Regional Energy Strategy Plan - November 2018

Anticipated projects and pipeline - who picks the winners (and losers)?

There are over £490M of commercially sensible innovative energy infrastructure projects in the proposed pilot EIZs alonelxxvi and at least the same scale of opportunity again across the wider region (Appendix I – Sub-regional mapping reports). In total, the analysis in Section 3 indicates that more than £15 billion of investment will be needed as a baseline scenario in energy infrastructure across the three LEPs between now and 2030, plus a further £74bn in energy-dependent technologies such as cars (£32 billionlxxvii) and buildings (£42 billion) over the next 12 years.

The task of this strategy is clearly to influence these investment flows to ensure regional strategic targets are met, but given the challenges set out in Section 4, who is best placed to make the key investment choices is a moot point.

A fundamental challenge in the energy sector is that who picks the winning and losing technologies is not a simple question to answer. Individual customers select energy suppliers and choose between makes of car (creating what looks like competitive markets). However, the costs of delivering the energy to the customer’s home or of driving the car are largely determined by local infrastructure, and the investment decisions which shaped this have been taken over decades by national and local stakeholders, including government and private companies18.

Similarly, experts and innovators may be convinced a new energy technology, such as a type of fuel cell, is bound to succeed in the future. But if customers don’t want it and the local infrastructure asset base doesn’t support it economically, it probably isn’t going to succeed.

So, the answer to ‘who picks the winners’ in energy is that it’s not the market, nor the government, or experts or innovators, but a complex combination of all of these. An effective regional strategy (and indeed market design and national system) needs to recognise and work with this reality.

Currently, infrastructure technology winners and losers are chosen by network operators with regional monopolies regulated nationally, broadly on the assumption that not a lot is fundamentally going to change: a one-size fits all system is the only economic option. Thus, who picks winners and losers doesn’t really matter. As previously discussed, almost everyone in the energy sector recognises these assumptions are now outdated, and the most economically competitive future systems will be more sensitive to local opportunities and needs (i.e., driven by local markets).

A more locally sensitive process for making energy infrastructure choices and investment decisions is therefore required.

This strategy responds to this challenge in three ways.

• It creates a framework through Energy Innovation Zones for localities to act as intelligent and strategic customers (i.e., procurement and investment bodies) for future energy infrastructure and asset investments. EIZ Partnership Boards will comprise stakeholders relevant to the local area (often including academic experts and distribution network operators) and controlled by the local authority which represents the long-term democratically determined interests of the area.
• It provides support for the creation and operation of EIZs through Energy Capital, which itself provides a gateway to wider support (such as BEIS’ Energy Hubs). Energy Capital will help fill gaps in expertise where necessary; it will develop large-scale investment funds; and provide access to regulatory and specialist legal advice and support where this is necessary and helpful (this will be provided to local authorities as well as EIZs where required). Energy Capital will ensure regional investment and activity in the energy sector continues to conform to national market regulations and policy.
• It sets out measurable, focused, and ambitious targets to prioritise activity and ensure national and regional economic needs are reflected in EIZ and local authority objectives.

What the strategy does not do is tell localities which technologies or projects to invest in or which infrastructure choices will be best for them.

Energy Innovation Zones

Energy Innovation Zones provide a flexible framework for focused energy infrastructure investment meeting local community needs. They are mechanisms for risk-managed transition to an appropriate energy infrastructure for the future. EIZs are defined areas operating with specified flexes in energy and planning regulations to encourage competitive innovation in energy infrastructure systems and meet local needs. The defined geography and local governance of an EIZ enables new energy infrastructure to be delivered integrated with transport, digital, and economic development plans and in innovative ways responsive to local needs that is simply not possible through existing national energy governance structures.

Discussions to develop an appropriate framework for EIZs have been taken forward through a Regional Energy Policy Commissionlxxviii, chaired by Sir David King and jointly funded by the Universities of Birmingham, Warwick and the Energy Systems Catapult. The Policy Commission is sponsored by the WMCA and Mayor and supported by BEIS, Ofgem, and national and local energy system stakeholders.

Appendix II – Pilot Energy Innovation Zones and Investment Cases provides overviews of each of the four pilot zones, while Appendix I – Sub-regional mapping reports summarises specific project opportunities (or references to existing sub-regional project pipelines) within these zones and beyond. The Arup report Business Cases for Energy Innovation Zones in the West Midlandslxxix sets out a range of infrastructure and project investment options for each EIZ from a baseline case (£270M investment across the four zones) to a more innovative case (£490M investment across the four zones). This investment will generate circa £200M GVA improvements by 2030 towards the overall £1 billion strategic target set out earlier in this strategy.

Wider initiatives, including cluster development and business support

The four pilot EIZs are only the start. The remaining £800M of targeted GVA benefit will be delivered through a range of locally led interventions, including identification and development of further EIZs and building on the framework set out in the Energy as an Enabler report recently published by the Black Country LEPlxxx.

That report identifies four areas of opportunity (see Figure 18 and Table 1 (Section 2)) and indicative GVA benefits of £420-£800M through a variety of initiatives including:

• Additional Energy Innovation Zones.

• Strategic infrastructure support for accelerated new market development for locally sourced products such as electric vehicles and smart connected and low carbon housing.

• Seeking to establish a legacy bank to cover sunk costs of stranded and legacy energy infrastructure assets and using this to reduce energy costs for innovative and competitive manufacturers.

• Energy efficiency programmes for manufacturing and residential sectors.

• Simplifying access and improving the transparency of energy markets for business customers.

• More rigorous and targeted new build housing energy efficiency standards.

• Large-scale retrofit programmes for fuel poor households and energy-inefficient housing.

