Investing in energy: price, security, and the transition to net zero Contents

Investing in energy: price, security, and the transition to net zero

Chapter 1: Introduction

Our inquiry

1.We launched this inquiry on 10 February 2022 and issued a call for evidence on long-term trends in the energy market and the private and public investment needed to fund the transition to net zero. The focus of this report is on measures to increase investment in the energy transition. However, as our inquiry progressed it was apparent that action was needed to address the short-term effects of the Ukrainian crisis on energy supply and therefore we also examine this significant issue briefly. We are grateful to all our witnesses and to our Specialist Adviser, Professor Richard Green.

Net zero and energy security

2.The Climate Change Act 2008 commits the UK to achieve net zero carbon emissions by 2050.1 The Act also established the Climate Change Committee as an independent body to advise the Government on setting targets, among other things. In 2021, the Government legislated to bring the Climate Change Committee’s Sixth Carbon Budget into law, which set a target of reducing emissions by 78% by 2035, compared with the 1990 level.2

3.The Government has set additional net zero targets in strategy papers. On 14 December 2020, the Government published an energy white paper, which included capacity targets for different sources of energy generation, including renewables.3 In October 2021, the Government published its Net Zero Strategy, which confirmed an objective to decarbonise the power system by 2035, subject to security of supply.4

4.The Government updated some of its targets after Russia invaded Ukraine in February 2022. As Russia has historically been a major oil and gas exporter to mainland Europe, the invasion caused significant concern over energy security. On 7 April 2022, the Government published the British energy security strategy (‘the energy security strategy’), which increased capacity targets for low-carbon sources of energy, and introduced measures designed to increase domestic oil and gas production to help maintain security of supply.5 Table 1 sets out the Government’s new low-carbon capacity targets and compares them against its previous targets and the Climate Change Committee’s assumed levels of capacity, as well as the UK’s existing capacity.

Table 1: Low-carbon target capacities

Energy type

Energy security strategy target capacity

Previous Government target capacity

Climate Change Committee capacity assumption

Current operational capacity

Offshore wind and floating offshore wind

Up to 50GW, with up to 5GW floating offshore wind, by 2030

40GW with 1GW floating offshore wind by 2030

45GW by 2035

11.3GW

Onshore wind

No target

No target

35GW by 2035

14.5GW

Solar photovoltaic

Up to 70GW by 2035

No target

54GW by 2035

13.8GW

Hydrogen

Up to 10GW by 2035

5GW by 2030

Not set out

0GW

Nuclear

24GW by 2050

5GW by 2030

10GW by 2050

7GW

Source: House of Commons Library, ‘Where will Britain’s future energy supply come from?’ (12 May 2022): https://commonslibrary.parliament.uk/where-will-britains-future-energy-supply-come-from/ [accessed 14 July 2022]

Box 1: Units of power

The power used by an electrical device is measured in watts (W). A typical kettle uses 3,000W, or 3 kilowatts (kW).

Electric power is a flow of energy. A kilowatt-hour is the energy transferred through a flow of one kilowatt that lasts one hour. An electric vehicle connected to a charger with a power of 7kW for an hour would therefore receive 7 kilowatt-hours (kWh) of energy—for two hours it would receive 14 kWh.

For larger amounts of energy:

  • megawatt-hours (MWh), with 1,000 kWh = 1 MWh;
  • gigawatt-hours (GWh), with 1,000 MWh = 1 GWh; and
  • Terawatt-hours, with 1,000 GWh = 1 TWh.

The UK’s total electricity demand in 2020 was 330TWh.

A typical gas-fired power station may have a capacity of between 500 MW and 1,200 MW; the nuclear station under construction at Hinkley Point C will have two reactors, each of 1,600 MW. A rooftop solar PV installation might have a capacity of 4 kW, and a utility-scale solar farm might have between 20 MW and 50 MW. The Hornsea 1 offshore wind farm has a capacity of 1.2 GW, with 174 turbines, each 190 metres tall with a capacity of 7 MW.

5.Sources of energy generation have different lead times for planning and construction before they can start producing energy, as displayed in Figure 1.

