Overview
Following a year of crisis-fuelled focus on resilience, especially in the energy and water sectors, 2023 will raise an even more difficult question – how do you fund investment in long-term resilience during a period of economic uncertainty? Government budgets are under pressure, and the continuing cost-of-living crisis means there is limited scope to pay for investment by putting up consumer bills.
The post-privatisation regulatory settlement has meant it has largely been possible to have rising levels of investment without substantial increases in costs to consumers. However, with efficiency improvements increasingly difficult to come by and investor returns squeezed to their limit, particularly in network industries, there is a growing need for a fundamental change in approach. There are important questions about what a new funding settlement for infrastructure investment looks like when significantly increasing consumer bills is politically unacceptable.
In an era of tight monetary conditions, there is an even greater need for certainty and predictability to ensure the UK can attract the scale of investment needed to achieve ambitions such as net zero and energy resilience. The Government’s lack of political capital makes holistic reform difficult to deliver, but we expect some attempt to make progress on regulatory reform and revenue mechanisms during the year.
Rishi Sunak has brought stability to the Government, and while it will struggle to address large-scale challenges like infrastructure funding, progress is being made across the Government’s infrastructure priorities – particularly in areas like energy security following the recent departmental reshuffle. However, other sectors, such as transport, will continue to face difficulties due to political and budget pressures.
Any fundamental change to the funding settlement is likely to take several years, meaning Labour’s plans will become increasingly important ahead of the next election. Labour has put infrastructure investment at the heart of its growth strategy but beyond headline announcements on the creation of a National Wealth Fund and the ruling out nationalisation for most network utilities, it has shared few details. As we get closer to the election there will be pressure on Labour to explain how it will unlock the economic benefits of infrastructure investment.
As the Government seeks to deliver its infrastructure priorities over the next 18 months, it remains important for businesses and investors to engage on existing workstreams. Labour is thinking longer-term, especially on how infrastructure can revitalise the economy and is keen to hear from industry and investors as it starts to consider what will go in its manifesto.
Below we assess the regulatory and policy outlook for individual sectors, covering energy, telecoms, water, transport, and resources and waste.
Energy
The immediate concerns about energy supply during this winter have receded. Falling wholesale prices and healthy European gas stocks have given Government the space to consider its longer-term energy priorities. It will unveil these in a new ‘energy independence’ plan, slated for March. This should answer questions on the Government’s backing of specific technologies, including renewables, nuclear and new oil and gas projects. It should also help address the ongoing challenges to infrastructure deployment – notably securing grid connections and gaining planning approvals for new windfarms. The newly created Department for Energy Security and Net Zero should help accelerate progress. There will be more ministerial focus on the core energy brief, where this focus on energy security will be a clear priority.
The Spring Budget is another key milestone which should include clarification on the Government’s plans to extend carbon taxes to more sectors across the economy and confirm next steps on deploying CCS. We also expect Government to publish a ‘Net Zero Growth Plan’ later in March – a combination of the revised Net Zero Strategy and response to Chris Skidmore’s Net Zero Review. The recent easing of wholesale prices has taken pressure off Government to rush its Review of Electricity Market Arrangements (REMA) – but we can expect a response to last year’s consultation in February, before more detailed policy proposals in the summer.
Ofgem has an ambitious programme for 2023. It will progress the next phase of network price controls (RIIO-3), and develop regulation for heat networks, CCUS, the nuclear RAB, and hydrogen. The regulator is also preparing for the launch of the Future System Operator next year, which will play an important new role planning system requirements and future infrastructure needs. In the retail energy market, there will be a stronger focus on compliance and enforcement, as well as new regulation needed to enable flexible domestic energy use and the wider consumer market reforms being considered by BEIS this year.
Key moments: REMA consultation response (February); Energy Independence Plan publication (March); Spring Budget: update on carbon taxation, CCS funding clarification, progress on setting up Great British Nuclear (March); Net Zero Growth Plan (March); detailed REMA policy proposals (summer)
Telecoms
Broadband and mobile phone bills will remain the main political focal point this year. As there is no regulation of retail prices in the sector, the pressure will be on operators to show voluntary restraint. Ofcom has recently launched a review into whether mid-contract inflation-linked price rises give consumers sufficient clarity and certainty. Science, Innovation and Technology Secretary Michelle Donelan has urged telecoms companies to “think before” imposing inflation-busting bill increases of almost 15%.
At the same time, Ministers will have an eye on the extent to which the Conservative Party’s 2019 manifesto commitment of bringing gigabit-capable broadband across the UK by 2025 can be met ahead of the next General Election. Ofcom’s strategy for delivering this has been to generate a regulatory environment in which competitive full-fibre investment takes hold across (most of) the country. There is some nervousness in government and Ofcom about the impact the deteriorating macroeconomic context and rising interest rates have already had on the economics of large-scale full-fibre rollout by alternative networks.
