GK Consultant Milo Boyd takes a look at the European Union’s recently published REPowerEU proposals to assess the likelihood of a clean break from Russian fossil fuels.
The Government has finally published its long-awaited Energy Strategy, against the backdrop of soaring global energy prices to improve the UK’s energy independence. GK Strategy Consultant Sam Tankard takes a closer look.
Negotiators at the end of the COP26 climate summit in Glasgow in November 2021 felt a fragile sense that real progress had been achieved as the final deal between 197 countries contained an agreement to draw down fossil fuel subsidies. Despite a fierce argument over whether coal should be phased down or phased out, the direction of travel was clear, said COP26 President Alok Sharma, who hailed that “the end of coal is in sight.”
Four months on, the global energy picture has shifted significantly; and not completely in the direction sought by Sharma and other COP negotiators. The monumental shift by western allies away from their previous Russia-reliant policies and towards new energy strategies puts their individual Net-Zero policies at risk.
The questions now are whether such a shift can happen rapidly enough to allow the world to meet its tenuous climate goals — and if the economic instability of the Ukraine war will prove to be a long-term setback, rather than an incentive towards a green transition.
As things stand, the US and the UK have both announced bans on Russian oil imports, while the EU has published a plan for more gradual independence from Russian fuels – cutting its reliance on Russian gas by two-thirds by the end of this year. Responding, Russian Deputy Prime Minister Alexander Novak warned that Western countries risk oil prices of $300-plus per barrel if they follow through on cutting off Russian supplies.
The UK Government is poised to announce its new energy supply strategy, which would make the UK more independent in its energy supply, in the ‘coming days’. The strategy will be a real watershed moment – determining whether the conflict has lent a new sense of urgency to the task of transitioning away from coal, oil and gas or, alternatively if fossil fuels are here to stay, as long as they’re not sourced from Russia. There have, for example, been calls for renewed North Sea exploration and exploitation, as well as a U-turn on fracking. Additionally, UK Prime Minister Johnson is currently lobbying United Arab Emirates and Saudi Arabia to increase oil production and attempt to secure major investment in green energy.
Johnson has already announced that the new strategy ‘maximises [the use of] renewables’. However, figures from the Department for Business, Energy & Industrial Strategy shown that the UK’s reliance on Russian gas has doubled in the past four years. Although this only represents 4% of the UK’s total energy supply, it is still a step in the wrong direction.
At this stage, it seems reasonable to assume that the UK will increase energy production from a variety of sources, including gas and oil, but to start a new era of energy policy, the Government could look to pull the levers at its disposal that would set in motion full-scale system transformation. Each of these can help to secure the UK’s future energy security, shield consumers from the worst energy price volatility as a result of foreign influences, whilst further strengthening the UK’s low carbon credentials. Some of these have already been pulled, including the ramping up of renewable energy through schemes like annual contracts for difference, but there are real opportunities to go further.
Gas heating of homes remains one of the UK’s biggest sources of emissions, with 85% of residential buildings connected to the gas grid. Although costly, any Government decision to improve domestic energy efficiency and untangle ties to the European gas markets intrinsically linked to Russia would result in tangible benefits for both the UK and hard-pressed consumers over the longer term and help to offset the seemingly unavoidable rise in fossil fuel production. A rapid scale up of other sources that makes use of the UK’s existing renewable credentials – such as the gradually increased deployment of hydrogen – or a delay to the planned closure of several nuclear power stations would also considerably reduce the pressure on the system.
In the immediate term, there are increasing suggestions that the UK Treasury – led by Chancellor Rishi Sunak – will have to produce COVID-scale market interventions to, first, save the UK from an energy crisis and, second, markedly soften the associated ‘cost of living crisis’ for British voters.
More broadly, the energy-related challenges facing the British Government are more serious than at any time since the oil crisis of the early 1970s or the year-long miners’ strike of the mid-1980s. Reducing emissions already represented a huge task, but now the Government needs to increase, simultaneously, the UK’s energy independence. The challenge will be enormous – but the opportunities for renewable energy providers could be equally huge. The ‘dash for gas’ is certainly over; a sprint for additional solar, nuclear and wind-power (including, significantly, onshore) seems certain to begin.
