Utility Week is privileged to count all of the major providers of water, gas and electricity among our membership base, with a strong following in boardrooms across the sector.
Our coverage is informed by reference to detailed analytics of what companies across the utilities eco-system are reading.
Throughout 2022, we will be using this data to present monthly snapshots of the hottest topics both pan-utilities and within particular sectors, alongside analysis of the emerging trends. These reports will be available exclusively to members of Utility Week, with an annual overview to be published in our January print magazines.
In any conversation with a utilities sector leader, it will only be a matter of time before talk turns to regulation. And so, it was natural that the top-read stories of the year on Utility Week were dominated by major developments in the relationship between regulator and regulated.
Of course, 2021 was the year of appeals, which dominated our top-read stories. March saw the culmination of the long-running PR19 saga, in which four water companies challenged Ofwat’s final determinations on their business plans for the next five years. The principal point of contention referred to the Competition & Markets Authority (CMA) was the cost of equity. When the CMA returned its interim verdict in September 2020 it offered a radically different equation for this crucial metric. However, by the time its final judgement was delivered the return to investors had been revised from 3.5% to 3.2%.
It was in this febrile atmosphere that our most clicked on piece of content emerged. Just two weeks before the CMA opined on the water sector, the gas and transmission networks had to decide whether they would challenge their own settlements from Ofgem. In the end all eight of the companies did so, with the cost of equity once again in the crosshairs, along with the much-maligned outperformance wedge (the 0.25% reduction to allowed equity returns to account for outperformance) .
While these two appeals were often discussed in the same breath, they were different beasts, with the energy challenges on specific points rather than whole re-determinations. Probably for this reason, the CMA returned a far swifter, and less controversial response in energy. There was little significant variance between draft and final pronouncements, with the companies gaining no ground on the cost of capital but claiming the scalp of the outperformance wedge.
It will be interesting to see how Ofgem approaches the issue of the wedge in its determinations for the electricity distribution networks, who presented their business plans at the start of December. A deep-dive into the detail of their draft plans was our third best-viewed story of the year. Follow-ups with the chief executives of UK Power Networks and Western Power Distribution, in which they delved into their plans to set up distribution network operator (DSO) functions, also featured highly.
On the Move
While regulation was one of the most tantalizing topics of the year, it was challenged by the intrigue of senior figures in the sector swapping chairs. And one of the best-read stories of the year combined these two passions. In February, then Ofwat chief executive Rachel Fletcher announced a shock move to Octopus Energy as their director of regulation and economics. After a year embroiled in the CMA appeals, Fletcher could be forgiven for wanting a quieter life in the tranquil pastures of energy retail. Of course, it didn’t quite work out that way.
Other top people moves of the year, judging by interest from Utility Week members, included Nicola Shaw’s departure from National Grid, Pauline Walsh stepping down from Affinity Water and a flurry of appointments at Ofgem early in the year.
Energy retail meltdown
As referenced above, the energy retail market proved anything but predictable in 2021. Throughout the year, and for many beforehand, senior figures across the sector had urged the government and regulator to look at fundamental reforms to allow sustainable businesses to flourish and sharp practice to be eradicated. Scant regard for these concerns was expressed in the Department for Business, Energy & Industrial Strategy (BEIS)’s Energy Retail Market Strategy for the 2020s, with its myopic focus on auto-switching as the cure to all ills.
There was no time for schadenfreude when soaring wholesale power prices in the autumn took a scythe to the industry, leading to the failure of 28 suppliers to date.
Former Ofgem chief executive Dermot Nolan had little sympathy for the bosses of failed suppliers when he was interviewed by Utility Week in September, saying “if you have committed to a fixed tariff and you haven’t hedged accordingly, then you don’t really have any right to complain”.
However, a group of recently departed retailers took a very different stance in a scathing letter to Ofgem in October. It accused the regulator of helping to bring the energy market “to its knees” and criticised its approach to the industry throughout the early stages of the coronavirus pandemic and the emergence of the recent crisis.
