John Pettigrew, chief operating officer of National Grid Gas (NGG), was hoping his network would be among the first to be “fast tracked” through Ofgem’s new price control process. He admits he is disappointed that did not happen. He says NGG put forward “the very best plan we thought we could put in”. He continues: “When you look at the issues to be dealt with between now and April, we think they are relatively small, and we can close the gaps that Ofgem has indicated. We thought it was a strong plan and we thought it was worthy of being fast tracked. But Ofgem deemed that none of the networks were ready.”
The RIIO (Revenue + incentives + innovation = outputs) formula is very different from the RPI-X approach to regulation that applied at the last price review for gas distribution networks (GDNs). When we meet in March, it’s clear that NGG has come a long way in preparing for the new regime. RIIO relies heavily on stakeholder engagement to set priorities. Pettigrew says the company has put a huge amount of work into that, and the response has fundamentally changed its business. He explains: “In the last 12 months we have looked really carefully at what RIIO means for the gas distribution business and how we are going to get to the outputs that we are committing to.
“We did multilayered stakeholder engagement. We had workshops, focus groups and telephone surveys – a whole gamut of ways of getting the information from our stakeholders. And we did it multiple times. We gave them results and they gave us feedback, and we used that to evolve the business plan.”
I ask for examples of how feedback drove the company. He offers work the company undertakes to deal with carbon monoxide. Network companies need emergency crews available to respond within an hour. Historically, these crews can be employed on metering work unless there is an emergency to deal with. Smart metering will see that metering work disappear, but the emergency crews will still be needed.
“When we explained that to customers, one thing that came out was a role to increase the awareness of carbon monoxide,” he says. “So in our RIIO submission we made a commitment to provide 2.1 million interactions with customers to improve the awareness of carbon monoxide. That’s an output measure that came from our stakeholders, that we might not have got to if we didn’t go through that process.”
Similarly, the company took advice from the stakeholder group when its gas holders became surplus to requirements, and decided – with the group – on a phaseout of around 16 years.
In fact, Pettigrew says the feedback will be deployed company wide: “We have done a huge amount, I think probably more than anyone else, in understanding what our stakeholders want from us. Having got that information, we have started to realign the whole organisation to be in a position to deliver
those outputs.
“We are replacing all our systems: asset management, customer relationship, and field force. We have realigned the organisation’s structure so we are aligned with the outputs required by Ofgem, and we are undertaking a huge training and development process so people understand what our stakeholders want.”
He says the intention is to be able to deliver outputs with the best value for money for customers. That’s a requirement from Ofgem too: in its first assessment of NGG’s business plan, the regulator asked for an efficiency improvement, saying the company should be aiming for a performance closer to that of industry leaders. Pettigrew acknowledges: “With the benchmarks Ofgem currently uses, there is a gap between us and frontier. The programme I have set up aims to do both things: close the gap, and ensure we are delivering outputs.” He says on a total expenditure basis, “compared with others, our cost per customer is the most efficient”. He adds: “It was the leanest of the investment plans, proposing a £1 billion reduction in the repex programme”, mostly in cast iron mains replacement (see box).
When I ask Pettigrew about the strengths and weaknesses of RIIO, he is very positive. He says: “By focusing on outputs it will drive more innovation into the gas industry, where there has not been that really strong regulatory drive to think innovatively. The obvious example is in London, where we are thinking about how we reduce the impact on congestion.”
He says that he wants innovation “from top down and bottom up”, and he provides examples. From the top, he says, one aim would be: “If you can find a genuine alternative to replacing cast iron pipes by lining them … That has been discussed and debated for many years, but there hasn’t been the impetus to find a solution that works for medium-sized pipes.”
As for bottom up, he says his engineers have no shortage of ideas. “So we are running a pilot, which is a very simple piece of software about facilitating innovation. Once the support for an idea starts to grow, there is a commitment from the company to take it on. As part of the pilot we will be looking at how we recognise and reward great ideas. Engineers are so enthusiastic that it doesn’t take much to prime it.”
His concern over RIIO is that Ofgem must get the penalties and rewards right.
He says: “What is important is that Ofgem starts to create an environment where there is sufficient reward for the networks if they do deliver and do outperform. It is important for us to be able to attract investment into gas distribution.
“There should be incentives for networks that perform well and a downside if they don’t. We have some way to go on that but there is time.”
Pettigrew is planning investment at a time when some assumptions would see a shift to using electricity for heating. I ask what the long-term future is for our gas networks. Pettigrew says there are reasons why they won’t disappear anytime soon: “Gas provides 75 per cent of all heat and it fails dangerously. So you have to ensure that you manage those networks safely. Even if you feel that gas is not going to be the fuel of the future, you can’t suddenly switch off the investment, because you have to maintain those networks and make sure they are operating safely.”
He acknowledges that demand is falling, explaining: “We aren’t projecting any investment on the
capacity of the networks. We think what we have now is sufficient for the next ten years. We have seen a reduction in the overall usage of gas over the past five to six years and our business plan is built on the assumption it will continue to fall at about 1 per cent a year.”
That doesn’t mean that there can’t be changes that will secure gas’s role. NGG is working with the Energy Networks Association to look at the longer-term future for gas networks, especially around heat.
Pettigrew explains: “If you look at the shape of the load profile, it is very peaky in the winter. To find an alternative you are potentially investing in new generation or other infrastructure to meet a short term peak. You can build a heat network if you want, but the cost of building a heat network is going to be huge. If you electrify all heat, then the cost of building that electricity network is going to be huge, so our view is that gas will have a role.”
He says the company’s interest is in “encouraging biogas directly into the network”. At the moment, that work is about standardising the way biogas can connect and inject. Projects of that type are increasing, and Pettigrew foresees a step-up in the immediate future as the balance of subsidy changes.
In the past, the Renewables Obligation incentivised developers to use biogas to generate electricity, but “the Renewable Heat Incentive will change the economics on that” says Pettigrew. His network must be ready.
Cast iron saving
NGG’s £1 billion repex saving arises from changes in the cast iron mains replacement programme, which was reviewed after ten years by the Health & Safety Executive and Ofgem.
In the refined programme, pipes are categorised by their diameter. In the case of the smaller pipes (less than 8 inches) replacement continues as before. For NGG, that is 82 per cent of its replacement programme. When it comes to larger pipes, networks have an obligation to ensure they are safe, but they are replaced only after a risk assessment or where cost/benefit analysis shows broader value for consumers. For NGG, the overall impact is a significant reduction in the volume of replacement of larger diameter pipes, and a saving of £1 billion.
Pettigrew explains: “We still have to replace some of the larger pipes as they are critical to maintain safety and security of supply in major cities. In particular we have a large programme in our London network.
“Every network operator has done it slightly differently, and that’s one of the things that Ofgem are looking at now in preparation for our April submissions.”
This article first appeared in Utility Week’s print edition of 6 April 2012.
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