Shifting the focus: 7 Policy: delivering further and faster change in energy demand

Tina Fawcett, Janette Webb, Stefanie Reiss, Dave Hawkey and Peter Mallaburn

Introduction

Policy to reduce energy demand will be critical in delivering the Clean Growth Strategy (CGS), helping to achieve the low carbon energy transition. The UK has been a pioneer in low carbon policy, with some influential energy demand policies in addition. The Climate Change Act is internationally leading, the GB energy efficiency obligation scheme has strongly influenced EU policy, and the London Congestion Charge has inspired similar schemes elsewhere. However, more significant change is needed if the UK is going to meet the 2050, and intermediate, targets for 80% GHG emissions reduction (CCC, 2018). Further, the 80% target will need to be strengthened if the UK is to contribute fairly to the Paris Agreement ambition of restricting global temperature rise to 1.5C (Pye et al, 2017). This challenge has been addressed by the Committee on Climate Change (CCC), whose 2019 report advises that the UK should adopt a net-zero carbon target by 2050 (CCC 2019).

The unprecedented challenge of decarbonising energy means that, while we can and should learn from past UK, EU and international policy experience, we are likely to need new approaches to the design, types and mixes of policy, institutions and delivery mechanisms. We will need to rethink governance and expand the ambition and reach of policy. The energy transition will require changes in technologies, practices and choices for every household and business, many of which we do not currently know how to organise technically, cost-effectively or in a socially acceptable way. To aid this transition, CREDS’ ‘policy and governance’ research theme will contribute new ideas, analysis and evidence to help characterise and meet the multiple challenges involved.

This brief review of policy and policy processes within the CGS is based on existing research and knowledge. It makes recommendations for change by Government, and highlights where CREDS can contribute new knowledge. First, there are detailed comments on the policy approach and policy mix within the CGS. Then governance and institutional aspects are discussed. Finally, policy innovations to deliver further, faster and more flexible change are presented.

Policy approach

First the contents of the CGS are briefly analysed and compared with the policy making approach of the Scottish Government Climate Change Plan. Then the policy mix and policy types employed within the CGS are discussed. Finally, a case is made for the importance of including equity in policy design and delivery.

From a strategy to a plan

The CGS is a report required under the UK Climate Change Act in which the Government has to set out the policies and proposals it considers necessary to keep emissions within the legislated carbon budgets. The carbon budgets, therefore, provide an overarching constraint on the future envisaged by the CGS. The CGS contains many policies and proposals – over 200 by our count. However, many do not have timescales, funding or targets attached (for detailed analysis see Appendix 1, pdfOpens in a new tab or Reiss 2018). There are very few policies that impose specific obligations on anyone.

A generous interpretation would be that this lack of detail is a function of the stage of policymaking (although the publication had been repeatedly delayed, and came six years after the first ‘Carbon Plan’). The CGS points forward to a range of consultations and sector-specific plans, which will create openings for more detailed policies, but these are yet to emerge. By contrast, the Scottish Government has produced a Climate Change Plan (Scottish Government, 2018) which sets out sectoral emissions’ envelopes and specific indicators against which progress in policy development and outcomes can be judged. The UK Government however has more powers than the Scottish Government, including some which affect Scottish emissions; powers over energy taxation and regulation, for example, are reserved to the UK Government.

A significant difference between the CGS and the Scottish Climate Change Plan is that the UK government does not expect to produce a single Clean Growth Plan against which progress is measured. Hence the CGS does not break the overarching carbon budget down into budgets for specific sectors. Sector-specific emission levels are mentioned, but only to illustrate emissions along “one of several plausible pathways” (Appendix 2, pdfOpens in a new tab or Hawkey 2018). Instead regular reporting is promised, in combination with the response to the CCC’s Annual Progress Report. Using a sector-specific approach would, however, have the advantage of allowing the UK Government to set differential targets for sectors of the economy where climate policy is perceived to threaten international competitiveness (energy intensive industries) and sectors where this is not a significant issue (particularly buildings and transport).

Recommendation: Government should work swiftly to turn CGS proposals into policies with specific targets, dates and budgets. This should include setting sectoral targets, or envelopes.

