Posted: 21 August 2014

Higher or lower?

Affordability, sustainability, decarbonisation, environment, heat, politics, intervention, uncertainty, economy, performance, productivity, fuel poverty, tariffs, incomes, energy efficiency
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Guy Newey, from independent think tank Policy Exchange, addresses the audience at the 2014 FES event.

 

Sustainability and affordability are two of the main energy challenges facing the UK. Alongside security of supply, they form what has been termed the energy ‘trilemma’. During the launch of National Grid’s UK Future Energy Scenarios 2014, four external experts presented contrasting pictures of how the UK’s future might look depending on the decisions we take today with respect to sustainability and affordability.

How will the three interdependent elements of the energy trilemma play out? National Grid’s 2014 Future Energy Scenarios assume security of supply is fixed by the reliability standard under Electricity Market Reform. So that leaves sustainability and affordability…

Will the UK invest in a more sustainable energy future or are we destined to end up in a world where affordability takes precedence? What are the economic drivers that could make energy more affordable, and what is the daily reality for people living in fuel poverty in the UK?

These questions and more were explored by four speakers – Matthew Spencer, from the environmental think tank Green Alliance, Guy Newey, from independent think tank Policy Exchange, Sunita Bali, of Experian Market Insight, and Jenny Saunders, from National Energy Action, a charity that aims to eradicate fuel poverty.

Towards a sustainable future?

“Achieving sustainability is not a question of affordability but of politics – how costs and benefits are distributed.” Matthew Spencer kicked off the discussion by outlining some of the hurdles that the UK must overcome to attain a ‘high sustainability’ future.

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Matthew Spencer, Green Alliance.

While acknowledging the scale of the challenge to decarbonise energy, he reflected on the major changes that have already taken place in other parts of our daily lives. “Text is now more dominant than the human voice but it’s not so long ago that letters and word of mouth were replaced by email.” Progress, he said would be dictated by how quickly as a nation we learnt and dealt with technological challenges.

Matthew described the collective challenge for the UK of minimising the impact of sustainable energy on the environment. He said that we need to find better solutions to the decarbonisation of heat, citing as examples the poor energy performance of the fabric of our buildings, as well as the cultural issues around the adoption of heat pumps.

“I don’t think there is necessarily a knowledge gap among the public, it’s more of an ownership gap – and I mean that in the sense of having a stake. Policy tends to be done at people rather than with people.” He also called for a “positive feedback loop”, for example the introduction of a green ISA where people derive practical benefits from a green infrastructure.

A world of low sustainability

Guy Newey put forward the argument that the UK could end up with a low sustainability future not through choice, but because of bad policy choices leading to mistakes. “There is a serious and profound danger that we will achieve this low outcome, despite aiming high,” he told the FES audience.

Reflecting on the recurring theme of uncertainty he said: “Investment decisions are extremely difficult to make… politicians promise to deliver certainty but it doesn’t feel to me like a very certain world. I would argue we are further away than ever [from that goal].”

Questioning whether Electricity Market Reform offered the most effective way ahead he described the Capacity Mechanism as “fraught with risk” and criticised the “alphabet soup of policy” where intervention has bred more intervention, adding: “A price freeze is, for me, the logical conclusion of all these interventions.”

Looking ahead, Guy predicted a breaking point in the near future when the country will be faced with a choice between the cost of sustainability and security of supply. He suggested that politicians would likely head towards a low sustainability future.

“The most important thing the UK can do is deliver a high sustainability example for the rest of the world. My worry is that we may end up with a low sustainability future that no-one will want to follow.”

Affordability – more money available

Sunita Bali placed the prospects for a high affordability future in the wider context of the UK’s economic recovery from the ‘Credit Crunch’ and one of the longest and deepest downturns that the country has experienced.

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Sunita Bali, Experian Market Insight.

“Finally we are seeing the recovery take hold and the anaemic growth is behind us. However, when you look behind the headlines, the picture is not as rosy because the underlying performance of the economy is not so impressive.”

Referencing figures on GDP per capita – the performance of the economy on a per head basis – Sunita said that the UK was not even half way back to the pre-recession peak of 2008. “Productivity is a key factor driving the outlook for long-term economic growth, which has an impact on incomes and ultimately affordability.”

She also described the wide range of views on the amount of spare capacity in the economy, with some analysts placing the 2013 figure at 6% and others as low as 1.1%.

So, what of an alternative future of high productivity and affordability? This would be characterised by higher long-term growth of around 3% a year, more resilient wages, lower taxes and growth in the jobs market. Under this scenario, productivity growth would remain between 2% and 3% per annum between 2015 and 2030, helping to boost economic performance and in turn leading to greater disposable income and higher affordability.

Affordability – less money available

The stark reality of life in fuel poverty for millions of households was laid bare by Jenny Saunders who produced some eye-opening statistics about how unaffordable energy has become for significant numbers of families.

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Jenny Saunders, National Energy Action.

Using the most recent figures, there were 2.28 million fuel-poor households in England. Although this showed a 5% decrease from 2011, DECC projections for 2014 showed an upward trend, with fuel poverty likely to affect 2.33 million households in England. The statistics also revealed that 35% of households living in the least energy efficient properties were in fuel poverty compared with only 2% in the most efficient properties.

Jenny described what she called a ‘poverty premium’ where people on low incomes cannot buy more energy efficient products because they are simply unaffordable. How can we square this, she asked, with assumptions that future energy savings will come from consumers’ investment in more efficient products?

Turning to the impact of low affordability, Jenny highlighted that about 2,000 people were killed every year on the UK’s roads and yet there were some 30,000 deaths caused by the excesses of winter. According to World Health Organisation research 30% of those deaths were due to cold homes because of low affordability. Meanwhile, figures from Age UK suggest that the cost to the NHS of cold-related illness annually is £1.3 billion.

So, what needs to happen? Jenny called for a more progressive tariff structure from energy companies, adding: “I don’t see a big dash to offer cheaper tariffs.” On a broader level she said that National Energy Action was pushing for policies that were fair to all consumers, the establishment of energy efficiency targets and priority being given to the most vulnerable in society.

Clearly there is huge uncertainty regarding what path the future of energy for the UK will take, and the resulting levels of sustainability and affordability. That’s why National Grid produces four scenarios that flex between these two variables. National Grid doesn’t have a crystal ball, but by creating a range of scenarios, the actual future should lie somewhere within that envelope.

Read more:

Gary Dolphin, National Grid’s Market Outlook Manager, National Grid, analyses the 
UK’s 2020 target for renewables
 and looks ahead to the future.

Richard Smith, Head of Energy Strategy and Policy, National Grid, offers his perspective on the UK Future Energy Scenarios 2014.

Ten things you need to know about National Grid’s Future Energy Scenarios 2014.

Alice Etheridge, National Grid’s Strategy Development Manager, explains what each scenario might mean for the UK as a whole and for consumers.

Gas innovation in full flow
“My worry is that we may end up with a low sustainability future that no-one will want to follow.”

Guy Newey, Policy Exchange.