Utility Week

UTILITY WEEK | 26TH APRIL - 2ND MAY 2019 | 9 Interview Meeting the policy challenge together The question for government and Ofgem, he believes, is how to get ahead of this change, to put frameworks in place – with electrification of transport and heat set to be key drivers of network growth. He says that as a society we have chosen to subsidise renewables though schemes such as the Renewables Obligation, but paying via electricity bills rather than the tax system has made electricity artificially expensive compared with gas. "In a world where you want to decar- bonise, does that still make sense?" asks Erwin. Keeping consumer bills at sustainable levels must also remain a priority. But for networks to maintain busi- ness as usual satisfaction levels – currently around 88 per cent for the sector as a whole – while developing sys- tems for the future, it will require some clear government thinking. "We can't go backwards. So, it's important, particu- larly during this transition period, that we're clear about roles and responsibilities, including precisely what we mean by 'DSO'. "We want to be this neutral market facilitator, but we want the political cover to have a clear mandate. Because there are going to be some trade-offs, we're going to do some things differently, and there are going to be some winners and losers." And more detail about the system's overall direc- tion of travel is overdue. "A lot of incremental reform is going on. What we can't really see is a blueprint of the whole thing." Questions remain about which future costs govern- ment would want to socialise, universal service obli- gations it wants delivered, and how it wants to pay for them. It's easy to see how the most engaged in society will capitalise on trading flexibility, so there needs to be more thought about how we protect the vulnerable. What is being "eroded at the edges", he says, are "these things which are, yes, natural monopolies, but they are also spaces in the system where everyone currently needs to go through. They provide a bit of simplification, they bind the complexity of it. I think gov- ernments risking losing that. "So, before they get into the micro bits of policy, they should think about the big picture – about industry structure." And that's clearly a big picture that's still emerging. … and on RIIO2 His thoughts on the next price controls are equally well argued, although Erwin says he doesn't envy the regulator. "However, we've been pretty clear we think the proposals in RIIO2 have been a bit of an overreaction, and we are working along with the rest of industry and the regulator to try to get them back into a sensible place. "We think Ofgem has to get the cost of equity right in isolation. If it doesn't, we risk undermining and running down assets and imposing extra costs on consumers – that's the wrong outcome. "We do recognise that in the other sectors – not in electricity and distribution, but in transmission and gas distribution – the returns are perceived to have got out of control. And we think therefore that some kind of 'safety-valve', as envisaged in the adjusted safety mechanisms, is probably necessary given the current environment. "But having done that, we think it's really important you maintain the incentive properties of the rest of the price control round, both to put forward ambitious plans and then seek to outperform those plans, because that's what delivers long-term value to customers." That model has really delivered for consumers, he says, adding that comparing UK network costs with the rest of Europe reveals we are doing very well, particularly on the cost of distribution networks, which are very competitive with other countries. "We are seeing more and more of the US regulators moving incre- mentally towards something that looks a bit more like a UK price control round. And we are disappointed that it looks like Ofgem is moving away from some of those principles of good regulation. "Because, although it might suppress rate of return in the short- term, we are worried it will disincentivise networks from making savings and just push up costs in the long term. "And that's really bad for our customers, and ultimately for us." Erwin on nationalisation On the potential threat of nationalisation of the networks under a Labour government, Erwin responds with a thorough appraisal of the benefits of the status quo: "DNOs are perfect for the DSO role; they've got people on the ground; they are regulated; good at complying. Critically, their assets are buried in the ground or are up in the air, so they have assets to lose; they are not heavily geared and have a big asset base which is security. "So, if you want to allocate risk, allocate risk to us. We are a good option to be the stewards of the local system because we are good at supplying local services, good at complying with rules, and we have deep pockets – so if we get it wrong you can sue us. And we pay rather than go bust. "Let's not replicate the supplier model in distribution and transmis- sion. Let's try and recognise what we've got. As long as you give us a fair return, you've got something that protects consumers and government if something goes wrong. And you have got someone who is going to do this well. Because if they don't, they're in trouble." Digitalisation and home automation are happening. The question is, are we going to have managed change or disruptive change? Because if it is disruptive, that's more power cuts. Erwin with a Nissan Leaf EV

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