Chris Train, the former chief executive of Cadent, talks to Tom Grimwood about the ‘silent revolution’ taking place among gas networks, and why it is now up to the sector to build the case for its continued existence.
Chris Train took up the job as chief executive of what was then National Grid Gas Distribution in the midst of a major transition for company. At the beginning of the year, National Grid had begun spinning off the business into a separate entity, with a view to selling off a large stake.
But none of this was new to him. Train began his 36-year career in the energy industry working for British Gas in 1983. A decade later, Train joined Transco – the gas distribution business responsible for operating four of the eight regional networks around Great Britain.
He would remain part of the company, through its various guises, all the way up to his retirement in February.
When Train was selected as the first chief executive of the newly independent National Grid Gas Distribution in October 2016, he had already been serving as the director of the business for more than a year – overseeing the separation for which the company won a Utility Week Award in 2017.
Among his first tasks was to forge a new identity for the business, which shortly afterwards was renamed to the now familiar Cadent.
Speaking Utility Week, Train is beaming with pride. He believes the new identity has really captured the spirit of the organisation, something he reflects on with “slight amazement”.
“As a long-term industry participant, I’ve been through many branding changes of organisations with lots of potentially sceptical people around that change,” he remarks.
“But you go around, particularly the internal business, and increasingly externally to the customer, and people are understanding the organisation and what the organisations is about.”
Train says the company’s mission – keeping its customers warm and safe – is reflected in its performance: “The regulatory results have improved across the period – year-on-year delivering the outcomes in the regulatory formula. And so that drumbeat of performance and delivery customers has been really helpful to the business.”
At the beginning of his tenure, the company was something of laggard, performing the worst in customer satisfaction surveys on interruptions and connections and missing multiple targets.
Since then the gap has narrowed significantly. There have been marked improvements in its customers satisfaction scores and several of the targets it was previously missing are now being met.
Nevertheless, the latest annual report from Ofgem shows the company is still behind on some counts. There is more work to do on this front.
RIIO2
Train’s stint at the helm of Cadent has seen some major developments in the regulatory and policy environment for gas networks – some of them to their benefit, others less so.
The latter includes Ofgem’s promise to cut network returns to the “lowest ever” level for the second round of RIIO price controls beginning in 2021 for gas distribution.
In May, the regulator confirmed the methodology it will use to set most of the price controls, which if applied at the time would result in a baseline return on equity of 4.3 per cent. This is around half of the equivalent figure for the current settlement.
The sharp reduction was prompted by concerns that the first set of price controls were overly generous, particularly to gas distribution networks.
In its response to a consultation on the methodology, Cadent was highly critical of Ofgem’s decision to set the baseline half a percentage point below what it considered the true cost of equity to reflect the expectation of outperformance by networks.
The company described the measure as “conceptually flawed”, “arbitrary in nature” and “a significant departure from regulatory precedent.”
But speaking to Utility Week, Train is reluctant to pour scorn on the regulator, instead extolling the virtues of the RIIO framework in its current form and emphasising the difficulty of Ofgem’s position.
“One of the real benefits of UK regulation has been the stability that has meant it has attracted long-term investors into the business,” he explains.
“And particularly for businesses that take a lot of capital and capital investments, attracting capital at a low rate is very important.”
He continues: “The regulator has the role of balancing that off against the needs of short-term and long-term customers. So I think it’s important that they get that balance right. And I think within the consultations, they are wrestling with the best way of achieving that.”
Pressed on whether Ofgem has struck the right balance, Train says that “time will testify”.
“The methodology is sound,” he adds. “What are the right numbers in terms of the outcome depends on how global markets move.”
The claims by organisations such as Citizens Advice that energy networks are making billions of pounds of “unjustified profits” has provided excellent fodder for a Labour party arguing for them to be taken back into public ownership.
When Utility Week asks for Train’s thoughts on the matter, a press officer intervenes, saying this is a question for the new chief executive Steve Fraser who took up the position at the beginning of September.
But Train, nevertheless, lauds the networks’ achievements: “We have delivered an efficient and effective energy system where costs have down and the quality of service has come up through the period of privatisation of the industry.
“And having lived through that as I was part of the nationalised industry as we were privatised, I think I’m very proud of that record of lower costs and improved service”.
Decarbonisation
The other major development for gas networks, and one they have lobbied hard for, is the shift in the consensus on the future of heat. The government’s 2013 strategy explored options for gas networks to provide a supporting role to the power grid but presented electrification as the default solution to the decarbonisation of heat.
In the meantime, gas networks have been working hard to make the case for a continued role in the future energy system – developing proposals for hydrogen gas networks and building a supporting evidence base for policy-makers.
