Minutes of a Meeting of the Gas and Electricity Markets Authority. Ofgem, London SW1P 3GE

Transcription

1 Minutes of a Meeting of the Gas and Electricity Markets Authority Thursday 15 th December 2011 at 8.15 am Ofgem, London SW1P 3GE Introductory remarks by the Chairman 1. There was an apology for absence from Jayne Scott who would be joining the meeting by telephone link. The Chairman noted the interest of a Member who was providing help to a company advising on complaint handling: should their future work involve the energy sector, the Member would not take part. Another Member had declared an interest, given the funding received by his institution from some energy companies. 2. The Chairman and the Legal Adviser noted that, following a number of small changes needed to the membership provisions for the Enforcement Committee, further modifications were required in respect of the membership of some other Committees, again purely technical changes after recent personnel moves, new titles and promotions. These were explained to and agreed by the Authority and would be set out on the Authority s website. 3. On appointments, it was understood that Ministers at DECC had been consulted and had agreed proposals on both re-appointments and new appointments of Non-Executive Directors to the Authority, and their terms, and the processes planned for taking forward a recruitment exercise in Information had been provided by the Secretary to Members accordingly. 4. The Chairman reminded the meeting about completing the feedback forms for assessing papers and their high value to staff drafting for the Authority. Minutes of the Authority Meeting held on 24 November The minutes of the previous meeting in Cardiff were approved. Staff Survey 6. The Authority was presented with the key results of a recent Ofgem Staff Survey by the Head of HR. Participation at over 95% had been encouraging, putting the Ofgem survey return rate at the top of organisations of its size. There were many positive elements to welcome including high marks employee engagement, enjoyment of Ofgem s work, career opportunities, the performance on internal management, inclusiveness, and on the positive working environment. Most indicators were in the upper quartile of national benchmarks, and some 70% of staff returns recorded the view that Ofgem was a very good place in which to work. Some steps were needed to improve

2 further aspects of vision, work objectives and feedback. Views on pay and benefits broadly reflected the national picture for public sector bodies at a difficult time of cost restraint. The Authority welcomed these pleasing results, noting the action in hand to work further on some elements identified in the survey. Reports from the Chief Executive, Senior Partners and MD/E-Serve 7. In his report, the Chief Executive reviewed a number of recent activities and successes including the launch of the Renewable Heat Incentive which had been a major project involving considerable effort from staff; the completion of the RIIO-T rollover which had been well received; further work on the RIIO-GD business plans; and the Ofgem outreach programme with closer working with independent suppliers and the large and smaller energy user groups. On the Retail Market Review, the new contacts with SMEs had been well received; and the independent supplier forum had been working successfully. On enforcement, a number of cases were reaching settlement after a sustained period of demanding casework. 8. There had been considerable engagement with DECC on a range of major regulatory policy matters including TransmiT, electricity market liquidity, the environmental schemes and their development and deregulation matters. Looking ahead to 2012, the Chief Executive noted that key determinants influencing the work plan and strategy would include European and Russian political developments. The environment for inward and outward investment by energy companies and was noted as well as the relationship to policies on nuclear generation, carbon taxation, renewables policies and rewards and climate change and its impact on the drive to lower carbon economies, and the prospects for job creation. 9. The report from Markets Division provided the Authority with the main developments in energy markets. Oil prices had been relatively flat in recent months though fairly high historically, with Brent Crude now at about $107 bbl. Japanese LNG prices had eased somewhat in November but were still double GB prices. The forward GB price curve had softened significantly over the past month with prices for Winter 2011/12 close to their lowest values during the past year. This was thought to reflect weak demand. GB storage stocks, at some 93% of capacity, were higher than the average of the past six years at this time. LNG stocks were also close to the level of maximum capacity for medium range storage stocks. 10. For electricity, UK power curve prices had declined significantly and were now close to their lowest annual levels. Near term continental European power prices had fallen to below GB prices. Spark and dark spreads favoured coal across the forward curve, given the currently low EUA price which had been in sharp decline.

