QUESTIONS FOR ENERGY DEMOCRACY: How different can the rules of the energy system be? What rules currently govern the technical management, ownership and value flows in the system? How did it come to be this way? Who has the power to change the rules and how?
Governance of the energy system is defined as ‘the policies, institutions, rules and incentives related to the energy system, and the underlying decision-making process which establishes those rules and incentives’ (iGov research on governance of the energy system).
The term ‘governance’ can sound technocratic, and a way of avoiding political questions by promoting some kind of best rational solution. However, governance is really about the operational rules of the system – what actually happens on the ground. Who gets to make those rules is deeply important for democracy. Democracy needs to go all the way through from the most high-level strategic direction to the day to day operational decisions.
The governance of the GB energy system has been deeply critiqued by a research programme at the University of Exeter called ‘iGov’, who spent several years engaging with energy industry insiders in GB and comparing what happens here with other countries. They conclude that the GB energy system’s governance is not fit for purpose for transforming the system to address climate change. The proposals they make are some of the most well thought-through and coherent and are presented here as a possible way forward. This guide also proposes ways in which the governance reform put forward by iGov could be made more deeply democratic.
The governance of the GB energy system has been very different in the past, and energy system governance is done very differently in other countries. So change is entirely possible – don’t trust anyone who says otherwise.
- Managing the national GB energy system, with its large scale network infrastructures, international supply chains, and huge political and economic importance, is complex. Continuing smooth operation of this system requires a certain level of complexity and stability of rules.
- The way that the rules work is strongly informed by worldviews and political ideologies. These have changed over time, and will continue to change in the future.
- Rules and governance co-evolve with technological systems. Our current rules are a product of our historic centralised, fossil fuel based energy system. They will change to evolve with new technology (decentralised energy generation, smart meters etc), because they have to.
- There are many possibilities for who gets to participate in and benefit from that change. Many different interests are involved in shaping future governance.
- The greatest understanding of the existing rules is held by people with interests in the status quo. This guide explains the existing rules so that you can make coherent arguments for change.
How it works now
The rules of the GB energy system are hierarchical, with parliament setting legislation, the executive department responsible for energy policy (which has changed over time) implementing policy, and many of the operational powers to oversee the energy system devolved to Ofgem, the regulator. Ofgem is responsible for electricity and gas system licenses, which fall into several categories. The license holders are then self-governing. They are also part of panels who can modify energy industry codes. The codes relate to particular types of activity or interaction between different license holders.
‘Consumers’ are also citizens, and can hold parliament accountable through the electoral process, and influence government through other forms of political pressure (lobbying, protest, demonstrations etc). However ‘expert’ lobbyists, many of them associated with fossil fuel interests, have powerful influence which is hard to match. Energy democracy would give citizens, as users of energy, more of a say in the day to day running and detail and an understanding of operational decisions, and thus achieve greater accountability.
In addition to BEIS as the government department directly responsible for energy policy, other government departments have remits that interact with the energy system. DfT (Department for Transport), MHCLG (Ministry of Housing, Communities and Local Government), Defra (Department for Environment, Farming and Rural Affairs) HMT (Her Majesty’s Treasury), in particular. These are identified in the image below, from iGov.
Transforming our energy system to respond to climate change is essential. So the Committee on Climate Change (CCC) is also included in the diagram.
The UK Parliament is responsible for new acts of parliament initiated by the government of the day. Energy policy has been the responsibility of different government departments over time:
- 2016 – present: Department of Business, Energy and Industrial Strategy (BEIS)
- 2008 – 2016 DECC (Department of Energy and Climate Change)
- 2007 – 2008 Business Enterprise and Regulatory Reform
- 1992 – 1973 Department of Trade and Industry
- 1973 – 1992 Department of Energy
- 1970 – 1973 Department of Trade and Industry
The government further controls the energy system via taxation, subsidy, incentives, planning controls, underwriting liabilities (eg for the nuclear industry), grants and funding for research. Around the world, fossil fuels receive tax breaks, which are effectively a form of hidden subsidy, skewing the energy market in their favour.
Energy Policy in Scotland is to a degree made by the Scottish government which leads at times to disagreements and inconsistencies with UK policy eg over the building of new nuclear power plants. Wales also have significant powers under devolution, for example planning – so they can still do onshore wind, and have set targets similar to Scotland, including community and local ownership targets. Have a look at Regen’s Energy Generation in Wales report for more detail on this.
Northern Ireland is regulated separately, and is coordinated with the Irish energy system.
