RWE’s Tom Glover warns against market revolution

RWE’s UK country chair Tom Glover tells Utility Week why his time working in global markets has made him sceptical about wide-ranging reforms to the UK's wholesale market. Instead Glover has called for "evolution" rather than "revolution" with targeted improvements. He also raises concerns about timelines to decarbonise the grid with ongoing consultations leaving key questions unanswered.

The corner of London’s Victoria where Tom Glover meets Utility Week is familiar turf for RWE’s UK country chair.

It is a stone’s throw from the London office of Enron where Glover, rosy cheeked after an albeit soggy Easter break in Devon, spent a couple of years working for the Texas-based utility prior to its early Noughties collapse.

However, for the last 20 years, following a short spell at Barclays, Glover has been at RWE, rising to his current role.

For the past two years, he has been exclusively focused on the UK business, which he previously combined with being chief commercial officer of the German energy giant’s global renewable business.

The worldwide role though provided useful first-hand experience in assessing how some of the radical reforms, which the UK government is contemplating through its review of electricity market arrangements (REMA), could work in practice.

This is because working in RWE’s global renewables business entailed spending a lot of time in Texas, the location of the company’s biggest portfolio of onshore wind and a testbed for the concept of local marginal pricing (LMP)- one of the key proposals in last year’s REMA consultation for reforming the UK wholesale market.

Experience of working in the Lone Star state has made Glover a “little nervous” from an investor perspective about introducing this reform, which essentially entails breaking up the wholesale market into a patchwork of local nodes or zones.

“Theoretically” it’s hard to argue against the concept underpinning LMP that optimising the system across more nodes delivers a better outcome, he says: “I’m a mathematician, so I can work out that bit.”

However, while the likes of the National Grid’s energy systems operator (ESO) are enthusiastic about LMP, Glover sees little groundswell of support on the generation and investment side of the industry for the concept.

The modelling used by its advocates tends to “overstate” LMP’s benefits, he says, particularly assumptions that demand and generation will relocate to take advantage of the cheaper power prices that a more localised system would yield.

In practice, the location of generation is constrained by other factors such as how strong wind speeds are in a given place and whether it is possible to secure planning permission.

There is evidence to show that big energy users with limited labour needs, like data centres and batteries, will relocate to seek out cheaper electricity, he acknowledges. However the same isn’t true for supermarkets, for example, which need to be close to their customers in existing centres of population.

But perhaps the deal breaker, from Glover’s perspective, is how long the mooted break-up of the wholesale market would take to implement: time that the UK doesn’t have if it wants to meet the government’s target to decarbonise the electricity grid by the mid-2030s.

“It would take five years plus to implement LMP but we need to deploy all our renewables in the next 12 years to get to 2035,” he says.

The question Glover poses is whether the extra optimisation that localised pricing can deliver is worth the greater uncertainty that would result from renewables investors not knowing the nature of the wholesale market they may be delivering their projects into.

On the whole, the case for LMP is not “proven” and that stronger locational signals can equally well be delivered by tweaks to the ESO’s Transmission Network Use of System (TNUOS) charging regime, which would be a “lot easier” to implement, he says: “We would go with evolution, rather than revolution.

“You don’t need to change the whole system, you just need to say what’s the bit that isn’t quite working and just upgrade that bit.

“Let’s focus on getting the renewable energy deployed rather than getting every little, tiny bit right, which just takes ages.”

Uncertain times

Given these concerns over the timetable for rolling out low carbon generation, Glover is “disappointed” that the government’s recent response to last summer’s REMA consultation left so many options on the table, including LMP.

“When you leave so many options on the table that just gives investors uncertainty because investors want to know is what (number) I put in my financial model.”

These concerns are compounded by the government’s admission, in its recently published Energy Security Plan, that the myriad options in REMA won’t be narrowed down until autumn.

This is getting “very close” to the probable date of the general election, which is likely to be next year, he points out.

Given the amount of “detailed” work that still needs to be done on REMA, this raises the spectre of no substantial decisions being taken on market reforms until the next Parliament.

This would leave very little time for implementation of any reforms, particularly if there is a change of government, given Labour’s commitment to a net zero emissions electricity system by 2030.

“If Labour got in, they have said they want a net zero system by 2030,” he says.

And the government’s wholesale reforms must be seen in the context of other countries upping the pace of their own low carbon generation deployment.

“Everybody else is doubling down and over the last six months we are just putting more uncertainty on the table. It’s not just REMA, it’s the generation levy, it’s the Energy Prices Act, which had some quite interventionist powers,” he says, referring to the both so-called windfall on low carbon generation and the emergency energy market legislation which was introduced last autumn.

