Readiness for storms ahead? Critical national infrastructure in an age of climate change: Government response to the Committee’s First Report

First Special Report of Session 2022–23

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First Special Report

The Committee published its First Report of Session 2022–23, Readiness for storms ahead? Critical national infrastructure in an age of climate change (HC 132, HL Paper 74), on 27 October 2022. The Government’s response was received on 20 February 2023 and is appended to this report.

Appendix: Readiness for storms ahead? Critical national infrastructure in an age of climate change: Government Response

The government is grateful for the work of the Joint Committee on the National Security Strategy and their report on critical national infrastructure (CNI) and climate adaptation. Please find below the government’s response to the Committee’s recommendations:

1. We recommend that the government formalises collaboration between CNI regulators on climate adaptation, through a statutory forum chaired by a senior government official (at Director General level), with key operators invited to meetings. This forum should publish an annual report to Parliament on key actions to address interdependencies and to enhance CNI resilience to climate change and extreme weather, utilising data and intelligence from the CNI Knowledge Base. The government should also make use of the power granted by the Climate Change Act 2008 to require CNI operators and/or regulators to report jointly under the Adaptation Reporting Power. (Paragraph 35)

Response (Cabinet Office)

Lead Government Departments (LGDs) use a variety of forums and bilateral meetings to engage and collaborate with CNI regulators and operators on a regular basis: in some sectors, detailed emergency planning activities are jointly undertaken by industry and government, such as through the Department for Energy Security and Net Zero led Energy Emergencies Executive Committee (E3C) and its associated task groups reporting into the Energy Emergencies Executive (E3).

On overarching and cross-cutting resilience issues, the UK Resilience Forum, which is chaired by the Chancellor of the Duchy of Lancaster, brings together representatives from the UK Government, devolved administrations, emergency services, responder organisations, the private sector and the voluntary and community sector for discussions on mitigating risks, emergency preparedness, crisis response and recovery, meeting approximately every 6 months. Further, the Infrastructure Operators Adaptation Forum (IOAF), which is made up of infrastructure providers and operators, also regularly meets to discuss chronic climate change related risks and appropriate adaptation and mitigations. As the Third National Adaptation Programme (NAP3) is developed, we will work with Defra and the Environment Agency to encourage and strengthen collaboration amongst regulators and operators with an adaptation remit, including through the IOAF.

In addition, as we have set out in the UK Government Resilience Framework, we are undertaking work to review standards, assurance and regulation of CNI sectors. This work will include consideration of governance of sectors, including on cross-cutting risks such as climate adaptation. We will consider the case for a statutory forum as part of this work, and update the Committee on our progress later this year.

Meanwhile, the CNI Knowledge Base provides a step change in how the government captures, visualises and understands linkages and interdependencies across the UK’s most critical infrastructure. The Cabinet Office has developed a common cross-government five step methodology for LGDs to identify and categorise CNI systems within their sectors, called the criticalities process. LGDs are required to work with CNI Owners & Operators (CNI O&Os) to gather the required information and data to complete the criticalities process and develop a comprehensive view and understanding of CNI systems within their sectors. This data is stored in the secure digital tool, CNI Knowledge Base, and enables the government to visualise and map the critical systems, interdependencies and networks that support the essential functions of UK CNI. It will also help identify areas of acute risk, as well as the impacts of cascading risks, including from climate change, and will ensure data driven risk analysis is used to inform policy decisions within government and by infrastructure operators.

The criticalities process and CNI Knowledge Base are designed to provide the government a holistic, systems thinking approach to understanding the UK’s CNI resilience. It provides a common approach to map and define dependencies (both within a sector and cross-sector) and increases our visibility and understanding of the complexities of the UK CNI. Work to baseline an initial criticalities process is in its final stage. It will then become an iterative approach that is embedded into the wider government approach to CNI. This will help the government to keep up to date with changes to the UK infrastructure and manage cross-cutting risks to CNI.

Using the geographical mapping feature in CNI Knowledge Base, and other analytical and modelling tools, LGDs will also be able to better understand the potential impacts of specific incidents and events through the interdependencies linked together on Knowledge Base. This will support work on climate risks, for example by considering the impact of forecasted extreme weather events or longer-term challenges such as coastal erosion to CNI in geographical regions. LGDs will then be able to provide CNI owners and operators with targeted, practical advice to equip them with the evidence needed to make informed decisions on adaptation and to build resilience. LGDs will seek assurance information for their sectors, with reference to regulators and regulatory powers as appropriate, to ensure owners and operators are increasing their resilience and are addressing risk.

