It will go down as a historic year for utilities – and the planet too. It’s been a year of landmark policy intervention, regulatory reset, government upheaval and shock developments. And it also witnessed the birth of a national climate change agenda that will shape the UK’s energy and water strategy not only over the new decade, but for generations to come.
An abundance of standout features makes it hard to do justice to one of the most critical 12 months ever for our industry. And as I write this review, the year’s significance and repercussions have still to play out, with the general election being held even as we go to press. The only thing certain now is that whether it’s a victory for one of the main parties or a hung parliament, the result will have profound and long-lasting ramifications for the sector and the country.
Yet it seems almost fitting that a year that came in with a bang should leave the stage in the same way.
Nuclear fallout
The start of 2019 saw Hitachi suspend plans to build new nuclear plants at Wylfa and Oldbury, sparking fears about the UK’s future energy security and its ability to achieve its targets on reducing greenhouse gas emissions.
Wylfa, on Anglesey, was the furthest advanced in the UK’s nuclear new-build planning pipeline after EDF’s Hinkley Point C power station, under construction in Somerset.
It was the second blow for the UK’s nuclear programme in three months, following the axeing of Toshiba’s plans for a power station at Moorside, Cumbria. Tim Yeo, former chair of the Energy and Climate Change Committee and current chair of New Nuclear Watch Europe, said the suspension of work by Hitachi posed an “existential threat” to the UK’s nuclear industry.
It is a debate that continues – with the price of offshore wind now way below the cost of new nuclear, pro-nuclear players arguing the case for a diverse, well-balanced energy mix, and a government consultation under way about a new, regulated asset base funding model.
The price cap
The new year wasted no time in making its mark, with the now notorious price cap staging its long-anticipated entrance on the stroke of midnight.
While utilities were resigned to a challenging 2019, the big six energy players were particularly girding themselves for a tough time, not least because of the government’s historic market intervention in capping default tariffs.
Already cited as a key factor behind the surprise collapse of a market-changing merger between Npower and SSE’s retail arm at the end of 2018, hindsight has shown the cap’s impact to be an ongoing narrative throughout 2019.
It was brought in by then-prime minister Theresa May to help ensure that customers loyal to their supplier “pay a fairer price for gas and electricity”. Originally set at £1,157, Ofgem reckoned it would result in a £75 saving for the 11 million customers on typical dual fuel standard variable bills. It has since risen to £1,254, before falling to its current £1,179 level.
Yet it will also go down as industry’s most divisive issue of 2019, playing a leading role in other market dramas: incumbents haemorrhaging customers; Centrica’s legal challenge to the regulator over how the cap was calculated; and SSE’s sale of its retail arm to Ovo.
Yet while Energy UK warned that up to 10,000 jobs could be lost as industry struggled to adapt to the cap, those who predicted in January it should not pose a problem for efficient companies were still making that case at the close of the year. The takeover of SSE by a strong, newer entrant was heralded as positive, and increased switching a testament to how competition is changing old norms.
Debate will continue about whether the cap will end in 2023 as planned, a decision the new government will preside over.
Make price cap permanent.
The energy retail market feels broken.
Sara Vaughan, political and regulatory affairs director, Eon UK
Energy retail casualties
It felt like “another month, another failed supplier” during a turbulent 2019 for the energy retail market.
The year has seen several suppliers exit the market, impacting thousands of customers:
Eight suppliers failed in 2019 and more are expected to in 2020. This year’s causalities were:
Economy Energy: 235,000 domestic customers (January)
Our Power: 38,000 domestic customers (January)
Brilliant Energy: 17,000 domestic customers (March)
Cardiff Energy Supply: 800 domestic customers August)
Solarplicity: 7,500 domestic customers, approx 400 business customers (August)
Eversmart Energy: 29,000 domestic customers, plus 10 business customers (September)
Rutherford Energy: 280 business customers (October)
Toto Energy: 134,000 domestic customers (October)
Boris Johnson v Jeremy Hunt
Which PM would serve utilities best? That was the question during the strange summer limbo of 2019 while the nation awaited Theresa May’s successor.