3 11. Dual fuel net margins per customer for retail companies were presently assessed at 105 and were forecast to fall further in the early months of The QR figure for October had been 125 then 110 in November. The plan was now to publish the analyses on the Ofgem website and update these regularly. 12. The Authority noted that DECC were that day publishing their Electricity Market Reform Technical Update. This would cover institutional arrangements with confirmation of National Grid as the delivery body - and the proposed capacity mechanisms. A briefing note on the main features of the DECC proposals was provided. Ofgem s future role would be to continue as the regulator of National Grid s systems operator function and the new instruments. Ofgem had continued to liaise closely with DECC during the development of the EMR plans. The Authority noted a number of outstanding points on the EMR and the related Ofgem role which were being pursued with the Department. 13. Detailed proposals under Ofgem s Retail Market Review had been published for the domestic sector on December 1 st, triggering a 12-week consultation period. It was hoped that companies would continue to engage constructively with these proposals. On smarter markets, Ofgem had published a Strategy, opening a debate about the ways in which Ofgem workstreams - such as cash out, balancing settlements and switching could contribute to the realisation of the fullest benefits to consumers from the mandatory roll out of smart meters. 14. In respect of industry links, two small supplier groups had been established, and inaugural meetings held, covering the interests of domestic and small suppliers; and, separately, non-domestic suppliers. These two groups would meet two or three times a year, and were likely to focus first on the RMR proposals, and later, on other major Ofgem workstreams. 15. The report from Sustainable Development Division first noted the publication by Defra of energy companies reports on adaptation to climate change. This addressed substation flooding risks, power generation at times of high ambient temperatures and potential damage to overhead and underground cables. The sector was believed to be making good progress. The Ofgem allowances to secure flood defence improvements in the context of price control settlements on DPCR4 were noted. Ofgem was planning to produce its own adaptation report for Defra in January This would focus on the steps which had been taken to embed climate change adaptation measures and related incentives through Ofgem s regulatory tools and policies, and the obligations being set for regulated companies in respect of secure, reliable and sustainable energy supplies. 16. The Authority noted that an enforcement policy review was about to start, first updating present policies, then seeking views for a further phase which

4 would address topics such as compliance vs. enforcement, penalty policy and investigation processes, as well as the themes of compensation and redress. BIS had just started a review Transforming Regulatory Enforcement, as part of its initiatives to continue to reduce regulatory burdens and examine the aspects of the culture of enforcement. 17. The Authority was briefed on the prospects for a further Energy Bill in the Second Session of Parliament, and its possible content. 18. The report from E-Serve noted that Ofgem s consultation on the enduring regime for offshore transmission would be published before Christmas, setting out how it was proposed Ofgem would deal with offshore construction by Offshore Transmission Owners. The NAO have been undertaking an assessment of the offshore regime. A number of technical changes were now needed to the terms of reference of the Tender Review Committee and the Authority s Offshore Committee, following organisational and personnel changes. The Authority noted these and the fact that they had been approved by the Chairman (for the Authority Committee) and the Chief Executive (for the TRC) and approved also the revisions to the TRC s terms to reflect the decision taken by the Authority earlier to delegate one of the Committee s duties to the E-Serve Commercial Division. 19. The volumes of applications under the Feed In Tariffs scheme, had continued to rise above departmental expectations. The Authority noted that three parties had initiated Judicial Review proceedings against DECC on the proposed tariff cuts. 20. The Renewable Heat Incentive Scheme had been successfully launched for non-domestic consumers on 28 November. Some 400 full or partial applications had been received, though the delayed start to the scheme could mean that all sums budgeted would not be paid within the financial year. On new scheme activity, the Authority noted that a study had been carried out on the possibility of E-Serve assisting Northern Ireland in the administration of their RHI scheme. Advice would come forward to the Authority in January. 21. The Divisional report from Transmission noted that Ofgem had recently received National Grid s proposals for amending the user commitment arrangements for generators on the security to be posted against new investment and notice periods. This was now being assessed against the need to ensure that an appropriate balance is struck between facilitating the connection of new generation and the need to protect consumers from the risk of stranded assets. There were plans to consult on an impact statement early in the New Year. In addition, RIIO had introduced new output measures in respect of connections performance. A decision document had been published on a new licence obligation on reporting for all electricity transmission companies.

