Can we build a new consensus on UK energy policy with better outcomes?
You cannot hope to change the debate without first looking within
Today I'm going to do things a little bit differently. One of the biggest things I've noticed when looking at energy policy is that you can very quickly end up going down a rabbit hole. RESP, SSEP, CSNP, TMO4+, RIIO-3, ED-3, REGO, WHP, CIB, SIF, NIA, BUS, ECO, NWF. The list goes on and this is not remotely close to exhaustive.
It is an immensely complex system. Some by necessity and some the inevitable sprawl of legislation over time. Having spent a couple of months buried in the papers, I realised it had become hard to see the wood for the trees. I took a step back. Although useful, the trick was not to look solely at the minutiae, but rather examine the guiding principles and methodology we use to approach the multivariate problem of energy prices and decarbonisation.
A call to arms
Today's blog is an attempt to do so. It is designed to be very high level and to trigger debate. All too often the debate on energy policy is framed as us vs them. Just take the bitter debate raging about the use of zonal pricing vs a reformed national market.
This is not useful as by entrenching positions you remove the potential for cross pollination of ideas and optimisation in the centre. Furthermore, the vilification of key stakeholders serves to inhibit progress as it encourages them to retrench further into their thinking rather than accept alternative ideas.
This piece is a call to arms. Tell me what you think, provide your reasoning, let's discuss it, test it and come to joint conclusions. What are the areas you think are being chronically underreported or misrepresented? What are the core untested hypotheses that are sucking up capital at the expense of tested measures? Indeed, anything you think. There are no wrong answers, just a selection of views that we can look to test. I’ll look to go first and provide some of my reasoning, I’ll also make clear what my pillars are and therefore where I can be guilty of blind spots.
The marginal cost of what?
In all my pieces to date, there is always one guiding principle. The clue is in the title; it’s the marginal cost of energy. It’s an unapologetic focus and one which the Climate Change Committee also implicitly acknowledge within the 7th Carbon Budget, on the potential uptake of heat pumps.
Emma Pinchbeck, CEO of the CCC, verbalised the issue in April in the Environmental Audit Committee. She indicated the main issue for uptake was the ratio of electricity prices vs gas prices. High electricity prices meant the economics of heat pumps were not viable. Indeed, this was the topic of my first piece. Outside of a small use case in EPC B and above, the economics of heat pumps do not stack up, given the high price of electricity. People will not switch unless the numbers stack up.
The primary focus should always be cost. Clearly, there is no universal constant amongst people. There are those for whom there is no price you can put on the damage from climate change and moreover it is a sliding scale. However, for the overwhelming majority of people, there is a desire to do the right thing, as long as they don’t not lose out in the process.
This is a theme that shows up overwhelmingly in polling with respect to things like the NHS. People are in favour of spending more money on the NHS but want the burden of taxation to fall elsewhere. What you are solving for is a way to ensure both aims can be accomplished and ultimately that comes from the price of electricity being low.
This also applies to demand flexibility, which is the second most du jour topic right now in UK energy. Chris Norbey, the CEO of EON, at Utility week live, framed consumers as demanding “cheap, simple and green”.
Those are his words, and the order is no mistake. Cost has primacy, which means you need to be prepared to say that some parts of the decarbonisation process do not make sense. Iterative failures and creative destruction should guide us to the right answer in time, but we need to allow that process to occur through an open marketplace with as little distortion as possible.
The state of play
The number and magnitude of subsidies attached to decarbonisation projects seriously inhibits the ability for efficient price discovery. I won’t list them all here as we’re staying high level (but see the back catalogue for more specific info), but the key point is you need to simplify the market, streamline subsidies and indeed look to remove them. By subsidising, via CFDs or otherwise, the Government is creating winners and losers, not based upon the primary motivation for the UK population. Cost.
Take the example of Biomass. In Running Up That Hill, the average strike price was £146.9/mwh1. Ironically, it’s not green and not cheap, yet is required as a source of inertia in the system. This is a classic case of a sub-optimal optimisation of the system. Gas, even with recent events in the Middle East, is going to be much cheaper than this if you’re polluting on the basis of inertia requirements. This is just the top of the iceberg, but I hope is illustrative of the broader point.
