The UK Government has endorsed a ‘net zero’ emissions target by 2050. According to the Committee on Climate Change, this will involve the widespread electrification of heat in buildings and the creation of a zero-emissions vehicle fleet during the 2030s. There also needs to be significant improvements in energy efficiency and deployment of heat pumps, heat networks and electric vehicles this decade.
This means big changes in people’s lives. They must change how they travel, upgrade their properties and use energy more efficiently and flexibly. And they need to start making these changes soon.
There is no evidence that the current policy framework will solve these problems quickly enough. We are already falling behind what is necessary to deliver the fourth and fifth carbon budgets endorsed by previous Governments and these will need to be tightened to bring them into line with a net zero pathway. New policies will be needed, and the Government must quickly decide how radical these changes must be. Can we get away with incremental changes to the current framework or is more fundamental reform required?
Incremental change vs. fundamental reform
When it comes to energy in homes, in particular, incrementalism won’t work. Modest fiscal incentives, which are the Government’s preferred policy approach, will not persuade most property owners to invest in their premises - most people simply feel that they can’t afford it and are reluctant to put up with the hassle. We need to find a way to overcome this obstacle and attract the huge amount of private finance needed to decarbonise urban environments. We need a solution that delivers benefits for both consumers and investors and ensures that consumer benefits go beyond the purely financial.
A potential answer lies in rethinking the consumer protection regime operated in the UK energy market and the introduction of long-term energy supply contracts. The ability to switch supplier is a core part of the current protection regime in which the onus is essentially placed on consumers to ‘look after themselves’. The expectation is created by Ofgem and Government that they should regularly switch supplier to get the best deal. However, it is not clear how encouraging consumers to switch energy supplier fits with the requirement for people to invest in their homes and businesses to improve efficiency, install low carbon heating and smart energy control systems. Long term contracts, on the other hand, could help everyone – reliable returns for investors and cheaper energy bills for consumers. Moreover, a new protection regime could ensure peace of mind – better service, the opportunity to upgrade technology and a guarantee of a fair price.
Obviously, Ofgem and Government would need to approve a new consumer protection package designed to look after the interests of the customer, but this could be done now – without the need for new legislation. Consumers would still be able to switch supplier, but this would change to a situation where the ability to switch supplier is a ‘safety net’ to cater for infrequent events such as a property sale. What would be necessary is for Government and Ofgem to make clear that consumers enjoying the new protections would be best served by not switching over the period of the contract unless the value of the investments can be realised, and the costs of exit payments covered at, for example, the point of a property sale. It would take time to develop such a consumer protection package. It would need to involve a fair price guarantee (not a huge step from the current price cap), a guarantee of excellent service, the option to upgrade technology, and various backstop provisions should these outcomes not be delivered.
The real obstacle is whether Government and Ofgem are prepared to think the currently unthinkable. The world has changed – it is not unreasonable to expect the policy to change. It is also important to recognise radical changes have risks – but so does an inadequate response, although it can seem attractive in the short term, particularly when encouraged by those incumbent business interests seeking to preserve the status quo.
There is the opportunity to explore radical solutions in a contained local environment. Local authorities across the country are setting their own net zero targets, often much more ambitious than national targets. They are looking for opportunities to show leadership in the climate emergency and deliver early wins for their citizens. They are also in an excellent position to co-ordinate change across the energy system given their role in planning transport and building infrastructure and are much closer to the issues faced by local people. The opportunity for Government is to use this local ambition to test radical ideas and reduce the risks associated with a ‘big bang’ national implementation.
This is the idea behind the Prospering from the Energy Revolution industrial strategy funding package. Several promising innovations are currently being tested at scale – two in Oxfordshire, one in West Sussex and one in Orkney. These demonstration projects are largely testing new technological approaches and are avoiding major changes to the market and regulatory framework. Whilst Government and Ofgem claim to be open to radical new ideas in this area, few, if any, promising suggestions have been made by innovators or local authorities. Maybe this is because the political narrative has created a set of beliefs that now seem so obvious they are rarely, if ever, challenged.
With local authorities ready and waiting to take advantage of opportunities, such as the one described above, and to test them in contained local environments this does not represent a major policy risk for Government and Ofgem. Delivering net zero requires we make changes, probably quite radical changes, and this will inevitably involve slaying some sacred cows. However, this does not mean we need to take big risks with consumer energy supplies – doing so, and failing, would be counterproductive. The real test with all local demonstration projects is the extent to which the learnings are assessed, and processes exist to ensure the best of them are rapidly rolled out across the country. But these governance issues must be the subject of another blog.