Jonathan Brearley’s speech at All Energy event in Glasgow
Agendas, minutes and presentations
- Publication date
Speech as delivered
Introduction
I am delighted to be back in Glasgow where I was a student many years ago and where over 500 Ofgem staff are now based.
A city that should be extremely proud of hosting COP26 which took place at a critical time for the climate and in the midst of the gas crisis.
Six months on, the gas crisis continues, but made far worse by Russia’s horrific invasion of Ukraine.
I want to make it clear that Ofgem will continue to do whatever is needed to support the UK and Scottish Governments in executing their strategy on economic sanctions against Russia.
The current market
Gas markets remain in a febrile state since the Russian invasion.
Prices fluctuated from nearly 16 times the average price last winter at its highest to around 4 times what we'd usually see.
The market remains highly volatile and as a result we do expect further price increases later this year.
Many of you in the room know the impact the gas crisis has on the sector, but most importantly it is putting huge strain on the customers we serve.
I talk to customers on a regular basis, and I know how tough rising energy prices are for many households and businesses.
For some, not being able to afford rising energy bills is literally a matter of life and death.
One customer’s story sticks out in my mind.
In February I spoke to advisors from Wise Group, the social enterprise group based here in Glasgow, who had been helping a customer who is unable to work after undergoing medical treatment for a brain tumour.
The customer, who lives with her daughter, has struggled to keep up with rising energy prices and is worried she will be forced to choose between heating and eating, even as she recovers from her illness.
What was shocking was to learn that she feels more comfortable in hospital where she can eat and be warm than at home.
I want to pay tribute to the frontline staff of groups like the Wise Group who are doing their best to help customers like her every day and are making a real difference in difficult circumstances.
Equally, I would encourage anyone struggling with their energy bills to get in touch with their energy company as soon as they can to access the support that is available.
Our response
In responding to this unprecedented cost of living crisis, our job – as the energy regulator, the industry and NGOs – is to do everything we can to look after customers.
It’s going to require every ounce of innovative, creative thinking that we can collectively muster to find new ways to help customers.
So, I’m really pleased that National Grid announced today it has agreed to pass £200 million to customers under Ofgem’s interconnector cap and floor mechanism, ahead of schedule to help reduce energy bills sooner.
Ofgem is acting quickly to move the retail market to a more resilient position and one that is better able to adapt to a changing wholesale market.
To reduce the risk of supplier failure, and ensure that inappropriate risk is not passed on to consumers, we are putting in place tougher and tighter controls on the retail market, focussed on financial resilience.
And we are changing the price cap to allow it to adapt more effectively to market conditions.
Now, we, the regulator, NGOs and energy companies need to step up and make sure we are looking after customers’ needs.
Now, more than ever, we expect customer service standards to be maintained and customer payments to be fair. Customers need to be able to turn to us with confidence.
That’s why we have launched the first in a series of market compliance reviews to assess whether recent direct debit increases are justified. Other reviews will follow shortly to assess other aspects of vulnerability, affordability and customer service and drive improvements across the market.
We are not prejudging the outcome of these reviews. These are complex decisions, and this is a time of extreme change in this market.
But, of course, we will not hesitate to act if we find companies are falling short of their obligations.
For example, last week we took action against a network company, WPD, for failing customers on its Priority Services Register.
They have agreed to pay nearly £15 million in redress, as well as fix the problems, which will help vulnerable customers.
Also, later this month we will also announce the findings of our review into network companies’ response to Storm Arwen which left nearly one million customers across Scotland and northern England without power last autumn.
Lessons learnt/limits
I have also been clear that there are regulatory lessons for Ofgem to learn from the gas crisis.
We will continue to be open and transparent about this.
In December we commissioned an independent review by Oxera into the root causes of the recent supplier failures and how regulation played a part.
Last week we published the review in full and we have a full action plan to implement its recommendations, many of which are already in train.
We will do everything we can to reform the regulatory system to protect customer interests in this new, volatile, and risky market.
