The UK is sleepwalking into a big problem with its gas network

To decarbonise the UK, the long term use of gas for heating, including any potential for hydrogen, is limited. Getting off gas is now an obvious climate change and energy security necessity. Both the UK government and its adviser, the Climate Change Committee (CCC), have signaled the need for the gas network to be wound down.

It should be crunch time for the regulation of gas network infrastructure. With government due to make a decision on the future of the gas grid in 2026 and Ofgem now planning for the next price control period (to start in 2026), this is a critical juncture in UK energy network regulation.

But, to all appearances, it’s still business as usual for these heavily regulated parts of the UK energy system, which continue to have capital poured into them. This is exposing UK citizens to significant financial risk while bolstering gas network returns.

The system is risky for consumers

There are large financial liabilities associated with the gas grid, related to stranded assets and decommissioning costs. Yet little thought is being given to them or how they should be managed, apart for some work by Frontier Economics for the CCC seven years ago.

The UK’s gas distribution networks are privately owned and split across four companies. These are regulated by Ofgem to operate the networks and, where they are allowed, to invest in new or replacement assets. Assets in these networks are costed by Ofgem to give something called a ‘RAV’, or regulatory asset value, and networks get a financial return on this. Networks can also profit from their operations. Ofgem assumes a certain amount for running costs and if the networks do better, consumers and networks share the difference. This system hasn’t always worked in the best interests of consumers.

The current regulatory model assumes that gas network assets have long lives; assets are given a 45 year financial lifetime; ie gas network owners recoup the costs of their investments over a 45 year period.

As the customer base shrinks, costs will rise

And herein lies the first problem: If we’re going to move to low carbon heating by 2050 and, as seems to be increasingly clear, the gas network will only play a very small role at that point, there is a significant stranded asset problem. Even with ‘front-end loaded’ depreciation, we are still talking about multiple billions (perhaps £3 or £4 billion) of stranded assets in 2050. And that’s assuming all capital investment stops in 2026, which it won’t; the Iron Mains Risk Reduction Programme (the big yellow plastic pipes you see when roads are dug up) is expected to continue to 2032, so these assets won’t be paid off until 2077.

Compounding this issue is that, over time, the number of consumers attached to the network will decrease rapidly if climate targets are to be met. So gas network charges will increasingly fall on a smaller number of customers. Without mitigation, increasing transportation costs could lead to a gas disconnection network death spiral and major equity impacts, as those without the means to switch, end up trapped.

The second issue is about the decommissioning of the gas grid. For obvious safety reasons, leaving a pressurized network of pipes full of an explosive gas across the entire country would not be sensible. In the UK currently, as was the case for me, if you get rid of gas appliances and have your gas meter removed, eventually the local gas network operator will come and make the supply line safe. This can involve digging, cutting the service pipe and then capping it underground as close to the main as is possible. This comes at a cost, borne by the network, unless (bizarrely) you ask them to come and do it, in which case you pay. This strange process and cost allocation is currently being considered by the government but highlights the need to think about what happens to the gas grid in a much more co-ordinated way.

The government needs a plan to manage the risks

If all 23 million connected homes do eventually remove their gas meter, there is a big question about how such a programme should be funded and what needs to happen in practice. This is a big unknown but, as cost estimates suggest around £8 billion, clearly efforts should be made to understand the practical and financial implications. In any case, decommissioning is an uncosted liability, the costs of which will sit with UK energy consumers.

In a briefing, just published, I consider the options for government and the regulator to attempt to manage these risks. Each has upsides and downsides.

Under option 1, the government could maintain the current regulatory model, and Ofgem could shorten the depreciation timescales to reflect the net zero target, and also collect a levy to fund decommissioning. This would mean higher gas bills and probably very significant equity impacts.

Under option 2, Ofgem could regulate gas network companies to become clean heat providers, mandating a shift towards becoming heat network owners and operators. This would make use of existing skills and relationships but comes with risks around how to regulate such a complex transition, particularly when network companies have been unwilling to shift their business models and have lobbied heavily for continued gas use.

Under option 3, the government takes a much more active approach and, as Denmark has done, renationalises the networks, with the express goal of running them down. Such an approach would enable a more co-ordinated and planned exit from gas, but it would transfer all stranded asset risks and decommissioning costs to the government. Equity impacts could potentially be more actively managed.

