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Table of contents

The House of Lords Economic Affairs Committee published its report ‘Investing in energy: Price, security, and the transition to net zero’ in July 2022. The House of Lords is scheduled to debate this report on 16 October 2023. 

1. What issues did the committee consider?

The committee considered how the government planned to achieve the following two separate but related policy objectives.  

The first was the government’s commitment in law to achieve net zero by 2050 alongside its target to decarbonise the power system by 2035. The committee considered how this target might be achieved while ensuring the UK’s energy supply was “affordable and reliable”. The committee argued that private investment was key to achieving net zero. However, it said there was “a gap between the government’s ambitions and the practical policy that is needed to provide confidence and clear market signals to investors”.  

The second was the government’s plans to mitigate the effect of rising energy prices, exacerbated following the Russian invasion of Ukraine in 2022. The committee argued that the war had made the transition to net zero “more complex”, noting its impact on energy supply and prices around the world. 

The committee considered the policies of the then government, including those outlined in ‘Net zero strategy: Build back greener’, published in October 2021 and updated in April 2022. The net zero strategy set out how the government intended to decarbonise the UK economy and reach its 2050 net zero target. The committee also considered the proposals outlined in the ‘British energy security strategy’, published in April 2022. The British energy security strategy set out how the government planned to accelerate homegrown power and increase the UK’s energy independence. 

2. What did the committee recommend?

The committee recommended the government should take the following measures over the next three to five years: 

  • Publish a net zero delivery plan which detailed how the UK can achieve net zero in an orderly way, taking into account energy security and foreign policy considerations.  
  • Publish an energy demand reduction strategy which included measures to increase incentives for investment in energy efficiency measures for buildings. The committee said the strategy should include measures to support the development of resilient supply chains and workforce skills. It also recommended this strategy should be published as soon as possible. 
  • Increase the deployment of renewable energy sources in order to reduce the UK’s dependence on gas markets. The committee argued this should include onshore wind, which it described as “one of the cheapest and fastest ways to increase renewable energy generation”. The committee said the government should consider promoting onshore wind by enabling local communities to benefit from the additional energy generated. 
  • Maintain existing energy generation in the short term, including coal-fired power stations where necessary. However, the committee argued extending the life of nuclear power stations over coal power stations, where this was feasible, was preferable as it would result in lower carbon emissions.  
  • Seek to reach an agreement with other European countries to manage energy supply emergencies. 

The committee also recommended the government should take the following actions to increase investor confidence and make more private capital available to support the transition to net zero:   

  • Set out a cost analysis of the government’s target to achieve 24 gigawatts of nuclear capacity. The committee noted this target was more than double the capacity assumed by the Climate Change Committee. It also said the government should confirm how it will prevent the costs of potential overruns and construction delays being borne by energy bill payers. 
  • Provide more detail on the capacity, timeframes and expected costs of increasing long-duration energy storage. 
  • Outline the market structures and mechanisms that would be used to support greater hydrogen production. 
  • Support carbon capture and storage by fulfilling the government’s commitment to develop four low carbon industrial clusters. The committee also recommend the government should design “market models” to provide information to investors on the types of technology required. The committee argued this was necessary to give potential investors greater confidence in the long-term viability of carbon capture and storage. 

The committee made further recommendations, including: 

  • The UK Infrastructure Bank should play a greater role in supporting innovative and potentially riskier low carbon technologies at an early stage in their development. The committee argued this would help leverage private investment in these new technologies. 
  • The government should enable more investment in North Sea oil and gas production in the short-term. However, the committee argued oil and gas exploration or investment should focus on projects with short lead-in times and payback periods in order to limit the risk of stranded assets. 
  • The committee recommended the UK could benefit from additional gas storage capacity and welcomed the fact the government and Centrica were considering reopening the Rough natural gas storage facility off the coast of East Yorkshire. It noted gas storage facilities could also be made suitable for hydrogen storage. 
  • The government should revise the national planning policy framework in order to avoid the danger of delays to projects necessary to secure the energy transition. 
  • The government should expedite the planning process for new nuclear reactors sited on the locations of former nuclear reactors. The committee also recommended the government should encourage schemes which compensate residents for energy projects built in their areas. 
  • The future system operator, a new body responsible for securing the security and quality of Britain’s energy transmission system, should be set up as operationally independent of the government. The committee also argued the government needed to clarify what the relationship will be between the future system operator and appointed industry champions and the energy networks commissioner. 
  • The committee noted the introduction by the government of the energy profits levy. The committee said the government should explain what effect it believes this would have on investment decisions in North Sea oil and gas. It also said the government needed to confirm whether or not the levy would be extended to electricity generators. 
  • The government should set out whether it planned to extend carbon pricing, currently in place through the emissions trading scheme and taxes on fuel, to other greenhouse gas emitting activities. 
  • The committee noted proposals from the government to reform the Solvency II regulatory regime for insurance companies in order to relax the amount of capital they hold against their liabilities and how they manage risk. The government had argued this would free up potential investment in renewable energy. The committee argued that there was no obligation for insurance companies to use this released capital to make net zero aligned investments. It recommended the government should explain how it might encourage capital to support the energy transition. 

