Ofgem has set out its strategy aimed at driving innovation and supporting the transformation to a low carbon energy system.
It believes the energy sector is undergoing “fundamental change” and regulatory and market arrangements will need to evolve to ensure this happens in a way that protects and advances consumers’ interests and enables them to benefit from innovation and new services.
It attempts to provide “more predictability” to system operators, investors and consumers on how it will develop regulatory and market arrangements.
Andrew Wright, Senior Partner, Energy Systems at Ofgem believes electricity market and regulatory arrangements were designed for a system with very different characteristics to those expected in the future.
For example, more than a quarter of all generation capacity is now connected to distribution rather than transmission networks, with much of it being intermittent renewables.
In addition, Ofgem believes an increasing proportion of generation is now located behind the meter on consumer premises, partly driven by the growth of solar panels.
Mr Wright added: “If we don’t adapt the arrangements, they could hold back further progress to a decarbonised electricity system that meets peoples’ needs, either because the cost will be higher than necessary or because opportunities to deploy new technologies and business models are frustrated.”
The regulator has set out principles for how it plans to approach regulation and its priorities for changing the current arrangements:
Aligning incentives so that monopoly network operators and National Grid as the gas and electricity system operator act in the interest of consumers.
Cost reflective charges for monopoly services that reflect the incremental costs and benefits of how consumers and other parties use the system, which includes minimising harmful distortions arising from the recovery of residual charges for using the networks.
A level playing field so all technologies and business models can compete equally, without barriers to entry to the market.
Efficient allocation of risk so those best places to manage the uncertainty inherent in a rapidly changing system shoulder the risks involved.
Harnessing markets and competition where it can bring benefits to consumers.
Yesterday the government launched an independent review to look at ways of reducing electricity costs.