How do you govern an energy transition?

When the rules need changing

Regulation can also impede progress. Nearly one in five respondents warn that outdated energy market regulations are a barrier to their organization’s clean energy transition. Indeed, in some jurisdictions and industries the current regulatory framework needs to evolve.

The United Kingdom’s (U.K.) contracts for difference (CfD) auctions, for example, have until recently been very successful in accelerating the country’s offshore wind capacity. However, failure to account for cost inflation led to disappointment at the most recent CfD auction.

Susannah Wood, Vice President of Public Affairs and Sustainability at European renewable energy specialist Statkraft, explains that CfD auctions do not always result in subsidies being paid and, in many countries, projects are being built without subsidies at all. “Rather, it’s a guarantee on price. And the fact that the government assumes the risk on price enables providers to attract low-cost, long-term finance,” she says. “To continue to do this, the CfD system has to evolve, perhaps by ensuring auctions use price indices to reflect the inflationary impact on equipment and materials.”

Evolving consistently

In many contexts, organizations don’t need subsidies or state support to make their business cases viable. They do, however, need a good measure of certainty. In our research, 73 percent of respondents say that stable energy and emissions regulations encourage more capital and better terms from financial institutions. A similar proportion feel we need new laws to keep energy and emissions regulations consistent over time.

Some countries are already announcing policies that signal a clear, long-term direction to energy companies and investors. Most strikingly, in August 2022 the United States Government passed the Inflation Reduction Act (IRA), which is a 10-year plan providing financial support for green energy projects and initiatives totaling US$370 billion. The package has been praised for ease of access to that funding.

“It’s the biggest single example of a regulatory development that has changed the direction of travel,” says Simon Virley, U.K. Head of Energy and Natural Resources at KPMG. “There are opportunities now to invest in low carbon technologies in the U.S. that just weren't there before. We have seen a fairly steady stream already of new investments as a result.”

Liberalization can boost confidence and drive investment

Support can also be more targeted. In 2021, Taiwan demonstrated the power of regulated intervention by amending its regulatory regime to allow corporates to buy electricity directly from suppliers, rather than requiring all sales to go through Taipower, the incumbent power supplier. “This enables renewable energy providers to sign long-term power purchasing agreements with corporates,” says Anna Su, Chief Executive Officer of Synera Renewable Energy (SRE), a Taiwan-based offshore wind developer. “Opening the market can provide renewable energy businesses with more opportunities to optimize their revenue models over the long term and boost investment confidence.”

Our research suggests that there’s plenty more to be done to promote innovation and competition, with 71 percent agreeing that regulation should make it easier for companies from other sectors to move into the energy industry and 63 percent saying they want energy markets to be made less restrictive for utilities.

In some markets grid operators — both transmission and distribution — are not permitted to own and operate storage assets. However, the installation of storage can be the quickest and most cost-effective means of overcoming grid constraints.

Governance with collaboration and leadership

In the U.K., the Office of Gas and Electricity Markets (Ofgem), which serves as regulator for the country’s electricity and downstream natural gas market, introduced a regulatory 'sandbox' to enable and encourage new approaches. Originally piloted in the financial services industry, it enables innovators to trial new products, services and business models without the usual regulatory constraints.

More examples like this will be needed, where public-private sector collaboration can help all sides gain knowledge and drive innovation. Legislators and regulators have enormous power to shape the energy markets and systems of the future. To do so, they must work closer than ever with all stakeholders.

The task for energy regulators is to proactively establish and evolve a framework in which markets can function, technologies can develop, and stakeholders can collaborate on advancing decarbonization. In the past, regulators have tended to follow the direction of markets. But to succeed in this new task, regulators will have to take a leading role — establishing the scaffolding ahead and above, to guide and support the energy industry as we build towards net zero.