Energy & Utilities,  Government & Public

Ofgem adopts a modern approach for assessing IT investments efficiently

We were appointed as independent IT experts by Great Britain’s energy regulator to assess £556 million in IT investments made by the national electricity system operator. Additionally, we supported the regulator in defining its regulatory reporting guidance and helped the system operator ensure compliance with these regulations.

Collaboration overview:

  • Energy companies' IT plans are often viewed as ‘black boxes’, which hinders regulators from holding them accountable and making informed funding decisions.

  • We supported an energy regulator with regulatory guideline development and jointly conducted assessments to improve information quality and help regulate IT investments.

  • Collaboration with our team helps drive factual decision-making around IT investments in the energy sector.

Energy regulator faces an IT ‘black box’ challenge

The Office of Gas and Electricity Markets (Ofgem) is Great Britain’s independent energy regulator. It is a non-ministerial department that regulates monopolies which run the gas and electricity networks, as well as makes decisions on price controls and enforcement.

The ESO is the Electricity System Operator and is responsible for keeping Great Britain’s electricity grid in balance and ensuring supply meets demand every second of every day.

Energy grid

As the ESO does not face any competition, Ofgem is responsible for reviewing its work and plans, as well as deciding how much money the ESO can collect in exchange for its electricity system operation services.

The ESO was spending hundreds of millions per year on IT costs. Ofgem needed to ensure that this money was being spent efficiently and delivering the right services at the best value.

Having very few IT specialists in-house, Ofgem commissioned our team of energy experts and data professionals to assess the ESO’s IT investment programme and advise Ofgem on the design of its regulation on IT spending.

Drafting a regulatory guidance document

Ofgem’s team already knew that the Technology Business Management (TBM) Taxonomy tool would be valuable for assessing ESO’s IT investment programme, but was seeking advice on how to make the best use of it to support the regulatory oversight.
 
TBM Taxonomy is a tool that can be used to improve business outcomes by giving organisations a consistent way to describe technology investments in terms of their business value and vice versa. This helps organisations react quickly to changing market dynamics, make data-driven decisions, and align around a common business objective.

People working on data

We started by running workshops with Ofgem and the ESO, explaining the TBM Taxonomy and how we planned to use it. This allowed us to establish clarity around the kind of information we expected the ESO to submit and gave their team an opportunity to provide feedback so that we could improve our proposed strategy.

Next, we used the TBM Taxonomy to produce a guidance document that:

  • Informed the information architecture for the ESO to use when submitting data about its business plan for Ofgem’s assessment.
  • Developed a data model for the implementation of the information architecture, helping Ofgem assess the efficiency of the ESO’s proposed spending and make informed price control decisions.
  • Enabled Ofgem to benchmark the ESO’s performance against compliance obligations and service expectations, streamlining the cost assessment process and allowing for much greater depth of regulatory analysis.

The document was published as a regulatory consultation and gained the support of energy market stakeholders.

Assessing the ESO’s IT investment plan

Lastly, we conducted an independent review of the ESO’s £556 million IT investment plan, using the newly outlined requirements from the regulatory guidance document.

We assessed performance using a structured set of seven criteria, applied both on an individual investment basis and at the portfolio-level across the entire ESO. We summarised our findings using a RAG (red, amber, green) rating. A project was rated as red if our experts found significant concerns, amber if there were some concerns, and green if there were no concerns.

After conducting the assessment, we scored 13 investments as red, representing £307 million (55% of planned IT spend), 13 investments as amber, representing £210 million (38% of planned IT spend), and 7 investments as green, representing £38 million (7% of planned IT spend).

We also provided recommendations for the ESO, showing how IT investment performance could be improved to create better value for money for energy consumers.

Business colleagues having a conversation

Collaboration impact

Our collaboration with Ofgem has helped the organisation improve the quality of information that it collects and hence its regulatory method. This allowed the regulator to effectively scrutinise a £140 million increase to the ESO’s planned spending and make informed decisions around funding, based on facts.

Ofgem now benefits from a modern, data-driven method for assessing the IT investment plans of the licensed entities under its responsibility for economic and consumer protection.

Our approach of describing an enterprise IT estate by using a multi-layered, taxonomically complaint data model enabled advanced analysis that translates technical information into business value. This makes it possible to evaluate the worth of each IT investment across a large portfolio. By supporting the development of regulatory guidance based on this method, we have provided Ofgem with a reusable template for regulating IT investments across other companies under its jurisdiction.

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