2022/23 Ofgem Forward Work Programme
Decision
- Dyddiad cyhoeddi
- Sector diwydiant
- Distribution Network
- Generation and Wholesale Market
- Offshore Transmission Network
- Supply and Retail Market
- Transmission Network
- Enw'r cynllun
- ALL
- Penderfyniad ar gyfer
- 2022/23 Forward Work Programme Consultation
Contents
- Foreword from our Chief Executive
- Who we are and our objective
- 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: Energy Systems Governance
- Point 7: Data and Digitalisation
- Point 8: Transforming Ofgem
- Point 9: Burden Reduction
- Point 10: Estimated Expenditure
Foreword from our Chief Executive
I have worked in the energy sector for many years, more than I care to mention. Nevertheless, I have never witnessed such extraordinary pressures on both consumers and the industry, starting with the international gas price shock last autumn, and now the horrifying events in Ukraine. Wholesale gas prices have risen by over 500% in under a year, putting the gas market and consequently the wider energy market, under unprecedented strain.
This extremely challenging external environment makes Ofgem’s primary duty, to protect the interests of consumers, even more important in the coming year. Working closely with government and industry, Ofgem has remained focused on that goal, working hard to shape a modern energy system that is cleaner and more responsive to changing demand, delivering a secure supply of electricity and gas at the least cost to consumers.
Our safety net has protected more than four million consumers, making sure that even when a supplier fails, customers are transferred to a new energy supplier with no disruption to their energy supply, and household credit balances are honoured. The price cap has also meant that consumers on their supplier’s standard variable or default tariff have been protected against unfair price rises.
Ofgem also recognises that there are lessons that need to be learnt, and that regulations that worked in the past may not be fit for purpose during such extreme and challenging changes. We have identified the need for reform in two critical areas: tighter financial regulation in the retail market, and reform of the price cap to make it more adaptable.
I want to thank the industry, government, and NGOs for the way they have worked together with Ofgem to meet these extraordinary challenges, and their feedback on what needs to change, which has helped set this reform agenda.
This Forward Work Programme for 2022/23 sets out our plan for retail market reforms, including changes to the price cap, tighter controls, and measures to improve financial resilience. These include new licence conditions relating to financial standards, stress testing, strengthened assessments at entry and growth milestones, and enhanced monitoring. Although some companies will need time to transition, we intend to bring in these reforms at pace.
Volatility in the energy market is not over. Events continue to move quickly, and it looks likely we will continue to see further consequences for consumers and financial strain for retail companies. For this reason, this Work Programme should be seen as a living document, which will need to remain flexible and responsive to future developments. We will continue to work closely with government to implement existing and forthcoming legislation, including the planned Strategy and Policy Statement.
The great strains being placed on the sector and consumers also underline the urgent need to transition away from our reliance on gas and move to cheaper, low carbon alternatives. The economics of energy has fundamentally changed, and the best way to protect consumers today is by making an even greater effort to move to a cleaner, more resilient, more affordable energy system that will protect us from price shocks tomorrow.
That is why this Work Programme details how Ofgem plans to support the UK government and the devolved administrations’ ambitious climate change targets, and ensure industry takes the action needed over the next decade to build an energy market that will support the longer-term transition to net zero at least cost to consumers. This will also change how some consumers engage with their energy use, taking advantage of new products and technologies.
We will encourage this innovation, while adapting our regulatory approach to ensure we continue to protect the interests of consumers. That means putting the right regulatory structures in place, from our work to develop a Future System Operator at a national level, changes to governance to plan and manage energy systems more effectively on behalf of consumers at a local level, to changes within Ofgem to make us more agile and responsive.
It will also mean supporting investment to begin to build the smarter and more flexible system that consumers need at a competitive cost: installing more electric vehicle charging points as we move away from petrol and diesel cars, increasing our grid capacity to power heat pumps as we transition from gas boilers, and making the grid more resilient, so it can withstand the more frequent storms we have seen this winter.
As an industry, we have a vitally important responsibility to support and protect consumers through the coming weeks, months and even possibly years in one of the most challenging markets we have seen in our history.
Working closely with the industry, government, and NGOs, I look forward to delivering our shared vision of a more diverse, cheaper, and low carbon energy system that works for consumers.
