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

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Chapter 2: Investment and action in the short term

Addressing the energy crisis

21.In this chapter we explore several measures—some in line with the Government’s plans and some in addition—which could make a significant difference to energy security and affordability over the next three to five years. These include improving home energy efficiency, accelerating the deployment of renewable energy, extending the life of power generators which are scheduled for retirement, and striking an agreement with European partners on energy security.

Home energy efficiency

22.Improving home energy efficiency is a long-standing goal and is needed for the net zero transition regardless of the energy price crisis. The UK’s housing stock is one of the oldest and least insulated in Europe.20 The security strategy listed several existing policies on decarbonising buildings and improving energy efficiency:

• The Heat and Buildings Strategy, which sets out how the Government plans to decarbonise homes, and commercial, industrial and public sector buildings. It includes £3.9 billion of support over this parliament, including nearly £1.8 billion targeted at low-income households through the Home Upgrade Grant and the Social Housing Decarbonisation Fund.
• The Energy Company Obligation (ECO), which has been extended from 2022 to 2026, with an increase in value from £640 million to £1 billion a year. Under the ECO, medium and larger energy suppliers fund the installation of energy efficiency measures in British households.
• The phase out of new and replacement gas boilers by 2035.
• A package of measures to increase deployment of heat pumps to 600,000 installations per year by 2028 and to expand heat networks through the Green Heat Networks Fund and designating heat network zones.

23.The Government said it is spending £6.6 billion in this parliament on decarbonising buildings.21 The 2019 Conservative Party Manifesto committed to spend “£9.2 billion on energy efficiency for homes, schools and hospitals.”22 The Climate Change Committee has estimated that approximately £9 billion will need to be spent each year, from the late 2020s to 2050, to decarbonise homes.23

24.Decarbonising homes broadly falls into two main initiatives: replacing gas boilers with heat pumps and insulating properties that have an energy efficiency rating below C on the energy performance certificate scale. The Heat and Buildings Strategy focuses on incentives for creating a market for heat pumps and better insulation over time. Most of the spending outlined in the Heat and Buildings Strategy is for social housing and public buildings rather than for homeowners. The Resolution Foundation, a think tank, said in a report that it would make more sense to prioritise home insulation over deploying heat pumps:

“Insulation is important for two reasons: first, improving the energy efficiency of the building stock will enable a smoother uptake of heat pumps, which work more efficiently and cheaply in better insulated buildings. Second, better insulation can help households make cost savings now through lower energy bills, with the current energy crisis bringing the poor thermal performance of British housing into sharp focus.”24

25.Several witnesses told us that scaling up ambitions to insulate homes would be one of the most effective and sustainable ways of reducing energy bills in the short term, as this policy could be implemented this year and next, then enhanced over the medium term.25 Simon Virley, Vice-Chair at KPMG, told us: “we could certainly make a significant dent in energy efficiency within a two-year timeframe”.26 In February 2021, the Government set out how substantial savings can be realised from improving home energy efficiency, as set out in Figure 6.

Figure 6: Example of estimated savings achieved from moving from Band E to Band C, energy performance certificate

Source: Department for Business, Energy and Industrial Strategy, Sustainable Warmth: Protecting Vulnerable Households in England, CP 391 (February 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/960200/CCS207_CCS0221018682–001_CP_391_Sustainable_Warmth_Print.pdf [accessed 29 June 2022]

26.Home insulation rates are significantly below the peak rates achieved up to 2012, as shown in Figure 7. Simon Virley explained that more progress had not been made because of the “start/stop” approach to implementing policy. He said this had reduced investor confidence which would have otherwise enabled more cost-effective supply chains to develop.27 In 2013, the Government cut support for insulation. Installations fell by around 90% and successive policies have failed to resurrect the industry.28 The most recent support programme, the Green Homes Grant Voucher Scheme, closed for new applicants after six months, with only 47,500 homes receiving an upgrade, against a target of 600,000. The House of Commons Public Accounts Committee ascribed the failure to poor project design.29

Figure 7: Home insulation rates by measure and year

Source: Climate Change Committee, Progress in reducing emissions: 2021 Report to Parliament (June 2021): https://www.theccc.org.uk/wp-content/uploads/2021/06/Progress-in-reducing-emissions-2021-Report-to-Parliament.pdf [accessed 29 June 2022]. Data from: DECC (2014) Data tables: Green Deal, ECO and Insulation Levels, up to March 2014, Green Deal, Energy Company Obligation (ECO) and Insulation Levels in Great; BEIS (2021) Household Energy Efficiency Statistics: Headline Tables; Climate Change Committee analysis. Notes: The CCC indicator shown represents the annualised rates of installation based on the Committee’s 2015 advice on the Fifth Carbon Budget, which we judged to be a realistic and appropriate annualised installation rate at that time.

