Jonathan Brearley's speech at Future of Utilities Summit - 21/11/22
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Introduction
It’s great to be able to join all of you at Future of Utilities again. I’ve been coming for more years than I care to remember and having wondered around it’s great to see some of the new technologies that we will need to continue to move forward.
But let’s face it, since I last spoke to you I know the industry has continued to face very challenging conditions.
But more importantly, it has been, and continues to be, an extremely difficult time for our customers.
Now I should say that we welcome the continuing support that the Chancellor announced on Thursday; both the Energy Price Guarantee, and the targeted support for vulnerable households.
Nevertheless, we should not lose sight of the fact that the cost a typical household will be facing will be £3,000 a year from April, and this for them, and for everyone out there, is completely unprecedented.
Now I know that many of the customers I talk to regularly will be feeling under immense stress and worry about the future.
For example, recently I spoke to a customer in Brixton who was just earning a little bit too much as a pensioner to be able to get any of the targeted support available. He is now facing a huge financial worry that he never used to have.
So there is a very tough road ahead, and one that will take all our combined efforts – and I was pleased to see the comments around collaboration - between Ofgem, the industry, the charities involved and the government to make sure that we can manage as best we can for our customers.
But while the road ahead may be difficult, the direction we are travelling is increasingly clear.
The energy trilemma
In considering the future of our sector, we have for decades wrestled with three objectives: affordability, security, and sustainability. Now some people, including me, used to describe this as the trilemma. And the reason we did that is because we perceived that these objectives were in tension with each other as much as complementary.
However, as the Prime Minister recently said at COP27, the changes the war in Ukraine has brought to our market are a reason to move faster on decarbonisation, not slower.
The economics of energy has fundamentally changed, and the decarbonisation of our energy system is most effective way to ensure security of supply, and to manage affordability.
So today I would like to focus my remarks on those three areas: affordability, security, and sustainability, and in particular how they broadly complement, rather than contradict, one another.
Affordability
So let’s start with affordability and protecting our consumers.
Russia’s illegal war in Ukraine continues to drive extremely high prices and volatility in the international gas market. Our best assumption, at least for the medium term, excepting that no one knows, is that this will continue.
Equally, as we look out towards our low carbon future, we know that the best way to construct an efficient and secure low carbon system means customers managing much more frequent changes in supply and demand and possibly, much more frequently changing prices. This means ultimately we will need a different retail model to manage in the medium term but also towards that longer term.
Therefore, together we need to reshape the retail sector.
Now for me, that means principally three things:
- First of all, we do need a sector that is well capitalised to manage the volatility in the market today, but also sufficiently capitalised to expand the range of services our customers need in the low carbon world of tomorrow.
- Second, we need a sector that continues to increase standards across the board, accepting that customers switching between suppliers will not play the role historically hoped for. We need other drivers of change and improvement.
- And finally, fair prices and pricing regulation that can adapt to the volatile market we find ourselves in today and also support the low carbon market of the future.
On financial resilience:
So let me start with financial resilience. To prevent excessive costs of supplier failures, Ofgem has already acted.
We have learnt the painful lessons of the last year, highlighted by the Oxera report and the recent parliamentary reports.
We have carried out stress tests, we’ve strengthened and applied existing rules, and used our compliance and enforcement powers where companies are falling short.
Now despite the more difficult conditions this winter, the sector is clearly more resilient this year than last year, with no major failures to date.
We are also changing the rules fundamentally to increase capital adequacy and prevent unsustainable business models re-entering the market, and we will be publishing our proposals on this very shortly.
In short, we seek to improve capitalisation and resilience in the retail market, while also maintaining sufficient competition, innovation, and dynamism to get to our net zero future.
So we have a balance to strike, there. We need to make sure this sector is dynamic, the sector is producing different kinds of services. But it does need to be sufficiently capitalised to do so, and we must find a way, together with the industry, to improve customer standards.
Improving standards:
Moving on to customer standards, in the past, many in the sector believed that switching would be the driver of higher customer standards. There was a great amount of faith that if you were an unhappy customer, you would simply move somewhere else.
Now as a result, compliance and enforcement was reactive and focussed really only on the worst cases.
