Strategy and Policy Statement for Energy Policy in Great Britain
(8 months, 3 weeks ago)
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Lord Callanan
That the draft Strategy and Policy Statement laid before the House on 21 February be approved.
Relevant document: 16th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Under-Secretary of State, Department for Energy Security and Net Zero (Lord Callanan) (Con)
My Lords, the past few years have brought unprecedented challenges and uncertainty to Great Britain’s energy system. But we have remained resilient and last year laid the foundations for an energy system fit for the future with the landmark Energy Act 2023, which I know many noble Lords were involved in. It was the largest piece of energy legislation in the UK in a generation, and a world first in legally mandating net zero.
The changes in that Act, including the powers to establish the National Energy System Operator, NESO, and new duties for Ofgem, mean that now is the right time to reaffirm the Government’s strategic priorities and policy outcomes in this strategy and policy statement. The Draft Strategy and Policy Statement for Energy Policy in Great Britain is developed according to Part 5 of the Energy Act 2013. It sets out in clear terms the Government’s strategic priorities and other main considerations of their energy policy, the policy outcomes to be achieved, and the roles and responsibilities of persons involved in implementing that policy.
The Secretary of State, Ofgem—the independent regulator for gas and electricity markets in Great Britain —and the NESO, a new independent public corporation responsible for planning Britain’s electricity and gas networks and operating the energy system, will be required to have regard to the strategic priorities set out in this SPS. The Secretary of State and Ofgem must also have regard to the policy outcomes contained within the SPS, and they must both carry out their respective regulatory functions in a manner that they consider best calculated to further the delivery of the policy outcomes.
The NESO is expected to be established this year. The SPS serves an additional purpose of setting out and clarifying the roles and responsibilities of the NESO, alongside Ofgem and the Government. The SPS is intended to provide guidance to the energy sector on the actions and decisions needed to deliver the Government’s policy goals, and places emphasis on where the Government expect a shift in the energy industry’s strategic direction.
As the independent energy regulator for Great Britain, Ofgem cannot be directed by the Government on how it should make decisions. Similarly, the NESO is being set up to be operationally independent and free from day-to-day government control. However, the SPS will provide guiding principles for Ofgem and the NESO, when it is established.
The strategic priorities and policy outcomes within the SPS do not include the creation of any new policies or duties. The SPS reaffirms the Government’s existing priorities and commitments, such as affordability, protecting consumers, security of supply, net zero, investment ahead of need, and encouraging Ofgem to make full use of its enforcement powers to support these ambitions. This statement will therefore support strategic alignment between government, Ofgem, NESO and the industry, through making clear what government wants to achieve in the energy sector.
As mentioned, the legal framework of the Energy Act 2013 means that Ofgem, NESO and the Secretary of State all have a duty to have regard to the strategic priorities within the SPS. Ofgem and NESO must also give notice to the Secretary of State if, at any time, they conclude that a policy outcome contained in the SPS is not realistically achievable. Ofgem must also publish a strategy showing how it will further the delivery of the policy outcomes, and its annual report must assess its contribution to delivery of the policy outcomes. The SPS therefore acts as a tool to promote alignment between government, Ofgem and NESO, as all parties will have to have legal regard to the statement in some sense.
As per the Energy Act 2013, the SPS has completed two consultations. The first consultation was undertaken with Ofgem and the Welsh and Scottish Governments. Government worked with all parties to make sure that their views were correctly captured before moving on to a second, public consultation held last summer. In the public consultation, government received views from Ofgem, the Scottish Government, ESO and many stakeholders across industry, including businesses, investors, trade bodies, suppliers, generators and infrastructure operators.
Feedback throughout both consultations was generally positive, and stakeholders were keen to see an SPS implemented to give guidance to the sector and clarity on the roles of Ofgem, NESO and government in delivering the Government’s priorities for the energy sector. Since the consultations have concluded, officials have worked through that feedback and, where appropriate, have used this to inform the current iteration of the SPS which is now laid before your Lordships. The Government are confident that this SPS reflects the right strategic priorities and policy outcomes for energy policy for the whole of Great Britain.
I thank the Secondary Legislation Scrutiny Committee for the time it has taken to review the SPS, as well as the noble Lords, Lord Hollick and Lord Lennie, the noble Baroness, Lady Hayman, and others, for their interest in the development of the SPS.
