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Gain insights from John Scott, a former Director at OFGEM and National Grid, on regulatory frameworks in the UK energy sector. Learn about best practices, challenges, and the importance of empowering companies for customer benefit and innovation.
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Regulatory frameworks A UK perspective John Scott KEMA: Director, Network innovation formerly OFGEM: Technical Director and National Grid Company: Director of Engineering
High Level comments • An over-arching goal is ‘best value for customers’ • Looking to both the short and the long term • With stable regulatory processes that • encourage new investment, • reward companies for good decision making, and • minimise regulatory costs and risks. • Not an easy set of requirements and new approaches must be wise to the risks and alert to the demanding changes now appearing in the sector.
National Grid experience • National Grid’s UK network has similarities to NZ • It is heavily loaded with a growing investment need, both for asset renewal and to meet new demands • Transmission should plan to renew assets ahead of failure; this is more critical than at distribution level • the importance of good asset management and planning is clear, but plans are inevitably imperfect • the objective of the planner is to minimise the errors and maximise responsiveness and deliverability • changes will arise from both known unknowns eg weather, and unknown unknowns eg breakdowns.
Ofgem experience • Ofgem focuses on company outputs, not inputs • It strives to ensure companies take the decisions • this recognises that the companies have the best information for decision making • it avoids risks being passed off to the regulator • and encourages companies to be proactive. • However, Ofgem are realists! • Mechanisms are in place to oversee performance • The focus is ex-post using specialist consultants • Claw-back and course-correction are available
Recent UK observations • Very large projects are now arising that require greater scrutiny and consultation • Years of ‘incremental investment’ are now giving way to new scale challenges, needing fresh thinking • Incentives have been introduced to encourage innovation (company choices but with transparency) • The regulator needs to transfer responsibilities wherever possible to companies to free up its own resources to address the big emerging challenges. Low carbon economy / Electric Vehicles / Variable power sources / Off-shore regimes / Micro-generation / Home Automation / Smart Metering / Demand Management / Climate Mitigation ….
In Summary • Companies should be required to be: • Flexible and responsive • Take responsibility, manage risks, be accountable • Find new solutions for new challenges • Regulators in turn should: • Encourage good planning in the companies • Expect deviations from the plan, but • Probe the out-turns and apply any re-alignments • Prescriptive rules always result in unintended consequences: focus on outputs not inputs.
Specifics for consideration • UK experience shows more to be gained than lost for customers by empowering the companies and focusing on outputs rather than inputs: • Encourage accurate capex planning and re-optimisation where justifiable changes arise • Set thresholds high to place accountabilities squarely with the company Board • Probe outputs, require transparency, challenge inefficiency – and set an expectation for innovation in all areas of the business.
In a sentence Without company empowerment there will be poor response to new challenges and unintended consequences will abound; aligning decision making to the companies is the only strategy that can bring real benefit to customers in times of rising investment and change – but implemented of course with regulatory eyes open. ... and hold the Board members to account.
Thank you for your attention. john.scott@kema.com