Analysis Of The Uk Renewable Energy Industry Environmental Sciences Essay

Renewable energy is the energy generated from natural resources such as biomass, sunlight, wind, rain, tides, and geothermal heat, which are renewable, that is, naturally replenished(Wikipedia, 2010). Renewable energy technologies are essential contributors to energy supply portfolio, as they contribute to world energy security, reduce dependency on fossil fuels, and provide opportunities for mitigating greenhouse gases (IEA, 2007). Renewable energy is also considered by some to be a potentially significant contributor toward the economic development of rural areas, a means of reducing poverty through the creation of employment and improving the quality of lives (Mark et al, 2008). Renewable energy sources were very unpopular in the past decades because of their comparative cost disadvantage. With the exception of large hydropower, combustible biomass, and larger geothermal projects, the average cost of renewable energy are generally not competitive with the wholesale electricity and fossil fuel prices(IEA, 2007).

However, this decade has witnessed a tremendous development in renewable energy sector. The rising oil prices, issue of global warming , carbon gas emission, terrorism and political instability in many oil producing countries in the middle east are the major forces driving this development. The International Energy Agency estimates that nearly 50% of global electricity supplies will need to come from renewable energy sources in order to reduce carbon dioxide emission by 50% by 2050 and minimise significant, irreversible climate change impacts (IEA, 2008). During the five- years period from the end of 2004 -2009, worldwide renewable energy grew at the rates of 10-60% for many technologies (REN21, 2010). In 2008 for the first time, more renewable energy than convectional power capacity was added in both European Union and United States, demonstrating “a fundamental transition” of the world’s energy markets towards renewable (Eric et al, 2009).

Renewable energy sector is growing at a very amazing rate in UK. Between 2003 and 2009 there was 138 per cent increase in power generation from renewables in the UK, but faster rates of growth were recorded in Northern Ireland (702 per cent), East Midlands (268 per cent), North East (211 per cent), Scotland (188 per cent), South East (146 per cent) and Yorkshire and the Humber (139 per cent) (DECC, 2010). Higher growth rate is expected in the next decade. This can be inferred from the fact that power generation from the UK’s oil and gas and nuclear reactors have been on a long-term downward trend and tend towards the end of their life span (Keynote, 2008). As a result, UK government has devised a comprehensive approach to support the development of the renewable energy sector through the UK renewable energy strategy 2009.

Renewable energy in UK is supported through a range of measures. The renewable obligation Order requires electricity suppliers to purchase a specified amount of the electricity they supply from renewable sources (Keynote, 2010). Renewable Obligation Certificates (ROCs) are obtained to demonstrate that renewable sources have been used. The climate change levy is a fossil-fuel tax from which exemptions can be obtained by using certain renewable technologies. Capital grants are available for research and development for a wide range of renewable energy projects. Grants are also available for the cultivation of energy crops. Obviously, these are good incentives to stimulate investments in renewable energy. However, investors need assurance that these incentives and subsidies will be available over a larger part of the product life cycle and not just trap-in-incentives. This will enable renewable energy companies to build a more stable and viable strategic plan to take best advantage of the incentives.

The favourable geographical location of UK in terms of its windy condition, long coastline and excellent infrastructural facilities contributes to the rapid growth of renewable energy. The amount of power generated in terms of renewable energy in UK grew each year between 2004 and 2008 (DECC, 2009).A total of 17,566 gigawatt hours (GWh) was generated in 2008 which is 76.2% more than the amount generated in 2004. Biomass produced most of the renewable electricity in 2008 (46.1%) of the total, followed by wind and wave power (40.4%) and hydropower (13.4%), see table 1.

Renewable energy is expected to develop into a major sector, providing scope for business growth and a substantial source of employment (Keynote, 2010). UK Renewable Energy Strategy, (2009) estimated that 500, 000 jobs could be created in the market by 2020.

