Clean, affordable, secure: a conversation about the future of the energy system

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Keynote speeches from the Ofgem strategy launch conference on 22 February 2023 by Chair Mark McAllister and Chief Executive Jonathan Brearley.

Mark McAllister, Chair, Ofgem

It’s great to see you here – we’ve got networks and suppliers, installers and supply chain, consumer groups, and charities, government, NGOs, trade associations, infrastructure investors, disrupters and innovators.

Every one of you has an important role in developing the new energy system that the UK needs.

First months as Chair of Ofgem

I’ve been Chair of Ofgem for a little over 3 months, and I have found it stimulating and daunting in equal measure. 

My immediate priority has been to meet as many people and organisations as possible – from people on the front line answering phones to customers in need, to the boardrooms where those big strategic decisions are made, as well as taking calls from vulnerable customers myself. 

With every visit and in every conversation I am learning something new and invaluable in helping me refine the priorities for Ofgem.

For example, I was in Brixton a couple of weeks ago meeting on the Roupell Estate whose residents benefit from power provided at a low and predictable cost, from solar panels on the roof of their flats installed by Repowering London.

These same residents are getting heat from a network run by a Local Council. The price has quadrupled with no advance warning to residents. Not only that, the heat is included as a service charge, so if they fall into arrears they face being evicted.

Within the course of one afternoon, I saw the potential of the community power schemes but also made acutely aware of the challenge facing Ofgem as we assume responsibility for heat regulation.

I was also encouraged on my trip to Glasgow by the work of the Extra Help Unit and the South Seeds Community Project I just visited.

And in Cardiff learning how the Big Issue is using the grants it receives from the Voluntary Redress Fund administered by the Energy Savings Trust.

I have also been getting to know the Ofgem team, not just Jonathan and the senior management, but also deep into the organisation. And what I have found is a group of people with the same commitment as all of you to solving the energy challenge we face together.  In Glasgow, I met the team responsible for the Boiler Upgrade Scheme, which has now paid out over £100 million in installation vouchers.

But I was taken step by step through the application, approval and monitoring process. Each element was shown to me by a young member of our team really proud of their role in the path to net zero.

The majority of the Ofgem Board joined at the same time as I did in November. And together, they represented real experience in regulation, government, customer groups and industry. And I have been working to harness that experience to the task ahead.

The scale of the energy challenge

All of these visits and discussions have reinforced my view that, although the scale of the challenge facing all of us is great, the goal of a fair, sustainable, reliable and affordable energy system is compelling.

The price shocks of the last few years have been greater than anything I have seen in 45 years in the energy business. And they have underlined the need for us all to work together to deliver a new energy system.

Approach to regulation

Although I am new to economic regulation, my ideas, philosophy about regulation more generally have been shaped in part by several key events.

In 1989, the North Sea experienced the horror of the Piper Alpha disaster. But out of that came the Cullen Report, a new approach to offshore safety was born. Based on the development of Safety Cases in which Duty Holders identify their risks and demonstrated appropriate mitigation in place. A great way for a regulator to monitor progress, and see leading indicators of any possible problems ahead.

So that in 2010, when the Deepwater Horizon Blowout occurred in the Gulf of Mexico, I chaired the UK response drawing on input from industry, trades unions, government and regulators. And the demonstrable success of the Safety Case regime was an important piece of assurance.

On a more personal note, my youngest brother was one of the 97 Liverpool supporters who died in the Hillsborough Stadium disaster. Among many other things, Hillsborough was a failure of regulation, the fences that stopped fans getting on the pitch were a blunt regulatory measure and they led to terrible consequences.

So how has all of this affected the way I think about regulation?

I have come to the conclusion that a modern, effective regulator must be not only technically competent and independent of all vested interests, but also intelligent, bold and creative.

Now if I apply those principles to the challenges now facing the energy system, I think that an important element of Ofgem’s role will be to enable properly funded companies to enter the market, to innovate and to grow by us creating an environment which allows for reasonable profits, and encourages investment for the long term. The more effectively we can create that environment, the easier it will be for the industry to deliver the new energy system while offering stable and affordable bills to customers.

One thing I did notice during my nearly five years at ONR was the very privileged vantage point the regulator enjoys.

I used to like being able to see into everyone’s back garden. And I am determined that Ofgem uses its position to foster and to facilitate the strong partnerships that will be needed to achieve our mutual goals.

Partnership with suppliers, built on an understanding that they must do much more to serve their customers, especially the most vulnerable, while we evolve the regulatory framework to meet the needs of the future.

Partnership with consumer groups and charities, using your front-line experience to inform our regulatory interventions.

