The energy revolution and future challenges for UK energy and climate change policy Contents

Conclusions and recommendations

Energy revolution


1.Storage presents a real opportunity for the UK. Strong public financial support and clear legislation in California have been vital in developing the storage industry and laying the foundation for the full integration of storage infrastructure in the grid. There are similar opportunities in the UK for legislation to help support investment in storage. (Paragraph 26)

2.We reiterate our previous call on Government to move quickly on addressing regulatory barriers faced by storage: there must be a clear definition for storage, double-charging must come to an end, and a separate asset class for grid-level electricity storage should be established as a matter of urgency. The Government must also review the outdated Capacity Market rules and regulations in relation to storage, including considering increasing the contract length and addressing restrictions around stacking of revenues for storage projects. We further recommend that Government sets out a high-level public commitment to making the UK a world-leader in storage and sets a storage procurement target for 2020. The Government should also consider a possible subsidy framework for energy storage to accelerate deployment given the importance of storage to unlocking the full potential of renewable energy. (Paragraph 27)

Demand-side management

3.The right policy framework needs to be put in place to unlock the full potential of demand-side response (DSR) technologies. Getting DSR right will empower consumers, reduce bills, ease grid pressure, and lower carbon dioxide emissions. Without explicit market mechanisms and target capacity goals DSR will not be able to deliver best value for consumers. (Paragraph 38)

4.Changes to Government policy with regards to DSR participation in the Capacity Market need to be implemented and we urge the Government to implement these in time for the upcoming T-4 and T-1 auctions in the winter 2016–17. The contract bond requirement for DSR providers bidding in the Capacity Market is an unnecessary cost for businesses. It should be removed, and if not, it must be reduced to a level that is a more reasonable percentage of the cost of the projects that are bidding. Government must update its evidence base to justify why it thinks the DSR projects should be limited to one-year contracts. Our view is that significantly longer contract periods should be available to DSR providers. Finally, the Government should reconsider its decision to reduce the volume of the T-1 auction.(Paragraph 39 )

5.The market should also be given a clear signal that DSR capacity is to be procured as a strongly preferred alternative to diesel generation plants. We recommend investigating the use of a merit order for meeting capacity needs in the UK when margins are tight, which places DSR high on the list. (Paragraph 40)

6.The Government should itself become a beacon of good practice by demonstrating the use of flexible demand solutions in its buildings in Whitehall and around the country. Parliament should also use the opportunities of the restoration and renewal of the Palace of Westminster to embed flexible demand and other new energy technologies within the Parliamentary estate.(Paragraph 41)

Digital engagement of energy consumers

7.The Government must stay on top of the developing challenges associated with data protection and privacy. While these issues are being considered in relation to the smart-meter roll-out, the Government needs to ensure that it is thinking ahead about these issues in the context of more fully-connected smart homes and businesses. (Paragraph 46)

8.It is vital to communicate effectively to consumers the benefits of smart meters and intelligent devices to manage energy use in homes and businesses. However, the Government must also develop methods to nudge the energy sector towards embracing the opportunities arising from developing a smarter market in which consumers are more engaged and where reduction of demand is valued over increasing supplies of energy. The Government should investigate the pros and cons of alternative approaches to do this, including the potential for a demand reduction obligation. (Paragraph 54)

9.It is clear that the digitisation of the energy system alongside the increasing availability of “internet of things”-enabled technologies and appliances will revolutionise not only the energy market but also the consumer experience. Government will want to ensure that this opportunity for UK households is not held back by regulation or a lack of understanding within Whitehall. (Paragraph 55)

Nuclear innovations

10.The Government hopes to establish the UK as a global leader in the Small Modular Reactor (SMR) market. Our successors may in due course wish to investigate progress on the development and deployment of SMRs. (Paragraph 60)

11.Fusion is an innovation for the next generation. In the United States, the prospect of over-regulation was clearly a worry. The UK is already involved in fusion projects and is home to some of the world-leading companies exploring this field. There is an opportunity to be a pioneer and world-leader in this area. Such is the potential of this technology, the Government should monitor and engage with developments in fusion research and plan ahead to minimise regulatory barriers to development and deployment. (Paragraph 64)

