Lights, camera, action plan

Chandni Ruparelia, Shakespeare Martineau

UK regulator Ofgem has been accused of not doing enough to promote a whole-system action plan to bring about the necessary changes in the UK system. The recently published Decarbonisation Action Plan is its answer.

Decarbonisation. Digitalisation. Decentralisation. Flexibility. Zero-carbon. Net-carbon. Electric vehicles. Affordable. Sustainable. Secure. Accessible. Optimisation. Innovation. Disruption. These are just some of the buzz words stakeholders in the energy industry use to describe the fundamental whole-system change taking place in this sector. With that requires a whole-system perspective of what needs to happen to make such fundamental changes. The recently published Decarbonisation Action Plan is Ofgem’s manifesto aimed at achieving this.

The notion that the energy system in the UK is going through a revolutionary change should be no surprise to those engaged in this sector. What is also unsurprising is hearing that a well-functioning energy system should be built on the tenets of a zero carbon economy at the lowest cost to consumers. However, what hasn’t been clear is how this will be put into practice.

GHG to net zero by 2050?

In June 2019, the UK government became the first major economy to legislate to bring GHG emissions to net zero by 2050, undoubtedly a positive move. In turn, and encouragingly, increasing numbers of corporates and the public sector have been announcing zero net carbon ambitions, backed up by planned investment in new technologies and solutions. The problem, however, is that  despite the swathes of policy and economic arguments in favour of low cost decarbonisation, what’s been lacking is a clear and stable overarching policy framework which brings everything together and sets the direction of travel. Without that, the necessary investment and behavioural change will be impossible to deliver.

Ofgem’s role

Ofgem, which is responsible for setting the regulatory frameworks for gas and electricity, and for taking regulatory decisions and balancing green policies with consumer protection, has been put under the spotlight for not doing enough. In particular, stakeholders in the industry have been asking for a more comprehensive and whole-system action plan to provide much more certainty, including clearer price signals, as to how this blockbuster energy transition will be achieved. In response, Ofgem has now published a nine-point action plan, calling for radical changes aimed at decarbonising the energy system in order to achieve net zero by 2050:

1. Designing cost effective networks for net zero:

Ofgem will use the network price controls (RIIO-2) to ensure networks continue to invest in and connect low-carbon technologies, whilst ensuring that additional network capacity does not come at a disproportionately high cost. A new suite of investment and innovation mechanisms, including a strategic network innovation fund and a new net zero reopener, will be introduced to enable key developments in regulatory policy or technological advancements to be reflected flexibly in the price controls.

2. Long term planning and innovation:

The aim here is to design regulation and funding which encourages investment ahead of need in anticipation of achieving decarbonisation. Accordingly, Ofgem will develop guidance to aid the development of investment proposals where there is significant uncertainty of need, and set up a new innovation fund.

3. More effective coordination to deliver low cost offshore networks:

Offshore wind has played a significant role in showcasing how renewable technology can become more cost effective than traditional fossil fuels. The government has signalled its ambition for a considerable increase in offshore wind capacity by 2030, and so a more coordinated offshore transmission system approach will be explored to maximise consumer benefits compared to the current approach of individual radial offshore transmission links.

4. Making progress on low carbon heat:

Decarbonising heat has always played a relatively small cameo role, particularly because of the fundamental technological uncertainties on how best to achieve this cost-effectively. Ofgem has renewed its commitment to help government and industry develop cost effective and low risk options to decarbonise heat, especially with the role other gases, such as hydrogen, are likely to play in a changing energy system.  The challenge here will be to remain realistic about the medium-term role of natural gas as a transition fuel in the decarbonisation trajectory, and the current limitations of alternative heating solutions when it comes to the UK’s existing thermally inefficient housing stock.

5. Preparing system operators for a net zero future:

Given the scale and pace at which decarbonisation will need to be delivered, the respective roles of the GB electricity system operator (ESO) and the distribution companies will be vital in enabling a transition to net zero. While the ESO has already facilitated the integration of new low carbon technologies into the Balancing Mechanism and balancing services markets, and has set an ambition to operate the transmission system zero carbon by 2025, decentralising energy markets will mean an ever-increasing role for the distribution companies. Ofgem intends to carry out a strategic review of the way energy systems are managed, and work with BEIS to ensure appropriate system governance between the network operators.

6. Supporting flexibility:

The ability of the energy system to respond to market signals, and accordingly adapt demand or supply of energy, is becoming increasingly important in optimising existing assets and delivering against carbon commitments. Prosumers, electric vehicles (EVs) and other technological advancements mean that supply-side solutions alone can no longer be relied upon. Flexibility platforms, demand side response, aggregation and other flexible trading mechanisms will be supported by introducing effective reforms to access, charging and half hourly settlement. 

7. Enabling electric vehicles at low cost:

While EVs have been the promising star performer in terms of the discussions regarding the impact this technology can have on the market design of a digitised and decentralised energy system, much more needs to be done to support a rapid uptake of EVs. Ofgem will work on reforming electricity network charging to help remove barriers to entry and identify new business models and a strategy on how network costs can be recovered.

8. Opening up retail innovation:

Energy retailers can play a key role in fostering consumer engagement, notably by providing new products and services, to encourage consumers to not only use energy more efficiently but play into a more dynamic bi-directional energy market. Ofgem will oversee the various trials that will need to take place to foster this new customer-retailer relationship and remove barriers to entry, for example by promoting more regulatory sandboxes, and enabling new business models to flourish. 

9. Adapting the organisation:

Criticised for not finding the right balance between protecting customers from rising costs and ambitious green investments, Ofgem aims to learn from past mistakes. It plans to become more ‘adaptive’ and keep in step with policy and other developments to enable decision making, including setting up a Net Zero Advisory Group to contribute more meaningfully to net zero.

Ofgem now plans to put into motion this nine-point action plan over the next 18 months. How quickly stakeholders react remains to be seen but there is at least now a positive signal from Ofgem that it is adopting a much more holistic agenda aimed at encouraging rapid decarbonisation at an affordable cost.

The author:

Chandni Ruparelia is a legal director in the energy team at law firm, Shakespeare Martineau