Eleventh Report - Decarbonisation of the power sector

To deliver the Government’s target to decarbonise the power system by 2035, the UK needs to deploy low-carbon technologies at a faster rate than has been achieved historically. A whole host of regulatory and policy barriers continue to impede the deployment of clean technologies. The evidence submitted to our inquiry made clear that, at the current rate of policy delivery, the UK Government will miss its target to decarbonise power by 2035. While the Government’s “Powering Up Britain” plans outline a suite of actions that would help it get on track, its focus must now be an unrelenting drive to deliver them.

The level of coordination and pace of delivery needed requires the Government to operate in a different way than it has in the past. We welcome the creation of the new Department for Energy Security and Net Zero, but that Department must now act to coordinate stakeholders, unlock bottlenecks, and drive the pace of delivery required. If the new Department operates ‘business as usual’ the Government will fail to hit its own targets.

An overarching delivery plan for the decarbonisation of power, with clear milestones and contingencies, will help the Government bring a complex set of interrelated tasks together. At the moment, decisions are taken on specific technologies or issues in silos without a roadmap for the whole system. This has led to sequencing problems and a failure to take ownership of whole system costs. This was illustrated by National Grid ESO confirming significant constraint payments, largely stemming from a failure to upgrade the transmission grid between Scotland and England. A comprehensive plan will give investors more confidence to deploy new, low-carbon infrastructure in the UK because they will have a clearer understanding of how their projects, and the reforms these depend on, will fit into a decarbonised energy system.

We reiterate the calls of both the Climate Change Committee and National Audit Office for the Government to publish a comprehensive, long-term delivery plan for a decarbonised power system by 2035. The creation of a new Department for Energy Security and Net Zero should provide the impetus and Ministerial capacity to do this. This plan should recognise the time needed to decarbonise the different aspects of the electricity system as well as the sequencing involved. We recommend that this delivery plan sets out clear roadmaps and milestones as well as contingency plans for key risks and uncertainties. It should also focus on whole system costs. We ask the Government to publish this delivery plan no later than by the end of 2023.

The Government has set a target to decarbonise the power system by 2035, subject to security of supply. The Government has not defined ‘security of supply’. After 2035, there may be rare occasions when the UK needs to use unabated gas-fired stations to meet shortfalls in supply. A clear definition of ‘security of supply’ is needed to ensure that the Government can be properly held to account for its performance against the 100 Decarbonisation of the power sector 2035 target. The Government should define the ‘subject to security of supply’ condition in its 2035 target and clarify the amount of residual emissions from unabated gas plants that it is willing to accept from 2035 onwards.

Announcements by major oil and gas companies to prioritise share buybacks and dividends over investment in renewables, and to scale back on targets to reduce the impact of their operations on the climate in favour of extracting more fossil fuels, suggest that the industry has some way to go before it finds a good balance between prioritising profit and its responsibility to cut emissions. The investment relief included in the Energy Profits Levy means that taxpayers will effectively pay oil and gas companies to clean up their own operations. Taxpayer support for oil and gas companies should be contingent on these companies being transparent about their future investments in renewables and low-carbon technologies, and on evidence showing how their plans for decarbonisation are compliant with the country’s statutory carbon budgets and net zero target. (Paragraph 40) Retaining investment in low-carbon energy

The UK has become less attractive to energy investors. The UK is in a global race against larger markets to attract capital to decarbonise the economy. The US and EU have introduced a series of long-term tax incentives for clean energy infrastructure. The UK Government has yet to respond. We recommend that when reviewing the competitiveness of fiscal incentives offered by the UK to encourage investment in low- carbon energy projects, the Government should consider providing a more tailored response in the capital allowance regime for the sector.

There is a risk that the Government has not accurately reflected rising costs for renewables developers in the budget for this year’s Contracts for Difference auction, putting the viability of future projects into question. We recommend that the Government reviews the parameters set for its Contracts for Difference Allocation Round 5 to ensure that they accurately reflect the cost pressures facing the sector.

