Features
28 Mar 2013 09:02am

The heart of British business

SMEs are being feted as powering Britain – and nowhere more so than in the energy sector. Nick Martindale looks at 11 businesses that are shining brightly

The UK’s energy sector has changed beyond all recognition since its days as a state-run monopoly in the 1980s. Deregulation brought proliferation of new entrants followed by a period of market consolidation, as well as a host of spin-off organisations offering advice and guidance to a rapidly maturing sector.

Many of these companies have flourished into established medium-sized businesses in their own right, helping ensure the sector remains both competitive and dynamic. The past decade, too, has seen huge strides in the field of renewable energy and energy efficiency. This has created further opportunities for new and established players and plays a pivotal role in meeting the UK’s future energy requirements and reinvigorating the wider economy.

Here, economia takes a look at some of the medium-sized organisations in the energy sector, ranging from highly specialised engineering companies to law firms and recruitment businesses.

“Typically businesses can get double-digit savings just by setting things up properly – switching things on and off at the right time and running buildings at the right temperature,” says Ian Kelly, chief executive. “We also give people investment protection so we track the return on investment in real time.”

The biggest issue the business faces as a medium-sized player is financing projects – sometimes it has to pay for and install energy-efficient measures itself before a customer will commit to larger projects. “Our biggest issue is convincing customers this is low-risk because the last thing people want to do at the moment is to invest in anything,” he says. “It’s a working capital problem really.” Third-party funding through measures such as the Green Investment Bank can help, says Kelly, but Matrix often has to finance such projects through debt funding.

He believes the government’s Green Deal initiative could inject more capital into the market but is less convinced by the government’s focus on renewable energy. “The bottom line is we’re putting renewable energy into buildings that aren’t fit for purpose,” he says. “Overseas they’re building modern infrastructure and then connecting that to supply and demand but we’re a long way off that.”

Renewable drive

Alkane Energy has been generating energy to feed into the grid since 2005. Traditionally this has come from methane gas sourced from old coal mines, but recently the business has moved into biogas – generating power from food waste – and the standby electricity market using natural gas. “The independent generators probably represent about 10% of the overall UK generation but it’s the final 10% that keeps the lights on,” says Neil O’Brien, chief executive.

The company has been growing by about 40% a year for the best part of a decade and currently turns over some £13m. O’Brien has ambitions to more than double this and has a target figure of £30m in his sights.

If this happens, much of it will be due to renewables. But O’Brien believes the uncertainty over long-term government policy can stifle investment. “I’m not saying it has to be generous to renewables but it needs to be settled,” he says. “To be developing a site for two or three years only to find that the Department of Energy has changed its mind is utterly frustrating.”

The company’s own financing comes from a mixture of equity release – the business floated on AIM in 2000 and has gone through two funding rounds in the past two years – and term debt provided through Lloyds TSB, which came on board nearly four years ago.
“They [Lloyds] have upped their facility at least twice and as we’ve taken on more sites they have allowed us to acquire companies,” says O’Brien. “We bought out our nearest competitor in April last year and Lloyds was critical in providing funding for that.”

Growth options

Energy management company Matrix, set up in 2003 on the back of the government’s carbon reduction programme, has grown rapidly, offering businesses advice on how to reduce energy consumption and make buildings more efficient. Today the business operates nine regional offices across the UK, turns over £55m and employs about 340 people. Its clients include BT, Virgin Media and Sainsbury’s.
“Typically businesses can get double-digit savings just by setting things up properly – switching things on and off at the right time and running buildings at the right temperature,” says Ian Kelly, chief executive. “We also give people investment protection so we track the return on investment in real time.”

The biggest issue the business faces as a medium-sized player is financing projects – sometimes it has to pay for and install energy-efficient measures itself before a customer will commit to larger projects. “Our biggest issue is convincing customers this is low-risk because the last thing people want to do at the moment is to invest in anything,” he says. “It’s a working capital problem really.” Third-party funding through measures such as the Green Investment Bank can help, says Kelly, but Matrix often has to finance such projects through debt funding.

He believes the government’s Green Deal initiative could inject more capital into the market but is less convinced by the government’s focus on renewable energy. “The bottom line is we’re putting renewable energy into buildings that aren’t fit for purpose,” he says. “Overseas they’re building modern infrastructure and then connecting that to supply and demand but we’re a long way off that.”

Acquired success

Sheffield-based Gabbro Precision is a specialist oil and gas engineering firm, manufacturing high-end components for worldwide engineering companies.

