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Interview: Basil Scarsella, chief executive, UK Power Networks

UK Power Networks chief executive Basil Scarsella has been voted one of the ten most transformational leaders in utilities. He tells Ellen Bennett how the transition to flexible networks requires a change beyond any he has ever seen

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

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Interview: Basil Scarsella, chief executive, UK Power Networks

“We’ve changed the business culture to ensure employees focus on our core responsibility – keeping the lights on.”

As music legend Kate Bush was due to go on stage at London’s Hammersmith Apollo at 7pm on a recent Friday night, the lights went out. The power failure could have meant sending home 3,000 frustrated fans – but a UK Power Networks engineer, in the area having finished his shift, took it upon himself to hot-foot down to the theatre with a back-up generator so the show could go on.

Basil Scarsella tells Utility Week the story with a smile. It makes a pleasant change from tales of storms, select committees and exploding pavements – the usual lot of the chief executive of UK Power Networks (UKPN), one of the country’s largest distribution network operators, serving more than eight million customers, including those in the London region. Indeed, he’s had a tough year, with the fallout from the Christmas storms hitting UKPN particularly hard, swiftly followed by the select committee inquiry on costs, and this summer the news that Ofgem was seeking to slice 9 per cent, or £600 million, from its business plan for the next eight years.

Despite these trials, Scarsella’s down-to-earth good humour is in evidence as he outlines his pride in the business’s turnaround, his concerns over the regulator’s draft determinations and his views on the changing role of networks.

It’s almost four years to the day since Scarsella successfully completed the bid for UK Power Networks, which he led on behalf of Hong Kong investor Cheung Kong Infrastructure (CKI; also the owner of Northumbrian Water). Italy-born Australian Scarsella had a history of working for the group as chief executive of ETSA Utilities (now South Australia Power Network). In 2009, when CKI bought UK assets, he moved to the UK as chief executive of Northern Gas Networks, during which time he also advised the company on its acquisitions.

“I led the bidding process, and together with advisers, we came up with the price which, through proper governance, the owners paid,” he says. “But then I was asked to go and run it and deliver on those assumptions, which tends to focus the mind!”

By anyone’s standards, it has been a success. Scarsella is widely credited with having turned around the business. He takes a quiet pride in the achievement and particularly in his workforce: “We took over a business that, to be fair and without being critical of the past, wasn’t that well regarded in the market and the performance wasn’t as good as it could have been… We’re now seen as one of the most reliable networks in the UK.”

UKPN has in effect begun the transition from a traditional engineering business to one focused on its customers as well as its assets. How has Scarsella achieved this?

“We’ve changed the culture of the business to ensure that employees are focused on the core responsibility of UKPN. Putting it simply, that is to keep the lights on and when the lights go out, to restore supply safely but as quickly as possible.”

He makes it sound easy, but in an organisation where the “40-plus club” (those who have been in the business for more than four decades) numbers in excess of 700, culture change is anything but.

“How do you go about changing the culture? By first establishing a clear vision for the organisation, communicating that vision right across all areas of the organisation to all employees in a very clear way, and then setting targets and clear accountability for the achievement of those targets that are related to the vision. I’m delighted to say that in all areas the employees have delivered to that challenge. Four years ago, the workforce had doubts whether the demands and the vision could be achieved, but those doubts quickly dissipated within 12 months because of the improvements that employees were able to deliver.”

It’s not all been good news, however. 2014 began in crushing form with UKPN and SSE the worst hit networks during the Christmas storms. Some 20,000 UKPN customers were left without power on Christmas Day. There was a media outcry, inflamed when Scarsella made some well-meaning comments with characteristic straightforwardness to the Mail on Sunday to the effect that, it being Christmas, many staff were on leave, and “could and should have responded to it better”.

The resulting coverage focused heavily on Scarsella in personal terms, and UKPN, as well as the rest of the industry, took a battering at the subsequent select committee hearing. Looking back, does Scarsella think it was unfair?

