Energy Matters: Across the Economy
A collection of essays from business leaders, community groups and parliamentarians.
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Foreword
Emma Pinchbeck, Chief Executive Officer, Energy UK
The UK’s commitment to achieving Net Zero by 2050 is not merely a policy directive; it is a rallying call for the entire energy sector and economy. As the Chief Executive of Energy UK, I have witnessed firsthand the unwavering dedication of our members, policymakers, and stakeholders to build a sustainable future for generations to come.
The recent energy crisis also highlighted how fundamental the energy sector is to every aspect of our lives. The availability of cheap, secure, clean, home-grown energy impacts the cost of heating our homes, of course, but also the costs of running a small business, or the price of good on our supermarket shelves.
As we navigate the complexities of this transition, it is vital that we learn from each other’s experiences, successes, and setbacks. The diversity of viewpoints within this collection mirrors the rich history of our industry, underscoring the complex nature of the challenges at hand.
Energy UK is proud to stand as an organisation committed to collaboration, advocacy, and knowledge exchange. We recognise that the road to Net Zero is not a solitary endeavour; the energy transition requires a united front, where industry, the Government, and society converge in a shared commitment to sustainability and prosperity for all.
It is with great pleasure that I introduce this collection of essays exploring the remarkable journey of the United Kingdom’s energy system. It is with hope that this collection serves as a source of inspiration and a catalyst for continued dialogue and shared work, and I would like to thank all those who have contributed to this collective effort.
Business and NGO collaboration will be key to Net Zero
Rachel Solomon Williams, Executive Director, Aldersgate Group
From 1950 to 2050 the UK’s energy system needs to have changed completely. Everything we do that is currently powered by burning a fossil fuel, from heating and lighting our buildings to running vehicles of all kinds and manufacturing, will need to be powered (directly or indirectly) by clean electricity.
This means changing radically not just the way we produce and deliver energy, but also the end processes and machines that use that energy: a total systemic shift.
There is emphatic agreement across much of society and business that, with thoughtful execution, reducing and shifting our energy use will bring an array of benefits: limiting the impacts of climate change, cleaner air, quieter streets, rewarding and secure jobs, better public health and a thriving natural environment. Leading the Aldersgate Group, where household-name businesses sit alongside academic institutions and NGOs, reminds me daily how broad and deep that agreement is. In July, for example, over 100 businesses including the likes of Amazon, BT, Cemex, IKEA, M&S, Ørsted and Unilever signed a letter to the Prime Minister calling for “renewed focus and commitment to delivery” on Net Zero.
The rapid decline of ecosystems in the UK and globally means the need for the energy transition has become even more urgent. Meanwhile many people in the UK are living in poverty, and public infrastructure and services of all kinds are under unmanageable pressure. Businesses are trying to cushion the public from cost rises, but many are struggling – especially SMEs – putting further pressure on the economy. The energy transition must work with the grain of tackling poverty, supporting the economy and driving widespread service improvement, while also avoidingunnecessary impacts on the very habitats that new energy sources are trying to safeguard.
Solving this huge problem needs sophisticated systems thinking of a kind that no UK Government has previously managed (or, arguably, hasneeded to manage). It is a well-known problemthat departments are organised thematically and structured to handle issues separately. This decision-making architecture has worked reasonably well in the past, but itis now struggling to manage the manifold interdependencies between current societal problems and their potential solutions.
The Aldersgate Group has previously advocated for an Office for Net Zero as a means of driving the energy transition decisively and coherently. This would be a positive step forward, but I would argue that systems thinking needs to be even broader and more embedded in policymaking across all areas. We need to start with a clear understanding of how society is likely to look in 2050 in high-level terms – across all dimensions, not just energy – and then work backwards to build a systems map which shows how those different dimensions interact and where important co-benefits and trade-offs lie. In doing so, we need to consider areas of UK strength and regional comparative advantage to ensure competitiveness internationally. This means, for example, leveraging CCUS and hydrogen production in the Humber and Teesside, offshore wind projects in the Celtic Sea and Scotland, and electric vehicle manufacturing in the North East.
This approach should be used to identify “no regrets” decisions – actions we can take now that will definitely contribute to a healthier, greener and more prosperous society in 2050 and look unlikely to have unintended consequences. These should be the first in a sequence of policies flowing from the overall vision, with clarity about how policies work individually and collectively. Decisions also need to factor in real-world feasibility and the impacts of human behaviour, with economic analysis being a guiding indicator rather than determining factor.
There is a huge opportunity to the UK to limit the impacts of climate change and grow our economy for the long term, but time is running out. Driving a systemic shift needs a new way of thinking, starting now.
Navigating Challenges in the UK’s Energy Transition: A Finance and Policy Perspective
Elena Pérez Celis, Head of Policy & Public Affairs, Bankers for Net Zero
The landscape of the energy transition in the United Kingdom reveals complex challenges and policy gaps, particularly in the realm of domestic retrofit initiatives. As the country navigates towards a more sustainable future, the imperative for transformative action in retrofitting becomes increasingly apparent. This complex landscape encompasses issues ranging from incongruent policy frameworks to financial impediments, underscoring the urgency of addressing these challenges to usher in a new era of energy efficiency and environmental stewardship.