Partnership with the new National Energy System Operator, who Ofgem will regulate, as we develop the integrated energy plan and ensure its implementation.

Partnership with network companies, building on the success of the ASTI regulations, to pave the way for prompt investment in this new system, while reducing the time it takes for technically viable, well-funded projects to realise a connection to the system.

And partnership with government, and other public bodies I’ve already met: the Climate Change Committee, the National Infrastructure Commission Crown Estate, all of us playing our respective parts in solving the trilemma of energy price, energy security and net zero.

When I talk about partnerships, I don’t mean something cosy, complacent and comfortable. 

I’m talking about relationships built on mutual challenge.

Ofgem challenging the industry as regulator, using all of our tools from influence to enforcement. And all of you stakeholders challenging Ofgem to offer bold and dynamic regulation. And with me as Chair and the Board, challenging the Ofgem team to be responsive and agile, strategic in their outlook, as we shape a stable and efficient energy market that works to benefit consumers and as we work with the industry to rebuild public trust in the whole energy sector.

Purpose of today

So as we come together today, we are reviewing the Ofgem strategy for the next 5-10 years. We will plan to publish later this Spring, to give clarity to all stakeholders on our plans and priorities. Today represents an important step in that process as we seek your insights and observations to help us develop our strategy. 

And the strategy document will cover the whole spectrum of Ofgem’s work, delivering government green energy schemes, reshaping the retail market, establishing an efficient, flexible energy system, enabling the infrastructure for net zero. As well as reshaping Ofgem itself.

And there are three key themes that are informing our strategic thinking: protect, build and change. I will touch on them very briefly now and Jonathan will address them in more detail in a few minutes.

Protecting people who are struggling to pay their bills. Building the new energy system, including: infrastructure, markets, home heating and insulation. Changing, not just Ofgem but the whole sector, to enable an efficient and flexible energy system that works for domestic and non-domestic consumers alike.

Protect

So protect. As you know, protecting consumers lies at the heart of our regulatory mission.

Now I started work in the energy sector in 1979 just after the second major oil shock. In all that time, the rise in the gas price we saw a couple of years ago is unprecedented.

And I believe we can be certain of more tranquil times ahead.

While gas and electricity prices are lower than last winter’s historic highs, they are unlikely to return to levels we saw before the crisis, if you put that alongside other cost of living pressures, this leaves millions of households and businesses struggling to pay for their energy.

We together must do everything we can, both as a regulator and as a sector, to protect the interests of consumers, particularly the most vulnerable.

In part, that means driving up service standards, transforming our ideas about what good customer service looks like treating all customers with respect and sympathy making it easier for customers to resolve concerns in a timely fashion and keeping a close eye on customers who have, or are at risk of, falling into debt. 

As I mentioned earlier, I paid a visit to the Extra Help Unit in my first few weeks in post. I heard a series of calls from a lady who struggled for months to resolve an issue with her supplier. When the Extra Help Unit became involved the matter was resolved in a fortnight and she received a substantial rebate. 

Just this weekend there was a similar situation with a customer wrote to the Guardian.

Someone had written to the newspaper, got a resolution to a problem that had dragged on for a long time and received a rebate.

Folks, this cannot be right, can it?

All consumers should expect that level of service from suppliers without going through the media, the Extra Help Unit, or other consumer groups.

We also need to take practical steps to make sure the energy system is as fair and efficient as possible we can make it  our proposals to make standing charges the same regardless of how you pay are a small but important set in this direction. 

As you know, we are currently conducting a wide reaching call for input on standing charges  - Jonathan will tell you the details in a few moments - which has attracted a huge amount of interest.

Build

Let me move on to build – but without forgetting protect. Protecting customers interests, is the prime responsibility of Ofgem. 

But that requires action for the present but also for the future.

To protect consumers from high and volatile prices, we must build a new energy system, which is more secure and affordable, and resilient to extreme weather patterns and external shocks. 

That will mean building at a pace we have not seen since the 1950s.

Again this requires a stable, investable sector to attract the funding that will deliver this major programme, while ensuring that margins are as competitive as possible in the best interest of consumers. 

Ofgem will continue to develop the regulatory frameworks to provide that stability, helping to drive down both capital costs and the cost of capital for infrastructure build, which in turn will deliver the lowest achievable costs for consumers.

And as we build out the transmission and distribution system, it is essential that we  carry the public with us.

And we must show empathy and understanding for the genuine concerns of local communities while not losing sight of the urgency of our net zero goal. 

This will require close cooperation between Ofgem, Government, the System Operator and the network companies.

Change

And finally – change. And this covers a number of different areas of change that we need to think about. 

