The UK’s cross cutting Net Zero Strategy – Power9 February 2022

Key commitment: Adopt a new approach to onshore and offshore electricity networks to incorporate new low carbon generation and demand in the most efficient manner, taking account of the environment and local communities.

Building on the Offshore Transmission Network Review (“OTNR”), the Strategy states that this approach will be used to review transmission network arrangements. To move this forward, BEIS will “publish, jointly with Ofgem, an Electricity Network Strategy, which will set out how we will facilitate an agile, flexible onshore network that allows the rapid, transformational change required while responding to consumer and energy system needs” and which will include “plans to introduce competition in the onshore building, ownership, and operation of onshore network assets” (paragraph 23).

Arguably this is not a new approach, built as it is on the recent OTNR (which is still ongoing) and the perhaps more distant memory of the CATO regime, which was never fully implemented given lack of parliamentary time after the Brexit referendum in June 2016. However, the recognition that the regulatory platform, which facilitates the management of our energy system, is the first building block in a fully low carbon network is helpful.

Key commitment: Provide £380m for our world-leading offshore wind sector, investing in supply chains, infrastructure and early coordination of offshore transmission networks, securing jobs and benefitting communities across the UK.

With £160m already promised in the Ten Point Plan, the Strategy promises to “build on this with £380m for our world-leading offshore wind sector, investing in supply chains, infrastructure and early-coordination of offshore transmission networks, securing jobs and benefitting communities across the UK” (paragraph 33). With slightly ambiguous wording, it is unclear at the moment if this is an increase of the £160m to £380m, or an additional sum, making £540m in total available. In any event, additional funding demonstrates a commitment to a technology and however it is deployed (whether through grants, competitions, or other means) it may offer valuable assistance to smaller businesses and developers in the offshore wind supply and infrastructure chain. Such grants are unlikely to sway any return on investment analysis for the major players but a buoyant local supply chain, for example, has the potential to make UK wind investment an even more attractive prospect.

Key commitment: Reform system governance so that the whole system can achieve our net zero ambitions and meet consumers’ needs.

Key commitment: Ensure that consumers pay a fair, affordable price for their energy and can engage with a retail energy market that offers the products and services required to make choices that support net zero.

It is certainly vital that system governance is flexible enough to move with rapidly changing technology, while remaining resilient enough to maintain safety standards and security of supply. It is also very clear that affordability and a resilient retail energy market are issues that need to be urgently addressed, as has been thrown into sharp relief by a slew of supplier insolvencies over the last few years and even more poignantly in recent months.

These measures will clearly affect technology innovators and power project developers, but they will also impact lenders and investors who are considering their offtake strategy with any major utility or residential energy supplier. The (politically popular) focus on keeping energy prices manageable for domestic consumers means the burden of cost increases is increasingly likely to be borne by the suppliers. The knock-on effect for generators is a reduced pool of offtakers with tighter controls on their fixed price offerings.

What are the risks and opportunities?

The opportunities in relation to power system decarbonisation are huge. The Strategy confirms the government intends to continue to rely on a market-led approach:

We are not targeting a particular solution but will rely on competition to spur investment in technologies which are cheaper and more efficient and on innovation to reduce the cost of existing options. The government’s role is to ensure a market framework which encourages effective competition and delivers an affordable secure and reliable system that is, consistent with net zero emissions. (paragraph 15)

First movers will therefore have an advantage as UK power regulation tends to follow the market, rather than the other way around. Early adopters of flexibility technologies who have the resources to scale up quickly will be clear winners. Investment in systems to optimise batteries and other storage infrastructure will set people in good stead to offer any newly reformed grid the crucial services it needs to balance the intermittent renewable energy supply.

In terms of the offshore wind announcements, further clarity is required about specifically where the funds will be applied. Investment in the UK supply chain is needed, particularly to mitigate impacts of Brexit, both in terms of extra levies and/or duties and of potential customs delays.

In terms of system governance, and the way industry codes are reviewed and modified, it is hard to say without more detail what the risks and opportunities will be here. While self-governance of the codes allows industry participants to raise modifications as required, the process can be clunky and time consuming. Ways of more easily implementing required changes would no doubt be welcomed by stakeholders.

Finally, we turn to the changes to energy retail markets and consumer protection. Given supplier insolvencies, there is a risk of a distinct narrowing of the pool of potential power offtakers available for developers. For new entrants to the supplier market this also looks challenging. With over 20 Supplier of Last Resort processes having taken place and the first energy special administration process under way, new entrants will need to have robust business models and, even so, will likely struggle to obtain investment and financing.