Policy clarity
There is currently a state of policy stasis that encourages “rational inertia,” where there is an expectation that homes will eventually need low- carbon retrofitting, but there is a lack of clarity on the pathway to achieve this goal. Policymakers must provide a comprehensive and clear roadmap, giving homeowners confidence and direction in their efforts toward sustainable retrofitting. Transparent communication on long-term goals and strategies is essential to overcoming this inertia.
Additionally, there is a lack of detail on how new models and technologies will be brought to market at-scale, putting investment decisions on pause. Unlike the US and the EU, the UK lacks a comprehensive long-term investment strategy to mobilize both public and private finance in support of transitioning to a Net Zero economy, as exemplified by the Inflation Reduction Act and the Green Deal, respectively. The Government is urged to play a more proactive role in driving renewable energy generation, including the promotion of solar panels, and to implement incentives for retail investment in this sector. Moreover, the current insulation scheme is deemed insufficient, and the progress in the heat pump rollout is criticized for being too slow, with a notable disparity in the number of installed heat pumps compared to EU countries like France and Norway.
Fiscal incentives
Policy clarity is interrelated with financial incentives. The lack of clear policy incentives leads to a dearth of effective financial support for decarbonization in most homes, leaving homeowners without the necessary support to invest in sustainable solutions. Incentives, such as lower stamp duty for energy-efficient homes, a building renovation passport, Enhanced Capital Allowances for retrofitting investments, and zero VAT on low and zero carbon products, emerge as crucial mechanisms to motivate property owners and landlords to invest in energy-efficient solutions.
By aligning financial incentives with clear policy directives, the Government can foster a conducive environment for sustainable retrofitting.
Fiscal incentives play a pivotal role in encouraging sustainable practices, motivating property owners to invest in energy-efficient solutions. The Government should prioritize investments in decarbonizing social housing and public sector buildings, leveraging these projects as catalysts to stimulate the wider market and drive down overall costs for sustainable practices. A strategic focus on social housing not only addresses energy efficiency but also promotes social equity, ensuring that the benefits of the energy transition reach all segments of society.
Reliable data
A critical challenge which hinders progress is the shortage of reliable data on the performance of energy efficiency measures. Upfront finance from banks to pay for insulation or other energy savings measures needs to be provided on the assurance that those savings will materialise. Currently, Energy Performance Certificates (EPCs) are the main source of data on building energy efficiency in the UK, but these certificates are not reliable to measure real world energy performance. The right measurement tools are needed to unlock finance to flow into retrofits at scale. The Government should explore accurate measurement tools that allow financial institutions to track the value of their green loans and encourage consumers to switch to greener alternatives.
Collaboration between the private and public sector
Addressing these multifaceted challenges requires a holistic approach, combining robust policy frameworks, strategic investment plans, and the accelerated deployment of renewable technologies. A collaborative effort involving Governments, businesses, and communities is essential to ensure a successful and equitable energy transition in the UK. To drive decarbonization efforts, financial institutions must strengthen their ties with customers and actively collaborate with the Government, providing consistent, trusted resources. Tackling emissions is not a standalone task; it’s intricately linked to pressing issues like the cost-of-living crisis and addressing regional imbalances. Access to finance is a hurdle in the upfront costs of retrofitting homes, where financial institutions play a vital role in providing necessary funding. Proactively, UK banks have set emission reduction targets for their mortgage portfolios, showcasing a commitment to align financial initiatives with broader environmental goals. By tackling financial barriers, enhancing policy clarity, and investing in accurate measurement tools, the UK can pave the way for a sustainable and resilient energy future.
The UK has to address the fundamental challenges of Net Zero
Alex Veitch, Director of Policy, British Chambers of Commerce (BCC)
Climate change and energy costs are two of the biggest challenges facing business as we head into the second quarter of the 21st Century. To give firms the clarity and certainty they crave then we must create an energy system that provides access to affordable, reliable and renewable power. The British Chambers of Commerce (BCC) welcomed the Government’s ‘Green Day’ announcements last March. But they were light on detail when it came to business energy use.
There was also a mismatch between the Government’s ambition and the ability to actually deliver projects within timeframes, with the skills and workforce currently available. Businesses has to be a key partner in the formation and delivery of UK energy policy. Giving firms a change to positively influence strategy development and supply chain opportunities. Chambers of Commerce are well used to acting as agents of delivery; developing supply chains, providing advice and facilitating innovation around new technology. Chambers can also support policy development and impact through business engagement and research.
The Grid
One of the key issues for business is the increased demand for grid connections and the negative impact on the pipeline for connections. The drive towards Net Zero is only going to increase demand for electricity but according to the National Grid, the network infrastructure that is required by 2030 is seven timeswhat has been delivered in the last 30 years. Some new applications are now being quoted connection times as long as 15 years. The network and pipeline, as they currently exist, are not compatible with modern energy usage, nor the changes to infrastructure (both new and upgraded) needed to achieve the growth mission set out by the Government.
