Comment by Tom Luff, Head of Policy and Business Model Innovation at Energy Systems Catapult

Calling this a busy month in energy would be an understatement.

The Middle East conflict has dominated headlines since the escalation that followed the strikes on Iran on 7 March. Beyond the human toll, the effect on energy markets – and the knock-on consequences for the economy – could be profound.

Back in 2010, at the National Security Secretariat, I was one of many to flag the Strait of Hormuz as a strategic vulnerability and recommended shifting from exported gas to alternatives like renewables. The government views the latest crisis as validating its energy policy choices, arguing that “this is yet another example of why we must end our reliance on volatile fossil fuel markets and switch to clean homegrown energy”. Yet the picture remains more complex.

This piece in Modern Diplomacy neatly explains how the global energy system has become remarkably fragile. In short, shocks ripple fast and ‘elasticity’ has failed, meaning resilience is increasingly important.

At home, the energy system faces structural inflexibilities. Grid bottlenecks are driving rising wind curtailment, while underdeveloped storage is limiting the usability of cleaner power. Renewables alone cannot deliver stability or value without significant investment in flexibility and storage. This was the standout message of our recent Innovating to Net Zero report, which found that scaling flexibility technologies is not only a huge opportunity for UK innovators but could help save billions in energy costs.

The Climate Change Committee (CCC) has also weighed in, calculating that achieving Net Zero by 2050 would cost less annually than the impact of a single major fossil fuel crisis.

Levers for cutting energy bills

In February, there was welcome news that the energy price cap will fall by 7% – though analysts warn this could be reversed next period given the reverberations from the Middle East.

Even without this geopolitical turmoil, the cap cut was not straightforward. Savings from shifting levies into taxation last autumn were partly offset by record increases in network charges to fund new transmission lines and reinforcements.

The truth is that network costs are increasingly a central driver of consumer bills. To manage the risk of delays pushing up costs, Ofgem is consulting on allowing early construction funding for key transmission projects – in some cases exceeding usual caps. While this aims to reduce late-delivery risks, it adds to upfront costs. Market reform, which could provide a check to better manage congestion and constraint costs, has stalled, making close scrutiny of transmission and distribution projects even more crucial given the significant impact they could have on energy bills.

Mixed price signals and queue concerns

Amid calls to strip carbon costs from wholesale electricity pricing to reduce bills, Jan Rosenow, Professor of Energy and Climate Policy at Oxford University made an important point: doing so would weaken price signals that encourage investment away from fossil fuels toward renewables.

We made a similar argument in our Innovating to Net Zero report, suggesting any consumer bill impacts should be offset by recycling proceeds into targeted bill savings.

There are also concerns that competition to connect demand to the grid is becoming a socioeconomic dilemma. The Home Builders Federation has warned that the growing connection requests from data centres are competing with new housing developments, and that parts of the electricity grid have already reached capacity. Balancing these competing priorities highlights the broader challenge of managing flexible, distributed demand alongside new supply.

New players and experienced hands

It’s interesting to see Tesla enter the GB electricity sector, after previous speculation / false dawns. Politics aside, we should welcome newcomers to energy retail – with scope for new consumer offerings. Whether this demonstrates that the regulatory framework is innovation-friendly (especially for smaller players) remains to be seen.

And finally, there has been a major leadership change in energy officialdom, as Jonathan Brearley moves from regulation to policy as Permanent Secretary at the Department for Energy Security and Net Zero (DESNZ).

Rumours of an “outsider” proved somewhat misguided. Jonathan, current head of Ofgem, designed the CfD, Capacity Market, the Climate Change Act and the Climate Change Committee – so he’s certainly not without strong policy reform credentials. He has also advocated zonal pricing – a sign perhaps that he could push for more radical reform in support of reducing consumer bills?

We’ll be watching with interest.