The energy balancing act

Michael Thorogood, Political Consultant

@MJThoro

When Prime Minister Boris Johnson unveiled the government’s 10-point plan for a green industrial revolution in November 2020, the outlook for the UK energy sector was already challenging. After becoming the first major economy to embrace a legal obligation to achieve net zero by 2050, the government set out a strategy to become a global leader in green technologies that would not only decarbonise the sector but also lower energy bills and help the economy bounce back from the Covid crisis. However, the spiralling cost of living—driven by supply shortages and the war in Ukraine—has hit customers and upended the energy sector, adding renewed complexity and urgency to the government’s drive to ensure a secure, affordable and low carbon energy supply.

To achieve this trinity, the government published a policy paper, the British Energy Security Strategy, in April 2022, some time after sector experts were expecting. The strategy sets out plans to produce cleaner and more affordable energy in the UK, with 95 per cent of electricity being low carbon by 2030. The Prime Minister has said that the strategy will reduce the UK’s reliance on power sources exposed to volatile global markets, securing supplies and lowering prices. “We’ve got the ambition, we’ve got the vision – and, with this plan, we’re going to bring clean, affordable, secure power to the people for generations to come,” he declared in a foreword. However, Labour has argued that the strategy leaves much to be desired, with Ed Miliband, shadow secretary of state for net zero, saying it "won't cut bills, won't deliver energy independence, and won't tackle the climate crisis."

The Energy Crisis Bites

The strategy was published against a backdrop of intersecting crises, both domestic and global, which have resulted in a perfect storm of high prices, low supply and both consumers and suppliers under significant financial pressure. In the UK, 29 mostly small energy suppliers—almost half the market—went bust between August 2021 and May 2022, forcing millions of customers to shift to other operators, sometimes on higher tariffs. This was largely the result of companies being unable to adapt to soaring wholesale gas prices, which were fuelled by a supply shortage in Europe and Asia but compounded by factors unique to the UK, including a key power transmitter catching fire and low energy storage capacity. The difficulties of the energy market have been exacerbated by war in Ukraine, which led to a scramble across Europe to reduce dependence on imported fossil fuels, even though the UK is not heavily dependent on Russia for its energy supply.

Against this backdrop, the drive to achieve a higher degree of energy self-sufficiency has become a pressing political priority. Nuclear power, with its promise of reliable uninterrupted year-round supply, is a cornerstone of the energy plan, with an ambition for 24GW of output per year by 2050. That would meet about one quarter of projected UK electricity demand, supported by a new government body, Great British Nuclear, to accelerate the pipeline of new nuclear power stations. Offshore wind is also high on the agenda with a goal for the UK to become the “Saudi Arabia of wind power.” This is underpinned by planning reforms to reduce the time it takes for offshore wind projects to reach construction stage to one year from four and a targeted output of 50GW by 2030. That’s enough to power every home in the UK. Over the past 12 years, the government claims the UK has increased renewable capacity connected to the grid by 500 percent as a result of around £90bn investment.

The government hopes that these ambitions will be translated from strategy into statute through a new Energy Security Bill that was announced in the Queen’s Speech in May 2022. The Bill—which has yet to be set out in detail—will aim to propel the UK’s transition towards a cleaner and more affordable energy system, backed by the establishment of a new Future System Operator (FSO). This independent body will oversee the whole energy system and integrate existing networks with emerging technologies such as hydrogen, which the strategy describes as a “low carbon superfuel of the future.” It aims to double ambitions for low carbon hydrogen production to up to 10GW capacity by 2030, with at least half coming from green hydrogen that could provide cleaner power, transport and potentially heat.

Gaps In The Strategy

However, sector experts have highlighted some notable omissions in the strategy, which call into question the government’s ability to realise its energy ambitions. While the government has acknowledged that energy efficiency is the “first step” in reducing energy bills, the strategy offers little in the way of a plan for reducing energy demand, nor increasing energy storage or efficiency. Brian Berry, chief executive of the Federation of Master Builders, said that while the strategy delivered zero percent VAT on energy efficiency improvements to properties, this would only help those with the money to pay in the first place. “A broader, insulation-led retrofit strategy would have been an immediate solution to reduce energy consumption and save homeowners money on bills," he said.

