It’s all downside and very little upside – Nicola Shaw blasts Ofgem’s sums

The brooding row between Ofgem and networks over the draft price determinations would appear to strike at the very heart of energy companies’ ambitions to Build Back Better – no more so than at National Grid as executive director Nicola Shaw tells Denise Chevin

The impact of Covid has sparked many initiatives across the utilities sector but few as cute as Griddles, an angelic-looking teddy bear who’s “looking after the staff” at National Grid.

Nicola Shaw, executive director of National Grid, fills us in: “We had people away from their homes for weeks, living and working on site at our control rooms. Now they can tell their families when they’re on video calls at night – “I’m OK, I’ve got Griddles to look after me.”

The little bear makes a brief appearance in our interview on the broad theme of Building Back Better when Shaw holds him up to her screen. She’s currently working from home – her last day before a staycation in Yorkshire, the planned trip to Santa Fe falling victim to Covid.

“He’s now got all sorts of jobs. During lockdown he delivered laptops to schools and to some hospitals. He’s also got a new book out, where he becomes an apprentice working for National Grid!”

What his next job might be is anyone’s guess but unless he can morph into the Griddles the Grizzly  it will certainly take more than his cuddly charm to disarm his employer’s current bête noir, Ofgem, which if National Grid is to be believed is on course to undermine any chance of Building Back Better.

When the interview took place, Shaw and her colleagues were gearing up to publish the evidence it was sending to Ofgem to persuade the regulator to rethink its draft T2 determination. The FTSE 100 utility group is at odds with Ofgem over its draft price settlement that would halve their returns from 2021 to just under 4 per cent and would disallow £5 billion of pounds of proposed investments.

In fact, it is going full out, all-guns blazing, to win these skirmishes. In the past few days Shaw’s boss, CEO John Pettigrew, has been doing the media rounds explaining Ofgem’s plans would increase risks to security of supply, destroy jobs and hamper efforts to tackle climate change. Pettigrew told The Times that National Grid was prepared to file an appeal against the plans to the Competition and Markets Authority for the first time if Ofgem did not relent by a final settlement in December.

And in her calm and assured manner, Shaw is now disseminating the same message.

“Unless Ofgem moves, we’ve got some really quite significant issues. I’m worried about the economic recovery, because I think it will slow down our ability to invest, to create jobs, to develop the supply chain and so on. That’s a worry.

“Secondly, I think it will actually slow things down for net zero”.  National Grid has proposed upfront spending of about £10 billion on its UK networks over the next five years, but this had been roughly halved under Ofgem’s draft plan.

She runs through some critical projects under threat – a new offshore ring main off the coast of East Anglia to facilitate connections for new wind farms and exploring hydrogen technology are two instances. “That’s not a good idea if we want to progress there.”

Thirdly, she says, “they haven’t left enough money to make sure our electricity network will be reliable. Ofgem has allowed us less money to replace the assets than we need to keep them at the same quality that they’re at now. It would take us 100 years to replace the assets given the funding that they’re making available.

“They’ve taken away all incentives, it’s all downside and very little upside. And that just makes us more risk averse.”

And she says Ofgem has added “lots of bureaucratic hurdles,” alluding to the emphasis on the uncertainty measures being introduced. “So instead of funding stuff up front, they’ve said ‘you need to come and ask anytime you need to spend anything, and we’ll probably not tell you then, we’ll probably tell you after you’ve spent it whether or not we think you should have done it’. And that means a huge amount of risk for us. Our investors won’t like it, it will make it much more difficult to finance the range of developments that need to be in place.”

Ofgem had been warning network operators to expect a tougher price review round than they were subject to for RIIO1. But the difference between the National Grid’s ask and Ofgem’s offer is currently a chasm.

“We were surprised about quite a lot of it, and interestingly, so was everybody else,” says Shaw.

“Ofgem just read it wrong. They thought they had told us, but nobody else thought they had. Jonathan [Brearley] has been very clear with his team that we need to be in a world where that isn’t likely to happen in December,” explains Shaw referring to the deadline for final determinations.

As a former regulator herself, Shaw certainly knows how these exercises play out and is well versed in negotiation manoeuvres. She joined National Grid in 2016, having chalked up an illustrious career in transport receiving a CBE for a services to the sector in 2016. Her first transport job in 1990 was with Transport for London, straight after graduating in history and economics at Oxford.