The government uses the Adaptation Reporting power provided for by the Climate Change Act 2008 to ask infrastructure providers and public bodies to report on how they are addressing current and future climate impacts in key sectors including transport, energy, water and ICT. The government will soon conduct a consultation for the fourth round of climate adaptation reporting (ARP4). The consultation will seek feedback on a range of issues, including whether reporting should remain voluntary or be made mandatory, and how interdependencies are handled, to further support the climate preparedness of infrastructure and overcome barriers to addressing interdependent risks. The final strategy for ARP4 will be published in 2023.

2. The Energy Bill is a vital opportunity to improve the resilience of the UK’s energy supply, so we are concerned by reports that the legislation may be dropped—even as reports suggest that the UK could face energy shortages this winter. If the Bill is passed, the Independent System Operator and Planner (ISOP) would be tasked with carrying out strategic planning and forecasting in relation to electricity and gas transmission. We would welcome the government’s assurances that the ISOP’s mandate will include planning for the impact of the changing climate on the UK’s energy supply. The government’s recently-announced review of energy regulation must also consider the extent to which the current regulatory regime allows for sufficient investment in resilience and adaptation, in line with the recommendations outlined in the final chapter of this report. (Paragraph 43)

Response (Department for Energy Security and Net Zero)

The government remains committed to all measures in the Energy Bill and, as announced on the 29th November, the Bill will continue its passage through the House of Lords. The Energy Bill will liberate private investment in clean technologies, bringing forward business models for industrial carbon capture and low carbon hydrogen production; protect consumers by establishing a Future System Operator; and reform the UK’s energy system so that it is efficient, safe and resilient.

The current Electricity System Operator factors in the impacts of climate change on the resilience of its operations and in its forecasting through the Future Energy Scenarios. The Future System Operator (FSO - known in the Bill as Independent System Operator and Planner) will continue to plan for the impact of climate change on the UK’s energy supply. The Department for Energy Security and Net Zero are also actively considering what more the FSO can do to ensure resilience of the system to climate change. This will be underpinned by the FSO statutory objective to ensure security of supply and to enable the government to meet its net zero targets, as set out in the Energy Bill.

Ofgem have ensured that the next electricity distribution price control (RIIO-ED21) will provide Distribution Network Operators (DNOs) with the framework and funding needed to manage climate risks by providing allowances to install resilience measures, requiring DNOs to submit climate resilience strategies as part of their RIIO-ED2 Business Plans and establishing an Energy Networks Association working group focused on climate resilience. Ofgem will also continue to enforce standards by setting targets for DNOs to meet in return for funding, including on reducing the likelihood of network failures under normal operating conditions, as well as severe weather events, and by setting outcome-based resilience standards through the Guaranteed Standards of Performance (GSoP).

Over the coming months Ofgem will be determining further priorities for climate resilience action and will consider the recommendations of the JCNSS report as it develops next steps. The work will also be informed by reports such as the Climate Change Committee’s Independent Assessment of UK Climate Risk and the National Infrastructure Committee’s report on Resilient Infrastructure Systems.

3. We welcome the development of the Cabinet Office’s ‘National Situation Centre’ (SitCen), which gathers and generates real-time data to inform the government’s crisis and emergency response work—including on weather patterns. We recommend, however, that the government explores the potential for SitCen to generate longer-term climate data and analysis for CNI operators, to inform their climate adaptation planning efforts. This should be drawn from a wide range of sources, in light of the significant uncertainties inherent in longer-term climate modelling. In the context of an open market for climate services, in which vital infrastructure operators could be relying on suboptimal weather and climate reports, this could ensure that operators and regulators are working to the same, quality-assured assumptions. It could also enhance their ability to collaborate on addressing cascading risks and interdependencies. (Paragraph 46)

Response (Cabinet Office, with input from the Met Office and the Office for National Statistics)

The government recognises the benefits that reliable climate change data and quality-assured modelling could have on climate adaptation planning efforts, for CNI operators and beyond, and we agree that infrastructure operators should not rely on suboptimal weather and climate reports.

