Trends in the Energy Industry 2023
From a long cold winter in 2021 amid lockdowns to Russia’s invasion of Ukraine last year, a combination of catastrophic events has plunged the UK energy system into a crisis - driving up wholesale prices of electricity and gas as much as 15-fold. Against this frosty backdrop, the UK government was forced to announce an Energy Bill Relief Scheme - emergency relief for businesses to help shield them from soaring prices.
So, what does 2023 hold for the energy industry? On the one hand, with global gas supplies still unable to meet demand and with Russia outcast by the international community over its illegal invasion, the energy crisis could extend beyond 2024. On the other, the transition to a more sustainable and secure energy system could be hastened by the challenges faced by fossil fuel providers.
Let's explore the energy industry trends that could impact small and medium-sized enterprises (SMEs) over the coming months - both positively and negatively.
Opportunities in the Energy Industry
The tremors felt in natural gas, coal, electricity and oil markets are damaging for providers and consumers in the short term, but could benefit the environment long-term. Subsequent renewable energy industry trends have the potential to boost the UK government’s net zero strategy for decarbonising all sectors of the UK economy by 2050.
The solar sector looks bright
With energy prices set to remain elevated this year, renewable and sustainable forms of energy are benefiting from tailwinds created by soaring demand and attractive incentives - and solar energy industry trends are leading the way. During 2022, global solar capacity additions expanded by about 47% and global solar demand rose by about 40%, with industry revenues increasing by about 50%.
According to Bloomberg Intelligence, it’s going to be a bright year for the sector:
- It’s expected to be the fastest-growing energy sub-sector in 2023, with demand forecast to increase 20-30%.
- Solar demand growth is expected to exceed 20% in 2023-25.
- Despite the challenges posed by geopolitical tension and trade uncertainty, solar capacity is expected to surpass a terawatt (one trillion watts) by the end of 2023.
Solar isn’t just a short-term fix until the non-renewable energy industry recalibrates itself. According to the BNEF’s New Energy Outlook 2020: “Even with no increase in policy support from the current levels, and even without strong carbon prices or net-zero targets…some 56% of power generation could be provided by solar and wind by 2050.”
Tailwinds for wind power
This clean energy industry sub-sector had plenty of wind in its sails last year as power from onshore and offshore turbines helped boost clean energy supplies. According to the National Grid’s electricity system operator ESO - which manages Britain’s grid - a new record for wind generation was set on 30th December, when 20.91 gigawatts were produced by turbines - the third time Britain’s wind turbine fleet set a new generation record in 2022.
Wind power is expected to continue this momentum in 2023, with increased storage capabilities developed specifically for on and offshore wind projects, improving their economics and productivity. According to the International Energy Agency (IEA), wind capacity is set to almost double by 2027, thanks in part to falling prices.
The Economist Intelligence Unit (EIU) echoes this positive outlook by indicating that 2023 will be a bumper year for solar and wind energy consumption, which is set to increase by 11%. The EIU also forecasts that solar and wind capacity addition will remain robust, prompting renewable energy consumption to grow at an annual average rate of 10% over the next ten years - further proof that the future is green well beyond 2023.
The industry will contribute to cooling inflation
Soaring energy prices stoked red-hot inflation in 2022, with the UK experiencing its highest rate in more than four decades (11.1%) - forcing the Bank of England (BoE) to hike interest rates to their highest level for 14 years in a bid to tackle it.
Inflation is forecast to fall in 2023 – albeit from sky-high levels – due to the global factors pushing up the cost of living shifting into reverse in recent months. Notably, wholesale gas prices have dropped more than 50% on last summer’s peak, while motorists are benefiting from a decrease in the cost of crude oil.
If, as expected, inflation falls further in early 2023, the BoE will be in a position to limit future rate rises - capping the cost of borrowing for businesses.
Challenges in the Energy Industry
The energy crisis could deepen this year amid unprecedented sanctions against Russia - one of the world’s largest producers of oil and gas. For the industry and society, the knock-on effects are concerning.
The ongoing effect of high energy prices
The ripple effect of soaring energy prices has not only contributed to decades-high inflation, it’s also forced some factories to reduce output or even close, and slowed economic growth to a crawl - and there looks to be little respite in 2023.
The UK economy has been bracing for a recession - usually defined as when GDP falls for two three-month periods, or quarters, in a row - since Russia invaded Ukraine, causing energy prices to spiral. The BoE believes the contraction of the economy in the third quarter represents the start of a prolonged recession that will last into 2024.
Speaking after the release of UK GDP data for the fourth quarter, Darren Morgan, the Office for National Statistics (ONS) director of economic statistics, said: “Our revised figures show the economy performed slightly less well over the last year than we previously estimated, with manufacturing and electricity generation notably weaker.”
The revised figures from the ONS painted a grim picture for the UK economy, with GDP now estimated to be 0.8% below pre-pandemic levels, down from a prior estimate of 0.4% below.
End of the Energy Bill Relief Scheme
The government has helped households weather the financial storm by capping energy prices, essentially limiting the amount suppliers can charge per unit of energy - but businesses were not covered by this price guarantee.
After prices spiked again last year, the Energy Bill Relief Scheme was introduced, fixing costs and providing a lifeline to businesses for which the crisis poses an existential threat without support. While domestic rates are capped, the relief scheme offers a discount on unit rates. The amount of discount a business receives depends on the rates they’re paying and the type of contract they’re on.
The scheme has been running since 1st October 2022 and is scheduled to end on 31st March 2023 - but the hardest-hit businesses are hoping it will be extended. In October, the government announced the scheme would be reviewed due to the cost to taxpayers, with extended support for "vulnerable businesses" only under consideration. A decision was due before Christmas, but the government postponed it until the new year.
Reacting to the news, Tom Ironside, director of business and regulation at the British Retail Consortium, said: “Without continued support from April 2023, estimates show that retailers could see their energy costs rise by £7.5 billion, putting further pressure on retailer costs and consumer prices. As a result, urgent clarity is needed on what comes next and the support that will be available.”
Weak pound will continue to make energy more expensive
The pound nosedived below $1.09 in September for the first time since 1985 following sweeping tax cuts announced in the disastrous mini-budget. Its prolonged slump - amid red-hot inflation, rate hikes, and political turmoil - has inflamed Britain’s energy crisis by driving up the cost of imported natural gas and power supplies.
Much of the nation’s energy and fuel is imported, such as coal and gas, which are typically priced in dollars or euros. Therefore, the cost of supplying businesses increases in the face of downward pressure on the pound. British power generators are also paying more to produce electricity because the imported fuel they rely on has effectively increased in price.
Ongoing pressure on the pound has the potential to perpetuate this worrying trend. Will 2023 be another torrid year for the UK currency? The early signs are worrying after it tumbled to its lowest level against the dollar since November.
You’d be forgiven for thinking anything that’s dubbed a crisis can only be a harbinger of doom. Yes, as we enter 2023, the beleaguered energy industry UK remains hamstrung by the source of the problem: there’s not enough fuel, and therefore not enough electricity, so prices remain elevated for both - bringing the status of government relief schemes and the performance of the pound into sharp focus for businesses.
However, there’s unprecedented momentum behind the renewable energy industry - notably solar and wind - as countries attempt to ride out the crisis. According to IEA executive director Fatih Birol: “Renewables were already expanding quickly, but the global energy crisis has kicked them into an extraordinary new phase of even faster growth.”
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