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Utility Capital Expenditure - UK - December 2017

“The business environment is in transition across the utility sectors, with the industry challenged by a changing regulatory environment, climate change, security of supply and uncertainties regarding future network requirements. These factors also influence the industry’s approach to capital expenditure.
Infrastructure investment will continue to be a key focus across the utility sectors, driven both by the need to replace old assets and new capacity requirements on networks. However, approaches to investment are now shifting across sectors due to changes in the regulatory environment, including increased pressure to reduce costs for consumers while ensuring security of supply. There is a focus on innovation, efficiencies and long-term outcomes in infrastructure management and investment, replacing the short-term outputs and capital expenditure preferred in the past. The scope for traditional infrastructure investment may be limited, but there will be more opportunities for companies that can provide innovative solutions for efficient network and asset management.”
– Claudia Preedy - B2B Analyst

This Report looks at the following areas:

  • 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 drives capital investment in the gas supply and distribution industry?
  • How do recent changes in the regulatory framework affect the approach to capital investment?
  • What are the expenditure plans for the current regulatory control period in the various utility sectors?

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Table of contents

  1. Executive Summary

      • The market
        • Water & sewerage sector
          • Figure 1: UK capital expenditure on water and sewerage services, 2015/16-2016/17
        • 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, 2012/13-2016/17
        • Gas transmission & distribution industry
          • Figure 4: Total gas transmission and distribution capital expenditure, 2012/13-2016/17
        • Market factors
          • Utility industry regulation
            • Legislative factors
              • Companies
                • What we think
                • Key Insights

                    • Will the UK’s decision to leave the EU affect the country’s renewable energy generation and decarbonisation targets?
                      • What does the shift towards total expenditure (totex) and long-term outcomes in AMP6 mean for the water and sewerage industry?
                        • What are the expectations of the regulatory framework for price review 2019 and beyond?
                          • What challenges does the rapid rise in distributed generation pose for distribution network operators?
                          • Introduction

                              • Definitions
                                • Water & sewerage
                                  • Electricity transmission
                                    • Electricity distribution
                                      • Gas distribution
                                        • Gas transmission
                                          • Methodology
                                            • Abbreviations
                                            • Market Positioning

                                                • Customers
                                                  • Suppliers
                                                    • Market factors
                                                    • UK Economy

                                                      • Overview
                                                        • Figure 5: Forecast GDP development 2017-21
                                                        • Figure 6: UK GDP quarterly development, 2004-17
                                                      • Inflation
                                                        • Interest rates
                                                          • House prices
                                                            • Figure 7: UK house price changes, 2006-17
                                                          • Consumer spending
                                                            • Manufacturing
                                                              • Figure 8: UK manufacturing, 2014-17
                                                            • Business investment
                                                              • Figure 9: UK GFCF, chained volume measures, seasonally adjusted, 2004-17
                                                            • Imports
                                                              • Exports
                                                              • Water & Sewerage Industry Market Factors

                                                                • Key points
                                                                  • Industry regulation
                                                                    • Legislative environment
                                                                      • European Water Framework Directive (WFD)
                                                                        • Urban Waste Water Treatment Directive (UWWTD)
                                                                          • 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
                                                                                      • No government decision yet to open up household retail market to competition
                                                                                      • Water & Sewerage Capital Expenditure

                                                                                        • Key points
                                                                                          • Total capital expenditure
                                                                                            • Figure 10: UK capital expenditure on water and sewerage services, 2010/11-2014/15
                                                                                            • Figure 11: UK capital expenditure on water and sewerage services, 2015/16-2016/17
                                                                                          • Sewerage-related capital expenditure
                                                                                            • Figure 12: Analysis of sewerage-related capital expenditure, by water and sewerage companies in England and Wales, 2010/11-2014/15
                                                                                            • Figure 13: Analysis of sewerage-related capital expenditure, by water and sewerage companies in England and Wales, 2015/16-2016/17
                                                                                            • Figure 14: Analysis of sewerage capital expenditure in England and Wales by water and sewerage companies, by type, 2015/16-2016/17
                                                                                          • Water-related capital expenditure
                                                                                            • Figure 15: Analysis of water-related capital expenditure, by water and sewerage companies in England and Wales, 2010/11-2014/15
                                                                                            • Figure 16: Analysis of water-related capital expenditure, by water and sewerage companies in England and Wales, 2015/16-2016/17
                                                                                            • Figure 17: Analysis of water capital expenditure in England and Wales by water and sewerage companies, by type, 2015/16-2016/17
                                                                                            • Figure 18: Analysis of water capital expenditure in England and Wales by water only companies, by type, 2015/16-2016/17
                                                                                          • Scottish water capital expenditure
                                                                                            • Figure 19: Analysis of Scottish Water capital expenditure on water and sewerage services, 2012/13-2016/17
                                                                                          • Northern Ireland capital expenditure
                                                                                            • Figure 20: Analysis of Northern Ireland water capital expenditure on water and sewerage services, 2012/13-2016/17
                                                                                        • Water & Sewerage Future Capital Expenditure