None of these measures individually will put off investors but combined they cool investor sentiment, he says, noting that just two days before we meet, one of RWE’s international investors had told him that it was putting a scheme on the backburner.

UK remains an attractive market

This doesn’t mean that the UK is no longer a good place to invest in low carbon energy, Glover says: “The UK still remains an attractive market. It’s probably gone from being the most attractive to one of the top five.

“RWE still thinks the UK is a good market to invest in: we still have an ambition to invest £15 billion in UK low carbon investments by 2030 so it’s still a high priority market but I can’t deny that convincing our group that they keep on allocating that money to the UK gets more and more difficult.”

An example of a small but “good faith” gesture, which could bolster investor sentiment, would be scrapping the sweeping powers that the government gave itself in the Energy Prices Act last autumn, he adds.

Other steps, which would bolster investor confidence, would be to enhance capital allowances for renewables projects and increase the budget for the current Contracts for Difference (CfD) allocation round (AR), he says: “If you want to maintain or increase the amount of total deployment of renewables, you have to increase the budget.”

The government may be anxious that increasing this total budget may ease the competitive pressures, which have delivered plunging renewable electricity prices over successive CfD auctions in recent years.

But deploying the maximum possible renewable generation is the long-term route to lowest costs for consumers, Glover says: “They (government) might say that an extra one or two pounds per megawatt hour isn’t worth it. We would say that one or two pound an hour is worth it because you’re deploying stuff much faster and the consumer gets the benefit of that low marginal cost power for the next 15 years.”

Meanwhile, other renewables developers, like SSE, have been warning that projects procured with rock bottom strike prices in the most recent CfD allocation round (AR) 4 will be difficult to deliver in the current environment of inflation and higher interest rates.

RWE didn’t have any CfD winning projects in AR4 but based on his experience of the Sofia North Sea offshore wind project, which the company won a CfD contract for in the previous AR3, Glover can understand why developers are finding it hard to make their sums stack up.

It was “extremely, difficult” to get Sofia, which is due to deliver 1.4GW of power when complete and is based on a similar strike price to projects in AR4, to final investment decision (FID), he says: “We’re very happy with it but it’s difficult. I can only presume if they are looking at the same figures that it’s extremely challenging for those companies to get there.”

Second thoughts

Even if companies do proceed with CfD projects, Glover cautions the government against being lulled into assuming that low strike prices for contracts are sustainable.

By the point of FID, projects have so many “sunk costs” that proceeding is generally the sensible option. However, if companies have had to effectively write off substantial amounts of money to get projects over the line, they are bound to have second thoughts about getting involved again, he says: “That is not a sustainable way to have an industry.”

Meanwhile, Glover is cautious about the government’s proposals, outlined in a call for evidence published last month, about putting more emphasis on non-price factors when awarding CfD contracts.

Injecting these non-price factors, like providing support for the ports that serve offshore wind projects, into the process will only have a limited impact if the timing of CfDs stays the same, he says: “When we’re bidding into the CfD, we’ve already tried to work out our supply chain and we’ve already got a very well thought out plan because we’ve got to put a number on the table.”

What could help most is to bring forward the timing of awarding CfDs “much earlier”, one of the recommendations in the government’s offshore wind champion Tim Pick’s recent report or incorporating non-price factors into the lease award.

Frontloading the process this way gives a greater chance of influencing the development of supply chains that take “years” to develop, Glover says.

And while in principle favouring a more robust UK supply chain, there are tensions surrounding a shift to a greater home-grown element, he warns.

“Everybody wants everything. They want a local supply chain but they also want it as cheap as possible to the consumer and they want it delivered as fast as possible. Those things actually have some element of conflict.”

If, for example, the Taiwanese supply chain is the “cheapest” option, going down a different route may mean customers having to pay more and developers having to wait a little longer while UK factories are built, Glover says: “You’ve got to be really careful about getting your priorities right.”

The other weakness in the existing CfD system is that it is still focused too much on individual projects when pieces of infrastructure, like the port facilities required to serve offshore wind construction, will probably be used by several different developers. He recommends that it would make more sense for wind developers to pay into a shared pot to deliver these large pieces of infrastructure.

There’s little point in winning CfDs though if it’s not possible to secure a grid connection which has been an ongoing gripe for Glover, like many renewable developers, over the past two years.

Initiatives like Ofgem’s Accelerated Strategic Transmission Investment (ASTI) grid upgrade programme are “really good” and “difficult” to criticise, he says.

So far, when we meet in late April though, RWE has yet to see any of its stalled grid connection applications move forward.

Joking that RWE ran out of patience with grid connection delays long ago, he says: “It’s very positive that it’s been addressed.

“It feels like it’s going the right direction. The proof is in the pudding: when I actually get the connection dates, I will declare success.”