Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/842661
The Topic: Flexibility FLEXIBILITY THE TOPIC 12 | 30TH JUNE - 6TH JULY 2017 | UTILITY WEEK T he new markets emerging in and around utilities, and the new business models they necessitate, will require a new approach to regulation. Regulators and companies are already preparing for this: just one year into RIIO-ED1, thinking has begun on RIIO-ED2. Speaking at Utility Week Live, Mott Mac- Donald group strategic development man- ager Simon Harrison highlighted the diverse range of stakeholders that need to be part of the process. "We've got this large and com- plex stakeholder group that's a very, very dif- ferent group to the one we have to deal with today, and what does that mean for RIIO2? How can we build shared visions that every- one can buy into? How does that then flow through to RIIO2?" he asked. "The range of stakeholders we have to think about in the [future] energy system is much bigger than what we tend to think about today. It's no longer just generator, transmitter, distributor, supplier; it's a whole bunch of people and much of the complex- ity exists on the consumer side of the meter. When you start unpacking that bunch of stakeholders it's a very different group – cul- turally, temperamentally, in terms of their fragility, in terms of the risk of return appe- tite they have, and also in terms of their ability to engage in the current regulatory environment. We put up a lot of barriers of complexity." Regulations need to be "flexible" and "agile", Harrison said. "There's a lot more uncertainty going forward so we need a RIIO2 settlement that can evolve." Networks could otherwise be "straitjacketed". Suleman Alli, director of strategy and regulation at UK Power Networks, called for ED2 to be an example of "evolution" not "revolution". One question that has already garnered headlines is whether the regulatory period, extended to eight years for RIIO1, should be put back to five. Alli acknowl- edged this: "We need to have quite a lot of debate about the duration of the regulatory period, the amount of uncertainty mecha- nisms that we're going to need to use. "If I underspend in year one, actually a proportion of that underspend is passed RIIO2: regulating for flexibility The next iteration of the energy sector's RIIO regime will need to factor in that networks are no longer static but are subject to continual change. back to customers. Within period my rev- enues drop. I think building on that frame- work and saying how we can use that framework to deal with uncertainty will be really important." He highlighted the need to incentivise whole-system solutions: "I think there's a great opportunity here for us to develop and evolve the regulatory framework to allow for the best decisions to be made for the system overall, whether that be transmission invest- ment, whether that be distribution invest- ment or whether that be flexible solutions." The regulatory framework will have to recognise flexible solutions to traditional challenges, he said: "Were already going out to market this year for tenders for up to a dozen sites where rather than reinforcing we want to buy a services contract. The view that we need to be clear about is how will deferral of investment be treated in following periods and how will that work within the regulatory mechanisms. That needs clarity." That said, Alli saw a continued role for more traditional financial incentives: "I still think cost and reliability incentives have got to play a big part… It helps us to innovate. It gives us something to focus on. We're proud of the fact that we're earning incentives from reliability and customer service. It's a badge of honour. A regulatory framework that ena- bles good managers to manage their busi- ness – we shouldn't lose that." Report sponsored by: FLEXIBILITY IN WATER The UK water industry has already seen the advent of a new market, with the introduction of competition for non-domestic customers on 1 April 2017. While the market itself is still in its early days, the transformation it has necessitated in water companies is well underway. Companies have separated their wholesale and retail operations – in some cases, exiting retail for non-domestic customers altogether – and there has already been considerable consolidation in the retail market. Further and arguably more significant changes are ahead, with the next price review, PR19, set to introduce market forces to parts of the wholesale value chain, notably that for bioresources. In a presentation at Utility Week Live, Ofwat's principal engineer Alison Fergus- son set out the thinking behind the changes, the anticipated benefits, and the next steps. See highlights from the presentation: What if we didn't change our regulation of bioresources? Optimised thickness and transport costs More efficient process operation and energy generation Trialling innovative processes Optimised in-company sludge movements Improved products for farmers – more income Trust in water 5 Occasional exploration of using third parties Incremental improvements, saving a few ££? "It's no longer just generator, transmitter, distributor, supplier." l Simon Harrison, group strategic development manager, Mott MacDonald