Sector urgently needs a framework towards net-zero

Earlier this month, the government committed the UK to becoming the first major world economy to fully decarbonise – net zero. Senior figures across the utilities sector give their view on the next steps to take this from an ambition to a reality.

The adoption of the net zero target gives the next British prime minister bragging rights in international climate change diplomacy circles, putting the UK in pole position to host next year’s UN climate change talks.

The move to adopt the net zero target, which means reducing emissions to such a low level that the remaining residues can be absorbed by tree planting or CCUS (carbon capture, use and storage) technology, is undoubtedly a big moment in UK energy and environment policy.

Keith Anderson, chief executive of Scottish Power, hailed the announcement as a “massive step forward” at last week’s Utility Week Energy Summit. Michael Lewis, chief executive of Eon UK, told delegates that it gives a “very clear idea of where we need to get to”.

Tom Thackray, director of infrastructure and energy at the Confederation of British Industry (CBI), told a meeting of the House of Commons BEIS (Business, Energy and Industrial Strategy) select committee last week that the business body was “delighted” to see adoption of the net zero target

“In a matter of months, we’ve seen a massive change in how people view climate change,” said Energy UK chief executive Lawrence Slade.

However, while setting the target is important, the hard work begins now – on the road to 2050. “It’s one thing making the announcement, and the rhetoric around that,” he said, “but it needs urgent follow-up.”

Thackray agreed: “Having that target enshrined in legislation is really important, but it’s not sufficient on its own. It needs to be backed up with policy frameworks.”

David Joffe, who authored the UK Committee on Climate Change report recommending the adoption of the 2050 net zero target, said: “There’s lots of progress that we need to make and need to make quickly.”

“If we don’t make progress on infrastructure, we won’t be able to do it because there won’t be enough time,” he said, namechecking electric vehicles, hydrogen and storage as three areas where rapid progress is vital.

“The time for analysis is over. We know roughly what we have to do, we don’t need to know how to do it to the nth degree.”

One problem, though, is the world of difference that exists between the long-term ambition announced last week and the immediate chaos engulfing what is currently a rudderless government.

“It would be difficult for a government with full bandwidth available and we know that’s not necessarily the case at the moment,” said Joffe, although he added that it’s “not beyond government’s ability to get on with things”.

Anderson suggested the existing policy regime was looking increasingly creaky, given the scale of the challenge it faces.

“There are some inconsistencies and unintended consequences in the system,” he said, identifying the cap on the amount of renewable generation that can be purchased in contracts for difference (CfD) auctions and the exclusion of onshore wind from this process.

Tom Glover, UK chair of RWE, told the summit he was “pretty sure” that if the government gets rid of the current 6GW cap on renewable electricity in each CfD round, the industry could deliver more low-carbon electricity.

And the increasingly hard to ignore elephant in the room when it comes to discussing net zero is the government’s block on allowing onshore wind and solar projects to compete in CfD auctions.

Glover said: “We need a policy framework from the government and price stability for onshore wind.”

For Anderson, this pointed to the government getting on with the publication of its energy white paper, which BEIS secretary of state Greg Clark said would be out in the summer.

“This makes the push to get the energy white paper out very important. Setting targets and committing to things like net zero are important but having a framework is essential. The sooner that is out the better.”

The CBI’s Thackray told the select committee that it was “really important” for the government to publish the energy white paper before parliament’s summer recess next month.

Utility Week understands from sources close to government that the white paper is virtually ready. What is holding up publication is the uncertainty surrounding the department’s ministerial team, given that the new prime minister will conduct a reshuffle when he is elected next month.

Given the broader political shenanigans at Westminster, Anderson expressed doubt at last week’s summit that the white paper would be published this summer.

“Unfortunately, it’s going to be kicked down the road and will be caught up in the new prime minister and further conversations around Brexit.”

As well as setting out a direction of travel on policy, the white paper is also an important tool in beginning to engage the public and government in the challenges involved in delivering net zero.

The need for public buy-in

In order to deliver the far-reaching changes entailed in reaching the net zero target, like converting domestic gas boilers to lower carbon alternative heat pumps, the level of public debate will have to improve, said Joffe: “We’ve made a lot of progress in the power sector in terms of electricity but we can’t do it all without people noticing.”

Getting the public on board will require mobilisation across Whitehall, he said: “We need engagement across government departments, not just BEIS and the Treasury but DfT [the Department for Transport] and the Department of Health.”

How much this may be needed was underlined by the internal government spat that took place in the run-up to last week’s net zero announcement.

