Nolan: Ofgem needs government guidance ahead of ED2

Ofgem’s former chief executive has said the regulator needs statutory guidance on how its core objectives should reflect the net-zero journey before it assesses distribution networks’ business plans for the next five years.

Dermot Nolan stressed that Ofgem needed clarity on whether the need for anticipatory investment in decarbonisation projects should override the principle of keeping costs down for billpayers.

He pointed to charging guidance issued to Ofwat in 2016, which he said had “given them more clarity around the investments they will and won’t permit”.

“That didn’t happen with Ofgem, to my regret”, he told Utility Week. “There was a draft of it six years ago but it was withdrawn and didn’t resurface – certainly not during my time at Ofgem.”

A direction from government could help to avoid the kind of conflict that was sparked by Ofgem’s draft determinations in the RIIO2 price control for gas and transmission companies, Nolan said. The suggestion that Ofgem’s tough stance on funding runs counter to the government’s net-zero pledge has been a common theme in network reactions to the draft determinations.

However, Nolan, who recently joined consultancy Fingleton, said it appeared too late for government guidance to impact the GD2 or T2 price controls.

He believes distribution companies frontline position in the decarbonisation journey means their business plans may need a different approach.

“The ED2 decisions are more important”, Nolan said. “The decisions in gas and transmission are not as urgent and not of the magnitude as in distribution.

“I would expect the distribution networks to come along with some very, very ambitious plans for ED2.

“My personal view is that some sort of legislative clarity on Ofgem’s duties would be helpful. It wouldn’t be a panacea but it might give some sense of clarity for Ofgem over the debate around the decarbonisation agenda. Is decarbonisation so important that cost doesn’t matter or is cost still the primary decision?”

He also pointed to the need for greater clarity from government on how net zero would be paid for and to what extent this would be layered on to bills.

Price cap

Last month, Ofgem admitted it was considering increasing the price cap on default tariffs because of a clear evidence that more customers could not afford to pay their bills.

As the architect of the cap, Nolan said he found this “painful” but accepts that his former colleagues had little choice.

He said it was vital for the regulator to clearly communicate the need for a temporary rise, stressing “the worst thing would be a lack of transparency”.

Asked whether he considered the introduction of the price cap a success, he said: “It was a tough cap and we said it would be. Nobody has really made very much money in the energy retail market in the past few years. I don’t want to unsympathetic but I think that’s ok. Amazon has made very little profit throughout its entire history despite its value, Google didn’t make profits for a long time.

“The important thing is that there has been new entry and relatively well funded new entry by firms that aren’t looking for a quick profit – they see themselves as tech companies that are there to provide a solution.”

He added: “I would accept responsibility for this but for a period Ofgem was so concerned with competition that we let a lot of firms into the market that should probably not have been let in. It has tightened up since then and the retail market was in a broadly good place before lockdown.

“I thought there was some prospect of removing the price cap in the early part of the year. The retail market had changed a lot. You had seen a lot of new entry. There was certainly the possibility of the market-wide price cap being removed and some protections for a smaller group of customers being retained.

“Because of the pandemic that is less likely. The prospect of it being removed before 2022/2023 is now lower than it was.

“If I was running an energy retail company I would approach my strategy on the basis that the price cap isn’t going to be removed until 2023.”

Dermot Nolan will be part of the panel for Utility Week’s next #AskUsAnything webinar at 11am on 16 October on the subject of Net Zero – how local and how fast. He will be joined by UK Power Networks chief executive Basil Scarsella among others. You can register for free here and pose a question to the panel here.