Energy market requires ‘fundamental redesign’

The energy market framework requires a “fundamental redesign” in order to deliver the transition to net zero emissions, according to the former director of clean growth at the Department for Business, Energy and Industrial Strategy (BEIS).

Giving evidence on Tuesday (9 December) to the ongoing inquiry by the House of Lords Industry and Regulators Committee into Ofgem and net zero, Tim Lord said the existing market was designed to serve the needs of fossil fuel plants with high running costs.

However, the market must be rethought to better facilitate renewable projects, which have high capital but low running costs, he said: “The challenge ahead is that the next stage is not just quantitatively but qualitatively different and needs technologies with fundamentally different sets of characteristics.

“This means we need a much more fundamental redesign of market frameworks. Over the last 30 years, the market fundamentals haven’t changed that much,” he said, giving as an example how the Contracts for Difference auction process had been “layered over” the existing market design.

“The idea that the market structure around the first set of technologies will effectively deliver the second set doesn’t seem terribly plausible.

“This is about looking at fundamentals. Until we do that, we will potentially struggle to achieve the scale of investment we will need over the next decade.

“As we move to the next stage of transition, Ofgem and government have to lead a process of fundamental reform and it has to happen quickly.”

Lord also expressed concern to the committee that the implications for the gas network of a shift to a more electrified heating had not been faced up to.

“If we are moving away from the gas network, it’s a huge strategic challenge. We need to be thinking pretty hard and quickly about the future of the gas network.

“For consumers, the incentive to move to heat pumps is not there at the moment. Policy costs needs to be looked at quickly.”

And he warned peers that he would be “cautious” about giving Ofgem greater formal independence from government because it could undermine progress to cut emissions to net zero.

“The risk of independence is that it becomes very transactional, which is a real risk with the scale of pace and ambition of the transition we need. A fully independent model would have significant downside costs.”

Lord said that his experience from serving in BEIS is that Ofgem is a “fierce defender” of its independence and that the “real advantage” of the current relationship between the regulator and government is the “real dynamic dialogue” they have.

Lord was backed up by Josh Buckland, who was a special advisor to ex-business secretary Greg Clark.

He said: “I don’t think we need to go down the road of separation and restructure the whole regulatory structure to ensure there is formal independence because ultimately that will take time and create difficulties around delivery.”

Buckland, who is now a director at public affairs company Flint Global, also said there is no need for a new agency to oversee the transition to a lower carbon energy system, as advocated by Professor Catherine Mitchell at the University of Exeter.

He said: “Lots of bodies play a role, which are not necessarily co-ordinated. The challenge is to better co-ordinate those bodies: another body won’t necessarily do that. The risk is you create a new body and another entity to co-ordinate.”

But Buckland said that the Future System Operator, which the government is proposing to split out from National Grid, could potentially play a co-ordinating role.