The Utility Week team takes a look back over what’s happened in 2018.

To say the past year has been an eventful one for utility companies would be a wild understatement. As we rapidly approach the end of the year, the Utility Week team looks back at some of the highs and lows for both water and energy.

News that the capacity market has been suspended “until further notice” was a blow to generators and adds, to the rest of the UK energy market, yet another layer of uncertainty.

Regulated water and energy network companies have continued to grapple with the issue of legitimacy and face threats of renationalisation.

For the energy networks things are beginning to hot up, as Ofgem announced it will be holding its first public meetings to scrutinise network companies’ business plans as part of the upcoming RIIO2 price control round. As if that line of examination wasn’t enough, they also face a “significant charging review”, which could see current charging arrangements change dramatically to facilitate the mass adoption of low-carbon technologies.

The spotlight has remained firmly on regulated water companies, which submitted their business plans for the next price review in September. What’s more, certain companies have been lambasted by environment secretary Michael Gove, and forced to wind down their Cayman Islands subsidiaries so as to win favour with the public (something they say they were doing anyway).

Things in the energy retail sector certainly haven’t been easy, as more and more suppliers struggle with tough market conditions and strong competition. At the smaller end of the market, many have gone out of business, whilst the larger suppliers continue to lose market share and see their profits slowly slide. News of the price cap, Brexit and the smart meter rollout also continue to dominate the headlines for this sector

For the water retail sector, meanwhile, switching has continued at a steady but somewhat stunted rate, and participants have continued upon the slow path to correcting the market’s many issues. And there is still little money to be made on the current margins, but new entrants are gradually making their way into the market.


Energy policy

By David Blackman, policy correspondent

The nation’s theatres are preparing for the annual Christmas show season. The biggest pantomime taking place at the moment, though, is in the House of Commons where MPs embarked last Tuesday on a six- night run of the Brexit withdrawal follies.

The prime minister’s proposed EU withdrawal deal, which MPs were debating and had not been concluded when Utility Week went to press, proved to be relatively good news for the energy sector.

And the risk of a much feared ‘no deal’ appears to have receded during the Parliamentary toing and froing.

The political declaration, which sets out a framework for the potential future relationship between the EU and the UK, keeps the UK linked into the EU Emission Trading System- probably the paramount concern for energy businesses about Brexit.

It also signals continued technical cooperation between UK and EU energy regulators, which is seen as a way of maintaining alignment on energy matters.

The package avoids the risk of the so called ‘cliff edge’ which Energy UK and its counterparts at an EU wide level, have been keen to avoid.

But the sheer amount of time consumed by the Brexit process within government means little bandwidth available to consider other issues.

The government’s main initiative in the energy space this year has been its crowd-pleasing ploy to introduce a cap on standard variable tariffs, which is due to be implemented in time for the arrival of the winter energy bills.

Labour made a renewed push at its annual party conference to push its proposals to renationalise the utilities but has far provided few more details about how the new regime would work. For the time being though the heat has gone out of the energy costs debate, although it could easily flame back into life if the widely predicted rise in the price cap happens.

Elsewhere though there has been a sense of government  energy policy beginning to unravel around the edges.

The spectacular fall in offshore wind prices, revealed via the last contract for difference auction in September 2017, has given the government some breathing space. Ministers have been able to plausibly claim that low carbon electricity can be generated at affordable prices.

However forests of wind turbines around the coast of the UK, only gets the UK so far in its efforts to transition to a more sustainable power mix.

This year has seen more low carbon options closed off more than opened up though.

The self-proclaimed green energy enthusiast Claire Perry, who holds the clean growth portfolio, has set her face firmly against any relaxation of what is effectively an embargo on new onshore wind and solar generation.

During the summer, the government finally put the costly Swansea Bay tidal lagoon project out of its misery by saying it would not back the plans because the electricity that it would generate is too expensive.

And the summer saw ministers pull the plug on the feed in tariff scheme to subsidise small scale renewable generation without any proposals for a replacement scheme

The move, which included removing the mechanism that enables those with small-scale devices to sell their surplus power to the grid, palpably appeared to fly in the face of ministers’ professed commitment to encourage the development of a decentralised, low carbon electricity system.

And the government seems scarcely any nearer to a solution about decarbonising heat than at the beginning of 2017.

