Net Zero (Industry and Regulators Committee)

Lord Hollick Excerpts

Friday 20th January 2023 Lords Chamber

Moved by

[Lord Hollick]

That this House takes note of the Report from the Industry and Regulators Committee The net zero transformation: delivery, regulation and the consumer (1st Report, Session 2021-22, HL Paper 162).

[Lord Hollick (Lab)]

My Lords, I am pleased to introduce this debate. I thank our team, Matthew Manning, Holly Woodhead, Dominic Cooper and Itu Osupeng, for their valuable contribution to the work.

Our work started 18 months ago and our report was published a year ago, just as Russia invaded Ukraine, sparking an energy bills crisis and showing what can happen when a country chooses to weaponise its energy exports. The impact of that invasion on energy security and prices strengthens the need to accelerate the transformation to a net-zero energy system that increases domestic production and reduces our reliance on importing fossil fuels from authoritarian countries. It will also lead to a material reduction in our ongoing energy costs.

The Government have set out a number of ambitious targets, including achieving net zero by 2050 and a decarbonised energy system by 2035, which will require a wholesale transformation of our entire energy system. The Climate Change Committee told us that, to achieve these targets, the level of investment will need to increase from £10 billion a year in 2020 to £50 billion a year from 2030 to 2050. Funding the cost of meeting these targets will rely heavily on the appetite of pension funds, overseas investors, the private sector and individuals to invest, and that depends on the Government putting in place policies to encourage and provide certainty for businesses to make these investments.

We asked the Government to set out a road map to deliver the energy mix they envisage for meeting their targets in a secure way, including setting out the funding structures and business models they aim to rely on. We called for clarity from them on the business model for hydrogen and its role in heating; business models for carbon capture and storage, long-duration storage technologies and small modular reactors; funding to support the energy efficiency of homes and the installation of heat pumps; and a review of the infrastructure challenges to deploying offshore wind. Given the potential for technology to develop in unforeseeable ways, this road map needs to be dynamic and adaptable.

We were told that gas will be needed as an energy source up to 2050. We asked the Government to explain the role they intend for gas in the future energy system, including from our own domestic resources. In their response, they promised a range of initiatives and guidance in 2022, few of which have materialised. We wrote to the Secretary of State in December requesting an update on the progress on 14 of those initiatives, to be provided in time for consideration in today’s debate. Unfortunately, Davos intervened and delayed the response until next week, but the evidence to hand shows that delivery is taking place at a snail’s pace—and this against a background of long lead times to build critical elements of the new energy system. Offshore wind infrastructure can take up to nine years and nuclear power stations can take 15 years or longer.

Then, there is the big question: who pays for the huge upfront capital cost of the transformation in order to provide certainty for businesses and households to budget? Currently, much investment in decarbonising the energy system is funded through charges on bills, including the costs of upgrading the grid and building new nuclear power stations. This funding is regressive, bearing down most heavily on those households that are least able to pay. We urged the Government to consider the full range of funding options, including the UK Infrastructure Bank, the British Business Bank, carbon pricing, co-investment, investment subsidies, investment tax relief and contracts for difference. We called on the Government to reconsider their opposition to the use of government borrowing, given its suitability for financing investments with high upfront costs that are to be followed by attractive returns over the following decades.

We found that the scale of the transformation requires urgent action across the economy and across a range of government departments and public bodies, including regulators. Currently, there is insufficient focus and co-ordination, as well as an absence of decisive leadership in government. We proposed creating an expert task force, following the example of the Vaccine Taskforce, that could take responsibility for strategic planning, departmental co-ordination and the monitoring of delivery by all government departments, agencies and business partners; the USA recently appointed a net-zero tsar to a similar role. We believe that this approach avoids unnecessary bureaucracy and provides the decisive leadership to deliver in a rapidly changing environment. The task force will need to address politically sensitive matters, including public spending commitments, so it must be at the heart of government and report directly to the Prime Minister.

Ofgem, the energy regulator, has an important role to play through its regulation of energy networks and suppliers and, of course, in setting prices for customers. Witnesses told us that Ofgem was overly cautious and slow to approve investments to make the energy system ready for the transformation. We therefore recommend that Ofgem’s duties be amended to include explicit reference to the Government’s net-zero target.

Ofgem must satisfy three main objectives of energy policy: keeping bills affordable, maintaining the security of supply and decarbonisation. Finding a balance between these three sometimes contradictory objectives comes down to questions of priorities and trade-offs that only a Government can decide. Since 2014, the Government have repeatedly promised, but so far failed to deliver, a strategy and policy statement to provide strategic guidance to Ofgem. Earlier this week, the Minister told us that it was “upcoming”, but when will it come?