Table 1 : Electricity Generated from UK Renewable Energy Sources (gigawatt hours), 2004-2008

Biomass

2004

2005

2006

2007

2008

Landfill

4,004

4,290

4,424

4,677

4,757

Co-firing with fossils fuels

1,022

2,533

2,528

1,956

1,613

Animal biomass

565

468

434

555

587

Plant biomass

362

382

363

409

568

Sewage-sludge digestion

440

470

456

496

564

Total biomass

6,393

8,143

8,204

8,092

8,090

Wind & wave power

Onshore

1,736

2,501

3,574

4,491

5,792

Offshore

199

403

651

783

1,305

Total wind & wave power

1,935

2,904

4,225

5,274

7,097

Hydropower

Small scale

283

444

478

534

568

Other hydro

1,353

1,542

1,969

1,912

1,794

Total hydropower

1,636

1,986

2,447

2,446

2,362

Solar photovoltaics

4

8

11

14

17

Total

9,968

13,040

14,887

15,826

17,566

Source :Digest of United Kingdom Energy Statistics 2009, Department of Energy and Climate Change

Having presented the general overview of renewable energy industry , a critical environmental analysis of the industry will be examined using PEST analysis, SWOT analysis and Porter’s five model of competitive advantage.

PEST ANALYSIS

The environment in which an organisation operates is divided into macro and micro environments(Philip, 2000). The micro environment has a major and direct impact upon the organisation, and its strategic planning process while the macro environment comprises those conditions that have a broad, rather than direct, impact upon the organisation (Wendy,1997). Brannan (1992) identified the major potential macro environmental factors that could significantly impact on organisation performance and a possible framework for listing such factors is PEST-Politics, Economics, Sociology and Technological developments.

POLITICAL FACTORS

The long-term decline in UK’s oil and gas fortunes has led to an increasing import of oil and gas (Keynote, 2010). This means UK will be competing in the world markets for its oil and gas requirements with emerging economies, such as China and India. These countries have different cultures and political structures to the UK, and it could be a challenge for the UK to maintain a good relationship with them. Political instability and terrorism in the middle east is also of concern on the security of global energy supply. Therefore, Energy supply could become a very political issues in the future. It is hopeful that renewable energy sector will gain enormous political support from the UK government as an alternative to heavy reliance on importation of oil and gas. This will create favourable atmosphere and opportunities for investment in renewable energy sector.

The quest to solve the problem of global warming has great political impact on government policies towards renewable energy. There is co-operation among the western world to reduce global warming by reducing carbon gas emission . The UK Government takes a prominent role in mitigating the effects of climate change by reducing carbon gas emission. Several government initiatives and legislation have been put in place, notable among these are; The Climate Change Act 2008-a commitment to reduce the UK’s greenhouse gas emissions to at least 80% below the 1990 levels by 2050, Energy Act 2008 and Renewable Obligation (Keynote,2010). Renewable Obligation requires electricity suppliers to supply a specific amount of electricity from renewable sources. This is a good initiative to develop renewable energy. According to Deloitte(2010), UK has nearly 30 different low carbon energy incentives in form of tax credits and subsidies. The argument here is the certainty of the availability of the incentives throughout the project life cycle. This is vital for long term strategic plans. Nonetheless, the political imperative to introduce regulatory and fiscal incentives will continue to create opportunities for investors (Deloitte, 2010).

ECONOMIC FACTORS

GROSS DOMESTIC PRODUCT (GDP)

