Regional energy system planners proposed by Ofgem

Ofgem has proposed the creation of a series of Regional System Planners (RSPs) to coordinate the development of local energy system plans across Great Britain in collaboration with network operators and councils.

It said the role should actually be performed by a single independent entity with “multiple branches,” identifying the soon-to-be Future System Operator (FSO) as the lead candidate.

Regional energy system planning is one of three key roles explored by the regulator in a new consultation on local energy institutions and governance, the others being market facilitation and real-time network operation.

Ofgem also proposed to appoint a single independent entity to facilitate the delivery of flexibility markets, again suggesting the FSO as the lead option. It said the regional planning and market facilitation roles would have “strong synergies” with the FSO’s national functions.

However, the regulator said the real-time operation of local electricity networks should remain the responsibility of distribution network operators (DNOs), despite concerns over potential conflicts of interest.

The FSO is due to be established as an independent publicly owned corporation by 2024, taking on all of the main roles of National Grid Electricity System Operator as well as the planning functions of the gas system operator.

“We need a radical rethink of the energy system, markets and grid to establish a net zero power system by 2035 and net zero economy by 2050,” said Akshay Kaul, interim director of infrastructure and security of supply at Ofgem.

“The role of local communities will be critical. That’s why we’re suggesting ways to make Britain’s energy systems and markets participatory and transparent.”

He continued: “We are exploring options so net zero networks are planned, governed and regulated strategically at regional and local level – so we have flexible, clean generation and distribution systems right down to street-by-street, town-by-town, home-by-home level.

“We are considering new independent regional energy system planners to ensure plans are cohesive, coherent and clear to all.”

The consultation is a follow up to last year’s call for input, which proposed four potential models for the future of local energy institutions and governance, ranging from the internal separation of distribution system operation (DSO) functions within DNOs to the dispersal of these functions among multiple parties.

Energy system planning

Under the status quo, Ofgem said network companies develop “single energy vector plans, with significant variation in how regional context or priorities are factored in.

“There is information asymmetry over how forecasts are generated and the variance in approaches make it challenging to be confident in when the investment is needed or if consumers may end up paying for work that is not yet necessary in a region.”

The regulator said regional energy system planning needs to coordinate development across multiple energy vectors – electricity, gas, heat and possibly hydrogen – while being “fully cognisant” of the regional context such as local aims, geography and demographics. It must also be coordinated with energy system planning at the national level.

Ofgem said the RSPs would be responsible for developing regional energy system plans that incorporate national and local priorities and ambitions.

These plans would be informed by input from local actors including DNOs, gas distribution networks and local authorities. The RSPs would provide independent technical advice and analysis to support decision-making, in particular the setting of network price controls.

The regulator said network operators would remain responsible for network planning activities but these would need to be aligned with the regional energy system plans. Local authorities would likewise remain responsible for spatial planning.

“It could be argued that having both existing actors and the RSPs undertaking ‘planning’ is a duplication – but we see a clear distinction,” said Ofgem. “The existing actors plan for their own assets and within their own competencies.

“We are proposing that the RSPs focus on their coordination and coherence: ensuring common starting points, facilitating dialogue and creating an independent strategic summary”.

It said these proposals would “streamline the current patchwork approach to regional energy system planning by introducing accountability for the activity and solidifying the process for how those with a democratic mandate interact and influence the more technocratic aspects of planning and vice versa.”

To ensure consistency and accountability, Ofgem said the role should be delivered by a single independent entity with multiple branches. It said this entity must have the appropriate skills, expertise and infrastructure, for example, to model future supply and demand and identify system needs.

“For these reasons, we consider that the lead option for delivering RSPs is the FSO due to its singularity within the system; the skills and expertise it will possess and can build; and its established position as a regulated entity.”

It said a new body could also be created from scratch but this would be more complicated and take a lot longer.

Market facilitation

Ofgem said the current market arrangements for distributed flexibility are “not fit for purpose,” with a lack of consistency in approaches between DNOs and the ESO.

It said the efforts to align these markets through the Energy Networks Association’s Open Networks programme “is not progressing at the necessary pace or being implemented consistently. This has created complex, uncoordinated, and hard to navigate markets, where revenue stacking is incredibly difficult.”

The regulator said scaling up flexibility will require “open and transparent markets that are unbiased by the commercial interests of the buyers” and allow smaller assets to participate on a level playing field with larger ones.

It said there must be fair and transparent rules and processes for procuring flexibility service, which should be standardised to reduce friction, as well as easily accessible and accurate market information to enable providers to respond to system needs.

Ofgem said a single independent expert entity should therefore be tasked with simplifying processes, reducing barriers to entry and ensuring consistency, whilst also aligning arrangements at the transmission and distribution levels.

It said this work should include developing data standards and communication protocols, standardised products and contracts, and primacy and revenue stacking rules.

Ofgem said it considers the FSO the most appropriate body to fulfil this role, whilst recognising potential issues over its impartiality given that it will be a buyer of flexibility.

Although the ENA was also considered as a candidate and does possess the relevant expertise, the regulator said the pace of delivery through the Open Networks project has been “slow” and its membership representation is “limiting”.

Ofgem said a neutral third party could also be appointed but there is “no obvious existing candidate” with the requisite capabilities, whilst establishing a new body would be challenging.

Under the regulator’s proposals, DNOs would have no substantive role within market facilitation but would continue to procure and dispatch flexibility.

Alongside the consultation, Ofgem has also issued a new call for input on plans to develop a common digital platform for buying and selling flexibility.

“Currently, energy markets are complicated, fragmented, and difficult to navigate, making it difficult for small assets like electric vehicles and heat pumps to join in, and putting off potential sellers and investors,” said Kaul.

“We are setting out plans for how we can standardise and open markets – specifically by creating an ambitious vision for distributed flexibility involving a common ‘digital energy infrastructure’ which will allow more communities, businesses and organisations to buy and sell surplus renewable electricity and services when and where they need it.”

Real-time operation

Ofgem said it is not planning to change the roles and responsibilities for the real-time operation of local electricity networks, for example, by creating legally separate or independent DSOs. This will ensure that “accountability for reliability and safety sits with one entity, the DNO.”

The regulator acknowledged stakeholders concerns that DNOs continue to favour traditional network solutions over non-network alternatives but said it does not believe separation is justified given the cost and disruption this would entail.

It said potential conflicts of interest are most likely to arise in relation to the planning and market facilitation functions “as the relevant decision making is not in real time”, and its other proposals should therefore go a long way to alleviating these concerns.

Ofgem stressed that this does not mean there will be “no change relative to the status quo,” saying there is “a clear message from industry that operational decisions need to be more transparent and that significant improvements in operational coordination are needed. We expect DNOs to rise to the challenge.”

The regulator said the RIIO ED2 price control beginning in April will represent a “step change” for DNOs with regards to data and digitalisation. DNOs will be required to gather and share more information about their network and decision making, ensuring the latter is “open, visible and auditable”.

Furthermore, Ofgem said: “In retaining real time operations, including procurement and dispatch, DNOs will be required to work closely with the FSO to ensure actions taken on the distribution and transmission network are coordinated. Operational coordination is not currently being delivered effectively. This needs to change.”

It continued: “We do not consider effective operational coordination to be a ‘nice to have’. We see it as a core function of an effective system operator and expect RIIO-ED2 investments to translate into concrete improvements.”

The deadline for responses to the consultation is 10 May.