Committee on Climate Change
The Committee on Climate Change (CCC) was created in 2008 as part of the Climate Act, which set out a legally binding target for the UK to reduce carbon emissions by 80% on 1990 levels by 2050. In June 2019, the UK passed a law to get to net zero emissions by 2050. The purpose of the CCC is
“to advise the UK Government and Devolved Administrations on emissions targets and report to Parliament on progress made in reducing greenhouse gas emissions and preparing for climate change.”Committee on Climate Change
The CCC only has an advisory role. It provides advice on the 5-yearly carbon budgets to be set by government, advises on policy to meet those budgets, and reports on progress. It does not have regulatory power. It is jointly sponsored by UK government departments (BEIS for the CCC overall, Defra for the Adaptation sub-committee), and by the Northern Ireland Executive, the Scottish Government and the Welsh Government.
The GB energy system is part of the EU energy market, and is likely to remain so post-Brexit. This requires the UK to comply with EU energy legislation. EU policy in turn harmonises with legally binding international agreements, eg the Paris Accord on Climate Change (2015).
The impact of the EU is mixed. EU energy policy and legislation, partly shaped by the UK, has a combination of provisions that support decarbonisation and those that embed market-based approaches and competition.
Many of the progressive energy policies in the UK derive from the EU. For example, EU regulations and directives have included:
- Renewable electricity target EU-wide, with specific country-based targets
- Energy efficiency in homes – new build and existing
- Roll out of smart meters
EU legislation originates from the Commission through regulations, which are immediately legally binding, and directives, EU acts which require member states to achieve a particular result without dictating the means. Different EU states have taken different approaches to implementing energy policy. Looking at other EU countries reveals what is possible within the EU framework and what has been chosen at the UK level. It also means we can see the impact of different approaches – several experiments in energy policy have been run at the same time, and we can learn from each other.
The main goals of the EU are enshrined in the Lisbon Treaty of 2007. : This is based in “EU Treaty-based principles of non-discrimination, equal treatment, transparency, mutual recognition and proportionality” (United Kingdom Crown Commercial Service, 2016). These rules aim “to create a level playing field for all businesses across Europe” (Europa, 2014) i.e. the main purpose of EU procurement rules is to prevent states from favouring suppliers within their own borders, and to ensure that there is free competition across the EU.
EU energy directives have the free-market goals of:
- Cost reflectivity – the end user pays a price that reflects the cost of producing the energy they receive
- Non-discrimination between commercial providers – commercial providers should be treated equally regardless of which EU country they are based in, their size or other factors. This particularly relates to procurement by public bodies (e.g. Bristol City Council must buy from the cheapest energy company, not the one they own), with a set of rules over ‘state aid’ which means the state not giving favourable treatment to any party.
These are different goals to the ones that energy democracy might prioritise, such as access to energy, decent worker conditions and environmental sustainability. They are also different to the stated national policy goals of the ‘energy trilemma’ – sustainability, affordability, energy security.
Competition, cost-reflectivity and non-discrimination are indirect objectives,which are valued for their percieved ability to achieve cheap energy through market mechanisms. However, they preclude policies such as rising block tariffs, described in the money flows chapter, which may be more effective in achieving both energy access and environmental benefit.
On the other hand, the EU has started to include renewable energy communities and citizens energy communties within their legislation, as discussed by Josh Roberts of european community energy body RES Coop.
OFGEM (office of gas and electricity markets)
The gas and electricity markets are regulated by Ofgem, the Office of Gas and Electricity Markets. Ofgem’s principal objective is “to protect the interests of existing and future electricity and gas consumers” (Ofgem, 2017). This is through: “promoting value for money; promoting security of supply and sustainability, for present and future generations of consumers, domestic and industrial users; the supervision and development of markets and competition; regulation and the delivery of government schemes.” (Ofgem, 2017). Ofgem itself is governed by GEMA – the Gas and Electricity Markets Authority.
Although sustainability is mentioned in the objectives of Ofgem, it has been criticised for not having a clear remit to respond to climate change. Incremental innovation and infrastructure investment is incentivised through regulation, but the big transformations needed in energy systems are not.
iGov proposes that Ofgem’s role should focus purely on market regulation, and that climate change responsibilities should be held in a separate body.
Ofgem is responsible for issuing licenses to gas and electricity network organisations. There are five types of license for electricity, and four for gas, and one, the Smart Meter Communication license that covers both.
Electricity license types:
- Electricity Transmission (21)
- Electricity Distribution (27)
- Electricity Interconnector (17)
- Electricity Generation (203)
- Electricity Supply (220)
Gas license types:
- Gas Transporter (28)
- Gas Interconnector (4)
- Gas Shipper (272)
- Gas Supplier (232)
License relevant to both:
- Smart Meter Communication (1)
Many of the companies involved in the gas and electricity systems hold several different licenses, through multiple sub-companies. In particular the big six energy companies are ‘vertically integrated’ in electricity, which means they do generation and supply and can buy their own electricity without going through the wholesale market. There is only one company holding smart meter data, called Smart DCC Limited, which was selected through a competitive procurement process in September 2013.
