Ofgem: Flexibility needed to deal with change and uncertainty

Policymakers and regulators need to be more flexible to deal with the rapid pace of change in the energy system and uncertainties over how it will evolve, Ofgem has said in a new paper.

Its progression will depend on social, technological and economic developments which “do not follow smooth and predictable trends”, meaning it is “impossible” to say what the energy system will look by 2050, or even 2030.

“The pace of change has accelerated, as demonstrated by rapidly falling costs in some renewable energy sources,” the paper said. “Even in the last few months, there have been astonishing developments: solar power in Chile was priced at £25/MWh in August, and then quickly overtaken in Dubai by a price of £17/MWh set in September. Offshore wind in Denmark was priced at £51/MWh in September.”

Change is not just accelerating but is also “unpredictable”. The regulator projected in 2012 that it would take 18 years to reach 6GW of installed solar capacity. In fact, it took just 4 years to reach 10 GW.

Attempts to map the way forward by outlining different scenarios, most notably in National Grid’s Future Energy Scenarios, “cannot be used as a plausible range for policy or regulatory decisions”. They typically come with “caveats that these visions of the future are not themselves predictions but instead form a plausible range in which the future is likely to lie.” However, this can be “misleading” as major new breakthroughs often lie outside that range, “perhaps on dimensions not even imagined yet”.

The projections for energy demand through to 2025 vary by just 2 per cent across National Grid’s Future Energy Scenarios. “This dramatically understates demand uncertainty which has in the past been much higher, in a 10-20 per cent range over a decade”, the paper said. It does not follow that such analyses are lacking in valuable insights but it does mean decisions should be made “on the assumption that more dramatic change is possible”.

Source: Ofgem

Ofgem said it heard a “strong call” from stakeholders for the government and the regulator to “decide now on our preferred pathway”. However, it said this is “unrealistic” in the face of so much uncertainty: “It would almost inevitably lead to higher costs and bills than necessary and more disruptive step changes later.”

The “drastic” reductions in the cost of renewables, for example, highlights the risk of becoming tied into long-term subsidies which seem more and more expensive, relatively speaking, as time goes on. “In the extreme, this risks consumers being incentivised to defect from the main energy system to avoid sunk costs”, the paper said. “Energy policy and regulation will need to ensure that previous commitments are honoured, while promoting efficient decisions about, for instance, which networks to use and how.”

Similarly, there “seems to be enough justification to invest in trials” of carbon capture and storage to learn more about how costs might come down. “But we should treat with caution arguments about needing to invest early in building supply chain and locking-in the roll-out a long way into the future,” it added. “There are substantial potential benefits from agility.”

Ofgem concluded: “Given the pace of change and uncertainty we can no longer rely on three to four year projects to develop regulation that will set policy for the next decade but rather need to set clear principles and a direction of travel for regulation. This will provide a signal of predictability while still allowing us to be flexible to wider changes.”

The paper is the first in Ofgem’s Future Insights series which was launched yesterday to examine the impact on consumers of the transformation of the energy system over the coming decades.  

Earlier this week the former chief executive of National Grid Steve Holliday called for energy policy to become “more flexible” and “more agile” to deal with the “revolution” that is taking place. He said the fast pace of change means many policies are “already out of date” by the time they are put into practice.