How will the energy price crisis affect UK Plc's net-zero transition?
As the energy price crisis rolls on, arguments for and against renewable energy and green subsidies are becoming increasingly politicised. Where will this leave UK businesses seeking to align with - or get ahead of - the nation's 2050 net-zero target?
Harold Wilson’s over-quoted remark that a week is a long time in politics is, at present, fitting. Parliament has been back from the winter recess for less than a week and, already, there have been many a scandal over the flouting of Covid-19 restrictions. At the same time, calls are intensifying on all fronts for the Government to take more drastic action to alleviate the energy crisis. But it is becoming increasingly clear that opinion on what shape that action should take is divided.
As 2022 began, a new group of 20 Conservative MPs and peers with around 20 members, the Net-Zero Scrutiny Group (NZSC), called for a temporary end to the 5% VAT rate on energy bills and a suspension of the ECO levy, which raises money for Government schemes in the fields of renewable energy, household insulation and alleviating fuel poverty. The NZSG is fairly new and small but is well-connected in business and media circles.
This approach was quickly shot down by an array of green groups, thought leaders and politicians, who argued that abandoning long-term investments in energy efficiency and renewables – which would decrease the nation’s reliance on imported gas – is a short-sighted approach. There is also the fact that the ECO levy adds just £29 per year to the average domestic energy bill.
This is the worst possible idea to tackle the energy bill crisis - last time ECO was cut, the installation of insulation measures crashed by 90% and the insulation rate has never recovered. It was a disaster and ended up entrenching fuel poverty. @KwasiKwarteng @SimonClarkeMP https://t.co/A5pJXbZqKw— Ed Matthew (@Ed_Matthew1) January 11, 2022
Opponents include the Conservative Environment Network of 116 MPs, which is pushing for the Treasury to temporarily foot the bill for the ECO levy, and the Energy Efficiency Infrastructure Group of businesses and charities, who are favouring a national scheme to improve energy efficiency in sub-standard housing. Labour and the Liberal Democrats had called for a one-off windfall tax on fossil fuel firms but this idea was quickly rejected by the Tories.
As those of these differing opinions continue to battle it out in political circles and on social media, Prime Minister Boris Johnson has promised swift action and stated that he is “constantly” meeting with Chancellor Rishi Sunak. But with every day that passes, there is growing anxiety for energy suppliers (21 of which had collapsed as of November) and for families and businesses unsure of how they will cope with rising bills.
For families, we will all have seen the harrowing headlines around how many households are facing an increase of £700 or more for energy bills this year. The Resolution Foundation is forecasting that this will result in the UK’s poorest third of families spending at least 10% of their annual budgets on energy alone. Separately, npower estimates that one million UK homes are already making compromises between heating and eating.
For businesses grappling with the need to recover from Covid-19 and make good on their net-zero pledges, this is a delicate moment in terms of balancing priorities relating to people, planet and profit.
Building business resilience
For context, Ofgem has reported a rise in the average price of gas per therm from 49p at the start of January 2021 to 112.5p at the end of November 2021. Within the same timeframe, electricity prices per megawatt-hour increased from 53p to 112.5p. The crisis is largely due to a discrepancy between international gas supply and demand, with cold weather in Europe and warm weather in Asia pushing up demand and nations including Russia supplying less gas.
This is pushing many organisations to increase their investments in energy efficiency and renewables to decrease their reliance on gas, with a particular focus on using home-grown technologies. But, for many, the increase in price may squeeze already-tight budgets. A recent Vattenfall poll of 500+ UK-based business decision-makers found that eight in 10 are worried they will need to decrease or scrap environmental investments in the short term.
Of course, green economy groups are advocating for businesses to take the former approach.
Speaking to edie, the Association for Renewable Energy and Clean Technology’s (REA) director of policy Frank Gordon says that while “there is no one-size-fits-all approach”, all businesses would benefit from shopping around for renewable energy tariffs and improving their energy metering and monitoring at present, if they have not already don so.
