Ofgem says ESO should stop ‘planning to fail’

The electricity system operator (ESO) should stop “planning to fail” by replacing its annually updated Future Energy Scenarios with Future Energy Pathways, all of which comply with the UK’s climate change targets.

The latest set published in July 2022 featured four main scenarios, three of which aligned with the UK’s 2050 net zero target. However, one of the scenarios, Falling Short, did not meet the target, primarily because of the imagined failure to decarbonise domestic heating.

National Grid ESO is due to be transformed next year into an independent publicly owned Future System Operator (FSO). Its responsibilities will include developing a Centralised Strategic Network Plan to guide investments in the power grid.

In a new consultation exploring the modelling of supply and demand to inform this plan, Ofgem identified numerous issues with the current approach to developing the Future Energy Scenarios.

The regulator said the scenarios are subject to frequent changes and lack transparency, regional granularity and clarity over the modelling of high-low, low-probability events that may jeopardise the energy transition.

Furthermore, Ofgem said the inclusion of a scenario that does not align with the 2050 net zero target effectively amounts to “planning to fail” and “sends the wrong signal at a point where ambition is needed”.

The regulator said retaining the current “neutral, illustrative” approach may lead to the development of “low regret” investment options that are equally valid under all or a majority of scenarios: “While this may help reduce the risk of overinvesting in infrastructure, continuing with this approach may limit signals to industry to be more ambitious, or to plan for a particular scenario, because they are all equally credible.”

Ofgem said the FSO should therefore replace these scenarios with Future Energy Pathways that all show alternative routes to meeting the UK’s net zero targets.

The regulator said they should start with a “shared single short-term view” that diverges into the different pathways further down the line. It said this shared short-term pathway should cover an “appropriate timeframe where there is confidence that assumptions made are robust and/or align to government policy,” giving an indicative time span of between seven and twelve years.

In line with its planned role as a strategic adviser, Ofgem said this approach would allow the FSO to be “more directive about the type and scale of investment needed” and would also provide more visibility over potential interactions between different parts of the energy system.

The regulator said the FSO should still develop a separate counterfactual scenario, including data, to demonstrate the potential implications of failing to meet climate change targets but this should not be presented as one of the pathways.

It said the FSO should also produce additional pathways and data at a regional and industrial level to provide more clarity to regional planners and assist decision-making by government and local authorities.

Unlike the current scenarios, Ofgem said the shared short-term pathway should incorporate network constraints to enable the FSO to advise government and Ofgem on where new generation should be located. It said the impact of new generation on constraints is the basis for much network investment “so pathways not considering this impact risk being unrealistic.”

Over longer horizons, the regulator said an unconstrained network model is still appropriate to “keep options open”.

As the UK currently has no climate change targets post 2050 and there is limited information on which to base modelling beyond then, the pathways should initially cover activities out to the middle of the century: “Any additional work that attempts to predict future policy goals, rather than investment to meet known goals, is not likely to provide useful enough direction to justify the effort expended.”

Ofgem said the pathways should not incorporate high-impact, low-probability events as this could result in either “underinvestment if the event was considered too unlikely to occur or overinvestment if the event was weighted too heavily.”

However, the regulator said the FSO should develop the capacity to advise the government and Ofgem of the potential impacts on the future network should an extreme event occur.”

To improve transparency, the input and output data used in the pathways should be “treated as open by default for all to use, with the FSO only restricting access where there is a clear reason to do so”. Ofgem said this principle should also apply to the models and algorithms used to produce the data.

A “major” pathways publication should be released a year prior to the publication of the main Centralised Strategic Network Plan to enable the latter to use the pathways for its investment recommendations. There should be “minor” annual updates to the pathways in between subsequent publications of the main plan, which could potentially happen every two or three years.

The deadline for feedback on the proposals is 23 June.