TFL's London Cycle Challenge

They are trying to encorage people to see that short rides (ie to work, to the shops) are a good alterative to pubilc transport, cars ect.

Correct. Increasing the percentage of short trips made by bike is the most important initial gain area. (You wouldn't believe the numbers of local trips of up to 2 miles made by car, for instance.) Ideally, they'd give the most points for trips up to 2 miles (local trips), then 5, etc., but as this is aimed mainly at commuters, it would make commuters with long commutes feel insufficiently rewarded.