In the face of the wide-ranging impacts of the coronavirus crisis, Ofgem have rightly said that they are reviewing their Forward Work Plan to allow more focus on short term issues around consumer protection and also to avoid over-burdening companies, acknowledging that the regulatory process can be demanding.
As a part of that re-prioritisation, Sustainability First, like many other organisations, would want to see a clear commitment to a continued focus on de-carbonisation with the aim that we emerge from the current crisis in a better place, with the emphasis on a green recovery. We now have an increased sense of how the unthinkable can happen and of the importance of resilience which should mean that tackling climate change stays high up the agenda.
What does this mean in practice for Ofgem's Forward Work Plan?
The draft Plan published in December was based around three strategic objectives – protecting consumers (especially the most vulnerable), decarbonising at lowest cost and enabling competition and innovation. These three objectives should still stand but there should rightly be a re-balancing towards some of the short-term aspects of consumer protection and away from longer term concerns around promotion of competition, for example.
The focus on short term consumer protection needs to cover:
- Immediate actions to avoid disconnection, to provide support to those struggling to pay and, importantly, to ensure pre-pay customers can stay topped up. This was the initial focus by Ofgem and BEIS – and has been reinforced by Ofgem's latest letter to suppliers - but continued monitoring and shared learning will be needed. As far as possible a consistent approach will help advisers whose own resources are stretched thin to know what advice to give.
- Ensuring such short-term support is sustainable will be the next challenge as suppliers' cash flows are impacted by customers who are struggling to pay. Energy UK has been debating with government the best way of providing additional funding (either via suppliers or direct to customers). Ofgem will want to be involved in any such discussions but should also be looking at how the retail price caps need to flex to accommodate the significant shifts that are happening. In so doing it will also want to think about how underlying charges will shift over what timescales and whether anything can be done to smooth those impacts. For example, under-recovery of network charges as a result of reduced demand will flow through into (primarily domestic) customer bills a year or two hence. However, if the networks are under-spending because of reduced demand, that would not ordinarily be reflected in their allowed revenues (and hence network charges) until the close-out of the price control many years hence. Ofgem should assess how material these impacts are likely to be and hence whether any additional action is needed.
- Providing clarity on ongoing obligations and incentives affecting networks. Through discussions with BEIS and Ofgem the networks have agreed to cease all non-essential maintenance and to focus on emergency work. Ofgem initially signalled that they would be pragmatic around licence compliance and that companies should not let this get in the way of doing the right thing. They have now provided welcome additional guidance on what they would consider high and low priority activities. Again this will need monitoring and Ofgem should be encouraging sharing of best practice (rather than the competitive spirit engendered by RIIO).
- Maintaining a strong focus on resilience planning. While the companies' resilience plans appear to have held up well so far and the system operator has proven itself able to cope with a very rapid and significant change in system requirements, this must remain a focus. In particular the real challenge comes if extreme weather or some other event is overlaid on top of the current pressures. There are also questions around international supply chains (whether for spare parts or "ingredients" for gas odourant, for example). Companies had been thinking about this in the context of Brexit planning but the timescales for disruption now are potentially longer term. While BEIS rather than Ofgem will lead on much of this Ofgem does have a specific role in relation to cyber security which again, should be high up the agenda, when attention risks being distracted and company systems are under pressure dealing with huge volumes of home-working for example.
Turning back then to Ofgem's draft Forward Work Plan and the question of how it might re-prioritise Ofgem will also want to think about the burden that they impose. In particular programmes involving system changes for companies are likely to create particular challenges at this time. At the same time however the current crisis has shown how bold actions can be supported where they are justified and Ofgem should be challenging itself to think whether there is scope for more radical thinking in some areas, in particular on de-carbonisation.
If looking for areas to trim, there were a number of initiatives in the Plan aimed at promoting competition that could reasonably be put on pause or scaled back given their benefits would be longer term. These include the review of the design of future retail markets, helping consumers share and access data, consumer engagement trials and the faster, more reliable switching programme. The plan for work to better understand the issues facing microbusiness could usefully be refocussed to consider short term issues.
In contrast the planned work around vulnerability – looking at the analytical framework, self-disconnection, and updating the "ability to pay" and "vulnerability" principles – all looks highly relevant to the short term and could sensibly be subsumed into one expanded programme.
Similarly on system resilience the planned work on black start, cyber, future trading with the EU and rule changes for the capacity market would seem to very relevant – with perhaps only a small shift in emphasis – to the current situation.
On RIIO2 the work clearly needs to continue to ensure that consumers are protected when the current price controls end. The challenges here are twofold. Firstly, how to simplify and structure the work so that it is deliverable against the timeframes given the uncertainty and likely depleted resources. Ofgem had always said that it wanted a simplified price control but these things have a tendency to grow as one gets into the detail. The COVID-19 crisis should prompt Ofgem to refocus on simplicity as a goal. Secondly, and perhaps in tension with the first point, is the need to think through how COVID-19's wider economic and other impacts will affect RIIO2. It seems inevitable that some sort of additional uncertainty mechanisms will be needed but these will need careful thought to avoid undermining the control itself, given their potential breadth.
On de-carbonisation, the actions listed in the Forward Work Plan need to be considered alongside those listed in Ofgem's De-carbonisation Action Plan. As highlighted above, Sustainability First's view is that these need to remain a priority even though they have a longer-term focus. Of course, Ofgem will want to think about how it engages on these issues at this difficult time but the issues are complex and Ofgem should give itself the time that it needs to work them through so that it is well positioned to support a green recovery when the time comes. This could include reflecting on statutory changes that are needed and Ofgem's traditional approach to non-discrimination.
Moreover, a large number of the most tangible actions that Ofgem is taking on de-carbonisation are tied in with the RIIO2 framework and hence cannot be put on hold – and should not be the victims of any move to further simplify the controls. These include the issues around anticipatory investment, including the need for local area energy plans to support that investment, an updated ESO framework, clarity on the DSO role and a regulatory framework to support flexibility – as well as a more co-ordinated approach to offshore wind networks. Within this Ofgem should be looking at how to drive a bold vision of the networks as regional enablers of a smart, green and sustainable recovery.
One early casualty of the re-prioritisation has been on network charging and the TCR where Ofgem has accepted the recommendation by the ESO to delay the implementation of changes to the allocation of the transmission residual until April 2022, recognising that this will enable industry and consumer to focus on other priorities. This move will be widely welcomed by those, like me, who always wanted to see the timings aligned with those for the Access and Forward-looking Charges review to provide more certainty to providers of flexibility in particular.
Finally, on a more practical level, Ofgem has flagged that it will be thinking about its approach to consultation over this period. Again, there is scope here to think how we can try to ensure some good comes out of the current situation. If as an industry, and led by Ofgem, we could move to maintain some of these new ways of working that are being adopted we could make some small contribution to carbon reduction for the long-term. Webinars are actually a much more inclusive approach to engagement – allowing a wider range of parties to engage without an expectation that they will travel to Canary Wharf (and have proven much easier to follow than trying to dial-in to a large meeting). Of course, face-to-face meetings will have a role when we are free to travel again but Ofgem should be looking at how it can embrace this new way of working for the long-term good.
In its de-carbonisation action plan Ofgem talked about a move to more agile and adaptive regulation. The current crisis will be its first test.