These programmes will need to be developed through appropriate partnerships, for example with EEF (formerly Engineering Employers’ Federation), West Midlands Housing Officers Group, the West Midlands Innovation Alliance (especially the Innovative Low Carbon Working Group) and the Sustainable Housing Action Partnership. The energy strategy will work with the Growth Hub and LEPs, and through existing working groups wherever possible.

Low carbon and energy technologies are identified as a strategic sector within the regional industrial strategy (Figure 12). There are a range of cluster support activities underway and about to be launched, for example supported by Aston Universitylxxxi, Birmingham Universitylxxxii and Climate KIClxxxiii (Figure 19). Energy Capital will support these initiatives through a dedicated working group, among which is Climate KIC that is about to start a three-year project to link the cluster development in Birmingham with best practice in London, Edinburgh, Valencia and Frankfurt.

Roles and responsibilities

EIZs provide a framework for local authorities to control and lead local energy investment activity within their areas, while establishing a mechanism which enables them to manage risks and to support appropriate partnerships and expertise alongside and distinct from their existing organisations. The EIZ structure as set out in the Regional Energy Policy Commission reportlxxxiv is entirely compatible with the existence of local retail energy companies where Councils are considering this (for example in Birmingham and Wolverhampton) as these will generally focus on trading within the current UK energy market structure, while EIZ partnership boards will be focused on infrastructure investment.

Formally the proposed division of responsibilities for energy is set out in the table below.

Body	Responsibility	Accountable to
EIZ partnership board	Energy infrastructure investment and strategic planning within its zone Alignment with local plans	Relevant local authority(IES)
Energy capital	EIZ establishment and monitoring (where regulated powers devolved) Funding Delivery of regional energy strategy (i.e., specified targets) Strategic regional energy planning, where appropriate (e.g., liaison with network operators and national regulator)	WMCA (SEPlxxxv Board)
Local Authorities	Effective delivery of public services, including local energy infrastructure Publicly-owned retail energy companies where applicable	Electorate
LEPS	Economic development within strategic sectors, including energy	Members
WMCA	Governance of Energy Capital Devolved powers over energy as agreed with Whitehall	Mayor and constituent members

 

Funding, governance and resourcing

Energy Capital is accountable to the Mayor of the West Midlands through the WMCA and SEP Strategic Economic Plan) Board. It is a partnership board consisting of key stakeholders established to ensure effective delivery of the aims of this regional energy strategy in a way that creates an efficient model for future energy systems governance across the UK19.

Energy Capital will be supported by a small executive, initially funded by partners and located in the WMCA. Over 18 months we would expect this team to develop to encompass similar responsibilities and capacity to strategic energy teams in other combined authorities, such as the GLA (which has 25 FTE officers plus two contracted technical support teams and an annual commissioning budget of around £10M on top of this). A preliminary estimate of the capacity of such a team for the West Midlands would be around 10-15FTE with an annual operating and commissioning budget of around £3-£5M. This will need to be detailed and justified as part of the interim executive role.

The four areas of responsibility outlined in the table above reflect two fundamental roles:

• To provide democratic governance and legitimacy to strategic regional energy infrastructure planning and major investment and cost allocation decisions. These decisions have a significant impact on the viability of the local industrial strategy, future economic prosperity of the region, and on domestic energy bills. They often require liaison with local authorities and national energy system stakeholders such as network operators, the regulator and major investors.

• To deliver the agreed regional energy strategy using the framework provided by the EIZs and working groups, facilitating investment and infrastructure development through identification, development, funding, support and supervision of designated EIZs.

The scope of the team is thus likely to cover as a minimum distributed energy infrastructure, energy efficiency including fuel poverty (housing and non-domestic buildings) strategic investment projects, regional energy data, energy policy and regional energy market regulation.

The Energy Capital Board will provisionally be constituted as follows:

• Chair (from membership)

• Infrastructure providers (4)

• Cadent

• Western Power Distribution

• Customers (6)

• Black Country Housing Group (housing)

• Climate KIC (environment) Engie

• EEF (manufacturers)

• JLR (manufacturer)

• Severn Trent Water

• Local authorities and EIZs (7)

• 1 representative nominated by each LEP

• 1 representative nominated by local authorities per LEP area

• 1 representative nominated by non-LEP WMCA local authorities

• Universities/Innovation (7)

• 1 representative nominated by each contributing university

• Energy Systems Catapult

• National government and stakeholders

• BEIS

• Ofgem

• Sustainable Energy Association

• National Grid

The model and approach is akin to a LEP board but specific to the energy sector.

Relationship to other regions

The West Midlands is already collaborating internationally in energy through Climate KIC – particularly with Edinburgh, London, Valencia and Frankfurt – and various university partnerships with overseas institutions. While developing this strategy Energy Capital has actively engaged and exchanged notes with Cornwall and West of England devolved authorities as well as the GLA (all of which have similar political structures and ambitions or experiences in local energy) and intends to maintain and expand this openness and willingness to share best practice and take it through into the strategy delivery phase.

Energy Capital welcomes the new regional energy hubs being established by BEIS and looks forward to supporting the staff allocated to the West Midlands. This region is part of the Midlands Engine and envisage this being helpful, for example in contexts like MIPIMlxxxvi (where external bodies – typically with little familiarity with UK regional geography – find it easier to relate to the various economic regions within the Midlands collectively) provided it doesn’t dilute the focus and efficiency with which we can deliver.

One of the recommendations of the Regional Energy Policy Commission is that the Energy Systems Catapult act as a conduit for transfer of best practices around innovation (which is not just what this strategy is about) so it’s very helpful the Catapult is based in Birmingham. The strategy proposes the Catapult is invited to become a continuing partner in Energy Capital and represented on the Board on this basis.