Comment by Ben Shafran, Head of Markets, Policy and Regulation, at Energy Systems Catapult.

Are you drowning in a sea of energy acronyms? Not sure if you can tell your NESO from your REMA, your ETS from your LAEP? Fear not – I’ve handpicked three Net Zero innovation stories and ditched the jargon.

Carbon Budget 7

The Climate Change Committee has published its advice to government on how the UK should decarbonise in the period 2038-42 (Carbon Budget 7) to keep us on the path to Net Zero. This is a colossal piece of analysis that the Committee conducts every five years and is then adopted by the UK government as our legally binding decarbonisation target for the period in question.

The big news is that the Committee thinks that achieving Net Zero by 2050 will be considerably cheaper than when it last reviewed the evidence in 2020: it forecasts a net cost (i.e. additional expenditure less avoided costs) of £108 billion – down from an estimate of £402 billion previously.

The savings mostly come from a forecast reduction in upfront capital expenditure required to decarbonise the economy – since low carbon technologies (wind and nuclear generation, electric vehicles, heat pumps) often have higher upfront costs but lower running costs than carbon-emitting alternatives.

Carbon Budget 7 targets an 87% reduction in emissions by 2040 compared to the baseline year of 1990. The focus during the 2038-42 period is on decarbonising surface transport and residential buildings – mainly through electrification. This is built on the assumption that electricity will be almost completely decarbonised by then.

To make this happen, the Committee’s recommendations include:

• Making electricity cheaper by removing policy levies from electricity bills to either taxes or gas bills (our work has demonstrated that “effective” carbon prices in the economy discourage electrification).
• Investing in electricity grid capacity, as this is a fundamental enabler for decarbonising buildings, industry and transport.
• Supporting households to install low-carbon heating, particularly by addressing the upfront costs of heat pumps (our Electrification of Heat project found that heat pumps can work effectively in every type of home in the UK).

Electricity distribution networks review

The National Infrastructure Commission (NIC) – a statutory body advising government on infrastructure strategy – has published a long-awaited report on how to create capacity in the local electricity system to enable decarbonisation. The messages from this report very much complement those of the Carbon Budget 7 advice.

Primarily, the NIC finds that it is likely that the local electricity networks will become increasingly constrained as households switch to electric vehicles and heat pumps. It estimates that £37 to £50 billion of load related expenditure could be required between today and 2050 to meet additional demand – representing a trebling of annual investment in electricity distribution compared to recent years.

The NIC echoes recent messages from Ofgem that it is preferable to invest ahead of need than to wait until demand shows up; this means moving away from a “flexibility first” approach. (In a recent submission to Ofgem we argue that flexibility can still play an important role in helping sequence grid reinforcements, so as not to lock consumers into elevated costs caused by supply chain constraints and high interest rates).

The NIC also highlighted the security of supply and resilience challenges that arise from the greater reliance on electrification – echoing our own work on system operability. It recommended that government and Ofgem launch a review of security of supply standards for electricity distribution networks – to be completed by 2028.

UK Emissions Trading Scheme

The UK Emissions Trading Scheme is the main policy tool for applying a carbon price to activities within its scope (electricity generation, domestic aviation, some industrial processes and, from 2028, waste).

It’s what is known as a cap-and-trade scheme because the government sets an overall cap on allowed emissions, but companies can trade their allowances up to the cap. Companies that find it cheaper to decarbonise their activities may sell their allowances to companies that cannot decarbonise as cheaply. In doing so, emissions are reduced across the economy in the least costly way (this is known as ‘allocative efficiency’).

From 2005 until 2021 the UK was part of the EU-wide Emissions Trading Scheme., The UK ETS was created because of our withdrawal from the EU and initially largely mirrored its European equivalent. The government is now consulting on continuing the scheme beyond its current end date of 2030. Doing so would offer businesses welcome clarity on the UK’s enduring commitment to decarbonise.

The government is mulling different lengths of extensions – between seven and 12 years – with an eye on better aligning the scheme with Carbon Budgets. The other question being explored is whether participants should be allowed to carry over any unused allowances beyond 2030. Energy Systems Catapult will be submitting our response to the government’s consultation, which runs until 9 April – watch this space.