The business attracted private equity investment from Baird Capital Partners in 2007, which helped it to finance acquisitions in 2009 and 2012 and fund a start-up project in Malaysia. Importantly, this also enabled it to withstand the financial pressures brought about by the economic downturn – 2009 was tough, recalls chairman David Barrass. Today, the company turns over just under £50m and employs more than 200 people.

The firm’s growth is based on making further acquisitions or partnerships with other businesses. The backing of Baird is instrumental here but finance is also required to invest in new machinery across the various plants. “If I had the opportunity I could lay down an awful lot more capital expenditure. But really we’ve got to create our own cash to fund new machines,” says Barrass.

He feels the business suffers from its medium-sized status. “We’re probably at the limit of where we could be with the bank, given the size that we are and the way that we’re financially structured,” he admits. “A bigger company would have a much easier ride.” The greenfield site in Malaysia was particularly challenging, he says as the business had to effectively finance this itself.

Barrass is confident about the future and expects to see significant growth from Asia, as well as the possibility of new acquisitions closer to home. “We’ve invested here in Sheffield and also in Leicester, which will get the business to £55m next year,” he says. “Then £60m is not an impossible task at all.”

Well fed

Renewable energy supplier Lightsource was set up in 2010 as a result of the government’s then extremely generous feed-in tariff policy. The policy paid those installing solar photovoltaic technologies, focusing on large-scale projects.

“Rather than running round in Cornwall trying to get farmers to lease land, we identified that the limiting factor would be having the cash to actually transact deals,” says chief executive Nick Boyle.

The founders formed a partnership with specialist fund management company Octopus Investments, which effectively established them as the business’s in-house development team. Crucially, this has avoided the need for any equity dilution, says Boyle, and means the business has not had to rely on any kind of external funding.

“When the government decided in March 2011 that it was going to cut the 30.7p rate to 8.5p, all equity and bank debt exited and we were pretty much the only entity in the market,” he says. “We were also able to complete projects very quickly because we weren’t relying on third parties to supply any of the money.”

As the industry itself was a new concept, the main challenge tended to be securing planning permission for installations, says Boyle. There was also the task of working out the technicalities of leasing agreements and finding the right locations for sites.

Boyle believes the market remains healthy, both from farmers looking to lease land and from large-scale enterprises seeking price security around energy costs. But the government’s power to review rates if it deems that too much capacity is being installed is a concern. “If it cut rates any more the industry would be dead,” he says.

Laying down the law

Law firm Gillespie Macandrew has carved out a niche for itself offering advice to utility companies, developers and landowners on energy issues.

A medium-sized business itself – last year its turnover topped £10m – many of its clients also fall into that category. These businesses rely on the firm for support over regulatory issues as they cannot stretch to resources in-house.

About 10% of the law firm’s work comes from renewables. According to Kirsty Macpherson, head of energy, climate change and natural resources, the potential pitfalls for clients here include third-party rights relating to onshore wind farms and the protection of catchment areas for hydro plants.

Words of advice

Since it was set up in 2000, Engage Consulting has carved out a niche for itself advising energy and utilities organisations on their business strategy. The company has grown steadily from five employees to its current tally of 36 and turns over about £4m a year.

Being a specialist player in the consultancy space can cause issues, admits managing director John Peters. “We observe from some of our competitors that when one of their sectors is not doing so well, they move consultants to another sector,” he says. “We don’t have that ability. But the advantage is that people know you for what you are and there’s no confusion about the service you’re offering.”

The business has grown as a result of the deregulation of the energy market, says Peters, and on the back of the expanding renewables sector. Current hot topics include the national smart metering rollout and the development of the smart grid under which utility companies can help deploy new technology on the country’s existing infrastructure.

“A lot of our work is driven by what the government terms the trilemma: keeping the price affordable; security of supply – so making sure there is enough fuel coming into the UK to run the power stations and keep the gas in the pipes; and making sure they don’t exceed their pollution targets,” says Peters.

Traversing such uncharted territory goes some way to levelling the playing field for smaller organisations. “Some of this is so new that no one has a track record,” he says. “There’s no head start for the big companies.”

People business

Founded in 2010, recruitment firm Spencer Ogden has enjoyed rapid expansion on the back of hiring energy professionals across the industry. Starting out in that environment was tough, says James Pipe, head of renewables and sustainability, and the business relied on a high-net-worth individual to finance it through the early years.

“We were very cash-hungry at that stage and found it incredibly difficult to seek funding that would aid our growth,” he says. Even today, as an established medium-sized business turning over £35m and with almost 200 employees, securing finance is challenging.