All of these options require a significant change from business as usual and there is no obvious frontrunner. But business as usual does not seem able to run-down and decommission regulated infrastructure rapidly in response to major external pressures.

Alongside broader reforms needed for the heating sector, I recommend four government actions, none of which should be particularly controversial, considering what’s at play, and all of which reduce risks for consumers. These are: to improve understanding of what’s needed and the costs; for the Department for Energy Security and Net Zero, Ofgem and others to work together on a plan to allocate the high costs and risks associated with stranded gas assets and decommissioning; to consider whether the Iron Mains Risk Reduction Programme is value for money and intervene if not; and, finally, to ensure heating policy and planning across the country is properly co-ordinated with gas grid decommissioning.

This is a problem laden with consumer risk and significant equity implications. The sooner something is done, the more those risks and costs can be limited and the faster climate action will be.

The original version of this article appeared in Inside Track, the Green Alliance blog. 

Zestaw narzędzi do wdrożenia pomp ciepła globalnie i na masową skalę

Pompy ciepła to jedna z kluczowych technologii na drodze transformacji energetycznej, już niedługo stanie się najważniejszą technologią dla dekarbonizacji ogrzewnictwa. Obecnie zdecydowana większość ciepła do gospodarstw domowych jest dostarczana przez paliwa kopalne. W celu promowania i zachęcania do instalowania pomp ciepła na całym świecie, w ramach wspólnego projektu Regulatory Assistance Project, CLASP i Global Buildings Performance Network, opracowany został niniejszy poradnik w zakresie pomp ciepła, który zawiera zestaw narzędzi i porad dotyczących ich stosowania, przeznaczonych dla decydentów zainteresowanych promowaniem tej niezbędnej technologii.

Struktura niniejszego poradnika jest luźno oparta na strukturze greckiej świątyni, z fundamentem i filarami, wspierającymi szybko rozwijający się rynek pomp ciepła. Interaktywny zestaw narzędzi (zawierający klikalne linki) zawiera również krótkie filmy wideo, które przedstawiają kluczowe aspekty każdego istotnego elementu.

Niniejszy zestaw narzędzi stanowi syntezę różnych sposobów promowania wdrażania pomp ciepła oraz przewodnik po projektowaniu najlepszych pakietów polityk. Kompletny pakiet polityk musi uwzględniać fundament, ale także brać pod uwagę każdy filar. Przedstawiamy szczegóły, przykłady i potencjalne problemy oraz rozwiązania w ramach różnych omawianych elementów polityk.

Fundament tego zestawu narzędzi to potrzeba koordynacji i komunikacji wokół działań, strategii i polityk dotyczących pomp ciepła.

W filarze 1 rozważane są instrumenty ekonomiczne i rynkowe. Instrumenty te są zasadniczo związane z równoważeniem ekonomiki różnych technologii grzewczych w kierunku czystych opcji, takich jak pompy ciepła, tak, aby ich koszty w całym okresie użytkowania były niższe niż alternatywy oparte na paliwach kopalnych.

Filar 2 dotyczy wsparcia finansowego. W ramach tego filaru identyfikujemy trzy kluczowe elementy wsparcia finansowego dla pomp ciepła – dotacje i ulgi podatkowe, pożyczki oraz rozwiązania typu heat-as-a-service (ciepło jako usługa).

Filar 3 uwzględnia regulacje i standardy. Przyglądamy się kodeksom budowlanym i normom dotyczącym budynków, normom dotyczącym urządzeń oraz planowaniu i strefowaniu ogrzewania.

Aby zbudować skuteczny pakiet polityk dotyczących pomp ciepła, decydenci muszą wziąć pod uwagę tak fundament, jak również każdy z filarów, dostosować je do specyfiki lokalnej, wdrożyć oraz monitorować skuteczność ich funkcjonowania.

Pump up the volume: Heat pumps for a decarbonised future

The most powerful tool for rapidly decarbonising heating in buildings and homes is the humble heat pump. How powerful? The International Energy Agency’s recently released analysis estimates that potential global carbon dioxide emissions reductions from heat pumps can reach at least 500 million tonnes in 2030. This would be akin to eliminating the annual CO₂ emissions from all of the cars in Europe today.

Evidence from the IEA underscores the ‘why’ of switching to heat pumps while the Regulatory Assistance Project (RAP), CLASP and the Global Buildings Performance Network offer further insights on the ‘how.’ The three organisations collaborated to create a toolkit to help policymakers develop packages to drive the heat pump market and deployment of the technology at scale.

