Energy regulation needs to catch up with changing markets and the need for new flexibility services. Several recent consultations and reports, including on Flexible Energy Retail Markets, Smart Data, the Energy Data Taskforce and Regulating for the Fourth Industrial Revolution look at how this could be done.
In November 2018, the then Energy Secretary Greg Clark gave a speech, After the Trilemma: four principles for the power sector. This was a response to Dieter Helm's Cost of energy review and signalled the start of a change in Government energy policy, moving away from the "energy trilemma" of how to make sure energy is cheap, green and secure, to a new policy built around four principles:
- the market principle – we must wherever possible use market mechanisms that take full advantage of innovation and competition
- the insurance principle – given intrinsic uncertainty about the future, government must be prepared to intervene to provide insurance and preserve optionality
- the agility principle – energy regulation must be agile and responsive if it is to reap the great opportunities of the smart, digital economy, and
- the “no free-riding" principle: consumers of all types should pay a fair share of system costs.
We were hoping for an Energy White Paper to follow, initially early in 2019 and then promised in the summer, but recent political developments have pushed it back to autumn 2019 at the earliest.
Instead BEIS have published a number of consultations on various policy aspects.
This article focuses on the Flexible and responsive energy retail markets consultation, which closes on 16 September 2019 and marks the mid-point in a joint Ofgem-BEIS review of the current energy retail market design – a review announced in Greg Clark's speech and formally launched in March 2019. It also examines the Smart Data consultation and the Energy Data Taskforce report.
Alongside these is a consultation on reforming the energy industry codes, which again closes on 16 September and was also trailed in Greg Clark's speech.
Flexible and responsive energy retail markets
The Flexible and responsive energy retail markets consultation complements other Government initiatives which are ongoing: the Smart Data consultation, the Energy Data Taskforce report and the Energy Industry Code Review all mentioned above, Ofgem's Consumer Vulnerability Strategy, and Ofgem's Microbusiness Strategic Review. It builds on Ofgem's call for evidence on future supply market arrangements.
A new trilemma and the energy transition
The energy system is having to adapt to a new "trilemma": decarbonisation, digitalisation and decentralisation. There needs to be an energy transition: shifting from the traditional fossil-fuel-based system to a low carbon, smarter, electrified energy system. This is becoming ever more urgent given that the "net zero" target (zero emissions by 2050) is now enshrined in UK law. The Government believes that "a dynamic, innovative and competitive retail market will help deliver the energy transition at the lowest cost to consumers", but the current energy retail market framework is not agile and risks holding back the energy transition.
Vision and outcomes
The vision for a future energy retail market is one where innovation brings greater choice to consumers, allowing them to take advantage of the increased flexibility and lower costs of a smart, low carbon energy system. There is a combination of healthy competition and appropriate safeguards so that all consumers pay a competitive price for their energy and vulnerable consumers are protected.
The consultation sets out five key outcomes to deliver this vision and the associated challenges of meeting these:
- Wide choice of energy services and consistent consumer protection
At the moment, companies seeking to launch innovative products and services in the retail market have to become a licensed supplier, with all the associated responsibilities. This puts a lot of innovators off.
On the other hand, energy switching services offered by third party intermediaries are not regulated. In the Smart Data consultation the Government is recommending that they should be, perhaps by a cross-sectoral general authorisation regime that covers both energy and telecoms markets, reflecting the move towards bundled service offerings.
- Minimal market distortions
Suppliers do much more than simply supply energy to customers. They have a number of responsibilities, not only to collect 'green' levies via consumer bills but also to deliver energy efficiency and heating measures to certain households via the Energy Company Obligation (ECO) and Warm Home Discount.
These obligations only apply to larger suppliers, so they face higher costs which they pass on to their customers. The larger a supplier is, the more disproportionately their customers contribute to the cost of delivering ECO. The rationale for this is to remove barriers to entry for smaller suppliers wanting to enter the market, but it has the effect of creating an uneven playing field.
The consultation asks whether the size thresholds for ECO and the Warm Home Discount should be removed so that all suppliers are liable; and whether to introduce a buyout mechanism for ECO, which would help to reduce the delivery burden on smaller suppliers.
- Competitive prices for all and ensuring consumers in vulnerable situations receive services they need
The consultation also looks at how to protect domestic consumers from a re-emergence of loyalty penalties once the price cap ends.
Rather disappointingly, the flexible energy retail markets consultation is recommending incremental reforms not a wholesale shake-up of the supplier licensing regime. BEIS and Ofgem seem keen on using existing tools, such as derogations and supply licence exemptions, where possible, but they are also considering an authorisation regime similar to the telecoms sector approach where non-supplier entities operating in the energy market are authorised to pursue an activity in the market as long as they comply with relevant rules. A longer-term, more radical option would be a modular approach, where energy retail businesses are regulated depending on the services they offer, with sections of the rule book turned 'on' or 'off' depending on which activities they undertake.
Data and regulation
Whilst the flexible energy retail markets consultation seems to be taking a conservative approach, elsewhere in Government, regulation is being looked at more widely. The Regulation for the Fourth Industrial Revolution White Paper wants more co-ordination between different regulators and to make it easier for innovative businesses, whose activities may span a number of regulated areas, to bring their products to market. It also stresses the use of regulatory 'sandboxes' such as that offered by Ofgem's Innovation Link to allow innovators to trial new products, services and business models in a real-world environment for a fixed period without some of the usual rules applying.
Data is key to this. The Government has said it will consult on a National Data Strategy in autumn 2019. In the meantime the Energy Data Taskforce has published its Report setting out a number of recommendations on how to support the delivery of a modern, digitalised energy system by unlocking the benefits of decarbonisation and decentralisation through better use of data. The Government will set out its initial responses to this in the Energy White Paper, hopefully this autumn.
It is the use of data and digitalisation of the energy system that will ultimately enable new, innovative energy services to come to market, so the Energy Data Taskforce Report needs to be looked at alongside the Flexible Energy Retail Markets consultation. In a nutshell, we don't know what energy system data we have (it is in different formats even within the same organisation), we cannot see all the assets connected to the distribution system and we are not getting value from the data as it is not open.
The report recommends that Government and Ofgem use their legislative and regulatory powers to digitalise the energy system, adopt the principle that energy system data is 'presumed open', establish a data catalogue of standardised energy system datasets, establish an asset registration strategy and a digital system map, to enable optimisation of investment and inform the creation of new markets.
This is an exciting time for energy regulation as there is a clear need to bring it up to date so it can cope with the changing energy system and the new trilemma of digitalisation, decarbonisation and decentralisation. It is interesting to see that regulators are looking to each other for ideas and the suggestion of a cross-sectoral approach governing both energy and telecoms shows that the boundaries between industries are blurring. These consultations are an opportunity for all businesses seeking to offer innovative energy products to have their say. Please contact us if you would like us to help input into your response.