Update on the Smarter Regulation initiative in the energy context

United Kingdom

Alongside the Autumn Statement and the Connections Action Plan and Transmission Acceleration Action Plan (on which we commented in a recent separate article), the Department of Business and Trade (the DBT) published a number of documents relating to its wide-ranging Smarter Regulation programme.  This follows the Government’s May 2023 introductory policy paper on Smarter Regulation to Grow the Economy and is stated to be complementary to the ongoing October 2023 call for evidence on the regulatory landscape, which also forms part of the Government’s work on Smarter Regulation.  

 The key new publications from an energy perspective are:

  • A consultation on Smarter Regulation: Strengthening the economic regulation of the energy, water and telecoms sectors;
  • A response to the Consultation on extending the Growth Duty to the economic regulators Ofgem, Ofwat and Ofcom; and
  • A consultation on updated statutory guidance on the Growth Duty.

We briefly summarise the key points in these new publications below insofar as they relate to the energy sector (although it should be noted that they also contain proposals relating to water and telecoms).  

Smarter Regulation: Strengthening economic regulation

Key proposals relating to energy are:

  1. A proposal for a holistic assessment of infrastructure investment needs in energy networks to be delivered with the aim of enhancing regulatory accountability and supporting decision making approaches. 
  2. Responding to concerns that pressures to deliver outcomes in the short term have led to insufficient focus from regulators on the steps required to fulfil the UK’s longer term growth potential, a proposal for Ofgem, when reporting on funding decisions, to cross-refer to funding needs outlined by public bodies such as the National Infrastructure Commission and the Climate Change Committee and future figures outlined by the infrastructure needs assessment.
  3. Encouraging Ofgem to continue to take innovative approaches where appropriate to ensure continued consideration of strategic investments, particularly those with longer-term payback periods, outside standard price review processes
  4. Encouraging Ofgem to consider introducing greater use of comparative metrics to promote greater competition on performance between companies. 
  5. Considering cross-sector development of a single, consolidated Priority Service Register.
  6. Responding to low take-up of existing support, the UKRN to work to ensure greater consistency in how affordability support and bill changes are communicated, within and across sectors, looking at both household and business customers.
  7. A thorough review of regulators’ duties, with a view to rationalising duties and enabling regulators to focus more on their key economic duties and functions (noting that this comes alongside the introduction of Ofgem’s new Net Zero duty in the Energy Act 2023 and the proposal to extend the “Growth duty” to Ofgem, discussed below).
  8. Tweaks to the energy appeals regime, including (a) giving the CMA the power to appoint more than three members to a group to hear appeals (likely in response to the difficulties involved in the RIIO-2 appeals which involved nine appellants); (b) giving the CMA the power to extend an appeal deadline at its own initiative (rather than responding to a request from a party to the appeal); (c) exploring whether to give the CMA the necessary powers to be able to recover reasonable costs from the losing party incurred by an intervener when they have acted on a “consumer interest” basis; and (d) giving the CMA discretion to apportion its costs as it considers appropriate on a code modification appeal (such that it would be aligned with the licence modification appeal regime, which recognises that appeals may be allowed in part).    

It will also be of interest to the energy sector that, following consideration of whether/how to align the water and energy price control redetermination/appeal regimes, the Government has proposed to move water price controls to an energy-style appeal regime.  This may reduce the likelihood of further reform to the energy licence modification appeal regime, albeit that energy code modification appeal continues to be considered as part of code reform.  

We note that many of the proposals are aligned to other policy developments, such as proposed Strategic Spatial Energy Plan and Centralised Strategic Network Plans and the streamlining of regulatory approvals processes for major projects, as set out in the Transmission Action Plan and the Future Systems and Network Regulation decision.  

Responses are due by 17 January 2024.

Smarter Regulation: Extending the Growth Duty

The Growth Duty is set out in Section 108 of the 2015 Deregulation Act, which establishes that any person exercising a regulatory function to which Section 108 applies, must have regard to the desirability of promoting economic growth.  This requires the regulator to, in particular, consider the importance for the promotion of economic growth of exercising that regulatory function in a way which ensures that regulatory action is taken only when it is needed, and that any action taken is proportionate.  Any regulator to whom the Growth Duty applies must also have regard to the statutory guidance issued under section 110(1) of the Act. 

The Government responded to its May 2023 consultation on extending the Growth Duty to the economic regulators Ofgem, Ofwat and Ofcom:

  • The Government will proceed with the legislative program to deliver the extension of the Growth Duty to Ofgem (in addition to Ofwat and Ofcom) for the commencement of the 2024/25 financial year. 
  • This expansion of the Growth Duty will be accompanied by updated statutory guidance. Alongside the consultation response, the Government has published a draft version of this updated guidance together with a further accompanying consultation.  The draft updated guidance seeks to address concerns raised, such as a lack of clarity on the meaning of “growth”; the interaction of the Growth Duty with existing duties and the hierarchy of duties; and how growth should be measured. Responses to this further consultation are again due by 17 January 2024.
  • The Government does intend to ask regulators to report against the Growth Duty, whether that is via the statutory option in section 110A of the Act or via a non-statutory approach as outlined in the consultation on the updated guidance.  The Government has outlined potential approaches to Growth Duty reporting in this letter from the Chancellor and the Secretary of State for Business and Trade to regulators currently in scope of the Growth Duty, and to Ofgem, Ofwat and Ofcom.

It is interesting to note that the extension of the Growth Duty to Ofgem comes alongside both a new Net Zero duty imposed by the Energy Act 2023 and a proposed review of the economic regulators’ duties that reflects, at least in part, a concern about the multitude of duties that regulators are now required to consider, and which have built up over time through many layers of legislation.  However, it seems unlikely that any rationalisation of (or indeed addition to) the current crop of statutory duties will be able to definitively solve the delicate balancing act that Ofgem will be required to perform as it seeks to balance different objectives including minimising costs, maximising economic growth, and facilitating net zero at the required scale and speed.