Ofgem unveils new regulatory strategy

Regulation for future energy system must acknowledge “gaps and inconsistencies” in current regime, admits regulator

Ofgem has responded to the rapid development of decentralised and low carbon technologies in a new strategy for regulation of the future energy system, published today

The strategy takes account of the the rise of new players in the market, which have exposed “gaps and inconsistencies in our current arrangements,” according to Andrew Wright, senior partner for energy systems at Ofgem.

Wright added: “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.”

Wright suggested that some aspects of the regulatory framework for networks may be reviewed ahead of the next price controls.

Wright said this may be necessitated by the “pace and extent of [system] change”.

He also hinted that the next RIIO price control for networks may be shorter than the current eight years, saying that the regulators will “consider ways of handling the greater degree of uncertainty that networks will face”.

Several industry leaders, including Ofgem’s chief executive Dermot Nolan and Basil Scarsella, chief executive of UK Power Networks, have speculated in recent months that a shorter price control might be one way of achieving greater flexibility in the face of uncertainty.

Ofgem said its new regulatory strategy is guided by five principles: aligning incentives; being cost reflective; creating a level playing field; supporting an efficient allocation of risk and harnessing markets.

It also addresses five themes where the regulator believes these principles will require the most urgent action.

These themes are: enabling smart metering and associated industry platforms; the balancing of supply and demand; efficient locational management; system coordination and institutional arrangements; supporting innovation while protecting customer interests.

Alongside the new strategy, Ofgem also launched its targeted charging review, setting out how it intends to alter arrangements for residual charges for electricity networks “and related matters”.

This review follows a controversial decision from Ofgem to cull the payments recieved by embedded generators for triad avoidance. The decision was welcomed by owners of large generations such as Uniper, whose chief executive Felix Lerch said the payment cuts were essential for a “level playing field”. However, owners and investors in small scale peaking plant complained that the cull – which is being introduced without grandfathering arrangements – will destroy their business models.

Ofgem announced its intention to conduct a wide ranging review of system charging mechanisms in December last year.