But there was happier news for the proponents of CCS, who saw the government give the green light to develop the UK’s first such plant, albeit reversing a previous decision by former chancellor George Osborne to abandon support for the technology three years ago. Perry has signalled that the government is prepared to rethink its position on the so called export tariff for small scale generation.

And the government appears has taken some encouraging steps on energy efficiency, increasing the amounts that private landlords will have to pay to bring their properties up to scratch.

However there are growing question marks whether a government, which has been so keen to trumpet its commitment to an industrial strategy for the UK, has an over-arching idea about how to achieve its energy goals.

Greg Clark attempted to bring a bit of coherence to the picture in mid-November with a speech that set out his response to the cost of energy review carried out by Professor Dieter Helm just over a year ago.

The secretary of state for business, energy and industrial strategy set out four principles which he argued should underpin future energy policy.

In the speech, he promised a policy paper setting out how these ideas would be translated into policy. But three weeks on of the document there is no sign.

Of course, Whitehall has had other things on its mind.  And whether the secretary of state gets the chance to even begin implementing his vision, given the ructions that Brexit is causing within the government, is a moot point.

Clark has stuck his neck out in the Cabinet with his advocacy of the softest of Brexits so will be marked man amongst those who would see such an outcome as a betrayal of the 2016 referendum.  For the time being, energy looks set to remain is a sideshow in the wider Whitehall farce.


Energy networks and generation

By Tom Grimwood, energy correspondent

Change is usually accompanied by uncertainty. Driven by the need to decarbonise, the energy industry is in the midst of a radical transformation. Whilst the end goal is clear, the route there is still being plotted out.

Although 2018 has brought plenty of answers, many questions still remain and yet more have emerged.

Take, for example, the government’s flagship policy for supporting the rapidly maturing renewables sector – the Contracts for Difference scheme.

In July, energy and clean growth minister Claire Perry announced an auction timetable for less established “pot 2” technologies. Starting in spring 2019, they will be held once every two years for the next decade.

In November, the Department for Business, Energy and Industrial Strategy (BEIS) also published the preliminary budget for the next auction, revealing that £60 million of annual subsidies will be on the table.

Initially it may not seem like much. But given the relatively small difference between the wholesale reference prices and the strike price caps for offshore wind (£53/MWh and £56/MWh) this could support multiple gigawatts of new capacity. That is, of course, if developers can squeeze underneath the caps.

With the previous auction delivering two projects at strike price of just £57.50/MWh, this certainly seems achievable. If the auction is competitive, we could even see the first “subsidy-free” contracts next year.

There is no word yet on how the government plans to split the £557 million of total subsidies it has committed to future pot 2 auctions. However, the way forward for offshore wind is far clearer than for more established technologies such as onshore wind and solar.

In an interview with The House magazine in May, Perry said they will be able to compete again in future, but there has been no further update since.

With the final grace period for securing support under the Renewables Obligation ending in January and the Feed-in Tariff due to close to new applicants in March 2019, developers will soon be left almost completely reliant on merchant revenues to secure investment in new capacity.

The solar sector will have taken relief from the recent announcement by Perry that the export element of the Feed-in Tariff will be retained in some form.

However, the government has ultimately failed to explain how these supposedly mature technologies will be delivered in the coming years, particularly as power prices are increasingly cannibalised by those with access to support.

The future is no more certain for the nuclear sector. The big story of year was the announcement by Toshiba in November it was pulling the plug on the Moorside nuclear project in Cumbria after failing to find a buyer.

The government has given assurances this is not an omen for the rest of the industry; Toshiba’s decision was the result of the financial difficulties brought about by the bankruptcy of its US nuclear arm Westinghouse.

But Hinkley is looking increasingly lonely. It’s now more than two years since EDF gave the final go-ahead and still no others have signed on the dotted line.

If more are to follow, they will need to bring down costs. And for that they are looking to the government for help, for example, by taking direct stake or allowing them to be funded under a regulatory asset base model. Throughout 2018 ministers have reiterated their support for nuclear, repeatedly indicating their willingness to consider such options.

Then there is the capacity market.

In February, the T-4 auction cleared at a record-low price of £8.40/kW as large-scale gas was once again pushed out – this time by interconnectors – perhaps explaining why RWE decided in November to abandon its plans to build 2.8GW of gas turbines at Tilbury in Essex.

