Last night the Government announced its much anticipated energy security strategy, with the full version appearing this afternoon. The strategy sets new targets for the deployment of wind, new nuclear, solar and hydrogen, whilst supporting the production of domestic oil and gas in the nearer term.
But the headline news is, as widely expected, a renewed commitment to nuclear power with an ambition to have up to 24 GW of new nuclear power by 2050, representing around 25% of projected electricity demand. A new body, Great British Nuclear, will be established immediately to bring forward new projects, backed by “substantial funding”, which could deliver up to eight new reactors. The £120 million Future Nuclear Enabling Fund first announced in the Comprehensive Spending Review will be launched this month.
The Government claims that its British Energy Security Strategy will increase the number of clean jobs in the UK by supporting around 112,000 additional jobs in renewable generation and hydrogen by the end of the decade.
However, the press release is silent on demand-side measures such as energy efficiency and reductions in heat losses, and while the strategy does describe these as a priority, no new measures have been announced. There is also little to support consumers with the pressures of high energy costs in the short term. Indeed, there is also little to address security of supply concerns in the short term.
Continuing with the strong supply-side focus
In addition to the plan for more nuclear power, the offshore wind target has increased from 40 GW to 50 GW by 2030, of which “up to 5 GW” could be from floating offshore wind. Planning reforms will be brought forward to reduce the approvals process for new offshore windfarms from 4 years to 1 year. There is a rather weak commitment to consult on “developing partnerships with a limited number of supportive communities” for the development of onshore windfarms in return for guaranteed lower energy bills, something which will comfort many traditional Conservative voters and backbench MPs who fear the development of onshore wind will blight rural neighbourhoods.
The Government would like to increase solar capacity from the current 14 GW to up to 70 GW by 2035, and will consult on the rules for solar projects, particularly for domestic and commercial rooftops.
Also, as expected, domestic oil and gas production is to be supported in the near term. A licensing round for new North Sea projects is planned for the Autumn, with a new taskforce providing bespoke support to new developments. The Government (correctly) pointing out that producing gas in the UK has a lower carbon footprint than importing it from elsewhere.
On fracking, the Government says it remains “open-minded” and that the moratorium will continue “unless new evidence emerges”. Earlier in the week the Government commissioned a new geological survey into the prospects for shale gas in the UK, and the requirement for Cuadrilla to cap its test wells in Lancashire has been lifted, at least for the time being, so there are some positive signs.
To offset any criticism of this fossil-fuel dependence, the Government says it will “aim to” double its target for low carbon hydrogen production to up to 10 GW by 2030, with at least half being “green hydrogen” ie produced using renewable energy. There is also a renewed commitment to delivering on the promise of £1 billion to fund 4 CCUS clusters by 2030, as well as a commitment to a Heat Pump Investment Accelerator Competition in 2022 worth up to £30 million to incentivise the production of British-made heat pumps.
The strategy recognises the need to maximise flexibility and to plan for and manage network infrastructure effectively. A range of measures is outlined, many of which have been seen before and almost all of which are supply-side focused:
establishing the Future System Operator as soon as practicable to oversee the energy system and drive the energy transition;
publishing a strategic framework this year for how networks will deliver net zero (jointly with Ofgem);
appointing an Electricity Networks Commissioner to advise on policies and regulatory changes to accelerate progress on network infrastructure;
setting out a blueprint for the whole system by the end of 2022 ;
delivering a Strategy and Policy Statement for Ofgem which will ensure that Ofgem expedites its approvals process for anticipatory network investments;
working with developers and the supply chain, to increase pipeline visibility and certainty to help accelerate procurement timelines;
reducing timelines for delivering strategic onshore transmission network infrastructure by around three years, and seeking to identify further savings in the procurement, manufacture and construction of new infrastructure;
ensuring local communities can benefit from the development of onshore infrastructure;
conducting a comprehensive Review of Electricity Market Arrangements in Great Britain, with high-level options for reform to be brought forth this summer.
There is a brief the retail segment with the Government saying it will continue with its ongoing review of the market to “ensure that consumers fully benefit from the next phase of our energy revolution,” with plans for more flexible pricing, as well as requiring all new homes to be designed so that smart meters can be fitted from the outset.
Disappointing lack of measures to address affordability and short-term security of supply concerns
The press release states that: “consumer bills will be lower this decade than they otherwise would be as a result of the measures this government has taken.” It would be interesting to see the justification for this statement – I have made a Freedom of Information request to see if BEIS will provide some quantification of this claim – but I am doubtful of its veracity. Consumer bills have been steadily rising as a result of the costs of renewables subsidies, and the indexation to inflation together with the leveraging effect resulting from early RO projects receiving more than 1 ROC /MWh mean legacy costs continue to rise on a unit basis. It seems unlikely that in a market where the marginal cost of electricity is still determined by gas prices over which the Government has no control, and the rising impact of both renewables subsidy costs and the network reinforcement and balancing costs needed to manage those renewables, consumer bills are lower than they would have been had we continued with a fossil-fuel based energy system.
There is nothing in the strategy to address either short-term affordability problems or security of supply concerns. Indeed, on Sky News this morning, Business Secretary Kwasi has admitted the strategy is “more of a medium three, four, five year answer”, and while he also highlighted the importance of “more security and independence in the year ahead,” there is little in what we have seen so far to achieve that.
The price cap is widely expected to rise again in October (or earlier if Ofgem decides to shorten the application periods), and many more households are likely to face the challenges of fuel poverty next winter. This raises the prospect of even more excess winter deaths linked to under-heated homes, particularly if the winter is cold. The support measures announced so far are unlikely to be sufficient, but it does not seem as if the Government is minded to do more at this stage, with the Prime Minister saying this week that “there’s a limit to the amount of taxpayers money we can simply push towards trying to deal with global energy price spikes”.
