The future of local energy governance? Regen’s take on the new Ofgem consultation
On 1 March, Ofgem launched a consultation on ‘The Future of Local Energy Institutions and Governance‘. In this blog, Regen’s chief executive Merlin Hyman identifies key elements of the local energy proposals including potential challenges.
In its new consultation on ‘The Future of Local Energy Institutions and Governance‘, Ofgem proposes a ‘Regional System Planning’ function for the new Future System Operator (FSO).
The consultation marks a shift towards a more ‘planned’ approach, and it is a strong statement from Ofgem on the risks to net zero if the electricity system does not adapt in time:
“Without reform, the electricity system, markets and grid become an obstacle, not an enabler, to net zero. It is imperative and urgent that generation and network capacity are closely planned and coordinated to deliver the investment needed.”
The proposals can be seen as a response to setting 2023-2027 Business Plans for distribution networks (the ‘RIIO-ED2’ process). The process was not able to get to grips with the number of EVs, heat pumps, renewables, storage etc that the networks were preparing for, nor how to accommodate local authority ambitions. The result was an unsatisfactory fudge of a low baseline and a mechanism to ‘up’ spending if needed.
Key elements of the proposal
The proposals have three key elements:
- A new power for the FSO to carry out whole system Regional System Planning.
- The FSO also carrying out a flexibility ‘market facilitation’ function.
- DNO retaining responsibility for real time operation of distribution networks.
Regional System Planning is essentially setting the requirement the networks need to plan for net zero: “network companies would remain responsible for network planning activities, but these would need to align to the regional energy system plan (ie by using the same key planning assumptions).”
Networks currently use the ‘DFES’ process (that Regen developed) to get an independent view of possible growth scenarios. The challenge is then choosing a central scenario for a business plan – a role that would now fall to the FSO.
The FSO flex market facilitation will include:
- Data standards for product, asset and market data
- Standardised products
- Stacking rules
- Primacy rules, for when two operators call assets in the same grid area
- Standardised contracts and pre-qualification
DNOs “would remain responsible for the procurement and dispatch of flexibility.”
Will the FSO be able to drive forward investment?
An obvious question is whether the FSO will be able to do a better job of setting a plan to enable the investment we need.
The real problem for any regional plan is the lack of a decision from Ministers on the role of hydrogen in heating. As a public body, the FSO will be better placed to think ‘cross-vector’. It may at least have enough authority to set out the areas where hydrogen definitely won’t be used.
When it comes to agreeing strategic investment for renewable generation, storage, hydrogen electrolysers etc, Ofgem may be more comfortable using an FSO plan than proposals from DNOs.
The consultation proposes that the FSO be in charge of regional planning, but that it should:
“Coordinate, facilitate and ensure effective participation between local actors (which ensures a place-based understanding is central to how the regional energy system is planned).”
Develop and own a regional whole system strategic plan that is coherent with national and local net zero ambitions and energy security priorities and that supports achieving the most cost effective decarbonisation outcomes, derived from and informing the individual sub-plans made by local actors.”
The consultation recognises that regional planning requires new capabilities for the FSO. That is something of an understatement. The ESO deals with a relatively small number of stakeholders with expertise in the energy system. Dealing with hundreds of “local actors”, many of whom with strong opinions and political mandates, would be a huge cultural shift.
The lack of consistency in “sub-plans made by local actors” makes this even more complex. Scotland has formal Local Heat and Energy Efficiency Strategies. Wales is carrying out Local Area Energy Plans. England has a patchwork of plans. Regen will be running a workshop on a future operating model with Innovate, Ofgem and the Department for Energy Security and Net Zero (DESNZ), but we are still some way from a clear process.
In answer to the problem of aligning network infrastructure with local plans, Ofgem has come up with a national body that it regulates. Andy Burnham may now have the power to set bus timetables in Manchester, but he still has to ask nicely for the network infrastructure to charge them. Devolution is a hard challenge for a national regulator. This proposal doesn’t suggest they have come to grips with it yet.
Aligning planning and operation
An obvious question with splitting the plan from operation could be summed up as: who is responsible when I can’t charge my EV? Was the regional system plan wrong or the network planning and operation at fault? Ofgem has some strong words that everyone needs to collaborate: “Ultimately, we expect all parties to do more to ensure they are working together effectively”.
Responding to the consultation
These proposals are still pretty high level. Lots of detailed questions remain about exactly where boundaries lie. We will be reflecting on Regen’s response and would welcome your input.
Our biggest question is on the FSO’s ability to take on the coordination of local energy planning. Especially given how long DNOs have taken to get to grips with local authorities.
The missing links are a national delivery plan and a consistent energy planning process for local authorities to follow. Without better political leadership and democratic accountability for key decisions and priorities, planning local energy network infrastructure is going to be hard, whoever is responsible.
Blog author – Merlin Hyman, chief executive at Regen