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How should we regulate gas networks for Net Zero?

Comment by Susanna Elks

Energy Policy Advisor - Markets, Policy and Regulation

Network regulation has not traditionally been a high-profile part of the energy policy landscape, but that could be set to change – particularly for gas networks.

The reason is that our approach to regulating gas networks could play a vital role in shaping the transition away from natural gas for both energy-intensive industries and millions of households.

The decisions taken on the future of the gas networks will affect when people need to change away from natural gas and shape the alternatives they will have available. How we regulate gas networks could be a key driver of the pace of decarbonisation in key sectors, and of the shape of emerging hydrogen markets.

Despite this, there has not been much focus on this space since the Net Zero target was put into law. Given the importance of this area, we commissioned Frontier Economics to consider the needs of future gas network regulation. Their work is published today in a new report ‘Gas network regulation for Net Zero’.

Before diving into their findings, here are four reasons we think gas network regulation needs renewed focus for Net Zero:

  1. Net Zero requires a fundamental transformation of the gas network.  Using natural gas led to at least 35% of the UK’s emissions in 2018. So one thing is certain, if the UK is to reach Net Zero this system must be transformed by 2050. That is a relatively short timeframe to transition for a massive and complex network of long-life assets, worth approximately £26bn, that currently serves over 23 million users of different types (see Figure 1).
Figure 1: DUKES main report 2018

Figure 1: DUKES main report 2018

For each section of the network, the UK needs to decide whether to convert it to carry hydrogen, decommission it, or maintain it for a small number of large natural gas users. The case for each of these solutions is likely to vary based on the needs and characteristics of an area (considering the age of the assets and surrounding users etc), implying a future where a mix of these solutions are adopted across the country. Some of the decisions will need to be taken soon as there is a lot of high cost pipeline which was built in the 60s, 70s and 80s which is coming to the end of its design life. We need to start taking “Net Zero-coherent” decisions about the future of these assets.

  1. Today, regulation does not incentivise Net Zero or have a way of managing the complexity. Gas networks are operated to make money based on the regulatory incentives Ofgem places on them. This regime does not currently include incentives or processes to spur the necessary network action for Net Zero. It will need Ofgem to shape and drive a robust process and probably some incentives, to drive network companies to make coherent strategic decisions across their networks, and to do this in a way that delivers maximum value for the wider energy system transition. The regulatory framework will need to be robust in the face of inevitable uncertainties as well as vested interests.
  2. Gas network regulation will be a key shaper of how the electrification vs hydrogen debate plays out. There is a charged debate developing on the relative benefits of using electricity or hydrogen to decarbonise different sectors. Gas network regulation will be a key factor which, alongside market signals, technology developments and consumer preference, will shape where electrification or hydrogen operate. Gas network regulation and the surrounding processes will ultimately decide what infrastructure citizens can access, including a potential hydrogen market, shaping the decisions that consumers take about changing their reliance on natural gas.

As such it is likely to make sense for there to be a much stronger link between gas network regulation and local area energy planning and locally led processes to make decisions that take account of local priorities and opportunities.

  1. Network regulation decisions will influence how costs are recovered from customers. It is important the costs of the transition are distributed fairly across society. In 2020, almost 30% of a consumer’s gas bill came from network charges. How these evolve must be carefully considered to ensure the costs of network conversion, decommissioning or expansion are fairly distributed across users of the natural gas network, the hydrogen network, the electricity system, as well as taxpayers more broadly.

Overall, it will be very hard to have transformative action on decarbonisation in the UK without strategic thinking around how we use gas network regulation to shape decisions for a fair and efficient transition to Net Zero, with gaseous energy vectors playing a key role. It will affect whether we lock ourselves into expensive and potentially high carbon pathways, as well as how a hydrogen system develops.

At Energy Systems Catapult, we think one of the key reforms for natural gas network regulation should be the introduction and integration with Local Area Energy Planning (LAEP). The need for this process has been reinforced by Frontier’s conclusion within this new report that gas network regulation needs to ‘Establish processes to enable coordination across the whole system’. A robust, well-evidenced process for LAEP can help deliver that. It will help us manage the challenges discussed above; enabling action whilst balancing uncertainty and vested interests.

It is a process which gathers stakeholders, led by local government, to interrogate different energy futures for an area and to develop the most promising, cost-effective options for decarbonisation based upon the characteristics of the area. Inherently this leads to different technologies being deployed in different areas by recommending the most promising technology mix. It considers costs across the whole system, including gas network and electricity network costs, whilst considering the values in the local area. These plans would create a foundation for decisions on network infrastructure.

In the new report, ‘Gas network regulation for the net zero transition‘, Frontier Economics considers the gas network regulation reforms and interventions needed to deliver net zero. They articulate the challenges of coordinating low carbon gas network investment, recommend steps for policymakers and consider how the costs could be distributed across citizens.

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