Providing that oil and gas companies utilise their investment allowances included in the Energy Profits Levy, oil and gas extraction will continue to benefit from a lower effective rate of marginal tax than low-carbon developers. This risks offering perverse incentives to investors. We recommend that when investing in low-carbon electricity technologies, developers should receive an investment allowance rate equivalent to that received by the oil and gas sector. We further recommend that the Government revisits the case for Voluntary Contracts for Difference for low-carbon electricity generators currently subject to the Electricity Generators Levy.

Recent policy and regulatory uncertainty has undermined investor confidence at precisely the time when the UK is looking to attract private investment in clean energy infrastructure. The Government should do its utmost to create and maintain a stable policy environment, which de-risks investments in low-carbon technologies. (Paragraph 53) Decarbonisation of the power sector 101 Routes to managing electricity supply and demand

The UK’s offshore wind sector is a success story. The Government has ambitious plans to scale up offshore wind deployment, maximising the potential of the UK’s natural resources. However, unless rapidly addressed, current bottlenecks in the process will stand in the way of the Government achieving its ambition for 50 GW of offshore wind to be deployed by 2030. While we commend the Government for the work being done to speed up the deployment of offshore wind, and to ensure local communities that host critical transmission infrastructure benefit from doing so, it is unfortunate that the Government is only now consulting in these areas.

In response to this report, the Government should set out how it is monitoring progress against its ambition to deploy 50 GW of offshore wind by 2030. The Government should also set out how it will be responding to the recommendations of the UK Offshore Wind Champion. Furthermore, local communities which host critical national infrastructure must see tangible benefits from doing so, and connections between offshore wind farms and transmission networks need to be better co-ordinated to minimise disruption for local communities. We ask the Government to set out how it will ensure appropriate oversight of Crown Estate decision-making in respect of social value and impact for local communities.

Floating offshore wind offers the potential to expand and diversify the UK’s portfolio of wind projects, including to the Celtic Sea. Significant new investment in UK ports will be needed to enable floating offshore wind to be deployed at scale and to harness local supply chains and manufacturing. The Government’s Floating Offshore Wind Manufacturing Investment Scheme, though welcome, may not address the key concern of port operators — long term market revenue certainty. To provide ports with the confidence to make long-term investments in the necessary infrastructure for floating offshore wind, the Government should provide policy certainty that de-risks the required investment in ports.

The British Energy Security Strategy did not include a target for onshore wind, even though it is one of the cheapest and quickest sources of renewable electricity to deploy. We recommend that the UK Government works with the Scottish and Welsh Governments to agree a UK-wide target for the deployment of onshore wind by 2035, which should inform a specific target to increase the deployment of onshore wind in England.

We welcome the Government’s decision to review the National Planning Policy Framework but are concerned that the proposed changes do not go far enough to encourage the new onshore wind capacity the country needs. The planning system needs to give more weight to critical infrastructure, such as onshore wind, that is in the national interest. If the Government’s proposed reforms to the National Planning Policy Framework do not result in a substantial increase in the amount of onshore wind development in England, we recommend that the Government brings onshore wind projects back under the regime for National Significant Infrastructure Projects, as we suggested in our report on the Revised (Draft) National Policy Statement for Energy. (Paragraph 78) 102 Decarbonisation of the power sector

We are pleased that the Government is looking at how best to support repowered assets. Replacing old onshore wind turbines with new technologies will help reduce the need for new capacity elsewhere. The Government should introduce a framework which supports the retention of existing onshore wind farms and other renewable assets, for example via the Contracts for Difference scheme, when they need to be repowered. The Government should ensure that the planning regime delivers a clear presumption in favour of repowering and life extensions of onshore wind farms.

The Government’s aim for 70 GW of solar capacity to be installed by 2035 is welcome. Achieving this goal will require the UK to ramp up the pace at which new solar capacity is deployed. We therefore welcome the Government’s announcement of a solar roadmap and the establishment of a dedicated government/industry taskforce. We strongly welcome the Government’s clarification that it is not planning to change the classification of agricultural land in ways which would constrain the expansion of the UK’s solar capacity.

