Two further themes emerged from the evidence presented to the Committee, which were not reflected in the Committee’s report: concerns over Ofgem’s lack of accountability and its competence.
Time and again respondents raised the issue of accountability and a lack of clarity on the various roles of Ofgem, BEIS, Parliament and the Energy Ombudsman, and that there was often book passing between Ofgem and BEIS. Technically, Ofgem is accountable to Parliament, but it was pointed out in the evidence that Ofgem’s management is not called to explain its actions, or the trade-offs involved in its decision-making by any Parliamentary committees.
In their submission, Phil Burns and Mike Huggins, directors of Frontier Economics point out that RIIO-2 is a radical departure from the approach to network price controls taken since privatisation, significantly reducing the incentives and increasing regulatory micro-management, which in their view will result in higher prices to consumers. This “significant policy shift” has not, in their view, been adequately scrutinised from a public policy perspective and they call for the Competition & Markets Authority to have some oversight role on the basis that it is possibly the only agency with the necessary expertise.
“Under Ofgem’s new approach, large swathes of the networks’ plans will be locked down for the duration of the price control, with little scope for reward if they depart from them efficiently, and material risk of clawback and further penalty…This approach carries high risks of creeping inefficiency pushing cup customers’ bills over the next 30 years. Even if the inefficiency cost is “only” 10%, that is still £40 billion that customers will have to pay for,”
– Phil Burns and Mike Huggins, directors of Frontier Economics
Electricity North West suggested that Ofgem should produce an annual transparency report outlining how it has gone about discharging its duties and powers, which would include discussion of how conflicts and trade-offs have been managed.
Centrica agreed that regulatory decisions should be open to robust scrutiny by bodies with the expertise and resources to review them. It also expresses concerns that in practice BEIS has increasingly interfered in competition issues that should be the remit of Ofgem, and that the large number of joint BEIS/Ofgem reviews make it unclear how regulatory policy is being developed and where responsibility lies. The now withdrawn collective switching proposals were cited as an example of the Government usurping role of economic regulator. The Global Warming Policy Forum believes that Ofgem is tying itself too closely to Government policy and is losing its ability to remain politically neutral and protect consumers.
Many respondents complained that the relationship between Ofgem / BEIS / Parliament is not clear. The Energy Intensive Users Group stated that accountability is “opaque at best” and that while Ofgem presents an Annual Statement to Parliament there does not seem to be any Select Committee hearing or similar where MPs question Ofgem on the rationale and impact of the choices made in the delivery of its duties. SSE said that at times it is unclear which of BEIS and Ofgem is responsible for a specific area of policy development and that there is a blurring of responsibilities. This was echoed by Sustainability First which pointed to a lack of clarity on the responsibilities of Ofgem and BEIS for example on affordability issues in network charging, where Ofgem said mitigation actions were for the Government while the Government said Ofgem was responsible for network charging.
The Mineral Products Association believes that Ofgem and BEIS fail to consider how new policies add to the cumulative burden of energy and climate policy costs faced by energy intensive industries, and the potential for carbon leakage. It believes there should be greater scrutiny and transparency in Ofgem’s decisions including Parliamentary scrutiny; “the process regarding Ofgem’s accountability is very unclear and MPA is unsure how or who ensures that Ofgem is conducting all its duties appropriately and meeting its responsibilities”. Wales & West Utilities said that it is difficult for affected parties to understand how Ofgem’s duties have been balanced which makes it hard to challenge its decisions.
Several respondents were also critical of Ofgem’s approach to carrying out its duties. The Committee identified regulatory failures in its approach to the retail market, but evidence was presented of failings in other areas.
The Independent Renewable Energy Generators Group expressed concerns over Ofgem’s abilities to carry out its duties effectively, particularly in relation to assessing the impact its reforms have on investor confidence saying its “modelling is based on unrealistic assumptions about future technology mixes, which do not represent reasonable outcomes based on the current GB policy mix. Furthermore, their modelling does not factor in additional system balancing costs that their reforms will incur, meaning that the overall impact of their reforms is a significantly negative on a system-wide basis and consumer benefits will be lower that claimed [sic].”
Solar Energy UK raised concerns over Ofgem’s approach to administration of the Renewables Obligation (“RO”) and Feed-in-Tariff (“FiT”) schemes, saying its members complain of “a vague, inconsistent and protracted [RO/FiT] auditing process which, in some circumstances, has resulted in the suspension of payments based on the absence of evidence, which is either unsuitable for the given site, or is in no way related to determining whether a site was “commissioned” or “capable of export” under scheme guidance”. It said its members have reported a significant increase in number of Ofgem audits and time and cost of compliance with audit requests: on average Ofgem’s auditing process costs over £50,000 per site and 2 full-time equivalent staff over an 18-month period. The average time taken is 89 weeks from receipt of audit letter to confirmation of completion.