Coal continued to be driven off the system, with 2.8GW of capacity failing to win contracts in the T-1 auction as it too cleared at a record-low price of £6/kW. This proved to be the final straw for Eggborough power station which closed for good in September.

The next auctions were due take place in early 2019. However, these have now been postponed indefinitely after the European Court of Justice annulled a 2014 decision by the European Commission to approve the capacity market, saying the commission had failed to properly establish the compliance of the mechanism with state aids rules.

The government has vowed to reinstate the capacity market as soon as possible and plans to hold a replacement T-1 auction over the coming summer and then a T-3 auction in early 2020. Before this can happened, the scheme will need to be reapproved by the European Commission, and this may require reforms.

The shock ruling has also created uncertainty over the existing contracts, worth roughly a billion pounds for 2018/19. Will capacity providers be held to their contract commitments? Will they still receive the payments and, if so, when? Currently there is no answer.

For aggregators like Tempus Energy, the company which filled the challenge, 2018 appears to have been a good year on the whole.

Not only has the government been pushed towards making long-sought changes to the capacity market – admittedly with some short-term pain – they are finally being granted access to the lucrative balancing market.

Limejump entered the first “virtual power plant” into the balancing mechanism in August under a temporary derogation from Ofgem and the following week the regulator approved several changes to network codes to allow others to follow in their footsteps.

With regards to networks codes, there were several other key developments in 2018.

In June, a court upheld Ofgem’s 2017 decision to cut residual triad avoidance payments for distributed generators and in August the regulator announced plans to hold a significant code review examining forward-looking network charges and connection arrangements.

In November, it published its minded to decision for the significant code review into residual charges launched the year before, choosing a fixed charge “line rental” model as its preferred option for recovering them.

At the same time, it outlined the scope of yet another a wide-ranging review looking at industry codes and governance in general, saying there is a “growing industry consensus” that the present arrangements have become outdated and a barrier to progress.

The networks themselves received some important updates on the amount they will be allowed to charge.

Ofgem launched a consultation in March on the RIIO2 price controls, starting in 2021 for electricity transmission and gas, and 2023 for electricity distribution.

The regulator proposed to rein in networks profits by, among other things, substantially reducing the cost of equity. It also proposed a reduction in the length of the price controls from eight to five years to reflect the growing uncertainty faced by the sector.

Both these changes were confirmed in July as well as plans to introduce competition to the delivery of high value network upgrades.

They also gave some updates on their own plans.

The Electricity Networks Association launched a consultation in August outlining some of potential options for the future structure of the energy system, including the new role of distribution system operators and their relationship to the transmission system operator.

The gas networks responded to one of the biggest questions facing the energy industry – how to decarbonise heat – by fleshing out their proposals for hydrogen conversion.

In May, Cadent announced its intention to invest £900 million in a hydrogen network anchored around industrial sites in Manchester and Liverpool and blend hydrogen into the gas supply for around two million nearby homes.

And in November, Northern Gas Networks released the blueprint for a much larger £22.7 billion network serving roughly 3.7 million homes across the north of England. The report also proposed extending the network to a further 12 million homes by 2050 via a six-stage rollout.

Whether this roadmap is followed remains to be seen.


Energy retail

By Adam John, reporter

2018 will be remembered for a number of key events in the energy retail sphere, namely the confirmation of the energy price cap and the influx of failing energy suppliers.

A total of eight suppliers ceased trading this year including Iresa, Spark, Extra, Usio, Future Energy, Gen4U, One Select and Snowdrop all closed for one reason or another during the year.

Pressure from the market was perhaps the strongest nail in the coffin of these suppliers, while firms like Iresa were subject to a number of investigations by the energy ombudsman.

The pressure was perhaps most clear when Ofgem released the names of suppliers who missed the 31 October late payment deadline for their renewables obligation (RO) payments.

Initially an “unprecedented” 34 suppliers missed the original 1 September deadline, of these 14 missed the final payment deadline which resulted in a £58.6 million shortfall.

Extra, Future Energy, GEN4U, Iresa, Snowdrop and Spark were among the 14.

The shortfall resulted in mutualisation being triggered for the first time ever, meaning compliant and partly complaint suppliers will have to pick up the bill.

