Energy infrastructure is fundamentally local

In my last blog I argued that the government was heading in the wrong direction with its suggestion that “allowable solutions” to deliver low carbon buildings might include investment in centralised generation such as nuclear or offshore wind farms. I promised to expand on my argument this time, so in this article I explain why I think all energy infrastructure is fundamentally local, and thus why de-coupling construction and energy policy is foolish.

I’m a great believer in the power and value of free markets. This is not necessarily a common position among people who make their careers in sustainability and low carbon buildings, but I think the reality that well-regulated markets deliver efficient economic outcomes and provide maximum opportunity for enterprise and human fulfilment is hard to deny.

The difficulty in establishing free markets, unfortunately, is that good regulation is hard to find, and critically, how markets are structured and bounded can make free enterprise very difficult. In other words, politics and history get in the way. We need to make this political and historic reality much more visible and contrast it with market and technical realities if we are to make constructive progress in the low carbon building and energy debate.

In the UK energy and construction markets are considered as distinct for historical reasons, except in energy efficiency, where the utilities are required by regulators to invest £2-4bn a year in construction activity. Unsurprisingly, these investments (I’m referring to the Energy Companies Obligation or ECO) are exceptionally inefficient and market-distorting because traditional energy regulators (and traditional energy companies) exist in artificially-created and protected markets dealing in commodity products and aren’t great at understanding construction markets and buildings.

Most people don’t care which flavour of fuel, boiler and building code are combining to keep them warm, they just enjoy not having to wear a jumper around the house

But this distinction is false. The built environment is the single most important component of energy infrastructure that exists, and the way it’s structured and managed potentially has far more impact on energy bills than any ‘green taxes’ or investments in nuclear power stations. For example, my company has recently completed a study showing how designing low cost modern energy infrastructure into a new housing development (1,311 homes) could reduce energy bills for every home by over £360 a year (forever). This isn’t energy efficiency in the traditional sense (insulation etc) this is connecting buildings together in new and different ways, and adding a bit of intelligence into the way energy is managed locally. Other studies suggest demand management and thermal storage in buildings could enable us to avoid the need for investment in new power stations altogether.

Markets should start from the customer. In the case of both energy and buildings, the customer is you and me, and the customer experience is warmth and convenience – light to read by and power to run washing machines etc. This customer experience is a product not of energy alone, nor of buildings alone, but the two acting together. In the final analysis, apart from us few specialists, most people don’t care which flavour of fuel, boiler and building code are combining to keep them warm, they just enjoy not having to wear a jumper around the house.

When we think about regulation, we should start from this customer experience, not historical industry structures. This has radical implications for both energy and construction markets.

For example, from a customer perspective, we should not create artificial distinctions between the markets for power and heat (let alone the markets for electricity and gas as was the case in the early 1990s).

This means thinking about the efficiency of electricity generation in isolation is nonsensical: we also need to worry about what happens to all the waste heat from power stations. This line of thinking quickly points at the merits of district heating and combined heat and power schemes which are much less wasteful and more efficient ways of generating customer convenience and warmth for most dense urban environments.

More fundamentally, if we start from individual customer experience as the basis for structuring markets and regulators, we arrive at the conclusion that energy markets and energy market regulation should predominantly be informed by the construction market. And the construction market is still one of the most local and diverse markets that exists (for common sense reasons we all know).

So there are fundamental economic and regulatory reasons for energy markets to be thought of as local, as well as the many straightforward arguments that exist for financial benefits and efficiency from local energy schemes (usually ‘if only the regulations or planning systems allowed it’). There are also major social benefits from people having the opportunity to contribute economically to their local communities through accessible local energy schemes.

The real struggle and debate around local energy and low carbon buildings is not a technical or economic one, but a political one. The fundamental question is this: should our energy and construction markets be structured and regulated around the interests of existing incumbents and historical industry structures, or should they be structured and regulated around the interests of individual customers like you and me?

If we start from the latter position, it’s time not only to abolish and rethink OFGEM (and the way we manage ECO), but also to think again about Building Regulations and the relationship between DECC and DCLG. And we should certainly not permit Allowable Solutions to turn into a subsidy for centralised power.

Which side are you on?

Matthew Rhodes is managing director of Encraft