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Tom Crisp Editor 01603 604421 [email protected] ENERGY PERSPECTIVE 02 Monday 08/10 – A report by the Intergovernmental Panel on Climate Splitting the atom: the need to Change says that limiting global warming to 1.5C would require “rapid prioritise work on the supplier hub – Nigel Cornwall and far-reaching transitions” in land, energy, industry, buildings, transport, and cities. Ofgem’s second cross-code survey on code POLICY 05 administrators’ performance shows “confidence and knowledge in CCC warns Road to Zero dealing with industry codes has increased among smaller parties”. The Strategy falls short as hybrid UK Atomic Energy Authority consults on a new £40mn thermal support cut hydraulic research and testing facility proposed for North Wales. IPCC warns world has 12 years Centrica announces that it has completed construction of two new to prevent 1.5°C rise CMA gives SSE-npower merger 50MW fast response gas power plants in Lincolnshire and unconditional approval Peterborough. OVO Energy and First Utility publish their latest annual Parliamentary update – Week 41 results, both reporting a profit. 2018 Tuesday 09/10 – The SNP’s annual conference in Glasgow, which REGULATION 11 started over the weekend, ends with Minister for Energy, Connectivity BEIS clarifies future for SMETS1 and the Islands Paul Wheelhouse predicting renewables capacity in meters Scotland could double. Ofgem opens a tender for owning the Survey says smaller parties more electricity transmission link to the 1.2GW Hornsea 1 windfarm project. It confident in dealing with codes also confirms that it has been granted an injunction compelling INDUSTRY STRUCTURE 15 npower to allow 100,000 of its customers to join its next collective National Grid says energy switch trial. supplies secure for winter Wednesday 10/10 – The Competition and Markets Authority delivers ESO kicks off new reactive power services tenders its final report into the SSE-npower merger, approving the deal without Suppliers looking for shelter in conditions. Research from the Institution of Engineering and scale and adjacent markets Technology and Nottingham Trent University finds the UK cannot NUTWOOD 20 meet climate goals without retrofitting older homes. Shell and its project partners approve the development of the Arran oil field in the Political fixers: reviewing the central North Sea. party conference season – Peter Atherton Thursday 11/10 – The Committee on Climate Change warns that the MARKETS 22 Road to Zero Strategy is insufficient to deliver the transport emissions reduction required for the Fifth Carbon Budget. But the government also removes incentives to buy the least efficient plug-in hybrid cars. Ofgem publishes its second annual State of the Energy Market Report, confirming a falling number of customers on default tariffs. Friday 12/10 – The government releases its latest tranche of papers, confirming that in the event of no Brexit deal being reached the UK would immediately leave the EU Emissions Trading System and the Internal Energy Market. North Beck Energy secures planning approval for a £220mn waste to energy facility which will generate nearly 50MW. Energy Spectrum 638 | 15/10/2018 | page 1 Last November Ofgem the focus for performance assurance and customer commenced work on protection. the shape of future In all cases, the system at the heart of these supply market trading arrangements was heavily centralised and arrangements based around complicated settlement systems and (ES595). A call for complex rules. The hub structure template remains evidence was the same today as it was in 2001, and became followed by its Nigel Cornwall national from 2005 with its roll-out to Scotland. Director response in July, with n.cornwall@cornwall- the conclusion that To complete the picture, the last decade also saw insight.com “there is a strong case the introduction of more low-carbon policy support for fundamental schemes, which required the supplier to collect reforms to be explored” to address barriers to payments from customers to pass through to other innovation, including “the entrenched role of parts of the value chain. Consequently, the traditional suppliers” (ES629). It noted specifically supplier hub also become embedded in the wider that “seeking to adapt a model put in place 20 legal and regulatory landscape (see Figure 1). years ago may not be enough”. But the electricity system has progressively Stripping back the headlines, it also signalled that decentralised, and questions have begun to arise work to support fundamental change was complex about the single pathway to the customer through and needed developing within a more explicit a deeply centralised national hub. Above all many assessment framework. It was unlikely to deliver now challenge the need for all customer proposals for early change, as it was focussing on interaction to be routed through a fully licensed the period after “temporary price protection”. It and nationally registered supplier, and Ofgem has would nevertheless also seek to take near-term