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SIEW 5Qs Interviews

By UK Gas & Electricity Markets Authority | 24 October 2016

SIEW 2016: 5Qs with David Gray, Chairman, UK Gas & Electricity Markets Authority

About David Gray

David Gray is Chairman of the UK Gas & Electricity Markets Authority (GEMA), the governing board of the Office of Gas and Electricity Markets (Ofgem). He was appointed to this role in October 2013 and was previously an executive director of Ofgem from 2003 - 2007 in charge of the Networks Division. He is also a non-executive director of the UK Civil Aviation Authority. In 2008 he advised the UK government on a review of economic regulation of airports and in 2011 he led a review of the Water Services Regulation Authority (Ofwat). Before 2003 he worked for HSBC where he was head of the Energy and Utilities investment banking team and advised the UK government on the privatisations of the gas and electricity sectors.

1. How has the UK’s energy market changed with the growth of more renewable energy and innovative energy technologies? How is GEMA responding to these changes?

Renewable generation, particularly solar photovoltaics, has grown faster than anyone had predicted in Great Britain. This has brought challenges for the networks, which were designed for one-way power flows (transmission to distribution) and in some cases led to grid constraints. We believe that the solution to these challenges cannot simply be reinforcing the networks and building more flexible generation. This could be very expensive. Increasing flexibility in the system from storage and demand side response will deliver network resilience at a lower cost. For new sources of flexibility to enter the market at scale, we need to ensure that any inefficient barriers are removed, and the roles and responsibilities for network and system operation are designed to promote whole-system efficiency.

We support innovation by network operators through the RIIO Innovation Stimulus, which allows networks to raise additional money from customers to fund trials of new technology and techniques. Under this arrangement, transmission operators and distribution network operators have trialed a wide range of ways to alleviate network congestion. These include flexible connection arrangements, where generators are prepared to accept that at times their output will be curtailed, and measures to smooth demand peaks – for example by automating charging times for electric vehicles. One condition of funding these trials is that the learning is available to all GB network companies. We are now looking to the networks to implement flexible solutions in their day to day business where these are the most efficient approach.

2. What are the investment gaps and opportunities which the UK could address to meet its priorities of greater energy security and decarbonisation?

The UK faces a number of investment challenges, including replacing the older generation fleet and meeting carbon targets while maintaining security of supply. Gas generation is currently more profitable than coal but developers of new plants are struggling to raise finance due to low generation margins. The Capacity Market was introduced in 2014 to ensure security of supply and provide investment incentives to new electricity generators. Generators are paid annually for the capacity (and therefore security) they provide. Prospective new generators are eligible for 15 year agreements. This year the government made changes to the Capacity Market to buy more capacity and buy it earlier, increasing the chance of new gas plants getting agreements.

On the other hand, we have seen very rapid growth in renewable generation (wind and solar) over the last few years. Having a larger share of renewables in the energy mix is an essential step to decarbonising the energy sector. Our innovative cap and floor regulatory regime has also resulted in significant interest in new electricity interconnectors that can help to ensure energy security and facilitate decarbonisation.

3. What are GEMA’s priorities for the implementation of the UK’s smart meter rollout plan?

There are three key outcomes, often conflicting, that we need to balance: maximising the number of smart meters that are installed; keeping the costs down; and ensuring a good consumer experience.

We acknowledge that there will be technical challenges in installing smart meters in every home and we are engaging with government, suppliers and others to ensure the industry is prepared for the challenges it will face. Equally, the smart meter rollout cannot be pursued regardless of cost and we need to ensure that smart meters represent value for money. Finally, we need to ensure that energy consumers see the installation of smart meters as a positive experience. We oversee regulations that require suppliers to provide a professional and positive installation experience. We will continue to monitor the consumer experience, and take decisive action where it does not meet our expectations.

Alongside the smart meter rollout, we are working on a number of exciting market reforms, including sharpening the incentives for suppliers to offer time of use tariffs, increasing the use of demand side response and creating a faster and more effective switching process.

The UK Competition and Markets Authority has recently concluded its investigation into the energy market. It stressed the importance of smart meters in helping consumers engage with the energy market, which could encourage consumers to switch supplier and help to drive competition between suppliers. This should lead to better consumer outcomes.

4. What is the biggest impact of the impending Brexit on the UK’s energy market and GEMA?

The impacts of Brexit on the UK energy market will ultimately be determined by the outcome of the exit negotiations between the UK Government and the European Union; and the nature of any arrangement within that regarding energy.

Whatever new relationship emerges between the UK and the EU, I would expect us to continue to support competitive markets in which energy flows freely and to seek to ensure that consumer benefits from this are maximised.

As a competition regulator, our main focus will remain on enabling energy to flow in line with market signals, including on the interconnectors between GB and the European Union which are important to our security of supply, and boost competition.

5. What are your thoughts on the SIEW 2016 theme “New Energy Realities”?

The SIEW 2016 theme is very relevant to a lot of our current and future work programme. We know that the energy system of the future will be very different to the energy system of today. Our role as the energy markets regulator is to protect the interests of existing and future consumers. While we cannot be certain what tomorrow’s system will look like, in order to best protect consumers’ interests we need to understand what is driving system change, the likely impacts on consumers and the implications for regulation which will help us navigate through this period of change.

Low energy prices have resulted in a shift in the generation mix and impacted on plant profitability. The decarbonisation agenda has been reinforced by the Paris Agreement. The GB energy system is transforming from a largely centralised and carbon-intense model to one that is carbon-constrained, more decentralised, smart and flexible. At the same time, we’re seeing new and potentially disruptive business models entering the market. We also know that these transformational issues aren’t unique to Great Britain or to the energy sector. Other countries are also in the midst of energy system and market transformations. Other sectors have already experienced such disruptions, for example the rise of mobile phone technology in the telecoms sector. It is important we are able to learn from experiences elsewhere and as such I am very happy to be able to participate in the SIEW 2016.

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