Markets, Policy and Regulation

Introduction

Reformed markets, policy incentives and regulatory frameworks are essential to drive investment and innovation in smart low carbon energy solutions.

Energy Systems Catapult offers a policy, regulatory and market design expertise that combines deep understanding of technology, economics, and energy policy design, informed by cutting-edge modelling and evidence-based analysis.

We work with government, regulators, SMEs, innovators and academia to develop practical, solution-focused market design, policy and regulatory options.

The Challenge and Opportunity

Meeting the UK’s 2050 climate change targets will require fundamental transformation of our entire energy system – not only electricity systems, but also heat, transport and industrial energy.

The challenge for energy policy and the design of markets and regulatory frameworks is huge: we spend more than 8% of GDP on our energy needs.

The energy sector is highly complex, dependent on major infrastructure networks and heavily shaped by policy intervention and regulation. The challenge of decarbonisation means that we need new policy thinking and market designs that put decarbonisation at the centre of decision making across the whole system.

Understanding the reform agenda requires deep knowledge of existing policy and regulatory frameworks, the processes of government and regulators and the technology and economics of low carbon energy options.

Energy Systems Catapult takes a whole systems approach to understanding and analysing the transition to low carbon energy. By whole systems, we mean:

  • Joining up the system from sources of primary energy all the way to end consumers;
  • Breaking down silos between energy vectors (e.g. electricity, heat and transport fuels);
  • Joining up physical requirements of energy systems, with policy, market and digital arrangements.

This broad definition means that our analysis encompasses policy and regulatory influences all the way through the value chain, and across the different policy domains from upstream taxation through to detailed regulation of network charges or retail markets.

Our Approach

The Catapult was set up to help navigate the transformation of the UK’s energy system. We work across the energy sector to ensure businesses and consumers grasp the opportunities of the shift to a low carbon economy.

The Markets, Policy and Regulation (MPR) team is our centre of excellence for energy policy and regulatory knowledge and works closely with government and regulators, including BEIS, the Committee on Climate Change and Ofgem.

We draw upon all our capabilities to develop evidence based analysis to inform key industry stakeholders and to undertake radical thought leadership work, such as our ‘Rethinking Decarbonisation Incentives’ project. A key part of our work is stakeholder engagement, understanding what stakeholders want and need from the Catapult and how this can be delivered.

Our Assets

Policy and Regulatory Knowledge:

  • Deep understanding of economic regulation of utilities;
  • Network price controls and incentives;
  • Economy-wide span of carbon policy knowledge;
  • Deep understanding of regulatory challenges raised by low carbon technical and social change;
  • Incentive design and low carbon regulatory mechanisms;
  • Policy interpretation of energy system modelling, engineering and infrastructure transitions;
  • Electricity market design and policy analysis;
  • Heat decarbonisation policy, local energy planning and social policy dimensions of energy.

Economic Appraisal:

  • Substantial experience of economic and policy appraisal, impact assessment;
  • Tariff design and analysis, network charging policy and regulatory economics;
  • Environmental and welfare economics perspectives and analysis, externality valuation.

Stakeholder Engagement:

  • Engagement on policy and regulatory issues with government and regulatory authorities;
  • Deep appreciation of the institutional environment for policy decision making.

Our Work

Our MPR team has delivered on or is currently working on a range of projects and developed specialisms, including:

Smart Systems and Heat: policy and regulatory support to a multi-million pound programme testing smart approaches to heat decarbonisation, including assessing the policy and regulatory changes to enable local low carbon transitions in three local authority areas (Newcastle, Bridgend and Bury, and drawing out key conclusions to inform BEIS about heat decarbonisation policy priorities.

ETI Future Networks Transitions Analysis: identifying fixed energy infrastructure transition pathways to meet a range of 2050 energy scenarios, assessing implications, underlying costs, dependencies (both between networks and with developments elsewhere in the energy system), timescales, resource requirements and constraints of pursuing those pathways, at both national and regional level.

Assessment of key network infrastructure implications of three scenarios based on the modelling results (technology mix deployed). Alongside this we reviewed policy and regulatory framework for gas, electricity, heat and CO₂ networks – identifying key stakeholders, governance structures, regulations, policies, and investment drivers.

Reforming Electricity Market Design: investigating electricity market design options to better enable innovation and more efficient decision making about decarbonisation and security of supply. It builds on existing knowledge and international experience to develop options to reform electricity market signals (as part of an efficient approach to whole energy system decarbonisation).

Rethinking Decarbonisation Incentives: a major thought leadership project to explore how UK policies can promote clean growth by taking a whole systems perspective on climate policy, opening up scope for strategic debate about the broad pattern of economic drivers for decarbonisation and the durability of incentives for carbon reduction across the whole economy.

So far, we have summarised the current pattern of ‘effective carbon prices’ in the UK for reducing emissions in different sectors; carried out case studies to learn from international experience with decarbonisation policies; formulated stylised economy-wide policy reform options; and proposed incentive designs for the agriculture, forestry and other land use (AFOLU) sectors.

We are currently assessing the consequences the proposed reform options might have on key sectors, including road transport and residential heat; the links between carbon policy and economy-wide productivity; and the available near and mid-term options to address low-priced emissions.

Energy Network Codes Review Project: production of a reasoned consultation document on changes to the existing arrangements to improve the regulatory framework for clean, smart, and consumer-led energy system. It will also look at how these changes can be made, including through legislation if necessary and if more radical change should be considered, including impacts on market participants and developing proposals for change.