The Government and Ofgem have the responsibility to inform and provide incentives to the public about the changes that they must make to their domestic energy systems. Consumers will want to spread the high upfront costs of heat pumps, for example, on a long-term contract basis, similar to mobile phone contracts. Electric vehicle batteries and other domestic appliances can be set automatically to operate when electricity is at its cheapest. The provision of these new products should form part of the drive to bring about greater competition between energy suppliers to provide added services.

Ofgem’s recent calamitous attempt to introduce competition between suppliers to promote switching has landed a surcharge on all customers to cover the liabilities, now estimated at £3 billion, of the failed new entrants. Fresh from that debacle, Ofgem has recognised the need to add financial and operational oversight to its regulatory duties, but its regulation must become more flexible to allow innovative products and services into the market. These products will help customers to reduce their energy demand, retrofit their homes—which could reduce energy usage by up to 20%—and introduce low-carbon heating, requiring financial support from the Government. Government needs to take the lead and clearly set out what it expects of the public and energy suppliers and what financial support it will provide to help to pay for the necessary changes and investment in our homes.

The Mission Zero review, chaired by former government Minister Chris Skidmore, was published a week ago. It echoes many of our conclusions, including the urgent need for the Government to develop and publish an overarching net-zero delivery and financial strategy and to establish an office for net-zero delivery. Chris Skidmore calls net zero

“the economic opportunity of the 21^st century”

and proposes 129 recommendations to turbocharge the nation’s climate action. More than half of these recommendations need to be acted on this year. He notes that the UK Government are

“not matching world-leading ambition with world-leading delivery”,

and we agree.

The US, China and the EU are investing heavily in net-zero technology and manufacturing. By contrast, our Government have yet to produce their net-zero industrial strategy. A modest number of investments have been made, but much more is required. Without that investment, we will remain importers of net-zero technology and miss out on the opportunity to create a domestic industrial sector, as the bulk of the significant demand created in the economy to source the new energy system will be spent abroad, only to widen our trade deficit still further. As the Committee on Climate Change noted in its last progress report to government, “important policy gaps remain” and

“Tangible progress is lagging the policy ambition”,


with “little concrete progress” on “cross-cutting enablers” of the transition.

The most important conclusion of these three reports —ours, Chris Skidmore’s and the Climate Change Committee’s—is that action is needed today. There are only 27 years left to undertake a fundamental change in the way that our economy works and to secure our energy supply at significantly lower prices, to the great benefit of all citizens and to provide a welcome boost to economic growth and social investment. The lack of a clear and consistent strategy and policy and the sluggish pace of delivery will lead to delay and missed opportunities. I beg to move.

--- Later in debate ---

[Lord Hollick (Lab)]

I thank all speakers today for their contributions. There is a theme of “Get on with it. Don’t go down the pub”. I think the Government have indicated—the Minister did in his remarks—that after a regrettable delay, we will receive a letter responding to the queries we made. I hope that will be an opportunity to discuss and debate the responses further.

The Minister also indicated that the strategy and planning document and the fairness and affordability work are under way and that we can expect them shortly. He mentioned that there was a consultation process that included the regions to be involved. One of the things that comes through very strongly from the debate and the work we have done is that this is quite the biggest challenge the country has faced. It is on an enormous scale and is going to last 27 years. It is unlikely, I hope, that the same Government will be in office throughout those 27 years, so it is very important that we build a cross-party coalition for this. That is essential if we are to attract investment from overseas. Our reputation as a reliable, safe and predictable country to invest in has, over the past few years, taken a bit of a knock, so it is important that when the Government publish their plans, they reach out across Parliament and across the nations and regions of the UK to get buy-in and to make sure that everybody knows that we are all heading in the same direction. Of course, the details will change and technologies will change and develop, but I urge the Government to hurry up and to make sure that they have consulted and got broad support from the nations of the UK and the other parties, but also that they have reached out to consumers and have them on board.

Motion agreed.

Energy Bill [HL]

Lord Hollick Excerpts

Committee stage
Monday 16th January 2023 Grand Committee

[Lord Ravensdale (CB)]

My Lords, I shall speak to Amendments 241, 242B and 242H in my name. In so doing, I declare my interests, first as an engineer and project director working for Atkins within the nuclear industry and as a director of Peers for the Planet.

