Is a carbon price a conservative solution to climate change?

Last weekend, the Financial Times reported that a number of large energy generators have been lobbying the Treasury to retain the UK’s carbon price. It might seem counter-intuitive that Drax and SSE, who themselves have to pay the tax, are advocating its retention. But businesses like a stable and predictable policy framework in which they have the confidence to invest. A long-term trajectory for the carbon price can provide that.

Carbon pricing puts a charge on fossil fuel users for every tonne of carbon they emit into the atmosphere. It is advocated by many on the centre-right as a market-based mechanism for reducing emissions and tackling climate change. It sends suppliers a clear signal to invest in clean energy, fully prices in the social cost of carbon emissions, and leaves markets to find the cheapest clean energy solutions. But the system has its critics. They point to the financial impact on consumers, arguing it raises household bills for low-income groups and harms business competitiveness.

The UK’s carbon tax regime

There are two principal mechanisms for pricing carbon in the UK: the EU’s Emission Trading Scheme (ETS), and the UK’s domestic Carbon Price Support (CPS). Sector-specific taxes, such as Air Passenger Duty (aviation) and Fuel Duty (road transport), could also be viewed as carbon taxes.

The EU’s ETS provides countries with a limited number of carbon permits that allow them to emit a certain amount of CO2. Those permits can be traded, creating in effect a market that sets the price of carbon. This is an example of a ‘cap-and-trade’ scheme. ETS is widely regarded to be failing and in need of reform. Between 2008 and 2013, around a year’s worth of allowances were accumulated across the EU, creating an oversupply and depressing the price of carbon. As a result, the scheme has failed to drive any meaningful carbon abatement. Moreover, the UK’s continued membership of the EU’s ETS is now uncertain, following the result of the EU referendum.

To increase incentives to invest in low-carbon generation, the previous Chancellor George Osborne announced a domestic ‘top-up’, the Carbon Price Support, in the 2011 Budget. Unlike the ETS, this is a straight ‘carbon tax’, and is levied on users of fossil fuels in the power sector. It came into force in April 2013, and was set to rise each year. In the 2014 Budget, the CPS was frozen at its 2016/17 level (£18 per tonne) until 2019/20, in response to political pressure over high bills. A decision is expected in next month’s Autumn Statement on the future of the policy.

The future of the Carbon Price Support

The person who will be announcing this decision, the new Chancellor Philip Hammond, has previously given strong support to a carbon tax. As Foreign Secretary, he gave a speech to the American Enterprise Institute in November 2015, saying that putting a price on carbon “is completely in line with conservative economic values”.

However, there is a significant coalition lined up against carbon taxes, and lobbying to scrap it will be intense. Some have drawn attention to the regressive nature of carbon taxes, pushing up the bills of those who already struggle to heat and power their homes. During the steel crisis, carbon taxes came under fire for increasing production costs of ‘energy intensive users’. This case was overstated: a Carbon Brief analysis showed that once the government’s compensation scheme was taken into account, less than 1% of the production costs of steel were caused by climate policy.

Some suggest overcoming these negative effects by making carbon taxes revenue-neutral. The tax receipts from carbon taxes could be spent on compensating low-income households and energy intensive users. While this would probably boost public support for carbon taxes, it would have to be funded by additional tax rises or spending cuts, as carbon tax revenue is currently spent elsewhere. It would also complicate the tax system by introducing more hypothecation, to which the Treasury is historically averse.

David Cameron’s former energy advisor recently wrote in a blog post that he favours reducing the CPS once coal-fired power stations have been phased out. He argues they add unnecessary costs to businesses and fail to provide investor certainty because of the abundance of cheap fossil fuels. In reality, the Contracts for Difference, which is his preferred tool for encouraging low-carbon energy, also add costs to bills by guaranteeing a fixed price to generators of low-carbon power. Moreover, the overall costs of these Contracts for Difference would increase if the CPS was removed.

Aurora Energy Research believe that the CPS can be removed given that coal-to-gas switching in the power sector is already well progressed, with the coal phase-out completed by straightforward regulation. They find that EU-wide emissions would fall in the medium-term, as the UK would import less coal-powered electricity from overseas via interconnectors and so generate more power through its own newly built gas plant. However, they add significant caveats that the UK’s own emissions would increase and that there could be a long-term impact on investment in renewables and other low-carbon electricity.

Carbon taxes are clearly not a perfect policy tool. Nor are they the only policy required to decarbonise the economy. A recent OECD report found there was a sizeable gap between the real price of carbon and the level of carbon taxes around the world. With the Paris Agreement likely to come into force before the end of the year, this gap can be expected to narrow. Countries like France are already considering increasing a unilateral carbon tax.  

If the UK does scrap the CPS at the forthcoming Autumn Statement, the government will need to assess carefully the impact on clean energy investments. The biggest long-term threat to UK competitiveness and living standards is failing to be a world-leader in low-carbon technologies.

Sam Hall is a researcher at Bright Blue

Future farming policy: putting all our asks in one Brexit?

Politics is finally emerging from the shock and awe of the Brexit decision and frameworks for policy development for a new post-EU future are beginning to emerge. An abiding question is whether the political and economic realities of our impending separation will mean damage limitation is required or whether Brexit presents opportunities, not least for innovation and dynamism in business and in policy.

The risks of damage are perhaps nowhere clearer than for farming. The Common Agricultural Policy (CAP) has taken the lion’s share of the EU budget for decades. Though it has fallen recently, it’s doubtful HM Treasury will want to continue funding farming in the way the CAP has done. George Freeman MP, chair of the PM’s policy board, has recently suggested as much.

