Supercharging the Net Zero Economy – Recommendations for the First 30 Days in Office.
The Importance of Net Zero for all parties
Net Zero and the environment didn’t feature as heavily as I would have liked in the election commentary or debates. But in my view, it was a deciding factor in the loss of votes within the Conservative party. Among the many miscalculations, Sunak’s biggest miscalculation in my view was on Net Zero. Rolling back Net Zero initiatives without a credible alternative for growth and investment ultimately led to several consequences:
But now Labour have won, there is significant expectation around what they must now do. Despite its majority, Labour’s cabinet has a lot to do to earn the trust of the electorate and demonstrate that they can make meaningful improvements to the lives of normal people. In particular there is a need to rapidly stimulate economic growth to make wider investment and spending more viable. Fortunately, their majority in the House of Commons provides them with both the platform and the opportunity to achieve this.
But what should they do? How can they achieve growth when the public finances are so challenged?
This blog sets out several actions they can take within the first 30 days.
Because of the state of public finances, we have focused on ideas that either cost nothing or are negligible in terms of public expenditure but could deliver significant impacts to supercharge the Net Zero economy. These actions include catalysing business and private sector investment, fast-tracking essential projects, and reducing energy costs while improving energy security to maximize benefits for ordinary people as quickly as possible.
So here’s what I would do in the first 30-days to supercharge the net zero economy.
Provide Clear Market Signals
A fundamental barrier to progressing Net Zero investment has been the stop-start nature of policy, which has historically created uncertainty and deterred investment. To supercharge the Net Zero economy, Labour must establish a stable and supportive policy backdrop. This means unequivocally affirming that the era of uncertainty is over. By clearly articulating a long-term commitment to Net Zero and bold actions, as set out in this blog, Labour can create the confidence necessary for businesses and investors to plan and invest in green technology and infrastructure. A steadfast adherence to this vision will foster an environment where innovation and investment in net zero can thrive. This vision needs to be set out immediately.
The first action to supercharge Net Zero investment is to accelerate energy market reform. One of the key things we need to do as quickly as possible is to disconnect the price of electricity from the price of gas and recalibrate charges so that the cost of decarbonisation falls on those that pollute, not those that are leading the change.
Allowing the cost savings from renewable energy to flow directly to end consumers is the single most important action we can take to stimulate investment. Once the cost benefits are clear, the breadth of support for Net Zero will be expanded overnight. This will drive end demand for renewable energy and accelerate private sector investment. This simple change will transform the business model for electrification, making the case for technologies like heat pumps, electric vehicles, freight, and industrial decarbonization obvious and unlock the flow of vast amounts of private capital.
For more ideas about how to improve the economics see here.
One of the significant challenges that local authorities face is the lack of clarity regarding their role in achieving Net Zero. While various documents have highlighted the benefits of “place-based” approaches, many officers and members remain uncertain about their specific responsibilities due to the absence of statutory obligations. This ambiguity has resulted in a “postcode lottery” of Net Zero approaches, with even established Net Zero teams often struggling to secure wider necessary support within their organisations.
To supercharge Net Zero delivery, Labour must eliminate this uncertainty by clearly defining the role of local government. Local authorities may argue that they cannot assume new statutory roles without additional funding, but this should not be an insurmountable challenge—the costs for the required capacity-building are negligible. Moreover, with broader liberalisation on borrowing (see later), the economic payback will be substantial.
Conflicting messages around hydrogen are holding back both consumer, business and investor demand in key areas. Labour must end the confusion. Clear, consistent policies and communication about hydrogen's applications, ruling out use in heating for example, is essential for encouraging adoption of both hydrogen (where it should be supported) and other technologies (in areas where it competes).
Unlock Borrowing to Enable Investment
Throughout the election, Labour have been keen to promote themselves as fiscally responsible. This means they have committed to not borrowing to fund revenue expenditure and to having debt fall in relation to the economy by the end of the parliament. Concerns over being perceived as fiscally irresponsible led Labour to roll back their stated aims around GB Energy. However, there is nothing in the rules that prevents borrowing specifically to invest in Net Zero. Given the complexity of fiscal rules, avoiding the debate during the election period was the right strategy. But now, Labour needs to be clear on how it will deliver growth in the economy—this is critical if we are to get debt falling as a share of the economy by Year 5, which will ultimately require borrowing to invest.