My Rosetta Stone
There are two things to note. Firstly, this is of course just my view. To go back to what I said before, there are pillars that guide my thinking. I am a child of the monetarist camp in the world of economics, I believe in free market mechanisms, smaller government and that by allowing the greatest degree of price discovery you allow the greatest room for creative destruction and optimisation of the best outcome. Unabated capitalism suffers without guide rails, so you need a strong regulator.
However, I am guilty of cognitive dissonance, confirmation bias, selection bias and narrative fallacy when it comes to this viewpoint. As much as I try and adjust for this, I am sure I commit a degree of mental gymnastics that means I can logically transform something to fit my priors.
I think if we all look deep enough, we can probably agree we've been guilty at various points of this. However, rather than implore you to change, I implore you to tell me where my blind spots are. What are the missing pieces? How can we build and develop a better model for the betterment of energy policy and society as a whole?
This also touches upon the second point. Where the simple aim of reducing cost goes wrong is the implementation of that goal. That simple goal straddles multiple diametrically opposed pathways running in a sprawling fashion.
A Rosetta Stone(Haven)
I recently read a fascinating piece by Stonehaven, titled Make Britain Build. It’s a must read, looking at improving the apparatus of government to greenlight projects and remove the chronic failures that have blighted investment in this country for over 30y and hit growth. It’s overarching conclusions are below:
Create powers for ministers to specify an expected timescale for major infrastructure projects, both generally and for specific cases. This would not be binding, but would provide a legally robust justification for proceeding at the specified pace.
Create structures for handling the impacts of development outside of an individual planning application where possible – in the manner of the government’s Nature Restoration Fund
Break up the big fixed tasks of the planning process and enable project teams to determine their own pathway, so they can spend most time on the most significant issues
Give decision-makers a clear legal right to decide planning applications based on the best available evidence
Establish a specialist infrastructure tribunal to hear legal challenges on a faster timescale with more expert knowledge, and in a way that favours affected citizens rather than organised campaigns.
The point here is to return power to the MPs and away from unelected officials, reduce the hurdles, remove the need for perfectionism (allow creative failure) and therefore reduce the time for projects to occur. They themselves state this is something required either in the private or public sector. This is spot on. Looking at historical periods of growth such as the growth of the rails and growth of the grid, the speed at which a project could move was a huge factor in its ultimate success.
Whatever your view on the underlying project, it is imperative that an elected official has the power to do what they were elected to do, rather than it be in the hands of an unelected organisation or judiciary. If the idea is a dud, you vote them out. That is literally the root of democracy.
Where the paths diverge however is that I believe the private sector should be picking up more of the slack, with less subsidisation. Liability, for what is a grand experiment (as global leaders we are rolling the pitch), should be overwhelmingly in the private sector, rather than in the hands of the taxpayer.
As Stonehaven attest, £250m and 13y has been spent on the Lower Thames Crossing in the planning phase. If you sped up the timelines and reduced the costs, there would be nowhere near the requirement for the government to prop up private industry through subsidisation, as you are removing key risk vectors.
Where from here?
I believe the answer is less is more. Remove the hurdles, put the ultimate liability in the private sector and remove the subsidies. Let the new technology stand on its own two feet on a level playing field. There can be no caveats or room for debate then, it will either be cheaper and used, if not it will cease to be used and the creative destruction process will move on to new technology that will achieve the aims of decarbonisation and low energy prices.
But again, this is just my view. Tell me where my blind spots are. Let’s develop a consensus based upon rigorous testing, large sample analysis and the removal of blame and vilification. Ultimately, everyone’s goals should be aligned in terms of wanting the best outcome possible.
Change must start from within, so before I lecture you, tell me. What did I miss?
I am indebted to the work of Matthew Syed, Andrew Lees, Nicholas Taleb, Benjamin Franklin, Dale Carnegie, Paul Johnson, Stonehaven and many more I’ve failed to mention, for triggering the thought processes that drove today’s blog
This number is out of date as it will be higher now due to CPI linkage and re-striking going on at Drax