Wider context
The UK is working towards delivering its commitment to reach net zero emissions by 2050. Energy will play a key role and the recently published Powering Up Britain strategy sets out significant investment in nuclear power (large scale and small modular reactors (SMRs)), offshore wind, solar power, hydrogen, carbon capture usage and storage (CCUS) as well as energy demand reduction measures such as greener buildings and decarbonising transport.
The recent energy crisis, as a result of Russia’s invasion of Ukraine, has highlighted the need for affordable and secure energy and has only strengthened the investment case. However, there are some concerns about overall progress towards the goals. For instance, the BBC recently highlighted that the Lords Climate Change Committee has said that adoption of the Boiler Upgrade Scheme grant to help households switch from a gas boiler to a low-carbon heat pump is so low that the national target is “very unlikely to be met”. The scheme was extended by three years, announced as part of Powering Up Britain.
There are also other challenges. Whilst renewables are great energy providers, they are not currently dispatchable and there is little storage in the mix. Therefore, there is minimal energy production when there is less wind or no sun. There are also difficulties mobilising private investment. The government hopes that its updated Green Finance Strategy will support the investment needed to meet targets by maximising the impact of public financing such as through the UK Infrastructure Bank with its £22 billion of financial capital. The ultimate aspiration is for the UK to become the world’s first Net Zero-aligned Financial Centre.
Planning hurdles have also caused issues previously. Alongside Powering Up Britain, a revised set of energy national policy statements were issued for consultation covering overarching energy, renewables, electricity networks, gas generation and pipelines.
Recent articles ‘How can we tackle the energy crisis?’ from Building Magazine, a product of a roundtable hosted alongside Gleeds, and ‘After years of false dawns, can Britain realise its nuclear ambitions?’ published in the Financial Times highlighted the importance of nuclear and the need for investment, but also that challenges in financing projects remain.
A basic summary of the fundamental points from the articles and roundtable:
- The government is targeting inward investment for new UK nuclear
- Industry suppliers and investors want effective policy to mobilise
- Reactor vendors seek a stable regulatory regime and to be able to deploy their technology safely with minimal effort
- The government, operators, utilities and investors want safe, predictable delivery
- Industry associations wish to represent their members by lobbying the government on new builds
- The general population want safe plants that deliver affordable energy.
Many of these issues are familiar and see energy industry stakeholders going around in circles.
Building energy infrastructure is difficult and we must thank EDF Energy for choosing to deploy Hinkley Point C alongside other investors on their balance sheets and at their own risk. The current energy situation and its impact on energy prices, together with cost increases borne by investors and the growing realisation of the costs of balancing intermittent supply from renewables, suggest that what some criticised as a “high” strike price for Hinkley Point C is proving to be a much better deal than they anticipated.
We are in an age where we measure major projects in the billions of pounds and where resources have become the critical constraint since the COVID-19 pandemic. After decades of so-called construction industry improvement, Office for National Statistics (ONS) data shows average productivity levels in the construction industry have remained consistently below the UK average and have also grown more slowly.
Improvements have continually been sought in government investment. Interventions that spring to mind include the Project Finance Initiative of the 1990s, Constructing the Team (The Latham Report) in 1994 and Rethinking Construction — The Egan Report in 1998 and the formation of the Major Projects Authority in 2011 (now the Infrastructure and Projects Authority). The regular reports of the National Audit Office on major projects suggest that despite all the measures that have been put in place, there is still some way to go before we can say that Britain excels at infrastructure.
If you were French, you might think, “Plus ça change, plus c’est la même chose.” A remedy to this blue Groundhog Day funk is to spend a few minutes thinking about the UK government’s commitments relating to energy: it may shake you out of your reverie. Your mind might then turn to thoughts of what it would take for us all to feel assured that it will be delivered in an economically efficient and effective fashion. We should all welcome these recent commitments to funding the infrastructure we need to continue to enjoy our 21st century lifestyles without 20th century levels of carbon emissions.
All that parties require is confidence:
- That outcomes will be delivered and the plant will work as advertised
- In the organisational capability to deliver the project with the known issues and risks
- That the project costs are appropriate and reasonable.
The UK has one of the world's safest construction industries and our approach to nuclear safety and professionalism is relatively good. Without a doubt, there are great projects with excellent outcomes, but why do we struggle to deliver safe, predictable nuclear new build projects, or other infrastructure projects for that matter?
We have an energy policy and a generous government support package and legislation to facilitate investment transactions. We are implementing Great British Nuclear (GBN), to enable nuclear projects and support the UK’s nuclear industry. It’s envisaged that GBN will be tasked with helping projects through every stage of the development process and developing a resilient pipeline of new builds. To sum up, we appear to have a policy and a way to support delivery via innovative mechanisms.
