CMA appeal rulings show regulation of electricity market is changing for the better

Professor Phil Taylor, Director of the Newcastle University Institute for Sustainability, considers the impact of the recent ruling by the Competition and Markets Authority (CMA) on the Northern Powergrid appeal against Ofgem’s 2015-2023 electricity distribution price control. 

A new era of regulation has dawned in the energy market, following the recent CMA ruling on appeals against Ofgem’s recent price controls. The Northern Powergrid appeal is the first time a distribution network operator has appealed a judgement by Ofgem, and the CMA ruling is hugely significant. From now on, network operators and suppliers will feel more able to challenge the regulator to justify its decisions and demonstrate a strong evidence base for the approach it takes.

What is more, the judgement also demonstrates the need for a technically competent regulator. The ground for complaint that was upheld by the CMA, relates to Ofgem’s calculations of the potential savings available to Northern Powergrid and other distribution network operators through the use of smart grids and other technological innovations. At present, this remains something that is not well understood outside academia.

I have spent many years researching smart grids in both Industry and Academia, and in collaboration with Siemens we are leading in this area with our state-of-the-art Smart Grid Lab and Energy Storage Test Bed, which will be housed at Science Central in Newcastle, a demonstration centre for urban sustainability.

Smart grids have a hugely important role to play in the future of energy distribution, as they allow an intelligent approach that matches supply with demand in real time and within network constraints. However, smart grids do have limitations, and will only lead to savings if they are matched to local need both spatially and temporally.

Ofgem’s original judgement was based on many assumptions, such as that the benefits seen through use of a bespoke smart grid technique in one area, or by one operator, could be simply extrapolated out to the whole country and all operators. It had therefore significantly overestimated the savings that were available over the next eight years (the period covered by its latest price controls).

The phrase ‘smart grid’ actually refers to a whole suite of different tools and techniques that overlay real-time measurement and control on top of existing network infrastructure, enabling it to respond more flexibly to changes. The precise tools and techniques required, and the benefits they bring, will depend on the specific situation in which they are used and will only be realised when the need arises due to growth in the uptake of low carbon technologies such as renewable generation, electric vehicles and heat pumps.

The impact of smart grid technologies will also depend on how much customers engage with the energy network, for instance whether they are willing to change their habits to use energy during off-peak hours if it is made cheaper for them to do so. More research is needed on consumer behaviour, to ensure that the most effective smart grid technologies can be rolled out in the most appropriate locations.

There are also a number of regulatory constraints on the roll-out of smart grids too. Distribution network operators have a responsibility to maintain a secure supply of energy, but smart technologies are relatively new and the regulatory framework has not yet evolved to recognise the potential of non-deterministic smart solutions, such as demand side response, real time thermal ratings and energy storage devices. This limits the realisable savings that can be achieved by smart grids.

Smart grid technologies are nascent, bespoke and often not well understood, which is why I was pleased to act as an expert witness for Northern Powergrid in its appeal. I was interviewed at length by the CMA and provided them with a view of the latest advances in smart grids, and a consideration of the level of benefits that could fairly be expected to be achieved over the next eight years. It is extremely gratifying that the CMA accepted the evidence and upheld the grounds for appeal.

The judgement means that Northern Powergrid ‘s cost allowance for the period up to 2023 has been increased by £32m. The CMA’s determination will increase Northern Powergrid’s allowable revenue over the price control period by approximately £11m. Northern Powergrid have stated that they expect to have to spend every penny of this reinstated money in order to deliver a safe, secure and sustainable network for their customers.

I believe that smart grids will eventually prove to be hugely valuable to electricity networks and provide greater and greater savings out to 2030 and beyond. However, this potential will be impeded if strong technically competent regulation is not in place.

I have long been urging Government to recognise the need for a ‘system architect’ for the energy sector: an independent body that can inform technical decisions and take a holistic view of the whole energy system, to ensure the country’s future energy supply is sustainable, affordable and secure. This ruling may take us a step closer to seeing that vision realised.

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