Good afternoon everyone, and just to say it is fantastic to be back here at Utility Week in Birmingham. I was just saying to Jane that I am sure I was here ten years ago, presenting on electricity market reform, where I said ‘these are reforms that are going to last a decade.’ So - it’s good to be back!
So today I’m going to cover the retail market of course, because of the situation we’re in, and all of the things that customers have been through over the last two years.
But the focus for me this year is equally on how we transform our energy to a cheaper, more secure, and low carbon system. And I want to touch on the role of the regulator in the way that we do so.
Let’s start with the here and now, with the retail market and what customers can expect this year.
Now as many of you know, wholesale prices have eased significantly from the extraordinary levels we saw last summer.
In a couple of weeks’ time, we will be announcing the price cap that will apply from July.
And we know that prices will almost certainly fall significantly.
Now that is obviously, compared to today, positive news for customers.
However, it remains unlikely that the prices will return to those levels seen before 2020, and even if they do, as one of our last panellists suggested, there will always remain a significant group of vulnerable customers who struggle to get their needs met from the energy market we have today.
So in my view, the energy crisis has not yet gone away, but it is entering a different phase.
And all of us, across the industry, need to recognise the tough situation that customers will continue to face.
So, for me, in the short term, there are three priorities.
Vulnerability and customer service
First, we need to prepare ourselves and the sector to manage the risks and concerns of vulnerable customers.
A crucial part of that will be the information we have available to identify and meet the needs of customers, such as through the Priority Service Register.
Now a couple of weeks ago, Ofgem ran its own vulnerability conference and we’ve been talking as a result to many organisations, about what we can do to enhance that register.
Now I have to say, that I was pleasantly surprised at the openness of government and the water sector, indeed of local authorities and others, to try to make sure we get better data, to make sure we coordinate, and to make sure we best look after the needs of customers across our sectors.
That means making sure we look after vulnerable customers when there are power cuts. That means being able to identify those customers, and being able to respond more quickly.
And as a result, it’s important that we work together across different sectors to try to fix this problem, and Ofgem and others are setting up a working group to do so.
Equally, the fact is that this undoubtedly will be a difficult winter for many households. And this makes it more important than ever that suppliers provide the service that their customers need.
And as a regulator, it’s more important than ever that we hold suppliers to account in doing so.
So we are developing a new consumer standards framework and we are significantly enhancing our compliance and enforcement functions to be able to do so.
The simple truth is if this sector wants to get trust back, it needs to look after the interests of its customers.
And leaving your customers waiting so long that half of them drop off the phone, simply isn’t acceptable if we’re going to look after the needs of vulnerable customers, and all our customers, this winter.
Second, we need to find a way that vulnerable people, including those on low incomes, can afford the energy they need without going into unmanageable debt.
We saw a good debate in the previous session about this, and you know we think that there is a case for examining, with urgency, a social tariff, which indeed the Secretary of State said recently ‘could be very helpful’.
Ultimately this is a matter for government, which is now developing a new approach to consumer protection in energy markets. And we will be working closely with them to explore the full range of options.
The third priority is around the financial resilience of the sector. And again this was touched on in the last session.
If we are to have a retail sector that delivers for its customers, it needs to be financially resilient, and that means reasonable profits.
And if we are going to have a resilient retail sector, then companies need to be able to make sure they can manage through different situations.
Now we all know over the last couple of years, we have seen retailers make a huge amount of losses.
But accepting that the market remains volatile, we do expect energy retailers to return to profit this year, partly because the price cap includes some payments to offset some costs incurred last year.
So as part of those ongoing retail market reforms, we will continue to monitor the profits of suppliers to ensure, yes that are reasonable to be resilient, but also to ensure they are fair to customers.
And as one part of the changes we’ve been making to improve the financial resilience of the sector, we will be setting out our proposed approach on allowable earnings within the default tariff cap, in a consultation to be launched shortly.
This will be aimed at reducing the risk of costly supplier exits, and providing greater incentives for investment and innovation to keep bills down, thus overall achieving better outcomes for consumers.
So in a sense, those are our three short term priorities in the retail market.
Making sure we are doing everything we can to improve services and protect vulnerable customers, continue work on a social tariff, and make sure that the retail sector moves to a place of financial resilience, which yes means profits, but also to service customers’ needs.
Long term: the transition away from gas
But as I said at the start, our priority now, equally, must be building a system that is better able to manage the price shocks we have seen in the last two years.
This means accelerating, as rapidly the possible, towards the government’s goals of decarbonising the energy system by 2035, and the Secretary of State’s ambition to create an economy with the cheapest wholesale electricity price by 2035, and putting ourselves on track to reach net zero by 2050.
