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Build Back Better: Government needs to get on with it – Armitt

“If you don’t want to make a decision, you can always find a reason for not making it,” says John Armitt, chairman of the National Infrastructure Commission, on the lack of energy policy coming out of BEIS. We’re risking missing net zero targets if it doesn’t make its mind up soon, he tells Denise Chevin.

It’s about nine months since Utility Week last caught up for an in-depth interview with Sir John Armitt, chairman of the National Infrastructure Commission, though of course it seems far longer. Back then we met in the auspicious surroundings of the Institution of Civil Engineers in Westminster and Armitt was hopeful that a meeting scheduled with the Treasury afterwards would shed some light on what response it was planning in a forthcoming budget to the NIC’s National Infrastructure Assessment. By that stage he’d already been waiting a year.

But there was no budget. An election was called, Brexit was passed and then no sooner had a landslide government stopped patting itself on the back, than Covid came along and a devasting lockdown. So, we’re still no wiser what government’s plans are for long-term investment, and we still don’t have a National Infrastructure Strategy.

So, over a Teams chat today, Armitt’s message is largely the same – though the frustration is more palpable. If we are to reach net zero by 2050, he says, the big decisions on things like low carbon heat, carbon capture and storage, the energy mix and plans for nuclear power and how we want to pay for the carbon transition, need to be taken now.

Armitt says the pandemic has not impacted on the priorities for the NIC. “We’re looking 20-30 years ahead, not two. With all of the uncertainties that still exist, it seems too early to row back from that long-term analysis,” he says.

At the same time, the government has set out its own short-term agenda, with ‘build, build, build’ and a mini spending announcement made by the Chancellor Rushi Sunak in July. Armitt says this is bringing forward some of the NIA’s priorities – to kick start the economy and create jobs – which he says is exactly the right thing to be doing. The NIC’s wish list includes the roll out of EV infrastructure and money allocated for energy efficiency, both announced in Sunak’s spending plans.  The NIC’s stall was set out in an open letter to Number 11 in May, but there are meetings every week about the key challenges and requirements, says Armitt.

So ‘build, build, build,’ he says, “was good as far is it goes but what we’re really waiting for is the National Infrastructure Strategy, and we are quite pleased that that’s now been spoken of twice in the last couple of weeks, by the chancellor and the prime minister. They’ve both said to look out for it in the autumn so we feel reasonably optimistic that it’s going to happen.

“The only difficulty is that as each six-month period goes by; it’s another six months off the period for some of the big challenges such as heat, where we had target dates for being able to make decisions around hydrogen for example around 2023, and we’re still some distance from really getting moving on that challenge, without stronger leadership from government.

“And of course, they’ve set out two dates for decisions on carbon capture and storage projects, one 2025 and the other one 2030. I would argue that’s too far away. That’s the challenge and the opportunity of net zero by 2050. You’ve got to make some really difficult and crucial decisions before 2025 to give yourself any chance of getting there by 2050.”

In July government allocated £139m for projects on CCS and hydrogen.

Given the extraordinary circumstances we have been living through, isn’t it understandable decisions around energy – as with a lot of policy areas – have not been forthcoming? Armitt holds no truck with that: “If you don’t want to make a decision, you can always find a reason for not making it.

“If you put off these long terms decisions, then you have to be prepared for the consequence and risk on not being able to achieve my zero carbon objectives. You have to ask yourself what you really value.”

While some observers are hopeful that the government has some big plan up its sleeve which will be announced soon, Armitt is yet to be convinced.

“We’ve been due an energy white paper for quite a long time. I don’t get the sense there’s a lot of activity. There may be behind the scenes but it’s not very visible.

“2050 might seem a long time away, but this is now a delivery challenge, and you can’t start delivery until you’ve decided on your policy. So you need a strategy, then you can figure out your delivery programme.”

There has been talk in some quarters that a new agency to deliver net zero might be necessary, perhaps even the NIC.  Armitt is not one of them: “Where does the bulk of the responsibility for net zero sit? It largely sits in BEIS. They’re the one with the biggest challenge, followed by the department of transport. But BEIS has the bigger challenges, I think.

“You don’t have to have a single agency, but you do have to have clear leadership, and a clear delivery plan, which people are then held to account to deliver.” As he says this, he can barely conceal his disdain.

So what is the way forward for government, where should investment priorities lie and what’s in the NIC’s in-tray currently? We’re about to find out.

Sir John Armitt Q&A

Is there any more momentum to go ahead with the green revolution now?

I think people have got used to a different way of living over the last three or four months, and have seen aspects which they like. I don’t see anything detracting from the enthusiasm for the zero carbon agenda and the green agenda.

If we had a severe recession, then it might become more difficult, because affordability and costs will start to become very important in people’s minds.

We’re hosting COP26 next October which should give government a chance to provide some momentum.

What is the NIC focused on at the moment?

We’re carrying out an assessment of rail needs, looking at HS2 and the rail requirements of the North and the Midlands, the northern powerhouse rail programme and the Midland link program, as well as phase 2 of HS2.

We want to give the government a whole series of options as to how you can best knit those different projects together in order to optimise connectivity and capacity and economic growth – and at the same time trying to deliver it as quickly as possible to bring the benefits as quickly as possible.

And for utilities?

We’ve just done the piece on resilience, and prior to that regulation, and there’s quite a lot of interplay between the two, because in our resilience work we said that the government needs to decide what levels of resilience it would like to see from the different utility sectors. And then having decided that, it becomes an interplay again between the companies and the regulator to say: ‘How do we deliver that level of resilience, and what investments will that require? What are the costs to the consumer, and how do you bring all that together?’

