2022/23 Forward Work Programme Consultation
Consultation
- Upcoming
- Open
- Closed (awaiting decision)
- Closed (with decision)
- Publication date
- Closed date
- Industry sector
- Distribution Network
- Generation and Wholesale Market
- Offshore Transmission Network
- Supply and Retail Market
- Transmission Network
- Scheme name
- ALL
- Decision
Contents
- Foreword and introduction from our Chief Executive
- Who we are and our objective
- How to respond to the consultation
- Context for our Forward Work Programme consultation
- Point 1: Enduring Priorities
- Point 2: Strategic Change Programmes
- Point 3: Future of Retail
- Point 4: Low Carbon Infrastructure
- Point 5: Full Chain Flexibility
- Point 6: Data and Digitalisation
- Point 7: Energy Systems Governance
- Point 8: Transforming Ofgem
- Point 9: Reducing Burdens
- Point 10: Estimated Expenditure
Foreword and introduction from our Chief Executive
The recent changes we have seen in the energy market, driven by the record increase in global gas prices has put customers and energy companies under huge strain.
Our priority has always been to protect customers through this difficult period. Through the processes that we have in place, we have ensured that over 4.1 million customers whose suppliers exited the market have stayed on supply and the credit balances of domestic customers have been protected. We have also ensured that suppliers continue complying with their licence obligations and continue providing support to their most vulnerable consumers. I want to thank the industry, Governments and NGOs for the way we have worked together through the extreme and challenging changes we have seen in the energy market.
Such challenging times require action. We are already taking immediate action to make the retail energy market more resilient. In mid-December, we published a package of retail market reforms, including proposed changes to how we set the Price Cap - so it more closely matches the costs suppliers face - especially from volatile wholesale energy prices. It also sets out proposals to bring greater financial resilience and tighter controls to the retail market, including through new licence conditions for suppliers, to ensure they pursue financially sustainable business models. This work will continue during the remainder of 2021/22, with initial changes to the Price Cap taking effect from 1 April 2022.
This proposed Forward Work Programme for 2022/23 builds on these initial reforms. Now more than ever, in the light of the recent challenges and the rapid changes that the transition to net zero will entail, it is critical that we have a clear vision for the future of the retail market and how to get there. This consultation sets out how our ‘Future of Retail’ Strategic Change Programme - one of our five Strategic Change Programmes we set out in December last year - proposes to deliver this.
The unprecedented rise in global gas prices also shows that we need to go further and faster in pursuing the country’s climate goals and in diversifying our energy supply, to protect ourselves from similar future price shocks. The November CoP26 climate summit in Glasgow focused on action to deliver existing commitments to reduce carbon emissions. Ofgem is equally focused on delivering the UK and devolved government’s’ net zero targets. This Forward Work Programme consultation sets out how we aim to support the transition. We plan to publish an ‘Energy Transition’ roadmap in early 2022, setting out the action that we and the industry need to take over the next decade to ensure that we remain on track to hit net zero by 2050.
At Ofgem, we are also changing how we work, and the transformation of the organisation to make ourselves more agile, responsive and bring in new skills continues this year.
Finally, I would like to remind you that this is a consultation on a statement of intent for our activities in 2022/23. The scale of the challenges in 2022 means that we will need to keep our work programme flexible and responsive, and feedback from stakeholders will help to inform the 2022/23 work programme we publish in late March. I look forward to receiving your views and working with you over the coming year as we seek to build an affordable, cleaner and more resilient energy system for all customers.
Jonathan Brearley
Ofgem Chief Executive
Who we are and our objective
The Gas and Electricity Markets Authority (the ‘Authority’), consists of non-executive and executive members and a non-executive chair, and operates through the Office of Gas and Electricity Markets (‘Ofgem’), which is a non-ministerial government department. In this consultation, the terms Ofgem and the Authority are used interchangeably.
