Today’s large utility companies – many grown through acquisitions and mergers – bring the benefits of scale, but these need to be balanced with a local focus. Scale and the long-term time frames utility companies must operate in also make it difficult for these firms to become more adaptable, something that more local focus and changing energy scenarios demand.
Steve Holliday (SH): We are in a world where we need politicians to be quite brave and take decisions that are far-reaching. A threat to our business can come about when we’re investing in infrastructure that requires support over a long period of time and there is a sudden switch or U-turn in energy policy. You can find yourselves having made investments that are not in the long-term interest of consumers all of a sudden, or having to make a whole bunch of other investments very quickly to ensure you’ve got reliable supplies of energy. You can see that with the changes in Japan. You can see that with some of the changes in Europe in the last year. So it is very important to our business that there is consistency of policy and sticking with things and making sure that, as governments develop those policies and the regulations, they’re well-thought through and based on real evidence.
SH: We have a very particular role in the UK because we sit at the heart of the electricity and gas market. So we model an enormous number of scenarios to try to think about potential shocks. What would happen if gas supplies from Europe shut off? Up to 40% of our gas potentially comes in liquefied natural gas (LNG) from the Middle East these days, so what would happen if something went wrong there? How do we make sure we’ve got robust scenarios? And, in fact, we can present that to the government and gain some assurance there. On the generation side, we have to run a system that is robust enough to cope with major power stations shutting down.
Of course, a number of these scenarios get close to Armageddon, but none of them would cover something like Fukushima, for example, where you decide to shut down all of the nuclear plants. You can’t handle that in the UK. That would not ensure reliable supplies. You couldn’t handle it in Japan, where, of course, they have had a very difficult power problem for quite a period of time. Because of Fukushima, Germany has taken a decision to shut its nuclear fleet down but that can’t be done overnight. It will have to be done over a period of years and replaced with other sorts of generation. So you think about those scenarios, across different timescales. How do we be sure that we’ve got reliable energy supplies we can afford for the next one year, three years and what are the different mixes that are five plus years out and how do we make sure our investments are robust against a range of scenarios? That’s exactly the way we think about our business.
SH: Natural gas certainly was a game-changer 50 years ago: we had in the UK, of course, a dash for gas. In the US right now it’s a game-changer again. Shale gas and cheap gas prices have completely changed the nature of the heating fuel business in the US, particularly in the cold parts in the north. In our own business, two years ago we were advertising to convince people that they should replace their old boiler that was both inefficient and very dirty. In fact, we used to campaign and say take three four-by-fours off the road by shifting from oil to gas – which is the equivalent in terms of carbon removal. We don’t need to advertise today: the price speaks for itself.
We can’t keep up with the number of people who want to change to natural gas. And it is a game-changer also in terms of generation. The US looks a little bit like the UK in terms of many of the old generators, both coal and nuclear, that are going to be retired in the next ten years. Today, they’re most likely to be replaced by natural gas fuel plants, much as here.
As we think about the mix in the UK, there are lots of renewables, which are quite clearly a part of our future. We are rebuilding a nuclear fleet over a long 20-year timeframe, and hopefully finding a way that we can capture the carbon from coal and still consume coal – but that’s, in my view, still at least a decade away. Natural gas is going to continue to play an important role as a fuel for power in the UK, but the sources of natural gas have changed enormously. By 2020 more than 70% of the gas in the UK is going to be imported. That’s in complete contrast to the US, which a few years ago was importing and now sees an opportunity to export gas.
There’s an enormous amount of noise and excitement, of course, in other parts of the world about the possibilities of having shale gas, and being another US. Does it change the whole economy through availability of cheap fuel? I don’t think anywhere else is going to replicate the degree of gas that’s been available at such cheap prices in the US. If I’m wrong, I’d be delighted. It will certainly be great for the UK but I don’t think we’ve got anything like those levels of reserves or the ability to exploit them.
While we don’t yet have enough information to understand the recoverable gas levels in the UK anyway, clearly we have a very different situation trying to recover gas from a densely populated country and navigate the laws of who owns the subsurface and the permissions that you need to drill.
Somebody who owns the land in the US has a huge incentive to want to drill. It’s not the case in the UK and the complexity of this island means it’s just unlikely we’re going to be able to replicate what has happened in the US.
