Regulating for net zero

How will a new government deal with the National Infrastructure Commission’s recently published review of regulation? In the latest of our Voices series, Maxine Frerk sets out the case for action.

The National Infrastructure Commission (NIC) report on regulation hits the nail on the head in a number of places. The question is whether a new and inevitably busy government will do any more than pay it lip service. Its basic premise is that to deliver on net zero and ensure our infrastructure is resilient requires strategic investment. To do that you need a regulatory system that both gives investors a fair return but also ensures that consumers see the outcomes as fair – otherwise politicians start to intervene in ways that undermine investor confidence. Ring any bells?

The report identifies a number of prerequisites for strategic investment to happen – most of which makes good sense to me.

First, they argue that all regulators should have duties to facilitate net zero and deliver resilience. I have said before that I am not convinced that Ofgem’s duties need to be changed given that its principle objective to protect consumer interests explicitly includes an interest in the reduction of greenhouse gases. However, for the avoidance of doubt, a reference to net zero would not go amiss. And the NIC also support the idea of Strategic Policy Statements – not long wishlists but providing broad direction and clarity around roles, including on the question of who is responsible for dealing with distributional impacts, which I raised in my Sustainability First paper What is Fair?.

The NIC has shunned the idea of a super-regulator, which I agree would just be a costly distraction – and I would question if Ofgem is really succeeding in linking its thinking on gas and electricity despite being in the same organisation. Instead, the NIC favours strengthening the UK Regulators Network (UKRN) and ensuring duties require regulators to look across sectors. Both are sensible ideas.

The need for investment

While duties and governance matter, perhaps the biggest issue the NIC grapples with is how you get a more strategic approach to investment. It rightly recognises the problem that regulators are set up to protect consumers against monopoly providers, who given a free rein would overinvest and push up bills to customers. As such, regulators have to be sceptical about any proposed investments. That worked fine in a world of incremental change, but to expect networks to be able to prove definitively that an investment is required is difficult in this fast-changing and high stakes world. Ofgem talks about “low regrets” investment. Our biggest regret may be not having the infrastructure we need to tackle the challenge of climate change.

That means a new approach to thinking about investment, and the NIC advocates a stronger role for government (or the NIC itself) in setting the direction and determining where the balance of risk should lie. I don’t think it is a call for central planning and there is a role here for an independent system operator to work through the detail. But it makes sense for government to give a steer on the level of ambition and the level of risk consumers should be expected to take.

The other important element it highlights is the need for regulators to pay more heed to the views of devolved administrations and city mayors as well as elected representatives at a local level. Even though energy is a reserved matter, the interactions with other devolved responsibilities including housing, transport and the environment, means that their views must be heard.

The NIC states that this does not imply cross-subsidy between areas, but I would note that there have always been cross-subsidies between rural and urban areas, for example – and the rural resident will benefit from electric vehicle charging in the city centre when they visit. Bringing a citizen lens and not just a consumer lens into the regulator’s duties might be one way to navigate through this maze.

There are then a range of other issues the NIC touches on but inevitably in a single report cannot do justice to, and maybe overreaches itself. For example, it talks about the challenges of price discrimination, which it believes regulators should tackle – without any reference to the extensive consideration the Competition and Markets Authority has given to that question (including criticism of Ofgem’s previous attempts to do just that).

Overall however, it has reached balanced views on a range of regulatory issues that need to be tackled if we are to meet net zero targets. I’ve not detected a warm welcome from government, but those of us who care about these issues should press for action along the lines the NIC proposes.

Maxine Frerk has extensive board level private and public sector experience, with a focus on consumer, regulatory and public policy issues in the energy sector. After 15 years at Ofgem she is now a consultant on energy regulation, chairs SGN’s customer engagement group for RIIO2, chairs the supplier forum overseeing Smart Energy GB’s performance, is a member of Ofgem’s electricity network innovation competition panel, an associate with Sustainability First and a visiting fellow at Oxford University.