Challenges and constraints
The speed and nature of technological change and choice in energy systems
There are a wide variety of technical choices to make in any energy system, whether for an individual house, a region or a country. The economics of energy technologies in a given place are also not independent of each other12. For example, a district heat energy system may make economic sense if local housing is poorly insulated or no sense at all if the same housing is retrofitted with the latest insulation (an economic choice which makes complete sense for the householder but not for the district heat operator).
This context is further complicated when technological change and changes in the economics of individual technologies are occurring on the scale and at the rate illustrated in Figure 15. The current world is one in which proponents of hydrogen, electric vehicles, biomass, solar, nuclear, micro-CHP, district heating, smart controls, energy storage, building energy efficiency and heat pumps can all credibly claim to be offering game-changing rates of technical progress and cost reduction.
These two realities can create a significant risk of very poorly informed and meaningless public debate and policy-making. This is particularly true at national and international level, and in political systems where public servants are poorly equippedlix to resist specialist lobbying by corporates and academic proponents of specific technologies. The outcome is too often much time wasted debating questions which are meaningless and impossible to answer in the abstract: like ‘are heat pumps better than gas? or wind better than nuclear?’. Such questions can only be answered in a defined context (i.e., for a specific geography and set of infrastructure and market regulations) and at a given moment in time.
Energy investment decisions will always entail significant uncertainty and risk, because a high rate of innovation means the only certainty is that tomorrow’s economics will not be the same as today’s. Some assets will thus be ‘stranded’ and looking back at decisions with the benefit of hindsight will find that if a different choice had been made a lower cost outcome would have resulted. The challenge then, is not to identify the best technologies to deploy in any kind of general sense, but to ensure that energy investment choices and decisions are made by those best placed to manage the unavoidable uncertainty and risks that all such decisions entail.
Two further points are increasingly relevant to many energy choices:
- Energy infrastructure choices are becoming more granular and local. This point has already been made in Section 3 and is the outcome of the reducing costs of storage and digital control technologies. Put another way, the proposition is that varying local energy infrastructure no longer necessarily means extra cost and risk to the national system.
- The challenge this creates is that it’s no longer economically optimal (or sensible) to think about a single national energy infrastructure. It’s becoming in everyone’s interest – especially the customers who pay for energy – to think about infrastructure choices more locally. This makes regional and local energy decision-making more challenging (because it’s no longer simply about what investments should be made in generation and demand-side assets given a fixed infrastructure – the infrastructure itself is now fluid and part of the process) but is more likely to result in better outcomes and match risk to reward.
- Energy investments (and their economics) are increasingly tied into wider (non-energy) infrastructure and policy decisions. Carbon pricing, carbon targets and environmental policy are the obvious examples of this at global, national and local level, but local waste, transport, and industrial strategies will also be critical factors determining the viability and attractiveness of energy projects, as will housing and spatial plans.
- This means that to manage the risks and uncertainty of energy investments effectively, decision- makers need to be able to take a broad range of interests and issues into account. This becomes very difficult (and can easily lose touch with political realities and voters) where decisions are taken at regional or national level – and which is why much spatial, waste and transport planning is done at local authority level.
Customer engagement in energy markets
While customers can occasionally get very engaged by energy technologies and energy investment and infrastructure choices in particular (for example, wind turbines, waste-to-energy plants or nuclear power) they are largely apathetic and disengaged when it comes to the energy market. Around 95% of customers of the larger suppliers are paying more than necessary for electricity and gas, despite the best efforts of Ofgem and others to persuade customers actively to shop around and switch suppliers regularlylx.
This is a significant problem for any effort to ‘do energy differently’, especially where such efforts assume benefits will be delivered by active competition. Markets simply don’t work if people ignore them and refuse to visit.
So, it’s essential that any strategy include some model for customer engagement and communication, particularly if benefits depend on customers making active and informed choices.
Narrow definitions of innovation
As discussed in Section 3, there are major opportunities for innovation and the emergence of new business models in energy (including potentially whole new industrial sectors, such as autonomous vehicles and connected homes). Facilitating the development of such models and such innovation is critical for the region to maximise both economic and environmental benefits. However, care needs to be taken not to constrain growth by taking too narrow an approach to innovation regionally.
A tendency to define innovation solely as commercialising new technologies emerging from university-led research, coupled with an innovation agenda largely set by existing (and typically larger) industrial interests, may result in too narrow an approach to innovation.