Not least the Brexit debate set many hares running about where our ‘repatriated’ EU contributions could or should go and farming wasn’t at the top of the list. If we add in the risk that the trade deals finally settled upon are likely to meet the needs of the most influential industries – perhaps financial services or engineering – then farming could face both cuts to a stable source of funding and more intense competition from often cheaper imports.   

These challenges are faced by an industry that is already in a precarious economic position. Despite turnover of nearly £24 billion in 2015, little short of half of the ‘income’ from farming came from public funding, not farmers producing food. In 2014-2015, farms in the cereals and grazing livestock sectors upland and lowland were on CAP life-support: they made losses. Overall, the farming industry is struggling from a combination of interrelated economic pressures despite public funding: long-term falls in farm gate prices, volatility on world markets, a de facto cheap food policy in the UK and supermarkets driving food prices down as they compete for customer loyalty and market share.  

Brexit hasn’t changed all these factors but it offers the chance, unparalleled in 40 years, to reshape farming policy to better address them and other pressing needs. Within the new frameworks of its 25 year plans for farming and the environment, the Government has a signal opportunity to be progressive. It’s also a moment for all those who care about the countryside and the future of farming to support an ambitious agenda.   

A first goal must be to agree on how to create a resilient, financially stable and dynamic farming industry for the long term. Without it food production will be less secure and the rural economy weakened.

A second and equal goal must be to agree on how farming can be made to work for the wider community and the environment. We should take it as understood that a farmer’s vocation is to produce food. Although food production depends on environmental assets, we can’t rely on farmers’ benevolence and voluntary action on the environment when they face tough markets and a fight to survive in the short term. But equally, if substantial amounts of public money are to keep going into farming, we can’t rely either on public benevolence to fund farmers for business as usual.

This means farming fit for the future has to engage with a wider set of issues as a norm: it must address unsustainable use of natural resources and the damage caused to wildlife, water quality, soils and landscapes. So a central goal for future policy post-Brexit – which the Government’s new plans for farming and the environment must help achieve - should be to recognise its multipurpose role: we need to farm for food and beyond food too.

In a country with a relatively small land area and growing population we don’t have the space or freedom for farming to do otherwise: farming must continue to feed us and provide cherished landscapes, clean water and effective flood management, healthy soils that soak up carbon, thriving ecosystems that support abundant wildlife, all of which benefit the public in myriad ways. These are benefits that the market poorly rewards, if at all.

These are benefits that, if farming is oriented towards them by policy with proper levels of funding, should bring greater efficiencies – for example, by ensuring fewer nitrates enter water bodies, that pesticides are targeted precisely - and cost savings to farmers. They will avoid costs to the public too: for the clean-up of water polluted by run-off, for the dredging of eroded soils, insurance bills for flood repair and the unpredictable fall out costs of global warming.

The case to fund multipurpose farming should and can be based on strong principles: demonstrable public benefits for public funding, accountability to those who pay, a holistic approach to link farming with nature across the landscape and fewer costs, more efficiency and better value for money.  Framed this way there is a strong case to be made to Government to win the first battle in the post-Brexit debate: to maintain public funding into farming at the high levels we will need to create the resilient farming sector that can do what we need for food, for communities and for the natural environment.

Graeme Willis is senior rural policy campaigner at the Campaign to Protect to Rural England. You can read more about these ideas in their new report, New Model Farming: resilience through diversity

The views expressed in this article are those of the author, not necessarily those of Bright Blue.

Polar bears, face paint and protest: why young people don’t care about climate change

I’ve been a climate change communicator and campaigner for over a decade, and recently I delivered a keynote at the Shell Powering Progress Together Conference at London’s Olympic Park.

An unlikely mix you might think. But not really.

There are three things which attracted me to speak at this event: complexity, cost and collaboration.

Before I explore my motivation and message, we need to evaluate why current communications on climate change aren’t working.

Climate change is perceived to be dull. Very dull. If you want to kill a conversation, just drop this climate-bomb in there and watch it wither. Climate change is not a fascinating topic for anyone outside of the niche bubble of climate geeks. By the majority of people, it is seen as a distant threat in time (its impacts are perceived to be at least a generation away) and space (its impacts are perceived to be happening to faraway, dehumanised landscapes like Antarctica or to communities so unrelatable to western lifestyles like rice farming villages on the Ganges-Brahmaputra delta). It is a concept which is seen as far removed from everyday life and ‘action’ on climate change is seen as punitive rather than liberating with the likes of carbon taxes, stricter standards on everyday products and the guilt associated with waste and consumerism.

There are countless reasons behind why the climate message isn’t resonating with people. However, the one which I am increasingly seeing as a barrier to people, especially young people, engaging with climate action is its long-standing association with activism and protest. Climate activism is seen as a preserve of the far-left, and protest is discarded by many as idealistic and ineffective. This long standing association between climate change and hard-core activism discourages many from engaging with climate change, and I feel this is even more true for millennials.

As a group, millennials are actually quite conservative: economics tops the list of our concerns, and as a result we are a very financially prudent generation. As Fiona Scott, Managing Director of consumer engagement agency PSONA, put it in a recent Evening Standard interview: “the 24/7 coverage of the recession means [young people] are very driven and at the same time also very entrepreneurial”.

We are entering the working world in one of the most competitive environments seen for generations: globalisation is speeding the world up and there are increasing pressures to achieve. Gym culture is thriving; vanity is increasing; and the hedonism of youth is being replaced by hard work. Entrepreneurship is exciting, and the images of the entrepreneur and of the activist couldn’t be more polarised. 