To explain further, there is an important distinction between borrowing to fund expenditure and borrowing to invest. If there is anything that characterises Sunakism, it is the complete unwillingness to invest in anything. Labour need to change that. Government borrowing should be used where it is clear that it is supported by productive assets with ring-fenced returns. Demand for energy is not going away, and energy projects have tangible returns. Whether via SPVs, guarantees, or simply direct borrowing, the Labour government needs to unconstrain productive Net Zero investment by enabling ring-fenced borrowing and setting out clearly how this will be assessed and managed. With the right approach in my view the markets will reward them, even if absolute borrowing goes up.
Local government also has enormous capacity to originate projects and mobilise investment, but they need immediate powers to take a more active and market-making role to supercharge Net Zero. After 14 years of constrained finances and the removal of local powers, borrowing by local government is significantly challenged. Immediate flexibility, incentives, and guidance on local borrowing for productive Net Zero projects would enable areas to benefit from some of the cheapest capital available, powered by existing teams of highly passionate officers and local politicians ready to respond to the Net Zero challenge. Supporting local capacity would supercharge investment activity across the UK, enabling all regions to take greater control and deliver immediate benefits to their communities.
The liberalisation of investment into Net Zero could go even further by enabling the Bank of England to provide better support for productive long-term investments. Using a single interest rate to control the entire economy is an incredibly blunt tool. Consider the cost of living crisis faced during the previous parliament. Under the current system, the Bank of England raised interest rates to subdue demand, adding further costs to households as energy bills rose. Worse still, this approach made it less attractive to invest in the very projects necessary to reverse energy price inflation and eliminate it over the long term (renewable energy). Similarly, I have long been frustrated by the lack of demand for Green Mortgages—this is yet another symptom of the current approach to setting interest rates. The current benefit of a Green Mortgage compared to a traditional mortgage is simply not worth the paperwork.
Allowing the Bank of England to set two separate interest rates (one for the main economy and one for the green economy) could further supercharge investment in green assets, while also stimulating a whole new class of financial products, catalysing one of the UK’s other major industries: finance.
If you think this is an implausible idea, read more about it here.
Unlock Wider Investment into Net Zero
Public sector pension funds manage a vast pool of assets, investing across diverse portfolios that encompass multiple asset classes. They already allocate investments to infrastructure, and many local funds have mandates allowing them to invest up to 5% of their portfolios in local projects. By combining local assets and infrastructure mandates, there is potential for pension funds to invest between 15% and 20% of their assets into UK-based Net Zero infrastructure. This could significantly boost the sector while facilitating broader benefits from UK projects. Any liberalisation of these investment rules would likely require clear guidance for project originators and developers regarding risk and return profiles expected by asset class, as well as streamlined pathways for local UK projects to reach investment committees. But simple steps would enables projects and pension funds to be brought much closer together.
To truly transform the economy, government investments and decision-making processes must align clearly with the delivery of Net Zero. Reviewing how Net Zero is integrated into business cases is crucial to fully understanding the long-term benefits and costs of public sector investment decisions. Currently, there are instances where investments following traditional green book rules may lead to outcomes not aligned with Net Zero, or may fail to account for the complete costs of achieving Net Zero. A review of the green book would ensure that all expenditures are aligned with Net Zero objectives and promote broader industry proficiency in aligning decision-making with Net Zero considerations.
Local government in England spends approximately ￡122 billion annually, a substantial portion of which is procured from private sector providers. This figure does not even begin to account for wider expenditure by national government or devolved nations. Consequently, once it is all added up, the public sector wields significant influence over the private sector and its investment practices through its procurement strategies.
To decarbonise Scope 3 emissions, the public sector must collectively address emissions throughout the supply chain in due course. Labour should therefore expedite this process and mitigate the duplication of efforts among multiple authorities by establishing clear guidance for public sector procurement officers. They should also set out clear signals and timelines for the tightening of environmental standards in contracts, so that private sector suppliers can plan their own transitions. Such leadership could also provide guidance to large private sector organisations who are also aiming to decarbonise their supply chains.
Make it Easier to Deliver Net Zero Projects
In 2015, the government introduced requirements so that onshore wind farms could be built only where a proposal was located in a suitable area as set out in a development plan and had the backing of the local community. The law was further amended in 2016 to mandate that all decisions on onshore wind farms, regardless of size, be made by Local Planning Authorities (LPAs). Since that time, only 21 wind projects have been approved, comprising a total of 48 turbines and delivering only 62 megawatts (MW) of capacity. The ambiguity pertaining to “backing of the local community” is seen as being pivotal to this. In some instances, for example, councils have rejected planning applications from developers of onshore wind due to the objection of just a single member of the public.
