Regulatory Impact Assessment in the energy transition era: insights from the UK experience

Abstract

Independent energy regulators need analytic frameworks to assess and defend their regulatory decisions. This paper critiques the traditional economic recommendation and explains a new approach applied in Great Britain. We find reliance on quantified cost-benefit analysis (CBA) as the dominant metric inadequate, particularly in the context of the clean energy transition. We do so by exploring the theoretical and practical limitations of CBA and the GB energy regulator Ofgem's response to these, drawing on experience of the authors who worked with and for Ofgem. We outline the unavoidable complexities that climate change, in particular, created considering the division of responsibilities between the government and the regulator and describe the major revisions to Ofgem's Regulatory Impact Assessment (RIA) framework that sought to address the resulting challenges.

We identify limitations of exclusive reliance on emission targets and the ‘social cost of carbon’ as a tool to include climate change concerns and related unquantifiable impacts in CBA. Given the realities of the purposive energy transition, while aggregated monetised CBA remains an (important) component of RIA, we explain why Ofgem concluded that regulatory decision-making benefits from the structured articulation of other impacts. In particular, Ofgem focused on distributional consequences for energy consumers and a direct analysis of how regulatory decisions may affect the strategic and sustainability dimensions of energy system pathways. Finally, we summarise an application of the expanded Ofgem RIA framework to the regulation and evaluation of electricity interconnector investments, and the outcomes, along with the evolution of Ofgem's RIA framework itself.