We have now moved to a proactive assessment of company performance, and are strengthening consumer standards through a series of Market Compliance Reviews.
Now these reviews are relatively new, and we will work with the industry and consumer charities to learn the lessons and adapt them if necessary.
Tomorrow we will be publishing the third of these which does a ‘deep dive’ into how customers in vulnerable circumstances are treated.
I know that many of you in this room have been hugely active in making sure we do support vulnerable customers.
But I will say this: that in every supplier in the market there is room for improvement. There are a lot of great things we are doing, there is a lot of excellent practice, but given the conditions in the market there is more than we can do to support vulnerable customers.
For example, our own customer poll said that over 50 per cent of customers are not aware of the help and support that is available to them.
So we must do everything we can to support vulnerable customers as an industry, with Ofgem, and indeed with the government.
For example, last week we launched a big push to raise awareness about the Priority Services Register.
This gives consumers access to very important services, which can make a real difference to those struggling with their bills.
So it really is incumbent on the industry to proactively find ways to identify customers and offer support where we can. There is a lot more for all of us to do and we will work closely with the industry and government to make sure those who are most vulnerable, facing the conditions they are facing today are helped as much as we can collectively.
Fair prices and pricing regulation:
The final area I would like to address is fair pricing.
Before the gas crisis, in a benign market, the price cap played a positive role in protecting customers.
It directly addressed the loyalty premium, clearly in existence before 2019.
Equally, during the early stages of the gas crisis, the price cap provided customers reassurance that higher prices were reasonably set.
However, as has become evident, the market continues to be volatile. Ultimately the price cap was never designed to be one that would subside costs to consumers.
So the price cap could not address the real driver of high prices – the sustained and unprecedented high costs in the market.
That is why we pushed for and fully support the government’s action to address prices and costs for all customers, including the energy price guarantee.
We welcome the commitment to continue this scheme beyond next April for a further 12 months, at the higher level of, on average, £3,000 a year.
And we are working hard to support its implementation, taking on new roles and functions to do so.
This period also gives us space to rethink the enduring model for pricing regulation that we need inside the retail market.
The price cap, while providing protection, does have risks for customers.
For example, in a volatile market, a cap increases the financial risks that companies face and therefore, the capital that companies need to hold. That entails a cost to customers. Equally, where all companies are basically following the cap formula, that may have a role in the prices that are paid in the market, and therefore ultimately the prices that customers pay.
It is my feeling that we will need to examine a wide range of options around the price cap to allow it to better adapt to the market we are in and, certainly to be compatible with the low carbon market of the future.
Equally, we all need to explore how best to protect, in an enduring way, the most vulnerable customers.
We, Ofgem will continue to examine what we can do within the existing methodology, but it’s also my feeling that we may need to look at the framework underpinning the price cap, including the flexibility the regulator has to set it.
So I very much welcome the announcement made in last week’s Autumn Statement that the government is looking at a new approach to consumer protection from April 2024, and considering options such as social tariffs.
We will work with consumer groups, government, and the industry as it considers the choices available. So once again we will have an advanced, resilient market, one where fair pricing and fair pricing regulation adapt to the conditions we find ourselves in.
Security
I’d now like to turn to the second part of the trilemma, security of supply.
We have simply never witnessed in any period in recent history where our energy market is exposed to as much risk as it has today.
Russia’s use of energy as a geopolitical weapon has made things far more challenging than any previous winter I can remember. And I’ve been around this industry for a very very long time as many of you know.
When we look across the international market today however, there are positive things which have happened in the last few months.
Warm weather, to date, combined with measures across Europe to reduce our energy use, and indeed reduced use within this country, are having an impact.
But as we have learned over the past few years, things can change quickly.
So Ofgem continues to work intensively with National Grid and across the industry, to make sure we are all prepared for a wide range of scenarios.
And we will work with National Grid, government and the wider industry to make sure that customers are informed and well prepared themselves.
We are running Ofgem’s Energy Aware campaign to bring together the help and support out there, while also setting out how we can all cut our energy use.
We know from the analysis we’ve seen that even small things, such as turning off radiators in rooms that are not in use and adapting boiler flow, can have a bigger impact, not only on customer bills, but in boosting our wider security of supply.