27.The UK Energy Research Centre recommended the publication of an energy demand reduction delivery plan to support the Government’s net zero strategy and said, “without this systematic framework, we are likely to continue as at present with piecemeal, stop-start initiatives, which effect only incremental change, and which may have the perverse outcome of discouraging participation by businesses and households.”30

28.The Green Finance Institute told us that its Coalition for Energy Efficiency in Buildings had set out several “stimulus actions and reforms for the net zero building and retrofit sectors that could be used by Government to deliver emissions reductions in the UK”. The following proposals were included:

• Energy efficient technology rebate system: similar to the US ‘Cash for Clunkers’ scheme, property owners are incentivised to upgrade inefficient or fossil fuel technologies (e.g. old windows, boilers) to efficient and clean ones through a government grant or voucher scheme.
• Domestic energy efficiency salary sacrifice scheme: this would be comparable to the ‘Ride to Work’ scheme, where employees draw a loan through their employer to invest into home energy improvements and repay the financing via gross salary contributions.
• Sliding Stamp Duty scale: a sliding scale of Stamp Duty designed to be fiscally neutral and linked to energy performance could drive demand for more energy efficient properties. This could be preceded by near term action in the form of a Stamp Duty rebate for the purchase of highly efficient properties.
• Green Help-To-Buy (HTB) scheme: the current HTB scheme could be extended beyond new-build housing and repurposed to preferentially support first-time buyers to purchase an energy-efficient and resilient home, through minimum EPC criteria or government guarantees to support energy improvements once the property has been purchased.31

29.Asked why the Government had not set higher ambitions for home insulation installations in the security strategy, the Rt Hon. Greg Hands MP, the Energy Minister, told us: “we are moving quite quickly on energy efficiency … 10% of homes were rated A to C in 2010, but the figure is now 43%.”32

30.High energy prices mean households are concerned about energy prices and may therefore focus more on energy usage. The Government can harness this public concern to speed up the pace of home insulation and other measures to improve home energy efficiency. Increasing the supply of installations should be driven by clear, long-term signals from the Government, and a commitment to working with the private sector. These measures require significant investment in both the near and longer-term. The Government’s British Energy Security Strategy does not sufficiently explain how such investment will be released.

31.We recommend that the Government publishes an energy demand reduction strategy. To strengthen public confidence, the Government should work with the financial sector to provide financing options and increase incentives for investment in energy efficiency measures. In addition, the Government needs to set clear signals so supply capacity can be increased along with steps to support the development of resilient supply chains and workforce skills. It should have a clear, practical delivery plan which learns from the failings of previous initiatives. The strategy should be published as soon as possible.

Deployment of renewables: onshore wind

32.The Government has said that accelerating the deployment of renewable sources of energy can reduce the UK’s dependency on volatile gas markets.33

33.The energy security strategy increases the Government’s offshore wind target from 40GW to 50GW by 2030.34 It sets out measures aimed at speeding up the offshore wind planning and development process, including by reducing planning consent time to one year from up to four years. The security strategy stated that the Government “expects” a fivefold increase in solar capacity by 2035 (current capacity is 14GW) and it doubled its ambition for hydrogen production to 10GW by 2030.35

34.The UK Energy Research Centre said some renewable energy projects could come on stream in the next two to five years: “more onshore wind and solar could be brought forward, particularly schemes that already have planning permission.”36 Aurora Energy Research has set out a scenario in which power sector gas consumption could be cut by almost 30% because of higher rates of energy generation from coal and renewables combined. This was based on rolling out onshore wind farms more rapidly.37

35.The energy security strategy sets out almost no measures to increase the deployment of onshore wind, although we heard it is one of the cheapest and fastest ways to increase renewable energy generation. Zoisa North-Bond, Chief Executive of Octopus Energy Generation, said onshore wind can be developed without public subsidies.38 She also said:

“It currently takes probably four years to build small wind farms and three years to build solar farms. … it only takes months to put [wind] turbines in the ground, particularly at small scale. We should be concentrating on building the things first that are the cheapest and the quickest to build”.39

36.While the Government has set out planning and consenting reforms for offshore wind—which we heard are critical40—it ruled out significant planning changes to support onshore wind development in England. There are separate planning policy frameworks in Scotland, Wales and Northern Ireland.