SH: It’s been a huge challenge to get an industry that by definition is thinking 20, 30 years ahead, is associated with slow thinking and which has historically liked to have a plan, to change into an industry that thinks much more flexibly, much more about scenarios and how to adapt to warning signs of change in those scenarios. Building flexibility into thinking processes has been a real journey the last three or four years. Part of that as well is just about organisational flexibility. How do you streamline the organisation with its layers? That has been a lot of what we’ve been doing in both the UK and the US. So there is just a speed of thought process, a speed of decision-making that is different today than it was in the past. Are we where we need to be yet? No, still not, and people who work with us or who are stakeholders would not yet describe us as agile. Yet the shape of the industry, the challenges we’ve got in terms of this unpredictability, the need for us to think about different scenarios, but also understand new technologies that are coming in and how we can quickly adopt them for our customers, all mean we’ve got to be agile to a degree we’ve never been before. That means changes in the way people work, particularly changes in structure about how you matrix the organisation more, how you share information more through new media, both across the UK organisation and between the UK and the US. We’re on a journey here, but we’ve got a long way to go.
SH: The regulator and government have always been major stakeholders but today there is also a very different new set of stakeholders, right down to you and I. The public at large are stakeholders because they can take part in discussions on social media. They can influence our decisions and we actually want them to do that. So one of the changes that’s been going on inside National Grid for the last two years in particular, encouraged very much by the regulator in the UK, is to really consult with society, customers and local neighbours about what they want from their energy systems.
Part of our challenge has been to make sure that we are genuinely consulting. It’s a word that often gets misinterpreted by businesses into an ‘I’m going to show you what I plan to do and I’m sure you’re going to be happy with it, aren’t you?’ exercise. We try to build a process that genuinely goes out and listens. We try to get a conversation going and ask some questions about what people would like from their energy systems and what they value most. Their answers influence our plans. That’s exactly the way we’ve built our big plans in the UK and the most interesting part of that journey has been that as we’ve listened, surprise, surprise, we’ve actually learnt something. So we’ve not ended up actually getting to the answer we thought of when we started. The consulting process has actually changed the answer and that’s helped us obviously start to change the culture even more about genuinely listening.
The big challenge, of course, is social media and how we can use that to help explain some of the things that we’re doing in our business and, moreover, how can we keep this continuous conversation going on about the challenge of energy and what you’re paying for. It’s important to remind people just how important it is that we’ve got energy at our fingertips. We just don’t understand the value that we have in the UK and the US in flicking a switch and having something work all the time; it’s something that we’re going to have to pay more for in the future and we need to focus on helping customers reduce their energy consumption. So all of that is part of this big debate and interface with customers, lobby groups and NGOs, and it is escalating year-on-year. I do think we’re getting better at it, but I also recognise that it’s a skill set we’re going to have to continue to hone.
SH: One of the challenges I’ve been focused on for the last few years is how we bring the benefits of scale to customers and yet are really seen as being local. National Grid is made up of many companies that have come together through acquisition to be the organisation it is today, with the skills and the finance to do the things we need to do for society in the future. What that led to, though, was a real view from many customers about the loss of their local company at a time when everyone wants to get much more involved in decision-making on a local basis. So achieving this balance, between bringing the benefits of international scale and yet going back almost 40 years to considering how to connect in locally to your communities, is difficult for an industry like ours. We don’t have the luxury of picking up a manufacturing plant and moving it down the road or moving it to another continent: the assets are in the communities. It’s not surprising therefore that there is a huge focus on reinventing things that used to exist when people spent more time in their communities, were more known in their communities: that is part of our licence to operate.
I also think it is part of the type of company we are, always have been, but want to remain in the future. If you want to come and work for National Grid, earn a good wage, have a really exciting career and be involved in some ground-breaking energy transformation in the countries in which we work, you also need to be a person who is happy to go into the community and volunteer and be engaged. It is part of the psyche of the organisation, but I think it’s just going to be increasingly a necessity for us to be able to feel with all of our customers that we’re part of their community. That will enable them to understand some of the things that we are going to need to do to ensure they’ve got power and heat, and they will be able to put a human face on it. So, in some ways, it sounds a bit like we’re inventing the past. We are to a degree, but in a different way.