The UK is not alone in feeling the effects of the Russia-Ukraine crisis which compounded an already tight energy market, in which the post-Covid economic recovery caused demand to outstrip supply. But the UK does appear to have been perhaps more heavily affected by this combination of factors, which has led to a steep rise in energy costs. With an average UK family’s energy bill increasing by 54% so far this year and inflation nudging the double-digit mark, the ONS declared earlier this month that the squeeze on living standards was the worst since the 1950s.
The EU has belatedly realized the dangers of its over-reliance on Russian hydrocarbons and is urgently seeking to source gas and oil supply elsewhere. In the short to medium term, this will force global gas prices higher as the EU competes on global gas markets for a constrained resource. In the longer term, countries view the war in Ukraine as a clear indication that reliable, clean, domestically-produced renewable energy bolsters national security by removing dependence on volatile international hydrocarbon markets. The PM’s comments in the foreword – “We need a power supply that’s made in Britain, for Britain” – underline how that sentiment also applies in the UK, whilst at the same time hint, perhaps worryingly, at a less globalized future energy market.
It is against this backdrop that on 7 April, almost unnoticed, the UK Government published its long-awaited Energy Security Strategy (ESS). The ESS was supplemented by the announcement in this week’s Queen Speech of the proposal for an Energy Security Bill, building on last year’s COP26 Summit in Glasgow and designed to deliver the transition to cheaper, cleaner, and more secure energy in the UK.
UK Energy Security Strategy
Immediate Support on Energy Bills
The ESS sets out a new Energy Bills Support Scheme that will see a £200 reduction in energy bills from October 2022, to be offset against a Government levy on domestic energy bills over 5 years from FY23. To mitigate the high cost of industrial electricity, the Government will extend the Energy Intensive Industries Compensation Scheme for a further three years, and increase the intensity of the aid to up to 100 per cent, representing 1.5 per cent of Gross Value Added. It will also consider increasing the renewable obligation exemption to 100 per cent. These measures will enable businesses to apply for greater relief for part of their electricity costs. The Government has since announced that the total level of compensation under the Scheme will increase from roughly £130 million to up to £280 million.
Building on existing efforts to promote the energy efficiency of UK homes, the Government will make the installation of energy-saving materials zero-rated for VAT purposes for the next five years. A new £450 million Boiler Upgrade Scheme will facilitate the uptake of heat pumps, alongside a Heat Pump Investment Accelerator Competition being run in 2022, worth up to £30 million. Later this year, the Government will aim to publish proposals incentivising electrification, which aims to ensure that heat pumps are comparatively cheap to run. The Government will increase innovation funding for the development and piloting of new green finance products for consumers from £10 million to £20 million. Early 2023 will see a formal consultation on new minimum standards and labelling requirements for a range of energy-using products.
Oil and Gas
The ESS sets out the Government’s vision for the North Sea, noting that in order to reduce reliance on imported fossil fuels, the UK must fully utilise North Sea reserves; use empty caverns for CO2 storage; and encourage the use of hydrogen as a natural gas alternative, alongside using North Sea offshore expertise to support the offshore wind sector. The ESS argues that there is no contradiction between the UK’s net zero commitment and its commitment to a strong and evolving North Sea industry, but rather that one depends on the other.
The next North Sea Transition Authority licensing round, in the autumn of 2022, will take into account the need for energy security and the forthcoming climate compatibility checkpoint. The ESS argues that this will mean more domestic gas will be used in the UK’s energy supply. The Government will establish “Gas and Oil New Project Regulatory Accelerators” to support the development of complex new projects. Further measures include driving investment in electrifying offshore production. The pause in shale gas development will remain in place unless new evidence emerges from a new report which the British Geological Survey will carry out.
In terms of fostering low-carbon technologies in the North Sea, the Government published, on the day after the ESS, investment roadmaps for carbon capture usage and storage (CCUS) and hydrogen. There will also be continued work on the £1 billion commitment to four CCUS clusters by 2030, with two sites currently being negotiated. If the clusters represent value for money for the consumer and the taxpayer, then subject to final decisions of Ministers, they will receive governmental support. These clusters will be the starting point for a new CCUS industry, helping to create what the ESS terms industrial ‘SuperPlaces’.
