Robert Symons is not your typical trade body chairman. The chief executive of Western Power Distribution is known for his outspoken style, his determined efficiency, and his relentless focus on the job in hand. Yet Symons recently took over the reins of networks body the Energy Networks Association (ENA) from UK Power Networks boss Basil Scarsella and will be in the chair for the next two years.
Today, as he sits down with Utility Week and ENA chief executive David Smith in London’s Goring Hotel, he admits he had “reservations” about the chairmanship – but cheerfully acknowledges: “I always perform better when there’s a problem. I’ve really enjoyed my first couple of months at the centre of the storm – it’s not so boring as I thought!”
So what’s the problem? Well, first up there’s the tide of negative publicity battering networks, the one-time public heroes, for their costs and profits. Then – some might say linked – there’s the looming question of the mid-period reviews for the networks’ regulatory settlement, RIIO, plus the negotiation of RIIO’s second round, RIIO2. Last, and by no means least, there is the once-in-a-generation transition the entire energy system faces, and the question of networks’ role in it.
Supply businesses have taken a good deal of flak for increased prices, so I believe that attention has now been focused on networks
When Conservative MP John Penrose took to the floor of the House of Commons in January and launched a blistering attack on networks for being “fat and lazy”, only to be lauded by energy secretary Greg Clark as “absolutely right”, it was clear that something has changed forever for energy networks. Once seldom noticed outside of a storm or other major event, networks are now firmly centre stage in the public debate about energy costs. Penrose’s intervention comes on the back of a flurry of reports attacking network costs and profits – reports that have been eagerly taken up in parts of the national press, with the Sun’s “Griddy Guts” a particularly memorable headline from last year.
What’s gone wrong? Symons is characteristically forthright in his response: “Supply businesses have taken a good deal of flak for increased prices, so I believe that attention has now been focused on networks, and when you think about that you have to recognise the fact that networks have actually reduced costs in real terms since privatisation by about 17 per cent, and that’s against a background of investment increasing 55 per cent year on year.”
Symons has a pointed message for British Gas and parent company Centrica, which have been at the forefront of criticising network returns, going so far as to refer the RIIO-ED1 settlement to the Competition and Markets Authority in 2015. He says: “A lot of our criticism emanates from British Gas/Centrica. They proudly say they can maintain your electric boiler and heating system for 47p a day. For 23p a day you’re getting your electricity distribution system, and for 10.3p a day you get the transmission system. When we start talking about value for money and think about the 55 per cent improvement in investment, 17 per cent reduction in costs since privatisation, let’s have some sense of perspective.”
All this must be taken in the context of the energy transition, as Symons and Smith are keen to point out. Networks’ role in that transition has come under question in recent months, as some market observers question whether these monopoly businesses are best placed to deliver the transformational change required. Professor Dieter Helm, for example, in his government-commissioned review of the cost of energy, suggests networks should be replaced by independent regional system operators – separate bodies to those owning and operating the transmission and distribution assets. While this proposal has gained little traction to date, there are questions being asked at the highest level about whether networks are the right bodies to act as regional system operators in a more dynamic energy system. Meanwhile, their ability to fully participate in emerging markets for flexibility was dealt a body blow with Ofgem’s ruling last year that networks cannot directly own or operate storage assets.
Our investors are in the US, and their regard for UK regulation was exceptionally high up until the MPR consultation
Symons has a robust answer: “Okay, if you want someone else to do it, who is it? Who’s sat there ready to do the job? If we didn’t have a history of already doing it, I could see the point of chucking all the balls in the air, but in such a dynamic situation surely you rely on those people with a record of doing it in the past, but also stimulate them and incentivise them to actually perform.”
Incentivising networks is a particularly thorny issue at the moment. Much of the public ire is aimed at the level of returns they are making under the current regulatory regime, which critics say overestimated the cost of capital, allowing networks and their investors to benefit from the wider economic conditions, rather than from performance on the ground. In the face of this criticism, Ofgem has been encouraging networks to hand back so-called “excess profits”, and four of them so far have heeded that call by collectively volunteering to return £650 million to customers.
