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Utility Capital Expenditure - UK - July 2015

Utility Capital Expenditure - UK - July 2015

“The approach to infrastructure investment is in transition across the utility industry. Whereas spending was previously mainly output-driven, future investment decisions will be increasingly centred on innovation, asset optimisation and long-term outcomes. Operators will also be challenged by rising pressure from industry regulators to reduce costs for consumers, which highlights the importance of cost efficiencies in capital investment decisions.

Although changes in the regulatory framework are likely to restrict traditional network investment, they will also provide opportunities for the supply industry, particularly for companies offering innovative solutions and new technologies that facilitate efficient and optimised asset management. The strongest growth is expected in the energy networks sector, driven by rising electricity demand versus the closure of generation capacity, changes in the energy mix and the growth of low carbon technologies.”

– Claudia Preedy - B2B Analyst

This report will explore the following key questions with regard to Utility Capital Expenditure in the UK:

What are the key drivers for capital investment in the water and sewerage industry?
What are the key drivers for network investment in the electricity transmission and distribution sector?
What are the drivers for capital investment in the gas supply and distribution industry?
How will changes in the regulatory environment affect the approach to capital investment?
How does environmental legislation and regulations affect the utility industry?
What are the expenditure plans for the current regulatory control period in the various utility sectors?


EXECUTIVE SUMMARY
The market
Water & sewerage sector
Figure 1: UK capital expenditure on water and sewerage services, 2009/10-2013/14
Electricity transmission & distribution industry
Figure 2: Forecast network investment of the electricity distribution network operators in Great Britain,
2015/16-2022/23
Figure 3: Capital expenditure by the electricity transmission industry in Great Britain, 2009/10-2013/14
Gas transmission & distribution industry
Figure 4: Total gas transmission and distribution capital expenditure, 2009/10-2013/14
Market factors
Utility industry regulation
Legislative factors
Companies
What we think
Key capital investment trends across the utility sectors include:
KEY INSIGHTS
What does the shift towards total expenditure (Totex) and long-term outcomes in AMP6
mean for the water and sewerage industry?
What are the key drivers for network investment by the electricity distribution network
operators (DNOs)?
What are the key drivers for investment and challenges facing the electricity transmission
sector?
Have Ofgem’s settlements for gas distribution networks for the price control period RIIOGD1
been too generous?
INTRODUCTION
Market factors
Definitions
Water & Sewerage
Electricity Transmission
Electricity Distribution
Gas Distribution
Gas Transmission
Methodology
Abbreviations
Market positioning
The market positioning of the utilities sector can be analysed in terms of the relative bargaining power of suppliers
and customers to the sector.Customers
Suppliers
Market factors
UK ECONOMY
Overview
Inflation
Interest rates
Business investment
WATER & SEWERAGE INDUSTRY
Key points
Water & sewerage industry market factors
Industry regulation
Ofwat’s priorities are manifold and include:
Legislative environment
European Water Framework Directive (WFD)
Urban Waste Water Treatment Directive (UWWTD)
Figure 5: Sewerage treatment enhancement expenditure driven by UWWTD in England & Wales, 1990-
15
Figure 6: Sewerage treatment enhancement expenditure driven by UWWTD in England & Wales, 1990-
2015
The Drinking Water Directive
Revised Bathing Water Directive
Figure 7: UK coastal bathing water compliance with Bathing Water Directive for mandatory coliform
standards, as of 2014
Transfer of private sewers in England and Wales
Figure 8: Capital expenditure on private sewers in England & Wales, by water and sewerage company,
2012-15
The Flood and Water Management Act 2010
Water Act 2014 to open up water and sewerage retail competition for all business customers in 2017
WATER & SEWERAGE CAPITAL EXPENDITURE
