Briefing paper
Review of Energy Policy 2023
Dec 2023
As part of the legally binding 2050 net zero target, the UK government has an ambition to decarbonise the power sector by 2035. The likely significant increase in electricity demand due to the decarbonisation of heating and transport will limit the amount of available capacity on the distribution wires and transformers that serve the vast majority of buildings. Therefore, exploiting flexibility (such as reducing demand during peak times) or reinforcing the electricity networks will be needed to ensure the reliability of the energy system. As the timing and location of this increase in demand is uncertain, new planning processes have been introduced for the distribution networks that use a combination of long-term scenario planning and near-term monitoring (Poulter & Bolton, 2023). However, these plans only produce a single vector view of the system, i.e. for gas or electricity distribution. As the future of gas is uncertain, particularly as more domestic heating becomes electrified, understanding how these two vectors interact becomes increasingly important. Therefore, basing investments on these single vector plans, rather than a broader view of the whole system, may result in inefficient investment decisions.
In recognition of the major changes that need to be enabled in the energy system to meet the 2050 and 2035 targets and to overcome the challenges of local planning, there has recently been a suite of interlinking consultations and reviews released by various government departments[1]. We focus on an aspect of one of these – the introduction of Regional Energy Strategic Planners, in the consultation for ‘The future of local energy institutions and governance’ (Ofgem, 2023a). An initial Call for Input was released in April 2022 (Ofgem, 2022)[2] that considered various governance options. This was followed by a consultation in March 2023 (Ofgem, 2023a)2 and the decision released on 15th November 2023 (Ofgem, 2023c).[3]
In the initial Call for Input (Ofgem, 2022), Ofgem considered four governance options for the future of local energy institutions and governance in GB (Figure 1). Of these four options, responders were in favour of a new approach to system planning: the regional system planner. In the case for change in the March consultation (Ofgem, 2023a), Ofgem recognised the need for a coordinated, multi-vector (e.g. gas, electricity, heat networks etc) approach to system planning as there were challenges associated with information asymmetry and each distribution network company producing single vector plans.
Figure 1 Summary of Call for Input framework model options (source: Ofgem, 2022)
In the consultation, Ofgem proposed that a regional system planner be a single body which undertakes strategic planning in line with national net zero objectives, basing this on ‘whole system’ optimisation across the networks. The consultation asked for views on possible design choices, regional boundaries, and which entity could best fulfil the role. Although Ofgem anticipated that the RSP would be delivered by a single entity with regional divisions and recommended the Future System Operator (FSO)[4], they encouraged further suggestions from responders.
In the final decision released in November 2023 (Ofgem, 2023c), Ofgem have decided to introduce Regional Energy Strategic Planners (RESPs) delivered by the FSO. The RESPs will be regional divisions of the FSO with two RESPs covering Scotland, one covering Wales, and eight to ten in England. The regional boundaries are still being finalised as are the detailed design of the RESP functions. These more detailed aspects will be consulted on during the design phase of the next regulatory price control[5] for the energy networks. However, Ofgem have outlined four key functions it expects the RESP to deliver (Ofgem, 2023c, pp. 18):
The regional plans the RESP will produce are expected to include both national and local input, with a ‘governance mechanism’ in place to convene regional stakeholders, such as local authorities, the energy networks and other local actors. Given this emphasis on governance and accountability, it will be essential that the RESP has the necessary expertise to engage productively with a range of stakeholders. This aspect of the new framework may present more challenges for the FSO than the detailed technical modelling, as the FSO, in its current role as energy system operator, already has modelling capabilities but has only needed to engage with a smaller number of stakeholders at the transmission level, unlike the larger numbers involved in planning at the local level. For example, if the boundary proposal for England is used (Figure 2), then the RESP covering the suggested boundary for the south east would need to negotiate between three electricity distribution licence areas operated by two electricity network companies, three gas distribution networks, six unitary authorities and ten county councils. The county councils then operate a two-tier system for local spatial planning policy, which are determined by 46 District and Borough Authorities.