More significantly still, the regulator has raised the prospect of opening up the current regulatory settlement for DNOs, ED1, at its four-year halfway point, in the mid-period review (MPR). In a consultation released late last year, the regulator set out several options for the MPR, including option three, which would involve reopening “financial and incentive performance and design”.
Symons doesn’t mince his words: “Our investors are in the US, and their regard for UK regulation was exceptionally high up until the MPR consultation. They regarded the UK jurisdiction as one of the best in the world, mainly because it gave investors stability over a period of time. As soon as an agreement looks as though it’s going to be turned on its head, which option three of the MPR really states, that creates great uncertainty for them. If I take my own company, at least 20 per cent has been knocked off the stock price because of that uncertainty.”
Symons argues that this uncertainty will hit customers in the pocket by increasing the cost of capital: “Discussions or debates that have been held about excess profits, which in themselves are a fallacy, and adjustments that could be made during an MPR melt into insignificance when you compare that to the effects of uncertainty – which are higher equity and financing costs in the future, resulting in higher costs for customers.”
As the MPR plays out, the detailed planning for the next round of RIIO is already under way. There are major questions about the structure of RIIO2 that Ofgem, under the leadership of senior partner for networks Jonathan Brearley, is currently consulting on. Among them are the questions of whether it should be a five or eight-year price control – “eight years – if you do the deal and stick by it” – and whether innovation funding should continue – “absolutely”.
There’s also the question of whether Ofgem will offer a fast-track option, as it did first time round, when Symon’s WPD was the only business to achieve that coveted status. Symons hopes so – and would be determined to achieve it again. “Basically, my aim has always been not to be second at anything, always to be in the lead – and the more distance you can put between yourself and whoever is coming second, the better.”
Taking a whole-system approach, is at the centre of what we’re doing
He stands by this view despite the fact that fast-tracking has, by one measure, cost the company: “If you look at the way debt is assessed in our cost of capital, compared to slow track companies, that’s cost us about £137 million. I have been encouraged to go back in an MPR and say this is significantly material and I have resisted that because I believe that the integrity of the regulatory system is far more important.” There’s a message there for Ofgem.
Of course, it’s not just electricity that sits within the ENA’s purview, and both Symons and Smith are keen to emphasise the work the ENA is doing on the future of gas – including the forthcoming gas networks innovation strategy, which will co-ordinate the networks’ approaches to innovation and applications for funding. Both are enthusiastic about the potential of innovation within the gas networks, where the experimental use of hydrogen is one of the few areas of the industry currently garnering positive publicity.
“Lots of people are looking at these new technologies, and in the past, they would have thought, ‘these companies aren’t going to do that’,” says Smith. “But we are – and being joined-up in everything we do, taking a whole-system approach, is at the centre of what we’re doing.”
The difficulty with a regulator that’s currently under fire politically is attracting the right calibre of people
Overseeing the energy system transition is Ofgem – the regulator, which has seen a series of personnel changes at senior level. Chairman David Gray, an expert in network regulation, stands down at the end of September. He has been followed out the door by Rachel Fletcher, who has moved to Ofwat as chief executive, Andrew Wright, and others. Symons acknowledges: “There’s a lot of change in regulation and change sometimes works for the good and other times there’s a drain of expertise. So I can see a lot of expertise going out. The important thing is that good people get attracted into it and I suppose the difficulty with a regulator that’s currently under fire politically is attracting the right calibre of people into the jobs.”
For the ENA itself, though, the road is clear. Smith acknowledges the benefit of having Symons in the chair, as someone who “has the back story of this, the biggest uncertainty in a generation”. He adds: “We’ve been below the parapet. That parapet has been shot away and now we have to show what we’re doing with clear concise messages, showing just how innovative networks are, and what good value for money they are.”
Asked what he hopes to achieve in his tenure at the helm of the ENA, Symons concludes: “Success in two years’ time is if, against the odds, we get our message across and can turn the tide of this negative view of networks. On the physical side, I would like to see networks enabling the low-carbon future. I believe we are the key to making it all happen.”
And there’s nothing boring about that.