Ofgem’s vision for a net zero future

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This is the keynote speech Jonathan Brearley, chief executive of Ofgem, gave at Energy UK’s annual conference on October 15.

I will start with today, as I have done many times before, by saying thank you to all of you who work in the energy industry. You have stepped up during the COVID-19 crisis; you are the unsung heroes of the effort the whole country has made through these unprecedented and challenging times.

I do want to say on behalf of the regulator, and on behalf of customers, that those efforts are appreciated. I have heard so many anecdotes of the things that different workers in different companies have done. For example, we met a father in Middlesbrough who had lost his job who received fuel vouchers for his prepayment meter, which made a huge difference to him.

Equally, we have heard a lot of stories about people who have been working to reinforce the grid at times when the rest of us were able to comfortably work from home. Things like those NHS Nightingale hospitals simply wouldn’t have happened without the work to make the grid connections possible.

I think that is hugely appreciated and as an industry, we have worked effectively and collaborated together. Research carried out by PwC said 82% of customers aged over 65, and 67% overall said they believed their supplier would support them if needed.

While these are only early indicators, when you have been around the industry as long as I have, and you’ve seen some of the trust figures in the past, that is clearly a step forward. It shows that we have done a great deal of good things over the past six months. We will continue to do so.

We acknowledge there is more to do. For example, as Citizens Advice have said to us, making sure customers understand what support is available to them is going to be critical, particularly as we go through the next phase of managing the COVID-19 crisis.

Equally, we do understand that suppliers themselves are facing a challenging time. We are engaging very closely with the retail market in particular to make sure we understand the situation in terms of supplier finances.

We don’t see a systemic problem at the moment but clearly, one thing the last six months has told us is that the situation is unpredictable. As a regulator we are examining the different scenarios that might play out to make sure we are ready to deal with those.

 

Progress so far

Alongside responding to COVID-19, Ofgem has been thinking hard about our vision for the future and the role that we should play within it.

I am going to start on a personal note. Climate change and energy are not new to me - my background includes creating the Climate Change Act, designing the CfD regime and I have personally argued for investment in this sector to make sure we get the technological change we need for net zero.

Emma [Emma Pinchbeck, chief executive of Energy UK who spoke earlier] talked about the birth of her new child. I have two very young children. When I look at them, and I think of our future, I know that all of us have a really strong shared vision of the future, and that is to build an affordable, low carbon energy system.

I know that we have to maintain public confidence as we do that. Yesterday I attended a consumer panel where customers from Dudley were talking about their experience and how they felt about this transition. The really heartening thing for me is that virtually everyone in that group said they understood that we are going to need more investment to make this low carbon transition.

But one customer struck me when he said: “I’m happy to pay but not if I feel I am going to be ripped off”. That’s something that we all need to bear in mind. People will be looking at us, as a sector, to make sure they feel they are getting value for money for what we do. Ultimately that comes back to Ofgem’s two strategic goals: to protect customers through this transition and make sure we hit net zero.

When I stand back and think about the sector as a whole, I don’t think we are talking about a transition that is going to happen in the future. It’s already happening, particularly in the power sector where we have seen a huge growth in renewables. The Prime Minister’s announcement last week shows there is a clear direction for changing the power sector from one that is high carbon to one that is low carbon.

All sorts of operational challenges and questions remain, but I do think we are well on the way. For transport, we can see electric vehicles will play a large part in the transition and that is something that we, Ofgem, are working to enable through our network price controls which I will come to later on.

We know there is more we need to do in the heat sector, to make sure we understand how we are going to get to a low carbon heating system, and indeed different low carbon ways in which we support industry. But even here I believe we are seeing movement, we are beginning to see the kinds of innovation, the kind of testing that will lead to some of those low carbon alternatives. For example, Ofgem funds a number of hydrogen trials which are beginning the process in helping us understand what we might do to replace gas in a low carbon way.

We also have COP26 taking place next November in Glasgow which we are very excited about. Ofgem would like to play our part to bring together international regulators to reflect on what we need to do to support net zero.

 

Ofgem’s strategy

That is our long term vision, which I think is shared across the industry and has a strong degree of public support behind it. So how do we get there? Ofgem has been reflecting on its strategy, which we’ve not yet finalised, but I thought I would share some of our early thinking about what this means for us.