Amendments 241 and 242H both relate to the renewable transport fuel obligation, the RTFO. I shall concentrate my remarks on Amendment 242H, as I believe it is the right amendment of the two to take forward. It aims to widen the scope of the RTFO from renewables to cover all low-carbon sources. I know the Minister will agree that we should, as far as possible, be technology-independent in how we set up subsidy schemes; as long as the source from which the fuel is derived is low-carbon, we should not care about its wider classification. The amendment seeks only to reflect existing government policy.

I note the July 2022 consultation on the related topic of recycled carbon fuels, which was titled Supporting Recycled Carbon Fuels through the Renewable Transport Fuel Obligation. Recycled carbon fuels are not classified as renewable fuels, as they are made from fossil-derived waste: for example, non-recyclable plastic waste or industrial waste gases that would otherwise be landfilled or incinerated. However, RCFs can provide significant carbon savings compared to traditional fossil fuels such as petrol, diesel and kerosene. The consultation says:

“To introduce support for RCFs into the RTFO we will need to amend the Energy Act 2004 and lay secondary legislation to amend the RTFO Order 2007. The measure is expected to be part of the forthcoming Transport Bill.”


The Government have already agreed with the principle of taking this important measure forward and there is a great opportunity for them to get it done now, within the Energy Bill, so that primary legislation is in place to begin allowing the significant carbon savings that can be generated from recycled carbon fuels, the constituents of which would otherwise end up in landfill. Otherwise, if we wait for the transport Bill, we are looking at a significant delay, as I understand that it will not be progressed in this Session—perhaps the Minister will correct me. I am sure he will see the sense in this argument, given the benefits of progressing with these measures now. It would not commit the Government to anything. Obviously, secondary legislation would be needed to enact any of this, but it would remove the blocker that currently exists in primary legislation and allow the Government to progress with these measures when they so choose.

The amendment would also have wider benefits beyond recycled carbon fuels. It would also allow, for example, hydrogen produced from nuclear power to be eligible for RTFO support. There are plans being developed to use nuclear-derived hydrogen to power construction vehicles for Sizewell C build. It could be a key use case for hydrogen in transport and in construction vehicles which need to operate for long periods—24 hours a day—on sites with limited electrical or charging infrastructure.

As with the RCF, much further work would be required to implement this in secondary legislation if the Government chose to, not least on additionality rules. However, it would remove the blocker that exists in primary legislation and open an opportunity for the nuclear industry to begin generating hydrogen. It would also demonstrate the Government’s commitment to technological independence.

The question may arise of how exactly we define low carbon. In the RTFO context, the Government have published detailed sustainability criteria which any eligible fuel must meet. These include requirements to deliver at least a 60% greenhouse gas emissions saving versus fossil fuels. Compliance with the sustainability and carbon reduction criteria would be a straightforward way to define this term in secondary legislation.

To summarise, this is a straightforward amendment that reflects existing government policy. It does not commit the Government to do anything but does remove a blocker that currently exists in the Energy Act 2004 in extending RTFO support to other low carbon sources. It would also allow the Government to progress with their plans for recycled carbon fuels, given the delays with the Transport Bill. Therefore, I hope the Minister will agree that it would be sensible to proceed with Amendment 242H and allow the carbon reductions that will be possible through the use of recycled carbon fuels.

Amendment 242B was originally put forward by the noble Baroness, Lady Neville-Rolfe, and was transferred to me following her move to the Front Bench, so I thank her for originally tabling it. It is also related to an amendment I put forward regarding the Nuclear Energy (Financing) Act. It is a probing amendment designed to highlight a key issue with the financing of nuclear projects going forward, both through the RAB and other investment mechanisms. There are two aspects relating to financing of new nuclear that need to be highlighted here.

First, investors are constrained by ESG criteria that apply to their funds. My concern is that nuclear will not be considered sustainable, or taxonomy aligned, under the green taxonomy, which the Minister assured us last week is progressing at the Treasury. This concern comes from previous positions on nuclear in similar EU schemes, and from the Treasury’s not including nuclear in its green financing framework.

As with the previous group of amendments, this all comes back to technology independence. Nuclear is a low carbon technology, along with many others, and the Government should not be picking winners in the race to net zero but enabling a level playing field. If nuclear is not considered as taxonomy-aligned under the UK green taxonomy, there is a real risk that nuclear projects will not be able to attract capital in sufficient quantity to realise the Government’s ambitions for the sector. ESG alignment is now a key factor in capital raises for pension funds and institutional investors. I would be most grateful if the Minister could again provide some assurance that nuclear will be considered as taxonomy-aligned under the forthcoming green taxonomy.

