British Regulator Sets Out Future Strategy

British energy regulator Ofgem is changing its approach to assets and markets, as the impacts of decarbonisation and related changing technology mean its concerns are now different.

It launched a strategy document to explain its thinking August 4, soon after deciding to press ahead with its plan to separate National Grid's role as a power system operator from its other businesses, to prevent conflicts of interest.

It says: "The energy sector is undergoing fundamental change. The regulatory and market arrangements will need to evolve to ensure this happens in a way that protects and advances consumers’ interests and enables them to benefit from innovation and new services."

Last month it said it has begun the formal development of the second round of price controls for network companies under its eight-year Revenues=Innovation+Incentives+Outputs (RIIO) methodology. RIIO 2 is to follow from 2021 when, Ofgem says, companies will be allowed a lower rate of return as well as a lower cost of capital. However elements of the strategy can be brought in earlier than 2021, the regulator told NGW.

Among the goals are the removal of barriers to smart technologies, smart homes and businesses, and markets which work for flexibility. But uncertainty is now great, as the wide range in forecasts for electric vehicles and the implicit demand for peak power shows.

It says: "As the energy system changes, and traditional boundaries and distinctions break down, there is a pressing need to ensure the system as a whole is effectively coordinated to deliver value for consumers.... The main current focus is on improving coordination across electricity transmission and distribution boundaries. We will also be considering where more coordination between electricity and gas may be beneficial."

Cyber-resilience is also "an increasingly important part of a well-functioning energy system. We will review our own role on cyber-resilience, particularly in relation to other government bodies, and consider what this means for how we regulate," it said.

It says the demands on the gas market are changing. "Gas-fired generators are playing an increasingly important role in balancing the electricity market, resulting in greater variability of within-day gas demand. We will continue to monitor this situation, and work with the gas system operator and industry to ensure that market arrangements remain appropriate as the system changes."

It also says: "There is not yet a clear direction on how heat will be decarbonised. The gas system may still have a significant role (for instance, if gas is used in hybrid heat pumps, or if carbon capture and storage technologies develop further), or could be re-purposed (for instance, if hydrogen is used for heating). Alternatively, if there is a high degree of electrification of heat or heat networks, we could see the role of the gas system substantially diminish over the long-term."

However despite the closure of the giant storage asset Rough, Ofgem says: "Sources remain diverse and flexible, comprising gas from Norway, the UK Continental Shelf, interconnectors to the continent, medium range storage facilities, and LNG tankers. As such, we are not dependent on any one piece of infrastructure for security of supply.... It is worth noting however that the market is undergoing a period of change – responding to both declining demand and an increase in sources of supply, which may lead to increased price volatility."

The regulator did not comment directly on Brexit but said it would continue to work with continental institutions until directed otherwise by the UK government.

William Powell