“The combination of costs, delays, lack of transparency and inconsistency has caused considerable uncertainty for the industry and could make it more difficult to secure finance and complete future transactions. The audits process as it stands has a profound impact on the confidence that shareholders and investors have in the renewables sector,”
– Solar Energy UK
Southern Gas Networks stated that Ofgem’s regression-based approach to assessing costs is flawed in that it only considers costs on a comparable basis according to workload which disincentivises activities outside the workloads in the model, and discourages higher quality but higher cost actions since that deviate from the industry from the average. It also believes Ofgem should strengthen its in-house technical capabilities to reduce reliance on external advisors.
There were also concerns over the reduced importance of incentives in RIIO-2. Scottish Power describes this as “unfortunate” saying that Ofgem’s focus on “introducing new and untested competition models into offshore networks, with limited evidence of consumer benefits, is creating additional regulatory uncertainty and weakening incentives for the large amount of network and generation investment required”. Several network operators also complained about a lack of clarity on consumer inputs to the price control, with consumer evidence from network companies often being disregarded. Wales & West Utilities suggested that Ofgem should do its own consumer engagement since it currently carries out very limited direct consumer feedback exercises.
Several respondents criticised the network charging reforms, both in terms of the slow pace and the content with extensive criticisms of TNUoS particularly from renewable generators. RenewableUK claims that the Targeted Charging Review impact assessment was flawed as it did not take into account the costs of carbon and need to meet net zero. Had these been properly included, the impact on consumers would go from savings of £113 million under Ofgem’s analysis to costs of up to £333 million. Of Ofgem’s review into forward-looking charging, Fred Olsen said:
“the supporting quantitative assessment contains some notable flaws: assumes a fixed exogenous deployment of generation, that government support will be exactly regionally and technologically tailored to offset generators’ revenue losses, and misapplies the existing network charging methodology to claim a carbon emissions reduction. The result is a proposed decision which may be in fact a net systemic disbenefit, and increase net carbon emissions, but does offer a distributional albeit short-term gain for consumers at the expense of generators.”
Several respondents say Ofgem fails to understand the different needs of different customers, and different types of vulnerability both for domestic users and energy intensive industries (“EIIs”). The Mineral Products Association complained that Ofgem has been unable to provide the analysis EIIs need to understand the impact of regulatory proposals preventing them from engaging fully with proposals until changes are finalised. The Energy Intensive Users Group said that EIIs are not given enough attention in regulatory policy and decision making and that “the current regulatory approach may help partly explain why UK EIIs have faced the highest energy prices in Europe for several years. The price disparity provides evidence that Ofgem has to date not addressed the needs of UK EIIs to remain competitive against near neighbour economies”. Sustainability First complained that Ofgem’s impact assessment on EV charging connections failed to explore the impact on fuel poor consumers who will pay disproportionately for the proposed changes – those in fuel poverty have lower levels of car ownership and are therefore less likely to benefit from charging infrastructure although they will still have to pay for it.
Multiple respondents also complained that Ofgem’s regulatory processes are too slow. EDF states that the regulatory framework has not always kept pace with changes in technology and markets, and that Ofgem will need more resources and more effective prioritisation going forwards. The Energy Intensive Users Group says that the time taken for decision making is “incompatible with the speed of change required” citing the Significant Code Review which was launched in December 2018 and is still not completed. At the same time, there was criticism over a lack of complete and thorough impact assessments in some areas. SSE said that new policies are being introduced without enough consideration of the impact on security of supply and reliability.
There was extensive criticism of Ofgem’s approach to retail market regulation. Energy UK says that the retail market in need of reform – average profits in recent years of -1.4% undermine the viability of investment in research and development, and that Ofgem must develop a robust competitive market. Ofgem also needs to apply learnings from sandboxes to rest of market to reduce barriers to changes in business models. It also criticised Ofgem’s reluctance to deliver full and considered impact assessments relating to some decisions which further undermines investor confidence. Centrica echoed these concerns, saying that retail regulation had created a structurally loss-making situation that inhibits the delivery of net zero.
“The quality of Ofgem’s decision making and effectiveness is mixed, especially where is [sic] comes to consideration of the needs of future customers, as opposed to current. Because of this, Ofgem has notably failed to address the structural lack of profitability in the retail market. Also slow pace of policy development has led to prolonged uncertainty, leading cautious investors to bide their time until uncertainty reduces. Ofgem has been slow to address irresponsible business practices…the market is littered with business failures,”
Citizens Advice recently published a critical report that highlighted failures of both regulation and supervision. In its evidence to the enquiry the consumer group said that Ofgem needs to properly resource its compliance and enforcement teams to be effective saying that in the recent past it has been slow to tackle issues, not been transparent enough and not prioritised appropriately, leading to greater customer detriment. It also believes Ofgem could be more proactive but is too afraid of legal challenge, saying that Ofgem could have capped energy prices without legislation but was reluctant to, something the Government acknowledged when it brought forth the cap legislation.
“Given the much higher barriers to passing new legislation compared to altering energy licences, it will be important that Ofgem is quick to act and culturally willing to take difficult decisions rather than deferring them to Parliament, as we transition to net zero,”
– Citizens Advice