Elexon chief executive Peter Stanley admits that his company was far from being the favourite when Ofgem invited bids to take on a new role, that of local electricity market facilitator. I meet him to ask about that new role just a few weeks after the decision was announced on 29 July, and as the Labour government promised investment in energy at all scales, including local and community energy.
Elexon’s new role could require it to interact with many thousands of local energy actors. It is a far cry from the industry-owned organisation’s roots, managing settlement in the electricity market. But at the same time it is consistent with its trajectory of recent years, in which it has taken on new roles, such as delivering market-wide half hourly settlement, and delivered new industry services like the insights solution, which replaced the balancing mechanism reporting service with a new data portal.
Stanley says the story of the industry as a whole has been one where the number of participants has increased and “even in terms of the traditional supply chain, there are many more actors now”. But he admits that bringing many parties together with different activities and interests is extremely complex and “it’s now quite difficult to centrally orchestrate all of that”.
He says the government’s ambition for a ‘clean power system’ by 2030 is clear, but the route for industry and governance is less so. The roadmap is being developed through a series of consultations. Although that means we are in an uncertain period, when “Things are being progressed in parallel and there is a challenge on how it will emerge”. He says that for Elexon, “Having a clear purpose [to facilitate local markets] and knowing what the industry is depending on us to do, means that we have much clearer line of sight towards what that might be.”
“I think it’s pretty widely understood that the Open Networks Project [facilitated by the Energy Networks Association] has faced challenges in terms of coordinating and bringing the industry together”
As regards the progress so far on local distributed flexibility markets, he says, “We are very clear on the challenges that have been faced to date in getting the required liquidity in those markets. I think it’s pretty widely understood that the Open Networks Project [facilitated by the Energy Networks Association] has faced challenges in terms of coordinating and bringing the industry together. We are very clear that the goal is about taking work that has already been done by the ENA and tackling some of the challenges that they have faced to date in getting alignment in some of the key areas.”
Tackling the challenges starts with the baseline methodology. Then, he says, it is about “Understanding how flexibility service providers and asset owners are going to stack revenues. This is key to ensuring that the benefits flow directly to the right place and the benefits are also felt, for example, by the DSOs [distribution system operators] who can defer network investment”. He adds, “we are really clear that we have a role to play in unblocking, or giving greater transparency in terms of how people enter that market and then get that value”.
Liquidity has been a stubborn problem. What is Elexon’s approach? Stanley says, “Any uncertainty brings a reluctance to invest in that market,” so he wants the rules to be absolutely clear for everyone in the market and for there to be transparency on getting value from it for players and consumers. He highlights two angles of attack: increasing the number of aggregators who can help parties access the market and meeting the systems’ needs. On the former point, he says, “assets that exist at the moment are either invisible, or people are not making them available in flexibility markets”. There is interplay between national and local markets and assets can choose between them. But it is easier to get value from national markets because there are fewer restrictions on entry – location is a major restriction to entering local markets, for example, but not national ones.
Governance with teeth
What does Elexon bring to the task? For Elexon, taking on the local market facilitator role requires governance and funding to be put in place. Stanley says the company is moving fast on this: by November, a modification to the BSC should allow Elexon to expand its vires and set up an initial funding model. It has initial approval and is out for consultation. Then the company will move from working with industry change bodies to taking a lead. Stanley says Elexon has been working with the DSOs, the Association for Distributed Energy (ADE) and the Open Networks team for 18 months and most of the work streams will be with Elexon by late 2025.
He explains, “We have already been working with the ENA to establish direct leadership of the Open Networks workstreams; we have taken over chairing the challenge group and we will have representation on the steering group. … we are working collaboratively with them now in order that we can progress them.”
Stanley says the first step is new rules with teeth, so “we can drive compliance across all the DSOs and, where required, harmonisation across the DSOs and the NESO”. He says this has been one of the Open Networks challenges: workstreams have tried to reduce barriers to entry, facilitate greater consistency and standardise, but success in getting DSOs to standardise has been “mixed”. He says, “Until you can truly create standardisation and interoperability, it is really hard for an aggregator to know they can develop a solution to fit a product that is being tendered and then be able to trade that with multiple DSOs.
