Energy market reform is key – but it needs to be done right
RenewableUK’s Ana Musat makes the case for carefully-crafted regulatory reforms that are neither rushed, nor overly protracted
Ten years ago, the public, media and politicians wondered just how much the green economy could deliver growth.
But fast forward to 2023, and we see evidence of green growth in energy, transport, manufacturing and finance, where the adoption of green alternatives has driven innovation, created jobs and raised productivity. As the green alternatives get more established in these sectors, we may end up with the cheaper, more efficient, green options.
Nowhere is this clearer now than in the energy sector. Not only are renewables cheaper and less volatile than fossil fuels, they are the secure option in generating homegrown energy that can’t be easily switched off unlike oil and gas from Russia. Without cheap and secure energy we can’t keep the lights on, heat our homes, produce the fertiliser needed to guarantee food security. We can’t maintain a thriving manufacturing sector, risking supply chain disruption and deepening dependence on China.
The offshore wind sector alone supports over 31,000 jobs, a 16 per cent increase on 2021. These jobs are regionally dispersed, with Yorkshire benefitting most by hosting 15 per cent. Achieving the government’s ambition of 30GW of onshore wind by 2030 could likewise generate £45bn of gross value added for the UK, and create 57,000 jobs.
A very important reason why this sector was able to deliver so much is the existence of a well-designed, stable, and attractive policy and regulatory systems. Together with investment from the Green Investment Bank, the UK created a pipeline of projects making investment in renewable energy supply chain companies attractive, for instance the Siemens Gamesa blade factory in Hull.
Whilst regulation and market arrangements should evolve with the sector, we are now at a point where protracted or rushed reform risks moving the dial in the wrong direction.
A prime example of this comes from recent interventions in the market to tackle the supernormal profits of renewables as gas prices have skyrocketed. For most of 2022 rumours around the potential implementation or the shape of a price cap or windfall tax put investment into the sector on hold, at precisely the time when we should be supercharging it. Not only were these interventions based on perceived rather than actualised profits, they were also designed in a way that put renewables at a disadvantage to oil and gas, most notably though higher investment allowances for the latter.
The Review of Electricity Market Arrangements (REMA), risks being overtaken by the political imperative to decouple gas and electricity prices to benefit consumers. Whilst the aim is admirable, such extensive reforms should not be rushed to serve purely political points. With the help for household bills coming to an end in April, non-financial interventions through REMA could be seen as the answer to this quandary.
However, we should remember that the previous Electricity Market Reform package from 2013 had been in development for more than three years, with adequate consultation to understand the potential unintended consequences of radical reforms.
REMA timelines, on the other hand, will be much compressed, with radical changes to how we price electricity and accelerate low carbon power deployment after less than one year of consultations. This is cooling down private investment, and risks delaying other reforms we urgently need.
A shift to locational marginal pricing could be the answer. This would delay the urgently needed planning reforms and the inclusion of net zero as part of Ofgem’s remit to allow investment in our infrastructure, enabling the quick development of the infrastructure we need to move electricity to where it’s needed.
Even if locational marginal pricing works, a change to our planning rules and the energy regulator’s remit are desperately needed. Although government has taken some promising first steps on these two fronts renewables projects still see delays longer than five years in connecting to the transmission grid, given capacity constraints and cumbersome planning rules.
We are in a position where a mixture of delayed and rushed reform risk cracking the foundation upon which a thriving renewables sector has developed.
Even if we are still the world leader in offshore wind, other countries could catch up quickly. The US has passed the Inflation Reduction Act (IRA), which includes funding and attractive incentives for companies investing in renewable energy. The EU will also pass its own version of IRA is to keep investment on the continent, rather than challenging the US at the World Trade Organisation.
The UK cannot afford to take its leadership position for granted and must maintain an attractive investment environment in a shifting global context. We can do more to guarantee our energy security, provide affordable energy to all, create jobs, accelerate innovation, and bolster export opportunities in the process.
Attaining 50GW of offshore wind by 2030 will require £48bn of private investment by 2030, the fourth largest source of investment into UK infrastructure. We have the most ambitious target in the world for floating offshore wind, a technology for capturing the power of our wind resources in deeper, windier waters. UK’s green hydrogen exports from offshore wind, meanwhile, could reach £48bn annually with potential for £200bn gross value added and generate up to 120,000 jobs from the production of green hydrogen and export of electrolysers.
To grasp these opportunities, we need to look beyond short-term interventions to balance the budget or a quick fix to the energy crisis. Government and industry need to work together to deliver energy reliability, affordability, and sustainability in an enduring way, to the benefit of all.
Ana Musat is executive director for policy and education at RenewableUK
