Regulatory challenges in the transition to low-

carbon heat

Dr Jeff Hardy Senior Manager, Sustainable

Development Ofgem

www.cir-strategy.com/events/heat

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Outline

1.  Ofgem and Sustainable Development 2.  The challenge for the energy industry 3.  The RIIO framework 4.  The heat challenge

1. Future of gas 2. Electrification of heat 3. Heat networks

5.  Conclusions

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Ofgem

•  Ofgem is the Office of the Gas and Electricity Markets. It is the independent economic regulator in the energy sector.

•  In making decisions Ofgem’s principal objective is to protect existing and future consumers interests, i.e. to ensure value for money.

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Sustainable Development

Our Principal Objective

• To protect existing and future consumers interests...including their interests in the reduction of greenhouse gases and in the security of the supply of gas and electricity.

We must have regard to...

• Amongst other things UK and European greenhouse gas and renewable energy targets

Therefore our role includes a contribution to...

• Enabling timely investment in necessary capacity for the electricity networks

• Ensuring connection to the electricity networks for new generation • Eliminating unnecessary regulatory and market barriers to the

economic deployment of distributed energy

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Outline

1.  Ofgem and Sustainable Development 2.  The challenge for the energy industry 3.  The RIIO framework 4.  The heat challenge

1. Future of gas 2. Electrification of heat 3. Heat networks

5.  Conclusions

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The energy industry is facing unprecedented change

De-carbonisation

Security of Supply

Ageing Assets

Affordability

ELECTRICITY NETWORKS

GAS

NETWORKS

•  Renewables / new generation

•  Smart Grids •  Electricity storage

•  Electric vehicles •  Different network patterns •  Electrification of heat

•  Energy efficiency •  Local generation •  Demand Side Management

•  Carbon Capture and Storage •  Biomethane

•  HVDC •  Skills shortages

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Outline

1.  Ofgem and Sustainable Development 2.  The challenge for the energy industry 3.  The RIIO framework 4.  The heat challenge

1. Future of gas 2. Electrification of heat 3. Heat networks

5.  Conclusions

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RIIO – a new approach to regulating energy network companies

•  New regulatory regime to encourage network companies to: –  Play a full role in the delivery of a sustainable energy sector –  Deliver value for money for existing and future consumers.

•  Key features: –  Comprehensive consumer-focused outputs on safety,

reliability, availability, environment, connections, customer satisfaction

–  Company business plans to be justified e.g. benefits of particular approaches including longer term context

–  Stakeholder views should inform these business plans and we expect continuing stakeholder engagement by the company

–  Strong incentives to deliver outputs and to innovate. •  RIIO-T1 and GD1 (2013-2021) and RIIO-ED1 (2015-2023) will be

the first price controls to implement the RIIO framework.

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Outline

1.  Ofgem and Sustainable Development 2.  The challenge for the energy industry 3.  The RIIO framework 4.  The heat challenge

1. Future of gas 2. Electrification of heat 3. Heat networks

5.  Conclusions

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Scale of the ‘heat’ challenge

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Heat technologies

Taken from ENA 2050 Pathways for Domestic Heat Report

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Regulatory issues

1.  Protecting the interests of current and future consumers 1. The degree to which heat is decoupled from gas 2. The degree to which heat is electrified 3. The future role of heat networks

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1. Decoupling of heat from gas?

•  Uncertainty over future of gas •  Scenarios suggest gas use in

decline in domestic sector from 2030...

•  ...and that the domestic sector could be fossil free by 2050

•  BUT these are scenarios Implication: •  Gas transmission and distribution

price controls

image: www.freeimages.co.uk

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2. Electrification of heat

•  Uncertainty over speed, scale and geography of deployment of electric heating technologies, particularly heat pumps

•  Scenarios suggest less than a million by 2020...

•  ...but up to 8 million by 2030 •  Mainly in rural/suburban areas Implication: •  Significant (smart?) electricity

distribution network reinforcement required, but when and how?

image: www.freeimages.co.uk

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3. Heat networks

•  Significant ambition for heat networks in high heat density areas

•  Potentially millions of customers on heat networks

•  Waste heat capture driven by European Energy Efficiency Directive

Implications: •  Consumer protection •  System balancing role

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Outline

1.  Ofgem and Sustainable Development 2.  The challenge for the energy industry 3.  The RIIO framework 4.  The heat challenge

1. Future of gas 2. Electrification of heat 3. Heat networks

5.  Conclusions

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Conclusions

•  We live in exciting times •  The pathway to low carbon heat is uncertain, but most routes

have implications for Ofgem •  There is a challenge for network companies to consider future

deployments of low carbon heat (and other technologies) for their businesses

•  The Low Carbon Network Fund (and the forthcoming Network Innovation Competition) is an opportunity to trial solutions to manage low carbon heat

•  A smart approach could have long term value for consumers

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