Utility Week

UTILITY WEEK | JANUARY 2022 | 9 Annual roundup for Business, Energy & Industrial Strategy (BEIS)'s Energy Retail Market Strategy for the 2020s, with its myopic focus on auto- switching as the cure to all ills. There was no time for schadenfreude when soaring wholesale power prices in the autumn took a scythe to the industry, lead- ing to the failure of more than 25 suppliers to date. Former Ofgem chief executive Dermot Nolan had little sympathy for the bosses of failed suppliers when he was interviewed by Utility Week in September, saying: "If you have committed to a fixed tariff and you haven't hedged accordingly, then you don't really have any right to complain." However, a group of recently departed retailers took a very different stance in a scathing letter to Ofgem in October. It accused the regulator of helping to bring the energy market "to its knees" and criticised its approach to the industry throughout the early stages of the coronavirus pandemic and the emergence of the recent crisis. The market exits came so thick and fast throughout autumn and winter that it was o'en difficult to keep up. But two fail- ures stood out for our readers. In October, Pure Planet lost the backing of BP, while in November Bulb's 1.7 million customers were protected by the special administration regime. M&A hits the headlines As discussed, the investibility of utilities was a hot topic in 2022 and there were some live examples of the kind of premiums investors were willing to pay for prized acquisitions. The most high-profile was National Grid's acquisition of Western Power Distribution (WPD). It may seem an obvious fit in hind- sight, and National Grid had been refer- enced as a potential suitor in the early stages of PPL's quest to offload the DNO, but the announcement took many by surprise. It had been assumed that one of the European util- ity monoliths or a private equity powerhouse would be the only candidates with pockets deep enough to take on WPD. Instead National Grid announced not just its successful pursuit of the company but also a "strategic pivot" towards power, with the launch of a sale process for its gas transmission arm. Our coverage of the deal and analysis of its wider implications were a popular thread throughout the spring – in particular the remarks of a senior Ofgem fig- ure that the premium paid proved the regula- tor had got the cost of equity right. Other notable M&A headlines included Pennon's acquisition of Bristol Water and SSE's sale of its remaining stake in SGN. ESO separation National Grid also featured in another strand of content that was of constant fasci- nation to Utility Week members throughout 2021. At the start of the year, Ofgem recom- mended the full separation of the Electric- ity System Operator (ESO) from National Grid, citing the need for total independence for a Future System Operator (FSO) with added responsibilities in coordinating the energy transition. While the ESO is already a legally sepa- rate body from National Grid, there has long been an appetite within Whitehall for a clean slate. So, it was no surprise when BEIS backed Ofgem's stance in a consulta- tion in July. This suggested a phased imple- mentation of an FSO, which would first take on the existing capabilities and functions of the ESO. However, the document also set out a ra' of other potential responsibilities, leading to questions about how quickly this vital bedrock of net zero could be brought online. Policy bonanza 2021 was the year in which industry calls for greater clarity of net-zero policy were answered. At least partially. Judging by the stories that grabbed the attention of Utility Week members, it was the long- awaited Heat and Buildings Strategy that sparked the greatest interest. While this prompted some criticism that government was avoiding making a decision on which technologies would drive forward the decarbonisation of heat, there were counter views that this was a pragmatic approach to a landscape of uncertainty. The blueprint, along with the flagship Net Zero Strategy, made clear that govern- ment now expects industry to ramp up innovation and drive down prices for low- carbon heating. The emerging solutions to this challenge are sure to feature promi- nently in our best-read stories for 2022. Looking forward On which point, are there any predictions to make about what we will be reflecting on in 12 months' time? As set out in our round- up of the ED2 final business plans, there are a number of discussion points that will no doubt arise from this process. While there are signs that Ofgem and the networks are perhaps more aligned on the need for anticipatory investment than in gas and transmission, there will inevitably be points of conflict. Distribution networks will be keen to see if the outperformance wedge has been retired completely a'er the CMA's pronouncements, while there will be much debate over the design of the cru- cial uncertainty mechanisms. I would also expect to see the DSO model being a regular conversation topic in the new year. On the water side, I would expect con- versations around the scope of the PR24 price controls to break cover. Investment in natural capital, support for decarbonisation ambitions, consumer engagement and the need to take a longer-term view are all likely to feature. Our Energy Reset campaign will continue to push for reform in the retail market, with Ofgem consulting on a number of proposed changes. The next revision of the price cap in early February will be a key date. People moves will no doubt be another area to watch but it would be foolish to make predictions. One high-level departure we can expect to debate, though, is Jonson Cox's departure as Ofwat chair in April, having twice extended his tenure. No doubt M&A activity will also continue. One major deal that should take place this year is the aforementioned sale of a majority stake in National Grid's gas arm. Having committed this to paper, the one prediction I am confident in is that there will be a story or a development that I could never have imagined. It is what makes cover- ing the utilities sector a constantly fascinat- ing job. James Wallin, editor Top 3 stories among Utility Week members Networks • RIIO2 appeals sought by all transmission and gas distribution networks • Premium on WPD sale is 'big help' to Ofgem • DNOs reveal ED2 plans Water • Ofwat names innovation competition winners • CMA narrows gap with Ofwat on cost of capital • Where does Fletcher's departure leave Ofwat? Energy Retailers • Will soaring wholesale costs take us back to a big six? • EDF becomes third supplier to adopt Kraken platform • Liquidity has become a primary concern for energy suppliers

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