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UTILITY WEEK | 21ST - 27TH APRIL 2017 | 17 Policy & Regulation Market view T he efforts of government and Ofgem to drive our energy system towards a smart and flexible future are multi- faceted, and are coming up against some dif- ficult legal and regulatory challenges. What is at stake here is a smart system that the government has said could provide gross benefits to consumers of £3-8 billion a year by 2030. A smart system is shorthand for the integration of smart technologies and tech- niques into our energy landscape, which in some areas could mean revolutionary rather than evolutionary change. This may be smart meters in every home and truly flexible demand; two-way electric vehicle- to-grid "smart" storage; consumers offering their own decentralised energy production and flexible consumption into the balanc- ing and energy markets through aggregators; actively managed distribution networks; and the Internet of Things generating a mass of sensitive, and valuable, data. As Ofgem observes in its 2017/18 dra work programme, this is essentially a vision of a decentralised energy system, created by a combination of technological and market drivers. This is already creating some legal head- aches as the regulators and legislators struggle to keep up with a wide range of stakeholders and vested interests, in what can be disparate and overlapping policy areas. This breadth and diversity of interests make the change process itself not at all straightforward, with a key challenge the need to provide consistency of approach across myriad governance regimes. These regimes are typically structured around codes, agreements and licensing frameworks built around the traditional two-dimensional structure of large generating plant exporting on to high-voltage networks to feed power to multiple consumption sites via passive local distribution networks. Against this backdrop, a key early prior- ity of Ofgem is the promotion of effective markets and competition, and the wish to see fair access to new and existing markets, and level playing fields, with price signals which recognise the value of flexibility. This involves the identification and dismantling of undue regulatory, commercial and legal barriers. An early question here is the status of storage, specifically the absence of a legal definition in UK legislation (outside of the capacity market rules). This has resulted in some anomalies, notably with respect to grid connection processes, the classification of storage within the planning framework, and network charging methodologies. This in turn feeds into the operation of the bal- ancing and capacity markets, and the extent to which these are accessible by aggre- gated consumer delivery models and other demand-side response providers, as well as the emerging role of distribution system operators. The issues have broadened in recent times into a review of the scope (and fair- ness) of embedded benefits more generally, and Ofgem's concern that smaller generators are favoured relative to larger, directly con- nected stations by operation of the existing TNUoS and BSUoS charging regime. Throw into the mix the broader climate change policy agenda, and the extent to which a future smart system can and should be technology neutral by incorporating flexi- ble fossil fuel plant such as diesel generators and larger gas plant, and the policy choices get decidedly complex. But it is the role of the consumer in all of this that presents one of the biggest challenges. One question is how consumer protec- tion law needs to adapt to reflect the new relationships that future consumers will undoubtedly have with the like of aggrega- tors. The regulation of third party interme- diaries such as brokers and switching sites already has Ofgem's attention, and proposals to extend mandatory codes of practice to the non-domestic arena will likely get wrapped up in the future role of aggregators. More significantly, a smart energy system will need to protect a vast array of sensitive consumer data. This will need to be done in a world of device interoperability which recog- nises that, in a truly interconnected world – and the UK's energy networks will inevitably remain integrated with those of the EU aer Brexit – devices and data will need to con- nect to and sit on standardised platforms. We do not need to look much further than the ongoing smart meter rollout programme to see the complexities involved. The way in which policymakers and reg- ulators strike this balance between allow- ing innovation to flourish, while protecting consumer interests from abuse, will be a key challenge moving forward. Ofgem believes that its move towards a system of principles-based regulation for the industry will give it the appropriate regu- latory tools to meet this challenge, and it may be right. Indeed, given the underlying uncertainty that principles-based regulation entails for compliance departments, new initiatives announced by Ofgem to facili- tate innovation from business are to be wel- comed. These include its Innovation Link and "regulatory sandbox" to facilitate the trial of consumer propositions free from the usual regulatory constraints, both an indica- tion of Ofgem's apparent willingness to think outside the box and embrace new ways of thinking. Andrew Whitehead, head of energy and senior partner at Shakespeare Martineau In search of flexibility The government is keen to see the emergence of a smart and flexible energy system, but some legal and regulatory challenges must be overcome first, says Andrew Whitehead. Key points A consistency of approach is needed across myriad governance regimes. Undue regulatory barriers must be identified and dismantled. The question of storage must be addressed. To what degree should the future energy system be technology neutral? What is the role of the consumer?