Interview: ‘Networks hold key to a smart system future’

"I genuinely believe that working for a distributor is where the action is" says Northern Powergrid’s policy and markets director Patrick Erwin. He shares his vision for its key role in the smarter system of the future, with Utility Week magazine editor Suzanne Heneghan

Patrick Erwin has a small office for a “big picture” man – or maybe it just feels that way. While every one of his responses is painstakingly considered, the policy and markets director at Northern Powergrid spontaneously makes a powerful argument that networks are key to the smarter system of the future.

It’s a vision that looks all the more compelling once you check out his CV. Erwin has strong commercial nous, honed over several years of working across a broad range of industry roles.

He has also spearheaded some of the most important initiatives shaping the energy sector today. It was Erwin who set up the Infrastructure Planning Commission, and who helped drive initial work for the Climate Change Act. He also led on early plans for two energy bills, and has spent time at the Department for Environment, Food and Rural Affairs and the then-Department of Energy and ­Climate Change.

His ideas for Northern Powergrid are no less ambitious, as the network steps up to be a vital player in the country’s transition to a flexible energy system.

We meet in that small office on a quiet floor of a block tucked away behind Covent Garden. The London venue comes courtesy of Cal Energy – a non-regulated arm of the holding group’s stable of businesses – and it’s where Erwin proceeds to map out for me Northern Powergrid’s overarching plans.

This is already a landmark time for the Newcastle-based electricity distribution company, which holds two of the country’s 14 licences – covering the North East and Yorkshire.

It is aiming to become the region’s distribution systems operator (DSO), the future facilitator of the transforming energy market, also responsible for the integrity of the system. That message is echoed in Northern Powergrid’s Next Steps and Emerging Thinking consultation paper, in which Erwin offers a scene-setting vision of the future.

“Imagine a world where you can buy electricity generated by your neighbour’s solar panels more cheaply than from your energy company; where you get a discount on power bills for letting your electric car back up the electricity system when it’s not in use; where batteries kick in automatically to keep critical infrastructure and your home running in a power cut. This is the world of the smart grid.”

Thanks to Erwin’s academic achievements being as eclectic as his career history, he does detail as well as concept. He has a forensic understanding of physics and – rather impressively thanks to a doctorate from Oxford, of volcanology – equipping him well for envisaging how the energy system’s own seismic shift will happen.

As he reveals some of these high-level thoughts, occasionally crossing the room to draw a colourful diagram on the whiteboard, it’s impossible not to buy into the exciting prospects he sees ahead for a sector whose ­strategic creativity has until now gone largely unnoticed by the public.

“That’s one of the reasons I’m here,” he explains. “I’ve worked for Transport for London, for government and I’ve been an academic. Yet this is the most strategic organisation I have ever worked for.”

Strategic philosophy

A key factor behind that strategic focus is that ­Northern Powergrid is part of Berkshire Hathaway Inc, whose chief executive is the famous US investment guru Warren ­Buffett, the ultimate long-term investor. With no dividend requirement, the company’s philosophy is about capital appreciation and long-term value.

“We focus on customer value because we’re more worried about where we’ll be in 20 years’ time – in fact, in 100 years’ time. It inspires a stewardship approach and it infects every way you think about things.”

Regulatory integrity lies at the “absolute heart” of the corporate mission. “We believe in the regulatory contract. We believe Ofgem is acting, if you like, as a pseudo customer. And we want it to do a really good job because we think that drives the right behaviours for us.”

In many ways, Northern Powergrid’s heterogenous patch is the perfect regulatory testing ground for consumer service and resilience, taking in the affluent Harrogate and Richmond, along with areas of severe deprivation. About 60 per cent of its customers are eligible for the priority services register. It covers three of the UK’s largest cities, as well as some of the most rural parts of the country.

Erwin is excited about meeting the long-term challenges and opportunities this brings, viewing now as the dawn of a whole new era for networks. “If you go back ten years, people talked about ‘dinosaur DNOS’ running passive networks the last mile to people’s homes.

