Reality check: Can utilities build back better?

Utilities want to lead the charge on building back better, but can they overcome the constraints of their regulatory settlements, asks Jane Gray

Many business leaders in the utilities sector are now talking up their ambitions to build back better in the post-coronavirus economy, pledging to sustain internal cultural and technological transformations triggered by coronavirus as well as supercharging a green economic recovery by bringing forward investments in low carbon assets, creating jobs – either directly or via supply chains – and nurturing communities through reinforced corporate social responsibility programmes.

But living up to these ambitions will be easier said than done. While the road to net zero undoubtedly demands a splurge on infrastructure spending and energy efficiency programmes, it is deeply questionable how well equipped utilities are to take part in the spree – and this is before we even get to challenges around policy uncertainty in key areas like low carbon heat.

The challenges are especially clear for regulated utilities. While the companies which own and operate our energy and water networks clearly have scope to initiate considerable infrastructure spending – and aging assets, coupled with a decarbonisation agenda, mean an infrastructure re-vamp would not be without need – they are hamstrung by fixed business plans set in a tough regulatory environment.

Both Ofwat and Ofgem have been on a cost reduction campaign of late, driving companies to find new efficiencies in their operating costs and scrutinising capital expenditure plans to the nth degree in order to minimise the costs being passed on to consumers.

This is of course a worthy cause – all the more so in today’s economic climate where financial hardship is running rife – but it also leaves regulated monopolies with scant room for manoeuvre when it comes to creating jobs or economic activity – either directly or indirectly.

Speaking privately to senior leaders at energy and water companies, Utility Week hears some frustration with this situation and a growing desire for some clear indicators from regulators on how they might accommodate flexibility around company settlements so that these utilities can play the part they want to in the recovery from coronavirus.

One senior water leader, for example, says the “universally tough” final determinations for PR19 “undoubtedly constrain companies’ ability to create jobs” or to bring forward investment. “From which you might take that there is a disconnect between Ofwat and the government’s agenda to invest in infrastructure.”

These thoughts are echoed across the industry. Most companies are continuing to recruit as usual to fill vacant roles, and have remained committed to apprenticeship programmes where possible – though start dates for new intakes have commonly been pushed back due to difficulties accommodating on-site training. Overwhelmingly though, there is a consensus that there is “precious little room for job growth within the FDs”.

One HR director adds that this constraint is very troubling in light of the hardship and insecurity emerging within its local communities, to which the company is deeply committed. “We would want to do everything that we can to help our communities through the tough times ahead. But I’m not clear yet exactly what we can do in terms of employment opportunities, above and beyond what we set out as necessary to support our AMP7 business plan, which doesn’t include any actual growth.”

In the energy retail market meanwhile, job growth seems a distant prospect. Through lockdown, several firms have shed large numbers of employees as a pre-existing need to find efficiency gains are amplified by the prospect of an increasing bad debt challenge in the wake of coronavirus.

Ovo Energy, for example, announced 2,600 job losses in May, as it accelerated plans to reshape customer operations in response to mass-sift towards digital service channels during lockdown. The move prompted a plea from the industry skills body Energy & Utility Skills Group, for companies to rally round to prevent a massive haemorrhage from the sector’s talent pool.

It’s not usually in the remit of regulators to consider economic stimulus in their approach to setting or managing price controls. But these are extraordinary times which call for extraordinary measures.

While the Chancellor’s stimulus measures may be the main lever for starting a green recovery from coronavirus, there is a role too for utilities regulators to play – a fact acknowledged by one Ofgem director at a Utility Week round table event.

Responding to a challenge from an industry participant who branded existing regulation as “not fit for purpose” in the post-Covid19 landscape. This leader admitted some soul searching is taking place within the regulator on “the extent to which we should refashion the networks so that they are best able to support a quick green recovery.”

They also admitted that existing regulatory incentives drive towards networks “making money by not spending money” after price controls have been set, and that this may not help companies deliver on their build back better intentions.

With final determinations for gas distribution, transmission and the ESO due this week, it will be interesting indeed to see what, if any, precedent is set for fashioning regulatory settlements, or flexibility measures around these, which encourage economic revival.