This article summarises part of an OSG Thought report on the future of the UK energy market, and the disruptive nature of technology and government policy.
The Incumbents' Dominance
Energy is more important now than ever, and it's one of the industries which is likely to be most disrupted over the coming decades, as new technologies and policy priorities shift the market towards more sustainable resources. Right now, the Big Six UK energy companies dominate the market, but new entrants to the market are seizing different opportunities, investing more heavily in renewables than the Big Six.
Technology and Disruption
As with most industries, energy is being disrupted by technology - and quickly. Renewable sources of energy are rapidly growing in the UK, as wind and solar power quickly become more cost-competitive. Our consultants found that once the tipping point of renewable production being viable without subsidy is reached, the renewable sector will witness exponential growth due to the absence of uncertainty in government policy.
Cheap Solar on the Horizon
Our team found three major trends pushing down the production costs of solar energy over the next decade, increasing solar power's cost-competitiveness to near-parity with gas by 2030. As solar gets cheaper, gas will only continue to get more expensive.
- Intellectual Property in solar technologies created in the 1970s is beginning to expire, allowing the entry of new suppliers and the widespread adoption of cost-saving technologies
- Economies of Scale are rapidly and exponentially driving down prices. As more solar is demanded, costs of production fall, further increasing demand in a virtuous cycle.
- Supply Chain Maturity is allowing solar to benefit from costs of distribution more in line with traditional energy producers.
It's not just Solar: Wind's Costs are Falling
While much is said of cost savings in solar energy, especially because of its vast potential in sunny southern latitudes, the UK energy market will undoubtedly also include a significant wind component going forward. While the cost-saving factors are weaker than for photovoltaic technology, the costs of wind energy should also fall over the next decade, also approaching parity with gas. Our team identified two main cost-competitiveness factors allowing newer and smaller entrants to disrupt the Big Six:
- Supply Chain Maturity is expected to improve efficiency in the market for wind energy, driving down costs for producers and consumers.
- Technological Innovation, especially in the conversion of energy to electricity and in the smoothing of production through short-term storage of electricity, will significantly improve wind's competitiveness.
Strategic Responses to Disruption
With the disruption caused by the dramatic cost savings expected in renewable energy over the next decade, as well as the inevitable changes in energy policy explored in the full report, there are strategic opportunities for both the Big Six and new entrants.
The Big Six can maintain their market share by participating in and benefiting from the changes in the market, reallocating investment to renewable energy generation. By taking advantage of their natural competitive advantages, like existing brand recognition and superior core competencies and financial resources, incumbent suppliers can defend and grow their market share despite the disruption.
In contrast, new entrants' flexibility allows them to invest more heavily and quickly in renewables. If new entrants can position themselves to disproportionately benefit from the rise of renewables, they can pick up market share from the Big Six, as the cost of traditional energy increases.
For more detailed strategic responses, as well as a full exploration of the changing energy policy landscape, see our full OSG Thought report.