Strategy and Policy Statement for energy policy in Great Britain
Consultation Document Summary
The government has identified strategic priority areas for energy policy in GB for the following purposes.
1. Enabling Clean Energy and Net Zero Infrastructure;
2. Ensuring Energy Security and Protecting Consumers;
3. Ensuring the Energy System is fit for the Future.
1. Energy System: Roles and responsibilities
1.1 Government
Government is responsible for setting the policy and regulatory framework for the gas and electricity sectors in Great Britain. Certain functions in the energy sector are reserved for the Secretary of State, including defining the extent of the regulated industry by deciding on licence exemptions, and appointing members of the Gas and Electricity Markets Authority.
The Secretary of State will be the sole shareholder of the Future System Operator (FSO), with the responsibilities of parties involved in the relationship between Government and the FSO set out in the FSO’s Framework Agreement.
1.2 Ofgem
Ofgem takes its regulatory decisions independently and, within its regulatory powers, it is free to decide on the most appropriate regulatory approach to a particular issue. Ofgem is directly accountable to Parliament for the performance of its functions and duties.
1.3 Future System Operator
The Government has introduced legislation, as part of the Energy Bill, to establish a new, publicly owned Future System Operator. The FSO will be set up initially with all the existing functions of the Electricity System Operator (ESO) and longer-term strategic gas planning and forecasting functions.
Once established, the FSO is expected to have the following core roles, responsibilities, and statutory duties that will enable it to meet its statutory objectives:
To promote an economically efficient and flexible system - the FSO will take a strategic approach to network planning to deliver investment ahead of need. It will consider opportunities to shift and manage demand through smart solutions, such as electricity storage and demand-side responses;
To consider whole-system impacts - the FSO will analyse problems and find solutions in a way that cuts across traditional sectoral silos;
To consider the need to facilitate competition and innovation – subject to the Secretary of State’s discretion, the FSO will be the tender body for onshore electricity network competition, and will drive effective change across the energy system;
To maintain security of supply and resilience of infrastructure – in electricity the FSO will continue ESO’s roles of maintaining real-time operation, balancing the electricity system and delivery of the Capacity Market. It will take a whole energy system co-ordination role to improve the security and resilience of both the gas and electricity systems and undertake assessments of medium-range gas supply security;
To consider how the actions of energy sector participants impact consumers - the FSO will consider the extent to which energy sector participants provide the products and services that consumers want and the effect of consumer behaviour on the development and functioning of markets for energy products and services;
To support the delivery of flexible and responsive markets - the FSO will drive competitive, coordinated and effective markets open to all flexibility technologies;
To promote digitalisation - the FSO will be a data-led organisation, with strong digital and IT systems capability. It will lead by example to improve sectoral energy data practices integral to the well-co-ordinated and cost-effective delivery of net zero;
To provide independent advice - the FSO will respond to requests for advice, react flexibly and engage intelligently with the government and Ofgem to shape the key decisions that will determine the future energy system.
2. Enabling Clean Energy and Net Zero Infrastructure
2.1 Government’s Strategic Priorities
Reliable, resilient and sustainable network infrastructure, appropriately connected to other markets;
Electricity network infrastructure delivered at scale and pace;
Government targets achieved to drive the net zero transition;
Alternatives to natural gas (for transition to net zero) planned and operated in a coherent way;
Competitive, effective markets and regulation that facilitate the anticipated investment required for the net zero transition;
Benefits of investment in clean energy and net zero infrastructure felt across the UK.
2.2 Government’s Policy Outcomes
Network regulation that enables accelerated delivery of network infrastructure;
Dramatically reduced timelines to deliver strategic onshore transmission network infrastructure – halve the end-to-end process by the mid-2020s;
Gas networks that are prepared for a transition to a low-carbon future;
Greater visibility of network data;
Increased uptake of low carbon heating by 2035 – an ambition that all new installations will be net zero compatible;
Heat networks with enforcement of carbon emission limits, evidence of compliance with technical design and build standards, consumer protection, and a licensing regime for heat network developers;
Development and implementation of an effective regulatory framework for Carbon Capture, Usage and Storage (CCUS);
Sustainable funding models for innovation, where private finance investment does not distort the market;
Barriers to multi-purpose interconnectors and other hybrid/novel assets removed;
Whole system approach for strategic network plans;
The ability for the flexibility of demand and system benefits provided by low-carbon technologies to be sufficiently monetised by flexibility providers;
Significant and urgent reform of the connections regime.
