Expert view: Creating a flexible framework for energy regulation

Innovation and information sharing are the keys to balancing central and market-based planning.

The GB energy sector is going through a period of rapid transformation. For RIIO2, Ofgem has emphasised its responsibility to “support innovation into providing the intelligent, flexible networks of the future”.

There are two approaches, at either end of a spectrum to deliver a co-ordinated and efficient energy system.

– Centralised system planning. A system developed by an informed planning agency or “single buyer” could internalise trade-offs across the energy networks, and between competing technologies.

– l Market-based planning. A system that leaves the development of the energy system to market forces could encourage competition between different technologies.

Of course, there is no “silver bullet” and intermediate approaches are possible. Finding the right balance within this spectrum is a key regulatory challenge.

There are two broad categories of action that Ofgem could focus on to address this balance: innovation and information sharing.

Ofgem could encourage innovation by rebalancing the risk-adjusted returns that networks can earn on new technologies. This would effectively increase potential returns on relatively risky investments, or lower the risk of investments via regulatory mechanisms.

Innovation funding creates “options” that may be exercised in the future in order to meet policy objectives. These include, for example, security of supply and decarbonisation targets.

For instance, if the government does not provide a clear policy on how to decarbonise heat, the value of these options could increase over time as the deadline to meet the carbon budget approaches.

Collaboration increases the quality and success of innovation and allows companies to share the costs and risks of innovating.

Innovation funding mechanisms like the Network Innovation Competition (NIC), and the Network Innovation Allowance (NIA) could help.

If used by Ofgem in RIIO2, these mechanisms could provide a “public good” by continuing to promote greater cross-network and third-party collaboration. For example, two-thirds of Wales & West Utilities’ NIA project portfolio has been delivered in collaboration with one or more of the networks.

With its stated aim of facilitating the development of a flexible energy system, Ofgem’s focus should now be on defining what a “whole system” view entails, and what mechanisms will lead to the efficient development of the system as a whole.

To read the full article, visit www.oxera.com/EnergyFramework
Sahar Shamsi can be contacted at sahar.shamsi@oxera.com,
tel: +44 (0) 20 7776 6624