Energy Transition

 

The Energy Transition has emerged as the term that best describes a major shift in our energy system.  It highlights the changing nature of the way in which our energy is produced, stored and consumed, driven by climate change, local pollution and other sustainability issues.

 

The physical manifestation of the Energy Transition is found everywhere: wind farms and solar panels delivering carbon-free electricity, new electric vehicles entering the mobility market, smart meters in the home to encourage energy efficiency.  But the Energy Transition is much more than a technological revolution; it embodies our need to decarbonise our energy system, to move away from large-scale infrastructure towards small-scale systems serving local communities, and it recognises a growing need by individuals to take control of their energy needs using digital systems.

 

The Energy Transition is a process that will last several decades. There will be nations that will lead in the Transition and others that follow, but all will move in the same general direction over time. And no technology or nation will dominate; rather, nuances on the Transition will emerge around local resources and conditions. It will require continual innovation and investment to bring new technologies and products to the market, and it will encourage a change in behaviour in the way businesses and consumers use their energy. 

 

There is a role for all stakeholders: government needs to take a lead role by presenting a vision for the future in this area; it also needs to provide the policy framework to facilitate the transition, and encourage businesses and individuals to invest in the technologies needed, and to change behaviours.  

 

It is crucial for all those that wish to engage with the Energy Transition to have a good knowledge of government policy in this area, to understand the nature and pace of development of the key technology developments, and to be aware of stakeholder action that is disrupting this vibrant marketplace.

 
Energy Market

 

The UK electricity industry today is arguably one of the most liberalised in Europe with a large number of suppliers and independent generating companies competing in the market; crucially, a significant number of international companies now operate in the UK bringing much needed inward investment.

There are three main drivers for the UK market today: climate change, security of supply, and the provision of affordable energy. These have been the same three drivers for the last 15 years or so with different ones taking prominence at different times. Overall, it is fair to say that the climate change issue has been particularly influential and remains so, but security of supply and most recently affordability, have both risen up the political agenda.

Government interventions in the market are occurring to ‘encourage’ specific new build projects to come forward such as nuclear, and the various renewable technologies. This gradual move towards a ’managed’ market has been achieved by a major reform of the electricity market through a number of new economic instruments - the carbon price support mechanism,  Contract for Difference Feed-in Tariffs (CfD FiT), a capacity mechanism and an emission performance standard for fossil generation - collectively known as Electricity Market Reform (EMR). This ‘transition’ from a ‘liberalised’ to a ‘managed’ market structure brings with it both threats and opportunities for market participants.

 

Looking ahead, Government will have a view about the relative importance of these three drivers, taking into account the prevailing economic climate, and the UK’s legally binding climate change and renewables targets. It will then ‘encourage’ the market players to respond to these drivers through new policy and regulatory initiatives.  The recent ‘Climate Extinction’ demonstrations in London have brought the Climate Change issue back into sharp focus for politicians and further policy action can be expected that will bring further changes to the market environment.

In summary, the UK is a highly sophisticated market and companies need to have considerable understanding and resources to be able to operate in this market today and to be confident in their investment decisions.

 
 
 
Political and Policy Developments

 

Brexit has dominated the political landscape over the last three years. In the short term the potential implications for the energy sector of the UK decision to leave the European Union will be relatively small because the drivers for energy policy were set some years ago. On leaving the EU, the UK will not be a party to new EU policy development but may instead continue to monitor them not least because they may form part of any agreement between the two parties. For example, the UK may seek to remain in the EU Emissions Trading Scheme and will want to understand the implications of new developments. 

In the longer term, it is possible that being outside the EU offers the UK greater flexibility as it determines its path of travel for the energy sector. For example, it will no longer need to seek State Aid approval for its policies, unless they fall under the formal agreement between the two parties. The UK has stressed the primacy of the carbon reduction targets over other targets involving renewables and energy efficiency, so there is, potentially, greater economic and technical freedom to address climate change objectives. 

The most impacted areas from a UK withdrawal for the EU are potentially interconnectors, market developments, and innovation funding; the first because interconnector status will be treated differently in the UK’s capacity mechanism, and the second because the UK may be outside measures to complete the internal market, including cooperation between regulators. The UK was one of the highest recipients of research funding in the EU and benefited hugely from working with counterparts in different countries. The absence of such opportunities must impact the energy sector in the longer term. 

Recent energy policy has been subject to the three pillars of sustainable development - economics, environment, and societal well-being - although it is fair to say that environmental issues and climate change in particular, have been the most defining. More recently, a more nuanced set of drivers has emerged and activities that benefit the economy such as growth and employment have been emphasised; the importance of renewing existing infrastructure and encouraging new build has also been recognised. Decarbonisation continues to play an important role with those working in the ‘traded’ sector (i.e. those covered by an emissions trading scheme) now internalising the cost of carbon; those in the ‘non-traded’ sector are also gradually being exposed to decarbonisation initiatives including the cost of carbon which is internalised in the price of electricity.