2.3 Increased Network Capacity for Low Carbon Supply and Demand
Transformed electricity and gas transmission and distribution networks to meet the demands of a decarbonised energy system;
Significant new demands for power through the mass uptake of electric vehicles and heat pumps;
A new approach to network development includes:
o An accelerated rollout of electricity transmission and distribution networks;
o A halving of the end-to-end process for onshore transmission network infrastructure by the mid-2020s;
o Reforms to ensure cost-effective and timely connections;
o Adoption of flexible and whole systems solutions;
o Measures to enable strategic and anticipatory investment.
Removal of barriers to the efficient and timely connection of new low carbon generation and demand projects critical to meet net zero through the co-operation of Ofgem, the ESO/FSO, industry partners and government;
A need to balance the competing principles of enabling net zero, fairness, predictability, and transparency with cost-reflective network charges, based on Ofgem’s network tariff design role.
2.4 Investment, Innovation and Competition
Government to ensure that:
o The legal and institutional framework exists to promote investment and competition;
o Effective policy support and stability exists to encourage innovation alongside competitive markets.
Ofgem to:
o Be responsible for promoting competition;
o Encourage cost-effective anticipatory investment;
o Ensure regulation is proportionate and allows for innovations to contribute to net zero and drive down costs for consumers.
ESO to prepare to develop the commercial model and tender process for early competition – with a view that this role should transition to the FSO.
2.5 The Role of Gas and Hydrogen
Renewable and low-carbon sources of gas, including hydrogen, will be critical (alongside electricity) to provide greener energy as unabated natural gas is phased out;
A well-developed network of transport and storage infrastructure is a central component of the UK hydrogen economy and a key enabler for the government’s ambition for up to 10GW of low carbon hydrogen production capacity by 2030;
The government will work with Ofgem to determine work programmes, timing and the appropriate funding mechanisms to support hydrogen network infrastructure development;
The government will support industry to deliver a low-carbon hydrogen neighbourhood trial by 2024, a village-scale trial by 2025 and a potential hydrogen-heated town before the end of the decade.
2.6 Heat Pumps and Heat Networks
Government to appoint Ofgem as the GB heat networks regulator via the Energy Bill;
Ofgem to enforce consumer protection rules under the regulatory framework so that heat network consumers receive a fair price, a reliable supply of heat, and transparency of information on their heat supply and bills;
Ofgem to support and advise government on heat pump and hydrogen rollouts from a system perspective and to take account of relevant developments in hydrogen in its network planning function.
2.7 Carbon Capture, Usage and Storage (CCUS)
Government is committed to supporting the deployment of four CCUS clusters by 2030;
The Energy Bill establishes a new economic regulation and licensing framework for carbon dioxide transport and storage, and Ofgem as the economic regulator;
Government will consider a CCUS Strategy and Policy Statement, once the legislative provisions are in force, subject to the procedural requirements in the Energy Bill.
2.8 Nuclear
Pursuant to the Nuclear Energy (Financing) Act 2022, once a nuclear company has been designated by the Secretary of State, the Secretary of State is able to modify the company’s electricity generation licence to include Regulated Asset Base (RAB) terms and conditions (RAB licence), subject to consultation and all relevant approvals being met.
Ofgem will determine the revenue that the company may receive in respect of nuclear activities in accordance with the RAB licence conditions.
3. Ensuring Energy Security and Protecting Consumers
3.1 Government’s Strategic Priorities
A secure and resilient energy system;
An energy system that provides protection for consumers;
A retail market that works better for consumers;
Energy wholesale markets that are competitive, transparent, and liquid.
3.2 Government’s Policy Outcomes
Security and resilience of the gas and electricity systems;
Restored consumer confidence in the energy retail market and high standards of customer service;
Increased financial resilience of energy supply market participants;
Regulators that ensure licensed bodies meet their obligations;
Existing investment market mechanisms improved to minimise overall costs to consumers and maintain security of supply;
Costs of the net-zero transition distributed fairly amongst all consumers and kept as low as possible.
3.3 Retail Markets
Retail market to work better for consumers, be more resilient, be more investable and support wider system transformation.
3.4 Security of Supply
Government to work with Ofgem and the ESO/FSO to further the aims of the British Energy Security Strategy (2022) and the Energy Security Plan (2023), to improve the UK’s energy security and move the UK towards greater energy independence;
Liquid, well-functioning energy markets to play a central role in ensuring GB’s continued security of supply;
The Capacity Market to be the government’s main mechanism for ensuring electricity security of supply in Great Britain;
Ofgem to progress changes to the Capacity Market Rules, working with the government, and to establish a Capacity Market Advisory Group.