We agree that the Government should seek to maximise the renewable opportunities afforded by the UK’s geography, including the potential benefits of tidal energy. Unlike offshore wind, tidal stream projects have not benefited from stable subsidies to bring their costs down. The Government’s recent decision to reduce the tidal steam ringfence from £20 million to £10 million in the upcoming round of Contracts for Difference scheme may damage the UK’s first-mover advantage in marine energy and increase project costs. However, we recognise that support must provide value for money for taxpayers.

The Government should justify the rationale for lowering the ringfenced amount of funding for tidal stream in the latest Contracts for Difference auction, and we invite the future Energy Security and Net Zero Committee to consider that rationale and to challenge it if it thinks necessary. We also ask the Government to consider longer term CfDs for tidal energy, reflecting the longer lifecycle for tidal energy compared to, for example, offshore wind turbines. Industry has requested the setting of a target of tidal stream deployment in order to send further market signals. We ask the Government to consider setting a 1GW target for tidal stream by 2035.

The British Energy Security Strategy set an ambition for the UK to deploy 24 GW of civil nuclear power by 2050. This significantly raised the level of the Government’s ambition on nuclear power, above estimates suggested by the Climate Change Committee and others. But to be an effective part of a low-carbon, secure and affordable electricity mix, the cost of nuclear power must come down. Nuclear projects in the UK and elsewhere have been beset with delays and overspends.

In response to this report, we request that the Government sets out: a) its current estimates of the total cost of delivering the Government’s 24 GW ambition; b) its latest official estimate of the total cost of Sizewell C and Hinkley Point C; Decarbonisation of the power sector 103 c) how it plans to finance its 24 GW ambition, including whether future projects will also adopt the Regulated Asset Base model; and d) the impact of the increasing costs of Hinkley Point C and Sizewell C on its plans for nuclear and how it is ensuring sufficient transparency over such costs.

International examples suggest that the best way to bring the cost of nuclear energy generation down is to build a programme of new nuclear reactors, so that supply chains and skills can be developed and transferred from one project to the next. The Government has taken steps in this direction, with plans to establish a programme of new nuclear projects, supported by Great British Nuclear, and to launch a competition to select the leading small modular reactors. The Government’s nuclear roadmap, due later this year, should set out the options for delivering the nuclear capacity the UK will need by 2050, including options for financing these new projects. Great British Nuclear should advise on how such a programme should be phased, including how to decide how much nuclear capacity is needed and the type of nuclear technologies the UK should deploy and when.

Aside from the need to import uranium, the UK has the capability to undertake critical parts of the nuclear fuel cycle, such as uranium conversion, enrichment and fuel fabrication. The export potential of these strategic assets should be maximised, especially now that countries are looking to reduce their dependence on Russia for these services. The Government should ensure that critical domestic assets in the nuclear supply chain are supported, while the UK’s current ageing fleet retires.

The Government’s recent confirmation of £20 billion investment over 20 years for the early development of Carbon Capture and Storage (CCS) is welcome, allowing the implementation of the initial clusters to commence. However, none of this £20 billion is reflected in the formal budget policy costings, so it is unclear how it will be raised. The Government will need to come forward promptly with clarity for projects involved in the Track 1 expansion and Track 2 clusters. We recommend that the Government announces the cluster sequencing Track-1 expansion projects as quickly as possible and provides further detail on the forward timeline for selecting the next CCS clusters that need to be operational this decade. We urge the Government to provide clarity on how the £20 billion for the early development of CCS will be funded. The Government should develop a robust regulatory regime that tests the carbon capture rates of CCS facilities and penalises failure, which in turn should drive innovation.

