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Ofgem outlines ‘holistic’ approach to future energy regulation

Energy regulation Ofgem has outlined how it intends to enact a more “holistic” approach to future regulation of the UK’s energy market.

Having last week released its vision for a drastically modernised energy market alongside the Department for Business, Energy and Industrial Strategy (BEIS), Ofgem has today published its ‘strategy for regulating the future energy system’.

Released at the same time as its targeted charging review, the document forms several areas of discussion as the regulator looks to tackle an energy sector it says is undergoing “fundamental change”.

As the power market transitions to embrace more low carbon, intermittent generation and flexible technologies such as storage and demand-side response (DSR), Ofgem has said the regulation it enforces must provide “more predictability” to system operators, investors and consumers alike.

To this end, Ofgem has pieced together a “broad vision” for future regulation which takes into account a number of key areas, typically; the alignment of system and network operator interests, more reflective and appropriate charging for monopoly services; ‘neutral’ regulation that promotes a technology agnostic approach, a predictable regulatory regime, and the promotion of competition and market-based mechanisms.

The document is wide-ranging and broad in its scope, with Ofgem openly discussing the potential for it to consider “transformational change” alongside more incremental updates to its regulatory framework. Some of these changes include, but are not limited to;

  • The potential introduction of “sharper imbalance prices” through the Electricity Balancing Significant Code Review
  • Considerations over whether more balancing responsibility can be put to market in order to reduce the system operator’s role (although this has been deemed a longer-term priority)
  • The need to improve the efficiency of the system operator’s procurement of balancing services – specifically the need for greater transparency for new technologies – through Capacity Market reforms
  • A review of signals for network charges, an assessment for which is to be started this autumn. A number of working options will be published in a paper designed to sit alongside the wider targeted charging review.

However the broader message Ofgem has appeared to put across in today’s regulatory vision is the need for it to ensure that its forthcoming RIIO-2 framework strikes the right balance between ensuring investment and protecting consumers.

Having already started discussions about the need for balance earlier this summer, Ofgem has today offered more insight into some of the considerations it will take into account when piecing together the future investment framework.

Ofgem has argued that system and network operators must be provided with strong incentives to pursue and “make full use of” smart alternatives to expensive reinforcement works, particularly storage and demand flexibility. It has also stressed the need for it to address the balancing act between furthering low carbon generation and balancing its impact on the grid.

But Ofgem has already said that it is opposed to network operators owning and operating storage facilities for their own flexibility.

And any review of the RIIO framework is likely to see the regulator pulled between both operators and consumers. Last month Ofgem issued a note stressing that operators must prepare themselves for more restricted returns having been lambasted by consumer organisation Citizens Advice for profits it considered to be “unjustified”.

However SSE leapt to the defence of RIIO, claiming that the framework offered the right incentives and signals for network operators to attract the required investment for much-needed improvement works to the grid.