The energy sector faces prolonged and significant pressures, not least in the form of “lower for longer” oil prices and a political drive for decarbonisation and investment in renewable sources. In a sector often slow to change, the industry’s largest players need to look at how they will drive efficiencies and adapt business models in order to secure competitive advantage.
The advantages of collaboration with smaller innovators, as one response to these shifting sands, are felt across the sector – and can be equally powerful for both SMEs and corporates.
Our new economic study Close Encounters: The power of collaborative innovation found that energy companies, both at home and abroad, completed 179 deals with UK SMEs in the last four financial years, largely in the form of minority stake purchases (56%) alongside mergers and acquisitions (44%). More than £5.4bn is known to have been invested in these deals between the 2013/14 and 2016/17 tax years.
The energy sector is facing some tough times with political uncertainty adding to the pressures of complex regulatory and technological hurdles. This difficult operating environment means that large energy firms continuing to weather low oil prices have a major challenge in making money from mature basins such as the North Sea.
This is where collaboration with SMEs comes in. Collaboration between large energy firms and smaller UK SMEs is helping the industry address some of the challenges, with nimble startups being able to achieve what larger corporates often can’t.
Collaboration is helping larger corporates achieve their economic goals through innovation, with oil companies entering into collaborations to drive financial efficiency, more accurately report on big data, adopt smarter working practices and embrace technological change. This feeds into the wider UK Government objective of encouraging cross-wide industry collaboration to maximise the economic recovery of petroleum from the North Sea. Working with SMEs is also being seen as a way to secure value within the supply chain and drive operational efficiency.
At the other end of the energy world, SMEs are playing a vital role in driving down the costs of renewable generation and are also inventing new renewable technologies. But what they offer in agility, they lack in scale. The innovators and startups who are developing new smart and demand side reduction technologies will require some form of collaboration from major utilities or manufacturers with the financial power and global reach to roll their ideas out on a commercial scale.
Compared to other industry sectors the volume of energy sector collaborations is relatively low (179 deals in the last four financial years, compared to 1,864 in financial services). However, the value of energy deals (£5.4bn in the last four years) signifies their attractiveness to investors and their strategic importance.
Paul Stockley is the head of energy at national law firm Bond Dickinson.