Others have argued that the strategy is too focused on the long-term. Laura Bishop, chair of the Ground Source Heat Pump Association, said in a statement that it would “do nothing to address the immediate cost of living and energy crises facing UK consumers”. In May the Treasury took action, announcing a much-anticipated windfall tax on energy companies, known as the Energy Profits Levy, and one-off grants to help households. The levy also includes a new investment allowance that means companies will receive nearly 91p in tax savings for every £1 that they invest, providing an immediate incentive for the sector to invest in new UK oil and gas extraction. 

The government has previously pointed to major announcements on energy efficiency in the Heat and Buildings Strategy published in October 2021 and a £9.1bn support package for household energy bills announced in February 2022. There is also new support for heat pump manufacturing outlined in the strategy via a Heat Pump Investment Accelerator Competition worth up to £30m and plans to enhance the flexibility, responsiveness, and efficiency of the energy network through the new FSO.

The government has set out plans to strengthen the resilience of the domestic energy system, which includes a continued role for North Sea oil and gas extraction and processing while output from renewable technologies is scaled up. In this light, the strategy represents something of a green regression, though one framed as necessary to ensure stability in transitioning the energy system towards net zero. The long development time for some green energy forms means that the UK will continue to utilise its North Sea oil and gas reserves for some time to come, albeit recognising that producing gas in the UK has a lower carbon footprint than importing it from abroad.

The Return Of Fracking?

The Energy Security Strategy outlines a new licensing round for North Sea oil and gas projects that will launch in the autumn, supported by a new taskforce providing bespoke support to new developments. Currently around half of UK demand for gas is met through domestic supplies and the government says that in meeting net zero by 2050 the UK may still use around a quarter of the gas that it uses today. It says the North Sea will remain a foundation of UK energy security, albeit with gas consumption reduced by over 40 percent by 2030. In a further shift in the government’s position on fossil fuels, the strategy says the government will remain “open minded” about onshore reserves and an impartial technical review on shale gas has been commissioned. This leaves the door ajar to lifting the UK’s 2019 moratorium on fracking.

The Climate Change Committee, the UK government’s independent advisor on tackling climate change, said in February 2022 that it would support a “presumption against exploration” of new oil and gas projects in the North Sea, primarily because of the signal it would send to investors and the world about the UK’s commitment to limiting global warming. However, it has also said the impact on the planet of new domestic production is “not clear-cut” and new drilling would not reduce energy bills for UK consumers.

Further North Sea fossil fuel exploration remains controversial. Andy Mayer, energy analyst at the Institute of Economic Affairs think tank, said that central to any solution to the gas supply crisis must be, “A commitment to rapidly increase domestic supply from the North Sea and onshore fracking.” But Luke Murphy, associate director for energy and climate change at the IPPR think tank, said, “Phasing out fossil fuels is not only essential for tackling the climate crisis and protecting future generations, but it is in the interests of our energy and economic security."

Looking To The Future

The shape of the UK’s future energy mix has reportedly been the subject of months of debate within the cabinet. Reports suggest resistance from Chancellor Rishi Sunak and some backbench MPs forced ambitions in the strategy to be scaled back. Onshore wind, for example, has been almost entirely dropped in favour of more nuclear, despite Business Secretary Kwasi Kwarteng reportedly wanting to double capacity by 2030. The strategy promises to consult on new onshore wind projects with a “limited number of supportive communities.”

The debate has also called into question whether the Department for Business, Energy and Industrial Strategy (BEIS) is driving energy policy in the UK. While the Prime Minister championed green policies and energy innovations around COP26 in November 2021, the Chancellor has expressed concern over the fiscal implications of a rapid energy transition following heavy spending during the pandemic and the need to weather the cost-of-living crisis. While Johnson has advocated for the development of Small Modular Reactors (SMRs) – mini nuclear power stations that can theoretically be deployed at speed and scale – the Chancellor has expressed concern over the longer-term costs of a major nuclear expansion.

There are also concerns over the government’s ability to generate the substantial private sector investment and technical capabilities required for the transition to net zero. SMRs are central to the strategy with the ambition to roll out the equivalent of one new reactor each year over the coming decade, supported by a £120m Future Nuclear Enabling Fund launched in May 2022. However, SMRs remain subject to technological readiness from industry and one of the most advanced programmes run by Rolls Royce expects to start producing power towards the end of the decade.

The cost-of-living crisis and soaring oil and gas prices has upended the energy sector and created hardships for customers, injecting greater urgency into the British Energy Security Strategy. While net zero remains the guiding principle for the longer term, recent events have shown that it will have to compete with the pressing need to secure affordable and home-grown energy.

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