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UK Energy White Paper Review: Industrial Energy

  • Legal Development 16 March 2021 16 March 2021
  • UK & Europe

  • Energy & Natural Resources

The UK Energy White Paper was published on 14 December 2020, setting out a road map for the future of the UK's energy sector. We've taken some time to digest the contents of the White Paper with a critical eye, and we've produced a series of articles on the main sections, summarising the key issues and analysing what they mean for our clients. The third article is on Industrial Energy, set out below.

Introduction

Manufacturing and refineries (forming bulk of industrial emissions) currently account for around 16% of the UK’s greenhouse gas emissions, and the Energy White Paper acknowledges that if the UK is to meet its Net Zero targets, “[b]y 2050, emissions from industry will need to fall by around 90% from today’s levels.” Obstacles to the decarbonisation of industry include the need to protect revenue and jobs[1] as industry operates in competitive international markets (probably on tighter profit margins); the need for capital investment (when risk and costs are at their highest); and the time cycle of planning, designing and installing emissions-capture technologies.

The Government's approach to achieving industrial decarbonisation is to "stimulate action, investing in … critical infrastructure which enables the deployment of low-carbon technologies…[and]… support industry with the costs of improving energy performance and reducing emissions". It is recognised that the White Paper is a broad-brush set of goals, and one of the Government's key commitments is to publish an Industrial Decarbonisation Strategy in spring 2021, setting out more details of the Government's industrial decarbonisation strategy.

Industrial Clusters

Two of the government’s key commitments focus on industrial clusters. The government promises that it will:

  1. Increase the Industrial Clusters Mission to support the delivery of 4 low-carbon clusters by 2030 and at least one fully net zero cluster by 2040.
  2. Invest £1 billion up to 2025 to facilitate the deployment of Carbon Capture, Usage and Storage (CCUS) in 2 industrial clusters by the mid-2020s, and a further 2 clusters by 2030, supporting our ambition to capture 10Mt CO2 per year by the end of the decade.

The White Paper states that “[d]ecarbonisation in clusters will enable economies of scale, reducing the unit cost for each tonne of carbon abated. Clusters provide high quality jobs which tend to pay above the UK average wage.” Industrial clusters provide a focal point for decarbonisation, utilising shared infrastructure to maximise the benefits offered by clean energy infrastructure such as CCUS (and hydrogen production and distribution) while novel technology initially remains limited. Ultimately the goal is to transform industrial clusters into world leading "green hubs".

The problem is that getting the necessary infrastructure operational involves innovation, long lead-in times and much capital investment. The UK does not currently have any commercially operating CCUS plants. The White Paper confirms that £1 billion has now been committed to the Carbon Capture and Storage (CCS) Infrastructure Fund to facilitate the UK’s deployment of CCUS in four industrial clusters by the end of the decade (increased from the £800 million announced in the March 2020 Budget). The Government has already demonstrated its funding commitment to decarbonising clusters by way of the industrial decarbonisation challenge[2] which is the first active funding stream as part of the wider government commitment to cut industrial emissions. As recently as January 2021, six projects were selected to receive a share of £8 million in funding under this scheme.[3]

The White Paper acknowledges, however, that “CCUS is not yet a viable investment” for the majority of industrial sectors, and recognises that “the market currently does not provide a sufficiently robust price signal to make industrial carbon capture viable”. Our previous paper in this series[4] recognised that the government’s CCUS plans and timeframes seem ambitious given that the revenue mechanism that the government is designing to drive investor confidence will not be finalised or implemented until 2022. The success of the CCUS plans are, to some extent, reliant on a revenue model of which the details are not yet transparent.

Furthermore, focus on industrial clusters is arguably too narrow in the long term, because deep decarbonisation of industry is required if the UK is to meet its Net Zero targets. The Government needs a strategy for disbursed sites including isolated (and inland) big emitters: a Government-commissioned report in August 2020[5] identified 36 dispersed industrial sites in the UK which collectively emitted almost 21 million tonnes of CO2 in 2016 which may be suitable for CCS.

