Utility Week

8 | JUNE 2021 | UTILITY WEEK The top stories… Energy Energy Water What has happened There have been mounting calls for the gov- ernment to review the balance of policy costs and taxes on energy bills. It comes ahead of the Treasury's Net Zero Review, which will tackle the wider issue of how to pay for decarbonisation. Speaking at Utility Week's Future of Heat conference in May, the director of clean heat at the Department for Business, Energy and Industrial Strategy (BEIS) David Capper said his department and the Treasury were look- ing "very closely" at the taxes and policy costs on gas and electricity. He accepted that the latter has shared much of the burden of policy and carbon costs. What has happened The Environment Agency is consulting on a proposal to reclassify seven areas of England and Wales as water stressed, meaning 14 regions will be subject to mandatory water metering and increased efficiency drives. The move is part of wider efforts to miti- gate the effects of population growth on water consumption. It has brought the concept of water neutrality back into the foreground. The goal of ensuring water demand stays What has happened The appeals by all eight transmission and gas distribution networks against Ofgem's RIIO2 final determinations have stepped up, with both sides putting forward their arguments to the Competition and Markets Authority (CMA). The first round of submissions, pub- lished at the end of April, centred on the read-across from the PR19 appeals in water. This saw most of the appellants cite the CMA's approach to the cost of equity in water as evidence that Ofgem has set its figure too low. The CMA's decision to scrap Ofwat's gearing outperformance sharing mechanism was also cited as a precedent for Ofgem's outperformance "wedge" to be rejected. However, Wales & West Utilities took a very different approach, insisting the two sectors were so different that it was "dif- ficult for any direct read across to be made". Ofgem dismissed the appellants' claims as "without merit" (see Review, p6) and defended its approach to returns. Separately, the regulator's director of networks, Akshay Kaul, referenced the "whopping premium" paid by National Grid for Western Power Distribution as showing "the allowed returns we set at 4.3 per cent remain extremely attractive for investors" (see Future Networks report, p18). What they said Kaul: "[The WPD deal] suggests one of two Bridging the gap on policy costs Gloves off as networks battle Ofgem at the CMA Pay up: should the bulk of the cost of the energy transition be paid via energy bills or general taxation? There's no pressure on developers to build water-efficient housing Water neutrality back in the spotlight things – either that the actual required rate of return for investors is considerably lower than the cost of equity we have set in RIIO2 or that the outperformance that is expected by investors is considerably higher than the 25 basis points that we assume." Nicola Shaw, UK executive director, National Grid: "What regulation is trying to do is create the same kind of incentives we would have in a competitive world. In that world you have to get your costs down and you've got to encourage people to buy your stuff. If you do that right and you're a leader in your sector, you will do well and you'll probably beat the sector metrics. That's what we should try to replicate in the energy industry too." Waterwise issued a report with a series of recommendations aimed at reducing the pressure new housing places on the water networks. The details can be seen on p32-33 but the focus is on encouraging collabora- tion and setting stretching goals for water efficiency. What they said Ben Earl, director of sustainability and water efficiency, Skewb: "We've got this slow car crash coming towards us of water shortages, into government expenditure and then intro- ducing a carbon tax. What they said Capper: "We are acutely aware that the way Meanwhile, a Public First report backed by a group of large energy suppliers pre- sented several options for rebalancing costs and ultimately recommended moving appro- priate policy costs off electricity bills and steady as more and more users access it has been given added prominence through a focus from the Waterwise charity.

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