Key points
Overview
Figure 9: Total capital expenditure by water and sewerage companies in England & Wales, 2005-10 and
2010-15
Figure 10: Total capital expenditure by water-only companies in England & Wales, 2005-2010 and 2010-
2015
Figure 11: Actual UK capital expenditure on water and sewerage services, 2009/10-2014/15
Figure 12: UK capital expenditure on water and sewerage services, 2009/10-2013/14
Figure 13: UK Capital Expenditure on Water and Sewerage Services, 2009/10-2013/14
Sewerage-related capital expenditure
Figure 14: Analysis of sewerage-related capital expenditure in England and Wales, by company,
2008/09-2013/14
Figure 15: Analysis of sewerage-related capital expenditure, by water and sewerage companies in
England and Wales, 2008/09-2013/14
Figure 16: Analysis of sewerage capital expenditure in England and Wales by water and sewerage
companies, by type, 2011/12-2013/14
Water-related capital expenditure
Figure 17: Analysis of water related capital expenditure, by water and sewerage companies in England
and Wales, 2008/09-2013/14
Figure 18: Analysis of water-related capital expenditure, by water and sewerage companies in England
and Wales, 2008/09-2013/14
Figure 19: Analysis of water capital expenditure in England & Wales, by water and sewerage companies,
by purpose, 2013/14
Figure 20: Analysis of water capital expenditure by water-only companies in England & Wales, by type,
2013/14
Figure 21: Analysis of water capital expenditure in England and Wales, by water and sewerage
companies, by type, 2011/12-2013/14
Figure 22: Analysis of water capital expenditure in England and Wales, by water and sewerage
companies, by type, 2013/14
Figure 23: Analysis of water capital expenditure in England and Wales, by water-only companies, by
type, 2011/12-2013/14
Figure 24: Analysis of water capital expenditure in England and Wales, by water-only companies, by
type, 2013/14
Scottish Water Capital Expenditure
Figure 25: Analysis of Scottish Water capital expenditure on water and sewerage services, 2009/10-
2013/14
Figure 26: Progress of Scottish Water to Date in the Five Year Investment Programme 2010/15
Northern Ireland Capital Expenditure
Figure 27: Analysis of Northern Ireland Water capital expenditure on water and sewerage services,
2009/10-2013/14
WATER & SEWERAGE FUTURE CAPITAL EXPENDITURE
Key points
25-year Strategic Direction Statements
Figure 28: UK Population, by Region, 2013-2025
Forecast capital expenditure
England & Wales - AMP6 2015-20
Figure 29: Average expected combined household bill, by water and sewerage companies, 2014/15 and
2019/20
Figure 30: Average expected household water bill, by water-only companies, 2014/15 and 2019/20
Changes to regulatory framework for AMP6
Move towards long-term alliances and frameworks across industry
Figure 31: Total expenditure (Totex) allowance for AMP6 in England & Wales, by water & sewerage
company, 2015/16-2019/20
Figure 32: Total expenditure (Totex) allowance for AMP6 in England & Wales, by water & sewerage
company, 2015/16-2019/20
Figure 33: Forecast capital expenditure for AMP6 in England & Wales, by water & sewerage company,
2015/16-2019/20
Figure 34: Forecast capital expenditure for AMP6 in England & Wales, by water & sewerage company,
2015/16-2019/20
Figure 35: Forecast capital expenditure for AMP6 in England & Wales, by water only company, 2015/16-
2019/20
Thames Tideway Tunnel
Figure 36: Estimated cost of Thames Tideway Tunnel, 2014/15-2021/22+
Scotland Investment Programme 2015-2021
Figure 37: Forecast Capital Expenditure for Scottish Water, 2015/16-2020/21
Northern Ireland Investment Programme 2015/16-2020/21
ELECTRICITY INDUSTRY
Key points
Electricity industry market factors
Price Controls
Environmental and Legislative Factors
Ofgem retail market review
Electricity market reform
Contracts for Difference (CfDs)
Capacity Market (CM)
Renewables Obligation (RO)
Feed-in Tariffs (FITs)
The Renewable Heat Incentive
Combined Heat and Power
ELECTRICITY DISTRIBUTION CAPITAL EXPENDITURE
Key points
Capital expenditure
Figure 38: UK gross capital expenditure by electricity distribution network operators, 2009/10-2013/14
Figure 39: UK gross capital expenditure by the electricity distribution network operators, by company,
2009/10-2013/14
Figure 40: UK gross capital expenditure by the electricity distribution network operators, by company,
