Many of us who grew up in the UK education system will have experienced the school ‘Annex’. A school has an issue or needs to expand, so it establishes a refurbished mobile home as an additional classroom while repairs, renovations, or extensions are delivered. Regardless of whether the work is completed, what was intended to be a temporary solution ends up becoming a fixture, with the original reason for its existence lost to time.
That is the state of energy regulation; temporary and insufficient solutions have been used to patch the issues of the day, only to become permanent once the next government forgets why the “annex” was built in the first place. This has been done to such an extent that the regulatory landscape is no longer a single cohesive structure, but a sprawling campus of confusing, complicated, and often conflicting stand-alone lean-tos.
It was welcome to see the Government publish its review of Ofgem, moving the needle forward and beginning a long process of reforming elements of the regulator’s role.
At a time when domestic politics, geopolitics, and wider market conditions have most minds focused on other issues, it may seem strange to turn attention to the minutiae of operating in the energy sector. But that is precisely the issue that has resulted in the current state of energy sector governance – there is always a more pressing, more politically salient point to be made, so the humdrum day-to-day organisation of the sector gets deferred, delayed, or simply forgotten.
As such, it was welcome to see the Government publish its review of Ofgem, moving the needle forward and beginning a long process of reforming elements of the regulator’s role. While the review did not have the broader scope that Energy UK would have supported, it still makes changes that will improve the approach over the coming years.
The review is not alone: in a glut of regulatory workstreams, the Government is working to identify areas of administrative burden caused by onerous regulation as part of its Regulatory Action Plan. At the same time, the National Infrastructure and Service Transformation Authority (NISTA) is reviewing the economic regulations governing utility infrastructure, with the potential to fundamentally change how energy, telecoms, and water projects are coordinated, funded, and delivered.
These workstreams all aim to reduce complexity and streamline regulation, but the approach taken highlights another challenge in delivery. The many institutions, governance arrangements, and frameworks across the energy sector often result in duplicated efforts, complicated and confusing processes, and a lack of clear roles and responsibilities. This results in a perverse outcome, where the complexity of change itself contributes to uncertainty and increases investment costs, resulting in higher energy costs for consumers. Fundamentally, the energy sector needs to know who is in charge, what is expected of the sector now and in future, and how to engage effectively to ensure the best possible outcomes for consumers.
Figure 1: The institutions and legal, technical and regulatory rules that govern the electricity industry.
Reproduced from Imperial College London’s report ‘Reshaping Regulation: Powering from the Future‘, with additional permission from Exeter University’s Energy Policy Group. Note: The Department of Energy and Climate Change (DECC) has now been replaced by the Department for Energy Security and Net Zero (DESNZ).
The current landscape
Energy is constantly evolving, with innovations, efficiencies, and new business models overflowing across the globe. In an attempt to keep up with the constant churn of energy sector innovation, consecutive governments have added temporary or partial fixes, often one on top of the other, to keep regulation evolving with the times. The result is a patchwork of confusing, conflicting and overlapping measures.
The core challenges with the current approach to sector governance include:
- Efficiency: The UK has a vastly higher number of employees working across planning and governance than in most comparable European nations, and Ofgem’s 200% increase in employees is not equivalent to the growth of the sector’s workforce, as set out in Energy UK’s report on regulation.
- Timelines: It is not unusual to see legislative, regulatory, and wider reforms delivered at least two years after the intended timeline. Where rules are established, delays and long processes slow down delivery. The developer process for building energy infrastructure, as an example, requires engagement with a variety of regulators and frameworks, from environmental regulations to local and national planning regimes, to the process for connection to the grid, which causes cumulative timelines of up to 14 years.
- Complexity: New institutions such as NESO (the National Energy System Operator) have yet to have their roles and responsibilities robustly defined, particularly where these overlap with existing organisations. Connections reform, reformed national pricing, and spatial planning are examples of where the fundamental question of “who is in charge” is impacting confidence in the approach.
- Administrative burden: There is no single point of information for energy codes, licence changes, guidance, requests for information, and energy legislation requirements, resulting in hours of work for licenced parties to search for, identify, monitor, clarify, and abide by relevant requirements.
At present, some of the fundamental building blocks of the future energy system are being developed, but without clarity on where to turn if something goes wrong. The reform of the connection queue has been implemented, but, as new offers reveal higher costs, no acceleration in timelines, and significant issues with the quality of offers, the industry is left without clarity on whether the grid will be built on time, and without a clear route to redress if NESO, network companies, or Ofgem fail to deliver to schedule.
Individual workstreams to address complexity – for example, Energy Code Reform – are welcomed by the sector, but without more wholesale reforms, these result in little actual impact. Code reform has resulted in no real reduction in either the number of institutions involved in energy codes or the length of the code documents they oversee. In effect, the school built another annex – and nobody really knows why.
While they do not address the fundamental need for holistic and radical reform of sector governance, reforms – including the DESNZ review of Ofgem – could significantly improve the complexity of working within the sector. A more efficient, more independent regulator that can focus on the most significant issues, not on headlines, is welcome, and the efforts from the regulator’s staff to engage with the sector show a genuine and enthusiastic desire to improve.
Fit for the future
The approach to date has been to make minor changes with limited immediate cost implications, rather than to rip off the plaster and dig into a more holistic reform that will save costs over the long-term. It is time for the Government to stop building annexes and start addressing the underlying inadequacies that have led us to this point.
Over the coming months, Energy UK will highlight the current impacts of uncertainty and complexity impacting the sector and set out some proposed solutions in a series of blogs leading up to the anniversary of our report on regulation.
Focusing not on the day-to-day functions of the sector but on the long-term outcomes desired would reduce the amount of work required from regulators and the industry alike.
Energy regulation and the institutions involved still need a fundamental root-and-branch review to redesign the approach and ensure that clear, streamlined, and simple regulation becomes the baseline. Focusing not on the day-to-day functions of the sector but on the long-term outcomes desired would reduce the amount of work required from regulators and the industry alike. Defining which organisations are responsible for what outcomes, and establishing who the industry should approach for redress, would also deliver improved confidence.
All of this must be put into context, with energy bills the most pressing issue for politicians. At the core of regulatory reform must, therefore, be efficiency, both in terms of how long the reforms take to implement and in terms of how the reforms reduce administrative burden. Both of these factors will reduce investment costs, improve system efficiency, and reduce the cost of business across the sector, resulting in savings passed on through energy bills.
Charles Wood is Deputy Director of Policy at Energy UK, with a focus on whole energy systems, infrastructure delivery, institutional governance, business decarbonisation and industrial strategy.
