Last Tuesday saw the launch of the ReDefining Regulation report. Co-authored by our very own Dr Aidan Rhodes, it lays out six recommendations on what the future of energy regulation could look like. To coincide with that Aidan has written us a blog post about the twists and turns of energy policy over the last year.
May you live in interesting times, whether a blessing or a curse it definitely seems to describe the last few years, it also seems like the energy system is always living in interesting times…
In October last year we published our Briefing Paper on energy security and whether the UK was facing a security crisis. We concluded that the UK was in its most secure position for years, partly due to the operation of the Capacity Market, operated by National Grid in order to procure enough reserve capacity to provide secure electricity supplies throughout the winter.
The more things change …
Nothing of course ever remains stable, and a few weeks ago on the 15 November the Capacity Market was indefinitely suspended following a ruling by the General Court of the Court of Justice of the European Union. This ruling followed a case brought by the decentralised energy technology company Tempus Energy, arguing that the Capacity Market unfairly favoured conventional generation over demand-side and decentralised technologies through differing contract lengths.
While the situation will hopefully be resolved before next year’s auction by BEIS and the European Commission, it highlights the complexities and uncertainties which so often surround energy markets. Late last year also saw the publication of the Helm Review of Energy Costs, which made several recommendations for radical change to the energy system and market arrangements.
A consultation on the review was subsequently launched, (you can read our response to the review online), and the Government formally responded to it in a speech by the Business Secretary Greg Clark last month.
These policy developments and uncertainties come at a time of great change in the electricity sector, as renewable generation tumbles in price, more smart meters are installed and time-of-use tariffs begin to be offered. As such, it is a good time to look at how we regulate our energy system and how it could change to encompass new technologies, business models and greater decentralisation.
Over the last year, I’ve been working with Laura Sandys of Challenging Ideas, as well as Dr Jeff Hardy and Professor Richard Green here at Imperial College London, on a report called ‘ReDefining Regulation’, itself building on last year’s ‘ReShaping Regulation’. The report brings together the results of many meetings and conversations with energy system stakeholders – regulators, policymakers, industry leaders and consumer groups.
The report contains six major recommendations:
- Change what we regulate: Normalise electricity by re-engineering the market from the plug to the system to reflect the new values of time, location and service to the system.
- Change how we regulate: Regulate risk not process, as the future will be too multi-dimensional for the current approach to succeed.
- Protect and serve consumers better: Amalgamate the consumer-facing parts of Ofgem, Ofwat and Ofcom into one Essential Service Regulator to manage the risks around bundled and blurred products and services.
- Open up to retailers: The one-size-fits-all electricity supplier licence is no longer fit for purpose and we propose an insurance-backed assurance scheme to replace today’s electricity supply licences.
- Optimise the system: Energy system data should be opened for the public good unless it is shown that is has to be proprietorial data.
- Get more from less: Redefine and recalibrate security of supply to electricity system security. We have more assets at our disposal to address security challenges and therefore need a new approach to better procurement, fully costed at the plug.
Keeping it secure
I contributed the most to the security of supply recommendation, as it follows on nicely from our earlier Energy Futures Lab Briefing Paper. In this new report, we discuss the greater complexity in providing security in a system made up of many more components, from smart grid technologies and increased digitalisation to behind-the-meter appliances, microgeneration and consumer storage devices.
In a more complex world such as this, security should not be thought of as simply a problem of supply, but needs to encompass the entire system – including responses from demand and decentralised storage. As such, we recommend reconsidering the issue as one of consumer provision and service – ensuring that the consumer is supplied, from whatever sources – either central or decentralised – are available, rather than focusing simply on a ‘one-size fits all’ model using centralised generation. As such we propose a simple hierarchy to provide system security in a cost-effective manner – No Build, Less Build.
No Build, Less Build
When considering security needs under this hierarchy, we should first therefore look at ways to increase security without building more generation or distribution assets. These could include peak management to smooth out electricity demand using demand-side measures, more localised interventions to manage the networks on a granular level and a greater emphasis on reducing network losses and improving efficiencies.
When these measures are insufficient and new build is needed to improve security, it must be fully-costed on a life-cycle basis and be contracted dependent on both the nature and capital costs of the asset. Connectivity between assets across the system, and visibility and management of the data generated from them, will be essential in order to achieve this vision. Flexibility is also key – understanding that the new technologies and services which are becoming available require individual and often location-specific treatment is essential to getting the best value-for-money out of providing system security.
You can find the full report, which covers all of the key recommendations above in a lot more detail than I have space to go into. Hopefully you find it as interesting to read as we did to write!
Energy Futures Lab will also be publishing a Briefing Paper on Electricity Market Arrangements early in 2019, so stay tuned for that if you’re interested in reading more.
Dr Aidan Rhodes
Dr Rhodes is an expert on UK energy policy and innovation strategy, with a particular emphasis on smart systems and networks. He has presented widely at events both in the UK and internationally, is the author of several influential reports in the smart systems and heat sector, and has facilitated several information-sharing missions between the UK and Asia-Pacific nations including Japan, Korea, China and Taiwan.
Aidan is a Research Fellow working at Energy Futures Lab and is responsible for the institute’s Briefing Paper series. These are a range of accessible briefing papers on topics of relevance to energy sector policymakers and stakeholders.