Transformation lessons from the NHS

The impact of the coronavirus outbreak on all aspects of the utilities sector will require a joint response across regulators, government and companies. According to Ted Hopcroft and Liz Parminter, from PA Consulting, this may necessitate the kind of cultural transformation that NHS procurement is currently undergoing.

As the coronavirus crisis unfolds, the news continues to report on the efforts of NHS procurement teams to tackle the challenge of securing personal protective equipment for frontline staff. In a fascinating interview, Mark Roscoe, former director of procurement for NHS Wales, described how this is a process which involves skills almost diametrically opposed to the NHS norm of large scale, long term, transparent, rigorous procurements and instead requires procurement teams to be fleet of foot, securing a range of small to mid-size deals. It is important to ask ourselves, is a similar need for urgent transformation now required from our sector?

Energy and water utilities, with a background in emergency planning, are responding well, but what about the governing institutions? In particular, how are our regulators adapting? The regulators’ focus has been driving businesses hard to take cost out and improve performance, based on skills in data and economic analysis. Now the challenge is completely reversed. Regulators need rapidity, creativity and entrepreneurial nous to act in concert with governments to save markets, not sweat them.

The regulators need to have many markets on their watch list. The fledgling NHH water retail market is already experiencing issues with deferred payments and bad debts. Similar issues afflict the energy supply market, where two more small suppliers, Robin Hood Energy and Bristol Energy have appointed “advisors”. The generation market has seen a collapse in demand to levels last seen in the 1960s. The more heavily regulated water and energy network businesses are now focusing on core provision, deferring schemes and initiatives to improve KPIs, with no clarity on business impact. We also need a post-Covid path for the industry and regulators have a role to play here too.

How are regulators approaching the challenges?

Ofwat acted quickly on bad debt and liquidity issues to prevent systemic retailer failure in the NHH market. However, the approach leaves great uncertainty in terms of how inevitable retailer failures will be managed, whether wholesalers will be paid and the longevity of the approach. In particular the statement: “If we find that retailers who opt to defer payment of wholesale charges do not comply with the requirements of the scheme, then we reserve the right to rule out the option of extending provision of liquidity beyond July 2020 for all retailers’ poses a risk that one bad retailer could bring down the whole contingency arrangement.”

In energy, it is the retailers who are bearing the brunt of the bad debt and liquidity issues, while also raising their game to ensure adequate support to vulnerable customers with a depleted workforce. Ofgem has been silent on any protections in the market, or potential to spread the impact across other elements of the industry. This is a well-established market and it could be reasonable to let the market decide outcomes, but the risk is that Covid-19 could bring an icy wind down on the smaller suppliers and undo a decade of increased competition.

In generation, Ofgem, Energy UK and the ESO have all indicated a high degree of confidence in maintaining resilient supply, albeit this is easier to manage with substantively reduced demand rather than increased demand. Ofgem has agreed an urgent modification to allow disconnection of distributed generators and the summer will provide an early test for the ESO’s new downward flexibility service. However, the issue is as for retail, it is the innovative providers and green agenda that could suffer, with gas providing greater stability and gaining from wholesale price reductions, while renewables remain largely unchanged.

On the price controls, Ofgem has indicated that it is conscious of the impact of regulatory processes and does not want those to get in the way of companies’ Covid-19 response, but has shown no specific, tangible change. Ofwat has stated that companies should ‘be assured that we will consider the need for any ex post adjustments to our regulatory system following an in-the-round assessment as part of our normal reconciliation process’, but this requires a high degree of trust and common purpose, which is extremely difficult to achieve in a situation where three companies are at the CMA.

The provision of our core energy and water provision has held up very well through the Covid-19 crisis. This is a testament to the companies and the structures that have been built through light touch regulation and demonstrates the extent to which industry still has social commitment at its heart. However, the impact of Covid-19 is so great, that regulators should ask whether this is sufficient. There is a need to provide greater certainty to companies, to ensure markets are protected and to develop a roadmap for our industry’s own path out of lockdown which can meet and exceed our environmental goals. This requires a collective, collaborative and creative approach across regulators, government and companies; an approach that may require the kind of cultural transformation that NHS Procurement is experiencing.