2020: Not just pandemics and price controls

This year will be remembered for one thing – and many will try to forget it for that same reason.

But before we put this remarkable year to bed, it is worth reminding ourselves that for the utilities sector coronavirus was far from the only topic of conversation.

This is by no means an exhaustive list of what happened during the year – I’m sure you have present wrapping or panic buying to do – but a whistlestop tour around six key topics and what they mean going into 2021.

1. The obvious one – Net zero

We had to wait until the end of the year for a clear government signal on decarbonisation but when it came there seemed to be no stopping it. First the prime minister’s 10-point plan, then the National Infrastructure Strategy, the fresh target on cutting emissions and then finally the Energy White Paper. All this with the Committee on Climate Change (CCC)’s sixth carbon budget thrown in for good measure.

If you missed any of these weighty announcements in amongst the blizzard you can catch up through the links above, or read David Blackman’s analysis on why the CCC’s update was arguably the most significant.

Through these plethora of pledges an outline of a net-zero strategy, at least over the next decade, is starting to emerge. However, the white paper was essentially a rundown of multiple consultations to come in 2021.

These are too numerous to list here but include specific papers on hydrogen, heat and storage as well as updates to the Gas Act. Consultations are promised on everything from energy efficiency to the role of Ofgem, the future of the energy retail market and biomass.

Unpublished as I write but promised in December is an interim report on the how the transition to net zero will be funded. This conversation will underpin every other element of the paper and cannot come soon enough.

The water sector’s role in reaching net zero cannot be forgotten and this year saw the publication of a road map for the sector to decarbonise by 2030. However, there are significant questions to answer here as well, many tied up with the aforementioned policy gaps.

2. The other obvious one – Regulation

In both water and energy, the regulatory agenda has been packed this year.

PR19 kicked off in the water sector against the backdrop of four companies appealing Ofwat’s final determination. After its surprise move on cost of capital, all eyes will be on the Competition & Markets Authority’s final redeterminations in February.

This includes multiple sets of peepers in the energy sector, as gas and transmission companies weigh up whether to challenge their final determinations on RIIO2 and electricity distribution networks find out how it will inform their business plans.

3. Changes at the top

There were numerous significant appointments at companies across the utilities sector this year. Perhaps the two most high-profile being the new chief executives at Thames Water and Centrica.

As two of the most high-profile companies in our sector – and often not for the right reasons – it is worth revisiting the visions set out by Sarah Bentley and Chris O’Shea respectively.

Given her background driving up customer service standards, it was no surprise to hear Bentley highlight this as key to her tenure, as well as “generating public value”. However, she has also committed to focus on the long-standing issues of resilient systems and assets and invest in Thames’ digital capabilities.

After two years as Centrica’s chief financial officer, O’Shea already had a handle on the many fires the company was fighting  and wasted little time after his promotion to CEO in April (after a month filling the role on an interim basis). In June, he unveiled a dramatic restructure, which will see around 5,000 jobs axed and half the senior leadership team depart. The company has spent the rest of the year locked in negotiations with staff and unions over plans to standardise the more than 80 different employee contracts within the business.

Other notable appointments in 2020 included Susan Davy’s promotion to chief executive of Pennon Group (of which more below) and the same route for Jonathan Brearley at Ofgem.

Looking to 2021 – and staying with regulation – Ofwat chairman Jonson Cox is due to step down from his role in October. Given the influence he has had on the regulator over the past eight years, the choice of his successor is likely to be closely scrutinised. If indeed, this year is his last. His tenure has already been extended once.

4. M&A activity

While the boardrooms may have been reshuffled across the sector, the shareholder base stayed largely stable. After 2019’s high-profile deals, such as Ovo acquiring SSE, Eon taking on Npower and a consortium buying Electricity North West, this year was much quieter.

One notable exception was Octopus Energy, which achieved unicorn status after Australian firm Origin Energy paid £300 million for a 20 per cent stake in May. Today it was announced Origin had invested a further $47 million, alongside Tokyo Gas taking a 9.7 per cent for $200 million. It puts the retailer’s value at $2 billion (£1.5 billion).

Although there was little movement on mergers & acquisitions in 2020, there were plenty of signs that deals are bubbling under the surface. Following two decades of ownership, the Pennsylvania-based PPL Corporation revealed in August that it was putting Western Power Distribution up for sale to allow it to focus on its core American business. PPL said in its most recent results that it expects movement on this in the first quarter of next year.

Meanwhile, Pennon Group has been linked with several possible targets in the water sector as it seeks a home for the £2.9 billion left over from the sale of its waste management business Viridor. Last month there were suggestions – not explicitly denied by the company – that Southern Water could be a target. The parent company of South West Water is also understood to have run the rule over Northumbrian, Wessex and Bristol before setting its sights on Southern.

While the company has refused to be drawn on its plans, the rationale of an approach for Southern is clear on both sides. Pennon would feel it can build on the in-roads made by Southern’s chief executive Ian MacAulay, while after 13 difficult years the latter’s current backers may not have the stomach for further transformation.

5. We could all be vulnerable now

For obvious reasons, the landscape of vulnerability and consumers’ ability to pay their bills has shifted dramatically this year. Research published by Citizens Advice earlier this month showed a 40 per cent increase in the number of people behind on their energy bills between April and September, with 2.1 million in arrears at that point. Crucially, this was pre-winter and with full furlough support in place.

That the situation will worsen in 2021 is unfortunately not really in doubt but the hope is that state support has bought utilities companies enough space to scale up their vulnerability strategies to be able to identify and offer support to the many customers who will need it.

The challenges of responding to transient vulnerability, as well as the opportunities presented by collaboration and data-sharing were discussed earlier this month at Utility Week’s Consumer Vulnerability & Debt Conference.

6. Ok, and coronavirus

Of course, it would be impossible not to reflect on the number one topic of conversation in 2020. There is no need to emphasise the disruption the pandemic caused across the sector – I’m sure you noticed.

However, it is worth noting the way utilities companies reacted to this upheaval. As we showed through our Keeping Us Connected campaign, innovation was fast-tracked, solutions were quickly identified and technology embraced as never before. More than this, many consumers were able to see a different side to their utility provider – offering more than just power or water but a helping hand when it was needed most.

It will be intriguing to see whether the sector’s perpetually lagging trust scores when compared to other industries are given a boost by the Covid effect.

Looking ahead to 2021

One final topic that is notable by its absence here is Brexit. Turning the clock back to January I could not have envisaged a summary of the year that wasn’t dominated by this word. However, the very real and immediate implications of the pandemic – and the very little progress actually made on the UK’s divorce from the EU – has rendered this topic a bit of a lame duck.

What we can say is that once again we enter a new year faced with extreme uncertainty. Companies across the utilities sector know that despite this, real progress needs to be made across multiple workstreams in 2021. I have no doubt that the dedication and innovation that shone through in 2020 will stand the sector in good stead to make headway on its goals in 2021.

I look forward to writing about them when Utility Week returns on 4 January.

From all of us at Utility Week, we wish you a Merry Christmas and a happy new year.