Interview: David Smith, Chief executive, Energy Networks Association

“The networks have always been different, we have our own story to tell.”

When St Jude, the storm named for the patron saint of lost causes, struck the UK last week, hundreds of thousands of homes were left without power. Within 24 hours, all but 60,000 of them were back up and running. Some networks even lent field staff to UKPN, the worst hit, so customers could have their power restored sooner. It was a timely reminder of how crucial power is, and how resilient thanks to the UK’s infrastructure and those who service it.
While politicians and the national media have been waging a furious war with energy suppliers, every person in the country can still walk to the nearest wall and casually flip a light switch on. That’s thanks in large part to the distribution networks, the companies that take power through the ground from National Grid’s transmission network to homes and businesses across the country. Days before the storm, Utility Week met David Smith, the man who runs their trade body, the Energy Networks Association, to talk about the challenges of creating a low-carbon network amidst a changing mix of generation and distribution.
Relaxed and friendly in his home town of Brighton, Smith is relieved that the preparations for the third annual Low Carbon Network Fund (LCNF) conference this month are completed – “touch wood”, he chuckles, tapping the metal table. The LCNF, a government programme to fund innovation in the networks, is close to his heart, encapsulating and enabling the transformation networks are experiencing. “If you go back ten years, networks were the quiet, invisible bit of the industry,” he admits. “We’d been there since National Grid was finished in the 30s and the transmission system was completed. We put copper in the ground, and in the overhead wires, and it was very much a ‘build and forget’. The last big push for the distribution system was in the 50s and 60s, where there was this dash for nuclear.”
Smith acknowledges that privatisation, enacted in 1990, bought with it pressure to drive down costs. “We sweated the assets longer,” he says. “Not because we just left them, but because we found different ways of doing things, new technologies and so on, but the technology is coming to the end of its life.”
Meanwhile, the networks have to be expanded and upgraded to cope with new power stations, distributed generation and a forecast boom in demand, for example for electric vehicles. “We have to change, and through privatisation we lost of lot of innovation – RPI-x was aimed at driving efficiencies and reducing costs, and it affected R&D in the networks. But there’s a need now to start reinvesting.”
Hence the LCNF, which has provided £500 million from August 2009 for five years to fund trial projects that will help transform the grid. Among its successes is a pilot by Electricity North West that allows the network to accommodate much higher demand without the need for expensive reinforcement. It does this by allowing customers to access latent capacity on the condition that they agree to be cut off in the event of an emergency need for the capacity elsewhere. It is this kind of innovation that will allow networks to adapt to the changing and growing demand for capacity.
One of the key innovations affecting the networks is the introduction of smart meters. It is no secret that the network sector believed it should have led the smart meter rollout, as has been the case everywhere else in the world. Indeed. Many of Smith’s members are vocal about the foolishness of awarding the rollout to suppliers and the problems it will cause when the networks need to intervene in installations. He is far too diplomatic to be drawn on this, saying with a smile: “That decision was made some time ago.” He is keen to emphasise that the ENA and the networks are represented at every level of the rollout and are willing to do what it takes to make it work.
It is now being whispered in Whitehall that given the pressure piling on suppliers and the prospect of a price freeze, it could make sense to hand the rollout back to the distribution network operators (DNOs) at the 11th hour. Does he think it likely? Again, Smith won’t be drawn, though when pressed he admits the move “wouldn’t be impossible”.
The DNOs seem better equipped to handle the rollout, which they would do on a street-by-street basis. They would be unencumbered by the competitive pressures of the suppliers – and perhaps less likely to have the door slammed in their face by an irate bill payer. All in all, the networks are sitting rather more comfortably than the suppliers at the moment – although the big six have been quick to point to rising distribution costs as one of the factors in this autumn’s price hikes.
It is a point the networks take issue with. Smith acknowledges that network charges are rising in 2013/14, but he points out that this regulated price rise was agreed back in 2009. “The key point here is that during the height of the financial crisis there was a look to defer some of the costs towards the back end of the price review, and that’s what we’re seeing coming through now,” he says. Under the next price review, the first using the new RIIO model, network charges are set to level out or fall. Steve Johnson, the chairman of the ENA and chief executive of Electricity North West, challenged suppliers in last week’s Utility Week to reflect these cuts in customers’ bills, saying: “When the component parts of a bill increase, it is understandable that the overall bill will increase. When the component parts go down – as distribution charges are set to do potentially as early as March next year for North West customers – I can only hope that the huge work we have put in to reduce costs will be reflected in customers’ bills.”
No doubt about it, it’s impressive that the networks can reduce prices while maintaining investment. However, some would take issue with the networks’ finances. Several have come under fire for exploiting a legal loophole that allows them to avoid taxes. The Independent on Sunday recently reported that Scotia Gas had avoided £72.5 million in tax and that UK Power Networks and Electricity North West had both saved more than £30 million. It’s part of the wider debate raging about companies paying tax, but Smith points out: “The network operators comply with all UK taxation and legal requirements.”
He says the ability to cut charges while boosting investment is due to smart planning and the longer depreciation of assets allowed by the new eight-year regulatory cycle. “We must always ask ‘what can we do at the least cost to maintain the network’s effectiveness and efficiency while at the same time putting innovation in so in future generations, we don’t need to throw copper in the ground?’”
It’s an attitude that many would welcome from the suppliers, although Smith, ever diplomatic, declines to criticise them. He does explain why the networks felt they were better retaining their own trade body than joining forces with Energy UK, which arose from the merger of trade bodies including the Electricity Retail Association and the Association of Electricity Producers in 2012. The networks declined to join the umbrella organisation. “The networks have always been different, we have our own story to tell, which is why the old Electricity Association came apart in 2003,” says Smith. The networks also have a strong sense of camaraderie and tend to stick together. This club mentality often works in their favour, for example when sharing ideas and resources, but does have its critics. Independent DNOs that attempt to compete in the market, for example by providing connections to new housing estates, complain bitterly that the networks block fair competition. Ofgem has given networks until the end of the year to meet a series of competition tests, which they seem to be slowly waking up to.
Created from the ashes of the Electricity Association, the ENA recently celebrated its tenth birthday. It now employs 30-plus staff and has taken a range of extra functions, including hosting Ofgem’s distributed generation forums and co-ordinating industry responses to electrocutions and other incidents.
Smith has been there since the start, joining the organisation as policy director before it officially came into being. He joined from the British Retail Consortium, where he oversaw the introduction of chip and pin technology – a complex programme that was achieved within five years, and might just contain some lessons for the smart meter rollout, if anyone thought to ask.
Protected by their monopoly status and economic regulation, the networks are able to focus on service delivery rather than competitive pressures. This was demonstrated during St Jude , when fellow networks lent a hand to UKPN to get the lights back on in thousands of homes. They are not without fault, or without critics, but the networks remain defined by their public service ethos – and that’s no lost cause.