Hydrogen

The White Paper recognises that the production and use of clean hydrogen is crucial for the achievement of Net Zero by 2050, and included in the Government's key goals are commitments to:

  1. Publishing a dedicated Hydrogen Strategy in spring 2021 to "position the UK as a world leader in the production and use of clean hydrogen".
  2. Working with industry to develop 5GW of low-carbon hydrogen production capacity by 2030.
  3. Create a Net Zero Hydrogen Fund to support low-carbon hydrogen production, providing £240 million of capital co-investment out to 2024/25.

The White Paper acknowledges that a variety of production technologies (likely to include methane reformation with CCUS, biomass gasification with CCUS and electrolytic hydrogen using renewable/nuclear-generated electricity) will be required to satisfy anticipated demand for clean hydrogen in 2050. It also recognises that action is needed now to stimulate domestic production methods and supply chains, and the White Paper expresses a "hope to see 1GW of hydrogen production capacity by 2025 on route to our 2030 goal" in this regard.

The Government's plans for clean hydrogen are as laudable as they are ambitious. The Hydrogen Strategy needs to identify practical steps which can be taken to make these goals a reality in the necessary timescale, and it remains to be seen whether the investment mentioned in the White Paper will be sufficient.

Carbon pricing mechanism: UK Emissions Trading System

The White Paper sets out the Government's intention to establish an Emissions Trading Scheme (“ETS”) to replace the UK’s participation in the EU ETS post-Brexit. The White Paper states that “establishing a new UK Emissions Trading System, aligned to our net zero target, [will give] industry the certainty they need to invest in low-carbon technologies”.

The UK ETS, which has been in effect since the start of 2021, provides a cap-and-trade mechanism whereby a cap is set for the maximum amount of greenhouse gases that participating businesses can release per year. The government divides the cap into allowances (to emit a fixed amount of emissions) which can be sold and bought by participating businesses. The UK ETS currently applies to energy-intensive industries, electricity generation and aviation but the government has stated in the White Paper that it is “committed to exploring expanding the UK ETS to the two thirds of uncovered emissions”.

The government has opted for this cap-and-trade as its carbon pricing mechanism stating that “[t]his mechanism of carbon pricing supports businesses to decarbonise at the least cost. Businesses who can abate cheaply will do so, and those that cannot purchase additional allowances to cover their emissions.” The scheme is essentially an adaption of the EU ETS model, with proposals of a tighter annual cap, increased fines for those that exceed allowances and lower compensation to energy intensive industries.

The carbon-pricing mechanism can be a crucial tool to achieve the UK's Net Zero targets, because it sends clear price signals which should guarantee the levels of resulting emissions (unlike a carbon tax) and send investment signals to the market. It remains to be seen if the UK will link the UK ETS internationally, although the White Paper confirms that the UK is “open” to the idea.

One criticism posed by economists of the cap-and-trade mechanism is the price uncertainty and volatility caused by market demand and resultant fluctuation in price. The government’s aim is that the cap will be “transparently” reduced over time to achieve the UK’s net zero target in 2050. One key issue for the government to overcome in future consultations is determining how the cap will be aligned to a net zero trajectory. This alignment will be crucial to setting a price signal that will give businesses the confidence they need to make the necessary capital investment in clean energy technology like the CCUS needed for industrial clusters. In the past industry lobbying – especially pointing to expensive electricity process - has resulted in the UK experience of carbon pricing mechanisms being less successful than might have been the case.

Conclusion

The government’s clear commitment to several ambitious goals in the White Paper is welcomed, as is the concept of becoming a world leader in industrial decarbonisation, but there is still much consulting to do ahead of the Industrial Decarbonisation Strategy and beyond around incentivising investment, supporting the manufacturing industry through its transformation and providing a robust revenue mechanism to bring through private sector investment.

 

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