3. What did the then government say in response to these recommendations?

The then government published its response to the committee’s report in October 2022. During the period between the committee’s report and the government’s response, there had been a change of prime minister and secretary of state for business, energy and industrial strategy. Following the resignation of Boris Johnson, Liz Truss became prime minister on 6 September 2022. Jacob Rees-Mogg was appointed by the new prime minister as secretary of state for business, energy and industrial strategy. On 8 September 2022, Mr Rees-Mogg announced an energy price guarantee capping the unit price for energy for households. He also announced the government intended to provide support for businesses and other non-domestic energy users. Further information on these schemes is provided in the House of Lords Library briefing ‘Cost of living: Impact on public wellbeing’ (14 October 2022). 

In its response to the committee, the then government refused to commit to publishing a new net zero delivery plan, saying the net zero strategy updated in April 2022 provided a “comprehensive overview” of its approach to decarbonising the economy. It said it had committed to publishing annual updates on the progress in achieving its delivery plan. The government also said it had launched a review to ensure it was meeting its net zero target “in a way that is pro-business and pro-growth”. This review was commissioned by Liz Truss in September 2022. Former energy minister Chris Skidmore (Conservative MP for Kingswood) was appointed to lead this independent review. 

The government did not commit to publishing an energy demand reduction strategy, arguing measures to reduce carbon emissions from buildings were already outlined in the ‘Heat and buildings strategy’, published in October 2021. It said this plan included measures to support the development of green finance for decarbonising homes. The government also said it had invested £6mn through the Department for Business, Energy and Industrial Strategy’s skills training competition to provide training opportunities to support skills needed to retrofit homes. It also said it had provided £4.7mn of funding for six local supply chain demonstration pilots. 

Responding to the committee’s recommendations concerning onshore wind power, the government said it acknowledged onshore wind was “an important part” of the UK’s energy mix. The government said more onshore wind power was needed if the UK was to meet its net zero target. It said it would consult on how to support new projects that had strong local backing in England later that year. The government also noted the committee’s recommendation concerning the preferability of extending the life of nuclear power stations over coal-fired stations in some cases and it acknowledged there had been parliamentary and public interest in this proposal. However, the government argued this would be a decision for the regulator, the Office for Nuclear Regulation, and the plant’s owner and operator. On the issue of cooperation with other European countries on energy security, the government said the UK-EU Trade and Cooperation Agreement supported future cooperation between both parties on security of gas supply.  

The government described its target of achieving 24 gigawatts of nuclear capacity as “a stretching but realistic ambition”. It said the decision to set this target had been based on “a range of internal and external analysis, including [the government’s] own energy and emissions projections”. The government also said it remained committed to supporting the deployment of large-scale, long-duration electricity storage (LLES). It said it set out plans for the deployment of LLES in the British energy security strategy and would develop an appropriate policy to enable investment by 2024.  

Responding to the committee’s recommendation that the government should provide further information on the market structures and mechanisms for supporting increased hydrogen production, the government outlined a series of policy announcements. This included a commitment to establish a hydrogen certification scheme for exported and imported hydrogen by 2025. It also said it was supporting investment in hydrogen production projects through its net zero hydrogen fund and its hydrogen business model. The government said it remained committed to developing four carbon capture and storage clusters by 2030. It also said it was making progress in establishing a framework for the economic regulation of carbon capture and storage. 

The government said the UK Infrastructure Bank was operationally independent from the government. However, it said its existing remit already included tackling climate change. It also said the UK Infrastructure Bank had outlined proposals for supporting infrastructure investment by the private sector and local government in its first strategic plan, published in June 2022.  

The government noted the committee’s recommendations regarding investment in North Sea oil and gas production. However, it argued decisions on the lead-in times and payback periods during the transition to a low carbon economy should be made by private companies rather than the government. It argued this included the decisions concerning the potential risk of stranded assets. 

The government agreed with the committee that gas storage capacity was an effective source of flexibility for the UK energy system during the winter. It also said it welcomed the decision of the operator, Centrica Storage Limited, to reopen the Rough storage facility during the winter of 2022–23. However, the government said the decision on whether to reopen the site in the future should be a commercial one taken by the operator. 

The government said it had committed to a review of national planning policies as part of its net zero strategy and that any change to the national planning policy framework would be subject to a public consultation. However, the government did not say when such a consultation would take place. The government also said it had made a commitment in the British energy security strategy to develop a new national policy statement on the deployment of new nuclear power stations after 2025. 