Equally we need to accept there are limits to what we as the energy regulator – and the industry and NGOs – can do to mitigate the impact of record gas prices.
Even by doing everything we can, none of us can solve or even mitigate this gas crisis alone – we need to work with government.
That is why I am pleased the Scottish and UK governments intervened to help customers earlier this year and, as you would expect, we continue to have active conversations about what more can be done.
Net zero
There is a huge challenge today with the gas crisis, but to me it highlights the biggest challenge we are facing.
If we now move onto the wider energy strategy – particularly the Scottish and UK targets on net zero which I know are close to the hearts of many in this room.
The gas crisis has not only changed our retail sector. It has changed the economic fundamentals of the energy sector as a whole.
If I go back to something Keith said earlier about the energy trilemma which I’ve been working on now for 15 or 20 years.
For years some have argued that you cannot move to a low carbon and renewable energy system and at the same time keep costs down for consumers.
I have to say that that argument no longer holds weight – the economics of energy have fundamentally changed.
Before the crisis, many forms of low carbon generation had already become cheaper than conventional generation.
With the volatility we see in gas prices, the economic case is far stronger.
The only way we can reduce our vulnerability to volatile and high gas prices is to focus on generating cheaper, cleaner power here at home.
In the future, greener energy means cheaper energy. It also means more secure supplies of energy too.
In my view, the gas crisis and Russia’s invasion of Ukraine show us that we need to make the transition to net zero more quickly.
We absolutely stand ready to work with industry and the Scottish Government to make ScotWind and another offshore wind projects a reality.
However, we need that transition to be one that is secure and at least cost to customers.
Building a smarter more strategic system that can use heat pumps, electric vehicle charges and other smart gadgets to shift demand will save consumers up to £4.5 billion a year.
To realise these savings will mean a different system for our demand and supply of energy.
Most likely this will require fundamental changes to the British energy market.
This is why we welcome the UK Government’s comprehensive Review of Electricity Market Arrangements (REMA).
We are working closely with BEIS on the review and will come forward in the coming months with our own ideas of the changes that we think are needed.
Let me expand on the key elements.
Stronger strategic system planning at the national and local level is needed. The UK Government last month accepted our recommendation for an independent system operator, or FSO, to oversee the network at a national level. Their work is critical.
We welcome the cooperative, supportive and collegiate approach that National Grid has taken in starting the work on design and implementation.
Last month Ofgem also launched a review into the different arrangements that may be needed at a local level again to drive local ownership and accountability for the next stage of the transition.
The Scottish Government has already set out its own climate change plan and net zero targets and we look forward to seeing its updated energy strategy and Just Transition plan.
Beyond these changes, we are likely to need wider changes to our wholesale electricity market to reflect different local conditions.
And we will need a different way of regulating our retail market to make the most of the value that customers can bring by changing the way they use energy.
We will come forward with further thinking on this in the coming months.
This year we will also decide on the regulatory settlement for local networks through our electricity distribution price control.
We understand the need to deliver at pace and the need for investment to make sure we get this right.
We need customers to also know two things – that they’re getting value for money and equally that investment will lead to the service they expect.
I look forward to sharing our draft determinations with you and I’m sure it’ll spark plenty of debate.
Finally I want to say that we are talking to Scottish Government and others about many issues on network charging and market investments, including transmission charges. We understand the need for pace to get to net zero.
Conclusion
I cannot find a similar situation to the gas crisis in our post-war energy history.
Business customers, the energy industry and many consumers, especially the vulnerable, are being put under extraordinary strain.
As an industry, we cannot pretend that our actions can mitigate the full impact of future price rises.
But we all must do everything within our power to help consumers.
And ultimately, as we all said, here in Glasgow, at COP26, the best way of protecting customers from price shocks is to diversify and move faster to a cheaper, cleaner, more resilient Net Zero future.
Ofgem will work with the industry, the Scottish and UK Governments and NGOs to make the changes to the market needed to deliver this transition at pace and in customers’ interests.