Ofgem is weighing up which body should fulfil the market facilitator role proposed by the regulator in March as part of a wider package of local energy institutions that also included the creation of a series of regional energy planners.
The regulator said the Future System Operator (FSO) and Elexon are both “capable and viable options” and it is therefore seeking views on the trade-offs between the two.
Last month, Ofgem confirmed its decision to proceed with the creation of a flexibility market facilitator, which would be tasked with leading, coordinating and monitoring the development of local and national flexibility markets.
Among other things, the market facilitator would make decisions on the common rules, standards and processes, which distribution network operators and the FSO would be required to adopt to align arrangements between markets. It would also monitor developments across policy, regulation, innovation and energy markets to identify the need for intervention and provide advice on necessary changes to the government and Ofgem.
Ofgem said it still believes that the FSO, which is due to be established as a not-for-profit publicly owned corporation by 1 July next year, is best placed to fulfil the role. However, the regulator said Elexon also remains a credible option.
It said it would make a final decision on the matter in early 2024 on the way to establishing a market facilitator by late 2025/early 2026, or sooner if possible.
Ofgem has now issued a consultation on which of the two organisations should take up the mantle and set out a list of key characteristics the market facilitator will need to possess. These include accountability, agility, the ability to deliver at pace, expertise, impartiality, inclusivity and transparency. It said the market facilitator must also be capable of driving alignment between transmission and distribution markets and must be easily implemented with a smooth transition.
Regarding Elexon, Ofgem said its “independence as well as its track record of delivering a substantive, robust, transparent change process means it could be an effective market facilitator that could deliver the role in an inclusive and collaborative way”.
However, the regulator said Elexon would need to develop greater knowledge of local flexibility markets, which fall outside of its core areas of expertise of code administration, settlement and scheme administration.
As an unlicenced entity, Ofgem said it would have few levers to hold Elexon to account short of removing the role from the not-for-profit company if it significantly underperformed.
The regulator said its appointment as market facilitator would also be dependent on modifications to the Balancing and Settlement Code which Elexon administers, introducing greater risk to the process and potential delays.
Ofgem said there are “close synergies” between the market facilitator role and the many others the FSO will have. It said the Electricity System Operator already has expertise around flexibility markets and market design, and will take on new strategic, forecasting, market and planning roles when it becomes the FSO.
It said the FSO’s position at the “centre of the energy system” and its strategic, whole system remit would mean it would be well placed to take a strategic approach to market facilitation as well and effectively identify and manage relevant challenges, opportunities, risks and interdependencies.
Ofgem said a potential trade off from this is that “as a large organisation with wide-ranging roles it may be more difficult for the FSO to be as agile in its delivery compared to a smaller, more narrowly focused organisation”.
The regulator said the principles of transparency, accountability and impartiality are all baked into the design of the FSO, which will be subject to statutory duties as well as licence obligations, which Ofgem could use to hold it to account.
As the FSO could be appointed as market facilitator through licence changes, Ofgem said this would give it more control over the process and timescales. The ESO’s existing role within the Energy Networks Association’s Open Networks programme would also minimise disruption.
However, the regulator did note concerns in some areas, particularly in relation to inclusivity and collaboration, which it said would “need to be an area of focus” as the ESO has “a mixed track record in this regard.” It said there would need to be clear communication of the rationale behind market design choices, “especially where this might not reflect the views of stakeholders but is in the consumer interest.”
It said it would also need to work with the FSO to address “historic issues” over the pace of delivery.
Ofgem said the FSO would be well placed to drive alignment between transmission and distribution given that the body would be responsible for the former in either case. Although the FSO would not have any incentive to favour transmission over distribution, Ofgem said it is “aware of the risk of an implicit bias based on its previous organisation role.”
“To address this, if appointed, we would work with the FSO and industry to put in place governance arrangements and reporting requirements which enable robust scrutiny, prioritise transparency in decision-making and garner trust,” it explained.
The regulator said it also appreciates that the FSO being responsible for monitoring the implementation of common rules, standards and processes, including by itself, could be perceived as it “marking its own homework”. However, Ofgem said there are options to mitigate this risks such as requiring the FSO to commission a third party to collect information on its behalf.
Commenting on the consultation, Elexon chief executive Peter Stanley said: “We fully agree with Ofgem’s decision that the market facilitator role should be established to oversee a much smoother process for all on flexibility provision and dispatch.
“Ofgem’s consultation recognises Elexon’s independence and neutrality in markets, and believes that we are a ‘strong option’ to take on the market facilitator role.
“We have a proven track record of enabling flexibility in the Balancing Mechanism and the wholesale market, delivered by our inclusive governance process, and strong market design capability.”
The deadline for responses is 7 February.