The Authority determines strategic direction, sets policy priorities and makes decisions on a wide range of regulatory issues, including price controls and enforcement.
Our objective is to protect consumers’ interests now and in the future by working to deliver a greener, fairer energy system. We do this by:
- Working with governments, industry and consumer groups to deliver a net zero economy, at lowest cost to consumers
- Stamping out sharp and bad practice, ensuring fair treatment for all consumers, especially the vulnerable
- Enabling competition and innovation, which drives down prices and results in new products and services for consumers.
How to respond to the consultation
In the sections below, we have set out our emerging thinking on the activities we believe that we should prioritise in the coming year. This draft Forward Work Programme represents a statement of intent and is subject to change, to reflect current and new challenges. We welcome your views on the rapidly changing energy market and the activities that we have proposed to address the challenges in 2022/23, as we plan for an affordable, cleaner and more resilient energy system.
As we respond to the effect that rising wholesale energy prices have had on the energy market in 2021, we will continue to focus on these and other risks and changes in the energy market, in order to protect the interests of consumers. Throughout this consultation period, we will draw on stakeholder feedback to inform where our resources are best deployed in the interests of consumers, before we confirm our headline programme of work for 2022/23. As such, we will continue to be flexible and responsive as we plan our activities; an approach that we will continue to apply as we enter the new financial year in April 2022.
Please respond to this consultation by emailing your response to FWP@Ofgem.gov.uk by 09:00, Monday, 28 February 2022. Unless you ask us not to, we will publish all responses on our website. A final version of our 2022/23 Forward Work Programme will be published by 31 March 2021.
Context for our Forward Work Programme consultation
Our principal objective is to protect the interests of existing and future consumers. During the remainder of 2021/22 and looking ahead to 2022/23, we will continue to deliver this objective against the backdrop of two main challenges: ensuring energy market resilience and supporting the delivery of net zero.
Rising wholesale energy prices and regulatory and consumer implications
In recent months, the energy retail sector has experienced significant challenges, with multiple market exits and ongoing supplier volatility. This situation resulted from a combination of sustained high, gas prices, and supplier losses linked to under capitalisation and price volatility. During the remainder of 2021/22, we will be focused on stabilising the retail market situation, continuing to protect consumers and taking steps to restore confidence.
This will involve three main planks of activity:
- Evaluating and preparing to implement changes to the Price Cap
- Looking to make the best use of existing licence conditions to protect consumers, and introducing new licence conditions to help address market weaknesses, and
- Considering how best to support vulnerable consumers, those consumers experiencing affordability issues and those suppliers experiencing continued financial difficulties.
These activities are set out in more detail in the ‘Building energy market resilience’ package issued on 15 December 2021: Adapting the price cap methodology for resilience in volatile markets
Looking ahead to 2022/23, our activities will address market reforms (to reduce risks and costs of exit) and transformation of the retail market to ensure consumers are protected and a supply market remains viable on the path to net zero. The ‘Future of Retail’ section of this consultation expands on this, and we will bring forward more detailed plans in due course.
This urgent need to respond to energy price volatility and retail sector resilience will need to be delivered alongside our day-to-day work and planned activities. As set out above, this consultation on our 2022/23 work programme should be seen as a statement of intent, and subject to change as we remain responsive to current and ongoing challenges.
Our role in delivering net zero
The 2020 Energy White Paper and the 2021 Net Zero Strategy set out government’s plans to cut emissions and deliver new, green opportunities and investments across the economy, with a focus on heat, buildings, power and industry. We are actively engaging with the UK and devolved governments on these areas to ensure our planned activities and strategy are well aligned to government’s vision for our role in delivering many important elements of net zero. An example of this is the Regulatory Energy Transition Accelerator, a collaboration with the International Renewable Energy Agency (IRENA) and the World Bank, which aims to help regulators around the world accelerate the transition from fossil fuels to clean energy at the lowest cost.
