What the UK’s Energy Security Strategy got right – and where politics hampered policy
What the UK’s Energy Security Strategy got right – and where politics hampered policy
Much leaked and long anticipated, the UK government’s “British energy security strategy” faced an expectant audience when it was delivered on 6 April.
The task was a difficult one. Balancing energy security, meaningful progress on climate action and long held, deeply felt political concerns meant walking a vanishingly thin line between fiercely competing priorities and agendas. All of this arrived against a backdrop where the cost-of-living crisis is the number one item in MPs’ inboxes.
We think the strategy has gone a long way to meeting the challenge – but there are certainly areas where more could have been done. Most of those are in areas where the politics has trumped economics.
Here, we give our thoughts on the paper, explaining the implications for the UK and why renewable energy infrastructure investors will be pivotal in the strategy’s long-term success.
Changes to UK gas production will have little to no long-term impact
Most gas in the UK is used for space heating or industrial processes, with relatively little used for making electricity. However, its price-setting role still spills over into electricity markets, affecting the price customers pay for their electricity, as well as their ability to stay warm. The need for a robust, far-sighted energy security strategy has been made clearer than ever by Russia’s invasion of Ukraine, which further destabilised prices.
We have seen gas prices rise to eight times what they were a year ago, with the government largely having to watch on as the now regulated cost of an average household energy bill has risen by £500 a year, with more to come in the autumn.
Energy security cuts two ways:
Firstly, price. Today in the UK, there is no shortage of gas. Despite this, gas remains unaffordable for many people and, indeed, for many industries. We are living the consequences of a long-held UK policy that energy security was more about gas availability than price. That has proven to be a miscalculation. Very high prices have severe impacts on society and industry.
The second is availability. Securing enough gas is a constraint on an independent foreign policy. The UK has not been affected by this greatly since Russia’s invasion of Ukraine, because we have diverse sources of gas.
For Germany, by contrast, it would be physically impossible not to buy gas from Russia for at least the next winter without introducing severe rationing. The effect on the German economy of such a measure would be immense. Making such a gesture in the UK is possible, but there would be no practical point, even if the foreign policy politics might be appealing.
It was no surprise to see the government announce a review, by the British Geological Survey (BGS), of the current position the BGS has on the safety of fracking. Neither was it a revelation to see measures announced to encourage North Sea oil and gas production.
If domestic fracking can be properly and safely conducted, it is likely that it could add to UK jobs, add to UK taxes and lead to a small amount of increased energy security. However, even if fracking were to be implemented and North Sea production increased, given the gas economics and the level of inter-connection between the UK and the rest of Europe, it will do little to nothing for pricing.
Furthermore, given that most forecasters expect the current price spike to wane within the next 24 months, it seems likely that long-term domestically produced gas volumes (North Sea or onshore fracking) will remain little changed.
Energy efficiency measures a surprising omission, given cost efficiency
What is most obviously absent from the energy security discussion is a coherent set of energy efficiency measures. It is unarguable that using less gas to heat houses and offices would make energy security sense and make energy bills – for those who have benefitted from the efficiency measures – more affordable.
High level energy efficiency standards for new and existing buildings have needed improvement for some time. Brexit and then the pandemic have hampered progress in this complex area in recent years, as they have diverted the focus of politicians and civil servants.
Even so, the absence of policies to address energy efficiency has been at the centre of the response, from the Opposition, to the government’s strategy. Leaks in newspapers suggest that the Treasury was not willing to sign off a package that it felt was not well thought through. It is likely that policies in this area may emerge more fully with the development of further thinking on “levelling up” as it would provide jobs, warmth and financial respite for those suffering from the effects of high gas prices.
Onshore wind plans little changed, offshore lacks ambition
The government’s stance up to this point means we were not surprised that changes to onshore wind plans were not forthcoming. In the past, arguments against onshore development were usually based on the government subsidy for new projects. This issue is no longer relevant, as new onshore does not need a subsidy. Today the difficulty is in getting planning permission in England and, in some areas, a grid connection. This is a significant problem with the strategy.
Onshore wind is one of our lowest-cost energy resources and could make a significant near-term impact.