There was an annual increase in the UK’s GDP between 2005 and 2008, but a decline of 4.8% was seen in annual chain-linked GDP in 2009, NSW,2010 (cited in keynote, 2010). GDP forecast for the period from 2009 to 2013 are well below the growth experienced during the 2005 to 2008 period (when annual growth was between 3.4% and 5.7% at current prices) TIA,2009 (Cited in Keynote, 2010). Growth is forecast to fall steeply to -4.2% in 2009, followed by a slow recovery to 2.6% in 2013. By 2013, GDP annual growth will still not be as great as any year in the period from 2005 to 2008. It is likely that lower GDP will have a depressing effect on renewable energy demand. However, this notion has been proved otherwise by the year on year increase in UK demand for renewable energy (DECC, 2009). UK demand for renewable energy increased by 6.7% between 2006 and 2007 and by 12.9% between 2007 and 2008. It is expected that the demand for renewable energy will continue to increase over the years to 2020 as government has put in place several incentives to attract private investors in a bid to achieve the goals of UK renewable energy strategy by 2020. According to the secretary of state for energy and climate change (UK renewable energy strategy, 2009), “UK government aims at reducing carbon emissions by expanding renewable energy to account for 15% of energy demand by 2020, reduce UK’s of fossil fuels by around 10% by 2020. Through the implementation of this strategy, enough renewable energy will be in place by 2020 to supply the equivalent of nearly all 26 million homes in the UK with their current electricity needs and 4 million homes with their current heating needs. This radical approach will require a seven -fold increase in renewable energy in the 11 years from 2009 to 2020. The ‘lead scenario’ of this proposed massive expansion is based on more than 30% of electricity needs to be generated from renewable (up from around 5.5% now), mostly from wind power, 12% of heat needs and 10% of transport needs from the current level of 2.6%”. If the proposal is fully implemented and progressed as planned, it will create a huge investment opportunities for investors in the renewable energy sector. It will also promote innovation and catalyse infrastructural development in the renewable energy sector. If infrastructural and technological development are sustained over a period of time, it can bring economy of scale in terms of reduced energy cost. This will improve the competitive strength of renewable energy.

UNEMPLOYMENT

Another important economic variable is unemployment. UK unemployment rose from 860,000 in 2005 to 910,000 in 2008, before suffering a huge rise of 68.1% to reach 1.5million in 2009 (Keynote, 2010). The drastic rise in unemployment rate was as a direct consequence of economic meltdown. The 5-year period from 2009 to 2013 is forecast to experience unemployment levels well above any annual figure in the preceding period (2005 -2009),unemployment is forecast to rise from 1.5million in 2009 to 2.16 million in 2010, after which it will decline to 1.86 million in 2013 TIA, 2009 (Cited in keynote, 2010). The implication of this is that with fewer people at work, it is to be expected that energy consumption in the workplace will decline. There will, however, be an increase in domestic energy consumption if a large number of people are at home during cold weather.

INFLATION

A stable inflation rate over time is essential for a more realistic strategic plans, whereas, in a situation of fluctuating inflation it may be difficult for organisations to have stable plans as adjustment will have to be made from time to time. UK inflation increased from 2.8% to 4.3% between 2005 and 2007, it fell to 4% in 2008 and a deflation of 0.5% set in 2009 (Keynote, 2010). From the economic point of view, a slightly rising inflation over time tends to favour investment as higher returns will be accrued to factors of production. Energy prices increased generally between 2005 and 2009 (Keynote, 2010). This can be partially attributed to increase in inflation rate over the same period. However, a well stable inflation over time can lead to economic stagnation, which can impact negatively on renewable energy market demand.

SOCIAL AND ENVIRONMENTAL FACTORS

Renewable energy is often considered as the solution to the world’s climate change and wider environmental concerns (Deloitte,2010). The success of renewable energy as an environmentally friendly and alternative energy source is always questioned by its scope and sustainability. The issue of sustainability is rising and corporate social responsibility is becoming an increasing concern for all companies. Therefore, there is more pressure on renewable energy companies to deliver an effective sustainability agenda (Deloitte, 2010). Renewable energy can involve large infrastructure, its construction and operation has both environmental and social consequences. These include questions regarding the carbon benefits of bio-fuels and argument that they are contributing to rising food prices, fears over the impact of wind farms and tidal barrages on local biodiversity, as well as the social impact of large hydro projects which can involve relocation of villages (Deloitte, 2010). As renewable energy continues to become a larger part of the energy equation, there will be increasing focus on its sustainability credentials. The strategic implication of this for a renewable energy companies is that they should undertake thorough environmental and social assessments embedding sustainability into their overall corporate strategy and supply chain in order to preserve their own and the industry’s reputation (Deloitte, 2010). It can be inferred that increased sustainability and social responsibilities will lead to increased renewable energy cost . A survey by electric utility week (2010), found that the single most energy related problem facing consumers today is high cost of various forms of energy.

