- Supply and Retail Market
- Distribution Network
- Offshore Transmission Network
- Transmission Network
- Generation and Wholesale Market
- Domestic RHI
- Non-Domestic RHI
Building a greener, fairer energy system for households and businesses in Great Britain
- Who we are and our objective
- Our focus for 2021/22
- Point 1: core regulatory functions
- Point 2: delivering government schemes
- Point 3: low-carbon infrastructure
- Point 4: full-chain flexibility
- Point 5: future of retail
- Point 6: data and digitalisation
- Point 7: energy system governance
- Point 8: transforming Ofgem
- Point 9: burden reduction
- Point 10: specific 2021/22 initiatives
- Point 11: estimated expenditure
The Gas and Electricity Markets Authority, Ofgem’s board, 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.
Ofgem’s board 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 government, industry and consumer groups to deliver a net-zero economy, at the 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.
Responses to our forward work programme consultation confirmed stakeholder support for our new strategic framework. We will focus our resources on our five strategic change programmes – alongside our core regulatory responsibilities and environmental and social scheme delivery – in order to achieve the greatest impact and help deliver the transition to net-zero in the interests of consumers. We will also continue to deliver commitments that we made in our Decarbonisation Action Plan by prioritising and focusing on issues through our strategic change programmes. Activities that support our Plan have been highlighted throughout this document.
During 2021/22, and as we further develop elements of our strategic framework, we will publish further details for the activities that we plan to deliver. To reflect this, the document will remain ‘live’ throughout the year. We will also publish our responses to key Government consultations regarding the energy sector, including the planned Strategy and Policy Statement for Ofgem.
- 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.
Strategic change programmes
- To enable investment in low carbon infrastructure at a fair cost.
- To deliver full-chain flexibility in how we generate, use and store energy.
- To deliver a future retail market that works for all consumers and the planet.
- To unlock the benefits of data and digitalisation.
- To ensure energy system governance, including Ofgem, are fit for the future.
We will continue to strive for excellence in delivering our core statutory and regulatory functions, protecting the interests of energy consumers, while conducting our activities as cost-effectively as possible. In 2021/22, we will deliver against our principal objective by focusing on the following:
- Consumers continue to pay a fair price for their energy through the effective running of the default tariff price cap
- Consumers, particularly the vulnerable, are treated fairly by suppliers
- When suppliers exit the market, consumers are protected through our Supplier of Last Resort process
- Through our price controls, competition models and tender processes, energy networks continue to offer consumers value for money
- Net-zero goals are supported through increased operational flexibility in the energy system
- Through our enforcement activity, we provide a credible deterrent to non-compliance
- Changes to the energy codes benefit consumers and our licensing is robust
- Through our joint Competent Authority role with BEIS, networks companies are cyber resilient.
In additional, and following the end of the Transition Period, work with the Government and energy stakeholders domestically and in Europe to:
- implement the EU-UK Trade and Cooperation Agreement as it relates to energy, and
- ensure effective new cross-border arrangements are put-in-place.
Core regulatory activities in 2021/22
Ofgem administers a range of environmental and social schemes on behalf of government and for the devolved administrations, which collectively are worth £9 billion per-annum. Our schemes fall into three main categories – renewable electricity schemes, renewable heat schemes and energy efficiency and social schemes.
2021/22 will be a key year for heat decarbonisation schemes, as the current Renewable Heat Incentive (RHI) schemes close to new participants, and the new Green Gas Support Scheme is launched. The continued decarbonisation of heat is central to the delivery of Action Four in our Decarbonisation Action Plan (DAP).
More broadly, we will continue to work actively with government to develop future policies, including future energy efficiency obligations. 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 in this year of change.
All of the government schemes that we administer support our Strategic Change Programmes, most notably through our drive towards decarbonisation:
One of our key drivers across all of 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 on 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.
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 (EVs). However, there remains uncertainty on key questions such as the roles of hydrogen in heat, and how much nuclear power and carbon capture, utilisation and storage (CCUS) will be needed.