In late 2018, the Committee on Climate Change called for the deployment of hybrid heating systems in homes, with heat pumps providing a baseload and hydrogen boilers providing backup on particularly cold days.
Cadent for its part has announced plans to create the UK’s first large-scale hydrogen network in the north west of England at a cost of £900 million.
“I think the whole debate around the future decarbonisation of heat and transport has taken on new dimensions over the last couple of years, which I think is very helpful,” says Train.
“From the standpoint two years ago, where everything was electrification, that understanding that there is a broader opportunity and a broader pathway to achieve those decarbonisation goals and do it on a more economically viable basis by using the existing gas network, has come on strides, whether that is through greener gas, bioSNG, biomethane or through hydrogen blending or hydrogen networks.”
Train says the question over the future of heat poses another major challenge for Ofgem: “You’ve got all of these interest groups saying that their way is best. It’s quite hard to then say: ‘Well where’s the hard evidence that helps us understand the engineering opportunities and capabilities and requirements, but also how the economic deployment will or won’t happen through that period.”
“What the regulator shouldn’t be doing is making bets at this point around what the outcomes are going to be, because there are lots of options around the elements of the pathway,” he argues.
“But what they do need to facilitate is the mechanism in place that allow these options to be explored and then, when they become deployable, have the right incentives in place to deliver efficient and effective outcomes for customers.”
And Train has few complaints here. He says the ball is now very much in the industry’s court: “I think it’s actually for us to help government with those policy gaps by demonstration.
“What do I want to see? I want to see policy-makers absolutely open to the broader prospect of opportunities around that decarbonisation and to understand the practicalities of the pathway and the journey.
“But I do think it’s for us as an industry to actually help the policy-makers do that.”
“I think for me that’s probably the most interesting area,” he adds: “Getting to that point where people are being a bit more practical around the challenges that the energy system faces in order to decarbonise itself into the future.”
Train believes the sector has done an excellent job of developing the case for the decarbonised gas networks but says more could be done to get the message out: “We are investing in projects that answer the technical sides of those questions that people will need to know and understand in order to deliver the outcomes.
“I think the area where we then need to move that forward is to get that evidence into the policy debate and influence the development of that energy policy going forward.”
One of his main concerns in this regard is the “enormous amount of bandwidth” that continues to be taken up by Brexit: “It is not surprising, therefore, that it gets harder to take other policy areas onto the agenda.”
The gas networks will not only need to win over the politicians but, more importantly, the voters who elect them.
Train says they will need to show that getting rid of a conventional gas boiler will not bring any hardship for their customers: “The way to grab the attention is by doing demonstrations as to feasibility.
“In the current environment, if you have an option in terms of your heating, the first thing you will go to is a conventional gas boiler… The UK still installs 1.5 million gas boilers each year and has done pretty consistently for a number of years now.
“Air-source heat pumps, we install somewhere just over 20,000 per year. The economic answer to the question is gas-fired boilers.”
“So how do we capture the imagination?,” he asks. “The first thing is to be able to offer solutions that help customers achieve the outputs that they want to achieve. And what do you as customer of a gas network – you want to be kept safe and you the heating to work in a way that keeps your house warm as and when you want it.
“And that’s the outcome that we need to be able to deliver on behalf of them. What the gas is, is not particularly important the customer. What’s important to the customer is having heat as and when you want it.”
When it comes to the future of heat, cooperation between gas networks is both his biggest concern and his greatest source of optimism.
He says the industry has successfully undergone major transformations before, for example, the shift from town gas to natural gas and the resulting uptake of central heating: “When I started my career back in 1983, we were at the start of what was a silent revolution that we didn’t really understand at the time.”
The gas networks were then responsible for providing between 25 and 30 per cent of domestic, but within a “very small” period the figure rose to the mid-80s.
“We’re now at 84 per cent of heating in the UK that is undertaken with gas-fired central heating,” he adds.
“And in a way that was a silent revolution in terms of the massive change in customers’ needs and expectations about how they heat their homes… Most households only heated one, maybe two, rooms and that was either with a coal fire or a paraffin heaters or a calor gas heater.
“That change was really facilitated by the change from town gas to natural gas increasing the capacity of the system and the network, but was really driven by responding to societal needs and customer expectations…
“As I look forward I think we’re at the start of a new silent revolution, and that will be how to we repurpose the gas network to decarbonise the heat in customers’ homes”.
Train has “absolute faith” that the industry will be able to transform itself once more.
If he does have any fears, it is that this cooperation comes to an end and the industry ceases to provide a “consistent and unified voice”. It will be up to Fraser to ensure this continues.