Memorandum 44
Submission from Ofgem
1. Ofgem welcomes the Science and Technology
Committee's inquiry into renewable energy-generation technologies,
particularly given our own commitment to promoting sustainable
development in the energy sector. This memorandum sets out Ofgem's
role and our response to those questions in the call for evidence
which relate to our work and expertise.
THE ROLE
OF OFGEM
2. Ofgem is the regulator of the gas and
electricity industries in Britain. Our principal objective is
to protect the interests of present and future gas and electricity
consumers.
We do this by promoting competition, wherever appropriate,
and regulating the monopoly companies which run the gas and electricity
networks. Other priorities include helping to secure Britain's
energy supplies and contributing to the drive to combat climate
change. Our work on sustainability includes helping the gas and
electricity sectors to achieve environmental improvements as efficiently
as possible, and taking account of the needs of vulnerable
customers: particularly older people, those with disabilities
and those on low incomes.
A STABLE REGULATORY
REGIME
3. Our first task in promoting renewables
is to create a stable regulatory regime that gives investors the
confidence to deploy capital into the sector.
— Markets: Both the wholesale and retail
markets are fully open up to competition. This means investors
are able to choose openly which technologies they wish to support.
The Government provides incentives to invest in renewable technologies
through the Renewables Obligation. Our role is to administer these
arrangements.
— Networks: The electricity networks,
in particular, have a large role to play in making sure that renewable
technologies are able to get their power to market. Our regulation
of these networks means we have a low cost of capital combined
with a strong growth in capital expenditure—so customers
get a modern reliable system at a competitive price. Ofgem has
sought to be innovative on research and development whilst at
the same time providing continuity and stability for those both
participating and investing in the utility networks business.
Since 1990, the regulatory structures, based on incentives and
comparability, resulted in impressive efficiency gains while also
raising the quality of service.
4. The remainder of this response focuses
on our role in network regulation because of its importance in
the transition to a lower carbon economy.
RENEWING BRITAIN'S
ENERGY NETWORKS
5. The need to renew Britain's energy networks
in order to connect more renewable generation and maintain the
reliability of the networks represents an ongoing challenge. Ofgem
has shown its determination to meet the challenge by increasing
capital expenditure by 50 per cent in the 2004 electricity distribution
networks review and by 100 per cent for transmission networks
in 2006.
6. In December 2004 Ofgem approved some £560m
of investment in the Scottish transmission system to connect renewable
generation in response to growing demand for connections driven
by the Government's renewables policies. In the 2007-2012 transmission
price control review we approved nearly £5 billion of investment
to renew Britain's electricity and gas infrastructure to meet
new demands from gas imports and renewables connections.
7. Our goal has been to enable timely efficient
investment and to ensure that lack of investment does not present
a barrier to new connections. As we know, planning issues have
presented a major block to bringing new projects on stream and
we particularly welcome the measures in the Government's Energy
White Paper to address the planning regime. As well as enabling
significant network investment, we are also leading work to review
access to the transmission system with specific measures in train
to manage the effects of the `BETTA queue'. A longer term strategy
for reform of the access regime is due for presentation to the
Ofgem Authority and the Secretary of State in May 2008.
8. In setting the electricity distribution
price control two years ago for the period 2005-2010, we also
allowed a major investment of £5.7 billion, an increase of
48 per cent, in the development of local electricity networks.
In addition we put in place the DGI, IFI and RPZs described below,
all of which were designed to reward generation connections at
the distribution level—principally renewables—and
to encourage innovation in network development.
9. Building on the price reviews work we
led with the DTI the Distributed Generation review and are now
leading work to deliver the four stage package of measures agreed,
including a review of the licensing and market arrangements as
they apply to distributed generation.
PROMOTING RESEARCH
AND DEVELOPMENT
10. During the 1990s there was a decline
in R&D activity in the energy sector. This was perhaps not
to be unexpected as the networks did not face such fundamental
technical challenges in the early years following privatisation.
This situation has changed recently, prompted by increasing asset
renewal and the challenging requirement for networks to accommodate
low carbon energy sources.
11. Ofgem has introduced new regulatory
incentives to encourage the companies in innovation with a particular
emphasis on sustainability. In setting the electricity distribution
price control for 2005-2010 we initiated new incentives (Distributed
Generation Incentive, Registered Power Zones and the Innovation
Funding Incentive for distribution companies to reward generation
connections—principally renewables—and to encourage
innovation in network development). In addition, we significantly
strengthened incentives to reduce distribution losses, partly
due to consideration of the carbon benefits of loss reduction,
and committed to an additional mechanism to provide funding
for selected network undergrounding in areas of outstanding natural
beauty.
12. With some two years experience, the
effectiveness of the IFI has been marked and R&D expenditure
has already returned to greater than 1990 levels. In the 2006
transmission price reviews we continued this approach to IFI and
gave support to some major state-of-the-art capital projects eg
the Dewar Place substation development in the heart of Edinburgh.
In addition, RPZs have brought forward a number of imaginative
new technology projects in the field for facilitating the connection
of distributed generation from low-carbon sources. Furthermore,
the local gas network price review of 2007 has also asked for
consultation on this topic. By adopting this approach Ofgem has
been able to introduce more innovation without losing the credibility
that has accompanied the RPI-X methodology.
13. We are happy to provide any further
information that the Committee may find helpful in the course
of its inquiry.
July 2007
| 