This disassociation with activism brings me on to my three ‘C’s which framed my message at the Shell conference. We need a radical rebranding of climate change, as it is actually extremely compatible with millennial values. You’re currently reading this article on a green conservatism microsite so these ideas probably won’t be entirely new to you, but acceptance of these features is far from universal.

Firstly, we have to acknowledge that tackling climate change is difficult. Very very difficult. And the simplified adversarial battle of attrition between ‘the people’ and ‘the powers that be’ who profit from the high carbon system only exists in the minds of some activists. We have built our entire civilisation on the foundations of cheap fossil fuel and now those foundations are shifting. There is not a simple solution to the transition as it is wound up in issues of national competitiveness, cost, technology, politics and science. Transitioning to the low carbon way is necessary, as we know, but difficult and we need to acknowledge that messiness.

That said, the transition is also a fantastic engine for innovation and enterprise. The future path to a low carbon world is not clear to see but this means there is room for trailblazers and new systems, which offer health, security and cost benefits alongside environmental ones. To communicate this new climate narrative, we need to banish the idea that tackling climate change is this grand battle of good versus evil.

Secondly, saving the world can actually be very profitable. The production price of renewable energy tech is plummeting, and after the Paris Climate Agreement new investable markets are opening up. Likewise, consultancies are genuinely transforming the sustainability of corporations throughout the entire supply chain. Now that the low carbon economy is starting to show how profitable it can be to go green, I expect more millennials to be attracted to the industry.

At the moment, I see an increasing dilemma in young people between having a career which is more of a lifestyle and fits their core values (generally associated with start-up or freelance culture) and a more traditional, safe and prestigious corporate job (yet often bland and stale). The dilemma is that although the former initially seems more attractive, it also has poor income stability and hubs of innovation such as London aren’t getting any cheaper! As traditional employers embrace sustainability (and similar internal culture changes which accompany this more modern mind-set), I believe they will also attract and retain young talent. Those of us who are already involved in the emerging and profitable industry of sustainability need to do more to get the message out there, show young people the opportunities for innovation and start getting excited about how you can change the world and make a living. Essentially the eco movement needs to take some lessons from what the tech industry has become.  

My final point is about meaningful collaboration. This is not so much about getting together with peers and friends but more about reaching beyond your current circles and getting radically new working groups. Mixing the very siloed domains of activists, business people and politicians. The echo chamber of social media exacerbates these views. There is an increasing need to break the chamber and bring these different groups together in order to achieve transformational change. In particular, I believe more work needs to be done to bring together activism and business. Activism has the vision and the passion for change but lacks the realism, business on the other hand has the economic pragmatism and experience but can be stale and un-imaginative. Combining these worlds offers an opportunity to make significant headway on tackling climate change. The private sector is showing increasing engagement with climate change after COP21 and seeing that sustainability action makes business sense. It is now up to activists to cast aside protest and opposition as a means of driving change and work collaboratively with business and politicians. This is not to say activists should stop pointing out social and environmental wrong-doing when they see it, but rather the general attitudes to genuine cooperation need to shift. 

The adversarial nature of climate change activism needs to change in order to attract more young change-makers to the issue of climate change and the future of energy. Discussing and debating with others who hold different views is an excellent start.

David Saddington is a climate change communicator. A white paper from Shell’s Powering Progress Together London event, including David Saddington’s contribution on youth engagement in climate change and business, will be available soon. 

The views expressed in this article are those of the author, not necessarily those of Bright Blue.

The case for targeted energy performance regulation

One of the key recommendations in our latest report, Better homes, was the introduction of new energy performance regulations for the owner-occupier sector. However, some are worried about the costs this policy would impose on households and the extent of government interference.  

Policymakers should use regulation cautiously, usually as a last resort. But the UK has some of the draughtiest housing stock in Europe. Progress in installing energy efficiency measures has slowed in recent years because of low uptake under the Green Deal and reduction in the scale of supplier obligations. With the current policy mix, the UK is forecast to miss its carbon budgets.

There is a particular policy vacuum for incentivising the non-fuel poor to install these energy improvements in their homes. Previous market-based schemes, such as the Green Deal, have failed to create sufficient demand. A combination of attractive consumer financing and targeted regulation is now required to achieve the scale of home energy improvements needed to achieve the 2050 target for reducing carbon emissions enshrined in the Climate Change Act.

Regulation has been effective before

Regulation has in the past been a good way of cost-effectively reducing carbon emissions. In 2005, the Government introduced new building regulations mandating that all replacement gas boilers installed in homes should be the more efficient condensing boilers. This has seen the share of condensing boilers rise from 2% of the market in 2001 to 53% in 2014. This significant amount of saved energy has come at minimal cost to the consumer, with boilers across the housing stock gradually upgraded as older models break down.

More recently, the Coalition Government introduced regulation to prevent private-sector landlords from renting out homes with the lowest two ratings on the Energy Performance Certificate (EPC), an official measure of how efficient and green a home’s energy consumption is. These regulations, due to come into force in 2018, demonstrate a willingness to intervene in order to protect property occupants from high energy bills.

Our proposals

Imposing minimum energy performance standards across the entire housing stock is not politically feasible, and would be an unacceptable level of government intrusion. But there are moments when individuals are more likely to consider home improvements, which are known as ‘trigger points’. By designing regulations that focus on these, costs and hassle to consumers can be minimised.

We propose two pieces of regulation that target such trigger points. First, prior to the sale of a property, a home must achieve a minimum rating on the EPC, the precise level of which should be decided by government. Second, whenever building work is carried out on a home, such as an extension, the home’s overall carbon emissions must be reduced.

