1st Report - The net zero transformation: delivery, regulation and the consumer

The government's response

What the committee recommended 26

1. 1
   Given the timescales involved in complex infrastructure projects and the life expectancy of newly built... Conclusion · paragraph 40
2. 2
   We call for clarity from the Government in the following areas: a business model to... Conclusion · paragraph 41
3. 3
   The Government should set out by the end of 2024 the roadmap by which it... Recommendation · paragraph 42
4. 4
   We strongly urge the Government to set out how the transition will be funded. Conclusion · paragraph 53
5. 5
   There are a number of ways in which the Government can support energy investment. Recommendation · paragraph 54

See all 26 recommendations and conclusions

Sources

• 1st Report - The net zero transformation: delivery, regulation and the consumer ↗The committee's report, parliament.uk
• Government Response to the Report "The net zero transformation: delivery, regulation and the consumer" ↗The government's response, 27 May 2022, parliament.uk

Recommendations and conclusions 26

1. 1
   Given the timescales involved in complex infrastructure projects and the life expectancy of newly built... Conclusion · paragraph 40 Conclusion (the committee's words)

   Given the timescales involved in complex infrastructure projects and the life expectancy of newly built energy assets, the current decade is crucial to the ambition of achieving net zero by 2050. While we welcome the targets set in the Government’s Net Zero Review, we do not believe that the necessary policy detail is in place to achieve those targets, with further detail needed to encourage the scale of investment required to decarbonise the energy system while maintaining energy security.
2. 2
   We call for clarity from the Government in the following areas: a business model to... Conclusion · paragraph 41 Conclusion (the committee's words)

   We call for clarity from the Government in the following areas: a business model to support the development of long-duration storage technologies; the overall funding envelope and business model for carbon capture, usage and storage (CCUS); the funding mechanism for the deployment of small modular reactors (SMR); business models and financial support for hydrogen conversion; an accelerated decision on the role of hydrogen in heating; the future role of the gas distribution network; funding incentives to deliver heat pumps; funding to support the energy efficiency of homes; and a review of the non-financial barriers to the deployment of 40GW of offshore wind by 2030.
3. 3
   The Government should set out by the end of 2024 the roadmap by which it... Recommendation · paragraph 42 Recommendation (the committee's words)

   The Government should set out by the end of 2024 the roadmap by which it will deliver the energy mix it envisages for achieving net zero in a secure way, including setting out the funding structures for any new technologies that the Government aims to rely on. This roadmap needs to be dynamic, recognising that technology developments over time may result in differing incentives and priorities becoming appropriate. The Government should also set out the role it intends gas to play in the future system and where it will source this from, given security of supply and price volatility in international markets. Given the ongoing requirement for gas, the Government must take all steps to facilitate the exploration and exploitation of our own resources.
4. 4
   We strongly urge the Government to set out how the transition will be funded. Conclusion · paragraph 53 Conclusion (the committee's words)

   We strongly urge the Government to set out how the transition will be funded. In doing so, it should explicitly set out the distributional consequences for any funding proposals. Funding the transition primarily through charges to billpayers is regressive and involves invidious trade-offs, making some consumers pay for investments that will not directly benefit them .
5. 5
   There are a number of ways in which the Government can support energy investment. Recommendation · paragraph 54 Recommendation (the committee's words)

   There are a number of ways in which the Government can support energy investment. We urge the Government to consider the full range of funding options including the UK Infrastructure Bank, the British Business Bank, carbon pricing, co-investment, investment subsidies, investment tax relief and Contracts for Difference.
6. 6
   We also call on the Government to reconsider its opposition to the use of government... Conclusion · paragraph 55 Conclusion (the committee's words)

   We also call on the Government to reconsider its opposition to the use of government borrowing, due to its suitability for this type of investment financing, and because future generations will be the main beneficiaries of net zero investment.
7. 7
   We support the Government’s plans to publish this year a call for evidence on fairness... Recommendation · paragraph 56 Recommendation (the committee's words)

   We support the Government’s plans to publish this year a call for evidence on fairness and affordability. We call on the Government to publish this as soon as possible and commit to consulting on more detailed proposals by the end of 2022.
8. 8
   The changes needed to ensure the transition to net zero by 2050 are transformational, not... Conclusion · paragraph 65 Conclusion (the committee's words)

   The changes needed to ensure the transition to net zero by 2050 are transformational, not gradual and incremental. There is insufficient co-ordination within Government on net zero, as well as evidence of insufficient bandwidth in BEIS to tackle the full range of issues associated with the transition.
9. 9
   The scale of the net zero challenge requires urgent action across the economy and across... Conclusion · paragraph 73 Conclusion (the committee's words)

