Localism, devolution and energy

Posted: 13/08/2018

Local government is becoming increasingly involved in the energy market. What are the key legal issues?[1]

Local authorities as energy market participants

Section 1 of the Localism Act 2011 gave English local authorities a general power of competence – “to do anything that individuals generally have a power to do”. Subject to questions of local political accountability and finance, and councils’ own constitutional requirements, they can establish trading companies.

Many councils have entered the retail (domestic) supply market. Some councils have also moved into small-medium scale generation such as solarPV projects, heat networks and even the development of large scale battery storage. This is generally driven by a combination of (i) tackling fuel poverty, (ii) giving residents the opportunity to “buy locally” and developing commercial revenues, (iii) “green” politics.

These activities generally require an Ofgem licence and compliance with associated licence conditions, the myriad industry codes, regulations such as the guaranteed standards of performance and complaints handling regulations (for suppliers) and potentially even REMIT. Heat networks are not currently regulated, but seem likely to fall under Ofgem regulation in the future. All of this can be a significant challenge.

One way for potential suppliers to manage the regulatory burden is with “Licence Lite”, which allows them to rely on a third party for industry codes compliance. “White label” arrangements are more common, with local authorities using a third party licensed supplier for the purposes of the regulated activities.

White label arrangements are commercial deals and so good contracts are essential. Particular issues for local authorities are likely to be defining how prices will be set (and there are now regulatory caps on tariffs to also consider), service standards, IP, data protection and protection of reputation. Procurement law will also need careful consideration, particularly if the council has ideas of the new business supplying energy to the local public sector. Understanding the regulatory environment will help local authorities get what they want from the white label relationship.

Where local authorities are trying to do something more innovative – for example peer-to-peer trading within a community – then questions of regulatory compliance become all the more important. Derogations from existing regulations, or a “sandbox” from Ofgem allowing the trial of the innovation, may be needed.

Local government as an enabler of innovation 

An additional, or alternative, approach is for the local authority to take on a role as an encourager and enabler of third party innovation (Oxfordshire County Council’s approach is just one example). Such schemes often recognise that issues traditionally put into an “energy” box can no longer be separated from other areas of local government concern such as transport, housing and the wider economy; they move towards the “whole systems approach” to energy (and related matters) that many want to see more of.

This does not necessarily mean the local authority becomes a direct energy market participant (although it might). Nevertheless, legal issues do need thinking about; there may be joint venture agreements, IP questions and data considerations (for example, if data about potential fuel poverty, or travel choices is being gathered). Understanding the regulatory environment that potential innovators and partners need to navigate, whether specific to energy, cross-cutting (eg emerging EV regulation) or more general such as planning, will inevitably be important.

Something really interesting - devolved government with devolved powers?

Taking this a step further still is the idea of devolved energy regulation powers. 

In the West Midlands the Energy Capital project, under the aegis of the metro mayor and Combined Authority, has produced a plan for developing a regional energy strategy. A central element is the identification that innovation can take place in energy regulation and need not be limited to the commercialisation of new(ish) technologies. Regulation at a regional or local level could allow for decisions that better reflect local economic, social and environmental considerations, and allow for joined issues such as transport or housing to be taken into account (ie a whole-systems approach).

To that end, Energy Capital’s plans include securing and co-ordinating the devolution of powers over energy, with a timetable of September to December 2018 for this to happen. Ofgem and BEIS are engaged in the plan.

Devolution of powers would be a big change in the approach to energy regulation. Regulations and decisions are, at present, almost invariably taken at a national level: BEIS sets policy, Ofgem takes regulatory decisions, statute gives powers for regulation by reference to Great Britain, and regulations are applied without variation to the GB market as a whole[2].

Devolution of powers will take political will, as well as policy and legal work to identify and effectively devolve appropriate powers. For GB energy regulation this could be an exciting new development in the political arrangements and public law underpinning it.

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