HM Insights

Energy Bulletin - The Energy White Paper: a transformation of the UK energy system?

The UK Government published the long awaited Energy White Paper (EWP) at the close of 2020, setting out the Government's vision for the transformation of the UK energy system. The paper largely repeats policies announced in the Prime Minister’s ‘ten point plan’ last year, rather than providing a comprehensive roadmap for implementing those policies. That said, the EWP has, for the first time, sought to address energy-related policy from disparate sectors in a single, ‘whole-system’ strategy; from energy generation and heat efficiency, to system governance.

While lacking in concrete detail (further publications are promised later this year), there is no doubt that the ambition contained in the EWP represents a significant milestone in the UK’s path to net-zero. Here, Joshua Hale highlights the key points.

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Renewable energy

The EWP reiterates the Government’s commitment to significantly expand electrification. The Government says it is ‘not targeting a particular generation mix for 2050, nor would it be advisable to do so’, but the EWP concludes that a ‘low-cost, net zero consistent system is likely to be composed predominantly of wind and solar’. The EWP accordingly restates Government plans to increase offshore wind to 40GW by 2040, representing a fourfold increase in capacity from 2020.

While the EWP offers nothing new in this regard, the vision for wind and solar will be encouraging for the UK renewable energy sector. Government support mechanisms will continue to play a key role, particularly in reducing power price risk in the medium term. The Government has already announced that the next Contracts for Difference (CfD) auction round, to be held in 2021, will be open to onshore and offshore wind and solar, and will aim to deploy around 12GW of new renewable generation. The future of the CfD will, however, be kept under review, indicating a departure from this system as the price of renewables falls. The Government has published a consultation on the future of CfD, which is inviting responses until 18 January 2021. The Government is also consulting on how support for renewables should develop in the longer term, with a deadline of 22 February 2021.

Energy intensive industry - a new UK ETS

Building on the Government’s response to the Future of UK Carbon Pricing consultation in June, the EWP announced a move away from the European Union Emissions Trading System (EU ETS), to a new standalone UK ETS from 1 January 2021 (Northern Ireland, which is part of an all-island energy market, remains subject to the EU ETS).

An ETS works by setting caps on the total amount of greenhouse gases that can be emitted by participating energy-intensive industries each year, and creates ‘allowances’, for each unit of emissions allowed under the cap. Emitting firms must hold and surrender an allowance for each unit of emissions, and they can receive or buy more allowances from other participating firms, or at auction. The cap is then reduced over time, mitigating the overall greenhouse gas emitted by participating industries.

The UK ETS will continue to operate a Carbon Price of £18 per tonne of CO2 until 2022, but will start with a 5% lower emissions cap. The UK ETS is intended to operate either as a standalone system, or linked to the EU ETS if agreement can be reached. Industry experts have questioned if a standalone UK scheme would be big enough to operate as an effective economy-wide incentive, and an internationally linked system is generally considered to be more efficient for both markets, provided there is general alignment between the targets set by the two systems. The UK says it remains open to international linking ‘in principle’; but whether this would be with the EU may depend on post-Brexit political will within the UK Government.

Buildings and energy efficiency

Buildings are currently the second largest source of carbon emissions in the UK (after transport), and so a large chunk of the emissions savings planned in the EWP are expected to come from building energy efficiency measures.

By the mid-2030s, the Government wants ‘all newly installed heating systems to be low-carbon or to be appliances that we are confident can be converted to a clean fuel supply’. There are currently 26m fossil fuel boilers in UK buildings, so this ambition will depend on the deployment of clean alternatives such as heat pumps. The Prime Minister had already announced a target of increasing heat pumps in UK buildings from 30,000 per year to 600,000 per year by 2028. This is below the target of over 1m heat pumps recommended by the Committee on Climate Change – a target the Government considered to be unachievable. In any event, new deployment of heat pump technology presents real opportunities for the UK supply chain. A challenge identified in the EWP will be ensuring existing fitters are upskilled to work with new equipment, which the Government hopes to address through a ‘green jobs taskforce’.

The headline though, is that the Government will be consulting on whether it would be appropriate to ban gas grid connections to new homes entirely from 2025, in favour of clean alternatives. This would dramatically scale-up the rollout of heat pumps and similar technology. The Government will also set out its response to a consultation from April 2020, on plans for a new Clean Heat Grant to support heat pump installation in existing housing stock.

