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

Chapter 3: Increasing investment in the transition

Market models

55.There are different routes to net zero and a range of technologies will be needed in the transition. However, there is uncertainty about the exact combination of technologies needed for our energy system and how much of a role each one will play. This is due to the uncertainty around pricing and technology learning curves—for example, it is difficult to predict if the cost of renewables or batteries will continue to fall—and there could be new technologies developed during the transition. While uncertainty remains, governments have had success in designing market models which have increased investor confidence to fund technologies that support the transition.

Contracts for Difference

56.Large-scale, low-carbon power infrastructure is supported through Contracts for Difference (CfDs). CfDs fix the prices received by low-carbon generators over several years, reducing the risks developers face from a fluctuating wholesale power price and ensuring that eligible technology receives a price for generated power that supports investment.

57.The fixed price is known as the strike price. A CfD is a contract between a low-carbon electricity generator and the Low Carbon Contracts Company (LCCC), a Government-owned company. Under CfDs, when the market price for electricity generated by a CfD generator is below the strike price in the contract, payments are made by the LCCC to the CfD generator to make up the difference. When the market price is above the strike price, the CfD generator pays LCCC the difference. This is shown in Figure 9. The payments, and repayments, paid and received by the LCCC for the CfD scheme are passed on to consumer electricity bills.

Figure 9: How CfDs work

Area chart showing the theory of Contract for Difference.

Source: House of Commons Library, Support for low carbon power, Number 8891, 8 April 2020

58.CfDs are mostly decided at auctions, known as allocation rounds, to allow competition between technologies. The Government sets a budget in advance, then sealed bids of strike prices submitted by developers are accepted sequentially from the lowest to the highest until the budget is exceeded. All developments of the same technology and delivery year (i.e. when construction is completed) that successfully bid are paid the last submitted successful strike price bid; there are different prices for different technologies and delivery years.67

59.CfD funding is set out in ‘pots’ which group the technologies that can compete:

60.Analysis from Carbon Brief, an environmental news website, found that costs have fallen from £167/megawatt hour (MWh) for offshore wind projects coming online in 2017 to £44/MWh for projects in 2023—a reduction of 74% over six years.69 Costs are now so low that it is cheaper to build and run new offshore wind farms than to continue operating existing gas power stations, although the former requires a back-up source to deal with the intermittency problem. Contracts for the latest offshore-wind farms due to come online between 2023 and 2025 were secured at a price below the Government’s wholesale price projections, meaning that these projects are expected to save consumers money over their lifetime.70 These figures do not include the cost of integrating and backing up the intermittent renewables on the grid, which has been estimated to cost an extra £10–25/ MWh in “systems costs”.71

61.The cost of building each MW of offshore wind capacity has fallen as the industry has gained experience and introduced new and larger turbine designs (which also capture the stronger winds at greater heights).72 Lord Turner of Ecchinswell told us, “as economists, we know about the theory of economy of scale and learning curve effects, but, in a sense, we have been continually surprised by how powerful [learning curve effects] are.”73 In 2010 there was 1.3GW offshore wind capacity in the UK, compared with 11.3GW in 2020—a 770% increase.74 The CfD has reduced the price risk faced by generators, allowing them to borrow money more cheaply and further reducing their cost per MWh generated.

62.Ed Northam suggested that the fall in costs for offshore wind was also due to the clarity that the CfDs provide investors on future prices: “It is a policy that has proven to be quite flexible and predictable. There is a framework there which investors can look at and say, “That’s clear and we understand how it’s going to be. It’s going to have longevity, so I can now make long-term investment decisions”.75

Cap and Floor model

63.The cap and floor model reduces pricing uncertainty for investors by setting an upper and lower threshold (the cap and the floor), and if the return on the storage unit falls below the floor, the regulator pays the generator, but if the return on the storage unit exceeds the cap the generator pays the regulator.76 The cap and floor model has been used to finance interconnector links between UK and other countries enabling the trade of energy.77 Figure 10 illustrates how a cap and floor model works.

