The Government published a raft of policy documents before the parliamentary recess aimed at delivering a net zero energy system.
These included a Smart Systems and Flexibility Plan, a Retail Markets Strategy, and a proposal for an Independent Energy System Operator. Other important documents, such as the Heat and Buildings Strategy and the Hydrogen Strategy failed to obtain the green light for publication. These remain in the hopper for later in the year. The published documents propose big changes most notably to electricity and gas system planning and operation.
Despite evident ambition, concerns remain that these various initiatives lack coordination and do not represent a coherent plan to deliver net zero.
A net zero delivery strategy requires that the various policy elements work together to achieve the desired reduction in greenhouse gas emissions. The chart below illustrates the different levels of policy.
It is the responsibility of Government to decide what must be delivered and when. This includes an overall carbon emission envelope, along with a range of sub-targets relating to technology deployment, inward investment, and social impacts. It also needs to establish the suite of fiscal and regulatory measures such as taxes, subsidies, and standards, that support delivery of these outcomes. These are important political choices since they define who will pay and who will benefit.
However, these two steps alone are insufficient. Energy markets involve a complex set of rules to ensure an efficient supporting infrastructure is in place and supply always matches demand. This, in turn, requires dedicated institutions to design and operate the market. Also, national policies do not reflect different local conditions and additional incentives may be required to deliver outcomes in a way that is acceptable to local communities. There is, therefore, an important role for local government in the delivery process.
Central Government must delegate the responsibility for some aspects of delivery to other institutions and they, in turn, must design detailed mechanisms to ensure outcomes are delivered. These mechanisms will inevitably alter the delicate balance between who pays and who benefits established by the high level fiscal and regulatory arrangements. For example, Government defines the subsidy regime to support investment in renewable power generation and Ofgem sets the charging regime for use of the power network. The latter can significantly alter the costs of renewable generation.
The policy documents published over recent weeks confirm that Government is in the process of changing all levels of this policy hierarchy. Key outcomes remain to be defined, such as those relating to affordability and fairness. This will be the subject of a future call for evidence. The Treasury has not completed a review of how net zero delivery should be financed, let alone set out how specific mechanisms will combine to achieve this goal. There is going to be an overhaul of delivery institutions – not just the creation of an independent energy system operator. Ofgem could get a new strategic responsibility for designing electricity and gas trading arrangements and will review distribution network operation. Also, the forthcoming Heat and Building Strategy is likely to set out new responsibilities for local authorities. Meanwhile, important changes in market rules are being considered. This includes those relating to the planning of power networks and how these costs are recovered.
How can the Government ensure a coherent net zero delivery strategy as it throws all these policy cards in the air? The policy framework will always need to evolve, and we should not shy away from making bold and transformative reforms when they are required. Instead, there must be structural ways to maintain coherence. An Energy Sector Strategy and Policy Statement has been promised and will be important.
However, with different institutions involved in the policy making process, it is vital to ensure policies are based on a common set of assumptions that is technically robust and up to date. The Government has indicated that an independent energy system operator could provide the required technical expertise in the long term. It also recognises the need to develop its own capability to support strategic decision making as an interim measure. This is a critical role that requires independence, deep knowledge, and the absence of implicit technology bias. This process is vital to maintaining coherence and it should sit at the heart of the net zero delivery strategy.