A transformed electricity system ‘requires a revolution in regulation’

The regulation of electricity needs to be redesigned to meet the challenges of decarbonisation, and to realise a ‘decarbonisation dividend’, according to a new report: ReDesigning Regulation.

The report suggests that the impact of decarbonisation, decentralisation and digitalisation requires a managed ‘revolution’ in regulation – focusing on how the market works, what needs to be regulated and what tools the regulator should use to deliver best value for consumers.

The electricity sector should be re-engineered from the plug and socket end, placing demand as the key driver of value within the system. This would require a fundamental rethink of how markets work, where supply chains can deliver better outcomes and a move away from ‘siloed’ regulation and cost pass-throughs, adds the report. 

The report was authored by Laura Sandys FEI, former member of the Energy and Climate Change Select Committee; Dr Jeff Hardy, Senior Research Fellow at the Grantham Institute, Imperial College London; and Professor Richard Green, Professor of Sustainable Energy Business at Imperial College Business School. Recommendations include:
  • Change what we regulate – re-engineer the market from the plug into the system rather the top down approach of today to reflect the new values of time, location and service to the system.
  • Change how we regulate – regulate risk not process, as the future will be too multi-dimensional for the current approach to succeed.
  • Provide greater protection for consumers – as we move into a more complex system of bundled products and services, amalgamate the consumer-facing parts of Ofgem, Ofwat and Ofcom into one ‘Essential Service Regulator’ to manage the risks around bundled and blurred products and services.
The report also suggests changing the electricity supplier license to a ‘retailer’ model, as today’s one-size-fits-all licence is no longer fit for purpose. An insurance-backed assurance scheme could replace today’s electricity supply licences, allowing the actual risks businesses pose to consumers to be assessed and insured against, without stifling business model innovation.

Laura Sandys, CEO of Challenging Ideas said: ‘Tomorrow is already today and we need to ensure that we don’t bake in the costs and inefficiencies of the past into the transformed system. We need to embark on a managed revolution to embrace the new structure of the future of electricity. Regulation will need to look and feel very different if we are to move away from the Price Cap and more interventionists policies. We hope that our thinking might contribute to this endeavor.’ 

In the light of the recent failure of several small electricity suppliers, Professor Green added: ‘Too many electricity suppliers are leaving customers in the lurch when they go out of business. An assurance scheme like the travel industry’s ABTA and ATOL bonds would provide protection against this disruption.’

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