The recent Ofgem announcement on clearing out ‘zombie projects’ in the waiting list will help but, as it stands, 37% of businesses surveyed in our October 2023 Net Zero survey said they did not believe the National Grid is giving them what they need in terms of energy supply, connectivity, and/or future proofing.
The 2023 Autumn Statement did see positive action on this point. The Government has listened to our calls and has accepted the recommendations from the Electricity Networks Commissioner to dramatically upgrade, modernise and increase capacity in the distribution network. This will help businesses with recharging for electric vehicle charging, distributed renewable generation, and grid upgrades to boost capacity.
Skills
The UK is also facing a labour shortage, at a time when the number of jobs in the green energy sector is increasing. However, in most cases ‘green jobs’ don’t involve totally new skills, but rather roles, in certain occupations; that will have to be hugely scaled up to meet growing demand in the future.
There is a deficit of such skills in every major sector that is facing decarbonisation: power, buildings, transport, waste, agriculture, and heavy industry. Estimates for the skills gap for these sectors, across the timeline of the Net Zero transition, go as high as two million jobs.
The issue is complicated by regional discrepancies. For example, almost all the UK’s housing stock of 29 million homes need to be retrofitted with energy efficiency measures and low-carbon heat. But building employment is skewed heavily towards London and the surrounding regions. Of the 1.3 million people in the UK currently working in the sector, nearly 600,000 are concentrated in London, the East and South East of England.
Almost all the UK’s housing stock of 29 million homes need to be retrofitted with energy efficiency measures and low-carbon heat.
Similarly, around half of heavy industry’s emissions derive from a few geographical clusters, notably Yorkshire and the Humber. This means jobs in high emitting sectors are unevenly distributed, so workers in these places need to be the focus of upskilling programmes to ensure that communities currently relying on heavy-emitting sectors are not negatively impacted by decarbonisation.
Energy Efficiency
Improving energy efficiency for businesses is another key component in ensuring the UK reaches its Net Zero goal. The impact of demand-side measures was clearly illustrated after the Ukraine invasion, where a determined effort to reduce natural gas usage managed to shrink demand and moderate prices to an extent. But policies to incentivise business energy efficiency improvements can be difficult, as many businesses do not own their facilities, causing tensions in the landlord and tenant relationship.
The Skidmore review proposed that Government should legislate by 2025 for the minimum energy efficiency rating for all non-domestic buildings, both rented and owned, to be EPC B by 2030. If this was achieved, it would provide a substantial long-term benefit to business operations through reduced energy use as well as lowering carbon emissions. But the capital cost of achieving this would be substantial.
The Department for Business, Energy and Industrial Strategy (as it was then known) estimated around £20 billion would need to be spent to shift all the UK’s non-domestic buildings to an energy efficient footprint.
To help firms on the way, the Government needs to look at grants to assist SMEs and provide clear and consistent advice to firms. It must spell out how companies can increase their energy efficiency and the competitive advantages it gives them. Business Rates and VAT reform could also help incentivise smaller businesses to take steps.
Reforming the retail market to ensure Net Zero transition works for customers
Gillian Cooper, Director of Energy, Citizens Advice
As we move past a period of intense price spikes driven by the conflict in Ukraine, it might be comforting to think that the energy market might soon return to normal.
We have moved on from an energy retail market where competition was measured by a minority of customers switching between generic tariffs with different logos. Meeting our Net Zero ambitions means building a market where more consumers are engaged, and open to reducing and shifting their energy consumption.
The politics of the last year have highlighted thorny distributional issues around the transition to Net Zero. The energy retail market is not immune to those, and short- and long-term challenges around energy affordability will remain considerable barriers to the change we want to see.
In order to win over the public, we must start from where they are. That means accepting that there isn’t public or political appetite for suppliers to make significant profits for delivering business as usual. This has been compounded by an era of cripplingly high prices, when household budgets have been squeezed by inflation. If there is scope for profitability that will be tolerated by politicians and consumers, then it is in addressing the market for energy efficiency and flexibility.
Fostering a positive relationship with customers means giving them something tangible in return – whether that’s getting paid to use energy more flexibly, or benefiting from products that help them to live more cheaply and comfortably. Only when customers feel that they are ‘winning’ will suppliers stand a chance of convincing the public of the value they provide.
It is in everyone’s interests for the market players to come up with exciting products that capture the public’s attention. But in order to retain customers trust in Net Zero we need companies to act responsibly. We need to ensure that market innovations don’t run ahead of consumer protections, so that the exciting deals of today don’t become millstones around customers’ necks. This requires a regulatory upgrade in the form of a new Consumer Duty, like the one introduced in financial services, and consumer protections that are fit for purpose in a rapidly evolving market.
There need to be products and services that work for different types of households, including for the most vulnerable. The retail market doesn’t have a strong track record of delivering attractive products and services to these customers. This year’s major reset around prepayment meter protections underscores that this needs to remain an area of focus for Government and regulator alike.
