Compliance and Regulation Newsletter – Winter 2019 / 2020

Since December’s General Election the new government has injected the country with a high dosage of political certainty reinforcing the 2050 Net Zero greenhouse gas emissions target. The Queen’s Speech which followed did not shy away from its ambition reaffirming that the government would take the steps to meet the “world-leading” target. There is something rather apt about this. Britain was of course the first country to go through an industrial revolution back in 1750, and now 300 years later, it will be first one to have completed an environmental revolution of similar proportion.  In this context, whilst the next few years will no doubt prove daunting for energy retailers in terms of what their future business model will look like, the overall outcome and likely opportunity it will present along the way provides a degree of excitement.  Indeed, in a recent speech the Energy Minister, Kwasi Kwarteng, made reference to the statistic that the UK economy has grown by 75% since the 1990s with overall emissions reducing by 40%, proving that sustained growth and a reduction in overall emissions is possible.

The momentum behind ‘Net Zero’ is still present, spurred on by the fact that the UK will be hosting the UN Climate Change Summit (COP26) in November as well as whipped up by the mainstream media almost on a weekly basis as the Climate Change topic becomes more ‘real.’ As recent as early February the government announced that the sale of petrol, diesel and even hybrid cars would be banned from 2035 (previously 2040). Whilst the government may have provided us with some attention-grabbing headlines and attempted to answer the easier questions around the “When’s” and “Why’s” of the Policy, we now find ourselves firmly in the “How?” zone. Interestingly this view was shared in Ofgem’s Decarbonisation Action Plan ‘Rewiring Britain for a Net Zero Future’ which was recently published.  In this document Ofgem sets the scene, laying out the necessary actions required by the regulator over the next 18 months to support the 2050 target.  Ofgem acknowledged that it is “uncertain” of the most effectively cost pathway to take to achieve Net Zero and investment needs are currently “unclear.”

The Decarbonisation Action Plan launch coincided with Jonathan Brierely taking up the helm as Ofgem’s new CEO. This change in itself brings added impetus to the Net Zero target, as it will likely be during his tenure that some of the answers to the difficult “How” questions will be provided.  During his presentation at Ofgem’s Future Energy Conference, Jonathan pointed out how he was no stranger to climate change ambition, having led the development of the Climate Change Act of 2008. Under his leadership Ofgem will be going down a path to meet the Net Zero target head on. This journey will require infrastructure investment, a delicate area for the Regulator, ensuring that a balance is struck between adequate investment (and price controls) on one hand and consumer cost protection on the other by keeping bills as low as possible. In his article “Stepping Up to the Net Zero Challenge”, the new CEO states that the ‘thorniest dilemma’ of achieving the Net Zero target is ‘not the technical’ but rather ‘deciding who pays for it and when.’

Coincidentally, whilst writing this newsletter an attempt was made to answer one of the “How” questions. In its paper “How Will Current Reforms Affect the Retail Energy Market Over the Coming Years?” Ofgem sees the energy retail market in 2024 being far more innovative and competitive than that which we see today. This environment will be possible, according to Ofgem, as result of both regulatory framework reform and industry system changes which are progressing today (for example, the Smart Meter Roll Out, Faster and More Reliable Switching, Retail Energy Code, Default Tariff Price Cap, Microbusiness Strategic Review, Supplier License Review, Targeted Charging Review and Market Wide Half Hourly Settlement to name a few). Over the next few years electricity demand will grow as we electrify both heat and transport, and given technological developments future consumer interaction with the energy market will need to be one which is more flexible then it currently is today.

Flexibility should give rise to new initiatives, products or services offerings. Indeed, the results of network charging reforms such as the Targeted Charging Review and Half Hourly Settlement, will, according to Ofgem, allow retailers to obtain ‘more accurate price signals’ which will lead to new products and services for consumers to choose from. Well-informed consumers will likely shift their consumption behaviours (perhaps to take advantage of cheaper charges) thanks to the faster-and-smart meter infrastructure that exists and better access to data which they will be better able to access and process. This is the flexibility that the retail market of the future will provide, a market where consumer engagement is at a level that today would feel incomprehensible.

With this it would seem that the need for TPIs and other independent energy experts in the future will continue, especially as Ofgem recognises that ‘strong consumer contribution will be needed to drive these benefits through,’ or to put it bluntly ‘…how and when energy is used must change.’  It will be highly likely that retailers will have to provide the carrot on the stick by introducing new products and services in an effort to force a change in behaviour in this respect.

Whilst the statistics quoted by the Energy Minister may provide us with some sort of comfort, what has been most welcomed is the fact that the Government and Ofgem recognise the importance of keeping commercial and industrial companies within the UK during the decarbonisation transition. Through energy bills and/or taxation, businesses will be key contributors to the success of Net Zero and strong political leadership will therefore be required to reduce the likelihood of businesses relocating to other countries where more relaxed carbon policies can be found.  Such “carbon offshoring” would make any successful Net Zero target artificial at the very least, and will require a global solution, which makes the COP26 meeting more of the importance.