Figure 10: Cap and floor mechanism

Area chart showing the throry of Cap and floor mechanism of pricing

Source: Aurora, ‘Long Duration Energy Storage’ (17 February 2022): https://auroraer.com/media/long-duration-electricity-storage-in-gb/ [accessed 1 July 2022]

Regulated Asset Base model

64.A Regulated Asset Base model aims to bring down the cost of financing by transferring the investment risk to consumers and spreads the cost over a longer period. It reduces the overall cost to investors by sharing risk with bill payers. Under the CfD, the developer does not make a return on investment until the plant is operating.78

65.Under a RAB model a company receives a licence from a regulator to charge on the basis of agreed capital expenditure and cost of capital. This becomes an agreed amount of revenue which is charged to energy companies which will then include that cost within their charges to consumers. In effect, this lowers the overall cost of capital to investors, but increases the short-term bills of consumers during the construction.79

Market models and low carbon technologies

Long-duration energy storage

66.Long-duration energy storage allows surplus electricity to be converted into energy which can be used when there is a shortfall. The Department for Business, Energy and Industrial Strategy described it as a possible solution to the renewable intermittency problem.80 Aurora Energy Research defined Long Duration Energy Storage as “storage technologies able to respond to supply and demand variations caused by daily peaks, weather events and seasonal patterns … Long Duration Energy Storage technologies are able to provide energy for over 4 hours”.81

67.The UK Energy Research Centre outlined the storage technologies required for short, medium and long duration storage:

“batteries for fast discharging of modest amounts of energy to help stabilise the electricity system in the seconds following a disturbance; pumped hydro storage for smoothing out daily variations in residual demand; or geological stores of hydrogen manufactured from electrolysis to help manage annual variations.”82

68.The UK Energy Research Council told us that since the Government plans to increase the share of renewables on the grid, for example when increasing offshore wind from 10GW to 50GW by 2030, there is an urgent need to assess more precisely what capacity of different flexible storage options is required and under what circumstances.83

69.We heard that short-duration storage (under four hours) is developing well without Government support. However, to reach the capacity needed to support the growing number of intermittent renewables on the grid, action by the Government is needed to increase investor confidence in long duration storage.84

70.An Aurora report estimated that, “up to 24 GW of Long Duration Electricity Storage—equivalent to eight times the current installed capacity—could be needed to integrate wind power into a secure Net Zero electricity system”.85 National Grid Energy Systems Operator told us, “Discussions with our storage stakeholders indicate that the market signals to justify investment in long duration energy storage are not strong enough, yet the costs of large storage projects are high and future revenues are too uncertain.”86

71.The Department for Business, Energy and Industrial Strategy’s call for evidence on business models for long duration energy storage closed in September 2021. It said:

“A combination of factors including high capital costs, long lead times and, in some cases, lack of track record associated with particularly novel technologies, alongside a lack of forecastable revenue streams underpins a financing challenge. As a result, large-scale, long-duration storage is not currently attracting enough investment and is not being built at the scale that may be needed to support the transition to a greener economy”.87

72.The department has not announced a market model for long duration energy storage. In the energy security strategy, the Government outlined an ambition to “develop appropriate policy to enable investment in long-duration energy storage by 2024.”88 SSE plc said decisions were needed sooner to ensure that there was sufficient capacity for long duration energy storage to store the surplus electricity produced by the growing number of renewable energy generators that will be on the grid by 2030.89

73.One model that has been proposed as an effective market incentive for long duration storage is the cap and floor model.90 SSE plc explained why a cap and floor mechanism for long duration energy storage would be more suitable than alternative market models:

“long duration storage options like hydro pumped storage and hydrogen storage have steep upfront costs and long lifetimes, meaning current market mechanisms to support new build such as the Capacity Market (CM)91 and Contracts for Difference (CfD) will not provide the correct level and structure of payments to unlock investment … These existing support mechanisms are also designed for different purposes—hydrogen electrolysis and hydrogen storage do not provide system security (as defined in the CM), and do not directly provide electricity (as the CfD contracts are structured to incentivise).”92

74.Matt Harper, Chief Commercial Officer at Invinity Energy Systems, told us: “The cap and floor mechanism is a good way of deploying some of these technologies, especially in the early stages … The model puts a minimum level of return on these projects so that they are investable in the short term while the markets themselves are stabilising and maturing”.93

75.The Rt Hon. Greg Hands MP, the Energy Minister, said, “we are not prescriptive about an economic model at the moment”. He said that his department was due to publish its response to the call for evidence on long duration energy storage in summer 2022.94

76.While we welcome the Government’s clear and ambitious targets for many renewable technologies, it should set out now the policy detail on how these targets will be met. The Government should provide more detail on the capacity, timeframes and expected costs of long-duration energy storage. It should also quickly develop a market model for long-duration energy storage. The view among witnesses was that a cap and floor model would be most effective.