To discuss this issue further, please email our consultant Dani Schmidt-Fischer and Milo Boyd on firstname.lastname@example.org and Milo@gkstrategy.com
Annual contracts for difference – how will this impact the UK’s renewable energy generation?
Amidst a worsening energy and cost-of-living crisis, and ongoing pressure from within the Conservative Party in the shape of the Net Zero Scrutiny Group, earlier this month the Department for Business, Energy and Industrial Strategy has made one of its biggest statements to reaffirm its commitment to the development of the renewable power industry in the UK. In line with commitments in the 2021 Net Zero Strategy, the Department has taken the decision to hold Contracts for Difference (CfD) auctions on an annual basis from March 2023, rather than every two years as previous.
The scheme is the Government’s flagship policy for the deployment of low-cost renewable energy, which incentivises investment into renewable energy generation by providing energy providers with stable and predictable returns on their supplies. This is achieved through long-term contracts of 15 years, where two parties — a renewable energy supplier and the Low Carbon Contracts Company (LCCC) — agree to pay the other party for the difference between the market price and the value which the parties agreed at the point the CfD was entered – the strike price. For example, when the price for electricity dips below the strike price agreed with the government as part of a developer’s CfD, the developer will receive a ‘top up’ to the level of the strike price, and vice versa.
This significantly reduces the investment risk for developers, and allows them to borrow money more cheaply, accelerating the development of low-carbon technologies and crucially continuing to drive down the costs of generation. This can act as the catalyst of continual development for the UK’s renewable energy market, creating optimal conditions for consistent private investment into the landscape.
These developers will be crucial pillars for the UK’s net-zero strategy, not least because of the UK’s lofty target to reach 40GW of wind power capacity by 2030. The scheme has clearly already had an effect. In 2010, total capacity was 5.4 GW. By 2020 that figure had more than quadrupled to 24 GW, after the scheme was introduced in 2013 on a bi-annual basis.
So why the need to scale the scheme up to annual rounds of bids? One of the biggest factors behind this is undoubtedly UK energy security. The Government has painfully learnt the complications and difficulties of being dependent on supplies of natural gas from the European continent for a significant portion of the UK’s energy supply, with considerable strain now being felt by the British consumer. Increasing the frequency of CfD auctions will increase the number of opportunities for developers to engage with the scheme, helping to provide a diversified power supply and support the UK’s long-term energy security. The decision will also dramatically lessen the burdens for renewable energy companies, who will be able to take advantage of the regularity of auctions rather than having to navigate the two-year periods of uncertainty between the CfD auction rounds.
Fundamentally, this move is a positive one for both supplier and consumer. The annual rounds of contracts greatly ease the strain on renewable suppliers, providing developers with the assurance that their risks will be minimised and incentivises continued investment into the UK. The subsequent scale-up of renewable energy into the grid will mean that there is much greater flexibility in the system for consumers to help shield them from future price shocks and advancing the UK’s Net Zero credentials further.
The fast-paced nature of this environment will create a strong platform for engagement with Government. GK Strategy has extensive experience of advising governmental engagement and helping businesses take advantage of existing opportunities within the energy policy landscape.
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GK are delighted to publish our thinking on all things environmental from decarbonisation of buildings, energy efficiency, wind power to the future of transport. Read your copy of Green Insights.
For more information or to set up a meeting, please contact Milo Boyd & Natasha Pinnington, GK Advisers on Environment & Climate on firstname.lastname@example.org and email@example.com
Comment Piece by Nicole Wyatt, GK Consultant
Ahead of the much-anticipated United Nations Conference on Climate Change, or COP26, commencing on 31st October in Glasgow, the Government has published a series of highly ambitious strategies to shape the green agenda for the next few decades, striving to ‘build back greener’.
On 19th October, the Department for Business, Energy and Industrial Strategy (BEIS) published the Net-Zero Strategy and the Heat and Buildings Strategy. To completement this, the Treasury published the Net Zero Review to analyse how much the green agenda costs, as well as the Green Finance Roadmap, which lays out the groundwork for green investments.