Policy types and policy mixes

The CGS does not specify an approach to policymaking, neither does it explain how it will determine the mix of policies needed to meet particular goals, beyond saying it will use “all the tools available” (p49). The majority of proposals are related to innovation investment, i.e. delivering clean growth through technological breakthroughs; only about a quarter of proposals aim to address clean growth through regulatory or fiscal measures (Appendix 1 or Reiss, 2018). While innovation is important, adoption of innovative products does not generally happen without the support of policy instruments.
The importance of policy mixes in delivering effective energy efficiency improvement has long been recognised, given the variety of instruments needed to overcome different barriers or to support different technologies at various stages of development (Rosenow et al, 2016). For many traded goods – including lighting, electrical appliances, motors, vehicles and boilers – an EU-wide market transformation approach has been taken, which incorporates standards for testing, minimum efficiency and labelling, and product bans, complemented by national information, advice, training and subsidy programmes. Policies to encourage fuel switching, or policies to change behaviours, practices or management of energy also require a mix of instruments.

Recommendation: In developing its more detailed plans, the Government should detail the mix of policies, regulatory and market-based, needed to deliver innovations.

Equity in the energy transition

Equity and justice need to be integral to the energy transition, for principled and pragmatic reasons (Parkhill et al, 2013). Fairness and perceptions of fairness are critical to successful policy in the UK; perceived unfairness has undermined many past policies, e.g. VAT on fuel, fuel duty escalator, feed-in tariffs. UK policymakers have long- acknowledged that householder access to energy/energy services and transport/mobility are unevenly distributed. For household energy use, this has led to considerable policy attention on fuel poverty. Policy has not, however, succeeded in ending fuel poverty (BEIS, 2018). Energy prices have increased at a higher rate than incomes for poorer households, and energy efficiency policies have not reduced energy demand in homes sufficiently such that adequate energy services are affordable for all.

More attention is needed on how the costs and benefits of the energy transition are going to be distributed between different groups in society and different sorts of organisations. This topic is not addressed in detail in the CGS (Appendix 1 or Reiss 2018).

Recommendation: More detailed equity and fairness analysis/questions should be included in consultations and other documents following up the CGS.

Governance

This section considers the governance of policy and the role of actors at different scales from individuals to national administrations. It proposes new institutional arrangements for delivering policies in the CGS, and finishes with comments on the role of politics in policymaking.

Individuals, intermediaries and organisations

Despite its focus on technological innovation, the CGS has limited focus on the users or adopters of new technology, and the supply chains and installers which will deliver it.

Research shows that these groups are critical to the adoption of innovations (Owen et al, 2017). Future research funding for helping people to ‘stop wasting energy’ is announced (CGS, p81); this frames people as the problem, rather than as integral to the low carbon transition. A wealth of research – some of it commissioned by Government – shows that more sophisticated conceptualisation and engagement with people and organisations as decisionmakers, investors and users of energy pays dividends.

The CGS has little to say about micro-businesses and SMEs, although they are responsible for 55% business energy use (as noted in the CGS, p61). SMEs have less capacity and resources to adapt to change than larger firms, and require distinctive forms of policy and financial support (Hampton and Fawcett, 2017). To enable and encourage them to contribute to the energy transition, SMEs collectively will require additional research and tailored policy attention.

Recommendation: Government to assess the effectiveness and impacts of policy design and delivery in relation to specific groups, including householders, intermediaries, SMEs and other organisations.

CREDS contribution: To undertake research focused on people and organisations and their centrality to, and many roles in, the energy transition.

Governance within the UK

There is as yet no strategy for coordinated governance of policy on energy efficiency and demand in the different nations and regions of the UK. Regional action is mentioned in only one CGS policy proposal, despite the focus on driving regional growth through local industrial strategies, highlighted in CGS Chapter 1. Earlier work has however argued that more systematic, comprehensive and faster improvements in energy saving could be achieved through explicit UK, devolved national and local/regional government frameworks for action on low energy buildings and clean energy (Webb et al 2017).

Scotland, Wales and Northern Ireland currently have different devolved powers relevant to energy policy, with Northern Ireland having most autonomy; in Britain energy taxation, regulation and licencing is reserved to Westminster. Within this framework, Scotland has developed the Energy Efficient Scotland programme, and Wales the Energy Efficiency Strategy for Wales, each emphasising coordinated national and regional action.

