The Decline and Fall of Britain’s Energy Regulator, Ofgem
The first act of Mr Jonathan Brearley, the new CEO at the UK electricity and gas market regulator, Ofgem, has been to publish a Decarbonisation Programme Action Plan, a document that demonstrates that the regulator is no longer independent and is now an integral part of the climate change policy delivery mechanism which will consequently do nothing beyond lip-service to protect present consumers from the costs of the 2050 Net Zero target.
This confirms concerns that as a long-term Whitehall policy insider and responsible in part for both the Climate Change Act (2008) and Electricity Market Reform (EMR), Mr Brearley was not an appropriate choice to lead the regulator.
In October 2019, Ofgem, the UK regulator for the gas and electricity markets, announced that Jonathan Brearley, its own Executive Director for Systems and Networks, would be succeeding Dermot Nolan as Chief Executive, taking over at the end of February 2020.
Mr Brearley’s Whitehall career is practically a history of modern British climate change policy. From 2002 to 2006 he served as “Head of Team” in Tony Blair’s Prime Minister’s Strategy Unit (PMSU). The PMSU was at least in part responsible for the Energy Review of 2002, and for The Energy Challenge study of June 2006, amongst other things (a full list of the PMSU publications and of those to which it contributed can be found on the National Archives site).
From July 2006 until September 2009 Mr Brearley worked as Director of the Office for Climate Change (OCC), an offshoot of the Department of Environment (DEFRA) that formed the administrative nexus drawing together six other departments for work on the Climate Change Act (2008).
This experience led to a further appointment in late 2008 in Gordon Brown’s new Department of Energy and Climate Change (DECC), where he became Director of Energy Strategy and Futures, and then Director of Electricity Markets and Networks. In this latter position he is said to have “led the delivery of the Governments’ Electricity Market Reform (EMR) programme”, the programme which introduced Contracts for Difference (CfD), the subsidy scheme introduced to replace the Renewables Obligation (RO).
Mr Brearley continued to serve under the Conservative/Liberal Democrat Coalition Government, but in 2013 he resigned visibly and dramatically from DECC, with the Independent newspaper reporting a source to the effect that Brearley was “not happy... DECC is working to improve the investment climate and the Treasury is stopping it”.
For a short while after his resignation he ran his own consultancy, Brearley Economics Ltd, the clients of which are not publicly known, which was incorporated in March 2013, just before he left DECC, and was voluntary liquidated in 2016–2019 prior to his return to Whitehall in April 2018 with a position in Ofgem, as Executive Director for Systems and Networks, a position he held for only eighteen months before being promoted to the top job of Chief Executive Officer in October 2019.
It must at the least be questionable whether such a person was a suitable choice to act as the CEO of a regulatory body intended to protect the consumer interest. The majority of Mr Brearley’s civil service career has been marked by close and committed involvement in the creation of climate policies that impose high costs on consumers, yet he is now entrusted with overseeing the regulation of the markets just as his own policies, now augmented by the Net Zero target, come to maturity. He can, surely, be neither objective nor independent.
Did no one in Ofgem’s board ask themselves whether this candidate might have a conflict of interest? Did they ask, for example, whether Mr Brearley was in reality likely to side with the consumer against the costs of instruments which he himself had a very prominent role in creating, even, it seems, resigning in protest over Treasury attempts to rein in those costs? If they did so it made no difference to their choice.
From the point of view of the regulator’s wider reputation this appointment is like to prove a mistake, and, until Mr Brearley is replaced, Ofgem will, even in the eyes of only moderately suspicious members of the public, lack any credibility as a sincere and scrupulous guardian of the consumer interest.
Confirmation that these concerns are not merely theoretical can be found in Mr Brearley’s first act as CEO, the publication of the Ofgem Decarbonisation Programme Action Plan, which was released yesterday, the 3rd of February.
This document is in substance only a subservient echo of the Climate Change Act and its successor the Net Zero target. Indeed, Mr Brearley’s own Foreword tells us as much:
“It is vital that as the regulator we are taking the steps to enable and encourage the decarbonisation of energy, playing our part in helping the government achieve its ambition. […] This action plan is just the start of Ofgem’s drive to play our role in achieving net zero by 2050” (p. 3)
No independent and consumer-oriented regulator could have written in this way.
Moreover, the lip-service to “low-cost decarbonisation” is revealed for what it really is by the subtle reference, easily overlooked, to what Mr Brearley refers to as Ofgem’s “principal objective”, namely, “to protect both current and future consumers” (p. 3), a point reiterated in the main text of the document:
In line with Ofgem’s principal objective we will balance the benefits to future consumers of greenhouse gas reductions alongside the potential costs to current consumers. (p. 13)
Those words will ring an alarm bell for any student of Ofgem’s history. As I noted in a post here on Energy Comment in 2017: The Utilities Act of 2000 had described the overarching principal objective for energy regulation as the protection of the interests of existing and future consumers, wherever appropriate by promoting competition (for further details see this DECC analysis published in July 2011). This was a lucid and unconstricting brief. However, the Energy Act of 2010 [] amended this principal objective by defining “interests” thus in two separate paragraphs (16 (3) 1A and 17 (3) 1A referring to gas and electricity:
Those interests of existing and future consumers are their interests taken as a whole, including—
their interests in the reduction of gas-supply/electricity supply emissions of targeted greenhouse gases; and
their interests in the security of the supply of gas/electricity to them.