The Committee has been concerned to hear reports about alleged misreporting by Drax to Ofgem in order to draw down public funds. We note that Ofgem has started a special audit process. We call on Ofgem to ensure a thorough investigation of the evidence that supported Drax submissions, specifically in respect of the sourcing of wood biomass, and for Ofgem to request access to any internal or independent external audits undertaken at Drax to investigate this issue. We ask Ofgem to report back to the Committee once this investigation has concluded. (Paragraph 127) 104 Decarbonisation of the power sector

The UK’s biomass industry is a diverse sector made up of large-scale power plants through to smaller-scale, more local, generators. The overall costs of large-scale bioenergy power plants, which converted from coal-fired plants, are very expensive and rely heavily on imported feedstocks, which may not be produced sustainably, and which may have significant lifecycle emissions. Existing support schemes for unabated bioenergy are due to end by 2027. We do not believe that the historic allocation of subsidies to large scale biomass, such as Drax, has represented either value for money or the best use of public funds.

We believe that there should be no extension beyond 2027 for taxpayer support for unabated bioenergy plants, and that the aim should be to phase out such plants in favour of more sustainable alternatives as soon as possible. This could include bioenergy with carbon capture and storage but only in a scenario where viable and functioning carbon capture and storage is in use. Further subsidy should not be given to unabated biomass. Any future subsidies should only be provided to companies which can evidence the use of local, waste biomass and not companies that rely on imported biomass.

Bioenergy with carbon capture and storage has yet to be commercially deployed in the UK. We have concerns about whether biomass feedstocks can be scaled up sustainably to meet domestic and global demand and whether BECCS facilities will provide value for money. To ensure sufficient oversight of sustainability standards, the UK needs to develop domestic supplies of feedstocks. We do not oppose the use of BECCS for power in principle, but future taxpayer support for BECCS must be contingent on: a) robust, transparent evidence that the full lifecycle emissions from BECCS facilities in the UK are carbon neutral within a timeframe compatible with our climate targets; and, b) detailed assessment that BECCS facilities provide value for money.

The Government was due to publish a biomass strategy last year, setting out the role of biomass in helping to achieve the Government’s net zero target, including whether biomass would be best used to generate electricity or for other purposes The Government should publish its biomass strategy without delay and set out: a) the Government’s assessment of future demand for biomass feedstocks in the UK and globally; b) the extent to which the UK can rely on domestic biomass feedstocks to meet future demand and mechanisms to support domestic biomass supply; and c) the timeframe for scaling up the supply of domestic biomass feedstocks.

We urge the Government to ensure that there is a robust contingency plan in place if BECCS proves unviable, either in terms of its sustainability or efficiency. We urge the Government not to rely upon unproven technologies at the expense of other simpler and cheaper approaches, which could be taken now, such as deploying measures to Decarbonisation of the power sector 105 reduce energy demand.

Hydrogen looks set to be an important part of a decarbonised power system, both as a source of low-carbon dispatchable power to replace gas and as a source of energy storage which can take advantage of excess supply of renewables. However, given supply constraints, the Government needs to determine the sectors of the economy in which use of hydrogen will be prioritised. We recommend that the Government takes forward the recommendations of the Climate Change Committee to develop a cross-sectoral infrastructure strategy that narrows the space for future hydrogen uses and finalise the business models for hydrogen this year.

Blue hydrogen may have value as a transitional measure which builds a market for hydrogen and provides supply over the shorter term. However, excess reliance on blue hydrogen could leave the UK exposed to volatile international gas prices and risk increasing greenhouse gas emissions due to the threat of methane leakage. In response to this report, we ask that the Government sets out how its plans for blue hydrogen will address recent evidence that hydrogen emissions escaping from gas pipelines have a stronger warming effect in the atmosphere than previously thought. It should include in that response an account of how it will ensure that efforts to constrain and monitor methane leakage at point of extraction, transportation and storage are robust.

Whilst the Government’s commitment to delivering hydrogen storage business models by 2025 is welcome, it appears that this could be too late to allow the development of hydrogen storage projects so that they are in operation in time to meet the Government’s target for 10 GW of hydrogen by 2030, given possible lead times of seven to eight years. In response to this report, the Government should confirm whether it still believes that hydrogen storage projects can be delivered by 2030 and, if so, how that will be achieved.

