There’s an unerring positivity about Peter Emery when we meet at Electricity North West’s central Manchester headquarters.
An unseasonal autumn sun has made a surprise appearance in the city, but the Indian summer is not the reason for the network boss’s upbeat mood. Two years into his tenure as chief executive and things are going well – despite this being one of the most turbulent periods ever for the energy sector, with more uncertainty ahead.
“That just makes it all the more exciting,” enthuses Emery. “It’s actually a really positive time. There’s an unprecedented degree of change – which is a handful – but great opportunities. There’s a lot to be gained if we get this right.”
Emery was the new kid on the block when Utility Week first met up with him in 2016. It was apparent he envisaged asking a lot of questions about the regulated monopoly while he bedded in, following roles at Exxon Mobil and Drax. And it was clear he’d soon be driving change and pursuing innovation.
Today those plans are materialising throughout the northwest network, with “purpose and principles” in place, several new projects in train, and a workforce closely involved with the process.
There’s a lot going on, he says, but then there has to be, with changing consumer demand, digitalisation, electric vehicles, decentralised generation, and decarbonisation all competing for the chief executive’s attention. It’s an emerging picture requiring huge management attention. Yet Emery seems unfazed, albeit quick to point out he advocates evolution not revolution.
“It’s been helpful coming into the industry without any preconceptions. Also, I have good leadership teams who keep me on the straight and narrow if I get over-enthusiastic. I’m very excited about this business.”
Emery’s vision may well be making ground, yet he has a gargantuan to-do list, including seeing the company fulfil its price control commitments under RIIO-ED1 through to 2023.
The number one priority over the next five years, he says, is delivering on ED1 for consumers, on reliability, service and cost. Second is the DSO (distribution system operator) transition, including starting to develop capabilities. Third is “working hard” with Ofgem on RIIO2. “It’s vitally important that there’s a good outcome for ED2 negotiations. The networks are a key enabler of decarbonisation and economic growth and if we don’t get RIIO2 right, we’re going to be snatching defeat from the jaws of victory.”
Like many network chief executives, Emery seems broadly happy with RIIO. “This is a negotiation but there’s something in it for Ofgem, government, customers and shareholders. And there’s incentives to improve. That’s a great basis on which to run a business like this.
“We’ve got visibility on the whole process. Our investors are patient capital. At the moment it’s very transparent, they understand what the regulator’s doing and are making satisfactory returns.”
Has it been strange adapting to a regulated approach? “Not really. It comes down to it being quite helpful. It is trying to encourage us to improve the business, and we had gaps where we could.” Yet he accepts RIIO-ED2 may spell change. “Ofgem is listening but it has a tough job, as do the DNOs [distribution network operators], in such an uncertain environment.”
Like others, Emery was pleased the regulator opted against a mid-period review. “Ofgem’s report for the first two years shows a sector improving, costs reducing and customers getting a better service. We have investment programmes in place for the eight years. We’ve got relative stability, at least within our framework until 2023.”
But would a five-year RIIO2 settlement make for a better future model? “I suppose eight years may seem a long time when you are sat behind a regulator’s desk. But I’m happy to live with either.”
Even if that poses issues around fit-for-purpose regulation? “The regulator is probably struggling to keep up. But, if other people were honest, I think everyone is struggling to keep up. That’s symptomatic of a market going through massive change and it’s to be expected.”
Despite these demands, ENW’s figures are bearing out Emery’s positivity, with cost reduction around 15 per cent overall and on track to come in under the company’s RIIO target in real terms. Meanwhile, reliability continues to improve, with fault rates falling. “At the moment we’re in good shape but you’ve got to handle both – to keep the plates spinning while you manage change – that’s the nature of our business.”
To capitalise on the incentives and opportunities, Emery has encouraged ENW’s senior leadership to work as a cross-functional team, allowing them more time for the change agenda. Early wins have come from improving controls to reduce non-compliance on safety and customer service. “If you can eliminate non-conformances, which eat management time, your leaders have more time – rather than worrying about today’s crisis.”