Truly lifting the de facto ban on onshore wind and making it harder to refuse planning for renewable generation more generally, would provide a significant catalyse to the sector as this is an area where the private sector is already primed to invest.? Fortunately, Ed Miliband has previously stated that lifting the ban on onshore wind would be one of his first acts if he was made energy secretary. The faster the better.
One of the key challenges in investing in renewable generation is grid constraints. Access to high-quality data on the electrical grid is something of a postcode lottery and depends heavily on which Distribution Network Operator (DNO) area you are in. It is often difficult to ascertain where and when grid investments are planned and their anticipated impacts. Standardised national grid data is crucial for facilitating the transition to net zero. Similarly, transparency regarding investment locations and the criteria DNOs use to include proposed investments in their business plans is essential for a well-functioning sector.
Labour should promptly establish standardised data sharing protocols for DNOs to ensure clarity, accessibility, and transparency of this information to potential investors and developers. This initiative would greatly accelerate investment and foster collaboration.
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A further challenge in many decarbonisation projects is the upfront cost of analysis and feasibility work required to make a project commercially deliverable or investment-ready. This development work can be risky, particularly where technologies or sites are complex and planning approval is uncertain. There is a critical need for mechanisms to mitigate this upfront cost and enable more projects to progress.
The Labour government should immediately explore potential financial products to address this gap—for instance, development grants that convert to equity or debt once projects reach a certain level of development maturity. Previous government schemes, such as the Green Heat Network Fund, should provide sufficient data to assess the viability of such products and the returns the government would require for the scheme to be cost-neutral, initially focusing on specific technologies. Developing a product that can accelerate the initiation of net zero projects could significantly boost the sector and potentially generate returns for the government through participation in projects.
There is also benefit in immediately consulting with leading projects and programmes (such as the Welsh government’s LAEP programme, UKRI’s Net Zero Living Programme, DESNZ’s Accelerator programme and other whole-system projects such as Glasgow’s) to identify shovel-ready opportunities that could be fast-tracked through such development capital vehicles.
Catalyse Investment in Net Zero Technologies
Now, it was difficult deciding whether to include this action on this list or not. Personally, and professionally, I have lots of friends at the Catapults and based on the work that we do, we have multiple touch points with them. However, it is impossible to undertake an honest appraisal of the current landscape for innovation and investment in the UK without discussing their role and considering whether they deliver sufficient value in their current form.
The original intention of the Catapults was to act as a bridge between academia, industry, investors and new markets to accelerate the rate at which technology is pulled through from early-stage development to commercial application. While they may argue that this is what they do, in my view there are other, more focused models within the private sector (e.g. IP Group, Entrepreneur First etc.) where it is much easier to point to tangible financial success, direct business investment and growth, and impact on the UK economy. The Catapults collectively consume a considerable annual core budget but also compete with the private sector for wider R&D funding (where their activities are funded at 100% compared to the private sector, where match funding is required). They have always been challenged with a conflicting mandate through which they are both expected to help the private sector, while also being tasked with generating revenue. This conflict naturally leads them to compete with the company’s they’re tasked with helping. Further, because they are perceived to be “government endorsed”, the competition is also skewed in their favour.
This lack of clarity and inherent conflict makes it difficult for the Catapults to operate, difficult for the private sector to work with them and ultimately holds back what they can achieve.
So what should Labour do? In my view, Catapults should be stripped back to their original function and restructured so that they operate more like early-stage investors. We desperately need highly-focused, highly-incentivised, highly-skilled and experienced teams tasked with extracting the best fundamental ideas from universities and turning them into viable businesses that can transform the vibrancy of the UK’s economy while delivering increased impact. An immediate review, focusing on genuine economic outcomes could transform the country's ability to create “unicorns” and deliver the step-change in new business growth we need to become a world leader in the Net Zero economy.
In April 2022 the Conservative government published the British Energy Security Strategy, which set an ambition to deploy up to 50 gigawatts of offshore wind capacity by 2030, of which 5 gigawatts earmarked to come from floating offshore wind (FLOW). However, a number of challenges are holding back the pace of development, confidence in the investment landscape and the port infrastructure necessary for FLOW. FLOW has been identified as having the potential to generate 29,000 jobs and ￡43.5 billion in GVA for the UK by 2050, but despite the UK having existing projects in Scotland, international competition, attractiveness of other markets, domestic delays and uncertainty around the attractiveness of support within the CfD regime mean there are real concerns as to whether the UK will seize a leadership position.
An immediate review of the current status, challenges, port infrastructure and CfD support should be launched to ensure there is a clear plan to make the UK the global leader in this technology.
