Utility Week

12 | FEBRUARY 2021 | UTILITY WEEK Interview final determination to be able to genuinely say plans were in the interests of customers." The big question remains whether Ofgem has done enough to head off appeals to the Competition and Markets Authority (CMA). While the changes to the cost of capital at final determination have been welcomed, there is still a wide gap between what regula- tor and regulated think is a reasonable rate of return. This was always going to be the case, but with the CMA having surprised everyone by moving signifi- cantly on cost of capital in the water sector appeals, energy networks may feel more emboldened. There has been speculation there could even be a joint appeal in which several, or all, of the companies challenge a particular element of the cost of capital. Brearley insists this is not keeping him awake at night. "The very clear instruction to our teams was to get us to where they think the right place is and put every- thing else out of their mind," he says. He adds: "We talked openly with the CEOs of the network companies around what we would do if we do end up at the CMA. Ofgem's intention is to work col- laboratively and constructively with them to keep getting that investment in place and to treat this exactly as it is – a referral to the umpire – and continue to focus on delivering net zero. There is simply too much to be lost if we end up with this getting in the way of the bigger task of supporting that transition." Net zero duty Our conversation took place as Ofgem launched its forward work programme, hastily updated to reflect the publication of the Energy White Paper the day before. This confirmed that the government will consult on a strategy and policy statement for Ofgem in 2021. Brearley has been very open about the need for Ofgem to change to adapt to the energy transition and says he welcomes the discussion, adding: "We have been very clear that we see net zero as fundamental to our goals anyway, but it all helps us calibrate that ambi- tion in terms of the next level of detail." Changes in the way it operates are already becoming evident, Brearley insists, pointing to the approach to net- zero reopeners in RIIO2, which will require the regulator to be more agile in the face of a fluctuating case load. Asked how he will overcome this challenge, while preparing the ED2 price review for electricity distribu- tion and potentially embroiled in CMA appeals, Brearley says: "It's a good test of the regulator we need to be. Proportionality is key. Where we have something that is a large, complicated infrastructure project, it needs to be treated differently to things that are smaller and can be approved or even based on a volume over time. "Equally we have to find quicker and more effective ways of doing that and that does mean making sure we have perhaps more resource in this area than we had in the past. "The regulator can only move as fast as the business case in front of them. We need those to be robust and full of information. If not, that will inevitably build in delay." At time of writing, Ofgem was yet to publish its sector-specific methodology for ED2, in which it set out a proposal to use automatic reopeners. But anticipating this news, Brearley says: "The days of a price control closing down with the funding formula are gone. Now we're in a world where it is going to have to adapt as ambitions change over time. "I have a suspicion that some parts of the sector will move even faster than we cur- rently think and the price control needs to be ready for that." The need to "promote energy system governance arrangements that are fit for the future, including Ofgem's role" is one of five strategic strands set out in Ofgem's forward work programme. Others include the enabling of investment in low- carbon infrastructure and the need to reach full-chain flexibility. On this point, Brearley highlights the importance of the "industry plumbing", such as moving to half-hourly settlements and the effectiveness of the smart meter rollout as well as the significant challenge of smart inte- gration of electric vehicle charging into energy networks. He also emphasises the need to digitalise the net- works, with a wider focus on data and digitalisation as another key pillar of the forward work programme. Brearley says he is pleased to see the white paper explic- itly reference the Energy Data Taskforce's report from 2019 and commit to the UK's first energy data strategy in spring 2021. Where do we go aer the price cap? It's difficult to talk about the future of the retail market without addressing the future of the price cap. In the white paper, the government noted the effectiveness of the cap in limiting the extent of the so-called loyalty penalty but added: "We believe competition is the most effective and sustainable way to keep prices low for all consumers over the long term." The white paper goes on to reference Ofgem's trials on opt-in switching as potentially playing a role in a post-price cap energy ecosystem. Brearley also professes his belief in competition but says the tests of a healthy retail market have yet to be hit. He says the ultimate goal is to drive that dynamic of switching and to ensure consumers have choice. But doesn't a move to automatic switching actually discourage consumers from being active participants? Brearley doesn't think so. "One of the huge opportu- nities we are going to get from the combination of the use of data from new digital products and of the differ- ent emerging technologies is that we're not going to ask customers personally to be engaged but through inter- mediaries, organisations or other technology searching the best kind of deals or them. "You can imagine saying to customers, we're going to get you the optimal deal based on you managing your behaviour – so telling us what you want and when you want it. That feels like quite a compelling offer." Ultimately, Brearley believes the pursuit of net zero goes hand-in-hand with delivering change that is in the best interests of customers. "We are at another inflection point in this transition. Some of the big decisions we've got on regulatory design are really between pathways that will be quite costly and quite difficult for consumers and others that will man- age those costs and create really big opportunities for customers as a result. "When you add together the 10-point plan, the white paper and our forward work programme it really is about creating that latter world – that world where customers are getting the best out of that market." "The regulator can only move as fast as the business case in front of them. We need those to be robust and full of information. If not, that will inevitably build in delay." continued from previous page

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