The Green Transition: In the zone
Weekly analysis of the shift to a new economy.
Dear Reader,
Welcome to this week’s edition of the Green Transition from the Spotlight on Policy team.
On the Today programme this morning, Nigel Farage made a series of dubious climate claims in his quest to suggest that the UK does not need any policies to tackle global warming. Farage seems to still be unclear as to whether the climate change we’re currently experiencing is actually man-made (it is!). When asked whether he thought climate change was at least partly down to human activity by Nick Robinson, Farage said: “It may well be. It may well be.” (Reform have got form on these kinds of assertions. Farage’s deputy, Richard Tice, has previously called that the idea that climate change is man-made “garbage”.)
It should be noted that among scientists, there is near unanimous consensus that anthropogenic activity since the industrial revolution has caused the spike in global temperatures that we are currently experiencing. This is due to the burning of fossil fuels (coal, oil, and gas) which proliferated after this period.
Farage also used his run in with Robinson to claim that the UK could be completely self-sufficient on natural gas. By his logic, Britain should ditch its quest for Net Zero in favour of gas mined from the North Sea. However, the North Sea Transition Authority (the oil and gas regulator) has projected a steep decline in production from the North Sea due to the basin’s ageing. According to their forecasts, the UK will be 94 per cent reliant on imported gas by 2050 (and this is even if new oil fields like Jackdaw and Rosebank end up being developed!).
The North Sea is predominantly oil, most of which is exported (circa 80 per cent). The UK is more exposed to the whim of international energy markets by its gas guzzling which, if the past three years of energy price hikes are anything to go by, is not a good place to be.
With Reform and the Conservatives (led by Kemi Badenoch) turning their backs on Net Zero, this is a tricky and uncertain time for the transition to clean power. Who knows where this diminishing consensus will lead!
Meanwhile, this week we have an excellent piece on the issue keeping those working in the energy sector up at night: zonal pricing. Don’t know what that means? Don’t worry! Sam Alvis, the head of energy security and environment at IPPR has got you covered. It looks like Ed Miliband may be about to approve this interesting piece of energy policy, so stay tuned!
Let’s get to it!
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In the zone
By Sam Alvis
It’s unorthodox to start an opinion piece both by explicitly avoiding taking a view and yet still expecting to piss everyone off. But it must be so when talking about energy market reform, the sector’s issue de jour.
Energy market reform, more formally known as the Review of Electricity Markets Arrangements (REMA), was a policy developed by the previous Conservative government. But with a Labour victory at the general election came a new plan for the energy system – Clean Power 2030 – backed by an interventionist state. This complicated REMA. Government needs a lot of private investment to build the infrastructure to decarbonise power by 2030. REMA changes the rules, risk and therefore cost to government of that investment.
A decision is still expected by the summer and is vital to the confidence business will have in government’s plans. But that decision now effectively boils down to one thing. Despite once being about every part of non-retail electricity markets, from contracts for difference to the balancing market and beyond, we are now essentially talking about one issue - locational, marginal, or zonal pricing.
On one side are the champions of a free-market policy where energy varies by location (let’s call them the insurgents). Their argument is predominantly pro-consumer, that zonal pricing is a silver bullet for lower costs and an easier energy transition. On the other are investors, legacy energy companies and climate advocates, who worry that the risk of shifting to zonal threatens infrastructure investment and therefore decarbonising the energy system (let’s call them the status quo). Their argument is predominantly about growth and investment. Both sides have the economic modelling to prove that zonal raises/lowers bills (delete where appropriate). There is no middle position, everyone must pick a side.
This is a nightmare for government, who have no off-ramp. We need a decision, the uncertainty either way is just as damaging to the UK’s investment prospects. Politics means meditating interests to get to a decision. To help, advocates should think a little about the political process.
First, think about the evidence. Paying for more numbers to prove your point clearly isn’t moving the dial. The best conclusion government can currently reach is that any decision has highly uncertain impacts which vary wildly on the underlying assumptions. At worst they will think that whatever action they take someone will accuse them of raising the cost of the energy transition. The mudslinging about incumbents, vested interests or profiteering may be good tactics for firms but they are terrible strategy for all those who care about net zero.
Second, recognise the government’s strategy. The Department for Energy Security and Net Zero (DESNZ) is planning a decarbonised system. It is going to have a concrete plan for where it thinks energy assets should go. How can it reconcile a free-market policy, which was developed under the previous Tory government, with its more statist instinct?
Clearly this government wants to be a reforming one. The status quo is not an option, and too often advocates against zonal stop at – ‘just don’t do it’. The government is already doing a lot of reform, not least on CfD terms, balancing market arrangements, or grid connections.
But “we are already reforming so we aren’t doing this” is not an announcement. It leaves open the question over whether REMA is paused, salami-sliced, killed or complete. There is no ‘no-change’ option available here, the world and energy system are already changing, fast. The government wants to be a part of that.
If zonal doesn’t go ahead DESNZ will still need answers on things like maximising the effectiveness of storage or efficacy of interconnectors. If it does, it needs a plan for managing the politics of a situation in which different towns, cities and industries pay different energy prices.
With both sides only representing their own interests it’s always going to be hard for government to mediate. In formulating a response, it can draw from both sides.
From those advocating for reform, the government can take a laser focus on consumers, and a clarity over where we’re trying to get to and why. Being positive about the future carriers a lot of weight. DESNZ should talk about households and their benefits, not investors. From those lobbying to keep the status quo, the government should push that whilst it is already reforming, there are myriad more options to do so.
But it can’t appease both; and the government must recognise not everyone will be happy. Government can go further than either side has in looking at more radical ideas for bill reduction that don’t feature in the current debate. They include, returning to ways to finally break the link between gas and electricity prices, thinking about hypothecating carbon pricing revenues or rethinking how Ofgem calculates network costs?
Too often industry focuses solely on their thing and can’t abstract it to a political process. But it’s naïve to think that government can do that alone. There’s a reason REMA has been three years in the making, it’s hard. Time to start compromising.
Sam Alvis is head of energy security and environment at IPPR.
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