Written evidence submitted by BP plc (ECO0046)

bp is a leading global energy company – our strategy is to transition from an international oil company to an integrated energy company delivering solutions for our customers.

bp has been based in the UK for more than 100 years and operates in over 70 countries around the world. We have a primary listing on the London Stock Exchange and a secondary listing in the US, on the New York Stock Exchange. 

In 2022, bp supported an estimated £20 billion gross value-added contribution to the UK’s gross domestic product (GDP) and 75,000 UK jobs, equivalent to 0.79% of UK GDP. Of this total, bp’s direct UK operations – such as oil and gas fields, fuels retailing facilities and major offices – generated a £15 billion gross value-added contribution to UK GDP in 2022. bp spent £5 billion with UK suppliers across more than 10,000 contracts: £4.3 billion on operational spend with 3,000 suppliers, spread across 551 constituencies.

While today we’re mostly in oil and gas, we increased the proportion of our global annual investment that went into our lower carbon and other transition businesses from around 3% in 2019 to around 23% in 2023.

In the UK we plan to continue to invest in helping maintain a secure supply of energy through North Sea oil and gas, as well as in solutions like offshore wind, EV charging, hydrogen and carbon capture. These plans go beyond investment in infrastructure - they also see us supporting the economy, skills development and job opportunities in the communities where we operate.

Key Points:

• bp recognises the need for a wide-ranging review of the GB electricity market to support economic growth and the transition to a net zero power system by 2035, and a net zero economy by 2050.
• The existing design of the electricity market has been largely successful in delivering competition, security of supply and the first phase of decarbonising the power sector.
• Energy market reform should prioritise reliability and resilience wherever possible, and support the deployment at pace of new technologies.
• Decarbonisation must continue with ambitious and strategic direction from Government, with the UK’s energy market enabling it to retain its place at the forefront of the drive towards net zero.
• Clear and long-term strategic frameworks will send the right investment signals, complemented by transparent and ongoing dialogue to reach workable solutions to shared challenges.
• Targeted reform can consolidate the UK’s existing global competitiveness in offshore wind and spur innovation in key technologies like CCUS and hydrogen. This will encourage investment and create high-skilled jobs in areas which need them.
• Further work will be needed to critically examine the proposals in the Government’s Second REMA consultation. This includes squarely addressing the need for grid modernisation, increased flexibility, and an appropriate degree of locational signals, as well as the CfD scheme – which has driven the UK’s significant decarbonisation success to date – remaining fit for purpose.

1. What should be the underlying principles of the UK energy market? 

• Energy market reform should prioritise reliability and resilience wherever possible. Strategically developing the UK’s domestic resources will remain critical for flexibility and energy security in the near term as the industry accelerates the build out of renewables.
• Decarbonisation must continue at pace with ambitious and strategic direction from Government, with the UK’s energy market enabling it to retain its place at the forefront of the drive towards net zero. This will require substantial investment in offshore wind, CCUS and hydrogen, and other renewable technologies, as well as energy storage and greater energy efficiency. The market must strongly incentivise and accelerate this investment.
• Energy costs should be manageable for consumers and businesses. New market structures should aim to deliver a strategic and diverse energy mix which leverages existing infrastructure while scaling renewables to support long-term price stability.
• A continued commitment to R&D funding and grid modernisation will be critical to maximising renewables deployment. This includes storage and flexibility solutions to enable the grid to handle the increasing share of renewables in the UK energy mix.

2. Can Government deliver radical reform in the UK energy market? 

• Reform must support the deployment at pace of new technologies. While bold ambition is needed in the long-term, a phased transition with realistic implementation timelines and thorough industry consultation is crucial. The Government’s approach to REMA is broadly a good example of this, building on the successes of EMR whilst recognising the need to sufficiently incentivise the investment and integration needed to deliver a rapid, orderly transition to a decarbonised grid.
• Cross-sector collaboration and transparency is key. Deep and trusted partnerships between Government, regulators, industry and academia are vital to effective market reform. We need clear and long-term strategic frameworks to send the right investment signals, complemented by transparent and ongoing dialogue to reach workable solutions to shared challenges.
• A stable regulatory environment is a pre-condition for attracting the investment the UK needs to meet its energy security and net zero goals. Consistent policies will foster long-term trust in the UK energy market as a global investment destination. 

