Over the past month we have seen Ofgem’s new chief executive Jonathan Brearley launch the organisation’s de-carbonisation action plan; the regulator appointed RIIO2 Challenge Group have published their assessments of the company plans and investor interest has been piqued by Ovo’s payment of £8.9 million after an Ofgem investigation. Each of these is as important for what it symbolises as it is for the content itself.
However, the question remains as to whether a leopard can really change its spots. There are encouraging words about the importance of flexibility and the need to send the right price signals. Should flexibility providers be encouraged by this – or is this only what Ofgem was always saying in the Targeted Charging Review which left investors feeling the rug had been pulled from under their feet? The proof of the pudding will be in the decisions Ofgem takes on charging in the coming year.
There’s also a sense that Ofgem remains more interested in electricity than gas. One of the few new policy decisions in the plan is that Ofgem will be asking HSE to review the gas mains replacement programme given the likely decline in demand for gas. Given there are very strong arguments for mains replacement to reduce methane leakage and to create a hydrogen-ready network, this is a strange policy to include in a de-carbonisation plan. What it suggests is a presumption that electrification is the way forward on heat – a policy call that has not yet been taken.
What this also reflects is that the focus was on the strategic changes needed to reach net zero. However, the science makes clear that it is the cumulative carbon emissions that matter (for the economists in Ofgem – “it’s about stocks not flows”). That means there needs to be at least as much focus on what can be done to reduce emissions now as there is on the endgame. That was totally lacking in the plan with no reference at all to driving reductions in methane on the gas side or SF6 (sulphur hexafluoride) on the electricity side. These come within the list of targeted greenhouse gases that Ofgem acknowledges it needs to worry about and have higher global warming potential than carbon dioxide. They should not be ignored.
Turning then to the Challenge Group report on the RIIO2 business plans, this is again symbolically important as bringing wider stakeholder voices into what historically has been quite a closed process between the companies and Ofgem. This report sits alongside the individual company Customer Engagement Group and User Group reports which are also an important part of that symbolic shift. What the Challenge Group report does is to look across the companies and provide a relatively accessible overview of how they compare.
The problem that they face – as they admit – is that they are often comparing apples and oranges. For example, a company can come up with a lower totex figure by including more of its costs in uncertainty mechanisms. Ofgem provided very limited guidance up front on this or on payback periods, or on willingness-to-pay methodologies, or the approach to be taken to Consumer Value Propositions. This has made the Challenge Group’s job harder and will do the same to Ofgem as it comes to compare plans. Ofgem will want to reflect quickly on whether it should be doing more in ED2 to aid comparability.
The other test is whether all these reports – and the significant consumer and stakeholder engagement that companies have done – will actually influence Ofgem’s decisions on the plans. Having been on the other side I know how easy it is to get embroiled in the detail of the plans, challenging assumptions and running econometric bench-marking models and that the consumer voice can get lost. That is why Ofgem put this new set of arrangements in place. These arrangements have – everyone seems to agree – resulted in much better plans. The question is whether they result in a much better overall process. We wait to see.
Finally, the penalty imposed on Ovo seems to have caught the media’s eye with a sense that this is also symbolic of a shift in approach. To me it isn’t. The penalty (or more strictly voluntary payment) of £8.9 million is not out of line with previous penalties. The individual issues – things like inaccurate annual statements – may not seem that egregious compared to some other breaches but it’s clear that there were widespread failings and a general disregard for regulation which, understandably, does not go down well with the regulator. This is not a shift in approach but a continuation of a well-established position.
So, as Jonathan takes the helm there will inevitably be interest in what impact that will have and what will change. I am sure we will see Ofgem more closely in step with government but hopefully not so far that it loses its independence. I am sure we will see Ofgem more focussed on managing its external reputation by showing it is acting for consumers – but hopefully not at the expense of longer-term consumer interests in securing investment. Finally, I am sure we will see steps to create a more agile organisation – but hopefully without losing the commitment and valuable experience of those working there. These are all difficult lines to tread and I wish Jonathan well. We will all be watching.