02 May 2023
In this series, we explore the global trends driving change in the energy and natural resources sector and how industry leaders can prepare for, and navigate through, the energy transition. From energy security and investment in the energy transition to the evolving energy mix (including the pivotal role of mined components), we examine the challenges and opportunities faced by the industry.
This series benefits from the collaboration of RSM’s global energy and natural resources specialists, who work with a broad range of global energy organisations.
In the first of our insights, we focus on energy security.
Energy security concerns spiralled following the war in Ukraine. This was further heightened by Russian threats to turn off supply, resulting in a rise in energy prices. According to National Grid data, the seven-day average wholesale price of gas was over nine times higher in March 2022 than in the same period of the previous year.
According to the Office for National Statistics (ONS) report, gas prices rose 129.4% and electricity prices rose 66.7% in the year to March 2023. Rising wholesale prices led to the UK government introducing a windfall tax, impacting ongoing investment in the sector.
The war in Ukraine has highlighted the UK’s reliance on foreign energy sources; however, the UK is more reliant on other countries than is publicly perceived.
The UK’s energy sources
The UK imports roughly 50% of its gas from the international market. Norway is typically the UK's largest gas supplier, accounting for 77% of 2021 gas imports, followed by Qatar, the United States and Russia. About 50% of the UK’s natural gas is sourced from its own territory, primarily from drilling in the North Sea.
The war in Ukraine disrupted existing European gas supply chains, causing impacted countries to seek other sources, which led to surging prices. The conflict also disrupted global oil trade. By April 2022, Russia dropped to the sixth largest supplier of refined oil in the UK, following the United Arab Emirates, the Netherlands, Belgium, Saudi Arabia and India.
At the end of 2021, global gas prices were rising in line with rising global demand. This came as pandemic restrictions eased and Asian countries increasingly transitioned to non-fossil fuel energy sources. As the global economy reopened in the aftermath of the pandemic, the sudden surge in demand – from new cars to foreign holidays – drove a spike in demand for oil and gas, increasing the price of these essential fuels, compounded by the war in Ukraine.
Like other countries, the UK wants to ensure energy security and reduce reliance on other countries. The government’s Energy Security Strategy highlights investment in domestic projects such as offshore wind, low-carbon hydrogen and nuclear. This has been backed up by sanctions against Russia, including ending all imports of Russian coal and oil by the end of 2022 and a ban on Russian liquified natural gas (LNG) from 1 January 2023. The UK’s energy independence is complex, due to the lead time needed to build capacity for renewables and infrastructure.
Paul Watts, co-head of energy and natural resources at RSM UK, states:
“Energy security is front and centre of the political mindset across the world now. The impact of high energy prices, as a result of global uncertainty, is having the effect of focusing government policy on security of supply and alternative energy solutions. This will mean both short term opportunities for new energy sources and technologies as well as the need to find more efficient uses of scarce resources, and we expect to see investors and entrepreneurs coming forward to meet these new challenges and opportunities.”
Sheena McGuinness, head of renewables and cleantech at RSM UK, comments:
“Despite the UK government’s stated commitment to net zero, to date we’ve not seen meaningful support for the clean energy sector, in terms of green tax incentives. In fact, HMRC’s introduction of the windfall tax or electricity generator levy on exceptional profits in the industry is set to negatively impact investment in UK energy generation, including renewables and cleantech. This won’t help to reduce the UK’s dependency on imported energy and ultimately appease concerns over energy security.”
Grant Morrison, head of oil and gas at RSM UK, adds:
“While economic uncertainty and windfall taxes are being attributed to a well-publicised and immediate impact on exploration and production activity in the UK, the impact on the service sector may be more subtle in the medium-to-long-term. The service sector is evolving to embrace the energy transition and the outlook is trending upward. However, much of the forecast growth is in international markets, which may create a prolonged 'bleed' of resources and value from the UK to overseas without greater incentive to create and retain investment in the UK.”
How RSM can help
Our specialist energy and natural resources team is made up of experts in assurance, accounting, corporate finance, financial modelling, deal structuring, valuations, fund raising and taxation. We have extensive experience across the energy market, and strong links with government bodies and funding initiatives. We advise clients of various sizes and ownership structures within the industry sector, including global corporate organisations, government, venture capital firms, private asset management companies, yield companies, energy producers and technology suppliers.
To discuss the impact on your business in more detail, please contact our specialists: Paul Watts | Sheena McGuinness | Grant Morrison | Graham Ricketts