The deployment of long-duration energy storage is essential to ensuring that a zero- carbon power system can operate 24/7, 365 days a year. These projects are capital intensive and face barriers to deployment due to a lack of long-term market signals. The Government’s 2024 ambition to develop appropriate policy to enable investment in these technologies is welcome, but we are concerned that this has not been made enough of a policy priority.

We recommend that the Government establishes an appropriate policy framework to support investment decisions in long-duration energy storage this year, to enable projects to be completed by the end of the decade. This includes setting out a target range for long-duration energy technologies and putting in place a revenue stabilisation mechanism. We recommend that the Government ensures that there is a sufficient number of staff within the Department working on this crucial policy area. In response to this report, we ask that the Government sets out how many staff are working on developing this policy and how this compares to other teams such as those working on civil nuclear energy.

Energy efficiency is the quickest and most cost-effective way to reduce gas demand and lower household energy bills. If significant strides are not made to reduce demand, it will become increasingly challenging and expensive to decarbonise 106 Decarbonisation of the power sector the electricity system. We call on the Government to bring forward the £6 billion funding package for energy efficiency allocated for the period 2025 to 2028 to now. The Government should prioritise delivering a locally co-ordinated programme of energy efficiency and home retrofit. This should be paired with a communications campaign on the benefits of home improvements and fuel switching. We recommend that the Government uses new powers in the Energy Bill to urgently reform the flawed EPC rating system, so that it gives a more accurate reflection of overall energy use and emissions, as soon as the Bill is enacted. (Paragraph 166) Delivery risks to the Government’s 2035 target

The planning system, nationally and locally within England and also in Scotland and Wales, is a major constraint on the timely delivery of low-carbon energy infrastructure. There are many reasons for this, some of which we do not cover in this report, and we acknowledge the need for effective controls where justified. But we are in no doubt that steps will need to be taken to accelerate the planning process for low-carbon energy infrastructure.

The Government should ensure that bodies within the planning system (such as local authorities, the Planning Inspectorate, and the Marine Management Organisation) are adequately resourced to process and comment on applications faster. The Department for Energy Security and Net Zero should work with the Department for Levelling-Up, Housing and Communities, as well as local government and the devolved administrations, to ensure that the planning system embeds and gives priority to the UK’s legally binding net zero target and the UK Government’s target to decarbonise power by 2035.

In December 2020, the Government confirmed that the National Policy Statements for Energy, which were published in 2011, would need to be updated to reflect our transition away from fossil fuels and towards cleaner, greener sources of energy. We are disappointed that now, in 2023, the Government has not yet finalised these statements. The Government is consulting on material changes to the statements which reflect recent shifts in Government policy. These changes will also be subject to parliamentary scrutiny. Due to the delay in revising these statements, we urge the Government to make sure the remaining work is delivered at pace. In future, revisions to the NPS should take place in conjunction with changes to the Government’s forthcoming delivery plan, so that the two remain aligned.

Local communities who host critical clean energy infrastructure should benefit from doing so. We call on Government to work with the Crown Estate to use the upcoming licencing round for offshore wind in the Celtic Sea as an opportunity for improving the assessment and delivery of social value to local communities, such as in Cornwall.

A lack of network capacity and delays to securing grid connections are together hampering the delivery of low-carbon power and driving potential investments overseas. For too long, transmission and distribution network owners have been able to delay or avoid the level of anticipatory investment required to deliver a network capable of meeting the needs of the country. Ofgem’s approach to agreeing future investment in previous investment rounds has not been proactive enough, Decarbonisation of the power sector 107 and frequent changes to Government policy have increased investment risk. Together, the system has failed to deliver what is required, and that must change.

We join many other organisations from across the sector in calling on Ministers, Ofgem and network owners to help recover lost ground by accelerating investment in future grid capacity now ahead of need. The increasing costs associated with turning off generation sites due to a lack of transmission capacity must be halted. Investment should be considered to increase capacity where it is currently inadequate and anticipatory investment should prevent this from happening in areas of future development, for example in Cornwall.

