The principle of no customer being left behind in the shift to a smarter, more flexible energy system is hard to argue with. However, some experts believe that in the short-term a just transition is just impossible. As part of our Countdown to COP campaign, James Wallin examines different pathways to fairness – from ensuring the most vulnerable benefit first to the introduction of non-participant tariffs.
Smart and Fair
November 2007: The iPhone is launched to the UK market.
The initial handset has a pricetag of £269 and is only available on the O2 network at a cost of £35 per month.
Responding to the launch, Jonathan Arber, an analyst with Ovum warns that the UK is a nation of pre-pay users, adding: “That’s a huge section of the market that is not going to be purchasing an iPhone. In the contract segment there are a lot of people who are not going to pay £35 a month.”
Fast forward just 10 years, and there were an estimated 44 million smartphone users in the UK, with Apple the overwhelming favourite. By 2020, that had increased to 55 million users – equivalent to 83 per cent of the population.
It is also a common reassurance when discussing the concept of a “just transition” and the challenge of ensuring no customer is left behind as we move to a smart, flexible and low-carbon energy system.
Whether it is around adoption of electric vehicles (EVs), heat pumps or involvement in demand flexibility, there is concern that the costs and benefits of these new decarbonisation tools will not be spread fairly across society.
Suleman Alli, director of strategy & customer service at UK Power Networks (UKPN), is one of those who sees the rapid adoption of smartphones as providing lessons for the energy transition.
“The iPhone was a premium device when it first came out. It was only a subsection of society that used it. Look at it now. Tech has democractised access to information and you can get a smartphone for next to nothing.
“We need to go through a cycle of exploration. And it probably does mean that prosumers are going to lead the way to help us understand this. But very quickly, in order to be able to compete and win in a market, propositions will develop that can be accessed by anyone.”
But how long will this cycle last, and what will be the cost – on the lives of the most vulnerable and on the reputation of the energy transition?
Former Ofgem chief executive and now Fingleton director Dermot Nolan says: “People will be left behind, almost certainly. Especially around EVs.
“For the first few years it’s likely to be about limiting cross subsidies, trying to limit the impact on the most vulnerable and then over a few years you’re trying to roll out some technological benefits from prosumers down to the second wave. That is a second-best transition, but it might be where we go.”
Net zero is a marketing challenge as much as it is an engineering one and will only succeed if people can be inspired to be active participants.
This is why COP26 matters so much. It is a chance for the UK as hosts to talk not just to other governments but to the public, both here and abroad.
For this reason, SSE, as one of the major partners of the UN’s climate conference in Glasgow this November, has made the just transition one of the three themes of its sponsorship.
“The actions we take and investments we make must be grounded in legitimacy and public consent and if it isn’t fair and bad things happen to people then that legitimacy will be diminished. We can’t let that happen.”
This view is echoed by Sharon Darcy, director at Sustainability First, who says: “In order to reach net zero you have to take people with you. There’s massive inequalities in society already and that is going to be exacerbated by factors we all know about so you need a more inclusive approach. That needs to go far beyond the way utlilities have traditionally dealt with these issues.
“It needs to ensure you tackle not only differences and inequalities in terms of income but also things like age gaps and ethnicity.
“How do you get a more inclusive approach to climate change so you take people with you, affordability isn’t a drag and people feel they have agency?”
The power of prosumers
One of the first hurdles of a just transition is to overcome the perception that investment is targeted at the early adopters – the type of people who would have slept outside the Apple shop to shell out almost £300 for a phone.
Marzia Zafar, head of customer policy & strategy at Kaluza, believes this comes down to true segmentation of customer groups, proving there is a solution to everyone’s needs.
“We have price sensitive customers, we have some older customers who may not want to deal with everything. Each one needs a different message.
“Agile tariffs are great for some consumer archetypes but most customers don’t want to monitor their energy use on a half-hourly basis. It’s down to us as an industry to show that we have an option that suits everyone.
“To bring customers along you need to make it extremely easy for them to engage. You have to show them what they’re paying and why they are paying that. It has to be tailored to them.”
To this end, Kaluza has introduced what it claims is the first “type-of-use” tariff, offering EV drivers a fee of 6p per kWh at any time of day. Kaluza will use live data on energy pricing, the weather and local network constraints to shift charging away from peak times to “capture the cheapest and greenest electricity on the market”. However, if the customer wants to charge their car at peak times, they have the option to override Kaluza’s optimal charging path and the 6p/kWh rate will still be offered.
He says: “You still have half of the market that doesn’t even want to engage in switching supplier, it’s going to be a real hard sell to get them interested in time-of-use tariffs.
