The energy system is changing. It now has more players, new business models and a greater regional focus – reducing the reliance on national networks and centralised production. As a stated aim of the UK's Industrial Strategy is for clean and affordable energy to provide clean economic growth, it will help our government succeed in fostering industries that can be price competitive. This is particularly essential in the years following Brexit as we'll need a bigger slice of the global marketplace.
So what needs to change?
While the government has levers to set policy for affordable and clean growth, they need regulatory arrangements and industry governance structures to support it. The current arrangements have been the source of confidence for incumbent companies to invest in the sector. But the Competition and Markets Authority (CMA)'s report suggests the existing self-governance framework, made up of numerous codes (multilateral agreements between the parties), needs to be updated. This is because it will enable more innovative industry reforms – ultimately to the benefit of the customer – to quickly progress.
So, what will make industry governance less cumbersome? And what can be done to increase the pace of change and investment in clean technology, eg renewable energy and carbon capture and storage, for cleaner growth? The CMA's findings give Ofgem a mandate to rework the framework, and I've outlined three actions the regulator can take to provide a more modern framework for change.
With more regional voices joining those of a growing number of new entrants, this is becoming increasingly complex. To confidently set a direction, Ofgem needs to adopt a more customer-orientated culture. This requires engaging proactively with customers, participants and potential participants to shape the markets and deliver outcomes valued by the customer. It must also continue to push the regulated businesses to better understand each customer's needs, instead of allowing utilities to require customers to adapt to what they deliver. Ofgem has to actively participate in the conversation around regionalisation, engaging with devolved administrations, regional authorities and city mayors, to reflect the fact devolved regions and city mayors have voices that need to be heard.
This could be, as the CMA suggests, a consultative board of the great and the good, or perhaps a professional design authority. Whatever body it is, it must demand the industry makes more rapid change where there's likely benefit for customers.
Regulators may find it challenging to keep up with the pace of decision making demanded by innovators and disruptors. And the historical pace of change may mean they're currently ill-equipped to do so. Increasing the pace doesn't necessarily mean reducing the burden of proof. Instead, it's about 'leaning' the process to create relevant evidence, reduce superfluous activity and use the longer-term strategic roadmaps to build buy-in quickly and engage for early consensus on change. The result? Real nimbleness in the framework.
So it's clear things needs to change given that the current electricity policy and regulatory arrangements were established to support a centralised system with a small number of incumbent players. By taking the above approach, Ofgem will create confidence and trust for those seeking to innovate – and be an enabler of disruptors in the market. And it'll reap the advantages from a greater number of innovative products and services available, and increased benefit for customers.