We need to change our whole approach to the energy system. 

We have to admit that natural Gas has been the workhorse of our energy supply for decades, warming our homes and providing a constant and reliable source of fuel for electricity. 

But all three legs of the energy trilemma, price, security and net zero mean that we must move as quickly and efficiently as possible to other sources of energy.

This is not just a challenge for Ofgem, for the energy sector, or for government. 

It is a challenge for the whole nation, and we should not underestimate the scale of change required.

This is not just about building shiny new kit, but about the way we all consume our energy.

Change can be challenging and making the case for change is going to require partnership between Ofgem, government, consumer groups, industry and media.

We shall be looking to suppliers, both current incumbents and new entrants to develop the innovative products and services to encourage as many as possible of our fellow citizens as possible to participate in and benefit from the brave new world of half hourly settlement in the retail market.

It is the responsibility of Ofgem to develop the regulatory environment which allows innovation to flourish.

There are some changes which have come from government and will inform our strategy.

We have a new net zero duty: for the first time directly linking our duty to protect consumers’ interests to specific net zero targets. 

But as you can tell from everything I’ve said so far, we already see building the net zero system as an important part of our role in protecting customers in the future.

In common with other regulators, we also expect to be given a new growth duty. We are currently working through the implications. But for a start, simply making good regulatory decisions in a timely fashion will be important in building an energy system that will not only attract external investment but also provide the foundation for British business to prosper and grow.

Last but by no means least when we think about change. We also recognise that the whole energy sector will need to change to reflect the society we serve. 

We have a very long-term mission and unless we continually adapt, reflect the make-up of society today and tomorrow, competition for talent will undermine all of our plans. 

I was at a lunch the other day, and someone started to talk about the search for talent as a mission critical activity, and then they started a conversation about diversity and inclusion as a sort of niche subject. The two are closely related – unless we cast the net as widely as we possibly can we will undermine all our best plans, so in my view diversity and inclusion in our sector are not nice to but mission critical to us.

Conclusion

So in conclusion, let me just say today is an important staging post on the journey we have begun together which will continue beyond well beyond the launch of our strategy in the spring. 

And speaking for myself, playing a part in resolving the trilemma of energy price, energy security and net zero, is the main reason that I accepted the role as Chair of Ofgem. 

And I invite all of you to roll up your sleeves and work together to develop the energy system our country needs. 

As I introduce Jonathan who is coming up next, let me just say that you may have noticed in my pre-selection interview with the Select Committee, some of the press had a little bit of mischief to make. If you believe what they wrote, Jonathan wouldn’t be in post today! But he is, and in the last few months I have realised what an invaluable asset Jonathan is to Ofgem, having steered the organisation and the sector through the challenges of the crisis. I also see that he is deeply respected among the staff, and amongst all external stakeholders. So I look forward to working with Jonathan for many years to come. 

Jonathan Brearley, CEO, Ofgem

Thank you, Mark and thank you for those kind words.

First of all, welcome to you all and thank you all for coming. 

The past 6 months have been a big time of change – as Mark as already mentioned. We have two new duties given to us by government – one on the way – on Net Zero and Growth underway.

And we have a new Board – not only a new Chair but five new Board members. As you can imagine as a public executive having that big change of a Board is big change for you and a big change for the organisation. The hiring process happens, but it’s a big like the quote from Forrest Gump – a bit like a box of chocolate – you never know what you’re going to get!

Not just to say that Mark and the team that we now have leading the organisation bring a huge set of experiences, not only from different parts of the energy sector, but also other sectors and other forms of regulation. We have people on the Board who have different economic perspectives. Pardon the pun, but I think you see a team which is full of energy.

We now have a chance to re-look at what we are doing, and set a new direction for the next 5-10 years, and really today is asking you to help shape that future by feeding in your thoughts and your ideas.

This is complex – of course it is – it is energy after all! But for me, the discussions we’d had so far really have produced something quite simple. 

Positive future

There is an incredibly positive future for this sector – one where customer standards and trust are high; where infrastructure is well planned and delivered on time; where our markets work to drive innovation and efficiency, getting us to Net Zero at the lowest cost, and we think may even be a cheaper destination for consumers than we have today; where investors get fair but not excessive returns in a trusted regulatory system

I genuinely believe that this will not only be best for customers and indeed for meeting our environmental goals, but I think it creates the greatest opportunity in a generation for the energy sector and for the wider British economy. 

Negative alternative

However, this future is far from assured – there is a clear risk of an alternative – standards and trust remain low, infrastructure doesn’t get delivered, and ultimately people ask where their money has gone, and what have they got back for it. 