Trends in the housing sector

 There is good evidence that bolting home energy improvements onto other types of renovation goes with the grain of consumer preferences. Focus groups run by the UK Energy Research Centre in 2013 found that just one in ten individuals would consider energy-only renovations, whereas they are three times as common when undertaken as part of general amenity renovations. Similarly, research by the Energy Saving Trust has found that 85% of homeowners were willing to stretch a renovation budget to include energy efficiency improvements.

There is also growing evidence that mortgage lenders are considering a property’s energy performance in their affordability calculations. Inefficient homes have higher bills, which means less money for individuals to make mortgage repayments. One US study from 2013 has found that mortgage default risks are 32% lower in energy efficient homes. The UK Green Building Council has argued that mortgage lenders should take greater account of efficiency, given the fact energy costs take up just over 7% of household income. Minimum energy efficiency regulations at the point of sale would reinforce this link.

The adverse effects can be mitigated

We propose some important exemptions to the regulations, such as listed buildings, fuel poor households, and homes with multiple occupants. It is essential that the government does not add costs to those who are not able, either legally or financially, to improve the energy performance of their property.

The government’s regulations for the private rented sector are conditional on a financing mechanism that removes the upfront cost. This is an important caveat, as it ensures improvements are affordable. This is why our proposed home energy improvement loans, guaranteed by government and therefore with lower interest rates than under the Green Deal, are an essential complement to the regulations.  

Conclusion 

This proposal would protect consumers from higher energy bills caused by volatile prices in wholesale energy markets. It would prevent homes being sold that will burden future occupants with permanently high bills. And it would prevent builders from installing extensions that cause a big increase in a home’s fuel bill.   

But as well as protecting consumers, these regulations would also provide a public good. Some homes in the UK disproportionately contribute to carbon emissions. These big-emitting homes carry an environmental cost. The least efficient homes must be upgraded if the UK is to cut its carbon emissions by 80% by 2050. Targeted regulation can achieve this without excessive government subsidy and in line with other household decisions around renovations. 

Sam Hall is a researcher at Bright Blue

Rewilding in Britain

Britain is one of the most ecologically depleted nations on earth. We have lost all our large carnivores and most of our large herbivores. While the global average forest cover is 31%, and the European average is 37%, ours is just 12%.  Our ecosystems have almost ceased to function. In the words of David Attenborough “far more species are declining than increasing in the UK, including many of our most treasured. Alarmingly, a large number of them are threatened with extinction. The causes are varied, but most are ultimately due to the way we are using our land and seas and their natural resources, often with little regard for the wildlife with which we share them.” In fact, 60% of all studied species in the UK have declined in the last 50 years.

People in Britain have never before spent so little time in contact with nature and rarely gain a sense of just being part of the environment rather than in control of it. Indeed three quarters of our children spend less time outdoors than prison inmates.  This is having a huge impact on health and wellbeing, and has been connected to increased levels of stress, physical inactivity and obesity.

The damage to our natural systems also means our environment is less able to provide the goods and services upon which we depend. Across the whole of the North of England, in late January 2016, about 16,000 homes and businesses were flooded. The preliminary estimate of the cost of the flood damage is £1.3 billion, and rising. The cost in terms of human misery is unquantifiable. It is now increasingly recognised that the impacts of this extreme rainfall were exacerbated by the overgrazing, deforestation, burning and drainage of the uplands and by the canalisation and dredging of the rivers. And there are increasing calls for investment in the planting of trees and changing land management practices to encourage the restoration of natural climax vegetation communities in areas upstream of our towns and cities. 

And it’s not just water – we are losing our soils at an alarming rate and the ability of our habitats to act as carbon ‘sinks’. We now know that the highly simplified ecosystems of the kind that prevail across Britain are also much less resilient to environmental change, such as climate change and invasive species.

Rewilding offers a chance to reverse that. A chance to restore natural systems and all the benefits they provide; to work with communities to restore to parts of Britain the wonder and enchantment of wild nature; to allow magnificent lost creatures to live here once more; and to provide people with some of the rich and raw experiences of which we have been deprived.

Rewilding Britain was set up to promote the large scale restoration of ecosystems in Britain, on land and at sea.  We believe it is not enough merely to try to preserve tiny fragments of our wildlife. Meaningful conservation must involve restoring natural processes and re-establishing missing species. Rewilding does not attempt to produce fixed outcomes. It sees dynamic ecological processes as an essential, intrinsic aspect of healthy living systems. The animals we lack, such as beavers, boar, lynx, pelicans, cranes and storks, are not just ornaments of the ecosystem - they have a role as ecosystem engineers and are essential to an effectively functioning environment. 

By 2030 we would like to see at least 300,000 hectares of core land areas and three marine areas established where nature is starting to take care of itself and key species are starting to become re-established. These areas will be ecologically connected, supported by an engaged and enthusiastic public, and delivering a range of benefits for local communities and landowners.

Rewilding is about the restoration of natural processes. It benefits nature, by connecting nature with nature, creating diversity and increasing the number of niches available, and making room for species to move through landscapes as they adapt to environmental change.

Rewilding benefits the wider environment too. By allowing natural process to function rewilding improves provision of ecosystem services. For example, restoring woodland reduces the flow of water downstream, flattening out the cycle of flood and drought. And increased woodland filters out contaminants that affect water quality, and increases carbon sequestration, helping mitigate climate change. Certain keystone species can have a huge impact. Beavers clean rivers. Their ponds retain silts and trap nutrients and flatten out cycles of flooding and drought.  And predators such as lynx can regenerate forests by reducing deer numbers and allowing saplings space to grow.

