How do we deliver a regulatory strategy that deals with challenges so fundamental they force our system to change?

As an energy professional working within utilities, the recent launch of the Strategic investment and public confidence report is a welcome and timely prompt from the National Infrastructure Commission (NIC) on the necessary debate around the future role of regulation in utilities.

It is worth stating from the outset that the report clearly demonstrates that our system and regulators are not failing and have delivered against significant challenges. But the industry cannot rest on its laurels.

Despite success, the challenges of decarbonisation, decentralisation and digitisation are so fundamental that the whole system will inevitably need to evolve. Developing a long-term vision will be essential, and clearly defining the role of regulators within this will be key.

Strategic policy statements will be needed to create a vision for a future system – agreed by industry, defined by government and with a clear mandate for regulators to execute change.

It is that central vision which will breed greater confidence for investors and gives utilities flexibility in the way they deliver business plans and investments, which will in turn help achieve the positive societal outcomes that everyone in the industry should be aiming for.

Regulating for a resilient low carbon future

Regulation is critical to delivering access to affordable, reliable and sustainable energy. But at present regulators do not have the power to mandate actions on issues like climate change.

Most in the industry would agree – regulator, government or utility – that recent business planning cycles have placed a lot of emphasis on protecting today’s consumers by keeping costs low in the short term, and less on contributing to long-term thinking to solve future societal and environmental challenges.

So, the conversation provoked by the NIC needs to be used to address the intergenerational trade-offs and give our regulators and utilities the power to deliver in the long term. Examining regulatory cycles and the longevity of strategic investment decisions is just one example of what should be looked at.

Who loses out in the short term if the focus shifts? In our interconnected world, a whole system approach and a need for system resilience across utilities – water, energy, telecoms - is blurring the lines between industries and sectors. Unifying efforts and creating efficiencies across regulatory bodies spanning multiple industries, that often serve the same consumers, should offer some additional protection.

The role of the UK Regulators Network (URN) will be essential, and the NIC’s suggestion of more powers needs significant follow through. The URN will quickly need a remit to coordinate whole system thinking and frameworks around issues like innovation, resilience and digitalisation. They will need a platform to communicate, discuss, share and adopt.

What is beyond the NIC report?

What is missing from a report is often as important as what is in it. Notwithstanding an acknowledgement of ongoing discussions elsewhere within the industry, the evolution of regulation beyond existing regulated industries is one such issue.

Understanding whether there is a need for regulation and how we would regulate new or additional technologies like carbon capture and storage (CCS), Electric Vehicle charging infrastructure and district heating will be critical in clarifying their role in a low carbon energy system. Ongoing discussion on applying a Regulated Asset Base (RAB) model for new nuclear power should also be considered; and whether a RAB-like model for local energy systems, energy efficiency and microgrids is needed. If regulated models are extended to new sectors and technologies, would Ofgem manage them? Would different regulators be needed? Or would the remit of existing bodies such as the Oil and Gas Authority, for example, be expanded? What would be their remit and governance? And finally, how could a new competitive / proxy model that has been developed by Ofgem already (such as OFTO or the SWW model) be potentially applied to new technologies?

Although it was not within the scope of the study, the role of new regulated models and how they interact with existing regulation needs to be addressed. I agree with the NIC that there is a need to enshrine the use of more streamlined competitive models in policy and legislation, but this also needs to go a step further and cover other areas that will almost certainly need to be regulated in the future given net-zero ambitions.

A positive step forward

In working with my colleagues to submit Arup’s initial response to the NIC consultation, the last few months has been an exciting opportunity to pool together our technical, regulatory and policy expertise across water, energy and telecoms.

The NIC report provides a golden opportunity for a pan-industry discussion on regulation. It is a complex topic – we haven’t even touched on here the shift to local energy systems, distributional impact assessments, consumer engagement or digitalisation - and a new methodology will not be developed overnight.

But this could be a once-in-a-generation opportunity to form the necessary regulatory policy and legislation which will be critical to achieving net-zero in the UK by our 2050 target.

I would welcome your thoughts.

This article was originally published in The Energyst publication, October/November 2019 issue available at https://theenergyst.com/digital-editions/