Utility Week

UTILITY WEEK | 1ST - 7TH FEBRUARY 2019 | 15 Finance & Investment In a statement, The Pensions Regulator told Utility Week: "While we did issue an in- depth report on Southern Water, we are not able to discuss whether we are taking other regulatory action in this sector, or indeed to give an insight into the sector generally in relation to pensions." However, Cowling believes the politi- cal mood is ripe for the regulator to take a tougher stance: "Since BHS and Caril- lion, the regulator has been under pressure to encourage pension trustees to shore up pension schemes over dividends. At the core there is a political imperative to avoid another pension scandal, so the pressure to better fund pension schemes and take the risk out of them will continue." In December the Pensions Regula- tor announced that it had appointed chief executive of the Money Advice Service Charles Counsell as its new chief executive to replace departing head Lesley Titcomb in April this year. "Bearing in mind utilities have large pension schemes, they tend to be more affected by regulatory interest so utili- ties will be keenly looking to the regulator pronouncements to see how the debates on prioritising dividends over pensions pan out. Utilities companies have made significant strides in recent years but there is still a long way to go," Cowling said. The government is currently consulting on the use of defined benefit pension scheme consolidations, which, if introduced could provide an alternative method for reducing companies' exposure to pension liabilities. In the meantime, the Pensions Regula- tor and the utility regulators acknowledge the competing interests that have to be bal- anced by utility companies, but take the view that the two regulatory regimes are not incompatible. "There is no doubt that this is a difficult balancing act for companies, but it can be achieved by identifying the interests of all shareholders and working closely with pension trustees, in particular to ensure the business risks are fully understood in fund- ing negotiations," Meehan says. Rachel Willcox is a freelance journalist Total pension Equity market Pension surplus/ liabilities (£m) value (£m) (deficit) (£m) National Grid 20,808 26,912 552 Centrica 9,337 7,965 (886) Severn Trent 2,860 4,357 (520) SSE 3,863 12,952 335 United Utilities 3,499 4,878 344 Source: JLT Employee Benefits, The FTSE 100 and their pension disclosures FTSE 100 UTILITIES PENSIONS LIABILITIES Market view Network charging reforms needed Phil Lawton says cost-reflective charging would boost, not hinder, low-carbon generation. W riting on utilityweek.co.uk recently ("One step forward, three steps back?"), Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit, wrote that Ofgem's proposed changes to network charging would not be "a good thing" for the country's efforts to decarbonise electricity. He argues that the changes would have the effect of reducing the embedded benefits of distributed generation, and thus damage the finances of low-carbon generation. However, Energy Systems Catapult recent report Cost Reflective Pricing found that energy tariff pricing reform – and by extension, network charging reform – would encourage the switch from gas boilers to low-carbon heat pumps. While current charging actually creates a barrier to customers moving from fossil fuels and on to low carbon electricity. Heat as we all know, is the elephant in the room as far as decar- bonisation in the energy sector is concerned. It makes up almost one- third of carbon emissions, yet for domestic users, only about 4 per cent of heating is low carbon. The Cost Reflective Pricing study investigated whether or not the fixed charge components of energy bills – covering network, envi- ronmental and social costs – are efficiently distributed between the standing charge and unit (per kilowatt-hour) price of electricity and gas tariffs. Working with the Oxford Martin School of Oxford University, Energy Systems Catapult found the arrangement of fixed and volu- metric charges within electricity and gas tariffs may inadvertently distort market behaviour towards favouring investment in decentral- ised generation technologies, like solar PV but also diesel generators, over demand technologies like heat pumps and electric vehicles. This means that any generation connected on the consumer's side of the meter is paid more than the value that it delivers to the sys- tem and any incremental demand is charged more than the costs it imposes. The present arrangements, by overstating the cost of a kilowatt- hour, are creating a barrier to the deployment of heat pumps and hence the decarbonisation of heat. For the energy system to transform to low carbon in an efficient manner, it's vital the financial incentives on individual participants reflect their impact on the total cost of operating the system. Some examples include: currently, if you install solar panels, almost half the benefit you derive comes from increased charges to other users rather than savings to the system; and while some of the generation benefiting from these arrangements is low carbon, fossil fuel generation like diesel receives the same benefit. While it is entirely legitimate to promote low carbon generation, it should be done in a way that is transparent – not via a "hidden" subsidy. Phil Lawton, power systems practice manager, Energy Systems Catapult

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