On 20 January 2023, the House of Lords is due to debate a motion by Lord Hollick (Labour) to take note of the report of the House of Lords Industry and Regulators Committee, ‘The net zero transformation: delivery, regulation and the consumer’.

The House of Lords Industry and Regulators Committee published its report on 4 March 2022.

1. Net zero target

In June 2019, the UK government legislated a net zero emissions target by 2050. In 2021, the government set two additional interim targets to run a net zero power system and reduce emissions by 78% by 2035. 113 countries and over a third of the world’s largest companies have also set net zero targets. However, not all such commitments are legally binding.

In the UK, the policy pathway to achieve net zero was launched in the ‘Net zero strategy’, published by the Department for Business, Energy and Industrial Strategy in October 2021. Some of the key policies include:

  • ending the sale of new petrol and diesel cars
  • promoting the use of sustainable aviation fuel
  • investing in clean electricity and hydrogen production
  • providing funding for households to switch to low-carbon heating systems
  • incentivising farmers to use low-carbon farming methods
  • planning to triple the rate of woodlands creation in England

2. Committee findings and recommendations

The committee recognised the “bold commitment” to meeting net zero by 2050, but noted that it was “not convinced that the necessary level of policy detail is in place to achieve these commitments”. It cited the Climate Change Committee’s estimates that, to meet these targets, investments needed to reach £50bn a year across the whole economy by 2030.

2.1 Energy technology policies

The report called for action and urged the government to set out detailed policies and funding models. At the same time, it said that the government should maintain some level of flexibility, given that it was not yet certain what technologies would be most beneficial. The committee stated that “if the power system is not decarbonised by 2035, reaching net zero by 2050 will be extremely difficult”. It added that “there was widespread scepticism from witnesses that the target will be reached without further policy detail”. The committee argued that such energy technology policies should address:

  • the development of long duration storage technologies
  • the need for a business model for carbon capture, usage and storage
  • the potential of investment in nuclear energy, including small modular reactors
  • the use of hydrogen, including its use in heating
  • the role that gas will play as a back-up energy source
  • the availability of funding for energy efficiency transitions, including heat pumps
  • the development of offshore wind technologies

The committee highlighted that the current decade will be “crucial” to the ambition of achieving net zero by 2050 and recommended that the government publishes a roadmap by the end of 2024. The committee also indicated that the need to maintain a secure energy supply might impede plans to achieve net zero, especially given projections of a two-to-three-fold increase in energy demand.

2.2 Funding

The committee urged the government to publish its plans for funding the net zero transition. More specifically, it argued that any funding model should include “distributional consequences” (ie details of the distribution of costs, benefits and impacts among all the interest groups). The committee made this recommendation because it was concerned that “any component falling on billpayers falls disproportionately on lower-income groups”. For this reason, it said the government should publish a call for evidence on fairness and affordability by the end of 2022. It also recommended the government consider all funding options and reconsider its opposition to the use of borrowing.

2.3 Institutional architecture

The committee report made the following recommendations about changes in the institutional environment responsible for delivering and monitoring net zero policies.

  • Energy transition taskforce. The report argued that the existing institutional environment was not sufficient to deliver the net zero transition. Instead, the committee recommended the establishment of an energy transition taskforce. This inter-departmental taskforce would be responsible for the “coordination, strategic planning and delivery monitoring” and report directly to the prime minister through a cabinet sub-committee.
  • Future system operator (FSO). The report also agreed with the government’s and Ofgem’s proposals for an independent FSO, an organisation responsible for planning and delivering a decarbonised energy system, that would report to the government and Ofgem.
  • Ofgem. The committee proposed that Ofgem better define its responsibility within the net zero strategy and argued it should not have a coordinating or political role in the transition. Instead, the committee said Ofgem should maintain its existing responsibilities of economic regulation and consumer protection. However, the committee argued that explicit reference to having due regard to net zero should be added to Ofgem’s duties via the promised strategy and policy statement. This statement should emphasise net zero among other competing priorities of Ofgem and indicate “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”. Once all suggested changes to its remit were implemented, the committee said Ofgem should publish details to its approach to enable greater scrutiny of its performance.