Career progression included stints in Dubai, Singapore and Malaysia on transport projects, before returning to the UK in 1999, where she was deputy chief economist and director of access, competition and licensing at the Office of the Rail Regulator. After that she was appointed managing director of operations at the Strategic Rail Authority, responsible for the contractual negotiations between the government and private sector train operators, before becoming chief executive of High Speed 1 in 2011.

Aligning profits to risk

Ofgem has been criticised for being too generous in RIIO1, resulting in some hefty profits for the networks. In June National Grid reported an underlying operating profit of £3.5 billion across its UK and US operations. As a monopoly business does, she have sympathy for Ofgem’s position?

“It’s the scale of the business that people forget. Just last year, we invested £5.4 billion, both in the UK and the US. We’re doing that year on year. To make those kinds of investments, you have to make profit to be able to pay the debt, and to be able to keep your equity investors happy.

“And that’s one of the things that I’ve been challenging Ofgem on. Not that I disagree with them that the cost of equity has changed, but that doesn’t mean that everything has changed.”

Returning to reliance on the uncertainty mechanism funding, Shaw is concerned that it places too much risk on the networks, and makes planning difficult. “It all happens very late on. And our cash flow is very odd in relation to that, so you don’t get the money until after you’ve spent it. And even then, you get this efficiency review, so you might not get the money at all.

“So when I said that would make us risk averse, it also gives us a problem, because we’re not sure we’ll be financeable, and we won’t be able to get the money in to cover us through that cash flow.

“One of the points that we’ll be making in our response to Ofgem is you have to change your models to reflect the way the cash will actually flow. Because otherwise, it’s hypothetical to the point of being unrealistic.”

Pressure is also likely to mount from extra costs coming from both recession and Brexit, which Shaw believes could also hike prices and present other risks. In its results in June National Grid said it expected the Covid outbreak to dent next year’s profits by £400 million, although most of that stems from bad debt in the US. The impact in the UK would be more like tens of millions.

Utilities had a good lockdown – and won plaudits for rising to the challenge of keeping vital services going unaffected under such difficult circumstances. Shaw points to the fact that the team managed to keep the construction programme going, aided by the key worker status the government bestowed on them. They were even able to get ahead on some maintenance and capital works because of the extra planning that was done to shore up the networks against risks from the pandemic.

Like many utility leaders Shaw says that the pandemic has reinforced the need to get on quickly with transition to net zero – and is amongst those who would like to see the banning on the sale of combustion engine vehicles brought forward.

She gives a shout out to the Treasury for the £500 million it’s making available to provide fast-charging points within 30 miles of everyone’s home to help allay fears on range anxiety. “I’m hoping that will be something we can get on with next year.”

Another major project, funding permitting, is the offshore ring main off the coast in East Anglia, which will make it easier to connect windfarms into the network, rather than have the constant disruption to the local area of having to connect them one by one. “The goal for government is 30/40 gigawatts of wind power by 2030, and we have currently installed just over 10 gigawatts. There’s a big gap between those two numbers,” she says emphasising the importance of the scheme and is pleased that BEIS has now set up a new steering committee to examine, east coast wind issues.

White paper wish list

Not all of BEIS’s policies currently meet with her approval. Asked what her wish list would be for the energy white paper, if and when it finally arrives, Shaw signals two big asks.

One is clarification on plans for proposed competition in onshore transmission, which at the moment Shaw describes as “a halfway house that is no good for anyone.”

“For the last 10 years, Ofgem has said we might be going to have competition. So it’s developed a tool for doing that late on, so we do all the development work, we get to the point of consent, and then somebody else builds it.

“It’s now consulting with the ESO on how would you do that earlier, how would you give somebody else the responsibility of coming up with the ideas, getting development consent, and building, for onshore transmission.

“And then we had two years, for our Hinkley connection. They were proposing a ‘competition proxy model’. So that was ‘we haven’t got the competition rights through parliament yet, so we will put in this other model that says we can simulate competition, we can pretend what it will cost to do this, and tell the network what they should do it at’.

“That is not the right way to handle us, because we don’t have certainty. And currently, there are tens of projects that are sitting stacked up, that we are to continue to develop, until Ofgem says ‘OK, that will go to competition’, or not.