In September Ofgem announced it was making “full use” of its powers to set the level of the energy price cap, a measure it says will benefit 11 million households on poor value default tariffs by saving them £75 on average.

Ofgem later announced the level of the cap would be set at just £1 higher than planned when it confirmed the final price of £1,137 in November.

The temporary cap is due to come into effect on 1 January and the first update of the level will be announced in February 2019 and come into effect in April 2019. It will then be updated every six months.

The long-awaited merger between energy giants SSE and Npower will see the big six become the big five after the Competition and Markets Authority (CMA) gave the green light in October.

In November Npower’s parent company Innogy SE announced that adjustments were being made to the merger due to “adverse developments in the UK market” and regulatory interventions such as the price cap.

The development was denounced as a ‘shambles’ by some industry analysts who forecast it could throw the whole deal into doubt. However Alistair Phillips-Davies, chief executive of SSE, maintained it continued to believe that “creating a new, independent energy supplier has the potential to deliver real benefits for customers and the market as a whole” and that this remained the objective.

SSE said it is likely that completion of the deal will be delayed beyond the first quarter of 2019, but all work to “seek to achieve the formation and listing of the new company will continue”.

As yet there is no indication what the new company will be called or where it will be based but significant progress has been made in terms of the make-up of its board.

In April Katie Bickerstaffe was appointed  as chief executive designate of the new company.

Bickerstaffe has served as a non-executive director at SSE and has previously worked for international consumer-focused corporations such as Dyson, PepsiCo and Unilever.

She will be joined by chairman designate Martin Read and Gordon Boyd, who was appointed as chief financial officer in June.

Finally, the smart meter rollout continues to amble along.

A recent report by the National Audit Office the government’s original ambition of offering a smart meter to every home by 2020 will not be met, whilst the cost of the rollout will likely “escalate beyond initial expectations”.

According to the latest figures almost 12.8 million meters are now in operation while 14.70 million smart and advanced meters have been installed in homes and businesses by both large and small energy suppliers – around 13.64 million (93 per cent) of these were installed in domestic properties and just over one million in smaller non-domestic sites.

The rollout continues to be criticised by a number of industry voices, with many concerned about the interoperability of first-generation SMETS1 devices when a consumer switches supplier.

The Data Communications Company (DCC) however says it has since successfully demonstrated the interoperability of a SMETS1 device, a “significant milestone” as it continues to upgrade its central network in time for the 2020 deadline.

Customers with SMETS1 meters are expected to see their smart capabilities restored once they are connected to the DCC’s network, a process which will happen automatically.

Angus Flett, chief executive of the Data Communications Company, said: “This confirmation represents a significant milestone in our work to migrate millions of SMETS1 meters onto the DCC’s secure network.

“Coupled with the rising numbers of second-generation meters being installed each day, real momentum is building behind this major transformation of Britain’s energy system.”

Suppliers had up until 5 December to install SMETS1 devices but seven million more SMETS1 devices have been installed than was planned, adding to the rollout’s significant challenges.

2018 will certainly be a memorable year in the energy retail sector and 2019 looks like it will be more of the same.


Water sector

By Katey Pigden, news editor

The past year has been a perfect storm for the water industry. Weather extremes are increasingly becoming the norm and the cracks of an ageing infrastructure are starting to show.

If water companies were hoping to quietly go about delivering quality water to customers while head office teams focused on the final details for their PR19 business plans in 2018, Mother Nature had other ideas.

Back in January some water firms, particularly in the South East were hoping for above average winter rainfall to avoid having to impose water restrictions later in the year.

Then as the first day of the meteorological spring was expected to have sprung the country was plunged into arctic conditions as the Beast from the East struck.

The subsequent rapid thaw caused widespread disruption to the network which left more than 200,000 people without water for up to four days.

Ofwat instructed water companies across England and Wales to submit plans by 28 September detailing how they intend to address the shortcomings identified in their handling of the freeze-thaw incident.

Four companies in particular – Thames Water, Severn Trent, Southern Water and South East Water – had to submit a detailed externally audited action plan of how they will address the issues identified in Ofwat’s “Out in the Cold” review which was published on 19 June.

The review painted a mixed picture of company performance. It found some companies responded well and protected customers while others fell short with their advance planning, response and communication with customers.

