The Government this week published the long-awaited Energy White Paper (EWP).
Much of the White Paper is about taking stock and reiterating recent commitments made in the PM’s 10 Point Plan, and the Spending Review. There was also plenty of signposting about further details to follow in various policy papers over the coming months.
The ambition outlined by BEIS in this EWP, combined with the opportunity to showcase progress on a global stage at COP26, means that 2021 has the potential to be the most significant year ever for the UK energy sector.
The key points covered, along with our thoughts on what is, and isn’t, included in the EWP is featured below. We’ll be sharing more thoughts on the inevitable opportunities presented by the transition to Net Zero by 2050 over the coming months. To ensure you receive these, sign up to our newsletters here.
Key points covered in the Energy White Paper
- Retail market: Government will explore new ways to ensure retail customers are protected from excessive prices, through ‘opting-in’ to collective switches, or ‘opting-out’ to allow automatic switching to the cheapest tariff when current contracts end. But these ideas remain at trial stage and legislation will be needed before consumers can benefit.
- New nuclear: decision taken to enter formal negotiations with EDF over Sizewell C, with the aim of the project reaching Final Investment Decision by 2024. A commitment to continue ‘exploring’ the Regulated Asset Base (RAB) model, but no firm decision on the preferred financing mechanism. An Advanced Nuclear Fund of £385 million to support next generation technologies such as Small Modular Reactors (SMRs).
- UK Emission Trading Scheme (ETS) from 1 Jan 21: a new UK ETS has the power to drive a Net Zero transition but with just two weeks until go live, the Government are still working out much of the detail, so is likely to follow closely the design of the EU ETS. The Government has though indicated that allowances will be 5 percent tighter under the UK ETS.
- System Governance: Government has recognised that energy system governance will need to change to deliver Net Zero and have committed to a 2021 consultation on institutional arrangements governing the energy system, which could result in the creation of an Independent System Operator (ISO).
- Buildings and energy efficiency: extensions to the Warm Homes Discount (to 2026), Energy Company Obligation and the Green Homes Grant to encourage further energy efficiency improvements and the take-up of low carbon heat technologies.
- Hydrogen: reaffirmed commitments in the PM’s 10 Point Plan to publishing a Hydrogen Strategy in Spring 2021. Will continue to explore the role of hydrogen residential heat and consult next year on mandating hydrogen ready appliances (e.g. boilers) with the view to making a strategic decision on the role of hydrogen in residential heat by the mid-2020’s.
- Carbon Capture Utilisation and Storage (CCUS): reiterated commitments from the 10 Point Plan about having four clusters up and running by 2030, including at least one power CCUS project. Further details around business models will be published in the Industrial Carbonisation Plan in 2021.
- Further details to follow: The White Paper signposts further plans, strategies and consultations for 2021, with more than ten due as early as Spring. Highlights include the Heat and Buildings Strategy, Transport Decarbonisation Plan, Industrial Decarbonisation Strategy and Hydrogen Strategy.
What about the detail?
The EWP represents progress but is not, however, a comprehensive plan for achieving Net Zero. Instead, it largely recaps announcements already made and lays out further Government policy statements or consultations to follow over the coming months on specific issues. For now, further detail and insights around the key points are outlined below.
Retail market
A topic receiving much press attention is the proposed new measures intended to ensure retail customers access the cheapest tariffs available to them in the market, particularly those customers less active in switching. The paper sets out options for both an “opt-in” scheme and an “opt-out” scheme.
The “opt-in” scheme would build on extensive trials for opt-in collective switches where customers give a third-party permission to look for a better deal for them, and then switch them to a new supplier. The next step on this will be consultation on an appropriate framework by March 2021, with the scheme potentially implemented after the smaller energy supplier exception from the Energy Company Obligation (ECO) and Warm Home Discount (WHD) is reformed after 2022.
The “opt-out” scheme will also be consulted on by March 2021. The premise here is that evergreen contracts that roll customer onto a default tariff after the initial contract period may need reform as they “allow suppliers to charge such consumers excessive prices”. The consultation will investigate ways to offer customers new and cheaper deals at the end of their standard period “through a competitive process”.
Curtailing the ability to charge customers excessive prices was a key reason given for the introduction of the price cap. It is not clear if these mechanisms are intended as alternatives to the price cap or to operate in parallel. Either way the message to consumers could easily be confused – having been told that the price cap protects them from being taken advantage of, the message now appears to be that it hasn’t addressed that issue. Transparency can easily be lost with new switching mechanisms causing consumers more confusion about their relationship with their energy supplier, and concerns about the sharing of their personal data - particularly if they are switched without recent permission.
