Five things we’ve learnt from the Energy White Paper

Dec 17, 2020

Ed Birkett looks at five things we’ve learnt from the White Paper, and one thing that’s missing.

 

 

This week’s Energy White Paper is a substantial document that moves the UK a step closer towards a Net Zero energy system. However, it’s clear that the White Paper is largely about ambition, which leaves a lot for the Government to do in 2021.

Here are five things we’ve learnt and one thing that’s missing.

 

#1: BEIS needs more resources to deliver Net Zero.

The Energy White Paper has been generally well-received by industry and consumer groups. There’s plenty to like, including a commitment to explore options to reduce customer bills, consultations on phasing-out fossil fuel heating and a promise of numerous strategies in the first half of 2021.

However, there aren’t that many concrete decisions in the White Paper, which leaves a huge amount to do next year. In fact, many of the key issues haven’t moved forward much in the last few years including the role of Electricity System Operator (ESO) and financing for new nuclear projects.

So, while the Energy White Paper is a step forward, it’s also about reiterating previous commitments. This lack of progress in some areas indicates that the Department for Business, Energy & Industrial Strategy (BEIS) is currently under resourced to deliver Net Zero. We’re tracking around 50 planned UK energy and climate initiatives, most of which sit with BEIS.

Some of this policy delay is caused by Brexit-related changes, so the end of the Transition Period should start to free up some resources. However, it’s clear that, as the key delivery department for Net Zero, BEIS now needs more resources.

The White Paper also promises a new Strategy and Policy Statement (SPS), which was legislated for in 2013 but never introduced. The SPS will provide Ofgem with more direction from BEIS, which should help the two organisations to work together faster and more effectively.

 

#2: New nuclear is still in the game, but not at any cost.

The Government is aiming for project developers to reach a Final Investment Decision (FID) on at least one new large-scale nuclear power project by the end of this Parliament (end-2024), but only if the project offers value for money for both consumers and taxpayers. If the Government makes a final decision in 2024, this would be 8 years after the final approval for Hinkley Point C in September 2016.

For new nuclear projects, the Government is keeping all financing models on the table, including a Regulated Asset Base (RAB) and direct Government investment, which means that the White Paper doesn’t provide much new information.

It’s still possible to imagine a situation where the Government chooses not to invest in new nuclear in this Parliament. In the next couple of years, offshore wind is likely to continue to deliver low prices in the Contracts for Difference auctions. The Government may also be able to secure alternative sources of ‘firm’ low-carbon power, including gas with CCS, low-carbon hydrogen, and bioenergy with CCS (BECCS). We’ll also have more information on how the Hinkley Point C project is progressing, as well as similar reactors under construction in Belgium and Finland.

 

#3: Spatial conflicts and coordination between projects are quickly becoming a key issue.

Policy Exchange has previously argued that spatial planning will be a key issue on the path to Net Zero, as more renewable energy projects compete for limited space and limited network capacity. In our recent paper, The Future of the North Sea, we proposed a UK Seas Authority to coordinate offshore development.

 

In the White Paper, the Government has announced a Ministerial Delivery Group for renewable energy projects, likely focusing on offshore wind. This group will bring together Ministers from DEFRA and BEIS and will focus on barriers including network infrastructure, balancing offshore development with protecting the marine environment, and mitigating the impact of wind turbines on radar. This will complement ongoing work by the Crown Estate to consider future scenarios for offshore wind farms and interactions with the electricity grid along the east coast of England.

As well as coordination for large-scale offshore wind farms, coordination also matters at a local level. In the White Paper, the Government announced support for Local Authorities to develop ‘Heat Network Zones’ by 2025. In these zones, new homes and businesses would be required to connect to a heat network, which could help to deliver low-carbon heating. The White Paper also talks about “local area planning”, similar to the Energy Systems Catapult’s call for “Local Area Energy Planning” to help to integrate heat pumps and electric vehicles.

 

#4: Regulation of energy bills could start to look more like regulation of financial markets.

