Who cares about climate change?

https://www.linkedin.com/pulse/who-cares-climate-change-maxine-frerk/

My Christmas was rather spoiled by reading Ofgem’s RIIO2 sector-specific proposals – not just the volume of material (which was significant) but the strong sense that for the most part Ofgem don’t care about climate change.

Last year, Sustainability First, with my input, put together a proposal for a low carbon incentive for RIIO2 to ensure a stronger focus on the critical issue of reducing greenhouse gases. At the roundtable we held there was strong support for the idea even if there were some differences in view on the detail of implementation. It was acknowledged by Citizens Advice that climate change was increasingly seen by consumers as a crucial issue and there was a consensus that the RIIO focus on outputs should include incentives for the networks to be proactive in playing their part.

We thought we were making progress with our idea, or variants of it, discussed in the various RIIO working groups but in Ofgem’s latest proposals there is a strong sense – in particular on gas distribution – that Ofgem is actually going backwards despite the growing evidence from the IPCC and elsewhere on the urgency of the issues around climate change.

For electricity transmission there are welcome proposals for an annual environmental impact report and, in gas and electricity transmission, for environmental impact to be one of the factors considered in assessing the quality of the business plans (although that is not reflected in the main framework document on the business plan incentive raising questions about how significant a factor it will be). Disappointingly Ofgem propose to drop the current environmental discretionary reward on electricity transmission. While we acknowledged the incentive was flawed it did provide a “put your money where your mouth is” signal about the importance attached to these issues and we had suggested ways to improve it and apply it across sectors.

On the positive front there is acknowledgment – in both electricity and gas transmission - that greater transparency and consistency across sectors are important to sharpen the reputational incentives that exist, including the business carbon footprint. This was one of our messages. Reputational incentives only work if the outcomes are accessible to those who have an interest in what happens so it actually impacts the company’s reputation.

On gas distribution nothing like this is proposed although there is a question musing as to whether something like what is proposed for ET and GT would be appropriate for gas distribution! One of the criticisms we made of the RIIO1 arrangements was that there was a patchwork of different incentives which reduced their reputational impact. Anecdotally we were told this largely reflected the personal inclinations of the different policy teams at the time more than any real differences between the sectors. It seems that problem persists.

But what is really depressing is that Ofgem are actually proposing removing all the incentives that currently exist for GDNs to play a role in supporting decarbonisation (and wider environmental action).

They are proposing to remove the discretionary reward scheme which covered social and environmental activity to replace it with a package purely focussed on vulnerability.

They are proposing to radically limit or remove the shrinkage allowance despite the fact that (as they note) shrinkage – ie predominantly gas leakage – accounts for 95% of the GDNs’ carbon footprint. Their concern is that the baseline allowance includes the costs of replacing iron mains with PVC pipes which contributes to (but isn’t the only factor determining) leakage reduction. The models used to calculate the incentive are meant to take account of that but Ofgem views it as all a bit difficult so is planning to ditch the incentive. Ofgem do not even accurately describe the incentive which actually comprises two separate elements – a shrinkage incentive (covering all elements of shrinkage and reflecting the costs of the lost gas that customers would otherwise have to pay for) and an environmental emissions incentive (which only covers leakage and reflects the cost of carbon). Given that methane is more damaging than carbon dioxide in terms of global warming effect (although it disperses much more quickly) this is a vital area where Ofgem should be looking to push for continued improvement. In Gas Transmission the importance is acknowledged and the proposal is to retain the incentive.

Moving on, Ofgem are then proposing to drop the requirement for GDNs to produce a business carbon footprint report on the grounds that leakage accounts for 95% of their carbon footprint suggesting the rest is immaterial. This despite the fact that in GT and ET the value of a consistent cross sector measure is noted (and is key to strengthening the reputational impact).

Ofgem are also dropping the idea of biomethane connections being an output that the GDNs should be working to deliver (albeit previously only a reputational incentive). This despite the clear direction from the Climate Change Committee that increasing biomethane injection (upto 5% of demand) through to 2030 is essential for meeting carbon budgets.

They reject the idea of GDNs playing any role in energy efficiency (which makes sense for major programmes but could have been allowed as an alternative to reinforcement for example). They reject the idea of facilitating CNG for heavy transport (while being happy to look at how DNOs need to evolve to cope with increased EV take-up).

What Ofgem have set out under the environmental heading for the GDNs is action to support the energy system transition and to deal with the uncertainty around the future of heat but there is nothing new in what they are proposing. If there are low or no regrets projects they can be included in baseline expenditure (which they always could have been). Innovation projects can be funded through the innovation funding mechanism (which they always could have been). And there will be re-openers for if / when there are major government policy changes (which is a no brainer – and implicit in any regulatory settlement). None of these create incentives for companies to act in this space they just mean they won’t be out of pocket if they do.

The interplay with government seems to be the critical factor here. Ofgem (or at least the RIIO GDN team) seem to see it as government’s job to worry about climate change. That is the reason they give for ditching any outputs around biomethane connections (or doing anything on energy efficiency or gas in transport). And everything seems to hinge around waiting for government to decide on future heat policy (albeit there is an acknowledgment this is broader than just central government).

But that misses the point that Ofgem’s statutory duties explicitly give it a role in this space. It has a sustainability duty and a duty to have regard to the interests of future consumers. But most fundamentally in its principal objective to protect the interests of consumers those interests are defined as including their interests in the reduction of greenhouse gases. Ofgem has a statutory duty to care about climate change which its RIIO2 proposals do not deliver against.

Of course major policy decisions in this space are still for government to determine. It’s the same with vulnerability. Ofgem is clear that major re-distributional decisions are for government but it still puts pressure on the companies to do as much as they can to support vulnerable customers. The same model can and should apply to de-carbonisation. Significant subsidies are clearly a matter for government but the companies should be under pressure to do all they can cost-effectively to reduce carbon now as well as to facilitate the transition. Every ton of carbon that is emitted over the RIIO2 period will stay in the atmosphere for hundreds if not thousands of years. Every ton matters.

Ofgem urgently needs to review its stance on environmental issues given changing consumer attitudes and the latest scientific evidence. It has a statutory duty to do so.