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What would a net zero duty for Ofgem mean in practice?

25 July 2023

The Energy Bill proposes new legal requirements for the UK regulator, putting it in a challenging position, writes Ian Parke.

What would a net zero duty for Ofgem mean in practice?
Increasing network capacity to support the demands of a decarbonised energy system will be one of the biggest challenges. Image credit: Shutterstock

In June, the UK government confirmed plans to amend the Energy Bill – which is currently nearing its final stages in parliament – to give Ofgem a statutory net zero duty.

This will give the energy regulator a legal obligation to support the government in meeting its net zero targets by 2050.

This amendment is evidence of the government’s commitment to supporting a low-carbon economy and has been welcomed by many, including the National Infrastructure Commission.

Equally welcome is the comment made by Ofgem CEO Jonathon Brearley: “Our fundamental objective will always be to protect the interests of existing and future customers. It is at the heart of everything we do.”

Well, that’s the easy bit.

The challenge will be convincing customers that they need to pay more – which may call into question this “fundamental objective”, and how it sits alongside the regulator’s new duties.

Trust in regulators is at its lowest-ever point

It’s unfortunate that Ofgem’s fellow regulator, Ofwat, has dropped the ball: it allowed several water companies to accrue significant debt while still acknowledging the need for more investment in water infrastructure.

This doesn’t sit well with consumers, who are now told to expect water bills to increase. Indeed, many customers believe this investment had already been paid for.

Unfortunately, this has contributed to the public trust in the regulators being at its lowest point since they were formed.

Although regulators’ actions are, to a large extent, transparent, their reputation would be improved if the ‘mystique’ was removed, and their work better explained to customers.

With both Ofwat and Ofgem seeking to increase costs to accommodate their regulatory duties, it will be challenging to separate how the public view their activities.

Their paths of action need careful attention.

Who decides where the money goes?

Asking customers to pay more is never welcome – not least when significant financial challenges affect many households.

The reality is that there’s only a finite amount of money available, and it all comes from the same source. Every £1 that goes to water companies to fulfil their agenda is £1 that can’t go to an electricity company to fund net zero.

In the words of a former prime minister, “There isn’t a magic money tree”.

But there must be a recognition that some priorities are more important than others.

Who gets to decide?

The ball is in Ofgem’s court

So, in practice, a net zero duty for Ofgem puts the regulator in a challenging position.

The government will have given them the authority and tools to raise money to support net zero. But the responsibility for successful delivery will lie with Ofgem.

Any increase in customer costs will need to be carefully managed, which will require a clear and unambiguous approach to protecting their interests and maintaining public trust.

The net zero duty constrains the actions that Ofgem will be able to take. This is likely to result in some changes to strategy.

Indeed, the government strategy and policy statement for energy policy – currently out for consultation – identifies several challenges, including the transition to net zero-compatible alternatives.

Achieving a decarbonised energy system

Perhaps the biggest challenge is increasing network capacity to support the demands of a decarbonised energy system.

Speeding up the rollout of the distribution system and increasing flexibility in infrastructure delivery will likely be a cornerstone of any adjustment to Ofgem’s strategy.

In financially limited times, both Ofwat and Ofgem have difficult roles.

They should be working together to limit the additional financial burden they’re certain to have to pass on.

As I said earlier, some priorities are more important than others.

The regulators’ task is to tell us what they are.

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  • Ian Parke, co-chair, Low Carbon Energy Advisory Board at Institution of Civil Engineers