Market activity and delivery
A considerable amount has happened for UK infrastructure over the last twelve months, but most things feel the same to many people.
In the last year or so, we have seen:
- Funding commitment to Sizewell C
- Formation of a new “arm’s length body” to build a fusion reactor at West Burton
- £20 billion for CCUS at “carbon clusters” in Northern England and Wales
- Another “arm’s length body” was launched to select an SMR technology by the end of 2023 and to invest in its development
- Progression of the first nuclear power station to be built in the UK for a generation and the arrival of the first reactor pressure vessel at Hinkley Point C.
Transformational change indeed.
Facing challenges
Currently, there are several issues facing the engineering and construction industry, including resource availability and inflationary costs.
Cost escalation
The BEIS ‘All work’ construction materials price index demonstrates the challenges the industry has faced following the COVID-19 pandemic and Russia’s invasion of Ukraine.
Between February 2020 (pre-pandemic) and January 2023, the index has increased by 40.5%.
Although the index has decreased recently, reducing by 4.3% since its peak in July 2022 due to lower commodities pricing and weakening demand related to the threat of global recession, price increase notifications were seen in the new year for some products.
Further price rises come into effect in March/April 2023 for products including:
- Aggregates
- Asphalt/tarmac
- Concrete
- Concrete blocks
- Insulation
- Sand and gravel.
Despite reducing energy prices, there are pressures on manufacturers who experience higher input costs — energy costs remain elevated compared to historical levels and inflation is increasing wages and prices.
Although the outlook is much improved, threats remain:
Many major economies are investing in infrastructure in response to the climate emergency and supporting economic growth that will draw on resources.
For instance, the US is committing huge sums via the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022.
A combination of positive factors led to easing of the energy crisis and reductions in pricing. These included achieving European gas storage targets ahead of time, a milder-than-average heating season across Europe and Chinese COVID-19 lockdowns reducing energy use, benefitting liquified natural gas supply.
However, there are no guarantees that winter 2023 will be as mild, China has relaxed its zero-COVID policy and only minimal Russian gas will be available to replenish gas storage.
Due to the transition to net zero carbon, significant demand is forecast for metals such as copper, zinc and aluminium, as well as minerals, as these are crucial in producing renewable energy and electric vehicles.
The International Energy Agency’s ‘The Role of Critical Minerals in Clean Energy Transitions’ report, published in 2021, found “high relative importance” for copper for the following clean energy technologies: solar photovoltaic, wind, bioenergy, electricity networks, electric vehicles (EVs) and battery storage.
Nickel is important for geothermal technology, hydrogen production, EVs and battery storage.
Many major economies are investing in infrastructure in response to the climate emergency and supporting economic growth that will draw on resources. For instance, the US is committing huge sums via the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022.
A combination of positive factors led to easing of the energy crisis and reductions in pricing. These included achieving European gas storage targets ahead of time, a milder-than-average heating season across Europe and Chinese COVID-19 lockdowns reducing energy use, benefitting liquified natural gas supply. However, there are no guarantees that winter 2023 will be as mild, China has relaxed its zero-COVID policy and only minimal Russian gas will be available to replenish gas storage.
Due to the transition to net zero carbon, significant demand is forecast for metals such as copper, zinc and aluminium, as well as minerals, as these are crucial in producing renewable energy and electric vehicles. The International Energy Agency’s ‘The Role of Critical Minerals in Clean Energy Transitions’ report, published in 2021, found “high relative importance” for copper for the following clean energy technologies: solar photovoltaic, wind, bioenergy, electricity networks, electric vehicles (EVs) and battery storage. Nickel is important for geothermal technology, hydrogen production, EVs and battery storage.
Materials availability
As well as cost escalation, there have been issues with the availability and delivery of materials and products.
Generally, the situation has improved. The Construction Leadership Council’s February construction product availability statement states, “The past month has seen yet more improvements in the balance of product demand and supply, with good availability for most construction products and prices no longer as volatile.”
However, longer lead-ins remain, with significant extensions seen for some specialist products compared to pre-pandemic timescales. There are also reports of localised pressures due to major projects such as HS2.
The good practices developed to overcome the challenges, such as early supply chain engagement and ordering, should continue.
We are concerned about reports of the perceived high risk of counterfeit, fraudulent and suspect items entering the supply chain from credible supply chain partners.
Labour and skills shortages
Construction vacancies are high when compared to historical trends. Sourcing sufficient labour and exact skills for projects is challenging, particularly for large infrastructure schemes where clients, designers and the supply chain seek the same expertise.
