UK regulator shows it can be easy being green

The UK regulator, Ofgem, recently make key announcements around its future treatment of the ‘Green Recovery Scheme’, an initiative developed with industry in response to the UK Government’s climate change commitments. We look at the scheme and how it enables electricity network providers to accelerate low-regrets investment to support the energy transition.

UK climate change commitments

In June 2019, the United Kingdom (UK) became the first major economy in the world to set a legally binding target of net zero emissions by 2050 (net zero target). The UK’s Climate Change Committee (CCC), an independent statutory body that provides advice and monitors progress against emission targets, recently released its Sixth Carbon Budget which sets the pathway to the UK’s net zero target. The Sixth Carbon Budget recommends an almost 80 per cent reduction in polluting emissions by 2035, representing the UK’s strong climate change ambitions.

Ofgem, the UK regulator of energy networks, recognising its pivotal role in energy sector decarbonisation, released a Decarbonisation Action Plan in 2020, and has been collaborating with industry to consider further the ways in which it can support the achievement of the net zero target.

Green Recovery Scheme

UK distribution network providers, through their UK industry association, Energy Networks Association, collaborated with Ofgem to develop the proposed Green Recovery Scheme (the scheme), about which the regulator is now consulting.

Like in Australia, electricity distribution network providers in the UK are regulated over a set period. However, Ofgem recognises that, given the scale and pace of change in the energy sector, investment decisions for net zero will need to happen increasingly outside of the regulatory determination process.

The scheme proposes to accelerate low regrets, targeted investment in the network that would support future user needs in light of the UK Government’s climate change commitments.  Investments made under the scheme must comply, as far as reasonably practicable, with the following principles set by Ofgem:

• be consistent with developing an efficient, coordinated and economical system; all available options to efficiently meet future network user needs should be considered
• fairly apportion benefits, costs and risks including vulnerable customers
• not discriminate between any person or classes of persons
• support competition in the connections and other markets
• be focused on addressing proven market failures
• be optimised across the whole electricity system
• be capable of implementation with minimal modification to existing regulatory arrangements and separate to discussions on the setting of future RIIO price controls
• be generally consistent across sectors.

Before the initiation of any projects under the scheme, UK electricity distribution network providers will consult with Ofgem, along with opportunities for stakeholder input. New funding above the regulator’s ex-ante expenditure allowances will be permitted by Ofgem if acceleration of the investment is considered to be in consumers’ best interests.

Ofgem’s collaboration with industry recognises that, more than ever, an agile and adaptive regulatory framework is needed. As climate change policy developments and targets are debated here in Australia, this UK case study represents a possible additional pathway forward for consideration in accelerating grid developments to facilitate a clean and efficient energy system for the benefit of current and future consumers.