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Print article2024 Predictions: Energy & Infrastructure sector outlook
January, 2024 - Shoosmiths LLP
Corporate Power Purchase Agreements ("PPAs")
Before the conclusion of 2023, the European PPA market had already achieved a ground-breaking record, thanks to a market-driven procurement strategy that played a pivotal role in fostering the much-needed expansion of renewable energy capacity in the region. However, with the ongoing energy crisis and the looming threat of high and volatile prices impacting businesses, there is an increasing trend toward securing long-term fixed price deals. This is especially true for businesses aiming to fulfil their climate change commitments by procuring clean, green energy.
Companies, by committing to acquiring a significant portion, if not the majority, of renewable power from a yet-to-be-constructed project for a duration of 10 years or more, find themselves financially obligated. This commitment not only aids developers in obtaining funding for new eco-friendly projects without relying on traditional government subsidies but also aligns with the growing preference for stable, long-term energy agreements.
However, adapting PPAs to suit the needs of mid-sized and small companies presents challenges. It is imperative to develop strategies that actively involve these businesses since their participation is integral to the overall success of the ongoing energy transition. We believe 2024 may see the first buyer’s clubs for groups of companies that, whilst not investment grade, are substantial PPA counterparties and if these structures cannot be quickly adopted, more will rely on innovative trading solutions, about which more below.
Hydrogen
Green hydrogen’s pipeline held strong through 2023, but high costs amid economic uncertainty meant we lacked a breakthrough moment for green hydrogen deployment in the UK. 2024 could change all of that, with HAR1 contracts awarded and HAR2 announced in December, promising additional support and a headline commitment to 1GW of green hydrogen electrolysis supported by CfDs by the end of 2024. Combined with further revisions to the UK Low Carbon Hydrogen Standard, a published roadmap for green hydrogen production and the pressure placed on the UK by the US and EU’s moves to jump-start a hydrogen economy, 2024 could be the first year in a big leap from front-end engineering and design (FEED) to fact for UK projects.
EVs and Charging
As mentioned in our recently published Electric Vehicle Country Attractiveness (EVCA) Index, created in partnership with Cornwall Insight, the ongoing challenges of policy and economic uncertainty pose a significant barrier to the swift advancement of electric vehicle (EV) readiness. Issues such as the slow implementation of the Rapid Charging Fund and the looming threat of Rules of Origin tariffs in the UK have the potential to diminish the appeal of new EVs.
Despite these concerns, there are encouraging developments highlighted in the 2023 Autumn Statement, particularly in support of UK battery manufacturing and actions taken on grid connections and planning. Additionally, the substantial scale of EV infrastructure and energy projects being prepared by our industry partners in the UK and Europe is a positive sign.
Furthermore, the growing availability of second-hand and ex-fleet EVs is poised to enhance the accessibility of electric vehicles. Major players like Motability are playing a crucial role in bringing EVs to a broader range of customers and geographical locations. Overall, there is a strong sense of optimism about the future of EVs.
In 2024, the focus of car manufacturers and EV battery producers will centre on incorporating new technologies and chemistries to decrease the cost of electric vehicle (EV) batteries. The shift to more cost-effective EV batteries in 2024 is expected to play a crucial role in enabling EV companies to further slash prices and devise more appealing pricing strategies for the mass market. However, it is important to be patient, as the production of battery technologies involving new materials will take time to reach the market.
Charging at a power level exceeding 1000 kW, known as Megawatt charging, stands as a pivotal technology facilitating the electrification of commercial vehicles. This advancement is poised to open avenues for electrifying various other segments of heavy-duty transportation. The commercial deployment of Megawatt chargers is anticipated to commence in 2024.
Fibre
Several market forces are pushing for an imminent consolidation in the UK fibre market, especially as challenges in interest rates and the debt markets heighten financial pressures on operators. However, the primary culprits for operational challenges in the market are the difficulties many face in achieving customer take-up. Among the influx of investors, some are positioned for the long term, particularly larger infrastructure funds with substantial financial resources and those who can continue to support UK altnets through stormy seas. On the other hand, numerous investors entered the market without a strategy for long-term involvement (be it through being an early-stage fund or due to the extensive capital investment nature of roll out) and may indeed seek to exit. Despite this, there are investors willing to sustain the market over the medium to long term, suggesting that a conclusive consolidation may not occur anytime soon. Consequently, factors such as the best operating model or network may take a backseat to considerations of which investors possess the deepest pockets and the longest time horizon.
In a relatively brief period, banks have shifted from actively seeking entry into the UK fibre market to adopting the opposite stance. The increasing demand from infrastructure projects (such as windfarms and hydrogen) and emerging technologies like AI underscores the undeniable role of improved broadband in propelling the economy forward. Nevertheless, the industry's size and its impact on GDP are often misunderstood, even by those Westminster. This misperception underscores a broader purpose that the fibre industry can rally around, potentially unlocking success. It is evident that the fibre industry is poised for a pivotal period in the coming year.
Innovative energy trading solutions
Over the past few years, the energy system in the UK has been undergoing major changes with the rise of renewable energy sources, decentralisation of energy production and new technologies enabling more flexibility and efficiency. These trends are expected to accelerate in 2024, driving further innovation in energy trading platforms and business models.
A key development will be the continued growth of peer-to-peer (P2P) energy trading platforms which allow businesses and consumers with solar panels or other renewable energy generation to sell excess energy to their neighbouring properties or back to the grid. Blockchain-enabled platforms that allow automated, transparent P2P transactions are likely to encourage the growth of local of energy markets, matching local generation with consumption and being able to offer 100% traceable and matched renewable electricity to businesses and consumers alike. Related to this, virtual power plants that aggregate and optimize distributed renewable capacity like batteries and EVs to trade or offer grid services will increase.
More homes and businesses will invest in smart energy management tech like home batteries, smart thermostats and EV chargers in 2024. This will drive the expansion of flexibility markets run by aggregators where consumers can get paid to shift energy usage to balance renewables' intermittent supply. New aggregator entrants and consolidation is likely.
Overall, the coming year will see accelerated innovation in the UK's energy grid towards a more decentralised, digitalised structure with a greater diversity of platforms, marketplaces and business models emerging to enable cleaner and more resilient power delivery. Key players will be those utilising cutting-edge digital technologies like blockchain, AI and advanced analytics within their trading infrastructure and offerings.
Summary
The primary focus for 2024 in a year of worldwide elections is to accelerate momentum towards a net zero energy and infrastructure system, irrespective of geo-political upheaval. This is not without challenges, but the appetite for the markets for clean energy and EV projects remains keen. Stakeholders and governments are rightly focussing on addressing the systemic barriers to renewable energy deployment and the Net Zero transition, but the drive from the private sector should only gather pace in 2024.
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