Interview: John Pettigrew, chief executive, National Grid
“With a focus on security of supply – it would be incredibly disruptive to move to an ISO.”
However, despite the company’s powerful position, the environment Pettigrew has settled into as chief executive is far from secure. Around him, the energy landscape is in the throes of rapid and turbulent changes, some of which threatens to strip his organisation of key responsibilities. Others may undermine its profitability.
If Pettigrew is perturbed by these challenges, however, you’d be hard pushed to tell. When Utility Week meets him at National Grid’s head office, overlooking the hustle and bustle of Trafalgar Square, he has the occasional smile for questions about radical technological and regulatory transformation ideas, but is otherwise neutral and measured in his appraisal of energy system transformations, from decentralising technologies to charging regime reviews and the post-referendum government.
In part, this poise has its foundations in Pettigrew’s long and varied career at Grid, which has seem him hold all manner of roles since joining as a graduate trainee 25 years ago. He accelerated rapidly to senior positions, being appointed director of engineering in 2003; chief operating officer for the US business from 2007-10; chief operating officer for the UK gas distribution businesses from 2010-12; and UK chief operating officer from 2012-14. Before occupying such illustrious positions, he also had solid hands-on responsibility in roles including network charging and system operation.
He mentions the latter as we launch into discussion of the idea that Grid should be stripped of its system operator (SO) role and a new independent system operator (ISO) established instead. Debate has smouldered for years on this issue, with significant concerns voiced in expert communities about the ability of Grid to avoid conflicts of interest between its SO responsibilities and its many other businesses.
In the past year or so, these concerns have flared up, fuelled by worry that conflicts of interest could undermine the move to a low carbon energy system. In July this year, for instance, the now defunct Environment and Climate Change Committee (ECCC) said that, despite Grid’s best efforts, the potential for damaging conflicts of interest were “growing and intractable”. In particular, it said there was scope for Grid to push for unnecessary asset investment and to unfairly advantage its interconnectors over, novel forms of distributed and renewable energy technology. The ECCC urged Ofgem and government to act “as soon as possible” to remove these risks.
Pettigrew coolly acknowledges these concerns and Grid’s responsibility to “give confidence”, but he is adamant that the company ought to retain its SO role for the foreseeable future.
“My personal view is that I don’t think an independent system operator is right for the UK now,” he states. “There are a huge amount of things to focus on as we undertake transformation and – with a focus on security of supply – it would be incredibly disruptive to move to an ISO. It is not clear that the benefit to customers would out way the risks in doing that.”
Grid has made this belief clear to government and the regulator. But is Pettigrew confident that they agree? “It’s difficult to judge,” he says. “They are very aware of the need for inward investment, given the amount that we need to do. They are very aware of the security of supply issues. But I think they feel that they want to respond to that market requirement that there is confidence in the independence of the system operator.”
By the time Utility Week readers have this interview in front of them, the government’s reconciliation of these concerns may be somewhat clearer.
The smart systems call for evidence was published on 10 November and it set out thoughts from Ofgem and the new Department for Business, Energy and Industrial Strategy (BEIS) on the scope for an ISO, as well as a range of other topics, including ways to enable a wider deployment of energy storage in the UK by removing “undue market barriers”.
This is something Grid has taken an active hand in too, by signing landmark contracts in August for enhanced frequency response (EFR) with seven energy storage providers. The EFR mechanism “was not limited” to bids from storage providers, but storage proved to be “perfect” for fulfilling its sub-second grid support requirements, says Pettigrew, who believes the contracts demonstrate Grid’s commitment to embracing new ways of operating the system and engaging with new players.
Broadly speaking, representatives from the storage industry seem to agree. The eight EFR contracts, worth £65.95 million in total, were welcomed as a boost to market confidence. But praise was not unanimous. Some complained that the tender was not big enough – 1.2GW of storage bid in to the EFR process but just 200MW was contracted. Furthermore, BEIS official Rachel Cooper raised doubts as to whether the EFR agreements will turn out to be profitable for their winners.
With an average price of just £9.44 per megawatt-hour of EFR, Cooper said it appears the winners had bid in “at any cost”, desperate to establish a foothold from which they might expand their role in the system. This is all very well for large storage providers which can afford to sign loss-leading contracts, but doesn’t it disadvantage smaller players?
Pettigrew isn’t visibly moved. “From the point of view of the SO, what we did was put a tender out. From a customer perspective, it’s a good thing, isn’t it?”
He continues: “I guess we were pleasantly surprised that we were able to get that service at a price which will probably save customers around £200 million against the alternative of having traditional generators do it.”