In this world, naturally regulation and policy naturally become more reactive, and investment becomes harder. We will find it much harder to meet all our energy goals, and we lose the economic opportunities for this country this transition provides.

Now clearly Ofgem wants to play its part to build towards that positive world, and that is what our new strategy is all about.

Protect, build, change

I will now expand on the three themes that Mark laid out, and our early thinking and the questions we have on our minds.

Protecting customers struggling to pay their bills.

Building out at pace to make the net zero transition.

Changing the energy system for the future to ensure it works for households and for businesses.

Protect

Focusing on protecting consumers. Now as Mark has said, protecting consumers is at the heart of everything Ofgem does – everything we do is driven by this – short and long term.

When I talk to customers – what matters to them today are two things: the standards of service that they get, and the price that they need to pay.

Standards

Focusing on standards first. In my time as CEO, I have seen excellent service across this sector, with new and innovative ways of engaging customers being created all the time.

I have also seen real empathy and real sympathy for the situation that customers find themselves in. For example, one customer adviser proactively called a vulnerable customer while he was shopping at a food bank. She found out that he had self-disconnected from gas all month and helped him restructure his payments, gave him support credit to allow him to get hot water and heating for the first time in a long time. That customer didn’t contact her, she contacted him. That is the kind of customer service we want to see across the board.

We know great practice exists, but we also know it is not universal.

Now I talk directly to customers regularly – let me summarise a conversation I had in the last few weeks.

I spoke to a woman who was saying to me she had never been so anxious about her energy bills. She was talking about her time as a child when it didn’t matter if you left the light on or the heating on a little bit too much – that was simply the background. Now it was her focus every day. She also told me that she really struggled with her traditional prepayment meter, where she had to take her children out of her flat, to the shop, where, for those who have kids, they want to buy loads of other stuff as well. So not only was she paying to top up her energy but it was costing her time and money.

I asked her – have you thought about getting a smart meter. She said two things: I asked once, and they never turned up for the appointment. And I’m not convinced that getting a smart meter is going to help me because I don’t know what those companies do. Now with that level of trust in our sector, in our organisations, it’s going to be hard to make the changes we need to make for the future. And we are not helping people as much as we could who are struggling.

Equally, I have sat in a room with a small business owner who owned eight shops before the start of the crisis, but due to very poor treatment by energy brokers had lost four of them as a result of the energy contracts he had felt forced to sign on to.

Now I know this is not everyone’s experience, and as Mark as already pointed out, it is still all too common. 

So we do want to have a big conversation about how we drive up standards:

We want to look at all tools – of course we will not be afraid to enforce, but we also want to look more broadly than that.

We want to create an ecosystem that means the experiences we have encountered become the exception and, when discovered, they are resolved quickly. 

And we are keen to understand what the right combination of incentives, compliance activity, reputation, and indeed relationships across the sector will achieve this.

To be clear, this is about business customers as well as households. 

And it is not just about the retail sector – networks too must be fully focussed on looking after their customers’ needs and with all companies need to maintain a comprehensive priority service register.

And as you will know, we strongly encourage government to get involved and share their data to ensure that that task becomes easier.

The need to provide higher standards is a good example of why think we companies need to understand their customers. The only way to do that is to make sure you have a diverse workforce in the organisation and your senior team.

That is why I have been championing diversity and inclusion in the sector since I become Chief Executive.

We also that this is a job for the regulator as well as the industry. We are very closely to gender balance in our senior team – we are already on 47%, so pushing a bit more I hope we will have a balanced senior team in time to meet our targets in 2025.

Price

At Ofgem, we do deeply care about standards. But the thing customers probably care about most is the price they have to pay for their energy – and over the crisis the financial strain on many customers has simply been unbearable.

We remain keen to examine options to reform or adapt the price cap to a volatile market, and allow for the world of time of use tariffs that in 2025 and beyond we hope to move towards. I am optimistic that government, Ofgem, and the sector, will work together to gather evidence and discuss options for change.

However, as a regulator, under any system we can ensure that prices fairly reflect costs, but we cannot remove those costs – even in a world of perfect price regulation, there are highly likely to be customers who simply cannot afford to pay their bills. 

Tomorrow, we will announce the price cap for April and as many are speculating, it is likely that prices will ease significantly. However, life for many customers remains hard, and debt levels in the market are still reaching new highs – with total debt of around £3 billion across the domestic market.

Therefore, in the coming weeks, Ofgem will launch our own assessment of the impact and implications of affordability, and the impact of debt in the energy market – asking the whole energy sector: suppliers, charities and consumer groups, for their input to help us better understand the impact and consider what to do next.

