Utility Week

20 | JUNE 2022 | UTILITY WEEK Policy & Regulation Policy & Regulation Network competition – the answer to yesterday's question? Opinion Maxine Frerk O ut of the long list of things promised in the upcoming Energy Bill, one stands out for me as being of questionable value and that is the intro- duction of competition in onshore networks. The idea of competition in networks is one that Ofgem has championed for over a decade but the world has moved on, and with net zero and energy security now top priorities is this still really the right path to go down? If indeed it ever was. Back at the start of this year energy secretary Kwasi Kwarteng in an open letter to the sector regulators reiter- ated the importance of the role of competition in infra- structure delivery across energy, telecoms and water. However, in the Energy Security Strategy, government talked about the importance of having the network infra- structure to deliver on the huge increase in renewable generation promised. It set an explicit goal of halving the time it takes to approve new network infrastructure including by streamlining the regulatory decision- making process. Introducing an additional competitive tendering step in the process is not the way to achieve that and the strategy said that certain infrastructure covered by the Electricity System Operator's new central plans would be exempt from the introduction of network competition. There would seem to be real tensions between the government's broader market philosophy and its ambi- tions for more home-grown green energy fast. Moreover – even absent those tensions – I am scepti- cal about the beneƒ ts of network competition. The enthusiasm for network competition over the past decade has been driven by reports such as one produced in 2016 by CEPA (commissioned by Ofgem), which highlight the cost savings achieved in the oŽ shore (OFTO) regime. However, the CEPA report and an earlier National Audit O" ce report both acknowledge the lower risk that these companies are taking on with, for exam- ple, a 20-year framework and guaranteed return. Under the OFTO regime the assets are only tendered once they are built so there is no construction risk and Ofgem's regime of "income adjusting events" was expected to protect OFTOs against construction faults that were outside their reasonable control. However, since 2016 the operation of these networks has not been plane sailing, with the Gwynt y Mor cable in particular suŽ ering a number of faults. The result- ing legal battles aimed at establishing where liability sits highlight a need for an updated review of the OFTO regime, if that is the example being relied on to support competition onshore. Once account is taken of the allocation of risks, and Ofgem's recent tougher stance on the cost of capital under RIIO, it is not clear how far competition is really delivering a lower cost of capital. And in terms of the wider beneƒ ts of competition in driving down costs and ƒ nding new solutions it must be remembered that network companies already take advantage of this. Although they are monopoly provid- ers they make use of contractors, appointed through competitive tender, to deliver most of the work. The beneƒ t of this in-house competition model over what is proposed is that the networks still retain responsibility for, and the licence obligations around, the quality of service that is delivered, helping mitigate the unintended consequences of competition that can be hard to manage otherwise. Following the debacle that we have seen over the past year in the retail market, policymakers should be in no doubt that there can be unintended consequences of competition that need to be thought about. The recent Oxera report on lessons learned concluded that deƒ ning the risks was key, that the success criteria should be set in terms of outcomes that should be monitored and that qualitative and quantitative evidence is needed to make the trade-oŽ between competition and resil- ience. However, worryingly, the Oxera report also noted concerns that Ofgem was "galvanised into action to ƒ x yesterday's problems rather than seeking to understand tomorrow's". Has anyone actually done the exercise of thinking through what the unintended consequences of network competition might be? It seems unlikely. Indeed, it is worth remembering that we already have competition in networks onshore through the independ- ent networks serving close to three million customers. In 2019 Citizens Advice raised concerns about whether that regime delivered any beneƒ ts for customers but Ofgem has not responded. Competition has its place. We need it to deliver inno- vative new œ exibility services and to support the wider delivery of our net-zero ambitions. But I remain unper- suaded that it is the right way forward for networks. Having been mentioned in the Queen's Speech and with draŸ legislation ready to go I think it's unlikely the idea will be dropped. However, I hope that during the passage of the bill Parliament will have a chance to debate whether this really is the right approach for today's world. It may be a useful additional tool for Ofgem to have in its toolkit but it should only be used if is clear that it will not create delays in building the infra- structure we need, that consumers will actually beneƒ t and that any unintended consequences have been fully thought through. That case has not yet been made. Maxine spent 15 years at Ofgem, latterly taking on responsibility for all aspects of the regulation of distribution networks. Since leaving Ofgem she has been working as an independent consultant for a mix of regulated company and consumer/community group clients and is an associate at Sustainability First.

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