This report is brought to you by Utility Week Intelligence in association with CGI
Dos and don’ts for the market facilitator
As we await Ofgem’s decision on the name of a pivotal new entity in our transforming energy system, Utility Week Flexibility Forum members set out their expectations of what it should and shouldn’t do to support energy flexibility.
The tantalising wait for the name of the new market facilitator – a new entity tasked with growing and developing local energy flexibility markets in GB – continues. Thanks to Prime Minister Rishi Sunak’s surprise announcement of a July general election, Ofgem has shelved its decision on whether the new National Energy System Operator (NESO) or balancing and settlement body Elexon will take on the role until July.
The elongated wait has not dulled the keen anticipation of market participants however. There are high hopes that the new market facilitator will catalyse much-needed action to break down barriers to growth and opportunity in energy flexibility markets – most notably by supporting “stacking” across national and local flexibility mechanisms and so boosting market liquidity.
There are plenty of differences of opinion about the finer detail of what the market facilitator should look like and how we should measure its success. But, at a recent meeting of the Utility Week Flexibility Forum (Flex Forum) – hosted in association with CGI – it became apparent there is broad agreement about some core dos and don’ts the new entity should hold front of mind when it is finally unveiled and can start work.
Here are the key points surfaced through debate among a core set of Flexibility Forum members representing a broad cross-section of market participants:
Be consultative but don’t seek consensus
Among the most prominent and commonly agreed points to emerge from the debate was the need for the market facilitator to hit the ground running and act quickly to make a positive impact.
To do this, it was agreed that it must have the power and confidence to make decisions without seeking consensus from market participants. “It needs to be empowered to take decisions which it thinks on balance are best without needing a democratic majority,” emphasised one senior leader. Seconding this, other attendees stressed that, while the market facilitator should show it has listened and taken account of different stakeholder views, it should strive to do this with the minimum of bureaucracy. There were pleas to ensure “we do not create another consultation-creating monster”.
To act quickly and decisively without causing undue strife, it is essential the market facilitator can demonstrate neutrality and an objective interest in pursuing “good” outcomes for flexibility markets and the energy system as a whole, said our Flex Forum representatives. Having an experienced and highly skilled team capable of making robust decisions will also be critical. And, last but not least, the market facilitator must have access to current and complete data on system and market dynamics. “It would be a no-regrets action to give the market facilitator the power to see what is happening across the system,” said one senior distribution system operator representative.
“The market facilitator needs to be empowered to take decisions which it thinks on balance are best without needing a democratic majority.”
Be curious. Don’t optimise the existing paradigm
Ofgem has set “strategic leadership” as a core function of the market facilitator. Attendees at our debate agreed that this puts an onus on the new entity to horizon scan and look for international exemplars and alternative thinking on energy flexibility as well as searching for helpful lessons from other sectors which have successfully overcome analogous challenges. The idea that there might be a role for the market facilitator to encourage and accelerate innovation was also broadly supported.
[The market facilitator] should certainly be looking across other markets and considering what we can learn to get the best outcomes for UK plc,” said one leader. Another debate attendee representing a large energy supplier agreed, stressing that the new entity must “be curious” when considering how to achieve the best system and market outcomes. “What it certainly should not be doing – and not be incentivised to do – is optimise existing market structures.”
Be ambitious. But set realistic milestones
Building on the above, our debate participants were united in wanting an ambitious market facilitator with a clear focus on tackling big, cross-cutting barriers to growth and vibrancy in flexibility markets.
While it’s still unclear exactly what targets or objectives the market facilitator will have, it was agreed that a primary focus should be on tackling “a massive problem with liquidity” in flexibility markets which has it s roots in the “lack of stackability” of local and national mechanisms for procuring and activating flexibility. The market facilitator should aim to create an environment where “any flexibility provider is able to trade across different markets”, our debate participants agreed. However, there was also consensus that “solving stacking” is not a realistic short-term objective for the market facilitator to be set/set itself.
“We should not set the market facilitator up to fail,” stressed one debate participant. Others agreed that a balance needs to be struck between ambition and deliverability in the initial scope of the market facilitator. “We shouldn’t set the bar too low. A scope which is based around minimum expectations would be suboptimal,” said one energy networks representative. But equally, setting achievable goals will be important to the preservation of trust, confidence and engagement from the stakeholders the market facilitator must engage with. A good solution might be for the market facilitator to establish “an objective measure of liquidity” upon its establishment and look to “measure and improve against that baseline,” suggested one Flex Forum member.