The Treasury signalled its concerns about the ramifications of the target for the economy in a leaked letter showing that reaching net zero would cost £1 trillion by 2050. The row has revived concerns that the Treasury is reverting to climate change sceptic type.

Joffe played down concerns about the Treasury’s intervention at last week’s summit. He said: “It’s not unreasonable that the Treasury should be thinking about it carefully rather than rushing into setting targets.”

“We think the target is affordable and the right thing to do. There’s no getting away from fact that some of the costs are big.”

Paul Spence, director of strategy and regulation at EDF Energy, agreed. “I would much rather have a government finance department paying attention to the fact that 1-2 per cent of GDP needs investing in the low-carbon infrastructure we need and making sure we are doing it right. There are really big questions for the finances of the UK.

“Doing that in the most affordable way is entirely possible. The important thing is that the Treasury is engaged and thinking carefully about how we transition to a low-carbon future.”

Eon UK’s Lewis observed that the blunt figure quoted in the Treasury letter must be put into context. “A trillion pounds is a lot of money but it’s over 30 years. To bail out the banking system was £1.16 trillion including all the contingent liabilities. It’s a number but we must absolutely make this investment and make this transition.

“It sounds like a big and scary number, but when you break it down there are also huge benefits.”

The Treasury may have lost the battle on setting the net zero target but it has secured a concession in the form of a pledge that the 2050 net zero target will be reviewed in five years’ time.

Joffe expressed concern that the existence of the review could “dampen the signal” of setting net zero in legislation.

But he stuck up for the Treasury’s right to carry out the exercise. “It’s not completely ridiculous, if nobody else is doing it, that it could be appropriate to reconsider level of ambition. It’s not completely daft as long as it doesn’t undermine ambition.”

A ‘just transition’

Closely linked into this exercise, the Treasury is examining how the costs of decarbonisation will be spread across society and the economy to help achieve what is increasingly described as a “just transition”.

Sam Williams, director of consultancy Economic Insight, told the summit that the transition to net zero will have potentially far-reaching ramifications, going beyond power to other sectors like auto manufacturing.

“All those things imply fairly fundamentally structural changes to the economy, where structural change occurs, we get a displacement of economic activity and jobs.”

And the UK doesn’t have a “great track record” in managing such transitions, he said, noting the experience of his native Wales following the closure of the deep coal mining industry.

Lewis warned the summit about the political risks of not managing this transition well. “You have to look really hard at redistributing the effects of investment so that costs are not all born by people who are unable to bear costs. If you go down that route, it won’t happen and sooner or later political pressure will build.

“If you load costs into energy, it will create a backlash because it is regressive.

“We can’t keep on loading these costs into energy bills,” he said.

Noting that removing policy costs from energy bills would benefit 70 per cent of consumers, he said: “We’re going to have to look at these redistributive effects if we are going to take this transition where it needs to go.”

Chris Stark, Joffe’s chief executive at the CCC, was relaxed about the review when giving evidence to the BEIS select committee last week.

“Done well, it needs that level of engagement and we know Treasury does these things well,” he said, drawing the committee’s attention to the Treasury’s role in commissioning the Stern review, the 2006 report on the economics of climate change.

The Treasury could bring a “big strategic focus” to the debate, he added.

Another vexed issue is the government’s decision not to exclude the use of international carbon credits to help achieve the 2050 target.

Joffe drew comfort from a statement by Greg Clark in parliament last week that the government aims to achieve targets without use of credits. “The intention ought to be to reach targets without credits if possible,” he said.

Taking a sideswipe at the Extinction Rebellion protest group, Joffe said there was “a lot we need to do simply to get to 2050”.

“It’s not impossible to achieve an earlier date but extremely stretching to get to 2050,” he said. “We need to be realistic about challenges we set ourselves. The call from Extinction Rebellion for 2025 indicates to me they don’t really understand the complexity of the challenge.

“We could have a conversation about 2045, but to anyone who says it can be done earlier, it is really important that they acknowledge the scale of the challenge.”

The requirement to build an extra 5 to 8GW of low-carbon generation capacity per annum is a “staggering number”, said RWE’s Glover.

But while it is easy to be daunted by the scale of the challenge, he reminded delegates at last week’s summit that the 2050 target is a “great opportunity” for utilities.

“It’s amazing to be in an industry where the demand for the product is going to double.”

Scottish Power’s Anderson agreed. “We have all the technologies to deliver zero carbon, so let’s get on with it,” he said.