Now as we look beyond winter, we need to consider market changes to ensure our energy sector is broadly resilient to the shocks that we face in the longer term.
For example, in electricity there is an established market for ensuring security of supply through capacity auctions, but no equivalent concept for the gas system.
Given what we know now, and given there will be a continued role for gas through the transition that we’re making, it may be time to reassess this.
These ideas are very much in the early stages, and Ofgem will offer expertise and advice to government through the energy supply taskforce and indeed a review of electricity market arrangements. But our job with government to make sure not only in the short term, but in the medium to long term this system maintains its security.
Sustainability
And that brings me to the third part of the so-called trilemma – sustainability.
To reiterate again the point that the Prime Minister made.
The war in Ukraine is a reason to go faster to meet our low carbon goals, given their synergy with low cost and security of supply.
We know to deliver that transition, urgent changes are needed.
So Ofgem is doing everything we can to forge flexible, adaptable regulation to speed up the building of our network infrastructure.
Later this month, will be concluding our settlement in the local electricity distribution networks, with an expected initial investment programme of over £20 billion.
This investment will make the upgrades to the grid needed to accommodate increased demand from new sources like electric vehicles and heat pumps, as well as connecting new local generation assets.
And to make sure our offshore networks are ready to connect up to 50 gigawatts of offshore wind generation by 2030, our Accelerating Strategic Transmission Investment consultation has set out proposals for a faster regulatory approval and a funding process.
We are currently considering the initial scope of its framework, and we intend to publish our decision in December.
We think this will unlock around £20 billion of additional investment at pace.
All we need the industry to do is to sign up to clear and enforceable targets to make sure that pace is maintained and match this ambition.
It is intended that these regulatory changes, alongside planning reforms and changes to the transmission operator delivery models, will reduce the time it takes to deliver large transmission projects from identification to completion, first by two and ultimately by three years.
By getting these projects built quickly, we can cut congestion and constraint costs, saving consumers money.
Ofgem is just one part of the chain however - it requires a coordinated effort. We need government to accelerate planning approvals and network companies to deliver a step change in their capacity to build new connections.
Part of the solution is greater planning, coordination and market making, which we are pursuing both nationally through an independent Future System Operator, and at a regional and local level.
In bringing more intermittent renewable generation onto our system, with greater peaks and troughs in production, we also need to think about how and when we use energy, as well as how we store it.
So we need non-network and non-generation solutions that will enable consumers to shift demand to different times. This will include new smart controls, as well as storage solutions and batteries in our electric vehicles, and heat stores in our homes.
That means that the future system will not just affect things beyond the end of the plug, but how we all interact with the grid.
For example, enabling consumers to let their electric vehicles charge when prices are cheapest, and sell power stored in their batteries back to the grid when it is under strain. It will make a huge difference to the efficiency of the system that we have. And just to touch on where I started with the retail market, that is why we need to have the retailers of the future, who are able to package the services that will make such offers attractive to customers.
Ofgem is working closely with government in designing a market that best realises those benefits, while also ensuring vulnerable or low-income customers who will find it more difficult to participate are not penalised.
And we continue to closely follow the National Grid ESO Demand Flexibility Service initiative, giving households who opt-in rebates for not using electricity during peak hours. To me this is a live experiment as to how the future may work, and it is borne out of necessity, borne out of the conditions we are in now, but it may well be one of the things we look to when developing the services and the systems of the future.
Conclusion
So those are some of the key actions we are taking as an industry to deliver a future energy system which is affordable, more secure, and more sustainable for our customers.
As I was saying, what is clear now, more than ever, is that broadly, although there will always be paradoxes and tensions, these three objectives are pointing to the same destination.
With renewables and low carbon generation becoming the cheapest form of energy, the economics has changed forever; that energy becoming not only the most sustainable but also the cheapest and most secure option.
The energy crisis and the war in Ukraine makes the need for our transition towards energy independence and net zero more, not less, certain. And the faster we get there, the better it will be for our customers.
So I look very much forward to working with all of you to make sure we not only define that destination, but we get there at pace.