Recent developments in GB energy regulation- and where next?

Martin Crouch

ENA Regulation SeminarEvolving Faster: Regulating Transformed Energy Markets

26 July 2017

Outline

• Recent developments in the GB energy sector

• Projecting forwards…

• Implications for how we regulate

• Some key initiatives

• Conclusions for GB energy regulation

3

Generation mix

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1998 1999 2000 2001 2002 2003 2004* 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 p

Electricity supplied by fuel type

Nuclear Interconnector Coal, oil, and other thermal

Gas Hydro and bioenergy Wind and solar

2017 records:

21 April: first day in over 100 years with no coal generation

7 June: renewable generation peaked at over 50%, renewable + nuclear at over 70%, grid mix CO2 content fell below 100g/kWh

0

250,000

500,000

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

Electricity Gas

£600

£800

£1,000

£1,200

Nov-2015 May-2016 Nov-2016

Average SVT (L6) Average SVT (others)

Cheapest tariff (L6) Cheapest tariff (market)

Retail marketVolume of switches

Average prices

5

Social Grade Unplugged On Standby Tuned In Switched On

AB 14% 22% 27% 39%

C1 27% 32% 34% 33%

C2 23% 21% 20% 17%

DE 35% 25% 19% 12%

Source: Consumer engagement in the energy market since the Retail Market Review - 2016 survey findings, August 2016

Energy consumers

6

Growth in PV capacity

7Outturn vs expectations. Cumulative capacity now stands at over 11GW

Growth in PV capacity

Outline

• Recent developments in the GB energy sector

• Projecting forwards…

• Implications for how we regulate

• Some key initiatives

• Conclusions for GB energy regulation

Ofgem Future Insights

• We expect to see:– a smarter and more flexible system– decentralisation and local energy schemes– increasing interdependence of services– a more diverse commercial environment– better service for consumers enabled by new and smarter technology

• Decarbonisation of heat is arguably the biggest policy challenge

• Supplier hub model may not survive• Many sets of scenarios don’t provide a plausible range

https://www.ofgem.gov.uk/ofgem-s-insights-future-energy-system 9

10

Future of transport

• Approaching 40% of new cars in Norway are plug-in electric• European governments setting target dates for end of

internal combustion engine (eg France 2040)

Ownership of Electric Cars

Using driverless electric vehicles

• Increased electric demand• Local constraints• Charging infrastructure• Some Vehicle to Grid (V2G)

• Increased electric demand

• Fleet charging• Enhanced grid services• Stranding infrastructure?

Outline

• Recent developments in the GB energy sector

• Projecting forwards…

• Implications for how we regulate

• Some key initiatives

• Conclusions for GB energy regulation

12

How should regulation respond?

• Not “fit and forget”, multi-year projects to design optimal regulation are risky

• Less prescription, balance principles and predictability with agility – set direction, learn, adapt

• Less “consultation”, more engaging with new ideas

• Further improving the role of economics and analysis

13

Regulating in a changing world

Setting out how we approach issues in our “Regulatory stances”

Our priorities 2017/18

14

1. Enabling a better functioning retail market

Urgent priority eg protecting vulnerable customers

2. Facilitating change in the energy system

3. Learning from the first RIIO framework and setting RIIO-2 up for success

4. Introducing competition into monopoly areas

5. An authoritative source of quality analysis

6. Our core business activities

7. E-Serve delivery of government schemes

Outline

• Recent developments in the GB energy sector

• Projecting forwards…

• Implications for how we regulate

• Some key initiatives

• Conclusions for GB energy regulation

Facilitating change in the energy system

Key enablers

Smart metersHalf hourly settlementFaster, reliable switchingCode GovernanceSupporting innovators

Network charging

Reviewing rules

Embedded benefitsAddressing charge avoidance Gas charging review

Review of network accessFuture system operatorRIIO 2 strategyFlexibility

More radical

change not ruled out

Acting as a residual balancer

Facilitating competitive

markets

Supporting competition in networks

Facilitating whole system

outcomes

Underpinned by licence obligations

Principle 1: Support market participants to make informed

decisions by providing user-friendly, comprehensive and

accurate information

Principle 2: Drive overall efficiency and transparency in balancing, taking into account impacts of its actions across time horizons

Principle 5: Coordinate across system

boundaries to deliver efficient network

planning and development

Principle 6: Coordinate effectively to ensure

efficient whole system operation and optimal

use of resources

Principle 3: Ensure the rules and processes for procuring balancing services maximise competition where possibleand are simple, fair and transparent

Principle 4: Promote competition in wholesale and capacity markets

Principle 7: Facilitate timely, efficient and competitive network investments

Example: enhanced System Operator

• Energy system is going through unprecedented change and next price controls will be more adaptable so companies can better meet customers’ needs

• Ofgem’s price controls have driven significant improvements in reliability and customer service at reduced costs

• Investors need to prepare for lower returns from 2021 with tougher price controls to maintain good value for customers

When we set RIIO-1, the intention was that the best performing companies (in terms of delivering output targets and efficiency against totex allowances) could achieve low double digit returns on regulated equity. In practice, the majority of network companies are delivering strong earnings towards the top end of our expectations for each sector.

July 2017 – mid 2018: review lessons of RIIO1 and set framework for RIIO2April 2021 and 2023: RIIO2 periods commence

Network regulation – RIIO2

Network Innovation Competition

19

£166m awarded in 4 years

25Projects

14elec

11gas

Around ¾ of fund

requested each year

Committed funding until 2021 (2023

for elec distribution).

Around 60% of fund

awarded each year

We’ve made £850m available (2013 to 2023)

Electricity £70m p.a Gas £20m p.a+£460m, 542 projects from innovation allowances

20

Conclusions for GB

Change is accelerating

Technology, business models, consumer behaviour…

A great opportunity

Regulatory response:

• Balance predictability and change• Markets where feasible – more flexible• Cost and value reflective pricing• Principles where outcomes matter, prescription for consistency• Network regulation based on outcomes (RIIO)• Support for trials and demonstration • Practical help for innovation