DNOs are subject to price controls on the charges they levy on suppliers and which are passed on to consumers. In theory these allow DNOs to cover the cost of managing and maintaining their network as well as making a profit which they can allocate to shareholders whilst still encouraging them to invest in new infrastructure (which as monopolies they otherwise may not have an incentive to do) .
DNOs submit long-term business plans to Ofgem and these are assessed according to the RIIO (Revenues=Incentives+Innovation+Outputs) methodology which then sets a price control regime for a period of 8 years. RIIO-ED1 price control period lasts from 1 April 2015 to 31 March 2023, RIIO-ED2 starts in April 2023. This business planning is important for energy democracy because it determines investment in new infrastructure as well as investment in innovation, which could enable new community energy business models to emerge.
Energy Industry Codes
The rules of interaction between the license holders are set out in the Energy Industry Codes, which detail the commercial and technical operational rules for the regulated energy industry. These codes are self-governed by industry – a form of ‘double delegation’ – from the government to Ofgem, and from Ofgem to industry. The ‘parties’ to the codes (i.e. the license-holders relevant to the code) are able to propose modifications, which are decided on by a panel. Ofgem can only propose modifications in exceptional circumstances, and usually only has veto power. The codes are extremely complex – there are over 10,000 pages worth of detailed rules across the various different codes. Some of this complexity is necessary for keeping the system working smoothly, but it makes the whole system opaque. Only the biggest energy companies can afford a team of codes experts who can participate in the modification process, and even then only a few people who have been around for a long time really know the detail inside-out.
- The energy industry codes have evolved over a long time, and were designed for a fossil-fuel, centralised big power station based system.
- Change in the codes is very slow and incremental – it is hard to make the big transformations we need to decarbonise the system.
- There is a lack of democracy in the codes – they are twice removed from government influence, and only a very small number of people know how to work them.
Energy Wholesale markets
History of electricity markets
Prior to privatisation, the GB electricity system was operated by the Central Electricity Generating Board. They used a ‘merit order’ to decide which power stations to turn on, using the cheapest power stations first. This was based on the marginal cost of power – so renewable electricity, which does not require fuel, has a marginal cost of zero, as does nuclear power, which is usually run to be on at a constant rate.
Following privatisation, the GB electricity system initially used a type of market called a ‘pool’, which involves a competitive market on the generation side, and a price given to the retail side of the wholesale market. This operated from 1990 to 2001. In an energy pool, generators sell their electricity to the system operator, which then centrally controls the dispatch of generators, based on a merit order, where the cheapest generators for any given time-period are chosen first, up until demand is met. Suppliers then buy the electricity from the pool at the ‘pool selling price’.
In 2001, GB moved to a bilateral trading system. In this approach, generators sell directly to suppliers, and announce to the system operator the amount of energy they have traded in advance. Other countries started a pool system later than GB, and continue to operate under a pool rather than using a bilateral trading system. Pools and bilateral trading systems each have pros and cons. For example, in the pool system, the SO can address imbalances through the existing spot market, whereas in the bilateral trading system dealing with imbalances is more complex, and a separate imbalance market is created.
Gas and electricity wholesale markets
In the wholesale markets, parties trade for various reasons:
- Trading of energy itself – to balance supply and demand
- Hedging – to reduce the risk of change in price by buying or selling ahead of time, sometimes years ahead
- Speculation – to make money from differences in price over time – buying when cheap in order to sell when expensive.
Liquidity is important in commodity markets, and is measured through the ‘churn rate’, the ratio of the amount of energy traded to the amount of energy physically distributed. A higher churn rate is a more liquid market, and a churn rate of 10 is considered to be good (electricity for dummies guide ref). The GB electricity market has low churn (8 in electricity for dummies guide, 3 in energy system catapult chapter 4), and the gas market has a higher churn of 20 (gas market for dummies).
Energy is traded in various timescales for both gas and electricity, with energy sometimes being purchased several years in advance, or traded immediately before it is used. Some of these are traded in specific markets, e.g. the ‘day ahead market’, or the ‘spot market’.
The specific time at which the gas or electricity is going to be used is important. This is called the ‘settlement period’. For electricity, the settlement period is half an hour (this varies between countries, and can be 15 minutes). For gas, the settlement period is a day. System stability and reliability of supply means that the energy used and the energy provided during each settlement period must be in balance. The responsibilities for being in balance are set out in the energy industry codes, or regulations. For electricity, there is the ‘Balancing and Settlement Code’, and for gas the ‘Uniform Network Code’.
