Replacing Dermot Nolan

The process is underway to find a new CEO of Ofgem who will "transform" the organisation.  Denise Chevin looks at who could fit the bill, the challenges they’ll face and the legacy left by the present incumbent.

The summer’s search is building to a crescendo. Applications have come in, the cut has been made, first assessments done, and interviews for the shortlisted candidates are set to begin on 5 September. The stage is set for the appointment of the energy sector’s lead player – the new chief executive of Ofgem.

Ever since Dermot Nolan, Ofgem’s current chief, announced he would be standing down in February 2020 after six years in the job, speculation has mounted as to who might step into his shoes. Or to put it another way, be prepared to take on what has become one of the most thankless roles in the sector. Will it be one of his three lieutenants, Sarah Cox, Mary Starks or Jonathan Brearley? Perhaps someone from an energy firm – poacher turned gamekeeper, as it were? A regulator from abroad? Or could it instead be someone completely unknown?

Whoever lands the £200,000 a year post will certainly have a task on their hands, pulling off the supreme balancing act of keeping bills low for consumers while transitioning to a decarbonised, digital and decentralised energy market. As Martin Cave, Ofgem’s chair, said in the application pack issued by headhunter GatenbySanderson: “We are looking for someone who will relish the challenge of playing a big role in the transition of a major sector of the economy, and in the transformation of its regulator.”

The application pack does not set out a timetable for the appointment – that could prove a hostage to fortune. But the choice will be made by a panel chaired by Rosie Glazebrook, a Civil Service Commissioner. Other members are: Martin Cave, the chairman of Ofgem; Stephen Carter, group chief executive, Informa Plc (the founding CEO of Ofcom); Lynne Embleton, CEO IAG Cargo and NED at Ofgem; and Joanna Whittington, the director general Energy & Security, BEIS. The new CEO will preside over an administration with more than 700 staff and will have the choice to be based in either London or Glasgow.

Having a change at the top is seen as an opportunity for Ofgem to re-equip itself for the challenges ahead in the sector that it regulates. “If it doesn’t make some changes, it will increasingly become part of the problem rather than part of the solution,” is the view of one former regulator.

So what kind of leadership is needed? What obstacles lie in their way? And what legacy is Nolan leaving?

The ideal candidate

Anyone coming in must be able to handle different pressures, champion the consumer, work with government and have a thick skin. They’ll also need to be resilient and politically astute, and understand the need for innovation and the need to change.

But additionally, there is a requirement for commercial and entrepreneurial experience – something that’s not previously been such an explicit criterion. The job description says: “To be successful in this role you will be an experienced commercial and entrepreneurial leader with an innate ability to be a champion for the consumer whilst maintaining the trust and credibility of colleagues and stakeholders. Your background could be in either the public or private sector.”

Notes one senior industry observer: “It’s interesting that they are not looking for an economist or someone with regulatory experience this time round.

“Martin Cave, the chairman, brings that kind of experience and the three existing senior partners also have that expertise. Bringing in someone with commercial experience gives a broader mix across the senior team. It also helps when going head-to-head with energy companies to have been on the other side.”

This observer adds: “That’s not how it is currently. Dermot Nolan and Martin Cave are fairly similar, with the same personality type. If they were different, he might have stayed,” referring to the fact that Nolan agreed to stay on for a year after his first five-year term as Cave took over from previous chair David Gray, rather than sign up for another five years.

Nolan, a graduate of Trinity College Dublin, is a former academic and subsequently career economist and regulator. He took up the role in March 2014, joining from the Commission for Energy Regulation in Ireland where he had been a Commissioner since 2008 and its chair since May 2011.

Likewise, Cave, who specialises in competition law, was deputy chair at the UK Competition Commission and deputy panel chair of the Competition and Markets Authority from 2012 to January 2018. He was the competition watchdog’s lone voice arguing for a price cap, nearly a year before the Conservatives adopted the policy as a flagship election pledge. He became Ofgem’s chair on October 2018.

The aspiration to appoint a new Ofgem chief with commercial experience appears to have been well received. The combination of commercial/regulation backgrounds has worked well at Ofwat with chair Jonson Cox coming from the water sector and CEO Rachel Fletcher being applauded for her stance since moving across from Ofgem.

Notes a former energy firm CEO: “Rachel Fletcher has been very impressive at Ofwat. She has set out to transform it. She has introduced the notion of a social contract and wants to make water the poster child of climate change. PR19 won’t be the transformative price review period, but PR24 where conversations are starting, will be.”

A senior figure in energy retail comments: “It’s no bad thing for a regulator to have commercial experience. Ofgem staff have a hypothesis of how companies behave, which is not necessarily how it works in practice.

