The global energy sector was already undergoing fundamental transformation due to the energy transition when Russia invaded Ukraine. With gas supplies now further restricted and consumer energy bills rising fast, energy security has become a priority for governments around the world.
War in Ukraine has sharpened the focus on how to transform an energy sector that for over a century has been shaped by the volatility of oil and gas prices. Though this is a daunting challenge, it is also one that presents enormous opportunity for investment and job creation.
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By GlobalDataIt is against this backdrop that the UK government published its Energy Security Strategy on 7 April 2022.
So what exactly can the UK do with its energy supplies?
Achieving energy security requires an increase in and better management of domestic energy supplies, a reduction in energy consumption, and support for customers struggling with rising energy bills. Given the climate emergency, energy security should also mean accelerating towards net zero.
The strategy published by the UK government focuses principally on increasing domestic energy supply, primarily through more renewable and nuclear power plants, but it contains fewer details on demand reduction and extra support for energy bill payers.
The government has committed to 95% of all UK electricity being generated by low-carbon means (renewables and nuclear) by 2030. It has set a new target of 24GW of new nuclear by 2050 and the establishment of a new body, Great British Nuclear, to oversee the implementation of new projects. Ambitions for offshore wind have risen to 50GW by 2030, including 5GW of floating offshore wind that operates in deeper waters.
Many in the industry will be disappointed the government has done little to address the roadblocks to more onshore wind being constructed, and environmental campaigners will protest its decision to hold new a licensing round for North Sea oil and gas later in autumn 2022. Of bigger disappointment to the wider industry will be the lack of any real support for households struggling with energy bills, which rose 54% at the start of April and could rise to as much as £3,000 a year by October.
What is certainly absent in the new strategy is any significant new spending commitment. While the government clearly wants to be doing ‘something’ about rising energy bills, it has little capacity to announce major new policies, given this announcement came after Chancellor of the Exchequer Rishi Sunak's spring budget statement.
“The Treasury has effectively closed the book,” says Alasdair Grainger, a former civil servant within the Department of Business, Energy and Industrial Strategy (BEIS) and now net zero director at law firm Grant Thornton. “It has completed its spending review and is not interested in fresh money going out of the door.”
In that spending review, Sunak argued that government restraint was necessary, given the unprecedented levels of public spending seen during the worst of the Covid pandemic.
Adam Berman, deputy director at Energy UK, agrees that “the government is in a difficult fiscal situation”, but highlights that “around renewables, the vast majority of the changes the industry has advocated for do not require significant financial support, or any financial support at all. It is red tape that holds back the kind of accelerated roll-out of renewables rather than necessarily the fiscal side.”
The government spent the lead up to this announcement fielding opinions from the industry on how energy security can be improved. On the evidence of the strategy document, it has heeded much of that advice but responded with new targets rather than detailed plans on how they might be met.
What is in the strategy?
Central to this strategy are targets to expand offshore wind and nuclear power capacity, along with a doubling of the previous hydrogen production target to 10GW by 2030 and a vague promise to try and increase solar power capacity, dependent on the results of a consultation.
Prime Minister Boris Johnson and other senior members of the government have made clear in private meetings with industry leaders that they are convinced by the arguments that more renewables bring lower costs to consumers, despite the best efforts of those lobbying against net-zero targets.
The need for new baseload power, which is not intermittent like renewables, is also obvious, and the government is backing nuclear long-term to replace gas-fired power, and thus reduce the UK's reliance on imported fuel.
Power from gas accounted for about 37% of total electricity in the UK in 2021. That represented an 8.5% year-on-year rise, while power from nuclear plants declined by a similar percentage to just 14%. The government wants nuclear to provide 25% of electricity by 2050. To do so, it has to replace an ageing fleet of existing nuclear power stations.
Power prices rose sharply in France in 2022 due to outages in its own ageing nuclear fleet, and most of the UK’s nuclear power plants are due to be decommissioned over the next decade.
The proposed RAB funding model for new nuclear is untested and will actually see energy bills rise in the short term as the cost of construction is passed on to energy consumers. The government hopes to build as many as eight new nuclear reactors, but the capability of government to procure several new plants at once is doubtful, according to Grainger.
“You could maybe, conceivably see two parallel teams working on gigawatt-scale [nuclear power projects], but you can’t do more than that, and each of those will take four or five years' negotiation time, meaning they will not be delivered before the next election,” he says.