The RESPs will also need to consider existing planning practices at the local and regional level. In the existing framework the network companies are expected to build their projections using a combination of modelling and stakeholder engagement, taking account of the English and Welsh Local Area Energy Plans (LAEPs) and the Scottish Local Heat and Energy Efficiency Strategies (LHEES). Preparing a LAEP in England is voluntary, in Scotland all 32 Local Authorities have a statutory duty to produce a LHEES (Collins & Walker, 2023) and, although not legislated, the Welsh Government have employed the Energy System Catapult to oversee a roll-out of LAEPs across Wales. While this has meant that local planning for energy in England is patchy and underdeveloped, and only nascent in Scotland and Wales, in some cases network companies have built good working relationships with local authorities, enabling a useful flow of information. It is important therefore that existing good practice is not cast aside as the new RESP framework is implemented. Where there is evidence of productive dialogue and information flow between local authorities and network companies, the RESPs should look to build on, and coordinate between – not replace – existing place-based engagement capabilities.
Over the course of 2024, Ofgem will be continuing to engage with stakeholders and will issue further consultations, particularly around the design of the RESP – its function, outputs and geographic scale. Following these consultations, further stakeholder workshops and possible trials, Ofgem wish to have the detailed design of the RESP completed by late 2025/early 2026 to inform the next electricity distribution price controls that commence in 2028.
Figure 2 Proposed boundary for England, following the transport for England boundaries (Ofgem, 2023c)
References
[1] The Future of Local Energy Institutions and Governance (Ofgem, 2022) , Future Systems and Network Regulation (FSNR) (Ofgem, 2023b) The Future of Distributed Flexibility (Ofgem, 2023c) and the Review of Market Arrangements (REMA) (DESNeZ & BEIS, 2022)
[2] https://ukerc.ac.uk/publications/ofgem-call-for-input-future-of-local-energy-institutions-and-governance/
https://ukerc.ac.uk/publications/ofgem-future-local-energy-institutions/
[3] The Ofgem consultation also covered other elements regarding distribution markets and network operations but these are not discussed in this blog
[4] The FSO is a new, independent body to be established in 2024 that will take over responsibilities from the National Grid Electricity System Operator (NGESO). The FSO will develop a whole system approach to electricity system operation and gas and electricity system planning, and to advise government and the regulator on strategic choices for achieving net zero (Ofgem & BEIS, 2022).
[5] As regulated monopolies, GB’s energy networks are awarded a revenue allowance for an upcoming price control period, currently five years, known as RIIO (Revenue = Innovation + Incentives + Outputs – companies earn revenue by using innovation to achieve incentives across a range of outputs). The amount of money awarded to the network company is decided through a price control process whereby the companies submit a business plan to Ofgem that contains their projected costs to operate and maintain the business and to meet outputs set by Ofgem for the upcoming period. The design stage provides the framework for the business plans that the companies will need to follow.
Collins, A., & Walker, A. (2023). POSTnote 703 Local area energy planning: achieving net zero locally. https://doi.org/10.58248/PN703
DESNeZ, & BEIS. (2022). Review of electricity market arrangements. https://www.gov.uk/government/consultations/review-of-electricity-market-arrangements
Ofgem. (2022). Call for Input: Future of local energy institutions and governance.
Ofgem. (2023a). Consultation: Future of local energy institutions and governance. www.ofgem.gov.uk.
Ofgem. (2023b). Consultation on frameworks for future systems and network regulation: enabling an energy system for the future.
Ofgem. (2023c). Decision: Future of local energy institutions and governance. www.ofgem.gov.uk.
Ofgem. (2023d). The Future of Distributed Flexibility: Call for input. https://doi.org/10.1201/9781003160496-8
Ofgem, & BEIS. (2022). Future System Operator: Government and Ofgem’s response to consultation.
Poulter, H., & Bolton, R. (2023, September 20). Demand Uncertainty on Low Voltage Distribution Networks: Analysing the Use of Distribution Future Energy Scenarios (DFES) in Network Company Business Plans. British Institute of Energy Economics. biee.org/resources