Recognising, therefore, that markets are just one part of a complex, evolving energy system, we feel that there is a need for an overarching Net Zero and Energy Security Delivery plan, which should include within it a detailed plan of how the electricity system will decarbonise by 2035 and how energy security will be maintained. We also recommend that the Net Zero and Energy Security Delivery Plan presents, at a high level at least, an overarching energy system architecture.

Having a clear view of this architecture, even if there are still areas of uncertainty, sensitivities and options to consider, will help the industry, policy makers, supply chain and investors to focus on delivery. It will help to move thinking forward, and away from the current tendency to think in terms of alternative, and often hypothetical, scenarios.  

The biggest market challenge right now is to bring forward massive investment in low carbon technologies, flexibility assets and network infrastructure. Investment that will provide economic growth, energy security, lower energy costs and achieve net zero.

Events over the past year have raised the urgency of progress towards our net zero goals. Even before the current energy price crisis, the Government had acknowledged the need to reform our electricity system quickly. The 2021 Net Zero Strategy committed us to net zero electricity by 2035, reflecting the growing realisation that decarbonising our electricity supply will be a key driver in achieving our wider net zero aims: while today electricity accounts for 20% of our end use energy demand, by 2050 we expect it to be between 50 and 80% [1].

According to the most recent Future Energy Scenarios published by the National Grid [2], by 2035 we need to be delivering around 80% of our electricity from wind and solar in order to achieve net zero. That means an increase in renewable capacity of between 100 and 150 GW in 13 years, with build-out rates of between three and four times greater than those we have achieved over the past five years [3].

Treasury analysis for the Net Zero Strategy has identified the need for £730 billion of investment to decarbonise the UK economy by 2037, of which £210 billion would be in the power sector. In addition to this, around £80-100 billion will be required to upgrade critical electricity network infrastructure. This investment significantly ramps up during the next decade and is a step-change on the current levels of investment [4]. More recent analysis from the CCC has highlighted that low carbon investment needs to reach £50 billion a year by 2030.  Achieving these levels of investment must be a key goal for REMA. 

Furthermore, the urgency posed by rises in energy bills makes the argument for accelerating the move towards net zero power more compelling. Renewables are substantially cheaper today than fossil fuel generators, with the most recent Government estimates of the levelised cost of energy putting wind and solar at less than half that of fossil fuels for projects commissioned in the middle of this decade [5].

Our current CfD system, initially envisaged as a competitive support mechanism for technologies which were not yet fully mature, is now starting to deliver significant savings to consumers, allowing renewable developers to pass their lower costs through to consumer bills in return for the long term price confidence needed for investment. If we had been more ambitious with CfD auction capacity over the past few years, both consumers and the public purse would have seen even greater savings today.

Regen has supported the extension of the CfD scheme for variable renewable generation such as wind, solar and potentially tidal energy, calling for a much clearer long term strategy for renewable energy deployment and supporting the move to annual allocation rounds. This would send a positive signal to investors, allow developers to build their project portfolios, utilities to invest in grid infrastructure and supply chain companies to build the jobs, skills and capabilities needed to efficiently deliver net zero. We continue to strongly support the scheme, and the opportunities it represents, as evidenced by the latest allocation round securing renewable energy capacity that will generate electricity nine times more cheaply than current gas prices [6].  

However, as Regen’s analysis for The Day in The Life of the electricity system 2035 shows, renewables alone won’t give us the operability, flexibility and security that we need. Delivering flexible technologies at pace represents an even greater step-change. For example, while the battery storage sector has grown over the past few years and is now providing substantial support to the system through ancillary services, we need to move from a system which is installing a few hundred MW of battery storage per year to one that consistently delivers GWs of new capacity.

We will also need significant investment in new forms of low carbon dispatchable generation, including thermal generation with Carbon Capture and Storage and hydrogen-powered generation. While investment in dispatchable generation technology will require policy support, we do not believe that an extension of the CfD scheme to cover such dispatchable renewable generation would be appropriate, as this would incentivise such technologies to maximise generation and become baseload energy generators, displacing lower cost and lower carbon renewable energy. Market reform should deliver a clear business case and investment in these low carbon dispatchable solutions via other means, including capital investment, innovation funding, a regulated asset base and also through an enhanced Capacity Market.

Market reform needs to support a step-change in investment in all zero carbon technologies and it needs to pass the cost-savings that come from a net zero power system through to consumers. This can be achieved if reform follows the following principles:

Our proposal for market reform is one in which we develop the existing electricity wholesale market at pace, but at the same time make meaningful changes to strategic planning, network development and wider societal, government and economic reform. This radical evolution of the electricity system and markets would represent the most far reaching process of reform since privatisation. The scale and pace of change is unprecedented. Delivering such unprecedented change carries risk – therefore, reform must look both to drive change and to manage risk. Rather than a single ‘big-bang’ change that would be high-risk, cause an investment hiatus and may be impossible to deliver, these reforms should be delivered as part of a controlled but major programme of change that could be rolled out within a 3-5 year period.

Delivering radical evolution requires strong, well-informed and strategic leadership at the centre of the electricity system. The complexity of the electricity system, the systemic uncertainty inherent in decision making, and the multiple objectives that we are trying to reach all mean that it critical that a full ‘system approach’ is needed.
In the past Regen has recommended the creation of an Office of Net Zero, or another integrated body, to be tasked with net zero delivery [8]. It may not be possible to create such an entity at present but there is a need for more integrated leadership across the FSO, BEIS and Ofgem, with the capability and authority to deliver the strategic planning and system architecture elements of system reform. Parallel policy initiatives should be clearly linked up and coordinated, or avoided.

In the modern energy system, which is far more decentralised and democratised, stakeholders from devolved governments, regions and localities must be fully engaged and their objectives recognised. The industry itself is also highly diverse. Therefore, REMA must continue to be transparent and multi-party; open to all and welcoming of challenge. This will not only help to ensure that the REMA design is fit for the future, but also that it can then be implemented.

Click the tabs below to investigate our recommendations for each of the key consultation themes. You can also read our consultation response in full here.