The Role of the CCC in a reformed GB Institutional Framework
Catherine Mitchell, IGov Team, 30th November 2017
IGov1 developed a fit-for-purpose GB governance framework (here and here), and is shown in Figure 1 below. This framework endeavours to bring together the relationships between all GB energy institutions in a ‘whole system’ sense, and it endeavours to cover all major institutions which will have to exist, and all high-level institutional decisions which will have to be made in transforming from the current GB governance framework to a fit-for-purpose one. IGov2 has taken this framework – the details of which it continues to support – and has simplified it to an extent by reducing it to 4 key dimensions (customer focused; transparent and legitimate policy making and institutions; flexible, coordinated operation and design; and reforming regulation). These dimensions are all workstreams for IGov2.
We have written blogs on most of the institutional relationships within the IGov1 framework in Figure 1, the latest being what exactly the consensus building body would do (CBB), and how it would interact with the other GB energy institutions. The only institution we have not discussed is the role that the CCC, and this blog discusses that topic. Both of these institutions (CCC and CBB) and their relationships come into the dimension of ‘transparent and legitimate policy making and institutions’.
IGov has argued that there is a gap between the CCC’s Advice to Government and embedding it in energy policy outcomes. The CCC provided a very useful document showing the policy gaps in meeting the budgets – the CCC needs to be more involved in energy system governance to ensure sufficient policies are in place.
A low carbon energy system transformation can follow many technological pathways, but the distributional impacts of those different technological pathways are great. Because of this, it is important that governance of the energy system transformation and its decision-making is ‘legitimate’ – and one important characteristic of legitimate policy-making is transparency in how decisions are made. If a policy-making process is not legitimate then it allows those with more ‘power’ to exert their influence in potentially harmful ways to society – this can be, for example, Government itself undertaking poor decisions because those decisions might suit wider political interests or because they lack capacity to understand the complexity of the decision; it can be that companies with deep pockets are more able to lobby for their particular corporate interests, over and above social interests; or it could be institutions which have control over energy system rules, but which de facto exclude alternative options which might suit social interests and public policy targets and goals better, such as the Code Governance process in GB.
As was argued most recently in a blog by Matthew Lockwood, IGov takes the view that energy policy is always going to be political because of distributional impacts, and stakeholders will always try and influence it. IGov argues what is needed is a policy making process which, at least as far as possible, is more transparent and legitimate thereby minimizing inappropriate influence on policy-outcomes. This blog examines the role that the CCC might play in this new, transparent, legitimate policy making process.
Figure 1 GB Fit-for-purpose Energy Governance Framework
The current role of the CCC
The role of the CCC is to advise the UK Government and Devolved Administrations on emissions targets and report to Parliament on progress made in reducing greenhouse gas emissions and preparing for climate change. In doing this it:
- Provide independent advice on setting and meeting carbon budgets and preparing for climate change
- Monitor progress in reducing emissions and achieving carbon budgets and targets
- Conduct independent analysis into climate change science, economics and policy
- Engage with a wide range of organisations and individuals to share evidence and analysis
We see the CCC continuing with its role, but we also see them having an additional role of formal discussions with various bodies to embed their Advice into institutional decisions.
We think a 5th role should be:
Engage with the IISO, and Code Administrators; market operators, the CBB and Ofgem to embed CCC budget advice, evidence and analysis into UK energy policy decision-making
Structural Issues of Current GB Energy Governance
IGov has argued there are a number of structural issues to do with GB governance (see Figure 2 below). The IGov institutional framework was developed to provide solutions to them.