 
 
Sustainable Development

 

"Development that meets the needs of the present without compromising the ability of future generations to meet their own needs" - Our Common Future, Brundtland Commission, 1987

There is widespread acceptance that all technologies and practices should be judged on the three ‘pillars’ of Sustainable Development: economic well-being, environmental performance and wider implications for society, including those for future generations. The Sustainable Development (SD) concept has been used to ensure a more holistic approach by countries and organisations when addressing issues such as health, safety and the environment.

Climate Change is often used interchangeably with Sustainable Development whereas in reality it is only one, albeit very important issue. For example, the Millenium Development Goals (MDGs) agreed in 2000 focused on eight areas that also lie within the Sustainable Development area:  poverty, hunger, disease, illiteracy, environmental degradation and discrimination against women. Importantly the MDGs were more specific in nature making them easier to understand and all had specific targets and indicators to be met by 2015.

In 2017 the UN refreshed this area further by encouraging countries, and organisations, to adopt the seventeen Sustainable Development Goals (SDGs), sixteen of which covered four areas: the human condition, human rights, resource use, the environmental condition; the seventeenth SDG focused on an approach based on partnerships. The fact that Sustainable Development had essentially gone from 3 high level ‘pillars’ to seventeen individual Goals, each with targets and indicators to be met by 2030, makes them highly relevant to individuals and organisations alike.  

Organisations are increasingly being judged on Sustainability criteria and a progressive organisation will want to engage with the SDGs. The nature of their business means it may not be appropriate for them to adopt all the SDGs; nonetheless, they can begin by aligning their current CSR practice with those SDGs most applicable to their business, and gradually broadening their scope of activity over time.

 
 
Climate Change

 

The UK is arguably one of the leading countries in mitigating its greenhouse gas emissions, it has signed up to various international treaties over the last 25 years or so, and its national targets are amongst the most demanding in the world. There has been genuine progress in a number of areas. It has reduced its carbon emissions by over 40% on 1992 levels, and seeks to reduce its emissions by 80% by 2050. An important institution, the Committee on Climate Change, has been set up to advise Government on how best to meet its targets, delivering a series of 5-year budgets which once agreed are legally binding.

The Government has brought forward a number of economic instruments to help meet its climate change commitments. These include a carbon levy alongside the EU Emissions Trading Scheme to put a cost of carbon on electricity production; a Contract for Difference, Feed-in-Tarifs mechanism to incentivise the deployment of low carbon technologies such as nuclear and renewables; and an Environmental Performance Standard that serves to limit emissions from fossil power stations. No new coal fired power stations will be built in the future and existing stations will cease operating by 2015.  Gas Generation is seen as an important transition fuel, providing the flexible generation and inertia that is needed for the integrity of the electricity system until such time as large scale storage enters the market. 

The focus on the electricity sector is deliberate because it is relatively easy to affect change in this industry. Changes here can then help decarbonise downstream in the more difficult domestic and transport sectors. This may be through, for example, the provision of low carbon electricity for heating and to service the needs of electric vehicles respectively.

The recent Extinction Rebellion demonstrations in London are encouraging politicians to go further and quicker than before in Climate Change mitigation; the period to 2030 is now seen as critical. There are threats and opportunities associated with the UK’s climate agenda and it is important the organisations understand the political, policy, market and technological environments to help inform their investment decisions.

 
 
Stakeholder Engagement 

 

“Never before has it been so vital for business to ensure that its side of the story is properly told and understood”.

Sir Adrian Montague CBE

Chairman, Aviva

 

Stakeholder engagement is increasingly seen as an essential activity for business, Government and its executive bodies, and representative of civil society. Despite this, there is remarkable ignorance in organisations about how best to engage with decision-makers and key influencers in the policy and regulatory arena. 

 

New government policy and regulation affect the markets in which organisations operate bringing both risks that need to be mitigated and potential opportunities to exploit. It is important then that organisations understand that they can influence policy outcomes and that they need to engage at all levels of decision-making if they are to protect their interests.  

 

A key question then is whether organisations are engaging with decision-makers and other key actors as effectively as they could. Are they managing to influence the policy and regulatory regime that shapes the markets in which they operate? Even more fundamentally, do they know who they should be interacting with or understand the formal and informal processes whereby they are able to present their concerns, views and ideas? 

 

Getting organised internally is an essential requirement. Organisations need a strong in-house capability, one that draws on all the talents and expertise in the organisation, working in a coordinated and concerted manner. It is also advisable to draw on the considerable advice and support available in the external domain, in order fro them to make the most of their position in the market.