Clear Roles and Responsibilities

Conflicts of interest, synergies, risk allocation and time inconsistencies should be key considerations in the development of efficient roles and responsibilities that are effective in promoting the public interest.

A key concern here is networks. In Europe, the Third Energy Package recognised that vertical integration of network and supply businesses brings about conflicts of interest, resulting in distorted investment incentives and heightened risk of discriminatory third-party access for competitors. Unaddressed, this can impede integration, cross-border trade and realisation of associated cost reductions. Thus, the Third Energy Package provided for unbundling options to address conflicts. Proper implementation of these provisions is important.

Another area of growing interest is the role of system operators (SOs) in facilitating the energy transition and accompanying electrification. There are strong synergies between system operation and the development of plans to drive the energy transition that point to a strong role for SOs. Many SOs, however, are bundled with transmission owners and thus subject to a conflict of interest to favour grid and/or build solutions over smarter ones. This has recently prompted the British regulator Ofgem (Office of Gas and Electricity Markets) to recommend reforms to provide for system operator independence, an approach recommended in the Independent System Operators factsheet. The role of ISOs in overcoming international conflicts of interest in development of generation projects that share international jurisdictions is also explored in the Coordinated Offshore Build factsheet.

Time inconsistency problems, which can present a barrier to necessary investment, stem from the significant up-front cost of many energy investments, their long-lived nature and the potential short-term priorities of political decision-makers. An example of time inconsistency in action is where the government’s executive branch reneges on promises not to impose tight price caps, after large investments are sunk, for short-term political gain. Investors may recognise the scope for such political expedience at the outset and the accompanying risk to the long-term viability of the enterprise. This can impede investment in the first place (or enhance its cost) and thereby obstruct system reliability at least cost. This is one key argument for the arrangements we see placing market regulation and competition enforcement in the purview of well-resourced and independent regulators and competition authorities and out of the remit of energy ministries, which are more prone to short-term political expedience.

This provides clarity to the market of properly set limits at which the government (the political realm) can interfere, and the processes independent regulators may employ provide greater certainty to the market. This can help lower the cost of capital through perceptions of reduced regulatory or country risk — important given the need for massive investment to deliver the energy transition and the cost of securing supplies.