Written evidence submitted by Ofgem
1. Ofgem is Great Britain’s independent energy regulator. We operate in a statutory framework set by Parliament. This establishes our duties and gives us powers to achieve our objective of protecting consumers’ interests now and in the future by working to deliver a greener, fairer energy system. We do this by:
2. The government is responsible for setting the policy for the energy sector and proposing any changes to the statutory framework we operate within.
3. Ofgem is responsible for regulating the gas and electricity markets in England, Wales and Scotland. We are responsible for ensuring market arrangements are established and maintained which minimise the possibility of gas or electricity supply disruptions, including through our requirements on market operation, industry codes and regulatory arrangements.
Security of supply arrangements
4. Government is responsible for defining the standards on security of supply to be met – in particular in determining the appropriate balance between the costs of a level of security versus the probability and costs of harm in the event of a failure.
5. Ofgem is responsible for ensuring the various industry licences, codes and standards through which security of supply obligations are assigned to relevant institutions. Where institutions are subject to a regulatory price control, Ofgem is responsible for ensuring that these controls enable the relevant institution to meet these obligations. Ofgem is also responsible for overseeing compliance with obligations and taking appropriate enforcement action where they are not met.
6. Industry parties are responsible for taking action to discharge their obligations set out in licences, codes, standards and contracts.
7. Gas supply adequacy is delivered via an obligation on gas shippers under the Unified Network Code (UNC). Shippers sign-up as a party to the code when they are granted a shipper licence by Ofgem. The code is ‘owned’ by the industry under open governance arrangements, with regulatory decision approval by Ofgem.
8. Electricity adequacy is delivered via the loss of load expectation standard, set by the Secretary of State. This is met through the Capacity Market, where the volume of capacity to be procured is determined by the Secretary of State. National Grid ESO run the volume recommendation and auction processes under regulatory licence obligations, overseen by Ofgem.
9. Network Security standards are a requirement under the licences we issue to transmission and distribution companies. Industry is responsible for setting these which Ofgem approve.
A brief summary of the requirements placed on operators to identify, plan for and mitigate the effects of climate change, including extreme weather events, and the reporting requirements placed on them
10. Network resilience is a crucial area of our regulation. The electricity and gas transmission and distribution networks operate under strict licence obligations and technical standards and we set funding levels and strong incentives for them to maintain a resilient energy network which the companies are held to account against.
11. For example, we have provided £29.5 billion of funding through the current electricity distribution price control (RIIO-ED1) for the Distribution Network Operators (DNOs) to operate, maintain and enhance the electricity networks, including for asset health and resilience.
13. For the next price control starting in April 2023 (RIIO-ED2) we required the DNOs to submit a climate resilience strategy and to establish related working groups to support the sharing of best practice. Networks are also required to produce strategies and investment plans to ensure physical site security as well as meeting broader requirements around cyber and workforce resilience. Plans are also required to maintain and improve network reliability, both through reinforcement to deal with growth in generation and demand, and though asset replacement and maintenance to maintain asset health and resilience.
14. We received the spending plans for RIIO-ED2 in December 2021 and will consider the case for investments in infrastructure from these strategies in our determinations later this year.
15. We will be reviewing overall network resilience to severe weather events as part of our review into Storm Arwen, and these findings will feed into our determinations. We are particularly interested in reviewing the mechanisms around ensuring the resilience of overhead lines on distribution networks which are vulnerable to severe weather conditions, considering whether more tree cutting, heavier construction standards and increased undergrounding would be appropriate and affordable.
The timeframes for this work eg how far in advance Ofgem requires operators to plan for the effects of climate change (ten years? 40 years?), and how regularly the operators are required to report to you on this work
16. The networks operate under the price controls set by Ofgem, which are 5 years for the new RIIO-2 controls that started in April 2021 for the transmission and gas distribution networks. In line with their licence obligations they do plan ahead and produce sustainable business plans taking account likely changes in the environment that they operate, taking a long-term view on the requirement to provide reliable network infrastructure beyond the price control period.
17. The networks are required to report annually on the delivery of their business plans. We monitor this performance and where targets are missed, company revenues are adjusted accordingly.
18. Where appropriate, Ofgem also undertakes engineering inspections and audits to check that the companies are maintaining their assets properly.
Whether or not you have established something akin to resilience standards against extreme weather and the effects of climate change, against which you assess your operators in the short, medium and longer term
19. The network companies are required to design and operate their networks in accordance with relevant legislation, codes and standards. Where there is evidence that network companies have acted in breach of their obligations under these regulations, we will consider whether Ofgem needs to investigate further, potentially leading to enforcement action to hold them to account.
20. The DNOs, for example, also work closely with BEIS to ensure that they have robust emergency response plans in place to minimise impacts to consumers. Such activities include reviewing industry preparedness for severe storms ahead of each winter, regular testing and exercising of emergency response plans and communication processes, and reviews of international or national events to identify and implement lessons learned.
21. Our price controls also provide incentives for companies to respond in emergencies so that power is restored as quickly as possible. We set tough targets for companies to reduce the number and duration of power outages over time; companies earn rewards for beating these targets and are penalised for falling short of them.
22. We also set outcome-based resilience standards through the Guaranteed Standards of Performance (GSoP). These guarantee a level of service that is reasonable to expect companies to deliver in all cases to individual consumers, including supply restoration when there is a power cut. If DNOs fail to meet the level of service required, individual customers are compensated for any long outages.
23. Both Ofgem and BEIS have now launched reviews of the response to Storm Arwen. This has numerous lines of enquiry, including opportunities to enhance the resilience standards applied to overhead power lines which can be vulnerable to some extreme weather events.
Your assessment of the current state of climate resilience in your sector, and what obstacles are preventing achievement of the agreed/desired standards of resilience
24. Overall levels of network reliability across the GB energy networks are extremely high – amongst the highest levels globally – and, on the whole, very resilient to weather events. However, recent events such as Storm Arwen show how much disruption and distress can be caused when faced with extreme weather events.
25. The information set out above sets out the requirements we place on the network operators with respect to reliability and climate resilience.
26. In the electricity distribution sector, for example, both the frequency and duration of power cuts has fallen by 18% on average across the sector since the start of RIIO-ED1 in 2015. Since the introduction of the Interruptions Incentive Scheme in 2002, the number of power cuts has fallen by around 45%, with the duration of power cuts down by 60%.
27. The National Infrastructure Commission (NIC) recommended in 2020 that Government build on the framework for network resilience set out above to strengthen it in three main aspects: updated resilience standards for critical national infrastructure in the context of climate change; Government and regulators using these resilience standards to run systematic stress tests across the industries that they regulate; and regulators taking into account the results when determining funding for resilience when setting future price controls.
28. The Government responded in September 2021 agreeing with the first two recommendations, but that it would consider the implementation of any measures in this area only in the context of a wider National Resilience Strategy that it expects to publish next year. We are also supportive of the NIC’s recommendations on enhancing the resilience framework further and remain open to providing advice to government so they can take the costs and benefits of enhanced resilience into account in the development of policy and standards, and to take any new policies into account in our future price control decisions.
9 February 2022