Utility regulators must have new powers if UK is to tackle climate change

Published: 11 Oct 2019

By: NIC

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The UK will fail to reach net zero greenhouse gas emissions by 2050 if regulators aren’t given new powers to ensure utility companies invest in sustainable infrastructure, according to a report from the National Infrastructure Commission.

Chair Sir John Armitt said the UK’s regulatory system must adapt to meet the demands of the future and urged ministers to take action to strengthen it.

Strategic investment and public confidence looks at all aspects of the regulation of energy, telecoms and water services.

It considers the need for extensive strategic investment in each of the sectors, to reduce emissions, improve digital connectivity and build resilience as floods and drought become more likely – and the role of regulation in delivering it.

The Commission concludes that while the current model has mostly achieved what it was set up to do, it has created a culture of short-termism.

The model’s excessive reliance on utility companies for strategic direction means that the long-term investments needed to meet challenges such as climate change have not been sufficiently prioritised.

As a result, the system must be updated to facilitate a scale of transformation it was not designed to deliver.

Among its recommendations is a proposal for new duties for the regulators – Ofgem, Ofcom and Ofwat – to promote the achievement of net zero and improve the resilience of the UK’s infrastructure.

The Commission also recommends that government should provide regulators with a clear strategic focus on the country’s infrastructure priorities for the long term, to guide regulation.

This shift will be essential to enable the delivery of major new projects to mitigate climate change. In coming years, this will include moving towards renewable technologies for generating electricity, building a nationwide charging network for electric vehicles and finding a clean alternative to natural gas for heating homes.

At the same time, regulators must use the price and market controls at their disposal to balance the needs of consumers and investors and ensure the market operates fairly.

Chair of the National Infrastructure Commission, Sir John Armitt, said:

“The government has committed the UK to net zero by 2050, but if regulators aren’t equipped with a new duty to specifically reach this target, then it is simply unattainable.

“The regulatory system must adapt to meet the demands of the future – and the great challenge we face to bring down emissions and build resilience against increasingly frequent extreme weather.

“If ministers are serious about a low-carbon revolution, they must act quickly and decisively to modernise regulation.”

National Infrastructure Commissioner, Julia Prescot, said:

“Our utilities require transformation across the board in coming decades – to bring down emissions, safeguard our water supply and improve digital connectivity up and down the country. That’s going to require unprecedented levels of investment.

“Well-balanced regulation would give infrastructure providers long-term certainty, empowering them to invest in innovative and creative solutions.”

Regulation for a changing world

The National Infrastructure Commission was established in 2015 to offer independent and impartial advice to government on meeting the country’s long-term infrastructure needs.

In October 2018, then Chancellor Philip Hammond charged the Commission with investigating the regulation of the UK’s energy, telecoms and water industries, to ensure the necessary levels of investment and innovation, while keeping these crucial services affordable for everyone.

Strategic investment and public confidence demonstrates how good infrastructure depends on effective regulation. In a changing world where climate change presents a huge challenge for the UK, the consequences for the regulatory landscape in coming decades will be significant.

Substantial investment will be required to reduce greenhouse gas emissions and ensure communities are resilient to the increasing risks of floods and drought. With society becoming increasingly digitalised and connected, the roll-out of full-fibre broadband and expanded 5G coverage must also be delivered.

This will place unfamiliar demands on regulation and it will need to respond in ways it has never had to before.

The Commission does not believe the system should be fundamentally changed, but it does need adaptation.

Billpayers will ultimately fund this investment, so public confidence will be essential. Customers must be assured that their money is being spent on the right things; that consumers – especially those in vulnerable circumstances – are not being exploited; and that they are sharing the benefits of regulation with investors.

The Commission recommends that:

  • Ofcom, Ofgem and Ofwat should have new duties to promote the achievement of net zero by 2050 and improve resilience.
  • The government should set out a long-term strategic vision for each of the regulated sectors, through strategic policy statements, within the first year of each Parliament, to support lasting plans and stable funding.
  • The UK Regulators Network should be given a stronger leadership role through the appointment of an independent chair to promote collaboration and coordination, and ensure markets continue to deliver for consumers.
  • Most major strategic investments should be opened to competition to support innovation, rather than relying on incumbents or government to have the best ideas.
  • Regulators should be able to prevent companies from engaging in price discrimination that does not provide an overall benefit to consumers.

The Commission was asked to undertake a study on regulation by the then Chancellor Philip Hammond on 3 October 2018, the terms of reference for which can be read here.

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