Figure 2 Structural Problems of the GB Energy Governance System
IGov solutions are:
- More direction from Government, to legitimise policy making
- Stripping back Ofgem to become an economic regulator
- The Independent and Integrated System Operator (IISO) should become the decision-maker on how energy system infrastructure should change in order to meet Government public policy goals, including meeting the CCC budgets. The IISO could seek CCC advice on the required level of low-carbon generation (or substitutes such as demand side etc) to contract in order to meet carbon budgets
- An ending of self-regulation for Codes, and an incorporation of Codes into the IISO with a right of appeal
- A means to monitor market practice, and profits; and means to enable free access to system data
- The transfer of distribution network operators (DNOs) to distribution service providers (DSP)
- A reform of regulation of networks from broadly cost of service to one more focused on performance outcomes
- The creation of a body to enable greater discussion, information gathering and input, and consensus building prior to decisions on energy policy by Government, which also provides advice to Government in parallel to the CCC
- A refocusing on customers by (1) acceptable customer propositions becoming the basis of supplier tariffs; (2) a greater means of input via the CBB; (3) bottom-up system optimisation; (4) providing value for customer services to system, and this enabled via (5) the DSP which, in part, ensures transparency in system data and encouragement of customer wish take-up
The role of the CCC in the IGov Framework
It seems to us that the CCC and their Budgets, once agreed by the Government, has to become more formally involved in providing information to those Bodies that actually implement policies or affect decisions about system operation, network development incentives or development. Only in this way will the CCC Advice be embedded in decision-making. This will require a book-end requirement, that there is an obligation on those Bodies to work with the CCC about their decisions.
It is not that by embedding CCC Advice within the various energy institutions all the issues related to meeting GHG reduction in GB energy governance will be solved. However, by embedding CCC advice further in to GB energy governance – whether it be within institutional change, network charging, RIIO-2 incentives; having more IISO direction, less Ofgem decision-making – a more coordinated process, with desired outcomes would be in place.
In many ways, it is the sum of the parts in governance that matters because no one action can make the energy transformation occur on its own.
IGov is concerned at the lack of overall direction and coordination of energy governance decisions – hence our Fit for Purpose energy governance framework. All the elements of that framework will have to be formally linked together. Originally, the Government was going to put in place a Strategic Policy Statement between Ofgem and DECC – which has not materialised. As part of our submission to that consultation, we wanted to have more linking between the various parts of governance so that it was not only Ofgem which had a clear SPS from Government – but that there were also clear relationships, and expectations, between all institutions. We still think that this will be a necessary component.
CCC and Market Design
Moreover, GB market design will have to change. At the moment, GB has a national wholesale market (which includes settlement etc). In addition, there are a few values for the demand side via NG; and there is a capacity market. In addition, there are increasing numbers of independent, small scale aggregator or supply apps / platforms running their own mini-markets and which act as buyers or sellers into the wholesale market.
The development of this current market situation already provides a wide range of concerns, and they will increase once variable renewables provide more than a certain % of electricity; or when there is more than a certain amount of energy services provided by apps / platforms at a local level.
There is no agreement yet about what market design would suit this future – although IGov favours a nested wholesale market with local balancing markets, something that would be reasonably easily implemented, and is something that is being discussed within the current SCR on Electricity Settlement.
Whatever market design is agreed has to fit with the IISO / DSP relationship; the transmission / distribution relationship; link markets and networks; and allow integration between heat, electricity and mobility.
CCC and Institutional Involvement
We think the CCC should formally be linked to four bodies:
We envisage that the SoS, with advice from the CCC, CBB and the civil service, would take all energy policy decisions which have a fundamental distributional impact. We have argued elsewhere (see here and here and here and here) that we see the IISO taking the Secretary of State decisions; then working out what that means for system development; and then providing strategic direction to the energy system. For example, if there is a policy or expectation to increase electric vehicles, then that policy has to cascade down through to the distribution networks and local implementation and involvement.
We would envisage, for example, that the IISO could seek CCC advice on (some combination of) the required level of low-carbon generation, flexibility (for example, DSR, storage, interconnectors), energy efficiency or mobility programmes required in order to meet carbon budgets.
IISO decisions will need to interact with market design; with the development of DNOs into DSOs; the relationship between transmission and distribution; network charging; tariffs and suppliers; system optimization – bottom up or top down, and so on.
We envisage, for example, the IISO having regular meetings with a wide range of stakeholders about future energy system needs, given changes in energy economics, market changes, technology prices, IT abilities etc etc. CCC would be formally and routinely part of those discussions as set out above.
