When it comes to getting connected to the grid, the UK ranks lower than a swathe of developing and war-torn countries, including Iraq, with close to a four-month wait. No wonder London developers are close to blowing a fuse
With the attention of the London property industry firmly fixed on the new developments appearing on the capital’s skyline, far less attention is given to what is happening beneath the city’s streets. Energy infrastructure is rarely a major topic of public discussion in the property world. But behind closed doors, developers are becoming increasingly frustrated by the hurdles blocking their path to getting new projects connected to an electricity supply.
“There is a real lack of clarity and consistency from utilities providers about how much time and money it takes to get new developments connected to the grid,” says Andrew Storey, development director at Cathedral Group. “It’s a big concern for property developers, yet we are not aware of any dialogue happening at industry level on the issue.”
Patrick Brown, assistant director of sustainability and construction at the British Property Federation, adds that while gas and electricity regulator Ofgem has organised consultations between energy network providers and their clients in the past, to his knowledge no talks have taken place that are specific to the needs of the property industry.
Open exchange
But this could all be about to change. Property and utilities industries may soon have no choice but to start being more frank with each other. London’s energy infrastructure is reaching a critical level of strain as the result of population growth – up by 12% over the past decade, according to the latest national census data – and new development.
Creaking cables and substations mean the capital runs the risk of 1970s-style electricity blackouts by as early as 2015, according to Ofgem. It adds that the capital gets a reliable supply of electricity 99.9% of the time, but the days of taking functioning energy infrastructure for granted could be numbered.
It does not help that the UK as a whole has a poor record for getting businesses and properties connected to the grid promptly. The World Bank and IFC’s Doing Business report ranked the country 79th out of 189 countries on the “getting electricity” measure, with 126 days reported as the time taken to get connected. This puts the UK behind a plethora of developing and war-torn countries, including Iraq, where the average is 47 days.
With more property development coming online and fewer resources to go around, failure to see eye to eye could have dire consequences for London’s substantial development pipeline.
So what could the impact be? And how can developers minimise the effect on their schemes?
Cannot connect
Concerns about getting connec ted to utilities infrastructure are a deep-rooted problem in the UK real estate industry. A survey from the National Federation of Builders in 2011 – the latest data available – showed that 73% of UK construction projects had experienced problems getting connected to electricity, while 40% of respondents had issues around the transparency of costs.
So who, out of the myriad of suppliers, contractors and network consultants in the UK’s electricity landscape, is responsible for the slow and unpredictable process of securing a connection?
“Responsibility for getting developments connected to the grid doesn’t lie with the energy providers, but comes under the purview of network operators,” says a spokesman for power generation giant EDF.
Distribution network operators are the companies that own and manage cabling infrastructure and electrical substations (see box overleaf). They tend to dominate the provision of services in certain geographies, with UK Power Networks being the largest player in London and the South East. While property developers can pick between a wide range of electricity suppliers, such as npower, SSE, Scottish Power and E.ON, there is less choice when it comes to the distribution network.
As one developer, who wished to remain anonymous, explains, a lack of competition in the distribution market is holding the property industry to ransom, forcing it to endure poor, unreliable service from the network: “The network operators have a virtual monopoly. It’s an inefficient, oligopolistic system. If they provide a poor service, we are at their mercy,” he says.
Lack of clarity
Cathedral Group is one company with first-hand experience of the sorts of problems caused as a result of dealing with DNOs. “We struggled to get clarity from UK Power Networks on how much our connection to the grid at our 200-home Greenwich development would cost,” says Storey.
“In the space of six months we had two wildly different quotes for the cost of getting us connected, and no clarity until the last moment about whether we would need to put in an additional substation to accommodate the Travelodge that we are building. We don’t mind paying for the infrastructure we need, but we just need transparency, upfront, about how much we will have to pay.”
The Vauxhall Nine Elms Battersea Power Station development is another high-profile example of a major project that is at risk of delays in getting connected to sufficient energy supply, and this could pose a “serious risk to London’s future competitiveness and reputation”, according to the mayor’s draft Infrastructure Plan 2050, published in July this year.
Last month, a dinner and debate hosted by the GLA, law firm Mishcon de Reya and the Central London Partnership, shed more light on the property world’s concerns about the commercial risks posed by electricity issues. The debate was an intimate gathering at which a small group of property developers, policymakers and academics shared their views on the future of London’s infrastructure development.
One of the major issues that emerged from the discussions was the contention between property developers and their electricity network providers over the grey area around liability for cost overruns.
Nick Lane, head of construction litigation at Mishcon de Reya, said: “If the delivery of electricity infrastructure is delayed for whatever reason, the contractor will still get paid, and the developer will have to foot the bill, which could run into tens of thousands of pounds per day on really big projects.”
Part of the problem, Lane believes, is that the Electricity Act 1989 gives providers a high degree of protection.
“Contracts with developers will usually feature a clause about an exclusion of liability for economic loss that the utility company can invoke if there is a delay. In a sense, it’s not a very level playing field,” he says. “Developers should think long and hard about whether they want to accept these clauses, but so far no one in the property community has fought back.”
Cutting costs
Responding to allegations of heel-dragging and lack of planning for the future, UK Power Networks’ head of service development Nigel Hall says the regulatory framework, which emphasises reduction of costs borne by consumers, makes it challenging to invest for future needs.
André Gibbs, partner at Argent, the developer of the 67-acre King’s Cross regeneration, says the property sector should be mindful of these challenges the energy sector is facing.
“Utilities providers are under a different type of commercial pressure from the property industry. Their main driver is to keep costs down for consumers in the short term, but this acts as a disincentive from making long-term investments into improving physical infrastructure,” he says.
“This inability to invest in networks for tomorrow’s needs, rather than just today’s, is already causing a lot of problems for London.”
Hall says UK Power Networks is working to “reduce the time it takes to provide a quote, or to make a connection”, and is now providing individual account managers to property developers to help bridge the communication gap.
Finding a solution
The property industry has yet to come up with any solutions at a high level. But on a project-by-project basis developers can improve the situation by starting a conversation with the network provider as early as possible, says Becky Worthington, chief executive of Lodestone and former chief financial officer of Quintain, the developer behind the 5,000-home Wembley Park.
“The key is planning in advance, so that the network provider knows exactly what you will need. Then you can work together to figure out the best route forward,” she says.
UK Power Networks’ reassurances that change is on the way may only provide limited consolation to developers. The BPF is starting to get involved in the need for change and, according to Brown, is “mulling a new piece of research” on the topic of utilities, as a result of concerns raised in the property community.
There is clearly a need for companies and industry bodies on both sides to engage with one another to shed light on one of property’s least understood, least talked about, but biggest potential problems.
Power in the hands of the providers
Developers wanting to get a new project connected to the grid will normally have to go through a distribution network operator, a company that owns and manages cables and electrical substations.
UK Power Networks is the dominant player in London and the South East. The company owns and manages more than 170,000km of underground and overground electrical cable, and was part of EDF until 2010, when it was sold off to a consortium owned by Hong Kong billionaire Li Ka-Shing for £5.8bn.
Although the electricity connections market opened up to competition in 2000, there are still relatively few DNOs in the market, and individual companies tend to dominate certain parts of the country.
While there is a widespread belief in the property world that DNOs have a monopoly, this is not strictly true.
Subject to permission from the regulator, property developers can use an independent construction company or contractor (dubbed an “independent connections provider” in regulation-speak) to build some of the infrastructure themselves.
sophia.furber@estatesgazette.com