“No, I don’t think it was unfair. As I said at the time, the storm needs to be seen in the right context. There was the worst weather event for probably a decade or more. UKPN, together with the Scottish network, was the worst hit. Our employees, given the time of year, responded brilliantly, but unfortunately the event occurred on Christmas Eve and we had 20,000 customers off over Christmas, and again I apologise for the disruption or inconvenience caused by that. The reality is, if you’ve got 20,000 customers off over Christmas, then you expect to be made accountable, and we were made accountable.”

If there was a similar storm this Christmas, what would happen? “If there’s a storm at Christmas to the same extent, then clearly it’s very likely that a significant number of customers will lose their power because a storm generally results in damage to our power lines. But I expect we will respond even better than we responded last Christmas, because you always learn from events and the event of last Christmas was the worst event that we had in ten years.”

He looks up with a smile: “Having said that, I hope it doesn’t happen on Christmas Day!”

While the storms episode, and the coverage of it, must have been painful, Scarsella is too much of a pro to be bitter – and he seems genuinely to believe such coverage comes with the territory. What, then, of battles with the regulator, whose recent draft determinations for the first cycle of the new RIIO pricing framework came as a nasty surprise for distribution network operators (DNOs)? Ofgem is seeking to slice £1.4 billion from business plans across the industry, with UKPN the worst affected at £600 million – nearly 9 per cent of its planned expenditure.

Let’s talk about RIIO. He brightens. “The World Cup?” he asks with mock hopefulness (Scarsella has been a football pro, chairman of Soccer Australia and executive member of Fifa in between running utilities). No, not that Rio – the other one.

“Ah – I thought so.” He settles down to business: “It’s disappointing when I look at the changes Ofgem has made in relation to real price effects and also the smart grid benefits. It’s even more disappointing on real price effects when you consider that we operate in a region that is the south of England and London, where everybody would agree that costs in this part of the world increase at a rate that is always higher than the average national inflation rate.

“Having said that, we are working co-operatively with Ofgem to try to address what I do believe are the changes that may not have been right.”

Scarsella is hopeful of a constructive agreement with Ofgem on real price effects, which set the expected change in the prices of inputs that DNOs purchase relative to economy-wide inflation, at its final determinations in November.

More worryingly, he warns that the high level of savings Ofgem is seeking to claw back on smart grid innovations could discourage networks from innovation. “The industry, with the help of the Low Carbon Network Fund, has invested £400-500 million over the period [in innovation], but Ofgem is saying the benefit to consumers over the next eight years on an industry basis is something like £900 million. Now, that’s an excellent rate of return for an R&D-type project – in order for the DNOs to benefit they have actually got to deliver benefits from innovation over and above the £900 million. A more equitable outcome would have been for those benefits to be shared between consumers and DNOs.”

Scarsella is more sanguine on the extra savings Ofgem is seeking on the smart meter rollout as part of the overall smart grid savings. Taking a moment to reiterate his support for the rollout, despite some reservations shared by the rest of the network industry on its supplier-led model, he says: “When I looked at the deliverability of the benefits of smart meters from a DNO perspective, it will be a challenge, but I think they will be achievable.”

Smart meters will be one part of a much wider change in energy consumption that will inevitably see the role of the networks change. “I think it will be a positive change. Today when a customer has their power cut off for whatever reason, we generally wait for the customer to call us to tell us that their power is off. With smart meters, we will know as soon as the power goes off, therefore we will be able to respond a lot more quickly than we do today and that will be for the benefit of consumers. There are big challenges for the DNOs, though.”

With the increase in distributed generation and the emergence of new business models such as community power, some experts are warning that the traditional distributor model is doomed. Does Scarsella think the networks are agile enough to respond?

“They have been able to respond to all sorts of changing demands over the past 30 to 40 years and will be able to respond to the changes that are occurring today.”

Or, to put it another way, as Scarsella, Kate Bush and the pros at UKPN all know: the show must go on.

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