Can we get to net zero and still keep the lights on? It’s a question that was thrust to the forefront of the agenda last February, as Russia’s invasion of Ukraine sent shockwaves across the energy market. With Europe now facing the once unthinkable prospect of blackouts, energy security has become more urgent than ever. But how does it affect the decarbonisation agenda?
In the late autumn, The Spectator had a chance to discuss that very topic, when we hosted a special roundtable lunch (made possible by the energy company Uniper) at Old Queen Street. With a number of energy experts and analysts around the table, our economics editor Kate Andrews sought to explore the big questions around decarbonisation and energy security.
As chair of Uniper’s UK operations, Mike Lockett was well aware of the short-term challenges facing UK energy supply. While the Germany-based international company was investing heavily in ambitious renewable projects – including a major hydrogen scheme alongside Shell – it also operated coal and gas-fuelled power stations, including in Britain. Across the continent, those assets were expected to play a vital role in avoiding blackouts. So how did that square with the company’s commitment to net zero?
‘We are certainly on a journey of decarbonisation, but we have to evolve pragmatically,’ said Mike Lockett, Uniper’s chair in the UK. ‘Fossil based assets are still needed for now, and we believe that someone needs to take on the task of decarbonising them – including using hydrogen. The question is how you complete that transition while securing supply in the meantime.’ It was a question, he suggested, of ‘phasing in’ replacement technologies before ‘phasing out’ gas stations entirely.
While Uniper’s coal stations may well be useful during an uncertain winter, until their close date in 2024, the company was also keen to see the government move forward with some of its ambitious plans of expanding the UK’s energy supply through more low carbon technologies. ‘Like a lot of organisations, we’re ready to invest in that transition – including in hydrogen and carbon capture – so we’re looking for the government to get the ball rolling,’ he said.
For David Joffe from the UK Climate Change Committee (the arm’s length body advising the UK’s net zero transition), the situation had become even more vital due to the shocking events in Ukraine. With the Kremlin intent on weaponising its gas supplies, Europe needed a diverse energy supply to keep Putin at bay. ‘There’s essentially no difference between strong climate action and increasing our energy security,’ he said.
For all the increased political and moral imperative, though, the economic situation was tougher, as a worldwide tightening of monetary policy – a situation expected to endure throughout 2023 – ramped up the costs of investment. This made it trickier for companies and governments to borrow the large sums they needed in order to meet the upfront costs of the energy transition.
‘On top of that energy firms are facing the same inflationary pressures as everyone else,’ said Barnaby Wharton from trade body RenewableUK. ‘As well as higher gas prices, you also have steel, cement and oil products going up. That makes it much more expensive for companies to make things like wind turbines, which we know are so important.’
For Ruth Herbert, chief executive of the Carbon Capture and Storage Association, the solution lay with the government – and its industrial strategy. ‘We need to make sure we have supply chain security when it comes to those things we need for the transition and carbon capture, utilisation and storage offers an opportunity to make that supply chain low carbon, for example enabling domestic production of clean cement. If we don’t develop this in the UK, we will end up importing it from elsewhere,’ she argued.
But inflation wasn’t the only factor affecting the investment climate. Six months on from introducing a windfall tax on oil and gas companies, the Treasury was reportedly looking at introducing a new levy for electricity producers – a move that would be confirmed just days after the lunch. ‘I’m personally quite worried that these levies will prove counterproductive,’ said our chair Kate Andrews. So did the industry share her fears?
‘I think the issue of investor confidence is absolutely critical to this balance of decarbonisation and energy security,’ said Uniper’s Mike Lockett. ‘The UK has been a very attractive market for renewables – it’s one of the few governments that has pursued both blue and green hydrogen, for example – but ultimately there is international competition for investment.’ By increasing costs and uncertainty for investors, the government risked denting its competitive edge.
‘Given the situation with energy prices, I think most people in the industry would expect some kind of temporary measure to ease the cost to households and businesses,’ said Pauline Lawson from Uniper’s policy team. ‘But the proposed cap on the revenue generators can earn lasts for five years, which is hardly temporary.’ What’s more, there was a danger that such measures could end up distorting the market, producing unintended consequences further down the line – locking Britain into a vicious cycle of dysfunctional energy markets.
For Barnaby Wharton from Renewable UK, there was already evidence that this new approach was deterring investors. ‘I’ve actually had members on the phone telling me they are putting deals on hold as the climate is so uncertain right now,’ he said. ‘It’s a combination of lots of things – including gas prices and interest rates. But I certainly don’t think things look as rosy to investors as they did at the beginning of 2022.’
So what exactly was the solution? A number of guests pointed to President Biden’s signature Inflation Reduction Act – a legislative behemoth that, amongst other things, introduced generous tax incentives for green energy investment. Yet for energy analyst Maxine Frerk (formerly of Ofgem), there were still concerns around the political sustainability of these measures. ‘If we see a change of political control in the US, it’s very easy to reverse those measures,’ she said.
‘Ultimately many energy companies are private investors, so we recognise there will always be an element of risk,’ said Uniper’s Mike Lockett. The government’s role, he said, should be to design intelligent market mechanisms that helped mitigate the upfront risk of investing. He pointed to the success of the use of so-called contracts for difference – which essentially offered investors a guaranteed energy price in return for them meeting upfront costs – in driving the UK offshore wind sector to be a global leader in terms of scale and cost.
It was this kind of industry partnership, he suggested, that would prove crucial if the government was to deliver on its much-vaulted goal of decarbonising the UK’s energy supply by 2035. It was a target that had been proudly championed by all three of the most recent Conservative prime ministers. Now it is time for the latest one to put it into action.
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