Smart, Flexible but a Bit Slow

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Reflections on the Ofgem/BEIS Smart, Flexible Energy Systems Plan.

Ofgem and government (BEIS) have now published their much-awaited plan for the development of a smart, flexible energy system. While it contains supportive statements and a long list of actions many of them, inevitably, are to do further consultation. It’s taken a long time to get here from the position paper Ofgem issued two years ago which actually identified many of the issues covered in this plan. And while joined up thinking between Ofgem and BEIS is to be welcomed, having this work managed jointly has made it like a three-legged race where progress is impeded by the need to keep in step. Hopefully with the plan now out and actions sitting more clearly with Ofgem and BEIS they can start to sprint.

While many of the actions are for further work, the press release and subsequent coverage made it look like there was a firm decision from Ofgem on distribution networks (DNOs) not being able to own or operate storage. In fact, the action here is for Ofgem to set out further details in the summer on what constitutes “sufficient unbundling”, including on any potential exceptions. This is vital. Ofgem’s justification for its “decision” remains a faith-based argument in favour of competition and the fact that the auction for EFR attracted lots of interest from storage providers. This ignores the core argument that for DNOs storage needs will be location specific which will limit the number of potential providers and in some cases may mean that DNOs cannot procure the services they need. The EU has accepted the idea that there can be exceptions. This is an important decision that needs proper analysis to understand what the real competition concerns are and what DNOs’ real requirements are and how these might realistically be met. Hopefully the next document will actually do that.

On a different tack, alongside the plan Ofgem published two consultants’ reports aimed at supporting their thinking on some of the knottier issues around half-hourly settlement and the impact of aggregators. One of these was a report by CEPA looking at the distributional impacts of time of use tariffs by looking at the impact on different socio-demographic groups. It reached the conclusion that the main source of variation lay within the groups rather than between them, albeit this was caveated to some extent by data quality issues. As such the report was badged as a first step. What’s disappointing is that there is no reference to the previous Ofgem work on distributional impacts by the Centre for Sustainable Energy back in 2013 which highlighted some interesting differences in profiles of usage but wasn’t able to link them through to demographic groups at that point. The two reports present complementary perspectives – what’s needed is to join them up.

More fundamentally though Ofgem misses the key point that any de-averaging of charging creates winners and losers. The reason why having a distributional impact analysis is so important is to try to understand – before we launch into half-hourly settlement – who those winners and losers will be. But Ofgem seem to want to maintain the pretence that there will only be winners. The CEPA report makes the point that only customers who will benefit from time of use tariffs will take them up but then notes that prices for other customers might rise or suppliers might try to move customers onto time of use as a default (which Ofgem argues is unlikely under the current regulatory regime). This is a key point. If the charges for some customers fall because they have flatter profiles and take up time of use tariffs then the charges for remaining customers who on average have peakier usage will rise (even if they don’t take up time of use tariffs). This is a bigger impact than the savings from load shifting and is the same as early water metering where those who took up meters were those who had low usage and hence would benefit, which meant charges for everyone else went up. It doesn’t mean moving to half-hourly settlement is wrong but Ofgem won’t be able to work out where added protection might be needed if it doesn’t grasp the problem.

As the plan makes clear there are a huge number of issues like this that need to be tackled and where further thinking needs to be done. The cover note acknowledges the thousands of pages of responses to the call for evidence. It’s vital that as they move onto the next level of detail Ofgem and BEIS continue to draw on this pool of evidence. As people move on it’s easy to forget what was done before (as has clearly happened with the distributional impacts work), and of course new developments are happening all the time.