But it’s not just about the environment – rewilding can bring significant economic benefits. According to the UN’s Food and Agriculture Organisation, the world on average has just 60 more years of growing crops. Rewilding can be farming’s greatest ally. It helps restore nutrients, worms and mycorrhizal fungi to the soil, provides for pollinating insects, purifies water, reduces flood risk and helps resist droughts. Perhaps rewilding will give us a few more harvests yet?

Rewilding can revitalise local communities. An RSPB report found sea eagle tourism on the Isle of Mull brings in up to £5 million a year to the island’s economy and supports 110 full-time jobs. Examples from around Europe show that new sources of income and jobs, based around wildlife and eco-tourism, offer a great potential to revitalise rural communities, supporting the recovery of the human economy as well as the natural world.

Rewilding is as much about people as it is about the planet. Time in nature improves concentration and behaviour, benefits health and wellbeing, and increases environmental awareness. Which is why rewilding is as much about rewilding ourselves as rewilding land. It’s about experiencing the enchantment of wild nature, about noticing and experiencing what's around us, about an increased connection with the living planet – “to love not man the less, but nature more”.

Rewilding is our big opportunity to leave the world in a better state than it is today. To turn our silent spring into a raucous summer. To introduce one of the rarest of all species into Britain’s ecological vision: hope.

Helen Meech is the Director of Rewilding Britain

The views expressed in this article are those of the author, not necessarily those of Bright Blue.

Hotting up: the potential of heat networks

Heating is one of the most difficult sectors of our economy to decarbonise. This is largely because gas provides 90% of our domestic heating demand, and so infrastructure to deliver gas to homes represents a big sunk cost. In addition, gas boilers are much cheaper than low-carbon heating technologies. For instance, the £2,600 cost of a condensing gas boiler compares unfavourably with £6,500 for an an air-source heat pump.

In our recent report, Better homes, we found that of the different microgeneration technologies that produce renewable heating, heat pumps, had the greatest potential to be deployed at scale. Private investment by individual households in heat pumps and other home energy improvements should be encouraged through new Help to Improve loans and ISAs.

However, there are alternative approaches to heat decarbonisation. For instance, ‘green gas’ (biomethane) can be injected into the gas grid, the gas grid can be converted to use hydrogen, or new ‘heat networks’ can be constructed.

This blog will examine the potential of heat networks in particular, and the barriers to greater deployment.

Heat networks trends

Heat networks are a distribution mechanism for heating. In a heat network, heating is generated centrally and then transported through insulated pipes to homes for space and water heating. The energy comes from a range of sources, including gas, waste heat from power and industry sectors, energy from waste plants, and large-scale electric heat pumps. District heat networks can be delivered by partnerships of energy companies, government, housing associations, businesses, and local authorities.

There are currently 2,000 heat networks in the UK, supplying heat to around 200,000 homes. Heat networks provide around 2% of the UK’s heating. Heat networks are very common in other European countries, such as in Denmark where over 61% of customers receive their heating from a heat network.

In the 2013 heating strategy, DECC modelling suggested that up to 20% of UK heating demand could be met by heat networks by 2030. The Government has allocated £320 million of public capital for heat networks over the course of this Parliament. It has created a new programme, the Heat Network Investment Project, to distribute the funding, leverage private finance, and deliver the infrastructure. It believes the pipeline of proposed projects over the next 10 years will require £2 billion of private investment.

Barriers to heat network deployment

There are a number of barriers to further deployment of heat networks. First, in order to enable carbon reduction targets to be met, the energy sources of heat networks must be low-carbon. At the moment, the majority of the energy used in district heat networks comes from natural gas. There are still carbon savings from switching to this more efficient heating system away from individual gas boilers, but it does not constitute low-carbon heat. Existing heat networks need to be converted over time to low-carbon energy sources, such as waste heat from power and industry sectors, or large-scale electric heat pumps.

Second, financing mechanisms for heat networks must be further developed to give operators more certainty while protecting consumers. This was one of the key recommendations in Policy Exchange’s recent report on the heat sector. Consumers are naturally unwilling to contract with a heating provider which isn’t yet operational. Yet to give investors the certainty they need to construct the heat network, a basic level of demand must be guaranteed. The Association for Decentralised Energy has called for a new capital guarantee scheme from government to de-risk heat network investment. It is vital that reducing risk for developers does not damage consumers, who will in effect be contracting with monopoly providers.

Third, not all types of properties in the UK will suit the heat network model. They require a dense heating demand profile in order to be economical and minimise capital costs, and as such will mostly be installed in highly populated urban areas. They are also more expensive to retrofit into existing properties than to install in new developments. In the right conditions, however, savings for the consumer are possible. DECC analysis suggest that heating costs for a flat supplied by a heat network can be 30% lower than the equivalent property heated by a gas boiler.

Conclusion 

Heat networks could certainly play a key role in cost-effectively decarbonising the heating sector. It is a great opportunity to utilise low-carbon waste heat sources, particularly in urban areas. The barriers identified above can be overcome by policymakers. However, given the scale of the transition away from gas boilers, it is likely that a combination of heating solutions will be required, also including energy efficiency measures, heat pumps, and green gas. Heat networks should be part of that mix.

