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Why energy system governance is not fit for purpose

Gareth Miller Gareth Miller CEO
27th April 2021

In my recent blog, the Emperor’s new clothes I referenced a poll of our Financing Net Zero (FNZ) membership which revealed 75% support for an energy systems architect to ensure we manage the net zero transition. In the spirit of independent thinking that Cornwall Insight is known for, I respectfully disagreed and mounted a short case for why I thought this might not be the right answer to ensuring a successful net zero transition.

My basic thesis was that institutions set up to challenge the status quo can very quickly become part of it. And rather than layer on new functions into a congested market in which architectural functions are already present, it might be better to focus on clarifying outcomes, objectives and principles, properly valuing costs, and benefits, and then decluttering the regulatory landscape so that market actors can get on with delivering.

Since then, we have had the government commitment to 78% cut in greenhouse gas emissions by 2035, relative to 1990 levels, which for the first time, will formally include aviation & shipping. We have also had an excellent report by the Energy Systems Catapult (ESC) entitled “Rethinking Electricity Markets” which talked to the question of how to structure a market fit for net zero and built on earlier contributions from others in the form of “Recosting Energy” (by Challenging Ideas) and “Powering Net Zero” by Policy Exchange.

Recognising this is a theme that is going to get more rather than less important, last week we decided to run a further FNZ webinar on two questions: is industry governance fit for purpose in a net zero world? And if not, what needs to change?

Cornwall Insight’s Research Partner Daniel Atzori invited Simon Virley of KPMG, Laura Sandys of Challenging Ideas, George Day of ESC, Caroline Bragg of the Association of Decentralised Energy, and our very own Tom Edwards to debate these questions. In this piece, I will cover the perspectives shared on the first of these questions.

There was complete unanimity across our panel: the energy governance structure is not fit for purpose. But the points of emphasis reveal subtle but important diagnostic differences which characterise the reform debate, and which shape the solutions favoured by our different panel members.

Net zero a significant factor

Simon kicked us off with the blunt message that net zero changes everything. In that context a system of rules developed 30 years ago will struggle to deliver strategic change at the pace and magnitude required. And further, whilst recognising that markets play a critical role in the journey, there are market failures that need to be addressed strategically, as well as there being desired outcomes that are beyond the gift of markets to deliver.

Simon gave three examples – planning and delivering the offshore grid, the hydrogen network and linked up local area energy plans. To focus everyone’s attention, Simon said that the gap between what is required strategically, and the bandwidth to deliver it had never been bigger. Coming from someone with three decades of experience in energy, and 25 working directly in policy, this is a perspective that deserves to be taken seriously.

Gaps between policy and strategy too wide

Laura shifted the light of analysis to the gaps between policy and strategy and delivery which she argues are too wide, and result in ineffectual outcomes. She also highlighted two related issues of overlap of institutional remits, and underlap of myriad policy silos and consultations which mean that it is unclear who is looking at the cumulative risks and opportunities and the cohesion between different actions and actors.

She gave a sobering headline that the volume of actions and actors are going to number between 50-100mn rather than in the hundreds, and we have long since moved beyond a tightly networked industry which was so small everyone “knew each other’s golf handicap”. Trying to centrally manage every aspect of such a sector will lead to it “falling over”. Coordination and cohesion are certainly required, but care needed to be taken to ensure frameworks created for achieving this were genuinely strategic and left freedom for people to operate.

BSC Panel lacks bandwidth

Tom gave much more of an industry practitioners perspective, reflecting his role as industry elected representative on the Balancing and Settlement Code (BSC) Panel. For Tom, self-authored and organically driven change processes in industry codes – an important part of the current set up – are not fit to deliver strategic or rapid change, or necessarily working towards a common objective of delivering net zero.

Furthermore, the current change processes rely effectively on “volunteers” from industry operating across code silos. This provides neither the bandwidth or line of sight to properly accommodate the inter-relationships and dependencies that arise from individual changes. The system is heavily reliant on ramifications of one code change creating necessity for change in another code first being spotted by spirited volunteers, and then being dealt with adequately in change processes which all operate differently, and not to common objectives.

Local action key

For Caroline, the principal challenge is the link between national and local action. Governance and policy needs to consider more deeply the role of regional and local actors such as local authorities, DNOs, municipal or district heat networks. The transition, particularly for heat and its relationship to the power sector, is going to be much more about devolved rather than just national activity. It will involve a patchwork of different solutions that must in some way be united with national policy objectives, and between vectors such as power, heat, and transport.

George agreed with the shift to local action that will be required in sectors such as heat. He then shifted the debate and positioned that idea that the components to achieve coordination and strategic progress certainly exist in the current landscape. The main problem is that government are trying to do too much on defining inputs and processes in the net zero transition, whereas they should really focus on strategy. In other words, they play too much of a micro-management role, which may in turn reflect that they are having to develop myriad policies to compensate for the absence of a vital one: proper valuation of the carbon externality.

So, in a little less than 30 minutes we had a cogent and varied critique of the status quo: lacking in strategic bandwidth, punctuated with gaps between strategy and implementation, overlaps and underlaps in institutions and policies, too reliant on silos and self-authored activity, dislocated between local and national activity, and policymakers too drawn into detail rather than focussing on quality and clarity of strategy.

Of course, diagnosis is one thing, treatment is another thing entirely. And whilst there was strong consensus on the need for fundamental change, there was plenty of diversity and debate on the necessary changes