The British Energy Security Strategy

The UK government published its new British Energy Security Strategy in early April. Soaring wholesale energy prices, pushed even higher by the conflict in Ukraine, have called for a new intervention in less than six months after the publication of the Net Zero Strategy.

The Strategy considers faster decarbonisation as the route to energy security and independence. However, some near-term challenges and hurdles to meet the long-term goals need to be considered.

The global commodity crisis and UK challenges

In the wake of rising global energy prices, the conflict in Ukraine has wide-ranging implications for international energy markets. The implementation of country bans on Russian imports could make the evolving supply crisis worse and keep commodity prices volatile for the foreseeable future.

The UK is significantly exposed to some Russian fuels. According to the Digest of UK Energy Statistics 3.9 (DUKES), Russian fuel made up about a third of the UK’s total diesel, over 10 per cent of crude oil and over 5 per cent of liquefied natural gas (LNG) imports in 2020. DUKES G.5 and G.2 report that Russia was also the largest source of UK coal imports in the same year, albeit UK consumption was relatively small.

UK domestic energy prices (electricity, natural gas and transport fuels) closely follow global and European price trends.

From an energy perspective, the UK’s challenge is four-fold:

1. reducing reliance on Russian fuel imports while maintaining security of supply
2. moderating the impact of global commodity price rises on the UK public and business
   
3. increasing energy independence to mitigate the impact of international energy market trends
   
4. maintaining its commitment to reach the 2050 net zero target.

UK response: The British Energy Security Strategy

To deal with the above set of challenges, the government published the British Energy Security Strategy on 7^th April 2022.

The Strategy is clear: the UK will speed up the energy transition to improve energy security and independence in the long term. To this end, large capacity increases are targeted in nuclear, renewables and hydrogen along with supporting domestic production of natural gas.

Multiplying low carbon power

Boosting low carbon power generation capacity is central to the Strategy as it will allow electrification of sectors such as heat and transport by using home-grown electricity to reduce reliance on imported hydrocarbons. The ambition is to provide 95 per cent of UK electricity from low carbon sources by 2030, on track to fully decarbonise the power system fully by 2035 as set out in the Net Zero Strategy. This will be achieved by increasing targets for the following generation technologies:

• nuclear – increasing capacity from 8 GW today to 24 GW by 2050. This target could see the building of up to eight new reactors. Great British Nuclear will be established to speed up project delivery. This follows the announcement of the Nuclear Energy (Financing) Bill last autumn that will introduce the regulated asset base model to fund future nuclear projects.
• offshore wind - increasing capacity from 11 GW today to 50 GW by 2030, including 5 GW of floating offshore wind. These are higher than the 40 GW (offshore) and 1 GW (floating) targets set in The ten point plan for a green industrial revolution (Ten point plan) and Net Zero Strategy
• onshore wind – increasing capacity from 14 GW today in line with local community views. Expansion will be incentivised by offering lower electricity prices to those living near future wind farms
• solar – increasing capacity from 14 GW today to 70 GW by 2030. Improvement in planning processes is planned to speed up both ground-mounted and rooftop solar deployment.

Contracts for Difference will remain the main mechanism to attract investments into renewables. However, auctions will take place on an annual basis in the future, with the next one scheduled for March 2023.

Industry concerns regarding regulatory challenges, lengthy delays to planning and consenting approval, and grid connection for renewable projects are well known. In response, the Strategy promises to cut consent time from four years to one.

Reviving oil and gas

In a more controversial move, the Strategy recognises natural gas as an essential transition fuel and supports the increase in its domestic production. Action will focus on three areas:

• offshore gas – a new licencing round will be launched in the autumn (the first since 2020) with applications assessed against the forthcoming climate change compatibility checkpoints. Gas and Oil New Project Regulatory Accelerators are also promised to take years off project development times
• onshore gas – a review of evidence on seismic activity and shale gas geological science has been commissioned from the British Geological Society
• low carbon technologies – commitment is maintained to carbon capture, storage and utilisation (CCUS) by 2030. To that end, the plan is to publish CCUS and hydrogen delivery roadmaps shortly.

Doubling hydrogen

Hydrogen also received a substantial policy boost focusing on:

• production – increasing the previously set target from 5 GW to 10 GW by 2030. Stipulating that at least 5 GW should be green confirms hydrogen’s role in helping integrate renewable generation. Annual allocation rounds are planned for green hydrogen that will be moving to price competitive allocation by 2025
• transport and storage – designing new business models for transport and storage infrastructure by 2025.

