Ofgem has recently published the third Working Paper in its RPI-X@20 review.
RPI-X@20 is a two-year project to evaluate the current approach to regulating Great Britain's energy networks and to develop future policy recommendations. The latest Working Paper focuses on the question of who should decide what the energy networks of the future will look like.
In the paper, Ofgem puts forward three alternative models for future decision-making:
- A central government-led model in which the Government makes decisions about the future role of networks. Central government would establish a plan setting out how energy networks would facilitate delivery of agreed environmental, security of supply and social objectives. The energy networks would then be responsible for delivering on this plan.
- A joint industry-led model in which the networks jointly make proposals, in collaboration and consultation with other industry stakeholders (including network users and consumers). Such proposals would then be endorsed by Ofgem and the Government.
- An adapted regulatory framework focused on delivering the low-carbon economy, consumer protection and security of supply. Networks would be given clear outcomes but would be left to determine for themselves the best way to deliver these outcomes. This framework is designed to respond to uncertainty about what the best model might be in 10, 20 or 30 years time and to leave room for innovation in the future.
Ofgem goes on to explore the advantages and disadvantages of each model. Some of its key findings are:
- The central government-led model could potentially put a plan for meeting environmental targets in place most quickly.
- In "The UK Low Carbon Transition Plan: National Strategy for climate and energy" the Government has already said that it plans to publish a road map for delivering a low carbon economy by 2050. If this plan provides detailed direction on what networks have to do, then it could potentially lead to a central government-led model emerging.
- However, there are concerns that a central government-led model might not lead to the best outcomes for existing and future consumers. There may be insufficient focus on innovation and there is a risk that decisions would be influenced by short-term political considerations.
- The adapted regulatory framework model is potentially the most likely to ensure value for money for existing and future consumers over time.
- A joint industry group, because of its collective knowledge and expertise, could improve the efficiency of decision-making. However, it is also possible for these benefits to be realised within the adapted regulatory model.
Ofgem concludes that at this stage the adapted regulatory framework model merits further discussion. It therefore plans to explore this model further in forthcoming consultation documents. Ofgem will now collect responses to this Working Paper and provide an update on its thinking in a winter consultation, "Emerging Thinking" (expected in November 2009).