A confident course to decarbonisation

Ofgem’s Decarbonisation Action Plan recognises that net zero requires a more holistic regulatory approach – and that it is crucial the costs and benefits of these initiatives fall fairly between different groups of consumers.

The year 2020 is already a defining one for the climate crisis. The COP 26 Climate Conference in November will ensure all eyes are focused on the need for action. But turning talk into a meaningful ­international agreement on net zero is not plain sailing.

The government’s 2050 net zero commitment is also a significant opportunity to show leadership at home. It is encouraging to see that Jonathan Brearley, as incoming chief executive at Ofgem, has done just that.

Ofgem’s new Decarbonisation Action Plan, in ­successfully pulling together numerous workstreams, recognises that net zero requires a more holistic regulatory approach. In addition, it recognises how crucial it is that the cumulative costs and benefits of these initiatives fall fairly between different groups of consumers – a point flagged in Sustainability First’s What is Fair? paper last September.

Ofgem’s new proposals for network price controls – for a net zero “re-opener” and strategic innovation fund – start to set out what “adaptive regulation” could look like. Recognition of the value (and challenge) of regional regulatory approaches, and the need for co-ordination and leadership from system operators, is welcome.

It is also good to see Ofgem firmly call for government clarification of its social and environmental guidance. Big decisions around who pays for net zero – and whether costs are best recovered through bills or taxes – need to be taken by those with a clear ­democratic ­mandate.

As Ofgem fleshes out the Plan, it will be thinking about how best to demonstrate its impact. Given the extent of uncertainty, it is perhaps only to be expected that the Plan is somewhat short on detail. But net zero is a “long-haul strategic challenge” and milestones along the way are vital. Sustainability First has argued hard for consistent approaches in RIIO2 on environmental reporting – for the sectors and companies – to give assurance on how far companies and Ofgem are “getting it right”. Without such an evidence base and analysis, it is difficult to assess whether the scale and pace of change are sufficient.

The Plan rightly notes that decarbonisation requires trade-offs. But net zero is not just about justifying new strategic investment. The plan could helpfully say more about encouraging the shift in mindset and culture that delivering on net zero will require.

This is vital if companies are to make the “right” judgements in the face of significant disruption – and to move away from more prescriptive regulation. It is also a potentially missed opportunity. Investors are starting to demand more on decarbonisation and taking a greater interest in environmental, social and governance (ESG) ­reporting. A clearer alignment by Ofgem with the responsible ­business agenda could amplify the impact of the Plan.

While the Department for Business, Energy and Industrial Strategy (BEIS) and Ofgem certainly need to pull the harder levers of policy and regulation to address the climate crisis, overlooking these softer levers could have a cost. Values, corporate and regulatory behaviours and relationships, meaningful community ­engagement and collaborative approaches are notable by their absence in the Plan.

These softer levers become more important as the demand-side really starts to flex and energy as a service develops; and when all sides have to cope not just with mitigation but also adaptation. When extreme weather brings the wires down or floods a substation, behaviour and relationships are key to recovery, public understanding and tolerance.

When it comes to the climate crisis, the past is not necessarily a good guide to the future. I have two final thoughts.

Firstly, the Plan recognises the importance of ensuring customers in vulnerable situations are not left behind in the transition. Work is needed to explain how this will be done given shifting patterns of disadvantage in a warming world. The Plan implies that vulnerability will be treated in a separate workstream to Ofgem’s decarbonisation work. If this is the case, ­opportunities for “smart inclusion” for those who cannot flex (for example, those don’t have electric vehicles) may not be fully integrated into net zero agendas.

Secondly, for justifiable reasons, the Plan focuses on what Ofgem itself can do. Ofgem knows well, however, that the decarbonisation of electricity will enable many of the cross-economy changes that will be needed to deliver on net zero. The need for joined-up approaches between sectors, not to mention circular business ­models, is likely to grow.

As he takes pole position at the regulator, Brearley will be thinking about how he will work with regulatory colleagues in other sectors and parts of government to open up opportunities to ensure we can all navigate a more confident course to net zero on the uncertain road ahead.