The Met Office recently launched a publicly available geospatial pilot ‘Climate Data Portal’, which makes key climate data and supporting information available in a wide range of geospatial and business application formats and visualisations, within the systems that government and industry organisations already use for their data management and decision-making processes. This is part of a programme of work to make it easier for government, industry organisations and CNI operators to find, access, understand and make effective use of Met Office weather and climate data and expertise in their operational and strategic decision-making. The Met Office’s Hadley Centre Climate Programme (HCCP), a national capability funded by government, undertakes scientifically excellent climate research benefiting the UK science base and also serves the needs of the UK Government by providing policy-relevant scientific evidence and advice. Additionally, National Climate Information Centre (NCIC) observational data and the UK Climate Projections 2018 (UKCP18) forecast data provide decision relevant information, widely used across government, academia and industry to inform both mitigation and adaptation policy and action.

Additionally, the ONS is working collaboratively to bring together climate change-related statistics from across government, through the UK Climate Change Statistics Portal and their quarterly Climate Change Insights publication. These make a range of high-quality statistics, data and analysis available in an accessible and usable format to inform policymakers and the public, and support further analysis and research. The Portal is structured around six dashboards, including on adaptation, providing users with visualisations of a range of indicators that they can explore. It also provides explainer articles, drawing on statistics from the dashboards, while the data explorer allows users to search, filter and download datasets for their own research and analysis. The most recent Climate Change Insights, themed around natural and rural environments, includes a section on adaptation.

The National Situation Centre (SitCen) also brings data and analysis together from across and beyond government to inform crisis preparedness and response. SitCen has established close working with both the Met Office and ONS and is able to ingest data from both organisations rapidly, drawing on their scientific and analytical expertise.

The government and its agencies, including the ONS, the Met Office and the Environment Agency, will continue to identify, scope and develop relevant sources of climate data. We will continue working with partners to increase the uptake and use of this data by infrastructure operators, utilising existing Met Office and ONS channels and platforms and using regulator, operator and industry forums, such as the IOAF. Working with LGDs, we will also use the CNI Knowledge Base to ensure CNI operators and owners are identified and that the data and evidence base necessary for adaptation and resilience decision-making is cascaded to them. We will also work with LGDs to understand how effectively CNI sectors are utilising these data sources and iterate our approach as required.

The government will also work with the Met Office to improve the uptake and usability of climate science and services to generate greater socio-economic benefit for the UK, with a focus on using the new Met Office supercomputer investment to make further improvements to climate prediction and projection data over coming years. This investment of up to £1.2 billion will enable more accurate prediction of storms, provide more detailed evidence to inform decisions on the locations for flood defences and allow better projections of future global climate risks. It will play an important role in ensuring communities are better prepared for weather disruption and the challenges of climate change.

4. We note the government’s concerns about the complexity of the regulatory landscape and the difficulty of imposing a more uniform regulatory regime. We agree with the NIC, however, that resilience cannot be left entirely to the market. Indeed, our survey found that only a third of responding organisations planned more than a decade in advance for the effects of climate change. We suggest that the government undertakes more detailed work on international comparators in relation to regulatory regimes. In addition, in line with the NIC’s 2020 report on resilience, we recommend that:

  • The government should publish a full set of resilience standards every five years, for the sectors under the NIC’s purview at a minimum (energy, water, digital, road and rail services); it should also examine how these could apply to other CNI sectors.
  • CNI regulators should require their operators to develop long-term resilience strategies;
  • Recognising that CNI should be tested regularly against a wide range of stresses, including interdependencies, regulators should oversee a programme of stress testing against a range of risks that might affect critical services; and
  • These resilience standards and stress tests should specifically address the effects of climate change in the short, medium and long term, to ensure that CNI operators are planning for a range of potential scenarios. (Paragraph 64)

Response (HM Treasury)

As it set out in its response to the National Infrastructure Commission (NIC) report on resilience from September 2021, the government agrees with the National Infrastructure Commission’s recommendations on stress-testing and standards. The government will further respond to the substance of the NIC’s recommendations on climate risk in the Third National Adaptation Programme, including on how to improve long-term resilience.
The regulators’ statutory duties require them to protect consumers as well as ensure suppliers are able to meet consumer demand with secure supply. It is therefore already incumbent upon regulators to ensure companies are resilient operationally. As part of its work to reform the framework for economic regulation, the government will consider how to ensure that companies can more easily secure the investment they need for climate mitigation and climate adaptation. Specifically, the government agrees in principle that more stress testing by the regulators should be carried out, such as in the form of more frequent independent audits of existing infrastructure assets to more accurately monitor their resilience relating to critical services and essential functions. As confirmed in the government’s oral evidence, the UK Government regularly engages with international partners on models for regulating their CNI sectors. The government will continue to engage with international colleagues on regulatory regimes to identify areas of best practice and will continue to conduct comparisons as policies are developed.