Secondly, I referred earlier to the UK Government Green Financing Framework, which describes how the UK Government plan to finance expenditures through the issuance of green gilts and the retail green savings bond. Currently, this excludes investment in nuclear, but again I urge the Government to reconsider. The Government need to take the lead here in defining what counts as sustainable within their frameworks. This is so important in leading the markets in the right direction and in allowing these schemes to finance future government investment in nuclear.

[Lord Hollick (Lab)]

I rise to speak to Amendment 242A, which my noble friend has just introduced. In the course of our inquiry into the net zero transformation, the Industry and Regulators Committee, which I chair, took extensive evidence about Ofgem’s remit and whether it should be amended to include a specific requirement to have regard to meeting the UK’s net zero emissions target.

Ofgem’s primary statutory duty is to protect the interests of existing and future consumers in relation to gas and electricity. This objective is to protect those interests taken as a whole, including their interest in the reduction of greenhouse gases and in the security of the supply of gas and electricity. This duty guides Ofgem when it is making decisions and trade-offs in the regulatory framework between the three objectives of decarbonisation, affordability and security of supply.

Many of our witnesses told us that the net zero target should be included explicitly within Ofgem’s strategic duties, not least because Ofgem’s responsibility for setting the price and affordability of energy must take into account the substantial level of costs of the transition to net zero which will have to be borne by consumers.

If there is no explicit reference to net zero, there is a danger that the decisions will be very short-term in nature, focusing on short-term costs for consumers and not the long-term costs of failing to achieve net zero and invest in the infrastructure necessary to achieve that. The Climate Change Committee agreed. It argued:

“Giving Ofgem a net zero responsibility”


will help it to

“think … strategically about the changes that lie ahead so that we can minimise the cost to the consumer in the long run.”

Jonathan Brearley, the CEO of Ofgem,

“said that Ofgem is open-minded about whether it should be given a primary duty to achieve net zero, arguing that ‘I and the board have been very clear that we see net zero as fundamental to our existing duty’ … noting that there may be a benefit to clarifying that.”

The impact of net-zero costs on consumer bills is, ultimately, a decision for the Government, not for regulators. The Government promised a strategy and policy statement setting out priorities for delivering a net-zero energy system to ensure that the supplies are available at the lowest possible cost—that was promised in 2022. They also promised to publish a fairness and affordability proposal by the end of 2022. Neither of those documents has yet been cited, and it is indeed unclear whether the consultations are actually taking place. There will be an opportunity in our debate on Friday on the report from the Industry and Regulators Committee for the Minister to enlighten us on the progress of those two very important pieces of work on strategy and affordability.

Without those two statements from the Government, Ofgem will struggle to reflect net-zero costs in its energy pricing; but there is no doubt that those costs will have to be reflected, and Ofgem should have a clear and explicit duty to do that. That is why the Government should accept the amendment, to make it plain to all parties that Ofgem has a strategic duty to take into account the very considerable short and long-term costs of the transformation of our energy system and challenge the Government should their guidance impose unaffordable or unfair costs on consumers. Perhaps the Government might find such an independent intervention from the statutory regulator a little inconvenient. It would be ironic if the regulator most responsible for regulating the journey to net zero is one of the only regulators which does have a specific responsibility in its remit.

[Lord Lennie (Lab)]

My Lords, I thank all noble Lords who have spoken, particularly the noble Lord, Lord Teverson, my noble friend Lord Hollick and the noble Baroness, Lady Hayman. I also support what the noble Baroness, Lady McIntosh, said and what the noble Lord, Lord Ravensdale, asked.

I will comment on how reforming the remit of Ofgem using the Energy Bill would achieve what we are trying to achieve in the amendments in my name and those of the noble Baroness, Lady Hayman, and the noble Lord, Lord Teverson. Ofgem’s remit has not changed substantially since 2000. It does not prioritise electricity decarbonisation in line with the Government’s recent legislation or stated ambitions; it has only a consideration of greenhouse gas reduction. As a result, Ofgem has been unable to reform substantially its working practices and regulatory frameworks in response to the Climate Change Act 2008 and the UK’s subsequent net zero ambition.

The Government have an opportunity to address that with the Energy Bill, and, while they have recognised the need to reform substantially the working practices of Ofgem in the past, they have done so through the creation of a strategy and policy statement—an SPS—for Ofgem. That urgent statement will be welcome; we note that, largely due to its complexity, it has not been published since 2020, when it was first proposed. It was consulted about in 2021, but we are still waiting for the statement to see the light of day. It seems to us that, to help with the Government’s net zero ambition, giving Ofgem the mandate to advance policies in support of net zero would be extremely welcome.