Working paper
Incumbency in the UK heat sector: implications for low-carbon heating
May 2018
Today, the Heat, Incumbency and Transformations (HIT) team have released the final working paper from the project. The project emerged as a combination of two suggested research areas: heat and incumbency.
Firstly we wanted to investigate issues surrounding the decarbonisation of heating which is increasingly seen as a priority by energy policy makers. Secondly we wanted to consider the move towards low carbon heating from the perspective of incumbency, a topic which has received only limited focus. This is despite issues of incumbency often being viewed as vitally important to the transformation of large socio-technical systems (such as the UK’s heat system).
Prior research has suggested that incumbent businesses can have both positive and negative influences on decarbonisation. There are examples of large companies investing in low carbon energy and driving change but there are also examples of incumbents trying to resist change therefore slowing or blocking decarbonisation.
The HIT project is fundamentally interested in how incumbents in the UK heat sector are behaving in the context of decarbonisation, and the impacts this behaviour may have in the future. Our first paper looked to investigate what the word incumbency actually means and we will publish our review into this topic shortly.
Our second paper mapped incumbency in the UK heat sector, investigating the key companies and sectors present in the UK heat industry. We considered how the companies in the UK heat sector may face risks or opportunities because of heat decarbonisation.
Our final paper, released today, focuses on what the policy implications of incumbency in the UK heat sector are for the decarbonisation of UK heat. The paper is based on a large number of interviews with experts working across the UK heat sector.
‘So, are incumbents bad then?’ is possibly what you’re thinking. Well I’m afraid there is no simple answer to that question. There is clearly some questionable behaviour and plenty of lobbying going on, but much of this is associated with how gas can fit into a low carbon future rather than obvious attempts to block the decarbonisation of heat.
Quite surprisingly, we found little evidence of some of the largest incumbents, such as ‘big 6’ companies or upstream gas producers engaging in the idea of the decarbonisation of heat. This is perhaps linked to short investment horizons (beyond the timescale of heat decarbonisation) or a focus on wider issues (such as global gas exploration and markets).
We did discover significant engagement by two key sectors; the UK gas distribution networks and heating appliance manufacturers. Gas networks potentially face an existential threat from heat decarbonisation because if gas cannot be burned, what do they do? They are also currently preparing for the next price control period where Ofgem will set investment levels and performance standards for the period from 2021 to 2026 and are obviously keen to maintain investment (and the network).
The heating appliance sector appears primarily interested in the maintenance of existing UK market positions. Their concern is that if heat decarbonisation requires new appliances, this could mean significant market changes. Interestingly, it should be noted, most of the heating appliance companies (these are generally multi-national) also manufacturer low carbon heat appliances for non UK markets.
So what are they up to? Well the key strategy at the moment is to promote the idea of ‘decarbonising the gas grid’ using hydrogen produced from natural gas alongside carbon capture and storage. This is an idea which has rapidly emerged (really only over the course of this project) and which policy makers are paying serious attention to.
Decarbonising the gas grid has clear advantages compared to other approaches to heat decarbonisation such as widespread electrification, or development of district heat networks. This is because it is expected to be able to use existing infrastructure and may require reduced engagement by consumers compared to other options (such as district heating or heat pumps). However, this is a novel idea which has major uncertainties associated with it including technical questions, unknown costs and energy sourcing issues (i.e. where does the hydrogen come from).
We have discovered two key approaches for how gas networks and appliance manufacturers have been promoting the idea of decarbonising the gas grid. Firstly there is a large amount of evidence of lobbying work to influence policy makers and regulators, attempting to show the future viability of the gas system. We have also discovered a significant amount of innovation work (primarily led by gas networks) which focuses on, and supports gas based solutions. This innovation is often at the expense of, or ignoring the potential of non-gas options. We have also discovered the emergence of networks and coalitions of incumbents working together to promote the idea of decarbonised gas – interestingly, one key network, the ‘decarbonised gas alliance’ has strong links to the shale gas lobby.
The decarbonisation of heat is a complex and sizable issue and all options currently have a number of uncertainties. However, our main concern is that because incumbents are strongly promoting the idea of gas grid decarbonisation as a defensive strategy, other more optimal low carbon heat solutions (which do not have the power of incumbents behind them) may not receive the appropriate focus by policy makers. This is a major issue because the best technologies and ideas for heat decarbonisation are unlikely to be with the gas incumbents.
We have therefore developed 10 policy recommendations which are listed in the full paper. These recommendations among other things, calls for significant support for the rapid deployment of known low carbon heat technologies which are already delivering at scale around the world. This includes heat pumps, heat networks, energy efficiency. We also call for greater demonstration and research into the potential decarbonisation of the gas grid to see how (and if) the gas system may fit into a low carbon future.
Finally, we call for Government to work with incumbents and support them to diversify into low carbon products and services. However, at the same time, policy makers must actively support the emergence of new ideas and new entrants into the UK’s heat market in the knowledge that the best ideas may not be in the most obvious (or most publicised) places.