5 22. In October, initial assessments of the RIIO-T1 business plans had been published along with the decision to retain two companies in the so-called fast-tracking process pending the resolution of some further issues by the companies concerned. Following discussions in the Authority s RIIO Committee, advice would come forward to the Authority, seeking a formal decision on fast tracking. The Authority noted this, and the proposed treatment of those companies whose business plans were not to be fast tracked, and where aspects of the plans would be subject to proportionate treatment, based on information currently being provided to Ofgem. 23. The Authority was briefed on the work of the Electricity Networks Strategy Group, co-chaired by DECC and Ofgem, a high level forum bringing together stakeholders in electricity networks, to support the achievement of HMG s environmental targets. A key workstream was the development of transmission scenarios to meet renewable and carbon reduction goals. An updated vision would be produced early in the New Year. 24. The planned upgrade of the Beauly-Denny line in Scotland, from 132 kv to 400 kv, continued to attract high public interest and had resulted in lengthy planning processes. Scottish Power, in respect of the southern part of the line in their area, had been provided with funding allowances for upgrading, and there was the possibility of certain further requests in response to new obligations, and requests, on visual impact mitigation measures. 25. The report from Smarter Grids and Governance: Distribution Division noted that GDNs had submitted their business plans as part of the RIIO-GD1 price control processes. Three companies had taken up the HSE s new approach to repex with large reductions in the consumer cost impacts for this element of planned replacement expenditure. All plans had shown a significant improvement compared to those of earlier price controls but, overall, were reflecting material increases in costs for a number of elements. The Authority would be briefed with further analysis early in 2012, including recommendations on whether any companies might be retained within the fast-tracking process. 26. The Authority had, in September, approved its approach to assessing the price control adjustment to be made to take into account the costs to GDNs of meeting local authority requirements under the Traffic Management Acts. GDNs had reported significant regional variations in costs, according to local authority, and had proposed that the benchmarking approach needed further examination. Data gaps and uncertainties on costs suggested that this reopener should be further considered, with interim, and then final adjustments at the end of the price control period. 27. There had been a review of the funding, governance and ownership issues for Xoserve, the organisation which provided data services to support the gas industry. Some suppliers had raised concerns on levels of service and the

6 transparency of costs. Following consultation, it had been decided that a cooperative model would provide improvements, with governance resting with the wider industry, the model reflecting similar arrangements for data services for electricity through Elexon and the Master Registration Services Company. 28. On DNO losses, an incentive scheme had been in place since 2005 to encourage DNOs to reduce losses on their networks. Delays in finalising settlement data meant that the DPCR4 incentive mechanisms could be closed out only in mid 2012 when the DPCR5 target losses would also be set. Work was in progress on data and assessment, and the Authority would be kept informed. Report of the Group Finance Director 29. From his report, the Group Finance Director highlighted the following: The current and projected underspend for the current FY, the bulk of which related to DECC or scheme funded work, but also in respect of staff and related costs, and consultancy work the potential treatment of any final net underspend, including contingency provision and possible refunds to licence holders an overview of staff numbers against Corporate Plan targets, staff changes to date, and staff movements outline plans for the development of strategy review processes in early 2012 the review of major projects and their progress Forward Work Programme 30. The Authority was planning a comprehensive review of its strategy in the coming months against the background of important changes in UK and EU energy and environmental - and regulatory - policies. It was required however to consult on a forward work programme, to be published in March, covering the planned projects for 2012/2013, their objectives and overall budgetary estimates. The programme presented included a budget ceiling of RPI-3%, and this would be reviewed by the Audit Committee at its next meeting. The Authority discussed and agreed the main elements of the preliminary draft work programme, and its four main themes: contributing to the achievement of a low carbon energy sector; helping to maintain security of energy supplies; promoting quality and value for all consumers; and Ofgem s work on the delivery of HMG s programmes for a sustainable energy sector. It was agreed that, subject to some further revisions to the introductory sections, the programme should be published immediately for public comment.

7 Enhancing liquidity 31. The Authority continued its debate on proposals for interventions in the GB wholesale power market, whose purpose was to improve liquidity; and reviewed further work and options on the development of the Mandatory Auction (MA) and Mandatory Market Making Arrangements (MMA) and their detailed design and assessed impacts, and the implementation plans. This covered also the potential products subject to these arrangements; proposals for the required marketed volumes; the arrangements and responsibilities for the platforms which might be used; and the process and timing steps needed to introduce the various arrangements under consideration. 32. The Authority had a detailed series of exchanges on the options and their pros and cons, reviewing also the recent developments on exchange-trading in wholesale electricity products, and the relationships between the potential interventions in the market and the measures foreseen in the EMR. No decisions on the options or their detailed design were called for at this stage, and it was suggested, in the light of debate, that a number of a number of features in these proposals would merit further investigation to prepare for Authority debate and decisions early in the New Year. Transmission Issues 33. Under this item, the Authority considered three interlinked issues on proposed developments of the regulatory regimes for future investment in electricity transmission assets, these covering a regulated regime for interconnector investment in GB; the offshore transmission coordination project; and recommendations on funding for transmission investment incentives from April On interconnector investment, further work had been carried forward since May to develop a contestable, regulated regime based on a cap and floor approach, using the proposed GB-Belgium interconnector as a pilot model. In June, a joint consultation with CREG, the Belgian regulator, had been published on the principles, the high level cap and floor design parameters and the proposal to develop this into an enduring regime. Since that date, several developers had come forward with new or revived plans for interconnector links. It was desirable that interest and momentum be maintained, with early publication of the final principles and high level design of the regime, so as to settle the next steps on the GB-Belgium interconnector as well as the basis of the enduring regime. 35. Consultees had supported the proposed principles for the new regime but had highlighted some of the wider benefits which interconnection could bring - for example in security of supply and in the integration of renewable generation. Accordingly, the team proposed that interconnector proposals should be assessed against criteria on the benefits which efficient levels of interconnection

