A Digitalised, Risk Based Licensing Regime

As the number of licensees in the energy market looks to increase, primarily driven by the government’s recent decision to give Ofgem powers to regulate heat networks, a new approach to regulating licensees is required.

A new approach to licensing, if properly designed, can meet the challenges of:

• an increased number of licensees
• providing opportunities for licensees to meet their obligations innovatively, and
• current poor visibility of emerging systemic or specific risks to consumers or the energy system

This paper proposes a reform to the licence conditions with a few principal objectives. The new licensing regime should be:

• Proportional: Licensees should be regulated based on what they do and how much impact they have.
• Measurable: Regulatory intervention should be measurable by design.
• Digitalised: The licensing framework should be designed to meet the current and future needs of users.

This evolution proposes a way to digitalise the licences as well as calling for a new focus on measuring success of those regulations and compliance with them. This can be achieved through adopting a digitalised, risk-based licensing regime where licensees provide regular updates to Ofgem across numerous categories, such as number of customers or volume of energy managed as well as providing data on their compliance with licenses.

Dr Zoya Pourmirza of Newcastle University along with the Catapult’s Greg Johnston designed two worked examples of the proposed approach to digitalising licence conditions. This focussed in on how to implement cyber security regulation in licences and can be found in the appendix of the document. Dr Pourmirza’s work was supported by the EPSRC Impact Acceleration Account.

By taking this approach, a renewed focus on deploying and measuring regulatory interventions at scale and pace can be taken. This will increase certainty for licensees and Ofgem, and enable new approaches to regulation with a focus on intervening only where unacceptable risk to consumers or the energy system is identified. High quality and regular reporting data will enable early warning systems to develop, with Ofgem being able to identify trends across licensees and intervene before significant harm to consumers or the energy system occurs.