Our work programme will continue to evolve as we engage with government and develop our role in delivering net zero. Our Strategic Narrative, which was developed in 2019 with a focus on how to enable decarbonisation while protecting the interests of consumers, sets out our three strategic goals, which have been translated into strategic change programmes. Our view is that this Strategic Framework – with its five Strategic Change Programmes and set of Enduring Priorities - provides a robust structure for us to organise and deliver our evolving net zero priorities. We also believe this structure will support our ongoing response to the urgent retail situation. We set out the proposed activities under our five Strategic Change Programmes and Enduring Priorities in subsequent sections.
We will closely monitor developments with the planned Strategy and Policy Statement (SPS)1, which will enable Ofgem and the Department for Business, Energy and Industrial Strategy (BEIS) to ensure that our planned activities are well aligned.
This year, we will further enhance our change programmes by explicitly incorporating some of the longer-term changes that we think are needed to achieve net zero at least cost. We plan to set out further thinking on Ofgem's role in the energy transition in 2022.
[1] If the SPS is published in advance of 31 March 2022, we will reflect its content in our final work programme. If it is published later in 2022, we will update our work programme accordingly during the year and alert stakeholders
Point 1: Enduring Priorities
A critical part of our Strategic Framework, our Enduring Priorities – which run throughout the delivery year – comprise (1) our core regulatory functions to regulate the sector and protect the interest of consumers and (2) the delivery of current and new government schemes to support vulnerable consumers and advance decarbonisation.
1 - Core Regulatory Functions
Turning first to our core regulatory functions, we will continue to deliver excellence in our core and statutory roles, protecting the interests of consumers while delivering our activities as cost-effectively as possible. We set out below a summary of the functions we plan to deliver in 2022/23, alongside the associated consumer outcomes and objectives:
[2] REMIT is Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency, which is a mechanism for reporting and preventing wholesale energy market abuse, in force since 28 December 2011
2 - Delivering Environmental and Social Schemes for Government
Ofgem administers a range of environmental and social schemes on behalf of government and for the devolved administrations, which collectively are worth over £9 billion per-annum. Our schemes fall into three main categories – renewable electricity schemes, renewable heat schemes and energy efficiency and social schemes.
2022/23 will again be a key year for heat decarbonisation schemes. While the Renewable Heat Incentive schemes are now closed or will shortly close to new participants, we have worked with BEIS to implement new schemes in this area. We recently launched the Green Gas Support Scheme and will implement its supporting Green Gas Levy. The Boiler Upgrade Scheme is due to be launched in Spring 2022. This will see the launch of the first grant-based scheme that we will administer. The Green Gas Levy sees the cost of decarbonisation placed onto licensed fossil fuel suppliers, rather than added onto electricity bills, as has been the case for previous schemes.
Decarbonisation of heat is central to our Low Carbon Infrastructure strategic change programme, which has the earliest, lowest-cost decarbonisation of energy systems as a central driver. Heat schemes are an important part of the Government’s plan to drive decarbonisation of heat and links to other parts of our work programme, including:
- the Boiler Upgrade Scheme
- enabling upgrades to distribution (including in off gas grid areas through adaptive price controls, to prepare for decarbonisation of heat)
- considering roles for Distribution System Operators and others in local energy planning, and
- innovation funding both on smart heating and hydrogen.
More broadly, we will continue to work actively with government and the devolved governments to develop new schemes within our areas of expertise, including the next phase of the Energy Company Obligation and the updated Warm Home Discount scheme. We will work on a programme to strengthen our scheme systems, improving delivery and efficiency over the coming years. We will also work to engage with the schemes’ key stakeholders to provide clarity as these new schemes bed in.
All of the government schemes that we administer support our five strategic change programmes, most notably through our drive towards decarbonisation:
- Renewable Electricity Schemes - These schemes have laid the foundation to deliver the transition towards low carbon infrastructure. Moving forward, they will continue to support renewable generation, ranging from domestic solar panels to the largest windfarms.
