Whether it’s the well-publicised difficulties UK water companies are experiencing in keeping Britain’s rivers free of sewage, or the problem of ensuring the National Grid has the right connections to take advantage of new energy sources and keep the lights on at times of peak demand, or the sheer cost to the consumer and the environment of water and heat, the utilities sector is rarely out of the news. And not much of that news has been good. However, from such a position there are obvious opportunities for improvement. For the companies – both large and small – that can fix any of the sector’s manifold problems, large rewards could be available to both innovators and investors.

Published in 2024, EY’s Energy and Resources Transition Acceleration report says the sector is entering an age of disruption: “Geopolitics are exacerbating cost pressures. New digital technologies and changing consumer expectations are creating a new energy world that is more complex, competitive and challenging. Survival for utilities depends on their ability to develop new capabilities, different business models and a mindset centred around agility and collaboration.”

Expanding on this subject, EY partner Sunny Aurora, who focuses on energy and infrastructure deals, says that these new models should be “anchored around the embrace of digitisation”. Aurora, who has worked in the power and water markets for 15 years, says there is a second theme of decarbonisation, where companies “have significant requirements to decarbonise their business, but they need capital. So one of the things that they’re trying to do is take some of their existing cash-generating businesses, divest minority interests and get infrastructure fund money or private equity fund money into those businesses, and then use that capital to invest in decarbonisation objectives.”

After digitisation and decarbonisation, the third ‘D’ impacting the utilities environment is decentralisation, Aurora says: “That linear transfer of electricity from a generator to a house has become significantly more decentralised and a lot more intermittent. You don’t have your old coal power plants, you have wind and solar, and what you need for that is the ability to balance the grid and make sure electricity is available. With that, new forms of energy are coming into the mix to balance the grid: battery storage, and perhaps a return of more investment in hydropower, especially in countries like the UK. Digitisation, decarbonisation and decentralisation are the change drivers in business models that we’re seeing.”

More cash needed

The other major change in the market is the availability of capital. Dubbed the Clean Tech 1.0 bubble, the first major investment in climate technology took place between 2006 and 2011, when venture capital focused on renewable energy solutions, energy-efficient building designs and early electric vehicles to the tune of some $25bn. Luke Rajah, an early-stage technology investor with BGF who has deep experience in energy and water companies, says: “When I first started investing in this space a decade ago, we’d seen the Clean Tech 1.0 bubble. There weren’t many funds deploying in the space and many of the major strategic players were not that acquisitive. Good businesses were still getting started, grown and sold, but it wasn’t anywhere near as active an investment space as it is today.”

BGF will often co-invest with other funds on early-stage deals – a typical first cheque from BGF comes at late seed stage, or Series A or B – alongside UK players such as Octopus Ventures, Oxford Science Enterprises and Cambridge Innovation Capital. “Then you have another category, with European and US funds including some large corporate VCs, who are active in the UK at a slightly later stage,” he adds. “We’re seeing more of that, with a number of funds that have raised hundreds of millions of dollars specifically for climate-focused investments in Europe.”

Aurora says that, having previously worked mainly with traditional infrastructure funds “investing in the core space”, the past five years have seen “a lot more interest from private equity, who look at ‘core-plus’ opportunities, with the services and providers around the utilities. And then we also work with venture capital investors with more of a climate transition focus.”

Optimising efficiencies

Opportunities in ‘core-plus’ are often involved with potential efficiencies. Internet of Things (IoT)-enabled smart metering would be a typical possibility for operational expenditure reduction or capital expenditure optimisation, says Aurora: “Anything that helps reduce operational expenditure is a good service.” Being able to generate your own electricity also “gives you circularity, ticks environmental, social and governance boxes and reduces cost”.

A third efficiency-based sub-sector concerns network optimisation, with technologies that improve the efficiency of the grid and its connectivity to data centres. “There’s lots of opportunity around analytics,” Aurora says. “Whether that’s sustainability-linked or operations-linked, it’s revenue-enhancing. If you look at battery storage as an example, and the revenue stack, some of it is just pure power generation, but a lot of it is offering balancing services to the grid, and optimising the usage of your battery to reduce your costs or increase your revenue stack. There is a lot of software that can enable higher revenues and lower operational expenditure, particularly in improving last-mile connections, whether in water or electricity.”

For Rajah and BGF, “We invest broadly in the climate space, covering all of the five key areas that account for the majority of global emissions – energy systems and storage; mobility; food and agriculture; industrial technology; and decarbonisation of buildings. We also focus on horizontal themes including environmental technology and the circular economy.”

New thinking

Government targets relating to net zero are perhaps being dialled back, but “getting planning permission in place to get these assets connected to the grid” is an area Aurora is looking forward to the Labour administration working on. “Anything the government can do to reduce that delay is welcome and necessary to accelerate the investment, and the market may drive the government in this,” he says.

“One of the key pillars of our investment thesis is enabling more efficient use of existing infrastructure,” says Rajah. “As with many of the challenges we’re facing in the UK, I’m not sure that just pouring money into infrastructure and workforce solves the problems we’re facing. We do have big problems with a lack of investment in infrastructure and an ageing workforce in the water sector, for instance, but I think there’s a danger that we just end up pouring money into a black hole without thinking differently.”

New technology is the key to the solution, he thinks: “We’ve seen huge investment in renewables and increasing uptake of EVs. To capitalise on these trends in full we will need to invest in new technology across energy storage, and make the grid smarter and more efficient.

“The UK is well placed as a global climate technology player, with top universities and an active spinout scene, and London is the second biggest hub for climate tech globally. That said, the vast majority of our businesses across all of our sectors are looking to go global once they get to a certain stage, which is when we see that investment interest from large funds in the US and elsewhere.”