In conclusion, the SPS reaffirms the Government’s commitments and priorities for the energy sector and, in doing so, acts as a tool to support alignment between government, Ofgem, NESO and industry. I beg to move.
Baroness McIntosh of Pickering (Con)
My Lords, I congratulate my noble friend on bringing forward the draft strategy and policy statement, which I support.
As president of National Energy Action, and focusing on the SPS’s aims of affordability and protecting consumers to which my noble friend referred, I want to put a question to him. Although I accept, as the department explains in paragraph 46—this was also referred to by the Secondary Legislation Scrutiny Committee—that although Ofgem is independent of government, the regulator is required to
“have regard to the strategic priorities set out in this statement when carrying out its regulatory functions”,
does my noble friend share my concern, particularly for those living in fuel poverty, that although a consumer has control over the unit cost of electricity they are purchasing, they have less control over the standing charge? My understanding of the changes being brought in on 1 April, is that, although we are reducing the unit cost to the consumer, the standing charge is going up incrementally. I imagine, in a very short order—possibly two to three years’ time—that instead of standing charges going up to 50p or 70p, they will cost up to £1 per day. I believe that for many living in fuel poverty that is unaffordable.
So, while I accept that Ofgem should operate independently of the Government, I recall that in 2014, as part of the price review that the water companies’ regulator Ofwat carried out, the Government issued a request to Ofwat to have regard to the affordability of customers’ bills. My question to my noble friend is: is that something the Government might be minded to do under this SPS, in order to have regard to affordability and protecting consumers?
Lord Naseby (Con)
My Lords, I welcome the speech from my noble friend and congratulate him on his dedication to this challenging industry. When one looks at the background to the document we have today, it is just over 10 years ago that the concept of a strategy and policy statement was introduced by the Act in 2013—and here we are now. We now have it, and the vehicle is to be this organisation, the NESO—I do not know exactly how to pronounce it.
It would be helpful for colleagues in the House if we had some indication of what the costs will be when NESO is actually established, as the sphere of influence it has to cover is massive—its responsibilities go right across electricity, gas and hydrogen—and it is no bad thing in life to know, before you start something, what the cost is likely to be. That at least provides you with criteria.
It is fortunate, or unfortunate, depending on one’s viewpoint—I had the privilege of serving on the Public Accounts Committee in the other place for some 12 years, as well as on the Select Committee on energy—that the National Audit Office published a report titled Decarbonising Home Heating on 18 March, precisely a week ago. Thankfully, I managed to pick it up. The summary of its investigations are, in effect, the first solid piece of evidence we have had in any depth on the particular area of home heating. We are talking about 28 million homes, which is a huge market, and the emissions that come from burning natural gas to heat homes. Reducing emissions from heating homes is a key component of the Government’s overall target of achieving net zero greenhouse gas emissions by 2050, and they have printed that here.
The report says, in paragraph 3 of its summary, that
“growing the supply chain for heat pumps to a minimum market capacity of 600,000 heat pump installations per year by 2028”
is the Government’s target. In the last 12 months, they have achieved 55,000, which seems like slow progress, quite frankly. Furthermore, it says that the Government are
“developing the evidence base to inform strategic decisions in 2026 on the future role of hydrogen in home heating”.
It seems to me that we should have done a fair bit of that work already, but apparently we have not.
Paragraph 4 says:
“The government also committed £6.6 billion from 2021-22 to 2024-25 for schemes to improve energy efficiency … This includes the Boiler Upgrade Scheme”,
which, equally, does not appear to be doing too well.
The report goes through a series of other points, with which I will not tire colleagues here, but it is well worth reading. I will, however, highlight points on some of the key findings. First, the NAO has established that some aspects of the
“plans to test the feasibility of hydrogen for home heating are behind schedule or have been cancelled, meaning it will have less evidence to make decisions in 2026 on the role of hydrogen”.
We know that British Gas has a trial going, and there is a small government trial, but I find that rather worrying. Secondly in relation to hydrogen,
“Ongoing uncertainty over the role of hydrogen could slow the progress of decarbonising home heating”.
The report goes on to say that the Government are thinking of using local government to play a role in establishing what to do about decarbonising home heating. As someone who had the privilege of being a leader of a local authority for some years, I do not think this is something, with a subject that is so important, that will be hugely welcomed by local government, which has more than enough on its plate.