Both these aspects of innovation are, of course, fundamentally important and need to be supported. But in regional energy systems and to deliver the scale of ambition of the West Midlands, it’s also critically important to recognise the value of investment which is innovative in the sense of, for example:
-
new applications of existing technologies at a scale beyond anything previously attempted;
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new combinations of existing technologies in a systemic way, creating new business models and new customer outcomes;
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incremental development (including simple cost reductions) of existing technologies
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innovative market regulation and governance, creating incentives for investors and innovators to take significant commercial risks at scale;
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investment in energy infrastructure which may not be that innovative, but which unlocks
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whole new markets for low carbon energy technologies and systems and opportunities for economic development.
Innovations such as Tesla are (arguablylxi) far more likely to arise from this kind of innovation than innovation driven by leading edge research or existing automotive or energy interests.
Innovation focused entirely on business models and on facilitating activity is also critical, particularly in sectors such as domestic retrofit, for the reasons set out in Section 3. For example, installing insulation is not inherently innovative. However, guaranteeing the performance of this insulation is innovative, as is financing insulation through a new mechanism, whether this be local crowd funding of retrofit projects through bonds or debentures, or social impact bonds, equity release, or green mortgages. Building a library of common retrofit construction details and solutions to technical risks would also be innovative, as it would help upskill architects, and overcome some of the barriers to retrofit being rolled out to a high standard13. These types of innovation particularly need to be publicly driven and supported, because they are least likely to be driven by market forces and the private sector.
The innovation challenge in the energy sector (particularly energy infrastructure) is especially acute stemming from the combination of:
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the world currently emerging from a relatively long period (several working generations) when the whole energy sector has been relatively static and slow-moving, with very limited innovation;
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a one-size-fits-all approach to national energy infrastructure that was driven by the economics and technologies of the 20th century rather than the 21st;
- a long-standing cultural problem with UK innovation policy which places too much emphasis on the simplistic ‘linear’ model of innovationlxii.
Some progress has been made in recent years with the creation of the Catapults nationally, and in particular the Energy Systems Catapult in Birminghamlxiii, although there is still some way to go in recognising the need for (and value of) local variety and sensitivity in energy systems. The regional energy strategy is an opportunity to take a broader perspective on innovation.
Diversity of local ambitions
The West Midlands’ scale gives it economic weight and the ability to deliver substantial and ambitious schemes and policy objectives, to national as well as local benefit. It is, however, a diverse geography (see Section 2) and the workshop-style medium-size manufacturing of the Black Country has very different needs from, and offers different opportunities and challenges to, the concentration of automotive manufacturing in Coventry and Warwickshire (for example).
Similarly, the highly diverse and concentrated urban population and environment of Birmingham contrasts with the rural environment and town centres of Warwickshire, North Worcestershire and South Staffordshire. It isn’t at all clear that the same energy system will benefit all areas equally.
The challenge is to see this diversity as a strength and a virtue, in common with the people who live in the region (who often commute from rural towns to Birmingham, or vice-versa for leisure and shopping) and not to develop an energy strategy which either ignores or undermines the diversity of ambitions and loyalties this variety creates.
Complexity of political institutions and public sector capacity
The diverse economic geography of the region is reflected in a complex layering of political institutions which can appear somewhat impenetrable to outsiders, although in practice it generally works very well and makes sense to those involved.
The table below summarises the political structure of the region.
Body |
How many |
Broad roles |
Accountabilty |
|
West Midlands Combined Authority |
1 |
Transport; industrial strategy; housing and land; productivity and skills; strategic infrastructure |
Democratic and to constituent members |
|
Local Enterprise Partnerships |
3 |
Economic development (Innovation; authorities creativity; growth) |
Local authorities via supervisory board |
| Constituent Local Authorities | 7 | Democratic | |
| Non-constituent local authorities | 11 |
Deliver public services – fewer voting rights on WMCA; mix of |
Democratic |
As at the end of 2017, only five of the seven constituent local authorities retained specialist energy or sustainability officers. The LEPs and Combined Authority had no dedicated energy officers at all, although the boards of all three LEPs include individuals with energy expertise (reflecting the strength of the sector across the region). Several local authorities retain energy project managers and specialists on a consultancy basis when required (e.g., Birmingham City Council has been working with a specialist team for over a year on the setting up a retail energy company).
