Angry. Angsty. Highly critical. There’s been a range of strong negative emotions on display by leaders in the energy world in the wake of Ofgem’s draft determination for transmission networks.
Though the same negotiations are still a little over two years away for distribution network operators, Ofgem’s proposals to disallow £24 billion of baseline expenditure and cut the rate of return on equity has signalled the direction of travel.
But though his peers’ displeasure has been evident, Peter Emery, the chief executive of Energy North West, takes a different approach. If he’s feeling pressured or concerned about challenges that lie ahead, he’s not letting on today.
It’s the end of the summer and we’re yet to see the resurgence of coronavirus and lockdown which would come just two months later. Today, Emery is working from his office overlooking Manchester’s Piccadilly. Avuncular and sanguine, Emery expresses sympathy for the regulator: “Ofgem have got a difficult balancing act to pull off, because they’ve got to provide value for money for consumers, and acceptable terms for shareholders.”
Emery acknowledges though that planning for ED2 is obviously one of his top priorities. “I wouldn’t say it’s keeping me awake at night, but I’m spending a lot of time thinking about the best way to tackle ED2. That is the biggest agenda item that my leadership team are working on now.”
Reflecting on announcements that have come out of Ofgem to date, he says: “Ofgem have been signaling for some time their intention to lower returns. The question that remains is to how low really, and we’ll see how that all unfolds. For us, there’s always going to be cost and efficiency challenges in a new price control, and that’s the way it should be.
“For DNOs, we’re in a slightly different place, given the strong growth we’re going to see over the next 20 to 30 years, so we’re firming up our plans now to keep costs down. But we’ve also got to gear up for a faster pace of change as EVs are deployed and heat decarbonisation starts to accelerate.”
He adds: “One good thing about a sector that’s growing is you can get economies of scale as the business grows. So, it’s all about how we execute efficiently, and how we move to a more digitally driven business, have fewer phone calls with customers and more online communication, and make efficient use of our resources.”
Emery can take comfort from knowing that ENW’s plans have been taking shape for some time, as the DNO has trailblazed the formation of close working relationship with the three big local authorities in its patch. Greater Manchester Combined Authority, Cumbria and Lancashire have all produced distribution future electricity scenario (DFES) documents. These provide a view of much capacity the network has got today, and how much it will need in the future. They were followed up with a road map ‘leading the north west to zero,’ published in early 2019.
Says Emery: “The road map has got three main elements in it: to provide support for our major stakeholders to help them decarbonise; to really put our own house in order, so that we’ve got a low carbon plan and a route to zero carbon; and also then to work with stakeholders to understand their infrastructure needs.”
Emery has worked closely with Andy Burnham, the Manchester Metropolitan Mayor, who has set an ambitious decarbonisation target of 2038. Cumbria is discussing 2037 and Lancashire is yet to set a date.
In the last couple of months ENW has been building on this process by working with Cadent, the gas network, to publish a carbon pathways documents for Greater Manchester Lancashire and for Cumbria.
“This is a major step forward because once the consultation process is finished by the end of 2020, it will help us develop our plans for ED2, because we know our plans are consistent with all the local infrastructure plans in the region. And it means that we can play our part to make sure the local authorities hit their targets.”
He adds: “It’s also important because it’s an integrated energy plan, it’s both electricity and gas. It’s the first of its kind. We’ve given open access to it, and it’s a UK first and a real innovation.
“There’s not been this kind of joined up thinking in the past because demand has been flat or declining slowly or growing slowly. But over the next 20 years, we’ll be moving through a very dynamic period of change.
“It’s very easy to stand on a platform and say ‘we’ll decarbonise by 2038’. But when you then see what has to be done to get there, it really focuses the mind.”
Emery says that having a clear destination also serves as a catalyst for action. “There’s a set of actions for each five-year period over the next 20 years. Some of those the combined authority can do, and some of them clearly government needs to do. But if you’re not careful, you can think ‘it’s all too hard, I’m going to wait for government’.
“And once you start to do things locally and put your own house in order, you’re then in a stronger position to influence government to take more action.”
For Emery, the carbon pathways work has given ENW a clearer field of view for ‘building back better’ which ENW is trying to embrace in its wider sense – supporting the community and supporting the economy by bringing work forward. This includes £25 million worth of capital projects and an £18 million smart street project intended to reduce demand and customer bills, awarded as part of Ofgem’s innovation fund last year. ENW is also working with other DNOs through the ENA to pinpoint shovel-ready schemes that could, for example, accelerate the roll out of EV infrastructure.
Meanwhile in the community, ENW has given about £200,000 to 10 grass roots charities supporting food banks and mental health.
He says that the cash has come from efficiency savings in the business.
