New Thinking Blog: We need policy certainty to create low carbon supply chains

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on Apr 22, 13 • posted by

New Thinking Blog: We need policy certainty to create low carbon supply chains

Richard-Hoggett-blog-smallerWe need policy certainty to create low carbon supply chains   

Richard Hoggett, IGov Team, 22nd April 2013

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It can increasingly be claimed that within industrial nations, climate policy is essentially about energy policy, and the IEA’s report last week starkly brought home how much we need to do if we are going to keep to an average global temperature rise to 2°C (a level that is by no means safe). Despite rapid growth in low carbon generation, the increasing global use of coal has resulted in average unit of energy produced today being as dirty as it was 20 years ago – progress has stalled. We have far more fossil fuels that we can safely use, and maybe as little as 20% of current proven reserves can be used by 2050 if we want to avoid the worst affects on the climate. Yet companies, with political support for remuneration, tax cuts, etc, including within the UK, are being encouraged to recover yet more fossil fuels, conventionally and non-conventionally.

It’s not just about the climate, the UK, like other countries, faces an on-going and complex challenge to tackle emissions whilst also trying to keep energy prices affordable and maintain energy security. How we do this, given the globalised nature of energy systems, is far from straightforward, but what is clear is that the current supply chains that meet our demand for energy services are increasingly unfit for purpose.  In UK and other industrialised countries these supply chains, predominantly based upon fossil fuels which have been cheap and easy to access, have become highly interconnected and complex. This makes them prone to inertia and lock-in, and as well as driving climate change, they are also increasingly struggling to deliver on affordability or energy security. To tackle climate and wider policy goals we need radical change to  enable new supply chains to develop and expand, as well as changes to the wider social, economic and political landscape in which they are embedded.

At a macro level the whole energy system is a supply chain, containing multiple inter-related networks and subsystems relating to suppliers and customers; based on different fuels, technologies and the infrastructures that connect them; as well as the materials, labour, equipment, actors and services which are needed for the development, manufacture, installation and operation of the system. The complexity cannot be overstated. Compared to incumbent fossil fuel supply chains, newer lower carbon alternatives face a range of internal and external risks reflecting the maturity of both the technology and its supply chain. These include: technology-specific barriers; wider cross-cutting issues like competition, investment, confidence, policy support, etc; as well as enabling factors like planning, infrastructure, skills and materials. There are dynamic inter-relationships between these issues and they need to be understood and acted upon, as they will influence the pace, timing and cost of the transition from hydrocarbons to low carbon – the clock is ticking.

A key issue is policy certainty; something even the Treasury recently acknowledged, although this is something the UK has been particularly poor at as of late – the 2030 decarb target, the energy bill and CfDs, John Hayes…..  In simple terms, bringing forward technologies and investment requires a stable and consistent policy regime to reduce risk, and perceptions of it; which includes a need for transparent and cost-effective regulatory and planning procedures, appropriate incentives, and support for innovation through to deployment. These issues can have an impact across the whole supply chain, as the CBI and many others have pointed out, companies are likely to be wary of entering a new supply chain, scaling up activity, or making long-term investment decisions for manufacturing or skills development, unless they are confident of the policy regime that is in place. Get it right and the UK could develop diverse and thriving supply chains, which bring down costs by stimulating growth, encouraging competition between companies, and through the learning rates that occur as technologies are rolled out and the supply chain develops and optimises. Whilst other countries, like Germany, are getting on with it and learning (by doing) – the UK is not learning anything by avoiding doing – investment is not happing or is going elsewhere. We obviously have a choice in terms of leading on the development of the technologies needed for a low carbon transition, or leaving it to other countries and buying it in. However, by capitalising on their development we can reduce local risks and bring wider dividends for a country through job-creation and economic renewal. You would think this would tick all the right boxes in Whitehall, but the support for fossil fuel supply chains continues to dominate – wrong for the climate, wrong for our long term security and wrong for affordability.

Separate reports from Bloomberg New Energy Finance and by Clean Energy Pipeline have both recently highlighted how policy uncertainty is impacting investment. PWC have also highlighted how investors are assessing opportunities across multiple markets, suggesting the UK is not giving the right policy signals to attract investment; that there are on-going uncertainties around support for renewables and that the on-going uncertainties supporting the CfDs in the energy bill need to be resolved. The first REA  survey of confidence within the renewables sector also shows clear concerns over CfDs for the renewables sector, as well as how the lack of a 2030 emissions target will not send the right signals to attract investment.

A lack of confidence is stifling investment, making the cost and timing of the necessary, and inevitable, low carbon transition more difficult; it is also driving up the cost of capital, making what does happen more expensive. We need a new political approach to supply chains that looks beyond individual technology silos (which can often miss the inter-relationships between them), whilst better evaluating the options from a climate, security, affordability and economic growth perspective. This means moving beyond the short-term political cycles and thinking that don’t encourage investment – those countries with a long term, consistent strategy like German and the Netherlands show what is achievable. Creating a low carbon energy system is a long term challenge, but is needs to be set in motion quickly. The benefits will be measured over decades and investment takes year to prepare, the government needs to create confidence to enable this to happen and recognise that the benefits won’t be felt in time for the next election.

Oh, and we are hoping to better understand some of these issues in relation to energy security in a forthcoming special edition on supply chains, we would welcome contributes from across the energy sector as well as academia.

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