3.5 Downstream Gas and Electricity Infrastructure Security and Resilience
Government, Ofgem, ESO/FSO and wider industry to continue to play a critical role in ensuring existing strategies keep pace with shifts in the landscape;
Government to be responsible for setting the policy direction for security and resilience across the energy sector;
Ofgem to be responsible for furthering the delivery of the policy outcomes in downstream gas and electricity security resilience.
3.6 Consumer Protection and Enforcement
Ofgem’s principal aim remains to protect the interests of consumers when carrying out its regulatory functions;
Government has urged Ofgem to ensure it understands consumer experiences in relation to supplier behaviour;
Adequate and proportionate consumer protection to be a key aim as new products and services are taken up.
4. An Energy System Fit for the Future
4.1 Government’s Strategy Priorities
To ensure national and local flexibility in the energy system;
An economic and efficient digital infrastructure which enables a smart, digital, and secure GB energy system;
Effective governance during the transition to net zero.
4.2 Government’s Policy Outcomes
Competitive, co-ordinated, and effective flexibility markets, open to all technologies;
Energy market design to enable GB to achieve among the lowest wholesale electricity prices in Europe by 2035;
By 2024, an appropriate policy to enable investment in large-scale, long-duration electricity storage consistent with cost-effective decarbonisation;
Energy code governance reformed to support the move to net zero;
Implementation of measures from the joint Government-Ofgem Smart Systems and Flexibility Plan (2021) and Energy Digitalisation Strategy (2021);
Establishment of the FSO as soon as practicable;
Mitigation of cyber security, grid stability and consumer protection risks related to the widespread uptake of demand side response;
Effective regulatory and technical co-operation with the EU to support the aims and obligations of the EU-UK Trade and Cooperation Agreement.
4.3 Electricity Markets Fit for the Future
Expectation of the need for change to accompany decarbonisation, to ensure continued security of supply and achieve the 2035 European target wholesale electricity prices;
Ofgem to participate in the review, support policy development and help implement a new suite of market arrangements.
4.4 Flexible and Responsive Markets
Government to work with Ofgem to deliver competitive, co-ordinated, and effective flexibility markets, open to all technologies and scales, and which unlock the full benefits of flexibility to best meet net-zero targets;
Ofgem to work with the government to scrutinise the ESO’s delivery of its net zero operability objective by 2025;
Ofgem to play a role in working towards co-ordinated national and local electricity markets and encouraging local flexibility solutions to offer market services to facilitate greater competition;
Government to maximise the participation of consumers of all sizes in demand side response (DSR);
Domestic consumer participation in DSR to be driven by smart charging technology;
Market-Wide Half Hourly Settlement (MHHS)to play a critical role in delivering a cost-effective decarbonised energy system, and be a fundamental element for retail market reform;
The digitalisation of the energy system through the rollout of smart meters to provide benefits to consumers by offering near-real-time information on energy usage and supporting development of innovative products and services.
4.5 Digital Infrastructure
Ofgem will be responsible for using its tools (or new and enhanced measures) to support the development of an agile regulatory environment for a digital energy system;
Government will seek to avoid unregulated monopoly providers dominating this area;
Ofgem’s role will be to work with industry to monitor issues as the digital infrastructure develops;
All parties should have a goal of getting data safely into the open and making sure it is easy to find;
Linking of energy data with other sectors, such as transport, heat and real estate will help ensure that data is harnessed to its full value and that investment decisions and planning can be made with a whole-system approach.
4.6 Governance
Ofgem to be at the heart of Energy Code Governance, to oversee and provide direction on future development of technical and commercial rules for the electricity and gas systems;
Ofgem to deliver the transition to a new governance framework for the energy codes;
Ofgem to prepare and publish an annual strategic direction for code managers setting out its vision for code evolution over the following year;
Ofgem to work with the government to assess, and facilitate, the most efficient and value-for money approach transition to the FSO.
4.7 EU-UK Trade and Cooperation Agreement
Efficient cross-border markets can reduce the cost of energy whilst supporting GB net zero targets;
The EU-UK Trade and Cooperation Agreement (TCA) includes a framework for cooperation and trade in energy;
Ofgem to provide regulatory and other support as required to implement the TCA.
