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 first article is on Power, set out below.
Electricity is key enabler in the transition from fossil fuels and decarbonising the UK by 2050. In 1990, electricity generation accounted for 25% of UK emissions; in 2018, it was only 15%. 30 years ago, fossil fuels provided nearly 80% of electricity supply – now low-carbon technologies provides the UK with more than half of its power.
Renewable capacity has grown five-fold since 2010 alone. The White Paper recognises that this trend must continue if the UK is to achieve its Net Zero target, since overall demand could double by 2050 (due to the adoption of electric vehicles and the change to electricity from - for example - gas in domestic heating), requiring a four-fold increase in clean electricity generation.
The White Paper states that the Government is "not targeting a particular generation mix for 2050, nor would it be advisable to do so…The electricity market should determine the best solutions for very low emissions and reliable supply, at a low cost to consumers." The Government intends to send a "strong signal to project developers and the wider investor community about the government’s commitment to delivering clean electricity. This should stimulate the continued deployment of key low carbon technologies in the near term, while encouraging innovation in the technologies of the future which offer the greatest potential to reduce costs". So achieving the White Paper goals will depend on whether these signals incentivise the market sufficiently.
The White Paper envisages change (the establishment of a Ministerial Delivery Group to oversee the expansion of renewable power) and stability (the continued use of Contracts for Difference (CfD) with biennial auctions). While offshore wind will continue to be the major focus, the Government recognises that onshore wind and solar "will be key building blocks [in] the future generation mix", and the next CfD auction will be open to onshore wind, solar photovoltaics and "other established technologies", as well as offshore wind.
The continuation of the CfD process to provide clear, stable and predictable revenue streams for investors is sensible. However, the White Paper makes clear that CfD regime will be kept under review; and significant amendment could not only disincentivise investment, but could also lead to Energy Charter Treaty or bilateral investment treaty claims by disgruntled investors.
The Government intends to quadruple offshore wind generation capacity to 40GW by 2030, including 1GW of floating offshore wind. This is ambitious but achievable: in the last decade UK offshore wind capacity grew from 1GW to almost 10GW (a 10-fold increase). Scottish Power's CEO commented that there is “no shortage of capital or investor appetite in offshore wind” but the pace and scale of the industry’s growth will depend on the government’s ability to grant new seabed licences and project contracts at record speed. Thought also needs to be given to capacity constraints within the transmission network.
The White Paper recognises that renewables suffer from intermittency, and so baseload capacity is essential, and UK’s existing gas generation capacity will be central to this. However, this requires the adoption of CCUS technologies, and CCUS requires significant capital investment. The UK does not currently have any commercially operating CCUS plants.
The White Paper says the Government will “support the deployment of at least one power CCUS project, to be operational by 2030, and put in place the commercial framework required to help stimulate the market to deliver a future pipeline of power CCUS projects”. The Government also intends to invest up to £1 billion to support the establishment of CCUS in 4 industrial clusters to capture 10Mt of CO2 a year by 2030 - the equivalent of 4 million cars’ worth of annual emissions.
The Government clearly recognises that if the UK is to achieve its CCUS aims, a supportive policy environment is vital. A consultation in August 2019 aimed at removing some of the hurdles that previously proved insurmountable for UK CCUS projects. It is intended that CCUS development will be supported using a business model based on the CfD regime, although there is little detail in the White Paper. The Government is also designing and implementing a business model to provide revenue support for investment, with the intention that a new commercial framework will be finalised by 2022. However, CCUS plans remain vague.
The White Paper recognises nuclear power's continuing role in providing "clean" baseload capacity. The Government aims to “bring at least one large nuclear project to Final Investment Decision (FID) stage by the end of this Parliament, subject to clear value for money and all relevant approvals.” This statement is (sensibly) highly qualified and doubts remain that this is achievable. Hinkley Point C, first proposed four decades ago, was in July 2016 the first large scale nuclear power station to get to a positive FID in a generation. It is not only seriously delayed but eye-wateringly over budget. Will Sizewell C (the most likely candidate to proceed) prove that it can deliver in time and on budget?
It is clear that large scale nuclear power is facing existential problems around the world, as the cost of renewable energies fall. It remains to be seen whether it can be cost-effectively brought to market. Financing new nuclear projects remains a huge barrier. The Government will “examine the potential role of government finance during construction, provided there is clear value for money for consumers and taxpayer", but for political reasons it will likely want to avoid striking a Hinkley Point C-style arrangement, where the UK taxpayer is effectively subsidising EDF Energy, a French company.
The Government also sees opportunities for the UK to be at the forefront of developing advanced nuclear technologies, including the creation of an Advanced Nuclear Fund of up to £385m to support the development of Small Modular Reactors and research and development into more advanced nuclear technologies, such as advanced modular reactors, to help them reach commercialisation by the early 2030s. Finally, the Government aims high by targeting the Holy Grail of nuclear fusion, aiming to build a commercially viable fusion power plant by 2040. While these aims are certainly laudable and ambitious, the technological, political and safety hurdles to be overcome seem significant (if not insuperable).
The White Paper's proposals for renewable energy composed predominantly of wind and solar, using existing CfD structures, seems sensible and achievable. However, its proposals for CCUS and nuclear power seem ambitious and may require much more significant Government investment than currently envisaged if they are to come to fruition.
There is also a question of how the White Paper's commitments to Net Zero can be squared with its recent acts of approving Europe’s largest new gas-fired power station (proposed by Drax in North Yorkshire) and Britain’s first deep coal mine for 30 years (albeit to produce coke for steelworks rather than for power stations). Nevertheless, the direction of travel is clear and the future looks green, not least because the economics are undeniable – the cheapest sources of power are now renewables.
 Spain provides perhaps the highest profile example of this, where the retrospective axing of a poorly devised feed-in tariff scheme spawned extensive legal action with approximately 40 investor-state arbitrations initiated against Spain and an almost decade-long hiatus in solar plant installations.