In January at Amey we published the second in a series of white papers on the roles of the public and privates sectors in the future of infrastructure. This was our energy white paper. The day before we launched the white paper I was telling my 12-year-old son, Bradley, all about our project and the speech that I was going to make at the launch event. His generation is much more conscious of the environment and he had a lot to say about it. He explained to me that all good speeches have to start with the word IMAGINE. Where he gleaned this nugget from – who knows – but I thought about it and started my speech with these words:
- Imagine a world of no climate emergencies
- Imagine a world of carefully controlled carbon emissions
- Imagine a world of cities with clean air
- Imagine a world where the dependency on fossil fuels is long gone
What a world that would be! Can we realise this vision? I believe we can and we must if we are to tackle the biggest challenge of our time – the climate emergency. A well-known proverb says: The best time to plant a tree was 20 years ago. The second-best time is now. The same applies to tackling harmful CO2 emissions from our built environment from our energy and heating usage. Action is long over-due. The second-best time to act is right now to curb the hugely harming effects of a warming planet.
Heating is the second biggest emitter (after transport) of CO2, accounting for 31% of the UK’s greenhouse gas emissions. We are a nation still highly dependent on fossil fuels. 84% (that’s 23 million homes) use gas as their heating source. While numerous initiatives are in place to reduce the carbon footprint of our public buildings and some good progress has been made, an enormous task lies ahead to decarbonise heating in our schools, hospitals, prisons and our public buildings.
The problem is that we have to deliver the solutions a lot faster that we are! Our white paper had input from a number of people from both the public and private sectors. The paper has three core recommendation that our company believes need to be actioned immediately to decarbonise our built environment. These are:
- Clear and consistent government policy to steer the market in the direction of low carbon technologies
- Clear investment models so that local authorities are better equipped to engage with the market and investors can invest with more confidence
- Local authorities and central government organisations empowered to make decisions by having in place business models and funding that work for them
We believe that these three steps, if put in place now, will transform the UK’s energy and heating markets, opening new supply chains and new markets where innovation thrives and where real progress is made in reducing CO2 emissions from the built environment. To explain more fully, the market needs:
Clear and consistent government policy
Typically, central government sets out the priorities and strategy for a sector or challenge, while local authorities and government departments deliver it. Success comes from local decision makers implementing within a clear policy framework, but this doesn’t exist for much of the energy sector, especially heating. To overcome this, government needs to:
- Initiate a consultation to local authorities and departments to understand the wealth of opportunities and barriers for implementing them
- Issue guidance on preferred business models, approaches to procurement and funding
- Local authorities and departments would then be required to deliver de-carbonisation plans, confident of what funding and business models are available.
Clear investment models
Local authorities and departments need to procure their projects as “fit for funding” to maximise the benefits of private sector investment. Standardisation is critical. Forget about balance sheet treatment and make value for money the sole measure of attractiveness of business models. Historically, trying to ensure private sector concessions are off balance sheet has led to:
- Inflexible contracts
- Too much risk transfer
- Lack of collaboration
Unconstrained by balance sheet, business models can include elements not common in public private partnerships, including:
- Joint public private ownership creates aligned incentives
- Lower base returns, with greater returns based on outcomes, such as energy saving
- Customer representation on project governance
- More flexible capital structure that will better accommodate change
- Rule out aggressive financial engineering
- Shorter term concessions that incentivise performance and don’t lock the LA into long term contractual obligations.
Value for money (VFM) models that could be considered are:
- Public private partnerships: schemes financed and delivered by private sector operators, paid in turn for the delivery of energy – e.g., heat in a district heating project.
- Guaranteed savings models: provision to a collection of accommodation at a unit cost of energy less than that currently paid.
- Cost plus: pass through costs to customers who benefit from the efficiency of say a central heat provision, but take the risk on usage
- Customer ownership: schemes financed by local customers, with a degree of local authority and private sector underpinning to address credit risk and generate initial buy in
Local authorities and departments empowered to make decisions
One size doesn’t fit all, so it is necessary to have a variety of business models and investment structure. Public sector procurement frameworks are sometimes too rigid to allow for new ideas. More focus needs to be placed on the desired outcome, than the means of getting there. Other things that could help innovation and investment at a local level include:
- Enforcing planning obligations that lead to the highest levels of energy efficiency
- Adopt and Interventionist planning framework – such as London and Heat Networks
- Empower the supply chain
These three recommendations will be key to setting the right regulatory framework and attracting the investment required to decarbonise the UK’s built environment. We need to move beyond imagining and work collaboratively with government and the wider industry to make a net zero UK a reality.