A new paper from the Energy Systems Catapult (ESC) proposes a reform to the licence regime in the energy sector as the number of licensees is set to increase.
Currently, energy regulator Ofgem manages 11 different licence types with hundreds of licensees, however the ESC said that with the number of licensees in the energy market set to increase – primarily driven by the government’s decision last year to give Ofgem powers to regulate heat networks – a new approach to regulation licensees is required.
In addition to the added challenge of a wider pool of licensees, the ways in which licence conditions are designed "stifles innovation within the retail sector" said the ESC.
Therefore it is proposing a new digitalised, risk-based licencing regime where licensees provide regular updates to Ofgem across numerous categories, such as the number of customers or volume of energy managed, as well as providing data on their compliance with licenses.
This regime should be proportional, with licensees regulated based on what they do and how much impact they have, while regulatory intervention should be measurable by design.
This new approach could help meet the challenges of the increased number of licensees, as well as the current poor visibility of emerging systemic or specific risks to consumers of the energy system, the ESC said.
In December 2021, Ofgem unveiled several new measures designed to boost the resilience of the energy supply market, including stress tests to reveal weaknesses, with an improvement plan to be put in place if these are found, especially if they are deemed to put consumers at risk.
This also included consulting on new financial licence requirements, and on the possibility of requiring suppliers to pause expansion at certain milestones until the regulator is satisfied they are financially resilient.
As part of the ESC's paper, Newcastle University's Dr Zoya Pourmirza and the ESC's Greg Johnston designed two examples of the proposed approach to digitalising licence conditions, with this focusing on how to implement cybersecurity regulation in licences.
The ESC said that by taking this approach, a renewed focus on deploying and measuring regulatory interventions at scale and pace can be taken.
This will then increase certainty for licensees and Ofgem, and enable new approaches to regulation with a focus on intervening only where unacceptable risk to consumers or the energy system is identified.
Ofgem has previously taken on board recommendations from the ESC when it comes to licencing, announcing in 2020 it would be introducing a new licence condition based on the Energy Systems Catapult’s Data Best Practice guidance.
The full ESC paper can be found here.