Be aware- The Regulation Tanker is Turning

Keeping track of everything that is going on in the energy market has always been a challenge, and never more so than now as the pace of change accelerates exponentially.

The market, over the last 5 years has started a radical transformation. Lead by the change in generation sources, we are now well down the line of fossil fuel to renewable generation, highlighted by this week’s historic 55 hours of ‘non coal’ generation. The shift from large scale to small scale is replicated in the supply market, with the growth in numbers of suppliers continuing with more than 70 companies operating in this space. And we are rapidly moving towards a technology lead future, with the development of storage, electric vehicles, blockchain and SMART technologies all attracting heavy investment and new businesses. Who will win out amongst old and new businesses is yet to be seen- but what is not in doubt, is a market that has never been more active.

Whilst this transformation has been gaining pace, what has not yet really seen much change is the regulatory landscape- rightly following rather than leading the market. This has meant, that whilst frustrating for many, the fundamentals of market design have been a relative constant. Whilst providing some stability, it has also become increasingly clear, as I’ve written before, that the market design is frustrating rather than supporting the new world.

The good news is that BEIS and OFGEM have recognised that doing nothing is no longer an option and have now started the process to move to a fit for purpose regulatory regime. It is not easy and will not be quick, but has signs of radical change.

Firstly the historical concept of the ‘supplier hub’ model is being questioned. Whilst appropriate when there were only six large players who were largely fully integrated, the risk allocation and more importantly the ability for suppliers to manage the risks is now asymmetric. There are many more market participants who are not touched by regulation who should be, directly interfacing and advising end consumers without necessarily having the market access for them to deliver on their promises- but also not beholden to market risk exposure. The value in supply now, whether as a large supplier trying to rapidly transform the traditional business model or as a small supplier trying to turn a profit, is increasingly being squeezed, by competition, price caps, monopolistic supply chains and regulatory cost burdens. Flow’s stressed sale last week to the Co-Op admirably demonstrates the pressure that all suppliers are currently under. A fundamental review of the supplier hub model is welcome, not least to ensure the sustainability of a well functioning supply market.

Secondly the transition of the roles of National Grid and all the DNOs to independent system operators is a fundamental shift to the historic norm. Whilst traditionally, these parties really only interfaced with industry players, they are now increasingly transacting directly with end consumers, with their need to attract flexibility in supply and demand. The cultural shift to customer facing organisations, let alone the operational and regulatory change required should not be underestimated.

Thirdly, access to the traded market through the Balancing and Settlement Code is facing fundamental change. Enabling direct market access to the traded market for aggregators and end consumers, rather than having to go via a licenced supplier will fundamentally shift the market and value within it. Equally the European TERRE initiative will see the need to settle in 15 min periods rather than the historic half hourly periods, a fundamental which the industry has built itself around.

Another massive potential change will result from OFGEM’s current significant charging review- All assumptions around DUOS, TNUOS and Embedded Benefits are up for grabs.

Lastly, the shift to a SMART world and the connected home requires massive industry and regulatory change and development. Whilst the ambition to roll out SMART meters by the end of 2020 has all the hallmarks of a car crash, no one doubts that the principle of moving to a SMART world is the right thing to do. There is much change still to come in this area.

The tanker will not turn quickly, and the complexity to manage all the key moving parts will keep many hundreds of people busy for several years. It will however, require traditional and new businesses to be on the front foot in response to change, in order to ensure business models and value assumptions still hold true as the market undertakes fundamental redesign. Exciting times!