But the business has made the most of opportunities in the sector, including renewables. Offshore wind and energy from waste are the current growth areas.

Pipe feels the UK market has suffered in recent years from a lack of government clarity over financial issues. This has made it a less attractive market than other parts of Europe and the Far East. Where there is investment in areas such as offshore wind, this is often by overseas companies, which means the UK does not derive the full benefits, he says.

A lack of UK engineering talent is also causing problems. “Historically we’ve seen a lot of good engineers at graduate level go into financial services,” he says. “That’s not the case so much now but we’ve got a 10- to 12-year skill gap.”

Pipe believes the government and industry need to work together to broaden the skills of existing talent and invest in apprenticeships or similar schemes to attract people to the industry.

Price pointer

Set up in the wake of the deregulation of the UK’s energy sector in the 1990s, EnergyQuote initially provided an energy analysis and price comparison service for companies looking to find cheaper suppliers, according to Gary Worby, its managing director.

In recent years the focus has shifted towards a consultancy service advising on achieving price security and helping companies reduce carbon consumption in the wake of new legislation and reporting rules.

The business has always resisted any kind of equity dilution and has funded its growth organically through working capital or term borrowing. “Gaining access to funding is more difficult because the growth projections for many companies can’t be substantiated for the conditions we’ve experienced post-Lehmans,” says Worby.

Energy market reforms in the UK mean there is plenty of potential for growth here, he adds, although the business also intends to replicate its model overseas as more countries deregulate.

Cooking with gas

For more than 20 years, Clarke Energy has acted as a distributor for GE’s gas engine business, supplying, designing, building and maintaining small satellite power stations. The business has traditionally relied on landfill gas but the main focus today is natural gas and, increasingly, biogas as a source for combined heat and power (CHP) plants.

In today’s climate a big obstacle is clients’ ability to fund such projects. The cut in rates for initiatives such as the feed-in tariffs and renewable obligation certificates have been further deterrents. “Energy is a long-term policy over 30, 40 or 50 years,” says company director Alan Fletcher. “Each government has its own designs and ideas but they never have longer than a five-year tenure.”

The government-backed Green Investment Bank and the Carbon and Energy Fund for NHS trusts are helping organisations to finance such projects, he says. He cites a CHP plant installed at Guy’s and St Thomas’s NHS Foundation Trust, which will save the trust £1.5m a year, as well as achieving an 11,000 tonne reduction in its CO2 footprint.

Fletcher says the business is focused on developing distributed power stations using natural gas as the UK’s ageing power stations and transmission network are replaced. It is also moving into markets further afield. “We’re seeing big growth in countries such as Nigeria,” he says. “Africa is where I see the future growth of the business.”

Emerging force

Energos is an example of a medium-sized organisation standing on the edge of an emerging industry. It converts non-recyclable municipal, commercial and industrial waste into renewable energy that can be used to provide local communities with heat and power.

The company has more than £500m of near-term projects in the pipeline, made up of third-party contracts and its own schemes. But much of this may not be realised due to difficulties securing planning permission for plants and, more pertinently, the willingness or ability of customers to invest in such facilities.

“Merchant facilities rely on the waste market rather than long-term municipal contracts, yet can provide a lucrative and reliable revenue stream from largely commercial and industrial waste,” says Andrew MacLellan, company director.

New funding models to encourage such investment – whereby customers only take on 50%-60% of debt funding as opposed to the current 70%-90% for contracted projects – will be needed if the market is to take off, he believes.

The decision last year to provide the maximum level of financial support in the form of double renewable obligation certificates to advanced thermal conversion processes has helped provide more certainty, he says. Yet this has so far only freed up funding for long-term municipal contracts rather than commercial and industrial sources.

The long gestation period of energy-from-waste projects places a huge strain on financing, says MacLellan. “The banks are still slow to lend, despite resilient waste markets and incentives to divert waste from landfill,” he says.

Professional plus

As a rapidly expanding recruitment business placing energy professionals in the UK, Europe and the US – last year’s turnover was about £9m – Twenty Recruitment has had to get up to speed quickly to meet the demands of a sector dominated by large customers.

“The challenge for a smaller business is trying to get all your operational ducks in a row because demand can sometimes overcome your ability to supply,” says director Dominic Morris. Staying up to date with the regulatory requirements of multiple countries can be difficult, he adds, as can lengthy tender processes.

And perhaps surprisingly, Morris has struggled to recruit staff to his own firm. “Our biggest challenge is finding talented people to join us in order to find talented people to join our clients,” he says.

 

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