Brearley: We have to adapt as ambitions change

Ofgem’s role in helping the UK reach its 2050 net-zero goal has been central to Jonathan Brearley’s strategy as chief executive since day one.

His tenure began with the launch of an action plan “to help make low-cost decarbonisation a reality”.

However, in the 11 months that followed he has been dogged by the criticism that this is more rhetoric than reality.

Following the publication of the draft determinations for the RIIO2 price controls for gas and transmission networks, as well as the electricity system operator, Brearley was accused of having “flunked” his first test as chief executive and being out of step with the government’s zeal to build back better.

The squeeze on returns, the disallowance of vast chunks of proposed expenditure and the preference for uncertainty mechanisms over anticipatory investment were all cited as examples of Ofgem failing to deliver on warm words about climate change.

The second half of the year has been dogged by calls for the government to step in and clarify Ofgem’s duties with regard to net zero and how these co-exist with its principal objective – to protect current and future customers.

Remember whose money it is

Utility Week spoke to Brearley after publication of its final determinations, in which that squeeze on returns was slightly relaxed and much of the funding withheld in the summer approved, on the back of more than 20,000 pages of supplementary evidence. There was also further evidence as to how the net-zero reopeners – expected to account for £10 billion of investment over the five-year period – will be triggered and administered.

Company reaction has, at the time of writing, been fairly muted, although several insiders expressed the view off the record that Ofgem’s u-turns in several areas simply showed up its errors at draft determinations.

Brearley retorts: “Companies need to bear in mind they are not asking for money from Ofgem but from customers.

“You need to stand behind your plan and ask yourself would I be happy to sign this off on behalf of customers. As we made clear in the summer, we simply didn’t feel that was the case.

“What we did see, which was fantastic, is a stepping up of all companies. Although that’s a huge volume for us to go through, it left us in a much stronger position at final determination to be able to genuinely say plans were in the interests of customers.”

The big question remains whether Ofgem has done enough to head off appeals to the Competition & Markets Authority (CMA). While the changes to the cost of capital at final determination have been welcomed, there still remains a wide gap between what regulator and regulated think is a reasonable rate of return. This was always going to be the case but with the CMA having surprised everyone by moving significantly on cost of capital in the water sector appeals, energy networks may feel more emboldened. There has been speculation there could even be a joint appeal in which several, or all, of the companies challenge a particular element of the cost of capital.

Brearley insists this is not keeping him awake at night.

“The very clear instruction to our teams was to get us to where they think the right place is and put everything else out of their mind.”

He adds: “We talked openly with the CEOs of the network companies around what we would do if we do end up at the CMA. Ofgem’s intention is to work collaboratively and constructively with them to keep getting that investment in place and to treat this exactly as it is – a referral to the umpire – and continue to focus on delivering net zero. There is simply too much to be lost if we end up with this getting in the way of the bigger task of supporting that transition.”

Net zero duty

Our conversation took place as Ofgem launched its forward work programme, hastily updated to reflect the publication of the Energy White Paper the day before. This confirmed that the government will consult on a strategy and policy statement for Ofgem in 2021.

Brearley has been very open about the need for Ofgem to change to adapt to the energy transition and says he welcomes the discussion, adding: “We have been very clear that we see net zero as fundamental to our goals anyway but it all helps us calibrate that ambition in terms of the next level of detail.”

Changes in the way it operates are already becoming evident, Brearley insists, pointing to the approach to net-zero reopeners in RIIO2, which will require the regulator to be more agile in the face of a fluctuating case load.

Asked how he will overcome this challenge, while preparing the ED2 price review for electricity distribution and potentially embroiled in CMA appeals, Brearley says: “It’s a good test of the regulator we need to be. Proportionality is key. Where we have something that is a large, complicated infrastructure project, it needs to be treated differently to things that are smaller and can be approved or even based on a volume over time.

“Equally we have to find quicker and more effective ways of doing that and that does mean making sure we have perhaps more resource in this area than we had in the past.

“The regulator can only move as fast as the business case in front of them. We need those to be robust and full of information. If not, that will inevitably build in delay.”

Our conversation took place before Ofgem published its sector-specific methodology for ED2, in which it sets out a proposal to use automatic re-openers.

Brearley says: “The days of a price control closing down with the funding formula are gone. Now we’re in a world where it is going to have to adapt as ambitions change over time.

“I have a suspicion that some parts of the sector will move even faster than we currently think and the price control needs to be ready for that.”

Future priorities

The need to “promote energy system governance arrangements that are fit for the future, including Ofgem’s role” is one of five strategic strands set out in Ofgem’s forward work programme.

Others include the enabling of investment in low-carbon infrastructure and the need to reach full-chain flexibility.

On this point, Brearley highlights the importance of the “industry plumbing”, such as moving to half-hourly settlements and the effectiveness of the smart meter rollout as well as the significant challenge of smart integration of electric vehicle charging into energy networks.

He also emphasises the need to digitalise the networks, with a wider focus on data and digitalisation as another key pillar of the forward work programme. Brearley says he is pleased to see the white paper explicitly reference the Energy Data Taskforce’s report from 2019 and commit to the UK’s first energy data strategy in Spring 2021.

Where do we go after the price cap?

The final focus for the forward work programme is the future of the retail market and how this can drive the technological and behavioural changes needed to hit net zero.

Brearley stresses that all of these areas of work are aimed at allowing consumers to play their part in that journey, adding it is “pretty clear that market is going to drive a lot of value for customers all round but it’s likely to be more complex”.

It’s difficult to talk about the future of the retail market without addressing the future of the price cap. In the white paper, the government noted the effectiveness of the cap in limiting the extent of the so-called loyalty penalty but added: “We believe competition is the most effective and sustainable way to keep prices low for all consumers over the long term.”

The white paper goes on to reference Ofgem’s trials on opt-in switching as potentially playing a role in a post-price cap energy ecosystem.

Brearley also professes his belief in competition but says the tests of a healthy retail market have yet to be hit. He says the ultimate goal is to drive that dynamic of switching and to ensure consumers have choice.

But doesn’t a move to automatic switching actually discourage consumers from being active participants in the market?

Brearley doesn’t think so. “One of the huge opportunities we are going to get from the combination of the use of data from new digital products and of the different technologies that are emerging is that we’re not going to ask customers personally to be engaged but through intermediaries, organisations or other technology searching the best kind of deals or them.

“You can imagine saying to customers, we’re going to get you the optimal deal based on you managing your behaviour – so telling us what you want and when you want it. That feels like quite a compelling offer.”

Ultimately, Brearley believes the pursuit of net zero goes in hand-in-hand with delivering change that is in the best interests of customers.

“We are at another inflection point in this transition. Some of the big decisions we’ve got on regulatory design are really between pathways that will be quite costly and quite difficult for consumers and others that will manage those costs and create really big opportunities for customers as a result.

“When you add together 10-point plan, white paper and our forward work programme it really is about creating that latter world – that world where customers are getting the best out of that market.”