The Government aims to deliver over half of renewable energy generation capacity from wind power by 2030, with up to 50GW of energy generated through offshore wind by 2030. This will include up to 5GW of innovative floating wind, to be supported by investment of up to £160 million in ports and supply chains and £31 million in research and development funding. The ESS states that by 2030, the UK will have more than enough capacity to power every home in Britain using offshore wind power. Some of this surplus energy will be used in hydrogen production, with the Government seeking to ensure that consideration is given to the siting of hydrogen electrolysers to best use surplus low carbon electricity.
The Government will seek to cut the processing time for establishing an offshore wind farm by half. This will be achieved by reducing the time taken to obtain consent from up to four years to one year; establishing a fast-track consenting route for priority cases; and making environmental considerations at a more strategic level. The Government is also consulting on changes to the 2024 Contracts for Difference auction, which would incentivise renewable projects to locate and operate in a way that minimises overall system costs.
The Government will continue to work with the devolved governments in Scotland and Wales to develop onshore wind, and in England will prioritise communication with local communities. The Government will not introduce wholesale planning changes for onshore wind projects, but will consult this year on developing local partnerships for a limited number of supportive communities who wish to host new onshore wind infrastructure in return for benefits, including lower energy bills. Onshore wind will continue to be included in future Contracts for Difference auction rounds, and the Government will look at arrangements to support the repowering of existing sites when they require updating or replacement.
Solar and other technologies
The Government will consult on amending planning laws in favour of the development of ground-mounted solar panels on non-protected land and will encourage large scale projects to locate on previously developed or lower value land. Co-location of solar installations with agriculture or onshore wind generation will be supported, and solar energy will continue to be included in future Contracts for Difference auction rounds. The planning process for installing rooftop solar panels will be radically simplified.
Finally, the ESS sets out the Government’s intent to “aggressively explore” tidal and geothermal energy, and to explore the potential for international projects, through, for example, expanding the Contracts for Difference Scheme.
The Government places nuclear power at the centre of its ESS and re-states its ambition to have progressed up to eight new nuclear reactors by 2030. To achieve this objective, the Government aims to deliver the equivalent of one nuclear reactor per year and to promote investment in nuclear energy projects with the objective of reaching 24GW of nuclear power generation by 2050, representing up to 25% of the UK’s projected electricity demand. The Government aims to take two nuclear projects to the Final Investment Decision stage during the 2022/23 Parliamentary session. The Government intends to initiate the selection process in 2023 for further UK projects, to enable a potential governmental award of support as soon as possible.
The Government will work with regulators to understand the potential for any streamlining of the consenting and licensing of new nuclear power stations, possibly including new harmonisation on international regulation. A new “Great British Nuclear Vehicle” will be tasked with helping projects through the development process.
The Government wants to double the UK’s current ambition for hydrogen production to 10GW by 2030, with at least half of this being electrolytic hydrogen. As noted above, surplus renewable energy will be used to make hydrogen, reducing electricity system costs. The aim is for up to 1GW of electrolytic hydrogen capacity to be in construction or operational by 2025. The Government is aiming to run annual allocation rounds for electrolytic hydrogen, with allocation aiming to be price-competitive by 2025. The Government is also seeking to set up a hydrogen certification scheme by 2025, to ensure that only hydrogen of a certain standard is imported and exported.
Networks, storage and flexibility
The ESS creates the post of an Electricity Networks Commissioner to help reduce costs in the network infrastructure and aims to halve the end-to-end process for delivering strategic onshore transmission network infrastructure by the mid-2020s. The Government will also establish a blueprint for the whole system by the end of 2022, which will include the identification of strategic infrastructure needed to deliver offshore wind by 2030. Certain infrastructure identified in the blueprint will be exempt from the introduction of onshore network competition. The Government will also undertake a comprehensive Review of Electricity Market Arrangements, with the aim of setting out high level potential reforms this summer.