Much of the political fear relates to the building of turbines near habited areas. However, the physics of wind power (energy from a wind turbine is proportional to the cube of the wind speed and the square of the blade length, meaning a small change in either makes a big difference) means that what gets built onshore would only ever be large turbines in lowly populated windy areas, for instance Scotland.
There are doubters in parts of the Conservative Party that public support for onshore wind is there, despite polls suggesting it remains very high. But it appears that Energy Secretary Kwarsi Kwarteng has secured some latitude to find a way to satisfy these doubters.
For offshore wind, the commitment to 50GW is not a big advance on the previously signalled 40GW detailed in the 10-point plan published in late 2020. Meeting the target will require supply chain development, but there is still plenty of space in the seas around the UK, and the cost continues to plummet.
Nuclear ambition the big play – but most supply remains a long way off
The nuclear ambition has cross-party support and is, again, not surprising. The key issue here is that even if the challenging 24GW target is met, it is a 2050 target. The government already has a target to decarbonise 95% of the electricity sector by 2030. This is long before even the first of the reactors, at the Sizewell C project in Suffolk, comes online.
In other words, most of the job of electricity decarbonisation will be done by renewables given the much shorter timescales to deployment. Most commentators see electricity use doubling between 2030 and 2050, as the use of clean electricity to decarbonise the rest of the economy kicks in.
Costs of nuclear remain to be proven and much will depend on the risk sharing model the Treasury adopts later this year between customers, taxpayers and investors. The sums to build even one, let alone five new power stations, are huge and will make for financing challenges.
Solar, heatpumps, hydrogen
Solar’s role in the strategy received fewer headlines, perhaps unfairly. While solar will do little to help with the gas price problem, it is the most rapidly deployable technology. Although no target has been set, there is an “expectation” that it will quintuple by 2030 from 15 GW today. Combined with battery storage, we expect it to play a large and useful part in the mix.
The role of heatpumps (as opposed to hydrogen) for domestic and commercial heating has again been reinforced and that is to be welcomed.
Last but not least is the role that hydrogen plays in the strategy, with an explicit 10GW of hydrogen production targeted by 2030. Hydrogen is widely seen as the “Swiss army knife” of the net zero story, but it is unlikely to arrive at scale until late in the energy transition story. Bodies such as the UK Climate Change Committee forecast that it will be used in industrial processes, aviation and shipping from the mid-to-late 2030s. These are hard-to-abate emissions that will prove expensive.
Long before that, electric vehicles will have achieved dominance, and electrified heating of buildings is forecast to be widespread. Accordingly, the primary use case for hydrogen in the near term is likely to be largely niche applications, where it can be manufactured cheaply at point of use.
As energy generation overall becomes more dependent on wind and solar resource, hydrogen’s energy storage capability will likely become a vital cog in our energy system. Working in concert with renewable generation, hydrogen can be produced at times of energy surplus (the summer) and then stored as a seasonal buffer until needed.
It all needs to be financed, meaning a wide range of opportunities
In amongst all of this confluence of energy security and climate action will be the need for finance.
An upcoming process which has received little public attention so far is a renewed commitment to the Review of Energy Market Arrangements with options for reform set out in the summer. This will be the most important piece of energy thinking since the 1980s, reflecting the sea-change in the type of generation we will have.
In fossil powered generation the cost is mostly the ongoing cost of the fuel. The fuel is often produced in politically challenging countries and is subject to price spikes. Clean generation - nuclear or renewables - and insulation, all require up-front capital expenditure, followed by essentially free fuel in the case of wind and sun, or low cost in case of nuclear.
The cost of electricity from renewables has fallen dramatically in recent years. There is an evident, increasingly urgent need for climate action. Latterly, the war in Ukraine has further embedded the need for a revised energy security strategy. The government has skilfully managed to align the politics of the country and its own party to enable a big leap forward. The strategy should, in the long-term, lower bills, provide cleaner air and lower carbon under with an overarching political narrative of energy security.
The infrastructure that will be needed to be delivered to secure these objectives will need to be financed, largely by the private sector. This should provide plentiful opportunities to invest in household, local and national infrastructure on a huge scale.
The good news is that the politics of low-cost energy now align with secure income, long-duration, inflation-linked investments that so many investors are searching for.
The formation of Schroders Greencoat further demonstrates Schroders’ broader commitment to contribute to net zero and decarbonisation, while providing access to this vital transition for clients.