2.4 Market regulation and consumer protection

Finally, the committee proposed the following changes in market regulations and argued for more clarity and better communication concerning the role of the consumer.

  • Price controls. Given that the companies who own the UK energy transmission and distribution network are monopolies, they are subject to price controls by Ofgem. This is to ensure consumers are protected from overcharging. However, the committee was concerned that such price controls had the potential to discourage investment when the market needed it the most. The committee was also concerned about Ofgem’s new uncertainty mechanisms. These mechanisms are imposed on price controls and allow for the funding arrangements to respond to change, through reopening a decision. The committee recommended that Ofgem conducts a review of its uncertainty mechanisms and publish it in a timely manner to allow for any conclusions to be reflected in the decisions it makes for its next price control periods.
  • Codes and licenses. The committee noted that the governance of the energy system, in particular its codes and licenses, “is slow-moving and resistant to change”. To improve this process, the committee suggested the government and Ofgem work on reforming and simplifying the code and licences. The committee argued this could potentially allow for new companies to enter the retail energy market, drive innovation, enable private investment, and improve market competition. In this regard, the committee said the use of switching as the singular metric of competition should be abandoned. It argued companies should compete on overall service and value to customer and not just in price.
  • Consumer protection. Finally, the report emphasised that the government ought to communicate to consumers what is expected of them, how much the net zero transition could cost them and how it would impact their lives. The committee argued that, although not all consumers have the capacity or capability of engaging with new energy models, it remained the government’s responsibility to provide greater clarity and guidance to enable interested consumers to play their part in the net zero transition.

3. Government’s response

The government published its response to the committee report on 27 May 2022.

In its response, the government argued that the net zero strategy set detailed targets and a clear vision for achieving net zero by 2050. However, it highlighted that not all policy elements could be known in advance, as decisions would be made following innovation and adoption of new technologies over time. The government also said it had committed to providing an annual progress report on its delivery to net zero by 2050. It said this would include:

  • an update on progress against the targets and ambitions set out in the [net zero] strategy
  • commentary on contextual changes that might affect the exact pathway to meeting [the government’s] decarbonisation commitments
  • a summary of key areas of progress made against the policies and proposals in [the net zero] strategy

3.1 Energy technology policies

In its response to the committee, the government said it was taking the following actions to support the development of UK energy technologies:

