Getting energy governance right: Lessons from IGov
IGov Team, 12th September 2019*
1. Executive Summary
The UK has committed to net-zero emissions within the next thirty years. Reaching this goal will require a major transformation of the energy system. This briefing looks at the crucial role of governance in achieving that transformation. It summarises the findings of seven years of work by a team of researchers, based at the University of Exeter’s IGov project, analysing energy governance within Great Britain (GB) and elsewhere.
1.1 The current position: Outdated governance
The fundamentals of GB energy governance were established at the time of privatisation of electricity and gas, thirty years ago. Since then, there have been reforms, but the basic arrangements remain the same. Governance arrangements define the energy ‘market’ – what is bought and sold; where the value lies; and who profits. The GB system is inadequate in the face of rapid innovation in energy systems, and the need to decarbonise.
There is currently no process for direction-setting or managing a process of decarbonisation, across government departments and agencies, and across different industrial sectors. This leads to confused signals for market participants. Current arrangements favour established players, who understand the complexities and have the resources to influence policies and regulatory processes. A particular problem is co-ordination across the energy system, both within electricity (linking generation, supply, demand, flexibility services and storage) and between electricity, heat and transport. Neither are there adequate governance arrangements for protecting low-income households.
1.2 Principles of energy governance
IGov recommends a series of reforms to create a system of governance which incentivises the outcomes that society requires from the energy system, including security, rapid carbon reduction and social goals. These should be underpinned by three core principles:
1. Legitimate and transparent governance: including setting clear outcomes; making institutions and decision-making processes transparent and accessible to all system participants; and aligning value in the system with the outcomes required, through market design and regulatory mechanisms.
2. People at the centre: Energy governance must create markets which reward people for providing system services such as demand reduction, flexibility, and demand response. This requires a different system of consumer protection, including greater segmentation, understanding that not all people will be actively engaged, and that vulnerable households will require specific interventions and policies. There should also be an acknowledgement that people have a role beyond their participation in the market, as citizens giving (or withholding) consent and engaging with governance.
3. Adaptive regulation: Given the rapid pace of innovation, there is a need for regulation that can adapt to changing circumstances. Specifically, there should be a shift from ‘input’ type regulation to output-based regulation. Reviews should also be incorporated into regulatory processes, to allow adjustments during the period of regulation. Finally, regulation needs to be adaptive to the needs of a local area, with local areas developing their own plans.
1.3 A new governance framework
There is a need to reform institutional structures for energy governance. IGov recommends the creation of an Energy Transformation Commission (ETC), to implement objectives set by government. The ETC would oversee the transformation process through co-ordinating all the institutions involved, and providing a hub for consultation and engagement. An Integrated Independent System Operator would integrate gas, electricity and aspects of transport, at different levels, both transmission and distribution, and ensure implementation of carbon goals. It would oversee an independent Codes Manager to enable open and fair consultation and engagement from all market players.
Ofgem’s remit would be reformed, to allow it to focus on regulation of the companies involved in the transmission, distribution and supply of energy and energy services. It would have an explicit duty to regulate for carbon reduction in line with statutory targets. It would no longer be responsible for strategy or system change.
At local level, IGov recommends the devolution of energy governance to local levels, in the form of a new statutory duty on local authorities, requiring them to produce a Local Transformation Plan. This Plan would require local areas to set devolved carbon budgets, with freedoms, flexibilities and funding provided from national government.
Local markets for energy services would be provided through Distribution Service Providers (DSPs), created through reform of Distribution Network Operators (DNOs). DSPs would implement the shift from the linear, top-down value chain of the energy system to one which places customers at its focus and values efficiency, flexibility and sustainability. They would combine current DNO functions – managing networks and systems operation – with new sub-GSP area co-ordination and balancing services, for electricity (including electricity for heat and mobility), demand response, flexibility and ancillary services.
Lastly, IGov recommends the establishment of a cross-economy Data Regulator; a data body or portal for energy system information; and a market monitor to follow market exchanges and identify improper trading or profiteering.
Together, these reforms will create a clear direction for the GB energy system, allowing people to benefit from innovation, and providing a route to net-zero carbon emissions.
You can download the full paper here: IGov-Getting energy governance right-Sept2019
* This blog was updated on 12th September to provide the final designed version of the paper.