37.The security strategy said the Government “recognises the range of views on onshore wind” in England, and that it would consult on “local partnerships for a limited number of supportive communities who wish to host new onshore wind infrastructure in return for benefits, including lower energy bills.”41 Survey data published on 31 March 2022 by the Department for Business, Energy and Industrial Strategy found 80% of the public supported onshore wind development.42

38.The Energy Minister told us: “There has not been any de-emphasis on, or neglect of, onshore wind … we want more onshore wind in England where there is local community support for it.” He said there would be a consultation later in 2022 on creating local partnerships and providing compensatory incentives for people living near onshore wind farms.43

39.The British Energy Security Strategy sets out several ambitions for increasing the deployment of renewable energy, which we support. While we acknowledge some local opposition, onshore wind is one of the cheapest and fastest ways to increase renewable energy generation. We recommend the Government re-examines its ambitions for onshore wind when it publishes its consultation on creating local partnerships with communities living near energy infrastructure, later in 2022.

Extending the life of generating plants

40.The UK has 15 operating nuclear reactors, generating approximately 20% of the UK’s electricity. These reactors are mostly due to retire by 2030. Only one nuclear reactor is currently under construction, Hinkley Point C in Somerset.44 According to the Nuclear Industry Association “all but one of the current six nuclear power stations will cease operating by 2030 … we will lose more than 5.2GW of power from the grid.”45

Figure 8: Location and retirement dates of UK nuclear plants

Source: ‘Britain prepares for new wave of nuclear decommissioning’ Financial Times 22 June 2021: https://www.ft.com/content/0381e567-d088-4802-a2e4-e125c8099605 [accessed 29 June 2022]

41.The Government could explore extending the life of nuclear plants that are scheduled for closure, subject to safety requirements.46 According to Aurora Energy Research, “in the medium–term, the lifetime of nuclear plants (Heysham 1 and Hartlepool) could be extended by 1-year, which could result in 1bcm savings in 2024 and 2025”. Heysham 1 and Hartlepool are scheduled to close in 2024 but Aurora noted there were safety constraints which may prevent delaying decommissioning processes.47

42.Coal-fired power stations generate around 2% of the UK electricity.48 The Government wants to close all remaining coal plants by the end of 2024, with some stations scheduled to close in 2022.49 We heard that the Government should extend the life of these power stations to reduce reliance on expensive natural gas. Michael Liebreich, Chairman and Chief Executive of Liebreich Associates, said this would be defensible: “I would be in favour of in a sense suspending our aspirations on climate in the very short term but not in the long term. The long-term security and climate play very nicely together but in the short term there might be contradictions.”50 Dan Monzani, Managing Director, UK and Ireland at Aurora Energy Research, agreed: “Over the course of this year, we ought to be prepared to consider coal plants running more hours to use less gas. I do not see that as inconsistent with the long-term direction of travel.”51

43.On 18 May 2022, the Energy Minister, said in answer to a parliamentary question that the Government was exploring an extension to “the life of remaining coal-fired power stations to provide additional back up electricity this coming winter if needed”. He stressed that the Government remains committed to ending the use of coal power by October 2024.52 On 23 June 2022, the Secretary of State for Business, Energy and Industrial Strategy said the West Burton A coal power station, which was due for closure in September 2022, will remain open this winter. On 6 July 2022, Drax also agreed to extend the life of its coal-fired power station in North Yorkshire, if needed.53 Negotiations with Britain’s only other remaining coal plant are ongoing.54

44.We support the Government in seeking to maintain existing energy generation in the short term, including coal-fired power stations where necessary, to reduce dependency on expensive gas imports. We welcome the Government’s continuing commitment to renewable energy in the longer term. Extending the life of nuclear power stations over coal power stations where possible, and cost effective, would result in lower carbon emissions.

