Future of Utilities conference: What is needed to deliver the energy system of 2040?

Thank you Laura. And thank you to Marketforce for their efforts in bringing the industry together to debate and discuss the biggest issues we collectively face.

I’m Chief Executive of SSE – a British company listed on the London Stock Exchange, headquartered in Perth with electricity generators – large and small – throughout Scotland, England and Ireland. We own and operate the electricity distribution networks in the southern central England and north of Scotland, alongside the transmission network in the north of Scotland too.

So, I am pleased to be here and I’m grateful for the opportunity to give a perspective on the energy system of the 2040s.

In giving that perspective there are three key themes I want to highlight:

• The first is that the imperative to tackle climate change is the driver behind all the investment and reform in the UK’s electricity industry since 2008. It will remain so, I expect, for most of our lifetimes. The challenge is how we ensure affordability, equity and fairness underpin further reform.

• My second theme is that while we have witnessed fantastic change and investment over the past ten years – we have yet to shake off a perception amongst some that we are an industry beholden to old ideas and old technologies.

• And finally, as an industry, as individual companies and as leaders within those companies, we must work harder to put – and be seen to put – the public interest first.

Cutting carbon: affordably, equitably and fairly
But my starting point must be the climate challenge. Thankfully, a consensus remains in the UK that tackling climate change remains a foremost concern.

The Climate Change Act celebrates its 10th birthday this year representing, arguably, the most stable and progressive legislative framework for tackling carbon emissions in the world.

This framework brought about reforms to the electricity market that are delivering both security of supply and decarbonisation. While we’ve had ten years of progress, we are only a quarter of the way though the journey to cut emissions. And the next steps of the journey through to 2040 and beyond look a whole lot more difficult.

I do sometimes wonder, however, if we might make things more difficult than we need to. Sometimes, we too readily revert to polarised debates and binary choices. It used to be coal versus gas. Now it’s centralisation versus decentralisation. Or offshore wind versus nuclear. Or batteries versus pumped storage.

A smart, responsive future low carbon electricity system must be all those things – and more too. Each technology must stand on its merits and provide the best, affordable solution to our electricity needs.

If they stand on a platform where the real cost of carbon is reflected in a strong and stable carbon price – then the allocation of scarce resources – customers’ money – will be attributed more fairly over the long term.

A place for onshore wind
In terms of technologies, it is the case that onshore wind has been the great success story of the past ten years. It is the dominant reason why the electricity sector has managed to take the heavy lifting in helping to deliver the first three carbon budgets.

With the fourth – and fifth carbon budgets looking difficult to achieve – not having the full array of tools in the country’s tool box seems to me, incomplete.

The onshore wind industry has matured. It has highly developed supply chains, has learnt how to work closely with local communities – and unlike almost any other industry in the UK – has a proud record of sharing the economic benefits of development with local people.

There remain good sites across the UK with excellent wind resources plus we can and must repower many of the wind farms operating today in the 2020s and beyond.

Long term affordability is a vital prerequisite to delivering the public interest, and the Government has clearly signalled its desire to reduce costs in the energy market; commissioning the Cost of Energy Review and intervening to put a cap on energy bills.

Equity and fairness
Keeping costs low must be the first challenge to us all in this industry. But there is a second consideration: the equitable allocation of the costs associated with this low carbon transition.

This first phase of the UK’s low carbon transition focussed on the decarbonisation of electricity. I’m not convinced either the government nor the industry properly thought through consequences on inequality of things like the feed-in-tariff and the costs of renewables being socialised across all bills equally.

What I am convinced about however, is that we do not make the same mistake twice. The electrification of transport is the next big challenge. The electricity infrastructure to support that transition will need to be reinforced, reorganised and reformed.

I don’t believe the generality of electricity customers should pick up the entire tab for that investment.

The first task must therefore be for networks companies to think as creatively as possible to manage this transition without the need for wholescale reinforcement. But the second must be for government and the regulator to consider very carefully as to how any additional costs are apportioned.

A performance record and an imperative to change
So – my second theme relates to change.

It could be argued that – at the time of the Climate Change Act in 2008 – the exciting part of the electricity industry for a bright young engineering apprentice would be the renewables sector. That was true. Maybe to some at the time – electricity networks might not have held the same appeal.

But all that is changing.

Take Scottish and Southern Electricity Networks Transmission in the north of Scotland. Ten years ago, this was the smallest and most remote part of the transmission network – with a regulated asset value of less than £500m. Now that network represents a scale of change that is truly exciting.

With over £3bn of investment since 2009, this network now has a regulated asset value of more than £2.5bn – and is expected to top £3bn by the end of the decade.

90% of the electricity it transmits is renewable – with over 5GW of electricity generation, 20% connected at distribution level, coming from renewable sources, more than double the volume of renewable electricity capacity in less than 10 years.

