Eleventh Report - Decarbonisation of the power sector

The government launched the Floating Offshore Wind Manufacturing Investment Scheme (FLOWMIS), worth up to £160 million, on March 30, 2023, to provide grant funding and leverage private investment in port infrastructure.

Ofgem states that its RIIO-ED2 framework already provides effective uncertainty mechanisms, including a Reopener mechanism, and an ability to accelerate investment for rapid low-carbon technology rollout, thus addressing the recommendation through existing provisions.

The government states that Ofgem's current price controls (RIIO-ED2 and RIIO-T2) already include stringent efficiency targets, lower allowed returns, and mechanisms to share outperformance with consumers, addressing concerns about value for money and excessive profits. They also highlight funding for data and digitalisation to improve network visibility.

Ofgem strongly agrees with the need for faster progress, stating it is driving DSO capabilities through incentives and working closely with the ENA and DNOs to ensure the Open Networks programme is delivered at pace.

Ofgem agrees with the recommendation, stating it has approved £167.54m for Distribution Network Operators (DNOs) to roll out Low Voltage (LV) network monitoring. Ofgem also clarifies that its DSO incentive framework within RIIO-ED2 includes evaluation criteria and a new smart optimisation output to monitor DNO performance in developing flexibility and using smart solutions.

The government confirms it is actively reviewing electricity market arrangements (REMA), with a second consultation due in Autumn 2023. It has updated its assessment criteria to include "Investor Confidence" and explicitly commits to ensuring that renewable generation investment is not unduly affected by any reforms.

The government aims to publish a second consultation on the Review of Electricity Market Arrangements (REMA) in Autumn 2023. This consultation will set out a direction of travel and next steps for the evolution of wholesale market arrangements.

The government published its consultation on the Strategy and Policy Statement for Energy Policy in May 2023 and is content to amend Ofgem's existing duty to explicitly reference the net zero targets from the Climate Change Act 2008.

The government confirms the FSO will have a net zero objective enshrined in the Energy Bill, aims for the FSO to be operational in 2024, and will publish a framework outlining institutional responsibilities between Ministers, Ofgem, and the FSO. It also notes the select committee will be able to invite FSO leadership to sessions.

The government will report annually on its delivery of power sector decarbonisation and strengthen its portfolio management approach to provide a 'whole system' view and manage uncertainties.

The government outlines its overall energy strategy for 2035, referencing existing plans like the Net Zero Strategy and Energy Security Plan. It describes the overall goal and existing strategies but does not detail how the new Department for Energy Security and Net Zero will specifically operate differently to coordinate stakeholders and accelerate delivery as recommended.

The Electricity System Operator (ESO) acknowledges the need for investment in its systems and details its ongoing Open Balancing Program to modernise balancing capabilities and IT platforms, aiming to increase flexibility and market participation for a net-zero electricity system. This describes internal ESO work rather than directly addressing systemic network capacity issues or Ofgem's investment approach.

The government details how Ofgem's RIIO-ED2 price control, which commenced in April 2023, along with measures like LV monitoring capacity and the DSO incentive, aim to unlock network capacity and support smart technologies. This response outlines existing or recently implemented policies rather than new commitments to accelerate grid investment ahead of need.

The government outlines that the FSO will have necessary powers via the Energy Bill, with Ofgem regulating its functions, performance, and funding. It commits to creating and publishing a framework agreement to clarify roles between ministers, Ofgem, and the FSO, with the FSO aiming to be operational in 2024.

The government acknowledges the benefit of a more overarching approach and commits to annual reporting on decarbonisation delivery. It will also strengthen its portfolio management to adopt a "whole system" view across its delivery work.