This section of the ESS focusses on reducing the UK’s reliance on Russian fossil fuels, and includes a commitment to phase out the use of Russian oil and coal by the end of 2022, and to end imports of Russian liquefied natural gas as soon as possible thereafter.
The Energy Security Bill
The Bill focuses on the following main elements.
- Supporting industry to step up investment in growing the consumer market for heat pumps; creating a new market standard and trading scheme to help support innovation and lower the cost of heat pumps.
- Appointing Ofgem as the regulator for heat networks in an effort to ensure consumers get a fair price and a reliable supply of heat and the creation of a large-scale hydrogen heating trial, to determine the role of hydrogen in heat decarbonisation from 2026.
- Extending the energy price cap to protect consumers from significant market price movement.
- Introducing competition into Britain’s onshore electricity networks, with a new Future System Operator who will provide strategic oversight across the electricity and gas systems.
- Creating a new regulatory environment for fusion energy, and facilitate the safe and cost-effective clean up of the UK’s legacy nuclear sites.
- Introducing new business models for CCUS transport and storage, as well as low carbon hydrogen and industrial carbon capture.
- Giving government powers to direct, require information from, and provide financial assistance to core fuel sector businesses to reduce the risk of fuel supply disruption.
The Levelling Up and Regeneration Bill also introduced in the Queen’s Speech aims to reform the UK’s planning system to speed up permissions for renewable installations – something that will be vital if the UK is to hit the Energy Security Strategy’s target of 50GW offshore wind by 2030.
There is much to welcome in the ESS and the Bills:
- ramping up renewables;
- ambitious targets for solar, offshore wind and Hydrogen;
- creating new CCUS and Hydrogen business models;
- fast-tracking planning consent for offshore windfarms;
- support for new nuclear power; and
- setting a clear target of target 95% of electricity being low carbon by 2030.
The Secretary of State’s comment that the strategy would not yield results for at least three to five years and represented “more of a medium [-term solution]” is a clear recognition and acceptance of the fact that there are no effective immediate solutions to the energy impact on the UK’s cost of living crisis.
However, some commentators have noted that the recent energy security package missed some potential short-term solutions to the current cost-of-living crisis and the longer-term energy security of the UK and some of the measures may actually produce results which run counter to the IPCC reports and the Government’s own 2050 Net-Zero Strategy:
- plans to issue licences this year for gas production from existing discoveries in the North Sea;
- ambivalence around fracking (which, given lead-in times, local opposition and the mass industrialization of huge swathes of the UK, seems an unsuitable solution to the immediacy of the current energy crisis before – even considering the carbon impact);
- uncertainty around the UK’s policy on coal (whilst the PM has committed to ending coal-fired power generation by October 2024, Number 10 is apparently in discussions with EDF to assess whether its Nottinghamshire coal-fire plant could extend operations);
- the absence of a windfall tax on hydrocarbon companies;
- the continued freeze on the fuel duty escalator (that could potentially raise significant sums of money to help those hardest hit by the cost-of-living crisis);
- the absence of provisions to encourage greater use of public transport; and
- the absence of demand-side measures (no additional impetus to heat pumps or insulation).
But the measure which has perhaps caused the biggest adverse response is the absence of any provision to accelerate onshore windfarms, which are significantly quicker and cheaper to build and install than offshore wind and nuclear. The development of onshore wind remains prisoner to a myriad of very current strict planning rules – introduced in 2015 to protect votes in rural communities.
Overall, though, the package of measures the UK Government is bringing into place to address the energy crisis and accelerate the energy transition are to be welcomed. With such a major shift in focus and impetus, as the government moves through the implementation and delivery of the package, there will be opportunities for companies involved in the renewables, infrastructure and financing sectors.
Covington’s mix of regulatory lawyers and public policy experts is well-placed to help companies spot and seize those opportunities and we look forward to working with you to help solve the energy crisis.