There has been a clear lack of strategic planning and coordination of energy infrastructure and network upgrades. A failure to plan from a whole system perspective risks increasing the overall costs of the transition. We welcome the more strategic approach emerging following National Grid ESO’s Holistic Network Design and Ofgem’s Accelerated Strategic Transmission Investment (ASTI) framework. We also welcome measures included in the Energy Bill to enable competition in onshore electricity networks in Great Britain, which should be made a high priority by the Government and Ofgem once enacted.

We recommend that Ofgem sees the Accelerated Strategic Transmission Investment (ASTI) framework as a starting point to accelerate the delivery of the necessary grid upgrades required to meet the Government’s 2035 target. This work should continue beyond 2035 to ensure adequate overall capacity for delivering on the 2050 net zero target. We support the recommendation of the Climate Change Committee for the Government to establish a Minister-led infrastructure delivery group, advised by the Electricity Networks Commissioner, to ensure that network infrastructure build is taken forward at pace. This should bring together senior parties across relevant Government Departments, as well as Ofgem, the Scottish and Welsh Governments, National Grid ESO and asset owners, to monitor progress across the initiatives required to expedite progress.

The UK’s “first come first served” approach to grid connections is failing to deliver the volume of connections required. Projects which may be speculative or slow-moving risk being prioritised over those that are more viable. While we welcome National Grid ESO’s five-point plan to tackle queue management issues at the transmission level, we do not believe this has proved successful to date. We recommend that Ofgem allows National Grid ESO to require projects already in the queue to meet strengthened milestones. If projects are unable to meet these, network operators should be able to prioritise other more viable projects in the queue. In response to this report, we ask that National Grid ESO explains what steps it is taking to work with the Distribution Network Operators to stop projects that want to connect to the distribution network getting stuck in the transmission queue. We would welcome direct intervention from Government on these issues if required.

The RIIO-ED1 process, which set the amount network operators could charge energy bill-payers for making upgrades to the grid over the period 2015–2023, proved overly generous. Distribution Network Operators were able to either build 108 Decarbonisation of the power sector more infrastructure that is rewarded through the Regulated Asset Value, or not spend on that infrastructure and keep a proportion of underspends. Given that technology deployment curves are hard to forecast, we understand Ofgem’s use of uncertainty mechanisms for RIIO-ED2. We will be looking to the regulator to ensure that they better manage risk and that network companies bring forward the required investment. The uncertainty mechanisms will need to be used efficiently, before customers see problems, particularly if the economics of heat pumps or electric vehicles change quickly.

We recommend that when a need for investment in the distribution network becomes clear, Ofgem ensures the uncertainty mechanisms included in the RIIO-ED2 framework are applied efficiently. Should these prove inadequate to respond to a rapid roll-out of low-carbon technologies, Ofgem should take equivalent steps to its ASTI framework to ensure that distribution networks are an enabler not blocker to net zero.

We are concerned by the risks that customers face different outcomes in different regions due to a lack of national direction setting for distribution networks. We recommend that Ofgem revises its approach to the planning of distribution networks to one which is more outcome focused. Ofgem should set the minimum expectations that network users should expect, as well as best practice. Distribution Network Operators should then find innovative ways to meet these standards.

Regulatory settlements for network owners must deliver value for money for consumers. Despite improvements from Ofgem in tackling excessive profits made by these companies in previous price control frameworks, we are concerned that network owners continue to be overly rewarded. Asymmetries throughout the regulatory process between network companies and other stakeholders, including consumer representatives, increase this risk. Greater visibility of network performance is needed to drive up standards and ensure networks deliver against their business plans.

We recommend that Ofgem consults on how best to address the asymmetries in resources and knowledge between network companies and other stakeholders, such as consumer groups, which influence processes such as price controls. We recommend that Ofgem introduces a more rigorous annual performance process for network owners, and that this information is given appropriate publicity to ensure consumer and parliamentary engagement.