Also concerning is data from the ONS showing industry numbers have dropped significantly since the financial crisis. Given the level of investment planned in infrastructure, as well as targets for transition to net zero carbon, this presents a substantial challenge.
The latest Construction Skills Network report from the CITB, found that despite the economic uncertainty, construction will remain a sector with labour requirements as almost 225,000 additional workers will be needed to meet UK demand by 2027.
Whilst labour and skills shortages are long-term issues, Brexit and an ageing workforce add further pressure.
Training and attracting new talent to the industry remain in focus. Five construction occupations, including bricklayers and plasterers, are to be added to the government’s “shortage occupation list” by the summer.
Industry bodies have called for additional jobs to be added to the list. Others have questioned the model's effectiveness due to the high levels of self-employment in the industry and SMEs who may not be familiar with the sponsorship process or have sufficient resources.
Capability
Following recent nuclear reports of spiralling costs and significant schedule slippage, risk is a key issue that naturally raises questions around responsibility and sufficiency of design information.
There is concern about the marketplace's ability to bring to bear effective and adequate project management of schemes. We have witnessed capability issues in this area, requiring some enlightened clients to implement internal transformation projects along with the supply chain to get performance back on track with a focus on leading performance indicators and strong governance. We are also concerned about the day-to-day management conversations we hear from project, programme and portfolio management (P3M) project professionals regarding project management theory rather than the development of client leadership, collaborative behaviours, tools and processes needed to address planning, production and productivity shortfalls.
Insolvencies
Although the shock caused by the Russia-Ukraine war has diminished, cost escalation pressures continue to impact the supply chain, particularly those delivering projects negotiated before the issues emerged.
Data from the Insolvency Service shows that 4,453 construction firms went out of business in the year to January 2023.
A high proportion of the firms affected are specialist contractors who have been particularly impacted by market challenges. This could add further pressure and cause cost escalation for associated work packages if there is a shortage of supply and increased caution.
There is concern that insolvencies may continue to rise as activity slows and pressures remain.
The UK construction industry relies on supply chains facing similar challenges outside the UK, leading to the risk of insolvencies from non-domestic suppliers.
Procurement and collaboration
It is a challenging backdrop and clients need to show leadership to develop a supply chain fit for their purpose, ensuring control and outlining the approach required.
If we’ve learnt anything from the last 10 years, we should not underestimate the complexity of building nuclear power plants. Clients should mandate transformational programmes and seek assurances from their supply chain on their ability to deliver on time and at cost.
Regardless of the rush to get a shovel in the ground, it is imperative that all parties understand engineering and construction risks and that a detailed design is complete before engaging and developing the supply chain.
Reactor vendors need to get a grip on their claims of schedule and cost. We’ve seen in the UK many project costs and schedules escalate. There are many reasons, but optimism bias, strategic misinformation and endless optimism are critical issues.
Research tells us that to achieve fleet or commodity-type savings, order books need to be in the 30s of reactors for SMRs. And whilst there are study findings which tell us that the fleet effect is a concept on gigawatt (GW) scale plants, there must be sufficient volume and supply chain capacity for this to occur.
Sizewell C is the seventh and eighth deployment of a European Pressurised Water Reactor (EPR) worldwide. There have been difficulties in reaching operation for the earlier projects, but the Taishan reactors in China have proven more successful. The challenge now is to minimise issues with replicating in the UK as first-of-a-kind/nth-of-a-kind technology.
Developing a new fleet of low carbon power plants (at GW scale or of the smaller modular type) provides an opportunity to fine-tune the UK nuclear industry with the necessary leadership and capability to fix the problems of the past and take learning from it to make the future zero carbon at the most affordable cost.
Addressing the problems affecting infrastructure projects requires informed client leadership and a suite of tools underpinned by an assurance regime. This isn’t going to be addressed by the commercial agreement on its own, but an imperative to develop a performance-related culture that spans project functions, the supply chain and the project phase.
Enhancing performance with digital and data
The adoption of artificial intelligence (AI) in the construction industry can help streamline operations, increase productivity and reduce costs. AI can optimise the design and planning of construction projects, utilising data to identify the most efficient building materials and methods. AI-powered construction robots can also automate repetitive and dangerous tasks, improving safety for workers. Additionally, AI can be used for predictive maintenance of construction equipment, reducing downtime and increasing efficiency. The integration of AI in the construction industry has the potential to revolutionise how we build and maintain our physical environment, leading to safer, faster and more sustainable construction projects.
