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.
Continue Reading The UK’s New Energy Security Strategy