This will require building a huge amount of new infrastructure, alongside recent reform of our retail and wholesale markets to keep the costs of the net zero transition as low as possible for consumers.
On the infrastructure side, that means we urgently need to do three things.
First, to better coordinate generation and network investment through more effective system planning – and I was pleased to see discussion of that in the previous session.
Second, to accelerate, as rapidly as possible, the build out of our network following that plan.
And third, as we said this morning, to speed up connections to the grid, maximising use of the network we have today to connect up as many parties as possible.
Effective system planning
So let me start with effective system planning.
To help us through this transition we, alongside government, are creating a now familiar new independent public body - the Future System Operator, or FSO.
The FSO will need to produce - in consultation with a range of stakeholders - whole system plans at both transmission and distribution level that anticipate the network capacity needed to meet our 2035 and indeed our 2050 targets.
It should have the authority and resources to design that strategic plan holistically, and shift to a new ‘invest and connect’ policy, 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 ESO last year in the form of 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 FSO, we will be progressing the scope and detail of the Central Strategic Network Plan – a holistic plan to assess our evolving energy needs, and how best to fulfil them.
And 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, to better promote planning and speed up connections, and make it easier to get energy on the grid.
In this way, with that planning function, we believe we can vastly increase the pace of investment and infrastructure build.
Once the FSO has that plan in place, we need to get that new network capacity it identifies built as soon as possible.
Now we have already done this. Last year, we approved all of the projects in the Holistic Network Design I just mentioned, and we put in place a new streamlined regulatory framework called the Accelerated Strategic Transmission Investment, or more familiarly known as ASTI.
Now it’s not my choice of an acronym, but apparently each transmission project in this list is referred to as a ‘TOASTI’.
So my team has suggested our policy is ‘unjamming the toasti!’
I apologise for that, but there has to be room for a few dad jokes.
We used that plan to unlock an unprecedented amount of anticipatory investment, totalling about £20 billion of electricity transmission network.
Now what in business as usual might have taken Ofgem years to approve, iterating and arguing with each individual network company, on each project, took a matter of months, once we had the confidence that this was already laid out in a holistic assessment of what is needed.
So, through ASTI, this anticipatory approach is already showing it can achieve real results on the transmission side, and that a system operator can act strategically to design a system and get network built much more quickly.
Additionally, once the Energy Bill has been passed into law, we may be able to put out such strategic projects to open competition, so that whoever can build that network most quickly and most cost-effectively will be commissioned, rather than simply being a monopoly of the incumbent transmission companies.
Again, we believe this could have a big impact on the pace of network build.
Now in the meantime, we are reviewing how we regulate network spending through our price controls in the light of the changes in system planning I have outlined.
Our new price controls also provide the platform to do things differently in terms of how we organise and how we operate the networks.
This includes harnessing the full potential of flexibility and other smart technologies, with new investment to ensure all DNOs improve the monitoring of their networks so that they can be used to their maximum.
So now let me move on to our third infrastructure challenge: the slow pace of connections to the grid.
Now sometimes it is the role of the regulator to call out difficult things, and what I want to say today is that where we now is simply not acceptable.
For example: 20% of generation capacity in the transmission queue will have to wait for a further 10 years before they reach their offered connection dates.
And 40% have been offered connection dates beyond 2030.
That pace is simply not compatible with our ambitions on cost, security, or net zero.
It is the biggest risk to decarbonising the power system by 2035, and it is clear we need to go further and faster to get renewable sources of power onto the grid as quickly as possible.
Now the principal cause of this problem, is that the first come first served queuing system no longer makes sense.
Polite queuing may well be in the very best of our British traditions, but it is simply not working here.
The queue is held up too much by projects that, likely, will never get built.
When I was trying to think of the right analogy, this came to my mind – and apologies again if this is a bit clunky.
Imagine you’re queueing for a bus. And imagine in front of you there’s a bunch of people who have taken up space for the queue for that bus.
They don’t know if they want to get on it, they may never get on it, but you are going to have to wait for them to decide before you get your turn.
The truth is that it doesn’t and it will never work, and that is where we are with network connections.
So in my mind it is, in a sense, very simple.
Put simply, we need to get common sense put back into the way we organise grid connections.
We need to prioritise projects that are ready to connect over those, potentially zombie projects, that are delayed and take up space that others can use.
So how are we going to fix this?
First, the ESO has made it easier to leave the queue, and allowed projects to leave without penalty. That will have a positive, but small impact.
Second, with the introduction of a two-stage process for connections, the ESO will be able to revise assumptions on how much grid capacity is realistically required to connect new projects, given a large percentage of existing projects in the queue are likely to fall away.
