Transforming Energy Systems – why governance matters
Reflections on Week 4 – Energy Governance for Rapid Decarbonisation
16th July 2019
Week 4 started off with an enthusiastic challenge from one participant: “I’m looking forward to this week. I can’t see how you’re going to fit everything in though!” We are hoping we managed to deliver on this!
Vulnerable groups & equity
An early theme emerging was the question of how governance could protect poorer households. Some felt that it was inevitable that poorer households would spend a larger proportion of their income on energy; others saw a role for governance in supporting these groups.
There was support for the idea of issuing bonds to finance energy efficiency roll-outs, following the German model. There was also a proposal for more devolution to local councils, which IGov would support (see this blog).
Our question about whether equity should be dealt with through the benefits system resulted in very different opinions. Some thought that inequality is an inescapable part of the global economic system, which had to be solved outside the energy context (e.g. through taxation). Others thought that the benefits system was too stigmatised and politically charged to be able to perform this function. One participant pointed out that this would reduce the ability to respond by reducing demand (e.g. through greater efficiency). There is a strong case and research to show it would be more equitable if the costs of energy transformation were taken off energy bills and moved into general taxation.
There was some debate around subsidies again this week, with a few arguing that the cost of supporting renewables, smart meters, etc were a principle cause of inequality. We would argue most energy technologies and fuels have received direct or indirect subsidies through tax or other financial breaks. For example fossil fuels around the globe continue to enjoy subsidies despite the damage these cause to the climate (as tracked annually by the IEA). There are also examples for nuclear power such as the socialisation of the additional system costs they create, which are picked up across all generators connected to the transmission system; or the recent insights from Sussex University on how civilian nuclear power potentially cross-subsidises the defence industry in the UK. So it is very misleading to only highlight subsides for one technology and argue that this is a cause of inequality. We as a society have to decarbonise and rapidly, and there will be costs related to that. People also have to be part of that and there are therefore ‘costs’ of unlocking that. How we cost the transformation and how we pay for it is central to us achieving both equity and transformation. However, it is very complicated and far less transparent that it should be in order for us to really understand those costs, and how best it is to pay for them. What is clear that governance has to put in place measures to ensure that vulnerable people are adequately protected within the energy transformation.
Types of energy market
There were examples given of existing governance which promotes flexible market structures – such as some of the proposals put forward in the latest price review process for networks (RIIO-2 in the jargon) and the old ‘Economy 7’ tariff which provided cheaper electricity overnight – arguably a forerunner to today’s proposals for ‘time of use’ tariffs.
There were some interesting answers to the question of what markets could be created – what could be sold, instead of units of electricity and gas. One participant summed up the problems with the current system succinctly: “governance in the UK post-privatisation had some controls on unit pricing but no caps on units sold. Therefore, profit is proportional to the number of units sold.” Another pointed out that the UK was currently a difficult market for energy services because of governance arrangements, compared to some US Public Utility Commission regulated markets, where profits from installing energy saving equipment is allowed.
Proposed alternatives included:
- Paying for transport of electricity and gas on a per-mile basis (possibly with IT-enabled trading) to incentivise local markets – though there would also need to be a way of incentivising zero-carbon energy
- The energy equivalent of a Universal Basic Income
- Markets for balancing – where businesses and / or domestic consumers are incentivised to avoid peak times (like a modern version of the Economy 7 tariff discussed above)
- Personal carbon budgets, incentivising reduced carbon emissions per person – backed up with grants for insulation and local energy generation and storage
- Carbon trading based on a cap-and-trade system, which would require energy suppliers to limit carbon emissions.
- Provide heat services to households, possibly based on the energy efficiency rating of the property, or the Council Tax ban, with a cap on the amount of heat, with excess heat being charged per unit.
On the need for direction-setting in energy, an Australian participant noted the progress that had been made: “the country’s network owners partnered with our national science research agency to consider direction-setting and coordination at a national network level… It will be interesting to watch actual progress.”
Since writing the MOOC, the IGov team have been continuing to work on its ideas for institutional change, markets and local governance. So we would like to draw you attention to the recent blog which refines some of the frameworks we put forward within this course.
As we set out in the course, we see the development of an Energy Transformation Commission as an essential new institution. Some highlighted that this might struggle to bring about change and we would agree that the ETC would have to have real teeth in order to implement the transformation process. It would also act as a focal point for crucial decisions that need cross-government coordination, like the transition to electric vehicles, and decarbonisation of home heating – two areas where the CCC says policies are lagging. Someone has to be in charge of this process as currently there is no clear plan in place for the UK to deliver on its climate targets.
And finally, some challenges: First, some challenges for the IGov team, that at times some wishful thinking was creeping in, such as in the phrase “IGov rejects trade-offs”; and a comment that there is more focus on electricity than heat or other energy use. Certainly the challenges of decarbonising heat are significant, and need much more attention – both by commentators like us, and by government. Last, a participant expressed not so much a challenge but a worry, that the needed reform “seems horribly out of reach”, given that political priorities are elsewhere. Another asked “Is there any sign of the Government taking up these ideas? Has IGov had its 2 minutes in the lift with the Minster?” The answers are, possibly, and yes, but neither yet to a satisfactory degree!