Electricity Regulation in the United Kingdom
Introduction
Electricity regulation in the United Kingdom governs the generation, transmission, distribution, and supply of electricity. The regulatory framework is built on the Electricity Act 1989, which privatised the electricity industry and established the regulatory authority. The industry structure comprises generation companies (who produce electricity), the National Grid (which operates the transmission system), distribution network operators (who manage regional distribution), and suppliers (who sell electricity to consumers). OFGEM (the Office of Gas and Electricity Markets) is the independent regulator responsible for promoting competition and protecting consumers.
The Electricity Act 1989
The Electricity Act 1989 privatised the previously state-owned electricity industry in England and Wales, creating a competitive market for generation and supply while maintaining regulated monopolies for transmission and distribution. The Act established the Director General of Electricity Supply (subsequently replaced by OFGEM) and introduced a licensing regime for generation, transmission, distribution, and supply activities.
Section 6 of the Electricity Act 1989 requires any person carrying on an electricity generation, transmission, distribution, or supply activity to hold a licence granted by the Secretary of State or OFGEM. Licences contain standard conditions, which may be modified by OFGEM following consultation. The licensing regime enables OFGEM to regulate the activities of electricity companies, imposing obligations in respect of security of supply, environmental protection, and consumer service.
OFGEM and Regulatory Functions
OFGEM was established by the Utilities Act 2000, replacing the Director General of Electricity Supply. OFGEM’s statutory duties, set out in the Electricity Act 1989 (as amended), require it to: protect the interests of existing and future consumers; promote effective competition; secure that licence holders can finance their licensed activities; have regard to the need to secure a diverse and sustainable supply of energy; and contribute to the achievement of sustainable development.
OFGEM regulates the electricity market through price controls, licence conditions, and competition enforcement. The RIIO framework (Revenue = Incentives + Innovation + Outputs) sets the price controls for transmission and distribution companies, incentivising efficiency, innovation, and investment in network infrastructure.
The Wholesale Electricity Market
The wholesale electricity market in Great Britain is based on the Balancing and Settlement Code (BSC) and the System Operator Transmission Owner Code (STC). The market operates through the Electricity Balancing Mechanism, through which the system operator — National Grid ESO — balances supply and demand in real time.
The Electricity Market Reform programme, introduced by the Energy Act 2013, introduced significant changes to the wholesale market, including: Contracts for Difference (CfDs) for low-carbon generation, providing stable revenues for renewable energy projects; the Capacity Market, which pays generators to maintain reliable capacity; and the Emissions Performance Standard, which restricts the carbon emissions of new fossil fuel power stations.
Network Regulation
Electricity networks are natural monopolies and are subject to economic regulation by OFGEM. The transmission network is owned and operated by National Grid Electricity Transmission (onshore) and various offshore transmission owners. Distribution networks are operated by six distribution network operators (DNOs), each serving a regional area.
OFGEM regulates network companies through the RIIO-ED2 price control for distribution and RIIO-ET2 for transmission. The price controls set the revenues that network companies may earn, the investments they must make, and the service standards they must achieve. OFGEM also regulates the connections regime, requiring network companies to offer terms for connecting generators and consumers to the network.
Consumer Protection
OFGEM has extensive consumer protection functions, including the enforcement of licence conditions relating to supply, billing, and complaint handling. Suppliers must comply with the Consumer Protection from Unfair Trading Regulations 2008 and the Energy Efficiency (Domestic) Regulations 2024.
OFGEM operates the Energy Ombudsman scheme, providing an independent dispute resolution mechanism for consumer complaints against suppliers and network companies. OFGEM also administers the Warm Home Discount Scheme and the Energy Company Obligation, which require suppliers to provide support to vulnerable and low-income households.
Net Zero and Decarbonisation
Electricity regulation is increasingly focused on the decarbonisation of the electricity system. The Climate Change Act 2008 (as amended) requires the UK to achieve net-zero greenhouse gas emissions by 2050, and the electricity sector is central to this objective. The Government has committed to decarbonising the electricity system by 2035.
OFGEM’s role in supporting net zero includes: facilitating the connection of renewable generation to the network; promoting the development of energy storage and flexibility markets; enabling the electrification of heat and transport; and ensuring that network regulation supports investment in the infrastructure needed for a low-carbon electricity system.
Conclusion
Electricity regulation in the United Kingdom has evolved significantly since privatisation under the Electricity Act 1989. The current framework balances competition in generation and supply with the regulation of natural monopoly networks. OFGEM’s role in promoting competition, protecting consumers, and facilitating the transition to net zero makes it central to the future development of the UK electricity system.