Will Ofgem’s review provide us with a future-proofed energy system?

On 4^th August, Ofgem announced its strategy for regulating the future UK energy system. For many, it’s been a long time coming, and states clearly that existing market arrangements simply aren’t fit for purpose, having been developed for the linear ‘generator to consumer’ model of times past.

In its quest to decarbonise, the UK increasingly operates a decentralised, multi-faceted, intermittent power base; one with a far greater need for all “stakeholders” in that system to work together to balance supply and demand – including consumers. Demand management is a familiar term now, with more businesses than ever choosing to participate in demand side response (DSR) schemes in order to earn revenues and mitigate against rising energy costs.

Over the next decade, participation from domestic and small commercial electricity users is also anticipated. The roll-out of smart meters means that more electricity tariffs will include incentives to avoid energy use at certain times of day or to switch off non-essential devices when requested by the National Grid or your local network operator.

This momentum behind a more agile approach is great news and much-needed if we are to decarbonise the sector affordably. But as Ofgem states, if the current market arrangements aren’t adapted they could inhibit further progress, either because costs will become unnecessarily high or because they don’t lend themselves to the introduction of new technologies and business models.

System and network costs currently make up approximately 20% of the electricity bill, so any change to the way in which they are calculated and distributed makes a tangible difference to high electricity users. Ofgem’s plans focus on an overhaul of electricity transmission and distribution charges, unpicking existing charging structures to ensure they take a fairer view for consumers. Much of this centres around the way in which ‘residuals charges’ are allocated. Broadly speaking, network tariffs are constructed using regional cost-based allocation models, with residual elements added to ensure that overall network costs are covered. The review intends to make those charges more cost reflective, ensuring that they are calculated in line with the interests of consumers. And with a paper on the topic expected at the end of this year, energy buyers would be wise to keep a watching brief.

Beyond this, the announcement talks of levelling the playing field for new technologies and business models, encouraging innovation in our developing network. It also calls for greater cohesion between the transmission system – operated by National Grid – and the localised distribution networks, recognising the fact that more embedded generation than ever is connected to distribution networks and “invisible” to National Grid.

The regulator is also reviewing incentives for generators and consumers to change generation and usage patterns, taking account of local network congestion periods, as well as the potentially thorny issue of determining the correct allocation of investment risk for future network upgrades between users, owners and consumers.  In parallel to this, the National Grid is reviewing the vast array of frequency support services that it has developed in an attempt to both simplify and expand those services.

It’s all fairly technical stuff, but with the potential to make a significant difference to business energy costs and future consumption strategies. It’s exciting for our industry too – if the UK flexible grid is developed successfully then it will have the potential to reduce energy costs. But more than that, it would enable the UK to become a world leader in electricity network development.

For the full strategy paper see: https://www.ofgem.gov.uk/publications-and-updates/our-strategy-regulating-future-energy-system