Summary
The Government has made a bold commitment to reaching net zero by 2050, enshrined in legislation, and to running a net zero power system by 2035. Official estimates by the Climate Change Committee (CCC) states that by 2030 investment needs to be ramped up to £50 billion a year—approximately a third of core NHS funding—across the whole economy to achieve net zero. This will include investments in new forms of energy generation and usage and in adapting and optimising existing infrastructure. We are not persuaded that the necessary level of policy detail is in place to achieve these commitments. There is a very large gap between the ambitious targets and the extensive investment required from businesses and individuals. We have been told that there is substantial UK and international private capital waiting to fund new technologies, but clarity is needed if we are to take advantage of it.
Given the scale of change involved in transforming the energy system by 2035, the Government must act urgently to make the necessary decisions and set out the detailed policies and funding models to allow investment to flow into the sector. We recognise that it is too early to know exactly what technologies will work, requiring a roadmap that allows for adjustment over time whilst giving sufficient certainty for investment. These details include: ensuring sufficient generation to meet the potential two- to threefold expansion of electricity demand, forecast in the Sixth Carbon Budget; a decision on the role of hydrogen in the heating system; the building of carbon capture and storage facilities to decarbonise natural gas; the development of new nuclear—including Small Modular Reactors—to replace existing reactors; and the provision of backup facilities, including stand-by generation and storage, to ensure continuous supply to cope with the intermittency of wind and solar power.
If the power system is not decarbonised by 2035, reaching net zero by 2050 will be extremely difficult. There was widespread scepticism from witnesses that the target will be met without further policy detail. Failing to deliver on such a target would have significant negative consequences and would see the UK lose out on potential industrial benefits in terms of technology and jobs which could result from having a leadership position in the global energy transition. Equally an absolute commitment to meeting these targets is likely to require accepting significant additional costs for consumers and taxpayers. These policy trade-offs need to be managed at the highest level of government.
A clear indication of how and when we pay for the transition is crucial to encourage investment. The transition will require substantial funding and we are concerned that any component falling on billpayers falls disproportionately on lower-income groups. Charges on bills are only a fraction of the required amount and the Government has yet to explain how the remainder will be raised. The Government needs to set out clearly how the transition will be paid for and we believe government borrowing should be one of the options it considers, especially given considerations of intergenerational fairness. The Government’s current plans to use a Regulated Asset Base (RAB) model for funding nuclear—requiring current billpayers to pay from the moment of construction—will add to impending cost rises.
Responding to climate change is a crucial part of energy policy but cannot be pursued in isolation from the Government’s responsibility for ensuring a secure energy supply. In a more weather-dependent, renewables-based system, security will be delivered by having a diverse range of sources of energy, from the traditional such as nuclear and natural gas, increasingly matched by carbon capture and storage, to newer technologies such as hydrogen, demand flexibility and storage. The Government must set out how it will ensure a secure supply of energy, including what public policy instruments and funding models will be used for each activity it intends to rely on. The aim in each case should be to establish a business model with sufficient credibility to secure large-scale private sector investment. As part of this, the Government should set out what role it envisages gas playing in the future energy system, given its important status as a backup, and how it will ensure an affordable supply of gas, given the issues caused by the current high price.
A suitable institutional architecture is crucial to delivering the transition. The current arrangements are not sufficient and the Government needs to address this immediately. To provide the necessary political and policy leadership across Whitehall, an Energy Transformation Taskforce within government responsible for co-ordination, strategic planning and delivery monitoring—reporting directly to the Prime Minister through a Cabinet sub-committee—should be established. Any delay is highly likely to lead to failure to meet the net zero target given the lead time for complex infrastructure projects and the lifespan of any assets put in place now. The Taskforce must be set up at the heart of government to progress the urgent decisions necessary for the transition and to advise on and monitor their implementation across all departments and agencies.
We welcome the Government and Ofgem’s proposals for an independent Future System Operator (FSO), responsible for the planning and design of a secure, decarbonised energy system, using its technical expertise to report to the Government and Ofgem on what is needed to enable this. However, the FSO will also need to be given clear direction by the Taskforce, to ensure technical experts are not being asked to make political decisions.
Ofgem will play a significant role and it is important to review its responsibilities to ensure it is not a barrier to a net zero energy system. We do not believe that Ofgem should have a co-ordinating or political role in the transition; it should maintain its existing responsibilities for economic regulation and consumer protection. Explicit reference to having due regard to net zero should be added to its duties, bringing it in line with other regulators and ensuring its regulation does not act as a barrier to decarbonisation. However, it is inevitable that there will be political or distributional trade-offs in Ofgem’s meeting its objectives, so the Government must give greater guidance to Ofgem in how to manage these trade-offs in the planned but long-delayed Strategy and Policy Statement.
The energy system is changing dramatically, moving from a centralised model with little consumer involvement to a decentralised system where consumers can generate and store energy and provide flexibility to the grid. However, the regulatory system can be too slow and difficult to change. Ofgem is often too cautious in its approach to allowing new business models into the retail energy market and a static set of codes and licences hampers attempts to innovate in ways that can help consumers through the transition. We are also concerned that network price controls have the potential to stifle investment at the exact moment it is most needed. Ofgem must be more open to innovative new companies and to enabling investment. The governance of the energy system is the product of a previously more settled era and needs to become more responsive to the dynamic transformation required to implement the transition to net zero.
Consumer protection should remain central to Ofgem’s work. The recent spate of failing energy suppliers is evidence that it has failed in this regard, having focused excessively on customer switching as one narrow measure of competition in the sector. This has led to short-term price competition that, combined with a lack of regulation over the sustainability of companies who have entered the retail energy market, has created greater cost and uncertainty for consumers. Recent events have shown how important energy costs are to the cost of living. Ofgem needs to implement a robust approach to the licensing and supervision of suppliers, akin to the supervisory regime that financial services are subject to—including capital requirements and a fit and proper persons test—while remaining open to new business models that benefit consumers. In a marketplace of new services and product offerings, Ofgem’s regulation will be crucial in upholding standards and ensuring that confusion and a lack of knowledge on the part of consumers does not lead to exploitation.
Consumers will have a crucial role in the transition and the Government will need to engage them in supporting net zero, including adapting their energy usage. Currently, there is confusion on what is expected of consumers, the measures needed for the transition and how we will foot the bill at a time of high energy costs. The Government must set out and explain what is expected of citizens, how much it might cost them both as taxpayers and billpayers, how it might impact their lifestyles and what benefits there will be.