The UK Government has published the Resilience Framework, which sets out the government’s approach to resilience regulation and standards.

5. We recommend that the government establishes a Minister of State for CNI Resilience and a team within the Cabinet Office to focus on this issue, across a range of national security threats and hazards. To drive forward this work across departments, the government should also re-establish a Ministerial committee on resilience, following the recent abolition of the National Security Council and its sub-committees (including the Resilience sub-committee of National Security Ministers). This group should regularly consider both climate adaptation and CNI interdependencies, reporting to the Foreign Policy and Security Council on an annual basis. (Paragraph 80)

Response (Cabinet Office)

As the Chancellor of the Duchy of Lancaster confirmed to parliament in Cabinet Office Orals and Topicals on the 27th October, he and the Minister for the Cabinet Office are Ministers for resilience, which includes working with the LGDs for Critical National Infrastructure sectors. The Chancellor of Duchy of Lancaster also recently announced that the Prime Minister has created a new National Security Council (NSC) subcommittee for Resilience.

Following the restructure of the Cabinet Office crisis and resilience teams, the newly formed Resilience Directorate is actively taking forward the government’s ambitious programme of work on resilience. The Directorate includes a CNI team providing overall coordination of Critical National Infrastructure, alongside LGDs of the CNI sectors, and a domestic climate adaptation team working with Defra on the NAP3. These changes put climate change and resilience at the heart of government policy-making, assessing, mitigating and minimising risks to the system.

Climate adaptation and resilience issues, including CNI, will be considered by Ministers in a variety of forums, including the Domestic and Economic Affairs (Energy, Climate and Net Zero) Cabinet Committee and the new National Security Council subcommittee for Resilience. These committees will be supported by a number of cross-government senior official-level forums, including a Resilience Steering Board.

6. We recommend that the Prime Minister wastes no time in publishing the crucial and long-awaited National Resilience Strategy (NRS), which has the potential to ‘mainstream’ climate adaptation planning across government, and to improve central government oversight of risk assessment and risk planning more broadly. In the context of recent moves to disband the Civil Contingencies Secretariat, she must also ensure that the Cabinet Office has the proper resources and structures to implement the NRS effectively. (Paragraph 92)

Response (Cabinet Office)

As stated above, the government has published a strategy for resilience—the UK Government Resilience Framework, which sets out how we will strengthen the structures and capabilities, including risk assessment, ownership, planning and accountability, which underpin the UK’s resilience to all risks, including climate change.

The changes to the Civil Contingencies Secretariat were made to ensure that there is a dedicated function for resilience in the Cabinet Office. There are now two units: the Resilience Directorate and the COBR Unit, to ensure that HMG has the capability and capacity to support the UK Government in both responding to emergencies and continually improving our preparedness for the range of disruptive challenges we face. The Resilience Directorate is already implementing measures to improve resilience, such as the most recent update to the National Security Risk Assessment and the UK Resilience Framework. It is also working across government to address a number of chronic risks, including climate change and adaptation, and to develop a programme of action to bolster critical cross cutting capabilities.

7. The next National Adaptation Programme is also a critical opportunity to enhance the resilience of UK CNI to the effects of climate change. To improve join-up between the government’s parallel programmes on resilience and adaptation, we recommend that the new Minister for CNI Resilience and Defra’s Minister for Climate Adaptation meet on a regular basis—every six weeks at a minimum—to ensure that the NAP delivers a clear programme of activity to enhance the resilience of UK CNI to the effects of climate change and extreme weather. The 2023 NAP should draw strongly on the recommendations made in this report, and on those generated by the National Infrastructure Commission and the Climate Change Committee. The two Ministers should report to us jointly by the end of March 2023 on progress against this recommendation. (Paragraph 93)

Response (Cabinet Office and Department for Environment, Food and Rural Affairs)

Working closely with the Cabinet Office, Defra is leading the cross-government work to develop the Third National Adaptation Programme (NAP3), which will address all 61 risks and opportunities identified in the Third Climate Change Risk Assessment (CCRA3). Whilst developing the NAP3, the government will carefully consider the recommendations made in this report and those made by the NIC and Climate Change Committee, and will review the government’s role in delivering enhanced UK CNI resilience across all 13 infrastructure risks identified in the CCRA3. This will include steps the government can take to better understand the interdependencies between risks and actions, and specifically between infrastructure sectors, including through our response to risk I1, which focuses on the risk of cascading failures in infrastructure sectors.

