Ofgem call for Evidence on Future arrangements for the electricity system operator: its role and structure
Submission from Matthew Lockwood and Catherine Mitchell, Energy Policy Group, University of Exeter
The Energy Policy Group (EPG) of the University of Exeter is pleased to respond to Ofgem’s Call for Evidence (CfE) on Future arrangements for the electricity system operator. Issues of innovation and governance within energy systems form a major focus for EPG research, and in particular the four-year RCUK funded project Innovation and Governance for a Secure and Sustainable Economy (IGov, 2012-2016), which has now been extended to become Innovation and Governance for Future Energy Systems (IGov2, 2016-2019). Many of our arguments below have come out of the IGov work.
We welcome the CfE (and its sister CfE in to SO regulatory and incentives framework) which we believe represents thinking with potentially far-reaching consequences. This CfE follows on from the Joint Statement on the future of the Electricity System Operation by Ofgem, BEIS and National Grid which argued for a legally separate SO within the National Grid Group (NGG). The joint statement argues that the SO should be ‘ready to adapt further as system challenges continue to evolve’ or be able ‘to adapt further to the changing system in future’, although it does not set out alternate roles for the SO which might allow them to ‘adapt further’.
We understand that this Call for Evidence on Future arrangements for the electricity system operator: its role and structure follows on from the Joint Statement, and therefore the questions it asks broadly derive from that Statement. However, for reasons discussed below in our opinion the decision to move to a legally separate SO within NGG is the wrong choice in such a rapidly changing energy world. Time and effort will be required to separate out the SO within NGG, but even then it will not be in a position to meet the desired objectives and play the desired role set out in the CfE effectively, and is not likely, therefore, to pass any rigorous analysis of value to customers. We believe the incremental time and effort needed to fully separate the SO from NGG will not be large. Unlike an SO still within NGG, a fully separated SO would be a genuinely independent institution, more likely to be trusted, and capable of fulfilling its role in helping GB to meet the objectives set out in the Joint Statement.
It is also important that that role be seen in a holistic context. There are multiple decisions being taken in the GB energy sector currently, and without a clear strategic overview of where the energy system should be heading the risk of silo-ed and un-joined up decision making is high. We understand that BEIS wants to move forward with institutional change for the energy system – in this case the electricity SO – but we need a clear vision for GB’s institutional requirements in order for us to do this effectively. Only once we have an overarching framework can we know what institutional changes will be needed for the SO to fit together with other institutional changes needed to deliver a sustainable system. Too often decisions in GB are made which then have to be remade, or are a step back on what was a stated policy objective.
In developing a framework for GB energy governance within the IGov project, we have argued that the current governance framework is not fit for the purpose of handling the major changes in markets and networks that are needed. We have argued that within that framework we need a System Operator that is: (1) wholly separated from National Grid and not for profit; (2) integrated across sectors (electricity, heat, gas and electric vehicles) and across transmission and distribution, and (3) undertaking a vital leadership role of delivery of network infrastructure and market design which will lead to a whole system approach to delivering cost-effective, sustainable and secure energy. Within this latter point, we argue that this leadership is embodied by the IISO having a responsibility for system security being placed upon it; as well as a responsibility for delivering the infrastructure needed to meet the Committee on Climate Change’s (CCC) carbon budgets. This is discussed more in the section below on SO roles. Importantly, major change in governance is needed because we need a step-change in the reduction of greenhouse gas emissions to meet the Government’s Carbon Budgets. We simply do not have the luxury to continue our past rate of change. Only a fully independent, separated SO can command the kind of respect and trust necessary from actors in the wider system, including the TO, distribution companies and new entrants, necessary to lead and deliver such a transformation to and meet the three objectives above.
However, we would also argue that a fully integrated and independent system operator (IISO) is just one dimension of a number of changes envisaged in the IGov framework that need to take place within an effective whole systems approach.
The driving of competition and efficiency, and the promotion of innovation (the second and third objectives) will require several other institutional changes. At the distribution level, we argue that what are currently distribution network operators need to become distribution service providers (DSPs), somewhat along the lines envisaged in New York State’s reformed energy vision. Ofgem’s role needs to be changed, with a return to a core focus on economic regulation. Code governance arrangements must move away from self-authored regulation and be placed within an independent body, probably under the ambit of an IISO. We also need changes to market design and the creation of a market monitor and a data body in the public sphere. Crucially, we need an acceptance that more direction is needed within the GB energy system in order to reach a cost-effective, innovative, flexible and smart energy system. An IISO, and the leadership it can provide, is central to that.
The full submission can be downloaded here: Ofgem Future arrangements for the electricity SO – submission from EPG March 2017