Nowhere are these concerns more apparent than our call for input on standing charges – people care deeply about this. The public response has been larger than any at Ofgem that I can remember.

On the day we launched the consultation at midnight, and by 11:00 we already received 4000 responses from the public; overall 40,000 people replied.

The problem remains that, without that wider thinking on affordability – any reduction in standing charges benefits some vulnerable groups but makes others worse off.     

Although the market is stabilising, we will need billions of pounds of investment if we are to build the energy system of the future. And it is my view that we need clear thinking on affordability, and what the role of all those involved – industry, stakeholders, Ofgem, and indeed government – need to play to make the transition possible. 

Build

So moving on from managing standards and how we protect customers, to building the infrastructure that we need. A clear lesson from the energy crisis is that almost regardless of any environmental concerns, we need to diversify our energy system away from gas. And our Net Zero Duty reinforces the need to make the low carbon transition at pace.   

Our team who run and deliver government schemes have been at the heart of this change from the very beginning – funding the early renewables – onshore and offshore wind farms – supporting the growth of heat pumps, and reducing energy use through a rapid increase in energy efficiency. The first windfarm I ever visited, Whitelee near Glasgow, was funded through our Renewables Obligation Scheme.

We know we need to go much further. 

To illustrate part of the challenge – last month I went to Humber and Teeside to see the carbon capture and storage projects. They are huge projects and require significant investment and indeed regional coordination. However, if successful they will provide opportunities for low carbon energy and to be honest for the first time in a generation significant industrial economic growth.   

Our strategy has already changed here. We have moved from market led generation and reactive networks, to a more strategically planned system, and a clear investment through new network regulation, called ASTI. This has allowed anticipatory investment based on the design laid out by the nascent system operator in advance.

As future demands on the network grow, the ASTI framework will enable £50bn-£60bn of network investment – and indeed that figure may grow further.

And we are delighted that the National Energy System Operator has now been set up, and that strategic planning at a national level is already under way, strongly backed and regulated by us to deliver the system that’s needed.

So we are prioritising  pace over perfection: rethinking how we weigh short-term risks and costs against long-term risks and costs. 

Of course, this change in pace now needs to be matched by delivery from network companies to meet their targets and commitments on time and we still need to work on other blockers such as the planning regime that need speeding up. Equally, Ofgem is willing to work with Network Companies and government to grow the supply chain in the UK – as long as this is in consumer interests.

There remain some critical questions we will need to tackle as we embrace this changed approach:

For of all, what is the right balance between spatial planning and market signals to shape our energy future?

What is the right relationship between Ofgem, government and the National Energy System Operator? And in particular, how does Ofgem regulate the system operator when its performance is so important for our long term energy future?

How do we plan at a regional level involving all local leaders so projects like Teeside and Humber are well integrated into local needs, and, linked to this, how do we best regulate our growing local networks?

And finally – how do we approach the regulation of the gas networks as that energy diversifies – particularly, as the use of heat pumps rises.

Change

So there is plenty to do to ensure we do our part to build infrastructure at pace. And moving on to change, I should say that people like me love to talk about building infrastructure – when I think of all we need to build, I have the same look in my eyes as my five year old boy does when he’s watching Bob the Builder!

But this transition is not simply about building infrastructure. 

In a world of intermittent renewables, we need imaginative, intelligent approaches that are going to move a customers’ use of energy – where possible – to the cheapest time for that customer, thus reducing costs to them and the cost to the system for all of us. 

We have talked about a smarter system for a long time – indeed as a government official I remember publishing a ‘vision for a smart networks’ over a decade ago. 

But, finally that aspiration is very close to becoming a reality.

By 2025, half hourly settlement will mean prices can vary by time of day – to better match demand with changing prices.

Data and AI capability are growing at pace – used across the sector from retailers to those wanting to better manage their energy system.

And customers are getting new equipment in their homes – not least through the schemes Ofgem runs, such as the boiler upgrade scheme.

However, to make a success of this world – we have some big questions we all need to answer.

Again, how do we best configure the wholesale market, network access, and charges to realise the benefits of flexile approaches?

How do market signals sit alongside this big infrastructure programme we are envisaging? 

And how do we configure the retail market of the future that will engender compelling offers to customers to encourage them to adapt their own demands and offer savings as a result? And in particular in this new world – how do we protect customers interests?

So overall we have big questions as to what we do, and how we regulate.

But equally, as Mark has already said, we need to change as a regulator. So today, as we put questions in front of you, I would also like you think about what you want and need from Ofgem, and what kind of regulator do you want us to be?

I look forward to working with all of you all on these critical issues today, and well into the future. Thank you.