Buchanan: gas bills could be cut by £55

Ofgem chief executive Alistair Buchanan says it's up to energy firms to explain themselves to their customers - and to him. He talks to Janet Wood.

I meet Alastair Buchanan just a couple of days after a team from the BBC's Watchdog television programme has been knocking on his door - along with those of energy companies - to ask why energy prices have not fallen.

The Ofgem chief executive says utilities have been hit by the recession. "Because demand is off by 10-20 per cent, not only do you have a glut of gas, therefore the overall price is down, but the companies are offloading gas as well, so you have a double hit from that," he says.

Nevertheless, after the regulator's quarterly analysis of retail and wholesale prices, Buchanan says: "If the wholesale price continues at its current level and retail prices don't respond, then it would be quite strange, frankly. On the gas side we used a figure of £55. That's the kind of saving you might expect given the margin analysis. We are watching this very carefully and the companies are going to have to explain pretty damn well to their customers why their prices won't fall going forward, if the wholesale price stays where it is."

Communication vacuum

Buchanan says it is up to companies to communicate better with people and make their case. "Where are they? Companies are not stepping forward to speak to their customers and explain to them what is going on. None of the big six stepped forward and therefore there is a vacuum."

Should Ofgem be more visible in that debate? "We have not got much to say at the moment," Buchanan says. "When there is something, you can be sure we will be on all the news programmes. The onus has to be on the companies to explain what they are doing."

Buchanan says there are steps he can take, from "naming and shaming" through to examining whether companies are "in breach of any of the new licence conditions" on cost reflectivity and undue price discrimination. If they are, he says he's prepared to take action. As well as licence conditions, there is also the Competition Act and the Enterprise Act. And as a last resort there is the Competition Commission.

Green pressures

The energy industry might argue that prices must rise to meet security and sustainability goals. Buchanan agrees that there will be rises - some of which, he acknowledges, will come from regulation. "The price pressure on environmental products is profound.

Around 10 per cent of your bill is now related to an environmental scheme," he says. "That's a good thing in climate change terms, for the greening of Britain, and that's probably going to double in the next ten years." But, in making the argument for investment, he believes "the onus has to be placed on the companies".

Ofgem is looking at the long term via its Project Discovery and RPI-X@20 initiatives. Buchanan points out that we are looking at some fundamental changes in the system. "We will have 30-35 per cent of electricity from renewables by 2020, subsidised. Then we will have carbon capture, subsidised. Then we will have nuclear. National Grid is going to have some interesting challenges with regard to system management and the cost of system management with these 1.6GW slabs on the system at remote locations. Not only will it have questions about reserve capacity and so on, but also how many more wires it will have to sling across to these power stations. There is a whole cost element there."

Nuclear

Nuclear is a good example of a sector where we are competing in a global market. Buchanan says: "Poland said it wanted to go nuclear. Italy is looking very interested in it. Merkel has just won the election in Germany, and looks to be at least delaying the closure of nuclear power stations, and at €4-5 billion these stations are not small beer.

"There is not a lot of capital flowing around at EDF if you look at its balance sheet right now. And there is only limited nuclear expertise in the world. If there is pressure as to where nuclear gets built and what the financial structure is for a nuclear station to get built, it's not beyond the realms of fantasy that we might see pressure for some kind of nuclear benefit for building in the UK."

He says Project Discovery is about whether the market architecture will bring about the right investment. "The implications of Discovery are profound because they are about consumers for the next 20-30 years and competitors' behaviours, whether they are going to work or frustrate the current arrangements we have got."

Gas supplies

Buchanan points out that in Russia, "a major field has been pushed back two years because of the credit crisis. Where is the gas coming from? We have gone from slightly protected island status to needing to know in some detail what we think is going to happen in Siberia, what we think demand will do in India, China and America. The challenge is much greater."

The UK has been building import terminals for liquefied natural gas, but there are concerns that the UK could become little more than a transit route for European customers. Buchanan says that needs to be considered. "National Grid has made no secret of the fact that at one time [last winter] we had under a week left of storage and there have been concerns that other countries in Europe had quite a lot of gas left in storage at the end of the worst winter in 20 years.

"The third directive is going to improve transparency and quality, but is that enough? The devil is in the detail... If push comes to shove and Germany has a very difficult winter, would they behave in the Anglo Saxon market model or not?"

Grid access

On the electricity side, Buchanan says the "spice" has gone out of the debate about how to manage grid access. "The secretary of state has said we are going for connect and manage and that's what we are going to do. Candidly, when the new European renewables directive kicks in, there is a very strong argument for saying that's what will happen anyway.

"They [Decc] are going to have to be very careful in their choices not to protect and enhance the legacy players at the expense of new players coming on to the system. That's where my interest is mostly going to focus. A lot of the debate turns on whether the legacy companies think they have access rights to the system."

The European Union wants renewables to have priority access to the network. Ofgem's legal advice previously said the directive does not give them that right. That will change, Buchanan says. "Future renewables requirements from Brussels will simply mean that option is taken out of our hands. But if Ed Miliband has pursued connect and manage... that will satisfy that requirement. It doesn't matter about the export because you can get paid whether it is taken or not."

But he warns: "That is the big political issue that it is going to sit there: if National Grid can't get those connections off fast enough, you are going to be paid. That will be an issue. Connect and manage is not going to come without its own costs. There could be windfarms - or other capacity - receiving constraint fees for years. I don't know how the consumer is going to accept it."

Ofgem split

Buchanan has announced a radical change at Ofgem that separates policy functions from so-called Ofgem E-Serve, a delivery organisation for government programmes the regulator manages.

Buchanan says on the policy side it is about bringing sustainability to the fore. On delivery: "When I joined six years ago the board was running the EEC [Energy Efficiency Commitment] programme for Decc [Department of Energy and Climate Change] - worth about £150 million per year. We are now running £2.5 billion-worth of environmental works, well over £1 billion-worth of offshore tendering. Altogether we are just shy of £4 billion-worth of products."

Buchanan says focus was needed. "There is a delivery focus and there is a policy focus. I have to ensure the E-Serve business can handle the growth, because it will grow from 10 per cent to 20 per cent of the bill. We will have smart meters, we will have the feed-in tariff, we have the CCS [carbon capture and storage] levy coming and the Tories want to give us their household subsidy."

E-Serve sell-off?

I suggest that Ofgem E-Serve could easily be moved into the private sector, especially given that the Conservatives, at least, have talked about reducing quasi-government bodies. Buchanan says Ofgem is better equipped and cheaper than the private sector, but that a switch is possible.

"We are a creature of statue and will do what [government] tells us to do," he says. "But we are doing it very efficiently - we run these schemes for about £8 million a year. We are doing it without a fee, because imagine what a fee would do to prices. We do it with an understanding of the dynamic of delivery and of policy. If there is confusion in government about what part of Ofgem they are dealing with, E-Serve stops that. Ofgem is a very strong brand with regard to trust, but fundamentally the government can use us as a magnet for growth or they can take us away and put us somewhere else. That is entirely their decision."

Buchanan says the change was important for the staff dealing with Ofgem's delivery programmes. "There was a degree of uncertainty about whether they were loved or not. This sent a very serious message saying you are part of a very serious business proposition."

I tell him I am surprised to hear a regulator described as a business. He replies: "I have been in business, I trained as an accountant, I am not uncomfortable with business."

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