Utilities regulation must stop living in the past
A new energy system needs a new approach to regulation. Laura Sandys and Jeff Hardy describe what it needs to look like.
While policy makers are having to look backwards addressing legacy problems such as SVTs, they must also keep their eye on the future. The energy sector should have recognised that the current price cap policy was inevitable, as the large players refused to take transparent action quickly enough to satisfied the politics.
However, the price cap must represent the last public policy response to legacy issues and now we all need to start embracing the opportunities that our new emerging energy system offers the consumer.
The newly published report, Reshaping Regulation, aims to do just that and proposes a new set of regulatory principles that reflect the future architecture of the energy sector.
"There needs to be a one stop shop consumer regulator who can disassemble the bundled products and provide protection for consumers’ data."
This is a sector in transition, with the electricity system at its vanguard. Records on renewable contributions and carbon emissions tumble every other week. The destination is increasingly clear – we are moving towards a decarbonised, decentralised, digitalised and, perhaps, democratised energy system. The challenge is that the market and system rules and regulations have been slow to catch up with this unstoppable momentum – we are still running our system like it has a few large entitled players, rather than millions of smart prosumers.
The architecture proposed by the report places consumer data at its heart – this is the big value driver for the future. Not the data that those charming smart meters supply, but total consumer data across a much wider range of behaviours and actions such as mobility, consumer purchases, social media and work patterns. This much more granular and specific data could have a dramatic impact on how we rationalise and optimise our energy system.
The goal, as stated in our report, is to propose a new set of high-level regulatory principles that can help provide the open environment to allow for a more productive, simple and superior power sector, delivering consumer value, attracting new players, and encouraging new low carbonand cost-efficient technologies. To this end, we propose four key principles that should guide the overall regulatory framework for future market design.
Our first principle is to regulate for how consumers consume, not how businesses are organised. By unleashing the potential of data, we foresee consumers will start to be offered different product categories and bundled services provided by trusted non-energy brands who already are starting to get a "data hold" in the home.
The data harvesting from our homes will be where the regulatory risk lies for the consumer with less interaction and less consumer risk around the energy component. Our report is therefore proposing that there needs to be a one stop shop consumer regulator who can disassemble the bundled products and provide protection for consumers’ data which will be where the value and risk really lies. We do not underestimate the risks to consumers, but rights and redress will be better protected by an integrated and more consumer focused regulatory system.
Our second principle is that, driven by much deeper data, the system could function much more productively and regulation should aim to drive greater optimisation of the generation and demand resources. The old linear supply chain – generate, distribute, supply – would change into an optimisation model and would meet the specific balancing need in a just in time manner with no bias to generation assets.
Thirdly, we propose that the markets must become more transparent and open. New players we haven’t even considered should be able to easily identify if there are opportunities to enter the energy services sector through an open, transparent, simple and technology neutral market platform.
Our last regulatory principle is focused on where system risk really lies. For too long “security of supply” has been the sector’s "catchphrase".
We need to be much more specific about this expensive term, identify the real system risk as opposed to services risks, and reshape our policy around solutions that should not always revert to generation. There is a growing risk profile however that needs much more attention of the vulnerabilities around data and cyber security.
We feel that there is a new world much closer to realisation than others currently think. Now having dealt with the legacy of the last decade, regulators, policy makers and the industry itself needs to either move on, embrace the future and unleash the immense consumer benefits on the horizon.