What are the potential challenges to meeting the targets?

In our view, the below challenges need further consideration.

Near-term challenges

The Strategy is firmly focused on goals to enhance UK energy security and independence over the long term. Offshore windfarms, nuclear power, North Sea oil and gas field development rightly need bold targets, while reducing red tape and speeding up project delivery should help. However, there are some near-term challenges.

While industry focuses on delivering technologies that take a long time to develop (small nuclear reactors are expected by 2029 at the earliest), Russian fuel imports will be phased out by the end of 2022. This could coincide with potential supply disruption across the continent, possibly sending commodity prices soaring again. With the UK being significantly exposed to international markets, consumers will feel the impact of global fuel price rises acutely.

The UK’s last coal-fired power stations are retiring in the autumn. Although polluting, coal can be cheaper than natural gas and in 2021 on certain winter days it made up almost 5 per cent of UK electricity. The Strategy did not extend the life of coal power stations beyond autumn 2022. While this was the right climate decision, the alternative may have helped keep prices down and help security of supply over next winter.

Many felt that more robust energy efficiency measures were missing from the Strategy. These could have included a replacement for the Green Homes Grant Voucher Scheme focusing on rapid installation of energy saving materials. Originally, the £2 billion scheme was expected to help 600,000 households save up to £600 on their annual energy bills. Additionally, campaigns to take personal responsibility for reducing energy use could have enhanced the Strategy’s impact. In Japan, the energy-saving media campaign following the Fukushima accident immediately helped reduce energy consumption by approximately 20 per cent. Energy efficiency has the dual benefit of reducing emissions as well as helping with the cost of living. Indeed, lowering every thermostat by as little as 1C could save the UK’s entire consumption of Russian gas.

Challenges further ahead

Even delivering the previous 40 GW offshore target would require installing approximately 3,000 wind turbines, according to Offshore Energies UK (OEUK). However, the number of large offshore turbine manufacturers is limited, and several are struggling to meet orders. Supply chain, logistics and permitting challenges are reported to be causing the delays. With other European countries planning to increase offshore wind capacity for reasons similar to the UK, pressure on manufacturers could lead to further strain on their supply chains, higher prices increases and more delays.

The Strategy invites greater community involvement in onshore wind – a cost effective technology that is also much quicker to deploy than offshore wind or nuclear. However, many do not expect a significant increase in capacity without changing the current planning restrictions. Targets for exploring other low carbon technologies such as tidal, geothermal or fusion have not been mentioned either.

Rapid renewable capacity growth, especially offshore, will only be possible if the network itself is expanded simultaneously and in a coherent manner. The Strategy recognises this need by promising to establish the Future System Operator and setting out a blueprint for the whole system by the end of 2022 in a Holistic Network Design and Centralised Strategic Network Plan. This will be a hugely complex undertaking on behalf of the government at the same time as spending substantial legal and regulatory effort on reducing the long planning, consenting and licencing lead times across several energy technologies. Interruption to any part of the plan will cause overall delays, frustration and cost increases.

The swift expansion of intermittent power generation must be aligned with adequate and timely storage capacity development. Recent high and volatile prices have driven a storage investment wave, but this is even more important in the wake of the prolonged period of low windspeed that North Europe experienced last year. While the role of green hydrogen has been confirmed as an important storage solution, opportunities for other types of storage mechanisms (further large-scale battery, pumped hydro, mechanical and gravity-based along with vehicle-to-grid in the future) should also be better explored.

Supporting domestic oil and gas production growth to enhance UK energy independence is central to the Strategy. However, the cost of independence must be carefully managed. According to OEUK, North Sea production is expected to return to 7 to 10 per cent decline after 2024. Capital investment, forecasted between £3.5 billion and £4 billion for 2022, could halve the rate of decline by around 2025. However, suppliers face continued challenges from low industry activity and have been increasingly applying their expertise in other energy sectors (including offshore wind). Increasing demand for supplier resources internationally could lead to project delays and cost challenges, which would only add to higher maintenance costs for late life assets in the mature basin.

Conclusion

Executed in a focused and timely manner, the Strategy could transform the UK energy landscape and firmly set the country on the trajectory to achieve net zero. Rebuilding the UK energy infrastructure and rebasing the economy to low carbon energy sources will bring a wide range of opportunities for businesses and investors. The Strategy will create a diverse and resilient energy system and shield UK customers from international price shocks. However, achieving it will require maximum effort and focus. In addition, the Strategy could be enhanced with a shorter-term focus on energy efficiency and action to reduce demand.