Chief executive’s view: moving from passive to active

"Remaining the top-performing network company is getting ever harder because the incentive mechanism encourages us all to improve"

The electricity distribution industry is facing the biggest change that I can remember as it moves from a passive to an active system.

The terminology of change – distribution network operator to distribution system operator – doesn’t quite sum up the way I, as an engineer, feel about the challenges we must overcome. They’re fascinating, stimulating and invigorating – and who better than the distribution network companies to manage them through?

When you consider our industry’s performance since privatisation it would be, in my view, a huge risk to even contemplate considering anyone else’s involvement.

Look at our track record: we’ve been responsible for exceptional levels of service, reliability and network investment. Across my own company, for instance, investment has grown substantially – over £1 billion a year, while our operating costs have fallen by 75 per cent in real terms.

Customers are getting great value for money too – especially when you consider that the total distribution element of an average bill is little more than the extra charges recently announced by some of the major supply companies.

A WPD customer pays an average of £8.50 a month, or 27 pence per day, which is cheaper than a typical monthly mobile phone bill. In return they receive safe, reliable energy – on average, a customer is likely to face one power cut every two years for just 29 minutes.

We’re delivering on a range of innovation to make our networks work smarter as well as specialist services designed to help society’s fuel poor and vulnerable. In 2017/18 my staff alone referred 15,229 fuel-poor customers to schemes that delivered more than £5.4 million in savings.

To my mind such high level performance supports Ofgem’s RIIO regulatory regime – and believe me, remaining the top-performing network company is getting ever harder because the incentive mechanism encourages us all to improve.

I welcome dialogue about our role as network operators; it is important, but it has to be a debate based on fact – it’s one of the reasons why we were the first network company to voluntarily publish RIIO Accounts for 2016-17.

Study the detail of that report and it is clear, for instance, that we do not achieve the 32 per cent profit margins some critics assert is the industry norm. Our equity investors earned a 6.5 per cent return in 2016/17, which is in line with Ofgem’s expectations.

Frustratingly, assumptions about excess profit fail to take into account our significant levels of network reinvestment. Additionally, network companies’ ongoing contribution to these costs is also frequently left out of profit calculations, leading to a substantial overestimation of returns.

Debate is also important when we consider the extra infrastructure that will be needed to support the nation’s decarbonisation agenda.

Which leads me back to the subject of change – and how adapting to change is part of our industry’s DNA. We are used to adopting technological innovation to create more cost effective network flexibility and instilling new processes quickly so that they become the business norm.

At WPD we’ve proved that we can turn a trial into a business-as-usual activity within a year with our Flexible Power initiative, encouraging half-hourly metered businesses to reduce their electrical consumption or increase their on-site generation. In this way we can manage network constraint, avoiding costly reinforcement as the standard response.

We’re also assessing the impact of the electric vehicles (EVs) that will be hitting our roads in the next few years – each likely to be consuming as much power annually as the average domestic property.

But we’re confident that we can cope with this challenge. Our Electric Nation initiative, Europe’s largest EV trial, is providing the tools to help us understand how effective demand management using smart chargers is an alternative to reinforcement.

It is also enabling our industry to understand customers’ vehicle charging behaviour, identifying network demand and providing the kind of economic answers that will help shape tomorrow’s world.