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Keynote address to the Infrastructure Investor Network Investor Forum: ‘Accelerating the transition to net zero’ - 12 September 2023
Thank you for inviting me. I’m Jonathan Brearley the CEO of Ofgem. I’ve been CEO since 2020 but have been at Ofgem for a while before that, and have been in the energy sector for approaching 20 years in total.
So I’m sure you are all familiar with the journey of the energy market we’ve been on this past couple of years, and without a doubt Britain like most countries in Europe has faced the enormous challenges. But equally, we’ve been on the net zero journey since I’ve been in the sector for 20 years now, and what the last two years have shown me is that the case for change is stronger rather than weaker.
So we need an energy system that is better equipped to cope with geopolitical shocks, better for the planet, better for energy security, and better for customers’ bills.
I have one main message here, and a lot of detail to follow, and the main message is this: as a regulator we have spent a lot of time managing this system, which as you know involves fairly robust discussion with the companies you invest in around how we’re going to do things. And in a sense when you look back over our history even though the generation sector has changed a lot, the network sector has been fairly steady state.
So my main message is we, Ofgem, accept that the world has changed, and we Ofgem are open for business for the scale and pace of investment that we need to meet the aspirations that both Ofgem and indeed the British government have for the changes that we need to make.
And if I were to articulate what that means, particularly in the way we regulate our monopoly networks is this: that we will value pace of delivery, pace of change and pace of build, over perfection.
I’ve been involved in network regulation for nearly ten years now, and quite a lot of that is detailed and fairly turgid. But equally if we’re going to meet the targets that we need to meet, we are going to need to speed up, and that is going to mean all sides doing things differently.
So what I’d really like to do is talk about three things. First that basic point: the tremendous expansion underway in Britain’s energy infrastructure, to achieve all those things I’ve described: greater affordability, security of supply, and to decarbonise electricity system.
Second, how Ofgem, alongside the government, is working hard to get that infrastructure built by speeding up the pace of connections to the grid, and taking a more strategic approach to the way we plan the system.
And finally, following this, the opportunity for investors in Britain’s energy sector, which as I say is very much open for business both in policy and in regulatory terms.
Building more infrastructure
So let me start with that first point: the scale and pace of what we need to do.
We know that under almost all circumstances if we are going to meet our net zero goals, we are going to need to use more electricity. We’re going to need more electricity in our homes and we’re going to need more electricity to drive the electric cars we’re going to need to use.
Now we’ve talk about that change for a long time and that change sounds simple, but when we think about the scale of that, let’s look at our own history.
If you look back to post the Second World War, 1950 to 1970, a kind of legendary period where we created the national grid, and we created the infrastructure that we need, we expanded Great Britain’s electricity generation capacity expanded around 4-fold.
Actually, right now, roughly, we’ll need to do the same thing in a little over ten years.
For the electricity grid alone, to connect new sources of generation like nuclear and offshore wind, this means roughly a quintupling of the rate of investment in the next seven years compared to the past 30 years – a massive acceleration.
We also know that the infrastructure world has changed, and that external factors that you face means this task has become more difficult.
Clearly, inflation is driving up costs. The affordability of core materials is now clearly an issue. And rising interest rates having an effect on financing costs.
This has of course been highlighted by the fact that I’m sure must be front and centre of your minds, which is fact we did not have new bidders in the offshore wind programme at this year’s Contracts for Difference auction.
Now this underlines the fact that wider economic pressures being experienced across the energy industry in Britain – and indeed internationally – make building the infrastructure we need to meet our net zero goals more challenging for all parties.
However, despite these challenges, as the energy regulator Ofgem strongly believes that the need to build that infrastructure, and to do it quickly, remains as strong as ever.
And we are using our powers wherever possible to design a regulatory regime to make sure that infrastructure build happens as quickly as possible, and that’s what I’ll come on to in a moment.
Having said all that – and despite the result of this year’s auction – we should recognise that there is cause for optimism. The growth of Britain’s offshore wind industry is extraordinary.
Britain already has the highest offshore wind deployment in Europe, and the second highest in the world – including the four largest operational wind farms in the world.
And we have a programme of investment for offshore wind worth over £50 billion, and Ofgem with the government is working to make this an attractive prospect for investors.
Government has also set a target of doubling interconnection levels by up to 18GW by 2030.
This will be vital in securing a reliable net zero system across the UK and our neighbouring electricity markets.
So I think it is clear that the ambition is there to create a decade of investment in infrastructure, with a clear pipeline of projects that are needed.
Building infrastructure faster
That brings me to my second point: pace over perfection – how can we can build out that infrastructure at the scale and pace that we need.
To do that, we urgently need to do three things.
First of all, to better coordinate generation and network investment through more effective system planning.
Second, to accelerate, as rapidly as possible, the build out of our network following that plan.
