Jonathan Brearley's speech at Future of Utilities event
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Introduction
Thank you Hayley, and to Future of Utilities for inviting me here. Before I get on to my speech, one thing I do want to say is I absolutely support the comments around diversity of our workforce that were made in the previous panel. We at Ofgem have a huge enthusiasm for making sure we have the diverse workforce we need.
Now bringing us back to the situation here, I hope there will be a time when I can bring customers good news and I can focus solely on the world that we want in the future.
That time is not today.
Like so many I am horrified and heartbroken by what is happening in Ukraine, and by the immense suffering of the Ukrainian people as a result of the Russian invasion. Many of us have relatives and friends and colleagues who are caught up in this conflict.
I want to make it clear that Ofgem will do whatever is needed to support the government in executing its strategy on economic sanctions against Russia.
The Russian invasion will undoubtedly change many things about our world, and we cannot yet know all of them.
But it underlines something very important for our energy policy.
We have known - for a long time - that we needed to move away from fossil fuels to avoid the most catastrophic impacts of climate change.
Last autumn underlined the fact that our reliance on gas left us exposed to extreme volatility and extreme prices.
Russia’s invasion of Ukraine has made that reality even more stark.
I have been working in energy and climate change for many years, longer than I care to admit.
But I have never seen a situation like this. Indeed, I cannot find a similar situation in our post-war energy history.
We started Winter, with an international gas price shock of unprecedented pace, scale and duration. Prices, on average – usually 40-60 pence/therm during recent winters - were nearly 5 times this from September to January, resulting in a record rise of almost £700 in the price cap.
However, this gas crisis is not over.
We are entering a second, more serious phase that will have further consequences for customers and further financial strain for retail companies.
Since Russia invaded Ukraine, the gas price has been extremely volatile with the day-ahead price peaking at almost £7 per therm yesterday, nearly 16 times the average price last winter.
These costs ultimately will be passed through to consumers.
While it is too early to predict what the price cap will be in October, a price increase is almost inevitable.
I talk to customers on a regular basis and I know how tough the price changes already announced will be for many households and businesses – let alone further rises.
And as I said, the Russian invasion will undoubtedly change many things about our world, but it underlines something very important for our energy policy.
It is not in consumers' interests for their energy sources or prices to be so exposed to international gas markets.
More precisely, it is not in customers’ interests for their household bills beholden to the uncertainties of geopolitics.
And it further makes clear that, there is no energy security pathway that does not involve diversifying away from our reliance on gas.
It is now not only a transition away from over reliance on fossil fuels to tackle climate change, it is a transition away from volatile prices.
And we must look to make that transition as short as possible.
It is right that there is a renewed debate about our energy strategy – and the appropriate policy response of course is a matter for Government. Yesterday the Prime Minister stated he would be setting out an energy supply strategy in the coming days, and we look forward to working with the government to achieve that.
However, as a regulator, Ofgem has a role to consider the economic and security implications of this crisis for consumers and the energy market.
That means that Ofgem has two simple priorities:
- First of all, to manage and mitigate, as best we can, the market changes and inevitable consequences on all British consumers.
- Second, to work urgently, towards cheaper, cleaner power in Britain. Which means a resilient, low carbon, British energy system that will diversify away from our reliance on gas. That is how we become energy independent in the long term.
Cheaper, cleaner power in Britain
Let me start with the need to diversify away from our reliance on gas.
Unlike some European countries, we are not reliant on Russian gas – for which the North Sea is our largest source, while the bulk of our imports come from Norway.
However, although we are not directly reliant on Russian gas, the price we pay for gas is set globally.
There are those who argue that more gas exploration will mitigate the price shocks we see in the market today. Now there are many good reasons why we may want to develop more gas domestically. It may well create revenues, jobs and, over time, support energy security.
However, it will not significantly change a price set that is set globally.
Equally, some have argued there is a contradiction between a low carbon and renewable energy system and the need to keep costs down for consumers.
I have to say that that argument no longer holds weight – the economics of energy has fundamentally changed.
Before the crisis, many forms of low carbon generation had already become cheaper than conventional generation.
Now, 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.
Building that low carbon system is going to require commitment, effort and innovation. There is no doubt that it poses us challenges, and I am sure you will be talking about those challenges today.
Most sources of supply are intermittent or hard to flex to meet demand.
And we need a grid in new places – for example under the sea.
And some forms of low carbon energy are still expensive – for example hydrogen or heat pumps.
But it also offers opportunities - to revolutionise how and when we use our energy.
To develop new technologies, IT and data, that will give us unprecedented opportunities to maximise efficiency, to shift and control our demand for a more efficient system for everyone to use.
From heat pumps to smart gadgets that draw energy from the grid at cheaper rates, to batteries, to supporting the electric car roll out by reducing our charging costs.
