In the midst of a Competition and Markets Authority (CMA) investigation into the RIIO price controls and SSE’s purported anti-competitive behaviour, Utility Week meets Bill McClymont.
As chief executive of Energetics Networked Energy, a relatively small but ambitious independent distribution network operator (IDNO), the soft spoken Scot unsurprisingly has views on this climate of condemnation.
Question marks over the extent to which regulation has encouraged competition for gas and electric connections set IDNOs up as the struggling underdogs in the market. But McClymont’s not looking for sympathy. His outlook is bright, considerably brighter than the gloomy London day outside the office we’ve borrowed for our meeting.
“Since the last price review there have certainly been improvements in the amount of competition, particularly in electricity,” says McClymont. Looking back over Ofgem competition reports in years gone by, he explains that competition for electricity connections initially struggled compared with gas, where 50 per cent of new connections were being won by IDNOs as early as 2007. “At the same time it was only about 8 to 12 per cent in electricity.”
Since then, Ofgem has introduced new competition tests and in the past couple of years McClymont welcomes “quite a marked improvement”, with the number of electricity connections won by independents now more or less on par with gas.
This improvement has, in part, been the result of RIIO, a new price control mechanism, bringing different drivers and requirements for the regulated distribution networks. But it’s also thanks to a gradual softening of an instinctively hostile DNO response to the introduction of competition back in 2005, says McClymont.
Then, the chief executive remembers conversations with DNOs could be “a wee bit abrasive”. Today, relationships are better and conversations, particularly at management level, are less defensive.
McClymont attributes this to a realisation – which has taken a while to trickle down from business plans to the coal face – that in a world where massive investment is needed in energy infrastructure and pressure is mounting to accelerate the emergence of smart grids, making new connections is “no longer core to a DNO’s business”.
Indeed, far from feeling threatened by the loss of new connections business to independents, McClymont thinks some managers welcome the opportunity to pass on a “troublesome” task that requires them to “deal with the customer directly”.
But although market conditions have improved, McClymont is clear that there’s more to be done before competition can be considered robust.
There’s no ideal ratio of connections that should be won by IDNOs rather than retained by incumbents, he says, but “because we are regulated differently, I believe we are more commercially fleet of foot in making new connections”.
“And I would take the view that certainly the vast majority of new connections should be made by independents, leaving the monopoly companies – still with a proportion of that revenue because we are still connected into their network – to concentrate on what is required to create a smarter energy system.
“I would argue that it is to their advantage for that to happen,” McClymont comments. But the fact that Ofgem has reported a possible breach of competition law by SSE to the CMA, and is now condusting its own investigation of the the connections market, suggests that, by accident or design, some DNOs are struggling to come to the same conclusion.
Offering his perspective on this development, McClymont says: “There doesn’t seem to be a huge amount of detail available on the challenge to SSE. But it’s interesting that it has not been charged with breach of licence, it has been charged under the Competition Act.
“Normally, where we have challenges – and we have had challenges with electricity networks over the years – it has been in the form of a licence breach. They are under licence under the Electricity Act to behave in a certain way and when they don’t, we can challenge them.
“But now we have a similar situation with a DNO – not SSE I stress – where we believe they are not breaching their licence, but they are breaching the Competition Act.”
In this case, the conflict has arisen over acquisition of land rights. The legal detail around these rights means that when a DNO or IDNO puts pipes and cables into a developer’s land “there are certain environmental indemnities that are required”.
McClymont says: “What we find with DNOs, up and down the country, is that if they are dealing with the customer they will take on some of these risks themselves. But in situations where an independent has won that job, we see them passing on indemnities to the independent in full – they don’t take on any of the risk.”
In situations like this, because Energetics cannot back-end the risk and cost to the customer, they generally end up losing that connection. “And the customer ends up going back to the DNO,” explains McClaymont.
When a DNO acts in this way, McClymont asserts that they are “using their monopoly power to effectively de-risk a project”.
“We take the view that within a commercial marketplace, there is a degree of risk that everyone has to take. If you use your monopoly power to effectively eliminate risk and pass it on to somebody else, that is an abuse of your power.”
McClymont acknowledges that the SSE case may be different – “it may be some other abuse of their position which is not a breach of license” – but asked if we can expect to see other DNOs come under the same kind of scrutiny he replies: “My view is yes. It is becoming an issue as the marketplace starts to recover and housebuilding programmes start to accelerate.”
This uptick in construction activity is something Energetics has waited patiently for since the early days of the world economic crisis stunned developers of both residential and commercial sites. It marks the start of an aggressive campaign to gain market share, especially in the Midlands and southern England, regions where Energetics is less well known.
Success in this ambition would build on solid growth at Energetics since McClymont joined in 2006. Back then, it was a regional connections company employing about 50 people with a turnover of about £5 million. Nine years on, 350 people work across the group – consisting of three main business units – and this year the firm is set to turn over £50 million.
A turning point for the business came in 2013 when Energetics saw a 300 per cent year-on-year increase in the value of new contract awards and a revenue increase of 20.6 per cent. 2013 was also the year that Energetics was able to attract investment from Macquarie Group, a global investment bank that also holds a 26 per cent stake in Thames Water. “It makes a world of a difference knowing that you have secure investment behind you,” says McClymont. “Things are much better now that they were before.”
Today, the main challenge still standing in the way of Energetics’ growth ambitions is access to resources – experienced system designers, engineers and skilled craftspeople.
Investment security has brought new capability to tackle this risk by growing apprenticeships and training programmes. But there’s also acute awareness of the need to retain existing talent – particularly the chartered engineers that are so essential to the complex requirements of Energetics’ commercial and industrial projects such as Media City in Manchester. McClymont hopes that his gesture of commitment to all staff in the dark days of the recession, not to make any redundancies, will now bring returns in loyalty.
From a technical point of view, the changing dynamics of energy generation and consumption also pose quandaries for IDNOs, just as they do to their larger regulated cousins. “Most of our challenges come with the microgeneration space – we are seeing a lot more of that,” says McClymont.
“Now that gives us a bit of an issue, because when we design our networks, we design them taking in a degree of diversity so we don’t over-engineer the network.”
Significant growth in microgeneration could blow that strategy out of the water because, he explains, “if every house on a development has a 5kW photovoltaic array on the roof, at the peak of the summer, when they’re all out working and the kids are at school so they’re not using anything, they are all pumping in 5kW to the network.”
While McClymont is up for the technical challenge of accommodating this multiplied and multi-vector loading, he wryly observes that “the irony here is, that in terms of cutting carbon and being environmentally friendly, we’re actually putting more copper and aluminium into the ground” to accommodate micro-generation.
And there’s another key disincentive for enthusiasm about the brave new world of decentralised energy generation. “Perhaps most importantly, at the moment, we don’t earn any revenue when people use our network for generating back up. We only earn revenue going one way.
“Feed-in tariffs reward the generator, which is understandable because we want to incentivise people,” McClymont continues. “But I think the regulatory model has to be challenged by the network operators, particularly the independents, because we are right at the sharp end of that.
“We need the opportunity to earn some sort of revenue if we are responsible for operating, maintaining, repairing and replacing a network that is capable not only of carrying electricity to the customer but also capable of carrying energy from microgeneration back upstream again.”