   The scale of the net zero challenge requires urgent action across the economy and across a range of government departments and public sector bodies. We are concerned that there is insufficient co-ordination and strategic direction in relation to reaching the target, particularly in translating high-level targets into detailed, deliverable policy. However, it is key that any co-ordination function does not create new and unnecessary levels of bureaucracy, and instead helps to drive cohesive decision-making at a political level, while directing and overseeing implementation of detailed policy.
10. 10
    We propose the creation of an expert taskforce, following the example of the Vaccine Taskforce—but... Conclusion · paragraph 74 Conclusion (the committee's words)

    We propose the creation of an expert taskforce, following the example of the Vaccine Taskforce—but on a longer term footing—responsible for economy -wide strategic planning, cross-departmental co-ordination, implementation of some agreed policies and operational delivery monitoring in relation to the net zero transition by all departments and agencies. Given the inherent uncertainty of the transition, the taskforce model provides the agility necessary to adapt to a rapidly changing landscape.
11. 11
    The transformation taskforce will need to address politically sensitive policy issues, including public spending commitments,... Conclusion · paragraph 75 Conclusion (the committee's words)

    The transformation taskforce will need to address politically sensitive policy issues, including public spending commitments, so—following the model of the Vaccine Taskforce—cannot be independent of Government. The taskforce should report directly to a Cabinet Committee chaired by the Prime Minister which would agree the strategy and key policy components and authorise any Government financing. The taskforce, housed within the Cabinet Office, will then have the authority to translate the policy into detailed policy implementation covering all Government departments. The taskforce should be set up immediately given the urgent need for action on net zero within the next few years.
12. 12
    There is clearly a role for the Future System Operator in considering both the electricity... Recommendation · paragraph 88 Recommendation (the committee's words)

    There is clearly a role for the Future System Operator in considering both the electricity and gas networks and providing greater planning of their future needs to ensure security of supply. We urge the Government to move promptly in establishing the Future System Operator and call for it to have clear objectives and responsibilities to avoid increasing complexity in the governance of the energy sector . Nonetheless, we believe that the Future System Operator should not have a wider role in co-ordinating the net zero transition; political trade-offs in this area should be decided by the Government.
13. 13
    Ofgem has an important role to play in enabling the transition. Conclusion · paragraph 96 Conclusion (the committee's words)

    Ofgem has an important role to play in enabling the transition. However, we believe that Ofgem’s primary focus should remain on its supplier regulation, economic regulation and consumer protection responsibilities. While we recognise that these may need to be expanded to cover new technologies and services, we do not believe that Ofgem needs to be given a more strategic role in planning the energy system; this role should instead be the responsibility of the Future System Operator.
14. 14
    We recognise that Ofgem ’s current leadership sees net zero as fundamental to its existing... Recommendation · paragraph 108 Recommendation (the committee's words)

    We recognise that Ofgem ’s current leadership sees net zero as fundamental to its existing duties. To ensure that, on an enduring basis, the appropriate focus is given to net zero within its competing priorities, we recommend that Ofgem’s duties should be amended to include explicit reference to having due regard to the net zero target. While Ofgem maintains that net zero considerations already factor into its decision-making, adding net zero explicitly to its statutory duties will serve to make this clear .
15. 15
    Adding net zero to Ofgem’s remit would not offer sufficient guidance for making judgements regarding... Conclusion · paragraph 118 Conclusion (the committee's words)

    Adding net zero to Ofgem’s remit would not offer sufficient guidance for making judgements regarding trade- offs. For this reason, we emphasise the urgency of publishing the promised Strategy and Policy Statement. The Strategy and Policy Statement must provide further clarity on how Ofgem should make trade-offs between affordability, net zero, security of supply and the interests of current versus future generations in its regulatory decisions; these trade-offs are political in nature and the Government needs to clearly set out how Ofgem should approach these issues.
16. 16
    We are concerned that the price controls regime has the potential to discourage investment at... Conclusion · paragraph 135 Conclusion (the committee's words)

    We are concerned that the price controls regime has the potential to discourage investment at exactly the point when it is needed most. Ofgem needs to ensure that its price controls allow the appropriate level of investment ahead of need and do not restrict investments that are necessary to enable the transition.
17. 17
    We recommend that Ofgem commit to carrying out a review of its use of uncertainty... Recommendation · paragraph 136 Recommendation (the committee's words)