Major investment will be required to deliver net-zero in the energy sector. In addition to £30 billion of investment recently approved in our electricity transmission and gas network price controls, we have introduced a range of new mechanisms with the flexibility to approve more than £10 billion of additional net-zero expenditure over the next five years. Additional expenditure will also be required in electricity distribution networks, new power generation and the deployment of low carbon technologies, such as heat pumps.
Ofgem will take an active role in facilitating this investment and in ensuring that it is efficiently spent. We are continuing to develop our agile and proportionate approach to assessing submissions for additional funding, including through our net-zero re-openers. We will work collaboratively with government to enable and encourage the industry to prepare for the future, by setting frameworks to help manage uncertainty, and to maximise the opportunities to enable a smart, lower cost zero carbon future. As part of this work, we want to ensure processes are in place to deliver the coordinated expansion of infrastructure in both onshore and offshore networks. This will include ongoing work on competition for onshore networks, an offshore transmission network review, and a review of onshore network planning and the role of the System Operator in this.
Alongside these initiatives we have been considering how to improve the transparency of information made available by regulated network companies in key area such as dividend policies, workforce resilience, and corporate governance.
Our low carbon infrastructure Strategic Change Programme aims to ensure that the necessary infrastructure enablers are in place by 2025, by:
- Efficiently transforming the onshore electricity network, connecting and enabling new sources of low carbon generation (e.g. offshore wind generation) and increasing demand needed to meet net-zero targets
- Taking a coordinated approach to the expansion of the offshore network and interconnectors
- Providing advice and developing regulatory mechanisms to enable investment in CCUS transport and storage and new nuclear power, where requested by government
- Preparing gas networks for a transition to a low carbon future, helping understand the feasibility and costs of hydrogen in the gas grid
- Developing new regulatory approaches and best practices to manage cyber risks to energy infrastructure.
Low-carbon infrastructure activities in 2021/22
 Network companies’ business cases will need to show how they support decarbonisation for new or anticipatory investment.
The potential for energy flexibility to reduce costs as we transition to a net-zero system is widely acknowledged. As the share of intermittent renewable generation rises, and electricity demand from heat and transport grows, the electricity system will need to become more flexible if system costs are to be minimised. Flexibility enables demand to adjust to the intermittency of low carbon supply, reducing fossil fuel use and limiting the costly curtailment of renewable generation. In a fully flexible electricity system, every connected resource could contribute its full potential to meet system needs, deliver cost savings of more than £5 billion per-annum, primarily from avoided investment in generation plant and network capacity.
Enabling demand flexibility will rely on customers having smart meters so that they understand their energy use and how to change it, and on it being possible to use time-of-use price signals to incentivise flexible responses. We continue to monitor the smart meter rollout by energy suppliers so that more consumers can take advantage of their benefits and ensure they are offered a quality installation experience. We will ensure timely implementation of the market-wide half-hourly settlement to create incentives for suppliers to drive flexible tariffs and new services.
We have established a full-chain flexibility programme, to build on the existing work that we set out with BEIS in the 2017 Smart Systems and Flexibility Plan. Through this programme, we will consider options and opportunities to unlock flexibility, as we decarbonise the system and protect the interests of consumers. We will be focusing on:
- Updating our understanding of the greatest needs and benefits from flexibility across the electricity value chain to achieve a secure, cost-effective system as we decarbonise
- Understanding how smart EV charging and vehicle-to-grid services can be leveraged for the system’s benefit, as the adoption of EVs accelerates
- Developing a comprehensive approach to unlocking significantly more flexibility services from smaller, distributed energy resources, including demand-side sources (e.g. heat pumps and industrial demand)
- Working with BEIS to continue to identify and remove barriers to energy storage
- Understanding how to maximise the flexibility benefits at a whole system level, allowing flexibility service providers to contribute to location-specific and system-wide needs.
As part of this assessment, we have reviewed our Access and Forward Looking Charges Reforms to ensure alignment with the approach that will emerge from the full-chain flexibility work, and plan to consult on an early minded to positions in the spring. We will be feeding our initial findings into our work with BEIS on the new joint Smart Systems and Flexibility Plan, which we will publish later this spring.