3. Is the Review of Electricity Market Arrangements likely to deliver the necessary changes to the energy sector? 

• bp recognises the need for a wide-ranging review of the GB electricity market to support economic growth and the transition to a net zero power system by 2035, and a net zero economy by 2050.
• The existing design of the electricity market has been largely successful in delivering competition, security of supply and the first phase of decarbonising the power sector. New market arrangements should focus on accelerating renewable development, but also on whole system technological needs (e.g. flexibility, stability, including low carbon solutions), and maintaining investor confidence.
• The Review is heading in a positive direction, acknowledging the need to adapt the market to incentivise investment in renewables, maintain security and operability of the system, and address price volatility. Achieving the right balance in the second phase of the Review will be critical: market reform must accelerate substantial renewables expansion, particularly given the increased pressure which has been modelled on AR7 and AR8 to deliver the Government’s targeted capacity.
• Further work will be needed to critically examine the proposals in the Government’s Second REMA Consultation. This includes squarely addressing the need for grid modernisation, increased flexibility, and an appropriate degree of locational signals, as well as the CfD scheme – which has driven the UK’s significant decarbonisation success to date – remaining fit for purpose.
• Government should not approach the Review in isolation and instead take an integrated approach with a long-term lens. Success depends on how it aligns with broader UK energy and infrastructure investment plans. Thought must also be given to how the reforms support a just transition for the communities which will be most affected by the energy transition. We particularly welcome the recognition in REMA that any change or disruption to the market should be planned in the long-term, giving the industry the opportunity to respond and plan appropriately.

4. What are the major benefits that the UK should be seeking to deliver from energy market reform? 

• Reform should boost domestic energy production to reduce the UK’s exposure to global market volatility as the UK builds out its low-carbon infrastructure at the necessary scale and pace. 
• The market should reward low-carbon investments which help the UK on its trajectory towards a net zero power system by 2035 and wider economy by 2050.
• A well-designed market fosters healthy competition. This should lead to greater innovation and efficiency and ultimately drive down costs for consumers.
• A modernised grid, optimised for high renewables integration and smart charging for EVs, will be critical for reaching the UK’s energy security and net zero goals. Reform must prioritise flexibility, storage and other solutions which enable a more reliable and decarbonised system.
• Targeted reform can consolidate the UK’s existing global competitiveness in offshore wind and spur innovation in key technologies like CCUS and hydrogen. This will encourage investment and create high-skilled jobs in areas which need them, further strengthening the UK’s leadership in low carbon energy.

5. What are the chief barriers to reform of the energy market and is the Government serious about addressing those? 

• Industry and investors need stable regulatory frameworks with long-term targets. Sudden or frequent policy shifts undermine confidence in the UK’s commitment and ability to deliver large-scale projects, especially those with long lead times.
• The Government has correctly identified a number of critical barriers to reform. This includes the fact that existing market structures favour legacy generation sources, as well as the need for urgent grid upgrades, and streamlined planning consent for offshore development. It must continue to prioritise reforms which accelerate renewables deployment, incentivise investment in nascent technologies and address the challenges of integrating them at scale.
• REMA needs to be delivered alongside other reforms including retail markets and grid governance, in order to be effective in achieving its aims. Such programmes should be coherent, compatible, and adequately resourced, including by delivery partners, whilst giving industry sufficient time to fully consider proposed reforms.
• The net zero transition will require a specialised workforce and robust and competitive domestic supply chains. The Government should continue to collaborate with industry on training programmes, both at apprenticeship level as well as up-skilling and re-skilling for the existing workforce. At the same time, it should ensure its policies encourage UK manufacturing which can support the UK’s future energy mix. 

6. Is it possible to ensure that consumers are insulated from market failures in the energy sector? 

• The energy sector has and will continue to experience volatility from wider global events.
• In conjunction with the Government, regulators and industry, risks could be mitigated through:

• Long-term contracts with reliable producers and sensible reform of the Capacity Market which incentivises participation of firm low carbon resources, which can offer a buffer against volatile global markets.
• A flexible, upgraded grid, that can utilise storage and flexible demand assets of all sizes, will help to reduce vulnerability to price spikes and extreme weather events. Consumers, supported by a well-functioning retail market, should be empowered to participate in the energy market as we transition towards a more decentralised and multi-directional system – EV users, for instance, may be able to play a more active role through shifting their power demand.
• Timely outcomes on final investment decisions for initial projects in technologies such as CCUS and hydrogen, which offer a pathway to long-term decarbonisation of carbon-intensive industries and can ultimately reduce long-term consumer energy costs.
• A stable market based on diverse sources of reliable, secure, and affordable, as well as lower-carbon power generation will help insulate consumers. Reform needs to drive us towards this future state.

April 2024