Priorisiting inclusive design practices will help ensure that Net Zero works for everyone.Alongside this we must get the finance packages right, based on a blend of grants and cheap finance, as well as well designed trigger points and incentives, including more cost reflective electricity pricing. If we don’t make it easier for all types of households to decarbonise their homes, we risk creating another world that doesn’t work for a significant portion of the population.
Even with all this in mind, there can be no shying away from the fact that the politics remain challenging. The current standing charge debate is a foretaste of what’s to come if the impacts are not addressed and the changes well explained by regulators and politicians. We must support those who adopt technology more slowly or are at more risk if they lose out from reforms. Ensuring there is long-term, targeted financial support for those on the lowest incomes is essential to manage those tensions as we make the necessary changes to incentivise a greener market. Ultimately, the success of the Net Zero transition depends on it.
In order to build a better energy market – one which works for customers and the climate – our focus will be continuing to build consensus, and advocating for the right policy solutions to develop and maintain public support for the transition.
It is in everyone’s interests for the market players to come up with exciting products that capture the public’s attention.
Accelerating change in our system to reach Net Zero
Guy Newey, Chief Executive Officer, Energy Systems Catapult
The pursuit of Net Zero is transforming every sector of the economy – none more so than the energy industry. In 1991, renewable energy accounted for just 2% of all electrical generation in the UK. By 2022, wind power alone accounted for more than 26% of the UK’s total electricity generation. This is an incredible achievement; now comes the hard part. How do we make sure all this new technology works together as a system, and how do we ensure consumers welcome and drive the take-up of ‘green’ technologies?
By 2022, wind power alone accounted for more than 26% of the UK’s total electricity generation.
Accelerate Net Zero
We have just over 26 years to hit our Net Zero target. Whilst the transformation is underway, we need to accelerate the pace of change, and do so while improving the outcomes that consumers care about most – comfort, convenience, and affordability.
Across the UK we’re seeing a steady uptick in the adoption of heat pumps and electric vehicles (EVs). It’s not outside the realms of possibility to believe that with the right price signals and incentives, almost every home could play host to a battery – in the form of an EV – to help balance the grid, and every airing cupboard could host a hot water tank – or more advanced technologies – offering thermal storage and cross-vector flexibility. But we’re still a long way from the truly smart, flexible, digitalised grid we have been promising (and promised) for the past decade.
Tap into flexibility
There are some incredible start-ups and SMEs making waves in the flexibility market – while maintaining a focus on the end-consumer.
Innovators – large and small – such as Sunamp with their thermal battery, AmpX, Electron, Atamate, Demand Logic, Flexitricity, OVO and Octopus Energy – among many more – are bringing ‘green’ solutions to customers and businesses. The combination of our national innovation expertise and our relatively agile regulatory system, mean the UK is a genuine world-leader in the future smart and flexible energy system. We have an opportunity to capitalise on this position and export our technology across the world, but others are catching up fast, and some of our progress in recent years has stalled. Go ‘green’ with data.
The transition will mean millions of devices will be charging and discharging at any one time. We cannot control that centrally and need to create the digital infrastructure to enable it. This digital infrastructure is urgent and essential to keep the system operating safely and securely. Industry and Government should prioritise implementing the recommendations of the Energy Data and Digitalisation Taskforces.
Moving forward with measures such as ‘Automatic Asset Registration’ would ensure that new small- scale energy assets installed during the transition are identified and registered – providing the networks with the knowledge and visibility needed to ensure system stability and maintain supply.
This should be underpinned with a presumed ‘open data’ approach to energy system data to enable better interconnectivity between networks.
The roll-out of digitally enabled clean technologies, the need to keep bills as low as possible and the importance of a resilient energy system (including, but not limited to electricity). Each factor points to a retail energy market that is fundamentally different in the (near) future compared to today’s. The new energy market will depend on trust.
Customers will be central to the transition – they must trust in those providing advice and guidance on investment decisions geared towards zero carbon living. This trust is also necessary for consumers to enter into longer-term relationships with their energy retailers, which would enable new types of retail business models.
Putting consumers first
Consumers must be the central pillar if the changes we need are to be adopted en masse. And this transition must work for all consumers, including the most vulnerable. That does not mean keeping vulnerable consumers away from innovation. It means making sure newtechnologies are helping make their homes more comfortable and cheaper to run as a priority.
Innovation, digitalisation, and customer partnerships will be central to the next phase of the Net Zero transformation. If we get it wrong, progress will stall. But the opportunity is huge if we get the right building blocks in place today.
Net Zero as a response to our changing planet
Shaun Spiers, Executive Director, Green Alliance
Climate scepticism is over as a political force in the UK. In its place, we have Net Zero scepticism.
Climate change is real and frightening, something people have seen and experienced. Net Zero is different. It is a policy, and it is easy to argue about policy: go slow, do it differently, be “pragmatic and proportional”.
But politicians tempted to frame Net Zero as a burden should remember that most of the world has committed to it because it is the best means we have of averting climate breakdown. And averting climate breakdown is more important than any election strategy.
