Who will Ofgem choose as market facilitator?

Concerns around neutrality have forced Ofgem to consider Elexon alongside the National Energy System Operator for the role of facilitating the flexibility market. But what will win out - impartiality or perceived technical capability? Lucinda Dann weighs up the options.

Ofgem has pushed forward with its vision of the National Energy System Operator (NESO) being the panacea to all issues in the energy market despite concerns about overloading an institution that is yet to exist to prove its capabilities.

Except in one instance. Concern across the industry about perceived conflicts of interest for a body that must be neutral to succeed has forced the regulator to have a rethink over its choice for the market facilitator role.

This body will be tasked with removing arbitrary barriers preventing the uptake of flexibility, particularly in local distribution markets. Part of the role will involve finally resolving longstanding issues such as primacy between flexibility markets at transmission and distribution while also determining which markets can stack together to build revenue.

Ofgem said in its Future of Local Energy Institutions and Governance consultation in March last year that the NESO presented a potential candidate for the market facilitator role because it needed to be carried out by an expert body who could navigate the technicalities of aligning markets.

Although it acknowledged that impartiality “could be a concern” given the NESO is also a buyer of flexibility, it prioritised ease of implementation, saying that assigning the role to a neutral third party presented “significant challenges”.

But many in the industry disagreed with this prioritisation, saying Ofgem had overlooked another credible option in the Balancing and Settlement Code Administrator Elexon, leading Ofgem to take the unusual step of reconsulting on the two potential candidates.

SP Energy Networks said Ofgem’s view that NESO was the best candidate was “premature and unjustified.”

With a decision expected imminently, here Utility Week collates the opinions of the market and the companies themselves and considers the future of the Open Networks project work in this area.

Three main concerns about NESO

Although there was support among respondents to Ofgem’s consultation for the NESO to take on the market facilitator role, for many that support was given “tentatively”, partly due to a lack of clarity over the role.

Trade body Energy UK said: “Whilst most Energy UK members tentatively consider (NESO) as the best candidate for the market facilitator role… this is neither a risk-free nor cost-free option.”

For Eon impartiality was a concern but on balance it decided that the inefficiencies and administrative costs associated with setting up a neutral third party outweighed the potential benefits.

But for others, they do not. Electricity North West (ENW) said in its response: “We do not consider the burden of regulating a new entity to be sufficient reason to not explore a third party taking on this role.”

Three main concerns around the NESO taking on the role emerged from the consultation. The first and arguably most important is impartiality, with many distribution network operators (DNO) understandably in agreement that the NESO could not perform the role of a neutral facilitator.

ENW said: “…above all the market facilitator must be neutral, acting and operating in an unbiased way to ensure that confidence in the operation of the market is always high. The market facilitator must be perceived by the industry parties as being neutral. Any loss of confidence by industry parties will damage the development of an efficient flexibility market.”

Scottish and Southern Electricity Networks’ director of DSO Andrew Roper said to Utility Week: “Neutrality is really going to be key to the market facilitator being successful. If you are neutral you are going to be more intrinsically curious and there is going to be more market confidence, and we need to ensure that confidence because we need stable markets.”

But while most of the network operators had concerns, the networks are not all of one mind. Northern Powergrid said the NESO was a “sensible option” which was “well placed to provide an independent role”.

For others in the industry resourcing within a body which has yet to become functional and which has many other roles to tackle is of key concern. Octopus Energy agrees with Ofgem that the NESO may be the most suitable party to take on the role long term, however, it adds “we are concerned by the amount of scope creep”.

It says that given the uncertainty around the organisation’s ability to deliver the regulator should consider Elexon as its scope is not set to change in the coming years.

“As such, there may be more appetite and ability to better resource this new function at Elexon, as opposed to assigning this to (NESO).”

Energy UK is also concerned around scope creep, saying: “We are concerned that the creeping scope of (NESO) creates a risk that it is unable to manage its range of roles, without losing focus on its core functions, which will include an increasingly significant role in shaping the energy system and driving forward competition.”

The final area that will be critical to the success of the market facilitator but in which the NESO in its current form of the Electricity System Operator (ESO) has a mixed track record is collaboration.

In its follow up consultation Ofgem points to this as being an area which the market has reported being dissatisfied with in the past, particularly on its communication around change and delays.