Economic opportunities of the energy revolution

12.Technological leadership can be lucrative, but often occurs on longer timescales than private investment is comfortable with so there is a role for Government in driving energy innovation. The UK has world-leading universities: leveraging these to attract and retain international talent, and support innovation throughout its cycle, is crucial to achieving an energy revolution. The Government should support efforts to get the next generation of students interested in (1) energy research, and (2) the policy implications of their research. The Government should embrace tripartite collaboration between academia, industry and government where projects help to address the UK’s long-term decarbonisation goals. (Paragraph 70)

13.The energy revolution presents a huge economic opportunity for the UK. With the appropriate strategy, policies and regulatory framework in place, Britain can become a world leader in the green technology sector. The Government should make green technology a top priority in its forthcoming industrial strategy. (Paragraph 71)

Leaving the EU

EU Emissions Trading Systems

14.The EU Emissions Trading System (ETS) is highly valued as a policy instrument for reducing greenhouse gas emissions across the EU. The System requires reform but stakeholders are optimistic that the next reformed phase of the EU ETS—with clearer price signals more closely aligned to the UK’s carbon price floor and improved governance—will better incentivise low carbon investment and reduce emissions. Several therefore make the case for the UK’s continued participation in the System after it has left the EU. Government should bear in mind the challenges associated with alternative options. These include the potentially costly and complex option to establish a UK ETS linked to the EU System, and the politically difficult creation of a direct carbon tax. Government must consider the impact of any alternative approaches on consumers and the competitiveness of UK industry. (Paragraph 84)

EU Effort Sharing

15.Stakeholders agree that there is little risk to the UK in signing up to its proposed contribution to EU Effort Sharing proposals up to 2030, as it aligns closely with the UK’s domestic targets. Renegotiating these proposals could be burdensome. We note that because of the UK’s higher than average contribution to the proposed target, the onus would be on the rest of the EU to step up its ambition and push forward more stretching emissions reduction targets for the remaining Member States. (Paragraph 86)

Paris Agreement and future international climate negotiations

16.The recent vote to leave the EU does not change the UK’s requirement to reduce emissions in line with the Paris Agreement and domestic legislation. The required levels of emissions reduction through to the early 2030s, during the fifth carbon budget period, have already been set by the UK Parliament. We have highlighted the prevailing stakeholder view that the Government consider maintaining UK participation in the EU ETS and in the EU Effort Sharing process, both of which will contribute significantly to the EU’s Nationally Determined Contribution up to 2030. (Paragraph 91)

17.The Government should explore the options for maintaining a relationship with the EU on climate change negotiations going forward. After 2030 there may continue to be value in pursuing the joint fulfilment of climate change goals. In this way the UK might retain its positive influence over EU nations and, by maintaining a progressive climate change agenda among that group of nations, exert greater influence elsewhere in the world too. (Paragraph 92)

Internal Energy Market

18.Stakeholders are in favour of continued UK access to the Internal Energy Market (IEM). In deciding the nature of the UK’s future relationship with the market, the Government will need to weigh the costs of associated legislation and regulation against the economic, security of supply and carbon reduction benefits afforded by IEM membership. We recognise that negotiations around this will be affected by broader issues, including freedom of movement. We note that:

19.Continued participation in the Internal Energy Market is expected to entail compliance with the European Network Codes (ENCs). Ofgem and National Grid should therefore seek to retain membership of ACER, ENTSO-E and ENTSO-G so that the UK can continue to shape the development of new codes. If on the other hand the UK sought to resign from the European Network Codes, the Government must take care to ensure that resultant gaps in domestic network codes are filled. We set out further conclusions regarding ENCs in relation to interconnectors (see paragraph 117). (Paragraph 103)