Like utilities everywhere, it seems cultural transformation is happening across ENW. Emery is keen to grasp the nettle, pointing to his recent report to his finance team entitled The View from the Hill, the Changing Landscape. “Because we’re a small DNO, we can’t compete on economies of scale. Freeing up time to continuously improve and innovate is vital. I make it clear we’re not just here to keep the lights on, that’s what we’ve done for the last 50 years. We’re a critical enabler, and we’re acting on that.”
Certainly, while relatively small, ENW has a reputation for innovation which Emery puts down to an open management mindset and engaged workforce – including its engineers. “In ENW we have been smart enough to say to them, ‘okay, if you can do it, let’s do it and take advantage of the situation’.
“We can be more fleet of foot, so we can excel. You can get your arms around this business and we are turning our potential weakness into a strength. We’ve got the skills, which is where we’ve been fortunate.”
Monetising such innovation has been a key task for Emery, who points to ENW’s CLASS programme of installing cutting-edge voltage controllers in its substations, expected to save customers £100 million over 25 years. Also, the Celsius scheme of cooling substation transformers to run at higher loads for longer.
ENW is also starting to see more decentralised generation on the network and recently made a call for capacity in seven different areas of the business. It is working on a frequency response project to offer services to National Grid, exploring the value of loss load, open networks, energy efficiency, how DNOs can help vulnerable customers more, flood impacts and on delivering reductions in energy usage.
And despite the doom-mongers, Emery says the infrastructure is there, or can be, to support and sustain major change. “Networks are pretty flexible. We’ve already seen them transmitting electricity one way, now both. The legacy of the past is that there is a lot of redundancy in the system that we can liberate and use at relatively low cost. And the DSO concept takes that further, using automation to make the most of existing assets and, also, using new distributed generation assets.”
Constructive dialogue with the regulator and government will be vital, believes Emery. “Changes don’t come smoothly. I think EVs are going to be like that – there won’t be a rush until there is one. This means that whatever the framework is going to be for ED2, it needs to be flexible enough to cope with volatility. The main role of a DSO is becoming pretty clear, as a market enabler and facilitator. We will need to be switched on to what people want and respond quickly. I would expect that government would work with industry players like ourselves to understand the consequences of actions they may take.”
One piece missing from the distribution jigsaw, he says, is a high-quality battery solution. “If there was a tech that was lower cost, more carbon-neutral, and very effective, things would start to move at a hell of a pace. A storage facility like that would be a really powerful tool to develop the network.”
It’s no secret that Emery is a fan of blockchain, something he believes could have real significance for the DSO model, when participants want to deal with their local DSO and the transmission system operator (TSO). “You need a platform to facilitate that, which is how blockchain works. It’s probably the right technology to enable full DSO/TSO market interaction. We’re still working on it, but it is something we’re actively engaged with.”
Amid this disruption, risk is increasing, says Emery. As well as technological and commercial risks, there is severe political and economic uncertainty – not least around Brexit. When I point out that two years ago he had not been unduly concerned about Brexit, his reply is direct: “Well I am now.”
He elaborates: “I’m not worried we’ll go out of business. I’m worried that if the economy is really buoyant, some of these changes will come faster. People will want EVs, government will have funding for infrastructure projects. If the economy is lacklustre, that pace of change will slow. It’s a big deal for us.”
He continues: “We don’t know what the outcome of Brexit is going to be. That means a lot of uncertainty and normally that means risks increasing, not decreasing.” So while some may view the business’s returns as high, Emery warns against pushing them too low in such unpredictable times.
The attractiveness of the UK to investors is key. Any drop in the value of dividends, or a volatile exchange rate, adds pressure, as does turmoil in global markets. Many of ENW’s investors are based in the US.
The prospect of renationalisation is also unsettling. “The government must decide whether regulated businesses providing some semblance of order to enable markets to develop and evolve is the right model. Our view is it is.”
So, two years in and despite his standout positivity, it seems there are some issues keeping Emery awake at night.
“Well it does worry me, because I’m already talking to shareholders about what the outlook for ED2 will be. There is no short-term panic, but I think once we get past Brexit, and things become a little clearer, people will start to make decisions.”