Another social factor militating the development of renewable energy project is the difficulties in obtaining planning permission (Michael, 2008). The reason for this is local NIMBY (Not-in-my backyard) opposition. But, this has been borne out of a fear of change and a lack of appreciation of the benefits that renewable energy can play in local communities. This constraint can be eliminated by encouraging local communities to co-invest in small scale renewable energy projects (Deloitte, 2010). This approach will assist in alleviating rural poverty and at the same time raise awareness on the benefits of renewable energy.

POPULATION

The population of a region, its distribution, composition, growth and trend over time is an important environmental factor that could play a key role in designing an effective corporate strategies over a relatively long period of time .Understanding population dynamics of the market in which corporate organizations operate promotes recruitment policies, gives better understanding of demand for the products and proper segmentation of the market. In 2009, the UK resident population was 61.8 million, which grew by 0.7% compared with previous figures of 61.38million in 2008 and by 2.6% compared with 60.24million in 2005 (NSW,2010). The UK population is projected to grow by 0.7% per annum between 2009 and 2013, rising from 61.8 million to 63.7 million (GAD,2009).This strong population growth and forecast is a favourable factor for the current and future prospects for the renewable energy industry. A favourable population growth can lead to increase demand for renewable energy, as a result companies can expand their market share which will impact positively on the organization’s bottom line (profit motive). However, a growing population could also a challenge for the industry to continue to provide a good service as it aims to reduce carbon emissions(Keynote, 2010).

TECHNOLOGICAL FACTORS

The growing demand for renewable energy of all kinds is generating a need for people with appropriate skills. Companies need to consider how to build up, manage and retain their human capital, particularly where projects may face an uncertain development period (Deloitte, 2010). Already, there have been reports of shortages of turbine blades, restricting wind-farm development (Keynote, 2008). Renewable energy in UK is a world-class industry and with government commitment to realise the sector’s full potentials, it is essential that its skill base grows to support its expansion. Key players in the oil and gas industry are also stakeholders in the development of renewable energy sector. These companies employ the latest technology, possess well- trained engineers and other personnel. Some of these skills can be readily transferred to renewable energy sector (Deloitte, 2010 ).

Technological developments in the global renewable energy world is also important. For instance, China is already the largest and fastest renewable energy economy in the word, their focus is not just domestic but international, and their impact will be felt everywhere (Deloitte, 2010).

COMPETITIVE STRUCTURE

Organizations do not exist in isolation but operate in a dynamic, turbulent and constantly changing world with many forces in place. Among the significant environmental variables are those relating to the nature of competition in particular market as these will determine current profitability and the scope for manoeuvring within that market (Wendy,1997). These environmental variables were identified by Porter through his five forces model of competitive structure, Porter, 1980 (cited in Wendy, 1997). These environmental variables include; threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products or services and rivalry among existing competitors. The current competitive position of any organization will be the net force of these five aggregated (Porter, 1980). This model will be used to analyse the competitive structure of the renewable energy industry in UK.