8 could offer to consumers, as well as the commercial viability of projects. The cap and floor design had also gained wide support in consultation and also its role as part of an enduring regime. This had been further developed, and in addition the necessary process steps, in joint work with CREG. 36. The Authority approved the approaches recommended, noting that the cap and floor levels would be set in 2012, and agreed that the preliminary conclusions should be published in December with the stated intention to develop an enduring regime based in both the principles and high level design. The Authority also agreed that the development of the enduring regimes, should also address issues related to offshore licensing and compatibility, efficient levels of connection to ensure greatest consumer benefit, and the mechanisms and governance of the cap and floor setting processes. 37. The Authority debated the team s work and emerging recommendations on the Offshore Transmission Coordination Project and the main proposed messages for a planned Ofgem/DECC publication planned for February This work, involving a joint project with DECC on offshore coordination, had also been reviewed by the Authority s Offshore Transmission Committee. The Authority noted that there should be benefits from increased coordination in some Round 3 Zones, though in the longer term; that some modest short term adjustments to the offshore regime may be desirable in order to keep open options for gaining coordination benefits for Round 3 connections, facilitated by some anticipatory investment on which proposals would be developed; and that a new workstream should be initiated to look at aspects of the role of National Grid as coordinator. 38. The Authority was briefed on Ofgem s work on Transmission Investment Incentives (TII) and its aim of ensuring that critical electricity transmission investments came forward from TOs and were funded within the current price control period TPCR4. Following on from its past decision to extend the TII framework to under the one year adapted roll-over of TPCR4, the Authority noted the additional funding that would be provided when past TII funding decisions are extended to include planned investment in , and was asked to make further funding decisions on five further TII funding requests received for investment prior to RIIO-T1. The five TII funding requests had been examined with the assistance of consultancy advice. Funding was awarded in line with the transmission companies requests (taking into account previous funding already awarded under TII and TPCR4) in all but one case where there was insufficient information to make a decision at this stage. The Authority noted that provisional funding for this project in line with the latest cost estimates was already included in the baseline allowance for the rollover and that it expected the transmission company in question to come forward with further information that would be assessed in the context of RIIO-T1. The Authority also noted that findings would be published in detail in January 2012 together with a consultation on the licence changes to extend the TII framework to

9 Transmit: consultation on charging options 39. At this item, the Authority reviewed the development of electricity transmission charging options and associated connection arrangements, aimed at ensuring the move to a low carbon energy sector while providing safe, secure and high quality network services at value for money for present and future customers. A significant code review (SCR) had set out, for consultation in July 2011, options for change to transmission charging. The next step would be to consult on these, looking for conclusions in March 2012 and for new measures and reforms to be made subject of modification proposals required from NGET under the Connection and Use of System Code (CUSC), and final decisions on indicated changes to the TNUoS charging methodology. 40. The Authority noted the analyses of a number of key options which had been developed by Ofgem, taking on board the views put forward by interested parties. These included maintaining the present approach of investment cost related pricing (ICRP) and its cost-reflective TNUoS methodology with some variants and incremental changes to reflect current connection developments; modifications to achieve improved targeting of costs; and the recovery of costs through a socialised model, with a uniform tariff to be applied to all generation (and demand) users. The Authority looked at initial assessments on how these approaches might work for generators, and considered the options against the broad aims of achieving HMG s renewable energy targets, security of supply, and the cost impacts on consumers, as well as distributional issues. 41. The Authority agreed that consultations on the options should start straight away; and that, in view of the analyses of costs and impacts on consumers of the socialised model for assigning charges, it should be indicated that this option was not favoured. The modifications and improvements to the ICRP model appeared to offer the best way forward in terms of yielding longer term benefits, cost savings to the power sector and reflected the position of intermittent generation, and it should be recognised that further work would be needed by industry, as part of the CUSC modification, to develop further and refine the preferred approach. New scheme development 42. The Authority was briefed on the steps being taken by DECC in respect of the delivery of its Energy Companies Obligation (ECO) proposals - which were to succeed the Carbon Emissions Reduction Target (CERT) and the Community Savings Programme (CESP) - and the processes in train to arrange for the administration of the ECO scheme. The scope of the administrative tasks involved and the considerations surrounding any potential role for Ofgem in assisting DECC were noted. The Authority agreed that it was appropriate for Ofgem E-Serve to contribute information in support of the department s process. Further advice would come forward to the Authority in due course as DECC proceeded with open pre-qualification and tender invitation steps as set out in EU procurement requirements.