Larger organisations that have already done this may wish, Gordon says, to get quotes for onsite self-generation of renewable electricity and energy storage. He advises using the Energy Saving Trust’s bank of open-source information on which technologies and financial support schemes are available.
Gordon’s points are echoed by Energy and Climate Change Intelligence Unit (ECIU) analyst Jess Ralston, who also points to the need for businesses to switch from gas boilers to cleaner heating options. The recent publication of the Heat and Buildings Strategy provided a little more clarity on the Government’s preferred timelines and technologies.
Larger businesses may also, the Energy Transitions Commission’s deputy director Ita Kettleborough adds, opt for long-term contracts to “hedge their risk of experiencing short-term price increases”.
Beyond building in resilience for their own operations, businesses can, these experts agreed, bring their suppliers on the same journey.
Supplier engagement will be necessary for the growing cohort of businesses with 1.5C-aligned science-based targets – the temperature pathway that will soon become the minimum requirement for certification. And, aside from the climate benefit, there comes the ever-more-pressing need to build other forms of resilience across the supply chain.
With discussions between the Department for Business, Energy and Industrial Strategy (BEIS) and the energy industry rolling on, and with Johnson and the Treasury reportedly set to confirm new measures this month, now is also an apt time for businesses to use their political influence.
From the hundreds of businesses being showcased at COP26 (highlighted this week by COP President Alok Sharma at a hearing in the House of Lords) to the Government listening to major fleet operators calling for the ban on new petrol and diesel cars to be pushed forward to 2030, it is clear that the Conservatives want to deliver a story of net-zero success led by the private sector.
But what policy changes, exactly, could be net-zero-aligned and deliver an appropriate response to the scale and urgency of the energy price crisis?
Gordon says: “Our hope is that this moment can highlight the urgent need to shift to renewables and spur action from decision-makers, while ensuring the most vulnerable are protected.
“There is a range of policy changes needed. To install renewables in people’s homes and businesses, we would like to see changes to the tax system to zero rate VAT for all home installations of renewables and energy storage devices; incentives in Business Rates and Council Tax calculations for renewables; and energy efficiency retrofitting of existing buildings to make sure we use as little energy in the first place as possible.
"At the larger scale of deployment, we also need to see far more regular and frequent Contracts for Difference (CfD) auctions for new renewable power, supporting a broad range of technologies, and new support for renewable heating systems at scale – the current policies for heat just won’t deliver the scale of change necessary."
The REA has this week published a six-point plan for tackling the energy price crisis. It is supporting a suspension on VAT on energy bills for a year and the launch of a commercial loan scheme for onsite renewables and energy efficiency, as well as the measures raised by Gordon directly.
Also supported in the plan are proposals to change the Climate Change Levy, which, at present, places a higher levy on electricity than gas. The ECIU’s Ralston also supports this measure, saying that it will ensure that “those that switch to cleaner electric sources of energy are not punished for it”.
Ralston adds that this change must come together with “a proper plan for energy efficiency improvements in buildings that will minimise energy use and keep bills low”. The REA’s plan calls for the implementation of such a plan by the end of spring, following the failure of the Green Homes Grant.
As for the The Energy Transitions Commission, the organisation had, in April 2021, published a report on the shift to a low-carbon and electrified UK, with Kettleborough standing by many of its inclusions in light of the current energy price crisis. Like the REA, the Commission is advocating for the CfD system to be used for a broader array of technologies, including investments in grid infrastructure, grid-scale energy storage and other technologies that unlock flexibility. The CfD system was, essentially, for offshore wind only between 2015 and the most recent round.
All in all, the decisions taken in Whitehall about short-term market-based mechanisms and the longer-term approach to the energy transition as a result of the energy price crisis will affect the foundations upon which the UK’s net-zero transition is built. With less than 13 years for the UK to deliver a 78% cut in emissions, and the risks of inaction becoming ever-clearer, the next few months could play a major role in the shape – and cost – of the transition.
“We must ensure that this energy crisis doesn't slow the pace of renewables build-out and investment in clean electrification,” Kettleborough summarises.