As someone who comes from the world of advertising and marketing, I found it worrying to read, in paragraph 14 of the report, that the department has developed a campaign to promote heat pumps, but it does not seem to be getting through:
“public awareness is low: around 30% of respondents to a government survey in summer 2023 had never heard, or hardly knew anything, about the need to change the way homes are heated”.
This is all very worrying; we do not seem to be making the progress that we ought to be making.
There are a series of eight recommendations in the report; I will not go through them all, but I will pick out a couple. On page 12 of the summary—and remember this is the NAO, which is not prone to stating anything positive unless it feels quite strongly about it— recommendation c states that the department should:
“Consider whether it is possible to provide more certainty on the role of hydrogen in home heating before 2026 to help industry plan and invest”.
There are then some suggestions as to how that could be done.
Additionally, I have one other further area, and that is small nuclear reactors, which were not covered in the NAO report. It is worrying that we have known for at least three years that Rolls-Royce is geared up to do small nuclear reactors, and we have given it good money to work on them, but we are still not at a point where anybody is being appointed. There is a list of six potential people involved; some of them are not even ready now to do a proper pitch, and the rumour is that the pitch will be put back further because some of them are not ready. This slippage, all the way through, symbolises this market, and it is extremely worrying. It is possibly one of the most key areas of our industry and our lives when we talk about home heating.
I do not envy my noble friend on the Front Bench the job, and I thank him for his work so far. There is an awful long way to go, and even though His Majesty’s Government are not the vehicle for doing the communication, we must make sure there is better communication with the general public and that we should go forward together to meet the main policy objective in a way that is based on good science and good experience.
Earl Russell (LD)
My Lords, this is the first use of the power to designate a strategy and policy statement—SPS—for energy policy in Great Britain, which was introduced in the Energy Act 2013. The changes in that Act included the powers to establish a National Energy System Operator a new independent public corporation responsible for planning Britain’s electricity and gas networks and operating the electricity system. NESO will be required to have regard to the strategic priorities set out in the SPS and new duties for Ofgem, which are all contained in this statement. Can the Minister confirm that NESO will be set up this summer?
All that this statement does is to bring together existing policy and restate that policy in one coherent paper; the statement
“does not introduce new roles or duties for bodies in the sector, it is comprised of only existing government policy, commitments and targets”.
We broadly welcome the statement, but my first question is: why has it taken 11 years, since the Energy Act 2013, to get where we are today? It is 11 years late; we should have been revising the second edition by now. While key elements are welcome, there is much that remains unclear or subject to regular change going forward. I do not think this statement should last five years without review. Will the Government commit to more regular reviews, even an annual review, as we continue our process of transition?
The relationship between the National Energy System Operator and Ofgem is still undefined in this strategy, so when will this be defined? Will the Minister agree to give a further review as soon as NESO is set in place, so that its powers, functions and relationships can be fully scrutinised? The strategy document says that NESO has a duty to notify the Secretary of State if, at any time,
“it thinks that a policy outcome in the SPS is not...achievable”,
as has been stated by other speakers. What are the interim arrangements for the period until NESO is up and running if it decides that there are policies that are not achievable?
I worry also that Ofgem is not accountable to Parliament at the appropriate level of scrutiny for the new powers that are given to it under this policy. There seem to be some tensions for Ofgem between net-zero targets and promoting economic growth as set out in its core functions.
While I welcome the continued commitment to reach net zero, and I am thankful for all the work the Government have done, the Government need to do more at pace. There are key areas where progress is lagging, such as: the development of long-term energy storage; meeting targets, particularly for power generation to be decarbonised by 2030; and the ability to deliver the nuclear plan for a 24 gigawatt deployment by 2050, when many projects are running behind or are late. There are questions about whether we are still on track for offshore wind, following the collapse of the offshore wind auction this year. There are internal disagreements over the clean heat mechanism, and a year of delays means that the target for implementing heat pumps is in question, as we have heard. Emission targets for 2030 look unlikely to be met, the sixth carbon budget is behind schedule and the planned energy efficiency upgrade of ensuring that all properties achieve a rating of band C by 2030 does not have clear mechanisms to take it forward.
The Government are missing their own 2030 fuel poverty targets by 90%; we need a fair and just transition to net zero, yet fuel poverty is completely missing from this statement. I could not find the words in the document and neither does it make any mention of the Government’s own fuel poverty strategy. There is also no mention of the social energy tariff, and the rollout of smart meters is behind. We need more renewables, and we to do more to improve home insulation at scale and at pace. These matters need to be at the heart of our future energy polices, and it feels like they have been forgotten in these documents.