The only nuclear power station under construction in the UK is Hinkley Point C, which has suffered several delays, with the latest design issues suggesting it may not be completed until 2030. Its developers are EDF of France, which is under pressure to focus on addressing domestic demand shortages, and China's CGN whose involvement has raised national security concerns.
There are few developers of nuclear power stations globally, with the government expected to turn to Westinghouse of the US for the new projects. The government has previously backed small modular reactors, which should be cheaper and quicker to deliver, but the technology is nascent and it is far from certain when the technology will be ready for commercial roll-out.
That the government has upped its target for hydrogen production is welcome, but likewise does little to address short-term issues with energy prices.
The government remains committed to blue hydrogen, which is produced by burning natural gas. Given rising gas prices, blue hydrogen projects are now more expensive and difficult to finance. Some saw an opportunity for the government to pivot to green hydrogen, produced by renewable power, but it gave no extra support to it in this statement.
What does the strategy leave out?
A major omission from the strategy is greater support for onshore wind. The strategy says it will support a "limited number" of new projects in communities supportive of it.
There are 5.8GW of consented onshore wind projects in the UK, yet planning restrictions at the local level have effectively stopped development in England, despite it being the cheapest form of energy in the country. Only 20 turbines have been approved in the past five years
“Planning regulations are intentionally constructed to effectively ban onshore wind in England,” says Nathan Bennett, head of public affairs at trade association RenewableUK. “Communities that want onshore wind have no real route to approve it.”
Johnson’s reluctance to support greater onshore wind development is hard to understand given public support for the technology.
In national polling conducted by the government in late 2021, 80% of respondents either supported or strongly supported onshore wind, with only 4% opposing it.
Berman says: “Onshore wind can be delivered quickly and at lower costs than offshore alternatives. It is the simplest way to quickly bolster the UK’s energy security.”
The largest wind resources in the UK is in Scotland, Wales and Northern Ireland, but not changing the planning laws for England represents a missed opportunity. If wind power generation is further concentrated in areas remote from energy demand, it will increase costs for bill payers, due to grid constraint.
If power is generated by renewables but cannot be dispatched to consumers due to limitations in the grid, the generator (the wind farm operator, for example) is compensated for being unable to sell its power. With no large-scale way to store renewable power, the construction of new wind farms in locations remote from end users actually adds to energy price inflation.
There are existing schemes run by energy companies that reward bill payers with discounts or rebates if they live near a wind farm. Many have called for a national scheme on this basis, others for a complete reform of the grid network to allow for localised wholesale pricing. This would incentivise large energy consumers to locate near wind farms, where prices are cheaper.
Not only would that encourage people to want wind farms near their homes, it could also help with the government’s levelling up agenda.
Reforming the grid
These increasing problems with grid stability explain why so many have called for an overhaul of the way in which the entire energy system is managed.
The day before the energy security strategy was published, BEIS announced that it was moving forward with a plan to create the Future System Operator. This will be a public corporation with operational independence from government that will be responsible for strategic planning across both the energy and gas systems, providing advice to both government and Ofgem, the UK's energy regulator.
In comments to the Economic Affairs Committee on 29 March 2022, Simon Virley, a former civil servant who is now vice-chair at KPMG UK, called for the creation of such a body that could work across government and coordinate efforts to reduce energy costs, increase energy security and achieve net zero.
“The need for systems thinking has never been greater, but the bandwidth has never been smaller,” Virley said.
That this new body would have achieving net zero as one of its core goals will be celebrated by many in the industry, as it could lead to the sort of localised wholesale pricing many have called for.
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Yet the absence of new initiatives to address energy demand in the UK is a worrying oversight by government. The bulk of gas use in the UK is in households rather than in industry, so demand reduction does not have to involve reducing industrial capacity. Yet the only reference to reducing demand in the strategy was a £30m investment accelerator scheme for heat pump manufacturers.
“The heart of any short-term intervention has to be significant help from government for consumers and businesses who are suffering as a consequence of high prices, and a move to try and reduce demand,” says Berman.
“There is an acceptance across the broader energy community that prices are likely to increase in October as well,” he adds. “We have to prepare for a scenario in which the government will have to provide significant extra support to what has previously been promised.”
This energy security strategy shows that the government has listened to industry concerns about the long-term challenges facing the energy sector, and increased commitments to low-carbon energy should eventually improve the UK's energy security. However, there is little in the document that will help those struggling to pay their energy bills right now, and any new government initiative without new spending commitments is unlikely to have any immediate impacts.
Editor’s note: This article was originally published on our sister site Investment Monitor.
