Ofgem and net zero inquiry – part III

Ofgem and net zero inquiry – part III

Dr Jeff Hardy, Sr Research Fellow, Grantham Institute for Climate Change, Imperial College London

18 January 2022

The House of Lords Industry and Regulators Committee recently asked me to provide further evidence to their Ofgem and net zero inquiry. Last year I gave oral (June 2021) and written evidence (September 2021] to the Committee. The Committee sought views on three questions, outlined below, stimulated by the Government’s October 2021 net-zero strategy.

Smart Local Energy Systems, the focus of EnergyREVs work, can play a key role in helping achieve net zero whilst bringing a range of additional benefits, but as with other options for decarbonising our economy, effective regulation and governance will be a key enabler of change. The window for getting net-zero right is small and Ofgem remains a critical actor in enabling this to happen, making net-zero one of Ofgem’s principal objectives remains a key priority.

  1. Following the Government’s policy announcements last week, do you believe that the UK now has a clear policy framework in place to support the objective of a net zero energy system?

The publication of the net-zero strategy and associated documents is an important milestone. The strategy provides some certainty across many areas of the economy on the pathway to net-zero. It is predominately a technology focused strategy, and contains many targets and in some cases funding or incentives for rollout, such as offshore wind, hydrogen, heat pumps and transport.

That said, the net-zero strategy does not itself represent a comprehensive strategy to achieve the net-zero goals by 2050. It’s analysis is commensurate with the 6th carbon budget. Beyond that point, it is reliant upon particular technologies being demonstrated (such as CCUS and direct air capture), some of which are in early development cycles. It also fails to recognise the importance of behaviour in achieving net-zero. There are 37 mentions of ‘behaviour’ in the strategy, the majority of which indicate that behaviour change is required, but the strategy does not address how this will be achieved. The Climate Change Committee note in their net-zero report that behaviour change (together with technology) is responsible for 62% of emission reductions. The lack of emphasis on behaviour in the net-zero strategy is disappointing and potentially a significant gap in the delivery of the net-zero target.

  1. Were there any urgent policy decisions that the policy announcements did not address? If so, can you specify what these were and how and when they should be addressed?

There are three areas where the net zero strategy failed to provide policy certainty:

First, several key decisions were delayed. These include a decision on phasing on gas heating in homes and buildings and the decision to delay the consideration of the burden of environmental levies between gas and electricity bills. The latter would level the playing field between gas and electric heating.

Second, on heating in particular, the strategy (and related Heat and Buildings Strategy) leave a gap between incentives and required deployment of heat pumps. The incentives account for 30,000 heat pumps a year, whereas the stated ambition is 600,000. The strategy is strangely silent on energy efficiency in existing homes. This is a particular omission given the current gas price crisis and the strains this will put on bills over 2021/22. Another aspect of heat is the lack of focus on skills, training and standards. In other countries that have been through a successful heat transition, such as Denmark, Norway and Sweden, these aspects were front and centre of the strategy and have been written about extensively in literature (for example, see this paper by Professor Rob Gross).

Third, and related to my point about behaviour above, there is limited focus on the business model innovation required in the energy sector and the commensurate attention from regulation and policy to enable it. Zero carbon journeys of homes and businesses could be different depending on circumstances and geography. Given that energy consumers are already disengaged, there is a need for businesses to help all consumers through zero-carbon journeys, and that might entail a myriad of approaches. Currently the regulatory regime in the energy retail market only really allows for one type of supplier model. Given the current energy crisis and the significant consolidation in the retail market, now is the right time for a fundamental change to encourage zero-carbon and customer-centred approaches to emerge. Laura Sandys and I have written extensively on this in our Reshaping Regulation, Redesigning Regulation and Recosting Energy reports (all available here). Together with colleagues at Imperial College London and University of Leeds, we also published some thinking on the future of the electricity utility in our Utility 2050 report.

 Are there any necessary changes to Ofgem’s regulatory framework and/or remit to enable net zero that have not been announced by the Government?

Ofgem’s current priorities are:

  • To enable investment in low carbon infrastructure at a fair price.
  • To deliver full chain flexibility in how we generate, use and store energy.
  • To deliver a future retail market that works for all consumers and the planet.
  • To unlock the benefits of data and digitalisation.
  • To ensure energy system governance, including Ofgem, are fit for the future.

In my oral and initial written evidence, I suggested bringing net-zero into Ofgem’s principle objective. This I still think would help resolve some issues with regulation.

In looking at Ofgem’s priorities, these are reasonable. However, progress has been slow. My priority would to start with the last of Ofgem’s priorities on fit for the future governance. Many of the programmes of work undertaken by Ofgem are siloed, multi-year projects – two examples are half-hourly settlement and network charging. My belief is that we need to move to a more anticipatory and agile model of governance (see Nesta’s work in this space) that encourages more innovation, greater collaboration (between the regulatory, industry, consumers and academics) and the opportunity to trial things, fail fast and learn.