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DISRUPTION RESEARCH: Key findings l All respondents agreed that business models will change increasingly over the next 15 years as a result of disrup on l In the main, the market agrees that technology and regula on are the most disrup ve factors (both were rated 6.75 out of 10). It is thought regulatory disrup on will affect energy genera on and energy retail the most (just ahead of energy networks) l Confidence in the various regulatory approaches is not high – 4.8 out of 10 on average l There is (marginally) more confidence in the RIIO regime (5.2 out of 10) to accommodate the scale of change facing networks in the next five to ten years than there is in the PR19 framework (4.8 out of 10) to accommodate the scale of change facing water companies in the me period to 2025 l Government and local authority ac ons are believed to be crea ng both posi ve and nega ve disrup on – some respondents said there was a lack of focus due to Brexit, but others said the government would provide both the nudge factor and regulatory push to alter consumer behaviour and the usage and storage of electricity/launch of new business models THE DISRUPTION: BREXIT What's the deal: By this me next year, the UK will be on the verge of leaving the EU following last March's triggering of the Ar cle 50 withdrawal no ce. Brexit places a ques on mark over the UK's con nuing par cipa on in the EU's internal energy market (IEM), the Emissions Trading System and Euratom and has par cular ramifica ons for the development of the all- Ireland single energy market. Prime minister Theresa May said in her Mansion House speech that the government aims to protect the single energy market across Ireland and Northern Ireland, explore op ons for the UK's con nued par cipa on in the EU's IEM and maintain a "close associa on" with Euratom. Why it ma ers: A key reason why the complexity and far-reaching impacts of Brexit may prove disrup ve for u li es is that their overall demand on government me mean ministers are swamped with decision-making requirements and the demands of lobby groups to priori se their par cular interests. The sheer volume of work involved within a limited mescale runs the risk of key technical requirements and impacts on regulatory and market mechanisms being overlooked or brushed aside. Top of the pile for u lity concerns in the Brexit process is the future of its rela onship with the IEM and the way in which the UK's growing interdependence with wider European energy networks will be managed in future policy and regulatory approaches. Brexit also looks set to end the UK's membership of Euratom, which currently governs the safeguarding of the UK's nuclear industry as well as cross-border movement of atomic labour and materials. THE DISRUPTION: POLITICAL INFLUENCE AND INTERVENTION What's the deal: A surge in populist poli cs over the past five years has prompted a corresponding rise in poli cal appe te for intervening in u li es markets. The impacts of this urge to intervene on behalf of consumers (and voters) have been most obvious and most heavily trailed in the energy retail market, where they have culminated in the introduc on of price caps to protect vulnerable customers and legisla on for wider price regula on. However, in the past 12 months, water companies and energy networks have also begun to feel the effects of poli cal influence on the shape and tone of regulatory frameworks. PR19 has included a crack- down on investor returns, most notably via a lower weighted average cost of capital. But environment secretary Michael Gove wants to push further forward with such measures and has promised to give Ofwat special powers to enforce a new era of financial responsibility and transparency at water companies. Why it ma ers: In recent research by U lity Week, industry chief execu ves were clear they felt that a rising appe te for poli cal interven on in markets is significantly eroding the independence of economic regulators, with a poten ally deleterious effect on investor confidence. This view was most strongly expressed by leaders in the water and energy networks space, where the ire of public-spirited MPs and ministers is being most freshly felt. In the wake of sugges ons that the RIIO mid-point review could reopen revenue se lements, one gas network leader told U lity Week that Ofgem's increasing suscep bility to poli cal pressure to take rapid ac on against perceived market failures runs the risk of damaging the largely posi ve and effec ve regulatory approach established under the framework. Our survey found that there is (marginally) more confidence in the RIIO regime (5.2 out of 10) to accommodate the scale of change facing networks in the next five to ten years than there is in the PR19 framework (4.8 out of 10) to accommodate the scale of change facing water companies in the me period to 2025. THE DISRUPTION: DIRECT PROCUREMENT What's the deal: Direct Procurement for Customers (DPC) is a new set of arrangements Ofwat is introducing to the water sector as part of its next price review, PR19. The new approach will enable third par es to design, build, operate, and finance new large-scale projects that would otherwise have been delivered by the incumbent water company (Ofwat defines a large-scale project as one with a totex value of more than £100M). This model is already being used in the £4.2 billion Thames Tideway Tunnel, or "super-sewer" – London's second biggest infrastructure project a er Crossrail. Why it ma ers: DPC is an exci ng prospect for companies, as it creates the opportunity for new partnerships to deliver some of the country's largest projects. However, there are those in the sector who have reserva ons about using DPC because the upfront costs a ached to the tendering process are high compared with more tradi onal procurement methods, and because there is uncertainty around how risk alloca on will work in prac ce. Top of the pile for u lity concerns in the Brexit process is the future of its rela onship with the IEM P R E S E N T S 16 WET NEWS APRIL 2018 | wwtonline.co.uk

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