The EWP highlights the potential of shared heat networks, promising £122 million of funding towards a new ‘Heat Network Transformation Programme’. Although not addressed in the EWP, the deployment of these ‘district’ heat networks, whereby multiple buildings are heated from a single shared source, will require a complimentary legal framework to address some of the perceived demand-side risks that have prevented development in the past. The UK Government says it will publish a dedicated heat and buildings strategy later this year. In Scotland, a Heat Networks (Scotland) Bill has already been published, which may provide a helpful starting point for policy makers in the rest of the UK. For an overview of the Scottish bill and the prospects for Heat Networks, see our article published last year.

Electricity System and Governance

A key pillar in the Government’s vision for a low-cost, net-zero system based on new renewable energy deployment, is a flexible power system capable of catering for intermittent supply and increased demand. As the electricity network becomes more decentralised, our existing one-directional system will need to transform into ‘something more dynamic’.

The EWP expects this flexibility will come from ‘new, cleaner sources, such as energy storage in batteries, increased interconnected capacity from neighbouring electricity markets, or from consumers using smart technologies to reduce how much energy they use or shift when they use the energy to different times in the day.’ No concrete proposals are detailed in the EWP, other than ‘defining electricity storage in law, when Parliamentary time allows’. We will need to wait for the Government’s ‘Smart Systems Plan’ to see the details, which is promised for later this year.

The EWP suggests the Government will be ‘assessing what market framework changes may be required’ to support the rollout of tariffs and products that work for consumers and contribute to net-zero. To manage this the EWP states that the role of energy regulator Ofgem and network operators will need to be updated; ‘we need to consider, at both the transmission and distribution level, whether the roles which discharge these functions are undertaken by government, Ofgem, industry parties such as the system operator, or by an entirely new body.’

Other key takeaways

  • ‘North Sea transition deal’: The EWP says the Government is currently negotiating a deal with the oil and gas industry for the long-term transformation of the sector. The intention is to enable the industry to repurpose existing infrastructure for new applications, such as CCS, hydrogen production and offshore wind, while protecting jobs. The industry has been badly affected by the Covid-19 pandemic, and the EWP says a return to ‘business as usual’ for the oil and gas sector is not an option, in light of net-zero targets. An announcement is expected in the first half of 2021.
  • Carbon Capture Utilisation and Storage (CCUS). The Government’s ambition is to capture 10Mt of carbon dioxide a year by 2030 - the equivalent of four million cars’ worth of annual emissions. The EWP repeats a previous announcement that the Government will invest £1 billion up to 2025 to support the establishment of CCUS clusters in the North East and North West of England, the Humber, Scotland and Wales.

Conclusion

The Energy White Paper doesn’t contain any surprises, and may disappoint those who expected a more detailed roadmap for the transformation of the UK energy system. Much of the EWP was about recounting recent commitments made in the Prime Minister’s Ten Point Plan, with more detailed proposals set to be announced later this year (see our table below). That said, the UK Government has set out its stall, and the paper suggests that the Government has serious plans to bridge the gap between ambition and reality.

With all eyes turning to Glasgow for COP26 in November, the 2020s could be a defining decade for the UK energy sector. The next stage will be all about delivery

Pipeline publications and consultations

Publication

Timing

Objective

Contracts for Difference (CfD): changes to Supply Chain Plans and the CfD contract

Deadline for responses 18 January 2021

Seeking views on proposals for changes to Supply Chain Plans and the CfD contract

Enabling a High Renewable, Net Zero Electricity System: Call for Evidence

Deadline for responses

22 February 2022

Call for evidence: what Government can do to support growth in renewable deployment to meet net zero targets

Heat and Buildings Strategy

Early 2021

To set out strategy for reducing emissions from buildings

North Sea Transition Deal

Early 2021

To map out long-term action for transforming the sector and delivering energy transition.

Hydrogen Strategy

Spring 2021

To set out Government plans for Hydrogen roll-out by sector

Smart Systems Plan

Spring 2021

Framework to drive and monitor flexibility across electricity markets.

Net Zero Strategy

Summer 2021

Building on sectoral plans to deliver whole-system net-zero strategy

 

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