UK will struggle to be zero carbon without stronger government steer

24 July 2020 (Last Updated September 21st, 2020 09:30)

The UK's energy regulator has asked network operators to accelerate decarbonisation efforts and set aside billions of pounds for infrastructure upgrades, but experts fear that unless the government adopts a more hands-on approach, the country’s energy transition may flounder. By Andrew Fawthrop.

UK will struggle to be zero carbon without stronger government steer
Renewables capacity in the UK is growing, but there are concerns that the existing transmission network is not fit for purpose. Credit: Shutterstock

For the UK to become a net-zero emitter by 2050, the transmission infrastructure that moves fuel and electricity across the country needs to adapt. Ofgem, the UK’s energy regulator, has announced plans to upgrade the grid, but a historical focus on cost efficiency and a desire to leave change to market forces rather than impose technological choices, means the country may find it difficult to increase renewable energy generation to meet climate goals.

The UK grid is getting cleaner. Policymakers are targeting a phase-out of coal-fired power generation by 2024 and National Grid ESO, the country’s electricity system operator, aims to be able to run a fossil fuel-free network by 2025.

Meanwhile, renewables capacity is growing. The UK’s combined onshore and offshore wind capacity stands at just over 23GW compared to about 5GW a decade ago, and the government wants to increase offshore capacity fourfold to 40GW by 2030. Solar capacity is at around 13GW with more than one million installations around the country, and the UK Solar Trade Association is calling on Whitehall to set a target of 40GW by 2030.

“We are moving from a place where we have had large centralised [fossil fuel] power plants to one where we have got renewables up and down the country, and we need a grid able to [accommodate this] so we can achieve net-zero emissions,” says Rebecca Williams at trade association RenewableUK.

“The industry is innovating quickly and it is a very different prospect to bring that [decentralised renewable] power back to the centres where it is consumed,” she adds. “We can’t be cautious any more. The clock is ticking and the more renewables we deploy the more we need a network that is fit for [purpose].”

Bigger cables, more connection points to an expanding offshore wind fleet and more local networks to enable “micro-trading” of solar power could all be solutions. The UK Government’s long-awaited energy white paper setting out how it intends to reach net-zero emissions is yet to appear, however. Expected last year, Energy Secretary Alok Sharma recently hinted it will be published in the final quarter of 2020.

Having the right infrastructure in place is vital to enable a clean energy system. David Hall, vice-president for power systems in the UK and Ireland at Schneider Electric, says it is vital to grow the charging infrastructure for electric vehicles.

“That is absolutely critical,” he states. “It is beginning to come, but it needs to be done a lot faster because if we don’t get the infrastructure a lot of people won’t buy [electric] cars.”

New regulations

The businesses that run the UK’s transmission networks operate as monopolies and their activities are controlled by Ofgem. The regulator recently announced plans to allocate £25bn to overhaul the grid over the next five years under the so-called RIIO-2 framework, which starts in April 2021 and applies to gas and electricity transmission and gas distribution.

It also proposes a fund of around £10bn for companies to pitch new net-zero projects later in the five-year period. This will allow decisions on nascent technologies such as hydrogen or large-scale batteries to be taken further down the line.

Striking the right balance between investing in networks and keeping costs down for bill payers is important. Under the new regime, the permissible rate of return to network companies on their investments would be cut to 3.95%, or almost half the current baseline.

Ofgem claims this will keep costs in check and free up £3.3bn for network upgrades, which would otherwise have gone to shareholders. It has also set efficiency targets such as lower project budgets and challenged companies to give “robust evidence” on why any of the planned expenditure is needed.

The focus on cost efficiency follows a review in January 2020 by public spending watchdog the UK National Audit Office (NAO). It found that deficiencies in current regulations have cost consumers “at least £800m” since 2013. The NAO said operational targets had been set too low, budgets too high and, in some cases, the regulator had failed to use “the best information available” to calculate network financing costs.

Ofgem says in real terms the average cost saving on household energy bills will be £20 a year in the earliest stages of the framework, although this figure is likely to fall as customers bear the cost of net-zero investments later in the period.

“We need to ensure consumer energy bills remain low to avoid weakening the appetite for clean power,” says Hall, although he believes it will be “a big challenge for the utility companies to continue their investments with these types of [earnings] reductions”.

Richard Lowes, an energy specialist at Exeter University and a member of the UK Energy Research Centre, the focal point for UK research on sustainable energy, questions whether incentivising the low-cost operation of networks is necessarily “the best long-term, cost-effective option”.

“That strategy might not prove to be the best if money needs to be spent [now],” he says.

Williams agrees: “We all acknowledge the need to meet net-zero [emissions] in the cheapest way possible to protect consumers, but it is not just about what is on the table now. [It is also about] what we may see in five years’ time when we will have a lot more renewables online.”

Investment concerns

The proposal to cut the rate of return on investments – which is subject to further consultation before a decision is made in December 2020 – has drawn strong criticism from network operators, who argue it could damage their ability to attract new investment. The concern is that by lowering the allowed return on capital, potential investors such as global asset managers and large pension funds may look elsewhere, jeopardising operators’ ability to finance the upgrades required for decarbonisation.

Ofgem counters that networks will remain “a low-risk and attractive sector” for investment.

“Strong evidence from water regulation and our offshore transmission regime shows investors will accept lower returns and continue to invest robustly in the sector,” it says.

More intervention

More fundamentally, Ofgem’s proposals “fall short of the mark” in outlining exactly how they will facilitate a green transition, says Tom Houghton from energy consultancy E4tech.

“They are very weak in terms of the specifics of where the money could get spent,” he says. “This feels like one of those situations where leaving it up to the market just doesn’t make sense.”

A more interventionist approach from the government is needed, Houghton says, but there is a reluctance to do this.

“[Policymakers] should be more deliberately saying ‘we think this is the best solution and this is the technology we are going to support’. It doesn’t seem to me that Ofgem is trying to steer things.”

Lowes suggests Ofgem’s mandate should be broadened to include decarbonisation in its statutory duty.

“Its primary goal needs to be changed, so that as well as protecting consumers it is also about delivering net-zero emissions,” he says. “That could get Ofgem to completely transform the way it thinks about networks.”

Several of the UK’s European neighbours like Denmark, Germany and the Netherlands have made much greater progress in integrating renewables into their energy networks, Lowes adds. He believes the UK’s slow progress is largely down to its reluctance to steer private enterprise.

“Lots of places have elements of privatisation in the energy system, but the UK has gone further than most,” he says. “It is all run at arm’s length from the government. When you have got the model we have got, the focus is on how you can operate in the cheapest way rather than what is best for society.”

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