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 document, 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 principal 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.
Context for implementing our Forward Work Programme
In 2022/23, energy consumers and the sector will continue to face extraordinary pressures. We will deliver our principal objective through our work to stabilise the sector and protect consumers, while supporting government energy security proposals and delivering net zero at least cost.
Responses to our forward work programme consultation showed a high level of support for our Strategic Framework, and we will therefore continue to focus our resources on our five Strategic Change programmes – alongside our two Enduring Priorities to achieve the greatest impact for consumers.
Given the market situation, a key focus in 2022/23 will be to reduce risks and the costs of exit through addressing retail market reforms, and transformation of the retail market to ensure consumers are protected and the supply market remains viable on the path to net zero. The ‘Future of Retail’ section of this programme expands on this in more detail.
We will continue to balance the urgent need to respond to energy price volatility and retail sector resilience alongside delivery of our enduring priorities and day-to-day activities. We will also continue to work closely with government to implement existing and forthcoming legislation, including the planned Strategy and Policy Statement (SPS), which will help to ensure strategic alignment between Ofgem and the Department for Business, Energy and Industrial Strategy (BEIS).
Given the fast-moving nature of events, this work programme is subject to further change to ensure we remain flexible and responsive to current and future challenges. We will notify stakeholders of updates and significant changes via our social media channels and e-bulletins.
Point 1: Enduring Priorities
A critical part of our Strategic Framework, our Enduring Priorities – which run throughout the delivery year – comprise:
- Our core regulatory functions to regulate the sector and protect the interests of consumers
- 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. In summary, in 2022/23 we plan to deliver the following functions and associated consumer outcomes:
[1] 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 which support net zero goals but also help consumers switch away from gas, thus reducing the impact of the recent gas price increase. The Renewable Heat Incentive schemes are now closed to new participants, but we will continue to support the last applications and the legacy participants in these schemes. Looking ahead, we will also continue to work with BEIS to implement new schemes in this area.
We recently launched the Green Gas Support Scheme, which will support biomethane injected to the gas grid. This will be funded by the supporting Green Gas Levy, which 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.
The Boiler Upgrade Scheme will launch in Spring 2022 and will be a key focus over the coming year. This is the first grant-based scheme that we will administer and will provide fixed support for consumers installing low carbon heating.
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 link 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 the 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 also work on a programme to strengthen our scheme systems, improving delivery and efficiency over the coming years, and 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, policy, and engagement.
Point 2: Strategic Change Programmes
Point 3: Future of Retail
Over the last few months, the unprecedented 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 recent challenges in the energy market, 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 to develop our organisational and regulatory approach to keep pace with the 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, protect consumers, and put forward our vision to provide them with safe, reliable 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
- Be resilient to variable wholesale market prices and attractive for long-term investment.
Recognising the market situation remains volatile, we stand ready to respond to emerging issues and priorities. Under this Strategic Change Programme, we anticipate the following new and continuing activities in 2022/23:
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, such as 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 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 to meet net zero and protect energy security. We will play an active role in ensuring timely and 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 needs cases for investment in network infrastructure and guides decisions on capacity and location of interconnectors and major new supply and demand.
- Network investment and disinvestment - Delivering necessary investment at best value for money for consumers, high levels of network reliability, while connecting new sources of generation, 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 such as price control or the cap and floor regime.
- 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, evidencing new developments on hydrogen, and developing new regulatory models for CCUS and nuclear generation infrastructure.
New and continuing activities in 2022/23 to support this Strategic Change Programme include:
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 also be able to play an active role, taking up new tariffs and smart appliances like smart electric vehicle chargers, enabling them to 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)
We will be engaging with stakeholders to shape outputs across the Full Chain Flexibility Programme.
New and continuing activities in 2022/23 to support this Strategic Change Programme include:
Point 6: 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 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. We will also continue to engage with government's wider review of regulators’ duties, announced last year.