Figure 1: Timescales for energy investment

Bar Chart showing time (in years) for pre-development and construction of various energy investments

Sources: Written evidence from Professor Ann Muggeridge, Professor Adam Hawkes and Professor Richard Green, Imperial College London (ESI0040)

Investment

6.The Government’s net zero objectives will require substantial public and private sector investment. In the UK, there was around £10 billion of public and private investment in low-carbon projects in 2020, but the Climate Change Committee said investment will need to increase to around £50 billion annually by 2030. It explained that the largest increases are for low-carbon power capacity, retrofit of buildings and the added costs of batteries and infrastructure for electric vehicles. It concluded that the necessary increase in investment “can, and should, be delivered largely by the private sector.” While the Government has not set out how much of the cost of net zero it expects to come from public spending, the Climate Change Committee expects a doubling in annual public funding to £9–12 billion by 2030, depending on policy choices.6

7.Although a significant amount of up-front spending is necessary, the Climate Change Committee said extra investment (capital expenditure) will be offset by savings in day-to-day spending (operational expenditure)—see Figure 2. The Climate Change Committee said that over time, “these savings cancel out the investment costs entirely … which means our central estimate for costs is now below 1% of GDP throughout the next 30 years.”7 There is a high degree of uncertainty surrounding all such figures and it is not clear how the Government’s ambitions, especially the higher levels of spending on nuclear, will affect assumptions on the cost of the transition.

Figure 2: Capital expenditure and operational savings during the transition to net zero by 2050

Area chart showing captal expenditure and operational savings suring tranistion to net zero

Source: Institute for Government, ‘Paying for Net Zero’ (1 September 2021): https://www.instituteforgovernment.org.uk/explainers/paying-net-zero [accessed 29 June 2022] and Climate Change Committee, ‘The Sixth Carbon Budget - Dataset’ (9 December 2020): https://www.theccc.org.uk/2021/02/01/the-numbers-behind-the-budget-six-ways-to-explore-the-sixth-carbon-budget-dataset/ [accessed 29 June 2022]

8.We heard there is a large amount of private capital available, and a willingness among investors, to finance net-zero energy projects provided there is sufficient clarity on policy and market models.8 Barriers to investment in planning and grid infrastructure will need to be overcome to enable a largescale and rapid rollout of low-carbon energy sources.

Intermittency

9.Energy security is the ability to generate sufficient energy to ensure that the economy and individuals can function at what is deemed an acceptable level without interruptions in supply.

10.One challenge for renewables is the intermittency, or variability, of their supply. If there is calm and cloudy weather, then levels of wind and solar energy generation fall, reducing supply. Figure 3 shows the extent of intermittency of wind and solar electricity generation in the UK over the course of a year. The scale of the problem increases as more renewable sources of energy are added to the grid.

Figure 3: Total power available from wind and solar in Great Britain in 2021

Line chart showing total power available (GW) form Solar and Wind in 2021

Source: Written evidence from the UK Energy Research Centre (ESI0029)

11.The UK currently relies on gas as a flexible back up to renewables, along with its ageing nuclear estate as a stable baseload source of energy.9 In the future, a combination of technologies will likely be needed to manage an orderly transition to net zero while maintaining energy security. Solutions include using batteries to store surplus electricity for later use; hydro-electric pumps; producing hydrogen from surplus energy which can be stored and burned when needed; using interconnectors to other countries to import and export electricity depending on need; and employing flexible demand management, which involves using technology and price incentives to encourage efficient energy use. Increasing nuclear power can also mitigate the intermittency problem by providing consistent baseload energy.10 Short duration reductions in renewable energy production are being addressed already by battery storage, but batteries are less effective at managing longer duration storage. This is why a combination of emerging technologies will be required to address the longer-term intermittency problem.

Supply and affordability crisis

12.There are many routes to net zero, which makes precise costs of the transition difficult to forecast with precision. The costs will depend on the speed and trajectory of the transition, and how the Government responds to shocks along the way. These shocks include the current energy affordability crisis.

13.In 2021, global energy demand increased quickly as COVID-19 restrictions on economic activity were lifted. Reductions in coal and nuclear power in Europe increased demand for gas at the same time as importers in Asia and South America were intensifying competition for gas supplies. Low levels of wind in parts of Europe increased the need to burn more gas in place of renewable sources of energy.11

14.While demand for gas was rising, supply was constrained. In 2021, the availability of liquified natural gas (LNG) was reduced because of planned and unplanned outages in some exporting countries. Russia, a major oil and gas producer, prioritised domestic storage over additional exports to Europe, which itself had low levels of stored gas during the 2021–22 winter.12 Figure 4 shows how gas and electricity prices increased together. Gas is used as a backup to renewables and hence gas prices set the marginal price of electricity which is reflected in wholesale electricity prices. Wholesale prices do not reflect the operating costs of other energy sources such as renewables which can be much lower than the marginal gas price.

