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on Aug 25, 17 • posted by rhoggett •

New Thinking: Summer Madness – trying to keep up with BEIS / Ofgem consultations and documents

Summer Madness – trying to keep up with BEIS / Ofgem consultations and documents

Catherine Mitchell, IGov Team, 25th August 2017

Ofgem’s Open Letter about RIIO-2 was published on 12 July, and any comments on it are due on 4 September 2017. On 4 August, Ofgem (or Ofgem and BEIS) released a set of ‘related’ documents – all of them in their way relevant to the RIIO-2 consultation. These were the Ofgem Strategy for Regulating the Future Energy System; the joint BEIS / Ofgem Plan for a smart, flexible power system with the Government (which resulted from the Jan flexibility consultation (see the EPG submission)) ; a paper about the direction of travel on proposals to separate the System Operator (SO, again see our submission to that consultation); a launch statement for the Electricity Settlement significant code review; and a launch document for the Targeted Charging Review.

The RIIO-2 Open Letter document itself raises many, many very interesting issues, about what is a really important dimension of energy regulation. The current RIIO incentives are very poor, its process is fundamentally flawed and so needs a total overhaul.

The Open Letter asks 37 questions – many of which could have major implications for future energy regulation. For example, one question is whether now is the time to align all the price controls – i.e. between gas and electricity, transmission and distribution, and the transmission system operator (we argue probably yes, but we absolutely cannot wait until 2023 until we start to do that).

Overall we argue that a more or less BAU approach to RIIO-2 (ie a bit more of the same incentives (currently worth 6.5% of revenue), no monetary incentive for environmental outcomes and 8 year price controls) would be an absolute disaster in terms of GB GHG reduction, but also unnecessarily expensive.

GB has to speed up the process of GHG reduction. Our regulatory system (and the mechanisms used to incentivise the way our system is operated or to encourage innovation (and new ways of doing things and so on)) has to work out ways to do that; and those mechanisms have to be to complementary across the GB governance system, and to other public policy goals. That is not the case with RIIO at the moment.

Moreover, regulation faces a number of fundamental questions – some of which are: how to pay for networks as more onsite electricity occurs; do we need a gas network at all; how are public service obligations going to be paid for; how to integrate heat, electricity and mobility; how to inject flexibility into the whole regulatory process; and how do we speed up the process of GHG emission in line with the CCC carbon budget requirements. The carbon budget for the period 2028-2032 is 1,725 mt CO2e, equivalent to a 57% reduction on 1990 levels. In order to meet this budget, networks will not only need to consider heat and power, but also following the statement released in July to end all sale of petrol and diesel cars by 2040, increasingly transport.

Currently, the regulatory system is a series of siloes where each regulatory problem is addressed on its own. We need a much more integrated approach, with more direction, and more urgency, and institutional change is the key enabler of that – but no mention of that in the Open Letter.

Thus, the role of RIIO-2 in all of this, and how it can be complementary to other regulatory areas, is central to developing a fit-for-purpose GB energy governance system.

So given how important a topic it is, as wide as input of comments would be useful. Question no.2 (of the 37) is ‘how can we strengthen the consumer voice (primarily end-consumers) in the development of business plans and price control decisions’. I am fairly certain one part of the answer to that is for Ofgem not to publish Open Letters / Consultations / Launch Documents and so on of this magnitude over the summer (and probably not over Christmas / New Year either). One idea might be not to publish anything at all in August. Let us hope that this does not dampen enthusiasm for engagement.