Cabinet Office and Defra Ministers have recently met to discuss these issues and the Chancellor of the Duchy of Lancaster, Environment Secretary, as well as a number of other interested Ministers from across government, will continue to meet regularly through a variety of forums, including the Domestic Economic Affairs (Energy, Climate and Net Zero) committee, National Security Council and Resilience sub-committee, throughout the process of developing the NAP3 to consider these matters further. Defra, as the lead department for climate adaptation and the NAP3, will liaise directly with the Committee on progress with the report.

8. When critical national infrastructure is impacted by extreme weather, the actions of local responders are absolutely vital for maintaining the health and security of local people. We welcome the government’s recognition of the need for reform, under a specific programme led by DLUHC. However, we recommend that the LRF reform programme considers specifically the role of LRFs in overseeing local CNI vulnerabilities to extreme weather and other effects of climate change, including the likely impact locally of extreme weather events. As recommended by the Lords Risk Assessment and Risk Planning Committee, the government should also establish a much clearer statutory remit for LRFs, via reforms to the Civil Contingencies Act. Finally, we expect to see clear join-up between the DLUHC programme and the Cabinet Office’s new emergency response and resilience structures; the government should outline to us, in its response to this report, how the Cabinet Office will remain engaged in local emergency planning. (Paragraph 104)

Response (Cabinet Office and Department for Levelling Up, Housing and Communities)

Local responders and Local Resilience Forums (LRFs) play a vital role in responding to crises and natural disasters and are already undertaking a range of work programmes that address this recommendation. As you reference, the Integrated Review included a commitment for DLUHC to consider strengthening the roles and responsibilities of LRFs in England, which it has done in close collaboration with the Cabinet Office. Central to this has been a recognition of the increasingly complex risk landscape we face, including the risks posed by climate change. The recently published UK Government Resilience Framework sets out further details on this, and includes proposals for strengthening LRFs, built around stronger LRF leadership and lines of accountability and ensuring resilience is built into wider local policy and place making. The Cabinet Office will continue to work closely with DLUHC as we implement the Framework, including exploring how we develop the capacity and capability of LRFs to feed into key Cabinet Office systems, such as the SitCen, and wider central government governance.

9. The government’s review of the CCA recognised the need for greater clarity on the roles and responsibilities of LRFs. We recommend that the government oversees a programme of ‘exercises’ to plan for major regional extreme weather events with multiple cascading effects. It should involve local and regional actors in these exercises, including key CNI operators, and use them to clarify and communicate roles and responsibilities at a national, regional and local level. When it responds to this report, the government should also outline, in confidence if necessary, its plans for CNI-related exercises involving local actors. If necessary, we will follow up with LRFs in six months’ time, to establish whether such a programme is underway. (Paragraph 109)

Response (Cabinet Office)

Resilience exercises are already being conducted or planned by UK Government departments and Local Resilience Forums for specific extreme weather and climate change related risks. LGDs, who retain responsibility for specific risks and the plans and capabilities required to respond to them, are required to identify CNI operators, where possible, when setting the scope and objectives of each exercise, to test those plans and capabilities.

Cabinet Office will also coordinate a programme of exercises, aligned to the NSRA, which articulate the risk of extreme weather events and the wider consequences of climate change. Thisexercise programme will include local and regional actors, and will clarify and communicate roles and responsibilities at a national, regional and local level. The Cabinet Office will continue to work closely with DLUHC to share good practice guidance for the delivery of exercises at the regional and local level.