With the long-awaited energy white paper still to materialise and decarbonisation front and centre of utility strategy across the industry – a new premier in favour of advancing environmental policy felt key.
Unsurprisingly, frontrunners Hunt and Johnson were to rediscover their environmental credentials in time for the hustings, yet history was to reveal that Boris would be the man to lead the Tories – and the country, albeit to a general election this week as it turned out.
Hope remained that he would deliver on his net zero rhetoric if he were to hang on to power, although his swerving of the recent Channel 4 debate on climate change was an alarm bell for those acutely aware of just how quickly the clock is ticking.
Cabinet: Leadsom in, Clarke out, Gove moves, Perry leaves
The Cabinet merry-go-round brought its inevitable ministerial shake-ups.
Former energy minister Andrea Leadsom returned to become BEIS secretary, replacing Brexit rebel Greg Clarke.
Former environment secretary Michael Gove moved to become Chancellor of the Duchy of Lancaster and Minister for the Cabinet Office, while Claire Perry stepped down from her role as clean growth minister, citing personal reasons. She was later appointed “president” of next year’s UN climate talks, COP26 in Glasgow.
Regulation: Nolan, Brearley and Cox
Dermot Nolan is to leave in February next year, to be replaced as Ofgem chief executive by Jonathan Brearley at a time of what even its chairman has described as “unparalleled change”, as the industry embarks on its journey towards net zero.
Jonson Cox has been reappointed to remain as chair of Ofwat until 2021, extending his tenure by one year. Cox has held the non-executive chair position since November 2012.
The dreaded ‘n’ word…
No sooner had 2019 begun than it felt like the looming threat of nationalisation had become a real and present danger for water and the networks.
While the opposition’s emerging thinking had been revealed a few months before, what had seemed like a vague spectre from the past was fast becoming a living, breathing bogeyman for utilities.
They would learn later in the year, once a general election was called in the autumn, that Labour’s plans under Jeremy Corbyn for public ownership would go even further.
The party’s sights would also be trained on privatising energy retail giants – although there was little detail about precisely which companies fell into this category.
Under “McDonnellenomics”, as the chancellor’s vision came to be dubbed by some, chief executives would need to reapply for their jobs, there would be more transparency on remuneration and performance, and worker representation would become a feature of utility boardrooms.
It’s a vision that hit a chord with a populous tired with austerity and disillusioned with headlines about excessive profits, leakage and executive pay.
Yet the proposals created huge questions over how such radical economic transformation could be financed and the legal implications involved. Recent reports have revealed that some utilities had not only sought legal advice, but that National Grid and SSE have since moved ownership of their UK operations offshore in a bid to protect the value of their assets.
B is for blackout
The country received a shock to its system on 9 August when we witnessed the biggest power cut in a decade.
A confluence of circumstances following a lightning strike on the transmission network – including two unexpected outages at Hornsea and Little Barford, 500MW of embedded generation going offline, and the loss of further units at Little Barford – brought disruption for thousands.
While it was contained as planned and resolved relatively rapidly, the event has proved a wake-up call for those who take the electricity system for granted.
It has sparked questions for National Grid ESO and changed the national conversation over what this might signal for the future shape and operation of our country’s fast-evolving, increasingly dispersed energy system.
Winds of change
A renewables record was set in the third quarter of the year when electricity from British wind farms, solar and biomass plants overtook fossil fuels to provide 40 per cent of the nation’s electricity mix – the first time since the UK’s first power plant fired up back in 1882.
Battle for the planet
The war for the world began in April 2019 and utilities found themselves right at the heart of the drive for net zero carbon emissions by 2050.
The target from the government’s independent adviser on climate change, later enshrined in legislation by Theresa May’s administration, upped the stakes for an industry that will need support from government across the piece if it is to help enable the ambition to end the use of petrol and diesel cars and natural gas boilers by 2035.
The world-leading move by government, viewed as one of the few positive legacies for the Brexit-embattled May’s term in office, has transformed the conversation throughout the utilities sector.