RIVALRY BETWEEN COMPETITORS

UK energy industry is dominated by many multinational energy companies. Notable among are ; AMEC Plc, BP Plc, Centrica plc, EDF Plc, E.ON Climate and Renewables UK Operations Ltd, Renewable Energy System Ltd, Royal Dutch Shell Plc, RWE Power Plc, Scottish Power Ltd, Scottish and Southern Energy Plc, AES Solar, Bio-energy Technology Ltd, among others (Keynote, 2010). These companies have very strong financial strength, employ latest technology and possess first class manpower. Their recent interests and investments in various renewable technologies in UK is making the competition tougher than before. For instance, in 2008, BP Plc invested $1.4b in its alternative energy business and Centrica Plc announced that its proposed 250MW offshore wind farm off the Lincolnshire coast had received official consent (Keynote, 2010). This trend is expected to continue because of the global interest in reducing global warming and carbon emission through low carbon energy sources. The implication of this is that competition between rival will grow more intense.

Moreover, renewable energy is a fast growing sector of the energy industry in UK. The renewable energy sector is expected to experienced a spontaneous and sustained growth over the next two decades because of the government supports to develop the sector. As the sector grows spontaneously over time, competition among competitors tends to be more intense. It is hopeful that increased competition will lead to overall industry efficiency and consequently reduced energy cost.

THREATS OF NEW ENTRANTS

Availability of different incentives in terms of tax credit and subsidies will definitely woo potential investors to invest in UK renewable energy sector. The existing companies in the UK renewable energy sector are mostly multinationals with robust balance sheet, highly innovative and technologically advanced. Their size and efficient technology give them economic of scale advantage in the area of production, marketing and distribution of renewable energy over the incoming companies. The effect of this is reduced energy cost per unit that can be favourably transferred to consumers. The greatest concern about the future of renewable energy is the acceptability of its higher cost compare to other traditional energy sources to consumers. However, injection of huge capital at start-up by new companies, with right management team and dedicated staff could neutralise the retaliation power of the existing competitor. This could as well serve as threats to the existing companies.

THREATS OF SUBSTITUTES

In recent years, renewable energy sector has received tremendous supports for its increase share of total energy supply not only from the UK government but also from EU and the world at large. This is attributed to its positive effects on climate change. However, much have not been said about the comparative cost of renewable energy with other convectional energy sources. A study carried out by the BP Power for Royal Academy of Engineering (RAE, 2010) revealed that renewable energy sources are generally more expensive than convectional energy sources. The studies attributed the higher cost of renewable energy to immaturity of the technology and limited opportunity to take advantage of cost savings through economy of scale. Convectional energy sources are good substitutes to renewable energy and constitute a serious threat to its growth and development . However, it is hopeful that with the global trend towards renewable energy, the sector will experience a technological revolution and take advantage of economy of scale from increased market opportunities.

THE POWER OF BUYERS AND SUPPLIERS

The bargaining power of suppliers is relatively high. This is driven by the small number of renewable energy suppliers and relatively lack of information and product choice for buyers.

SWOT ANALYSIS

This is a model for assessing the Strengths, Weaknesses, Opportunities and Threats that face an organization . Strengths and weaknesses define the internal context of the organization, while opportunities and threats examine the external environment (Philip, 2000).

STRENGHTS

One of the greatest environmental problems facing the world today is global warming. Global warming is caused by carbon gas emission from the convectional fossil fuels . The focus of the western world is to reduce carbon emission to as low as possible. The fundamental approach to this is the development of global alternative energy sources with low carbon emission, of which renewable energy is viable and feasible option. UK is playing a leading role at reducing global carbon emission. A comprehensive approach towards achieving these goals, “UK Renewable Energy Strategy 2009” was presented to the house of parliament in July, 2009. The strategy contains various incentives to attract private investors and proposed huge government capital investment in different areas of renewable sector. Renewable energy already benefits £485 million a year through the Renewable Obligation and plans are on ground to offer further subsidies (e.g. reductions in transmission charges) through amendments to the electricity bills (RAE, 2010). Also, recent legislation in the UK and EU provides a framework for more commitment to the development of renewable energy.