10. The establishment of the UK Infrastructure Bank is a welcome development, given its specific mandate to help the UK to adapt to climate change. It is vital that this remains at the forefront of the Bank’s investment decisions, with adaptation projects prioritised as much as those targeted towards mitigation and/or regional economic growth. We recommend that the UKIB’s annual report outlines specifically how the Bank has met its adaptation objectives, including projects that will enhance UK CNI’s resilience to the effects of climate change and extreme weather. (Paragraph 118)

Response (HM Treasury)

The UK Infrastructure Bank (UKIB) is committed to delivering on its mandate to help tackle climate change. In its first Strategic Plan, published in June 2022, the UKIB provided detail on the strategic approach it is taking to deliver on its mandate in its initial years, publishing details on the measures the Bank will take to help the UK adapt and be more resilient to climate change. The UKIB has announced 10 deals worth over £1 billion, mobilising over £4.5 billion across clean energy, transport, digital, water and waste priority sectors.

To support UKIB meeting its climate objective, the initial Strategic Steer from government to the UKIB in March 2022 set expectations that UKIB will explore and report on projects that make the UK’s infrastructure more resilient to climate change and better adapted to future risks. The Strategic Steer also confirmed that climate risk, including the impact of climate change on financial assets should help to inform the Bank’s decision making.

As is set out in UKIB’s inaugural Strategic Plan, the Bank will report through its Annual Reports and Accounts on its impact against its climate change objective through measuring relative greenhouse gas emissions on its investment decisions. This will include a report on the impact of their investments on adaptation and resilience, as set out in the government’s strategic steer for this area. The UKIB will continue to develop its approach and assessment of its impact in these areas over time, with a focus on delivering its objectives in a transparent and accountable way. The UKIB will align with the UK’s reporting requirements for green finance as these evolve and come into force over time. Such requirements currently include disclosures aligned with the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD). In time, such requirements will evolve into the UK Sustainability Disclosure Requirements (SDR) which will include reporting against the UK Green Taxonomy.

The UKIB’s Strategic Plan also includes details on how it will incorporate climate analysis into how it considers investment proposals, for example developing a specific focus on resilience to climate change within its ESG framework. This will ensure analysis on how specific investments deliver the UKIB’s policy objectives are always at the forefront of the UKIB’s investment decisions. For each investment decision, the UKIB assesses how each deal will generate additional private investment or improvements to environmental aspects of a project and deliver on its policy objectives, including improvements to environmental aspects of a project. When assessing climate resilience [for a specific deal], the UKIB requires evidence that a suitably qualified organisation or national body or regulator has considered resilience. Generally there will be a Climate Risk and Adaptation Assessment as part of planning applications that the UKIB will consider. The UKIB will ensure there is evidence that the investment is adding to climate resilience.

11. The government’s Growth Plan commits to accelerating the construction of a large number of critical national infrastructure projects, including by “reducing the burden of environmental assessments”. Given the shortfalls outlined in this report, it is essential that the Growth Strategy does not reduce investment in—or requirements for—proper adaptation planning. In that context, we welcome the Plan’s commitment to producing National Policy Statements for significant sectors, which must include a consideration of adaptation requirements. The government should also commit to us, in writing, that its planned acceleration of infrastructure investment and approvals will not be to the detriment of improvements to climate adaptation planning and investment. (Paragraph 119)

Response (HM Treasury)

Infrastructure is a vital means to drive the UK’s economic growth, increase long-term energy security,deliver Net Zero and build greater climate resilience. The government remains committed to delivering high quality infrastructure, whilst respecting environmental standards, in a timely manner across the UK.

The government has already announced a series of reforms, including through the National Infrastructure Strategy (November 2020) and British Energy Security Strategy (April 2022), including updating National Policy Statements (NPSs) for transport, energy and water resources during 2023, and sector-specific interventions. These updated NPSs will, per Planning Act 2008 requirements, have regard to the desirability of mitigating, and adapting to, climate change. The Levelling Up and Regeneration Bill is also taking powers to replace EU-derived environmental assessments with new Environmental Outcomes Reports (EOR), which will offer a more streamlined approach to environmental assessment without sacrificing outcomes.

The government will seek to accelerate the delivery of projects across its portfolio, rather than focus on the list of projects flagged for acceleration in the Growth Plan.