“What you need is an option to get the benefits but let the company deal with the details.
“The kind of company that is likely to win out in a decarbonised world is one that looks pretty much fixed price. For your energy needs its £X. Then the company is facing all the complexity on price and everything is automated.
“Then you’re in a world where the more risk a customer wants the business to take, the more automation that company will want in the home.
“It shouldn’t be about competing on price it should be competing for customers that suit your company’s profile. That means companies getting to know their customers better and that might need greater segmentation. Is it slow and steady, full flexibility or everything in between?”
McEwen insists that timing is crucial in the fairness debate.
“Right now, we do not have mature, smart systems and the people participating at the moment are early adopters. Vulnerable people should not be early adopters. It’s people who are willing to put capital at risk and have the capacity and finance to trial and give feedback.
“We have to be very careful about the timing of interventions.”
SSE commissioned a report from the Centre for Sustainable Energy (CSE) to explore social justice in the future energy system.
It sets out a framework to examine how the energy transition can be both ‘smart’ and ‘fair’ and makes several recommendations to Ofgem, government and the industry.
McEwen explains that at the core of the report is the notion of capacities and capabilities to access.
“Most people would think it’s all about access to finance but it’s actually a lot more complicated than that. In some ways, it will be access to constraint managed zones. Access to some tariffs or enabling sophisticated demand management will depend on if there is a market signal locally and whether there needs to be demand management.
“Very quickly you realise the opportunity to benefit might be in high urban density, not rural areas.”
CSE has drawn up an ‘offer profiling tool’ which assesses the capabilities and characteristics required for households to participate in one or multiple smart energy offers. It looks at five areas: the customer’s energy profile, the dwelling and local area, their financial status, their digital tech readiness (including access to broadband and high quality mobile phone signals) and personal and social issues.
The idea is to build up a picture of the required capabilities common to many offers and which ones tend to occur in combination both within offers and for individual consumers.
The CSE concludes that smart and fair outcomes will not emerge reliably from the market without deliberate and purposeful action to secure them by policy-makers and regulators, including requiring adherence by all market participants to a set of ‘smart and fair guidelines’.
It also warns that the smart innovation the UK needs is “unlikely to be forthcoming if we seek to achieve fairness by insisting that every smart offer in the market has itself to be fair and inclusive from the outset”.
Putting need ahead of means
There is clear evidence that the early days of the energy transition are likely to bring with them new ways to generate unfairness and leave people behind. What can be done to mitigate such an unpalatable proposition?
Hardy believes that to ensure the benefits of a smart energy system genuinely do reach those that most need it, “they should go first”.
“However you define that segment of society that is most in need, give them measures that bring them to a net-zero lifestyle – at society’s expense – so that they can benefit by lower bills, a more stable environment, more comfort, better health, better wellbeing.
“Then, if, and only if, they want to, they could be trailblazers for the kinds of business models that are going to follow – energy as a service, flexibility or whatever. Why can’t they be the early adopters?”
Where more affluent, better resourced areas do take the lead, Hardy believes there is an option for them to share their model with areas that are less well-positioned.
“Places like Oxfordshire and Cambridgeshire are very well ahead on the energy transition. They could quite easily succeed in their transition and then sell their blueprint to another county and actually transfer wealth.
“Oxfordshire have two projects part-funded by the taxpayer which are giving them valuable insights into how this transition could be achieved. That puts them at an advantage and that advantage should be shared.”
Councils and other local actors will be vital partners in the national push to net zero, Hardy insists, saying “zero carbon is inherently local”.
Hardy wants to see a framework that allows the whole economy to hit the 2050 target but lets individual areas go down the routes that are right for them and identify the potential for inequalities.
Alli agrees that the industry needs to work hand in hand with local authorities to understand the pace of change they are comfortable with.
For Nolan, the question of how involved DNOs will be in local net-zero plans is key, with business plans for the ED2 price control covering a crucial period of change between 2023 to 2028. At the end of this period, the government expects 600,000 heat pumps per year to be fitted. Nolan asks whether this responsibility could end up falling to networks.
On EVs, Nolan asks: “How does a DNO business plan set out how all areas will receive chargepoints when that’s not their actual job? If the market doesn’t provide those, does the DNO start doing it itself?”
UKPN is seeking to address this issue through a new project with five local authorities in Cambridgeshire, Norfolk and London. The pilot will seek to identify areas that have yet to install enough chargers or would benefit from improved air quality.