The Brexit factor
Despite the political froth and posturing, the close of 2019 sees an industry, and country, still awaiting clarity on the UK’s withdrawal from the EU.
The much-trumpeted deadline for departure, 31 March, came and went – with all eyes now on the end of January 2020. Meanwhile, industry has been getting its ducks in a row, from stockpiling strategic materials to boost resilience in the event of supply chain disruption, to considering how to deal with worst-case scenarios.
Concerns abound about the need for “constant vigilance” to anticipate any issues that Brexit is likely to throw up, not least over the future of UK emissions trading arrangements.
Access to interconnectors, including a number of proposed projects which are playing an increasingly important role in the UK’s energy mix, also remains uncertain.
There is, however, confidence that established exchanges of electricity and gas will continue, albeit less efficiently.
PR19: crushing verdicts
Water companies may have slaved away for months to deliver their price review business plans, but this was the year we saw the regulator get ruthless.
Ofwat’s initial assessment of water companies’ PR19 submissions left many disappointed, with none viewed as “exceptional”, and just three – Severn Trent, United Utilities and South West Water – securing “fast-track” status. Four ended up in the “significant scrutiny” category.
It was a theme set to continue throughout a difficult year for a sector struggling with the pace of change.
Dealing more successfully with innovation, cracking down on leakage and improving resilience, and meeting Ofwat’s ambition for a greater fairness and sharing of rewards brought some tough challenges for an industry as it awaited the regulator’s final determinations.
The road to RIIO2
Energy networks are the masters of the long game; they have had to be. So, while chief executives were not surprised by Ofgem’s decision in summer to stick to its December plans to cut returns under RIIO2, some were left exasperated at what they saw as an “overreaction”.
The cost of equity figure may have shifted a little in their favour, up 0.3 per cent on the mooted 4 per cent, but it still fell way short of their view of a fair return, at between 5.5 and 6.3 per cent, and even further off the comparative 7 to 8 per cent allowed under the current price control regime.
With the net zero challenge upon them they had hoped for more. June 2020 will see the draft determinations, with final decisions set to follow in the November.
Return of the capacity market
Nearly a year after the European court decided the capacity market broke state aid rules, the European Commission approved the scheme for a second time on 24 October, paving the way for its return.
However, the first list of unpaid invoices from the restarted market reveals a £38.3 million deficit so far, with a mutualisation process to recoup the lost funds due to start this month.]
£126m
One of the standout numbers of 2019 was the £126 million in fines and customer rebates dispensed by Ofwat to Southern Water for serious failures in the operation of its sewage treatment sites and for “deliberately misreporting” its performances, between 2010 and 2017.
Southern chief executive Ian MacAulay, who joined in 2017, said the company was deeply sorry for the failures, which took place before the start of his tenure. He also launched a whistleblowing policy regime.
It feels hard to imagine a worse story surfacing in a year that marked 30 years of water privatisation. Regulator Rachel Fletcher was to later describe it as having been “a dark week for the water industry”.
Moves and mergers
Shelling out
You can be sure of Shell, so the slogan went a few decades ago, but this year saw the super-major’s message move on from forecourts. Royal Dutch Shell’s announcement in March that it would be rebranding its energy supplier First Utility to Shell Energy and switching its 700,000 households to renewable power, was one of the clearest indications yet of its refocused market strategy.
All change
It felt that a transitioning energy retail market had finally arrived when Ovo Energy, the ambitious poster child for challenger brands, bid to acquire SSE’s retail arm, effectively changing the shape of the original big six forever. Market watchers will be following its fortunes closely in 2020.
SSE had planned a merger with fellow big six player Npower, which fell through. Eon UK would later go on to inherit Npower as a result of its parent company’s acquisition of Innogy, Npower’s owner. This month brought reports that 4,500 jobs look likely to go at Npower in order to sustain the business’s future.
This sector’s on fire
Eon UK chief executive Michael Lewis, describing the state of the energy retail market in October and calling on government to increase focus on this end of the energy chain if the UK is to truly unlock nationwide energy efficiency.