                                                                                          • Key points
                                                                                            • Future challenges facing the water and sewerage sector
                                                                                                • Figure 21: UK population, by region, 2014-36
                                                                                              • Expectations of regulatory framework for price review 2019 and beyond
                                                                                                • Opening up of non-household retail market in England to provide new opportunities for water and sewerage companies
                                                                                                  • Forecast capital expenditure
                                                                                                    • England & Wales - AMP6 2015-20
                                                                                                      • Move towards long-term alliances and frameworks across industry
                                                                                                        • Figure 22: Total expenditure (totex) allowance for AMP6 in England & Wales, by water & sewerage company, 2015/16-2019/20
                                                                                                      • Thames Tideway Tunnel
                                                                                                          • Figure 23: Estimated cost of Thames Tideway Tunnel, 2015/16-2021/22+
                                                                                                        • Scotland Investment Programme 2015-21
                                                                                                          • Figure 24: Forecast capital expenditure for Scottish Water, 2015/16-2020/21
                                                                                                        • Northern Ireland Investment Programme 2015/16-2020/21
                                                                                                        • Electricity Industry Market Factors

                                                                                                          • Key points
                                                                                                            • Electricity industry market factors
                                                                                                              • Price controls
                                                                                                                • UK energy policy
                                                                                                                  • UK committed to reducing carbon emissions by 80% below 1990 levels by 2050
                                                                                                                    • The government remains committed to tackling climate change despite Brexit vote
                                                                                                                      • New government policies urgently needed to achieve long-term emission reduction goals
                                                                                                                        • Government publishes long-awaited Clean Growth Plan in October 2017
                                                                                                                          • Levy Control Framework
                                                                                                                            • Renewable Energy Obligation (RO)
                                                                                                                              • Feed-in-Tariffs (FITs)
                                                                                                                                • Government commits to fresh FIT review before end of 2017
                                                                                                                                  • The Renewable Heat Incentive
                                                                                                                                    • Contracts for Difference (CfDs)
                                                                                                                                      • First CfD auction concludes in February 2015
                                                                                                                                        • Second CfD auction winning bids dominated by offshore wind, which has seen a dramatic fall in costs
                                                                                                                                          • Next CFD auction scheduled for Spring 2019
                                                                                                                                            • Annual Capacity Market auctions are held to help secure the UK’s energy supply
                                                                                                                                            • Electricity Distribution Capital Expenditure

                                                                                                                                              • Key points
                                                                                                                                                • Capital expenditure
                                                                                                                                                  • Gross capital expenditure
                                                                                                                                                    • Figure 25: UK gross capital expenditure by electricity distribution network operators, 2011/12-2016/17
                                                                                                                                                    • Figure 26: UK gross capital expenditure by the electricity distribution network operators, 2012/13-2016/17
                                                                                                                                                    • Figure 27: Total expenditure by electricity distribution network operators in Great Britain, by type, 2015/16
                                                                                                                                                  • Smart grid development to support low-carbon economy
                                                                                                                                                    • Recent years have seen rapid increase in distributed generation connected to DNOs’ networks
                                                                                                                                                        • Figure 28: Distributed generation connected to the distribution network during DPCR5, 2011-15
                                                                                                                                                        • Figure 29: Distributed generation connected to the distribution network, 2015/16
                                                                                                                                                    • Electricity Distribution Future Capital Expenditure