  • Long duration storage. The government said it was committed to the development of sufficient long duration storage technologies, as set out in its ‘British energy security strategy’, which was published in April 2022. The details of achieving this were set out subsequently in the government’s response to its consultation on facilitating the deployment of large-scale and long duration electricity storage, which was published in August 2022, after the committee report and the government’s response was published.
  • Carbon capture, usage and storage. The government said it recognised that carbon capture, usage and storage (CCUS) infrastructure was needed to ensure the transition to a net zero economy. Details on the government’s plans for CCUS were provided in the ‘Carbon Capture, Usage and Storage: business models’. Updates on this were published regarding transport models in April 2022, and on the power and industrial CCUS business models in November and December 2022, respectively.
  • Nuclear. The government said it intended to move three projects concerning small modular reactors to a final investment decision. A final investment decision is the final stage of mega energy projects that determines if an investment in the project would be beneficial or not. These three projects concern a neighbourhood, village and town-scale trial of the costs, benefits, feasibility and other impacts of the use of hydrogen.
  • Hydrogen. On 8 April 2022, the government published their ‘Hydrogen investor roadmap’. The government also published the net zero hydrogen fund, which included planned funding for hydrogen worth £240mn. In their response to the committee, the government said they intended to proceed with a “contractual, producer-focused hydrogen business model, applicable to a range of hydrogen production pathways and able to facilitate hydrogen use in a broad range of sectors”. The government also said that it had incentivised industry to switch to hydrogen through several initiatives. The government added that hydrogen remained an “unestablished” low-carbon heating option, but noted that three separate research projects regarding hydrogen for heating were in development.
  • Gas. The government said natural gas would remain a primary energy source as the UK moved towards decarbonisation. In its response, the government stated that in meeting net zero by 2050, the UK might still have to use a quarter of the gas used now. The government said it planned to fully utilise the North Sea reserve, to avoid overreliance on imported fossil fuel, especially since around half of the UK demand for gas was already met through domestic supplies.
  • Energy transition funding. In terms of funding for the transition to low-carbon energy efficient buildings, the government highlighted schemes such as the boiler upgrade scheme, which it said provided upfront capital grants for the installation of low-carbon heating systems in homes and small non-domestic buildings in England and Wales. The government also reiterated that funding has been made available to decarbonise buildings, and highlighted their extension of the energy company obligation and the warm home discount scheme.
  • Offshore wind. In the ‘British energy security strategy’ the government set out plans to accelerate its development of offshore wind technologies, aiming to deliver up to 50 gigawatts of offshore wind by 2030. For this purpose, the government said it had established the offshore wind acceleration taskforce with the aim of “[bringing] together companies from across the offshore wind sector to coordinate their efforts, and speed up the further development of offshore wind power in the UK”.

3.2 Funding

The government agreed on the need to increase investment while ensuring fairness and affordability in reaching net zero by 2050, saying:

To maintain the UK’s energy supply and deliver our net zero ambitions, we estimate that additional capital investment averaging £50–60bn per year is needed through the late-2020s and 2030s across the economy. A combination of public and private investment will be crucial for any path to net zero but a substantial portion of this investment will come from the private sector, providing new opportunities for businesses and investors.

The government also said it planned to set out a long-term pathway to net zero and continue levying funding from consumer bills to encourage private investment. It said it was providing £1.5bn in funding to support commercialising clean technologies. In this system, the government would focus on “fairness and affordability”.

In its response, the government committed to publishing their proposals on “rebalancing” the costs placed on energy bills away from electricity. The intention to publish a call for evidence on fairness and affordability was first declared in December 2021 and reiterated following the publication of the committee report in July 2022. Nonetheless, as of the time of writing, the call for evidence on fairness and affordability has not been officially announced.

Regarding the issue of borrowing, the government recognised that some government intervention would be necessary to reach net zero. For example, the government highlighted the case of “green gilts” (ie a type of government bond) that since September 2021 had been used to raise a total of £16.3bn. The government has committed to publishing an annual allocation report which it said would provide transparency to investors on how the proceeds had been allocated across six green categories of the ‘Green financing framework’. The first of these allocation reports was published in September 2022. The government said it was also committed to publishing a biennial impact report, that would detail the environmental as well as social co-benefits of the expenditures funded.

3.3 Institutional architecture

The government also responded to the committee’s proposals for changes in the net zero institutional environment.

  • Energy transition taskforce. On the issue of a new taskforce, the government said that the current net zero governance arrangement was already sufficient and effective, with well-established and robust supervision by senior government officials.
  • FSO. The government said itself and the regulator Ofgem were committed to establishing an expert and impartial system operator, the FSO. The FSO would be a public corporation, independent from the government, with its main responsibility being to coordinate and overlook the strategic planning across the gas and electricity sector. Ofgem has also said it intended to introduce a new centralised strategic network planning model, led by the FSO.
  • Ofgem. The government disagreed with the committee’s recommendation to add net zero as a new duty of Ofgem. It argued that Ofgem’s primary statutory duty was to “protect the interests of existing and future consumers”. The government said that the interests of such consumers “are their interests taken as a whole, including their interests in the reduction of greenhouse gases and the security of the supply of gas and electricity to them”. The government also committed to publishing an energy sector strategy and policy statement to give Ofgem the legal obligation to have regard for strategic priorities and policy outcomes of the government’s net zero plan. It would require Ofgem to report at the outset and annually on its progress and plans for implementation. The statement was due to be published in 2022, but as of the time of writing it has not been published.

