Energy transition: challenges and risks for UK construction contractors into 2024

This energy transition will create multiple opportunities for construction businesses as well as challenges and significant risks, such as disputes caused by changes in infrastructure and regulatory changes.

While there are other elements needed to satisfy the demands of clean energy in the UK – such as a coherent and robust regulatory landscape to provide and encourage financial support – there appear on the face of it to be multiple opportunities created by the energy transition for those in the UK’s construction supply chain, from ‘tier 1’ contractors to specialist subcontractors of all types.

Despite what some have described as the watering down of the UK’s ambitions in targeting net zero, the UK government plans to develop 50GW of offshore wind capacity by 2030, up from around 14GW now – albeit with some hiccups along the way.

Notable progress has also been seen in opportunities for carbon capture, utilisation and storage (CCUS) projects in the UK, with the East Coast and Hynet clusters each moving forward with a total of eight projects entering into contract negotiations with the UK government.

In the hydrogen space, opportunity in the UK may be hampered by perceived sluggish progress through strategic activity and analysis to get to construction delivery on projects – but, nonetheless, 17 projects have been selected for contract negotiations, accounting for 262MW of low carbon hydrogen production in total. In addition, the revised UK planning policy is now supporting the development of utility scale solar activity.

For construction contractors, fast-growing new markets present new opportunities and an opportunity to reduce dependence on more ‘traditional’ markets through diversification of project portfolios, an important tool to enhance resilience. The challenges facing the UK infrastructure market are well-documented: the government’s ‘levelling up’ policy has given businesses “very little to go on”, as our colleague Jon Hart previously highlighted. Diversification through pivoting into delivery of low carbon energy projects such as offshore wind, CCUS, hydrogen and solar is likely to give a real competitive advantage to companies that are able to successfully invest in the capabilities and expertise needed to do so.

Challenges and risks to watch out for in 2024

Whilst there are undoubtedly huge opportunities for UK construction contractors to get involved in the energy transition, any transition has its challenges, and a move away from more traditional and familiar markets and technology is no exception.

Findings from the energy arbitration survey published in February this year by Queen Mary University of London in partnership with Pinsent Masons identified project construction as the second most likely source of disputes arising out of the energy transition after regulatory change.

In recent years there have been a significant number of high-profile cases which have arisen out of the construction of projects essential to energy transition. There are some common themes among the causes of these disputes - including supply chain constraints and limited proven technology resulting in performance failures and pressures to reduce cost.

At present there are a finite number of suppliers and subcontractors capable of delivering major new energy infrastructure and projects. Competition for their expertise and the products they supply is likely to increase with greater risk for knock-on delay leading to budget overspend and delay damages. To achieve bankability, developers are often required to pass risks down the construction supply chain, not all of which can be passed on or mitigated.

Whilst large scale solar, CCUS and wind projects are, to some extent, more susceptible to these challenges and have the potential to offer the greatest rewards, there is increasing interest by contractors in focusing on new energy transition markets where the risks and challenges may be more familiar. For example, substantial local grid infrastructure work will be needed as part of the energy transition. In May this year National Grid announced it was looking for supply chain partners to deliver £4.5 billion of grid infrastructure improvements by 2030. Similarly, for businesses more familiar with UK real estate, opportunities potentially may lie in delivering improvements in energy efficiency to decarbonise UK real estate, as the government sets out further detail on policy to achieve decarbonisation between now and 2030.

It is true to say that the energy transition does represent a huge opportunity for UK construction contractors, and those who best capitalise on that opportunity will choose their market entry point wisely.