And thirdly, to speed up connections to the grid, maximising use of the network we have already today to connect up as many parties as possible today.
Effective system planning
So let me start with effective system planning.
To help us through this transition we, alongside government, are creating a new independent public body - the Future System Operator.
The Future System Operator will produce whole system plans that anticipate the network capacity needed to meet our 2035 and our 2050 targets, both for transmission level, where the energy is produced, down to the distribution level, where it is used.
It should have the authority and resources to design a strategic plan where infrastructure is built and ready ahead of when it is needed, at the lowest cost to consumers.
The first version of such a plan was produced by the existing system operator last year, known as the Holistic Network Design, focusing on the government’s target to connect 50GW of offshore wind by 2030.
This year, as part of developing the scope and function of the Future System Operator, we will look even further ahead to consider our evolving energy needs, and how best to fulfil them.
Now, the world has changed, we used to have big scale generation and now we have a combination of large scale generators but also very local generation and very local forms of storage.
So local networks will 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 because we will ultimately need to plan regionally, we have been consulting on the scope and governance of dedicated regional system planners, who will have the job of liaising across all energy infrastructure and with local representatives.
With that planning function, we believe we can vastly increase the pace of investment and infrastructure build.
So with that plan in place, we need to get that new network capacity it identifies built as soon as possible.
Now, this is a big change in stance for the regulator. What we said last year on the back of that first version plan, the Holistic Network Design, was we were going to approve all of those projects in principle, and we now have something called the Accelerated Strategic Transmission Investment, or ASTI, as a framework to bring forward investment much more quickly.
We used that plan to unlock an unprecedented amount of anticipatory investment, totalling about £20 billion across 26 projects in the electricity transmission network.
Now it’s not my choice of an acronym, but apparently each transmission project in this list is referred to as a ‘TOASTI’. So our policy is in a sense has been described by my team is ‘unjamming the toasti!’
What in business as usual might have taken Ofgem years to approve, is now something we have done in a matter of months, once we had the confidence that this was already laid out in a holistic assessment of what is needed.
So in the build out of transmission, we are creating a dynamic regulatory process that will allow us adapt to changing market conditions, both when they are more challenging but equally when they get easier.
And we are now working to extend this basic framework to the rest of network regulation through our work on the future of price controls.
Once the Energy Bill has been given Royal Assent, Ofgem will receive a new statutory net zero duty, which reinforces the fact we are fully engaged with and behind the government’s goal and the net zero targets that have bene set for the country.
And we expect this to give additional impetus to further improving the pace of network build, potentially including putting out strategic projects to open competition, so that whoever can build that network most quickly and most cost-effectively will be commissioned, rather than relying on the existing companies to do so.
So I cannot come to this forum and not talk about connections.
At every forum I go to, particularly those who are interested in generation or batteries, connections is raised as an issue.
On current projections, 33% of generation capacity in the transmission queue will have to wait for a further 10 years before they reach their offered connection dates.
And 55% have been offered connection dates beyond 2030.
That is frankly not acceptable if we are to decarbonise the power system by 2035 and ensure projects in the pipeline are an attractive proposition to investors.
So we are working hard with the system operator, the transmission companies and the distribution companies, to make sure people can connect more quickly.
The root problem is basic – and it’s not just a British problem. We have a first come first served queuing system that made sense when we were trying to encourage people to come forward, but is simply being overwhelmed.
The queue is held up too much by projects that, likely, are never going to get built.
So in a sense, polite queuing may well be in the best of British traditions, but the truth is that it’s not working for us here.
So we need to get common sense back into the way we organise grid connections – and prioritised projects that are ready to connect.
So we will do this in three ways.
First of all, the system operator has made it easier to leave the queue, the Transmission Entry Capacity amnesty, so you can leave the queue without penalty if you know you’re not going to get there. That will release capacity reserved from around 50 projects.
Second, the introduction of a more effective two stage process for assessing connection needs means the ESO will be able to revise assumptions on how much grid capacity is needed for new projects, freeing up space which can be used to bring forward connection dates for the rest.
Finally, the system operator is proposing changes to introduce tighter queue management process, setting milestones for projects, with those that do not meet them required to exit the queue entirely, allowing the viable projects to move up more quickly.
We expect the ESO's plan to speed up the current connections queue, and see existing projects having the opportunity to bring their connection dates forward by as much as 10 years.
And taken together, work in the pipeline across transmission and distribution companies have the potential to release up to 100GW of capacity for projects that are ready to connect.
Additionally, the networks are now allowing customers to connect ahead of the completion of reinforcement works at the transmission level on the understanding there may be periods where their output may need to be limited, a so-called flexible connection.
So in summary: we know that connections are a significant barrier to meeting our net zero goals, and we do need to see a significant increase in the speed of these connections, while continuing to deliver high quality services to customers.
