SSE Group Written evidence (ONZ0052)

About SSE

1. SSE plc welcomes the opportunity to give evidence to this important and timely inquiry.
2. Headquartered in Perth, SSE is a UK-listed energy company with operations and investments across the UK and Ireland.
3. SSE is primarily a developer, operator and owner of low-carbon energy assets and businesses, with a strategic focus on regulated electricity networks and renewable energy. Our purpose is to provide energy needed today while building a better world of energy for tomorrow, and our strategy is based on creating value for shareholders and society in a low-carbon world.
4. SSE is proud to be a Principal Partner of COP26 and its business strategy is firmly geared towards enabling the net zero transition for the whole energy system in the UK and Ireland.
5. In November 2020, SSE joined the ‘Race to Zero’ campaign by committing to reaching net-zero emissions by 2050 at the latest and setting a relevant Science Based Target.

Executive Summary

6. The scale of the net zero challenge is significant and will require significant efforts from all parts of the economy, with strategic direction and cross sector oversight provided by the UK Government on the trade-offs between affordability for customers today, versus those in the future. 
7. As the energy regulator Ofgem has a critical role to play in the transition and SSE believes that its statutory duties should be strengthened and amended to explicitly include reference to achieving net zero. 
8. Government should clearly set out Ofgem’s role and responsibilities in a Strategic Policy Statement. 
9. Pace is essential to support the delivery of the strategic infrastructure investment necessary to meet net zero targets.  Ofgem must be empowered to take risks and make judgements with confidence rather than be constrained by conflicting priorities which may prolong its decision-making and act as a barrier to net zero. 

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

10. Ofgem’s role as independent regulator is integral to achieve Government’s climate change target as outlined in the sixth Carbon Budget on the pathway to meeting net zero by 2050.  Enabling regulatory frameworks have a critical part to play in the transition given the significance of the energy sector to delivering decarbonisation across the economy. 
11. For Ofgem to play this integral role, its duties and responsibilities set out in legislation must be amended. As Ofgem’s statutory duties do not give Ofgem a strict requirement to carry out its activities to enable legally binding net zero targets, they must be strengthened to explicitly reference the targets and require it to set out how it will measure its progress as a facilitator of net zero. This is particularly significant given the expectation that Ofgem may play an increased role to support the delivery of Government policy objectives, for instance, as the preferred regulator for heat and potentially taking on new responsibilities for CCS and Hydrogen. 
12. Recognising that formal remit change will require primary legislation, Ofgem’s role in achieving net zero should be set out clearly in Government’s Strategic Policy Statement. Whilst Government has committed to consult on this late in 2021, this is long overdue, having been originally recommended at the conclusion of the CMA’s energy market enquiry in 2016.  Providing clarity regarding the relative responsibilities of Government and Ofgem will avoid sub-optimal outcomes and ensure that there is sufficient pace and certainty in the regulatory framework to underpin vital investment and delivery at best value to existing and future consumers (Just Transition). Regard should also be given by Ofgem in its decisions to the increased focus on regional and local targets in achieving net zero.
13. Effective regulatory frameworks and transparent decision-making by Ofgem must be anchored in meeting net zero, supported by robust impact assessments, taking account of the environment, communities, social and intergenerational risks and costs.
14. These principles apply particularly when considering Ofgem’s role in setting price controls and the increased requirement for network investment ahead of certain and optimal need.  Clear guidance should be provided to network companies about the level of evidence and analysis required. Ofgem must make proportionate and timely decisions.  Least cost, risk averse investment decision-making may put net zero at risk and should be avoided.
15. Ofgem must play a strategic co-ordination role as sector regulator, considering and resolving wider barriers to investments across the industry. Placing conditionality on developers before needs cases of large investment projects can be approved may be the right thing for consumers, but if conditionality cannot be met due to other barriers (e.g. higher charges for developers in the North of Scotland) Ofgem has a role in seeking to resolve and remove those barriers to unlock much needed investment. 
16. In order to carry out its core remit and responsibilities it is critical that Ofgem has people with the appropriate expertise, capability, confidence and tools to make the necessary long-term decisions. Since its conception Ofgem’s responsibilities have grown, and are anticipated to continue to grow as noted in paragraph 11.  We recognise that internal transformation has been an area of focus for Ofgem more recently, but this should not cause delays to decision-making when pace is needed. Keeping to time in policy development is vital, particularly where it is on the critical path to facilitate net zero.

We believe questions 2 and 3 are linked and so have answered together:

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

How well does Ofgem fulfil its obligations to consumers? Does Ofgem take consumer views into account sufficiently, particularly those of vulnerable consumers?