There are several issues that will need to be addressed as part of these trials:
- They are predicated on switching being the only measure of healthy competition and engagement with the market. Customers who don’t switch are viewed as necessarily disengaged and therefore disadvantaged. The strong trend in recent years has been the immense shift in market share from the former Big 6 to a host of new challenger suppliers. Customers have to switch once to make that leap, if they stay with their new supplier for years from there, do they stay because they are disengaged, or because they have found a supplier that offers them a deal that works for them?
- They appear to be purely price-based mechanisms, ignoring that the “best deal” also needs to take account of factors such as great customer service, digital engagement, brand loyalty, and access to innovative products and services. The importance of sharing the benefits of the energy transition across all customers is the aim of much energy policy. There is a real risk that price-driven schemes make this ambition harder to achieve, replacing perceived price disadvantage with other potential categories of disadvantage.
New Nuclear
Despite declining renewables costs, advancements in flexible technologies and the emergence of new solutions such as hydrogen and CCUS, this Government has continued to support a role for nuclear in the UK’s future generation mix. This reflects projections in the White Paper showing a possible doubling in the volume of low carbon electricity by 2050. Against this backdrop, the EWP sets out an aim to make a Final Investment Decision on one or more large nuclear plants by the end of this Parliament (December 2024) and the beginning of formal negotiations with EDF over the £20 billion Sizewell C project.
Government has outlined their desire to put affordability “at the heart” of this transition, and whilst new nuclear is unlikely to be able to compete with renewable technologies such offshore wind on cost, the industry will need to be able to demonstrate that new projects can be delivered at least in a similar ballpark (£40-60/MWh) as competing technologies, once system balancing costs are taken into account. Given it’s often argued that ‘nuclear isn’t costly, but financing nuclear projects is’, reducing financing costs is seen as the main lever for achieving cost reductions as BEIS continue to consider alternatives to the Contracts for Difference (CfD) mechanism in their re-assessment of the allocation of risk between investors, Government and consumers.
BEIS have been somewhat silent on this issue since it ran a consultation on using a Regulated Asset Base (RAB) model in 2019. In the EWP, they have committed to ‘continue to explore a RAB approach’, alongside a range of other financing options as they consider the potential role of Government financing during construction, whilst considering the value for money case for consumers and taxpayers. Of course, moving away from a CfD model towards a RAB approach would see construction risk shifted from the developer to consumers and given the current cost and time overruns being experienced at Hinkley Point C, this would come under heavy scrutiny from those pointing to the lower cost alternative of a renewable power plus storage, or flexible gas back-up.
Government have also committed to support further innovation in nuclear technologies such as Small Modular Reactors (SMR’s) and Advanced Modular Reactors (AMR’s) through a £385 million fund – subject to future HM Treasury spending reviews. In line with the broader EWP, at this stage, the focus is on a commitment to develop regulatory frameworks and support UK supply chains rather than outlining a pathway for how or when this technology could be delivered at scale.
UK Emission Trading System (ETS)
Building on BEIS' June response to the Future of UK Carbon Pricing consultation, the EWP confirmed that we will move to a UK ETS from 1 Jan 2021, with the new rules being introduced by 31 December 2020 - just two weeks away. The Government has indicated that allowances will be five percent tighter than under the EU ETS.
A market-based mechanism will retain the flexibility for UK businesses to innovate to drive least cost emissions reduction across the economy and has the potential to represent the World’s first Net Zero aligned ETS. Brexit permitting, the UK are open to the idea of linking the UK ETS to the existing EU ETS as well as other ETS around the globe.
As with the EU ETS, the UK version will apply to energy intensive industries (EIIs), the power generation sector (for assets with 20 millionWth+, excluding EfW), aviation, refining, heavy industry and manufacturing, however historic consultations have referred to the need to review this sector coverage in line with the Net Zero approach. This would seem a pragmatic way to approach the Land Use, Land Use Change and Forestry (LULUCF) and Agricultural sectors where other global ETS i.e. NZ, have had success in incentivising land use conversions through entry of these sectors to their ETS.
Whilst the clock ticks down on the opening of the ETS, there’s very little detail and some key questions remain outstanding; given Northern Ireland is in the All-Island Electricity Market, is it really a UK ETS or more likely a GB ETS? If the UK ETS remains a standalone system will it be big enough to operate as an effective and efficient economy wide decarbonisation incentive solution? How can a UK ETS be used to incentivise the deployment of Greenhouse Gas Removal (GGR) technologies? Given these uncertainties and the enhanced ambition of the UK, does reducing the UK Floor Price versus that which we've seen since inception make sense?
System Governance
The Government has recognised the need to review the institutional framework to deliver Net Zero, including the role and governance of the System Operator.
Legal separation of the Electricity System Operator (ESO) was completed in April 2019, although it remains part of the National Grid Group.
