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Britain’s approach to regulating its electricity networks risks holding back the shift away from fossil fuels by focusing too heavily on short-term costs, the government’s infrastructure adviser has warned.
The National Infrastructure Commission urged regulator Ofgem to take into account a “broader set of long-term objectives” in order to drive the £37bn-£50bn of investment needed in electricity distribution networks by 2050.
“The current regulatory process is too complex and focused on the short-term cost of network investment, rather than the wider goals of economic growth and decarbonisation,” the NIC said in a report on Friday.
“Continuing the current approach risks delaying investment and putting significantly more pressure on networks and supply chains in future, as well as on the bills of future consumers,” it added.
The comments are likely to strike a chord in Whitehall as the government pushes watchdogs to do more to boost economic growth, while trying to cut carbon dioxide emissions and keep energy bills down.
The Financial Times reported this week that chancellor Rachel Reeves will tell cabinet ministers to audit Britain’s 130 or so regulators to ensure they are working to drive growth. One person briefed on the move described it as a “battle with the blob”.
Electricity distribution networks have an important role in the UK’s planned shift away from fossil fuels, which involves replacing petrol cars and gas-fired boilers with models powered by clean electricity.
Now owned by companies including Berkshire Hathaway’s Northern Powergrid and CK Group’s UK Power Networks, they carry electricity between the main transmission network and homes, businesses and smaller power stations.
Demand for electricity is set to climb by 50 per cent by 2035 and to double by 2050, according to the NIC. It estimates that annual investment in the distribution networks needs to be “at least” double current rates to hit the £37bn-50bn required, and must accelerate “most steeply” in the next five to 10 years.
Ofgem determines how much the network companies can spend and charge consumers. But the NIC said price control needed to be “rebalance[d]” with long-term objectives in mind in order to deliver the required step-up in investment.
“These should include enabling economic growth, accelerating progress towards net zero, strengthening network resilience and delivering high-quality customer service,” its report added.
Extra investment in distribution networks could cost households between £5 and £25 a year from now until 2050, according to the report, which warned that under-investment in the short-term risked increasing overall costs.
Investment costs could be cut if households became more flexible about when they used electricity, the NIC added, reducing the level of peak-time demand that needed to be met.
Gas and electricity bills in Britain are forecast to rise by 5 per cent from April because of a surge in wholesale energy prices, while energy bill arrears are at record levels as households struggle with high living costs.
Simon Virley, head of energy at advisory firm KPMG UK, said managing the need for investment amid already rising bills was “going to be the critical balancing act of the next few years”.
Ofgem said it welcomed the report, which “chime[s] with work already under way . . . We are committed to promoting growth and investment and enabling network operators to invest for the future”.
The regulator has taken several steps aimed at boosting investment in Britain’s electricity grids in recent months, including reforming the process for generators to connect to the grid in a push to clear a massive backlog.
The Department for Energy Security and Net Zero said upgrading the grid was “critical to building a secure energy system that can bring down bills”. “Through our clean power mission we are overhauling the energy system,” it added.
The Energy Networks Association, an industry body, said: “We welcome the Commission’s recognition that the [regulatory] framework requires a step-change in network investment and a focused, long-term vision to realise the government’s decarbonisation and energy security ambitions.
“More widely, we support the report’s findings around the need for wider changes beyond price controls, including reforms to speed up the planning and consenting process for network infrastructure, the need for a holistic approach to industry-skills development and proactive strategies for addressing supply chain issues.”
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