The government said the future system operator would be established as a public corporation and this would ensure it was operationally independent from government. The government said that, subject to the timing of legislation and other factors, the future system operator could be established by or in 2024. 

The government said it would keep the energy profits levy under review and set out its plans to expand carbon pricing to more sectors of the economy “in due course”. The government also said it would set out in the future how it would encourage capital unlocked as a result of reforms to Solvency II to be invested to support the energy transition. However, it did not give an indication of the timescale of when it would do this. 

4. What did the Bank of England say in response to the committee’s recommendations?

The committee also considered recent changes to the remit of the Bank of England. In March 2021, the government introduced a requirement for the Bank to consider the government’s commitment to decarbonisation when making policy. This was followed in April 2022 by a further change requiring the Bank to also have regard to energy security. The committee recommended that the Bank of England’s Financial Policy Committee and Prudential Regulation Committee should both set out high level principles of how they planned to interpret the expansion of the Bank of England’s remit to include energy security. It argued this was necessary to provide clarity to the financial sector.  

The Bank of England published a response to this recommendation in a letter to the chair of the committee on 21 September 2022. The letter confirmed the Prudential Regulation Committee would take this expansion of its remit forward in the same way as other factors it must have regard to.  

The letter also said the Financial Policy Committee would publish a formal response to the chancellor’s expansion of its remit separately. This response was published in December 2022. The Financial Policy Committee said it would consider how its policy actions and decisions might affect both energy security and climate change “where practicable in the context of its financial stability objective”. 

5. What has happened since the publication of the government response?

Following the resignation of Liz Truss, Rishi Sunak became prime minister on 25 October 2022. On the same day, Jacob Rees-Mogg was replaced as secretary of state for business, energy and industrial strategy by Grant Shapps.  

In July 2022, Boris Johnson’s government had introduced the Energy Bill in the House of Lords. The Energy Bill includes a series of provisions concerning energy policy, including measures intended to leverage investment in clean technologies, protect consumers and maintain the safety, security and resilience of the energy systems. The bill reached the second day of committee stage in the House of Lords on 7 September 2022. However, later in September 2022, the press reported that the bill had been paused as a result of Liz Truss becoming prime minister. The bill was not referred to in the government’s response to the Economic Affairs Committee’s report. However, following the resignation of Liz Truss, committee stage of the Energy Bill began again in December 2022. At the time of writing, consideration of House of Lords amendments to the bill is scheduled to take place in the House of Commons on 18 October 2023. The bill includes provisions to establish the independent system operator and planner, the new body previously referred to as the future system operator. Further information on the Energy Bill is provided in the House of Lords Library briefing ‘Energy Bill [HL]’ (14 July 2022) and the House of Commons Library briefing ‘Energy Bill [HL] 2022–23 committee stage report’ (1 September 2023). 

In February 2023, the Department for Business, Energy and Industrial Strategy was replaced and responsibility for energy policy was transferred to the newly created Department for Energy Security and Net Zero. Grant Shapps served as secretary of state for energy security and net zero from 7 February to 31 August 2023. The current secretary of state is Claire Coutinho. 

The findings of Chris Skidmore’s review were published in its final report, ‘Mission zero: Independent review of net zero’, on 13 January 2023. The review concluded that, while the UK should be proud of the progress it had made towards achieving net zero, it was not on track to meet all of its targets. The review also recommended the government and industry needed to do more to make the most of the economic opportunities arising from the transition to net zero. Further information on the findings of this review is provided in the House of Lords Library briefing ‘Mission zero: Independent review of net zero’ (20 January 2023).

The government has published the following policy updates on its plans to achieve its net zero strategy. In March 2023, the Department for Energy Security and Net Zero published its new energy security plan, entitled ‘Powering up Britain’. This restated the government’s commitment to becoming a net zero economy by 2050. In the same month, the government published its ‘Mobilising green investment: 2023 green finance strategy’ updating the government’s previous green finance strategy published in 2019. In this updated strategy, the government committed to do more to support the UK financial services sector during the transition to net zero and encourage more green investment. It included a commitment by the government to commission an “industry-led market review into how the UK can enhance our position and become the best place in the world for raising transition capital”. 

On 20 September 2023, the prime minister, Rishi Sunak, gave a speech in which he announced a change to some of the government’s policies on achieving net zero. While he said the government would continue to work towards meeting its overall 2050 net zero target, he said that he believed the government’s plans did not provide the “fairest credible path” to reaching this target. He announced policy changes including that the deadline for ending the sale of petrol and diesel cars and vans and the cut-off date for the sale of new gas boilers would be pushed back from 2030 to 2035. In the same speech, Mr Sunak said the government remained committed to supporting new oil and gas exploration in the North Sea.  

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Cover image by Egor Kunovsky on Pexels.