Utility Week

12 | 8TH - 14TH NOVEMBER 2019 | UTILITY WEEK Utility of the future: Regulation create mechanisms for strategic direction and technical/ commercial co-ordination across the multiple parties delivering energy transformation." As part of a new systems architecture, there was also support for exploring whether the Electricity Sys- tem Operator (ESO), a legally separate business within National Grid Group since April 2019, should be sepa- rated entirely. The current arrangements focus the ESO's role on National Grid's transmission system, but in a whole-systems context might full independence from National Grid create opportunities for undertaking new and wider roles? Scott says the London blackout in August highlighted another benefit of creating an overarching oversight role: "The systems worked very much as intended, but at the same time there was huge customer inconvenience. You have the parties in effect saying 'it's not our fault'. There simply is no co-ordinating party." 2 Reorganise to protect consumers in the age of the packaged utility Our experts thought that rather than buying individual utility packages, telecoms, water and energy could be bundled together in the future, especially with the rise of EVs. If the lines are blurred between products and services, then perhaps it no longer makes sense to have siloed regulators. There has been discussion in the industry about reorganising regulators into consumer issues and infra- structure issues. The heads of both Ofwat and Ofgem have said they do not think it is necessary – as did the NIC. The latter's report said: "The commission does not believe wholesale change would deliver better outcomes than strengthening the existing model. The whole sys- tem does not need to be redesigned. But it needs to be updated to achieve a well-regulated market economy that can respond to the coming challenges." Our advisory board, however, thought that more gen- erally in future it would make sense to have the func- tions split between economic regulation and consumer protection – which happens to a certain degree in water anyway. 3. Adopt less prescriptive more agile regulation to cope with unknowns What we've heard consistently is the need for innova- tion, innovation, innovation – if zero carbon targets are to be met. One key debate is whether the current regu- latory system provides enough flexibility and agility for new ideas and new services to come into the market. An example is that it would be difficult for an energy sup- plier to also replace a customer's gas boiler with a low- carbon heat pump, which the consumer might pay back over ten years. This is difficult because customers could be locked in to a bad service provider for a decade or might switch, as they are currently entitled to do, leaving issues over who picks up the cost of the heat pump. This is a major challenge for decarbonising heat, because around 23 million gas boilers will need to be replaced if the 2050 net zero greenhouse gas emissions target is to be met. Business models that enable customers to install expensive new kit without the upfront costs will be required. As well as innovation, flexibility and agility will also be prerequisites of energy regulators in the view of our board. Laura Sandys and Jeff Hardy, authors of Redesigning Regulation, picked up on ideas they pro- posed in their December 2018 report to cultivate a less prescriptive approach. A central principle is "perim- eter regulation", which sets boundaries for things that suppliers can do, but does not set out how companies should run their businesses. As Jeff Hardy, a senior research fellow at the Gran- tham Institute at Imperial College London, pointed out: "This would mean regulators would need to be comfort- able with not knowing what's going on in businesses – they shouldn't need to know about every transaction. What they will need to be good at is spotting trends and signals of bad behaviour in the market and coming down on that very hard. Thus, regulators will need to be as good, if not better, than the industry at accessing and interpreting energy and wider data." Laura Sandys, director of Challenging Ideas, says the current system was designed 30 years ago for an era in which there were only 500 key players – now there are 20,000. "Regulation has been all about command and con- trol – now it has to be about identifying key risk, which would be calibrated by insurance." Philip New says that getting the market design right is crucial if we are to tackle the most difficult challenge – decarbonising heat. "There are about 25 million households that need to be decarbonised. If we're going to do that by 2050, from 2025 onwards we'll be needing to hit a run rate of a mil- lion houses a year. That is 50 times more than we're man- aging to do in a year today. "In other words, if we're going to hit that target, we need to be decarbonising as many houses in a week as the country is doing in a year right now. Once again it's a question of market design, innovation, and planning within a framework that's been set by regulation." The NIC report made it clear that regulation needs to be embedded in a clearer strategic framework for the long-term investment needs of the country. It said the government should set out a long-term strategic vision for each of the regulated sectors, through strategic policy statements, within the first year of each parliament. It also called for a greater leadership role for the UK Regulators Network, which brings together 11 regulators from sectors that include transport, finance and utilities. The board felt the current arrangement was not driving change and opportunity sufficiently. Denise Chevin, intelligence editor, Utility Week COMING UP IN REGULATION IN FUTURE ISSUES OF UTILITY WEEK • What can we learn from other sectors and other countries? • Regulating heat networks • What next for the UK Regulators Network? Analysis continued from p12 "Regulators will need to be as good, if not better, than the industry at accessing and interpreting energy and wider data." JEFF HARDY, GRANTHAM INSTITUTE The Utility of the Future is also the theme of Utility Week Live taking place at the NEC in Birmingham on 19-20 May 2020. Visit: www.utilityweeklive.co.uk

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