“And we’re not being paid to develop those projects under the draft determination. So for sure, I’d like to be paid to develop those projects.”

Shaw points to the new western link from Scotland to England, and on the East-Coast. “There are two projects that we’ve been developing, that need to be delivered this decade, but we don’t know if we’re going to build or not.

“So in the white paper, I want clarity – it is competition, or is it not?”

Another major source of frustration is the planning regime which stacks the risks unfairly against National Grid – unnecessarily in Shaw’s view.

“Currently we have double jeopardy. Where we are developing a project, we have to get planning permission to do it. And the way you do that is through this development consent order. To get a development consent order, the secretary of state has to say that the project is of national significance.

“Ofgem is saying that once we’ve done that, it will then decide whether or not the project is needed – there’s no ‘needs case’ until Ofgem decides. But you have to demonstrate that it’s needed, in order to get permission. Which is daft.

“Getting planning permission for anything costs millions. Hinkley was a good example. We got planning permission by including the T pylon across the Somerset Levels. Our QC told us you won’t get it without that, you’ve got to have some undergrounding, some overhead lining, and some pylon, to get it all the way through, because of what stakeholders in those communities are saying.

“We did it, we got the planning permission. Ofgem then says ‘we’re not sure you really needed the T pylons, and they’re more expensive, so we might not pay for it’.

“That kind of jeopardy for shareholders is just too much. So, I would also like, either in the energy white paper or the planning white paper that government is developing for the end of the year, it to be really clear that Ofgem has to participate in the development consent order.

“At the moment, they are consulted, they just don’t respond.”

ESO sell off

But what about the forced sale of the ESO, rumoured to be in the White Paper? Would National Grid challenge that?

Shaw says that government is coming at it the wrong way

“I’d go back a step and say what do we have to do for the purposes of achieving net zero effectively. Starting with ‘we should have an independent system operator’ is the wrong way round. We need to look at what it is we need to achieve, and then how do we want to set ourselves up to do it.

“And then what do you need to be able to do at BEIS level, what needs more of a day to day more detailed policy development, what needs regulation and oversight, and what needs operational delivery?

Shaw says that it’s also beneficial to “have someone incentivised to keep balancing costs down. And having that bit, close to the cutting edge of day to day life, because it’s minute by minute, is really important”.

She adds: “And I don’t think it’s a good idea to just move that into the public sector or whatever, because our system is more complex, with more players, and with a more ambitious target for change, than almost any other system in the world. That’s very much the British way, we require a lot of our infrastructure.”

So, having ESO as part of the group works perfectly well?

“Yes. I think they are very transparent about what they do, and we have good separation arrangements in place. I can see a case for more jobs to be done, as we transition. And where those jobs get done is worthy of consideration, as the government is doing.”

A single voice for zero transition

Shaw is in the camp which thinks it would help the transition to net zero having a single body overseeing it, pointing to the myriad of bodies you need to for EVs infrastructure alone – BEIS, DoT, Treasury, and Office of Low Emission Vehicles, and more recently Ofgem.

“So, who is actually making the policy decisions, how are they being made, being implemented, how quickly?

“If we had an organisation whose job it was to think about, across all systems, heating, electricity generation, and transport, to deliver net zero, to think about all the issues and make sure they get implemented in the right place, I can see there would be a benefit.”

One can see a new role for our National Grid mascot…. Griddles moves to Whitehall.

Nicola Shaw on….

Nuclear

You need a diversity of supply, and depending on only one very big machine at Hinkley would be lacking in sufficient diversity. I want a bit more of it I think, I think it’s better for the economy to be safe.

What keeps her up at the moment?

Determinations! They need to move a long way to get to something that will work for the nation, and that’s what I’m looking for.

Rumours of National Grid’s interest in WPD – which has been put up for sale by its owners

For starters, I’ve got to get this draft determination sorted out. I couldn’t persuade anyone to buy anything in this world. So come and ask me again at Christmas!

Similarities between rail and energy?

I think there are lots of very similar things. People’s commitment is huge in both industries, commitment to others, and the support they give to the nation. The whole regulation process is really similar, and very aligned. And both feel that community connection, a lot more than some businesses do.

Nicola Shaw is s speaking at Utility Week’s Build Back Better Forum on October 20-21