Energy regulators are spearheading initiatives towards locally-produced, renewable energy through regulatory updates. However, issuing updates is only one-half of the equation for regulators have a responsibility to ensure that new laws and amendments are effective in getting utility firms to follow these regulations and ultimately accomplish the goal of shifting towards green energy.
However, ensuring that organisations are following these updates remains a massive challenge, as evidenced by recent headlines where energy companies have criticised Ofgem for their harsh take on energy regulations. To ensure that regulations remain effective, regulators must carefully consider their network of regulatory rules and how they affect operations. In this blog, we explain how to prompt regulatory effectiveness using a combination of incentive regulation and energy compliance solutions.
What is incentive regulation?
Energy regulation often comes in different networks where different mechanisms, such as price caps, performance metrics, and utility measures are all connected and geared towards a single goal. These networks often come in different forms. For example, cost-of-service regulation encourages utility firms to cut costs and offer more affordable rates, providing companies with a reason to over or under-invest in the plant.
Incentive regulation, on the other hand, is designed to reward the energy producer by encouraging energy efficiency or compensating the organisation for lost revenue. Incentive regulation is often implemented to trigger the recovery of lost revenue, direct cost recovery of energy efficiency programs, and promote energy efficiency. Incentive regulation can improve efficiency in production and distribution, making energy more affordable – a growing concern in the UK and the EU.
Will incentive regulation improve compliance management?
Incentive regulation can help with energy compliance management. Conventional regulatory networks, such as traditional cost-based regulation, often come with their fair share of challenges that could often compromise service quality and prices.
Incentive regulation can help organisations shift from the inefficiencies associated with other regulatory networks that often lead to negative consequences, such as inefficient procedures. Instead, it can discourage many practices energy producers use to meet the requirements in other regulatory networks while allowing energy regulators to meet their goals.
Organisations become more efficient because incentive regulation encourages entities to be more efficient in their internal operations. Rather than placing an arbitrary cap on prices, incentive regulation encourages energy producers to be more efficient in their processes. This method works compared to other regulatory networks, such as energy price caps, because energy producers must thoroughly assess their procedures and determine where they can improve productivity and reduce costs as opposed to taking shortcuts to meet certain goals such as lower costs.
Moreover, incentive regulation can mitigate one of the main complaints targeted towards energy regulation, and that is too controlling, not accounting for an organisation’s unique stances, creating the perception that regulation is too restrictive and costly. Incentive regulation seeks to resolve these issues by giving organisations more autonomy.
By focusing on efficiency rather than “surface-level” measures, such as energy caps, regulators are prioritising how well an organisation is operating relative to how they were performing at a prior time period. The new focus gives energy producers greater autonomy over how they should meet regulatory targets, allowing them to consider their unique circumstances while meeting regulatory goals. Critically, the focus on incentives would encourage producers to meet compliance requirements, improving their response rate.
Can energy compliance solutions help with incentive regulation?
Energy compliance platforms can help organisations meet the requirements per incentive regulations. With a drive toward efficiency, energy producers will look towards modernising their operations to reduce costs and improve productivity. This could include energy production and distribution but could also extend to legal operations, like compliance.
Hence, why energy compliance solutions are critical. These solutions can help energy producers optimise their compliance procedures and make the process more efficient and timely. With streamlined compliance processes, energy organisations can meet new legal requirements that follow the incentive regulation framework because it encourages organisations to be more efficient in their compliance procedures.
The new technology, combined with a different perspective on regulation, will be critical in the coming months. If regulators are to resolve some of the issues that are facing the industry. As energy costs threaten to rise, focusing on efficiency using the incentive regulation framework and RegTech platforms can help organisations in the long run.