Comment by Ben Shafran, Head of Markets, Policy and Regulation, at Energy Systems Catapult.

Blackouts aside, there has been no shortage of energy policy news this month. To help cut through the noise, I’ve picked a few that are particularly relevant to decarbonisation and the role of Net Zero energy innovation.

Consumer-focused digitalisation

The government will introduce legislation to require electrical heating appliances such as heat pumps, storage heaters, and heat batteries to have smart functionality (consumers would retain the option to use the products in non-smart mode). This means that they could respond to a price or operational signal to turn up or down – subject to settings controlled by the user. This will align heating products with the requirement that all electric vehicle (EV) chargers should have smart functionality.

To complement this, the legislation will require appliances to be capable of working under a range of tariffs – to avoid lock-in to a particular tariff or energy supplier. Additionally, a new license will be created to enable providers to remotely control those smart-enabled appliances, subject to consumer consent.

At the same time, Ofgem has progressed its work on creating functionality that would easily enable consumers to give or withdraw consent for their energy data to be shared.

Taken together, these changes would create the legal framework to enable a wide range of consumer-focused smart offerings – ranging from dynamic pricing models (similar to Octopus Agile) through to service-based models (e.g. buying a level of comfort for the home).

This is a good start. Though the target implementation date could have been set more ambitiously than 2027 – to match the Clean Power 2030 mission’s aim of speeding up energy processes. We must match our ambition on delivering better consumer outcomes and Net Zero with action.

More needs to be done – including simplifying the rulebook for energy retailers and potentially opening the market up to ‘secondary supply’ models. Keep your eyes peeled as we’ll soon be releasing our report on the lessons from our Living Lab trial of the secondary supply concept.

Decarbonising heat

Two proposals from the government are aimed at scaling up the low-carbon heating market:

The Boiler Upgrade Scheme – the main subsidy to address the high upfront cost of hydronic heat pumps – could be extended to air-to-air heat pumps. The proposed subsidy would be considerably smaller than they are for hydronic heat pumps – reflecting the lower cost of such systems (which in the UK would mainly be used in flats). The government is consulting on options of £1,000 and £2,000, compared to £7,500 available for air source and ground source heat pumps. Additionally, the government is consulting on whether to allow third-party ownership models, such as hire purchase, to access the subsidy.

The government is also consulting on updates to the Clean Heat Market Mechanism – the other key policy for stimulating the heat pump market, which came into effect on 1 April. This sets a target for manufacturers of gas and oil boilers to sell a certain amount of heat pumps, or purchase ‘credits’ from other manufacturers who have outperformed their target. Manufacturers who fail to meet their target or purchase sufficient credits face a fine of £500 for each unmet unit. The government now wants to increase the target from 6% of gas boiler sales this year to 8-10% of gas boiler sales in 2026/27.

These are two important pieces of the heat decarbonisation puzzle. But we’re still waiting on the other pieces – specifically, reforming Energy Performance Certificates so that they reward low carbon choices and the long-promised consultation on rebalancing policy costs so that they do not disproportionately fall on electricity bills.

Offshore wind

Offshore wind is widely accepted to become the dominant form of power generation as the GB electricity system decarbonises. The government’s Clean Power Action Plan set a target of 43-50GW of offshore wind by 2030 (current operational capacity is around 15GW), while our own Innovating to Net Zero 2024 modelling suggested that as much as 71GW could be needed by 2050.

A lot is riding on the government securing unprecedented amounts of new capacity in Allocation Rounds 7 and 8 of the Contracts for Difference auctions. To give itself the best chance of securing such capacity, the government is changing how CfD auctions are run, with the two key changes being:

• instead of publishing a budget for the auction the government will announce a target for the capacity to be procured; and
• giving the Secretary of State the option of seeing anonymised bid data (price and capacity) before the auction concludes.

The aim of these two changes is to give the government the option of increasing its budget to secure the target capacity. The risk with this approach, of course, is that bidders know the government has backed itself into a corner. This creates a weak incentive for developers to bid aggressively.

That effect is worsened by external factors that pushing up the cost of new wind farms – as evidenced by the decision of Danish developer Ørsted to halt the development of the Hornsea 4 wind farm, citing rising cost pressures from both the supply chain and finance. At 2.4GW, Hornsea 4 was due to become Britain’s largest wind farm. It had secured a CfD at last year’s auction at a price that translates to around £83/MWh in today’s money – very similar to the current wholesale electricity price in GB.

Energy Systems Catapult has previously argued that CfDs were effective at growing a nascent renewables market in GB. But, as the share of renewables grows and with it the need for whole energy systems solutions, different policy approaches are likely to be more effective at delivering low-cost, rapid decarbonisation.