Cost of Energy – Independent Review: call for evidence

Published: 5 February 2018

Energy Systems Catapult welcomes the publication of Professor Dieter Helm’s report on Cost of energy – Independent Review for the Department for Business, Energy & Industrial Strategy and the chance to contribute to the debate via this call for evidence.

Professor Helm put forward his proposals on how to reduce costs in the power system in the long-term whilst ensuring the UK meets its climate change targets.

The Review is a valuable opportunity to step back and consider the broad direction of change in energy markets and policy as the UK progresses further towards a low carbon future. In particular, we welcome Professor Helm’s emphasis on simplifying policy, enabling innovation, and delivering decarbonisation across the economy at the lowest cost.

We support the broad thrust of much of Professor Helm’s diagnosis and the priority given to:

  • The importance of simplifying government intervention in energy markets
  • The creation of a carbon price on a common basis across the whole economy to enable carbon budgets to be met at least cost
  • Unlocking benefits for consumers from technical innovation and change (including the growing importance of digitalisation).

However, we have doubts about a number of the review’s specific recommendations:

  • Firm power auctions: This proposal could raise the costs of providing reserve capacity by requiring each party to provide its own reserve. The Catapult believes a wider range of options to address security of supply should be explored. In particular, there is scope to give energy service suppliers greater decentralised responsibility for service reliability with reduced reliance on government-led contracting. This could strengthen incentives on market players to innovate and enable a range of demand-side and flexibility options.
  • Carbon tax and border tax adjustments: The Catapult agrees that an economy-wide carbon price would enable decarbonisation at least cost. However, the implementation challenges for the tax-based approach recommended in the report are formidable, so we believe that a broader range of options for delivering a consistent carbon price signal should be explored. In particular, the Catapult believes that a progressive portfolio decarbonisation obligation placed on energy service suppliers, with tradable certificates, could enable a near economy-wide carbon price to emerge.
  • Creation of a merged ‘UK Energy Research Laboratory’: The case for merging a range of existing institutions and research centres each with distinctive objectives is not strong. The Government’s new Energy Innovation Board should provide strategic oversight and direction of energy innovation and research and development funding, drawing on a strong evidence base of ‘whole energy system’ analysis.
  • Reform of transmission and distribution network regulation: The Catapult does not see a strong case to abandon the current framework of network price controls given their strong monopoly characteristics, or to create publicly owned national and regional system operators. Future reforms should focus on increasing the agility of network governance processes (to enable innovation) and increasing the spatial and temporal accuracy of pricing of network capacity and constraints to incentivise flexibility and efficient location and operation of generation.