50 billion+ in AMP7 (2020-25)
• Capital expenditure in electricity transmission and distribution sector
• Capital investment in distribution networks expected to be lower in current price control
  • Figure 2: UK gross capital expenditure by electricity distribution network operators, 2013/14-2018/19
• Rise in distributed generation requires more active management of distribution network
• Capital expenditure in gas transmission and distribution sector
• Capital spending picks up as current price control period progresses
  • Figure 3: Total gas transmission and distribution capital expenditure, 2014/15-2018/19
• Companies and brands
• Utility operators are adopting a more collaborative approach and closer relationships with the supply chain
• What we think

Issues and Insights

• AMP7 (2020-25) set to be the toughest price review faced by water and sewerage companies yet
• The facts
• The implications
• Enabling low-carbon energy transition will be a key focus for electricity network operators in the next price control
• The facts
• The implications

Water and Sewerage Sector – What You Need to Know

• Gross capital expenditure in water and sewerage industry up by 8% in 2018/19
• Move towards long-term alliances and frameworks across industry
• English water companies plan to spend a record £50 billion+ in AMP7 (2020-25)

Water and Sewerage Industry Capital Expenditure

• Move towards totex in AMP6 and beyond set to reduce bias towards capital spending
• Move towards long-term alliances and frameworks across industry
• Total capital expenditure
• • Figure 4: UK capital expenditure on water and sewerage services, 2015/16-2018/19
• Sewerage-related capital expenditure
  • Figure 5: Analysis of sewerage-related capital expenditure, by water and sewerage companies in England and Wales, 2015/16-2018/19
• • Figure 6: Analysis of sewerage capital expenditure in England and Wales by water and sewerage companies, by type, 2015/16-2018/19
• Water-related capital expenditure
  • Figure 7: Analysis of water-related capital expenditure in England and Wales, by water and sewerage companies, 2015/16-2018/19
• • Figure 8: Analysis of water capital expenditure in England and Wales by water and sewerage companies, by type, 2015/16-2018/19
  • Figure 9: Analysis of water capital expenditure in England and Wales by water-only companies, by type, 2015/16-2018/19
• Scottish Water capital expenditure
  • Figure 10: Analysis of Scottish Water capital expenditure on water and sewerage services, 2014/15-2018/19
• Northern Ireland capital expenditure
• • Figure 11: Analysis of Northern Ireland Water capital expenditure on water and sewerage services, 2014/15-2018/19

Water and Sewerage Future Capital Investment

• Future challenges facing the water and sewerage sector
• • Figure 12: UK population, by region, 2014-36
• Thames Tideway Tunnel
• • Figure 13: Estimated cost of Thames Tideway Tunnel, 2015/16-2021/22+
• AMP7 (2020-25) set to be toughest price review yet
• English water companies plan to spend a record £50 billion+ in AMP7 (2020-25)
• Opening up of non-household retail market in England to provide new opportunities for water and sewerage companies

Water and Sewerage Industry Legislative and Regulatory Environment

• Industry regulation
• Legislative environment
• European Water Framework Directive
• Urban Waste Water Treatment Directive
• The Drinking Water Directive
• Revised Bathing Water Directive
• Implications of Brexit on the UK water and sewerage sector
• Transfer of private sewers in England and Wales
• The Flood and Water Management Act 2010
• Water and sewerage retail competition opens up for all business customers in England in April 2017

Electricity Distribution and Transmission – What You Need to Know

• Capital expenditure by DNOs expected to be lower in current price control period
• Rise in distributed generation requires more active management of distribution network
• Change in energy mix is a key driver for investment in transmission network

Electricity Distribution Capital Expenditure

• Introduction
• RIIO model adopted for current price control period (2015-23)
• • Figure 14: Total expenditure versus allowance, by DNO, 2015/16-2017/18
• • Figure 15: Total expenditure by electricity distribution network operators in Great Britain, by type, 2015/16-2017/18 cumulative total
• Capital expenditure expected to be lower in current price control
  • Figure 16: UK gross capital expenditure by electricity distribution network operators, 2013/14-2018/19
  • Figure 17: UK gross capital expenditure by electricity distribution network operators, 2013/14-2018/19
• • Figure 18: UK gross capital expenditure by the electricity distribution network operators, by company, 2014/15-2018/19

Electricity Distribution Future Capital Expenditure

• Forecast total expenditure in RIIO-ED1 (2015-23)
• • Figure 19: Actual total expenditure, totex allowance and forecasts for RIIO-ED1, by company, 2015/16-2017/18
  • Figure 20: Total expenditure forecast for RIIO-ED1 in Great Britain, by company, 2015/16-2022/23
• Impact of decarbonisation, decentralisation and digitisation on distribution networks set to be key focus in next price control period RIIO-ED2

Electricity Transmission Capital Expenditure

• Overview
• • Figure 21: Size of electricity transmission network in great Britain, 2019
• • Figure 22: Capital expenditure by the electricity transmission industry in Great Britain, 2014/15-2018/19
  • Figure 23: Capital expenditure by the electricity transmission industry in Great Britain, 2014/15-2018/19

Electricity Transmission Future Capital Expenditure

• Price Control Period RIIO-T1 2013-21
• • Figure 24: NGET annual capital expenditure, 2014-21
• • Figure 25: SHET annual capital expenditure, 2014-21
  • Figure 26: SPTL annual capital expenditure, 2014-21
• Enabling low-carbon energy transition will remain key focus in next price control (RIIO-T2 2021-26)

