FTI Consulting Public Affairs Snapshot: The British Energy Security Strategy – the roadmap to a low cost, secure, low carbon future, or simply high level ambition?
Against the backdrop of global gas supply issues, the need to accelerate progress on net zero, soaring inflation and a cost of living crisis, the Energy Security Strategy is critical for Government to demonstrate delivery on its political agenda in the energy sector. However there are little in the way of quick wins, and a huge amount of work for the sector to meet these ambitious new targets.
The Government has bombarded the energy industry and wider policy ecosystem with strategies over the past 18 months. Fatigue has set in, and yet, when Government started briefing the policy sphere and the media that another one was coming that would drive down bills, improve security of supply and deliver the green transition – the old energy trilemma that has recently come back into fashion – there was optimism that Government would seize this opportunity to set out a roadmap for delivery.
The energy market has been thrown into turmoil, with a cost of living crisis driven by soaring inflation and high energy prices; the invasion of Ukraine and the resulting disruption to gas markets has only added to the challenges.
It is this that the Strategy was touted to address, but realistically, short of direct cash to those that are struggling, there are few quick fixes in the energy space. Putting in place the necessary systems, infrastructure and market mechanisms takes time, and all the while wholesale prices keep increasing and the most dramatic rise in domestic energy prices for decades looms in the form of the October price cap.
This is a huge challenge for Government to deal with, compounded by political pressure from Labour who argue that it is too little too late, and are persistently calling for the adoption of a windfall tax on North Sea Oil and Gas.
Against this backdrop, the Government has been presented with an array of technologies and options and we have seen fierce campaigns for the inclusion of each. There have been winners and losers, but what the Strategy has not delivered is anything that will lower bills in the short-term. Instead, this is a Strategy for the long-term future of the UK energy system, building on previous targets for offshore wind and hydrogen, with an additional big bet on nuclear and an acknowledgement that oil and gas will continue to be needed.
Offshore wind has been at the forefront of Government’s communication around net zero and hailed as a British success story, with continuous reminders of our world leading status. This was clearly going to feature as part of the Strategy. What was surprising was the ambition: an expansion on our already stretching target of 40GW of offshore wind by 2030, to a new 50GW by 2030 target.
Whilst welcomed by the renewables sector, there is a lot of work required to realise this. Government has sought to address one issue, setting out that it will reform the planning system and cut the approval times for new offshore wind farms from four years to one year. However, missing is anything meaningful on the development of an offshore grid, which is already heavily congested, inefficient and one of the major challenges developers face when trying to move projects forward.
Far more disappointing however, is the omission of onshore wind, essentially frozen out of the UK market since 2016 when then Prime Minister David Cameron removed subsidies. A concerted campaign over recent weeks has taken place to put onshore wind back on the table, and the initial media briefings suggested it would be. However, in a change of direction amidst Cabinet disputes over concerns about support from local communities –likely driven by the upcoming local elections – this decision was reversed.
Given the pressure on bills, the omission of one of the cheapest forms of energy is striking. Government has said will consult on developing local partnerships for a “limited number” of communities who wish to host new onshore wind in return for lower energy bills. What is not clear, is how many projects this may or may not be, or when.
Nuclear, however, was one of the big winners. The Prime Minister has long been an advocate for large scale infrastructure projects and won his battle with the Treasury on new nuclear capacity. Government will now be targeting 24GW of nuclear capacity by 2050 – three times more capacity than the UK currently has and representing up to 25% of our projected electricity demand.
Whilst proponents argue that the technology will be essential to make up baseload power when the sun doesn’t shine and the wind doesn’t blow, opponents argue this is an expensive way – particularly given the focus on energy prices – to enable a net zero future. However, with costs spread over the long term, investment in nuclear survived the Treasury’s generally tight-fisted approach to facilitating new spending commitments.
To drive this, the Government will set up a new body, Great British Nuclear. Government has also been explicit that it sees Small Modular Reactors (SMRs) as a huge part of its nuclear ambitions. However, as often is the case when it comes to nuclear, Government caveated these plans in the document that this will all be “subject to value for money”. It will now be for the nuclear sector to demonstrate how it can drive down costs and compete with other technologies.
Also noteworthy is the doubling of the UK’s low carbon hydrogen production target to 10GW. The UK now has the equal biggest target in Europe, matching Germany’s. While ambitious, this is also in line with industry’s thinking. Hydrogen industry groups had called for the Government to increase the target to 10GW with the publication of last year’s UK Hydrogen Strategy, given the potential production pipeline in the UK and the fact that Scotland has its own target for 5GW of low carbon hydrogen production by 2030, meaning the UK-wide target was not aligned.
With Government setting a clear ambition for the production of hydrogen, the question will now turn to how we will use it, and how we get it from producers to consumers. Government has signalled its intention to make a decision on the role of hydrogen in homes by 2026, and it is currently consulting on when or if hydrogen ready boilers should be rolled- out. Converting the gas networks for hydrogen use will be a gargantuan task, and industry remains concerned that the longer we wait on a decision, the more challenging and expensive it will be to implement. The sector will be using this moment to emphasise the need to move faster and call on Government to set out more clarity.
Those on the supply side have done well out of the Strategy with a boost to nuclear and renewable generation, and hydrogen production. If they are the winners, then the losers are those on the demand side.
Energy efficiency is seen as one of the few ways of helping reduce consumer bills in the short to medium term, whilst also doubling up as an essential measure to reduce household emissions and pave the way for the installation of heat pumps. The lack of new support has resulted in a stinging rebuke from both environmental and consumer protection campaigners.
In the context of tight public finances, perhaps it is not surprising, that in the 24 hours before the Strategy was published, The Telegraph revealed that whilst Number 10 and BEIS were pushing for an expansion of the Energy Company Obligation Scheme to support energy efficiency improvements, it was blocked by the Treasury, who would have had to put in an additional £200 million a year of taxpayer money.
The North Sea Oil and Gas sector has also received a boost in political capital. With security of supply returning to the fore and the price of gas heavily impacted by the war in Ukraine, domestic supply has become more salient.
Whilst Labour have continually called for a windfall tax, the Government is clear that the sector will be essential for continued security, and that sourcing this from the North Sea rather than abroad is the cleanest and most secure way to do so whilst ensuring a smooth transition. To this end, Government has announced a new licensing round for North Sea oil and gas projects is planned to launch in the autumn.
However, expect fierce political debate with many arguing that the current crisis has only demonstrated the need to remove our reliance on gas, and that continued investment in the North Sea is contrary to this. The strength of feeling from those who represent North Sea Oil and Gas communities should also not be underestimated in this fight.
Does this strategy address the high bills and supply issues we currently face? No. What it does do however, is set an ambitious agenda for the sector to deliver on. To achieve this, industry needs decisions made on important areas like offshore transmission, the models of support for hydrogen, and future subsidy structures to name a few. Whilst many of these are for Government to take, it will be for industry to hold Government’s feet to the fire, and close engagement has never been more important.
| The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.
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