UKPN will then hold a competition in which chargepoint operators will be invited to bid at the lowest cost to install and operate chargers in these blackspots under contract with the participating councils. The chargers will be owned by either the local authorities or the winning bidders.
Alli believes projects such as this can “jumpstart the EV revolution” and ensure it is done in the fairest way possible.
He says: “It’s not about putting costs on the bill willy nilly. You are looking at where there are market failures and where there is a big social benefit that is not captured in the business case. That gives you tangible evidence of an intervention that is needed to support the market in these early stages.
“The big question is what’s the role of network companies where market failures are clear. We’re trying to demonstrate that and produce the evidence for the regulator and for others.”
Nolan points out that the role of energy suppliers in the just transition is even more difficult.
“Retailers have an obligation towards the vulnerable but only to their customers. And they only have an obligation to treat them ‘fairly’. What exactly does that mean? It doesn’t obviously mean putting an EV charging point on their house or installing a heat pump.”
Audrey Gallacher, deputy chief executive of Energy UK, admits that retailers need to take a more holistic view of net zero.
“We’ve not always been great at the whole house approach and net zero might give us the chance to really nail that. Being efficient on your water use will massively impact your energy bills and vice versa so as a society we have to ensure we are working collaboratively and thinking about consumers’ needs as a whole.”
But for retailers to take a more active role in guiding consumers towards net zero they must first transform themselves, says Laura Sandys, who recently released her report into ReCosting Energy, which calls for a “citizen’s dividend” on net zero.
Sandys says: “There has been an historic issue with utilities being able to really engage with consumers so I think it’s time we started listening to them rather than beating them over the head.”
She points out that the scale of investment required for a consumer to buy an EV or install a heat pump is commensurate with a large infrastructure fund’s into an offshore windfarm. Therefore there should be corresponding access to support.
Sandys wants to see a move from commodities to services, with the capital investment passed on to the retailer while the customers gain the benefits through product-based services. She also cites the example of smartphones. “If we didn’t have the kind of contracts we have in mobile phones then 2 per cent of the population would have a smartphone.”
Even if packages are much more tailored towards individual needs and support is boosted, Matthew Vickers, chief executive of the Energy Ombudsman is still concerned that some consumers will be left behind.
He says: “You hear a lot of talk about if you get the price signals right, all of the rest will fall into place. I don’t think it’s that simple. Price signals are only one part of the mix.
“Some people can’t respond to price signals, no matter how strong they are. Shift workers, families with young children – some people just don’t have any flexibility.”
The CSE has suggested that in cases where there are vulnerable customers genuinely being left behind and beyond the reach of mitigating interventions, there is a strong case for a protective ‘non-participant’ tariff.
Nolan sees the case for this and argues “in some ways that’s what the retail price cap is – in an old world sense”.
However, he raises the difficulties of how to identify who would benefit and how it would be implemented.
The CSE report has this to say: “The charges for this could perhaps be determined in a similar way to the current standard variable tariff price cap. The eligibility for such a tariff should be determined by further analysis of the consumer vulnerability characteristics most typical amongst those which the market monitoring is showing are being left behind.”
Trust must be won
Ultimately, identifying the needs of all consumers and ensuring the whole of society is brought along on the net-zero journey is about utilities getting closer to their customer.
Vickers warns that to do this, energy retailers in particular must overcome a “trust deficit”.
He says: “If we don’t get consumers to buy in to and engage with what will be a fundamentally very different market of services, not commodities, then it’s simply not going to move at the pace we need.
“We are doing this from a point of view of market economies, not a centralised state, so we have to make the case to the public. That’s on one hand a commercial challenge, about customer positioning, but it’s also about fairness and transparency.”
He believes this means moving away from “our fixation with price” towards developing a more nuanced approach to customer engagement.
“We need to get to a point where we are valuing the marketing and customer service skills that are going to get people to come along with us over the next 30 years. That needs to be as important a focus for investment as infrastructure and innovation. That’s not the case at the moment. Not by a long way.”
“How long do you think Amazon spends thinking about vulnerability? In a sense, they don’t need to because they think about consumers in a different way to begin with.”
Gallacher agrees that a continued focus on switching to cheaper tariffs is not helpful in the long term and the debate needs to move towards showing how everyone can benefit from a smarter, dynamic energy market.
To do this she urges the government to change its narrative around the sector – something which she does not believe the Energy White Paper’s support for auto-switching will do.
“When we’re moving to a new world where people are opening up their homes for what is probably quite an invasive process and you’re potentially looking at packages which include the kit as well as the consumption, how can that work in an environment where everyone is obsessed with switching?