- Renewable Heat Schemes - These schemes have supported early adopters of technologies like heat pumps and biogas injection, and have moved the UK towards lower carbon energy networks.
- Energy Efficiency and Social Schemes - These schemes provide direct support for vulnerable consumers and energy efficiency measures, which reduce the amount of energy generation needed. They also provide routes for innovation for new technologies and monitoring systems to be trialled.
One of our key drivers across all these schemes is to ensure that public funds are protected. To that end, we employ data-driven statistical and targeted auditing to ensure that participants in the schemes comply with the rules that are set out in legislation. This is managed through our hub model, which provides functional expertise for delivery, assurance and policy and engagement.
Point 2: Strategic Change Programmes
Point 3: Future of Retail
Over the last few months, the unprecedented and unexpected rise in wholesale energy prices has placed enormous strain on the retail market. We have been working with government, industry, and consumer representatives to protect consumers' interests during this time. Specifically, we have:
- Ensured that customers have been protected if their suppliers have exited the market
- Consulted on updating the Price Cap methodology
- Reemphasised our expectation that suppliers must continue to comply with their licence obligations
- Taken steps to ensure that energy suppliers pursue financially sustainable business models.
We believe that these steps will make a material difference to reducing the risks facing energy consumers. In light of the recent challenges in the energy market, now more than ever it is critical that we have a clear vision for the future of the retail market and how to get there. Looking beyond the current situation, the energy market is likely to undergo rapid change in the next few years. Decarbonisation of heat and transport will fundamentally transform how some consumers use energy. Digitalisation of the energy sector, better access to data and new technologies will also drive the development of new, innovative products and services, which will radically change how some consumers engage with their energy use. We will continue develop our organisational and regulatory approach to keep pace with data and digital transformation taking place across the sector.
Our ‘Future of Retail’ strategic change programme aims to identify what reforms are required to best deliver net zero, and our vision for consumers, at the same time as protecting consumers and providing them with a safe, reliable source of energy. Specifically, we want to deliver a retail market that will:
- Deliver fair prices for consumers
- Support the transition to net zero at lowest cost
- Provide effective protection for consumers, in particular for those in vulnerable situations.
Recognising the market situation remains volatile, we stand ready to respond to emerging issues and priorities and anticipate the following new and continuing activities in 2022/23, under this strategic change programme:
[3] Ofgem, November 2021 https://www.ofgem.gov.uk/publications/renewables-obligation-202021-mutualisation
Point 4: Low Carbon Infrastructure
The transition to net zero requires a major transformation of the energy sector: the continued decarbonisation of power; the electrification of most surface transport; and the moving to low carbon energy sources for heating our homes and workplaces. In some areas, there is broad consensus on the direction of travel – for example, the accelerating deployment of renewable power and electric vehicles. However, there remains some uncertainty on key questions such as the role of hydrogen in heat, and how much nuclear power and carbon capture, usage and storage (CCUS) will be needed.
Through our ‘Low Carbon Infrastructure’ strategic change programme, we will ensure that the necessary enablers are in place to facilitate a more coordinated approach to the transition of GB’s network infrastructure for net zero. We will play an active role in ensuring efficient investment in the networks, while keeping costs to consumers as low as possible.
Our ‘Low Carbon Infrastructure’ strategic change programme addresses three key strategic themes:
- Network planning - Ensuring there is a system-wide strategic network plan in place, which forms the basis for strategic needs cases for investment in network infrastructure and guides decisions on capacity and location of interconnectors.
- Network investment and disinvestment - Delivering necessary investment at best value-for-money for consumers, to deliver high levels of network reliability while meeting new sources of demand and managing the impacts of climate change. We will continue to do this through competition, where possible, and, where not, using an efficient regulatory model (e.g. price control or the cap and floor regime).