Furthermore, UK is blessed with many suitable locations for the development of various forms of renewable energy. As at 2009, a total of 1,648 sites generated electricity from different renewable sources; 939 (57%) were in England , 436 (26.4%) were in Scotland, 143 (8.7%) were in Wales and 130(7.9%) were in Northern Ireland (DECC, 2010). The location advantage couple with UK government and EU supports is a strong impetus that could drive a revolutionary development in the renewable energy sector. Also, the long- term decline in the UK’s offshore oil and gas industry adds strength for an increase in renewable energy.

OPPORTUNITIES

UK has a stable political structure characterised by high technological and infrastructural development. Thus, the economy is capable of developing extensive expertise in a wide range of renewable technologies, including design, research, manufacture and installation (Keynote, 2009). The availability of world class facilities and manpower in various UK universities can be harnessed to channel research towards developing a first class renewable energy technologies that will promote overall industry efficiency in the sector. The impact of research and technology in the development of a sustainable renewable energy economy cannot be overemphasised. It will drive the industry into maturity from which economy of scale can be achieved. Also, renewable energy sector opens opportunities for many multinational oil and gas companies to increase their stake or as new entrants. These companies have appropriate skills mix and technology. Development in renewable energy sector can also open opportunity for companies to enter foreign markets.

THREATS

Large energy companies review the whole global energy market to identify the best returns for their investment. Some of these companies have decided to curtail investment in renewable energy in certain regions and technologies, as more interesting opportunities (not necessarily in renewable energy ) lie outside UK (keynote, 2009). Also the proposed plans to replace the UK’s ageing nuclear power stations with new nuclear power stations pose a serious threat to the future of renewable energy. They have very low carbon emissions and represent perfect substitute to renewable energy in this respect.

WEAKNESSESS

The development of large scale renewable energy and the necessary infrastructures require substantial amount of capital which is difficult to come by. Investors are finding it very difficult to obtain the much needed fund from the banks because of the recession. Also, it has been established by research that, in the short run, renewable energy are more expensive than the convectional energy sources . The business implication of this is that profitability will be affected in the short run. Energy supply has little product differentiation and consumers will only go for the cheapest energy source. Thus, new renewable energy companies may be forced to apply price penetration policy to gain enough market share from which they can enjoy economy of scale. Shortage of equipment, for instance in wind farm power sector also hinders development of renewable energy (Keynote, 2010).

CONCLUSION

This analysis has shown that renewable energy is a growing sector of the energy industry in UK with many potentials to develop into a major energy sector. Many forces are responsible for the growth of renewable energy industry. These include; the global and EU commitments to reduce carbon gas emission from the convectional fossil fuel and gas, UK government supports in terms of incentives and subsidies, location advantage of UK, long term decline in UK’s oil and gas output and various government legislations. In addition to this, renewable energy if fully developed provides a permanent energy source unlike other convectional sources with limited supply life span. However, the greatest challenges facing the development of renewable energy sector are uncertainty of supply as most renewable sources are affected by natural conditions that are difficult to control, and high cost of renewable energy. Studies have shown that renewable energy sources are more expensive than other convectional energy sources(Lucintel, 2010, IEA, 2007 & RAE, 2010). The reasons given for this are both technical and economic. The technical aspect of the cost has to do with the level of technology while economic relates to cost savings through economy of scale.

According to Reuters (2009), the high cost of renewable energy sources relative to convectional energy sources is a short term technical and economic bottleneck, which will be eliminated as the sector grows in scope, expand its market share and tends towards maturity. Al Gore (2009) claimed that as time progresses, renewable energy cost generally gets cheaper, while fossil fuel generally gets more expensive. It is expected that the UK 11 years (2009-2020) strategic plans for developing the renewable energy industry as analysed by UK renewable energy strategy 2009, will drive the industry into maturity through innovation and high technology. The continuous increase in demand and market share by the renewable energy over the years is an indication that in the very near future, the sector can achieve reduced energy cost per unit through economy of scale. Thus, the sector will be able to compete favourably in terms of cost with other sources of energy. It is therefore, evident that there are potential and viable business opportunities for investors in renewable energy sector of the UK economy.