Alice Barrs, Head of UK Policy and Public Affairs at RWE, reflects on the UK’s success to date in decarbonising electricity. However, unless the government takes action, the UK could lose its place as one of the most attractive places to invest…
In May 2011, the Climate Change Committee published its ‘Renewable Energy Review’ report. This had been commissioned by the newly-formed Coalition Government to determine whether the UK should increase its target to reach 15% final energy consumption (FEC) from renewable sources by 2020. The target, part of a wider commitment to reach 20% FEC across all EU Member States, was considered extremely challenging because it covered all energy sources, including electricity, heat and transport. At the time, renewables accounted for just 3% of UK FEC.
The CCC advised the 2020 target should not be increased. I was part of the team that delivered that report – and as I look back now, I realise I could not have predicted where we would end up, 12 years on.
Firstly, by end-2020 the UK had left the EU, therefore the 15% was no longer a binding target. However, the UK managed to reach 14.4% FEC by 2020. This is because, despite renewable penetration in heat and transport turning out much lower than predicted, the UK has been extremely successful at deploying renewable electricity faster and at lower costs than anyone predicted.
The world in 2020, according to 2011
In 2011 the CCC estimated that subject to a significant ramp-up in deployment, the UK could stretch to reach just under one-third of renewable electricity by 2020 – in fact, that number turned out closer to 45% (see chart).
Source: CCC, DUKES Table 6.5
Not only has the UK enjoyed unprecedented success in developing and deploying renewable power, in particular onshore/offshore wind and solar, but it has done so at much lower costs than anticipated. In 2011, the CCC predicted the costs of an offshore wind project starting construction in 2020 would be £100-150/MWh (2010 prices) – RWE’s 857MW Triton Knoll offshore wind farm, commissioned in 2021/22, will be delivered at a strike price of just under £75/MWh. Our 1.4GW Sofia wind farm (currently in construction) will be delivered at £39.65/MWh (both 2012 prices).
What lies behind UK’s success? Put simply, a stable and supportive policy framework, underpinned by a Contract for Difference (CfD) scheme which provides developers with revenue certainty, thereby reducing the cost of capital, resulting in lower costs for consumers. As a private law contract, CfDs are bankable and thus have proven very successful at incentivising investment.
No time to rest on our laurels – the real challenge is yet to come
It would be tempting to look back on the last 12 years and think we’ve done the hard bit – now is the time to relax. In fact, we should be doing quite the opposite. The rapid decarbonisation of the UK’s power sector (amounting to nearly 80% reduction in CO2 emissions since 1990 – see chart), has largely been driven by coal phase-out. With electricity demand predicted by the CCC to at least double by 2050, continued deployment of renewables won’t be enough – not only will the rate need to increase significantly, but the UK also needs to find new sources of low-carbon, flexible generation to replace unabated gas. In 2021, gas accounted for around 40% of all electricity – in just 9 years, that figure needs to drop to just 5% in order to achieve the Government’s ambition of 95% clean electricity by 2030.
Source: BEIS (2022) Provisional UK greenhouse gas emissions national statistics 2021; BEIS (2022) Final UK greenhouse gas emissions national statistics: 1990 to 2020.
2023 is a make or break year for UK power sector decarbonisation. It is therefore unfortunate that, despite the need to accelerate investment in clean energy in the UK, the market conditions over the last year have been typified by political intervention, uncertainty, and slow progress.
- Intervention: The Electricity Generator Levy (EGL) was introduced to address ‘extraordinary’ returns of renewable electricity generators resulting from increased gas prices. However, in place for over five years (until 2028), with the possibility of extension/increase at the whim of the politicians, and no capital allowance regime, its introduction has undoubtedly shaken investor confidence.
- Uncertainty: As part of its Review of Electricity Market Arrangements (REMA), the Government is evaluating the existing market arrangements to ensure is fit for purpose. Whilst it is absolutely right to do this review, given the wide-range of radical options on the table – from locational marginal pricing to physically splitting the wholesale market, this needs to be done at pace; anyone looking at investing in clean power essentially has limited idea what the market will look like beyond the next 2-3 years.
- Slow progress. The lack of grid capacity continues to be the number one barrier to timely deployment of renewables. Progress under the Government’s Offshore Transmission Network Review (OTNR) has been slow. Unless clear progress is made within the first half of this year – the UK has no hope of achieving its ambitious target to achieve 50GW offshore wind by 2030.
What needs to happen now?
The UK Government should not be afraid to be bold, in order to restore investor confidence in the UK as one of the most attractive places to invest in clean energy. If it does not, it risks being left behind the USA (following the introduction of the Inflation Reduction Act) and the EU (and its Green Deal Industrial Plan).
- Through tax incentives, if generators earn higher profits they should be incentivised to invest in more renewables.
- The CfD process needs to move away from the current ‘race to the bottom’ auction approach, to one that better aligns with ambitions to secure maximum delivery at low-cost and a competitive, UK-based supply-chain bringing jobs and prosperity across the UK.
- The regulatory framework for investing in the grid needs to change completely, from an ‘as little as possible, as late as possible’ approach, to one that builds the necessary capacity ahead of need and allows more flexibility to optimise existing grid connections.
So – where will we be in 12 years’ time?
Subject to these changes (and more), in 2035 I hope to be writing a blog reflecting on the UK’s great success in fully decarbonising its power sector!