National Grid estimate this could shorten connection times by 2- 10 years for many projects.
And finally, the ESO are proposing changes to introduce a tighter queue management process. Their intention is to set clear milestones for projects, with those that do not meet the milestones being required to exit the queue.
This will take out those zombie projects that are taking up space better used by those projects that are ready.
At the same time, distribution networks are bringing forward coordinated reforms to speed up connections at the distribution level, and the ESO is taking forward thinking on the future direction of connections under its Connections Reform project.
Ofgem will take a central role in driving progress on the future of connections – monitoring, convening, and where necessary driving and pushing change.
And today we are outlining, in an open letter, our proposals to go further in reforming the connections process as a whole.
This will examine how connections should be prioritised in the future as we move to a more planned system; with anticipatory investment based on an “invest and connect” philosophy I outlined earlier.
And we will set out detailed plans with the Department of Energy this summer, again on how we can make sure the connections regime is making progress.
But to be clear, this is where the regulator, government, industry, and all stakeholders need to work together. And, for some, that will mean looking beyond narrow short term commercial interests, to make sure the sector as a whole is moving to where customers need it.
If we do not see progress, as a regulator, it will be Ofgem’s responsibility to consider a wider range of reforms to the way in which grid capacity is allocated in the future.
This could include moving from ‘first come first served’ connections towards a stricter and more controlled access to the grid, in a network that is substantially planned and coordinated.
So this problem needs to be tackled now. We will work with everyone across the industry to make sure that we do. But if we don’t go far enough, then yes we will have to change the regime to make sure that we do so.
Retail and wholesale market reform
So those three big priorities are the way in which we will transform our infrastructure system to make sure we meet those goals for 2035 and ultimately 2050.
Now I think you all know that alongside that infrastructure build and deployment, we need a new long term retail and wholesale market that needs to be designed to reward and allow flexible use of energy, to make sure we make the most of the infrastructure that’s in place.
Now I acknowledge that is a very important topic, but unless I have all afternoon, I’m afraid that is going to have to be a topic for another day.
Role of regulators
But there is one thing I want to touch on before I conclude. I would like to talk more broadly about the role Ofgem and indeed the wider of role regulators.
Now naturally, both have been the subject of intense parliamentary debate recently.
So first of all, we welcome the recent publication of the draft Strategy and Policy Consultation issued by the Department of Energy and would encourage all of you and indeed all stakeholders, to respond to that and make sure it is fit for purpose for all of us working in the energy system.
But Ofgem’s duties as well as other regulators have been subject to understandable debate.
Many people have advocated Ofgem being given an explicit net zero duty.
Our view, led by Ofgem’s Board, has long been that our statutory duty to protect the interests of current and future consumers, has always meant putting the goals of a net zero electricity and system decarbonisation, at the heart of virtually every decision we make.
Now I’m sure many of you here know my background in this process.
I was part of the process to set up the Climate Change Act, and I’m equally passionate about ensuring that the regulator is supporting delivery of the targets that have been put in place.
But equally, the Board have been very clear that we can certainly see the benefits of clarifying that responsibility, and therefore are open to that change in our duties.
We will be working closely with government and stakeholders in Parliament to consider if and how a net zero mandate could be usually applied.
Also, the Secretary of State for Business and Trade announced last week that there will now be a consultation on whether the economic regulators should have a more explicit focus on economic growth.
Now we know that the energy transition offers enormous opportunities to promote growth and jobs. So we will be working closely with government on these proposals, and recognise that regulators do have a pivotal role in supporting the way the economy grows.
Finally, there have been questions raised about the way regulators like Ofgem are held to account by Parliament. For example, the proposals put forward by the Regulatory Reform Group.
All I will say now is that we are very open to these ideas, and agree that there should be a more systematic way for Parliament to exercise its duties and to hold regulators accountable. And indeed we are very happy to work with Parliament on how best to do so.
So, to conclude, the energy system of the future will need to be lots of things: more low carbon, more secure, more agile and flexible, as well as more resilient – both financially and systemically.
I believe that the gas crisis means that those objectives are more aligned than they ever have been in our energy history.
But as ever, there is a huge amount to do to get there: developing more effective whole system planning, greatly speeding up the process of our network build, and speeding up the connection of viable projects to the grid – as well as reforming our institutions, our networks, and our markets.
However, if we can work together – government, industry, system operator and regulator to see the step change that we need, then I am very confident we will get there.
I know, and we know, that it won’t be easy.
But just to finish, I look forward to working with all of you in this room and beyond, to make sure that we get there, and we get to the system that all of our customers need and deserve. Thank you.