164. The Great British Energy Crisis

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1:34Hello and welcome to The Rest is Money with me, Robert Peston. And with me, Steph McGovern. Now, today we are joined by Jonathan Braley. Now, he is CEO of Ofgem, of course, the energy regulator. It's a job he's been doing since 2020. so he's been in the game a long time in energy. Before that, he worked in Downing Street as part of Tony Blair's strategy team. He spent time in the civil service where he led the task force setting up the office for climate change. He's a man who's been consumed by energy policy for at least the last two decades and now, given he's in charge of the regulator, Robert, there is a lot to talk to him about.

2:13Yeah, there certainly is. And if you're listening and your heart immediately sinks when you hear the words energy policy and regulator, I would ask you to bear with us because regulators in this country are the great hidden powers, right? I mean, regulators, you know, whether they're him or in the media space or in the water space, my God, they've had an impact on all our lives. And so one of the things, you know, it's really important for podcasts like ours to do is to hold these people to account. And frankly, most of them are invisible most of the time. So it's great that Jonathan is here. And then there's just the other obvious point, which is whether you're struggling to pay the bills to heat your home or whether you are a business with huge energy costs and you're desperately worried how you're going to pass these on to customers.

3:03The decisions that he and Ofgem make are absolutely central to you, to all of us. So here's our interview with Jonathan Braley. Jonathan, great to see you. Energy is so important to our economic prospects, our living standards, climate change. But I want to start with something very specific in relation to what the International Monetary Fund yesterday. They said inflation would be going up more in the UK than in any other big developed economy. And they said the big reason for that is that our energy costs are going up more in the UK than in other places. I mean, is that your fault? Why is it happening?

3:44Well, when I think about energy costs and when I think about the changes we've seen over the last few years, I always start with the customers that we work for. Now, it gives me no pleasure at all to be the person on the Today programme and elsewhere talking about price rises and the sort of changes we've seen over the last few years. But look, Robert, the reason is really simple. We are more reliant on gas in this country than other countries. So as that gas price changes, our energy prices change. Now, if you look, for example, what happened before winter, we saw the gas price go up about 40 % roughly from October last year to December.

4:19And that led to about£100 price rise for the average household. Now, those prices are coming back down again. So energy costs might come back down. But we are dependent on a market that I don't control, the government don't control, but is set ultimately internationally by the international gas price. And that's the principal reason for why our bills are more. You talked, Jonathan, recently in your kind of state of the market speech about how things have changed since you started the energy policy. And you say, you know, when you started, we faced this choice between the environment, cost and security.

4:52But you think those things are closer together now. What do you think has changed? Because there's a lot of people who still think that, you know, it's one or the other. You can't have all of them. No, look, I think we're at a pivotal moment for this transition, actually. So what we have is a country that has grown its renewable sector. But as I've said, you know, your heating system is provided by gas. A lot of your electricity is provided by gas. Now, the only way in the long term I can see for us to get what we all want, which is a much more stable system and a stable cost base and a much more secure system, is by building more renewables, building more low carbon technologies, renewables, nuclear and others.

5:29And so for me, the world has changed. When I started in 2006, when we were arguing for the Climate Change Act, we thought there was a big trade-off. We thought that things like offshore wind were much, much more expensive than gas-fired generation. But two things have really happened. I mean, offshore wind costs have plummeted in the last 15 to 20 years. And indeed, gas costs have gone up significantly. So now, in my mind, both for cost, for security of supply, and indeed for stability, the renewable sector is what we need to do to provide the energy sources that we need. I mean, there is very resonant politics here.

6:06We have Kemi Baden-Ock, the leader of the Conservative Party, and Nigel Farage, the leader of reform, both saying that it is the government's commitments to hit net zero, to build more renewables, which is the reason, they say, why our energy prices are higher than other countries, are uncompetitive. You've just said they're straightforwardly wrong. Well, ultimately, it is for government and for ministers to decide the level of ambition that we face. But hang on, but Arbada and Arbada is just wrong. But coming back to the facts, just coming back to comparing costs, renewables are very cost competitive with gas and so low carbon alternatives are less than that.

