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on Jun 28, 17 • posted by Iain Soutar •

New thinking: Ofgem has to be reformed if GB is to meet its energy policy goals

Ofgem has to be reformed if GB is to meet its energy policy goals

Catherine Mitchell, IGov Team, 28th June 2017

Ofgem has announced its decision on how to pay for embedded generation, which is to accept its March ‘minded to’ decision. This is the latest stage in what is known as the embedded generation saga – explained here and here. IGov deplores this latest Ofgem decision.

As IGov has argued before, we think that Ofgem should not take this narrow decision about embedded benefits now but wait until a clear decision on the institutional needs of GB energy system transformation has been clarified – including a decision on the methodology to be used when valuing distributed energy resources (DER) . As the reset the reset (1) blog argued, GB is making too many decisions from too many policy statements and too many Consultations without a coherent institutional framework for them to fit into. This is leading to non-joined-up energy policy making, and this latest decision by Ofgem is just one more of those unhelpful decisions.

At all stages of the Embedded Generation Saga, as explained here, Ofgem has taken the ‘wrong’ decision [if we assume that Ofgem should, broadly, be working to move the momentum of the energy system towards a smart, flexible, secure, sustainable and affordable energy system able to meet GB emission reductions – in line with its Duties and the Government’s energy policy goals].

IGov has long been critical of Ofgem (for example, see here and here) but ultimately the Government has to take full responsibility for the incoherence of GB energy policy, and this includes GB having a Regulator who is becoming increasingly distanced from where energy system momentum is going, and its regulatory needs.

IGov has argued that the current GB energy governance – and that includes the position, function and role of the Regulator, Ofgem – is not fit for purpose. The IGov fit-for-purpose framework (and powerpoint) argues that the Regulator should be re-purposed, and be stripped back to being an economic regulator within a restructured set of institutional arrangements. The issues around the Regulator have been enlarged on in various submissions, the links to which can be found in the reset the reset series (blog 1, blog 2 and blog 3). Separately, IGov has questioned whether the CEO model which Ofgem currently has is suitable for a rapidly changing energy system, or whether a US PUC-like model may be preferable.

As the Committee on Climate Change has shown, there is a gap between GB’s GHG emission targets and policies to help make that transformation within the energy system. Moreover, as IGov is trying to illuminate, even if there were policies in place, governance (policies, institutions, market rules, network rules, code rules etc) has to complement those policies rather than act as barriers to them – as is the case now – hence the need for an overhaul of GB energy governance, as set out in the Framework paper (and here).

Ofgem is a very important (and expensive) institution within the GB energy system, and responsible for much of the governance which needs to change. However, in IGov’s view, Ofgem has been (possibly unintentionally) making things more difficult for the transformation to a sustainable, secure and affordable energy system rather than better.

The Government has got a lot on its plate at the moment. And helping the environment does not appear high on its list. However, helping customers and keeping energy bills down in this time of austerity is on its list.

Reforming the Regulator, as part of its reforming GB governance, is one essential dimension of that. The Vision document of the NY Reforming the Energy Vision remains one of the clearest explanations of why the traditional regulatory roles are changing, and why the basis of regulation needs to change in order that Regulator’s are able to fulfil their Duties satisfactorily. Moreover, every time the Government puts pressure on the Regulator to do something, but without altering Ofgem’s Duties or Role, the problem is exacerbated. The longer the Government ignores the need for a regulatory overhaul , the worse it is for all energy customers, and meanwhile new entrants – which the Government says it is trying to support – find it harder and harder to survive.

As reset-the-reset Blog 2 argues, the Regulator does not have to be passive in this. Ofgem should recognise, given the enormous changes going on within the energy system, that their regulatory process is not fit for purpose – and needs re-purposing. Ofgem could kick-off the necessary debate about their appropriate role, and their relationship to other energy stakeholders – including Government, going forward.

What Ofgem should not be doing is taking decisions, in this case decisions about embedded generation which resulted from other poor decisions, and then justifying them through narrow, letter-of-the-law reasons. GB needs, and deserves, a Regulator which is capable of honestly assessing the big picture requirements of energy regulation. If this were the case, Ofgem would accept that there should be changes in their role and Duties. Until that time, the short-term decisions which Ofgem takes which harm those aspects of the energy system that public policy is trying to foster, and accepting it as (unfortunate but necessary) collateral damage for the greater good, is wholly inappropriate.