Utility Week

16 | SEPTEMBER 2021 | UTILITY WEEK Policy & Regulation Analysis Duty bound: should Ofgem be served with an SPS? What direction does Ofgem need from government in order to tackle the trade-offs net zero will inevitably present? James Wallin posed the question to experts in energy regulation. D efining Ofgem's role in the context of net zero is no easy task. The regula- tor is clearly there to protect custom- ers but where does the balance lies between current and future consumers? Similarly, what does it actually mean to "protect" cus- tomers? Is this purely about bill shocks or is there protection in the acceleration of decar- bonisation itself? Since 2014 there has been talk of gov- ernment providing Ofgem with a strategic policy statement (SPS), to set out the regula- tor's role within the government's vision for a future energy system. In its Energy White Paper last year, the Department for Business, Energy and Industrial Strategy (BEIS) prom- ised to consult on an SPS this year. But what should it include and where is there potential for unintended conse- quences? Utility Week spoke to former regu- lators and energy experts to get their views. Foundation stone Rachel Fletcher has first-hand experience of the impact of an SPS, having joined Ofwat as chief executive in 2017 just as the original 2013 publication was being updated. She describes the government steers (there were separate publications from the UK and Welsh governments) as "incredibly helpful and allowed us to set out an ambi- tious vision for the water sector and a new strategy for ourselves as regulator". The SPS provided "an excellent founda- tion stone" for its 2019 strategy "Time to Act, Together", Fletcher tells Utility Week, emboldening the regulator to put social and environmental outcomes at its heart rather than being constrained to focus on price and customer service. Fletcher points out that the revision to the SPS emerged shortly before the water sector became a political football thanks to Jeremy Corbyn's nationalisation agenda. She adds: "The reshaping of the industry to focus on its social and environmental pur- pose has helped the industry weather that storm and looks set to become an enduring feature of the water industry." Fletcher, who has since returned to the energy sector as director of regulation and economics at Octopus, believes one of the reasons an SPS for energy has not appeared so far is that a "calm moment to be reflective and strategic" has never occurred. However, she hopes that BEIS is able to "liœ themselves out of today's noise and the clamour from the various lobby groups to give the clarity and the strategic direc- tion that will help Ofgem as it plays its part in achieving net zero in a speedy, affordable and fair manner". Specifically, Fletcher expects an SPS for energy to have zero carbon at its centre but to make clear there are multiple objectives for the sector, including security of supply, customer affordability and fairness. "I'd expect the SPS to leave it largely – though not entirely – to Ofgem to figure out how to optimise across those objectives." Fletcher points out that the affordability and fairness agenda will be one of the most interesting areas to watch, namely "what is leœ to Ofgem's judgement and what does government want to be in control of and take responsibility for". Back-up required In 2019, the National Infrastructure Commis- sion (NIC) produced a report calling for gov- ernment to update regulator duties to support investment in resilience and net zero. The group's director of policy, Giles Ste- vens, stresses that the regulatory model has done the job it was designed to do but must now adapt to serve a changing world. Having previously worked at both Ofwat and Ofgem, Stevens understands the risk of adding more complexity but worries regu- lators "don't necessarily have the direction or the back-up" to play a leading role in decarbonisation. He tells Utility Week: "Ofgem clearly knows it has a part to play in net zero and made that clear to industry and to con- sumers. The SPS can be a useful vehicle to support Ofgem's tilt towards that and specifi- cally in terms of greater investment towards net zero. "There's always a balance of how much risk you expose customers to and having this SPS can give that tilt, where it is appropriate, a bit more backing. It has to be clear that this is an appropriate stance for the regulator to take." Former Ofgem chief executive Dermot Nolan agrees with the need for clarity on certain trade-offs but does not see an SPS as automatically the best route to take. "I would prefer an amendment of the statutory duties. It is legally clearer, less meddling and is some- thing where parliament has given the steer rather than a particular ministerial depart- ment. I'm not sure it needs that amendment of statutory duties and I don't know if it would want it but I would prefer it." Expanding on his objection to an SPS, Nolan cites the potential for political inter- ference and for it to be "used as an offensive weapon by the companies at a CMA appeal". He adds: "The clarity of an objective duty over 30 years gives a clear view and allows the regulator to have discretion within that time period to still make decisions and trade- offs that are consistent with that. An SPS that could be changed more regularly and might be changed for potentially rather politi- cal reasons seems less pure for achieving a 30-year plan." Nolan, who is now a consultant for Fin- gleton, also airs his concern that both mech- anisms "cut the regulatory discretion". For another former Ofgem executive, Maxine Frerk, there is value in the ability to update the priorities on a five-yearly basis,

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