The mention of the EU-UK Trade and Cooperation Agreement is very welcome, as we are spending £1 billion extra a year on our energy bills. When do the Government think the strategic spatial energy plan will be ready? The policy states that the Government expect an investment of around £100 billion in the energy sector by 2030. Does the Minister agree that recent changes in government policy direction, particularly in relation to electric vehicles as well as on other matters, have caused market uncertainty and damaged investor confidence? What actions are the Government taking to ensure the long-term clarity and stability of our environmental policy?
Lord Lennie (Lab)
My Lords, I thank noble Lords who have contributed thus far to the debate for making my job somewhat easier than it would otherwise have been and for raising important questions. The noble Baroness, Lady McIntosh, raised the affordability of standing charges from the NEA. The noble Lord, Lord Naseby, raised a lot of concerns about lack of progress in a number of areas, which, no doubt, the Minister will address. The noble Earl, Lord Russell, had a range of concerns, particularly about a lack of potential progress on the auctioning of offshore wind contracts for difference, which is about to take place—I think next week.
For my own part, there are three points I want to raise this evening. First, this is the first statement since the Government’s Energy Act 2013 facilitated such statements. Secondly, while we agree with much of the statement, there are some clear differences between the Conservatives and Labour: in particular, on setting 2030 as the date by when Great Britain will be a clean power generator. Thirdly, there is a lack of detail and therefore a need for revision at the earliest opportunity.
I will take these points in order. The Energy Act 2013 assumed that a strategy and policy statement would be essential to align government policy with the actions of government agencies and bodies such as Ofgem and ensure they were marching in lockstep. There has not been a statement since 2013. As the noble Earl, Lord Russell, said, given the five-year gaps between statements, we should now be reviewing our second statement.
However, this policy statement is important in seeking to align government and Ofgem, with Ofgem having recently been designated with a net-zero mandate under the Government’s energy policy of 2023. The Government cannot direct Ofgem, so Ofgem cannot operate unless there is such a policy statement. While this policy statement has been delayed—let us say, since 2013—it is certainly now welcome.
These policy statements are supposed to last five years. We should have had a strategy and policy statement immediately after the 2013 Act, and we should now be revising the second one. It is also clear that the strategy and policy statement will not last more than a year or so from now, because there will be a general election. The outcome of that election is not yet known but, should Labour win, it will certainly be reviewed. Can the Government say why no policy statement has been submitted before now?
While much of the statement is welcome, there are some clear differences between the Government and Labour. The original 2030 date by when we were to have clean power is no longer accepted by the Government. They have recently put back from 2030 until 2035 the date for ending the sales of internal combustion engines, in effect, meaning there will be at least a five-year delay. Their former net zero tsar, Chris Skidmore, and their widely respected former chair of COP, Alok Sharma, have both been highly critical of the Government’s policy. This will surely do nothing to reassure either of them.
There are also areas as yet undefined and unclear, such as the relationship between ISOP—now to be called the national energy system operator—and Ofgem. NESO is a commitment in the Energy Act 2023 but, as we have heard, is yet to be established. When it is, there will be much work to be done to define its relationship with Ofgem as well as questions to be addressed about the regional energy system planners. Once NESO is set up, will there be a statement about these matters, including its relationship to Ofgem and, therefore, to government?
There are other areas that require updating. As the noble Earl, Lord Russell, said, these include a plan for developing long-duration energy storage, as well as the 2030 fuel poverty target, which National Energy Action says will be missed by 90%, and the rollout of smart meters, which is well behind the time set originally by the Government. These and other areas in the statement are either unexplained or undefined. Will any update on these matters be forthcoming?
Finally, a strategic policy statement must take account of the real state of the policy landscape or risk irrelevance; but a statement is better than none at all, which is why we welcome this statement despite its shortcomings
Lord Callanan (Con)
My Lords, I thank all noble Lords who have taken part in this debate. First, I am confident that the strategic priorities and policy outcomes in the SPS clearly establish what the Government are trying to achieve in the sector. I think it got fairly widespread support and it established why this is important, demonstrating how these smaller policy outcomes contribute to the broader strategic priorities so that stakeholders can be reassured of how their role fits into the bigger picture.
