Alistair Phillips-Davies’ speech at Marketforce’s The Future of Utilities
On Christmas Day last year renewable energy powered 40% of Britain’s electricity; which is close to being a record for a single day. This ended a year in which output from coal fell to its lowest level since 1935.
Britain’s turkeys were roasted using electricity generated from onshore wind, offshore wind and hydro power. Whilst the bookmakers had money on it being a White Christmas, for those in the energy industry we marvelled at a Green Christmas.
I say this because it encapsulates the scale of the change in our energy generation mix that is taking place right now. It is a change that brings huge opportunities.
I joined the energy industry 20 years ago last month. At that time if you’d have told me that in 2017 the UK would have 10 GigaWatts of onshore wind, 5 GigaWatts of offshore wind and 11 GigaWatts of solar in our mix I probably wouldn’t have believed you.
The late 1990s electricity system was very different to today. Power cuts were far more common and our electricity was high carbon. We as an industry had to change.
And change we did.
The energy system we have now is unrecognisable from 20 years ago. My speech today outlines how to approach an energy system which will again change in ways we can’t yet imagine over the next 20 years.
This brings challenges and it brings opportunities. Our role is to ensure that 20 years from now someone delivering this same speech can say we as a group of industry leaders met those challenges on behalf of customers, our economy and our wider society.
A framework to guide change
Many people in the energy sector lament change. They see it as a risk. They think their job is to contain and mitigate it.
In my view that is the wrong approach. In our sector change is a continuous process. Whether it driven by Brexit or changing customer expectations, the status quo will not last.
There is never a handbook or ‘how to’ guide for change. Yet we may have the basis of a framework. The UK Government’s draft Industrial Strategy did not pick winners from this changing energy system. Instead it outlined the broad parameters that we must work within:
- Firstly, we must ensure that the shift to a green economy is cost-effective;
- Secondly, our energy networks need to adapt for the future;
- Thirdly, our energy policy should reward British industry and stimulate economic growth across the UK.
It’s hard to disagree. The challenge being asked of our industry is how are we going to respond?
I’ll now reflect on each of the three areas in turn.
We must ensure that the shift to a green economy is cost-effective
it is right that energy cost is the primary focus for this government.
I speak regularly to our customer service teams and hear customers’ perspectives first hand. They tell me unequivocally that the cost of energy is the most important issue to them.
We know that Britain is shutting down old coal stations, building new nuclear and renewables, and upgrading a post-war grid. Doing so will incur costs that are unavoidable.
Yet at SSE we say that the customer is at the heart of everything we do. So we can’t just ignore them when they tell us that cost is their number one concern.
We have a few options available to us:
We can try and reduce costs by reforming the regulation of the retail market, and government clearly have ideas in this area that we will respond to in a constructive and open-minded way. Particularly if further assistance can be provided mainly for those customers who we have identified as vulnerable and who need more help with their energy costs.
We can try and reduce costs by cutting operational costs and being as efficient as possible. And that’s something that SSE’s success has been built upon.
Yet for sustainable cost reductions over the long-term we need a more strategic approach.
We can achieve reduced cost by industry and government working together. Stability in the policy environment allows us to plan, reduce wasted spend and target our resources. All of this will better target spending and reduce costs.
Let’s also not forget that the Government has built the foundations for what could be amongst the most reliable and enduring mechanisms found in global energy markets.
Mechanisms like the Capacity Market and Contracts for Difference are embedding into our system and I believe they can drive significant investment in technologies such as new gas and offshore wind at prices which many would have thought impossible a few years ago. Gas and renewables can provide the flexible, base-load of power that the UK requires, particularly if new nuclear power stations are not delivered on time.
Add to them the Government’s commitment to long-term carbon pricing and the efficiency-focused RIIO model for network price controls. Taken together we have the basis of a policy and regulatory framework that is focused on decarbonising our economy and investing a diverse range of technologies at ever reducing cost.
