Letter from the Editor: A tale of two decisions

It’s little surprise that Ofgem faces a judicial review over its decision earlier this year to slash embedded benefits for distributed generation. Indeed, chief executive Dermot Nolan seemed to be expecting the move last month, when he told Utility Week in an exclusive interview that the regulator would defend any such action “rigorously”.

His rationale for the cuts to embedded benefits – that distortions in the system should be eliminated – is persuasive. Indeed, it was these very embedded benefits that allowed a high proportion of diesel generation to win out in the capacity auction, undermining the core purpose of an energy market reform designed to green the system.

However, the judicial review will be won or lost not on the rights or wrongs of the decision, or the current system, but on the technicalities of how it was made. Millbank will be hoping that the analysis on which it based the decision, which critics have called “rushed”, will stand up to the scrutiny of the court.

It would be an exaggeration to say Ofgem is spoiling for a fight, but it’s certainly not dodging one. Speaking last month, Nolan seemed to anticipate further legal action to come. As the energy system becomes more complex, the current charging arrangements, governing who pays what for transmission and distribution, are no longer fit for purpose. The targeted charging review now under way is designed to address this, and Nolan was clear that the decisions Ofgem makes as it oversees the energy transition may be contentious. To use his own words: “Ultimately, we will make decisions, potentially difficult decisions, that we think are in consumers’ interest, and that could lead to litigation.”

Isn’t it interesting, then, that Ofgem’s rationale for insisting the government was best placed to enforce a market-wide price cap on energy supply via legislation, was that if the regulator did so itself, it was likely to face legal challenge?  What is the difference between the two decisions – one which Nolan is happy to stand up in court and defend; the other which he is adamant needs legislation to back it up? Particularly when you consider that any energy supplier taking the regulator to court over a price cap would be committing public relations suicide.

There’s an obvious answer, though it’s probably not the one Nolan would give if asked. Can it be that the regulator doesn’t believe in the price cap, doesn’t think it’s in customers’ best interests, and doesn’t want to be held responsible for the unintended consequences of heavy-handed intervention in a supposedly free market?