“And it would be great to have someone who understands consumers and with consumer-facing experience. Perhaps someone from supermarket retail, a sector which has done well for consumers. Certainly, they need to better understand the energy revolution that is upon us now and move away from systems thinking and an infrastructure-driven world.”

However, the same observer is a little baffled by the desire for entrepreneurial experience. “An entrepreneur to me is someone who is willing to take a risk – which I think is the antithesis of what you need in a regulator. You need solid, evidence-based decisions – it’s not about taking risks around consumers and systems.

“However, if you mean an entrepreneurial approach to problem-solving, that’s not a bad thing. Certainly, anyone coming in should understand digital technology – in terms of the world today – not the 20-year-old world of mainframes.”

Says another: “I don’t know what they mean exactly by entrepreneur: whether that’s internal regulated company innovation or understanding new players coming along. If the latter, that would be great; they would bring an understanding of the huge barriers to the parties coming along, wanting to operate at the grid edge, beyond the customer.”

Who might be eligible?

“It’s quite an attractive job. The energy sector is at a critical time and the system needs to change dramatically. Someone could come in and be a bit of a hero,” is how a retail figure sums up the job. But in terms of who might meet the various criteria, the winning candidate at this stage would appear to be anyone’s guess.

Conflict of interest may rule out some who would be potentially be in the frame from the private sector, while the salary level may deter others – unless they wanted, as the phrase has it, to give something back. A previous Ofgem CEO, Alistair Buchanan, moved from the City.

Although there is certainly chatter about Mary Stark, Ofgem’s director for consumers and markets, and Jonathan Brearley, Ofgem’s director for systems and networks, being in the running, senior figures Utility Week spoke to felt the job criteria “more or less” rules out anyone internal getting it. There was a strong sense that it would be difficult to change an organisation of which you’ve been part for some time.

It also rules out network businesses or heavy generation business or some of the retail, according to another industry observer. “In fact, anyone who has been in a non-forward-looking sector, including heavy generation. That’s seen as the past rather than the future. I’d put my money on someone from a technology or telecoms company – certainly not water.”

Nolan’s legacy – and the challenges ahead

Being CEO of Ofgem is nothing if not a political hot potato. Ongoing controversies about the price cap and the smart meter rollout aren’t going away, and there could be added government pressure to drive down the cost of energy to reduce inflation if the UK ends up in a no deal scenario.

However, those Utility Week spoke to felt the main challenge facing the new CEO will be around redesigning regulation to suit the transition of the energy market. “Decarbonisation has finally made it on to Ofgem’s agenda, but what role should Ofgem play?” was a common theme.

Certainly anyone coming into the role will need an iron constitution. Since Nolan joined in March 2014 the political pressure has ratcheted up and this is unlikely to recede.

Though he has been well regarded and well liked, such has been the directives from government, that some in the sector regard Ofgem under Nolan as having been unwittingly blown off course by the introduction of the price cap, with an embattled leadership sucked into choppy political waters.

In Utility Week’s 2018 CEO survey nearly two-thirds (64 per cent) of CEOs across the utilities spectrum said their regulatory regime is not fit for purpose, up from 57 per cent the previous year.

Nolan has been applauded for his commitment to help vulnerable customers – and has pushed that up the agenda, including by introducing the prepayment price cap in January 2016. “His whole way of working has seen vulnerable customers running through it – he would always ask what does that mean for vulnerable customers,” says a former colleague. Others say he is well liked as a manager with a natural leadership style. When he gave a speech, people always warmed to him. He has also made his mark being rigorous and analytical – introducing an economic panel of independent experts.

His approach to RIIO2, which will see the cost of capital capped at 4.3 per cent, is a mark of a tough regulator – though he will not see that through. Instead he was left to see the fruits of RIIO the price control review that was already cemented when he came on board – resulting in double digit returns for network operators and consequently plans by Labour for their nationalisation on the back of unchecked profits – and criticism of Ofwat for not being tough enough.

In terms of other issues, insiders say he is likely to be disappointed by Ofgem’s role in the so-called “Ash for Cash” scandal that brought down the devolved Northern Ireland government. It is likely that the inquiry, which opened in November 2017 and is due to publish its findings this autumn, will call out Ofgem for not doing enough to flag up the risk of fraudulent behaviour to officials in Northern Ireland’s Assembly. The abuse of the renewable heat incentive scheme cost the taxpayer more than £500 million. Though the scam didn’t necessarily occur on his watch (it was suspended in May 2016), Nolan has been called to give evidence. “It is difficult for him because of the way he cares about members of staff,” says one close to the issue.

