Utility Week

UTILITY WEEK | 28TH FEBRUARY - 5TH MARCH 2020 | 9 Policy & Regulation Analysis T he new chief executive of Ofgem, Jonathan Brearley, has pledged to crack down on "sharp practice" in the energy retail sector and promised networks a squeeze on the cost of capital. He has also vowed to change the percep- tion of the regulator as being overly con- cerned with short-term cost-cutting to the detriment of investment for the future. And, he insists, the fears around the energy price cap have so far proven to be misplaced. Brearley was speaking at an Ofgem Energy Conference in London earlier this month, at which he outlined the organi- sation's forward work programme and its recently published decarbonisation plan. The journey to net zero dominated his opening remarks, in which he said it was Ofgem's core mission to help to build a low- carbon energy system while keeping con- sumer bills low. He said: "There has sometimes been a perception that Ofgem has prioritised effi- ciency and reducing costs over protecting the customers of the future. Some stakehold- ers said we have been swept along by, rather than leading, efforts to decarbonise the UK. "Under my leadership Ofgem is taking an approach which recognises that protecting customers includes helping to hit the net zero target. Giving equal commitment to protect- ing customers of today and in the near future will reinforce every decision we make." He went on to say the biggest challenge of the net zero goal "is not technical but decid- ing who pays for it and when". He added: "The plummeting cost of off- shore wind shows us that thanks to inno- vation and economies of scale, low-carbon energy sources can become cheaper than their fossil fuel equivalents. In the long run the bill for consumers may well be higher if we do not move now." Taking a tough line Brearley said one part of Ofgem's role in pro- tecting consumers was "stamping out sharp practice" on the retail side, saying it would "do more to identify and call out the unac- ceptable behaviour in the market early where we are concerned about the way customers are treated". This focus on the customer stretches into network regulation, Brearley stressed. "Our current price controls have resulted in company returns at the higher end of our expectations. We are learning lessons for the next set of price controls, which will be tough on the companies but fair. "Of course we need investors. We cannot hit net zero without attracting the necessary investment into Great Britain's networks. This means having a fair, stable and trans- parent regulatory regime for those investors. But we will ensure that company returns in future are no higher than necessary to achieve this, in order to keep bills as low as possible for consumers." Asked about the priorities for RIIO2, Brearley said there were three key areas: "First, that the cost of capital should come down – and quite dramatically. Second, the price control needs to be more flexible. Given the uncertainty, we may need to ramp up or ramp down revenues as a result. "And finally, we want more strategic innovation. We want to make sure we are focusing on the things that really matter for the sector, not simply operational improve- ments, where we expect the companies to take forward more of that on their own." The sea of change will not escape Ofgem, Brearley insisted. The regulation model can no longer be solely based on "pure, classical free market economics". "For a time we expected competition alone to fix the retail market. While competi- tion can be highly effective at keeping costs down and stimulating innovation, markets can, and do, fail. When this happens, under my leadership, Ofgem will intervene to pro- tect consumers – especially those in vulner- able circumstances – and the environment. "Our exam question will always be which market or regulatory structure is in the best interest of current and future con- sumers. We will examine the full range of regulatory tools when identifying what we think is the best answer, without any prior assumptions." Measuring the price cap During his speech, Brearley referenced the early success of the price cap and Ofgem's commitment to it. Asked by Utility Week to point to these markers of success, Brearley said: "We seem to have a price cap that has definitely benefitted the consumer and we are seeing quite active competition. We are seeing switching rates at roughly the same rate or slightly higher than before. We are seeing customer service standards that don't necessarily seem to have been compromised. "If we take a step back and look at the things we were worried about, very early indications are that those aren't things that seem to be playing through in that way." He was also quizzed on why Ofgem did not intervene in Ovo Energy's acquisition of SSE's retail arm, given the ongoing investiga- tion into the former's historic failings on bill- ing and communication with customers. His response was that the regulator had acted "quickly and robustly to the things we saw". He added: "Like any company, if that behaviour continues we will follow that up with enforcement action and fines if necessary." James Wallin, digital editor, Utility Week Brearley fires warning shot at networks and retailers Ofgem will redouble its efforts on decarbonisation under its new boss, but there will be no let-up on bills. James Wallin reports. Ofgem CEO Jonathan Brearley

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