Introduction:

The energy system in Britain, like others around the world, is undergoing fundamental and rapid change due to a wide range of different drivers, from technology through to social, environmental and businesses preferences and innovations (Mitchell 2016).

The drive to decarbonise electricity over the last 30-40 years has led to a significant rise in renewable generation, especially from wind and solar, and this has had significant impacts on how energy systems are operated and managed. As these technologies continue to expand as their costs come down, the value of flexibility elsewhere in the system will also grow fast. Existing forms of flexibility, such as natural gas-fired power plants, will become increasingly unavailable as carbon budgets get tighter.  As a result, flexibility in demand for electricity, either through demand-side response or through forms of storage, is becoming increasingly important.[1]

Electrification may play an increasing role in transport and heat (DECC 2013b: 102-105), which may mean a significant increase in the demand for electricity, including peak demand.  Wilson et al (2013) estimate that shifting even 30% of heat demand to electricity would mean daily electricity demand doubling if resistive heating is used, and increasing by 25% if heat pumps are used. It remains very unclear whether decarbonisation of heat and transport can (should or will)  be achieved by this electricity route, or how far renewable gases may also be involved (Maclean et al 2016). These developments also point to the importance of demand reduction since the costs of system transformation will be lower the lower is total demand (Steward 2014).

A further dimension of transformation is that the rise of small-scale technologies (including many renewables), again (currently) especially in electricity generation. Britain is seeing a sharp rise in distributed generation (DG),[2] and the beginning of the reversal of the centralisation of the electricity system in the 20th century. Crucially, 21st century energy systems will be decentralised, with households, businesses, local government and other organisations taking back more control over energy production. It is also likely that we will see more heat being provided through local heat networks, rather than through burning gas delivered through a national network, especially in cities.

The emergence of a decentralised energy system, involving variable renewable power, more distributed generation, flexible demand including transport and heat, storage, interconnectors and interactions between electricity and renewable gas , will be made possible by the much deeper application of integrated ICTs across the system, in networks, meters, appliances, lighting, heating and cooling technologies, and in generation. These present the possibility of optimisation of energy and power flows at local levels, including the operation of virtual power plants composed of many different sources of generation, storage and demand response.

The changes that the energy system is now facing add up to a shift away from a supply-oriented, centralised system to a decentralised, smart, demand-focused system (Willis 2006). Some elements of this shift are already under way, with increases in renewables, the rise in DG, new business models for demand side response, and local authorities setting up energy companies. Interesting technical work is being done, for example in the Smart Grid Forum[3] and the IET’s Future Power Systems Architecture initiative[4].

However, the most fundamental challenge in this transformation is not technical, but rather one of governance, and specifically inertia within governance (Mitchell 2014).[5] As we discuss further below, the current institutional framework for energy in Britain is not fit for the purpose of facilitating innovation and transformation. Transforming this framework is vital because of the risk that as technology races ahead infrastructure and regulations lag behind, thereby undermining (or even blocking) its use and potentially increasing the costs, undermine the security and threaten the low carbon transformation itself (Mitchell 2014).

The importance of the governance challenge in energy is now being increasingly recognised, and there is an active debate on the kinds of institutional changes that may be needed. For example, the House of Commons Energy and Climate Change Committee (ECCC) and the now-defunct Department for Energy and Climate Change (DECC) have raised the possibility of creating an independent system operator.  Some distribution network operators (DNOs) are taking first steps  towards becoming more active distribution system operators (DSOs). The recent reports from the National Infrastructure Commission (NIC) and the ECCC have highlighted the challenges and opportunities for creating a low carbon network infrastructure, and suggested that the challenges can only be met with an appropriate governance, regulatory and operational framework.

This paper provides a set of principles and options for a new institutional arrangement which, we consider, better manages the required transformation whilst at the same time trying to reduce energy system disruption. Our approach has been developed through a four-year project on Innovation, Governance and Affordability for a Sustainable Secure Economy (IGov) at the Energy Policy Group at the University of Exeter, funded by the Engineering and Physical Sciences Research Council. This paper only provides a headline summary of the institutions and their role, and a brief rationale for thinking. However, we have written a number of blogs, working papers and journal articles about the governance needs of the GB energy system in general, and its constituent parts. For further details on the approach and an earlier version of the proposed framework see Mitchell et al (2015). All of this information can be accessed via the IGov website.

[1] For more details see: http://www.sustainabilityfirst.org.uk/index.php/energy-demand-side/gb-electricity-demand
[2] i.e. generation attached to the lower voltage distribution networks
[3] http://uksmartgrid.org/
[4] http://www.theiet.org/sectors/energy/resources/fpsa-project.cfm?origin=reportdocs
[5] See IGov blog post Overcoming inertia is the key to unlocking a sustainable energy future, 12 January 2015,. Here governance is taken to mean policies, institutions, rules and incentives (i.e. the rules of the game).

Download the full paper here: GB Energy Governance for Innovation, Sustainability and Affordability

There is also an accompanying presentation for this paper: Mitchell Copenhagen November 2016