“As such, if appointed, we would need to work with the ESO and wider stakeholders to ensure stakeholder engagement processes are developed to allow clear communication of rationale behind market design choices, especially where this might not reflect the views of stakeholders but is in consumer interest,” it adds.

Meanwhile, the collaborative nature of Elexon is likely the reason it has been put forward for the role, thinks chair of the Elexon Board, Sara Vaughan.

“One of the ways Elexon has always worked is by collaborating with the industry on a sort of co-creation basis. If you look at the way the BSC panel works and the working groups under the BSC, we take into account that there are many experts in the industry and that their views are worth listening to and I think that is something that has put Elexon in this position.

“It wasn’t the top down Ofgem choice, it was the industry choice and I think that is representative of the collaborative style that we have.”

Lack of technical knowledge

While Elexon has been put forward as a second credible option, it is also not considered to be the perfect candidate. Top of Ofgem’s concerns is that Elexon would need to develop deep subject matter expertise and it could be harder and take longer for it to be able to take on a substantive leadership role ahead of formally becoming the market facilitator.

It also believes that aligning transmission and distribution market arrangements could be challenging.

One idea put forward by ENW to potentially overcome this issue is for the NESO to work alongside Elexon while policy and rules are being developed, before stepping back to allow Elexon to perform the enduring function.

However, other networks do not believe the NESO has all the necessary capabilities itself. UKPN says in its response that the body “does not have the expertise to understand distribution level issues”.

For the Energy System Catapult the point around NESO’s capability at distribution level is of more concern than its ability to be neutral. “…there may be cultural issues – given (NESO)’s centralised, transmission-focused role – that could make (NESO) less effective in characterising the most efficient market designs at distribution level.”

Roper agrees: “Regardless of which organisation it is, they are both going to have to create new capabilities that they do not have in terms of skill sets and IT platforms, and an imminent decision is required to ensure they can hit the ground running.”

However, Alastair Martin, chief strategy officer at flexibility aggregator Flexitricity believes both organisations have good things to say about their IT platform development. For the ESO the Open Balancing Platform has been an “amazing step forward”, he says, while Elexon has been able to achieve “absolute precision” in its market controls.

What the companies have to say

In response to Ofgem’s second consultation, which closed earlier this year, the NESO said: “NESO remains the only organisation with robust accountability, technical and strategic capability, and whole system purpose to deliver Ofgem’s vision for the Market Facilitator.”

To address concerns around impartiality it plans to create a distinct market facilitator team separate from its transmission market design teams.

“The market facilitator will interact with transmission market teams in the same way as DSOs and market participants under a fair and transparent process, to address concerns around transmission bias,” it says.

Given the concerns around its track record of collaboration and communication the NESO says it will work with stakeholders in the coming months to transform its market design and reform process and to standardise its process for developing new services to enable a consistent experience for market participants.

“To bridge any technical gaps in DSO markets expertise, we will work with DNOs and providers to explore options including potential secondments between organisations,” it adds.

In Elexon’s consultation response it acknowledges that it will need to strengthen its knowledge and capabilities but believes the same is also true for the NESO.

“We will be expanding into new areas of technical expertise from an already strong and wide-reaching foundation of technical knowledge that spans across some areas of the DNO network operations,” it says.

It adds that its existing expertise ranges from the Balancing Mechanism down to metering for the smallest customers, giving a unique ‘whole system view’ within the industry.

To mitigate that potential concern of slower than necessary progress in the initial ramp-up phase, it intends to work closely with Open Networks programme if appointed, and highlights that it has been involved in the project in an advisory or challenge capacity for several years.

Final decision and clarity on Open Networks

A final decision is expected from the regulator imminently, but the industry will also be hoping for clarity on the future of the Open Networks project and the transitional arrangements from the work already being carried out on barriers to the new facilitator role.

For many this handover is potentially as critical as the choice for the role itself, as momentum could be lost if there is any meaningful hiatus between the two programmes. Octopus Energy believes that many of the issues that the market facilitator is being created to address could be rectified before it comes into being.

So, while the naming of the market facilitator should be a significant step forward in the journey towards increased flexibility, a clear plan for the intervening period is needed urgently for the pace of change to not be impacted.