Funding energy transition from bills is ‘unconscionable’

Utility Week speaks to Labour peer and chair of the House of Lord Industry and Regulators Committee, Lord Hollick, about the committee’s report following its inquiry into Ofgem and net zero, which has criticised the government’s reliance on current bill-payers to fund the transition to the energy system of the future.

“Unconscionable, unsupportable and unreasonable” is how veteran Labour peer, Lord Hollick, has branded the government’s current reliance on getting today’s energy bill-payers to bankroll the transition to the energy system of the future.

Breaking down the Treasury’s long-standing resistance to using taxpayers’ money instead is one of the key recommendations of a heavyweight report on the net zero transformation, which was issued on Friday (3 March) by the House of Lords Industry and Regulators Committee.

The former TV station and newspaper owner clearly feels passionately about the issue of what he sees as the “inter-generational unfairness” baked into the current regime of environmental and social levies.

The government’s current moves to utilise the RAB (regulated asset base) model to finance nuclear power will saddle current bill-payers with even bigger costs, Lord Hollick says: “It is unconscionable, unsupportable and unreasonable that consumers who are paying sky high prices with a surcharge to build a nuclear power station, the benefit of which won’t be felt until sometime in the mid-2030s.”

The RAB model, which allows the developers of infrastructure to receive revenues while it is being built rather than waiting to be paid until it is up and running, will add a “very high surcharge” to the energy bills many households will already struggle to pay following last month’s price cap hike, he says: “Consumer bills are already at a very high level and look to go higher still with the security situation at the moment.

“The current system of loading consumer bills is regressive and penalises the less well off in society who spend a larger share of their net income on energy: that needs to be looked at.”

Leaving aside issues of fairness, Lord Hollick says the sheer scale of the UK’s £50 billion per annum energy system transformation bill, means some government funding will be required.

While there is a “considerable amount of interest” from investors, not just the established infrastructure funds, levies alone will not support the level of finance required, he warns.

The peer, who has worked in the City of London since graduating from the University of Nottingham more than 50 years ago, says: “The government is going to have to rethink its opposition to public borrowing because they can borrow funds for 30 years at a very low rate, and the money will be almost exclusively invested in assets that generate revenue.”

Government borrowing could be ploughed into bodies like the embryonic National Infrastructure Bank. This could provide pump priming finance that helps to convince otherwise nervous private sector investors that the government has a “viable business model” for new types of projects, like conversion of the gas network to hydrogen, he adds.

Creating the framework for this investment would be a new body proposed by Lord Hollick’s committee – an Energy Transformation Taskforce

Modelled on the Vaccine Taskforce, which played such a successful role in the UK’s response to coronavirus pandemic, it would report to a Cabinet committee personally chaired by the prime minister and bring together the “best and brightest” experts in a “centre of excellence” housed in the Cabinet Office, he explains.

The long-term nature of the net zero transition and the way it impacts on multiple areas of government demands this kind of high-level institutional response, Lord Hollick says: “This cuts right across government: lots of departments are involved so it needs to be very effectively co-ordinated.

“The policy decisions required are of such complexity and political impact, such as who pays and how much, that these issues can only be resolved by the government at the highest level.

“This task force will have heft and experience, reporting directly to the prime minister with the authority to deliver the goods.”

These kinds of political calls “can’t be handed off to Ofgem or any other agency”, he states.

The committee’s inquiry kicked off last June in a very different environment, when wholesale gas prices were a fraction of what they are now, and the biggest worry was coronavirus rather than war in Europe.

Inevitably, these changed circumstances have had an impact on his thinking, Lord Hollick says: “The absolute priority of security of supply became more and more apparent particularly recently with all of the geo-political problems and being at the mercy of world markets.

“We should be taking advantage of the resources we still have in the North Sea, so we are less dependent on the vagaries of the world market.”