National Grid Electricity System Operator-Written evidence-(ONZ0020)

Introduction

• National Grid Electricity System Operator (ESO) is responsible for the real time balancing of electricity on the GB electricity network. 
• Alongside this, the ESO plays a leading role in the development of the future GB network. Our Future Energy Scenarios and Network Options Assessment work together to ensure network investments are made to support technology and capacity needs, whilst providing value for money to consumers. 
• We use our unique position, at the heart of the GB electricity network, to consider how energy use may change in the future and how the capability of the GB electricity network will need to adapt to meet these changes. 

Key points of our response:

• As the ESO, we would like to see Ofgem given the mandate and the tools to more directly support net zero activity
• We feel that one of the clearest ways to grant Ofgem a net zero mandate is to incorporate the promotion of net zero in Ofgem’s statutory duties. This view is shared by the National Infrastructure Commission in their 2019 report - Strategic Investment and Public Confidence. As we set out below, an explicit net zero duty will enable Ofgem to take a greater role in delivering the investment and market reform needed to achieve the net zero target.
• The delivery of net zero will likely require greater investment risk to be taken by the energy industry, for example to deliver new technologies, services and investments over a shorter time scale. Transparent and stable policy and regulation will be key to building the confidence the market needs to take these risks and to deliver the rapid changes needed to reach net zero
• A net zero duty will allow Ofgem to more readily consider the use of anticipatory investment to support decarbonisation, by ensuring a fair balance is struck between current and future consumers. This will help to ensure that timely action is taken now, and future consumers are protected from inflated bills caused by delays in delivering net zero investments.

Response to Consultation Questions

What role should Ofgem play in the transition to net zero? What changes, if any, should be made to its remit, responsibilities and resources?

1. Ofgem will play a central role in delivering the transition to net zero through its role as regulator of the energy industry, which is expected to be the first part of the economy to reach net zero.
2. Given this central role, we believe that Ofgem should have an explicit duty to support net zero activity, such that an appropriate balance is struck between this and its other existing duties, such as to support vulnerable customers and to ensure competition in markets.
3. Similar duties or mandates to deliver net zero have been created for other organisations involved in the delivery of net zero, such as the Bank of England.
4. An explicit duty to support net zero would help support Ofgem’s activities and provide it with greater agility to provide regulation to support new technologies and services critical to the delivery of net zero.
5. Delivering net zero will require greater levels of investment risk to be undertaken by the market, to bring forward the development of technologies and services that can play a part in the energy transition.
6. A stable investment horizon has already delivered significant progress towards the UK’s net zero target.  For example, without the economic incentives to bring offshore wind solutions to market, delivered through the Contracts for Difference regime, we would never have seen the dramatic reductions in the cost of delivering this technology.
7. If Ofgem is given a clear duty to support the delivery of net zero, the regulatory framework will be able to better support the rapid developments in technology and innovation needed to deliver it.
8. Providing Ofgem with a clear net zero duty would also allow them greater latitude to support anticipatory investment, provided ahead of need, in order to optimise the infrastructure investment needed to deliver net zero. This would also guard against the risk of future customers picking up a disproportionate amount of the cost of net zero, resulting from delays to necessary investment.

How well does Ofgem balance environmental objectives against its responsibilities in relation to affordability for consumers?

9. Striking the right balance between environmental impact, consumer protections and net zero activity will be critical to ensuring that we reach net zero in the right way.
10.         Ofgem will need to continue to ensure that environmentally damaging actions are not taken purely to reduce consumer costs, as this will likely penalise future consumers.

What implications will the transition to net zero have for the security of the UK’s energy supply? How does Ofgem currently manage issues relating to security of supply?

