In June 2005, National Grid sold four of its eight gas distribution networks, marking the start of life for new independent operators.
Although the electricity and water sectors had experienced competition and benchmarking, this new era for gas distribution created a comparative marketplace for us for the first time.
Before 2005 all gas distribution was the responsibiltiy of a single UK operator, Transco. The network sale created four new ownership groups, with Wales & West Utilities (WWU) owning and managing over 35,000 kilometres of pipework across an operating region covering more than a sixth of the UK.
It’s fair to say that, as far as some outside commentators were concerned, the jury was very much out on whether the new independent networks could survive and prosper. Ten years on and I believe the answer to that question is, without doubt, yes they can.
By every key measure set out by our regulator Ofgem, the independent gas networks have led the way in performance, driven by the desire to succeed in the brave new world of comparative regulation.
Three regulatory price reviews over the past decade have kept the industry busy.
The most recent of them introduced the new regulatory concept of RIIO (revenues, incentives, innovation, outputs) – signalling a much greater focus on innovation and outputs in particular – along with a longer regulatory period of eight years.
This review demanded a much greater focus on stakeholder engagement and on demonstrating the consumer benefit of the money we spend – something we fully support as a business, and which has become even more important as consumers feel the pressure of increased energy prices.
The price rises of recent years have put the energy sector centre stage before the public and politicians, something we are acutely aware of. It’s up to us as networks to constantly demonstrate that we are delivering good value for consumers’ money.
That said, a key issue remains in the lack of public transparency around the real cost of the different sources of energy and the lack of a clear energy strategy for the UK. The debate continues to lurch between focus on security of supply, affordability and carbon reduction.
We all recognise the drive to reduce carbon, but this needs to be achieved through a balanced energy strategy – one that also recognises the need for consumer affordability and UK industrial competitiveness. The strategy must also ensure a secure energy supply, even when the wind doesn’t blow.
The drive for carbon reduction clearly raises questions about the future of gas in the UK, given its fossil fuel status. But let’s consider the broader facts.
• Gas emits 50 per cent less carbon dioxide than coal – at a time when the use of coal has actually increased in the UK and is projected to increase globally for some time to come.
• With a “strike price” of about £50/MWh, gas remains significantly cheaper than most other forms of energy. For example, as the cost of sources such as wind is falling, they are still at £80 to £90/MWh for onshore and £120 to £150/MWh for offshore. Gas continues to be an efficient source of fuel, a fact reinforced by the significant numbers of consumers that still regularly seek to convert to it from other fuel sources.
• Shale gas has been a game changer in the US, where fuel now costs about a third as much as it does in the UK, giving their industry a competitive advantage. Geologists tell us there is a significant shale gas resource in the UK – and if we eventually get round to accessing it there is a ready-made and effective way to transport it safely through the existing UK gas network.
As we strive in the UK to achieve the challenging carbon reduction targets up to 2050, we must not overlook the contribution that gas can continue to make in the energy mix – by providing a low-cost and sustainable contribution to our energy and climate change needs.
A comprehensive report by independent consultants Redpoint in 2011 said that
the continued use of gas could realise savings of up to £700 billion up to 2050, compared with scenarios in which gas is phased out of the energy mix. These numbers still hold true.
This reflects a massive saving of £20,000 per household in the UK, and represents a significant contribution to easing consumer hardship and supporting industrial competitiveness over the period.
All this said, the challenges of climate change and sustainability will demand changes in gas technology. At WWU we have embraced this reality with a strong and ambitious innovation strategy.
With a seventh biomethane plant soon to be connected to our network, we’re making some big achievements that will stand us in good stead over the next ten years.
Graham Edwards is chief executive of Wales & West Utilities
Ten years of Wales & West Utilities
WWU has flourished under the market conditions since four of the eight gas networks were sold. We have consistently been a leading performer in customer satisfaction over the whole of that period, something that is unprecedented in the utility industry.
And before anyone shouts that utilities are not the benchmark for customer service in the UK – WWU has been scored highly by the UK Institute of Customer Service – placing us alongside leading household names for customer service such as retailer John Lewis and financial services provider First Direct.
Of course this success has not come without significant challenges to overcome. We were tasked with setting up a business developed from an operating region with a distinct need for investment in both assets and people. Our workforce was sceptical and apprehensive of the new regime and disillusioned by the changes in the gas industry.
From the outset we had to get our strategic direction right, so everyone knew what we were striving to achieve. We set out key objectives to shape our new business and developed a strategy to make sure we strived for excellence in customer service, safety and operational efficiency – encouraging ownership and accountability throughout the organisation.
Setting up a new company was a great opportunity for us to determine what we wanted to stand for and, ten years on, we are now recognised as one of the leading players in our sector.
Over the past decade we have attended more than a million gas escapes, connected 130,000 properties to our network and replaced almost 40 per cent of our iron mains with plastic pipe.
This has been a key activity for us given the poor condition of much of our inherited old iron mains – though despite the age and condition of some of our infrastructure, it still provides a reliable service. On average consumers can expect to experience an interruption to their gas supply once in 40 years. This kind of reliability is bolstered by the significant investment we make each year in our assets. Between start-up in 2005 and the end of this current regulatory period in 2021, we will have invested almost £2 billion to ensure a safe and reliable gas supply for consumers. Our approach has also been recognised by the Health and Safety Executive, which recently rated WWU as exemplary in the safety leadership of what is a major risk industry.
Another area of significant investment over the past ten years has been in our workforce. We recognised at the outset the age profile of our people, caused by a lack of recruitment over many years.
Over the past 10 years we have significantly refreshed our workforce, recruiting more than 500 new people – including 100 apprentices. This has brought an injection of fresh talent into the business, and also reduced the average age of our workforce significantly.
If all this activity hasn’t kept us fully occupied, the business has also changed ownership during the period.
Global infrastructure group Cheung Kong acquired WWU in 2012, adding to its substantial portfolio of utility businesses in the UK. The new owners didn’t make any management changes – the same leadership team is still in place. This is testament to the success of the business.
It is pleasing that our performance over the past ten years has also been recognised externally – with WWU clocking up a raft of awards over the period, both at the company and individual level.
We look forward to the next ten years, and seeing how we and the other gas networks can continue to contribute to the cost-effective delivery of greener energy that also delivers excellent value for consumers.