17. Achieving environmental and net zero objectives have associated costs and Ofgem has a perceived embedded short-term “low cost culture”. It should be recognised some costs may rise, therefore trade-offs will have to be made between affordability for consumers today over strategic investment to protect the consumers of the future and deliver decarbonisation across the economy.
18. Thorough stakeholder engagement and co-creation has been undertaken by network companies to build their RIIO2 business plans. Feedback from SSEN’s RIIO-2 stakeholders indicates that consumers want us to invest in reliability, being environmentally leading, supporting local communities and meeting the needs of the future – and are willing to pay for it.
19. We support Maxine Frerk’s points in her paper “Investing for net zero in the face of uncertainty: Real options and robust decision-making”[1] that net zero may require unavoidable additional costs, but it is a price worth paying.
20. To fulfil its duties, Ofgem must recognise what stakeholders and consumers value, and respond accordingly. New policies, solutions, or processes must be evidence based, tested and led by engagement with Ofgem’s stakeholders.

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?

21. Our stakeholder engagement has identified that consumers expect current levels of security of supply and network resilience to be maintained in the transition and through Ofgem’s decisions. As we shift to low carbon technologies of increasing complexity, and increased electrification of the system, a longer-term strategic outlook is needed to plan the networks efficiently and deliver timely investment.  This whole systems approach needs to sit alongside enabling market frameworks. 
22. Currently new policies are being introduced where impacts on security of supply and reliability may not be being carefully considered, as Ofgem seeks to bring new and innovative options to address electricity transmission system needs. We recognise the ESO’s objectives of the Pathfinder initiative, however the Offshore Transmission Network Review (OTNR) has evidenced that the developer-led ‘learning by doing’ approach did not provide solutions to enable the coordinated and efficient development of a transmission network to the overall benefit of GB consumers. 
23. As Local Area Energy Plans, Local Heat and Energy Efficiency Strategies, and Local Network Plans have the potential to provide local communities, authorities, and regions with opportunities to support the delivery of net zero through local energy system planning and whole systems planning, it is important these plans are recognised and considered by Ofgem.
24. The role of flexibility in net zero has been heavily focused on by BEIS and Ofgem, and it is critical that flexibility providers are fairly remunerated throughout the transition.

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?

25. Generally, the current system of price controls has worked well. Network companies have improved delivery of services consumers and customers value, whilst keeping costs down through efficiencies and focusing on innovation. However, there is significant challenge in the operability and deliverability of the price control mechanisms and how strategic investment is made, and therefore the framework and regulatory decision-making must continue to evolve given the important role that networks have in the transition to net zero and enabling decarbonisation of transport and heat at national, regional and local level.   
26. We believe the price control and ESO framework requires more long-term certainty and foresight to ensure industry is working together towards the long-term target of Net Zero. Ofgem must make decisions and provide certainty now, to facilitate large renewable generation opportunities such as ScotWind and hydrogen electrolysis. One-year forecasts are not long enough to provide long-term strategic direction, where a ten-year strategic plan may help to fill this gap.
27. Delivering net zero brings greater uncertainty and risk to network companies and the regulatory regime needs to reflect this. Network businesses need to take investment decisions based on the evidence available at the time and to ensure adequate investment, Ofgem needs to give network businesses the confidence to invest and not review with the benefit of hindsight.
28. One of the key challenges network companies and Ofgem collectively face is ensuring the intention of achieving agility in Ofgem’s RIIO framework with the increased use of re-opener and uncertainty mechanisms. The assessment of Large Onshore Transmission Investments projects remains heavily focussed on cost efficiency, which, whilst vital, must also be balanced with and set in the context of wider government and societal objectives. For instance, cost benefit analysis is centred around capital and constraint costs with little consideration given to net zero benefits, nor any other socio-economic benefits, despite Green Book guidance recommending this.
29. With significant load growth expected on the electricity network in the coming decades, we strongly support a “one touch” approach to increasing network capacity. Informed by network scenarios and enabled by coordinated policy decisions, this approach allows for DNOs to increase capacity aligned with the UK’s net zero aspirations and local community plans in an efficient and cost-effective manner. Up to one third of upcoming reinforcement will be on underground networks in built-up networks, requiring civil works on street around the country. The Climate Change Committee found that a “one-touch” approach could avoid £34 billion of unnecessary expenditure by 2035.
30. Underpinning all of the above, it is our belief that the environmental framework of the RIIO price controls should be strengthened, and we will engage with Ofgem on the Environmental Scorecard incentive, to enable and incentivise network companies to put the investment required into infrastructure.
31. The above points are exemplified by SSEN Transmission’s appeal on the decision for RIIO-T2, where we raised concerns that there were areas where Ofgem’s decision does not reflect the robust evidence provided throughout the price control process, alongside material errors in the decision. We continue to engage with Ofgem and the CMA in order to achieve a fair settlement that delivers for stakeholders and unlocks the investment required to deliver net zero. 