concluded the hub is a primary barrier to actions to promote innovation and competition innovation. The advent of smart metering and half “apace”. hour settlement for smaller customers, and the emergence of a wide range of technologies and In this week’s Energy Perspective we focus on the potential services behind the meter, demand more entrenched role of traditional suppliers, which is flexible arrangement. short-hand for the supplier hub, and explain why the need to test other models and approaches in But for the present any party seeking to undertake the short run is a necessary step to defining an activity on significant scale has to weigh up the longer-term changes. costs and complexities of becoming a supplier itself or agree terms with an existing supplier to Safe from harm manage the market interface. Today’s supplier hub arrangements were put in Special cases place largely between 1990 and 1998. They were established progressively and gave rise to the There have been previous attempts to separately licensed electricity supplier being at the accommodate the increasing diversification across centre (hub) of the retail market in electricity (though Figure 1: Supplier hub evolution gas arrangements are based on broadly similar principles) and the single point of contact with the customer. Under it, in addition to competing for customer contracts, the supplier is responsible for paying for and billing all elements involved in delivering power to the customer, including imbalance charges from Source: Cornwall Insight 2001. The hub also became Energy Spectrum 638 | 15/10/2018 | page 2 f the system. A decade or so ago the industry and five (out of 30) were selected for evaluation for worked up options that could help smaller regulatory sandbox treatment in July 2017. A generators and suppliers to operate within the second round of expressions of interest followed market without having to become embroiled in the in October 2017. supplier hub. This resulted in the “licence-lite” To date results of only the first round have been approach introduced in 2009 whereby any entity announced, in September 2018, with three projects could apply for an electricity supply licence, but it led respectively by EDF Energy, OVO and could out-source key functions to another licensed Empowered granted formal sandbox status. supplier. This tried to mimic the gas market where Interestingly two of these centre on peer-to-peer the supplier undertakes customer-facing activities trading arrangements and as such could directly and the shipper (a role that does not exist in challenge aspects of the supplier hub model. electricity) the market facing aspects. Clearly Innovation link and the regulatory sandbox The failure of licence-lite (there are two examples it oversees is a work in progress. These do create of its use) can be explained by the need to safe environments for credible new approaches to negotiate complex arrangements with an existing be trialled in a live environment. Over two years on licensed to provide the necessary balancing and from the launch, we have yet to distil any proper compliance services. It swaps out one form of learnings, though in part it would be asking too complexity and cost for another (albeit much much to obtain hard findings from trials involving smaller). We have previously argued that, for the technology and new processes. But workshops mechanism to work, there needs to be an hosted by Ofgem have suggested it needs to build obligation on larger suppliers to offer these on the arrangements. services at reasonable terms, as well as standardised agreements to support negotiations. One specific move to enhance the arrangements has been to encourage code administrators to More recently, in 2015, Ofgem issued a discussion establish their own sandbox arrangements to paper on the benefits of, and barriers to, non- permit derogations to support innovation trials, and traditional business models (ES485). The regulator P362 Introducing BSC arrangements to facilitate concluded this work in September 2015 with a an electricity sandbox has already done this for the commitment to “publish a proposed course of Balancing and Settlement Code (BSC). Ofgem is action by the end of the year”. This work-plan also encouraging other code administrators to though did not materialise, as it ran into the follow suit, but as yet good words have yet to Competition and Markets Authority review. translate into tangible actions. One limited But the regulatory debate up to the latest Ofgem response has been the adoption of a new principle push has been addressing yesterday’s problems. in the Code Administrators Code of Practice to Since 2015 the market-place has been reinventing support innovation and innovators. itself. Contractual variants of models involving But even here there are lessons for Ofgem. Elexon “senior” and “junior” suppliers (á la licence-lite), brought forward P362 last November, but the including a myriad of small white label deals, have basis for it was agreed a while before that.

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