Energy networks aspire to be part of the green recovery and unleash investment, but there are some significant policy and regulatory challenges to navigate on the way, reports Jane Gray

This is an extract from The Green Recovery, a major new insight report from Utility Week in association with Addleshaw Goddard. The full report can be downloaded for free.

The opportunities for GB’s energy network operators to make significant and varied contributions to a green recovery are myriad. Unfortunately, so are the challenges which might prevent them from doing so – or at least from fulfilling their full potential.

By unlocking network spending power on a wide range of projects that span hydrogen demonstrator projects to EV charging infrastructure; the gas mains replacement programme, to expansions in transmission link capacity, the UK could accelerate its progress towards its 2050 net zero ambition and generate enormous green economic benefits – both direct and indirect.

The Energy Networks Association, at the behest of Ofgem, is currently finalising its work to put a figure on exactly how much value projects of this nature could generate in the fairly immediate future in order to fuel a green recovery from the pandemic.

The trade body was reluctant to hazard a ballpark sum before its analysis was complete. But as glimpse of the investment that could be unleashed, Western Power Distribution (WPD) says that accelerating its planned EV charging infrastructure alone would amount to spending £67 million by 2023.

Before this potential can be unleashed, however, a number of critical policy, regulatory and market challenges need to be addressed. Some of these have been on the industry’s wish list for years – like policy clarity on the pathways for decarbonising heat – while others are tied up with controversy around Ofgem’s framework for the networks’ next regulatory period, RIIO2.

It’s a predicament which is weighing heavily on the minds of sector leaders, many of whom are vocal about their passionate belief in the role networks should play in supporting the build back better agenda and catalysing the net zero transition. Enabling a green recovery, they say, now sits at the core of their commitments to be responsible corporate citizens, serving both national and community interests.

“We are a massively purpose-led organisation, and the meaning of that is really enshrined in our responsible business charter, which is coming out quite soon,” says Darren Pettifer, head of regulatory finance at National Grid.

“You’ll hear John [Pettigrew, National Gris CEO] and the board talking a lot about what it means to us to be a more sustainable business, a more community focussed business, but above all, what it means to us to be a business which will enable the UK to get to where it needs to get to by 2050.”

The arrival of coronavirus has only redoubled corporate focus says Pettifer, and also added to its sense of responsibility for providing industry leadership.

“If we’re not doing everything we can to contribute towards a green recovery, then there’s a worry that others won’t – especially at the moment when so many organisations are worried about their own futures, let alone the future of the UK,” Pettifer explains.

It’s a sentiment shared by Phil Swift, self-professed green recovery fanatic and chief executive of the UK’s largest power distribution company, WPD. “It all comes down to leadership,” he says. “At WPD our focus in recent years has increasingly been on the role we have to play not just to facilitate but to lead progress in the UK’s ambitions to achieve net zero carbon emissions. Covid has added a new perspective and urgency to that shift.”

RIIO2 draft determinations

But alongside other sector leaders, Pettifer and Swift are unabashed in voicing concerns that their good intentions to support a green recovery could be undermined by Ofgem’s approach to its RIIO2 price control.

In July 2020 Ofgem published its draft determinations for GB’s gas distributions business, transmission companies and the electricity system operators – for all of whom the five-year RIIO2 period will begin in 2021.

While the historically low cost of capital set by Ofgem for RIIO2 continues to play a prominent part in the sector’s concerns, the overall message from leaders has been that they fear Ofgem has been so tough in pursuing cost reductions for consumers over the next five years that it has pitched performance targets unfeasibly high. This leaves very little incentive for outperformance and has stripped out work from business plans which networks believe to be essential to sustained reliability as well as to their net zero transition.

Ofgem has pushed a lot of planned work into ‘uncertainty mechanisms’ in the name of regulatory flexibility. However, especially in light of the need for a green recovery, sector leaders say they believe Ofgem should show more willingness to green light investment in projects to support decarbonisation “ahead of need.”

Admittedly, it is transmission owners like National Grid which have been especially stung by the draft determinations owing to the scale and number of projects which Ofgem has pushed towards uncertainty mechanisms. Pettifer explains that in addition to the concerns this is causing about delayed action on the net-zero goal, it also exposes transmission companies – and National Grid Electricity Transmission in particular – to a high level of cash flow risk due to delayed revenue returns.

For power distribution companies, meanwhile, the current brouhaha over gas and transmission settlements is a portent of things to come – they are due to submit business plans next year for their own RIIO2 period, which begins in 2023.

WPD’s Swift says he has been watching developments “with interest”, with an especially keen eye on how Ofgem’s position on the extensive use of uncertainty mechanisms may alter.

“The possibility that companies will be required to check back every 12-18 months to seek approval for major investment schemes only serves to heighten uncertainty and slow investment at a time when the duty to deliver a green economic recovery rests firmly with us all,” he comments.

Ofgem, of course, has been keen to distance the debate over the draft determinations from its work with industry to identify what investment could be accelerated in the interests of a green recovery. The regulator’s director of networks Akshay Kaul says: “We’re consulting on our next price controls, but we and the industry must act fast to power the green recovery. That’s why we want network companies to seize the opportunity to invest now.