The above paragraph summarises the need for AI perfectly: for improved efficiency and effectiveness of working, from the design and planning stage to the way we build and maintain assets. What makes this even more significant is that the above paragraph was written entirely by AI, using ChatGPT, a language model trained to generate human-like responses to a wide variety of prompts and questions. The software generated the above response when asked to write a short paragraph exploring the need for AI in the construction industry.
So, does AI know more about what we need to do in our future than we do?
With the increased use of Chat GPT and GPT-4, the global economy will undoubtedly face a revolution in AI and digital capability within the workplace. The question now on the tip of our tongue is: how can we harness and utilise this ability to improve our client’s performance and outputs?
Gleeds is developing a portfolio of smart, innovative tools that improve projects and processes within organisations, which includes:
Business capability tool
- An app that facilitates a “discovery” phase, allowing the investigating team to identify how mature the client is with project controls and processes. The output provides the client with an employee-focused assessment of their business with a score and tailored plan to improve
- The company can be benchmarked against others within its sector and provide a pathway to continuous improvement.
AI assistant (Assist)
A powerful, natural language search function which makes AI available to employees for all aspects of information gathering specific to a client contract. Utilising AI saves time, enabling focus on analysis and added value.
Incentivisation model
A tool which automates complex incentives from multiple alliance partners and theorises outcomes based on current and forecasted performance.
Real-time reporting tool
Traditional reporting challenges obscure the ability to discover trends, insights and decision-making abilities. The data will be subject to a robust six-step process before being prepared and presented to provide the end-user with the ability to forecast trends and utilise machine learning in real time.
Rate knowledge database
An interactive and live database of norms and rates compiled from multiple sectors and industries. The information is standardised, geographically allocated and inflated to the current month to provide the user with around one million lines of data to inform estimates better, benchmark data and provide insight into current market conditions and inflation factors.
Whilst these tools can improve projects and processes, there is a common theme that currently runs alongside major projects and programmes undertaken worldwide. They almost always run over budget and schedule, often creating a negative public perception of how these complex infrastructure projects are undertaken and managed.
So, what is the solution?
With the vast amount of data and resources that businesses have at their disposal, there should be an emphasis on real-time, transparent reporting to all stakeholders. This, combined with robust project controls and processes, ensures that the data is reliable, accurate and timely.
Using the tools outlined above, we can implement accountability for costs and schedule, as well as quickly identify risks and their impact, to facilitate informed decision-making.
By undertaking an assessment with our forensic analysis tool, we can carry out scenario testing on project outcomes, identifying the cost and an accurate real-time schedule impact.
Alternatively, in conjunction with our commercial mechanisms, our incentivisation model can allow alliance partners to strive for excellence and receive bonuses for cost and schedule performance and reporting. Performance data should be freely available to all stakeholders, enabling faster process improvement and lessons learnt sharing.
As we begin to enter a digital and AI-focused economy and workplace, we should operate smarter with more alliance partnerships, collaborative working practices and lessons learnt sharing between major projects and programmes.
Perhaps we should look at our economy as we do our planet. We waste food, water and resources — we must save and use data and information. Efficiency and evolution should become our future focus, with collaborative working becoming commonplace and data transparency for stakeholders necessary for our digital future.
If you are interested in learning more about Gleeds digital and data tools, reach out to one of our team.
Get in touch with our Gleeds Energy team
Andy Ellis
Regional Director
Adrian Blumenthal
Project Director
Asa James
Director
Daniel Sharrem
Senior Cost Engineer
Gavin Dobbing
Project Director
Get in touch with our Gleeds Energy team
Research team contacts
Nicola Sharkey
Project Director, Insights and Research Lead, UK
James Garner
Senior Director, Global Head of Insights and Analytics
Edna Benavides
Insights and Analytics Manager, EMEA
Padmini G
Market Research and Client Engagement Manager, India
Res Orgut
Executive Consultant, USA
Sherif Sweillam
Director of Business Development, Egypt
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Research team contacts
Nicola Sharkey
Project Director, UK Insights and Research Lead
James Garner
Senior Director, Global Head of Insights and Analytics
Edna Benavides
Senior Cost Manager, Insights and Analytics Manager, EMEA
Padmini G
Market research and client engagement manager, India
Res Orgut
Executive Consultant, USA
Sherif Sweillam
Director of Business Development, Egypt
Legal disclaimer: This report was prepared by Gleeds and is for general information only. Neither Gleeds nor any of their partners, directors, employees or other persons acting on their behalf makes any warranty, express or implied nor assumes any liability with respect to the use of the information or methods contained in this paper to any person or party. This document is subject to copyright and must not be reproduced.
The report was prepared in March 2023 and published 5 April 2023.
