Anderson: Ofgem cost-cutting puts net-zero ambitions ‘in the fridge’

Keith Anderson, the chief executive of Scottish Power, has warned that by proposing to strip billions of pounds of spending from networks’ business plans, while leaving much of the rest subject to doubt, Ofgem has effectively asked them to put their net-zero plans “in the fridge”.

Anderson was speaking to Utility Week after Ofgem published the draft determinations for the RIIO2 controls beginning in April 2021, in which the regulator proposed to disallow a third of the more than £24 billion of baseline expenditure requested across electricity transmission, gas transmission and gas distribution.

The electricity transmission sector was hit particularly hard, with Ofgem proposing to cut its baseline expenditure by 45 per cent. Of the nearly £1.4 billion requested by Scottish power, the regulator proposed to disallow more than £400 million – or 30 per cent.

Ofgem said the RIIO2 price controls would deliver net-zero emissions at the “lowest possible cost” to consumers. “An alternative interpretation of that, and my concern,” said Anderson, “is that delivers net zero at the slowest possible pace because your entire focus is cost.”

Noting that around 40 per cent of baseline expenditure across transmission and gas distribution is covered by an uncertainty mechanism of some kind, Anderson remarked: “What I’m hearing from Ofgem is ‘put all of your plans in the fridge’.”

“Are we seriously saying as a country net zero is uncertain?”, he asked. “Are we really saying as a country we’re not too sure that we want to do all of this?

“Because I thought, I think, what I’m hearing from the government, is that they’re absolutely certain they want to do this and they’re absolutely certain that this an opportunity to create investment, jobs and an economic recovery. So why are we putting it into an uncertainty mechanism?”

Given the commitment to reach net-zero emissions by 2050, Anderson said there was little risk the proposed project would be left as stranded assets.

He continued: “What Ofgem will say is come back and apply to do those projects. That puts a massive amount of bureaucracy and delay into the system. If I need to go back to every individual project, recreate the business case, put back it through Ofgem, allow them to go through and review it and then sit down and negotiate it,  all of this stuff’s going to go back three or four years.”

“They’ve effectively lumped £10 billion of a £25 billion investment programme into an uncertainty mechanism,” he added. “This isn’t just three or four per cent of the investment.”

Anderson said plans to cut shareholders returns by almost half will also leave little incentive to go through this rigmarole: “Ofgem have in effect said to me: ‘I don’t need you to do this. I don’t know that I want you to do this. So, you’re going to have to come and convince me that this is a good thing to do…’

“And I’m going to sit and look at that and say: ‘Do I want to go through that process or will I go an invest in my transmission businesses in Spain, America, or Brazil?’

“And right now, what I’m looking at is in every one of those countries I can get a far higher rate of return than the one that’s on offer by Ofgem.”

Anderson said Ofgem’s draft determinations came as “a massive surprise” when they were published last Thursday (10 July).

He said their business plan was the product of a long and thorough consultation process: “Along with all the companies going through this, we had to create a user group who were made up of key stakeholders who could look at, review, challenge and interrogate your plan to make sure it absolutely represented good value for money; that your plan delivered what stakeholders and the communities wanted in terms of where your transmission system was and that your plan was robust.

“We decided to pick a really robust chair for the group so we picked Charles Hendry, the ex-energy minister. We deliberately wanted to pick somebody who knew what they were talking about and would challenge it, and Charles chaired that group all the way through the process.”

“We also had to engage with Ofgem’s independent challenge group and all the way through that process all of the reports back from our user group and the report back from the independent Ofgem challenge group said our plan was good.”

Indeed, in its report to the regulator, the RIIO2 challenge group described the business plan of Scottish Power’s transmission arm as one of the best two it examined alongside that of Northern Gas Networks.

The report frequently praised the plan or cited it is an example to follow, whilst offering relatively little in the way of criticism. Despite raising concerns over a proposed increase in non-load-related expenditure, the report said Scottish Power’s costs were generally “well justified”.

Anderson said: “We’re sitting and asking ourselves how could we have ended up here where I’m being told by a government spend, invest, go faster, do more, create jobs, and I end up with a regulatory process that says slow down, cut, pin it back, don’t do it all; and it’s like the two processes are separately and independently of each other.”

He continued: “I know we have an independent regulator and we are massive, massive supporter of independent regulation – it’s an important part of what goes on in the UK – but the regulator has to be independent within the correct framework and the correct remit, and there’s a big disconnect there between what the government are trying to do economically around the green recovery and net zero, and what the regulator is trying to do in terms of business plans and investment plans.”

With the start of the price controls now only nine months away, Anderson said they will now struggle to put their plan into action: “I need to start looking now at what contracts am I going to do; what contract frameworks; what suppliers are we going to use; how many people do I need to employ to deliver it; what apprenticeships positions am I going to create. I need to have all of that in train and ready to go by the end of the year.

“The problem I’ve got right now is the only bit I know I can deliver is my base business plan, and right now, I’m looking at a base business plan that has been cut by 30 per cent.

“For the previous eight years, I’ve been investing on average £250 million a year in the transmission system. Ofgem are now telling me, I only want you to invest £190 million in the system.

“I can’t build my business, I can’t create the jobs, the contracts, the supply chain, and the economic benefit of what’s sitting in uncertainty mechanisms. I can only build a business around what’s in the base case because that’s the only stuff I know I’m allowed to do.”