No time to lose

In March Ofgem published three significant and related consultations around the future regulation of networks. The consultations specifically relate to the successor to RIIO, local governance and distributed flexibility. Ofgem claims that “there is not a moment to lose” given the imperative to meet net zero. However, Maxine Frerk, former senior partner at the regulator, argues that Ofgem risks blocking momentum by heading back to the drawing board on frameworks and archetypes.

In the forward to the three recently-launched Ofgem consultations, interim director of infrastructure and security of supply Akshay Kaul stresses that, given the imperative to meet net zero “this task is now vital and urgent. There is not a moment to lose.”

However, in its desire to stand back and consider a radically different approach to regulation Ofgem risks a hiatus at a time when we can least afford it. What is lacking across the trio of documents is any sense of how we can maintain momentum while Ofgem goes back to first principles and has a think about frameworks and archetypes. What would an “agile” approach look like in this context?

There is also a sense that Ofgem is looking to offload as much as it can onto the new FSO. While the creation of the FSO does provide a real opportunity for a whole-systems view and some industry leadership, we need to be careful not to assume it can do everything from day one, when the legislation to create it is still wending its way through Parliament and it will take time to build new capabilities. And is what Ofgem is suggesting the FSO do appropriate for a national body given the real action on decarbonisation of heat and transport will be happening, as Ofgem says, “street by street and town by town”?

The time pressures point to two key asks. First, on local governance, the ENA Open Networks programme (which already includes the ESO) must keep pushing forward in the interim on market facilitation and system planning. And second, on RIIO, Ofgem must decide quickly if it is just going to rollover the gas distribution price control and, if so, ensure that this does not result in two wasted years.

Local Governance

The Open Networks programme came in for some stick from Ofgem but, as chair of the Open Networks Challenge Group, my sense is that most stakeholders are supportive of the work that it does – albeit everyone would like to see the pace accelerated. Upping the pace requires more resources and a governance structure that means they do not simply proceed at the pace of the slowest.

Of course, the radical changes that Ofgem is proposing with a substantial role for the FSO will have been helpful in focussing minds at the ENA but there is more Ofgem could do to drive progress. Ofgem used to attend the Open Networks Steering Group where it could use its influence to drive things forward. It withdrew last year but if it wants to effect real change on the ground, it should re-engage.

Also, Ofgem has only just put in place a new DSO incentive as part of the RIIO ED2 price control. This should be used to help drive the progress that Ofgem wants to see – with more emphasis put on collaboration, rather than the competitive spirit that RIIO financial incentives all too often engender.

In both cases there is a real question at a practical level of what Ofgem is asking the FSO to do. Is it simply a coordination/ facilitation role or is it actually taking over the doing? To answer this Ofgem needs to understand what happens now, what works well and what doesn’t. In a recent local governance webinar, Ofgem said that it was keen to explore this through a series of working groups once the consultation closes. That can’t happen soon enough.

Alternatives to RIIO

A similar story arises on the alternatives to RIIO where Ofgem are proposing radical alternatives to RIIO of “Plan and Deliver” (based on the FSO developing a strategic plan with competition used to ensure cost efficiency) or “Freedom and Accountability” (effectively an ex-post approach with digitalisation enabling better monitoring).

In the last year Ofgem has made a positive shift in its approach to network regulation with its Accelerated Strategic Transmission Investment (ASTI) programme. Within the short period of a year the ESO developed its Holistic Network Design setting out the network needed to support the anticipated 50GW of offshore wind by 2030 and Ofgem then agreed to fund that investment. It did that within the RIIO framework and by focussing on the specific challenge in hand – to ensure grid capacity was not a barrier to meeting the government’s targets for offshore wind.

The radical proposals that it is now putting forward build on that. But the problems faced by gas distribution are very different. And the question of what worked well or not in RIIO2 is one that Ofgem are only now planning to explore through yet another round of working groups.

It feels inevitable that they will end up rolling over the gas distribution price control as they suggest in the consultation. Given where they are in the process they would seem to have no choice. Getting a decision on this quickly is important as the gas distribution companies are already starting work on their business plans.

Assuming Ofgem does roll over the gas distribution price controls to align with electricity distribution, it is vital that these two years are not wasted and that the rollover process is as light touch as it can be. There are lots of hard questions about how to regulate a network that faces real stranding risk, that needs to be kept safe while any customers are still connected and where there is the prospect of a “death spiral” with a declining number of (probably poorer) customers left picking up the bill for the overall network.  And then there’s the question of how to treat the gas networks if they are repurposed for hydrogen.

Waiting on the FSO or on the DESNZ decision on heat before starting these conversations would be wasting time that we do not have. Thinking about these real-world challenges now will also help make clear where RIIO works and where it doesn’t which can then inform what the future shape of network regulation should be for gas distribution, rather than trying to answer that question in abstract.

This is a difficult time for energy regulation. We know the industry is going through a transformation and it makes sense that regulation itself may need to be very different as a result. But we have to keep the plane in the air and carry out that refit mid-flight. That points to bold but incremental change rather than starting with a blank sheet of paper; keeping what works and changing what doesn’t; and, above all, maintaining momentum. How’s that for a definition of agile regulation?