Regulated utilities are limbering up before starting guns are officially fired for their next price reviews – and so is Nick Ellins, chief executive of Energy and Utility Skills.
A man on a mission, Ellins is determined that this time round, the price reviews for water and energy network companies, will give due weight to the issue keeping him awake at night – the startling disconnect between plans to transform utilities infrastructure in the UK, and the availability of skilled people to deliver the revolution.
All too aware that skills and workforce issues can be quickly dismissed as “fluffy” by business leaders focussed on securing spending allowances and protecting shareholder interests, Ellins methodically builds his case for putting them at the core of the regulator’s frameworks for PR19 and RIIO 2.
“People are frankly bored of hearing about the skills ‘cliff edge’ facing the sector,” he says, pragmatically.
UK utilities companies will be responsible for 56 per cent of projects within government’s £500bn National Infrastructure Plan. (This is in addition to infrastructure spending already committed to in regulatory settlements.)
“But when you look at the ambitions of the National Infrastructure Plan and government’s proposed Industrial Strategy and the UK productivity agenda in the shadow of Brexit and how important utilities companies are to delivering all of that and then you look at our workforce renewal and talent gaps, you have to accept pretty quickly that this is a cold, hard risk – for businesses and for government.”
The way Ellins sees it, the best way to ensure this risk is tackled strategically, and with appropriate rigour, is by embedding it at the heart of the price review frameworks which drive the behaviours and interests of regulated utilities.
And conveniently, he sees a helpful “hook” in the growing emphasis that both Ofwat and Ofgem are placing on resilience and sustainability.
“You can’t have a resilient or a sustainable utilities sector without a skilled workforce,” he states. “You can talk about infrastructure resilience and cyber resilience, but unless you have the volume and quality of labour needed to deliver and sustain that resilience, it’s all a bit arbitrary.”
PR19 and resilience in the round
Focussing on PR19, a “live issue” since the publication of Ofwat’s draft framework, Ellins is optimistic.
Already, references to skills are peppered throughout the draft framework. High up in the report, right after Ofwat sets out the four overriding themes of resilience, customers, affordability and innovation which will shape its price review, a “key message” is set out, stating: “We believe that these proposals in PR19, together with our other tools, will drive resilience in the round. This means having the right skills, the right leadership, and the right systems; as well as having a robust infrastructure.”
Ellins is excited by this prominent acknowledgement of workforce challenges – and hopeful that it will become even more assertive as Ofwat finalises its approach.
In the final methodology, he’s keen to see the definition of resilience in the round include a direct requirement for a “resilient, skilled and sustainable workforce”.
For water companies, Ellins believes the effects of such wording in the regulatory documentation for PR19 would be profound – more specifically, it would transform the role of HR leaders in the planning process for the upcoming AMP.
Utilities companies need to recruit 221,000 new staff members by 2027 to replace retiring workers and people who leave the sector for jobs elsewhere. Meanwhile, 36 per cent of vacancies in the utilities sector are classed as “hard to fill” because of skills shortage (the national average is 23 per cent).
Traditionally, this process has been dominated by finance and policy teams in cahoots with asset leaders who pore over the detail of complicated incentive and penalty mechanisms to calculate a plan which will secure them a tidy spending allowance and protect shareholder interests.
“There’s no logical reason currently, why policy teams would consider some of the issues impacting the work of HR directors today – issues which directly impact how utilities will approach recruiting, training and retaining an effective workforce for the delivery of future plans,” says Ellins.
Pointing to a prime example, Ellins identifies the new apprenticeship levy, which came into effect this April.
The new employer tax requires all companies with a payroll of more than £3m to contribute 0.5 per cent of what they pay out in salaries, to a government-owned apprenticeship training fund.
Companies can then claim this money back in credits to deliver approved training schemes for apprentices. It’s a complex mechanism which, though live, is not yet finalised. There are tweaks and details coming down the line, especially regarding how it will be run in Wales, Scotland and Northern Ireland, whose governments have devolved control of skills policy areas.
“If you are focussed on PR19 within a water company, why would you even stumble on the work that is being done to deliver the apprenticeship levy? Why would you even consider it?” asks Ellins.
“It’s only when you start to look at the productivity costs for your business that you’d start to consider that the skilled labour is not available and you’ll have to put your price up to be able to go and get it” – not a move that would be likely to get a water company a prized position in Ofwat’s “exceptional” or “fast tracked” categories for business plans.
With resilience in the round giving prominence to skills issues however, Ellins is clear that “HR leaders absolutely must make sure they are at the table in planning meetings”.
Government stewardship
Ellins’ hopes for a water price review with skills and workforce strategy at its core extend equally to energy and he is working diligently with leaders at Ofgem to carve out a strong position for skills in the RIIO2 methodology.
But, it’s not only regulators Ellins wants to see embracing skills and workforce challenges as a key strategic issue. Government too could play a stronger role, he insists.
Firstly, he finds fault with Defra’s strategic direction statement, which sets Ofwat’s objectives. Published in March this year, the statement failed to reference industry skills or workforce requirements a single time.
Ellins is frustrated: “Why didn’t it mention workforce?”, he asks. “The sector takes its lead from that statement.”
But it’s not just Defra and BEIS, the utilities sector’s primary points of contact with government, that Ellins believes could play a much more positive role in connecting infrastructure and investment ambitions to the availability of labour and talent. He has set his sights on Treasury.
“Treasury owns the national productivity agenda and the National Infrastructure Plan,” says Ellins. “It also ultimately owns the Industrial Strategy – which it commissioned out to. So there is a natural reason for Treasury to take on a kind of stewardship of the sector.”
Someone should be responsible in Treasury, Ellins suggests, for providing an “intellectual overview” which looks at expectations for national productivity and industrial growth as well as infrastructure investment and asks “does this all fit” with what is known about labour demographics.
The number of EU nationals arriving in the UK seeking working has fallen by 180,000 in the year since the Brexit vote. In December 2016, the ONS said the number of EU nationals working in the UK had dropped by 200,000 compared to the previous year.
With Brexit looming, Ellins is clear that this requirement is becoming more urgent by the day. Quoting statistics from the Office for National Statistics, Ellins warns that the number of EU nationals working in the UK is falling, so too is the number of EU nationals arriving and seeking work. Meanwhile, there has been an increase in the number of EU nationals emigrating from the UK.
Set these trends alongside a UK labour market displaying its highest ever employment levels, and a utilities sector in which 36 per cent of vacancies are designated “hard to fill” because of skills issues (the cross sector average is 26 per cent), and it’s clear there is a toxic problem brewing for the industry, says Ellins.
But he’s determined not “to be all doom and gloom”.
“It’s not about bemoaning a ‘crisis’. The point is ‘what are we going to do about this?’”
Earlier this year, E&U Skills launched the first ever utilities sector strategy for skills and workforce renewal, aiming to leverage it as a tool for rallying collaborative and strategic action around the challenges it sees ahead.
The document succeeded in securing the backing of an impressive group of utilities chief executives, including Ofwat’s Cathryn Ross. Subsequent meetings with Ofgem, BEIS, THE Drinking Water Inspectorate, Treasury and more have buoyed Ellins spirits.
With sustained senior buy-in, Ellins sees every reason to be optimistic that utilities, their regulators and government can collaborate to deliver a stronger sector for a low carbon, post-Brexit future.
Nick Ellins will deliver a keynote presentation at Utility Week’s HR Forum in September. Find out more about the event here.