On the size the EFR tender and the length of the contracts – which at four years has also provoked some criticism from commentators, who point out storage sites will have a lifetime of at least 20 years – Pettigrew is clear that this first tender was a proof of concept. “We were trying to strike the right balance between giving contracts that, for the providers, were actually worthwhile, but not too long that we find three years in that its not meeting the needs – 200MW is a good number to test this.”
While Grid refines its relationship with large-scale storage for system balancing, another dynamic is developing with storage at a much smaller, distributed scale.
In July, at Utility Week’s Energy Summit, Centrica chief executive Iain Conn delivered a warning that massive uptake of distributed generation, such as solar PV, combined with domestic-scale energy storage, is likely to create “huge complexity in managing the grid system”.
“It is even possible,” he said, “that distributed energy may increase to the point where it will challenge the economics of the central grid and generating system. The grid could eventually become back-up, swapping places with the traditional role hitherto assumed by distributed generation.”
Conn’s words have been echoed by others, and sources have told Utility Week that the scope for this “historic shift” has recently prompted industry briefings at Number 10.
Pettigrew, however, is doubtful. “The concept that storage and solar, in the short term, are going to reduce the vast majority of the use of the network is not something I’ve talked to Number 10 about because I don’t think they would believe it. I certainly don’t believe it,” he says. “We are seeing significant reduction in the price of storage, but most of the scenarios that I’ve seen say that, optimistically, you’re talking about three, maybe three-and-a-half gigawatts by the early 2020s. Against the backdrop of how much generation there will be in the UK, it’s not going to change the fact that the vast majority of the energy will still flow through the networks.”
Pettigrew does admit, however, that the anticipated growth of energy storage and other decentralised energy technologies will affect the way in which electricity networks are financed in the UK. It is part of the reason he believes that a “fundamental” review of the network charging regime is needed “pretty soon”.
“We are encouraging Ofgem that this is the direction they should take,” says Pettigrew. “A holistic look at charging rather than individual elements” – like embedded benefits for distributed generators, which Ofgem has said are “distorting investment decisions and leading to inefficient outcomes in the capacity market”.
Pettigrew does not refute Ofgem’s concerns here. He says: “I understand the drivers for the embedded benefit review – looking to make sure that it is equitable in terms of making sure everyone who is using the network in some shape or form is paying their fair share. But I actually think that it would be more useful at some point, pretty soon, to take a more holistic look. Not just at the transmission charge and the distribution charge but at charging for networks generally.”
Ofgem had intended to issue a plan for amendments to the embedded benefits regime by the end of this year, but Pettigrew says a “rushed” review would be “problematic” and has the potential to create disaffected “losers”.
“Anything that moves away from where we are today will mean winners and losers and therefore it needs to be done in a timely and sensible way to take all stakeholders with you,” he advises.
Another milestone expected by the end of 2016 is a decision on the preferred bidder for a majority stake in National Grid’s gas distribution business. Grid announced in late 2015 that it wanted to sell a controlling share in this arm in order to deliver shareholder benefits.
In the wake of the EU referendum, however, with the emergence of a seemingly interventionist approach in national infrastructure deals from government, some have speculated that the sale might be derailed. Indeed, in September this year the GMB union called publicly for the prime minister to “halt” the auction process, which has reportedly attracted interest from Canadian, Australian and Chinese investment funds.
Pettigrew plays down the likelihood of such an intrusion – though he does not rule it out.
“We are very aware of what happened with Hinkley,” he says, referring to the last-minute delay the government imposed on EDF while it tinkered with security clauses.
“We are aware of the conversation around the Enterprise Act. We’ll watch how that develops with interest…[However] from our perspective the obligations on networks are very clearly set out,” and Pettigrew is quietly confident that precedent implies foreign ownership of energy networks is something “the government has seen and been comfortable with”.
As the light fades outside Pettigrew’s office windows and our interview wraps up, we return to the subject of his accession and the approach he will take to Grid’s top job during such challenging times. When Pettigrew was first appointed, analysts expressed some anxiety about his relatively light executive experience. However, Pettigrew is clear that his track record is exactly what makes him confident in his role.
“I’ve seen National Grid continue to evolve and adapt over 25 years and that gives me confidence – it gives the organisation some comfort – that we can take a leading role in today’s transformations,” he says. “It’s a very different business today than it was 25 years ago and it will be a very different business in 25 years’ time. I know the organisation is very capable of making those changes because I have lived through them all.”
Of course, history doesn’t always provide the best answers to unprecedented market disruptions, but that’s not about to dent Pettigrew’s deep-rooted faith in his professional home.
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