Ten years since the Climate Change Act, the UK has made significant progress in reducing emissions from the power sector. Overall emissions have dropped by nearly 60 per cent on 2008 levels and, while five years ago fossil fuels contributed nearly two-thirds of the UK’s power, by August 2018 over 60 per cent was instead provided by zero-carbon sources. An excellent example of what clear goals, well-designed policies and technological innovation can achieve.
The job to decarbonise energy is, however, far from finished. Not only will the power sector need to continue on its decarbonisation trajectory, but we urgently need to decarbonise how we heat our homes, invest in energy efficiency to reduce overall energy demand and increase the deployment of low carbon cars.
The good news is that, aside from avoiding the devastating impacts of climate change, cutting carbon brings a wealth of other benefits, including lower bills, better-insulated homes, cleaner air as well as jobs in low carbon industries. But how should those benefits be distributed?
A look at how benefits (and costs) of the low carbon transition are currently distributed
Policy and energy system design should ensure that the benefits and costs of decarbonisation are fairly distributed. Yet, this is not currently happening.
The way energy policy is currently funded, via consumers’ energy bills, is highly regressive. On average, the poorest households spend around 10 per of their income on energy while the richest households only pay 3 per cent1. And this regardless of whether households are actively taking part in the transition themselves. For example, the uptake of solar PV installations is greater in more affluent households2. Similarly, previous ECO schemes have not appropriately targeted those most in need of home insulation, with the IPPR estimating that only 30 per cent of funds are likely to be spent on fuel-poor consumers3.
The uneven distribution of benefits is also evident on a regional scale. A recent study from Imperial College has shown that only some parts of the country are seeing the benefits of low carbon technologies, largely as a result of different levels of national and local government investments, building efficiency and household incomes.
Finally, the way the UK energy market is designed is outdated. Innovation in low carbon technologies is resulting in a more distributed energy system, with (generally affluent) consumers increasingly opting for small-scale technologies to generate and store their own energy and use electric vehicles. However, given the current energy market design, as these new forms of energy generation and use grow they are likely to challenge the way in which we cover the costs for the grid, flexibility and back up, as highlighted by BEIS Secretary of State Greg Clark in his recent speech.
What could a fairer system look like?
Sharing the benefits and costs of the low carbon transition requires a rethink of the UK’s energy policy and market design.
Various options are on the table. Research by UKERC suggests alternative forms of funding could place policy costs on businesses or recover them through general taxation4. Alternative market-based solutions are also being explored. One option would be to have more cost reflective tariffs, which would allow to more effectively recover fixed costs and encourage fuel switching and uptake of low carbon technologies if coupled to an appropriate carbon price applied across electricity and gas. Alternatively, with the emergence of smart home energy management systems, energy may be offered as a part of a bundle of services rather than as a product itself5. Non-commercial solutions, such as community energy and energy cooperatives, may also play a role in ensuring a bigger share of consumers can benefit from cheap, low carbon energy.
We will be discussing these issues in more detail with an expert panel on Thursday 6 December. If you are interested in joining the debate, register here. We look forward to seeing you there.