UK unveils energy strategy as it seeks to move beyond fossil fuels

This week the UK government published a much anticipated and wide ranging energy white paper which could have profound implications for the insurance market. Emerging Risks takes a look.

After months of delays, the UK Government finally unveiled its Energy White Paper, Powering our Net Zero Future, on 14 December. The document details an ambitious transformation of the country’s transport, energy and infrastructure systems system as it seeks to move away from a dependence on fossil fuels on the road to net-zero by 2050.

The White Paper builds on the Prime Minister’s Ten Point Plan for a Green Industrial Revolution and the National Infrastructure Strategy (NIS) in outlining how the nation plans to transform its power and heating systems to support the net-zero emissions target.

A core component of the strategy is nuclear energy, with Britain confirming it would enter negotiations with France’s EDF to try to strike a funding deal on the £20 billion pound Sizewell C nuclear energy project in Suffolk, Eastern England. EDF is already building Britain’s first new nuclear plant in more than two decades, Hinkley Point C, with backing from China’s CGN.

“We’re starting negotiations with EDF, which would be the developer at Sizewell C,” Business Secretary Alok Sharma told the BBC. “What this is not is a green light on the construction, so what we will be doing is looking to see whether we can reach an investment decision in this parliament.”

The Government wants to explore new funding options to enable investment in at least one nuclear power station by the end of this Parliament.

This includes the creation of an Advanced Nuclear Fund of up to £385m to support the development of Small Modular Reactors and to support research and development into more advanced nuclear technologies, such as advanced modular reactors to help them reach commercialisation.

The White Paper also outlines that a range of financing options for nuclear will be explored, including the Regulated Asset Base (RAB) funding model, which could help secure private investment and cost consumers less in the long run.

It’s a gas

As well as nuclear energy, hydrogen is also seen as an important component of the over-arching vision. The UK government says it aims to kick-start the hydrogen economy by working with industry to aim for 5GW of production by 2030, backed up by a new £240m net zero Hydrogen Fund for low carbon hydrogen production.

According to the white paper, clean hydrogen could potentially provide a way to decarbonise gas supplies on a much larger scale than reliance on biomethane alone. This could offer consumers a future heating option which works for them in a similar way to natural gas today, but with no carbon emissions.

The paper goes on to state, however, that unlike electric heat pumps and heat networks, the feasibility of using hydrogen for clean heat needs further testing and development. The practicalities and cost of safely converting or replacing existing networks and appliances to operate with pure hydrogen need to be fully evaluated:

“The UK is already a world leader in investigating the use of hydrogen for heating. Both the government and the gas industry are currently running major studies and testing projects. We will increase the funding available for testing and trialling projects, working with the industry to ensure that the overall programme of work is comprehensive and fully coordinated.

“A range of further Research and Development (R&D) and testing projects are required, including an assessment of the options for major new hydrogen infrastructure, such as gas transmission networks and inter-seasonal storage.

“Trials of hydrogen will also be key to evaluating the practicalities of converting existing boiler appliances and the way in which consumers experience hydrogen for heating in their own homes and workplaces.”

Emissions trading

In a move that will be welcomed by the green bond sector, the paper envisages the establishment of a UK Emissions Trading Scheme (ETS) from 1 January 2021 to replace the current European Union ETS at the end of the Transition Period. It increases its ambition with regard to reducing emissions, and provides for the continuation of emissions trading for UK businesses and a degree of certainty on how they operate.

The ETS works by setting a cap on the total amount of greenhouse gases that can be emitted by energy-intensive industries, including aviation, power generation and steel manufacturing. The cap is then reduced over time so that overall emissions from each sector fall.

UK factories are able to purchase carbon allowances to cover emissions, which can be purchased at auction or traded. Currently, around one-third of UK emissions and 1,000 factories and plants are covered by the EU ETS and will be covered under the new UK variant.

The white paper also confirms the creation of a UK variant that will be introduced on 1 January 2021. The document notes that the Government is “open to linking the UK ETS internationally in principle” but no preferred linking partners have been confirmed.

Other keys points of the white paper include:

  • Moving from an economy that was historically based on fossil fuels to one that is fit for a net zero economy, changing how we heat our homes and travel, doubling our electricity use, and harnessing renewable energy supplies.
  • Generating emission-free electricity by 2050 with a trajectory that will see the UK have overwhelmingly decarbonised power in the 2030s. Low carbon electricity will be a key enabler of the transition to a net zero economy with demand expected to double due to transport and low carbon heat.
  • Delivering ambitious electricity commitments through a commitment to deliver 40GW of offshore wind by 2030, including 1GW of floating wind, enough to power every home in the country – while attracting new offshore wind manufacturers to the UK.
  • Investing £1 billion in state-of-the-art carbon capture storage in four industrial clusters by 2030 – sucking carbon out of industrial processes to stop emissions escaping to the air. Four low carbon clusters will be set up by 2030, and at least one fully net zero cluster by 2040, stimulating the market to attract new investors and manufacturers to reinvigorate our industrial heartlands.
  • Investing £1.3 billion to accelerate the rollout of charge points for electric vehicles in homes, streets and on motorways as well as up to £1 billion to support the electrification of cars, including for the mass-production of the batteries needed for electric vehicles.
  • Commenting on the white paper, the UK’s Business and Energy Secretary Alok Sharma claimed it “establishes a decisive and permanent shift away from our dependence on fossil fuels, towards cleaner energy sources that will put our country at the forefront of the global green industrial revolution”.

The full white paper can be accessed here.

According to the white paper, clean hydrogen could potentially provide a way to decarbonise gas supplies on a much larger scale than reliance on biomethane alone. This could offer consumers a future heating option which works for them in a similar way to natural gas today, but with no carbon emissions.