11.         Net zero shouldn’t impact overall security of supply; however, supply and demand drivers will be very different in a net zero world, which will create different risks around security of supply than we face today.
12.         Those involved in ensuring security of supply (Government, Ofgem, Energy Networks & System Operators) will need to ensure that they identify, assess and mitigate these risks to ensure future security of supply.
13.         In particular, the 6th Carbon Budget pushes us towards net zero electricity by 2035, requiring the delivery of new net zero/low carbon technologies and the removal or abatement of fossil fuels such as coal and gas.
14.         Currently, low carbon technologies such as small modular nuclear reactors, hydrogen and carbon capture and storage aren’t at the stage of maturity and commercial scale required to replace coal and gas. To ensure these technologies are available in time to contribute to net zero targets, BEIS and Ofgem will need to continue to push their development through the policy and regulatory levers they control.
15.         Net zero will also require a new approach to the operation of electricity networks, as low carbon sources will require greater network flexibility to maximise the output of the cheapest energy sources, such as high wind levels. This increased network flexibility will come from storage (particularly long-term/inter-seasonal storage), interconnectors, and demand side flexibility. In turn, this will require the development of smart homes and businesses, smart networks, the smart charging of electric vehicles, etc., all of which need to be supported, enabled and regulated by Ofgem.

Is Ofgem’s current system of price controls appropriate? Does it provide sufficient incentives to invest in the context of the transition to net zero?

16.         Throughout the RIIO2 price control process, we have been clear that Ofgem needs to encourage and incentivise the energy industry to be innovative and ambitious enough to deliver the scale of change needed for net zero.
17.         This innovation and ambition must also be matched with a regulatory framework with the flexibility to respond to technology developments and policy changes over the course of a price control period. The “pass-through” mechanism in place for the ESO’s RIIO-2 control, together with the greater use of “uncertainty mechanisms” and “reopeners”, are good examples of this.

Is the current system of governance for the UK energy market appropriate to secure the transition to zero? What improvements could be made and what role should Ofgem play?

18.         Ofgem needs to be given an explicit duty on net zero, as this would help to deliver the regulatory pathways for new technologies and services that are needed to achieve the target.
19.         The market will need to take greater risks (new technologies, services, investments, etc.) over a shorter period of time than usual in order to deliver net zero and this needs to be enabled by a regulatory regime that allows efficient investment to take place in a timely manner. Transparency and stability are critical components of the regulatory framework needed to attract investment in new technologies, as is a shift to allow infrastructure investment to be provided in advance of need.
20.         It is important that policy and regulation, and relevant decision-making bodies, can work coherently in a way that supports the market in rapidly evolving, to deliver net zero and the needs of current and future consumers.
21.         A clear Ofgem duty on net zero would also help to address issues like anticipatory investment, by striking a balance on affordability between today’s and future consumers. This would help to ensure that technology and infrastructure spending is supported in a timely manner, to ensure that future consumers are not exposed to increased costs resulting from a lack of investment today.

Are Ofgem’s duties and powers appropriate and sufficiently clearly defined? Do Ofgem’s objectives conflict and, if so, how should any conflicts be managed?

22.         Ofgem needs to be given an explicit duty to deliver net zero as this would help them to deliver regulatory pathways for new technologies and services needed to deliver the target.
23.         It is important that BEIS brings forward the Strategy & Policy Statement for Ofgem, to ensure that the overall policy direction the regulator needs to help deliver is clear. This would also help to minimise potential conflicts between policy and regulatory signals sent to the markets and industry.

Is Ofgem’s relationship to Government and Parliament appropriate? Are there issues related to the split of responsibilities, transparency or accountability?

24.         Delivering net zero creates new challenges at all levels of the energy sector, including at the policy, legislative and regulatory level.
25.         It is therefore right to re-examine the roles and responsibilities of individual bodies and how they align with others in the sector. This review of institutional arrangements across the energy sector, will ensure that the right governance is in place to deliver the changes required to successfully deliver net zero.
26.         By ensuring there is greater clarity on the roles and accountabilities of different bodies within the energy policy space it will be far easier to ensure that energy targets are met, as the relevant bodies will be better aligned in discharging their respective duties.

20 August 2021