- Enabling new technologies - Enabling new technologies that could lower the cost of the net zero transition for consumers in the future. This includes providing funding for innovation in network technology and evidence development on hydrogen; and developing new regulatory models for CCUS and new nuclear generation infrastructure.
Point 5: Full Chain Flexibility
A smart and flexible energy system is essential to hitting the UK’s net zero climate goals, while keeping energy bills affordable for everyone. Being smart and flexible in how we generate, use and store energy will support the decarbonisation of power, heat, transport and industry sectors.
As we change the way we fuel our cars and heat our homes, demand for electricity will increase from millions of new electric vehicles and heat pumps. Being more flexible in when we use electricity will help avoid the need to build new generating and grid capacity to meet this demand, resulting in significant savings on energy bills, estimated as up to £10 billion per year to 2050. Consumers will be able to play an active role, taking up new tariffs and smart appliances like smart electric vehicle chargers, so they can save money by using electricity at cheaper times.
In summer 2021, Ofgem and BEIS published the Smart Systems and Flexibility Plan 2 (SSFP) setting out a vision, analysis and work programme for delivering a smart and flexible electricity system that will underpin our energy security and the transition to net zero. The ‘Full Chain Flexibility’ strategic change programme encompasses Ofgem’s actions from the SSFP.
The Plan sets out reforms to:
- Removing barriers to flexibility on the grid for storage and interconnectors
- The markets and signals needed to bring forward and reward flexibility
- How we facilitate flexibility from consumers (including products, tariffs and how we regulate smart appliances load controllers)
- The data and digital architecture required to underpin planning and markets (including greater network visibility and monitoring, cyber and data privacy).
BEIS and Ofgem are currently working on refreshing the Smart Systems Forum, which we expect to reconvene in early 2022.
Point 6: Data and Digitalisation
The energy transition will continue to drive increasing complexity as the number of energy markets, assets, services and market participants proliferate, and the need for clear communication and data sharing grows. The smart creation, collection, sharing and use of energy system data is fundamental to managing this complexity, and for unlocking new services and value for all energy stakeholders, including improved consumer protection.
The associated digital infrastructure services also need to integrate with equivalent data and services from other sectors. This will enhance opportunities for new and emerging markets, improve consumer protection and facilitate the visibility and coordination of economy-wide efforts to deliver decarbonisation.
Ofgem is simultaneously an instigator, proponent and beneficiary of data transformation. As well as encouraging cross-industry energy data transformation, we are specifically driving this agenda through the work programmes of our regulated entities and have committed to using and sharing data effectively as a core component of our operations and regulatory decisions.
In particular, the objectives of this strategic change programme are for Ofgem to provide leadership and collaboration to deliver the scale of change required for the energy sector to deliver net zero. We will:
- Seek increased and more robust data sharing, enabling new and more efficient markets, and better investment and regulatory decisions
- Enable data to be more visible, secure, accessible, and interoperable for the benefit of market participants and consumers
- Continue to enhance Ofgem’s data and digital capability through:
- Effective regulation for a changing energy market, with increased use of digital tools and data science
- Building the foundations for the use of advanced analytics to conduct regulatory-focused predictive market analysis.
Ultimately, this will reduce the overall operational friction in the use and management of data and lower the barriers to enable innovation that meets the needs of a net zero economy.
Point 7: Energy Systems Governance
As the energy system undergoes an unprecedented transition, it is right to take a fresh look at the institutional and governance structures – including Ofgem’s own role – and consider whether those structures remain fit-for-purpose.
To facilitate the transition to a more flexible, data-enabled, net zero energy system, we believe that there is a case for stronger strategic oversight and better whole system coordination, which will likely require changes to existing governance procedures, codes, standards and licensing arrangements. We also welcome the UK government’s intention to provide a Strategic Policy Statement for Ofgem, which along with any forthcoming legislation, will set out the government’s energy policy priorities of relevance to Ofgem. We also look forward to working with the Energy Digitalisation Taskforce and BEIS to determine how best to reflect their recommendations in our work, where relevant.
