Utility Week

UTILITY WEEK | 18TH - 24TH OCTOBER 2019 | 7 Utility of the future: Regulation The regulators respond toclimate change We begin our regulation pillar by asking regulators themselves about the future direction of travel. Expect to see a more proactive approach to tackle climate change is their message. Networks and RIIO2: when the going gets tough, the tough get innovative It was no surprise that Dermot Nolan once again set out the tough stance Ofgem would be taking with networks as they head into the RIIO2 price deter- minations, which for 60 per cent of networks take place by the end of 2020. "The board has taken a clear view so far on what the cost of capital should be, and that networks can expect average returns to be lower. But if they want returns of the same mag- nitude as RIIO1, they will have to up their game and be more innovative than in the past," he said. Nolan acknowledged that he expected kickback from networks on price determina- tions but Ofgem's stance was based on the fact they were not risky businesses. A number of conference speakers, including Economic Insight's director and co-founder Sam Williams, underlined the need for innovation and on a big scale, and questioned how this could come about in a heav- ily regulated market. He called for a shi‰ to a more longer-term approach to regulation – one of the key thrusts of the NIC report. There are certainly jitters in the sector about the avail- ability of Ofgem's innovation fund, which allows networks headroom to invest in new tech- nology and processes. Nolan reassured the networks that the innovation funding pot would remain going forward, but it would need to be shared with third parties. Networks, he said, would have no divine right to it. Retailers: Some rms may face obliteration, and that's• ne Any struggling retail Ž rm look- ing for Nolan for a sympathetic ear would have le‰ the confer- ence severely disappointed. Nolan acknowledged that there had been interventions, and in the retail market this had cre- ated a perception of an uneven playing Ž eld. "I think us and government will do our best to correct that," he said. But he was unapologetic about the impact of the price cap and the e' ect it was having on retail businesses, including the departure of a giant like SSE. "In any sector you expect to see shakeouts and mergers and exits – and we've seen some spec- tacular levels of exit and entry. I'm agnostic about any particu- lar Ž rm entering and leaving the sector," he remarked. "So, I welcome change and the disruptions that have come to the market." Nolan said he was conscious that "there are infelicities in the retail market that do have to be addressed and I would say that when it comes to the price cap, the board of Ofgem has a very clear view. We do not want to see a price cap in the long term and we are determined to Dermot Nolan on Ofgem I t was Octopus's chief executive, Greg Jackson, who aptly contextualised the gear shi‰ needed to tackle climate change when he talked about the huge aircra‰ car- rier built in the second world war now resid- ing on the Hudson River, built by the US at speed alongside dozens more. It's quite a contrast to the near decade-long process delivering today's – agship of the UK – eet, The Queen Elizabeth. He was making the point that tinkering at the edges was no longer an option for government and utility companies – very much a common refrain at Utility Week's 2019 Congress in Birmingham where he was a keynote speaker. Jackson's beef was that the way companies were being regulated "infantilised" them, creating the polar opposite conditions to bringing about the bold moves and big ideas needed if we are to meet net zero targets. Jackson is not alone in his sentiments: there is a groundswell of opinion in the sec- tor that regulation is no longer Ž t for purpose in the predicament we Ž nd ourselves in. The greater need for innovation, collaboration, and more resources is leading many in the sector – including the Utility of the Future (UOTF) Editorial Advisory Board that we'll be hearing from in a couple of weeks' time – to the view that redesigning regulation needs to happen as a matter of some urgency. The debate is timely. The National Infra- structure's report on utility regulation, published a‰ er Congress, includes recom- mendations for new duties for Ofgem and Ofwat, to ensure that their decisions promote the achievement of net zero and improve the resilience of the UK's infrastructure. But what do the regulators themselves think? And what are their views on resolving economic regulation with the challenges of the future? At Utility Week Congress on 8-9 October they spoke candidly about plans for the near and mid-term future. We also explore what can be learned from regulation in Northern Ireland Here we pick out the key messages of their time on stage. continued overleaf

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