Ofgem launches review into local energy system operation

Press release
Publication date
Industry sector
Distribution Network
  • Ofgem believes current arrangements are not geared up to support net zero at the lowest cost to customers
  • New bodies separate from network companies could be created to plan and operate the system locally
  • Ofgem is seeking views from industry, local authorities and other interested stakeholders 

Ofgem has launched a review into how the energy system is planned and operated locally to ensure Great Britain is ready for a huge increase in green, more affordable homegrown power. 

This could result in the creation of new independent bodies separate from network companies to oversee local energy systems across the country.

Local power grids will play a critical role in helping to reduce our reliance on expensive imports of gas, bring down energy bills and meet the country’s climate goals. 

They will deliver electricity to charge millions of electric cars and power clean alternatives to gas boilers to heat homes and businesses.

To do this most quickly and at the lowest cost to customers will require a strategic, co-ordinated approach at a local level. 

Currently, each electricity distribution network company is responsible for operating its local power grid and planning for future energy demand, for example by reinforcing the grid to connect new local electric vehicle charging points and heat pumps. 

Local authorities also play an important role and need to make sure that these network companies meet the needs of local transport and housing.  

Ofgem believes that the current arrangements have gaps, lack co-ordination and could create potential conflicts of interest which could add unnecessary costs to customers and delay the transition to net zero.

For example, new local markets could play a bigger role in future to balance power supply and demand flexibly and reduce the need for building expensive new grid capacity.

However, if electricity distribution network companies are responsible for these new markets, they face a potential conflict of interest as building new grid capacity would boost their revenues.

In today’s Call for Input, Ofgem has set out four possible alternative arrangements. These range from separating the local system operation function internally within electricity distribution network companies to setting up new fully independent regional bodies.

Charlotte Ramsay and Richard Smith, co-directors of energy systems, management and security of Ofgem, said: 

“To reduce our reliance on expensive imports of gas and bring down customers’ energy bills, we need to accelerate our transition to net zero. This will require a transformation of our energy system, in particular at a local level. 

“This review will ensure that local energy systems across Great Britain are set up for a huge increase in green, more affordable and homegrown power.”

Polly Billington, chief executive of UK100, a network of local government leaders for delivering net zero, said: "This review is extremely timely and welcome. It is great to see Ofgem recognise the vital role of local communities and authorities in creating the kind of future-proof Net Zero energy systems we need, which have flexibility at their core. UK100 members are keen and ready to play their part." 

Notes to editor

1. In addition to this Call for Input, and to complement our information gathering, we will be carrying out a programme of stakeholder workshops which we aim to kick off in June 2022. Over the second half of this year, we will focus on evaluating reform options, with a view to arriving at conclusions by early 2023. The outcome of our workshops will help to inform how we take our work forward, including how to evaluate change options.

2. Earlier this month, the Government backed a recommendation from Ofgem to create a new Future System Operator (FSO) fully independent of National Grid to oversee the energy system at a national level.

3. Ofgem includes four sample alternative governance models in its Call for Input. These models range from relatively small changes, such as governance reforms within existing institutions to drive effective delivery of energy system functions (eg internal separation of Distribution System Operator or DSO roles from Distribution Network Operators or DNOs), to more significant reforms such as the creation of new institutions to deliver some or all functions (eg independent DSOs or regional bodies carrying out roles with responsibilities across electricity, gas and heat). The sample models presented are not intended to be exhaustive of all possible reform options but aim to stimulate a wider discussion with stakeholders about challenges presented by existing arrangements and how to best address them.

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Ofgem is Britain’s independent energy regulator. Our role is to protect consumers now and in the future by working to deliver a greener, fairer energy system. We do this by:

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