Crises: energy prices and what is next for construction
This article was co-authored by Phoebe Penman, Trainee Solicitor, London.
2021 proved to be a tumultuous year for the UK supply chain across various sectors, including construction. We saw major disruption to imports from the ongoing impacts of COVID-19 and Brexit, along with delays in shipping caused by the incident on the Suez Canal. The shortage of raw materials was further exacerbated by large infrastructure projects in the UK, such as HS2 monopolising the supply that was available.
This shortage had been easing towards the end of 2021, but now soaring costs of electricity and gas could lead to a new phase of scarcity – making materials increasingly unaffordable for many projects. The war in Ukraine has caused turbulent energy security, and the imposition of sanctions in Russia has left many countries finding alternative sources for fossil fuels. The subsequent spike in energy prices in places such as China, India and Europe has driven up the cost of the dwindling stocks of construction materials, with production dropping off significantly.
With its heavy use of materials manufactured using energy-intensive processes, the construction industry is set to be hit hard as energy price rises become the key driver of building cost inflation. Noble Francis, economics director at the Construction Products Association believes ceramics, bricks, steel, concrete, cement and aluminium will face the biggest cost increases.
Recently, the Department for Business, Energy and Industrial Strategy has indicated that fabricated structural steel rose by 36% year-on-year to February 2022.
However, measures might soon be implemented in an attempt to halt the threat posed to the viability of small and medium-sized construction businesses. Manufacturers may try to hedge against volatility by negotiating fixed prices with producers. However, this temporary fix might only delay the problem as suppliers eventually factor in higher prices into future negotiations.
Impact on construction insurance
The energy crisis and subsequent shortages will impact construction insurance in a number of ways. Firstly, the delay in building materials could give rise to more contractual disputes as contractors find it increasingly difficult to deliver works in previously quoted timescales.
Additionally, inflation could have a knock-on effect on insurance costs; businesses, property owners and contractors should be reviewing the adequacy of the sums insured and policy limits under their insurance policies.
Russel Crewe, chief operating officer of Property Claims at Davies notes the shortage in building materials may continue to cause disruption to claim lifecycles and indemnity speed, both from a cost and a procurement perspective. Utilising surveyors to re-evaluate buildings and projects as well as maintaining regular contact with brokers and insurers is recommended.
Furthermore, both insurers and insureds should consider whether sufficient cover is in place for delay in startup or business interruption losses arising from delays caused by the crisis.
What does the future hold?
Despite the clear challenges, it is important to note that there are alternatives and possible solutions for the construction sector in the future. The increased focus on sustainable energy and decarbonisation initiatives has meant fossil fuel supply has ultimately fallen and pressure on traditional sources of energy could eventually reduce.
Many insurers such as RSA firmly believe that continuing to focus on renewable energy sources could reduce the UK’s exposure to future energy price shocks. They are of the view that the answer is to increase the diversity of the energy mix through non-carbon sources. Perhaps the UK energy crisis could be a wake-up call to accelerate the transition to renewables – for economic, as well as environmental reasons.
Many construction businesses have already set goals to adopt more carbon neutral projects through the 2022 Heat and Buildings Strategy and Social Housing Decarbonisation Fund. We have also seen trends in insurers seeking to progressively rebalance risks they underwrite in favour of renewable energy production. It seems moving forward that collaboration between loss adjusters and insurers will be vital to understanding the pressures in the supply chain and the ever changing construction environment.