However, what he will inevitably be remembered for is the introduction of the standard variable tariff (SVT) price cap in January 2019 – four years after Ofgem pledged to bring an end to prescriptive, restrictive regulation in the energy sector and instead adopt a principles-based regime, under which companies would be trusted to do the right thing by consumers while competing freely and creatively.

The measure was foisted on Ofgem – it was a manifesto pledge in the 2017 election. But the introduction of the price cap and other interventions have given rise to charges that Ofgem is meddling. One senior retailer complains: “Ofgem is at its best when it’s doing least. Ofgem tries to tightly define how markets will work – and can be heavy-handed – as is the case with the smart meter rollout. I would say what’s needed is strong invisible hand – but what we have is a rather weak reactive one. We need less regulation but regulation that is clear and effective. As it is, I would say Ofgem is guilty of lots of meddling.”

He cites examples, saying: “It is encouraging consumers to switch to the cheapest deal – and then companies go bust because they are unsustainable – and then it has to bring in financial controls to stop people coming into the market. Instead it should be asking, what does it take to make this market do as well as others? Retail regulators don’t stand outside supermarkets and frog march consumers off to different supermarkets.”

Technology and decarbonisation

The most difficult challenge for a new CEO is coming up with strategy to transform the entire energy system while the clock is ticking and there’s a tight lid on costs. For one energy veteran, who himself was asked to apply for the vacancy, this means that a new regulator will need to get to grips with what the future new energy market looks like and how we design a flexibility-led market. “Is it to be led by ESO (energy system operator) or DSO (Distribution System Operators)? Who has the primacy of balancing supply and demand?”

All agree that decarbonising the energy system requires energy flexibility – but currently that is only in place as one off projects, not as system facilities. And while ENA has been leading in this area in terms of its Open Systems Network Project, Ofgem is clearly keen to drive the agenda. In what is being seen as something of a marker, it published a paper earlier in August setting how it plans for DNOs to take a more proactive role in the management of their networks through their transformation into distribution system operators.

Harnessing data will be playing a big part of the future system too – and how to take forward the grid system in a way that is data led, making sure data is available but protected. These challenges were recently set out by Laura Sandys in her data taskforce review, which Ofgem has been responding to.

To afford the zero carbon transition, there’s also a sense that Ofgem’s sphere of activity will need to change to include achieving net zero as part of its remit and to mop up the gaps that are emerging across the system, thus leaving areas that are unregulated or lack oversight. One such area is the developing of EVs and charging points. As one proponent for the wider role for Ofgem put it: “Electric vehicle charging is highly disruptive to the power grid – it needs to be managed very well for customers to get a good outcome. The people providing charging points are not regulated, they’re not part of the utilities that Ofgem was set up to focus on.

“Smart charging affects the cars, the charging points, the apps, and crosses the meter, because it affects the distribution network, and if there are millions of cars charging, it affects the national system. Whose job is it to coordinate that? It’s not just National Grid, not just the charging point manufacturer.”

He continues: “Here’s an example of the chaos. We’ve got multiple electric vehicles manufacturers and charging point manufacturers, all fighting for market dominance, until government steps in and says ‘we want you to compete, but we want there to be an open system for customers’.

“In other sectors, phones for example, we get great choice with our mobiles. But hang on, they all work anywhere in the world, without us having to do anything. And that’s done by top class systems engineering, and management of data and protocol, and open systems.

“The answer would appear to be that Ofgem needs a facilitating role. It can’t just put the shutters up; it can’t just manage transmission and distribution like in the 1990s. Now, the whole system spreads right the way down, across the meter and out.”

Some in the sector say that having a new leader at the helm affords the chance to change the remit and way regulators are arranged. One school of thought would be to create an umbrella consumer regulator for telecoms/ energy/ water and a separate regulator for infrastructure. This may be an aspiration too far – and what new incumbent would want to do themselves out of job?

The National Infrastructure Commission investigation into the regulation of the UK’s energy, telecoms and water industries is aiming to ensure the necessary levels of investment and innovation whilst these critical services are kept affordable for everyone. The NIC’s findings expected to be published in October could impact how Ofgem’s new chief takes the organisation forward.

Nolan’s tenure is drawing to a close at something of cross roads for regulation where pragmatism and economics have already given way to a more prescriptive approach that plays more visibly to protect the consumer. Its clear that this is only the start of the evolution. Someone with vision, and willingness to challenge the status quo arrangement to bat for the bill payer and the environment and not be put off by the mountain that has to be climbed to do that – will be key requisites for whoever lands the role as Nolan’s successor.