OPINION: RIIO 2 is the time to do some serious thinking on heat and decarbonisation

Bridget Woodman and Richard Lowes consider the decarbonisation of the UK’s heat sector – and the lack of political commitment to achieve it.

Extensive, or even complete, decarbonisation of the heat sector is vital if the UK is to meet its 2050 commitments under the Paris Agreement and the Climate Change Act (CCA). The three key options at the moment are increased electrification, heat provision from renewable-fuelled district heating networks, or substituting hydrogen or biogas for natural gas, although perhaps geography and resources could also play a factor. Whatever the end point, it is clear that the future role of natural gas, which currently provides more than 80% of our heat, will be very different.

As with any large system, changing the way heat is produced and provided will take time. This means the building blocks for a decarbonised heat sector have to be put in place now if the challenge is to be met in 30 years’ time.

But as with much of the UK’s energy policy, political commitment is currently sadly lacking. There are a number of trial projects for heat networks, there are desk studies for hydrogen and the underperforming Renewable Heat Incentive has recently been reformed. But there is no real sense in government of any urgency in pushing for decarbonised heat, even though, as the Committee on Climate Change highlights, meeting the CCA’s fourth and fifth carbon budgets is unlikely without solid extra heat policies. Something has to change soon.

Lack of government focus does not mean that there are no opportunities to influence the rate and direction of change. The developing price control for gas networks is one such opportunity to shape thinking and investment around the future role of gas networks in a decarbonising society.

 

Price controls

The current set of price controls for gas and electricity transmission (RIIO-T1) and for gas distribution (RIIO-GD1) end in 2021. RIIO (Revenue = Incentives + Innovation + Outputs) is Ofgem’s framework for regulating the income and behaviour of the monopoly network companies. Because the income that the companies can generate is to a degree related to company performance and innovation, the mechanism provides a basis for shaping company activities, innovation and investments. Ofgem is currently consulting on the shape of the next phase of RIIO, which will last from 2021 to 2026 – a key period if we are to meet carbon budgets and drive change in the decarbonisation of the heat system.

The opportunity lies in the question of what will become of gas networks in a decarbonised energy system. Some scenarios see a declining use for them in the longer term as heat becomes increasingly electrified or based around renewable district heat networks, and with gas use in power stations drastically reduced.

Even if there is still some gas requirement in the future, the challenge is how to maintain and operate the networks cost effectively, given that there will be a decline in their use and therefore their financial viability.

This is a similar issue to that currently being faced by some electricity networks, notably in Australia, where increased localised renewable generation means that utilisation of electricity networks is declining, together with the revenues for their use, creating stranded assets.

Gas network companies are currently promoting the continued use of their networks into the future by promoting the substitution of low-carbon hydrogen for some or all of the natural gas they transport. In this scenario, hydrogen is produced from natural gas and the carbon is captured and stored in the process. This is a technique with significant uncertainties, which would require new appliances and a major conversion programme. However, it would allow the networks to operate in the same way as they have always done – and avoid their assets becoming stranded. It would have high costs elsewhere, both for the infrastructure to produce and store hydrogen, and for changing appliances for users.

Ofgem published its framework document that set out the general structure for the new RIIO phase (RIIO 2) at the end of July. The framework is based on consultations with industry and other stakeholders earlier this year, and the document discusses their views.

One of the most striking parts of the document is in the discussion about future network use. Ofgem highlights the future changes in gas network use as having the potential to lead to stranded assets and suboptimal investments. However, despite the inevitable – but as yet unquantified – need for a shift in network use, the gas network companies do not see this as an imminent threat, leading Ofgem to write: “Some stakeholders thought that stranding is a more significant risk for gas networks in the near term, but gas network companies thought that the risk in RIIO 2 was minimal. They observed that the gas network still had an important role to play in supporting the future decarbonisation of heat.”

The reason behind this position could be that the gas companies have not yet fully understood the impacts that decarbonising the heat sector will have on gas use. Or it could be more strategic: gas network companies do not see any urgency because the policy drivers for system change are lacking in the short term, and in the longer term using hydrogen as a means to decarbonise will be inevitable, despite the relatively high costs projected for it. It could also be because they simply believe heat decarbonisation won’t (or shouldn’t) happen.

At the moment, the lack of policy clarity is creating a situation where hydrogen may become a default rather than optimal choice. Certainly, that is what the incumbent gas network companies would like to see. Alternatively, nothing may happen. Through RIIO though, Ofgem has a real opportunity to unpick the implications of future changes in gas network use, including hydrogen substitution.

Given the increasing urgency to decarbonise heat, RIIO presents a real opportunity for some serious forward thinking.

Published in the October 2018 issue of New Power Report

Further reading

Should we underwrite new gas storage? Think about the ‘smart, flexible’ system plan first

Don’t mention the margin

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