12. The current price review mechanisms for utility companies may be unsuitable for ensuring investment in long term resilience. We welcome the Prime Minister’s recently-announced review of energy regulation, but we recommend that the government goes further, undertaking an urgent review of price control mechanisms across all relevant infrastructure sectors. This should consider specifically their suitability for ensuring investment in CNI resilience and climate adaptation, in time to inform the next set of price reviews. (Paragraph 124)

Response (HM Treasury)

In January 2022, the government set out its plan to update the framework of economic regulation in the utility sectors. This plan considered a number of constituent parts of the framework for economic regulation, including the price control mechanism, and how regulation can better facilitate investment so that utility sectors can meet new challenges, such as climate change, help meet our Net Zero targets and improve long-term drought resilience. As part of this plan, the government committed to launching a consultation on reform to the regulatory system, which is due to run this year. We welcome views from all interested parties.

Whilst it is not the government’s intention to review the price control mechanisms independently, government is very much committed to looking at the regulatory system in the round. This approach includes an examination of the price control mechanism and how exactly it needs to be reformed to encourage more competition, how the cost of capital is calculated ahead of each new price review period, and the process by which companies can appeal these determinations. Alongside these considerations, the government will consider regulators’ statutory duties and how these can contribute to long-term resilience as well as the role of government in providing strategic guidance to the utility regulators.

13. The government’s own climate change risk assessment notes that early adaptation efforts deliver high value for money. We recommend that the government undertakes a more detailed cost-benefit analysis of climate adaptation for every CNI sector, using the results to inform the resilience standards recommended in Chapter 3. It should also consider a more wide-ranging review into the economics of adaptation, as recommended by the Environment Agency. (Paragraph 130)

Response (HM Treasury)

As part of the government’s Third Climate Change Risk Assessment (CCRA) published earlier this year, the Climate Change Committee produced an analysis of the monetary valuation of risks and opportunities, as well as an analysis of the indicative costs and benefits of adaptation. These analyses concluded that many early adaptation investments deliver high value for money, whereby every £1 invested in adaptation could result in £2 to £10 in net economic benefits. This report was based on a synthesis of available evidence, and includes making new infrastructure climate resilient for which benefit-cost ratios (BCRs) were typically 4:1. Adaptation interventions are highly location- and context-specific, with significant uncertainty around the scale of climate change, which will all impact BCRs, and makes estimates of sector-wide benefits challenging.

In developing the Third National Adaptation Programme, the government will seek to determine what additional research and analysis, including economic analysis, is required to ensure robust adaptation. In that context, the government will also consider how the Fourth CCRA could incorporate more advanced economic analysis and improve regional and localised mapping to understand how risk varies by location, which would facilitate a more detailed cost-benefit analysis for each CNI sector.

More widely, there is already an expectation on departments to consider climate risks and the vulnerability to these risks of any policy, project or programme, in accordance with the Green Book. The Green Book supplementary guidance ‘Accounting for the Effects of Climate Change’ supports departments to ensure, where appropriate, that interventions are resilient to the effects of climate change and that such effects are taken into account when appraising options, so that public value can best be delivered over time. The Infrastructure and Projects Authority’s Gateway Review process also specifically considers climate change adaptation to ensure resilience in government decision-making on major infrastructure projects.

14. The government works in partnership with the insurance industry to ensure cover for terrorist attacks, with an unlimited guarantee from HM Treasury. A percentage of this insurance pool—managed by Pool Re—is invested in resilience measures. This could serve as a model for an insurance-based scheme to encourage CNI operators to invest in resilience to the changing climate, as another major systemic risk. We recommend that the government engages with insurance providers to explore options for a public-private insurance partnership to incentivise investment in climate adaptation measures, in conjunction with resilience standards and other forms of central government oversight. It should report back to us with its findings in six months’ time. (Paragraph 131)

Response (HM Treasury)

The government is conscious of the systemic risks the UK faces, and appreciates the vital role the insurance sector, industry, and regulators play in building a resilient economy. The (re)insurance industry has an important role to play in catalysing the ‘whole of society’ approach to UK resilience established by the Integrated Review and the Resilience Framework. Insurance market interventions, and specifically the introduction of a new government-backed reinsurance scheme, are just one of a range of tools the government will need to consider as we look to build greater economic resilience against future threats.

Pool Re and our other existing public-private partnership insurance schemes have been designed to provide cover for specific risks and insurance market failures. For example, Pool Re has accumulated its reserves over 29 years, with currently only a small proportion of its assets invested in risk mitigation projects.

The government will continue to engage with the insurance industry and other key stakeholders as it explores possible options to address systemic risks facing the UK, including climate change.