Britain's net zero goals "need new regulation": academics

Britain's energy market regulation needs a fundamental overhaul if the goal of net zero carbon emissions is to be met at the least possible cost, two academics told the House of Lords' industry and regulatory committee June 22. 

Catherine Mitchell of Exeter University and Jeffrey Hardy of Imperial College, London, said that the regulator Ofgem lacked the powers needed to drive the change on the scale needed in the time available. Further, the market had altered beyond recognition since the gas and power markets were privatised over 30 years ago. That was what led to the creation of the gas and power regulators, now merged into Ofgem. It is no longer fit for purpose, they said several times.

In the 1980s, the system relied heavily on "60 big pieces of kit" to keep the country running; coal accounted for over two thirds of the generation mix and there was almost no renewable energy, no residential generation and digitalisation had not been introduced to the networks.

They argued for Ofgem's remit to be stripped back to regulating the economics and for a new co-ordinating body, accountable to parliament, to enforce the necessary measures and manage the gaps in the system and hold the ring from a democratic point of view. "Nobody wants to take the difficult decisions," Mitchell said, explaining the log-jam where government decrees changes to the energy mix, but not enough happens. At the moment, uncertainty is a big obstacle in the way of low-carbon investments, a survey of industry by utility Centrica has found.

This body would take the difficult policy decisions that both government and Ofgem had either shied away from – in the first case – or not had the powers to enforce, in the second. Fear of a judicial review – if it acted beyond its powers – also made Ofgem act timidly, she said.

Ofgem therefore is dodging decisions that would help Britain achieve net zero carbon. Among them would be setting targets such as the use of electric vehicles and heat pumps – which many householders would regard as intrusive – and ensuring they were met. Other responsibilities that now sit with Ofgem, such as market governance – through the codes – and innovation could also be hived off into this proposed new entity.

Too much on Ofgem's plate

Hardy –himself a former employee of Ofgem – said that the net zero objective should be Ofgem's overarching mission, not "least cost" energy, which itself is a very specific goal that might not sit with net zero. He said Ofgem has a "smorgasbord" of other duties to consider as well as the environment, including protecting the vulnerable and security of supply.

Both he and Mitchell told the parliamentary committee there were no issues over security of supply: demand could be moved around the country through a mix of battery storage, demand-side response and other measures, with customers being as much or as little involved in balancing the market, in exchange for a corresponding share of the price risk as they wanted.

Hardy, a self-confessed geek, admitted to watching his smart meter closely and said he would like to take a share of the risk with his future energy supplier, although he admitted this approach would not suit everyone: many people like predictable bills. These too would be an option though. "It has to work for everyone or it will not work at all," he said.

He also suggested that in the future, energy supply choices should be fragmented depending on the locality: for some, heat networks and electrons might make more sense, in others it might be more wind farms and hydrogen. "Nobody owns the future," he said. 

In fact the future changes so quickly that five-year price controls, which Ofgem now agrees with the network operators, very rapidly became outdated – in some cases owing to sudden government subsidies for renewable energy, he said, drawing on his own experience at Ofgem. It would be important though for these networks to be interconnected, to allow them to function flexibly: a key part of keeping down the costs.

Mitchell said that Ofgem had over 800 staff and paid consultants on top of that, working for an unelected CEO, and the regulated entities were keen to retain the status quo. She said they were given far too much leeway. Other countries managed with much smaller regulators and worked on the economic side, leaving social issues such as the treatment of vulnerable consumers, to the government to arrange. 

She said that while the up-front costs involved in enabling the energy transition, such as ripping out gas boilers and installing heat pumps, were very high – "even for a well-paid professor" like herself – her house was now running almost entirely on renewable energy and bills had shrunk dramatically.

The regulator however was continuing to fund development of the gas network that is heading for obsolescence and the money spent on that – which also comes from consumers' pockets – could be redirected towards energy efficiency and other projects.

Other funding could come government bonds, funded from general taxation, as is the system in Germany, Mitchell said. Set up originally by the Marshall Plan, the state-owned KfW bank now allows entities, ranging in size from local energy suppliers down to the household consumer, to access funds to finance the transition. These would be payable over time and bear almost no interest.