10 Green Deal 43. The Authority was informed about the current DECC consultation to give effect to its Green Deal measures. A limited role was envisaged for Ofgem. Nonetheless, the Authority recognised that there were a number of points on Green Deal policy which would be of interest to Ofgem, given its duties and responsibilities, and in particular the steps which had already been taken forward following the Retail Market Review. These touched on aspects of competition, consumer protection and governance. The Authority concluded that Ofgem should continue to pursue these points, and their relationship to the Green Deal proposals, with the Department, seeking clarity, such that the RMR proposals were suitably safeguarded. Managing the environmental programmes 44. The Authority received a report on the measures taken which had been taken forward - and some additional ones planned - to improve further the resilience of processes, IT systems and anti-fraud and anti-money laundering measures across the environmental programmes managed by E-Serve, in the light of reviews, external advice, and the inputs of the Audit Committee and the E-Serve programmes Committee. These matters would be kept under regular review by both these Committees and progress reported to the Authority. Report from the Audit Committee 45. A report from the Audit Committee noted continuing work on Divisional risk registers, recently those discussed with European Strategy colleagues. A revised risk management strategy had been presented to the Committee in the light of the Authority s Risk Workshop held in September. The Audit Committee had proposed that a paper should come forward to the Authority, after the next meeting of the Committee, examining risk tolerance and related reporting levels. The NAO s proposed approach to audit planning for the 2011/12 audit had been noted. Finally, the Audit Committee had reviewed the satisfactory status reports on a number of schemes and their procedures following recent examinations by Internal Audit. Olympic Impact Group 46. At this item, the Authority received a briefing on the key areas of work of this group and an assessment of the energy industry s preparations for the 2012 Olympic Games. The main areas of risk noted with measures to mitigate them - included security of supply to Olympic sites, possible disruptions to customer service given certain road access restrictions during the Games, incident management, and Ofgem s own business continuity. Enforcement cases 47. The Authority noted its monthly schedule of enforcement cases and the progress of each case under review. The Chairman again noted the substantial progress being made, offering his congratulations to the Ofgem teams involved and his thanks to those NEDs participating in the Committees work.

11 European legislation 48. A note updated the Authority on how European legislation was progressively changing the duties of the Authority, as an EU National Regulatory Authority, under the terms of the Third Package. Key points noted included the importance and rules governing NRA independence from Government and industry in the pursuit of regulatory tasks; cooperation in the creation of a single European market and the removal of barriers to cross border trade; and monitoring and market development such as network codes, and the regulation and efficient use of interconnections. Further steps concerning aspects of regulation in respect of infrastructure and energy efficiency were under debate in the EU. The Authority was also briefed on how European issues were being integrated across Ofgem. Other business and date of next meeting 49. There was no other business. The next Authority meeting would be held on Thursday 19 th January 2012 at Ofgem at 8.15 am. Those present The Lord Mogg Alistair Buchanan (Chairman) (Chief Executive) Stuart Cook David Harker Sarah Harrison John Howard Jim Keohane Jayne Scott (via telephone link) Andrew Wright John Wybrew Those attending David Pimm (all items) Rachel Fetcher ( )

12 Hannah Nixon ( ) Ian Marlee ( ) David Gillies Paul Heseltine (Staff Survey) (Corporate Strategy) Philip Cooper ( ) Giles Stevens (Liquidity) Camilla Eggington ( ) Tim Collins ( ) Phil Slarks ( ) Jane Corera ( ) Sarah Cardell ( ) Bob Hull (Offshore matters) (New scheme development) Mark Cox ( ) Jon Parker ( ) Martin Crouch ( ) Charlotte Ramsay ( ) Geoff Randall ( ) (TransmiT) Jonathan Hodgkin Matthew Harnack (TransmiT) (New scheme development) David Fletcher ( ) Andy MacFaul (Green Deal) Philip Callum ( ) Megan Forbes ( ) Michael Brocklehurst Dr Tony Burne (Legal Adviser to the Authority) (Secretary to the Authority)