6:49So if you look at the fact, just the objective facts, without getting into the political debate, if you want a more cost efficient system, you need to move to one that has renewables as a large part of it. Now, the pace at which you do that and the scale at which you do that is a matter for politicians. But the fact is, without a renewable sector, our costs would be more reliant on gas and more reliant on that international gas price. If I look at a country like Spain, for example, way more of the costs of transition are paid for through the general taxation system. Is the fundamental problem in the UK that we expect, the government expects customers to pay the bill of the transition, would it be more sensible in terms of cost for consumers, cost for industry, if more of the burden from getting to gas dependence to renewables was put through general taxation?

7:49So I am in the fortunate position of not having to manage the fiscal envelope and not having to manage public sector borrowing. So, of course, it would be better for customers if more of this was borne by the taxpayer. But I accept the Chancellor has a whole set of tradeoffs that I don't need to face. The point is, is that if you look at Spain, for example, you look at a system that has more renewables, they are more cost competitive. So I spoke to someone, one of the industrial leaders in Europe, looking across Europe at the different energy systems. And he was being asked the same question you've asked me, you know, why are we doing all these renewables?

8:19Why don't we simply go back to fossil fuels? And he pointed to Spain and said, look, because it's more cost effective to do it that way. And just on that other issue about our vulnerability to rising gas prices. We have a system here where the marginal cost of energy is set by the price of gas. All right. Is there, given now that we've got a very large renewable sector, is there another way now for setting the general energy price that is less dependent on gas fluctuation? Is the way that in a sense we organise this thing, the system, capable of being reformed? Well, the government's undergoing a almost three year reform process looking at how we might change that market.

9:07But the simple fact is, is that for new renewables, so for the stuff that we are hoping to build in the next two years, they're effectively on a fixed price contract. So the price of that electricity is not set by gas. So the more we build projects like that, the more we put them on long term prices, the less our system is dependent on gas. Now, the department did look at saying, should we have different markets? Should we separate the whole thing out and have a renewables market and a gas market? But pragmatically, that doesn't work. Why doesn't it work? Explain. It doesn't work because the electrons that come into your house come from a mixture of sources.

9:39So it's very hard to sort of define two different prices coming into your home for electricity. But contracts are different. So those long term contracts we have for renewables are things that already separate the gas price from the price of renewables. So it's something that over time will happen and significantly increase. But is there a world in which we can, you know, even before we're completely weaned off gas, forgive me for pressing you on this, but it has been unbelievably painful for businesses and for households, you know, that we are so dependent on that gas, not just on the volume of gas that comes in, but on that marginal cost of gas in terms of setting the tariff.

10:22Intellectually, I've struggled to understand why there isn't a way of smoothing it differently, given how big the renewable sector is now. Well, it comes back to putting more renewables onto those long term contracts. So basically, the concept we have now is that renewables get a fixed price for their electricity. The more we build renewables, the more they're on that fixed price, the less your bill is being set by the gas price. So it is something that will happen over time. But it's all part of making this transition a much bigger and broader transition. Jonathan, the thing I'm really interested in as someone who, where I'm sitting now, out of my window, I can see lots of wind turbines.

10:59So I'm up on the northeast coast. And the thing I'm really interested in is this idea of zonal pricing. You know, the idea that these areas where, like my area, like, you know, large parts of Scotland, often areas where there's higher deprivation and things, have got this enormous amount of capability to create renewable energy. And this zonal pricing idea of it being cheaper for us, for the people who live in these areas where there's cheaper energy is being made. but it's really it seems to be quite controversial this idea doesn't it because you know there's a lot of debate around whether if you make it cheaper for people in these areas then investors might think well hang on we're not going to make as much money so we won't invest as much like what what are your thoughts on this idea of zonal pricing can you see it working well honestly this has become a massively hot topic in the energy industry right now and what we're seeing a company's taking very polar positions with you a part of the industry saying we absolutely must have this the other part of the industry saying if you have this then we're not going to invest or we'll charge a lot more and i think the arguments are more nuanced than that so it's worth stepping back and thinking what problem are we trying to solve here and it's really quite simple it's two things it's saying when you build a wind farm particularly when you build a wind farm in scotland you have to pay for wires to bring that electricity all the way down to england to where most of the demand is.

