Ofgem’s mandate must be changed so that it intervenes in the energy market to protect the environment, rather than the short-term financial interests of consumers, says James Basden.
Despite the turmoil in Westminster surrounding Brexit, it’s clear that transitioning to a net zero carbon economy to temper the catastrophic impact of climate change is a priority for the UK – and will be a big topic in the likely upcoming election.
All major parties have committed to tackling the issue; the current government has promised to uphold the 2050 pledge initially introduced by Theresa May, while the Liberal Democrats and the SNP have brought this forward to 2045. Across the bench, the Labour shadow cabinet adoped a 2030 zero carbon position at its annual autumn conference, after more than 50 constituency Labour parties signed a petition calling for it.
However, no matter which party comes out on top, if any of the incoming leaders are serious about this commitment, they must develop a long-term strategy to embrace and invest in new technologies that can help us transition to a clean energy system.
Change Ofgem’s mandate
Critically, Parliament must change Ofgem’s mandate so the regulator’s main purpose is to intervene in the energy markets to protect our environment, rather than focus on the short-term financial interests of consumers.
Ofgem’s primary purpose is to promote fairness, transparency and competition in the market, as well as ensure security of supply. While protecting consumers from high energy pricing is important, how is it that the environmental impact, on both the public and more widely, is a secondary consideration for our nation’s independent regulator?
Take the Targeted Charging Review (TCR) as an example. Ofgem’s TCR consultation paper aims to change the way the regulator recovers the residual cost of electricity from consumers and businesses, to account for the huge changes to our energy system in the past few years. Total energy costs are currently recovered in two ways: “forward-looking charges”, which predict the cost of energy use based on energy consumption at the time, and “residual charges”, which recover the remainder of the costs.
Ofgem’s suggested changes to the residual charges are a concern for the energy sector. The paper’s suggestions place short-term consumer cost savings as the regulator’s number one priority over and above the wider national issue of dealing with our transition to net zero, as the changes penalise renewables, decentralised systems and flexible energy solutions. This is because Ofgem outlined concerns that consumers who take energy efficiency measures, such as investing in on-site renewable generation such as solar panels, will pay less than those who don’t, which could mean the cost is picked up by vulnerable consumers further down the line.
The industry has widely criticised the impact assessment, in particular the effects on carbon budgets, renewable energy generation and the deployment of energy storage solutions. The reforms are already penalising investment in these sectors and, despite the evidence that this is the case, this fact is not reflected in the modelling that supports Ofgem’s review.
Underestimating the benefits
The approach underestimates the benefits of renewables and flexible energy solutions for consumers and the system as a whole. Flexible solutions, for example, will lower the price of energy for all users, through avoiding both carbon-intensive methods and energy generated at expensive peak times.
Ultimately, the UK’s energy regulator should lead the transition to a decentralised, decarbonised and flexible energy system and not be creating barriers. Energy storage, for example, is vital to bringing renewable energy onto the grid. Renewable energy sources such as wind and solar are intermittent, therefore storage solutions are a necessity in order to have security of supply as we move towards a clean energy system.
Ofgem’s proposals are already disincentivising businesses from investing in flexible technologies and renewables, despite the fact that these solutions reduce demand on our energy system at critical times and will ultimately help the UK achieve its net zero target.
The suggested network charging reforms would create a hostile business environment due to the lack of coherence between government messages on decarbonisation and the actual policy framework. New energy and technology companies would be unlikely to enter the market bringing innovative ways of storing energy to tackle the intermittency of renewables. This review undoubtedly contradicts the government’s ambition to tackle climate change and lead in green energy storage areas such as batteries, so is stifling innovation in the sector.
Urgent change needed
The United Nations has warned we have roughly 12 years to curtail the catastrophic impact of global warming. Urgent change is needed to cut the risk of extreme heat, droughts, floods and poverty across the globe, according to the world’s leading climate scientists.
A vital step towards reversing the effects of climate change in the UK must be Parliament reviewing Ofgem’s remit, to allow the regulator to align its objectives with the UK’s 2050 carbon emission targets.
Without specific and measurable targets, Ofgem does not have the tools to justify choices made to protect the environment. The regulator must prioritise resolving the disastrous impact our energy grid is having on the climate, therefore enabling investment and innovation in green solutions – before it’s too late.