Basil Scarsella knows transformation. The chief executive of UK Power Networks is widely recognised in the energy industry for taking the country’s largest network group, with the most challenging patch, and turning it into one of the top performers. UKPN has won the Utility of the Year Award for the past two years straight, achieved a solid regulatory performance with a customer satisfaction score of 87 per cent and strong returns for its investor CKI Holdings, with EBITDA up by £167m to £1,293m in 2015-16. Little wonder, then, that Scarsella, who led CKI’s acquisition of the business in 2009, was voted one of the ten most transformational individuals in utilities today by the readers of Utility Week, ahead of this year’s Utility Week Live at the Birmingham NEC from May 23-24.
So is the transformation complete? “No, it’s just starting,” Aussie Scarsella tells Utility Week in his south London office, in the unglamorous location of Elephant & Castle. Relaxed as usual, straight talking but charming with it, he explains how UKPN may be well advanced in the traditional transformation expected of an energy network – but the changing landscape now requires a transformation beyond any he has yet seen. Scarsella is determined that UKPN will play a leading role in the new world order, and reckons the DSO model, the smart systems consultation and RIIO-ED2 will help it do so.
“The traditional transformation of the business is well advanced, but transformation as the industry transforms and UKPN is going to respond to or lead that innovation is now becoming more important and urgent,” he says. Barely pausing for breath, Scarsella lists the changes the business faces: the increase in renewables, the electrification of transport and heat, the impact of decentralised generation on traditional revenue streams, the need to balance the system at a local level, the shift to microgrids… The list goes on.
“We should be careful not to predict what the new world will look like because we’re bound to get it wrong…. In short, the regulatory regime needs to evolve with the industry transformation.”
Scarsella isn’t daunted. Rather, he seems excited by the scale of the challenge – “it will revolutionise the industry in a way I have certainly never seen before” – and determined that UKPN will lead, and benefit from, the change, rather than be outpaced by it. Take his views on microgrids, for example: “Rather than try and fight it, we should be facilitating that transition. We’re better placed than anyone else.”
It’s become the accepted wisdom that DNOs will need to evolve into DSOs, or Distribution System Operators, which balance the grid at a local level. There’s a lot of buzz about the new model within the sector, but has its business case been proven? “The business case needs to be developed,” Scarsella acknowledges. And then in reference to the potential £8 billion of savings per year the National Infrastructure Commission has identified from the more to a flexible power system: “The business case of moving from a DNO to DSO really depends on how that £8 billion of benefits is going to be split up. I see distribution system operators as playing a pivotal role in delivering the flexibility and therefore I expect they will share some of the flexibility benefits.”
The other power networks are queuing up alongside UKPN to lead the transition to a more flexible energy model that makes use of storage and demand-side response to manage the new forms of generation and consumption – but will the regulatory system allow these monopoly businesses to lead a new market? A consultation is currently under way as to how to remove the current barriers to smarter systems, for example, around the ownership and market operation of storage. Is Scarsella confident it will come to the right conclusions?
“I think we should be careful not to predict what the new world will look like because we’re bound to get it wrong…. In short, the regulatory regime needs to evolve with the industry transformation.”
One vexed point is storage. It’s increasingly seen as the silver bullet that will enable the transition to a flexible power network, but there’s disagreement over whether networks, as regulated monopolies, should be allowed to play directly in the market. Should they? “Yes. It’s a new market and it seems to me that trying to restrict networks from owning storage could hamper the development of a market and I think storage is so important that putting obstacles in the development makes no sense.”
There’s a school of thought that the RIIO regulatory regime, which moved the sector with great fanfare to an eight-year regulatory cycle, should shift back to five years in its second round, beginning in 2023 for electricity distributors, to reflect the rapidly changing nature of the sector. Does Scarsella agree? A measured response: “If it continues as an eight year cycle then there needs to be uncertainty mechanisms or reopeners. We’ve still got six years of ED1, let’s see what develops over that period before we jump.”
“I see DSOs as playing a pivotal role in delivering the flexibility and therefore I expect they will share some of the flexibility benefits.”
All these changes are liable to make investors jumpy – particularly as the stability and asset-intensive, heavily regulated nature of the networks business has made it so attractive to date. Scarsella, who is close to UKPN’s parent company CKI, which also owns Northern Gas Networks, Wales & West Utilities and Northumbrian Water, acknowledges the point with a smile, and issues a careful response: “To a degree the risk profile might change, I say might because it depends on the regulatory regime that evolves… but in some ways even as DNO we are now incentivised to reduce the cost of the networks because under the current regime we share in the benefits [of doing so]. That sort of sharing of the benefits looks set to continue.”
Transformation is already supposed to be underway in one area of the energy market, with the rollout of smart meters – voted one of the top ten transformative technologies by the audience of Utility Week Live. Of course, the rollout is supplier-led rather than managed by DNOs as in other countries, giving UKPN and its peers a role limited to intervening when called upon. Does Scarsella consider the technology transformative? He pauses and chooses his words carefully: “Let me say this, smart meters are essential to move to smart networks, I think it is pointless talking about smart grids and networks if you haven’t got smart meters, now whether the technology that’s going to be rolled out is the latest or not I’m not sure, but if functionally it does what is being proposed it’s going to do then it’s essential that the rollout goes ahead as planned.”
And will the 2020 deadline for the rollout be achieved? “That’s not for me to say, but whether its 2020 or 2021, my view is it doesn’t matter too much. What matters is that it goes smoothly.”
A diplomatic response. As the interview draws to a close, Utility Week asks Scarsella what makes a transformational leader. His response is modest and he won’t be drawn on personal qualities: “The first thing you need to have is a good team.” It’s an answer that would have been equally applicable in Scarsella’s other life as a football pro, chairman of Soccer Australia and executive member of Fifa.
Back to utilities, does he have any words of advice for fellow leaders hoping to achieve transformation? ““Be clear as to what is it you are trying to achieve. Set very clear targets all the way down to the front line, empower employees to get on with things, monitor progress and report regularly.” If Scarsella’s track record is any measure, it’s good advice.
Hear Basil Scarsella discussing energy network transformation in these sessions at Utility Week Live 2017: In conversation with Jane Gray, 09:40 – 10:20, 23rd May, Keynote Conference