12:25So when you add those costs together, they're different just than the cost of building the wind farm itself. So we have to have a way of making sure that we locate plant in the most efficient place possible. Second thing you want to do is you want to make sure that those plants operate efficiently so that they are discharged at the right time. And we're not in the future paying wind farms to turn off as much as we are today. Now, one answer is zonal pricing, because it says, well, if there's more wind power, your price goes down, therefore your incentives to generate go down and the system balances more organically.

12:55And I can see the attractions of that. But the counter argument against that is people say, well, I now have no idea what that wind farm is going to make. So I don't know what my returns are going to be. Therefore, I'm going to charge more to invest in the first place. And really, you've got a sector debating these as if they are two very polar extremes. My view is we need to do the maths. We need to work together. I'd like to ask investors, what would it take? what protections would you need to get back to investing cheaply in a zonal system? And equally, I'd like to ask those who want a national system, what other changes do we need to make to make sure we don't build wind farms in the wrong place and charge everybody more?

13:31And that's really the debate that's there. And, you know, it's one that we need to have. But my message to the industry is let's have a sensible conversation on the facts and treat it less like some sort of culture war specifically for energy nerds. Yeah, because it could also bring businesses to areas where this energy is cheaper. And, you know, from a kind of equality point of view, the regional inequality is the thing I bang on about the most, which won't shock you, given my accent. But it feels like just like we get these kind of enterprise zones or these free ports or whatever. This could actually be something that helps with the regional equality we do have.

14:09And then there's nuclear. If we look at why France has way cheaper power, it's because they've consistently invested in nuclear and therefore they have much more security over their price. If you look, I don't know, 10 years ahead, what share do you think of our energy will come from nuclear? I mean, in the UK, like many other countries, you could argue that it's scandalous that we allowed our nuclear industry to wind down and didn't reinvest over the last 20 years. Well, as you probably remember, in the energy policy debate, there was a big question over nuclear for a long time. And without a doubt, in 10 years, we'll certainly see Hinkley.

14:53We might see size well C on the system. And what about small modular? How many of those will we see over 10 years? I mean, it's going to take time to develop. I would love to see small modular playing a big part in our energy system. Now, there is a cost challenge there. There is a lot the government needs to work through. But in terms of new and emerging technologies, that certainly has a great deal of potential. But you can't put a percentage on how much they'll be in 10 years' time. Not at this stage. And look, small modular reactors in particular will be still small in 10 years because they're going to take a long time to develop.

15:19but they could be a big part of our 2050 system. And no, not right now. You can't put a number on that. But it is these technologies that are our future. And it comes back to the point I made right at the start. These things are basically all modular units where you build them and to run them costs very little. That's a much, much more stable system, whether it's wind farms, whether it's small modular reactors, whether it's big nuclear power stations. To me, that's much more stable than relying on a gas market we know we can't control. The other big issue, Jonathan, is investment, isn't it? in the sector.

15:50What do you think needs to happen to make the UK energy sector more attractive to investors? Well, the one thing I am really proud of is the way Ofgem has changed its approach to how we get investment in the sector. Now, you know, it's true of many infrastructure regulators. If you look in the 20 teens, we were in a bad place with the industry. We had an industry that seemed to be focused on gaming the system. And we had a regulator, therefore, that saw their job was to protect customers by protecting against this gaming. Talk us through what that gaming was. Well, to give you an example, so if you look right back in 2012, 2013, when we set a price control, network companies in some cases would see their job as bidding as high as possible.

16:30So saying we need to build all this stuff. And I tell you, I remember my first moment in Ofgem. So the day I sort of started as networks director, I sat next to our chief engineer who was a really mild-mannered, calm, lovely person. And I just kept hearing these sort of minor explosions sort of every sort of five minutes. I said, what's going on? And she talked about shunt reactors. And she took me aside in the room and she said, they told us they needed loads of these. And now they're saying a year later, they need hardly any of them. And companies were keeping that money and keeping a share of that money.