Now that’s what Ofgem’s doing, but clearly we are not the whole of this picture. So we do need government to act, we do need a planning regime that will allow us to remove barriers, deliver transmission network, and plug renewable generation into the grid at pace, and we are very very supporting of the recommendations in the Winser Review.
That will need government, regulator, energy sector, and wider stakeholders to work together in a way that they haven't before – undertaking nothing less than a new industrial revolution - to overcome barriers and reach a net zero power as soon as possible.
Frankly, as I mentioned before, all of us need to find a better balance between pace and perfection, making sure that our checks and balances don’t become brakes and blockages.
However, despite all of these challenges, despite all of the things I’ve mentioned, that you’re facing and we are facing, I do believe that our net zero ambitions are achievable, and will present great opportunities for investment in Britain.
And that is a message I will be taking to New York Climate Week on Monday, where leaders from business, government, and civil society from across the globe will be meeting to deep dive into delivering the transition.
As the energy regulator it is Ofgem’s responsibility to continue to push hard on connections as we move to a more planned system, and hold the system operator, transmission operators, and distribution network operators to account, to ensure that we do so.
So alongside these shorter term measures, we continue to work closely with both the industry and government to address the issue of connections more broadly, and we will be publishing a new joint action plan with the Department for Energy Security and Net Zero shortly.
Opportunities for infrastructure investment
I’d now like to move to my third point: how these changes in Britain’s energy infrastructure will provide more opportunities for investors.
One of Ofgem’s most important jobs is to create an environment for our energy sector that continues to grow and become more competitive, so the that huge sums of investment we know we need to meet our net zero goals are raised successfully, and at low cost to consumers.
With a clear investment and policy framework, tried and financeable investment models, and strong support from government, Britain’s energy market is truly open for business, set up to attract investors from around the world for a great deal of the infrastructure we are likely to need.
Again, let’s look at offshore wind. We are facilitating the investment of billions of pounds in offshore and onshore substations and cables connecting the wind farms to Britain’s electricity transmission network through what we call our Offshore Transmission Owner or 'OFTO' regime.
This involves offshore links newly built by wind farm developers being sold through a competitive tender process, with the successful bidder owning and operating them for around 25 years.
From an investor’s point of view, OFTOs are a unique asset, coming to market consented, commissioned, and constructed, with proven technology and a steady index-linked income stream.
We expect projects worth up to £10 billion over the next few years - potentially even more - with the next bidding round due to begin early next year. And we hope to get powers soon to extend such models into the onshore network.
And if you’d like to know more, my colleague Jennifer McGregor is with us today and is keen to tell you more about them – so do find Jennifer at the drinks reception later if OFTOs are of interest to you.
We are in the process of confirming the extent to which project timelines might change given the CfD outcome last week, but we expect the projects to continue to contribute to government's 2030 targets, and for related OFTO assets to come to market by then.
In terms of interconnectors, the cap and floor regime is now well-established, and recently saw major projects begin construction with Neuconnect to Germany and Greenlink to Ireland.
This regime provides a degree of market exposure for investors, combining the predictability and safety of regulated investment with a capped upside and downside, providing investors with an attractive proposition.
Beyond interconnection, we are keen to explore applications of the cap and floor model for areas such as gas, hydrogen storage; and long duration storage of electricity.
In terms of onshore energy networks, the Regulated Asset Base, or RAB, regime has attracted a considerable amount of investment over the past twenty years at relatively low cost of capital – and will continue to be of great importance as we continue to build the network we need.
Additionally, it now appears to be the favoured model for novel forms of low carbon technology such as nuclear; carbon capture and storage; and hydrogen transport: creating major new opportunities for innovation and indeed, for investment.
So in summary there are a huge number of projects and asset classes in the works, using a variety of tried and tested investment models, and presenting a wide range of opportunities to investors.
For our part, Ofgem is working closely government, which is giving strong backing to this agenda, to ensure we can attract the investment required into these technologies, through stable, consistent, transparent and fair regulation.
And personally am determined to ensure we continue to incentivise change, streamline processes, and continue to create new opportunities for these investments and technologies.
So finally to summarise: we recognise there is still a huge amount still to do to get us to that new and better energy system that you want to invest in, and customers deserve.
With that comes challenges – including in the wider economic environment.
But that case for building that infrastructure, and building it at pace, remains as strong as ever.
If network companies behave fairly, as we intend to ensure they do, if customers and communities are looked after, and commitments are delivered on time, there really are major opportunities ahead to invest in Britain’s energy infrastructure – delivering consistent, fair, returns to investors.
And I look forward to seizing those opportunities, working with all of you in doing so. All of us need to work together to deliver the energy system Britain needs. Thank you.