                                                                                                                                                      • Key points
                                                                                                                                                        • New price control framework based on Revenue = Incentives + Innovation + Outputs effective from April 2015
                                                                                                                                                          • Forecast total expenditure
                                                                                                                                                            • Figure 30: Actual total expenditure in 2015/16, totex allowance and forecasts for RIIO-ED1, by company
                                                                                                                                                          • Ofgem slashes £200 million from RIIO-ED1 DNO spending allowances in September 2017
                                                                                                                                                            • Figure 31: Total expenditure forecast for RIIO-ED1 in Great Britain, by company, 2015/16-2022/23
                                                                                                                                                            • Figure 32: 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 33: Size of electricity transmission network in Great Britain, 2017
                                                                                                                                                                • Figure 34: Capital expenditure by the electricity transmission industry in Great Britain, 2012/13-2016/17
                                                                                                                                                                • Figure 35: Capital expenditure by the electricity transmission industry in Great Britain, 2012/13-2016/17
                                                                                                                                                            • Electricity Transmission Future Capital Expenditure

                                                                                                                                                              • Key points
                                                                                                                                                                • New Price Control Period RIIO-T1 2013-21
                                                                                                                                                                    • Figure 36: NGET annual capital expenditure, actual 2014-16 and forecast 2017-21
                                                                                                                                                                    • Figure 37: SHET annual capital expenditure, actual 2014-17 and forecast 2018-21
                                                                                                                                                                    • Figure 38: SPTL annual capital expenditure, actual 2014-17 and forecast 2018-21
                                                                                                                                                                  • Drivers for future capital investment
                                                                                                                                                                    • Tentative signs of investor confidence returning in the UK renewables sector
                                                                                                                                                                      • Energy storage to play key role in transition to clean electricity supply system
                                                                                                                                                                        • Renewables capacity development pipeline
                                                                                                                                                                          • Figure 39: Renewables capacity development pipeline, as of September 2017
                                                                                                                                                                        • Future potential energy mix
                                                                                                                                                                          • Renewables
                                                                                                                                                                            • Nuclear
                                                                                                                                                                              • Thermal plants
                                                                                                                                                                                • Interconnectors
                                                                                                                                                                                  • Figure 40: Forecast power generation installed capacity under “slow progression” scenario, by source, 2017-42
                                                                                                                                                                                  • Figure 41: Forecast power generation installed capacity under “two degrees” scenario, by source, 2017-42
                                                                                                                                                                                  • Figure 42: Forecast power generation installed capacity under “steady state” scenario, by source, 2017-42
                                                                                                                                                                                  • Figure 43: Forecast power generation installed capacity under “consumer power” scenario, by source, 2017-42
                                                                                                                                                                                  • Figure 44: Future potential energy mix in 2037, by scenario
                                                                                                                                                                                • Despite Brexit uncertainty, interconnector capacity between Britain and Europe is set to increase
                                                                                                                                                                                    • Figure 45: Existing and planned interconnectors, as of June 2017
                                                                                                                                                                                • Gas Industry Market Factors

                                                                                                                                                                                  • Key points
                                                                                                                                                                                    • Social factors
                                                                                                                                                                                      • Economic factors
                                                                                                                                                                                        • The UK’s increased reliance on gas imports
                                                                                                                                                                                          • Government push for shale gas exploration to reduce reliance on imports
                                                                                                                                                                                            • Wholesale gas prices
                                                                                                                                                                                              • Figure 46: Average wholesale gas prices, 2006-17
                                                                                                                                                                                            • Industry structure and regulatory factors
                                                                                                                                                                                              • National Grid sells majority stake in its remaining four gas distribution networks in 2017
                                                                                                                                                                                                • Roles of distribution networks
                                                                                                                                                                                                  • Ofgem regulates gas network operators via price controls
                                                                                                                                                                                                    • Environmental and legislative factors
                                                                                                                                                                                                    • Gas Capital Expenditure

                                                                                                                                                                                                      • Key points
                                                                                                                                                                                                        • The market 2013-17
                                                                                                                                                                                                          • Figure 47: Total gas transmission and distribution capital expenditure, 2012/13-2016/17
                                                                                                                                                                                                          • Figure 48: Total gas transmission capital expenditure, 2012/13-16/17
                                                                                                                                                                                                          • Figure 49: Total gas distribution capital expenditure, 2012/13-2016/17
                                                                                                                                                                                                          • Figure 50: Total gas transmission and distribution capital expenditure, 2012/13-2016/17
                                                                                                                                                                                                        • Replacement expenditure (Repex)
                                                                                                                                                                                                            • Figure 51: Length of iron gas mains replaced, by distribution network operator, 2011-16
                                                                                                                                                                                                        • Gas Future Capital Expenditure