The Scottish Government is also now consulting on a new statutory power for local government to develop comprehensive Local Heat and Energy Efficiency Strategies (LHEES) and implementation plans. In England, governance arrangements are more piecemeal and experimental, including for example recent BEIS funding for six pilots to test locally-customised supply structures for private housing retrofit.

Local government needs guidance if it is to make high quality, locally sensitive decisions around energy. Scottish LHEES pilots are testing proposals for development and adoption of standard socio-economic assessment metrics for evaluating cost effectiveness of different energy saving strategies suited to each locality. In the Smart Systems and Heat programme, local energy planning tools have been developed to model cost-optimal routes to a low energy, low carbon building stock at locality scale, but underlying cost calculations are contingent on multiple future uncertainties, and resulting scenarios can be difficult to evaluate for local governments with limited technical capacity. More work is needed on development of standards for assessing the cost effectiveness of different approaches responsive to local problems and priorities.

Recommendation: UK Government to work with devolved national and regional governments to develop clearer frameworks, mandates and metrics to support further, faster local authority action to reduce energy demand through local and regional energy planning and implementation.

CREDS contribution: Our research programme will develop knowledge and capacity on emerging comparative governance strategies within Britain, with a particular focus on energy use in buildings.

Institutions and approaches for policy delivery

Delivering energy efficiency through policy requires a complex mix of policy instruments (Rosenow et al, 2017). Most OECD countries use some form of energy agency to manage this complexity. An external agency also adds specialist market and project management expertise, which is difficult to provide via a generalist civil service with restrictive procurement rules (Mallaburn & Eyre 2014). However, this approach comes with risks, particularly around loss of Government control and accountability, which was the main reason why public funding was removed from the Carbon Trust and Energy Saving Trust in 2012.

A new generation of hybrid energy efficiency programmes is emerging that fuse industry-led, voluntary programmes with selective Government intervention (van der Heijden, 2017). For example, the National Australian Built Environment Rating System (NABERS) is a voluntary initiative, supported by the Government, to measure and compare the environmental performance of commercial buildings and tenancies. It has been widely adopted, and is considered to have been successful in increasing environmental and energy performance (Mallaburn, 2018). The German energy efficiency networks apply the same approach to industry (Durand et al, 2018).

Recommendation: The government should evaluate the case for hybrid energy efficiency programmes run by a new national Energy Agency or similar facility to help deliver the CGS.

CREDS contribution: to review the impact of hybrid energy efficiency programmes and the agencies that run them and to consider how the approach could work in the UK.

The politics of policymaking

Policymaking is not an apolitical process: policies are made by governments with particular political priorities and values, and within a wider socio-economic context (Appendix 2 or Hawkey, 2018). At certain times there may be ‘policy windows’ for ambitious climate change policies, but such windows may also close unpredictably (Carter and Jacobs, 2014). Nevertheless, some policies have achieved lasting cross-party support, and the UK has shown leadership in establishing carbon reduction as a priority shared across the mainstream political landscape. Analysis of 40 years of UK energy efficiency policy has shown that energy efficiency can meet different goals and fit with different political philosophies (Mallaburn and Eyre, 2014). However, other emerging approaches to demand reduction, such as sustainable prosperity in a circular economy (Jackson, 2017) or sufficiency (Darby and Fawcett, 2018), are more politically contentious. These, too, are legitimate and important subjects of research.

CREDS contribution: to explore the full range of policy solutions, including radical options, and to consider their robustness against different political priorities.

Further, faster and more flexibly

To reduce energy demand further and faster, and to make it more flexible, innovation in energy and relevant non-energy policy will be required. A number of changes to current policymaking are suggested: joined-up policy, going beyond short-term win-win and energy efficiency, and taking the reduction of demand more seriously.

