Policy Impacts

Ofgem: why flexibility could be back on the agenda

Posted on 18 February 2020
By Wayne Mitchell
Wayne Mitchell
Director of npower Business Solutions, Energy HQ

Wayne has worked in the energy industry for 20 years, starting as an Analyst for an energy consultancy before moving into business development and pricing for npower Business Solutions. Upon joining the company he focused on strengthening relationships with external consultants, before taking up his current position heading up Energy HQ, which provides energy solutions and risk management services to UK businesses.

As we work with some of our most flexible and forward-thinking customers to calculate the cost implications of no longer being rewarded for this behaviour – due to changes being introduced by Ofgem’s Targeted Charging Review (TCR) – I’m very interested to see the regulator now prioritising ‘most forms of flexibility’ in its surprise decarbonisation plan.

Published earlier this month, Ofgem’s Decarbonisation Programme Action Plan sets out a new vision for how it will govern and regulate the energy industry in order to support the government’s net zero target.

Mismatch with net zero goal

This comes after critics, including the CBI, pointed to a mismatch between the government’s climate policies and Ofgem’s statutory duties.

According to a CBI spokesman: “We believe that Ofgem should be supported with new statutory duties to enable prioritisation of decisions that promote clean growth and progress towards net zero, alongside fair competition and value for money to consumers.”

It now appears their concerns could be addressed via Ofgem’s new approach, which includes support for a more flexible energy system.

Consumer participation a priority

Ofgem’s new plan acknowledges: “Greater flexibility will help smooth peaks in electricity demand” and cites battery storage – “whether industrial scale or those in electric vehicles” as being key to this.

And it promises a regulatory framework to enable this flexibility. “We will ensure that customers are offered low-hassle ways to participate, and are rewarded for contributing flexibility to the system where they are able to.”

But it’s worth noting that Ofgem-instigated changes to the way in which key network and transmission charges are calculated for large consumers mean that current rewards for being flexible are soon to be withdrawn.

TCR changes removing existing incentives

For example, under Ofgem’s TCR, new methodology for Transmission Network Use of System (TNUoS) charges mean from April 2021, there will no longer be any incentives for large consumers to reduce consumption or switch to on-site generation during periods of peak demand (or Triads).

According to National Grid, Triad avoidance currently reduces the UK’s peak national demand by around 2GW over the winter season.

So once that incentive is removed, we’ll have to resort to other ways of either generating that extra demand or saving it (eg via different ‘demand side response’ schemes).

The industry is also waiting for the outcome of Ofgem’s forward-looking charges review to see if this will provide much-needed incentives for demand side to participate.

The market arguably needs these price signals asap in order to support business cases and drive participation.

A consultation is due in the summer, with changes due to be implemented from April 2023.

Low-carbon approaches now a priority

As part of its new decarbonisation agenda, Ofgem has signalled that it will change the way in which it controls spending by network operators and energy companies to allow more flexibility to invest in low-carbon technologies as the market develops.

Last year, it came under fire for its lack of foresight and flexibility when Scottish Power was refused a request to invest an extra £42m to upgrade its networks to prepare for rising demand in electric vehicles.

At the time, Ofgem said the plan would not offer good value for money if the demand failed to materialise.

Delivering net zero: Ofgem’s nine point pan

Overall, Ofgem’s Decarbonisation Programme Action Plan sets out nine key areas of focus. These are:

1) Regulating to ensure network companies invest efficiently to deliver affordable clean energy.

2) Setting up a fund to unlock investment in innovative solutions to tackle climate change.

3) Exploring regulatory options to support the development of an offshore grid to enable a four-fold increase in offshore wind generation by 2030.

4) Supporting government and industry to develop affordable low-carbon heating options for homes and businesses.

5) Reviewing the way the energy system is managed to ensure it is fit for a net zero future.

6) Encouraging more options in the way people use electricity, for example charging electric vehicles at night and selling the power stored in car batteries back at peak times.

7) Enabling drivers to go electric by supporting an energy network that can power 10 million electric vehicles by 2030.

8) Kick starting innovation by energy suppliers to create low-carbon products and services for consumers.

9) Taking big decisions in a fast-changing environment by being more adaptive in its approach to regulation.

You can read more detail in Ofgem’s report here.

To understand what these changes may mean for your business – both now and in the future – speak to your Client Lead (for existing customers). Or check out our range of resources in our new Energy Management Toolkit.

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