Firstly, there are many things that Ofgem needs to continue to do today that it has always done. If you go out and talk directly to customers this is where they think Ofgem has a strong role and needs to continue to play that strong role.

For example, in the retail market we will want to see high standards of customer satisfaction and customer service, we will want to enforce where necessary against behaviour that we think is against customers’ interests, and we want to support the most vulnerable to engage within this market.

Across the wider energy system we want to work to maintain security of supply, and to make sure that systems and codes are managed effectively.

And finally we will continue to run government schemes that support decarbonisation and support some of the most vulnerable in society. Those schemes are already driving the change we need to see to hit net zero.

However, we know we are in a changing market. We know there is a great deal we need to do to support some of that change so we’ve identified five big change programmes. I’m now going to describe them in a little bit of detail to give you a picture of Ofgem’s work programme going forward.

1. Investment

The first is investment in low carbon infrastructure. I will come onto RIIO shortly, but we accept that there is a case for a great deal of investment in networks but that settlement with customers must be fair.

RIIO is not the only place that we will be involved. For example we are working to develop new mechanisms in networks to drive competition, working with government on the possible use of regulatory mechanisms like the regulated asset base for larger forms of low carbon technology like carbon capture and storage and nuclear.

We also need to make sure that the sector’s cyber structure is secure against physical and cyber risks. To this end we are continuing to evolve our role as Joint Competent Authority with BEIS on cyber security, to make sure we as an industry are robust not just to physical attacks but also attacks or issues that may come from the cyber world.

2. Flexibility

The second programme is flexibility. Flexibility is something many of us have talked about for some time. In our view it represents a very compelling vision of the future, particularly, when you add electric vehicles into the mix. The more we can shift our demand, and potentially our supply, to adapt to a more intermittent world of renewables, the more likely it is that we will make this transition in a cost effective way.

We have a vision where many of us don’t have to engage directly in the market, but where we are shifting our demand where we can, when we can charge our electric vehicle batteries at different times, where we can store energy in different ways, and where we can make the best of data and digitalisation to make the most effective use of the assets we have.

If we get this right the price is huge. We estimate around £7 billion a year by 2030 can be saved by moving to a smarter system and a more integrated energy system as a whole.

3. Future retail market

The third area which is highly linked to flexibility is the future of the retail market. We have a retail market that is competitive in parts and have a price cap that protects those that don’t switch. That market is going to have to change to enable some of the behaviours I have described. We are thinking hard about and are excited about a world where we can design tariffs differently, we can use data differently to ensure customers maximise the opportunity from the technological changes that might happen, but equally they get protection where new risks might emerge.

4. Data and digitalisation

Finally, we have highlighted data and digitalisation as a different workstream. They underpin everything - flexibility, infrastructure and the retail market. We have brought them out as a workstream on its own because we think they are going to play an increasingly important part in the sector.

Ofgem is beginning to understand the data world, we are beginning to understand the potential it might bring - in fact we are in the process of hiring a chief data officer - but there is more to do here to make sure we as a sector maximise the technological opportunities we can and we genuinely deliver some of the market changes I’ve already described.

5. System governance

The final programme is system governance: how we run the system, how we integrate thinking between the gas and electricity sectors, new emerging technologies like district heating and other areas to make sure we have a comprehensive, integrated and compelling vision for the future. We are thinking about that in different ways. For example we are still working on the review of the system operator.

We accept we are part of that landscape. Ofgem itself is going to need to change and we are fully up for the conversation about what that might mean about our roles and our duties. Alongside that we are working very hard to transform ourselves as an organisation. We were designed in a world that was not moving the way the energy system is moving now so we want to become a more adaptable and responsive organisation. As many of you will know we have started that by moving to a much flatter, much more horizontal and less hierarchical senior structure. But there will be more changes in the way we run and operate ourselves in the future.

I should say as an aside, I can’t resist this opportunity to mention, that we are recruiting two new directors, one who is going to lead our energy systems and the piece around integrating everything together, and the other director on analysis and assurance. For anyone watching who is interested please do get in touch. These are fantastic and exciting roles. I promise that is the advert over!

 

RIIO

So to one of the things that are most pertinent, RIIO, and the price control process we are in at the moment. I should start by reiterating what I have said before - we accept the need for more investment to get ourselves towards net zero, we accept that if you add on electric vehicles and think about the low carbon solutions for heat we do understand that we need more investment than in the past.

