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14 | OCTOBER 2020 | UTILITY WEEK Build Back Better Interview ate jobs, to develop the supply chain and so on. That's a worry. "Second, I think it will actually slow things down for net zero." National Grid has proposed upfront spending of about £10 billion on its UK networks over the next five years, but this had been roughly halved under Ofgem's dra plan. She runs through some critical projects under threat: a new offshore ring main off the coast of East Anglia to facilitate connec- tions for new wind farms; and exploring hydrogen technology, are two instances. Third, she says: "They haven't le enough money to make sure our electricity network will be reliable. Ofgem has allowed us less money to replace the assets than we need to keep them at the same quality that they're at now. It would take us 100 years to replace the assets given the funding they're making available. "They've taken away all incentives; it's all downside and very little upside – and that just makes us more risk averse." What is more, she says, Ofgem has added "lots of bureaucratic hurdles", alluding to the emphasis on the uncertainty measures being introduced. "So instead of funding stuff upfront, they've said, 'you need to come and ask anytime you need to spend any- thing, and we'll probably not tell you then, we'll probably tell you aer you've spent it whether or not we think you should have done it'. And that means a huge amount of risk for us. Our investors won't like it. It will make it much more difficult to finance the developments that need to be in place." Ofgem had been warning network opera- tors to expect a tougher price review round than they were subject to for RIIO1. But the difference between National Grid's ask and Ofgem's offer is currently a chasm. "We were surprised about quite a lot of it, and interestingly, so was everybody else," says Shaw. "Ofgem just read it wrong. They thought they had told us, but nobody else thought they had. Jonathan [Brearley] has been very clear with his team that we need to be in a world where that isn't likely to hap- pen in December." December is the deadline for final determinations. As a former regulator herself, she knows how these exercises play out and is well versed in negotiation manoeuvres. Shaw joined National Grid in 2016, having chalked up an illustrious career in transport and receiving a CBE for a services to the sector in 2016. Her first transport job in 1990 was with Transport for London, straight aer graduat- ing in history and economics at Oxford. Career progression included stints in Dubai, Singapore and Malaysia on transport projects, before returning to the UK in 1999, where she was Deputy Chief Economist and Director of Access, Competition and Licens- ing at the Office of the Rail Regulator. Aer that she was appointed managing director of operations at the Strategic Rail Authority, responsible for the contractual negotiations between the government and private sector train operators, before becoming chief exec- utive of High Speed 1 in 2011. Aligning profits to risk Ofgem was criticised for being too gener- ous in RIIO1, resulting in some hey prof- its for the networks. In June National Grid reported underlying operating profit of £3.5 billion across its UK and US operations. As a monopoly business does, she have sympathy with Ofgem's position? "It's the scale of the business that people forget. Just last year, we invested £5.4 billion, both in the UK and the US. We're doing that year on year. To make those kinds of invest- ments, you have to make profit to be able to pay the debt, and to be able to keep your equity investors happy. "And that's one of the things that I've been challenging Ofgem on. Not that I disa- gree with them that the cost of equity has changed, but that doesn't mean that every- thing has changed." Returning to reliance on the uncertainty mechanism funding, Shaw is concerned that it places too much risk on the networks, and makes planning difficult. "It all happens very late on. And our cash flow is very odd in relation to that, so you don't get the money until aer you've spent it. And even then, you get this efficiency review, so you might not get the money at all. "So when I said that would make us risk averse, it also gives us a problem, because we're not sure we'll be financeable, and we won't be able to get the money in to cover us through that cash flow. "One of the points that we'll be making in our response to Ofgem is you have to change your models to reflect the way the cash will actually flow. Otherwise it's hypothetical to the point of being unrealistic." Pressure is also likely to mount from extra costs coming from both recession and Brexit, which Shaw believes could also hike prices and present risk. In its results in June, National Grid said it expected the Corvid out- break to dent next year's profits by £400 mil- lion, although most of that stems from bad debt in the US. The impact in the UK would be more like tens of millions. Utilities had a good lockdown – and won plaudits for rising to the challenge of keep- ing vital services going unaffected under such difficult circumstances. Shaw points to the fact that the team managed to keep the construction programme going, aided by the key worker status the government bestowed on them. They were even able to get ahead on some maintenance and capital works because of the extra planning that was done to shore up the networks against risks from the pandemic. Like many utility leaders, Shaw says the pandemic has reinforced the need to get on quickly with transition to net zero – and is one of those who would like to see a ban on the sale of combustion engine vehicles brought forward. She gives a shout out to the Treasury for the £500 million it's making available to pro- vide fast-charging points within 30 miles of everyone's home to help allay fears on range anxiety. "I'm hoping that will be something we can get on with next year." Another major project, funding permit- ting, is the offshore ring main off the coast in East Anglia, which will make it easier to connect wind farms into the network. "The goal for government is 30-40 gigawatts of wind power by 2030, and we have currently installed just over 10 gigawatts. There's a big gap between those two numbers," she says, emphasising the importance of the scheme and saying she is pleased BEIS has now set up a steering committee to examine east coast wind issues. White paper wishlist Not all of BEIS's policies meet with her approval. Asked what her wishlist would be for the energy white paper (of which there is still no sign at time of going to press), Shaw signals two big asks. One is clarification on plans for proposed competition in onshore transmission, which at the moment Shaw describes as "a halfway house that is no good for anyone". She cites as an example Hinkley Point C. "They were proposing a 'competition proxy model'. So that was a 'we haven't got the competition rights through Parliament yet, so we will put in this other model that says we can simulate competition, and we can continued from previous page Nicola Shaw on… Nuclear "You need a diversity of supply, and depending on only one very big machine at Hinkley would be lacking in sufficient diversity. I want a bit more of it I think, I think it's better for the economy to be safe."

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