BT Openreach has repeatedly been accused by its rivals of using its discount schemes to entrench an already very strong position in the market. This issue will be brought to a head in Ofcom’s upcoming decision on whether to approve the latest discount scheme, Equinox 2. Its preliminary view, published earlier this month, is that such discounting from Openreach is unlikely to be problematic as it would not prevent ISPs from switching to rival networks. Investors in alternative networks, who stand to lose from such an approval, will be watching the final decision closely as it has the potential to impact the investment thesis for the sector – will the UK see competing networks engaging in a race to build through the rest of the decade, or will the market rapidly consolidate around just a small number of players?
Key moments: Ofcom Equinox 2 decision (mid-March); Potential update on Project Gigabit progress and funding (March Budget); Voluntary commitments from the sector on moderating price increases (Q1)
Water
The water sector continues to face heightened political and regulatory scrutiny, particularly on the issue of sewage pollution. This – and the broader cost of living crisis – is the context that will inform the two most significant ongoing regulatory processes: the next price control run by Ofwat (PR24) and the Environment Agency’s Water Industry National Environment Programme (WINEP). These will determine company’s investment plans for 2025-30.
Ofwat, the Environment Agency and Defra are under significant pressure to improve the sector’s environmental performance to meet new environmental standards and rising customer expectations. At the same time, regulators and government (including HM Treasury) are all acutely aware of the pressure to keep bills stable, while unlocking the necessary environmental investment. This tension is causing a vacuum of clear guidance on how environmental improvements should be funded, creating significant uncertainty and the risk of knee-jerk policy pronouncements and poorly thought-through regulatory intervention. How it resolves will define regulatory settlements for 2025 and beyond and have a significant bearing on the attractiveness of the sector to investors.
Key moments: WINEP concludes (March); Levelling Up and Regeneration Bill (including nutrient neutrality obligations) becomes law (expected Spring); companies submit PR24 business plans to Ofwat (October); Ofwat/Environment Agency sewage treatment works investigation continues (next steps TBC).
Transport
The Government, and the Treasury in particular, will be seeking to minimise public subsidy for rail and bus operators, but some public funding need will remain as revenues have not yet recovered to pre-pandemic levels. This drive to reduce subsidy, alongside the need to tackle strike action, is likely to consume bandwidth to the detriment of proactive reform agendas and policy clarity.
The details of rail reform, in particular, remain uncertain. While the new Transport Secretary is supportive and a recommitment to reform has been made at this year’s George Bradshaw address, DfT will need to make outstanding decisions on the future policy framework and contracting arrangements to clarify the extent of private sector involvement and the commercial landscape.
A Transport Bill could offer some clarity and had previously been promised and drafted, but it will need advocacy to make it onto the legislative programme for the fourth session. Any Bill is likely to be constrained in scope, meaning representations will need to be made to push along outstanding regulatory issues, such as support for the rollout of more electric vehicle (EV) infrastructure and regulation of autonomous vehicles and e-scooters. Substantial delays to these risks holding up investment in the new mobility sector.
While the Government appears content with the rate of EV adoption, EV infrastructure and battery supply is widely considered to be lagging, worsened by the collapse of Britishvolt and dearth of other gigafactories. The Government will be seeking to address perceived weaknesses in supporting the automotive sector to decarbonise through a twin approach of offering clear incentives for private investment and setting stretching but realistic targets, including through the upcoming ZEV mandate. It will also need to be pressed to offer clearer direction on future subsidy regimes for decarbonisation technologies, including sustainable aviation fuels (SAF) and hydrogen.
The Heathrow H7 price control final decision is expected in March; Heathrow and airlines could then appeal the CAA’s decision to the CMA, which would take up much of 2023. There will be some read across between this decision and the CAA’s final proposals on the NATS NR23 price control, due in Q2 this year.
Key moments: Publication of proposed ZEV mandate (by Spring); setting of end date for the sale of new non-zero emission buses (H1); Heathrow H7 price control final decision (March).
Resources and waste
Having been somewhat ignored by previous Environment Secretaries, under Thérèse Coffey there are signs the resources and waste sector has a little more political impetus behind it. With the consultation response on the Deposit Return Scheme published in January, the next big milestone will be the Government’s update to Extended Producer Responsibility (EPR) in the form of the statutory instruments to implement the scheme. Eagerly awaited by firms working across the material production and disposal chain, EPR will be particularly important for the recycling sector. There are currently significant questions over whether the proposed framework will provide the right conditions and incentives to support new investment in recycling infrastructure. How Defra decides to structure and define the responsibilities of the Scheme Administrator will be key.
Clarification on the Government’s plans to include waste incineration in the UK’s ETS is likely to come in the March Budget, as well as confirmation of the funding envelope for Carbon Capture Utilisation and Storage (CCUS). Deployment of CCUS on energy from waste facilities is vital to achieving significant progress in decarbonising the sector. The next three months will set the tone for future investment prospects in the sector.
Key moments: Further information on carbon capture funding and extension of the ETS (March Budget); Defra EPR statutory instruments likely to be laid (Q2); Statutory instruments for new environmental targets to be laid (Q2).
Mark Caines leads our competition and regulatory team. An economist by background, he advises on complex regulatory and policy developments and supports clients on competition matters. Josh Buckland heads Flint’s energy and climate work, having previously worked as Energy Advisor to the Secretary of State for Business, Energy and Industrial Strategy. To find out more, get in touch.
