Net zero: Three stumbling blocks to delivery

As part of Utility Week's Countdown to COP campaign, former Ofgem chief executive Dermot Nolan highlights three things the government should consider in balancing the need for a rapid transformation of the energy system alongside the responsibility to keep costs down for consumers.

The end of 2020 saw political and media attention focussed on decarbonisation and the net-zero emissions goal, including the prime minister’s 10-point plan, the Climate Change Committee’s Path to Net-zero (CCC), plus a much-delayed Energy White Paper.

The ambition of these plans should be applauded, with the banning of combustion engines from 2030 being a politically painful yet necessary measure to ignite decarbonisation and innovation of the transport system in the coming decade.

But despite the myriad of documents there is a distinct lack of detail of how plans will be implemented, leading to frustration amongst investors and climate groups. MPs from the Public Accounts Committee (PAC) echoed these frustrations in their report highlighting there is “no coordinated plan with clear milestones towards achieving the target ”. They recommended detailed sectoral plans be delivered, along with an injunction to the Treasury to ensure all departments consider the impact of any policy decisions on net-zero.

It is hard to argue with the PAC. Aspirations need details if the UK is to move from talking about net-zero to being a country delivering it. COP26 this November offers the government an opportunity to bestride the world stage and emphasise the UK’s leadership.

For this to be credible, the government should remember the transformative nature of the change we are embarking on and the many ways it could fail and result in higher consumer costs. With this in mind, here are three things government might consider as it moves us towards net-zero:

1. A flexible system

Major physical investments are needed to deliver net-zero. But there is more than one vision of how decarbonisation can be achieved.

The CCC report set out various different scenarios that could propel us forward. One is the idea of a flexible energy system – that system demand for electricity, heat, transportation, etc can be managed by clever use of technology and pricing signals – which new entrants such as Octopus and Ovo have hailed arguing that if there are appropriate consumer incentives, the use of new tech will help decarbonise with lower amounts of physical investment.

This vision is easier to state than to implement, but the government needs to engage with it, and avoid building too much costly infrastructure. The energy industry has a hoary cliché – “the cheapest power plant is the one you don’t have to build”.  There will need to be many new power plants built, but markets that allow companies adept at understanding consumer behaviour to flourish will lead to a flexible and lower-cost energy system.

2. Use markets and competition to drive down cost

Investors warn of the amount of funding needed, as well as appeal for certainty. These are valid sentiments. But when spending taxpayer money, the government should use markets where it can. Energy retail has had a mixed record in this space yet in wholesale energy markets the use of well-designed competitive tools in offshore wind auctions, or the electricity capacity auction in driving down costs, shows the consumer and environmental benefits that can be achieved.

This is not saying progress should be delayed while the government works out the most theoretically elegant framework, but major projects involving billions of pounds of consumer money should make as much use of competition as possible.

There will be challenges from investors that this will mean net zero will never happen. But while truly innovative investments should yield high returns for investors, the government should remember its responsibility to deliver decarbonisation at lowest cost. The cost of offshore wind was £140MW before competitive auctions were introduced and the auction price just five years later was less than £50MW. Lower prices result in greater adoption which will be critical in achieving ambitious targets.

3. Consumer delivery

Much of the decarbonisation debate has focussed on “upstream” investments and new technology. But the success story so far – the electricity generation system – has had no direct impact on the consumer experience. This will change if consumers are to use decarbonised vehicles and heating systems so solutions must be found that they will accept.

Consumer reluctance to use EV charging points, heat pumps, hydrogen boilers, etc, will undermine delivery. Smart metering has been a sobering experience. It never won widespread acceptance, was plagued by delays, and consumers were reluctant to switch to something where the benefits to them seemed unclear.

Government must focus on the seemingly mundane task of delivery and strive every sinew to enable an effective framework for consumer acceptance.

To paraphrase Blair’s ‘97 pre-election phrase, the focus should be on “delivery, delivery, delivery”. If the government is serious about meeting the net-zero target, it would do well to remember these words.