Jonathan Brearley's speech at Energy UK Annual Conference
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Introduction
It’s great to be back here and it’s a pleasure to come and talk to all of you at the Energy UK conference.
But let’s face it, this has been quite a year - I know this industry, and most importantly our customers have been through difficult times.
Unprecedented is a word too often used for energy in 2022, but I genuinely cannot think of a time that produced such great challenges.
Wholesale gas and electricity costs are at an all-time high, hitting families and businesses...
… and we are heading into winter, in the middle of a major European land war where Russia is using gas as a geopolitical weapon.
None of us in this room can control these events.
But we can do is control how we respond, how we best protect customers, and how we navigate to a more secure, low carbon future.
So today I’m going to talk about three things:
First, protecting consumers in the short term: what we can do together and what we expect the industry to do, to help customers through the winter.
Second, what we are doing, together with National Grid and government to ensure security of our energy supply this winter.
And third: what we need to do to overcome the energy crisis and put ourselves in a better position in the years to come.
Supporting customers
So let me start with our work to support customers in the short term.
We absolutely welcome the government’s Energy Price Guarantee and Energy Bills Support Scheme, which will provide much needed relief to millions of consumers and indeed the schemes government has targeted at business.
Ofgem is working closely with government on the design and implementation of both schemes, making sure that the contract is fair, and compensation is set in a way that represents reasonable costs across the retail industry.
We are also taking on roles and functions to administer both schemes.
Now, these measures may make it tempting to feel under less pressure than before and absolutely we think they will make a huge contribution to households and businesses this winter.
However, it is important to remember that the Energy Price Guarantee still means that a typical household will be paying around double what they were a year ago: £2,500 rather than the £1,277 level of last October.
And just a reminder that that £2,500 figure is based on the use of a typical household – the amount you pay will still depend on the amount you use. So many families may well be using more energy than that and be more highly impacted.
Now, I talk to customers on a regularly basis and I know that for some these price levels will still have a huge impact.
Recently I spoke to a single father in Glasgow, who works in a reasonably paid job. However, for the first time he fears he will not be able to top up his prepayment meter to provide for all his and his families energy needs.
Last Tuesday I spent time with the local community in Lambeth through the non-for-profit Repowering London. It is clear from what they told me directly there are real worries about bills that need to be paid and the way they are treated by their energy companies who serve them.
So we really do need to be clear that this isn’t the time for complacency.
Regulator, industry, and government are going to need to work to together to make sure we are protecting customers’ interests in what is inevitably going to be another challenging winter.
In the first instance, I would urge customers who are struggling to contact their supplier for help and advice. We have been clear with suppliers that they must take their obligations very seriously.
This includes keeping an up-to-date Priority Services Register to help people in vulnerable situations, such as giving advanced notice of planned power cuts, and giving priority support in an emergency.
And equally, all of us should be thinking about how to reduce our energy use where possible.
This is not only the most direct way to reduce our bills. It directly helps with security of supply, contributes to decarbonisation, and saves money for the public finances.
For example NESTA has just launched their Money Saving Boiler Challenge to lower the flow temperature on boilers to 60°C. In effect to have the same heat service but through a lower cost. They claim you can save roughly 9% of your gas bill if you do so. And if many of us do this, this can save billions of pounds for His Majesty’s Treasury. Now it has only been launched for 3 days but already 30,000 people have signed up for the challenge and say that they have done what NESTA have suggested they do.
Organisations such as the Energy Saving Trust recommend only having your heating on when required, turning off lights when you leave a room, and switching devices off standby, for example.
Ofgem is working with the energy sector and interested groups to help consumers navigate this information, and we will shortly be launching a campaign to explain the support that is available, on how to reduce energy consumption, and what customers should expect from their providers.
We want to drive a culture change in the energy sector to ensure providers are fulfilling their obligations, achieve good consumer outcomes, and are financially and operationally robust, thinking back to the challenges we had last year.
So in April we announced four market compliance reviews, focused on direct debits, customer service, support for vulnerable customers, and those with difficulty paying.
We have now expanded this programme with three more assessments focused on suppliers’ financial robustness and risk management.
Now I know from these reviews and from things I see from companies themselves that there is some phenomenally good practice from suppliers. Some indeed are here in this room, who have upped their game to protect vulnerable customers in particular. But sadly this is not universal.
So I do need to be clear with suppliers: now is the time to act on behalf of your customers. And where you fall short of the rules we will, we need to, take robust action.
Security of energy supply
I’d now like to turn to the second thing: our efforts to ensure energy security through this winter.
The overall picture for Britain remains favourable. We are in a stronger position than many European countries.
National Grid Gas and ESO believe that they will be able to meet demand in a typical winter, and in most scenarios we expect the system to be robust.
We have reliable domestic gas production and imports - whether through pipeline or via liquified natural gas.
And the government support announced last month should help support our security of supply and ability to secure additional wholesale gas if that becomes necessary.
However, we should be under no illusion that this winter is likely to be a difficult environment – and we cannot at any time, but particularly this winter, eliminate all risk.
The fact that European gas pipeline infrastructure has been attacked, shows how the war in Ukraine has fundamentally changed the energy situation in Europe.
So as everyone rightly will expect, government, Ofgem and National Grid are working closely together and will do everything we can to protect consumers from these risks.
We are making extensive preparations for a wide range of scenarios: taking action to enhance physical supply, putting in place mechanisms to reward customers for reducing their demand at peak times; monitoring and supporting market resilience; and ensuring emergency responses are reviewed and ready for action.
Now, I understand why the media coverage has concentrated on the worse-case scenario preparations.
So to be clear, we do not think a supply emergency is likely.