Another sector we have routinely failed to invest in is tidal. Tidal lagoons were a key part of David Cameron’s National Infrastructure Plan (backed then by Amber Rudd) and supported by an independent review by Tory MP Charles Hendry in 2017. The Hendry review stated:
“The aim now is that we should move to secure the pathfinder project as swiftly as possible, so the learning opportunities it offers can be maximised.”
However, in 2018, plans to build the world's first tidal power lagoon were thrown out by the same Tory government.
It is clearly not easy to make a judgement without a detailed and up-to-date review of costs, but given the potential opportunity tidal lagoons present, the high levels of support I generally experience from stakeholders, and the ongoing need to invest in continuous baseloads as we transition to renewable energy, I think it is highly-worthwhile getting tidal lagoons back on the agenda with an up-to-date review, in particular critically re-evaluating the evidence upon which Greg Clark made his infamous decision.
Align Transport Investment with Net Zero
Transport is another area where there are a huge number of potential costless quick-wins. Representing 26% of the UK’s emissions, transport is often perceived as a challenging area to address. But it is also one where significant investment could be unlocked, and better outcomes for travellers delivered, with the right policies. The following are just a few of the immediate opportunities to supercharge investment into a decarbonised and functional transport system.
Quantifiable Carbon Reduction (QCR) guidance for transport is ready-to-go. Based on work by DfT, STBs, the engineering supply chain (including City Science) and others, QCR guidance was highly developed and ready to be launched. However, in the final year of the Conservative government, as the cabinet refocused on the “plan for drivers”, talking about QCR quickly became dangerous - like talking about state secrets.
QCR is a great and obvious idea – quantifying emissions from transport plans to ensure they align with Net Zero. QCR would support Local Transport Plans to make sure every place has a clear plan to decarbonise transport and that local investment strategies are fully aligned with the national goals.
The quickest win for the Labour government in transport is to launch this already-formed concept, claiming it as their own, and catalysing every place to have a clear transport decarbonisation plan.
Another quick win for the Labour government is to ensure greater levels of alignment between national infrastructure spending and more local and regional objectives. At regional and local levels, transport professionals want a greater say in how transport investment gets spent by mode (i.e. the share of investment between active travel, rail, bus and cars). Nowhere is the challenge more controversial than in the building of new roads.
It’s impossible to ignore the fact that the National Highways RIS programmes represent ~￡27bn of investment capital that could be spent on other, potentially more productive investments that also more clearly align to Net Zero. Learnings will need to be taken from the Welsh Roads Review, but developing an approach that provides more clarity on the national modal hierarchy, and logically links this to the overall investment strategy, would help everyone understand the rationale behind transport spending decisions and drive up the expected returns overall.
One of the key challenges we regularly encounter, but is rarely spoken about, is the lack of clarity regarding responsibilities for EV infrastructure investment. While government schemes such as LEVI exist for both capability and capital funding, leaving something as important as EV charging to competitive funding bids is, in my view, suboptimal. Through this approach, the UK has inadvertently created another postcode lottery, rather than a joined-up strategic approach. While the private sector is investing in key sites, there are a number of market failures emerging (like rural areas, or on-street charging) that individual authorities are being largely left to identify and solve on their own.
A strategic, nationally-coordinated approach to investment-ahead-of-need is ultimately going to be critical if we’re going to give EV owners positive experiences and avoid negative stories which hold back or deter EV take up. This will require clarity of responsibilities and coordination to ensure the UK gets the charging network it needs.
Labour has promised to allow every community across the country to take back control of local bus services, aiming to make franchising possible in as little as two years. The objective is to create or protect 1,300 bus routes and enable 250 million more passenger journeys per year. This is entirely possible, but one of the key building blocks is much clearer, transparent and useful tools to help model costs and revenues. One of the key negative impacts of privatisation of buses has been the impact on the capacity of the public sector to understand and model the link between route investments and sustainable services. To ensure franchising can enable a virtuous circle- where investment leads to profitable/sustainable routes, which in turn generates a surplus that can be used to invest in more sustainable routes- the public sector needs to be armed with much better tools to understand bus network profitability, and how best to design services that are more sustainable overall. Getting these tools right will ensure that we can recover bus services as quickly as possible, whilst minimising future burdens on the public purse.
Stimulate Obvious New Markets
Finally, to further supercharge the Net Zero economy, there are some obvious new markets that the new Labour government could catalyse that could quickly attract private sector capital.