Parties which trade on the wholesale market must tell the system operator how much gas/electricity they have contracted to put into the system for each settlement period, and how much they have contracted to take out. The deadline for stating their ‘position’ is called ‘gate closure’. This is immediately before the electricity settlement period begins, and a couple of hours before the gas settlement period begins. Generators and suppliers continue to adjust their position up until that point, as things change due to changes in weather conditions (affecting e.g. heat demand as well as renewable energy generation), technical faults and other factors. Inevitably, what actually happens doesn’t perfectly fit the plan, and any discrepancies between the stated positions and the actual physical energy balance are subject to imbalance charges. The system operator also has to ensure that the system is physically in balance during each settlement period, and has a number of mechanisms available to make adjustments. This is a more complex and sensitive task for the electricity system than for the gas system.
Alternative proposal for governance
Various organisations have proposed alternative approaches to GB energy system governance. These mostly agree that there should be more system-wide coordination, long term planning, and ability to make transformative, rather than incremental change.
Energy Networks for the Future – Regen
Regen’s proposal for future energy networks is sturctured around strategy and policy, system delivery and optimisation, and asset and service provision. An overview of their proposal is shown in their summary diagram.
iGov – University of Exeter
The proposal made by iGov is one of the easiest to understand and most comprehensive. This is shown in the image below.
At the centre of the iGov proposal, there is a new organisation called the ‘energy transformation commission’ (ETC). This is responsible for implementing the changes we need to make to get to zero carbon. It has direct links with government departments responsible for energy, transport, housing, climate change and the treasury. It also has advisory relationships with the Committee on Climate Change and National Infrastructure Committee.
The iGov proposal continues to have a role for Ofgem – but this is clarified as an economic regulator. Rather than arguing that ofgem should include climate change in its remit, ofgem becomes accountable to the ETC which has climate change at the heart of its purpose.
Many of the current licensed activities remain in the private sector, but the network infrastructures have carbon reduction and social goals.
Finally, the system operator role which is currently done by National Grid in gas and electricity, is taken into the public sector, and has a remit that integrates and coordinates the different systems relevant to energy, including gas, electricity and aspects of transport. This means that energy storage and time of use matters are coordinated in an integrated way and with non-commercial objectives.
There is a lot that is attractive in this proposal, in terms of clarity and transparency, and effectively addressing climate change and social outcomes. However, it is worth looking closely at the proposal made by iGov, and comparing this with the arguments for public ownership discussed in the section on ownership and organisations. While their critique of the current system is clear, and the proposals they make to improve things are good, they could go much further in terms of democracy. For example, including consumers and workers within the decision-making and governance structure at each level. Berry and Guinan argue that creating this deeper level of democracy can help ensure that such structural changes are lasting.
Public ownership – David Hall and Mika Minio-Paluelo
In contrast to the iGov proposal, public ownership and energy democracy advocates David Hall and Mika Minio-Paluelo propose an energy governance structure centred around National, Regional and Local energy agencies.
Local energy governance
Currently, supply of electricity – the retail role – is at a national scale. This is limiting for the development of community-based, local democratic organisations in the energy system. The community energy sector has been trying to develop approaches to ‘local supply’, including microgrids, private wire arrangements and local tariffs in partnership with licensed suppliers. Creating a local level of energy governance makes a lot of sense in the context of Ostrom’s work on polycentric governance, which is multi-scalar. Ostrom’s 8th design principle for commons is to have ‘nested governance’, which this additional local scale would also contribute to. Enabling local supply is essential for creating any kind of local autonomy or wholeness of system.
Various academic and policy organisations are concerned with ways to enable local supply. They are in some ways taking their lead from attempts made by community energy groups to develop local supply of various kinds, and learning from the barriers encountered. Bear in mind that the focus of most of these explorations is electricity. This does not mean that local supply is not relevant to gas and heat, or that it shouldn’t be integrated at a system level (across energy vectors).
Academics at the University of Leeds proposed a set of ‘archetypes’ for local supply in 2015. These are quite complex and difficult to understand partly because they are describing something that does not yet exist. These are available in the report Hall, S. and Roelich, K. (2015) ‘Local Electricity Supply : Opportunities , archetypes and outcomes’. They are worth looking at, but fully considering their implications is beyond the scope of this guide in its current form.
IGov have also thought about the local aspect of transforming the energy system New Thinking: Governance for Local Energy Transformations.
There is a lot more to be said about how we could govern our energy system in the future. This is something which would be better to explore together with other people. A future version of this guide may include outcomes of discussions and workshops about future energy system configurations.