National Grid ESO’s markets for balancing the system and addressing constraints continue to be dominated by fast-acting gas plants. More flexible and responsive low-carbon assets, such as batteries, could lead to greater competition in National Grid ESO’s markets and offer more cost-effective services. We recommend that National Grid ESO opens up its markets to more participants and that it is transparent about the choices it makes when selecting which technologies will be used to balance the system. We further recommend that National Grid ESO reports on the carbon footprint of all its markets. In response to this report, we also ask that National Grid ESO sets out its transition plan to ensure that its markets align with the Government’s target to decarbonise the power system by 2035. (Paragraph 215) Decarbonisation of the power sector 109

Despite welcome progress by National Grid ESO to develop and implement new initiatives to harness flexibility, there is still more to be done to ensure that clear signals are provided regarding the location, duration and value of future constraints. We recommend that National Grid ESO sends stronger identifying when and where constraints are likely to occur, their value and duration.

To build on the success of the Demand Flexibility Service and ensure that demand- side response can become mainstream, the industry needs the opportunity to do more learning by doing. While necessary system reforms take place to create a more enabling environment for demand-side response, we recommend that National Grid ESO and Ofgem work with industry on developing a transitional demand-side response service that can support existing day-to-day balancing services.

At present, flexibility markets are disjointed and difficult to navigate, impeding the participation of small assetsand reducing the value of distributed flexibility. While Ofgem should be commended for its proposals for a single digital flexibility platform, this should not distract from near-term actions that are required to drive immediate progress. While Ofgem should be commended for its proposals for a single digital flexibility platform, this should not distract from near-term actions that are required to drive immediate progress. We recommend that Ofgem puts pressure on the Energy Network Association and Distribution Network Operators to ensure faster and more consistent implementation of the Open Networks Programme.

To unlock the potential role that flexibility can play in better synchronising supply and demand, National Grid ESO will need to improve its digital capabilities. We recommend that National Grid ESO speeds up progress on making sure its IT upgrades mean that it can handle flexibility from assets smaller than 1MW and reports to Parliament on its progress in hitting this target.

In future, data and visibility will be key to ascertaining whether network reinforcement or an alternative, such as procuring flexibility services, would be most cost effective for consumers. But there has been insufficient investment in monitoring capability at low voltages to date, resulting in poor visibility of connected assets and the state of the distribution networks. It is also unclear whether all distribution operators are maximising the opportunities of a smarter, more flexible grid. We recommend firmer intervention from Ofgem on minimum visibility standards for Distribution Network Operators. We also recommend that Ofgem reviews whether it has robust processes in place to monitor whether Distribution Network Operators are taking a ‘Flexibility First’ approach and making sufficient use of smart solutions.

The current regulatory and market structures of the retail sector will not deliver a consumer experience that can adequately support the transition to decarbonised power system. We recommend that the Government prioritises the reform of the retail market and that its updated Energy Retail Market Strategy: a) clearly sets out the role that suppliers will be expected to play in the transition to a decarbonised power system as well as interim milestones to achieve this; b) enables suppliers to innovate and build sophisticated relationships with customers through the provision of a broader set of energy services; 110 Decarbonisation of the power sector c) allows suppliers to be fairly rewarded for providing services that entice customers to shift and reduce demand, in a way that reflects the additional risks that suppliers will be taking on; and d) removes barriers that prevent vulnerable customers from accessing the benefits that the transition will offer.

We agree that the wholesale electricity market arrangements need reform to help decarbonise power in a way that secures supply and ensures the system can function efficiently, including more locational signals. In principle, we find the argument for locational pricing appealing, but we are concerned about its deliverability and its potential impact on investor confidence. The Government must satisfy itself that any reforms it does pursue do not create an investment hiatus, which would put the 2035 target at risk.

