Price controls based on cost-cutting are ‘incompatible’ with innovation

Price controls which push utilities to focus on cost efficiencies are “completely incompatible” with innovation, according to a leading energy lawyer from Addleshaw Goddard.

Speaking as part of Utility Week’s #AskUsAnything webinar last week, Richard Goodfellow, partner and head of energy at the law firm, warned that the regulatory environment for energy network companies in RIIO2 could inhibit their ability to innovate in the interests of net zero and a green recovery from coronavirus.

He said there is an “inherent tension” between a focus on lowering the cost of capital to drive down prices and the ability of companies to be innovative.

In part, he said this is because companies are “straightjacketed by 30-year old licenses” which limit their ability to generate revenues from non-core business activities.

He suggested there has been a “lack of imagination” around reviewing how alterations to network licenses could liberate companies to capitalise on the commercial potential of their expertise, and to use additional revenues to further reduce costs to consumers.

For example, Goodfellow suggested National Grid could be allowed to seek commercial gain from the creation of its Future Energy Scenarios reports.

“They [National Grid] produce reports that Bain or McKinsey could produce,” he said. “If the Future Energy Scenarios reports were produced by one of these consultants, people would flock to it.”

Goodfellow also said that a price control which pushes companies to minimise operational costs is likely to make it challenging for networks to attract and retain the right talent to drive innovation forwards.

“Given this cost of capital, how easy or difficult will network companies find it to attract and retain the best, agile brains to drive innovation? The more emphasis there is on cutting costs, the more emphasis there must be in your staff base on being able to deliver that,” he observed.

“It’s very difficult in the human sense for an individual to be very good at driving efficiency, and for that individual to be very good at driving innovation. It strikes me as being almost completely incompatible.”

Goodfellow was keen to emphasise that he was not seeking to criticise the regulator. Having previously worked as a senior lawyer for the Northern Irish utilities regulator he said he has a “great deal of sympathy” for the balance Ofgem is trying to achieve in its approach.

Instead, he said it is “for policy makers to reframe the debate” around the role of regulation and utilities companies in driving a green recovery. “BEIS could do a lot better,” he stated.

An on-demand recording of the webinar is available to listen to here.

Utility Week’s next #AskUsAnything webinar will take place at 11am on 7 August and will look at issues relating to work and workforce in the utilities sector after coronavirus.