Hydrogen

77.The Government’s Green Hydrogen Strategy, published in August 2021, set out an ambition to attract investment in 5GW of hydrogen production by 2030, which would mostly power heavy industry and transport, and heat up to 70,000 homes.95 The Government’s April 2022 energy security strategy doubled this target, aiming for “up to 10GW of low carbon hydrogen production capacity by 2030, subject to affordability and value for money.” It said at least half of this would be electrolytic hydrogen [also known as green hydrogen].96 The Government’s hydrogen strategy has been called a “twin track” approach because it supports both green and blue hydrogen, in contrast to other countries’ plans, like Germany and France which focus on green hydrogen.97

78.Blue hydrogen is produced from natural gas to form hydrogen. The process emits carbon as a by-product and carbon capture and storage is used to trap these emissions. Green hydrogen is produced by using renewable electricity to power an electrolyser that splits the hydrogen from water molecules. This process produces pure hydrogen, with no harmful by-products.98

79.Marco Alvera, author of The Hydrogen Revolution, supported the Government’s twin-track approach to developing blue and green hydrogen because of the UK’s geology and existing strengths in oil and gas which can be transferred to producing both types of hydrogen. He said, “you can store 100% hydrogen in the existing depleted gas reservoirs… in the North Sea, a lot of beautiful reservoirs… can be converted into hydrogen storage very cheaply.”99

80.Hydrogen has several possible applications. Witnesses were uncertain about the extent it would be used in heating and transport, but there was a consensus that hydrogen would be used in hard to abate industries and as long-duration storage to back up intermittent renewables.100 Marco Alvera said:

“The main use and the first use will be for heavy industry, those hard-to-abate sectors that are now running on coal or natural gas, which need very high temperatures. There is no debate right now that certain sectors like steel, where you are reducing iron ore, or certain cements or certain heavy transport like shipping, will be using hydrogen.”101

81.He said that there would probably be a role for hydrogen in heating and passenger transport, but it was unclear how much of a role compared to electricity. He said it depended how much progress was made with reducing hydrogen costs compared to batteries and heat pumps.102 The Government is facilitating trials to test whether the gas grid can be converted to use hydrogen as part of the supply for heating homes.103 Marco Alvera said that blending hydrogen into the gas grid would be “a great way to create immediate demand”.104

82.Lord Turner of Ecchinswell, Chair of the Energy Transitions Commission, told us there is a “major role” for hydrogen when the UK has surplus energy from wind, solar and nuclear sources. He said, “we would make large amounts of hydrogen, store it, and then take it back to electricity by burning it in gas turbines.” He said existing gas turbines could be retrofitted to burn methane or hydrogen”.105

83.According to a 2020 report by the International Renewable Energy Agency, the largest single cost component for green hydrogen production is the cost of the renewable electricity that is needed to power the electrolyser unit. However, low electricity cost is not enough by itself for competitive green hydrogen production; reductions in the cost of electrolysis facilities are also needed.106

84.The Government’s energy security strategy included an ambition to design new market models for hydrogen storage by 2025, but this might be too slow to provide sufficient long duration storage to back up the growing capacity of renewables needed to decarbonise the grid by 2035. SSE plc told us that there is no support framework or market model being proposed by the Government for hydrogen storage and given the long lead times involved in developing a storage asset, the Government needs to ensure a business model is in place “to support the early, strategic deployment of hydrogen storage capacity from the late 2020s.”107

85.Catharina Hillenbrand von der Neyen, Head of Research at Carbon Tracker, said investment in hydrogen could be encouraged by using a CfD model. She envisaged the strike price of hydrogen would come down as the capacity of hydrogen in the energy system was increased. It would benefit from similar efficiency improvements as wind turbines.108 Martin Pibworth, Chief Commercial Officer at SSE plc, said “some kind of CfD for a hydrogen generation plant might be a credible instrument. It is an instrument that clearly government and industry are very familiar with.”109 Simon Virley said: “Most of my clients have been eagerly awaiting the details of the CfD model—what levels of support will be provided, what the reserve price will be, what the reference price will be, how they will deal with volume risk”.110