Overview of Net-Zero Strategy
The Net-Zero Strategy is this one of the Government’s hyped projects. It ambitiously sets out the UK’s plan to reduce greenhouse gas emissions and reach net-zero by 2050. This green strategy also completements the Government’s ‘levelling up’ plans as it promises to “support up to 440,000 jobs across sectors and across all parts of the UK in 2030″.
Some noteworthy points that can be observed in the strategy include the Government’s plan to fully decarbonise the UK’s power system by 2035. Moreover, the Government would like to see that no new gas boilers be sold after 2035 and all heating appliances in homes and offices be low carbon—but this is not going to be a legally binding commitment. Other measures include the £450 million Boiler Upgrade Scheme (more detail in the Heat and Building Strategy), £625 million for tree planting, decision about a nuclear plant by 2024, ending sale of new petrol and diesel cars by 2030 with £620 million for zero emission vehicle grants, and a focus to deliver 5GW of hydrogen production capacity by 2030 while halving oil and gas emissions.
Opinions of the strategy have been mixed with some worried about how much this will all cost the individual taxpayer or homeowner, and others concerned that these measures still won’t get the UK to their 2050 goal.
Overview of Heat and Buildings Strategy
With 21% of the UK’s total carbon emissions coming from heating and cooling buildings, the Government felt one of the main ways to achieve net-zero by 2050 was to address the housing sector. Their main target within the sector was gas boilers. Natural gas provides heating to approximately 85% of homes in the UK. Within the Heat and Building Strategy, the energy saving measure which has been allocated the highest level of importance is heat pump installation. From next April, homeowners in England and Wales will be offered subsidies of £5,000 to help them to replace old gas boilers with low carbon heat pumps through the Boiler Upgrade Scheme. These grants, totalling £450 million over three years, form part of the Government’s £3.9 billion plan to reduce carbon emissions from heating homes and buildings, by ensuring that no new gas boilers are sold after 2035. The emphasis on heat pump installation stems from real concern in Government that gas boilers possess a disproportionately high carbon footprint, with one report suggesting that gas boilers contribute twice as many carbon emissions as all the country’s gas-fired power stations combined.
However, the Government’s plans have already attracted criticism, due to the fact that the £450 million funding package for heat pump installation will only cover 90,000 new heat pumps over the next three years. This falls well short of the Government’s aim of installing 600,000 heat pumps per year by 2028.
Interestingly, there was very little focus on other energy efficiency technologies in the strategy. Despite the fact that the Government stated that they wanted a ‘fabric-first’ process to reduce costs for homeowners and address the core energy efficiency problems within the structure of buildings, this had little attention in the strategy. There was some mention of improved insulation to walls and lofts and even less mention of other technologies, such as triple glazing to windows and doors. Many industry leaders may be left wondering why.
The main takeaway from the Treasury’s analysis of the costs of the net-zero strategy is that “the costs of global inaction significantly outweigh the costs of action”. While due to the geography of the UK, much of the impacts of climate change may not be felt as directly in the UK, the indirect costs will be significant, especially in relation to global supply chains. The report sets out some of the economic benefits of green such as the fact that “improved air quality could deliver £35 billion worth of economic benefits in the form of reduced damage costs to society, reflecting for example lower respiratory hospital admissions”.
The bulk of the report lays out the expenses to individual households as the Government encourages people to improve the energy efficiency of their homes. Ultimately, the homeowner, but also businesses, taxpayers, motorists, will have to invest money to reduce carbon emissions from heating and cooling homes, but the report suggests there should be more policy to incentivise people to do so. The Heat and Buildings Strategy establishes grants for heat pump installations. The report also suggests more can be done to encourage people to get Electronic Vehicles (EV). The report finds that it’s impossible to forecast these costs over the next thirty years and emphasises that they will be disproportionately felt across different economic backgrounds.
Next, the Green Finance Roadmap lays out the Chancellor’s framework for how the UK’s financial sector can be greener. The financial sector plays a vital role in assisting the country to meet its decarbonisation goals by attracting Environment, Social and Governance (ESG) investments and utilising green bonds. Moreover, the aim of this report is to help align the financial sector with the green agenda.
How GK can help?
GK Strategy is a political and strategic consultancy that specialises in environment policy and the built environment. If you want to hear more about how GK can help your business or investment, please get in touch with firstname.lastname@example.org