Transforming the Energy System



This post offers notes on and references from an online course entitled "Transforming Energy Systems: Why Governance Matters", produced by IGov [1] at the University of Exeter, led by Professor Catherine Mitchell, and presented on the FutureLearn platform.


The course examines energy governance and its relationship to energy system transformations in the context of the pressing need for a decarbonised, secure, affordable and just energy system to tackle climate change [2]. The focus of attention here will be on those aspects of the course concerned with the UK, and particularly on the recommendations made for reform of the UK system.

Four interrelated key factors are identified as central to the transformation of a centralised system originally designed for the one-way flow of energy from generation through to consumption into a system which meets today's needs [3],[4].
These factors are decarbonisation, decentralisation, digitalisation and democratisation. IGov identifies essential governance requirements to deliver a co-ordinated, smart and flexible energy system:
Moving the value of the energy system from ‘dirty’ to ‘clean’;
Building a system around people;
Dealing with incumbents and their assets;
Coordinating energy system transformation;
Reforming regulation; and
Leading a transformation.

Currently there is a lack of coordination for energy system change within the UK. For example, advice from the Committee on Climate Change (CCC) [5] to Parliament doesn’t formally filter down through the energy system; policy decisions are left to the regulator to interpret; change is largely left to companies and actors within the system to implement; and key parts of regulation are set out in licences and codes that are not necessarily supportive of a sustainable, smart and flexible energy system.

Regulation has to be fit for the challenges of transforming the energy system. In GB, the energy regulator Ofgem works to a number of Duties set out in legislation [6]. Whilst decisions on policy are taken by the Government, how that policy is executed is often largely left to the regulator. This independence creates risks because the regulator can end up making policy decisions which have potentially major distributional impacts for society. This is neither legitimate nor transparent.

All the challenges set out above point to a greater need for clarity over decision-making processes and more transparency. Government has to lead on this, to set the agenda for change and enable it to happen through policy, regulation and engagement with companies and people. It implies a new balance between direction-setting from Government, regulation and markets.
IGov argues that it is only by taking a whole-system integrated approach to decarbonisation which maintains security and is equitable and affordable, that it will be possible to transform the energy system at the pace needed to meet the challenge of climate change [7],[8].

Customers, those whose interests the energy system is meant to serve, are currently disconnected from those that actually run the energy system. NGOs have no formal means of representation. The only way Ofgem can be held to account is via the Competition and Markets Authority.

In terms of governance, it is clear that the current governance system is very complex, with no obvious coordinator. It is not a governance system which easily enables what we, as people and users want; nor is it a governance system that suits the public interest; or where individuals can hold any institution to account.

Coordination is fundamental to whole system change, it includes issues like: technology development and deployment; the emergence of new business models; changes to system design and operation; shifts in social preferences.

In moving towards a decarbonised energy system, the importance of addressing equity and justice concerns is becoming increasingly clear. Any attempt to take a low carbon but inequitable pathway is likely to be ethically questionable, politically misguided and technically unworkable.
Until recently, Britain’s Government policy was framed by trade-offs between sustainability, equity and security. IGov rejects trade-offs and argues Britain has to meet sustainability, security and equity needs together.

Ofgem should be regulating in such a way that networks and markets complement public policy goals, including the CCC’s carbon budgets; that they encourage innovation; that they and their regulatory mechanisms are sufficiently flexible to keep up with changing technology, energy system economic, and public perception. The regulatory systems and processes should not de facto support the incumbent system; their systems should be equitable; and they should ensure that customers are able to function in ways that they wish, whether buying, selling and / or providing system services.

IGov recommends three major high level Government actions: to move from energy policy delegation (via the ‘independent’ Regulator) to clearer direction of Government policy via new or reformed institutions; to implement or change the legal Duties on Institutions (including Ofgem) to include a requirement to reduce carbon in line with the CCC carbon budgets; and to implement various institutional changes to deliver regulatory reform so that Ofgem, and economic regulation, works in step with public policy.

To achieve this, IGov proposes the following changes to energy governance.

A clear commitment from Government to govern and oversee a process of energy system transformation. This would, in effect, be a move from a principle of delegation to a principle of direction, acknowledging that active governance of the energy system is essential to achieving economic, social and environmental outcomes.

Creation of an Independent Integrated System Operator (IISO)
This non-profit organisation would integrate gas, electricity and aspects of transport, at different levels, both transmission and distribution. A key role of the IISO would be to ensure implementation of carbon goals set at the strategic level. The IISO would also be responsible for the management of industry Codes and Standards, incorporating an independent Codes Manager to enable open and fair consultation and engagement from all market players.

