Capgemini’s response to Ofgem’s 2022/23 Forward Work Programme Consultation

Every year Ofgem invites various stakeholders to share their views on certain activities that they believe should be prioritised in the coming year. This year was the first time Capgemini responded to Ofgem’s Forward Work Programme (FWP) Consultation; our response focussed on these key four points:

• Future of Retail
• Full Chain Flexibility
• Data and Digitalisation
• Energy Systems Governance

Below we quickly summarise our thoughts and suggestions concerning the above priority points.

Future of Retail

Recent volatility in the wholesale market has exposed design flaws, which have resulted in the retail space becoming a high risk, low reward environment that disincentivises investment. Radical reforms are required in the retail energy market to drive private investment and avoid further issues.

Future Retail Market

• Consumer protection needs to be at the heart of future market design. We view heating, lighting, and hot water as basic human rights. These fundamental needs should be affordable to all, with additional protection provided for the most vulnerable in society.
• To create a retail market that attracts the investment and innovation needed, we need to change the lens in which we view the system. When the current market arrangements were designed, Ofgem regulated a centralised ‘energy-only market’. However, the requirements of the future energy system have evolved to that of a ‘flexible – energy service market’.
• We need to create an environment where market actors expect to see returns from investments. To achieve this, a clear direction of travel must be established so that the private sector can make informed investment decisions.
• Revitalising the retail space will ignite many benefits, from job creation, increased market competition, money, talent and technology. By acting now, we can capture the first-mover advantage and its associated benefits.

Full Chain Flexibility

We recognise that full chain flexibility is a critical element in the transition towards net zero and requires a whole system approach. While the task ahead is substantial, there are several key opportunities and ‘no regrets’ investments that can and should be taken now to enable full chain flexibility.

Whole system approach

• All net zero models agree that significant volumes of additional generation and demand will be added to the system. Creating a fundamental need for major upgrades to our energy networks.
• Generation will increasingly be variable as the system becomes more reliant on renewables. New opportunities in generation, grid flexibility and operability services will create a myriad of investment opportunities. However, unlocking value will not be easy and will involve addressing issues regarding costs and pressure on returns.
• Electricity demand is also set to at least double by 2050. Without action, this demand will often be ‘peaky’ and create a volatile energy network. To avoid instances of system volatility, new demand side technologies must be integrated into the system. This approach requires a smart, flexible energy system, provided for by robust regulation.
• Facilitating flexibility from consumers explores how consumers can interact with the system to reduce their energy bills. We must look to enable the deployment of smart technologies and removing barriers to the provision of consumer flexibility services.
• The risk of flexibility introducing significant price swings for consumers cannot be ignored. Surge pricing elsewhere has not always been sufficiently thought through and this has damaged trust.

Data and Digitalisation

Now that data is at the forefront of people’s thinking, the principles of the data and digitalisation transformation must be established to capitalise on the good work done so far. We believe that there are several ways in which data and digitalisation can be further enhanced to enable the net zero transition.

Data Quality

• We must have a firm understanding and governance of available data to best resolve the data quality crisis within the industry. Focusing on data consolidation, simplification and removing barriers is one way to achieve this.

Asset Identification

• Our future energy system vision must allow for the adoption of a modern, flexible approach to data definition. This will include the creation of data schemas that are extensible and enable future evolution.

Access

• We must ensure that we can interrogate data in a flexible way. We will not be running specific reports but querying data answer questions such as ‘give me all the available storage capacity for an area tomorrow morning’.

Taking inspiration from other energy markets

• Amber Electric in Australia is currently trialling Time of Use (ToU) tariffs which respond to live changes in capacity to enable balancing. It is based on available technology on phones which predicts behaviour through user action and applies this to electricity grids. Our current data model does not support innovation such as this but, instead, constrains it.
• Currently, the British public is extremely wary of making data available, due to the inferred risks. We need to demonstrate that the benefits far outweigh the risks.

Ofgem and Regulation Evolution

• It is imperative that Ofgem lead the regulatory transition to a flexible model, which supports innovation, rather than constrains it.

Energy Systems Governance

There are currently well-known and well-publicised demands facing the energy industry as it goes through unprecedented transition. Institutions such as Ofgem are pivotal in driving that change. With that in mind, we believe that there are several areas where the FWP could go further to help accelerate the pace of change in the energy sector.

Code Governance Reform

• Digitisation and consolidation of the codes present an opportunity to move to principle-based regulation. The licences could be the home for these principles with most of the operational requirements moving from the licences into the codes.
• We need to drive for further consolidation and simplification of industry codes. There are still too many codes and coordination between them which is becoming increasingly difficult.
• We believe that there should be three energy codes (Retail, Settlements, and Network) backed by a set of Engineering Standards. Such an approach would not only reduce the cost and complexity to market entry but will also incentivise greater innovation and accessibility.
• The industry needs certainty on the future direction of the codes and the key themes that will be brought forward by the code managers over the medium term (next 3-5 years). We recommend that each code manager should publish a Codes Roadmap – this must be aligned to the direction set by the Strategic Body.
• Governance also needs to reflect the goal of an innovative competitive system. If the world is to view the GB energy market as the primary ‘sandbox’ environment to invest in money, talent, and ideas, then the governance must reflect that goal.

The above comments only form a summary of our response to Ofgem’s FWP consultation. Ofgem have published the full response which you can read here:
https://www.ofgem.gov.uk/publications/202223-ofgem-forward-work-programme#Context%20for%20our%20Forward%20Work%20Programme%20consultation

Peter King

Global Head of Utilities