Joined-up policy: Heat decarbonisation as an example

The call for more joined-up policy is not new. However, given the scale of change envisaged in the energy transition and the interconnected nature of the changes required, a joined-up, systematic approach will be essential. The changing nature of the energy system itself is widely acknowledged with, for example, distributed generation, increasing renewables and smart meters all opening up new opportunities for policy intervention, and requiring new policy frameworks. The relationship between supply and demand of energy is different and more joined-up now. It is important that analysis by researchers and Government identifies the social/technical/economic systems surrounding new flexibility, low energy or low carbon innovations, and that policy builds on this.

Heat decarbonisation, a CGS priority, demonstrates the complexity of change envisaged and the need for joined-up policy. Low carbon heating systems, such as low temperature heat delivered by heat pumps or low carbon gas (hydrogen/biogas + Carbon Capture Use and Storage – CCUS), are currently more expensive, complex and problematic than the incumbent technologies. To enable adoption of these technologies, it will be vital to reduce the energy used for heating and hot water in buildings (Webb, 2016). Reducing energy demand in buildings is the best-understood and lowest risk element of a heat decarbonisation strategy. However, this is not acknowledged in the CGS, where the focus is on supporting low carbon heating technology through a) supporting measures to become more attractive so that homeowners will adopt them; b) investing in long term knowledge generation for fuel switching; c) investing £320 million in heat network infrastructure to develop a self-sustaining market post-2021 (Heat Networks Investment Project, 2018). There is a notable lack of policies to deliver more efficient existing buildings, particularly in the non-residential and able-to-pay residential sectors (as discussed in Chapter 2). Policy for new buildings is also less strong than it could be. Thus, by focusing primarily on the supply of heating systems, and not addressing demand for the energy services they supply, the CGS is left without an overarching strategy to govern the decarbonisation of space and water heating.

Recommendation: Government needs to join up policy on all aspects of decarbonisation of heating, and prioritise policies to ensure high standards of efficiency of the new and existing building stock. More generally, a joined-up systematic approach to policy is required.

Beyond short-term win-win

The CGS expects mitigation actions to be win-win: in the short-term, actions should deliver both carbon reductions and economic benefits to their adopters. This is constraining. For example, a decarbonised heat system is forecast to lead to cost increases (Energy Research Partnership, 2017) which are difficult to reconcile with short-term win-win framings. The costs of low carbon options can fall more quickly than expected, reducing the economy-wide cost of the energy transition – with solar PV and batteries being good examples (CCC, 2109). Policy support prior to these technologies being win-win options, both in the UK and abroad, has helped deliver cost reductions. Nuclear and off-shore wind generation are not subject to a win-win expectation. Public subsidy is considered justified, despite cost increases in the case of nuclear power.

Government is also prepared to support controversial supply-side options, e.g. fracking (not mentioned in the CGS); such support has been lacking when demand-side policies become controversial, e.g. in the debate about the impact of ‘green charges’ on energy bills in 2013 (Carter and Clements, 2015).
There are alternatives to a short-term win-win approach. In Scotland, the Government announced in 2015 that it would treat energy efficiency as a national infrastructure priority. This approach to demand-side policy is leading to a requirement for specific policy instruments (Scottish Government, 2017). Another option is the ‘energy efficiency first’ approach taken by the European Union, which builds on the principles of integrated resource planning.

Policy could be framed around energy services, rather than energy itself, as proposed under the ETI/Energy Systems Catapult ‘Smart Systems and Heat’ programme (Energy Systems Catapult, 2018). This is intended to create incentives for suppliers to invest in building fabric retrofit, where this is the more cost effective route to provision of contracted service levels. Finally, a multiple benefits approach to developing policy would ensure that the full social, environmental and economic effects are taken into account. This approach can provide a powerful case for action which appeals to a variety of values and priorities (IEA, 2014). Each of these proposals would have different implications for policymaking.

Recommendation: Government should reconsider the requirement for short-term win-win from technologies and energy saving, low carbon options at the earlier stages of innovation and adoption.

CREDS contribution: to build capacity on energy demand policy which is not necessarily win-win in the short-term and learn from the emerging approaches elsewhere.