Figure 4: Wholesale price of energy, January 2021–January 2022

Area chart showing wholesale roice of gas and electricity Jan 2021- Jan 2022

Source: British Gas, ‘Energy market news’ (5 July 2022): https://www.britishgas.co.uk/energy-price-news.html [accessed 29 June 2022]

15.The mismatch between energy supply and demand was exacerbated when Russia invaded Ukraine on 24 February 2022. Many countries, including the UK, reduced imports of Russian oil and gas with the intention of restricting financial flows to the Kremlin. Russia has also reduced oil and gas exports to some European countries and there is concern that Russia will cut off oil and gas exports before certain countries have secured access to alternative sources of energy.13

16.The UK imports around 8% of its oil and less than 4% of its gas from Russia.14 The Government plans to stop importing Russian oil by the end of 2022 and it is exploring ways to reduce gas imports. The UK can partly rely on domestic oil and gas production from the North Sea, although this has decreased in recent years.15 The UK imports a significant amount of gas from Europe via interconnectors and LNG from a range of other countries, as set out in Figure 5.16

Figure 5: UK natural gas supplies by source (billion cubic metres per year)

Stacked bar chart showing source of UK natural gas supply by year

Source: Oxford Institute for Energy Studies, The potential impact on the UK of a disruption in Russian gas supplies to Europe (February 2022): https://a9w7k6q9.stackpathcdn.com/wpcms/wp-content/uploads/2022/02/Insight-109-The-Potential-Impact-on-the-UK-of-a-Disruption-in-Russian-Gas-Supplies-to-Europe.pdf. Data from Department for Business, Energy and Industrial Strategy, ‘Energy Trends: UK gas’ (last updated 30 June 2022]: https://www.gov.uk/government/statistics/gas-section-4-energy-trends [accessed 30 June 2022].

Note that the net storage withdrawals in 2018–21 are associated with the withdrawal of cushion gas from the Rough storage facility, which formally closed in 2017. BEL/NED refers to the iUK Interconnector between the UK and Belgium (BEL) and the Bacton-Balgzand Line (BBL) interconnector between the UK and the Netherlands (NEL).

17.While the UK has access to diverse sources of supply of gas, pressure on supply in the European market could severely affect the UK in certain circumstances. The UK relies on the spot market for gas imports, and it has no long-term storage facilities. On 29 May 2022 it was reported that the Government was assessing the effect on the UK’s security of supply from a possible Russian decision to cut gas exports to Europe. The Government’s ‘reasonable worst-case scenario’ was reported to be that imports of LNG and piped gas from Norway could halve, and imports via pipeline interconnectors with Belgium and the Netherlands could cease because of competition for supply in mainland Europe. The Government said this was just one in a range of scenarios for which it was contingency planning.17

18.Intense competition for gas supply is keeping energy bills high. Ofgem expects the energy price cap, which is designed to protect consumers from short-term changes in prices, to rise above £2,800 in October 2022—or higher if there is further disruption to gas supplies.18 While high prices may moderate somewhat, they are forecast to remain well above the prices in early 2021.19

19.Decarbonising the UK’s energy system while ensuring that the UK’s energy supply is affordable and reliable is a highly complex challenge. Russia’s invasion of Ukraine has made the task more complex. No government can be expected to predict the future with accuracy, nor should a government seek to plan for every eventuality. Instead, the Government should address issues that undermine investor confidence and increase resilience in the energy system. The Government will need to:

20.One challenge for the Government is to ensure that short-term measures to maintain security of supply are consistent with the Government’s net zero plans, and that this objective is well communicated to industry. While the Government should continue to address the impact of the immediate supply crisis, it should also act to encourage long-term investment to facilitate the transition to net zero, which should help to ensure more sustainable energy security and greater long-term price stability. In this report, we set out what needs to be done now to increase investment that will assist in carbon reduction and improve energy resilience.


1 Climate Change Act 2008. The commitment is known as ‘net zero’ because some emissions can remain if they are offset via removal from the atmosphere or via trading in carbon units. The net zero target supports commitments made by the UK under the 2016 Paris Agreement to keep global warming under two degrees centigrade. United Nations, ‘The Paris Agreement’: https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement [accessed 14 July 2022]. The target in the Act as passed in 2008 was for an 80% reduction in emissions. This was amended in 2019 to provide for a 100% reduction, or net zero.

2 Climate Change Committee, ‘The Sixth Carbon Budget: The UK’s path to Net Zero’ (December 2020): https://www.theccc.org.uk/publication/sixth-carbon-budget/ [accessed 29 June 2022]. The Act requires the Government to set five-yearly carbon budgets, 12 years in advance, from 2008 to 2050.