Moreover, our leaders should take pride in the UK’s record on climate change and the energy transition. It is an area where we really can claim to be ‘world leading’. Let’s not move into the second division.
The Net Zero transition is not some exercise in self sacrifice that comes at the expense of the economy and people’s living standards. Rather, it is the way to restore economic growth, which is why the US, the EU, China and others are investing so heavily in it. The necessary reordering of our economy and energy system will also have tangible benefits for the “ordinary families” so loved by politicians. Done right, it will result in lower bills, warmer homes, cleaner air and good new jobs.
But it must be done right, with a steady eye to fairness. This applies to the “squeezed middle” of low and middle earners who do not have the money to retrofit their homes or fit a heat pump, let alone buy an electric vehicle, but are too well off to get the state support currently available.
It applies to the 4.6 million households in the UK who rent their homes in the private sector. A quarter of them live in fuel poverty. Tenants in the least energy efficient homes pay up to £950 more on energy than the average. That adds up to a lot of people going cold and hungry as they struggle to pay their bills. We need to improve these homes for moral, as well climate reasons. And we really should stop building homes that will need to be retrofitted almost as soon as they are occupied.
Tenants in the least energy efficient homes pay up to £950 more on energy than the average customer.
And it applies to workers in the oil and gas industry. The transition away from fossil fuels is unstoppable and it needs to happen faster, both to reduce emissions and for the UK economy to reap the economic benefits. But it will be much easier to gain the acquiescence of workers with a stake in the current energy system if the new jobs that replace the old jobs are unionised and well paid.
Finally, our focus on the existential challenge of averting change must not lead us to ignore two other imperatives: restoring nature and adapting to the climate change that is already happening and which will inevitably get worse, even if global warming is limited to 1.5 or two degrees above pre-industrial levels.
Fortunately, we can do many things that have the triple benefit of enriching nature, reducing greenhouse gas emissions and increasing our resilience to climate change. These measures include mass tree planting and rewilding some uplands, at minimal cost to food production; restoring peatlands; and improving and extending wetlands. As with the energy transition, most of the jobs that will created will be outside London and the south east.
Net Zero is important. It should be a source of national pride. It will improve people’s lives now, as well as in the future. Of course, it needs to be done fairly and without excessive cost. But we need to hear more of the positives from our political leaders. If Net Zero is to be a political dividing line, all mainstream politicians should be on the side supporting it.
We need to rethink the way we view the energy system
Laura Sandys, Former Chair of the UK Government’s Energy Digitalisation Taskforce
Deploy, deliver, scale – action is what is needed rather than more strategies. We have got ourselves into a circularity of strategizing, high bounded by aiming for perfection and this is most certainly the enemy of progress towards our crucial destination.
We need to get on with the evident no regrets actions as we should feel confident that we have many of the jigsaw pieces in place or in view – but getting on with it seems to be the problem. We must get on with transmission deployment and grid upgrades. This is being pushed forward by Ofgem but we are late to the party to get the infrastructure needed in place to stop the current waste in the system. There does need to be a significant focus on smartening the distribution system and the trails on V2G need to be accelerated.
By 2035 the number of EVs on the system will equate to two nuclear power stations so that capacity must be unlocked.
We need a lot more storage – the equivalent of refrigeration in ood – throughout the system. Storage comes in lots of different shapes and sizes from the long duration storage requirements – the frozen food of the energy sector; through to the localised storage systems that can make a real dent into the congestion on the system. We still don’t know how to value storage properly as we are not using whole system costs to reveal true value to the system.
However most importantly we are forgetting for whom we are doing all of this – the public. There is a still a blind spot when it comes to some key changes to the characteristics of the new system. Demand is equal to supply – not in scale but in value.
However we are at the step hills of building a system that reflects our needs from both supply and demand. This needs to be address quickly as our little secret on the balancing and constraint costs incurred by not building a strong flexibility, demand side and localised storage system would shock the public if they knew!
Yes this will require much deeper digitalisation of the system – and we have the tools to do this that we can pinch from other sectors and adapt. The new price regime for networks needs to drive this transformation forward but key to this will be the Future System Operator whose role in supporting the management of the 100’s millions of actions and assets on the system will be critical and can lead the way in developing the digital tools that distribution operators can also adopt.
But fundamentally this is about mind shift from “my generator is bigger than yours” to one of “my distributed and diverse customers are an active part of the energy system”.
Market reforms being proposed are still far too supply focused and when we will need 20-30GW of flexibility by 2035 and only have 1GW on the system today we have a long way to go. There is limited consideration around what incentives and market mechanisms should be put in place for whole system benefits – thinking is still focused around the commodity.
Retail reform for both domestic and commercial and industrial customers must be a priority and I am concerned about the sequencing of electricity market reform being proposed before establishing what that retail market should look like. Currently customers are being served by a retail regulatory system that is 30 years old with very limited changes to the shape or service that customers might want or need. It has been atrophied with politicians too scared to change it, with business models developed around the vanilla proposition but with customers still not getting a new and tailored service to reflect their changing needs.