17:00And that was going towards their shareholders. Now, a regulator in those circumstances becomes quite defensive and finds it hard to approve new funding. So we had a macro conversation with the network industry, which basically said this. They liked you, basically. They said, we wanted to invest. And then they didn't. And then they gave the money back, the money that you'd allowed them to earn from the energy price. They gave that to their shareholders. Exactly. And so we had to bring in lots of protections that were protected against that. But the point is, we then had a sensible conversation with the industry leaders and said to them, it is in customers' interest that we build very fast.

17:33It is in your business interest that we build the infrastructure we need very fast. And so if we work together, the overlap between what customers need and what you need is really strong. but if you lose public confidence if you resort to some of the things we've seen in our history and i won't sort of comment on sister sectors like water but we've seen it elsewhere as well then we will not be able to deliver for you and we won't be able to deliver for the country so what we said is let's redesign our system to get that money in as far as possible fast as possible and what we ask of you is to deliver on time and on budget and right now we are building a monitoring regime which will make sure they deliver their part of that deal.

18:12Jonathan if you could sit tight for a couple of minutes we've got loads more we want to ask you we're going to go to a quick break and then off the back of the break we are going to do our monthly small business barometer. You know small businesses feel the pressure of energy prices too so we're going to have a quick chat about that and then we'll come back to our interview with you Jonathan but first here's the break.

18:40Welcome back to The Rest is Money. We're going to be chatting more to Jonathan Brealey, the CEO of Ofgem in a moment. But first, we just want to bring you the small business barometer brought to you by Monzo Business, because every month we look at different challenges facing SMEs. These are the guys who employ 60 percent of the UK workforce. So it's really important what's happening to them. This time we want to talk about what companies are doing, I guess, to work smarter and not harder. There's a lot happening at the moment. We often talk about AI and how AI is driving things like customer service and lots of other elements of business life.

19:18Also, the government's making tax digital rollout is kicking in next year. So I guess technology is no longer really an option for SMEs. It's an essential part of survival and growth. There are clearly advantages, but the UK lags behind other nations in SME tech adoption. So we're going to talk about what's holding us back and more importantly, how we can catch up. And just to give you a little stat on this, just over half of UK SMEs use at least one AI-powered tool. It might be a chatbot, it might be automated bookkeeping, marketing tools, fraud detection. So businesses are using it in some sense, but there are loads more tools out there and the adoption could be a lot more, couldn't it, Robert?

20:06You made a very important point, Steph, which is that every business is going to have to do way more online because of making tax digital. from next year and then in a rolling program, depending on size, everybody will have to file revenues digitally and do digital bookkeeping in real time and submit every quarter. That's a massive change. But digitizing an incredibly important part of your business, bookkeeping, keeping control of money, is coming whether businesses like it or not. And it seems to me that if that is being forced on everybody, then you should turn that to your advantage by looking at other aspects of what you do that you could get digital help with.

20:57I mean, just a little thing about myself. I went to chat GPT 3.0. I set it a challenge. I said, look at all the free stuff I put out there on the internet and come up with a marketing campaign that would persuade people to pay for that. And I've got to tell you, what it came back with was super intelligent. And five years ago, I would have had to pay somebody quite a lot of money to come up with that kind of plan. Yeah, yeah. I know we use it for loads of different things in our business as well, just in terms of doing job specs for us or personalised marketing tools. It's quite incredible what you can do.

21:40And also, Robert, I should tell you, I'm also one of these people who's going to have to be made to go tax digital. So I've got a training session actually on Friday with my accountant to get me up to speed on what apps are out there and what you can do to make it digital. So it's, you know, we've got to get with the times. Certainly right. Certainly right. And, you know, it's about productivity. I mean, it seems to me the two big advantages of adopting technology are you can get your costs down. But the other thing you can do is just come up with way more imaginative ways of getting to customers and cheaper ways of getting to customers.