2009/10-2013/14
ELECTRICITY DISTRIBUTION FUTURE CAPITAL EXPENDITURE
Key points
Capital expenditure allowance 2010-15
New price control framework based on Revenue = Incentives + Innovation + Outputs to come into effect
from April 2015
Figure 41: Total expenditure allowance for RIIO-ED1 in Great Britain, by company, 2015/16-2022/23
Figure 42: Total expenditure allowance for RIIO-ED1 in Great Britain, by company, 2015/16-2022/23
Figure 43: Forecast network investment of the electricity distribution network operators in Great Britain,
by company, 2015/16-2022/23
ELECTRICITY TRANSMISSION CAPITAL EXPENDITURE
Key points
Capital expenditure
Figure 44: Size of electricity transmission network in Great Britain, 2014
Figure 45: Allowed Capital Expenditure by the Electricity Transmission Industry in Great Britain, 2007/08-
2012/13
Figure 46: Capital expenditure by the electricity transmission industry in Great Britain, 2009/10-2013/14
Figure 47: Capital expenditure by the electricity transmission industry in Great Britain, 2009/10-2013/14
ELECTRICITY TRANSMISSION FUTURE CAPITAL EXPENDITURE
Key points
New price control period RIIO-T1 2013-21
Figure 48: Baseline capital expenditure allowance for NGET, 2013/14-2020/21
Figure 49: Baseline capital expenditure allowance for SHETL 2013/14-2020/21
Figure 50: Baseline capital expenditure allowance for SPTL, 2013/14-2020/21
Figure 51: NGET annual capital expenditure, Actual 2013/14 and Forecast 2014/15-2020/21
Figure 52: SHET annual capital expenditure, Actual 2013/14 and Forecast 2014/15-2020/21
Figure 53: SPTL annual capital expenditure, Actual 2013/14 and Forecast 2014/15-2020/21
Drivers for future capital investment
Figure 54: Renewable electricity generation capacity awaiting/under construction, as of March 2015
Figure 55: Operational renewable generation capacity, by technology, as of March 2015
National Grid’s electricity 10 year statement
Figure 56: Major current and planned transmission network development projects, as of November 2014
Future potential energy mix
Figure 57: Forecast power generation installed capacity under “slow progression” scenario, by source,
2015-35
Figure 58: Forecast power generation installed capacity under “gone green” scenario, by source, 2015-
35
Figure 59: Forecast power generation installed capacity under “no progression” scenario, by source,
2015-35
Figure 60: Forecast power generation installed capacity under “low carbon life” scenario, by source,
2014-35
Increased Interconnectivity between European Countries
Figure 61: Existing and planned interconnectors, as of November 2014
GAS INDUSTRY
Key points
Market factors
Social factors
Economic factors
The UK’s increased reliance on gas imports
Potential for shale gas extraction
Wholesale gas prices
Figure 62: Average wholesales gas prices, 2002-14
Environmental and Legislative Factors
Climate Change Programme (including Climate Change Levy, Agreement and efficiency
measures)
Emissions trading scheme
Combined Heat and Power
EU Renewables Directives
UK renewables policy
Renewables Obligation (RO)
Feed-In Tariffs (FITs)
The Renewable Heat Incentive
National emission ceilings directive
Carbon Emission Reduction Target (CERT) and Community Energy Saving Programme
(CESP)
Energy Company Obligation (ECO)
Carbon Emissions Reduction Obligation
Community obligation
Home heating cost reduction obligation
GAS CAPITAL EXPENDITURE
Key points
The market 2010-14
Figure 63: Total gas transmission and distribution capital expenditure, 2009/10-2013/14
Figure 64: Total gas transmission capital expenditure, 2009/10-13/14
Figure 65: Total gas distribution capital expenditure, 2009/10-2013/14
Figure 66: Total gas transmission and distribution capital expenditure, 2009/10-2013/14
Figure 67: Cumulative capital expenditure during GDPRC1 2008-13, by GDN and type
Replacement Expenditure (Repex)
Figure 68: Length of gas mains replaced, by distribution network operator, 2009-13
Figure 69: Cumulative replacement expenditure during GDPRC1 2008-13, by GDN and type
GAS FUTURE CAPITAL EXPENDITURE
Key points
Forecast 2014-21
Figure 70: Ofgem’s required expansion of the number of properties to alleviate fuel poverty, 2013-21
Innovation at centre of new price control model for gas distribution and transmission
network
Transmission network