The market exits came so thick and fast throughout the autumn and winter that it was often difficult to keep up. But two failures stood out for our readers. In October, Pure Planet lost the backing of BP, while in November Bulb’s 1.7 million customers were protected by the special administration regime.
M&A hits the headlines
As discussed, the investibility of utilities was a hot topic in 2022 and there were some live examples of the kind of premiums investors were willing to pay for prized acquisitions. The most high-profile was National Grid’s acquisition of Western Power Distribution (WPD). It may seem an obvious fit in hindsight, and National Grid had been referenced as a potential suitor in the early stages of PPL’s quest to offload the DNO, but the announcement took many by surprise. It had been assumed that one of the European utility monoliths or a private equity powerhouse would be the only candidates with pockets deep enough to take on WPD.
Instead National Grid announced not just its successful pursuit of the company but also a “strategic pivot” towards power, with the launch of a sale process for its gas transmission arm. Our coverage of the deal and analysis of its wider implications were a popular thread throughout the Spring – in particular the remarks of a senior Ofgem figure that the premium paid proved the regulator had got the cost of equity right.
Other notable M&A headlines included Pennon’s acquisition of Bristol Water and SSE’s sale of its remaining stake in SGN.
ESO separation
National Grid also featured in another strand of content that was of constant fascination to Utility Week members throughout 2021. At the start of the year, Ofgem recommended the full separation of the electricity system operator (ESO) from National Grid, citing the need for total independence for a future system operator (FSO) with added responsibilities in co-ordinating the energy transition.
While the ESO is already a legally separate body from National Grid, there has long been an appetite within Whitehall for a clean slate. So, it was no surprise when BEIS backed Ofgem’s stance in a consultation in July. This suggested a phased implementation of an FSO, which would first take on the existing capabilities and functions of the ESO. However, the document also set out a raft of other potential responsibilities, leading to questions about how quickly this vital bedrock of net zero could be brought online.
Policy bonanza
2021 was the year in which industry calls for greater clarity of net zero policy were answered. At least partially. Judging by the stories that grabbed the attention of Utility Week members, it was the long-awaited Heat & Buildings Strategy that sparked the greatest interest. While this prompted some criticism that government was avoiding making a decision on which technologies would drive forward the decarbonisation of heat, there were counter views that this was a pragmatic approach to a landscape of uncertainty.
The blueprint, along with the flagship Net Zero Strategy, made clear that government now expects industry to ramp up innovation and drive down prices for low-carbon heating. The emerging solutions to this challenge are sure to feature prominently in our best-read stories for 2022.
Looking forward
On which point, are there any predictions to make about what we will be reflecting on in 12 months’ time? As set out in our round-up of the ED2 final business plans, there are a number of discussion points that will no doubt arise from this process. While there are signs that Ofgem and the networks are perhaps more aligned on the need for anticipatory investment than in gas and transmission, there will inevitably be points of conflict. Distribution networks will be keen to see if the outperformance wedge has been retired completely after the CMA’s pronouncements, while there will be much debate over the design of the crucial uncertainty mechanisms. I would also expect to see the distribution system operator model being a regular conversation topic in the new year.
On the water side, I would expect conversations around the scope of the PR24 piece controls to break cover. Investment in natural capital, support for decarbonisation ambitions, consumer engagement and the need to take a longer-term view are all likely to feature.
Our Energy Reset campaign will continue to push for reform in the retail market, with Ofgem consulting on a number of proposed changes. The next revision of the price cap in early February will be a key date.
People moves will now doubt be another area to watch but it would be foolish to make predictions. One high-level departure we can expect to debate though is Jonson Cox’s departure as Ofwat chair in April, having twice extended his tenure.
No doubt M&A activity will also continue. One major deal that should take place this year is the afore-mentioned sale of a majority stake in National Grid’s gas arm.
Having committed this to print, the one prediction I am confident in is that there will be a story or a development that I could never have imagined. It is what makes covering the utilities sector a constantly fascinating job.