On 13 September, I spoke at the British Institute of Energy Economics (BIEE) Energy for a net zero society conference. The conference considered the legacy of the Covid pandemic and how the means of recovery will influence the pace and direction of the net zero transition. The timing of the event was perfect with the imminency of COP26 in November. The many themes explored by speakers and participants delved deeply into the implementation agenda that will need to accompany the setting of (hopefully) even more ambitious international climate goals.
My job on the first day was to open the conference and set the scene. In my view, we are at the beginnings of a paradigm shift in the focus of regulation and policy. The last two decades have focussed on the liberalisation of markets and the creation of policy and market frameworks to support renewable technologies at (mainly a power) system level. But the next twenty years will need to focus on driving decarbonisation at an actor level, whether that be businesses or citizens, and across the entire economy.
I want to be clear that I don’t subscribe to the “power sector job is done” maxim. The work to continue greening the power sector whilst providing the appropriate levels of flexibility continues. Not losing focus on this will remain critical as we transition away from fossil fuels and ageing generators, and maybe we need to think radically about the design of wholesale markets to support this. The last week perhaps demonstrates there are considerable challenges that emerge during the current stage of the transitionary phase. But there is now no doubt that low carbon generation is cheaper than carbon alternatives. This simple fact alone will ensure momentum is self-sustained in the power sector, so long as policy continues to address unhedgeable risks such as merchant price volatility, and more work is done on how to provide adequate and investible flexibility signals.
However, inescapably the demand side must now become paramount in the minds of regulators and policymakers. Many changes to how we heat our buildings, how we travel and even how we eat will require people to change their consumption patterns and behaviour. Businesses, through ESG becoming a pervasive influence on company strategy, will be seeking to embrace decarbonisation in an unprecedented way. As decarbonisation moves from energy production to energy consumption, it will also be the case that the focus moves away from the power and gas sectors and reaches more deeply into every individual life, every community, every segment of the economy and every business.
There are several high-level areas for us all to think on as this shift takes place, particularly in terms of the basic proposition upon which we ask people to make a change.
The first is the absence of serious thinking on how to create the right flexibility incentives on the demand side (essentially making sure worthwhile behaviour changes happen). Energy industry change programmes such as smart meter rollout and half-hourly settlement have been both incredibly slow and not always accompanied by a clearly articulated vision of the benefits they bring to the consumers themselves. A meter, dumb or smart, as an end in itself, plays into what some conference attendees described as the way in which the industry views the consumer: indistinguishable from the asset which measures their consumption. Lots of good thinking has gone into alternate models to properly value and reward demand-side actions without asking people to become engineers or energy experts. Indeed, several companies are attempting to make this happen through their propositions to customers. But more needs to be done, and a lot of policy attention needs to focus here now.
Second, we need to understand better how policy costs in energy bills influence consumer behaviour. Consumers cite cost and convenience as barriers to taking forward low carbon options in home heating as an example. Our current system potentially means that every increase in money spent to support the net zero ambition risks ratcheting up the hurdle of consumer resistance to ever-higher levels. If bills (rather than unit costs) rise, resistance will harden, at least in the short term. Higher bills are perceived to be vote losers, so this also means that putting money behind ambition risks becomes politically self-defeating. Further from a social justice point of view, cost recovery via bills as it is currently designed brings with it all sorts of potentially uncomfortable distributional outcomes for vulnerable households. Carbon and energy consumption differ greatly based on household incomes, as does affordability of upfront cost and the risk/returns balance on investment in low carbon solutions. Investment costs to deliver system-wide and in-home changes to support net zero will inevitably rise as we move attention to heat and transport. As a result, we perhaps need to think about how we currently approach and structure the bill-based recovery of costs – whether in the power or gas bill – and whether it is sustainable, equitable and efficient.
Third, it isn’t all about investment cost but returns. However, we need to be clear that net zero is a multi-generational return-on-investment proposition. Money spent today on buildings and transport will yield big benefits in the decades, not days to come, both environmentally and economically. Not everyone who pays today will have the pleasure of enjoying these benefits. In such a context, motivation to change behaviour is unlikely to be based on cost benefits to an individual in the near term. Regardless of how the investment in the transition is funded, people need to pay today to get material benefits later. Motivation will rely on a desire to create a positive legacy for future generations, leveraging the strong popular desire to deliver positive outcomes on climate change. There is a large body of work by the CCC, OBR and others that can be utilised to demonstrate a quantitative basis for this positive legacy. Light should be shone on this in the public discourse to inspire people and convince them that to “pay” today is worthwhile. Merely referring to the need to make net zero happen in a “least cost” way misses this temporal point entirely and may contribute to a misunderstanding of the inter-generational bargain we are asking people to make. That, in turn, could shake faith in the transition.
As I left the conference, I was struck by one thought: the context of driving change across society and an economy is going to be vastly different to driving change to energy infrastructure. In reimagining our energy system as low carbon, we in the energy sector have had to become part engineers, part economists and part lawyers. But, whilst there are exceptions, the focus has been largely inward-looking, creating a rather impenetrable community with its own language and conceptualisation of the known world beginning at the point of production and ending with measured consumption. The next stage is going to rely on energy people learning to cooperate and coordinate with actors from across the spectrum of the economy in an unprecedented way and for new skills and perspectives to be allied to our existing capabilities to help make sustainable low carbon consumer change happen. My major takeaway was this: perhaps the biggest change that needs to happen first is not how consumers think and behave but how we in the energy sector think and behave. What a challenge. What an opportunity!