On 15 December 2022, the Electrification Academy welcomed the lead author of the IEA report, Yannick Monschauer, and two of the heat pump toolkit authors, Richard Lowes of RAP and Matt Malinowski from CLASP. They shared:

• Highlights and conclusions of the IEA study The future of heat pumps, including examination of barriers and solutions for heat pump deployment.
• The principles and tools in A policy toolkit for global mass heat pump deployment.
• Examples of actual policies and best practices for coordination.

We were delighted to have Caroline Haglund Stignor from RISE moderate the session.

A policy toolkit for global mass heat pump deployment

Heat pumps, a critical technology for clean energy systems, are poised to become the most important technology for heating decarbonisation. Currently, the vast majority of heat is provided by fossil fuels. In order to promote and encourage heat pump installations across the globe, the Regulatory Assistance Project, CLASP and the Global Buildings Performance Network have developed this heat pump policy toolkit, which provides a suite of tools, and advice on how to use them, for policymakers interested in promoting this critical technology.

The structure of the toolkit is loosely based on that of a Greek temple, with foundations and pillars, supporting a rapidly growing heat pump market. The interactive toolkit (which includes clickable links throughout) also features short videos that give an overview of each relevant element of the toolkit. These videos make up a short series which complements this document.

This toolkit works as a synthesis of policy approaches to heat pump deployment and a guide to designing the best packages of policies. As you’ll see in the toolkit (and in the graphic below), a complete policy package needs to consider foundational elements and must also take account of each pillar. We provide details, examples and potential issues, and solutions within the various policy elements discussed.

Foundational elements of this toolkit recognise the need for coordination and communication around heat pump policy efforts and strategies.

Pillar 1 considers economic and market-based instruments. These instruments are fundamentally associated with balancing the economics of heat use towards clean options, such as heat pumps, so that their lifetime costs are cheaper than fossil-based alternatives.

Pillar 2 considers financial support. Within this pillar, we identify three key elements of financial support for heat pumps — grants and tax rebates, loans and heat-as-a-service packages.

Pillar 3 considers regulations and standards. We look at buildings codes and standards, appliance standards and heat planning and zoning.

To build an effective heat pump policy package, policymakers must consider foundational elements as well as each of the pillars. And even within each pillar, combinations of elements may be appropriate.

The RAPPORT, Europe edition, September 2022

The clash with gas: Should it stay or should it go?

Europe’s stated goal of achieving a net-zero power system by 2050 is inherently replete with enormous opportunities and challenges. High energy prices and Russia’s invasion of Ukraine have now ratcheted up the urgent need for action to emergency levels. Policymakers are facing the challenge of a lifetime to secure the supply of energy and protect disadvantaged consumers while maintaining momentum towards long-term climate goals. The events of 2022 have made evident to many experts that the transition away from fossil gas will figure prominently in all of these objectives.

To support policymakers and the numerous stakeholders in planning for a deliberate reduction in the use of fossil gas in the coming years, RAP has developed five fundamental guiding principles. The principles are general in nature due to the breadth of this gas transition and the various policy instruments that governments will need to reform such a large part of our energy economy. In light of the current crises, the authors have also applied these best practices specifically to the European Commission’s proposed Hydrogen and Decarbonised Gas Market package and Hydrogen Strategy, as well as to the hydrogen strategies of selected Member States.

To achieve an efficient and cost-effective transition away from fossil gas, we offer policymakers the following recommendations:

A Clean Heat Standard for Massachusetts

The burning of fossil fuels for heat accounts for a significant portion of greenhouse gas emissions and burdens many families and businesses with high energy costs. Meeting climate and equity goals requires that we find effective and affordable pathways to rapidly revamp the thermal sector.

This policy brief — prepared as an appendix to the Massachusetts Clean Energy and Climate Plan for 2025 and 2030 — describes the concept of a new requirement on heating energy providers, which we call a clean heat standard. The paper explores the major design choices that would be necessary to implement this concept.

At the highest level, a clean heat standard is a credit-based performance standard that would be applied to suppliers of heating energy. In the Massachusetts context, that includes gas utilities and providers of heating oil and propane, and possibly electricity suppliers. These parties would be obligated to serve their customers with gradually increasing percentages of low- or zero-emissions heat, earning tradeable clean heat credits while sales of fossil fuels are phased down.

