Introducing the Future Regulation Sandbox: an innovative new tool to trial changes to the energy rulebook

By Marzia Zafar, Deputy Director Strategy

Ofgem’s Innovation Hub team works with innovators every day to support them in bringing innovations to the energy sector – be that products, services, technology, or new ways of doing things. From those interactions we know that our rulebook is struggling to remain fit for purpose to enable and respond to these innovations.??

We believe there is a need for innovation in regulation itself to better support the exploration and deployment of innovation at the pace and scale necessary to reach the UK’s net zero targets. But to do so, we need tools which help us understand the sometimes complex impacts that result from changes to regulation.?

Drawing on international best practice from other regulators and learnings from running our Energy Regulation Sandbox, we are proposing to introduce the Future Regulation Sandbox (FRS), a new policy instrument to test and trial changes to the energy rulebook before making them. Trials would be set up with the explicit purpose of delivering evidence needed to make difficult policy decisions, bringing together market participants and rule owners (Ofgem, and Code bodies where relevant) to do so.?

Trials could cover any topic and we do not wish to limit stakeholders’ imagination for what FRS trial could look like. Here are some examples to spark ideas:?

• Open innovation challenge: Invite retail innovators to propose which business models could support the uptake of low-carbon technologies amongst low-income and hard-to-reach households. Trial multiple business models alongside each other, as well as the rule changes necessary to enable and adequately regulate these business models. Gather evidence of the effectiveness and risks of the innovations and rule changes, and implement reforms to enable the most successful models.???
• Innovation trial: Develop with industry alternative approaches to connections queue management. Short-list promising approaches and invite network companies to trial them in different locations to understand their effectiveness and risks. Reform rules around queue management.??
• Regulation trial: If allowed by DESNZ, develop with industry options for how Ofgem licence rules and Code rules would have to change to enable hydrogen blending as an example. Invite network companies to trial different methodologies in different locations, to understand their impacts. Feed learnings into final methodologies.??

For each trial, we would set up a bespoke Sandbox environment - rules and conditions that apply for the time-limited period of a trial, but that may become enduring rule changes in the future. We may derogate participating innovators from existing rules, put in place new rules, and impose conditions to limit the scale, geographic location and risk to consumers. In designing these trial environments, we’re of course bound by our regulatory remit and powers. We would aim to provide regulatory relief from Ofgem rules where possible, and to integrate the derogation processes that some technical industry codes already offer - namely the Balancing and Settlement Code, Distribution Connections and Use of Systems Agreement and Retail Energy Code. We are exploring the option of bringing the Uniform Network Code rules within scope.?

Today (31 October), we have published a call for input to begin to bring this to life and invite stakeholder views on whether they see value in FRS trials, what topics it could be used for, and how FRS could best be implemented to maximise its potential.?