“Ofgem and industry have demonstrated throughout the crisis that we can work at pace for consumers at times of significant economic change, and we want to bring that pace to the energy transition. We have asked the Energy Networks Association to lead a project to identify investment that can be accelerated within the existing price controls.”

Ofgem’s final determinations for gas and transmission are due out in December this year. But even if the regulator shifts significantly, there are other issues too which networks need to overcome to play a full role in the green recovery.

Transmission reinforcement

For power transmission companies, the green recovery challenges beyond RIIO2 centre on uncertainty around decarbonisation policy, misaligned government bureaucracy and Brexit.

In the case of the former issue, there’s solace to be drawn from the fact that things are moving fast. For instance, the announcement that government may bring forward its end date for the sale of new petrol and diesel vehicles could provide the required justification for heavy investment in network reinforcement to support fast EV charging infrastructure along motorways.

The latter two points are real bugbears, however, according to National Grid’s Pettifer who worries that key projects to allow for growth in the connection of offshore wind as well as increased interconnection could remain caught in the gears.

The Eastern Link project to expand transmission capacity between Scotland and England is a prime example, says Pettifer. “This is exactly the kind of project which could be brought forward and accelerated. We want to be starting work next year and the first tranche of work for the project represents £600 million – and that’s just from our side. Scottish Power would be investing a similar amount.

“However, at the moment our challenges are not just the draft determination, but also the amount of time it takes to get a project of this scale through planning. Then too, it’s likely the East Coast is going to be hit with a lot more offshore wind development and the more we can allow for that now, with the early work on Eastern Link, the more efficiently we can accommodate it.”

With this in mind, Pettifer says policy work to support the creation of a so-called “offshore grid” should be accelerated. He also argues that Eastern Link could be a good demonstrator for the concept.

Another challenge for Eastern Link and similar projects in the pipeline is legislative delay over the introduction of competitive tendering for onshore transmission schemes via the proposed CATO (Competitively Appointed Transmission Owner) mechanism.

CATO, which is designed to build on the success of its offshore equivalent, OFTO, was meant to come into force in 2017. The distraction of Brexit means the required legislative changes to allow for it have been continuously pushed down government’s to do list, causing delay and inefficiencies.

Distribution reinforcement, local energy, and flexibility

For power distribution networks, which have more time to run within their current price control, there is more flexibility for companies to bring froward key investments to boost green recovery, given the right regulatory go-aheads.

WPD’s Phil Swift says it has identified around £200 million of net-zero-friendly investment which could be accelerated, “with an initial £67 million brought forward within the current RIIO-ED1 regulatory period. But we will need the support of the regulator to do so.” In particular, Swift says he needs Ofgem to allow for a “minor modification to the allocation of costs which will enable a greater portion to be shared across our customer base.”

In the scramble to bring forward investment for net zero, it’s important the industry does not lose sight of the role energy flexibility has to play in delivering a cost-effective energy transition for consumers and that the potential for more dynamic flexibility markets to underpin a growing digital green economy is also recognised.

In recent years, innovation projects run by a number of DNOs have proven that energy flexibility – which uses smart technologies to modulate supply and demand – can provide enduring solutions to network constraints in areas where the impact of low carbon technologies is more predictable. There has also been some significant progress made in the past year or two in matching up the procurement of flexibility services at a national and local level, creating greater confidence among potential market players.

Reflecting on the potential role of energy networks in the green recovery in the round, Addleshaw Goddard’s head of energy practice Richard Goodfellow expresses considered optimism.

“There are still a lot of unanswered questions for networks around relevant policy decisions, and there still does not appear to be an obvious owner of responsibility in government for delivering net zero – which means that misalignments between the priorities of different departments persist and could hamper a green recovery.

“But this landscape is moving fast – recent announcements around EVs in particular have been helpful in boosting market confidence about the road to decarbonisation of transport and will underpin the justification for an accelerated wave of investment at both transmission and distribution levels to support EV adoption.”

While the policy framework for decarbonising heat (and heavy goods transport), is less clear, Goodfellow also notes that the long-promised Energy White Paper, along with the upcoming publication of the Buildings and Heat Strategy, should soon provide firmer foundations on which networks can build business cases for accelerated investment in underlying infrastructure projects.

Policy advances like this do need to be met with a regulatory environment which is both agile and appreciative of the conditions needed for innovation, notes Goodfellow. “Ofgem undoubtedly has an unenviable task in balancing the need for affordability – all the more sensitive right now – with the need to support the significant investment needed for net zero.

“Putting the debate around the RIIO2 draft determinations aside for the moment, the general observation I would make is that the regulatory approach and settlements companies receive needs to allow them the breathing space to be innovative. If there is an overwhelming focus on bringing down business as usual costs, it is inevitable that organisational resource and talent will constantly find itself drawn back towards a focus on business as usual operations and that leaves very little space for innovation.”

Notwithstanding this challenge, however, Goodfellow is clear he expects to see GB’s energy networks playing a prominent and fundamental role in the UK’s green recovery from coronavirus. “There remain huge policy and regulatory challenges before networks can play the role they want to in this recovery. However, I remain confident that they will barge their way to the table in order to do so. The skills are there, the knowledge is there. Investors stand behind the reinforced purpose that companies see for themselves in this context. Essentially, they see it as non-negotiable that there will be a green recovery, and they are determined to be a part of it.”

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