“Consumers need to know that when they are entering into this world they have places to go to if things go wrong.”
Assert authority. Don’t use sticks
Undoubtedly one of the biggest topics of discussion at this UW Flex Forum meeting was how the market facilitator will hold market participants to account and assert its authority.
There was a healthy appetite from all attendees for the market facilitator to be given robust accountability levers. It’s been made clear by Ofgem that it will stop short of giving the market facilitator direct enforcement powers. Instead, it prefers an “assurance” model whereby the market facilitator will set out its rules for engagement with market participants and its expectations of them and will report to Ofgem if it sees shortfalls. Ofgem will then decide what punitive action might be required to correct bad behaviour or encourage greater levels of cooperation.
Attendees were broadly happy with this model, though they were concerned it might lead to cumbersome and lengthy referral processes which would slow down the ability of the market facilitator to make a positive impact in the market. Some wondered if giving the market facilitator “sharper teeth and bigger sticks” might allow it to fulfill its purpose with greater alacrity. “It is reliant on the actions of others for its success,” pointed out one leader.
On the whole though, there was an acceptance that endowing the market facilitator with enforcement powers would likely make the process of establishing it all the more complex, and that getting the entity established and functioning is the best first step. Putting enforcement at arm's length should also help to avoid a situation where the threat of direct measures causes markets to “optimise around the avoidance of penalties”, suggested one Flex Forum member.
Add value – don’t waste money
In a wide-ranging discussion about expectations of the new market facilitator, defining its measures for success was a key focus. As has already been covered above, tackling the stackability of flexibility services and boosting liquidity are the prime areas where market participants want to see prompt action and change. Strategic leadership of flexibility market development, conducted with an open mind and without undue attachment to incumbent processes or players, also felt important to the group.
But what kind of organisation do market participants feel will be needed to fulfil these expectations? Here there was less clarity and, frankly, less interest. One senior leader from a prominent flexibility platform provider expressed “horror” and fatigue at the idea of debating suitable operating models for the market facilitator. Others, while less forthright in their sentiments, seemed to agree. There was some concern expressed around finding the suitable expertise and resourcing to support delivery of the market facilitator’s objectives. But the weight of sentiment swayed toward caution on over engineering a new entity in an already complex energy landscape. The market facilitator is keenly anticipated by market participants but, as one leader summed up, perhaps the most fundamental measure of its success will be its ability “to justify that its role is additive — not a waste of money”.
Concluding remarks
Rich Hampshire, vice president digital utilities at CGI – Utility Week’s strategic partner for its Flexibility Forum, offers reflections on the community’s latest debate.
This latest meeting of the Flex Forum presented an opportunity to surface the differing expectations of the flexibility market facilitator by its stakeholders from across the energy system.
There was a consensus amongst forum attendees that the need for the market facilitator to make a positive impact quickly should come ahead of its need to achieve consensus amongst its stakeholders. That’s easy to say but may be harder for some to accept when the market facilitator’s decision isn’t favourable to their interests, even if it creates value across the system as a whole. The market facilitator has quite a tightrope to walk. It’s unsurprising, therefore, that the forum stressed the importance of neutrality and expertise to the market facilitator’s success.
Perhaps the biggest expectation of the market facilitator is to create value by improving liquidity. Reducing barriers to, and increasing the value of, market participation by facilitating stacking across markets was cited as the solution to increasing liquidity. Whilst forum members recognised that “solving stacking” is a long-term challenge, that should still mean that the market facilitator needs to establish a realistic roadmap to improve liquidity, measure progress against the plan and adapt its approach to stay on track.
The good news is that the market facilitator can look to other markets to inform its approach to creating well-functioning markets for flexibility. But its ‘curiosity’ should extend beyond electricity markets in other territories – plenty of other sectors have faced analogous challenges in creating vibrant markets, and those exemplars can be found closer to home.
About the Flexibility Forum
Utility Week’s Flexibility Forum, created in association with CGI, is a community for all stakeholders in the development of energy flexibility markets and services in GB. Through running regular events which promote discussion and learning on topical issues, and publishing insights into these meetings, it is our ambition that the Flexibility Forum will encourage consensus and understanding about how to tackle market challenges and accelerate realisation of the value energy flexibility should bring to a sustainable, affordable energy system.
We are open to enquiries for new participation in the Flexibility Forum. Please contact Jane Gray at: janegray@fav-house.com, content director Utility Week, if you would like to join future meetings.