And of course – it doesn’t take a genius to work out why. The rain falls and the wind blows in an unparalleled fashion in the north of Scotland!

This record of investment and reform is layered upon a striking story for electricity networks. UK energy networks are amongst the most reliable in the world, network costs are almost a fifth lower than they were in 1990 and – across all networks – industry projections forecast there will be a further £45bn of investment by 2023 – while prices remain flat.

But that story is not enough.

Localised energy systems: the killer app in the fight against climate change
We know the electricity distribution network in particular has a big job on its hands in this energy system of the 2040s.

• It can connect many more Gigawatts of renewable energy.

• It can support the mass take up of electric cars.

• And it can deliver genuine democratisation of energy systems at a local level.

But it can only do these things if we, as an industry, embrace significant reform and think creatively.

That means avoiding unnecessary network reinforcement in favour of smart, responsive methods to match supply and demand locally. To achieve this, DNOs need to collaborate and learn together to become DSOs, in effect mini system operators, managing their local network dynamically and becoming truly neutral facilitators, providing a platform for distributed energy resources to thrive.

As an industry we are making progress. We are already using local knowledge to run local tenders for local solutions, delivered by our local teams.

We must continue this progress, working collaboratively with other network operators, the regulator and government to deliver cross-industry solutions, ready to be built into RIIO-2 as it evolves. We must step up and I like to think we are.

But there is more to do to further localise our activity. We need to realise that there needs to a whole lot more planning at a local level. With the voice of the community, at the heart of it.

That means we’ve got some big questions to ask. Are we entirely convinced local communities have a big enough voice in the strategic planning of local energy systems? Is it time for more creative arrangements at a local level where energy networks and local authorities work together on strategic development?

For those of us involved in what we can call ‘big-electricity’, I believe we must embrace this reform of the decentralised and democratised energy system. The country will always need high voltage grids – and larger scale generation can provide the foundation from which local systems can flourish.

That makes this a hugely exciting time to be involved in electricity distribution – and we must, not just respond to this increased localism – but help lead it too.

Putting the public interest first
My final theme relates to the challenge of legitimacy we are all facing.

This debate is being expressed as one of private companies versus re-nationalisation. The polarised nature of this debate can sometimes hide the underlying issue that is at stake. In my mind that is the question of public legitimacy.

At SSE, we have always understood the nature of the work we do. We exist because of an Act of Parliament. And we will always require public consent to be able to do what we do. It is a privilege to be the custodians and stewards of national infrastructure that keeps the lights on and homes warm.

While it is true the efficiencies of the privatised utilities compare well to those when these industries were nationalised, the legitimacy debate of now demands that we demonstrate – not just enhanced efficiency on behalf of the energy bill-payer – but that the public interest is always front and centre.

Our product is something people need – not just want. With that comes great responsibility – to run our businesses in ways that support the public interest. To become more reflective of the communities we serve. To pay fair wages, create and sustain good jobs, and create opportunities for people who may have been excluded from them in the past.

And yes – to pay our taxes. We should be proud of reasonable profits, fairly earnt. We must avoid the notion that tax is a penalty on profit. Paying tax on profit is our side of the social contract that enables us to exist. Which is why we are Fair Tax Mark accredited.

As we look ahead to RIIO2 and to the political debate about the future of this industry, we have to contemplate new ways of demonstrating we are fulfilling our part of that social contract, genuinely acting in the public interest and clearly putting our customers at the heart of our business.

People are fully entitled to ask if private ownership and operation of utilities is the right thing for the people of this country. I believe it has been a great success.

But the arguments of the late 20th century, however powerful then, need to be made relevant to the energy challenges that we face today and will face tomorrow.

That means we have to be progressive in our approach to a changing electricity system. And as we go into RIIO2 we must embrace reform that in the past might have seemed radical but in the future might be essential.

Most of all – we must understand as the custodians of critical national infrastructure we have responsibilities that go well beyond the safe and reliable provision of energy. We must live up to the responsibility of being the backbone of the British economy – both now and in the future.

And – in case there are some that need more persuasion, perhaps now is the time for a more explicit duty in the regulatory framework that requires all parts of the energy industry to meet a defined public interest.

Tackle climate change with all the tools, embrace change and put the public interest first. The critical ingredients of the fair, low carbon energy system of 2040.

 

About the author

Alistair Phillips-Davies Chief Executive

Alistair became Chief Executive of SSE on 1 July 2013. He has a degree in Natural Sciences and is a qualified Chartered Accountant. He has worked in the energy industry since 1997, when he joined Southern Electric. He was appointed to the Board of SSE as Energy Supply Director in 2002 and was appointed Deputy Chief Executive in 2012. As Chief Executive, he leads the Executive Committee and the rest of the SSE team in the day-to-day running and operations of SSE and is responsible for implementing the strategy and policy set by the Board.

Read more articles by Alistair Phillips-Davies