The announcement of the energy strategy is an important step on the UK’s road to net zero, which will also help strengthen the country’s energy security and independence. However, against the backdrop of the cost-of-living crisis and soaring energy bills for consumers, did the strategy go far enough? What does the strategy mean in real terms for the energy sector?
Two key aims of the strategy are to support ambitions for low carbon technologies to generate 95% of the country’s electricity by 2030, and for the electricity system to become fully decarbonised electric by 2035. While the strategy sets out ambitious expansion plans for technologies such as wind, solar, hydrogen and new nuclear, the talk of “doubling-down” on these did not necessarily result in clear targets for each technology-type.
Catching the breeze
Slashing approval times for new offshore wind farms from four to one years and ambitions to develop 50GW, including 5GW of floating offshore wind by 2030, will undoubtedly focus investor interest. However, these projects don’t come without their own complexities – geophysical, environmental and technical challenges alongside the sheer scale and capex requirements can all impact development.
Yet the market is already gearing for the upscaling offshore wind – for example, the recent ScotWind auction saw 17 projects (circa 25GW) being selected from 74 applications. There is a growing market trend for joint venture arrangements between two or even three specialist developers, and an increase in project funding via investor consortiums (which could be a mix of debt and equity) with investors entering the pipeline at different stages depending on their appetite for risk. One potential blocker to offshore is the way in which the new wind farms are connected to the onshore grid. The government is considering an offshore transmission system which will reduce cost and limit the need for onshore infrastructure but this needs to translate into action for offshore wind to reach its full potential.
Defined targets were also set for new nuclear, with 24GW to be deployed by 2050 – three times the current capacity. While this could represent 25% of the UK’s project energy demand, like offshore wind, these projects tend to have a long lead-in time. Does this leave the UK reliant on more traditional sources of power in the short to medium term?
This is where the strategy could have gone further, defining set parameters for onshore wind, solar and both short- and long-term energy storage. Onshore wind in particular didn’t benefit from the anticipated changes to planning law in England, which could have led to large-scale deployment. Instead, the strategy promises to consult on developing partnerships with a limited number of communities. Developer led collaborations which balance commercial and community interests could overcome some of the traditional community energy scheme hurdles of cost and expertise, and lead to a number of smaller-scale schemes coming to market.
In addition, bundling technologies such as onshore wind with energy storage and EV charging infrastructure could make these projects even more attractive to the community – particularly in rural areas where the development of net zero infrastructure is slower. For the developer, maximising land use, grid capacity and the addition of multiple revenue streams also has benefits.
While these schemes will play an important role in communities reaching net zero, the scale isn’t sufficient to meet the UK’s decarbonisation targets. That leaves solar and the government has targeted a five-fold increase in solar capacity by 2035 which could equate to circa 70GW of ground-mounted and rooftop solar generation capacity.
Ray of sunshine
Ground-mounted solar is already a buoyant market – competition for sites is fierce and while labour shortages and supply chain challenges have increased the cost of construction by around 30%, these projects remain attractive to investors. The amount of investment into solar (and solar plus energy storage) from European and UK funds is driving the trend for joint ventures between investors and developers. Investors are entering the project life cycle earlier – as early as the site finding stage to build portfolios from scratch – and joint ventures are lasting longer. Instead of exiting at ready-to-build, joint ventures are progressing through the construction phase and taking some of the construction risk so they can benefit from operational returns.
With the market already capitalising on co-located solar with energy storage as a way of maximising land use and grid connections, the continued government support of these schemes is a clear indication of the important role they’ll play in achieving net zero.
In addition, scaling up solar projects to reduce capex, particular given increases in construction costs, is already a market consideration. Obtaining a development consent order (DCO) can be costly and take time, meaning the cost benefit of large-scale development doesn’t always stack up. As part of the strategy the government intends to consult on amending the planning rules but only to strengthen policy in favour of development on non-protected land. In order for the government scale-up of solar ambition to be realised, further consideration will also need to be given to how planning supports large-scale solar.
With ESG decision-making driving business strategy and the demand for green buildings powered by green energy on the rise, the strategy’s plans to consult on relevant permitted development rights and consider how the best way to make use of public sector rooftops is another important milestone. This could see a resurgence in commercial solar rooftop developments as part of a wider portfolio/investment mix.
Hydrogen conundrum
There is practically no low-carbon hydrogen in the system today, but the government is looking to double its target to 10GW of low carbon hydrogen production capacity by 2030. The investment in the North Sea, renewables and new nuclear outlined in the strategy will leave the UK well placed to exploit all forms of hydrogen production.
Hydrogen has had renewed recognition for its potential role in helping to achieve net zero but the challenge is around application in day-to-day usage – for instance whether it will be used more for heating or transport. While there has been some initial investor interest in hydrogen, the nascent nature of the technology and the lack of clarity in the strategy could hamper development and investment
A clear pathway around how hydrogen fits into the longer-term journey to net zero is needed to facilitate more focused project development and funding.
Keeping the lights on
The planned renewable expansion is largely dependent on developing the existing network infrastructure. Two key priorities have been identified for this decade. Firstly, anticipation of demand and planning ahead to minimise costs and public disruption. Secondly, hyper-flexibility in matching supply and demand so that minimal energy is wasted. With these two measures in place, costs could be brought down by up to £10 billion a year by 2050.
The strategy outlines the role of energy storage in achieving this but without setting deployment targets. However, the need to balance the grid and keep the lights on will spur development of both short-term and large-scale, long-duration energy storage. We are already seeing energy storage being used beyond the more traditional National Grid balancing mechanisms. For example, Zenobe’s 100MW Chapenhurst project will be the world’s first to receive reactive power directly from the locality’s distribution network operator.
Large-scale, long-duration energy storage such as gravitational storage, redox flow batteries, compressed or liquid air energy storage, and power-to-X technologies, are also moving up the development pipeline. These technologies still remain in their infancy, so investment is likely to be dominated by those already operating in the storage space who are more comfortable with the revenue streams and risk profile.
Powering the future
The energy transition won’t happen overnight. The purpose of transitioning to renewable energy sources is to provide long-term, sustainable solutions that allow the economy to thrive while protecting the planet. However, despite the lack of defined targets for some technologies, the importance of signalling intent and outlining future plans should not be underestimated.
When government signals the direction of travel, the market can make decisions based on that plotted trajectory. That’s exactly what we are likely to see in this case, and as the energy sector responds accordingly to where they see both need and opportunity.