Drivers for Investment in Electricity Distribution and Transmission Infrastructure

• Decarbonisation of UK energy system
• Government ambition to achieve net-zero emissions by 2050 will push up electricity demand
• Change in energy mix is a key driver for investment in transmission network
• Smart grid development to support low-carbon economy and aid transition to a more flexible energy system
• Ofgem-supported innovation schemes to drive smart grid market and transition to low-carbon economy
• Rise in distributed generation requires more active management of distribution network
• • Figure 27: Distributed generation connected to the distribution network, 2012-17
  • Figure 28: Distributed generation connected to the distribution network, 2016/17 (MW)
• Renewables capacity development pipeline
  • Figure 29: Renewable energy projects in pipeline, by technology, as of September 2019
• Growth in decentralised and renewable electricity generation will increase the complexity of operating a secure and cost-effective energy system
• Energy storage to play key role in transition to clean electricity supply system
• Electrification of transport creates new opportunities
• Despite Brexit uncertainty, interconnector capacity between Britain and Europe is set to increase
• • Figure 30: Existing and planned interconnectors, as of November 2019

Gas Distribution and Transmission – What You Need to Know

• Capital spending picks up as current price control period progresses
• Gas network operators to face tougher price controls from 2021

Gas Capital Expenditure

• RIIO model adopted for current price control period
• Innovation at centre of new price control model for gas distribution and transmission network
• Capital spending picks up as current price control period progresses
  • Figure 31: Total gas transmission and distribution capital expenditure, 2014/15-2018/19
• • Figure 32: Total gas transmission capital expenditure, 2014/15-2018/19
• • Figure 33: Total gas distribution capital expenditure, 2014/15-2018/19
  • Figure 34: Total gas transmission and distribution capital expenditure, 2014/15-2018/19
• Replacement expenditure dominated by iron mains replacement programmes
• • Figure 35: Length of iron gas mains replaced, by distribution network operator, 2013-18

Gas Future Capital Expenditure

• Network operators to face tougher price controls from 2021
• Transmission network capital expenditure
  • Figure 36: Annual capital expenditure plans by National Grid Gas Under RIIO-T1, by category, 2013/14-2020/21
• Distribution network capital expenditure
  • Figure 37: Annual capex plans under RIIO-GD1, by GDN, 2013/14-2020/21
• • Figure 38: Annual Repex plans under RIIO-GD1, by GDN, 2013/14-2020/21
  • Figure 39: Forecast total capex and repex during RIIO-GD1, 2013/14-2020/21

Gas Industry Market Factors and Drivers

• Social Factors
• Economic Factors
• The UK’s increased reliance on gas imports
• Government suspends shale gas fracking indefinitely
• Wholesale gas prices
  • Figure 40: Average wholesale gas prices, 2009-19
• Environmental and legislative factors
• UK Energy Policy
• Government commitment to reduce carbon emissions
• UK makes good progress in reducing CO2 emissions to date, but on track to miss targets between 2023 and 2032
• Policies to decarbonise electricity
• Renewables Obligation
• Feed-in Tariffs
• Carbon Price Floor
• Contracts for Difference
• Capacity Market
• The Renewable Heat Incentive

Companies and Brands – What You Need to Know

• Balfour Beatty now clearly focused on specific markets with inherent growth and where the group has the right expertise
• Costain launches “leading edge” strategy to accelerate transition away from complex construction programmes to higher-margin services
• Kier’s strategic review identifies need to simplify the portfolio of businesses

Industry Structure

Company Profiles

• Balfour Beatty
• Build to Last transformation programme launched in 2015
• Balfour Beatty expects the UK water sector to offer significant opportunities in the medium term
• Financial performance
  • Figure 41: Financial analysis of Balfour Beatty, 2014-18
  • Figure 42: Turnover analysis of Balfour Beatty, by segment, 2016-18
• Costain Group
• “Leading Edge” Strategy
• Financial performance
  • Figure 43: Financial analysis of Costain Group, 2014-18
• • Figure 44: Turnover analysis of Costain Group, by segment, 2014-18
• J Murphy & Sons
• Group strategy
• Financial performance
  • Figure 45: Financial analysis of J Murphy & Sons, 2014-18
• Kier Group
• Strategic Review 2019
• Kier acquires McNicholas Construction (Holdings)
• Financial performance and outlook
  • Figure 46: Financial analysis of Kier Group, 2015-19
• Laing O’Rourke
• Following a Strategic Review in 2015/16 Laing O’Rourke has established a more focused business structure
• Company performance and outlook
  • Figure 47: Financial analysis of Laing O’Rourke, 2015-19
• Morrison Utility Services
• Company performance
  • Figure 48: Financial analysis of Morrison Utility Services, 2015-19

Appendix – Data Sources, Abbreviations and Supporting Information

• Abbreviations
• Methodology

Further Sources and Contacts

• Trade associations and regulatory bodies
• Energy UK
• Energy Networks Association
• Energy Industries Council
• Office of Gas and Electricity Markets (Ofgem)
• Office of Gas and Electricity Markets – Scotland (Ofgem Scotland)
• Office of Gas and Electricity Markets – Wales (Ofgem Wales)
• Association of Consulting Engineers
• British Water
• Chartered Institution of Water & Environmental Management
• International Water Association
• Ofwat
• Street Works UK
• Trade magazines
• The Engineer
• European Process Engineer
• Plant and Works Engineering
• Utility Week
• Trade events
• edie live 2020
• Utility Week Live 2020