Ofgem proposes reforms to power the UK forward to a net zero, home-grown energy system

Press release
Publication date
Industry sector
Distribution Network
Generation and Wholesale Market
Offshore Transmission Network
Supply and Retail Market
Transmission Network
  • Significant changes are required to make the transition to a secure and net zero energy supply at the lowest cost to customers
  • Record and volatile gas prices highlight the need to accelerate transition away from expensive imports of gas to a cheaper, long-term solution 
  • Reforming wholesale electricity markets could save customers billions of pounds  

Ofgem has put forward a range of potential reforms to reduce Britain’s reliance on expensive gas imports and accelerate the transition towards cleaner, more secure and affordable supplies of home-grown energy. This reflects a world where the economics have changed, and renewable options are increasingly the cost-effective choice.'  

 

Last October, the UK Government pledged to decarbonise all our electricity generation by 2035, subject to security of supply, a key milestone on the path to hit net zero emissions by 2050. It subsequently published the British Energy Security Strategy, following Russia’s invasion of Ukraine. The strategy sets out more ambitious plans to reduce our reliance on expensive gas imports, including up to 50GW of offshore wind by 2030 and a five-fold increase in solar power by 2035. 

 

However, existing market, regulatory and institutional arrangements are not geared up to running a net zero power system in the most cost-effective way. Today’s ‘Net Zero Britain’ discussion paper sets out a range of options to make the net zero transition over the coming years to achieve Government targets, at the lowest cost for consumers. Some reforms will take time to develop and implement. And most of the key decisions are for Government, including through its review of electricity market arrangements. Ofgem will work closely with Government to support reform in the interests of energy consumers. 

 

Jonathan Brearley, chief executive of Ofgem, said:  

 

“Record gas prices are driving the cost-of-living crisis, causing real harm to customers and the wider economy.  

 

“As well as doing everything we can to protect customers now, we must diversify Britain’s energy supplies away from gas as soon as possible. Recent months have demonstrated that the arguments for boosting our energy security and building a home-grown supply have never been stronger. The economics of energy have fundamentally changed with green energy no longer a desirable but costly alternative, instead, it is now the secure, more reliable, and cheaper option.  

 

“Today’s discussion paper sets out potential reforms to the energy system so customers can benefit from more affordable, homegrown and renewable energy. We’ll now continue our work with BEIS and other stakeholders to further develop proposals." 

 

The discussion paper identifies two key areas of reform:  

  • Strategic planning for the energy system by a new independent Future System Operator at a national level and a potentially similar model at a local level;  
  • Potential reforms to the electricity wholesale market, including limiting the price setting potential of natural gas, which could be done by splitting the wholesale market, and using pricing signals to run the system more efficiently and save customers billions of pounds collectively on their energy bills

Using pricing signals could include moving from setting wholesale electricity prices at a national level to either a regional or local level. Ofgem is undertaking further work on the benefits and feasibility of this as one of a range of options, to ensure that any changes could benefit all consumers. 

 

These reforms could help enable a smart, flexible system, which has the potential to deliver more than £10 billion a year savings to customers by 2050.  

 

The report also sets out a proposed framework for consumer interests, to help focus our actions. We will be working with consumer groups and other stakeholders to gather feedback and further develop this framework. 

Notes to editor 

1. Responding to this paper: We welcome comments from stakeholders who can email us at NetZeroBritain@ofgem.gov.uk by 8 August 2022.  

2. In April, the Government backed a recommendation from Ofgem to create a new Future System Operator (FSO) fully independent of National Grid to oversee the energy system at a national level. Ofgem has also launched a review into how the energy system is planned and operated locally. 

3. The £10bn a year cost savings are calculated as reduced system costs resulting from a smarter and more flexible energy system, as detailed in the BEIS/Ofgem Smart Systems and Flexibility Plan (2021). Ofgem is undertaking a more detailed assessment of the potential consumer benefits associated with such a change, which will consider implementation and distributional impacts and how to ensure benefits for all energy customers.  

4. This paper sets out a proposed framework of consumer interests. that will guide our regulation to ensure that it:  

  • Delivers fair prices for consumers;  
  • Supports a low-cost transition to net zero;  
  • Provides quality and standards so that all consumers, including vulnerable and disengaged consumers, receive good service that meets their needs; and,  
  • Is resilient to volatile wholesale prices and attractive for long-term investment.