“We’ve done a lot, and we’ve also donated 500 hours of our own people’s time to help support these activities, to help the charities collect pack and deliver the food parcels.
“But it’s very clear to us that more and more people are going to need help. We’ve agreed to spend a further £250k, which wasn’t in our original budget, to provide support for these communities over the next 12 months. And that money has basically come from our shareholders.”
Looking at the wider market, a litmus test of how the market views Ofgem’s stance is what happens in the sale of Western Power Distribution, which was put up for sale in August shortly before the interview.
Like others in the sector Emery says he was surprised by the decision of US parent company PPL to put the DNO on the market. “It’s happening at a very interesting time, as we’re negotiating price control.”
ENW changed hands last year. A Kansai-led consortium and Equitix took over 50 per cent in July 19, and then in December 2019 Kansai, Equitix and CNIC took full ownership.
Emery says that it’s been very much business as usual. “Our ED1 strategy remains unchanged. That was the basis on which the business was sold, so for us the real focus is ED2, and there are plenty of opportunities for change as we develop the business plan for ED2.
“Kansai are a major shareholder, they are a significant industry player in Japan. They have a lot of technical expertise, because they run networks themselves, they’re a fully integrated energy company, so they’ve got knowledge about storage, and renewables, and they’ve got knowledge about how to make a network more reliable.
“We’re getting quite a lot of interaction with our Japanese shareholders, on the technical side. Whereas our previous shareholders were financial institutions. So, whilst there was some technical challenge, it was slightly different in nature.”
Another change is the arrival of a new chairman – former Ofgem chief executive Alistair Buchanan, who has been a non-executive director for the past two year.
“Knowing Alastair, I’m sure he’s going to challenge me and my team on our submission for the ED2 plan, and I’m looking forward to that.
“For us, we’re certainly keeping an eye on our costs, and productivity, because with demand being down, our earnings are less in the short term. Demand was down nearly 20 per cent in April. Now, it’s in single digits, between 6 and 8 per cent down on where we expected.
“It’s moving in the right direction, but we still need to keep an eye on our costs and productivity, trying to get as close to our business plan objectives as we can.
“We’ve had to make sacrifices. We paid no mid-year dividend, to keep an eye on cash. So, it’s not been without pain. But for us the question is how quickly will demand pick up from here.”
It’s become clear this doesn’t look like being any time soon. As the article was being finalised the Chancellor had just announced that he was extending furlogh until March 2021. We’re in for a tough winter.
What he’d like to see in the long-awaited energy white paper
There needs to be a lot more stimulation for the switch to EVs and low carbon heat. We’ve got to stimulate demand and change consumer behaviour. And we’ve also got to work the manufacturers. If we accept that there’s a climate emergency, which we do, then risks have got to be taken, and we’ve got to increase our level of ambition.
I think there’s a very strong case that the ban on the sale of internal combustion engines, certainly for passenger cars, could be brought forward to 2030. And that’s not just for low carbon – but to improve air quality.
Rapid charging capacity of DNOs
I think it’s being exaggerated a lot, certainly for DNOs. We have got quite a lot of network capacity to facilitate early switch to EVs. Network capacity, in our area, is not a constraint. And therefore, at least from our perspective, the quicker EVs are rolled out, the quicker we’ll see consumers really grappling with the low carbon transmission, and we can put the infrastructure in place to support it.
I think that’s the major challenge for the energy white paper. We’ve got to speed up the deployment of low carbon technology, of which EVs are probably the most notable.
A strategy for low carbon heat
The government has definitely got a role to play. We’ve seen it in our carbon pathways work. At the moment, in heat, there are three solutions to decarbonised heat.
First is just to use electricity, and you can do that if a house is thermally efficient. The other extreme is to substitute gas for hydrogen
And then the third option is a hybrid of the two. A house may not be thermally efficient enough for electricity to keep it warm all year, you may have to use gas for 20 or 30 days a year when it’s really cold. That’s what these hybrid solutions are.
The only way that hydrogen is going to play a big part in this is if government decides to help industry produce hydrogen, and that’s probably going to involve the use of carbon capture and storage. If you want hydrogen, you’ve got to go down that route.
The flipside is that if you don’t like the hydrogen solution, then there needs to be an awful lot more electricity generation, which is really where nuclear comes in.
Government needs to look at this blend of fuel security, whether they’re interested in hydrogen, or whether they want to encourage more electricity heating, which will mean there needs to be a real focus on making homes a lot more energy efficient, particularly existing housing stock.
And until the government provides some clarity on that, it’s not clear where we’re going to end up. What’s important for us as DNOs is the electricity side of it is definitely going to play a part. The question is how big a part.
We need to start now, because it’s pretty clear that when the new building standards come out in 2025, that buildings will have to be thermally efficient enough for electric heating. So new builds are likely to go down the electric route