But it is incumbent on a responsible and prudent energy system to be as ready as it can be for any challenges we might face – and that is what the public expect of us.
Overcoming the energy crisis in the long term
I’d like now to turn to my third and final theme: how we can get to a more resilient, efficient, and low carbon system in the long term.
We must make sure we are never in this position again.
Principally, this means reducing our exposure to international gas markets and the impact this has across our energy system – including the consequent cost of electricity.
Our planning assumption needs to be that Europe is no longer able to rely on Russian gas.
Equally, with the possibility of high gas prices being sustained, we must break the link between gas prices and the cost of renewable and low carbon energy.
Contracts for difference, indeed something introduced in a past role of my own, already achieve this.
And I welcome the government plans in the Energy Prices Bill, which break that link whilst ensuring a fair price for generators. And I would encourage all low carbon generators to sign up to the potentially newly offered contracts for difference.
When we look to the medium and longer term, as I think I’ve said previously, the economics of energy has changed.
Even before the crisis, renewable energy was cheaper than gas, creating a huge opportunity.
For example, we have seen Contracts for Difference auctions with price for offshore wind eight to ten times cheaper than the current cost of gas-fired power generation. It is reasonable to expect that onshore wind will be even cheaper.
Equally, new technologies, like small modular reactors, hydrogen and carbon capture should become vehicles for keeping Britain at the forefront of industrial and technological development.
There is greater alignment than ever before between the desire for homegrown renewable energy, the affordability and security of our energy supply, and the desire of government to drive growth.
Last October, the UK Government pledged to decarbonise electricity generation by 2035, and more recently, these goals have been supplemented with a target of making the UK a net energy exporter by 2040.
This will require rethinking how we plan, operate, and deliver a smarter, more strategic system.
We welcome the system operators’ work on the holistic network design, which sets out the onshore and offshore grid we need to build and connect 50GW of offshore wind by 2030.
For our part, we are working to develop the regulatory framework that allows us to review and approve these projects so that they can be delivered at the pace that is required. Our aim is that economic regulation should not be a blocker to the development of these transition projects.
However, to keep pace with the changes we need, we do need reform of planning process– it will not help if Ofgem and the industry act at pace, but projects remain delayed waiting for wider approvals.
Local electricity networks have a fundamental role in making sure we can connect new forms of local generation, electric vehicles, and heating, as well as improving our resilience and response to extreme weather events.
So our regulatory settlement for distribution networks is to be published later this year, and this will drive the necessary investment, and encourage new approaches to managing local systems which avoid unnecessary increased network charges on people’s bills.
So, for the medium term, we are driving change and we’re acting at pace to build the system we need.
However, as we all know in this room, for the longer term we need wider, systemic, change.
Given the volatile international market, and understanding the security risks that are clear today, we will work with the government to assess further measures needed to maintain energy security in the longer term.
In any energy transition, we know that there will need to be a continued role for gas for many years.
We have a longstanding set of arrangements in electricity to maintain security of supply, and it may be time to reassess what is needed to maintain gas security of supply in the environment we now find ourselves.
However, under all circumstances, to meet our energy goals, we need to move to that smarter more integrated energy system.
To do that, we need also greater strategic planning at the national level. So we remain supportive of the establishment of the independent Future System Operator to lead this.
In my view the creation of the holistic network design has already demonstrated that the system operator can act strategically to design a system, and ultimately, to drive implementation at pace.
We need work like this extended to include, for example, consideration of heat, the role of hydrogen, and potential for electric or other low carbon forms of transport.
We will also need greater planning, coordination and market making at a regional and local level.
This is why we are reviewing the local institutional framework and governance arrangements, examining the wider roles of markets and institutions at a local level to achieve net zero at lowest cost. Local authorities across the country will be key stakeholders in this process.
We also know the importance of unlocking a smarter more flexible system: enabling consumers to shift their demand patterns, and to benefit themselves, and the wider system by doing so. Indeed we saw a robust debate in the panel that came before this session.
New smart technologies are emerging which can draw energy from the grid at cheaper rates when demand is low, or it is sunny or it’s windy, and can dispatch that electricity when people need it most.
This means electric vehicles could recharge during low demand or high generation and put electricity back into the grid when there’s high demand or low generation, saving the electric vehicle owner money, and reducing costs for all electricity bill payers by storing electricity for, literally, a rainy day.
We will also follow closely the demand reduction initiative being launched by the System Operator; in particular, we want to see how customers react.
It is my personal ‘bet’ that customers may be more willing than we think to move their time of use of energy if the price is right.
For the longer term, to unlock the consumer behaviours and new technologies that will still support our energy transition will mean a different retail and wholesale market.
A retail market with likely fewer companies than in our history, better capitalised, with both incumbents and new entrants able to offer a wider range of smart, easy-to-use products and services for customers. Though companies are going to need to develop new products, and take the lead in making sure we develop something that is in customer’s interests, rather than something we simply talk about in policy terms.
And a wholesale market where the grid is ready when it needs to be to connect renewable and low carbon power; the system is balanced; and investments are being made in new technologies, such as storage and consumer flexibility, that drive a lower cost, low carbon, and resilient energy system.
And we are working with government and the sector to design and implement both of these things.
Conclusion
So, in short, there are huge challenges ahead.
It will be a challenging winter, which will need a collaborative response across the industry, the regulator, and government to support all customers, particularly the most vulnerable, as best we can.
But while dealing with the short-term challenges, we must continue to assess how the energy crisis should change our approach and plan for the longer term that addresses our current vulnerabilities.
Ultimately, the long-term destination remains clear - we need to move to that smarter, secure, low cost and carbon energy system that customers deserve. As ever, I look forward to working with all of you to get there. Thank you.