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markets. In this sense, a lack of harmonisation of market rules and products is an important consideration and might lead to illiquidity of the markets. For example, DNOs are geographic monopolies and they set their flexibility procurement tenders individually. This structure creates a situation in which flexibility providers must understand and bid under different market rules in each DNO’s geographic region with significant transaction costs for the service providers, which poses a barrier to entry.

The potential advantages of smart meters, which provide real time information on customer energy consumption, a better management of energy use and enable savings. Smart meters open up untapped sources of demand management and new ways in which consumers can switch and engage with the market, provided dynamic tariffs are available to them. However, the smart meter roll-out is proceeding at a slower pace than expected. British energy suppliers are responsible for installing smart metering equipment at no upfront cost while consumers may refuse the installation. Ofgem can fine suppliers. Gas and electricity suppliers are required by their license to take all reasonable steps to roll out smart meters to all of their residential and small business customers by the end of 2020, when consumers can opt into such a service. The roll-out has been progressing more slowly than expected, with 11 million smart meters of the SMETS1 generation being deployed so far. The targeted full roll-out for 2020 is at risk if there is no proactive policy to improve the benefits for consumers associated with smart meters, which include dynamic prices, consumption monitoring, and real-time data monitoring for smart appliances, which are becoming more and more widespread among consumers.

Moreover, the digitalisation of the electricity system offers new opportunities to support the integration of distributed renewable resources, EVs, and smart systems. There are new risks emerging linked to cybersecurity, privacy, and economic disruption, and the government should integrate digital resilience in its energy market policies.

A smarter energy system requires a stronger emphasis on independent system operations. The government has taken steps to reform NG, which is transitioning to its role as an ESO on the basis of legal unbundling, and should lower the focus on transmission investment and shift it towards system operation. Also, distribution companies transition to a system operator role. Both the distribution system operators and the ESO will need to exchange a growing amount of data. It is critical for Ofgem to facilitate the discussion and data sharing between the ESO and DNOs. The creation of the Energy Data Taskforce and the upcoming Engineering Standards Review, alongside a broader review of all industry codes and their governance, are welcome steps.

Recommendations

The UK government should:

Wholesale electricity

>Assess the possibilities to simplify and consolidate the policies introduced as part of the EMR, following a review of the capacity market.

>Prepare for a more flexible energy system with ever higher shares of variable renewables to deliver low-carbon energy, which includes in heat and transport.

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>Continue to enable the development of interconnectors and strive for the reduction of future uncertainties for these investments when it comes to the trading of energy.

>Prioritise demand-side flexibility within future reforms to the electricity market, e.g. in the intraday and balancing market, for industry, and for the aggregation of endconsumer flexibility.

>Provide certainty on the future carbon price regime in the United Kingdom.

Retail electricity markets

>Evolve the UK regulatory framework and remove barriers to new types of participants in the retail market, such as aggregators.

>Ensure that energy suppliers continue to deploy smart meters in accordance with their licence obligations.

>Encourage the take up of cost-effective tariffs for networks.

>Integrate digital resilience into technology research and development, and to the policy and market frameworks to address cybersecurity and privacy concerns.

>Substantially reduce the switching time and simplify the switching process.

>Provide as much guidance as possible on the conditions for the removal of the retail price caps on natural gas and electricity.

>Protect vulnerable customer through a social programme financed by the general budget of the government and not financed through the consumer energy bills.

References

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Carbon Trust/Imperial College London (2016), An Analysis of Electricity System Flexibility for Great Britain, Carbon Trust/Imperial College London, London, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_d ata/file/568982/An_analysis_of_electricity_flexibility_for_Great_Britain.pdf.

CMA (Competition and Markets Authority) (2016), Energy Market Investigation: Final Report, CMA, London, https://assets.publishing.service.gov.uk/media/5773de34e5274a0da3000113/final-report- energy-market-investigation.pdf.

Clark, G. (2018), After the Trilemma – 4 Principles for the Power Sector, Speech by Business Secretary Greg Clark on the future of the energy market, 15 November 2018, www.gov.uk/government/speeches/after-the-trilemma-4-principles-for-the-power-sector.

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Regional Investment Plan: North Sea, WNTSO-E, Brussels,

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https://docstore.entsoe.eu/Documents/TYNDP%20documents/TYNDP2018/rgip_NS_Full.p df.

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IEA (International Energy Agency) (2019), World Energy Balances 2019 First edition (database), Paris, www.iea.org/statistics/.

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Littlechild, S. (2018), “Competition, regulation and price controls in the GB retail energy market”, Utilities Policy, Vol. 52, Elsevier, Amsterdam, pp. 59-69.

Mathieu, C., Pye, S., Deane P., (IFRI 2018), Brexit, Electricity and the No-Deal Scenario: Perspectives from Continental Europe, Ireland and the UK, Etudes de l’Ifri, Paris, https://www.ifri.org/sites/default/files/atoms/files/mathieu_deane_pye_brexit_2018.pdf

NG (National Grid) (2017), Future Energy Scenarios FES 2017, fes.nationalgrid.com/fes- document/fes-2017/

NG ESO (National Grid Electricity Systems Operator) (2018a), Electricity Ten Year Statement, Warwick, https://www.nationalgrideso.com/insights/electricity-ten-year- statement-etys

NG ESO (National Grid Electricity Systems Operator) (2018b), Winter Outlook 2018/19, NG ESO, Warwick, www.nationalgrideso.com/insights/winter-outlook.

Ofgem (Office of Gas and Electricity Markets) (2018a), State of the Energy Market, London, www.ofgem.gov.uk/system/files/docs/2018/10/state_of_the_energy_market_report_2018.p df.

Ofgem (2018b), Annual Report on the Operation of the Capacity Market 2017/18, London, www.ofgem.gov.uk/system/files/docs/2018/08/20180802_annual_report_on_the_operation _of_cm_2017-18_final.pdf.

Ofgem (2017), RIIO Electricity Distribution Annual Report 2016/17, London, https://www.ofgem.gov.uk/publications-and-updates/riio-electricity-distribution-annual- report-2016-17 (supplementary data file).

PTE (Panel of Technical Experts) (2017), Final Report on National Grids Electricity Capacity, BEIS, London, https://www.gov.uk/government/publications/electricity- market-reform-panel-of-technical-experts-2017-final-report-on-national-grids- electricity-capacity-report-2017.

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