It isn’t easy. On the one hand, regulators and policymakers need to provide stability, because without it, banks won’t lend and businesses can’t invest. At the same time, if we are to limit the rise in global temperatures to 1.5 Celsius (2.7 Fahrenheit) by 2030, as outlined by the Paris Agreement, the world will need to rapidly change course to triple renewable energy capacity in the next seven years.
What we need is stability of intention and trajectory, not stagnation. On the contrary, regulations and policies need to change in line with every stage of the transformation. But we need consistent, collaborative, well-communicated governance. This increases predictability and in turn, investor confidence, even as regulations and policies evolve.
The success of the energy transition is, in many ways, dependent on this leadership from energy regulators and policymakers. The private sector can provide capital, innovation and expertise, but in this era of transformation, the choices of regulators and policymakers are pivotal – shifting the direction of investments, increasing or decreasing the speed of decarbonization, and promoting or limiting competing technologies.
In our research, based on the views of nearly 850 senior executives from nine industries and 22 countries, 43 percent say that government regulation is a key driver in their organization's response to the energy transition. This is second only to business opportunity (46 percent) overall, while in sectors such as roads, freight, logistics and real estate, regulation is the top driver.
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 Nearly one in five respondents warn that outdated energy market regulations are a barrier to their organization’s clean energy transition.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.”
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.
Regulation is supercharging electric vehicle infrastructure in the United States
Supportive government policy can enable the energy transition by encouraging private sector investment right alongside public sector investment. A recent Technavio study found a clear link between electric vehicle (EV) charging subsidies and market growth.
It is estimated that the number of EV charging points in the United States (U.S.) will rise from 4 million today to 35 million in 2030. It is also projected that by 2040 the U.S. EV infrastructure and devices market will be worth US$100 billion, compared to US$7 billion today.
The market has been supercharged by supportive federal legislation such as the Infrastructure and Investment Jobs Act and the Inflation Reduction Act, in tandem with local and state-level support for the development of EV charging infrastructure in states like New York, New Jersey and California. In the private sector, Siemens USA has unveiled a US$30 million, 10-year investment plan around EV manufacturing and hiring.
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.
What do you need to build the energy workforce of the future?Organizations are facing a massive skills shortage. They have to retrain or hire people to operate a more digital, data-driven business that will help them make the transition to clean energy.Organizations are facing a massive skills shortage. They have to retrain or hire people to operate a more digital, data-driven business that will help them make the transition to clean energy.
How to get power grids ready for prime timeSolar and wind power are forecasted to supply more than a third of all electricity by 2030. To reach this ambitious target, we'll need a tremendous investment in global grid infrastructure.Solar and wind power are forecasted to supply more than a third of all electricity by 2030. To reach this ambitious target, we'll need a tremendous investment in global grid infrastructure.