Ofgem would retain its function as an economic regulator, regulating transmission operators and energy service providers in their delivery of what the Secretary of State had decided, and the plan the IISO had agreed.
Distribution Service Providers (DSPs) would replace Distribution Network Operators, to become co-ordinators of local energy systems, market facilitators and balancers. DSPs would implement the shift from the linear, top-down value chain of the energy system to one which places customers at its focus and values efficiency, flexibility and sustainability. An independent Data Body and Market Monitor would oversee use of data and ensure workable competition within the industry.

Creation of an Energy Transformation Commission (ETC)

This body would be established through primary legislation, and would work alongside the Committee on Climate Change, Parliament and the Department for Business, Energy and Industrial Strategy. It would implement the transformation process set by government, through brokering, co-ordination, consensus-building and engagement. It would take advice from the Committee on Climate Change and the National Infrastructure Commission, work with all government departments, oversee a direction-setting process, co-ordinating the key actors across the energy governance domain, and involving other actors as necessary. Its function would be advisory, but it would set the overall direction within which other actors operate [9],[10],[11],[12].


References:

[1] http://projects.exeter.ac.uk/igov/about/about-igov/

[2] The World Energy Outlook 2018: summary at:
https://www.iea.org/weo2018/

[3] An analysis of electricity system flexibility for Great Britain 2016
https://www.gov.uk/government/uploads/system/uploads/
attachment_data/file/568982/
An_analysis_of_electricity_flexibility_for_Great_Britain.pdf

[4] Centrica. Our Strategy
https://www.centrica.com/about-us/what-we-do/our-strategy

[5] The CCC. About the Committee on Climate Change [Internet]. https://www.theccc.org.uk/about/

[6] Ofgem. Who we are. 2016
https://www.ofgem.gov.uk/about-us/who-we-are

[7] People, Demand and Governance in Future Energy Systems 2017. 
Richard Hoggett
http://projects.exeter.ac.uk/igov/working-paper-people-demand-and-governance-in-future-energy-systems/

[8] We need to talk about (deep) energy democracy.
Soutar I., 2018
https://blogs.exeter.ac.uk/energy/2018/11/12/we-need-to-talk-about-deep-energy-democracy/

[9] Lockwood M. Not just independent but also integrated – the future for energy system operation. IGov Blog, 4 March 2016. http://projects.exeter.ac.uk/igov/new-thinking-not-just-independent-but-also-integrated/

[10] Lockwood M, Mitchell C, Hoggett R, Kuzemko C. Innovation and the governance of energy industry codes. Conference Paper for BIEE 2016, Innovation and Disruption – the energy sector in transition. Oxford 21-22nd Sept 2016. http://projects.exeter.ac.uk/igov/wp-content/uploads/2016/09/Lockwood-et-al-Innovation-and-the-governance-of-energy-industry-codes.pdf

[11] Mitchell C. Blog 1 of Name, Form and Function of Distribution Entities. IGov Blog, 19 October 2017
http://projects.exeter.ac.uk/igov/blog-1-of-name-form-and-function-of-distribution-entities/

[12] Lockwood M, Mitchell C, Hoggett R, Kuzemko C. The governance of industry rules and energy system innovation: The case of codes in Great Britain. Utilities Policy 2017, Aug, 47: 41-49.
https://www.sciencedirect.com/science/article/pii/S0957178716301266

Further references:

Changing actor dynamics and emerging value propositions in the UK electricity retail market January 2019
http://projects.exeter.ac.uk/igov/wp-content/uploads/2019/01/IGov-BM-Analysis-report.pdf

Li F et al. Regional winners and losers in future UK energy system transitions. Energy Strategy Reviews, Volumes 13—14, 2016.
https://www.researchgate.net/publication/
306262705_Regional_winners_and_losers_in_future_UK_
energy_system_transitions

Ofgem. Future Insights Series. Local Energy in a Transforming Energy System.
Available from https://www.ofgem.gov.uk/system/files/docs/2017/01/
ofgem_future_insights_series_3_local_energy_final_300117.pdf

Paying for Energy Transitions: public perspectives and acceptability.
Demski C & Pidgeon N., UKERC, 2019.
http://www.ukerc.ac.uk/asset/A5D663D6-B455-43B2-A19095483B7C7BB4/

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