There has been much talk in the industry recently about a new Energy White Paper. Of course a lot can change between now and final publication, but our view is the White Paper will develop on the themes championed by Greg Clark in his speech in November 2018 on the future of the energy market, ‘After the Trilemma – 4 principles for the power sector’. These include:
- the market principle -using market solutions wherever possible to take full advantage of innovation and competition;
- the insurance principle - proposed due to the intrinsic uncertainty about the future, emphasising the concept of insurance as an added strategic layer to preserve the plurality of generation technologies and other energy management technologies;
- the agility principle - keeping energy regulation agile and responsive in order to benefit from the opportunities of the smart, digital economy; and
- the “no free-riding principle”- the payment of a fair share of the costs of transition.
We anticipate that the White Paper will see a move to put all users at the heart of the system. Significantly, we gather it will be an energy paper in a broad sense, rather than focusing specifically on electricity or any particular type of energy. If correct, this would be a welcome move to a more holistic approach to energy provision and management.
We also anticipate that the paper will include provisions on heat, and there have been signals that it may include provisions around a Regulatory Asset Base model to facilitate to the financing of new nuclear in the UK – principally at Sizewell and Bradwell. In all likelihood, some of the measures in the White Paper will be for the industry to deliver, some will be for Ofgem, and others will require new legislation.
Particular areas of focus within the White Paper are likely to include the following:
The future of system operations
There is likely to be a focus on the role of Distribution System Operators (DSOs) in the future operation of the UK energy system. We anticipate a drive towards standardisation of approaches to flexibility, especially the provision of flex services to DSOs in order to encourage liquidity in both national and flexibility regional markets.
Steps towards this goal have already been taken, such as the introduction of Piclo, an energy tech start-up that provides a local flexibility platform, used by all Distribution Network Operators, but we expect a greater drive towards standardisation.
We also believe that there will be a move to join up the approaches to flexibility and system management between DSOs and the Transmission System Operator (TSO). This is likely to include a drive towards greater information exchange and clearer roles and responsibilities. Whilst some of this process has to be left to the market, a clear road map from the government would be welcome. It will be interesting to see what position the White Paper takes around the DSOs' market neutrality and separation at the distribution level of network ownership from network operation.
Regulation and codes
The current code structure is recognised as being overly complex; with 11 current codes, the system is not working as efficiently as it should. There is a debate as to whether, and how, to modernise the codes and who should “own” the codes.
One suggestion by Elexon, is to have three codes, covering both power and gas. These would include:
- a Retail Smart Energy Code that covers all aspects of the energy retail markets, including codes governing smart metering;
- a Wholesale and Settlements Code, combining the Balancing and Settling Code with the management and operation functions of the existing Uniform Network Code, which governs the gas sector; and
- the Networks and Use of the System Code, bringing together five electricity network codes governing connection and the use of the networks.
It will again be interesting to see whether BEIS provides direction as to how to modify and simplify this structure and, if it does so, how this can be done without losing the vital elements that allow the multiple parties in the industry to engage with each other on a day-to-day basis in order to keep the lights on.
It will also be interesting to see how BEIS reacts to concerns that smaller participants are being locked out of many of the code modification discussions and working groups in practice due to the number of meetings or modifications and the scale of commitment needed.
We understand that there is desire within the government to move "policy charges" from a pound-per-kilowatt hour (£/kWh) to a residual/capacity approach. In some respects this mirrors the equivalent move in network charging (for example the Ofgem Targeted Charging Review).
Whether such a step will be taken remains to be seen, but at first impression this appears to be an extension of the policy approach to the problem of the last pensioner connected to a DNO having to pay the entire system costs.
The thinking around heat in the White Paper is likely to be more tentative, and akin to a green paper, in contrast to other areas with clearer policy objectives and approaches to implementation. Heat regulation is seen as likely, with Ofgem being favoured to take on the role. However, it is not clear what remit Ofgem would have, or what role that will leave the Heat Trust (the heat customer protection scheme set up with DECC backing a few years ago). BEIS has reacted positively to the Heat Task Force’s 2020 call for greater investment protection to balance the imposition of regulations, but will regulation be accompanied by a balancing set of policies to encourage investment in the sector?
There have been conflicting indications as to whether the White Paper will be published prior to the summer parliamentary recess. Even if it is, implementation will to some extent depend on who is the next Prime Minister, as this will determine who has ministerial responsibility for Energy (presumably at BEIS), and their wider priorities.
The industry is waiting to see what BEIS's plans are for the energy sector in the White Paper and also what the next Energy Bill may contain. However, just as with the race to Number 10, there are bound to be some bumps along the way.
If you have any questions regarding the upcoming White Paper, please speak with Simon Hobday, or your usual Osborne Clarke contact.