Figure 71: Capital Expenditure Plans by National Grid Gas Under RIIO-T1, by Category, 2014-2021
Figure 72: Annual capital expenditure plans by National Grid Gas Under RIIO-T1, by Category, 2014-
2021
Distribution network
Figure 73: Controllable Cost Allowances for Gas Distribution Companies Under (RIIO-GD1), 2014-2021
Figure 74: Annual capex plans under RIIO-GD1, by GDN, 2014-2021
Figure 75: Annual repex plans under RIIO-GD1, by GDN, 2014-2021
Figure 76: Forecast total capex and repex during RIIO-GD1, 2013/14-2020/21
Individual companies
Northern gas networks
Figure 77: Northern Gas Networks Capex & Repex, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
Figure 78: Northern Gas Networks Capex & Repex Workload, 2013/14 (Actual) and 2014/15-2020/21
(Planned)
Scotland gas networks
Figure 79: Scotland Gas Networks Capex & Repex, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
Figure 80: Scotland Gas Networks Capex & Repex Workload, 2013/14 (Actual) and 2014/15-2020/21
(Planned)
Southern gas networks
Figure 81: Southern Gas Networks Capex & Repex, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
Figure 82: Southern Gas Networks Capex & Repex Workload, 2013/14 (Actual) and 2014/15-2020/21
(Planned)
Wales and West Utilities (WWU)
Figure 83: WWU Capex & Repex, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
Figure 84: WWU Capex & Repex Workload, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
NGG East of England
Figure 85: NGG East of England Capex & Repex, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
Figure 86: NGG East of England Capex & Repex Workload, 2013/14 (Actual) and 2014/15-2020/21
(Planned)
NGG London
Figure 87: NGG London Capex & Repex, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
Figure 88: NGG London Capex & Repex Workload, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
NGG North West
Figure 89: NGG North West Capex & Repex, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
Figure 90: NGG North West Capex & Repex Workload, 2013/14 (Actual) and 2014/15-2020/21
(Planned)
NGG West Midlands
Figure 91: NGG West Midlands Capex & Repex, 2013/14 (Actual) and 2014/15-2020/21 (Planned)
Figure 92: NGG West Midlands Capex & Repex Workload, 2013/14 (Actual) and 2014/15-2020/21
(Planned)
SUPPLY INDUSTRY STRUCTURE
Key points
Companies
AMEC FOSTER WHEELER
Company outlook:
Figure 93: Financial analysis of AMEC, 2009-13
BALFOUR BEATTY
Balfour Beatty announces six profit warnings in two years as it faces major challenges from
construction contracts
Figure 94: Financial analysis of Balfour Beatty, 2009-13
Figure 95: Financial analysis of Balfour Beatty by segment, 2012-13
KELLOGG BROWN & ROOT HOLDINGS
Figure 96: Financial Analysis of Kellogg Brown & Root Holdings, 2009-13
THE COSTAIN GROUP
Company performance
Figure 97: Financial Analysis of Costain Group, 2009-13
Figure 98: Turnover analysis of Costain Group, by division, 2010-13
LAING O’ROURKE UTILITIES
Company performance
Figure 99: Financial analysis of Laing O’Rourke, 2010-14
Figure 100: Financial analysis of Laing O’Rourke Utilities, 2010-14
MORRISON UTILITY SERVICES
Company performance
Figure 101: Financial analysis of Morrison Utility Services, 2010-14
MCNICHOLAS CONSTRUCTION HOLDINGS
Company performance
Figure 102: Financial Analysis of McNicholas Construction (Holdings), 2010-14
FOREFRONT UTILITIES
Figure 103: Financial analysis of Forefront Utilities, 2010-14
FURTHER SOURCES & CONTACTS
Association of Electricity Producers
Energy Networks Association
Energy Industries Council
Energy Retail Association1
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)
Energy Networks Association
Society of British Gas Industries
Association of Consulting Engineers
British Water
British Waterways Board
Chartered Institution of Water & Environmental Management
International Water Association
OFWAT
Society of British Water & Wastewater Industries
National Joint Utilities Group
Trade magazines
The Engineer
European Process Engineer
Modern Utility Management
Plant Engineer
Plant and Works Engineering
Professional Engineering
Utility Week
Trade exhibitions
Utility Week Live incorporating IWEX 2015
Sustainability Live 2015
UK B2B
Trade research
Informal
Formal
Desk research
Consumer research
Sampling and weighting
Definitions
Qualitative Research
Further Analysis
Statistical forecasting

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