This must change and we need to shift the incentives in the system for more is more to less is more and enable suppliers and other retailers to be rewarded for less energy supplied.
And so we come to the big elephant in the room. Energy efficiency – the key to improving national productivity, delivering lower costs for consumers, requiring less infrastructure and key to a Net Zero world. The Treasury that is so focused on counting the pennies should realise that every pound spent on efficiency saves money throughout the economy every year and reduces the cost of decarbonisation for everyone. While on the other hand every pound spent on generation costs not just that pound but additional costs in transmission, distribution and suppliers margins – every year.
I have a dream – that all policy and markets reflect whole system costs that would unlock storage and all forms of flexibility and demand side actions; that we reform the retail market and bring it into the 21st century rewarding retailers to sell less energy but better outcomes; and that we launch a national efficiency programme…
So not much to do!
Manufacturing: Challenges and Opportunities
Stephen Phipson, Chief Executive Officer, Make UK
Manufacturing is the engine of the UK economy. In 2022 it jumped from 9th to 8th place in the global manufacturing rankings and its contribution of £224 million GVA is 20% higher than a decade ago, 14% higher than the UK economy average.
Manufacturers delivered £290+ billion worth of goods exports in 2022, almost half the UK’s total exports, and the sector is 2nd in the world for service trade. Britain’s manufacturers – especially our smaller companies – are a seedbed for innovation, contributing 41% of all business R&D.
As the provider of 2.6 million high-quality, well-paid jobs, manufacturing businesses play a key role in our regions, where they are particularly important in underdeveloped rural and regional areas. Skills development and apprentice training is a constant across the sector, with manufacturers working to create a sustainable fit-for-the-future workforce within local communities across the whole of the UK.
The low-carbon economy is a major growth opportunity for the UK manufacturing sector, where it has an instrumental role to play in supplying vital goods and services. In this decade the focus is on energy efficiency, electrification, and industrial innovation that will lead to the technologies of the 2030s and beyond with widespread hydrogen, modular, nuclear and CCUS.
Digitalisation, particularly artificial intelligence (AI) is an integral part of that opportunity, which will enable productivity growth alongside material and resource efficiency and resilience.
An overwhelming majority (92%) of manufacturers see the UK’s transition to Net Zero as a priority to their business. The UK continues to be a global leader in tackling climate change and manufacturers have understood the gains to be had commercially and are intent on playing their part to reduce carbon emissions. 68% of manufacturing firms have already made business investments to transition their operations to Net Zero, seeing significant savings as they do so.
But manufacturers cannot do it alone and need Government to support them towards that transition and 87% of manufacturers say they are at a disadvantage compared to our international competitors. The Advanced Manufacturing Plan is welcomed, delivering £3.45 billion for our strategic manufacturing sectors in automobile, aerospace, and life sciences alongside the £960 million for the Green Industries Growth Accelerator to support investments in manufacturing for the clean energy sectors. This will undoubtedly provide a much-needed longer-term boost and help the manufacturing sector make progress towards achieving Net Zero emissions. Making full expensing permanent is positive news but the exclusion of leased equipment and second-hand assets needs to be addressed as these are often the only option for smaller companies.
The business rate freeze for SMEs is not so helpful as it is limited to property values well below the value of manufacturing facilities e.g. (< £51,000). To give manufacturers the boost they need, the overall landscape needs to be tightened up to avoid punishing those who are investing in the right technologies e.g. onsite generation. The full rollout of Made Smarter is great progress as it will support the wider adoption of AI and digital technologies across manufacturing businesses, and this should be extended to technologies supporting energy efficiency.
The accelerated upgrade of the electricity grid infrastructure is crucial for the sector to electrify and ensure energy security through a smart, flexible grid.
What we now need is for Industry and Government to work together on the practicalities of the Advanced Manufacturing Plan, so we can deliver better coordination across the clean energy sectors and build true resilience into our supply chains which are key to providing the components and services vital to deliver clean energy in the future low-carbon economy.
Manufacturers delivered £290+ billion worth of goods exports in 2022, almost half the UK’s total exports.
There is no path to Net Zero that does not travel through the homes of the poor
Adam Scorer, Chief Executive Officer, National Energy Action
The transition to Net Zero will be crucial in tackling fuel poverty. The lowest income households in the least efficient homes are those most exposed to volatile fossil fuel price fluctuations and those most likely to resort to dangerous coping mechanisms.
At the same time, the scale of the challenge in decarbonising domestic heat means those same households need to be prioritised for support.
There is no path to Net Zero that does not pass through the homes of the poor and no serious attempt to tackle fuel poverty that does not need the drive toward Net Zero.
The UK Government recently said that we should ensure that Net Zero does not harm low-income households. Absolutely right. But this is not achieved by shielding low-income households from the change.
The benefits of decarbonisation are significant, and we must ensure that fuel poor households can access them and do so early. Indeed, the earliest legal target we have towards Net Zero, is to ensure that all fuel poor homes meet EPC C by 2030. We are far from meeting this target, and significant barriers remain in the way of fuel poor households who want to decarbonise.
