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Report calls for “Managed Revolution” in electricity regulation to unleash the Decarbonisation Dividend and deliver value to consumers 

Amalgamate the consumer-facing essential service regulators into one Essential Service Regulator

Electricity regulation needs to be redesigned to meet the challenges and realise the Decarbonisation Dividend, according to a new report, authored by Laura Sandys former member of the Energy and Climate Change Select Committee, Dr Jeff Hardy, Senior Research Fellow at the Grantham Institute, Imperial College London and Professor Richard Green, Professor of Sustainable Energy Business at Imperial College Business School .

ReDesigning Regulation, launched in Parliament on 11th December, proposes that the impact of decarbonisation, decentralisation and digitalisation requires a managed “revolution” focusing on how the market works, what needs to be regulated and what tools the regulator should use to deliver best value for consumers.

The sector needs to “normalise” around commercial arrangements, better price discovery and more supply chain pressure to deliver better value.  The authors propose that it is re-engineered from the plug placing demand as the key driver of value within the system.  This requires a fundamental rethink of how the markets work, where supply chains can deliver better outcomes and moving away from “siloed” regulation and cost pass throughs.

The key recommendations in this report include:

  • Change what we regulate: Re-engineer the market from the plug into the system rather the top down approach of today to reflect the new values of time, location and service to the system
  • Change how we regulate: Regulate risk not process, as the future will be too multi-dimensional for the current approach to succeed.  The regulator should sit outside the sector looking in rather than aiming to conduct every dimension of an increasingly complex and diverse electricity system. A risk-based approach enables the regulator to assess where risk really lies for consumers, the market and the system and can allocate risk to those who can best manage them – with robust sanctions.
  • Provide Consumers greater protection: As we move into a more complex system of bundled products and services, amalgamate the consumer-facing parts of Ofgem, Ofwat and Ofcom into one Essential Service Regulator to manage the risks around bundled and blurred products and services.
  • Change the Supplier License to a “retailer” model: The one-size-fits-all licence is no longer fit for purpose and the report proposes an insurance-backed assurance scheme to replace today’s electricity supply licences. This allows the actual risks businesses pose to consumers to be assessed and insured against, without stifling business model innovation.
  • Supporting “vulnerability” holistically: Supporting those with specific needs or challenges needs to be amalgamated across all the essential services, developing holistic responses to the wide range of different needs stripping away all the overlapping and underlapping programmes currently sitting in utility silos.

“Tomorrow is already today and we need to ensure that we don’t bake in the costs and inefficiencies of the past into the transformed system.  We need to embark on a ‘managed’ revolution to embrace the new structure of the future of electricity. This report aims to propose regulatory actions – reimagining the market design, refocusing regulation, opening up consumer choice, and unlocking the power of supply-chain pressures while shaping a new ‘retailer’ market, said Laura Sandys,  CEO of Challenging Ideas and former Member of the Energy and Climate Change Select Committee.

“Regulation will need to look and feel very different if we are to move away from the Price Cap and more interventionists policies.  We hope that our thinking might contribute to this endeavour”

Professor Richard Green, Professor of Sustainable Energy Business at Imperial College Business School and one of the authors of the report added: “Too many electricity suppliers are leaving customers in the lurch when they go out of business.  An assurance scheme like the travel industry’s ABTA and ATOL bonds would provide protection against this disruption.”

Dr Jeff Hardy Senior Research Fellow at the Grantham Institute, Imperial College London, said: “In a decarbonised, decentralised and digitalised future there is an expectation that consumers will be more flexible and low-carbon in their energy demands, which will be a surprise to many! We need to allow electricity retailers to manage risk and complexity on behalf of the consumers who can’t or don’t want to. Our proposals show how this can be done”.

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