Local governance for local institutions
This week I have mostly been reading Ofgem’s call for input on: “Future of local energy institutions and governance”. Together with EnergyREV colleagues, I’ll be drafting a response in due course. For now, I’m summarising my initial thoughts on the document.
Energy governance bonanza
My first observation is that we are in somewhat of an energy governance bonanza, which is simultaneously a good thing and brings challenges. Just about every aspect of energy governance is open at the moment. We have the Future System Operator (FSO), the Review of Electricity Market Arrangements (REMA), Energy Digitalisation Taskforce recommendations, network charging reviews and final decisions (and resolving subsequent challenges) on electricity and gas price controls. These are all huge undertakings. They are also all related. Add two other things that should be, but aren’t, happening - retail market reform and significant action on demand reduction.
The challenge of energy governance reform is to ensure future arrangements deliver common objectives and outcomes (for example, zero-carbon, energy security and affordability) and avoid silos. These silos almost inevitably emerge because each of the above topics is complex and huge – and on current evidence, we are in danger of creating several silos.
Ofgem’s latest call for input is exploring local governance. More specifically, it asks stakeholders whether we have the right institutions to deliver future local energy system functions (and, if not, what changes are needed?). The functions in question are the planning, operation and facilitation of flexible markets in local energy systems, focusing on electricity systems.
The governance of local energy systems is complex. A range of actors and institutions are involved in delivering these energy system functions, each with roles, responsibilities, interests, and objectives. For example, DNOs currently plan and operate the local electricity networks and are starting to facilitate flexibility markets. Gas Distribution Networks do the same for local gas networks. Local electricity grids interact with the transmission grid, which National Grid (currently) operates. Other actors, such as local authorities, are responsible for planning energy activities, including, for example, developing heat networks. Then private and community (and even individual) actors wish to connect to and receive/provide services from/to networks (including flexibility services). And, of course, we all want access to cheap, reliable and green energy.
My take on the call for input is that Ofgem is unconvinced that current local governance arrangements are fit for purpose in a future zero-carbon energy system. Ofgem seeks to assess the accountability, credibility, competence, coordination, and simplicity of current and potential future institutions and governance arrangements to deliver local energy system functions effectively.
Future governance models
The document outlines four potential scenarios for future governance, and I suspect everyone will have a favourite. These are as follows:
Status quo – where the DNO becomes a DSO and plans, operates and facilitates flexible markets across existing licence areas.
Independent DSO – where (some of) the DSO functions are operated by an organisation independent from the DNO. So, where the DSO is fully separated from the DNO, like FSO from National Grid.
Regional System Planner and Operator (RSO perhaps) – where regional energy system functions (including gas, electricity and heat) are gathered together at a regional level into an independent RSO.
A mix of stuff – where functions are dispersed to organisations best placed to deliver them in a geography that makes sense.
It’s worth noting that bar option 1), the other options look to be in the ‘hard to do quickly’ camp because they may well need legislative change (for example, changes to the Electricity Act). Also, it is possible to use option 1) as a stepping stone to any of the rest.
I’m quite drawn to option 3) as a concept. The idea of an organisation adopting a whole energy systems approach to a region has merits in getting the outcomes right. It is also probably the toughest to achieve as it requires changes to the roles of both gas and electricity networks.
Option 4) is interesting, as it might mean different things in different places. In region A, where the DNO has made significant progress on becoming a DSO, it might assume these functions. In region B, where the opposite is true, the FSO might step in to deliver functions. In region C, an independent flexibility platform might emerge that is so brilliant that it assumes the market facilitation role. That might be too much of a Wild West for Ofgem, but all bets are on if I read that option correctly. If these energy systems carry value, then, in essence, option 4) opens them all up to competition.
I think Ofgem are right to look into local governance and the approach they are taking, which is quite open-minded, is a good one. Simultaneously I worry that this is yet another governance review occurring in a silo. It feels like one of those games where everyone draws a body part and folds the paper so the next person only knows they must draw legs, but not the manner of creature to which they attach. Who has the job of making sure everyone is looking at the whole picture (and, indeed, what is the picture is supposed to be)?
Together with EnergyREV colleagues, I’ll be responding to this. In discussion with many others, we won’t be alone. We must get local energy system governance right. It’s even more critical that local governance fits into the bigger picture that enables us to get to zero carbon as soon as possible.