Usually, these three dimensions operate sequentially. A commercially-driven decision (e.g., a new market entry or an acquisition) triggers the requirement for legal advice, which in turn, may identify ring fencing requirements. This generally translates into a structural setup, aimed at legal compliance, with some guidelines that are passed on to risk and compliance teams to implement.
From our experience, we have observed that it is the intricate dance between the three dimensions that allows for the best solution to emerge. By concurrently probing and discussing each dimension, the optimal outcome can be achieved by considering what the regulations require or allow, by identifying which controls may be needed and how this can be achieved in a way that makes commercial sense.
Ring fencing in the energy transition
Effective ring fencing is critical to the energy transition. As the world decarbonises, energy markets have become more complex and decentralised. The traditional supply model where generation businesses are located upstream of the network businesses has changed and continues to evolve. Consumers can now also generate energy. Firming assets can be placed anywhere on the value chain – next to generation, within the networks or behind the meter within consumers' premises. New markets are emerging to meet the demands of this constantly evolving sector and with them, new and different opportunities for a diverse range of business models and participants. On top of all of this sits the mounting pressure to accelerate decarbonisation, where all capacity and capabilities within the sector are being tapped to partake in the transition.
The regulators are grappling with these same issues and challenges. Striking the right balance between regulatory intervention and oversight and promoting competition is a consistent feature in commentary by the key industry regulators – the ACCC and the AER. Electricity and gas ring fencing continues to be the priority of policy makers and the AER.
In this ever-evolving landscape, nearly all network and pipeline operators (who are used to operating in a regulated monopoly environment) are establishing business units to address new needs in the sector – normally contestable markets. Energy regulation has set boundaries for these players for a while now, but, as the sector continues to shift, so too do the ring fencing requirements. In line with the approach described above, in our experience, the most effective process to manage ring fencing must allow collaboration between the three dimensions to take place. An approach such as the one illustrated below will almost certainly deliver a better outcome.
Ring fencing: The recommended process
Either one team vs eight or more handovers required.