“It’s down to the industry to prove that everyone is treated fairly. We should be scrutinised.
“But if we are really serious about that transition then we have to stop looking backwards and look forwards. The white paper is looking for problems that maybe existed three years ago. I understand there may be concerns about what happens after the price cap but let’s look forward and harness how dynamic the market has become.”
However, Hardy remains concerned that issues around “greenwashing” could further undermine the trust issue between consumers and energy retailers.
“Currently, there is no value to the majority of green tariffs in the market. There is zero provenance of the power, especially where they have been bought from Europe.
“There is a clear appetite from the public for green tariffs but there has to be something behind them. In short, no one is building more renewables off the back of current green tariffs.”
Hardy’s solution, “which doesn’t make me popular” is to insist that any supplier offering a “green” tariff can show provenance.
He admits: “This would kill 95 per cent of green tariffs but the remainder would be a lot clearer to consumers.”
Hardy would like to see an independent panel arbitrating on green tariffs. “Then to grow it you either leave it to market forces or you look at more of a stimulus.”
Sandys’ report poses the idea of subjecting suppliers to an 80 per cent decarbonised electricity mandate by 2030. She says this would create a strong market pull from suppliers to demand and procure decarbonised services. She adds that regulation would also benefit from this level of clarity.
For Gallacher, the onus is on government and regulators to set out clear guidelines on what is expected from suppliers.
“It would be awful if consumer confidence was undermined by something where people are playing by the rules.”
As thoughts around a just transition solidify, they are doing so in the context of a global pandemic, which has provided a useful and timely example of a national programme based on need not means and that has managed to rally almost overwhelming public participation.
Vickers says the industry must be mindful of framing a narrative that is “more vaccine than lockdown”.
“The key to the message about the vaccines was that it was giving us something back – our freedom. Is there a way to make a similar, really positive message for the energy transition?”
Hardy says the key to success on rolling out vaccines has been handing autonomy to local players.
“There is no central diktat. It wasn’t a case of ‘this week you are focussing on the over-80s and no one else’. If slots became free, they used their local knowledge to find people slightly lower down on the priority list and offered it to them, rather than wasting that opportunity.
“If you were gong to replicate it for net zero, the main takeaway is that local actors are more trusted. If people get a message from their local health provider they will respond more readily than to some distant government body.
“Local authorities can also see the benefit of doing things in a multifaceted way. They see the impacts on health, air quality, the local economy. And they know where the need is greatest. That knowledge and those relationships are there to be utilised.”
Being honest with the public
In conclusion, can smart, flexible energy models really follow the trajectory of the iPhone and rapidly break down barriers of wealth and ability to engage? To be blunt, they simply have to. And they have to go further. Despite the proliferation of smartphones, there remain more than 12 million people in the UK without access to one. If the energy transition fails to touch the lives of a similar number of people by 2050, and if they are disadvantaged as a result of it, then the project will have failed.
There are many sensible and innovative approaches to building a smart energy system that can be accessed by all. Many of these may even be able to tackle other forms of injustice in society.
But, depressingly, there are few concrete strategies for avoiding unfairness in the short-term. Mitigation may not be the ideal answer but it is probably the most pragmatic.
This is why the issue of trust, which at face value may not seem directly relevant to a just transition, is so important. Consumers may accept inequalities in the short-term if they have faith that there is a plan to resolve them and that the utilities sector is part of that solution.
One constant in the interviews conducted for this report was that we should not underestimate the public’s ability to face the uncomfortable truths about decarbonisation.
As Hardy says: “The public aren’t stupid. If you have a grown up conversation with them then they really do get it. Ultimately it’s a pretty straightforward proposition. We need to stop emitting carbon and here are the ways to do that.
“They understand they are going to have to pay. But they need to know what they’re going to get in return. If they’re going to pay, it can’t just be the same, it has to be environmentally better.
“They also want it to be fair. While that’s a difficult thing to quantify, I think we can all recognise what is unfair.
“At the heart of everything is a social contract between the public at large, the government and utilities. If we all understand our roles and how everyone benefits you really can get mass buy-in.”
This report is part of Utility Week‘s Countdown to COP campaign, which aims to present a pan-utilities roadmap to net zero.
The issues raised in this report will be discussed by an expert panel for our webinar on 26 February at 11am.
The panel will include:
- Tim Lord, senior fellow, net zero at Tony Blair Institute for Global Change and formerly director general for clean growth at BEIS
- Tom Lowe, head of UK regulatory affairs, Bulb
- Giulia Privitera, social sustainability strategy & programme manager at UK Power Networks