Put simply, a smarter, more strategic system that can shift demand will save consumers up to £4.5 billion a year as we extend the use of low carbon technologies.
To put that system in place we need a new, different, energy market – one that we, with government, are already designing and building.
We need network innovation – as we hope to see from the 40 new projects launched from our Strategic Innovation Fund last week.
And we need a system that is planned holistically and more directly, so that onshore and offshore regimes strategically make sense.
This needs to happen at the national and the local level.
At the national level, we are working with BEIS on developing the Future System Operator and expect to respond to the recent consultations shortly.
At the local level, we issue a call for evidence to explore how governance could change locally to ensure we have the capacity to plan and manage local energy systems effectively on behalf of consumers.
However, in advance of any changes to governance which we know takes take, we will need our local networks to evolve now.
This year we will decide on the regulatory settlement for local networks through our electricity distribution price control. So I expect to be seeing a great deal of Phil, who you saw in the last panel, over the next six months.
This will prioritise a strong, secure, resilient and low carbon system.
We will need to support investment.
But equally importantly, distribution network operators must begin to build the smarter and more flexible system that customers desperately need.
Beyond our work on governance and network regulations, it is possible that we will need wider changes to our market, for example our wholesale market.
And we will need a different way of regulating our retail market fit for our net zero future.
There is still a great deal to do.
I look forward to working with government, NGOs and the industry to build the resilient, low cost, low carbon system that we all need.
Managing and mitigation
Now let me now turn to what Ofgem is doing to manage and mitigate, as best we can, the markets that we are seeing change.
We have had some successes.
Working closely with government, NGOs and the industry, we have protected customers by keeping them on supply, maintaining credit balances and minimising disruption for the 4.3 million customers affected by supplier failure.
And the price cap has provided some protection for 22 million households, ensuring they pay a fair price for their energy, given legitimate costs.
Regulatory changes underway
However, we also recognise that there are regulatory lessons that Ofgem needs to and has learnt from this crisis. Change is already under way:
To reduce the risk of failure, and to ensure that inappropriate risk is not passed on to consumers, Ofgem is proposing tougher and tighter controls on the retail market, focussed on financial resilience.
This means:
A new capital adequacy framework to ensure firms are more resilient to market risks – while still giving them the flexibility to determine their own hedging strategies.
More robust stress testing, already underway, with improvement plans and clear enforcement pathways put in place to address weaknesses.
Financial audits on the most high-risk suppliers.
Greater supervision of industry staff in significant roles, with strengthened assessments for entry to the market and on growth.
Ring fencing of all relevant assets within the regulated retail company.
And measures to ringfence renewables levies and customer credit balances from firms’ balance sheets.
These proposals can and will be brought in at pace although we accept that some companies will need time to transition.
Where we need to make changes in licenses, we will publish legally required consultations – the first of these, on credit balances and renewables levies in April.
And we are changing the price cap to allow it to adapt more effectively to market conditions.
These changes, in aggregate, will move the market to a more resilient position, better able to adapt to a challenging wholesale market.
Wider energy challenges
Now the gas crisis is not the only thing to hit customers this Winter. Storm Arwen and the following storms, Malik and Eunice, caused significant disruption.
We are publishing our lessons learned from these events through our review and I have talked personally to customers affected to understand their experience.
Put simply, there are many cases where customers should not have had to endure the combination of being without power, poor communication, and inadequate response to their needs.
We will make sure the industry learns where its needs to, to make sure this does not happen again.
Both Storm Arwen and the gas crisis point to the need to fundamentally change our energy system. In my mind, it is in full synergy with our goal to meet our Net Zero climate change goals.
Conclusion
In conclusion, this is an historic moment.
Where households, particularly the most vulnerable, business customers and the energy industry are being put under extraordinary strain.
Ofgem has robust measures for how vulnerable customers are treated, and I would encourage anyone struggling with their bills to get in touch with their energy company as soon as they can, and to take advantage of the grants, services and schemes available that help reduce household energy costs that help reduce household energy costs.
I would ask those of you in the industry to reach out to the most vulnerable customers.
To act with pace, to act on your obligations, and act to support those customers throughout this crisis as best we can.
As an industry, we cannot pretend that our actions can mitigate the full impact of future price rises.
Nevertheless, I believe we have a vitally important responsibility to face up to a likely future where energy prices go up even further, doing whatever we can to support and protect consumers through the coming weeks, months and even possibly years, in one of the most challenging markets we have seen in our history.
But as we do so, we need not to lose sight of the fact that energy economics has changed.
The best way to manage this risk in the future means making an even greater effort to move to a greener, more resilient, more affordable energy system today that will protect us from price shocks tomorrow.
Ofgem will work with the industry, government and NGOs every step of the way, to realise that opportunity.