Full-chain flexibility activities in 2021/22
Regulation and reform of the Electricity System Operator will play a key role to play in developing cost effective net-zero pathway milestones through flexibility in Balancing and Ancillary markets. Details of our 2021/22 activities in this area can be found in the energy system governance section.
The energy market is likely to undergo rapid change in the coming years. The need to decarbonise heat and transport will impact how consumers use and access energy, while better access to data and new technologies will drive innovative new products and services. At the same time, post-COVID economic pressures may affect the ability of some households to pay their energy bills. And decisions will need to be taken in relation to appropriate protections for consumers, as we approach the 2023 date at which the current default tariff price cap is due to expire.
Ofgem aims to enable a future retail market that can help deliver the technological and behavioural changes needed to support decarbonisation at lowest cost, while ensuring the interests of consumers remain protected.
We are currently developing our future of retail Strategic Change Programme, focusing on areas of greatest potential consumer detriment or opportunity, with the following high-level objectives:
- energy transition that works for all energy consumers, harnessing innovation and flexibility, with effective protection for consumers
- fair energy prices, with or without the price cap
- a better deal for consumers in vulnerable circumstances.
We expect to finalise this Strategic Change Programme in the summer. We will publish further detail as a part of an update to our forward work programme at the time. Our current planned activities, which are already scheduled for the year ahead are set out below.
Future of retail activities in 2021/22
The energy transition will continue to drive increasing complexity as the number of energy markets, assets, services and market participants proliferate, and the benefits of clear communication and data sharing grow. The smart creation, collection and use of energy system data is fundamental to managing this complexity, and for unlocking new sources of value for all energy stakeholders, including improved consumer protection.
This data and its digital infrastructure services will be able to integrate with equivalent data and services from other sectors, further enhancing opportunities for new markets, better consumer protections and a coordination of economy-wide effort to deliver decarbonisation.
Ofgem is committed to using and sharing data effectively as a core component of our operations and regulatory decisions. Our data and digitalisation Strategic Change Programme aims to ensure better regulatory decisions are taken through the improved use of data, and that data is used more effectively by the market, through modern data regulations. In particular, the objectives of this Strategic Change Programme are:
- For Ofgem to provide leadership and collaboration to deliver the scale of change required
- To establish new data and digital defaults and ensure the sector is incentivised and coordinated to adopt them
- Enable the sector through new and existing shared infrastructure to grow and develop future data and digital solutions that work for consumers.
Core to this programme is Ofgem’s data strategy, coordinating efforts across the energy sector to digitalise, progressing government goals to modernise the use of and sharing of data, and ensuring value from public funding in Ofgem, through the better use of data in Regulation and operation. We will be working with industry and government to ensure a joined up approach to unlocking the benefits of a digitally enabled energy sector and supporting the wider agenda of joining up data across different sectors. We will detail our ambitions and delivery plans by publishing a Digitalisation Strategy & Action Plan (DSAP), jointly with government, in the spring. We will create a plan of work designed to utilise data and digitalisation techniques, enabling Ofgem to regulate and operate effectively and efficiently, aligned with sector investment.
Data and digitalisation activities in 2021/22
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 systems 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 and Policy Statement for Ofgem, which will set out the government’s energy policy priorities of relevance to Ofgem.
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. For example, we are working with BEIS to review energy codes and their governance arrangements. We also recently published our review of GB System Operation, recommending an independent system operator, and are now supporting BEIS to develop a plan for next steps for the GB System Operator and governance of the energy system as a whole.
The aims of this fifth 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 fullhain Flexibility. This includes for example consideration of Future System Operator functions, including the interface between the ESO and DSOs.
- Implementing institutional and functional reforms, to reflect any recommendations from ongoing work from the Energy Codes Review and the Engineering Standards Review.
- Identifying Ofgem’s medium and longer-term goals as the energy regulator, for our shape, functions, and regulatory model, to become a regulator that remains fit for the future.
Our energy system 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 2021/22, 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.
