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In her previous role at Hydro Tasmania, Australia, Thalia focused on developing medium and long-term price forecast models of the Australian energy market using PLEXOS modelling software. Thalia holds an Honours degree in Renewable Energy Engineering from University of New South Wales and joins ECA as a consultant.
Guanfei is a recent graduate from the London School of Economics (LSE) and holds a MSc in Econometrics and Mathematical Economics and a BSc in Actuarial Science from Nankai University in China. In his role as an Analyst, he is currently involved in an electricity demand forecast project. His primary responsibility is to identify the most robust forecasting approach from a range of international practices.
Welcome both to the ECA team!
Ofgem is considering the biggest change in network regulation in a decade. On 10 March 2023, Ofgem published a consultation on frameworks for future systems and network regulation in which it considers new ways to regulate energy networks.
This represents the most extensive assessment of energy network regulation in Great Britain (GB) in over a decade and raises the question of whether Ofgem will force its existing model of ex-ante regulation, Revenue = Incentives + Innovation + Outputs (or, RIIO), into early retirement?
Since 2012, when it was first introduced, RIIO has provided for a stable and predictable framework for network investments, with settlements reached in advance and subject to periodic reviews every five to eight years.
Over time, the model has allowed service levels to improve, and lowered costs, but it has increased complexity and administrative burden too.
Ofgem consultation calls periodic reviews into question, probing whether the benefits of a ‘static’ regulatory model like RIIO will continue to outweigh the cost in a rapidly changing environment.
In what could be the biggest change in network regulation in a decade, the consultation considers three alternative regulatory models, or ‘archetypes’:
- Archetype 1 – Plan and Deliver. A central planner, like the newly created Future System Operator (FSO), will take many of the investment decisions that would normally pertain to Ofgem and network companies (e.g., on need, output and delivery) in a price review. This is expected to simplify the business planning process and reduce reliance of ex-ante reviews.
- Archetype 2 – Ex-ante Incentive Regulation. Simplified approaches to ex-ante regulation have been proposed. Amongst these, a simplified cost efficiency incentive, or an ex-post efficiency assessment for ‘repeatable’, business-as-usual (BAU) activities have been suggested, providing these activities can be ‘carved out’ of companies’ business plans.
- Archetype 3 – Freedom and accountability. Companies will be free to decide the most efficient way to deliver their outputs. Ofgem, on the other hand, would monitor output delivery ex-post, rewarding companies for realised efficiencies, and vice versa. Companies’ return will be set on a cost-plus basis. Effectively, a form of rate-of-return regulation.
In addition to the consultation, Ofgem intends to run an intense programme of stakeholder engagement over the coming months with the aim to decide upon the most appropriate model for the upcoming reviews of the transmission and gas distribution sectors in autumn this year.
This is by far the most extensive assessment of energy network regulation that has taken place since the RPI-X@20 review, which led to the RIIO model being introduced in 2012.
We will be following these developments very closely, and with a question at the forefront of our mind: 10 years on, will Ofgem force RIIO into early retirement?
The UK was one of the earlier adopters of the independent regulation of utilities. Over time price controls in the UK, as in many other jurisdictions, have become increasingly complex. This makes it ever more challenging to get a clear view across the whole of a price control. This can be true for anyone not closely involved in a specific price control, including for our many non-UK clients for whom UK approaches to utility regulation can be a reference point.
Back in November 2022, Ofgem published its Final Determinations for Great Britain’s electricity distribution networks price controls (RIIO-ED2). The main decision documents run to just over 1,000 pages. In the following we provide an overview of the key elements of the RIIO-ED2 framework and outcome. We hope it will be of interest to our international clients – and, maybe, to some of our UK clients too.
Please see full overview here.
As the year draws to an end, we want to wish all of our clients, associates and friends a joyous festive season and a successful start to 2023.
2022 was an exciting year for ECA. We were delighted to go back to a normal working mode meeting clients, holding workshops and engaging with stakeholders face to face where possible.