The EWP hints that the Government may see a case for the ESO being moved out of National Grid altogether, creating an entirely independent body to help deliver Net Zero and address perceived conflicts of interest.
A BEIS consultation on options is expected early in the New Year, including on what additional roles the system operator might have to take on to deliver Net Zero, or whether an entirely new body is needed.
Also due out soon are the conclusions from Ofgem’s ‘Review of System Operation’ initiated after the major power outages on 9 August last year. This could add further pressure to move to an ISO, as already exists in a number of other countries.
There are many questions that still need to be addressed, including what remit the body would have, its ownership and governance and what any change means for the terms and conditions of existing staff in the ESO.
Any reforms to create a new body would require primary legislation. BEIS remain hopeful of securing an Energy Bill in the next session of Parliament starting next year, although legislative time will be limited by Brexit and COVID.
Buildings and energy efficiency
Buildings account for the second largest source of emissions in the UK with Government anticipating up to £100 billion of investment required in the 2020’s alone to improve energy performance in residential and commercial buildings. This is alongside an impetus to reduce reliance on fossil fuel for heating and instead rolling out low carbon heat technologies such as hydrogen, heat pumps and/or heat networks.
The EWP also has a big focus on affordability and addressing fuel poverty. Hence, the extensions to the Warm Home Discount to 2026, the Energy Company Obligation and the Green Homes Grant. These extensions will help the supply chain gear up, creating many new jobs in the process.
As a result of these measures to improve energy efficiency and tackle fuel poverty, plus lower wholesale prices, the Government estimates that energy bills will remain broadly flat in real terms to 2030, despite the investment needed for Net Zero.
Carbon Capture Usage & Storage (CCUS)
The CCUS announcements in the EWP reiterated those outlined in the PM’s 10 Point Plan; £1 billion to facilitate two industrial clusters by mid-2020’s and a further two clusters by 2030 in addition to a 10 milliont/Co2 per annum capture target by 2030. However, those hoping for further clarity around the CCUS business models required to stimulate the investment to deliver these targets, or a signal as to which industrial clusters would be supported first, will be left disappointed.
Instead, the EWP announced a commitment to provide this additional clarity through the Industrial Decarbonisation Strategy due in Spring 2021. This paper did include a commitment to utilising CCUS in the Power sector, delivering the first Gas CCUS project by 2030 based on an amended CfD regime which will be designed to ensure efficient dispatch relative to renewable technologies whilst also committing to a 2021 consultation on changing ‘CCS ready’ requirements for new large scale gas-fired generators – noting distortions created by the current 299MW threshold. This will be increasingly important as the T-4 Capacity Market in Feb 2021 (for delivery in 2024/25) will potentially be locking in unabated assets to 15-year agreements which in theory run past 2035, the date by which the UK are targeting a zero carbon power grid.
The EWP also acknowledged the vital role that negative emissions and sustainable biomass could play in achieving Net Zero. This will provide encouragement to those, like Drax, involved in developing bioenergy with Carbon Capture and Storage (BECCS).
Hydrogen
As with CCUS, the hydrogen announcements were broadly a reiteration of the 10 Point Plan with further detail promised in the Hydrogen Strategy due in Spring 2021. Government have committed to continue to explore Hydrogen’s role in residential heat through further testing and development. This comes with the intention to make a strategic decision in the mid-2020’s on the long term role for hydrogen in heating peoples homes, recognising that it represents a solution which “could offer consumers a future heating option which works for them in a very similar way to natural gas today, but with no carbon emissions”. In advance of that strategic decision, Government will run a consultation on the role of hydrogen ready boilers in preparation for any future conversion of the gas network and work with various stakeholders to enable up to 20 percent hydrogen blending in to the existing network by 2023 – subject to further testing and trials.
Conclusions and what’s next:
The Energy White Paper may disappoint those that expected to see a comprehensive plan from the Government on how it plans to achieve Net Zero but it undoubtedly covers a broad range of key issues and suggests it is beginning to be viewed on a whole-system basis.
Much of the White Paper was about taking stock and reiterating recent commitments made in the PM’s 10 Point Plan, and the Spending Review. There was also plenty of signposting about further details to follow in various policy papers over the coming months.
With COP26 on the horizon, 2021 could be an historic year for the energy sector. The UK continues to sign up to stretching goals to decarbonise faster than most other countries, believing that there are significant jobs and investments that will be created as a result.
It is now all about delivery. Without early clarity on the policy frameworks, investors will be unable to invest in new technologies or industries and create the jobs the Government wants to see.
Finding requisite Parliamentary time to scrutinise the vast amounts of new legislation required to deliver Net Zero could be problematic at a time when the UK will be focussed on post-Brexit issues and COVID-19. This is evident in the EWP with regular reference to the intention to introduce legislation for measures “when Parliamentary time allows”.
