The pillars of policy

The pillars of policy
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How do you create infrastructure policy in an uncertain world? A recent roundtable discussion hosted by Network and National Grid sought to find out. Tom Grimwood was there.

There was once a time when you could be reasonably certain about where the energy industry was headed. Sure, there were changes, but they happened relatively slowly and were usually signposted well in advance.  

The same is not true today. Driven by the need to decarbonise, the energy system is undergoing an unprecedented transformation that leaves a big question mark over its ultimate destiny. It is a well-worn phrase that there is no "silver bullet" for the challenges the industry faces, but there are now so many potential solutions on offer they could probably fill the ammo box of a belt-fed machine gun.

All this uncertainty creates a big problem for policy-makers and regulators. How do you create policy and regulatory framework with enough stability to enable long-term investments, whilst also ensuring that it has enough flexibility to help, rather than hinder, the development of unforeseen innovations?

Mulling over the problem at a recent roundtable discussion hosted by Network and National Grid industry figures began by setting out some of the specific sources of uncertainty by which the industry is beset.  

 

Decarbonisation

First on the list was the aforementioned decarbonisation.

Attendees agreed there is a reasonable level of certainty over the broad direction of travel within the power sector, although less certainty over the pace.

They said the same is true for the transport sector, where there is now a consensus that battery electric vehicles will be the go to replacement for old petrol and diesel cars. What is less clear is when we will reach the tipping point at which EVs become the cheaper option and mass adoption quickly ensues.

The greatest uncertainty, however, concerns the future of heating. The government is still the best part of a decade away from deciding between the two main options of electrification and hydrogen gas grids. A huge section of the industry is left unsure whether they have any long-term future at all.

 

Decentralisation and digitalisation

Next came the other two of the so called three Ds - decentralisation and digitalisation.

The future energy system is definitely going to be more decentralised than it is now, but it is uncertain to what degree. According to National Grid's latest Future Energy Scenarios anywhere from 38 per cent to 65 per cent of generation capacity will be local by the time we hit the middle of the century, compared to just 27 per cent today.

One attendee suggested it is also likely to become more diversified, with different solutions in different parts of the country depending on the available resources.

There is also the question of the relationship between the local and the national. Will there merely be more interactions between distribution and transmission, or will there be a more fundamental change with the energy system being balanced from the bottom up?

Likewise, the future energy system is undoubtably going to be more digitalised. But given the pace of technological change, what exactly this will look like is anyone's guess. Could this finally provide a solution to the long-running problem of customer disengagement as many are hoping?

One participant pointed to the issue of cyber-security in particular, which he said inherently involves a high-level of uncertainty. In the cat and mouse game between attackers and defenders, one sure-fire way to lose is to become predictable.

 

Democratisation and disruption

The attendees added a few more Ds to the list, the fourth being democratisation.

With Labour calling for renationalisation of the energy networks, who owns and governs the energy system is up for debate in a way which hasn't been the case since privatisation.

Many local authorities are also returning their attention to the energy sphere following a long hiatus, whether it be through community energy and district heating schemes or the rollout of EV charging infrastructure.

The fifth D was disruption. Wherever you look in the industry the old order is being upended, often by players from outside the sector. There were various suggestions as to what will be single biggest source of disruption - from innovative business models and affordable long-range storage to artificial intelligence and the Internet of Things.

The conversation then moved on to how to deal with this uncertainty. Having had little difficulty in identifying the problems the industry faces, attendees understandably found it harder to come up with solutions.

There was agreement that regulations are failing to keep up with the pace of change, with several attendees arguing this has become an inevitability. They said regulators should not try to get ahead of new developments for risk of stifling innovation, and should instead seek to be as agile as possible - reacting quickly to problems as they arise.

Some called for the creation of a multi-utility regulator to reflect the move towards whole-system thinking. Among the more radical proposals was to create competition between multiple regulators which consumers could choose between.

There was also broad consensus that policy-makers and regulators should be pragmatic - focusing on the ends rather than the means. No option should be off the table if it produces the right outcome.

 

Protecting consumers

Everyone agreed consumers should be central to decision-making. They pay the bills and will have to live with the results.

There were calls for more public debate over issues such as the decarbonisation of heat which could have a very noticeable impact on their daily routines and require their buy-in.

Many thought one of the best ways to deal with uncertainty is to create market arrangements that properly compensate participants for the value they bring, whilst also charging them appropriately for the costs they impose.

This would help to facilitate the dynamic optimisation of the energy system, lowering energy bills, and allow new products and services to find their place, even if they were unanticipated.

However, several attendees raised concerns over the implications for equity and vulnerable customers. Whilst strong price signals might be appropriate for electric vehicle charging, said one, this would be unacceptable for heating where high prices during periods of peak demand could have fatal consequences.

This is one of the conundrums which Ofgem is looking to resolve as it examines grid access arrangements and network charges via two significant code reviews.

There are plenty more questions still left to answer.

 

Views from the speakers:

 

"The choice really is about how much you rely on market-based signals to govern decentralised decision making around the system and how much you try and centralise through regulatory interventions on rules. I think the jury's out on that one."

Akshay Kaul, director of network price controls, Ofgem

 

 "One of the answers is making sure you have a framework in place that allows proper interactions between the local and the national and you have correct allocation of prices and risks."

Jason Mann, senior managing director, FTI Consulting

 

 "Figure out what is it you want, give the right incentives to the companies, and then let them go and deliver."

Suleman Alli, director of strategy and regulation, UK Power Networks

 

 "Everyone has posed questions and the reality is decisions need to be made in the next few years about some of these things."

Mark Brackley, project director for RIIO2, National Grid

 

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