While we note that these questions are primarily for government, Ofgem has a role to play in contributing to the debate in our role as the independent regulator, and in delivering and/or overseeing some elements of organisational change. We continue to work alongside BEIS on policy development for key projects, such as reviewing energy codes and their governance arrangements – which we consulted jointly on with BEIS in July 2021 – and following our review of GB System Operation in January 2021, which recommended an independent system operator, we consulted alongside BEIS (in July 2021) on proposals for an expert and impartial Future System Operator (FSO). Recognising the role the Electricity System Operator (the ESO) would have if there were a FSO transition, we set out in September 2021 that, as part of the next iteration of its business plans, we expected the ESO to be making the necessary preparations for potential future system operation changes.
The aims of this strategic change programme are:
- Establishing a vision for energy system governance, with a clear view of areas for potential institutional reform, grounded in the changes we are seeing across the energy system and the pursuit of our other strategic priorities, such as data and digitalisation and full chain flexibility. This includes, for example, consideration of FSO functions, including the interface between the ESO and the Distribution System Operators (DSOs), as well as DSO governance arrangements at a local level, including how local energy planning decisions are made.
- Implementing institutional and functional reforms, to reflect any recommendations from ongoing work from the Energy Codes Review.
- Continuing to ensure that Ofgem’s medium and longer-term goals drive our organisational shape and the functions we undertake, and we continue to evolve our regulatory model in a way that makes us a better fit for delivering our part of net zero and the energy transition.
Our ‘Energy Systems Governance’ strategic change programme will help shape Ofgem’s role in the energy system transition, transforming Ofgem’s capabilities to become a more adaptive regulator, that can flexibly respond to a rapidly changing energy landscape. During 2022/23, we will identify any strategic changes required relating to how we regulate, including developing new regulatory approaches related to any additional responsibilities given to us by government.
Point 8: Transforming Ofgem
Ofgem is currently undertaking a significant transformation programme with the overarching goal to ensure we are a dynamic, inclusive and high performing organisation with a strong reputation as an employer of choice. This programme of work began in 2021/22 and will continue to transform Ofgem internally into 2022/23 as we strive to be as efficient and effective as possible. The programme aims to further the following outcomes:
- Uniting behind our purpose, so we are clear what we are here to achieve, and live values to which we can sign-up
- Effective structure and governance to make better decisions, through flatter leadership, simpler governance and supporting decision-making frameworks
- Transforming how we work so our activities contribute to clear strategic goals, and we can use our resources efficiently and flexibly as priorities change
- Developing our talents so that we are an inclusive organisation that actively celebrates difference, and our people have the skills, capability and confidence to deliver
- Improving our workplace experience so our people have the equipment, tools, skills and central support they need to work collaboratively and productively.
By becoming increasingly efficient and effective in how we operate, we will be better able to deliver our strategic framework with pace and agility as we face the regulatory challenges of tomorrow’s energy market.
Point 9: Reducing Burdens
In accordance with the Regulatory Enforcement and Sanctions Act 2008, we regularly review our regulatory functions to ensure we do not impose (or allow to continue unnecessarily) undue burdens on regulated parties. We are currently reviewing our ongoing activities from 2020 and 2021 and considering what further burden reduction actions we can take in 2022/23.
Point 10: Estimated Expenditure
On 27 October 2021, the Chancellor of the Exchequer announced that Ofgem’s three-year budget submission had been approved as part of the Comprehensive Spending Review, which is presented in the table below. These numbers include ring-fenced funding for Heat Network Regulation and Carbon Capture Usage and Storage regulatory costs.
These numbers exclude separate funding requests made to BEIS for the delivery of environmental and social schemes for government, and funding for our offshore transmission operator regime, whereby Ofgem recovers costs from developers as a part of a competitive tender process.