Net zero: ‘no role’ for carbon tax but local energy planning could be key for heat futures

The UK’s new ‘Net Zero’ target has “a wonderful simplicity … because we have to decarbonise everything. There are no excuses. You have to look at every sector and find out how we are going to get the carbon out of it and if we can’t get it out then we have to ask how [that sector] are going to pay for offsetting,” George Day, the Energy System Catapult’s head of markets, policy and regulation, told New Power in an exclusive interview.

Subscribers can login to read the full interview.  Some highlights:

On pricing emissions…

Among the problems highlighted are under-pricing of emissions. Some big sectors “just don’t have the economic incentives to do anything [about decarbonisation],” says Day.

The report offered five potential policy responses. One is a carbon tax across the whole economy. But Day says, “frankly it doesn’t seem to work that well in the real world, because it is really politically challenging to get it at high enough level.”

Another option is a carbon version of VAT – a carbon tax at the point of consumption. But it was seen as a non-starter, “because of the information you would need to carbon-rate every single value-added step in the economy.”

Instead, he has a sector by sector approach.  “If you look at where decarbonisation is really happening a lot of it is being delivered by other policies like sectoral policies or clean energy standards. … That may not mean that you have one instrument that cuts across the whole economy – it may be different standards or instruments in different sectors.”

On heat…

Decarbonising heat is one huge issue that is now gradually being picked at by policymakers. Day says, “That is a massive gap at the moment. It is not priced at all. Burning gas in our homes is basically subsidised.” That is because it attracts a low rate of VAT. So does electricity – but unlike gas, electricity also bears the cost of support programmes like the Contracts for Difference and Capacity Market.

“We are tilting the playing field in favour of gas (versus electricity) for heating, which is the opposite of what we want to do,” he says.

He forsees an obligation on suppliers to deliver low-carbon heat because, “the supplier is the one that has the interface with the consumer.” Whatever the final mechanism, all companies in the heat space, including those supplying LPG or oil to off-gas homes as well as gas suppliers, “are going to have to supply to buy credits to offset the carbon intensity of continuing to supply fossil fuel and that ratchet is going to tighten over time.”

On local energy ownership…

Whatever happens, power consumption is set to expand. Day says the CCC’s estimate that demand will double “is as good as anybody’s”.

Replication helps to get technologies down the cost curve, but local resource considerations will play a big role. ES Catapult has been working on local area and energy planning. Day asks the questions: “What does the mix of solutions look like at a regional or even a town level? Maybe you need to be taking zoning decisions about whether this is an electrical region or hydrogen region.

“…If we went through a process of rolling out local energy planning, and creating a spectrum of what the local zero carbon energy planning looks like for a location, it will help people avoid making investment mistakes… And help homeowners to prepare their property”.

But he adds, “You have to create quite a lot of competencies to do it well. Can we really realistically do it at every local authority level? Perhaps not.”

Labour’s energy plans suggest region and city based publicly owned organisations. Day says “it’s not obvious that ownership change on its own is the main thing.” But “If you are going to take decisions that are going to have an impact on peoples’ choices and freedom on what they want in their homes there has to be a democratic legitimacy about it that does sit naturally with a local authority having a role in the planning process.”

On the power market…

Are our power markets fit for purpose? “We are acutely aware from an innovation point of view that relying on the centralised mechanisms that we have built – like the CfDs and the Capacity Market – the risk with those is that they don’t send signals that are sufficiently granular and accurate to deliver the investment in the innovative flexible energy system. …Those centralised mechanisms have crowded out the space for innovative, flexible solutions.”

In future, “Digitalisation potentially offers us the opportunity to have real-time accurate pricing that reflects the physics of what’s going on in the system. How can we move in that direction?” With that flexibility accessible, “It might mean that people don’t need the Capacity Mechanism.”

…Fundamentally, he asks, “Why can’t we have a market that is based on contracts between buyers and sellers? If I’m a supplier and I need to buy fairly large volumes of electricity and have some longer term of visibility on that, why don’t I enter into long-term contacts for offshore wind? Why does the state have to do that?”

“There will be plenty of people who are quite happy with the existing arrangements and don’t want radical change,” he admits. But the Net Zero target is “a game changer. If you start thinking at this level about how we decarbonise the whole economy, then it is very important how you get the right mix for electricity.”

How quickly does he think the existing arrangements could be replaced? He says, “I think it’s probably five years minimum. But five years is not a long time.”

Further reading

‘National debate’ needed as some consumers will lose gas option

Is it time to re-examine the regulatory model?

Net zero: the industry responds

Bristol Energy joins Energy Systems Catapult to offer ‘heat as a service’

Labour renationalision plans – responses

From New Power Report: what’s the direction of travel on heat?