Comment by Ben Shafran, Head of Business Model & Policy Innovation, at Energy Systems Catapult.

It’s been a month of big announcements in the energy sector. I’ve summarised the biggest announcements and what they mean for decarbonisation and low carbon energy innovation.

Review of Electricity Market Arrangements

After three years of vigorous debate, the government has decided not to introduce locational (zonal) pricing into the wholesale electricity market. This is a missed opportunity to support UK innovators in the flexibility and digitalisation space – you can read Guy Newey’s statement here.

Instead, the government will pursue a programme of reforms under the umbrella of a ‘reformed national market’. The REMA decision, much like the Spending Review and Infrastructure and Industrial Strategies (see below), reiterates the government’s focus on getting big infrastructure built.

The proposed reforms may include:

• Making even greater use of the Strategic Spatial Energy Plan to direct which projects are built and where. While we certainly support strategic planning – the SSEP was first proposed in our report for the Electricity Networks Commissioner – there is a risk that it focuses on larger infrastructure at the expense of demand flexibility and distributed assets that are harder to centrally plan.
• Reforming transmission network use-of-system (TNUoS) and connection charges. Here, the government has indicated a preference for less variable charges, that are seen to reduce risk for renewable generation projects, rather than more dynamic charges that would benefit batteries and other flexible technologies.
• Reforming trading arrangements, such as allowing smaller assets to participate in the Balancing Mechanism and moving to shorter settlement periods for the wholesale market. These would be welcome changes – the Catapult has consistently made the case that we need more granular prices in time and space.

The next step will be the government’s Reformed National Pricing Delivery Plan, due later this year, as well as initiatives on charging reform and trading arrangements that will be led by Ofgem and the National Energy System Operator, respectively.

RIIO-3

Moving from markets to networks, Ofgem has made its draft decision on the charges and outputs for electricity transmission companies, and gas network companies, for the period 2026 – 2031 (RIIO-3).

The attention at this stage is on how far apart Ofgem and the network companies are on forecast costs. The draft decision allows roughly 25% less than the companies requested for the RIIO-3 period, which is standard for this stage of the process. This gap will close by the time Ofgem makes its final decision in November. Funding for the largest, strategically important electricity transmission projects is unaffected as those projects are handled via the Accelerated Strategic Transmission Investment (ASTI) scheme, which sits beside the price controls.

On the innovation side, Ofgem is taking steps to make funding more strategic and easier for innovators to navigate:

• A taskforce will be created to define long-term challenges and innovation targets, which will inform Strategic Innovation Fund (SIF) allocations.
• The taskforce may identify areas where innovation is needed to deliver consumer benefits, but this innovation is unlikely to benefit networks directly, and Ofgem will be looking to create a process for third parties to submit SIF project proposals in these areas.
• Removing the requirement for a 10% contribution to SIF projects. Projects that are riskier or have greater potential to benefit consumers could have lower (or no) contribution rates, whereas projects that use established or low-risk technologies would be set a higher contribution rate.
• A deployment fund worth £50 million will be set up to encourage lessons from SIF projects to be rolled into network companies’ business-as-usual activities.
• Ofgem also awarded £215 million funding for the Network Innovation Allowance, with a further £2.5 million to create a central ‘one to many’ advisory service to early-stage innovators. The service will offer advice, training and collaboration, and would be freely accessible to all innovators.

Infrastructure and Industrial Strategies

Hot on the back of the Spending Review, which allocated significant amounts of funding for energy infrastructure, came the 10-year Infrastructure Strategy and the Modern Industrial Strategy. There was little in the way of new energy announcements in either – mostly they reiterated commitments such as £14.2 billion of public money for Sizewell C and £9.4 billion for two carbon capture and storage clusters, as well as systemic changes such as the Clean Power 2030 plan and the establishment of Great British Energy as an investor in renewable generation.

The Clean Energy Industries sector plan (a subset of the Industrial Strategy) identified eight technology focus areas for UK policy: onshore and offshore wind, nuclear fission and fusion, heat pumps, electricity networks, CCUS and hydrogen. An update to the Hydrogen Strategy is promised for later in the year, and may well include a decision on the role of hydrogen in domestic heating (our modelling sees such a role being limited).

Notable by their absence were mentions of flexibility and digitalisation. But these are expected to be covered in the Clean Flexibility Roadmap, which is due later this month.

Solar and Onshore Wind Strategies

Also published in quick succession were the Solar Roadmap and Onshore Wind Strategy – the output from the solar and onshore wind taskforces, respectively. In both cases, the taskforces are expected to transition to enabling councils to oversee implementation of their recommendations.

The Clean Power 2030 plan includes targets of 45-47GW of solar PV and 27-29GW onshore wind by 2030, so action is paramount. Both include similar areas of focus, including the role of strategic management of the grid connection queue, the need to address planning and permitted development blockers, and the community benefits that could arise from hosting these technologies.

The main difference lay in the commercial models applicable for each technology. The onshore wind taskforce focuses on the risks to commercial development of windfarms, such as variability of TNUoS charges and the design of Contracts for Difference. The solar taskforce pays greater attention to smaller scale installation, and to the role GB Energy could play in funding these.