The strategy claims that the Government’s “immediate priority has been to provide financial assistance to families and businesses struggling with higher energy bills”, but as the UK is spending the equivalent of over £1,200 per person this year to service the national debt, “we cannot afford merely to rely on taxpayer funding to assist with paying ever higher bills; we need to bring down the bills themselves”. While the strategy sets out improved energy efficiency as being the first step to achieving this, it only refers to previously-announced measures, which are not enough to properly address the challenges of Britain’s leaky homes.
“Soaring gas prices are responsible for adding at least £500 to energy bills, forcing another 2.5million households into fuel poverty. Without help to insulate their homes to bring down gas bills there may be little prospect they can afford to keep their homes warm…It’s all the more striking, since insulation is the public’s top priority in the current gas crisis with 84% backing it as the best way to cut our reliance on gas and cut bills. With any extra UK gas production having no effect on prices, it begs the question whether having gas that households can’t afford to use counts as ‘energy security’ to them,” – Sepi Golzari-Munro, deputy director, Energy and Climate Intelligence Unit
The strategy also says that the long-term solution is to address the country’s underlying vulnerability to international oil and gas prices by reducing dependence on imports, but this is not really true: not only do we need to reduce consumption, reducing reliance on imports will not fundamentally change the cost of energy when prices are set in international markets (although increased domestic production will bring in additional tax revenues and improve the balance of payments).
“This (energy strategy) is about tackling the mistakes of the past and making sure that we are set well for the future and we are never again subject to the vagaries of the global oil and gas prices and we can’t be subject to blackmail, as it were, from people such as Vladimir Putin, we have energy security here in the UK,” – Boris Johnson, Prime Minister of the United Kingdom of Great Britain and Northern Ireland
(The Prime Minister has previously referred to the hiatus in new nuclear power as a mistake.)
It has also been reported this week that the Treasury blocked a proposal to expand the Energy Company Obligation – a scheme under which suppliers must upgrade household insulation and energy efficiency. I am not a fan of the ECO – suppliers have no natural expertise in the construction industry and building such expertise is inefficient. I believe these types of schemes should be the responsibility of local government, with funding provided by central government. Local government is already responsible for both planning decisions and building control ie the process by which it is ensured that building works conform to laws on Building Standards. As I described in my 14-point plan, a comprehensive scheme to reduce heat losses in homes meets every aspect of the energy trilemma: it is clearly environmentally sustainable, it reduces energy demand supporting security of supply, and at the individual level it reduces the cost of energy because less energy is needed.
Failing to address the demand side, and particular the thorny issue of heat losses in homes is a huge missed opportunity – the funding earmarked for yet more offshore wind could, and should have been used for this instead, so that the benefits could be directed to those most in need.
But while this would be a very desirable policy approach, it would take time to deliver and therefore have little impact on short term affordability or security of supply concerns. To address these the Government should:
Remove green levies from bills to general taxation and consider using Government borrowing to fund them in the short term to avoid raising taxes
Provide VAT relief on domestic energy bills – increased VAT receipts on business bills would likely cover much of this cost to the Treasury
Re-open the T-1 capacity auction for winter 2022 to ensure there is adequate available capacity to guarantee security of supply
This last point is important – the nuclear issues in France have seen us going from 3 GW of imports to 3 GW of exports, a net reduction of 6 GW, and while interconnector flows are de-rated in the capacity margin, this still represents a significant chunk of the 3.9 GW capacity margin we had in Winter 21. With falling nuclear availability and the planned closure of West Burton A in September, next winter is likely to look even tighter. Re-opening the auction would provide an opportunity for West Burton A to remain open and potentially bring the two mothballed Calon CCGTs back into the market.
Worryingly vague, worryingly long-term and worryingly still supply focused
It is difficult not to be underwhelmed by this new strategy. It is very short, and large parts are simply a re-hash of previously announced initiatives. The tone is also worryingly vague conveying a lack of conviction: targets are described as “up to XX MW” of such and such, which could mean very little in practice. We “could” have eight new reactors rather than we “plan” to have eight new reactors. For something which purports to being an energy security strategy in particular, this lack of firmness is worrying. Phrasing targets in this way provides an excuse for them to be missed and presents a risk to the very security of supply they are designed to provide. In other words, even within the strategy there are no guarantees, before implementation risks are taken into account.
So it is tempting to ask what the point of this is. There are certainly positives around nuclear power and UKCS production: both are likely to increase as a result of this strategy, which is positive for security of supply in the medium-to-long term. But neither can be delivered quickly. The Government still needs to act on capacity concerns for the coming winter, and the next few winters after that – a good place to start would be to re-open the T-1 capacity auction to any generation that can deliver, at the clearing price, for next winter.
And the strategy appears to be almost exclusively focused on the supply side. The energy transition cannot be achieved only through supply-side measures – it is widely recognised that consumers will need to change the way they access and use energy if net zero targets are to be achieved. This will be difficult: while some affluent and engaged consumers are keen to self-optimise flexible energy assets in response to time-of-use price signals, they represent the minority. Most people, for a variety of reasons, either will not be able to do this or will simply have no interest.
Two important steps need to be taken to support these consumers – the first is to reduce heat losses in homes, which has all the benefits described above. The second is to reform the retail market so new business models emerge, particularly energy-as-a-service, where flexible energy assets are bundled with supply and optimisation under multi-year deals which are similar to current mobile phone contracts.
The Prime Minister has spoken about correcting past energy policy mistakes: this strategy may indeed correct historic mistakes around nuclear power and domestic gas production, but it is set to perpetuate the mistake of focusing too much on the supply side and ignoring the growing issue of affordability. The Government needs to do much better than this.