Offsets or negative emissions are the elephant in the room in every net zero study we undertake. Despite being the name, it is often a surprise to people that they in order to reach net zero, they will need to do something to “net off” residual emissions. Further, even in some of the most leading regions there is uncertainty or concern about the trustworthiness of offsets, carbon credits and insets, limited understanding of the options available, and limited knowledge of how to ascertain and monitor quality. With a leading financial sector, the UK could be leaders in the development of high-quality offsets (the London Stock Exchange has already developed products and processes to enable this, see here) but needs some simple policy support to help stimulate a domestic market.
To catalyse a new offset markets, I recommend the development of simple guidance for Local Authorities, setting out what quality thresholds need to be demonstrated to allow offsets to be included in annual carbon accounting returns. Further, if this guidance is extended to public sector supply chains, this could also stimulate public sector suppliers to start investing in high-quality domestic offsets.
Another area being held back by technology and demand uncertainty is the decarbonisation of freight. Like with the shift to Electric Vehicles, the early steps to decarbonise freight will require bold actors to lead the way and develop a charging network, just like Tesla did in the early days of EVs. Given the need for international coordination in freight networks, and its role in ultimately setting the rules for vehicle emissions, government has a critical role to play in helping establish the network and secure the demand that will be necessary to enable the pay back on private capital.
Early in the last parliament, the DfT and Innovate UK ran a series of feasibility studies on all types of freight decarbonisation technologies which were hugely successful in advancing our understanding of different decarbonisation options. The depth and breadth of these studies also demonstrate that we already have the evidence and expertise to develop a long-term freight refuelling networks in the UK. All it needs is policy certainty, clear direction, demonstration projects and a priority network plan to provide coordination and derisk investment by the private sector. Zero carbon freight networks represent a >￡20bn opportunity with secure returns, as long as there is confidence that planning can be de-risked and vehicles will ultimately switch. Let’s get it done.
Conclusion
In conclusion, the suggestions outlined here represent just a fraction of the immediate opportunities awaiting the new Labour government to kickstart the Net Zero economy. By swiftly implementing policies that catalyse investment in renewable energy, reform the energy market to support decarbonisation, clarify roles for local authorities in achieving Net Zero, and enhance transparency in infrastructure and innovation funding, Labour can set a strong foundation for sustainable economic growth. These actions not only align with public sentiment towards climate action but can also position the UK as the global leader in clean energy innovation and transformation. With a clear mandate and majority in the House of Commons, Labour has the platform and opportunity to make decisive strides towards a greener, more resilient economy that benefits all sectors of society. Let’s get moving.
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Public Health Specialist
4 个月Excellent blog Laurence. I was particularly pleased to see the pension funds mentioned. I'd particularly like to see the Local Government Pension Funds mandated to invest in social housing, with I believe huge potential to deliver net zero housing and begin to eat into the enormous housing benefit payments to private sector landlords. Invest to save in more ways than one!
Traffic Reduction campaigner at Transport Action Network (p/t)
4 个月Firstly, I'd echo others' comments, that's an excellent posting! But like Mark Frost, I hope you won't mind if I add an item to your list. It's to ensure that Labour's planning reforms align with net zero, not just in overcoming objections to low-carbon energy infrastructure, but also in (1) requiring energy-efficient buildings and (2) giving councils a mandate to reject car-dependent developments. These are issues that Labour clearly hasn't thought about - at least, they've not said anything about them in their various statements on planning. However, the National Planning Policy Framework currently makes it easy for councils to reject developments that are not 'beautiful', while making it really hard for them to reject developments whose location and design are bound to entrench car-dependence - see https://www.cyclinguk.org/blog/beauty-alone-wont-solve-climate-crisis. This really needs to be reversed!
Transport Planning Professional
4 个月Wow Laurence too much here for me to take in all at once. Will return to this when I have the brain power to compute all the insights!
President of the Chartered Institution of Highways & Transportation (CIHT) and Mott MacDonald Professor of Future Mobility at UWE Bristol
4 个月Wow Laurence - quite some tour de force - with all the important signs of someone who brings together a first career in finance and a second in climate action. I am still coming to terms with a seismic shift in the UK's political landscape - how refreshing that volunteered advice such as this is in good supply. Invite the experts back in and let's see what magic could happen! ??
Director, Fern Consulting Services Ltd. Policy Director, Transport Planning Society. CTPP MTPS
4 个月Brilliant Laurence - a one man manifesto to save the world in 30 days! Only thing I'd add from a transport perspective perhaps would be a grown up conversation about road user charging, and putting in place a credible replacement for fuel duty for EVs. Putting into practice the recent NIC recommendation that funding levels for urban authorities should in part be influenced by whether or not they've implemented a demand management measure would also be a bold step forward.