This change was of enormous importance, since an increasingly large part of the charges on the consumer were (and still are) the result of climate policy. In effect, the revision to Ofgem’s principal purpose made them unable to comment on the imposition of cost increases resulting from measures to mitigate climate change.
Mr Brearley’s Ofgem embraces this restriction with vigour. Since present consumers are finite in number, and the nebulous definition implicit in the term “future consumers” creates an infinite set, no balancing calculation can favour present consumers unless there is a discount rate, and of this there is no mention either in the Act of 2010 or in Ofgem’s commentary. But real consumers do discount the future, and this is not necessarily selfish; if parents, for example, failed to discount in order to maintain their own lives, there could be no future generations to be worried about.
The lack of discounting thus puts Ofgem on a collision course with real consumer, real human behaviour. Ofgem’s interpretation of the 2010 Act means that they will put only the weakest of brakes on the imposition of climate change cost burdens. Present consumers now have little or no voice.
Any hopes that Ofgem might in the future attempt to reverse this weakening of its powers, made of course when Ed Miliband was Secretary of State and Mr Brearley was a senior director in DECC, must now be abandoned since Mr Brearley himself is in charge of Ofgem. Until there is a major overhaul this will be the status quo.
The defence that will be offered, of course, is that immediate high expenditure is simply prudent and precautionary. Ofgem writes in its Action Plan:
“We are clear […] that investing in the short term will save money in the medium and long term” (p. 4)
The misuse of the phrase “I/we am/are clear” in political declarations is by now a notorious give-away, and it is regrettable to find it in the statement of a regulator. Emphatic assertions of faith may pass with politicians, but are surely impermissible for an objective body entrusted with quasi-judicial oversight. From such an institution the public has every reason to expect careful calculation and argument, not unsupported fervency.
A great deal depends on this, for the short term investments about which the regulator claims to be so clear are not of a minor order. Mr Brearley’s new model Ofgem blithely reports the Committee on Climate Change’s estimate that power sector investment:
“may need to increase to around £20 billion (in 2019 money) per year by 2050, to cover “investment in renewables, firm low-carbon power, CCS, peak power and networks (including transmission and distribution)” (p. 10).
The cumulative sum, in fact unpublished, will be very large indeed. For comparison, the document itself notes that a mere £10 billion was spent between 2013 and 2017.
Similarly, in regard to heating Ofgem now reports without concern the CCC’s estimate that switching to low carbon heating “will require annual investment by 2050 of around £15-20 billion (in 2019 money), up from just £100 million in 2018” (p. 11).
Faced with such vast proposals for expenditure an objective regulator would require stringent cost benefit analysis and justification, but under Mr Brearley that not will happen, as the Action Plan explains:
“The challenges of net zero are stark and require us to step up our efforts to meet them. As energy regulator, we can create the regulatory framework to enable the appropriate investment, and help direct that investment where it is needed.” (p. 11)
There is only one way in which this can be understood. The ends are taken to justify the means, and Ofgem will collaborate with government to coerce the consumer into delivering a rate of return sufficiently high and secure to motivate investment.
As a supplementary reinforcement for this position Ofgem claims that the costs of the preferred energy supply, renewables in general and offshore wind in particular, are already very cheap:
“The dramatic reduction in offshore wind costs demonstrates that in the long term, low carbon energy can be cheaper than traditional fossil fuels.” (p. 4)
“Few commentators anticipated the recent rapid reductions in the cost of wind and solar power” (p. 9).
As a matter of fact, not everyone is convinced that there is significant substance to these apparent cost reductions, with some doubting, for example, that the capital costs of offshore wind, for example, have fallen much if at all. Hughes, Aris and the present author (2017) and Hughes (2019) detected no dramatic fall in reviewing offshore wind capital cost data, a finding that has been replicated by a recent study of audited wind farm company accounts conducted by economists at the Aberdeen Business School of Robert Gordon University (Aldersey-Williams, J et al. “Better estimates of LCOE from audited accounts–A new methodology with examples from United Kingdom offshore wind and CCGT”, Energy Policy 128 (2019), 25–35). The authors of this latter paper appear broadly sympathetic to the renewables agenda but nevertheless write:
The most recent CfDs were awarded at a price (in 2012 terms) of £57.50/MWh, while the analysis here shows that modern wind farms typically have a LCOE of c. £100/MWh. Although […] the LCOE and strike price are only the same in a zero-inflation world, it is nonetheless clear that very significant reductions are required to wind farm costs to offer economic projects in the context of current strike prices.
Of this data-grounded concern Ofgem says not a word, and instead simply repeats the self-serving industry propaganda about falling costs. A truly independent regulator would not have filled up the cry in this way. On the contrary, it would instead have asked if the bids were too good to be true, and whether the CfD system were being exploited to obtain options for development that gain market position and inhibit competition. But Mr Brearley is, surely, not disengaged in this matter, since he himself oversaw the introduction of Contracts for Difference as part of the Electricity Market Reform (EMR) package. Being only human, it would be remarkable if he did not have a personal interest in declaring CfDs a success. He may even be quite blind to the possibility that things have gone wrong.
The publication of Ofgem’s Decarbonisation Programme Action Plan marks the final degradation of the United Kingdom’s electricity and gas market regulator. The process begun by the revision of Ofgem’s objectives in the Electricity Act of 2010 has been completed in 2020 by the appointment of Mr Jonathan Brearley, a long-term Whitehall climate policy insider who has interests that appear to conflict strongly with those of the consumer. Reform of the Office of Gas and Electricity Markets has long been regarded as needed; it is now essential.