In the third edition of GK Strategy’s ‘What would Labour do?’ series, the GK team looks at Labour’s flagship energy policies, covering key announcements on energy generation, domestic decarbonisation and green investment, as well as the competing dynamics at the centre of the Party. Find GK’s report here: What would Labour do? – Issue No.3
GK consultant Milo Boyd takes a look at the significance of both the EU’s Green Industrial Plan and the USA’s Inflation Reduction Act, and assesses what these mean for the UK’s climate competitiveness.
It’s no secret that the Inflation Reduction Act (IRA) has been framed by the incumbent Democrat administration in the United States as one of their big successes (or failures, depending on who you ask). To make it this far, the Act has battled internal Democrat opposition, as well as big-spending averse, influential Republicans who have sought to rein in spending commitments from central government. Despite this, the IRA has put the US on a path to meet its Nationally Determined Contribution (NDC) as set out in the 2016 Paris Agreement and achieve a 50-52% reduction in its carbon emissions by 2030. Of importance to European nations, the Act also contains provisions to benefit US domestic industries. Fearful of the influence that the IRA could wield over the clean tech and net-zero sectors, the European Commission has recently published its own strategy to avoid European industry marching into the welcoming arms of the US – the Green Deal Industrial Plan.
The net-zero transition, the acceleration of which has been stimulated by the ongoing energy crisis due to the conflict in Ukraine, has resulted in considerable shifts in economic, industrial and geopolitical planning throughout both the UK and the EU. With the release of the Green Industrial Plan, the EU has made clear its intentions as to how it aims to take advantage of the accelerated transition to net-zero and strengthen its industrial footing. Fronted by the EU Commission President Ursula von der Leyen, the Plan confirms that the EU will propose a Net Zero Industry Act, which promises to provide a regulatory framework to enhance the competitiveness of the EU’s low-carbon and net-zero industries, including the provision of tax-breaks for companies that support those ambitions.
The plan aims to build on ongoing initiatives, such as REPowerEU – released in May 2022 – and at its centre provides a more predictable and streamlined regulatory environment for clean teach by loosening the limits on subsidies provided by EU member governments to struggling businesses. The hope by the EU is that this will help ensure that Member States are able to provide more ‘state aid’ to prop up businesses that are lagging behind. The Plan has received mixed responses in EU circles, with some figures going as far as describing the plan as ‘Marx on steroids’, amid fears that the stronger EU economies will be able to spend their way to internal economic dominance, and subsequently influence. As described by Von der Leyen, “the next decades will see the greatest industrial transformation of our times”, clearly setting out how the EU views the scale of the opportunity. Evidently, both the Green Deal Industrial Plan and the Inflation Reduction Act will be cornerstones of decision-making on both sides of the Atlantic, with clear transparent efforts to tempt businesses to invest and take root in each respective economy.
So what do both of these plans mean for the United Kingdom? The UK cannot afford to lag behind and lose out to international big hitters, especially now that green industries are understood to be critically important to the UK economy. Lacking the pure economic firepower of both the EU and the US, it is vital that the UK remains agile enough – Brexit benefit anyone? – to spot opportunities as they emerge and quickly take advantage of them, optimising its regulatory and planning landscape to do so. Restrictive planning policies and a 13-year backlog of grid connections for renewable projects have been the Achilles heel of the UK economy throughout the 2010’s, and to date remain overly drawn out and cumbersome, rightly being identified by the Skidmore Review as some of the UK’s biggest weaknesses. Despite generally performing quite well on low-carbon energy, the UK should prioritise speeding up the planning and consent processes to ensure a steady stream of new green projects in the pipeline. Doing so would encourage external investment into the UK economy and secure the continuation of the UK’s position as a global climate leader.
GK Strategy are experts at helping companies navigate the UK’s changing policy landscape, get in touch with milo@gkstrategy.com for more information.
In our latest edition of our monthly Russia/Ukraine bulletin, GK consultants analyse the conflict’s latest economic, political, and diplomatic developments in the wake of Russia’s partial mobilisation: GK Strategy Russia Ukraine Monthly Bulletin – September 2022
GK consultants analyse the impacts of the latest squeeze on European energy supplies by Vladimir Putin’s Russia. Find the latest edition of our monthly bulletin here: GK Strategy Russia Ukraine Bulletin Monthly Bulletin – July 2022
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.
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.
For more information, get in touch with milo@gkstrategy.com.