We have continued growing our economic regulation services by providing important (and at times intensive) support to several regulators through their electricity and gas price controls. Our investment planning team has further improved the suite of electricity market and system models we have developed through our least cost generation, integrated resource planning and net zero investment strategy engagements. We have also seen great interest from clients in electricity market design questions and in particular pricing and regulation approaches for flexible supply assets to support the energy transition.
We have been excited to add a few new pins to ECA’s global experience map (including the beautiful island nations of Iceland, the Seychelles and Vanuatu), complementing the continuation and deepening of our engagements and relationships in markets we know well, such as Greece, Indonesia and Kenya.
All this means that our team continues to grow steadily and that our ‘ECA weeks’ in summer and winter get ever busier.
2023 is unlikely to be a ‘calm and steady’ one. Global energy market upheavals will continue raising major regulatory and policy questions on security of supply, affordability and decarbonisation.
We very much look forward continuing to support our clients and working with our friends and associates in finding answers to these questions and delivering innovative, practical and robust solutions to the exciting challenges facing the sector.
From all of us at ECA, happy festive season and a very happy new year.
Following our 2021 Insight on inflation of the Regulatory Asset Base (RAB) and Weighted Average Cost of Capital (WACC), in this Insight we shed light on the treatment of working capital and work-in-progress, which are seemingly esoteric issues that can have a significant impact on tariffs and a regulated company’s ability to cover its costs.
Please read the full Insight here.
In the first of our ECA Insight – deep dive series, Iro Sala and Frederik Beelitz look at policy responses to the unprecedented energy price spikes in Europe. We consider both, market re-design proposals and support mechanisms, to provide an overview of different approaches in tackling high prices.
Although there are plenty of factors that have resulted in a constrained power market, eg low hydro output, French nuclear shutdowns, the current situation is primarily a gas supply crisis bleeding into the power market. The policy focus should therefore be on addressing gas shortages and rebalancing Europe’s gas supply mix away from Russian gas.
In the power sector, there is a danger of hastily proposed electricity market reforms being mainly targeted at shielding consumers from high prices. These reforms may be detrimental to long-term objectives we want to see, namely providing incentives for much needed investments in low carbon, flexible and reliable supply. Any power market reform proposal should therefore be designed – not just by the guiding principle of affordability – but by considering the incentives it sets for longer term investment requirements.
You can read the full Insight here.
Energy Exemplar’s Energy Modelling & Simulation Summit – Xcelerate2022 – was an excellent opportunity to meet fellow Plexos users and Energy Exemplar’s team and discuss the challenges facing the energy sector now and into the future and how modelling advancements can best be used to address these.
Please see the full presentation here.
In ECA’s recent Insight, Robert Barnett looks at market designs being proposed to cover the case where increased penetration of near-zero variable cost generation from renewables and nuclear leads to a collapse in prices to zero at times. This insight considers what is actually happening to prices and why the solutions being proposed seem not to consider the economics of price signals and efficiency incentives and so do not provide advantages for consumers and generators compared to the status quo. The solutions seem to offer a halfway house approach that is likely to have the opposite effects to what was intended. Read the full Insight here.
ECA has been contracted by the European Bank for Reconstruction and Development (EBRD) to scope, recommend and help implement appropriate performance-based incentives (PBIs) for electricity network firms in North Macedonia. Work will cover “traditional” PBI areas such as interruptions but also focus on how decarbonisation objectives may be supported.
Finally! For the first time in 3 years, we were able to restart our tradition of the ‘ECA Summer week’. It’s a week whenl ECA colleagues from around the world get together in London for fun, games, the occasional tipple and interesting discussions. Last week we orienteered our way through the East Sussex countryside (thanks to Arena Events for an amazing day), had the pleasure of tasting British wines c/o Balfour Winery and celebrated ECA’s 25th anniversary at The Union Club. Thanks to all staff at ECA for a fantastic week.
Please see our LinkedIn page for more photos.