Scarsella on ED2: Asking for more money doesn’t show ambition

UK Power Networks’ (UKPN) chief executive has stressed that distribution network operators (DNOs) must spend “only what is necessary, not what is allowed” over the next five-year price control period.

Basil Scarsella spoke to Utility Week following submission of the network’s business plan for the RIIO-ED2 period, which he admits has adopted a different approach to other DNOs.

For a start, UKPN is the only company not to publicly release a full business plan. It has asked for the lowest rise in total expenditure at 7 per cent, along with a 10 per cent cut in customer bills. It has also taken a different approach to the role of distribution system operator (DSO) pledging to create a “separable and independent” legal entity.

The plan is based on five different scenarios of demand, flexibility and change in public behaviour towards energy, with a baseline model indicating investment of £4.5 billion from 2023 to 2038. The highest scenario, based on Climate Change Committee projections, would require totex of £5.6 billion – a 33 per cent rise compared to ED1 but with a bill reduction of 4 per cent still promised.

Scarsella says: “We are ambitious and that’s why we’ve costed the five scenarios. But we also want to keep customer bills low. We want to be trusted by customers and we believe the way to do that is simple – we do what we say we’re going to do.

“We don’t want to say, ‘give us a £5 billion allowance and we will go ahead and spend it’, because the first issue is where should we invest with confidence?  The reality is that no one can predict for sure where demand for EVs and heat pumps is going to appear and to what extent – especially given the massive potential of flexibility and energy efficiency.”

Scarsella points out that in ED1 only 20 per cent of forecast uptake of low-carbon technologies actually came to pass.

“What we’re saying is that we are prepared to respond if the take-up of electric vehicles (EVs) and heat pumps goes faster than we expect. But if peak load has actually decreased over ED1 how can we justify asking for a huge jump in network reinforcement investment now?

“Whether you ask for a high level of totex upfront or not, the way you go about delivering investment is the same. You plan the network based on where you are confident that the capacity will be utilised without overinvesting. All we are saying is that there is no point asking for all this totex upfront until we are more confident on the need and it makes no sense given our strategy to maximise flexibility and energy efficiency first.”

DSO separation

Suleman Alli, UKPN’s director of strategy & customer Service, tells Utility Week the whole thrust of the plan is to “make the smart future a reality”.

At the heart of this is the plan for a “fully separable” DSO business unit as a “separate legal entity” with an independent advisory board. UKPN estimates this could deliver direct benefits of approximately £400 million and enable between £1.3 billion and £5.4 billion wider whole system benefits up to 2040.

Initially, the DSO will come under the UKPN umbrella but Scarsella insists the independent advisory board “will keep us honest”.

Alli says: “If we establish a separate DSO which makes investment decisions fully independently of the DNO and in the interest of customers then that DSO should put full throttle behind flexibility, energy efficiency and smart tariffs. It can work with third-parties, including suppliers and new entrants, to help them put forward compelling propositions to enable customers to consume when it’s cheaper and greener to do so.

“That’s a win for consumers because they benefit from reducing energy costs, plus it’s a win for networks who should also benefit from the value created for consumers by using smarter solutions.”

But given the DSO model is in its infancy and the question of separation from DNOs is not yet settled, what does an independent model actually mean at this stage?

Scarsella is adamant that the move sends a strong signal about the independence of decision making and heads off questions about conflicts of interest.

“Why was the DSO model put forward in the first place? It was because the regulator, the public, believed that all we want to do as a DNO is put copper in the ground, to reinforce the network and increase the asset base because it adds value to our business.”

“If we need to reinforce the network, and there’s no incentive to do anything else, then that is what we would do. But an independent DSO can go to the market and find alternative solutions, such as a battery, to address the capacity needed which might also be useful to the wider system.”

“We agree that there should be separation of the decisions on flexibility and reinforcing the network. It should be independent, so let’s do that from the start.”

Alli adds that there is a wider role for the DSO in terms of local planning functions, helping to bring together wider stakeholders and offer impartial advice.

“The DSO can look at the best way to deliver decarbonisation without bias to an asset-based solution.

“When we talk to local authorities there is a gap between what they’re expected to do and the skills they have in-house. The DSO can help to bridge that gap.”

The company has also designed an evidence framework with local authorities to assess local climate plans and pledges to “work with them proactively to unlock network investment quickly and consistently”.

UKPN has also committed to publishing a DSO work programme each year.

But, if transparency is key to the company’s approach, why did it decide to publish only an executive summary rather than the fully costed business plans made open by the other DNOs?

Scarsella says: “We don’t believe that placing a 200-page document on our website is meaningful customer engagement. We have done extensive customer research and stakeholder engagement and there is more coming.”

He adds that UKPN’s customer engagement group had pushed the company to ensure its customer research gave enough context to prompt meaningful responses in what is traditionally a low awareness sector.

“Ultimately this is a competitive process. We will publish our full plan in December, when Ofgem requires us to do that.”

Driving forward net zero

In discussing the business plan, both Scarsella and Alli repeatedly return to the impact on consumers, reiterating the view that networks cannot be a blocker to net zero.

Alli cites the example of EVs and the huge challenge, particularly in London, around on-street charging.

“How can it be just that you pay five times more to charge your EV on the street because you live in a high-rise block than if you are lucky enough to have off-street parking?”

To this end, UKPN is ramping up a trial begun in ED1 to identify and address market failures in the provision of on-street charging. It estimates this will unlock over 3,000 public charge points in areas of market failure by the end of ED2.

Scarsella believes it is vital that networks unlock barriers to EVs and heat pumps but warns they must not be seen to dictate to consumers how they use them.

He says: “You’ve got some others saying customers should be prevented from charging their vehicles between 5pm and 8pm. We think that’s wrong. Customers should be free to choose, including adopting a smart tariff if it helps them save money.”

The business plan states its aim to be a “company worthy of customers’ trust” and to that end is introducing a social contract and updating its articles of association to embed an explicit public interest commitment. It is also aligning remuneration with additional customer and environmental targets.

Meanwhile, the company has pledged to “walk the talk” on the environment by reducing its own directly controlled emissions to net zero by the end of ED2, and is the first DNO to have had its targets already verified in line with the science-based targets initiative.

Acting as a disruptor

Alli says that in order to deliver net zero at lowest cost, UKPN will act as a “disruptor” and will adopt new approaches that mark “a radical departure from the traditional thinking that has guided network companies over the past 100 years”.

Scarsella acknowledges that UKPN’s approach differs from other DNOs and says he “copped some criticism” in ED1 for not going with the flow but insists “asking for more money doesn’t show ambition”.

He is confident that UKPN is agile enough “with the strong support of our trade unions” to respond if demand requires it to increase investment.

However, he stresses that companies can only be fleet of foot if the regulator responds accordingly.

“The critical test is over the next few months. We want the uncertainty mechanisms now to crystallise and Ofgem needs to be agile. All indications are that they will be, but the onus is very much back on them.”