20.Northern Ireland’s electricity system is highly integrated with that of the Republic of Ireland, which will continue to be bound by Internal Energy Market (IEM) rules. The Government should carefully consider how any changes to the UK’s relationship with the IEM will have particular significance for Northern Ireland. It may be appropriate to differentiate between the approach taken for Northern Ireland and that for Great Britain. (Paragraph 107)

Security of supply

21.The UK is heavily dependent on Europe for its electricity and gas imports. Pan-European coordination has helped to improve the UK’s security of supply. The Government should seek to build investor confidence, to avoid exacerbating difficulties in bringing forward investment in new electricity capacity and new indigenous resources. The Government should also examine the role of the ‘solidarity principle’ in managing potential gas crises, specifically how the UK can continue to participate. If excluded from the ‘solidarity principle’ the UK Government must urgently investigate alternative back-up arrangements to ensure security of supply in the event of a crisis. (Paragraph 111)

22.Interconnections improve security of supply, facilitate cross-border trading and enable grid-balancing to be managed more cost-effectively. Substantial expansion of interconnection has been proposed for the coming decade, and we support this. The Government should continue to progress planned and proposed new interconnections with Europe. (Paragraph 116)

23.The European Network Codes (ENCs) may need to be retained to ensure the functionality of energy trading and system operations across interconnectors with Europe. As noted in paragraph 103, Ofgem and National Grid should seek to retain membership of ACER, ENTSO-E and ENTSO-G so that the UK can continue to shape the development of new ENCs. If the UK resigns from the IEM and the ENCs, the Government must take care to ensure that interconnector trade and operations are not distorted by differences between European and UK energy market design. (Paragraph 117)

EU funding

24.The EU has provided substantial financial support for energy infrastructure and R&D in the UK. The Government should provide clarity to Parliament on whether funds awarded from EU schemes other than Horizon 2020 will be retained and/or underwritten. The Government should also ascertain whether access to EU financial institutions and funds, including but not limited to the European Investment Bank, will be available to British applicants in the longer term. It should develop credible alternatives where this is not possible. (Paragraph 121)

Investor confidence

25.The vote to leave has reduced already-weak investor confidence in the energy sector. The Government should promote investment by providing clear signals on the direction of domestic energy policy to be followed throughout, and after, the exit negotiations, for example through the timely publication of a detailed Emissions Reduction Plan. (Paragraph 123)

Repealing the European Communities Act 1972

26.EU-derived legislation retained in UK law will need to be reviewed and amended in the light of the UK’s relationship with the EU once it has formally left. It is essential that Parliament has adequate time to fully scrutinise any proposed legislative changes. There are also questions about how relevant such laws will remain once the UK is no longer in the EU, and how enforceable they will be when the directives from which they are derived no longer apply and there is no longer any recourse to the European Court of Justice. (Paragraph 126)

Guiding principles for the EU exit negotiations

27.The UK’s departure from the EU is not expected to change the general direction of UK energy policy, since this is perceived to be driven primarily by the Climate Change Act 2008, and domestic concerns about supply security and affordability. However, the absence of external enforcement and accountability mechanisms could weaken the imperative to deliver on policy targets. EU energy and climate change policies have historically played an important role in underpinning UK policy and providing a ‘double-lock’ to decarbonisation commitments. This has bolstered investor confidence by providing policy stability beyond the five-year domestic parliamentary cycle. As the UK Government prepares for the exit negotiations, we set out the following guiding principles:

Highlights from 2015–16

28.We urge our successors to press the Government on the timeline for developing its Emissions Reduction Plan to meet the fourth and fifth carbon budgets. Delaying the publication and implementation of a robust plan risks further uncertainty on the direction of UK energy and climate policy which could damage investor confidence and call into question the UK’s ability to meet its long-term decarbonisation targets. Our report, Investor confidence in the UK energy sector, set out a number of detailed recommendations and questions that remain ignored by Government. The Government’s engagement with this report has been wholly inadequate, and we urge our successors and other Members to continue to press for an adequate response. (Paragraph 134)

© Parliamentary copyright 2015

14 October 2016