Exploring local energy: A regulator's perspective

Thomas Bearpark

Thomas Bearpark

Graduate Analyst
16th February 2017
Areas covered:
Electricity
Gas
sheffield houses
In Britain and across Europe there is growing interest in local energy activities, where consumers seek to take more control of their energy production and/or supply. This approach to energy has become popular with consumers who want to contribute to decarbonisation, or feel unsatisfied with larger suppliers. Many groups and organisations see a potential in decentralised energy arrangements to drive a decarbonisation agenda, through consumer empowerment and engagement.
 

Over the last year there has been a growing emphasis on local energy. Local councils (including Nottingham City Council and Bristol City Council) have entered the energy market as suppliers, or in partnership with suppliers. On 24 January, the Scottish Government published a consultation on a draft energy strategy, which includes a target to have at least 1GW of renewable energy from local or community ownership by 2020. The strategy also aims for at least half of newly consented renewable energy projects to have an element of shared ownership by 2020. Further afield, on 30 November 2016, the European Commission published its Proposals on Clean Energy for all Europeans, which suggests that local, decentralised energy projects should be allowed to compete on a level playing field with incumbent energy suppliers.

So where does Ofgem fit into this? At the end of January we published Local Energy in a Transforming Energy System as our latest Future Insights Series discussion paper. Future Insights is a programme in which we explore the risks and opportunities for consumers which will arise from the transformation of the energy sector, over the coming decades.

In the paper, we assess the current local energy landscape and the models that are emerging. We share our perspective on the risks and opportunities that underpin the growth in these projects, and what that means for how we regulate the sector.

housesIn general, we see the growth in local energy as a good thing, especially where it brings more choice for consumers and more competition to the market. Local energy projects can drive decarbonisation and energy efficiency, and have the potential to reduce the investment needed in our networks. We therefore aim to ensure that there is a level playing field for new business models, and that the market arrangements do not stop innovation from bringing consumer benefits.

However, local energy undertakings come in a wide range of shapes and sizes. In some of the schemes that are emerging, the benefits may come at the expense of the broader consumer base, for example by burdening them with an increasing share of network costs.

Local energy projects cannot be viewed in isolation from the electricity system; they form part of an interconnected whole, and the decisions made in one part of the network can affect the interests of consumers in another. As the sector regulator, we need to consider the impacts of local energy in the broadest possible sense, to ensure that local energy grows in a way that benefits all current and future consumers.  

In the paper, we argue that it is important for consumers to be informed about the risks and rewards that result from the choices they make about their energy arrangements.

We also argue that in general, relying on the market to allocate investments, and creating a system that allows for diversity, is in the long-run interests of consumers.

We conclude that as the energy system evolves, including through its growing decentralisation, the regulatory framework will also need to evolve. Whilst we cannot predict the future, we think that we can best make a positive difference for consumers by having a flexible approach to regulation that relies on learning over time.

If you are interested in the issues we have raised in paper, and you want to share your views, please get in touch on: energy.futures@ofgem.gov.uk