Sam Hall is a researcher at Bright Blue

Addressing the burning injustice of fuel poverty

With the right policies, tackling fuel poverty can deliver two vital government objectives. It can help to reduce carbon emissions by improving the energy efficiency of the housing stock, and it can improve the welfare of low-income households by reducing their energy costs. An effective, long-term fuel poverty strategy should therefore be a top priority for this Government, particularly given the new Prime Minister’s focus on tackling social injustice.

There are two elements to the government definition of fuel poverty. First, the required fuel costs of the household must be above average for the type of property. Second, paying the required fuel costs must take the household below the poverty line, which is currently defined as 60% of the median income.

The most recent figures show that there were 2.38 million fuel poor households in England in 2014, which is equivalent to around 10.6% of English households. This is a significant number of families in absolute terms, which has remained roughly flat across the last Parliament.

Policies for tackling fuel poverty

The government has had a legal obligation to monitor and provide a strategy to address fuel poverty since the passage of the Warm Homes and Energy Conservation Act 2000. The most recent strategy was published under the Coalition Government in 2015. This set out the target to have as many fuel poor homes as possible achieve by 2030 at least a C rating on the Energy Performance Certificate (EPC), one of the government’s measures for assessing a home’s overall energy consumption. The Conservative Party 2015 General Election manifesto promised to improve the energy efficiency of at least one million fuel poor homes over the life of this Parliament.

There are two types of policy for addressing fuel poverty: giving customers discounts on their fuel bills through cash transfers and installing energy efficiency measures that reduce a home’s energy consumption.

Cash transfers are important, as they ensure that vulnerable groups are able to stay warm in the short-term. There are three schemes with this purpose. First, the Winter Fuel Payment, with an annual budget of £2.1 billion, is paid to all pensioners. Second, the Cold Weather Payment is a discretionary benefit paid to individuals on income support. In 2014/15, just £11 million was spent under the scheme. Third, the Warm Homes Discount is paid to those in receipt of pension credit and is estimated to have an annual cost of £320 million.

But a long-term, sustainable approach to tackle fuel poverty by upgrading the housing stock and permanently reducing energy bills is also needed. The Government’s policy for this is the Energy Company Obligation (ECO), a mandate imposed on energy suppliers to find carbon savings in the customers’ homes. The government sets criteria about which homes are eligible for energy efficiency measures and what measures can be installed. The £640 million cost of the scheme is borne by energy suppliers, who in turn raise consumer prices.

Reforms to this scheme have recently been proposed in a government consultation. Previously, ECO had been focused jointly on reducing fuel poverty, improving energy efficiency of properties in deprived rural areas, and delivering more expensive energy efficiency measures across all households. The reforms will transition the policy towards an exclusive focus on alleviating fuel poverty while reducing the overall cost of the scheme.

Some regressive effects

Many believe that tackling fuel poverty using a supplier obligation is regressive. As described above, there are over two million fuel poor households in England. Yet the government has promised to improve just one million homes in this Parliament. That means that there are over one million fuel poor households that will have higher bills over the lifetime of this Parliament as a result of the costs of the supplier obligation, without receiving any subsidised measures to help them lower their bills. Moreover, as energy suppliers have discretion about how they pass on policy costs to customers, they often choose to increase the bills of those that do not switch providers. This group is disproportionately populated by those on low incomes. This increases the likelihood of a regressive effect of supplier obligations.

There is also concern about effective targeting of cash payments for the fuel poor. There were reports earlier in the year of a disagreement between the Treasury and the then Department for Energy and Climate Change over whether the Warm Homes Discount could be better targeted. The government’s response to the Warm Homes Discount consultation does promise to “explore ways for better targeting of those identified as living in fuel poverty.” But this vague formulation falls short of a concrete commitment to refocusing the scheme. In addition, there are long-standing criticisms of the non-means tested Winter Fuel Payment for pensioners.

Conclusion

The Government is right to want to reduce fuel poverty. It can make a significant contribution to the Prime Minister’s social reform agenda, and enable the UK to cost-effectively meet its climate change commitments. However, the current suite of policies must be reviewed to mitigate regressive effects. Government support must be focused on the most vulnerable.

Sam Hall is researcher at Bright Blue

Strengthening the UK's demand response flexibility market

Energy has become front-page news, and the debate about its future has never been so important. Understanding what that future might look like is crucial if we are to meet the long-term challenge of providing safe, reliable, and secure energy in a sustainable and affordable way. Of course, we cannot be certain how the energy future will evolve. Factors such as environmental legislation, energy costs, and economic developments will all have a major impact on the future energy landscape.

Generation of thermal electricity in the United Kingdom is coming to an end. A large amount of coal- and oil-fueled generation has and is retiring because of age and environmental legislation, including the European Union’s Large Combustion Plant Directive. Furthermore, challenging economics for gas-fueled generation has resulted in few new power plants being built and many, including units only two years old, being mothballed until the business case for their operation becomes more favourable.

The resulting decline in capacity and generator availability has led to very tight capacity margins—the difference between electricity supply and demand levels that can make the role of the National Grid in matching generation and demand quite challenging. Indeed, spare electric power production in the electricity system is predicted to fall to less than 2% by 2015, increasing the risks of blackouts should an unforeseen operational issue arise or the United Kingdom experience a cold winter.

Today the situation is very different. Increasing contributions from the renewables sector, notably from wind and solar, are both unpredictable and fragmented, spread out across the country. To maximise carbon savings, National Grid needs to make the most of clean sources like these but must also take compensatory actions when they are not available. Expensive stand-by plant has to be called upon when the wind doesn’t blow or the sun doesn’t shine. Additional power must be either taken on to the grid or demand reduced. Large users in industry are increasingly being encouraged to “turn down” and delay their demand until such time as available capacity improves.