While we note that these questions are primarily for government, Ofgem has a part 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, including reviewing the energy code governance arrangements which we consulted jointly on with BEIS in July 2021. Following our review of GB System Operation in January 2021, which recommended the creation of an independent system operator, we published a joint consultation with BEIS (in July 2021) on proposals for an expert and impartial Future System Operator (FSO) with responsibilities across both the electricity and gas systems. Recognising the potential role of the Electricity System Operator (ESO) in the proposed FSO transition, in our September 2021 ESO Business Plan Guidance, we set out that the ESO should include an estimate of the internal ESO transformational costs related to possible changes to the ESO’s wider governance arrangements.
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, continuing to develop potential policy that may result from the proposed FSO, and DSO governance arrangements at a local level, including how local energy planning decisions are made.
- Implementing institutional and functional reforms in line with any outcomes of the ongoing review of energy code governance
- 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.
New and continuing activities in 2022/23 to support this Strategic Change Programme include:
Point 7: 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 an instigator, proponent, supporter and beneficiary of data transformation. As well as encouraging cross-industry energy data transformation, we are driving this agenda through the work programmes of regulated parties, 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 industry data sharing, enabling new and more efficient markets, better investment and clearly communicated 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 help to 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 8: Transforming Ofgem
Ofgem continues to implement 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 up to our values
- 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: Burden reduction
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.
As part of this, we monitor and report on the impacts of our work on business under the Business Impact Target methodology. We continue to receive ‘green’ performance ratings from government for this work.
As in previous years, we continue to progress several thematic approaches to reducing business and consumer burden, while also improving Ofgem’s operating efficiencies.
These include but are not limited to:
- Transformation - As described above, our ongoing organisational transformation programme is designed to ensure Ofgem is as effective as possible as we face the regulatory challenges of the changing energy market. From 1st April 2022 our new organisational structure will be in place, a critical step towards simplifying and streamlining Ofgem so we are able to make better and faster decisions.
- Collaboration - We will continue to work with other regulators on issues of common interest via the UK Regulators Network with a particular focus in 22/23 on debt and affordability, and through similar cross-sectoral initiatives.
- Regulatory impact assessments - Our approach to regulatory policy making is underpinned by robust analysis and consumer research to ensure we arrive at interventions that work in the best interests of consumers and avoid unnecessary burdens on all parties. This approach to avoiding unnecessary burdens includes our Requests for Information (RFI) to industry, which are a critical tool in helping shape current and future regulatory processes, but which come at a cost to industry (see Data and Digitalisation Strategic Change Programme and below).
- Efficient market functioning - Under both normal and extraordinary market conditions, we will continue to proactively engage, monitor, and manage retail and wholesale market activity, both through specific functions related to REMIT, transparency and Standard Licence Conditions monitoring and compliance, and also through provision of accurate data.
- Industry reforms - Continuing to lead industry reforms for improved processes. For example, in 2022 the Switching Programme entered Transition on 21 March and is scheduled to go-live on 18 July, paving the way to realise benefits to consumers.
- Embracing innovation - We are supporting new and potentially transformative ideas through our Innovation Link Feedback and Sandbox services and feeding through insights into the development of our future Retail strategy.
- Data and digitalisation - One objective of our Data and Digitalisation Strategic Change Programme is to increase the use of data to facilitate improved decision making and increase digitalisation of the sector/system (including Ofgem) so that it operates more efficiently, accurately and with more agility. For example, we were pleased to have worked with BEIS to update legislation to allow Ofgem to serve statutory notices and documents by electronic means, helping to reduce the costs and time burden associated with paper-based notices2.
- Stakeholder communications - Building on our website revamp in 2021/22, we will continue to streamline and focus our corporate messaging and consultations, and carefully consider the burden our consultation timings place on interested parties.
- Operating efficiencies - As part of the Comprehensive Spending Review, we have agreed efficiency targets with HM Treasury and are implementing internal efficiency programmes for 2022/23 to reduce our overall operating costs. These efficiency programmes are supported by internal financial controls, and our Data and Digitalisation Strategic Change Programme and Transformation programme activities.
- Reporting on progress - We will report on our progress in achieving both consumer outcomes and organisational transformation in our Annual Report 2021/22.
[2] This work relates to the Gas Act 1986 and Electricity Act 1989 (Electronic Communications) Order 2002 which came into effect on 1 August 2021 and amended provisions of the Gas Act 1986 and Electricity Act 1989
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 CCUS 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 part of a competitive tender process.