Most immediate are the financial barriers, including the upfront costs embedded into many schemes that are meant to help fuel poor households increase the efficiency of their homes and switch to low-carbon energy. Even schemes such as new heat pump offers that have reduced costs to around £3,000 with Government grants, will be completely out of reach for fuel poor households. ‘Hidden’ costs such as rewiring or upgrading electricity networks to use electrified heat, are not always covered by the available grants. Too often we exclude those households that stand to benefit the most from our efforts to decarbonise.
Information is needed to ensure that fuel poor households can be part of the transition to Net Zero, and not left behind by it. Centrally administered advice, to overcome the current postcode lottery, as well as reliable, non-partisan advice available through local touchpoints, such as GPs surgeries and food banks.
Energy efficiency is the crucial exam question to achieve a positive alignment between fuel poverty and Net Zero targets. But we also need low- income households to be the big beneficiaries of a smarter, more flexible, responsive energy market. Not just making smart prepayment the only acceptable way to prepay but using flexible markets and consumption data to target support and interventions for people with less market power and fewer ways to make the market work for them.
Of course, the costs of Net Zero are a concern. ‘Who pays?’ is not a rhetorical question. Currently, a significant proportion of Net Zero funding comes through energy bills. This disproportionately burdens low-income households. Ensuring that policy costs are paid for progressively will be key to facilitating a fair and affordable transition.
Without very careful management of distributional outcomes, there is an elevated risk of exacerbating inequality. Fuel poor, low-income and vulnerable households will require the protections discussed here in order to ensure that the transition works for all.
It’s time to stop saying the fuel poor should not be left behind. It’s time to put them at the front of the queue so we can bank the bigger cost, carbon and comfort savings that follow when you prioritise those in the worst conditions first.
It’s time to have a vision for a low carbon energy economy that delivers warmer homes that are places of safety, security and sociability, not of dread and despair. Put fairness at the heart of the transition and more people will feel a warm glow from Net Zero.
New heat pump offers that have reduced costs to around £3,000 with Government grants, will be completely out of reach for fuel poor households.
The UK’s leadership on the global stage is vital
The Rt Hon Baroness Helene Hayman GBE, Peers for the Planet
Responding to the energy price crisis, fuelled by high fossil fuel prices, has been the challenge of this Parliament, but decarbonising and tackling climate change is a challenge which transcends electioncycles. The two are linked, and how we respond to the former will impact our success in achieving the latter.
Energy is a commodity that links virtually every sector and so success here is key to achieving an orderly transition. But we cannot meet the ambitious electrification targets we have set if they are primarily based on top-line ambitions and aspirations. We need serious plans, led by Government in partnership with industry, that are long-term in nature and accountable in their governance. While we should be proud of what we have achieved already we can’t afford to be complacent and rest on our laurels.
The phrase ‘low hanging fruit’ is often used when describing our decarbonisation journey so far. And yet, while it is true we have picked much of that fruit already, there remains one opportunity which I have been trying to persuade the Government on for several years – unlocking onshore wind and putting it on a level playing field with other renewables. Despite some recent progress in this area and some signs of a shift in policy, the Government have not yet grasped that opportunity in full.
We know that renewable energy sources are now cheaper than the fossil fuel alternatives, and we need to have an open discussion about how the public can benefit, not just from the cleaner air that an electrified economy will result in, but from the associated cost savings for bill payers. It is crucial that the public are brought along on this journey, and passing on these savings or giving communities a sense of ownership in a shared asset are some of the ways to achieve this. But it is on Government to set the key milestones, the robust measures against which progress can be assessed, and clear roles and responsibilities.
We need the ambitious targets that we have for renewable generation to be replicated to address energy demand and energy efficiency, and the current EPC certification scheme needs to be urgently refreshed to reflect the movement towards the installation of heat pumps and the effects they can have on the efficiency banding, and therefore the value, of property.
It was very welcome to see the Chancellor respond to our calls and address the fundamental lack of equity in our tax and subsidy regimes for investing in fossil fuels versus renewables and other clean energy technologies, and to see the investment allowance enjoyed by the oil and gas industry extended to the renewable industry in the recent Autumn Statement. However, we need to go further.
The success of our domestic renewable industry was once the envy of the world, but other countries have now caught up with us which means that we are competing on a global market for parts and skills. This leads to new challenges both in terms of infrastructure, the upgrading of the grid is rightly a Government priority, and in how we can compete globally for the right skills. We need to think of ways for workers, including those working in oil and gas, to transition to renewables and the right training for the energy industry’s future workforce.
The Government talks about putting accountability and long-term decision-making at the heartof policy making, but we are still lacking the golden thread weaving climate and energy policy throughout the Government’s agenda.
What we do in the UK really matters and has reverberations across the globe. Because of our reputation as a global climate leader, when we change direction other countries do take notice – this is not the time to step back, despite the challenges which undoubtedly exist.
The UK has led on this in the past, and I hope that we can again.