                                                                                                                                                                                                          • Key points
                                                                                                                                                                                                            • Overview
                                                                                                                                                                                                                • Figure 52: 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
                                                                                                                                                                                                                • Gas network operators to face tougher price controls from 2021
                                                                                                                                                                                                                  • Transmission network
                                                                                                                                                                                                                    • Figure 53: Annual capital expenditure plans by National Grid Gas under RIIO-T1, by category, 2014-21
                                                                                                                                                                                                                  • Distribution network
                                                                                                                                                                                                                    • Figure 54: Annual capex plans under RIIO-GD1, by GDN, 2014-21
                                                                                                                                                                                                                    • Figure 55: Annual repex plans under RIIO-GD1, by GDN, 2014-21
                                                                                                                                                                                                                    • Figure 56: Forecast total capex and repex during RIIO-GD1, 2013/14-2020/21
                                                                                                                                                                                                                • Supply Industry Structure

                                                                                                                                                                                                                  • Key points
                                                                                                                                                                                                                    • Companies
                                                                                                                                                                                                                    • AMEC Foster Wheeler

                                                                                                                                                                                                                        • Transformation programme sees Amec Foster Wheeler sell non-core assets
                                                                                                                                                                                                                          • Amec Foster Wheeler acquired by Wood Group in October 2017
                                                                                                                                                                                                                            • Company outlook:
                                                                                                                                                                                                                                • Figure 57: Financial analysis of AMEC Foster Wheeler, 2012-16
                                                                                                                                                                                                                            • Balfour Beatty

                                                                                                                                                                                                                                • Build to Last transformation programme launched in 2015
                                                                                                                                                                                                                                    • Figure 58: Financial analysis of Balfour Beatty, 2012-16
                                                                                                                                                                                                                                    • Figure 59: Financial analysis of Balfour Beatty by segment, 2015-16
                                                                                                                                                                                                                                • Kellogg Brown & Root Holdings

                                                                                                                                                                                                                                    • Company strategy:
                                                                                                                                                                                                                                        • Figure 60: Financial analysis of Kellogg Brown & Root Holdings, 2012-16
                                                                                                                                                                                                                                    • The Costain Group

                                                                                                                                                                                                                                        • Company strategy and performance
                                                                                                                                                                                                                                            • Figure 61: Financial analysis of Costain Group, 2012-16
                                                                                                                                                                                                                                            • Figure 62: Turnover analysis of Costain Group, by division, 2014-16
                                                                                                                                                                                                                                        • Laing O’Rourke

                                                                                                                                                                                                                                            • Strategic review 2015-16
                                                                                                                                                                                                                                              • Company performance and outlook
                                                                                                                                                                                                                                                • Figure 63: Financial analysis of Laing O’Rourke, 2012-16
                                                                                                                                                                                                                                            • Morrison Utility Services

                                                                                                                                                                                                                                                • Company performance:
                                                                                                                                                                                                                                                  • Figure 64: Financial analysis of Morrison Utility Services, 2012-16
                                                                                                                                                                                                                                              • McNicholas Construction Holdings

                                                                                                                                                                                                                                                  • Kier acquires McNicholas Construction (Holdings)
                                                                                                                                                                                                                                                    • Company performance:
                                                                                                                                                                                                                                                        • Figure 65: Financial analysis of McNicholas Construction (Holdings), 2012-16
                                                                                                                                                                                                                                                    • Forefront Utilities

                                                                                                                                                                                                                                                        • Figure 66: Financial analysis of Forefront Utilities, 2012-16
                                                                                                                                                                                                                                                    • Further Sources & Contacts

                                                                                                                                                                                                                                                      • Trade associations & 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 exhibitions
                                                                                                                                                                                                                                                                                            • Utility Week Live 2018
                                                                                                                                                                                                                                                                                              • edie live 2018

                                                                                                                                                                                                                                                                                              Utility Capital Expenditure - UK - December 2017

                                                                                                                                                                                                                                                                                              US $1,321.06 (Excl.Tax)