Beyond energy efficiency

For the UK as a whole, energy efficiency has been, and will continue to be, an important route to demand reduction – but this is truer for some sectors than others. For buildings, energy efficiency has been key to reducing demand over recent years and offers significant scope for further reductions (Chapter 2). For industrial energy use, energy efficiency has delivered one-third of the savings due to reducing energy intensity, but the remaining efficiency opportunity is limited (Chapter 3). However, for transport, internal combustion engine vehicle energy efficiency improvement has been insufficient to deliver decreases in energy use, with considerable concern about the mismatch between lab test and real world energy efficiency (Brand, 2016; Chapter 4). In addition to energy efficiency, demand-side policy must also encompass fuel switching and flexibility. Government must also acknowledge its own role in shaping demand.

The current policy approach to fuel switching varies by sector. The CGS has set a date for the phase out of fossil-fuelled cars and vans (albeit not as ambitious as called for in Chapter 4). Until recently, the same drive to require fuel switching has not been seen in the buildings sector. . However, in March 2019, a ‘future homes standard’ was announced which will ensure that new UK homes will be built without fossil fuel heating from 2025 (Hammond, 2019). This is a good start, but covers just a small part of the building sector (i.e. not the existing building stock). The electrification of heating and transport are both likely to require planned withdrawal of existing fossil fuel supplies and their infrastructures – a complex social/technical/economic process which now urgently requires policy development.

Government policy contributes to shaping demand for energy, energy services, travel and mobility. This is arguably most strongly the case in the transport sector, where nearly all infrastructure is publicly funded (Marsden et al, 2018). Decisions to expand airport capacity inevitably increase energy use and carbon emissions.

However, more indirectly, economic, tax and monetary policies also contribute to stimulating and shaping demand. Acknowledging tensions between climate goals and economic goals, where these exist, is important. Not all growth can be clean growth.

The CGS does not challenge existing energy-intensive practices, such as long-distance air travel, or the growth of new energy uses, e.g. the internet of things, big data storage and exchange, or cooling of buildings. It does not consider any substantial policy to reduce demand for mobility or the services that energy provides. While such policy may be thought contrary to the usual aims of Government, it is important to recognise that the Government has already expanded policy into new areas in order to deliver energy savings and the multiple benefits these bring. For example, it has introduced minimum standards for energy efficiency of (some) existing privately owned homes – an intervention previously considered politically impossible. The Government will need to find new intervention points if carbon reduction targets are to be met.

Recommendation: Government to develop stronger policy on switching away from carbon-intensive fuels. Also to recognise the role of its own policies in stimulating and shaping demand, and to consider how these could contribute instead to the net-zero transition.

CREDS contribution: By analysing policy across sectors, and taking a whole systems view, to develop new evidence and arguments for more rapid change.

Taking demand more seriously

Demand reduction and flexibility will be hugely important in delivering the energy transition – but policy still focuses disproportionately on energy supply. For example, the CGS dedicates almost three times more investment to the electricity system (responsible for 21% of emissions), via power and smart systems investments, than to businesses and homes (responsible for 38% of carbon emissions, including the 32% of national emissions for heating). This is despite recognising the necessity to decarbonise heat and its status as “our most difficult policy and technology challenge to meet our carbon targets” (CGS:p75). Given the expected future role of electricity across all sectors, this may be the right balance of investment. However, the apparent mismatch does require closer attention.

Recommendation: Government to reassess the relative priority given to supply and demand policy.

CREDS contribution: Research on reasons for policy asymmetry between energy supply and demand

Conclusions: raising the ambition level

As the CCC concluded, the CGS will not deliver sufficient carbon savings to meet Government-legislated targets. This chapter has suggested a number of ways of raising ambition within the current framing of policy – by setting more detailed policy targets and stronger standards, designing appropriate policy mixes, involving and coordinating with multiple actors at different levels of governance, and considering new institutional arrangements. There is also the more challenging call to reconsider the limits and purpose of policy. Successful policymaking also requires paying attention to equity, and to the individuals and organisations who make up (and meet) the demand for energy services and mobility.

CREDS aims to conduct research on reductions in demand which go further, faster and more flexibly – options beyond ‘business as usual’. This will include investigating demand for energy services and mobility, and proposals for reducing these, consistent with equity, climate protection and energy policy goals. CREDS will provide recommendations and evidence for radical or non-marginal changes in delivering emissions reduction, as well as incremental improvements.

References

Banner photo credit: Alireza Attari on Unsplash