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The Emperor’s new clothes?

Gareth Miller Gareth Miller CEO
2nd March 2021

Institutional and governance reform forms a major plank of the energy white paper, with the inevitable result that industry commentators are proposing various and new institutional constructs to address the immense challenge of transitioning the energy sector to net zero. We have seen many ideas in this space over the years, now being dusted down, including popular concepts such as a system architect.

Last week, during our Financing Net Zero Forum, we asked our attendees: “Do we need an energy system architect or is it better to leave the initiative to the market?". Among our 127 respondents, 75% opted for “energy system architect” and only 25% for “market”. So, our audience is clearly highlighting a need for clarity and consistency in terms of direction of travel that the market alone is not capable to deliver – and that is precisely the role of the government.

However, before the energy sector engages in creating new layers of governance and institutional responsibility we should probably pause and ask what problem would this really solve?

Those favouring institutional creation suggest that this is necessary because the pursuit of net zero requires “whole systems thinking”, which in turn needs the combination of deep expertise and a long term, and non-party political perspective to unlock.

This assumes that efficient whole systems outcomes require an “intelligent designer”, or a group of such actors working together to define the road-map to net zero. But does our experience of innovation, ingenuity and evolution in other complex systems does really bear this out?

Similarly, when it comes to net zero should we challenge ourselves on whether we are seduced with the idea of institutionalising innovation or transformation because it makes it feel less daunting?

We all agree about the importance for government to provide a clear road map and holistic policies to achieve net zero, so to develop integrated cross-sector collaborations across the energy value chain. However, creating another institutional circle in the Venn diagram of accountabilities and responsibilities between regulation, government policy and system operation only makes sense if there is genuine confidence that this will unlock the biggest lever for net zero: low carbon innovation in the interests of the consumer.

There must be some doubt that a new institution is the best way to achieve this. Subconsciously or not, “organisational” views and positions emerge over time, and even institutions which are proximate to the zeitgeist of markets at inception tend to drift away and weigh anchor in one view of the world at some stage. This limits the positive impact they can have on transitions as dynamic as the one we are already engaged in, and risks placing new boundaries on forces that in truth would be best left to find their own frontiers, within the least invasive or pervasive bounds of regulation. Hence, too much regulation could end up stifling innovation.

Instead, would the courageous move now be to reduce the number of institutions and roll-back the frontiers of regulation? Perhaps the focus should be on sharpening the economic costs for emissions and the incentives for low carbon solutions, and then focus on reducing complexity and increasing transparency and accessibility of both regulation and industry data.

This institutional and regulatory “decluttering”, and unleashing the power of data, would make it easier for businesses who are great at delivering exceptional outcomes to consumers through digital platforms to enter the market and thrive. They would innovate in a manner and fashion that new or existing institutions could never do and drive bottom-up changes to the system much more in tune with consumer needs.

In this world, we would accept that once the policy ambition is set – as it has been by net zero – regulation and institutions should focus on ensuring acceptable levels of equity and fairness, efficient system operation, and maximising competition and innovation. Controlling the means of transition would be a regulatory taboo, and “getting out of the way” to let consumer-focussed firms find the answers within the boundaries of regulation considered a triumph. And in this approach to the transition, institutions would only exist in so far as they are necessary for achieving those outcomes, and strategic policy objectives should be aligned between them. Perhaps we would be better advised to start the conversation on regulatory and governance reform here, rather than default directly to adding to the institutional complexity that already characterises the sector because it makes us feel like we have “control”.