The success of our domestic renewable industry was once the envy of the world, but other countries have now caught up.
What is holding back the necessary investment in the UK’s energy sector?
James Alexander, Chief Executive Officer, UK Sustainable Investment and Finance Association
The UK has to date been fairly successful in attracting investors to support low-carbon energy projects, but to achieve Net Zero by 2050 there needs to be a step change in the level of investment we attract.
The efforts the UK has made to date has allowed us to reduce emissions by 44% since 1990, while still growing our economy by over 75%. Since 2010, low carbon sectors in the UK have seen public and private investment of approximately £198 billion and, across 2021 and 2022 alone, it is estimated that £50 billion of new public and private investments were made in low-carbon sectors.1
It is estimated that £50 billion of new public and private investments were made in low-carbon sectors.
The UK’s renewable energy sector has been a big winner from this. The best example of this is offshore wind, which benefitted hugely from the Contracts for Difference (CfD) support scheme. Between the first CfD allocation round in 2015 and the fourth in 2022, the per unit (MWh) price of offshore wind fell by almost 70% and the UK now has the highest deployment of offshore wind capacity in Europe.
But the Government has estimated that to deliver on the UK’s Net Zero ambitions, an additional £50- 60 billion of capital investment will be required each year through the late 2020s and 2030s. Most of this investment will need to come from the private sector.
However, there is increasing global competition for this investment – most significantly from the USA with its $500 billion Inflation Reduction Act – and there are clear signs that the UK is becoming a less attractive destination for energy companies. There were no bids in the latest Auction Round for offshore wind licences, and wind energy developer Vattenfall has halted work on its Norfolk Boreas offshore windfarm, citing increased costs of 40%. We, along with others, watch closely to see if others will follow suit.
So, what needs to change to get us back on the right track? At the UK Sustainable Investment and Finance Association (UKSIF), which represents over 300 financial services firms with more than $19 trillion of global assets under management between them, we have been working with our members to consider what could unlock the private capital needed to decarbonise the energy sector.
One of the biggest hurdles is the grid. With over 600 projects waiting to connect, Energy UK estimates that if uncertainty is not addressed, by 2030 the UK could lose around £60 billion in private investment in low-carbon generation alone.
Positively, Government has now published both a Transmission Acceleration Plan and an Electricity Networks Connection Plan, but there is still more to do and it is critical that the reforms and changes Government have committed to are delivered at pace. In addition, whilst changing the way projects connect, we would also like to see changes to the regulatory regime that will enable greater anticipatory investment into grid infrastructure, providing renewable developers and investors certainty that the grid capacity needed is in place ahead of time.
The failure of the latest auction round of the CfD scheme shows that the process is now ripe for reform. We are pleased to see that Government has learnt lessons from this and increased the administrative strike prices for the next auctionround AR6, and that there will be a separate funding pot for offshore wind. However, there is less clarity on what the budget allocation for this auction will be; it is critical that Government apportions a realistic amount to ensure pipeline projects in the bottleneck are able to move forward. This review of the CfD process should be accompanied by delivery of the Review of Electricity Market Arrangements as a priority.
Finally, planning rules must be overhauled to reduce the hurdles and construction time involved for energy projects. Reforming this labyrinthine system will decrease the time it takes to bring energy projects online, and thereby reduce the risk involved and reduce the cost of capital. We would also encourage the speedy publication of the Government’s plans to update the Nationally Significant Infrastructure Project regime.
Now that energy bills and energy security are at the top of the agenda, we firmly believe that the time is ripe to lift the effective ban on onshore wind. Research done by the Energy and Climate Change Intelligence Unit has found that without this restriction, between 2016-2022, onshore wind could have generated around 2.5 TWh – or enough to power 1.5 million homes through the winter.
In the run up to the next general election we will be promoting these reforms alongside our members to help inform whoever forms the next Government so we can unlock the vital private investment our energy sector needs.
1. UK Gov, Green Financing Allocation and Impact Report, September 2023, p.6
Energy UK is the UK’s largest and most diverse energy trade association, representing companies leading on modernising and decarbonising the whole system to those focused on developing better products and services for consumers. The range of expertise within our company and across our membership means we’re able to take a holistic view across the whole energy system when advising on policy and advocating for change.
To complement this series of essays, Energy UK has produced its own industry manifesto for the next Government.
Energy matters; improving people’s lives and livelihoods, investing in clean power that doesn’t destroy our planet, and growing our country’s prosperity.
The UK energy industry’s vision is for our economy to be powered by clean, innovative technologies, delivered by resilient and modern systems, with nobody left behind.
Affordable, stable energy bills for people, low-carbon electricity powering our country, and a strong economy are all linked outcomes of a successful energy transition.
The private sector will deliver most of the investment required to reach Net Zero, and a strong partnership between industry and government will unlock it.
Three priorities for partnership to unlock investment, transform the economy and deliver change:
- People: A practical and fair Net Zero transition that improves lives and livelihoods
- Power:Building the clean energy infrastructure to power our economy
- Prosperity:Reaping the economic rewards of a globally leading energy sector