It’s a little bit like the debate between the electricity companies and Ofgem [regarding RIIO2]. Ofgem have made a series of proposals, which clearly the companies are not liking, as utilities normally never like the first set of proposals which come from a regulator.

We saw it take place 18 months ago with the water companies. And clearly the regulator will say it’s part of their job to push what is an acceptable level of return and it’s the job of the water companies to try and get the best they can for their shareholders.

The key thing at the end of the day is that there does need to be direction from the government in terms of what’s best for investment for the future.

Hopefully the National Infrastructure might shed some light on what the government is looking for going forward, in terms of future energy systems and heat systems, which again will lead to a discussion about what level of investment is required to meet those outcomes.

We’re also doing a piece of work with the Met Office, modelling through extreme weather scenarios with climate change in mind. That ties in with what was being said last week by the cabinet office about the civil service in the future, and about the need for increasing the use of data, and having decisions which are more data-based within government generally.

Energy companies maintain that if the regulator cuts returns too much investors will be put off? What are your views?

That comes back to the negotiation, which is a commercial one, between the regulator and the companies and the investors. What doesn’t disappear from infrastructure is the fact that there is long-term steady demand for a service. Demand for water is not going to go away, the demand for energy if anything is going to increase, demand for telecoms has been even higher because of Covid.

Everything we’re seeing at the moment makes infrastructure investment look like a good long-term play.

What are the big policy decisions that need to be made?

The energy mix still remains the big challenge. We can see that at the moment the government has a policy, which is some 10 years old, involving a reliance on nuclear. But arguably it’s a policy which at the moment would appear to be undeliverable, because the basis of the investment by any potential nuclear investor requires the government to take some of the risk, and they haven’t in the last two or three years been able to reach a conclusion on how that might be handled.

What are your thoughts on the Regulated Asset-based model to fund nuclear?

Some of the energy companies are still looking for the investment to be allowed to be taken on the ‘Regulated Asset Base’ (RAB) model for keeping down the finance costs of new nuclear projects [which government has yet to make any decision on, a year later than it promised to].

Nuclear is never going to be able to meet the cost base of renewables. Nuclear only has a real future if in fact there is a capacity argument which says that at the end of the day, we see a need for nuclear as a fallback means for a baseload of generation.

That’s why we said, up to 2025, no problem at all with adding one more nuclear to the fleet; ordering one more in addition to Hinkley. By 2025, we’ll be in a better position to understand  the tech developments and the information available on how we can generate that smart network; how we can generate storage systems; how we can ensure that renewables can meet that 85 per cent of load.

That remains a critical element of the decision. So if I was in the nuclear investment lobby, I would be saying to government: ‘Look, even if you just take the minimum forecast of the NIC, which says order one more before 2025, can we not reach an agreement on how we might do that?’

At the moment, they’re unable to reach an agreement on how they might add one more to the system. And the hoo-ha with the Chinese investment adds to the uncertainty, certainly.

What about other urgent decisions?

The other question is what we’re going to do about heat. The two options at the moment are either hydrogen or heat pumps, or maybe at the end of the day some of both. But at the moment we don’t really have a basis on which to make a decision about either.

We recommended large-scale projects, large scale carbon capture and storage, and I would argue that 2030 is too late for rolling out a decision on that. It needs to move quicker than that.

The government will say: ‘we’ve allocated X hundred million to supporting that,’ but it’s not just about money. It’s about clear, determined leadership from government on delivering these pilots. Government really needs to be saying: ‘We want to be in a position to make a decision by X,’ and I think X needs to be 2025, not 2030.

Has anything happened during lockdown in terms of demand for infrastructure, or the way things work, the mechanisms in place, that has surprised you?

The whole market structure of energy has been very interesting. In order for people to make investments, there needs to be a guaranteed level of take up, or a guaranteed price at which electricity will be bought, and then the system is being modified by the minute.

And this is an enormous challenge. Hats off to people in the utility sector who have been managing networks which have been very different to normal over the last few months. We haven’t seen any outages, or anything really fall over in the last few months despite a different flow of demand from that which would normally be required.

In a way, it’s a good example; a reminder of the challenges we face in balancing out the network between all the different supply sources.

Is the NIC supportive of a green investment bank being set up?

This is clearly being talked about at the moment , and it’s something we’ve always recommended. I would stick to ‘infrastructure investment bank’ rather than ‘green’. But there’s certainly potential benefit from having that.

It provides the opportunity for government to show its willingness to put some government supported money at risk, which doesn’t have to be a lot, but it’s that which brings the private sector to the table in the same way as the European investment bank used to do.

Do you work closely with local authorities?

We’re in constant discussion, with the cities particularly, and the LEPS and these sorts of groups. We’re doing it currently with rail. We’re doing it on our cities program, where we’ve been working with half a dozen of the cities to help them draw up their long-term infrastructure plans.

And we’ve made a clear recommendation to government that we feel they should give the larger cities more authority to be able to make a lot of their infrastructure decisions for themselves, having also been given sufficient fiscal means to deliver that.

We probably have more meeting with local governments than we do with central government.

Government has talked about shaking up the Civil Service. Is there any feeling that they might not need a National Infrastructure Commission?

No. The sense we get is that people see a real value in what we’re doing. The civil service has said it wants more evidence-based decision making in the future. That’s exactly what we’re there to do; provide evidence and arguments for good long-term decision making.

Build Back Better Forum

Build Back Better Forum October 20-21 – a digital event to explore the role and shape of utilities in the world beyond coronavirus