By ANDREW WRIGHT
Electricity market and regulatory arrangements were designed for a system
with very different characteristics to those we now expect in the future.
For example, more than a quarter of all generation capacity is now
connected to distribution rather than transmission networks.
Much, but not all, is intermittent renewable generation, which only
generates when the wind blows or the sun shines.
In addition, an increasing proportion of generation is now located behind
the meter on consumer premises, partly driven by the growth of solar panels.
If we don’t adapt the arrangements, they could hold back further progress
to a decarbonised electricity system that meets peoples’ needs, either
because the cost will be higher than necessary or because opportunities to
deploy new technologies and business models are frustrated.
So we have published our strategy for regulation during the energy system
transition. It covers both electricity and gas, as the transition will
have profound impacts on both systems.
We have set out the following five principles for how we will approach
regulation and our priorities for changing the current arrangements. We
believe this approach will work in the interests of consumers and help
progress towards decarbonisation.
Aligning incentives, so that monopoly network operators and National Grid
as the gas and electricity system operator act in the interests of consumers.
Cost reflective charges for monopoly services that reflect the incremental
costs and benefits of how consumers and other parties use the system. This
includes minimising harmful distortions arising from the recovery of
residual charges for using the networks.
A level playing field, so that all technologies and business models can
compete equally, without barriers to entry to the market.
Efficient allocation of risk, so that those best placed to manage the
uncertainty inherent in a rapidly changing system shoulder the risks involved.
Harnessing markets and competition where it can bring benefits to consumers.
These principles will help stakeholders understand the rationale behind
decisions we will have to make. This will improve the predictability of our
regulation despite the uncertain outlook.
Reforms are needed in some areas because changes in technology and cost
structures are exposing gaps and inconsistencies in our arrangements.
These “gaps” were less important in the past given the generation mix and
system configuration at the time. But there is a risk that they will
prevent the system evolving in the most cost effective way. Opportunities
to take advantage of innovation would be lost too.
Our priority areas for reform are as follows.
The right incentives for system users
Generators, consumers and storage operators need to face the right
incentives when using the system. We need arrangements for network access,
including changes for connections and use of the system that reflect the
principles set out above.
We have already made changes to create a more level playing field between
transmission and distribution connected generation. We have today announced
a “significant code review” addressing remaining issues arising from how
residual network charges (which broadly recover sunk or fixed costs) are
recovered.
We want the system to be used in the most efficient way. In particular, we
want to ensure there are the right incentives for generators and consumers
to change the way they generate and use electricity to take account of
local network congestion.
This will encourage new innovative businesses to manage local congestion
and avoid expensive network upgrades.
The right incentives for system operation
National Grid as the system operator makes sure the electricity system
remains stable regardless of the actions of network users. It has
historically been focussed on transmission, with distribution systems
largely managed as passive infrastructure.
However, distribution networks are now taking on system operation and
flexible management of their own grids. Therefore we need to ensure that
system operators at distribution and transmission level co-operate and
co-ordinate to deliver benefits across the whole energy system.
The financial incentives they face must be aligned with the interests of
consumers. As a part of these changes we have agreed with National Grid
that they will move electricity system operation to a new, more independent
function, legally separate from their other business, including the
transmission network.
The right incentives for networks
Our framework for network regulation is generally well suited to the energy
system transition. However, the pace and extent of change means that we
will review some aspects of the framework ahead of the next price controls.
We will consider ways of handling the greater degree of uncertainty that
networks will face. We will also examine what is the right allocation of
investment risk for future upgrades between network users, network owners
and consumers. This relates closely to changes in charging arrangements and
incentives.
This strategy, together with our priorities for reform, will show a clear
direction of travel of regulatory arrangements and market rules as the
transition to a decarbonised energy system progresses. Of course, with so
much uncertainty, we must be prepared to alter our plans in response to
circumstances, including changes in technology, costs or government policies.
Having published our strategy, we will now take forward this work as
separate projects in an integrated programme. We will review our progress
against the strategy and its objectives regularly and report back as a part
of our forward work program.
Andrew Wright is Senior Partner, Energy Systems, at OFGEM.
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