Setting out a nine-point ‘Action Plan’ for the next 18 months to deliver decarbonisation, Ofgem has tacitly acknowledged that it is currently ill-equipped to deal with the challenge.
The regulator pointed out that the existing ‘Social and Environmental Guidance’ from government, under which it operates, is out of date. It was issued before the 2019 target of achieving net zero by 2050 became law and the regulator said that it “would welcome further clarification”.
The lack of updated government guidance for regulators has been a longstanding concern, with pleas for policy guidance ignored by successive governments. In one recent discussion group, speakers reiterated that the regulator can act to protect consumers, but it needs government and elected politicians to provide guidance on the trade-offs between efficiency and equity and how costs fall on different consumer groups. Similarly, government can set aspirational targets, for example on climate change, “but if it wants the regulator to be more ambitious you have to give them a framework”.
Ofgem promised to use its ‘full toolbox’ to address decarbonisation, but the action plan showed that some of its tools are currently blunt instruments.
For example, most approaches to a new market will require consumers to change their behaviour. But Ofgem said the experience was that “a large body of research, including work done by Ofgem’s behavioural insights team, shows that most consumers do not make active energy tariff choices even when prompted to do so.”
Ofgem said it had to do more to embed “consistent and realistic assumptions about consumer behaviour” into the policy development. The regulator’s ‘behaviourally informed’ approach in increasing consumer engagement had been successful, but “We recognise that it would be more powerful if a realistic model of consumer behaviour were to be incorporated into policy making from initial conception to implementation and evaluation,” Ofgem said. That would become more important because “As changes start to impact consumers’ heating and transport (rather than their electricity), understanding consumer needs and behaviours becomes increasingly important and complex.”
The regulator also acknowledged that it needed more flexibility in the five-yearly network business plans and price reviews. The solution is a new ‘net zero advisory group’ of stakeholders who will back up some general ‘re-openers’ that will enable Ofgem (and the companies) to respond to a changing environment.
The action plan also saw Ofgem give way on some longstanding debates, notably network extensions to connect the UK’s offshore wind farms. The regulator has resisted calls for a co-ordinated approach because of the risk of stranded assets if there is investment ‘ahead of need’. But Ofgem now says that with the planned massive increase in offshore wind farms individual connections to shore are no longer appropriate.
Playing catch-up?
At some points, the regulator appeared to be playing a very late catch-up. For example, it suggested “one future path” might involve network companies working with third parties, particularly local, regional and devolved governments, to help identify low-cost approaches to heat decarbonisation and to respond cost-effectively to wider decarbonisation challenges such as the roll-out of electric vehicles. “This could include local authorities and communities being engaged in the development of local area energy plans,” the regulator said. But in England, 38 Local Enterprise Partnerships, linked closely with local authorities, finalised energy plans last year (for a full list and links see New Power’s December 2019 issue). The LEPs will work via five ‘Energy Hubs’ that have been created under the Department for Business, Energy and Industrial Strategy to increase public sector capacity to bring forward energy schemes. They are at arm’s length from BEIS, with flexibility to agree objectives that align with local needs.
Ofgem also promised a review of some major programmes in the gas network, including a multi-decade plan to replace iron pipework, that has reached the end of its lifetime, with plastic pipes. When that programme began it was assumed that the gas network future was assured; over time it has also been seen as opening up the option of converting the network to transport low-carbon hydrogen. Ofgem now says it will re-examine that programme, which runs until 2032, and begun a fundamental review of other questions over the gas network, such as the depreciation rate, once government’s heat strategy is announced later this year.
This announcement comes just a month after gas distribution networks have completed and submitted business plans for the five years from 2021.
Ofgem’s action plan
1: Designing cost effective networks for net zero
Introduce a suite of net zero investment and innovation mechanisms, including the strategic network innovation fund and a new net zero reopener, that can help to enable key developments in regulatory policy or technology to be reflected flexibly in the price controls. These would allow for net zero-related actions to be put into place in the price controls at any time, rather than just during the preparatory phase
2: Long-term planning and innovation
Encourage further long-term planning, leadership and innovation in networks through regulatory design and funding. Develop guidance to aid the development of investment proposals where there is significant uncertainty of need. Set up a new strategic innovation fund focussed on decarbonisation.
3. More effective coordination to deliver low cost offshore networks
Explore options for a more coordinated offshore transmission system to connect offshore wind generation
4. Preparing for low-carbon heat
We will support government and industry to ensure that there is a fair balance of costs in preparing for heat decarbonisation across different groups including between current and future consumers. During the price control, we will review gas network depreciation. We will work with the HSE to review the Iron Mains Risk Reduction Programme and with National Grid to review the capacities required on the gas transmission network, in light of the potential futures of gas in a changing energy system.
5. Preparing system operators for a net zero future
Ensure that the roles and responsibilities to plan and operate a future energy system are adequately fulfilled, including making recommendations to government where change is needed. A strategic review of the way our energy systems are managed, to ensure they are t for a low carbon future.
6. Supporting flexibility
Ensure markets adequately reward flexibility. Support innovation to develop easy and engaging ways for small businesses and consumers to provide flexibility through demand-side management.
7. Enabling electric vehicles at low cost
Develop a regulatory strategy for electric vehicles, removing obstacles to new business models, products and services such as EV users selling flexibility services.
8. Opening up retail innovation
Enable new energy service business models, particularly in the retail market. Explore the use of innovative experiments and randomised control trials, in particular to better understand how to stimulate the consumer behaviour change that will be necessary to support decarbonisation.
9. Adapting the organisation
Be more adaptive to take decisions in the face of significant uncertainty. Set up a Net Zero Advisory Group to enable Ofgem to keep in step with policy and other developments. Work with industry to develop toolsets to enable better decision making under uncertainty