This limited resource is potentially a significant challenge, particularly to efficient and informed ongoing discussion of local needs14. However, it has facilitated a recognition at all levels that energy investment is an area which may well best and most efficiently be supported from the Combined Authority and driven the formation of the Energy Capital partnership for the region. Energy Capital has been well supported by the public and private sector.
BEIS have recognised public sector capacity issues in energy nationally and are funding the equivalent of one specialist energy post per LEP area for the next two years. This funding will be very helpful in supporting better dialogue and knowledge transfer, but will fall some way short of the resource necessary to deliver any meaningful strategy for the region with the scale and impact justified by the opportunities outlined in Section 3. The lack of alignment between regional hubs and political boundaries (i.e., governance) is unhelpful and clearly inefficient.
Existing industrial strengths
The West Midlands has historic strengths in several sectors, especially automotive and manufacturing. This is a weakness and risk, of course, as well as a major virtue.
Given the global consensus that new cross-sectoral business models are likely to emerge as the energy transition unfolds (and companies like Tesla and Amazon already exemplify this), it will be very important to the long-term economic success of the region that not only existing industrial strengths are reinforced through our energy strategy.
The regional approach must support new firms and start-ups with potential to grow, and the ‘silent majority’ of mid-sized manufacturing firmslxv who could grow substantially by redirecting their existing skills and competencies to new markets and opportunities opening worldwide.
A mismatch between regulatory system design and market opportunities
There are two separate and equally fundamental issues with energy market regulation from the perspective of a region seeking to develop a coherent and meaningful energy strategy to deliver local economic, social and environmental objectives. One is the complexity of the system, the other is a structural mismatch between regulation and where technical and economic opportunities lie.
Historic complexity
Over the last 40 years the UK has led the world in developing a market-based regulatory model for energy. This model was initially successful, but the past 15 years have seen a progressive return to government control and increasing criticism of the complexity and outcomes delivered for customers, which generally result in higher priceslxvi.
The desire of government to be involved in energy market regulation is understandable (and probably necessary) because energy has such a significant potential impact on economic and environmental outcomes at all levels – national, regional and individual. However, the consequence of recent UK history in this sector and the rather confused mix of ‘independent’ regulation ofprivatised companies and increasingly robust government intervention (e.g., the introduction of price capslxvii) has created a complex and opaque energy sector. This slowly stirring soup of regulations is virtually impenetrable to many insiderslxviii, let alone to local or regional authorities (or small and medium-sized businesses) wishing to innovate or develop coherent and ambitious strategies in this sector.
Structural mismatches
The current structure of UK energy markets is summarised in Figure 16 below. Since 2010, criticism has come from all sides of academic and political debate (for comprehensive and largely opposing academic critiques see Helmlxix, iGov (Mitchell)lxx).
The practical reality is that this makes it challenging to take an integrated, market-based approach to energy systems and energy infrastructure planning at regional level. This is because energy markets and energy infrastructure are primarily regulated, planned, and managed nationally, whereas transport, waste and spatial plans are primarily planned and regulated regionally and locally.
Successful modern distributed energy projects and economic opportunities associated with (for example) low carbon autonomous vehicles, smart connected homes, and optimised waste-to-energy systems, require integration of transport, waste, spatial, digital and energy strategies. They require local political and community consent and engagement. If energy systems investment is fundamentally regulated nationally while other key enablers of energy projects are controlled locally, progress will be limited.
This is not purely a regulatory and policy point. Regulation essentially specifies how returns on investment are allocated. If regions want or need to invest in substantial energy infrastructure to support their economic goals and local needs, they need to be able to offer investors returns on these investments. Constraining such returns within national regulatory frameworks inhibits and prevents this.
The essential argument in this strategy is that maximum economic, social and industrial benefit can be secured by optimising the energy system starting from inherently diverse and place-based
requirements and opportunities. Increasingly this means paying attention to distribution and generation infrastructure at a regional level (integrated with other regional infrastructure and industrial needs) in the context of an overarching national system which supports this.
The system is currently designed on the assumption that distribution and transmission infrastructure is essentially fixed, changes only slowly, and has little or no impact on competitiveness. It assumes that the only economically viable generation assets are national in scale. These assumptions were broadly true in 1970, 1980, and 1990 but from 2000 they became diminishingly true and no longer hold.
The present UK system therefore assumes that the only economic benefit and industrial advantage that the energy system can offer is through competition in retailing energy and in generating energy to supply a national system. In the 21st century, these assumptions are simply wrong15.