This increases the requirement for demand side balancing services, known as demand side response (DSR). These services help the system operator, National Grid, to balance supply and demand at times of system stress, vital to maintaining the UK’s power supplies. DSR could provide an important contribution to managing security of supply and cutting energy consumption. It offers a cheaper and greener alternative to building new generating capacity.

Ofgem estimates that non-domestic buildings (excluding industry) contribute approximately 15GW to peak demands on Great Britain’s national grid. This could rise to around 30-40GW when considering large industrial and manufacturing facilities.

The main routes to enter the demand side market are either by providing services directly to National Grid or by working with one of a growing number of demand aggregators or other third parties. Aggregators and third parties can work closely with an energy user and show them how to maximise their assets in terms of the speed of response they could provide, capacity available, the amount of time that delivery could be sustained for – and the various prices available. In effect, the demand-response aggregator will enable property owners and asset managers to access their assets' untapped revenue sources while meeting energy-saving demands, cutting costs, and contributing to the reduction of carbon emissions.

Pearlstone Energy is a National Grid-approved demand aggregator. We use Honeywell’s proven technology to automatically reduce energy consumption in buildings for a short amount of time during periods when electricity demands exceed availability. These automated energy reduction measures are totally carbon neutral and can create additional revenue streams for participating companies while contributing to broader UK carbon reduction goals.

But there are commercial challenges, especially for new entrants, due to lack of investor certainty and reliance on multiple revenue streams. Therefore, some demand side providers would like to see longer-term contracts. Others suggest that more frequent tenders, a move to regular auctions, and standardisation of products would enable wider market entry, and potentially lower minimum size thresholds.

There have also been some concerns by a number of industry observers that DSR has not received sufficient attention and is disadvantaged compared to generation capacity. In particular, DSR providers can only bid for one-year contracts, whereas new generation can receive capacity agreements of up to 15 years. Evidence from markets in other countries, where equal contract lengths are awarded to both generation and demand capacity, suggests that DSR can make significant contributions, without being at the expense of new generation.

For business customers, it can be confusing to navigate the different products and routes to market. There are cultural, informational and behavioural barriers. Confidence is critical, and can be undermined by conflicting sales messages from demand side providers. Industry standards are needed, and are being developed. For customers, senior buy-in and cross-business commitment is often required. Demand side flexibility should link into the significant opportunities for energy efficiency.

The market expectation is that change will occur. However, if change does not happen quickly enough, there is a risk of discouraging new non-traditional market participants. Likewise, as business customer interest grows, we need to ensure they are able to participate, and do not miss the opportunity. For example, some customers wanted to take part in the transitional auctions but couldn’t respond within the required timescales.

There is a clear tension between changing existing markets to ensure that they are fit for future, and not knowing how markets may develop. But a slow watchful approach may also rule things out. So we need to provide a sense of direction for those coming into the markets and wanting to invest, without being able to offer certainty.

A shared vision of an end-point, or at least the principles for a future market is required, as are the incremental steps to get there. This should be an evolutionary pathway – to ensure that we build on lessons learned and maintain investor confidence in the transition from existing to future arrangements.

Dr Azad Camyab is the founder and CEO of Pearlstone Energy

The views expressed in this article are those of the author, not necessarily those of Bright Blue.

Story-telling: making the case for climate action

For two months this year, electricity generation from UK solar eclipsed that from coal. Granted, it was in the summer, but it is nevertheless significant to see the future overtaking the past. To energy policy experts this isn’t surprising: July was sunny, and coal is viewed as a poor investment. But when I mentioned this to a friend over the weekend, her response was one of perfect confusion: “So, why don’t we ever hear the good news about renewables?

Faced with austerity, policy experts and commentators focussed on proving the business case for investment and intervention in the low carbon economy. This should not have been difficult: the sector continued to grow rapidly even after the 2008 crash, turning over £121.7 billion in 2013 and employing 460,600 people. Energy efficiency is a particularly impressive performer in productivity terms – responsible for around 94,200 jobs and a disproportionately high £7.3 billion of Gross Value Added to the wider economy.

We have the hard economic modelling to back this up, showing that ambitious decarbonisation can outperform business as usual in terms of future economic growth (an increase of UK GDP by 1.1% in net terms, with average householders financially better off against business as usual scenarios where little is done to reduce emissions).  With around 45% of all new energy capacity worldwide now renewable, we thought we had spotted an opportunity for the UK to lead the next global industrial revolution – and we thought the numbers more than justified supportive policy and government investment.

In reality, a positive economic narrative alone has failed to get the job done. The Committee on Climate Change recently warned government that there is a growing gap between our commitments on climate change and what government policy will deliver.  Instead, we need to reach people emotionally about what decarbonisation looks like, speaking to their values as well as their wallets – as a more detailed look at energy efficiency policy should tell us.

Investments in energy efficiency offer big returns. Consumers benefit from bill reductions and there are wider social gains, such as a reduction in NHS admissions for respiratory illnesses following the retrofit of the homes of vulnerable people. A mass-retrofit of UK buildings would offer better value for money as an infrastructure commitment than High Speed 2. Yet, shortly after the last general election, subsidies for products and regulatory standards for new homes were scrapped. The indignation of industry, policy experts, and campaigners focussed on the economic short-termism of the cuts. The numbers added up. What more could have been done?  

Well, it’s possible that we were all having the wrong argument – or at least the right argument in the wrong way. Climate change communications tend to be negative, with the solutions often presented as a “loss” rather than a “gain”. For energy efficiency, for example, consumers have been concerned about lost loft space, the cost of installation, or changing ‘the feel’ of their homes. Psychological research has shown that negative or reactive messages can undermine trust in the long-term; not only do negative stereotypes prevent immediate action but they also stick, and undermine the wider case for change.