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?

32. Generally, the current system of governance works well, however roles and responsibilities need to be clear, with the UK Government providing strategic direction to Ofgem, factoring in regional differences. We agree with the National Infrastructure Commission's call[2] that, "Regulatory independence should be maintained, and government should better fulfil its role to set strategic policy direction and to provide guidance to the regulators, if requested, on choices about how the impacts of regulation will affect different groups of consumers”.  This is particularly relevant given the facilitating role that energy has to secure the transition to zero across the economy where costs incurred e.g. investing in infrastructure to support electric vehicles should be offset against reductions elsewhere.   

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?

33. As noted above, it is critical that Ofgem’s duties are amended to include achieving net-zero emissions to the timetable set out by Government in accordance with the reporting from the CCC.
34. There is often potential for Ofgem’s duties and powers to conflict and this can make it uncertain where/how it makes trade-offs between them.  This can be addressed by amending Ofgem’s duties; clear direction being provided in Government’s Strategic Policy Statement; and an ongoing requirement on Ofgem within its Forward Work Programme to set out how it intends to enable net zero and measure its progress so that it can be held to account by its stakeholders.
35. In order to provide transparency substantial policy changes initiated by Ofgem must be subject to robust impact assessments which take into consideration the impact on net zero delivery.  Ofgem must also explain how it has balanced the interests of existing and future consumers in any new policy development. As set out in Question 4, the price control framework needs to deliver in practice and we have concerns that Ofgem’s appetite to introduce a competitive tender process into an already challenging timeline to develop and deliver critical network infrastructure could add years of delay to net zero delivery. 

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

36. Ofgem is independent of government and accountable to Parliament and this remains appropriate. Defining clear responsibilities and roles is vital to ensure there is no ambiguity about who should be leading change such that there is sufficient pace to support investment.  
37. More broadly, the net zero target needs to be reflected across all government department and regulators’ objectives to ensure that there is a coordinated approach across all sectors over the long-term. 
38. One positive example of Ofgem and government working closely together to enable policy is through the OTNR.
39. There have been instances where it has been unclear which of BEIS or Ofgem we are waiting for in terms of policy development. Two areas which we have highlighted are severely limiting progress in the transition to net zero are Transmission Charging and Electricity Market Reform.  Both have informed us that they are waiting for the other party to make advances in the area.
40. This blurring of responsibilities between parties worsens on topics such as policy costs, where other government departments become involved. We note the Public Accounts Committee’s “Achieving Net Zero”[3] recommendations for clear strategies, timelines, milestones to support net zero delivery. 
41. We recognise that Government is consulting on reforming the framework for better regulation[4] which includes a review of “Better Regulation Principles” and we intend to engage further on these issues as part of that process.

How does Ofgem compare to similar bodies internationally? What lessons can be drawn from the experience of other countries or jurisdictions?

42. International comparisons are difficult to make since duties will differ between regulators. For example, Ofgem has been expected to absorb a range of duties which may otherwise be the responsibility of Government or other bodies elsewhere.
43. Net zero and transition is a global issue, so it is positive that Ofgem has positively engaged with other regulators to learn lessons from their experience including the recent Green Fair Future events.  Clear direction is needed to ensure that UK competitiveness is not disadvantaged when there is much demand for technologies and materials required to deliver infrastructure. 

Are there any other aspects of Ofgem’s work that the Committee should consider?

44. Whole system view: As noted in question 4, Ofgem must recognise that whole system means different things in different areas. For Transmission, it means building the right infrastructure at the right time, whereas for Distribution it involves taking into consideration local energy system strategies, objectives, and ambitions.
45. Competition (offshore and onshore): Competition can bring value to consumers across a range of markets, but for monopoly networks, appropriate economic regulation can ensure that infrastructure is delivered at lowest cost. 
46. This is particularly important when considering the more coordinated approach to offshore transmission which can enable more innovative approaches and development of local supply chain is key technology such as HVDC. A focus on cost alone will not enable companies to invest in developing technical skills, invest in their local communities and encourage a streamlined approach to tax planning.
47. The process to introduce competitive tendering (and new third parties into the operation of the GB transmission system) must maintain security of supply and the high reliability standards and performance of GB’s transmission networks, avoiding a fragmentation of responsibility.  New entrants must be subject to the same rules, responsibilities and obligations as incumbents.  At present there is a limited view of the wider benefits beyond the cost of individual point to point offshore assets. 
48. We view that the pursuit of competition in electricity transmission will delay, not accelerate the delivery net zero, leading to a poorer outcome for consumers and wider society, and could risk the delivery of the UK’s 40GW offshore target by 2030.

27 August 2021