3 Department for Business, Energy and Industrial Strategy, Energy, Energy White Paper Powering our Net Zero Future powering our net zero future, CP 337 (14 December 2020): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/945899/201216_BEIS_EWP_Command_Paper_Accessible.pdf [accessed 29 June 2022]

4 Department for Business, Energy and Industrial Strategy, Net Zero Strategy, Build Back Greener (October 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1033990/net-zero-strategy-beis.pdf [accessed 29 June 2022]

5 Department for Business, Energy and Industrial Strategy, British energy security strategy (7 April 2022): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1069969/british-energy-security-strategy-web-accessible.pdf [accessed 29 June 2022]

6 Climate Change Committee, ‘The Sixth Carbon Budget: The UK’s path to Net Zero’ (December 2020): https://www.theccc.org.uk/publication/sixth-carbon-budget/ [accessed 29 June 2022]

7 Ibid. The Office for Budget Responsibility came to a similar conclusion in its 2021 Fiscal risks report: “Our scenario assumes that public spending meets around a quarter of [the cost of delivering net zero]. When combined with savings from more energy-efficient buildings and vehicles, the net cost to the state is £344 billion in real terms.” It said this figure represents an average on 0.4% of GDP a year when spread across three decades. See, Office for Budget Responsibility, Fiscal risks report, CP 453, (6 July 2021): https://obr.uk/docs/dlm_uploads/Fiscal_risks_report_July_2021.pdf [accessed 29 June 2022].

8 Q 17 (Paul Spence), Q 156 (Simon Virley) and Q 92 (Ed Northam)

9 Written evidence from the UK Energy Research Centre (ESI0029)

10 Q 10 (Julian Critchlow)

11 Energy Transitions Commission, The drivers of the Winter 2021–2022 gas crisis (May 2022): https://www.energy-transitions.org/wp-content/uploads/2022/05/The-drivers-of-the-winter-2021–2022-gas-crisis.pdf [accessed 29 June 2022]

12 Ibid.

13 ‘IEA chief warns Europe to prepare for total shutdown of Russian gas exports’ Financial Times (22 June 2022): https://www.ft.com/content/f7990162–395f-488e-9d23-13f3cce83e24 [accessed 29 June 2022]

14 HM Government, ‘UK to phase out Russian oil imports’ (8 March 2022): https://www.gov.uk/government/news/uk-to-phase-out-russian-oil-imports [accessed 29 June 2022]. The Government said it will work with companies through a new Taskforce on Oil to support them to find alternative supplies.

15 Oxford Institute for Energy Studies, The potential impact on the UK of a disruption in Russian gas supplies to Europe (February 2022): https://a9w7k6q9.stackpathcdn.com/wpcms/wp-content/uploads/2022/02/Insight-109-The-Potential-Impact-on-the-UK-of-a-Disruption-in-Russian-Gas-Supplies-to-Europe.pdf [accessed 29 June 2022]

16 The UK also exports gas to Europe. According to the Office for National Statistics, exports of fuels to EU countries exceeded £3 billion in a month for the first time in March 2022 (£3.1 billion) since records began in 1997. Exports of fuels to the EU further increased in April 2022 to £3.6 billion. See, Office for National Statistics, ‘Trends in UK imports and exports of fuels’ (29 June 2022): https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/trendsinukimportsandexportsoffuels/2022–06-29 [accessed 6 July 2022]

17 ‘Millions warned of power cuts this winter’ The Times (29 May 2022): https://www.thetimes.co.uk/article/millions-warned-of-power-cuts-this-winter-b7gl2ckx9 [accessed 29 June 2022]

18 Oral evidence taken before the House of Commons Public Accounts Committee, 11 July 2022 (Session 2022–23), 56 (Jonathan Brearley). On 3 February 2022, the Chancellor of the Exchequer set out an initial package of financial support to help households with rising energy bills. See, HC Deb, 3 February 2022, col 471. See also, HM Treasury, ‘Government support for energy bills and the cost of living : factsheets’ (3 February 2022): https://www.gov.uk/government/publications/government-support-for-energy-bills-and-the-cost-of-living-factsheets [accessed 29 June 2022]. The level of support was later judged to be insufficient, and the Chancellor announced a revised support package on 26 April 2022. This consisted of payments of between £400 and £1,200 to households depending on their circumstances. See HC Deb, 26 May 2022, col 449 and HM Treasury, ‘Millions of most vulnerable households will receive £1,200 of help with cost of living’ (26 May 2022): https://www.gov.uk/government/news/millions-of-most-vulnerable-households-will-receive-1200-of-help-with-cost-of-living [accessed 29 June 2022]. We examine the levy in more detail in Chapter 3. The total value of this additional support in 2022–23 is £15.3 billion, although the overall cost of financial support to households is £21.3 billion as it converts £6 billion of earlier support from a loan to a grant. This extra spending will be partly supported by a new Energy Profits Levy on oil and gas companies, which the Government expects to raise £5 billion in its first year.

19 Cornwall-insight, ‘Cornwall Insight, GB Power Market Outlook to 2030’ (13 April 2022): https://www.cornwall-insight.com/gb-power-market-outlook-to-2030/ [accessed 29 June 2022]. Cornwall insight said energy prices will be elevated because of high gas prices (which drive up the cost of power production) and because of closures of existing nuclear power plants and delays to the completion of the Hinckley C nuclear power station.




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