People with centre-right values are more likely both to believe negative misconceptions about low carbon solutions and to reject overall climate change messaging which they view as “doom-mongering”. The absence of a distinctively centre-right vision for climate change action might go some way to explain why greater doubt exists among Conservative MPs about climate science than for parliamentarians in other parties.

All of this suggests that we need to reach a broader audience, with a language and set of values that work for all voters. Without this, relying on numbers will not be enough to win the argument for rapid decarbonisation. Fortunately, the messages already exist – they have just gone unnoticed, as returning finally to energy efficiency again can illustrate.

As I write this I am sitting in WWF’s headquarters, the Living Planet Centre, in Woking. It is built using the cutting edge of low carbon, energy efficient technology. When we show guests around it, we focus on the business case for the building – we talk about the operational savings that come from switching to a ground source heat pump, or how much energy our solar panels generate on a given day. We talk, too, about some of the building’s secondary impacts, as part of the urban regeneration of Woking, or the improved wellbeing and productivity of our staff.

But what we often forget to do is point out that The Living Planet Centre is just a better building than most new buildings. It is also beautiful, an upturned ship of glass and wood which sits back into the green landscape of canal and heritage Surrey woodland. We should be able to make a case to the British public to say: “The changes we need to make to decarbonise our lives are also changes that will improve our lives - they will be more socially positive, economically beneficial, and (on occasion) more beautiful than sticking with the way we do things now.” We need story-tellers now, as well as economists.

Emma Pinchbeck is Head of Energy and Climate policy at WWF UK

The views expressed in this article are those of the author, not necessarily those of Bright Blue.

We need a new Green Deal

One of the first achievements of Theresa May's new government was to secure the passage through Parliament of the fifth carbon budget. This committed the UK to reducing emissions by 53 per cent between 2028 and 2032 relative to 1990 levels. It was an important demonstration that our cross-party consensus on tackling climate change will continue. But how is the government going to make good on this now legally binding ambition?

Twenty-two percent of the UK's carbon emissions currently comes from heat and power used in homes. The Committee on Climate Change does not think that there is a cost-effective path to decarbonisation without eradicating these emissions. Owner-occupiers are the biggest sector in the housing stock. They also have the worst energy performance. Yet since the scrapping of the Green Deal in 2015, there has been no scheme to incentivise home energy improvements. That's why today Bright Blue is today publishing a new report proposing fresh policies to cost-effectively stimulate this market.

The first set of improvements that should be prioritised are energy efficiency measures, which reduce the amount of energy homes consume. Good progress has been made on installing cheaper measures, like cavity wall insulation, but for more expensive measures, like solid wall insulation, there is still much further to go. The Committee on Climate Change believe that around 10 per cent of the UK's carbon emissions could be mitigated cost-effectively through improving the energy efficiency of residential buildings.

The second set of improvements that should be prioritised are decentralised renewables, which decarbonise the remaining electricity and heating supply. For electricity, there is now about as much small-scale solar power in the UK as a large power station generates. Much of this uptake has been driven by falls in price. Renewable heat has seen slower progress, with just 2.5 per cent of our heating demand met by low-carbon sources. The Committee on Climate Change believes this heating figure needs to be at least eight per cent by 2020 if we are to achieve a cost-effective route to decarbonisation in 2050.

The government's previous scheme to incentivise these measures in the able to pay market, the Green Deal, is widely regarded to have failed. When the Green Deal launched in 2013, ministers predicted 14 million homes would be improved by 2020. Yet the reality was no way near that. Just 15,000 Green Deal plans had been signed by the time the scheme ended last year.

The Green Deal allowed households to fund improvements by a loan that was repaid through energy bills. This attractive off-balance sheet financing was made unappealing as a result of high interest rates and the long average payback period. In addition, the 'Golden Rule' limited the size of the loan such that repayments could not exceed the amount that was being saved on bills from the measures. As a result, the average Green Deal loan was just £3,500 - insufficient to finance expensive measures like solid wall insulation or heat pumps.

Bright Blue is making a number of recommendations for how these deficiencies with the Green Deal can be overcome.

First, the government should introduce new 'Help to Improve' loans and ISAs. The government should underwrite loans to households to finance an exciting package of home energy improvements including energy efficiency measures, decentralised renewables, battery storage, and smart appliances. The interest rates would be considerably lower than under the Green Deal, because the government has much cheaper borrowing costs than private lenders. In Germany, where there is a similar scheme to the one we are proposing, every €1 of public money spent on the programme earns the Treasury €4 in additional taxes and reduced welfare spending. A new Help to Improve ISA should also accompany this policy, to encourage households to save for improvements.

Second, the government should introduce new regulation to ensure there is consumer demand for home energy improvements and to give the supply chain confidence to invest. Homes should be prevented from being sold if they do not meet minimum energy performance ratings. Building regulations should also be amended to ensure that any general renovations, such as constructing a new conservatory or an extension, do not increase the home's overall carbon emissions.

The new government is currently drawing together its emission reduction plan for the end of the year. This will set out how it intends to meet the legally-binding fourth and fifth carbon budgets, in a way that is cost-effective and guarantees energy security. Incentivising more home energy improvements in this sector should be a top priority.

Sam Hall is a researcher at Bright Blue and co-author of 'Better homes'

This article originally appeared on BusinessGreen and can be viewed behind the paywall here.