“That world has completely changed with the shift to distributed generation and the combination of cheaper control and cheaper computing.

“I now genuinely believe that working for a distributor is where the action is.”

Building resilience

As an evolving energy climate turns up the spotlight on networks, Erwin is happy to talk about Northern Powergrid’s track record on reliability as delivering “at something like 99.99”.

That said, a customer can have on average between 30 and 40 minutes without supply per year, and this is something the company is working to reduce. The ­continual challenge is striking “a balance between ­providing a perfect service and something that is ­infinitely expensive”, says Erwin.

Yet Northern Powergrid’s de-industrialised legacy infrastructure offers a distinct advantage in the new network world ahead. It may be old, but it was a network built for steel works and coal mines. It is only really just starting to see significant constraint issues, unlike some networks operating further south.

Investing in innovation

If resilience is at the heart of the company’s thinking, innovation looks to be at the forefront.

The company boasts a host of initiatives, such as early flexibility schemes ACE (Activating Customer Engagement) and its customer-led network revolution, both now informing current strategy. It has also teamed up with Nissan as part of a consortium trialling a major vehicle-to-grid [V2G] project.

But without a crystal ball, can Northern Powergrid truly plan for the uncertain technological times ahead? “We don’t know what the future is, and policy is changing all the time. So we make ‘least regret’ investments, because option value is really important.

“Yet we also can’t imagine a world where having more automation and more switching on the network isn’t a good thing.”

Key, he says, will be ensuring a strong focus on the compelling value propositions for customers. In terms of electric vehicles [EVs], for instance, he wants as many charging points as possible to optimise the system, feed as much energy as possible into a smarter grid and allow people to easily and automatically make use of cheap available energy via their smartphones. “Let’s put in place the back-office infrastructure that lets computers optimise a life for us.”

But what about managing these demands? “In a dumb world, you’d plug your car in with everyone else between 5 and 7pm. In a smart world, you’d say I’m leaving at 7am for work and will need 30 per cent of my battery, and this gets done at the best time for you.

“We see ourselves as facilitators of this future system, as providers of the physical infrastructure. And, while it’s difficult to look ahead, we want to be that for our customers of the future too.”

In the last price control round Northern Powergrid received an explicit allowance for deploying smart grid technology and is investing in a bigger, thicker data hub to talk to substations more quickly and provide more pervasive control and measurement. Having “seen the value” with lots of switching capacity, it is also now putting more in place.

Because completely rethinking the way networks are run has become imperative, says Erwin. “We used to run this very reliable, quite boring, passive network, to serve demand, plus headroom – the network is running at a fraction of its capacity most of the time because it’s engineered that way.

“DSO recognises that paradigm, but that we can now use that capacity in a different way. We can switch a network remotely but also, with smart meters and home services, EVs and smart charging, we can control supply and demand. We can run an ‘active system’ with much less headroom and release capacity when we are not using it, without having to build more network.

“We want to be the platform that lets people get the benefits of smart flexibility, we think we have to be, because customers connect to us, they don’t connect to National Grid.”

And Northern Powergrid, which employs around 2,700 people and is engineer led, is prepared, he tells me. “That’s not complacency. What it means is that whereas the wave is crashing over some of the other DNOs as we speak, it’s not quite crashing over us yet.

“That’s an artefact of history and geography as well as everything else. So, we are not dealing with a crisis, but we can see it’s coming.”

Nevertheless, you’re really going to have to get this one right, aren’t you, I ask him.

“Yes, getting it right is critical. But equally we don’t have a choice. Digitalisation and home automation are happening. The question is, are we going to have ­managed change or disruptive change? Because if it is disruptive, that’s more power cuts.”

Meeting the policy challenge together

The question for government and Ofgem, he believes, is how to get ahead of this change, to put frameworks in place – with electrification of transport and heat set to be key drivers of network growth.

He says that as a society we have chosen to subsidise renewables though schemes such as the Renewables Obligation, but paying via electricity bills rather than the tax system has made electricity artificially expensive compared with gas. “In a world where you want to decarbonise, does that still make sense?” asks Erwin.