Energy system governance activities in 2021/22
With the support of the Ofgem’s board and under the direction of our new Chief Executive, Ofgem has begun a significant transformation programme. Our overarching goal is to ensure we are a dynamic, inclusive and high performing organisation with a strong reputation as an employer of choice. We want to ensure we are as efficient and effective as possible, as we face the regulatory challenges of tomorrow’s energy market.
Our Transformation Programme will continue to drive change internally across Ofgem, into the 2021/22 year. These internal changes will take effect at the same time as we launch our new, external-facing Strategic Framework. The programme includes a range of change activities that aim to further the following outcomes:
- Uniting behind our purpose, so we are clear what we are here to achieve, and live values we can all sign up to
- 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
- 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. An important part of this relates to providing an excellent environment for our people, for example, by supporting the retention and development of our talented workforce. This will help ensure we can best deliver good outcomes for those we serve.
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 have reviewed our ongoing commitments from previous work programme periods, and set out an update on these below. We have also set out new business simplification activities that have been identified internally and through consultation feedback.
Update on existing burden reduction activities
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 set out in our Transforming Ofgem section, we have begun a significant programme of work to ensure we are a dynamic, inclusive and high performing organisation. This programme will help ensure we are as efficient and effective as possible as we face the regulatory challenges of tomorrow energy market.
- Collaboration - Working with other regulators to develop common standards and approaches via the UK Regulators Network and similar cross-sectoral initiatives (such as participation in the International Network for Delivery of Regulation).
- Industry reforms – Leading industry reforms for improved processes. This includes our work on Switching, Smart Metering and Supply Licence monitoring and reforms.
- Embracing innovation – We are supporting new and potentially transformative ideas through our Innovation Link services, which we substantially enhanced in July 2020, and through wider policy development aimed at enabling innovative business models, products and services.
- Efficient markets - Proactively engaging, monitoring and managing markets. We ensure efficient market operation through specific functions (REMIT, Standard Licence Conditions) but also through the provision of accurate data (State of the Market report, etc.).
- Stakeholder communications – As in previous years, we will continue to reduce and streamline the volume of consultations we produce, and consider carefully the burden our consultation timings place on interested parties.
As set out in the data and digitalisation section, we intend to publish our joint Digitalisation Strategy & Action Plan with BEIS in 2021, with the aim of modernising the use and sharing of data across industry, and ensuring a joined up (and efficient) approach to unlocking the benefits of a digitally enabled energy sector.
Industry information requests - We have already made significant improvements to our Requests for Information (RFI) to industry. These RFIs are a critical tool in helping shape current and future regulatory processes, but they come at a cost to industry. We are looking at the information we gather in the round to ensure we have the necessary information to monitor the market without causing undue burden on market participants.
Impact assessment (policy) and (corporate) efficiency - 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. Corporately, we have also agreed efficiency targets with HM Treasury and have introduced internal efficiency programmes for 2021/24, to reduce our overall costs and support our Transformation Programme goals.
Business Impact Target – We continue to monitor and report on the impacts of our work on business. We continue to receive ‘green’ performance ratings from Government for this work. Looking to the term of this Parliament, we will look to engage constructively with the new business impact target methodology. Following the publication of the Penrose Report on Competition Policy we will also work closely with Government on responses to the report’s energy-related recommendations.
Introduction of electronic licensing – We are pleased to be working with BEIS on their plan to amend legislation to allow Ofgem to serve statutory notices and documents by electronic means, helping reduce the costs and time burden associated with paper-based notices.
Ofgem submitted a Comprehensive Spending Review bid to HM Treasury in September 2020, setting out how we proposed to support the net-zero ambitions of the UK and devolved administration governments, to facilitate investment and innovation and to reduce the cost of energy.
On 25 November 2020, HM Treasury confirmed an increase to Ofgem levy funding, accompanied by a challenging efficiencies target. This figure does not include funding for the delivery of government schemes (eServe) which is agreed with BEIS and has yet to be finalised.
Agreed in-year efficiencies
In the late summer, Ofgem will submit a bid to HM Treasury to fund activities in the 2022/23 financial year.