Ofgem Review of Licensing Arrangements: On-Going and Exit Arrangements

One area which has seen consistent movement over our Newsletters has been Ofgem’s review of supply license arrangements. The October 2019 consultation was followed by a well-attended Industry workshop in November where Ofgem sought supplier views relating to their four work packages:

• Promoting better risk management (this could be achieved through cost mutualisation protections, milestone assessments).
• More responsible governance/accountability (for example, ongoing fit and proper tests)
• Increased market oversite (independent audits, the maintenance of ‘Living Wills’)
• Exit arrangements

Audience surveys during the workshop revealed the challenge that Ofgem faced when trying to put together a policy which would support its “prevention is better than cure” mantra. When asked whether the proposals outlined would achieve the desired outcomes 29% of the audience agreed, 29% disagreed and 26% neither agreed or disagreed. The variety of suppliers (both in a commercial and portfolio sense), as well as market mixture meant that there was no agreement over which package would be the most optimal.

Fast forward two months and Ofgem have provided a further update. Supplier milestone assessments, fit and proper tests and independent audits proposed last year remain unchanged and will go forward into a further consultation within the next few weeks.  Cost mutualisation protections (an area which have been a common cause for recent supplier failings) will be examined through a two phased approach, the first phase being the introduction of high level principle to ‘drive suppliers towards taking action that mitigates the extent of costs to be mutualised in the event of failure’ and will be included within the spring consultation. The second phase looks at introducing a specific requirement on suppliers to put in place protections for costs otherwise at risk of mutualisation. Interestingly the update noted that the Department for Business, Energy and Industrial Strategy (BEIS) were considering whether changes to the Renewable Obligations scheme are required – a hopeful reference perhaps to the need to review the annual payment frequency (set in legislation) which has been a common cause of recent supplier failings.

Smart Metering Update

On the 26^th February the Data Communications Company (DCC) announced that the 4 millionth second generation (SMEST2) smart meter had been installed – impressive considering that this time last year the number was around 340,000. The saturation of SMETS2 has not gone unnoticed. Since our last newsletter we have seen the first microbusiness SMETS2 meters switch into our supply, which has led to successful interactions with the DCC service ensuring that the “Smart” functionality associated with the meter continues even after a switch event.

As for the SMETS1 cousins, the DCC is continuing to migrate the 14 million first generation into their network. Given the delays the programme has experienced with migrating all the various SMETS1 meter models, the government launched a consultation in early January proposing a sensible 12-month extension to the current 31^st December 2020 deadline which requires energy suppliers to exchange any unenrolled SMETS1 meter for a SMETS2 meter.  Not only do we have the result of this consultation to look forward to, but we also eagerly wait for BEIS’ decision relating to last year’s Smart Meter Policy Framework Post 2020 consultation (discussed in the previous newsletter) as well as Ofgem’s policy response too.

Also, we should just mention Smart Energy GB.  Following a widening of their remit, this year see’s the government-backed organisation targeting microbusinesses as part of promoting the national smart meter roll out. The target audience, message content and actual benefits are not as clear cut for business consumers as they are with typical domestic households, so it will be interesting to see what is produced as the year progresses.

Faster and More Reliable Switching Programme

The Faster and More Reliable Switching Programme is currently tracking at an Amber status relating to its intended go live date of July 2021. The status reflects the fact that whilst there is a risk that the target date may not be achieved, the risk is manageable with mitigation. The number of stakeholders involved in the programme (energy suppliers, plus their relevant IT Service Providers, existing service providers, new service providers for example) and the number of interfaces which need to be tested (on top of data cleansing activities) has meant that things have slowed slightly as we get down into the real nitty-gritty of design and build. As part of this, suppliers have been required to choose the method in which they will connect to the new Central Switching Service (CSS), a way for the Programme Coordinator to identify where future programme risk (if any) could lay.

Climate Change Levy Increase

Don’t forget – from 1^st April 2020 the Climate Change Levy rate for gas will be increasing to 0.00406 pounds per kWh. For electricity there is a slight reduction to 0.00811 pounds per kilowatt hour.

What do you want to see in the next issue?

If there is a particular topic or feature that you would like to see in the next newsletter then let us know by contacting your Account Manager. As usual we welcome your views and appreciate all the positive feedback that we have received to date.

External Resources

The energy market is complex owing to the many stakeholders and big data which it entertains. Nevertheless, the links below provide some useful visual information which may help satisfy your curiosity or be of some use if you wish to understand more.  The link to the Unidentified Gas (UIG) Dashboard is still in development, although it does provide some insightful features to illustrate the levels of unidentified gas on a regional and national level. Credit should also be given to Xoserve for publishing some useful infographics which provide some practical reference points.

Gas System and Market Status (National Grid) – http://mip-prod-web.azurewebsites.net/StatusView

National Grid System Electricity Generation Status (National Grid) – http://grid.iamkate.com/

UIG Dashboard (in development) – https://www.gasanalytics.co.uk

Gas Industry Process Booklet (produced by Xoserve) – https://www.xoserve.com/media/8023/gas-industry-processes-booklet.pdf

Gas Supply Points Simplified Infographic (produced by Xoserve) – https://www.xoserve.com/media/8024/supply-points-simplified-infographic.pdf

Gas Industry Stakeholders Infographic (produced by Xoserve) –

https://www.xoserve.com/media/8025/industry-stakeholders-infographic.pdf