The Consumer Council for Water (CCWater) has since published new guidance for the water sector about how companies can improve how they deliver priority support to consumers in vulnerable circumstances.

CCWater said consumers who found themselves in such a predicament were among the worst affected during the severe cold weather.  The vast majority (93 per cent) said they did not get any additional support from their company.

Things started to heat up for the water sector and the country as the hottest summer on record was recorded. The prolonged dry period didn’t do any favours for water companies with some struggling to cope with the increase in demand.

United Utilities had indicated it was going to impose a hosepipe ban but called it off at the 11th hour as slightly cooler temperatures and the heavens opening for enough time ahead of the looming date helped reservoir levels.

No such luck for customers in Northern Ireland hoping to water their gardens as NI Water’s country-wide ban was in place for around three weeks.

September proved to be a busy month for the submission of hefty documents to the regulator. The 3 September deadline for business plans covering 2020 to 2025 would have been circled on every office calendar.

Collectively the industry has put forward proposals to invest £50 billion during the five-year period. Water UK’s manifesto for the sector, published on the same day water companies submitted their proposals to Ofwat, said the business plans are the result of an “extensive consultation exercise” with 5.3 million customers.

Ofwat wasted no time in getting down to business to scrutinise the plans. It continues to assess the nitty gritty of the documents which stretch to around 5,000 pages.

Just a week after receiving them, the regulator put together a chart comparing the data that companies provided about how: customers’ bills will change, leaks will be tackled, and daily water use per person will change between 2020 and 2025.

And if the weather and business plans wasn’t enough to contend with, Labour continued with its message to renationalise the industry.

The shadow chancellor of the exchequer John McDonnell lined up water as the first industry Labour will bring back into public ownership if the party gets elected to power.

The government has also dished out its fair share of criticism to water companies in 2018.

It’s been quite a year for the sector and for Rachel Fletcher, Ofwat’s new chief executive who took up the post in January. She’s certainly had plenty to keep her occupied and ensure she gets to grips with the sector, having joined from Ofgem.

Next year will be busy too. The regulator will remain tight-lipped about individual plans until 31 January 2019 when it will publish an initial assessment. Then it will be all systems go. Again.

Ofwat will categorise companies’ plans according to the level of quality, ambition and innovation they have demonstrated.

It expects plans to cover a range of matters including what companies propose to invest and what they will charge customers, how they will support vulnerable customers and how they will ensure the long-term resilience of their infrastructure and operations.

With the lessons learnt from this year, water companies will be hoping to weather the storm in 2019.


Water retail

By Lois Vallely, features editor

You might be forgiven for thinking that not much has happened in the water retail sector in the past year, so marginalised is it by the national newspapers, which often latch onto the energy sector. Look closer, however, and you would find that there is a great deal going on.

The most recent big development is that Chris Scoggins, who headed MOSL (Market Operator Services Limited), is “no longer the CEO”. He left suddenly after just six months in post. He has been temporarily succeeded by Des Burke – a man who knows how to build a “strong culture of continuous improvement”. This is certainly something MOSL needs as it continues to lead the slow and steady improvement of so many aspects of the market.

Switching has seen a slow-down in recent months. October saw a mere 8,397 supply point switches. This decrease, however, followed three months of high activity driven by large multi-site switches. The total number of switches since the market opened now stands at 184,017, representing 6.9 per cent of the total 2,672,477. There are varying opinions on whether this amount of switching constitutes success.

Meanwhile, the market operator continues to try and find a solution to the problem of the current “bilateral arrangements” when it comes to interaction between retailers and wholesalers in the market. There is no standardised method by which retailers and wholesalers communicate, which adds complexity for retailers who are having to deal with 20 different wholesalers all using different methods. MOSL has set aside £600,000 to find a solution – probably technological – in the next year.

In the summer, CCWater published its customer complaints league table for water retailers. It revealed complaints it had received about retailers were up a whopping 237 per cent on the year and warned that retailers must “get their act together”.

It is true things have not been as active as they were in year one, as the novelty of a new market begins to wear off. Next year, however, we are likely to see a lot more activity in the market, as new entry continues, and more companies consolidate. Make sure you subscribe to Water.Retail, and keep your eyes peeled for big developments.

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