We recommend that the Government provides before the end of 2023 a clear pathway on how wholesale market arrangements will evolve following its consultation. There are a number of constructive steps that the Government could make to the existing market structure in the near term, which would help it to provide more effective signals on the type of low-carbon technologies and services the UK needs to decarbonise power. The optimal degree of locational granularity should weigh the benefits against the level of market disruption, and whether other mechanisms can achieve similar outcomes, within investment timeframes. Comprehensive impact assessments should be published in due course. (Paragraph 238) The role of institutions

Even though we urged the Government to publish its already very delayed Strategy and Policy Statement for Ofgem back in July 2022, it has still not materialised. We recommend that an explicit duty to deliver on the statutory net zero target is added to Ofgem’s remit. We reiterate our previous call for the Government to publish an updated Strategy and Policy Statement for Ofgem which provides a very clear sense of direction to the regulator on how to manage the political and distributional trade-offs intrinsic to its responsibilities, as well as a clear delineation of its roles and responsibilities.

The Future System Operator (FSO) is expected to provide strategic oversight of the planning and coordination of the power system, but there is a still a lack of clarity over its specific roles, responsibilities and powers, as well as how it will interact with the Government and Ofgem. It is vital that the FSO is adequately resourced and that there is sufficient accountability and scrutiny of its work.

The Future System Operator (FSO) should be granted sufficient powers and resources to effectively plan and co-ordinate the transformation of the electricity system. The FSO should be given a clear net zero directive within its governance arrangements. In response to this report, we ask that the Government confirms whether it is on track to set up the FSO by or in 2024 and outlines its plans for the division of institutional responsibilities between Ministers, Ofgem and the FSO. The FSO should engage with Decarbonisation of the power sector 111 the Energy Security and Net Zero Committee on the progress it is making to deliver a decarbonised power system by 2035 and proactively share key decisions, performance issues and relevant policy concerns. (Paragraph 244)

While huge strides have been made by the Government and industry over the last decade to tackle emissions in the power sector, the UK must continue to accelerate its shift away from fossil fuels to clean energy. However, a suite of policy and regulatory barriers are blocking progress to achieving the Government’s target to decarbonise the power system by 2035. Businesses which want to drive the transition forward on the ground are getting caught in red tape. The absence of an overarching delivery plan and lack of ownership of whole system costs has created policy silos and sequencing problems. Low-carbon projects are now facing delays of up to fifteen years to connect to the electricity network, as well as a cumbersome planning regime. The Government has launched a number of welcome consultations across different sectors of the power system which could lead to much needed policy reform, but a resolute focus on delivery is now essential. The Government’s strategy to decarbonise the power sector also includes notable omissions. These include, but are not limited to, policy to deploy onshore wind, measures to reduce energy demand, support for long-duration energy storage, a decision on the use of hydrogen across the economy and clarity on where private finance for nuclear energy projects will come from.

The UK investment proposition for the electricity sector has deteriorated since the launch of our inquiry. The global race for capital in low-carbon projects has intensified. Meanwhile developers of renewables projects in the UK are experiencing substantial cost inflation and are subjected to a windfall tax less generous than that of the oil and gas sector. These factors, which are compounded by policy and regulatory delays, risk putting the viability of some renewable projects in danger. The Government has yet to set out a competitive offer to industry to ensure that the UK can continue to attract investment and maximise the economic opportunities of the transition to a decarbonised power system. The time to do so is limited.

To address the delivery risks to the 2035 target, the Government will need to ensure that planning and environmental authorities are properly resourced, that planning guidance is aligned with its decarbonisation goals and that the process is streamlined. Ofgem needs to approve investment in the electricity networks ahead of need and network owners need to deliver on their business plans. The process to securing a grid connection must be overhauled. Demand-side flexibility needs to be treated as an equal partner to supply and customers, who are paying for all this new infrastructure, must be at the heart of the transition. This will only be achieved with improved market signals to reward flexible services and reform of the energy retail sector. Ofgem and the Future System Operator should be given clear duties to deliver on net zero. (Paragraph 247) 112 Decarbonisation of the power sector