A flexible energy system – some legal and regulatory challenges ahead

The efforts of government and Ofgem to drive our energy system towards a smart and flexible future are multi-faceted, and are coming up against some difficult legal and regulatory challenges.

What’s at stake here is a smart system that the government has said could provide gross benefits to consumers of £3–8 billion a year in 2030.

A smart system is shorthand for the integration of smart technologies and techniques into our energy landscape, which in some areas could mean revolutionary not evolutionary change. This may be smart meters in every home and truly flexible demand; two-way electric vehicle to grid “smart” storage; consumers offering their own decentralised energy production and flexible consumption into the balancing and energy markets through aggregators; actively managed distribution networks; and the “internet of things” generating a mass of sensitive, and valuable, data.

As Ofgem observes in its 2017/18 draft work programme, this is essentially a vision of a decentralised energy system, created by a combination of technological and market drivers.

This is already creating some legal headaches as the regulators and legislators struggle to keep up with a wide range of stakeholders and vested interests, in what can be disparate and overlapping policy areas.

This breadth and diversity of interests make the change process itself not at all straightforward, with a key challenge being the need to provide consistency of approach across myriad governance regimes. These regimes are typically structured around codes, agreements and licensing frameworks built around the traditional two-dimensional structure of large generating plant exporting onto high voltage networks to feed power to multiple consumption sites via passive local distribution networks.

Against this backdrop, a key early priority of Ofgem is the promotion of effective markets and competition, and the wish to see fair access to new and existing markets, and level playing fields, with price signals which recognise the value of flexibility. This involves the identification and dismantling of undue regulatory, commercial and legal barriers.

An early question here has been the status of storage, specifically the absence of a legal definition in UK legislation (outside of the capacity market rules). This has resulted in some anomalies, notably with respect to grid connection processes, the classification of storage within the planning framework, and network charging methodologies. This in turn feeds into the operation of the balancing and capacity markets, and the extent to which these are accessible by aggregated consumer delivery models and other demand side response providers, as well as the emerging role of distribution system operator.

The issues have broadened in recent times into a review of the scope (and fairness) of embedded benefits more generally, and Ofgem’s concern that smaller generators are favoured relative to larger directly connected stations by operation of the existing TNUoS and BSUoS charging regime.

Throw into the mix the broader climate change policy agenda, and the extent to which a future smart system can and should be technology neutral by incorporating flexible fossil fuel plant such as diesel generators and larger gas plant, and the policy choices get decidedly complex.

But it’s the role of the consumer in all of this that presents one of the biggest challenges.

One question is how consumer protection law needs to adapt to reflect the new relationships that future consumers will undoubtedly have with the like of aggregators. The regulation of third party intermediaries such as brokers, and switching sites, already has Ofgem’s attention, and proposals to extend mandatory Codes of Practice to the non-domestic arena will likely get wrapped up in the future role of aggregators.

More significantly, a smart energy system will need to protect a vast array of sensitive consumer data. This will need to be done in a world of device interoperability which recognises that, in a truly interconnected world – and the UK’s energy networks will inevitably remain integrated with those of the EU after Brexit – devices and data will need to connect to and sit on standardised platforms. We don’t need to look much further than the ongoing smart meter roll out programme to see the complexities involved.

The way in which policy makers and regulators strike this balance between allowing innovation to flourish, whilst protecting consumer interests from abuse, will be a key challenge moving forward.

Ofgem believes that its move towards a system of principles-based regulation for the industry will give it the appropriate regulatory tools to meet this challenge, and it may be right. Indeed, given the underlying uncertainty that principles-based regulation entails for compliance departments, new initiatives announced by Ofgem to facilitate innovation from business are to be welcomed. These include its Innovation Link and “regulatory sandbox” to facilitate the trial of consumer propositions free from the usual regulatory constraints, both an indication of Ofgem’s apparent willingness to think outside the box and embrace new ways of thinking.