Impact case study database

The UK Government’s Clean Growth Strategy (2017) requires investment in renewable electricity development to achieve decarbonisation targets and to deliver a clean and secure supply of electricity at affordable cost. The UK’s model of regulation for energy, water and telecoms also requires adaptation to achieve the Net-Zero 2050 targets, with UK regulated assets currently worth around GBP144,000,000,000 in energy and water alone (S1).

Research at the University of Bath (led by Zalewska) has significantly influenced the regulatory response to achieving the 2050 targets, as well as affecting the costs associated with investments in renewable energy. The Managing Director at the National Economics Research Associates (NERA) explained that “ her [Zalewska’s] academic research and expertise played a key role in shaping the update of electricity generation costs (and) in helping the policy makers form confidence around the results and make decisions” (S2).

Moreover, the research has impacted the recommendations given by the National Infrastructure Commission (NIC) to the government on the direction and cost of investing in the UK’s energy, water and telecom sectors to meet the coming challenges of achieving net zero (S1). It also impacted infrastructure investment strategy and financing decisions at the Civil Aviation Authority (CAA) (S3a&b) and the Competition and Markets Authority (CMA) (S4).

Influencing Contracts-for-Difference (CfD) at DECC/BEIS

The UK Government’s Contracts-for-Difference (CfD) Scheme (Energy Act 2013) aims to reduce risks for investors in renewable electricity development through offering a fixed price for the sale of electricity. Assessing the risk of CfD projects, and thus their auction price, is an essential component of the success of the CfD Scheme, because the auction price has a major financial impact on UK citizens and businesses, thereby affecting the competitiveness of the UK economy.

In 2015, Zalewska was appointed by the Department for Business, Energy & Industrial Strategy (BEIS), to conduct an analysis and to produce a review “ assessing costs and benefits of energy policies and [in] setting administrative strike prices of auctions for low-carbon CfDs” (S5). Her research into market risk and cost of capital demonstrated that the costs of risk compensation for some renewable technologies should not increase (S6a, S6b). The research recommended that the costs of compensation for risk that were proposed by NERA Economic Consulting were too high and that they should not increase between 2015 and 2030 (S2). The 2016 BEIS Electricity Generation Report (S7) states that, based on the recommendation of Zalewska, “ hurdle rates stay flat between now and 2030”. Before the research, for most renewable technologies, FOAK (first of a kind) CCS (carbon capture and storage) and nuclear, BEIS had used the “ 75% success rate hurdle rates from the NERA report”. After the research, BEIS “adjusted the NERA 75% success rate hurdle rate by applying a lower effective tax rate to that used by NERA” (S7p14). This meant that:

“… following from [Zalewska’s] calculations, some of the renewable energy technologies could be more attractive and cheaper to use than the technical studies suggested, impacting both on the anticipated cost of meeting renewable targets and hence the renewable mix” (S2).

Indeed, while the first wave of CfD auctions resulted in offshore wind prices of GBP140 to GBP150 per megawatt-hour (MWh), in the 2017 CfD auction, which adopted these recommendations, the price decreased to an average of GBP64 per megawatt-hour (MWh) (S8).

Influencing the National Infrastructure Commission

In 2019, Zalewska and Grout were commissioned by the National Infrastructure Commission (NIC), which provides impartial advice to the UK government on major infrastructure challenges, to assess the potential impact that changes in the structure of utility regulation might have on the cost of capital of regulated utilities. Their report (R3) advised the NIC that significant regulatory changes have had limited effect on the cost of equity and cost of capital for regulated companies. This finding significantly influenced the NIC’s recommendations:

“The evidence does not suggest that the implementation of regulatory policies such as putting more emphasis on environmental performance, the public interest or helping vulnerable customers, would necessarily increase the cost of capital of these companies” (S1p46).

Moreover, the recommendation had material effect, because the NIC report states that even a “0.5 percentage point increase in cost of capital for energy and water would raise the amount of revenue that needs to be recovered from consumers by around £720 million [GBP720,000,000] a year” (S1p46).

Influencing the Civil Aviation Authority and the Competition and Markets Authority

In 2019, Zalewska was commissioned to provide an expert opinion on the cost of debt used by the Civil Aviation Authority (CAA), the UK aviation regulator, in setting regulatory requirements for NATS (En Route) between 2020 and 2024 (S3a, S3b). The research showed that the debt beta estimate of 0.13 used by the CAA was too high (R4). The CAA stated that it “ reviewed a wide range of evidence … including reports from NERA and Professor Zalewska” (S3a) and decided not to follow the advice of Europe Economics, whose calculations suggested a debt beta in the range of 0.19–0.25, but lowered it to 0.1, following the estimations of Zalewska (R4). Lowering debt beta has a material impact on the regulatory rate of return, and consequently, the prices charged to consumers and businesses and the earnings of companies.

In 2020, Zalewska’s report (S4) was used by the Competition and Markets Authority (CMA) in resolving a dispute between four water companies and their regulator OFWAT with regard to setting the regulatory requirements for 2020–2025. In relation to the debt beta, the CMA “ refer specifically to the ‘direct’ econometric estimates of the debt beta put forward by Professor Zalewska in relation to the NATS price redetermination, which indicated that the debt beta was at, or below, 0.1” (S4), and it reduced the OFWAT debt beta from 0.125 to 0.1, impacting directly on how much the water companies are allowed to earn on their investments.