EU-UK energy cooperation on gas

45.The UK is embedded in the European gas market and is physically connected with continental Europe’s gas network via two interconnectors which link to Belgium and the Netherlands. A third interconnector links to the island of Ireland, supplying both Northern Ireland and Ireland. Pipelines also bring Norwegian gas to the UK. Continental Europe also relies on the UK’s LNG terminals to deliver gas imported as LNG via interconnectors. While the UK has greater capacity to import LNG than most EU members states, it has little gas storage capacity.

46.The trade in gas in Europe operates as a private market and gas flows between the UK and continental Europe according to supply and demand. For the UK to attract gas from Europe, traders must offer a price that is higher than the European benchmark and vice versa for gas to flow from the UK to Europe. The UK is also exposed to price competition on the global LNG spot market.55

47.SSE plc told us that when the UK was an EU member state, interconnector flows between Great Britain and continental Europe were determined by an algorithm to ensure that gas flowed according to price differentials. However, following the UK’s exit from the EU, gas trading between Great Britain and continental Europe is now conducted manually. New trading arrangements are currently being developed.56

48.We heard that it was not clear what would happen if the EU decided to stop energy exports to non-EU countries to conserve gas supply, or if the UK decided to stop exporting gas to continental Europe. Professor Michael Bradshaw explained to us that Ireland, an EU member state, relies on UK gas infrastructure but nevertheless:

“It may sound a trivial point, but it is not that long ago the French Government threatened to switch the power off to Guernsey because it had a squabble over fishing rights.”57

49.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 have said 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 more competition for supply in Europe. The Government said this was just one in a range of scenarios for which it was contingency planning.58 It has also been reported that the UK has contingency plans to cut gas exports to Europe if there is a severe supply shortage.59

50.When the UK was an EU member state it was bound by the 2017 EU Security of Supply Regulation, which aims to ensure a co-ordinated approach to the preparation and management of gas shortages in a crisis. We heard that now the UK is no longer a member of the EU, the full implications of its exit from the Single Energy Market are unclear and untested.60 SSE plc said there is no UK-EU agreement for emergency situations affecting and electricity trade been Great Britain and the EU. It said the UK and EU should “put in place a comprehensive energy relationship outside of the EU-UK Trade and Cooperation Agreement (TCA) as a matter of urgency given the importance of energy to the European economy.”61

51.The UK-EU Trade and Cooperation Agreement, which sets out the UK-EU relationship, includes a provision which states that in the event of a crisis, the EU and UK should only activate non-market-based measures as a last resort. Furthermore, plans to address risks to the security of electricity or natural gas supply should not distort trade between the parties and should not endanger the security of supply of electricity or natural gas of the other party.62 In March 2022, the UK and EU agreed to strengthen cooperation on energy security under the agreement.63

52.We heard that there would be significant mutual benefit from greater UK-EU cooperation on gas supply because the UK is integrated in the European market. The UK Energy Research Centre told us:

“Current LNG import capacity into the EU is limited and poorly connected with the wider European market and the UK can help. The UK could assist the EU in accessing the additional 15bcm of LNG promised this year by President Biden on the 24 March. Since the UK has very little storage the interconnectors could flow gas into European storage. Those same interconnectors also provide the UK with access to European storage. So, there is a strong case for reciprocity and cooperation.”64

53.The Energy Minister told us that “it is quite possible that we will be exporting gas to Europe later this year in order to help them with their situation”. He said the UK and the EU cooperated “well” on energy policy.65 The UK has exported substantial amounts of gas in 2021 and 2022, particularly since the Russian invasion of Ukraine. Exports reached record levels in April 2022.66

54.While we welcome statements from ministers on UK–EU cooperation on energy security, we note reports of Government contingency planning for scenarios in which either the UK or EU cuts gas exports to the other party if there is a severe shortage. As one of the few countries in Europe with significant ability to import LNG and transport natural gas, the UK is playing an important role in supporting security of supply in Europe. In return, some EU countries have gas storage capacity from which the UK could benefit this winter. The Government should urgently seek an agreement with the EU and, if necessary, Norway on energy cooperation to manage possible shortages.

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