How should regulators oversee the transition to net zero?

Posted in: Energy

Posted on: 22.10.2019

Regulators exist to protect consumers. But is having a narrow focus on protecting the consumers of today, failing the consumers of tomorrow?

On the 11thOctober, the National Infrastructure Commission published the final report of their year-long Regulation Study. Chaired by Sir John Armitt, the study investigated the UK’s energy, telecoms and water industries, and assessed whether the regulatory system is in a position to adapt to future challenges.

Their key finding?

That sector regulators Ofgem, Ofcom and Ofwat should have new duties to promote the achievement of net zero carbon emissions by 2050.

It is a conclusion which Good Energy has been calling for for a while. In May, we submitted evidence to the government calling for all sector regulators to be given an explicit mandate to encourage sustainability and decarbonisation within their sectors. That the NIC is reflecting our view in their findings is a big step towards what could be a transformation of the UK’s regulated sectors.

The UK’s current regulatory system was not designed to deliver transformational change. The system needs to be updated to adapt to the coming challenges of achieving net zero, digitalisation, and building resilience to extreme weather events.

– NIC Regulatory Study, Oct 19

Ofgem’s role

Founded in 1999, Ofgem’s legal duty is to protect the interests of existing and future consumers. Whilst this does include the reduction of greenhouse gases, the mandate has never been explicit enough, and their role has traditionally been more of an economic regulator than anything else.

This has led to a focus on prices and competition. Important factors, but prone to lead to short-term consideration that can have negative longer-term impact.

Protecting consumers

Protecting consumers, in both the short and long-term, requires consideration far beyond just price. We are in the midst of a climate emergency, with a legal obligation to reach economy wide net zero carbon emissions by 2050. Reducing the environmental impact of our utility companies, in the words of the NIC, cannot be left completely to the market.

What has been happening?

Companies with an interest in clinging on to the high-carbon status quo have exploited the lack of a regulatory mandate to decarbonise. Without it, they have been able to neutralise and undermine policies which may reduce emissions but challenge their business models.

Examples of this can be found across the energy sector. The scrapping of Levy Exemption Certificates (LECs) effectively means we now pay carbon taxes on renewable electricity. Changes to the Energy Company Obligation has seen the installation of energy efficiency measures drop. More recently, network reform has removed revenues for small renewable generators, making decentralised clean energy less attractive for investors.

Why has Ofgem allowed this?

Ofgem are aware of the conflicts between short-term consumer protections and the need to decarbonise. They have sought guidance from the government, so far, it seems, to no avail. CEO Dermot Nolan has remarked several times in the last year that the government has not been clear about the role Ofgem should be playing. To a parliamentary committee he said that they‘need clarification over the extent to which we should support decarbonisation.’ With more direction, they could work with industry to ensure that the marketplace is a more hospitable place for the renewable generation, storage and flexibility technologies which are key to transforming our sector.

What needs to happen now?

Whilst the problem is complex, now we have this recommendation from the NIC the next step is simple. The government, or more specifically, the Department for Business, Energy and Industrial Strategy, need to follow through on the NIC’s recommendations, and bring into law the duty to consider decarbonisation a key part of the Ofgem’s remit.

If implemented, this will allow regulators to truly act. Ofgem will not simply be bound to pursuing low costs at all costs, but free to oversee the transition to a zero-carbon energy system.

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