3.4 Market regulation and consumer protection

Finally, the government responded to the committee’s proposals for changes in market regulation and an emphasis on the role of the consumer.

  • Price controls. In its response to calls from the committee to review the use of Ofgem’s uncertainty mechanisms, the government emphasised that price control was a matter for Ofgem as the independent, expert regulator. The government said more information on the importance of Ofgem maintaining strategic network investment would be included in the anticipated strategy and policy statement.
  • Codes and licenses. On the issue of the simplification of the codes and licenses process, the government said it would direct Ofgem to establish a new framework on code consolidation and simplification, code manager appointment, licensing, and transition to code reform. The government said it intended to introduce primary and secondary legislation related to Ofgem’s new strategic functions.
  • Consumer protection. The government agreed that consumers should play a central role in the transition to net zero by 2050, and focused on three priorities. First, consumers should receive appropriate levels of protection, pay a fair price for their energy, and be able to easily engage with the market to exercise choice. Second, energy companies should invest in innovative products and services to unlock the benefits of low-carbon technologies. Third, consumer choice and active market competition should contribute towards a lowest-cost flexible energy system, in order to give the right price signals and drive the uptake of low-carbon products and services. The government also commented that, although they believe in the responsibilities of the consumer, they intended to “take account of the lessons from recent months to ensure that the energy retail market [was] resilient, sustainable and continues to protect consumers” during the move towards a net zero energy system.

The government also made a commitment to encourage Ofgem to implement reforms to the retail market. It said that such reforms should maintain stability and reliability for consumers while enabling new business models that could attract and retain private investment. In December 2021, the government announced a call for evidence on the future of the energy retail market. The results of this consultation have yet to be published.

4. Ofgem’s response

Ofgem responded to the committee’s report on 4 March 2022. In its response, Ofgem said that, while over 4 million consumers were effectively protected even when their energy supplier failed, the regulatory process needed to improve to ensure the market was resilient against potential continued global market volatility. Ofgem said net zero remained a priority of many consumers and it had responded with reforms to decrease carbon emissions and encourage the widespread use of renewable energy. Ofgem finished their statement by saying that meeting the net zero target while maintaining fairness and affordability was a big challenge and committed to responding to the committee’s suggestion in more detail.

On 8 July 2022, Ofgem published their report ‘Net zero Britain: developing an energy system fit for the future’. This report set out Ofgem’s priorities for achieving net zero and said “significant reform” was required to deliver a resilient, low cost, low-carbon power sector. The potential reforms concern changes in infrastructure and governance at national and local levels, improvements of the wholesale energy market, and transformation of the retail market. Ofgem also announced that it was developing a new framework of consumer interests. The framework remains under development, but Ofgem said that the core of the framework would focus on key issues such as ensuring fair prices for consumers, supporting a low-cost transition to net zero, maintaining high quality and standards of service, and establishing a network that was resilient to volatile wholesale prices.

5. Legal challenges to the net zero strategy

In 2022, the environmental organisations Friends of the Earth, ClientEarth, Good Law Project and the environmental campaigner Joanna Wheatley filed papers asking for a legal review into the government’s net zero strategy, on the basis that it did not comply with the Climate Change Act 2008. Under the 2008 act, the government has a responsibility to set out a pathway to net zero, and it was the belief of the claimants that the net zero strategy was not supported by the necessary policy detail.

On 18 July 2022 the high court judge, Mr Justice Holgate, ordered that the net zero proposals were too vague and did not enable him to be satisfied that the statutory targets would be met. The government was given eight months to update its climate strategy and include a quantified account of how its policies would achieve climate targets.

6. Read more

Cover image by Marcin Jozwiak on Unsplash.