The first chapter of the Energy White Paper focuses on consumers and on reducing energy bills. The Government notes that smart technologies will have a big role to play, helping us to “take control of our energy use and reduce bills”. However, smart technology could also make domestic energy bills more complicated, for example through time-of-use tariffs or “energy as a service” type offerings. There’s a risk that consumers could be mis-sold complex energy tariffs and services that don’t meet their needs.

The Government recognises this risk and has proposed two solutions. In the short-term, the Government is planning to regulate Energy Brokers and Price Comparison Websites. In the longer-term, the Government has committed to explore changes to “enable innovation and competition, while protecting consumers”. This could lead to profound changes to the retail electricity market and the existing Energy Price Cap.

To integrate more renewables, the Government needs consumers to concentrate their demand for energy in periods of high renewables output, particularly for electric vehicle (EV) charging and heat pumps. This is likely to mean more real-time electricity prices or consumers giving their energy supplier more control over their heat pump or to charge their EV.

As suppliers introduce more sophisticated energy tariffs, their offerings will start to look more like financial products than traditional energy supply. To keep up, energy regulation may have to become more like financial regulation.

 

#5: The Government is tiptoeing towards interventions in owner-occupied homes.

The Government has made huge progress in the electricity sector, reducing carbon emissions by around two-thirds within a decade. It’s achieved all of this without any major changes to the way we use electricity. Electricity is still available at the flick of a switch and prices have remained relatively stable in real terms.

Similarly, for transport, there’s now a clear path to decarbonising cars and vans with electric vehicles. Again, this transition will cause only relatively small changes for drivers, so long as the Government supports the required EV charging infrastructure.

We’ve known for a long time that buildings will be one of the hardest sectors to decarbonise. Energy efficient products like LED lights have helped to reduce energy demand from homes, but we need to go further. The Government already regulates the privately-rented and social housing sectors to improve energy efficiency and intends to go further. However, it’s more difficult to make changes in owner-occupied homes, even those these will need to be decarbonised to reach Net Zero.

The Government is now starting to think about how it can intervene in owner-occupied homes. In the White Paper, the Government has floated “regulatory measures” to decarbonise owner-occupied homes, coming into effect later in the 2020s. The Government could introduce financial measures like lower stamp duty for energy efficient homes or cheap financing offers for energy efficiency upgrades. However, we’re also likely to need regulatory measures like banning the sale of new gas boilers in the 2030s.

The tough decisions on owner-occupied homes are probably still a few years away, but it’s clear that this will be a real test of the Government’s commitment to decarbonise buildings.

 

What’s missing? Location, location, location.

Whilst the White Paper covers a lot of ground, there few mentions of the need to encourage consumers and businesses to use renewable energy when it’s available in their local area. Consider two examples:

  • Electrolysers for low-carbon hydrogen should be concentrated in the UK’s coastal industrial hubs, where they can take advantage of abundant offshore wind resources.
  • In the summer, EV drivers in Cornwall should be encouraged to charge their car during the day, including at work, to take advantage of low-carbon energy produced by local solar farms.

In our recent paper, Powering Net Zero, Policy Exchange identified local pricing as the top issue for Great Britain’s electricity market over the next 5 years. Without local pricing, the cost of integrating wind and solar into the electricity system will continue to rise, and customers won’t fully benefit from the falling cost of renewables.

In the White Paper, the Government repeatedly talks about the need for flexibility, including through demand side response, interconnectors and battery storage. However, flexibility is not only about moving national electricity demand to different times of day, but also about taking advantage of local clean energy resources, which vary significantly across the UK.

The White Paper does talk about the potential for local flexibility markets. However, there’s no commitment to explore the types of local electricity markets that operate in many US States, New Zealand, Singapore and others. Given the importance of local flexibility, this feels like a missed opportunity.

However, this omission shouldn’t distract from a significant White Paper that will set the agenda for UK energy policy during this Parliament. If the Government can deliver this programme, then it will transform the UK energy system and take a huge leap towards Net Zero.

 

 

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