That’s why we designed this price control to be adaptable. It can change to make sure we can respond to the changing and potentially increasing demands that are going to be put on the network. We accept that we are going to have to work at pace to process those re-opener applications for new investment to make sure that the regulator doesn’t become a blocker.

For me it is fundamental that we have a price control that can change with the landscape around it. If we don’t we will find it very hard to adapt. We believe the investment case for low carbon goes well beyond what was in companies’ existing business plans and might come to about £10 billion of green projects overall. To give you some examples, we need to invest to make sure we have a vehicle charging network and absolutely we are going to have to invest to connect all of that new offshore wind that the Prime Minister referred to.

Equally though, as I mentioned, we do need to maintain public confidence and justify the final determinations for consumers. The process for RIIO is ongoing, but we are having a discussion about returns. At this point in the price control the CMA has issued their provisional findings on the water sector price controls and we are working through those in detail. We will consider that evidence alongside all of the other evidence we have had around returns before coming to our final determination.

The last thing I will say about RIIO is that this has been a robust debate. One of the things we have been asking for as a regulator is for more evidence around some of the business plans that were submitted over the summer. We have had a huge amount more evidence from the network companies. We are working through that in a structured way and I am confident we will end up in December with the right balance between the interests of customers, who need to be protected, the investment we need to make sure we get to net zero, and making sure there is a fair and reasonable return for shareholders. I believe ultimately we can make that happen.

 

Green recovery

We can’t wait for RIIO to start to support the green recovery. I am really pleased to say today that we are working closely with the network companies on our green recovery project to identify opportunities to get investment into the ground in the very short term.

Either through the rest of the financial year, or for those price controls that go up to 2023, we want to bring forward investment that may need to be over and above what is already planned. I am happy to announce that we have agreed that this year £80 million of projects will be brought forward.

For example SSEN are investing in their license area in Oxfordshire to make sure that we can support a world leading vaccine centre. Electricity North West will build a zero carbon substation to provide power supply to the South Manchester Enterprise Zone, which will support the extension of the metro link and increase electric vehicle charging.

There is a lot we can do in the short term and we are open as a regulator to see what we can do in the medium term to support the green economic recovery alongside the much more fundamental conversation about the price controls.

So just to recap on RIIO: we are making good progress, we are working closely and well with the industry, there is a lot of new evidence for us to consider, but I am confident that when we get to the final determination we will get the balance right between what we need to invest in the network, what customers need in terms of a fair deal for them, and what shareholders need in order to invest.

 

Diversity

Before I finish, I would like to talk about another thing that is close to my heart - diversity in the energy sector and Ofgem. As I said earlier, we are thinking about ourselves as an organisation and how we can change to better reflect the world that we serve.

On a personal note, I am in a mixed race family, I am married to a British-Indian woman, I have two mixed race boys who also come from complex backgrounds for various reasons, and I live in rural Buckinghamshire, a place that perhaps isn’t as diverse as some more urban areas. I understand what it means to be different, I understand the differences that people feel when they interact with the energy market, indeed when they interact with Ofgem.

I am passionate about diversity and inclusion. I would like us as an organisation to change, and I would like us as a sector to change. I want to emphasise that the reason is not simply about wanting to be a better kind of organisation - it’s because I think that is fundamental to our business success and our capacity to work on behalf of our customers.

So I am really pleased today to say that we have recently become a partner with Energy UK and Citizens Advice, to increase the number of BAME speakers in the industry, and challenge organisations to think about their public face.

I look forward to continuing collaboration and working across the sector on this. I am genuinely open to ideas as to how collectively we can increase the diversity of the people who lead and work in our field. It’s something that Ofgem will be focused on, and we have set ourselves some fairly stringent targets to do this.

 

Conclusion

We are fully committed to our statutory objective to protect customers today, but also in the future. That means doing all of the core things we are currently doing with a passion. And also making sure we stick up for customer’ interests and support that pathway to net zero to build a greener and fairer energy system.

The RIIO process is ongoing and we are not going to agree on everything. But I am confident we are going to get to a place where we get to the final determination that lands us in the right place to protect those interests and make sure we get to net zero in the future.