The CCC is not embedded within Code Governance. The current Code Administrators have no requirement on them to take notice of the CCC Advice when fulfilling their statutory responsibilities. As IGov has argued at length with respect to Code Governance – the current Code Governance can effectively, at worst, veto change if, or when, there is disagreement within the Code Panel on code modifications (see here, here, and here)
Any use of the energy system by any actor currently requires signing up to Codes. There are 17 in all – and it is not necessary to sign up to all of them – but many players do because they often interlink. Licenses are additional – a company has to have a License to be a supplier etc. How that Licensee then interacts with the system is based on the Codes. Codes are currently self-regulated meaning that there is a Code Administrator, and an established process for how any change to a Code may occur, and also an established composition of each Code Panel.
Most fundamental changes occur through Strategic Code Reviews – which Ofgem can put forward, and execute.
We think that the Code Administrators should be gathered together within one Code Body and self-regulation should be ended.
We also think that the Code Body should either exist as an institution separately, or sit within the IISO – but in both cases, the IISO would be able to make a decision about system direction and Codes would be changed to fit with that.
In this situation, as said above, we envisage specific elements of CCC advice could be taken into account by the IISO, which then has oversight of these being taken into account in code change (e.g. range anxiety, charging infrastructure, improving conditions for system flexibility).
Our preference would also be that the Codes themselves have a formal Duty within them to take account of CCC Advice, for example, the Code administrators could review, on a regular basis the likely code change requirements in the CCC’s scenarios for meeting carbon budgets.
We also accept if the IISO had a direct oversight relationship with the CCC, and the IISO were able to direct Code changes then it may be considered too much of a ‘belt and braces’ approach to add a similar Duty to the Code Body.
Once the IISO has made a decision on system operation, market involvement and network development, then we argue that Ofgem should regulate that decision as the economic regulator. How they do this must both reflect public policy but also the needs of the CCC Advice. This will require a new Duty for Ofgem. The current Duties are set out here.
Of these, the primary duty is:
‘’The Authority’s principal objective is to protect the interests of existing and future consumers in relation to gas conveyed through pipes and electricity conveyed by distribution or transmission systems. The interests of such consumers are their interests taken as a whole, including their interests in the reduction of greenhouse gases in the security of the supply of gas and electricity to them and in the fulfilment by the Authority, when carrying out its functions as the designated regulatory authority for Great Britain, of the objectives set out in Article 40 (a) to (h) of the Gas Directive  and Article 36 (a) to (h) of the Electricity Directive.’’
IGov is arguing that this wording should change slightly to: interests in the reduction of greenhouse gases sufficiently to meet CCC Carbon Budget Advice…
So that it reads:
’The Authority’s principal objective is to protect the interests of existing and future consumers in relation to gas conveyed through pipes and electricity conveyed by distribution or transmission systems. The interests of such consumers are their interests taken as a whole, including their interests in the reduction of greenhouse gases sufficiently to meet CCC Carbon Budget Advice in the security of the supply of gas and electricity to them and in the fulfilment by the Authority, when carrying out its functions as the designated regulatory authority for Great Britain, of the objectives set out in Article 40 (a) to (h) of the Gas Directive  and Article 36 (a) to (h) of the Electricity Directive.’’
We assume that their Duties will also have to change to clarify their focus on economic regulation but it is interesting to note, when reading the Duties, how little would have to change. This does reflect how limited Ofgem’s Duties are with respect to environmental and social concerns, and goes someway to explaining why Ofgem has the difficulties it does in delivering an energy system which places the customer proposition at its centre.
There would also have to be a clause which says that Ofgem would regulate what the IISO (following wide consultation) has decided upon.
The CBB would be responsible for intellectual coordination of energy system change and governance; confronting the politics of energy system transformation; and putting forward a process for consensus building to enable a move forward, and that includes customer involvement. The CCC should also formally be providing advice on CC science and carbon budget needs.
In conclusion, the CCC’s important role continues as provider of Advice on carbon budgets – but it also becomes embedded in energy system governance so that those carbon budgets have to be heeded in energy system decisions. GB needs to move to a position where policies are there to meet the carbon budgets, and governance (ie policies, institutions, network rules and incentives; market design rules and incentives; tariffs etc) must also be in place to actually enable those policies to be successfully implemented (see Figure 3 below).