I hope that the SPS gives industry a sufficiently high-level understanding of the roles, responsibilities and remit of government and the regulators in helping to deliver these objectives. Particularly in the case of NESO, we have provided enough information on the body’s remit to give confidence on the role that it will play when it is established, while also recognising that its responsibilities will evolve over time. As well as reaffirming our ambitions, this SPS will give encouragement to Ofgem to utilise the full range of its existing powers to ensure that those ambitions are realised and that stability and confidence are restored across the sector.
I move on to the points that were raised in the debate, starting with my noble friend Lady McIntosh. The SPS makes clear the importance of tackling fuel poverty, as was also raised by the noble Lord, Lord Lennie. Ofgem has conducted a call for evidence on the standing charges issue. I know it is a very topical issue; there is a lot of concern. Ofgem received over 40,000 responses to that consultation. It is reviewing those responses. The Government are liaising closely with Ofgem to understand the options going forward. It is an independent regulator, and it would not be right to interfere in the decisions that it will make, but we do understand the concern that has been raised.
The NESO will be funded and regulated by Ofgem through licences and the price control process, as is the case with the electricity and gas system operators today. That is a well-known model, understood widely across the sector. The approach will provide accountability, scrutiny and, of course, value for money, while ensuring that the NESO is able to deliver fully on its objectives.
As part of agreeing future price controls, Ofgem will ensure that NESO is fully resourced to fulfil its objectives and the obligations set out in its licence, including the funding of its statutory duties such as those towards innovation and keeping developments in the energy sector under review. As with other regulated bodies in the sector, the NESO will have the operational freedom it needs to manage and organise itself to effectively deliver its roles and objectives.
I move on to the points raised by my noble friend Lord Naseby. He quoted extensively from the National Audit Office report on home heating. That is of course different from what we are debating today, but he raised some very good points, particularly on the rollout of heat pumps et cetera, on which I agree. My noble friend will be aware that we took a decision not to proceed with the hydrogen village trial last year. That was due chiefly to the lack of available hydrogen, but it also took into account the real concerns that were raised by many members of the public in that area. It is undoubtedly the case that electrification will provide the vast majority of the decarbonisation options in home heating; hydrogen will play a very limited role, if any, in the decarbonisation of heating.
In response to the questions raised by the noble Earl, Lord Russell, and the noble Lord, Lord Lennie, our aim continues to be for the NESO to be operational in 2024, depending on a number of factors including agreeing timelines with various key parties.
On the review of the SPS, I confirm that the Secretary of State can review the strategy and policy statement at any time—for example, following a general election or a significant change in energy policy.
On the questions raised by the noble Earl, Lord Russell, about the rules and responsibilities of NESO, I confirm that we have set out the roles and responsibilities of government, Ofgem and NESO at a high level in the SPS. The Government set the policy direction, while Ofgem is the independent regulator and makes decisions on business and investment plans. NESO will be the whole system planner, the operator of the electricity system, and the expert adviser to the Government and Ofgem as key decision-makers.
We are currently developing a framework agreement, which will set out the relationship between the Government as the shareholder and NESO. We plan to publish this shortly after designation. The specific roles and obligations of NESO will be set out in its licences, on which Ofgem undertook an initial consultation last year. We are due to undertake a statutory consultation this spring. However, as mentioned previously, we expect that NESO’s role and remit will continue to evolve over time as energy policy develops.
On NESO not being able to raise concerns over the achievability of SPS outcomes until it is established, I reassure the noble Lord that Ofgem will also have a responsibility to raise concerns over achievability. We are already in frequent dialogue with the current electricity system operator, on which NESO will be based, where the Government’s ambitions for energy are regularly discussed.
Finally, I move on to the point made by the noble Lord, Lord Lennie, on why now is the right time for the SPS. The Energy Act 2023 introduced new measures and established the independent system operator and planner in the first place as NESO. We thought that now was a good time—to reply to the point about major policy changes—to develop strategic guidance to explain exactly how we believe that Ofgem, government and NESO would work together to meet the Government’s energy priorities going forward.
I hope I have been able to deal with all the points raised by noble Lords.
Lord Naseby (Con)
Can my noble friend answer the question about small nuclear reactors? There has been consistent delay after delay. Are we going to get a decision in this calendar year?
Lord Callanan (Con)
That is not the subject of this particular policy statement, but my understanding is that Great British Nuclear is currently reviewing the various designs, having instituted a competition to try to pick the best design going forward. I do not know the precise timescale for responding to that, but I will certainly find out and write to the noble Lord.