22:21So for me, the real excitement is both in getting your overheads down and in reaching many more people in a much more creative way. I don't know if you can hear you, Robert, but the seagulls are going absolutely wild outside my house. I wonder if there's some type of digital revolution they could get involved with as well to keep them busy and stop them squawking all the time, waking me up every morning. But there we go. Thank you to our business banking partners, Monzo Business, for supporting this part of the show. So you can join me and over 600 ,000 other businesses already banking with Monzo Business and sign up for an account today.

23:01Only sole traders or limited company directors in the UK can apply. T's and C's apply. Now, obviously, one of the things that AI and technology can help with is energy. So let's go back now to our interview with the CEO of Ofgem, the energy regulator, Jonathan Brearley. Given that there is such a big cost in our bills related to investment, particularly in cleaner energy, and that is, I'm afraid to say, even though it's not going through general taxation, it's still basically a tax on most of us. why has this idea of a social tariff not really properly taken off? Because, you know, what we have is a regressive system where everybody has to pay a lot for energy.

23:53Why don't we have a system where those who are really struggling to pay the bills on low incomes can't get cheaper power? Well, you may know I've been talking about this and asking that question for a number of years. I mean, some of the things we saw during the crisis still don't make sense to me. So we do have some form of a social tariff. We have what's called warm home discount. That takes£150 off of bills of a subset of people. I was really pleased that the government have extended that to over 6 million homes right now. But that number,£150 discount, was the same in 2021. Through the gas crisis and out the other side of the gas crisis, that number hasn't changed.

24:31We put£40 billion of support in for customers during 2022 when prices went through the roof. Now, my question is very simple. Wouldn't it be better if we were able to target that support more at those who needed it more? So one thing we are doing within Ofgem, and I know this has caused controversy over the last few days, is asking the question, as you get that investment in place, as you get those fixed costs in place, is there a different way we can spread those costs out? Now, look, we're at the stage of exploring that. There are big trade-offs, particularly for a regulator to play that kind of role.

25:01So we would need a relationship with ministers. but I think the question of how do we make sure particularly those who can't afford it are able to manage is going to be fundamental for the next five years and I should say I think you've got a similar question for industries that need that kind of help as well totally I mean I see through the kind of work I do up here with the various charities and food banks and things that energy is the biggest stress for people and I know you yourself quoted the YouGov research saying 40 % of the people poll so energy is their top concern and debt arrears have reached a record high do you ever see a time when it's not going to feel like that for people for the you know the people who are in the most deprivation feeling like they cannot afford to heat their home and cannot afford to like charge their phones or whatever else they can't afford to to do what is a kind of basic right really yeah and you know over the last three years i've spent a great deal of time at food banks i've spent a lot of time with community groups.

25:59And as you can imagine, the level of both concern and quite frankly, anger is huge. You know, when I again, when I started out in Ofgem or I started energy policy in the 2000s, prices were a problem, but they were a sort of problem in the background. We weren't front of people's minds. But right now, as you say, energy debt is one of the biggest debts that many, many customers face. Now, I think you've got to divide the problem up slightly into two parts. The first part is how much of this is an overhang of the last two or three years. So there are some families that have simply got themselves into an unsustainable situation, not because they can't pay their bill today, but because they racked up so much debt over the last two years because prices went up to£2 ,500 a year for the average household.

26:41Now, we think, and we are designing with government, a scheme that targets support at those customers, that helps them get out of that big lump of debt that they're in and helps them get on a more even keel to manage their bills. I think that will bring down debt. And then coming back to your question, Robin, we need to find a way to target support at those who can't manage on a day-to-day basis now that's not just for offgem that's for government as well but i would like to see a way in which we begin to tailor that support more to a family's energy use because you can have two families on the same income one in a well insulated well-built flat the other in a drafty house particularly frankly in the northeast where you do see a lot of housing in this condition and they're paying very very different energy bills so i'd like to support better targeted people's energy needs but also able to change as the market changes.