How to get UK energy and climate policy back on track

21660736191_b33a880c4d_zSometimes it takes an outsider to reveal an uncomfortable truth. In his speech this week to Green Alliance’s Beyond Paris event, held in association with the CBI, Al Gore held up a mirror to the UK and it wasn’t pretty.

He described a UK out of step with the new found ambition of China and the US on green growth, a welter of low carbon energy policies being cancelled and a prime minster who is not providing public leadership on climate action. An audience of over 400 studiously phlegmatic business and NGO leaders got to their feet and gave him a standing ovation. It must have been a first for a buttoned up London policy audience.

John Cridland’s more measured assessment of the risks the government is taking with business investment is perhaps even more notable than Gore’s arch comments. A government that has been narrowly re-elected on its economic competence cannot afford to develop a tin ear on the low carbon economy, given that it is one of the areas of strongest investment growth in the UK economy.

I have to confess I was not expecting a critique of the UK government to be the main theme of the event. But the welter of negative policy changes by the government in the last five months has caused bemusement abroad and consternation at home. There was no hymn sheet shared between the CBI and Al Gore, it was just there was only one song to be sung.

The CBI has raised the alarm
Gore is a friend of the PM who has been excited by his climate leadership and clearly feels let down. John Cridland raised the alarm, having talked to CBI members worried about the instability in domestic energy and climate policy. The only people who have been surprised by their reactions are those in government who think their internal logic of cutting costs justifies every decision.

The PM may have missed Gore’s comments, but it is unlikely that his views are far from those of the Obama administration, so Number 10 should assume that they have a political problem in the run up to Paris. Whitehall mandarins certainly know there is a business investment problem, and that it just got bigger with the CBI intervention.

The question is what to do about it?

Stop talking about ‘energy policy reset’
The first rule of politics is ‘when in a hole, stop digging’. Ministers should avoid doing anything that creates further uncertainty amongst nervous investors. They must stop talking about an ‘energy policy reset’. You can’t unplug the energy system and energy policy only carries people with it if it is iterative. It’s meant to be dull, and the UK has come a long way by producing some very boring policy documents over many years.

We’ve halved our dependency on coal by breaking up a state energy monopoly and opening electricity supply to competition. We’ve lowered heat consumption in most British homes by supporting higher building and appliance standards. There are now over a million people generating their own clean electricity at home and, somewhat to everyone’s surprise, the UK is leading the world in bringing down the cost of offshore wind.

The PM needs to tell this UK success story urgently, and he needs to do it here at home, as well as at the United Nations in New York, so that we have something to balance the self-defeating narrative about change being too expensive.

The government needs to rebuild investor confidence
The biggest task for the government is to rebuild confidence in energy policy, which will take time, and a disciplined plan. DECC has to re-establish that the principles on which energy decisions are made is least cost over time. It needs a plan to 2030 which creates certainty over the length of energy project timescales and forthcoming carbon budgets. It needs to tilt the playing field in favour of new demand side technology, so that it can reduce the number of power stations we need. And it needs to continue to maintain a popular mandate for the UK’s energy transition.

We’ve identified three ways that it can do this:

1. Budget for low carbon supply contracts into the 2020s, and create new incentives for cost reduction
This is the critical step for rebuilding business confidence. No one knows what the cheapest, scalable, low carbon power source will be in the future. Right now mature renewables, like onshore wind and solar, are cheapest, but they can’t decarbonise the UK on their own. If we want the least cost, long term trajectory to zero carbon, we need a second levy control framework designed to deploy immature technologies like offshore wind and carbon capture and storage so we can learn which will serve our needs best in the 2020s. Auctions have proved their ability to reduce costs but, to speed up that process, the supply chain needs more confidence to invest ahead of these contracts. We should commit to a minimum size of market for immature technologies now, but make it conditional on offshore wind and carbon capture and storage meeting cost reduction targets.

2. Use technology, feed-in tariffs and popular finance to maintain public support for change
Energy policy should be boring, but energy technology is cool, and it’s a quick route to building a public mandate. Solar PV is now an aspirational technology for most of the population, accruing status to those who have it on their roofs and envy amongst those who don’t. This is the sort of cultural change politicians dream of and, given that the British public will end up paying significant sums for big low carbon power stations as part of energy transition, it’s only right that there should be a home energy strategy running alongside it.

The key to making this strategy affordable is to bring down costs, learning lessons from Germany and the US about scale, steady deployment and innovation in rooftop solar. Smart meter technology and software will provide new ways for households to actively manage their own energy and benefit financially from demand response incentives. There need to be many entry points to energy for the public and the savings market, where we invest through ISAs and pensions in UK assets is the big untapped opportunity. Why not sell the Green Investment Bank to citizens rather than to private equity, so that they share some of the return from our technology transition?

3. Plan the phase out of coal, and open the energy market to the demand side Phasing out unabated coal use in power generation is relatively easy to do for the UK, given the progress we have already made, but once an end date is set it will be seen as an act of outstanding political leadership. It can happen quickly – perhaps even by 2020 – avoiding the costs of having to cut carbon faster in the 2020s, and the need to upgrade old coal fired power stations to meet air pollution requirements before scrapping them. Announcing a date will bring forward new gas power stations to fill any generation gaps, but peak demand will reduce significantly once there is a demand response market, where customers are given financial incentives to shift their electricity use to times of low demand, using software that turns devices on and off.

Evidence from the US shows that even greater saving can be made once markets are unleashed for ‘negawatts’ or permanent electricity demand reduction, as well as temporary demand response. The government should not be squeamish about letting energy saving aggregators compete for the same money as low carbon energy suppliers, because it is always better for consumers and the environment to save energy before generating it.

The mirror Al Gore held up suggested a fine ship losing its direction and taking on water. There is another much more positive story to be told of an entrepreneurial nation charting a course that marries disciplined finances with responsibility for the world in which we sail. David Cameron needs to establish that case before the December climate conference. His ministers will then have time to develop a long term least cost energy plan, the memory of the past few months of investment uncertainty will fade and he will deserve high praise for re-establishing the UK’s international climate leadership.

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