Our energy networks need to adapt for the future
The second challenge is to transform our energy networks. Our networks have served Britain very well by reducing power cuts whilst making huge investments and controlling costs efficiently. These are achievements that were hard-won and shouldn’t be over-looked.
But now we need more from them. This country’s Distribution networks are arguably now at the centre of our energy transformation.
They are going to have to be more flexible, more dynamic and far smarter. Distribution Network Operators will need to transition to new roles as Distribution System Operators empowered to locally balance capacity and energy.
There is lot of discussion on what this transition will look like and what roles different parts of the industry will play. This is an important debate, but what is more important is delivering the best result for the customer.
In my mind, this transition will be best delivered by learning from the past mistakes of our industry and avoiding unnecessary complexity.
Our six DNOs have decades of experience of responding to customer needs and conducting local network planning. This local knowledge and expertise means they are now best placed to be the engine of this new system - supporting and managing the efficient connection of flexible and dispatch-able resource in their geographical patches.
There is a lot of work to be done. Ofgem’s RIIO regulatory framework is driving the beginnings of this necessary evolution. It is asking us the right questions and, as ever, we have to see the opportunities and adapt.
RIIO has been the enabler for our networks business, Scottish and Southern Electricity Networks, to undergo significant transformation of its systems and service. At the same time customers’ network costs IN our Distribution areas are reducing in the coming years.
We are now beginning to run tenders to manage local constraints in our distribution networks through flexibility services, such as Demand Side Response, Energy Storage and stand-by generation. To return to how I started this speech, 20 years ago this would have been unimaginable.
As we move to this new, smart, flexible system, this is an exciting time to evolve RIIO and make it deliver the framework of the future. However, success is not guaranteed.
The industry must now work constructively with the regulator to make sure that precise roles are defined, that objectives are clearly articulated and that the next price controls build on this further. I look forward to helping achieve these aims.
To ensure that our energy policy rewards British industry and stimulates economic growth across the UK
Finally, the Industrial Strategy talks about linking energy policy to wider industrial benefits.
I couldn’t agree more.
I lead a UK-listed utility. We operate across the UK, from onshore wind farms in Scotland and Northern Ireland to smart metering centres near Portsmouth. We are an accredited Living Wage employer and have almost 20,000 people working for us. We are the only FTSE 100 company with the Fair Tax Mark. And last year we calculated we made an almost £9bn contribution to the UK’s economy.
So we understand more than others the need to meet the third challenge.
This is partly about capitalising on existing strengths. The UK is a world leader in offshore wind and a domestic supply chain is developing. This is bringing jobs to companies from Fife to Falmouth.
Our own Beatrice offshore wind farm is being built using substantial UK supply chain content. The Industrial Strategy provides an opportunity to build on this through industry co-ordination, private and public sector partnerships and central government leadership.
There are so many exciting opportunities in offshore wind. We now have the technology to go deeper offshore than ever before. We’ve a stake in the Dogger Bank project which could, in time, unlock the beginnings of a pan-European North Sea energy grid.
I’ve talked here about offshore wind but the Industrial Strategy allows us to think beyond that. Technological change in demand, large scale energy storage, domestic batteries and flexible gas generation will be transformative and these are the areas the UK should be looking for sector deals that create wider industrial benefits.
In conclusion, my career in the energy sector over the last two decades has seen considerable change. We have transformed significantly as an industry.
But we can’t rest on our laurels and now we’re being asked to transform again.
The direction that transformation needs to take is clear. As I have said:
- we must ensure that the shift to a green economy is cost-effective;
- our energy networks need to adapt for the future; and
- our energy policy should reward British industry and stimulate economic growth across the UK.
If we achieve these things, we will be able to look back in 20 years and say that we made it a success. We delivered for consumers. We were part of a low-carbon transformation in our energy sector.
It’s a challenge that we at SSE relish and I know that people in this room will share that sentiment.