Just as a renewable portfolio standard requires electricity providers to replace coal- and gas-fired generation with wind, solar and other clean electricity generation, the clean heat standard would replace fuel oil, propane and fossil gas heat with weatherization, energy efficiency improvements, heat pumps, clean district energy and other verified low-carbon options.

The E3-India model: It’s come a long way

In 2016, the Regulatory Assistance Project approached Cambridge Econometrics about building a new macroeconomic modelling tool for India. The rationale for the model was simple: India needed to reduce its greenhouse gas emissions, but much of the policy to do so is set at the state level. A model that could identify the impacts of policies to boost state-level sustainable growth was therefore required.

Years later, the outputs of this work are presented in the book Economy-Wide Assessment of Regional Policies in India, edited by professor Kakali Mukhopadhyay. The book covers a range of topics relating to sustainable economic development in India, always with a focus on realistic (i.e., feasible) policy at the state level.

The model that was built came to be known as E3-India — “E3” for energy-environment-economy. It was developed by experts at Cambridge Econometrics, Professor Mukhopadhyay and former RAP colleagues Ranjit Bharvirkar and Surabhi Joshi. Without this collaboration, it is unlikely the model would have advanced to its present state.

The foundations of the model follow the Cambridge tradition, drawing on the demand-driven framework originally developed by Michal Kalecki and John Maynard Keynes. This approach provides several advantages over the more common equilibrium approach to modelling; it does not make assumptions about perfect information, rational behaviour or frictionless markets. In addition, it models labour markets, including involuntary unemployment — matters of particular importance to policymakers.

This demand-driven approach requires that behavioural parameters be informed by econometrics — that is, it requires, among other things, time-series historical data. With the model disaggregating India’s economy into both states and economic sectors, a substantial exercise in data collection and processing was required. Professor Mukhopadhyay led this herculean effort, yielding a tool that researchers today can download and use free of charge.

Another important feature of the model is its tight integration of energy consumption and greenhouse gas emissions within the wider economy. The model ensures consistency between physical and economic measures of energy consumption and prices — something that is critical for effectively assessing sustainability.

The power sector, which will play a crucial role in decarbonising India’s economy, is modelled in additional detail using an advanced framework developed by Jean-Francois Mercure. This allows the user to test policies such as feed-in tariffs, renewable subsidies and coal phaseouts, along with the standard energy and carbon tax policies that other models typically examine.

Each chapter of the book is dedicated to a different sector of the economy. A set of scenarios is used to explore different possible outcomes by implementing combinations of policies. The demand-driven nature of the model allows the analysis to start from a position in which the Indian economy has been set back by COVID-19; many of the scenarios look at ways to restore jobs and prosperity.

Eleven authors, experts in their respective fields, were involved in the production of the book. They put the E3 model to rigorous use, testing its capabilities and performance, and with it have revealed some important truths about the Indian economy and good news about its ability to transform itself into the sustainable, low-carbon powerhouse that it aspires to be.

The book is by no means the end of the E3-India project; in many ways, it is just the beginning. E3-India is a tool that policymakers can use for many years to come as they embark on the journey of promoting sustainable development. The model will continue to be updated. We encourage readers of the book to work with the model themselves, to challenge its conclusions and to examine other scenarios, all with the aim of developing public policies dedicated to improving the long-term welfare of Indian society and the environment. If India is to contribute to meeting global climate targets, much work remains to be done.

Where Do We Go From Here: Visions for a Clean Heat Standard

In a webinar discussion, panelists discussed efforts across the country to put in place clean heat standards or other mandates for reduction of emissions from thermal end uses.

Where Do We Go From Here: Visions for a Clean Heat Standard

The term “transition” implies moving away from one thing and toward something else. The energy transition in the United States has challenged utility regulators to ensure that the movement away from fossil-fuel-dominated resources, and the adoption of lower-carbon resources in their place, will not put at risk the economic benefits, security, and reliability associated with our current energy system.

As part of this transition, states across the country are exploring ways to lower the emissions associated with a particular energy demand: building heat. In a webinar discussion, panelists took a closer look at a variety of these efforts under way. Policies adopted or being considered by Northeast and Western states illustrate how cleaner heat does not need to be an “either/or” proposition, but instead can provide everyone — suppliers, consumers, and grid operators — with choices and a path toward a lower-carbon future.