Keeping consumer bills at sustainable levels must also remain a priority. But for networks to maintain business as usual satisfaction levels – currently around 88 per cent for the sector as a whole – while developing systems for the future, it will require some clear government thinking.

“We can’t go backwards. So, it’s important, particularly during this transition period, that we’re clear about roles and responsibilities, including precisely what we mean by ‘DSO’.

“We want to be this neutral market facilitator, but we want the political cover to have a clear mandate. Because there are going to be some trade-offs, we’re going to do some things differently, and there are going to be some winners and losers.”

And more detail about the system’s overall direction of travel is overdue. “A lot of incremental reform is going on. What we can’t really see is a blueprint of the whole thing.”

Questions remain about which future costs government would want to socialise, universal service obligations it wants delivered, and how it wants to pay for them. It’s easy to see how the most engaged in society will capitalise on trading flexibility, so there needs to be more thought about how we protect the vulnerable.

What is being “eroded at the edges”, he says, are “these things which are, yes, natural monopolies, but they are also spaces in the system where everyone currently needs to go through. They provide a bit of simplification, they bind the complexity of it. I think governments risking losing that.

“So, before they get into the micro bits of policy, they should think about the big picture – about industry structure.”

And that’s clearly a big picture that’s still emerging.

Erwin on nationalisation

On the potential threat of nationalisation of the networks under a Labour government, Erwin responds with a thorough appraisal of the benefits of the status quo: “DNOs are perfect for the DSO role; they’ve got people on the ground; they are regulated; good at complying. ­Critically, their assets are buried in the ground or are up in the air, so they have assets to lose; they are not heavily geared and have a big asset base which is security.

“So, if you want to allocate risk, allocate risk to us. We are a good option to be the stewards of the local system because we are good at supplying local services, good at complying with rules, and we have deep pockets – so if we get it wrong you can sue us. And we pay rather than go bust.

“Let’s not replicate the supplier model in distribution and transmission. Let’s try and recognise what we’ve got. As long as you give us a fair return, you’ve got something that protects consumers and government if something goes wrong. And you have got someone who is going to do this well. Because if they don’t, they’re in trouble.”

… and on RIIO2

His thoughts on the next price controls are equally well argued, although Erwin says he doesn’t envy the regulator.

“However, we’ve been pretty clear we think the proposals in RIIO2 have been a bit of an overreaction, and we are working along with the rest of industry and the regulator to try to get them back into a sensible place.

“We think Ofgem has to get the cost of equity right in isolation. If it doesn’t, we risk undermining and running down assets and imposing extra costs on consumers – that’s the wrong outcome.

“We do recognise that in the other sectors – not in electricity and distribution, but in transmission and gas distribution – the returns are perceived to have got out of control. And we think therefore that some kind of ‘safety-valve’, as envisaged in the adjusted safety mechanisms, is probably necessary given the current environment.

“But having done that, we think it’s really important you maintain the incentive properties of the rest of the price control round, both to put forward ambitious plans and then seek to outperform those plans, because that’s what delivers long-term value to customers.”

That model has really delivered for consumers, he says, adding that comparing UK network costs with the rest of Europe reveals we are doing very well, particularly on the cost of distribution networks, which are very competitive with other countries.

“We are seeing more and more of the US regulators moving incrementally towards something that looks a bit more like a UK price control round. And we are disappointed that it looks like Ofgem is moving away from some of those principles of good regulation.

“Because, although it might suppress rate of return in the short-term, we are worried it will disincentivise networks from making savings and just push up costs in the long term.

“And that’s really bad for our customers, and ultimately for us.”

Developing future energy systems is a key theme of Utility Week Energy Summit 2019 on 13 June in London. Expert speakers include Ofgem chairman Martin Cave; Energy UK’s Lawrence Slade; Michael Lewis of EON UK; Keith Anderson of Scottish Power; Joanna Whittington of BEIS; and Simone Rossi of EDF UK. More details here