    We recommend that Ofgem commit to carrying out a review of its use of uncertainty mechanisms , their effectiveness, the regulatory burden they have placed on energy networks and their impact on investment. This should be done in time to allow any conclusions to be reflected in the decisions it makes for its next price control periods .
18. 18
    Given the scale of change set to take place in the energy sector, we are... Conclusion · paragraph 150 Conclusion (the committee's words)

    Given the scale of change set to take place in the energy sector, we are concerned that the governance of the energy system, and in particular its licences and codes, is slow-moving and resistant to change.
19. 19
    We recommend that codes and licences be simplified and reformed in such a way that... Recommendation · paragraph 151 Recommendation (the committee's words)

    We recommend that codes and licences be simplified and reformed in such a way that they are able to adapt to a fast-changing sector and enable the energy transition and are pleased that this is under active consideration by the Government and Ofgem. If this requires legislation , the Government should ensure that this is brought forward swiftly
20. 20
    It is clear that the service that retail energy companies provide will have to change... Conclusion · paragraph 172 Conclusion (the committee's words)

    It is clear that the service that retail energy companies provide will have to change to help consumers through the transition, including by providing new products and services that enable them to spread up-front capital costs and to realise the value of providing flexibility to the grid . However, it is far from clear that the industry or the regulator are ready to adapt their approaches in this way. Ofgem must ensure that its regulation allows new models to benefit consumers through its regulation of activities carried out by suppliers, its expectations of industry and through enabling more granular pricing. Ofgem should also make it easier for successful firms to make use of existing mechanisms to support innovation , such as the regulatory sandbox.
21. 21
    While these new models have the potential to benefit consumers, we have heard that not... Conclusion · paragraph 173 Conclusion (the committee's words)

    While these new models have the potential to benefit consumers, we have heard that not all consumers will have the desire or capability to engage with them and that they may bring new risks. Ofgem must strike a balance between allowing new entrants and models into the retail energy market, while enabling an appropriate level of consumer protection for all consumers, no matter what service they are receiving.
22. 22
    Without acceptance by consumers the transition will not be possible. Conclusion · paragraph 191 Conclusion (the committee's words)

    Without acceptance by consumers the transition will not be possible. They are set to be key participants, but need greater clarity, information and guidance in order to play their part and realise the benefits. The Government needs to take the lead in clearly setting out the need for consumers to take action and what it expects them to do—for example, with respect to heat pumps—as well as providing incentives to decarbonise energy use. This will allow Ofgem to set out its expectations for energy companies, and for those suppliers to adapt their offering to customers. Ofgem must ensure that energy suppliers do not disproportionately penalise those consumers unable to engage with the changing energy market.
23. 23
    Becoming a more adaptive regulator must not come at the expense of consumer protection. Conclusion · paragraph 208 Conclusion (the committee's words)

    Becoming a more adaptive regulator must not come at the expense of consumer protection. The recent collapse of a large number of suppliers has highlighted substantial failings on the part of Ofgem. We welcome Ofgem’s recognition that change is needed to restore trust in the retail energy market and urge the regulator to prioritise the introduction of a robust regulatory framework akin to the financial services sector for energy companies holding large amounts of customer money, including adequate capital requirements and a fit and proper persons test. Nonetheless, the regulator must be careful to strike the right balance between resilience and innovation, ensuring that new requirements do not preclude new entrants and business models from the retail energy market.
24. 24
    The promotion of switching and short-term price competition without adequate financial oversight contributed to energy... Conclusion · paragraph 209 Conclusion (the committee's words)

    The promotion of switching and short-term price competition without adequate financial oversight contributed to energy supplier failures. We welcome that the Government and Ofgem recognise the need for broader objectives for the retail energy market, including enabling net zero. New business models may require longer-term relationships between customers and suppliers and this must be based partly on greater trust in those firms.
25. 25
    Ofgem should publish a detailed approach to supervision once these changes are in place, to... Recommendation · paragraph 210 Recommendation (the committee's words)

    Ofgem should publish a detailed approach to supervision once these changes are in place, to make its new requirements clear and enable greater scrutiny of its performance.
26. 26
    While competition will remain an important feature of the retail energy market, the Government and... Recommendation · paragraph 211 Recommendation (the committee's words)

    While competition will remain an important feature of the retail energy market, the Government and Ofgem should set out their expectation that companies should compete on their overall service and value to customers and not just on price. The use of switching as a singular metric of competition should be abandoned. It is the ease of switching rather than actual switching which supports competition; high switching may be an adverse measure of customer service rather than something to be encouraged. Indeed, if firms are to help customers manage the energy transformation this may require longer term contractual relationships.