The net zero transformation: delivery, regulation and the consumer Contents

The net zero transformation: delivery, regulation and the consumer

Chapter 1: Introduction

Background

The UK’s energy sector

1.The energy sector comprises several participants including: the generators and producers of gas and electricity; the suppliers of that energy to consumers who purchase the electricity or gas from the generators/producers; and the distribution and transmission networks that transport that gas and electricity to the consumer.

2.The Office of Gas and Electricity Markets (Ofgem) is the UK’s energy regulator, covering both the electricity and gas sectors. It operates within a statutory framework set by Parliament that establishes its duties, including a primary duty to protect the interests of current and future consumers. Ofgem regulates energy suppliers and their interaction with consumers through supply licences and operates the default tariff cap which the Government introduced in 2018, adjusting the cap every six months to take account of underlying energy costs. Ofgem also regulates monopoly energy networks through its price controls and network charging regime, which limits the amount of money that can be earned by network companies over the length of a price control period, in order to manage the potential impact on consumer bills.

The timeline for net zero

3.The Government legislated in 2019 for the target of reaching net zero carbon emissions by 2050.1 The Government subsequently legislated in 2021 to bring the Sixth Carbon Budget into law, with a target of reducing emissions by 78 per cent by 2035 compared to 1990 levels.2 When setting the Sixth Carbon Budget, the Climate Change Committee (CCC)—an independent statutory body that advises the UK Government and devolved governments on emissions targets and reports to Parliament on progress made in reducing emissions—outlined that it would require a fully decarbonised energy system by 2035.

4.In its Net Zero Strategy, published 19 October 2021, the Government confirmed that it would set the target of a fully decarbonised power system by 2035, subject to security of supply. The Net Zero Strategy3, which set out the Government’s overall approach to reaching net zero across the economy and society, and the Heat and Buildings Strategy,4 which set out a number of policies aiming to decarbonise buildings, including housing, include a number of policies and targets that relate to the energy sector.

Our inquiry

5.The Industry and Regulators Committee launched its inquiry on 23 June 2021. We received a number of written submissions and held oral evidence sessions with 21 panels of witnesses from June to November. We are grateful to all our witnesses. We also thank our Special Advisers Nick Butler and Anthony Pygram.

Structure of this report

6.This report considers the institutional architecture required to support the transition to net zero, including the role of Ofgem within it. Chapter 2 provides an overview of the main participants in the energy market and a summary of some of the issues that need to be settled for a plausible transition. The question of how the transition is to be funded is also considered.

7.Chapter 3 reviews the institutional architecture supporting that transition, focusing in particular on the role of the proposed Future System Operator (FSO), co-ordination between the various organisations with a role to play in securing net zero and the strategic planning and delivery monitoring necessary to reach net zero. The chapter also considers whether a statutory duty to promote net zero should be added to Ofgem’s remit.

8.Chapter 4 considers in more detail the role of Ofgem. It reviews the operation of the price cap, the readiness of consumers for the transition to net zero, the importance of engaging with consumers and the potential for an increasingly decentralised energy-as-a-service market. Finally, we consider Ofgem’s role as a consumer protection body, particularly in light of recent energy supplier failures.

9.We make this report to the House for debate.


1 The Climate Change Act 2008 (2050 Target Amendment) Order 2019 (SI 2019/1056)

2 The Carbon Budget Order 2021 (SI 2021/750)

3 HM Government, Net Zero Strategy: Build Back Greener (October 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1033990/net-zero-strategy-beis.pdf [accessed 23 February 2022]

4 Department for Business, Energy and Industrial Strategy, Heat and buildings strategy, CP 388 (October 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1044598/6.7408_BEIS_Clean_Heat_Heat___Buildings_Strategy_Stage_2_v5_WEB.pdf [accessed 23 February 2022]




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