At the moment the market is being fragmented”.
What can Elexon do differently? He says, “We are more independent of the DSOs. We won’t be reliant on the lowest common denominator or something everyone will agree on. There may well be tough decisions where it is in the interest of the market to agree something that may not suit every participant.”
He adds, “That’s where the teeth come into it.” But he stresses, That isn’t just Elexon making unilateral decisions … we have a lot of experience in inclusive and open governance where we are very transparent about the mechanisms to get to these rules and how we engage.”
“We won’t be reliant on the lowest common denominator or something everyone will agree on. There may well be tough decisions where it is in the interest of the market to agree something that may not suit every participant.”
Elexon will be held to account by Ofgem under its governance arrangements and if there are compliance issues in the markets it will be Ofgem that holds the companies to account under their licences.
Data transfer and digitalisation systems will underpin new markets and the data architecture is being developed alongside the new governance. Does the fact that these are still in an early form, and under consultation, introduce exactly the type of uncertainty Stanley wants to avoid?
He says that the pieces of the puzzle are becoming clearer. An Ofgem proposal that Elexon will also govern and design the new flexibility asset market register will also help with that.
“We are also seeing consultations around the data sharing infrastructure [previously referred to as the digital spine] and we are seeing how these different infrastructure capabilities are going to be interoperable and work together.” Overall, he says, “Consultations are a good steer and even though you may not be directly responsible for undertaking a role you can at least have some clarity about what you should be developing or designingEarlier this year Ofgem published its views around data sharing best practice. That was sending some very clear signals about the need to standardise things like meta data and set standards for data interoperability. These are all helpful.”
A data-rich industry
Compared with the value chain over the last 20 years, there are many more interactions and much more data. Stanley says in future markets, “we will need much more digital infrastructure to improve the decision-making and make sure that we are selecting the right products at any point.” As part of MWHHS Elexon has built a data acquisition hub to take on half hourly smart meter data (about 500 billion meter readings per year) and it has been working with Ofgem “to look at how that capability of having all of the smart meter data stored at Elexon can be made available by working with the consent framework that has just been published”.
Stanley thinks that will also unlock value: “Having that consent framework means that we will be able to share that data, as well as in an anonymised, aggregated form making it available in line with what we have been doing already in the BSC around open data principles.”
A data-rich industry driven by customer consent describes a very different energy industry than it was in the past. Should its governors learn from other parts of the economy and particularly comparators like telcos, Ofcom and DCMS?
Stanley says convergence is limited: a complexity in energy is that “you are trying to drive these standards across disparate organisations and get alignment, which is very much what Ofgem has been working on with its data sharing infrastructure work, and its approach to standards.” He compares that with logistics that have a ‘digital spine’ and have control over their supply chain via commercial contracts.
As for customer consent, other sectors show they give it when the benefits are clear, “So understanding these revenue streams and how they get back [to consumers] is a really important part of consumers giving their consent”.
“We’ve seen Ofgem take a much more proactive and direct response over the last year, which from our perspective has helped introduce real clarity”
But Stanley agrees that the energy industry has been influenced by other industries and one effect of closer involvement with digital is the speed of change, including at the regulator. Stanley says, “We’ve seen Ofgem take a much more proactive and direct response over the last year, which from our perspective has helped introduce real clarity in terms of the steps made to move the industry forwards. They are performing a role here in transforming the industry, where perhaps if you went back to two or three years ago when they were more in a pure economic regulator mode, you didn’t see the level of movement that we do now.”
An example is the requirement for network businesses to publish their digitalisation strategy and six-month digital action plans.
Overall, he says, “There is lots going on with new products and services. Those things coming together do help with moving the energy transition more quickly.”
That will require continued recruitment from different sectors. The industry will need many more digital skills but Stanley is optimistic they will be forthcoming: sustainability and Net Zero, “is a really strong value proposition in this industry now, so it has made attracting talent much easier.