86.The Rt Hon. Greg Hands MP, the Energy Minister, told us, “The Energy Security Bill will contain the hydrogen investment plan, and the hydrogen business model will come after that”.111 He suggested that it was too soon to provide detail on the market model and said that hydrogen was still at a “high-level policy” stage in its development.112

87.We welcome the Government’s ambition to increase hydrogen production. We support developing both green and blue hydrogen; the evidence suggests this builds on the UK’s industrial and geological strengths in offshore wind and gas reservoirs. We recommend that the Government outlines market structures and mechanisms for hydrogen as soon as feasible.

Carbon capture and storage

88.Carbon capture and storage (CCS) is an important technology for managing the transition to net zero.113 CCS involves capturing carbon dioxide emissions from industrial processes, such as steel and cement production, or from burning fossil fuels in power generation. The carbon is transported from where it was produced, via ship or pipeline, and stored underground in geological formations.114 CCS technology allows for some fossil fuels to be burned even in a net zero scenario, as the CCS can negate the emissions. The Government has published a CCS Roadmap which includes the target of delivering four CCS “low carbon industrial clusters” by 2030.115

89.According to Professor Sir Dieter Helm, Professor of Economic Policy at Oxford University, the best option for maintaining affordability and stability of supply during the transition is to continue using gas, but in a way that is “almost completely backed up by CCS if it is to be net zero-compliant.”116 He argued that the Government’s support for CCS has been inadequate: “We have no regulatory regime for offshore CCS; we have no agreement about integrating the pipelines; we have no agreement about how the pricing will be done.”117 SSE plc said: “whilst we welcome the Government’s ambition on CCS, a Government commitment to five power-CCS projects this decade is deliverable with SSE’s projects potentially online by 2027.”

90.Some witnesses were more sceptical about the role of CCS, especially when used in conjunction with gas. Ian Simm, founder and CEO of Impax Asset Management, told us: “the complexities of getting the project finance sorted out has proven to be intractable for almost all [CCS] projects”.118 Michael Liebreich agreed: “to capture the CO₂ from generation is a non-starter because we are going into a world where the gas that we are going to need is intermittent. It is there as back-up.”119 He suggested that it would be too costly to have CCS used only occasionally when there is low wind and sun.

91.Lord Turner of Ecchinswell agreed that CCS might prove too expensive to rely on as gas is used less.120 Nevertheless, he regarded the role of carbon capture and storage as “small but still vital”, adding: “we may need CCS to get negative emissions mid-century, because we may not be able to get all the way to net zero within the system itself. We also need it for cement.” This is because there are still some sectors that are too difficult to decarbonise, and CCS will be required to negate any residual emissions.

92.Witnesses suggested that, if the role of CCS is small, it will be challenging to attract investment without Government support. Ed Northam said: “carbon capture needs government support. I actually wonder if it is not better sitting in a Regulated Asset Base model.”121

93.Julian Critchlow, a former Director-General of Energy Transformation and Clean Growth at the Department for Business, Energy and Industrial Strategy, told us: “we need to create a carbon price for carbon capture and storage to allow people to buy that service … That business model does not exist today.”122

94.Carbon capture and storage is expected to play a small, but valuable, long-term role in the transition to net zero. The limited scale means that there is likely to be little appetite for the private sector to invest in it without a stable and enduring commitment from Government to support it. The Government should therefore play a role in setting up clusters and in designing market models as soon as feasible so that investors are given greater confidence that there will be a long-term market for carbon capture and storage.

Nuclear energy

95.The Government’s energy security strategy included an ambition to generate 24GW from nuclear power by 2050, up from 7GW in 2022. This will require significant investment.123 On 19 April 2022, the Prime Minister told the House of Commons “in the country that split the atom—we will build a new reactor not every decade, but every year.”124 However, the Energy Minister told us that the Government’s policy was not to build a reactor every year, but to make “a decision on eight further reactors before the end of this decade.”125

96.The Climate Change Committee assumed 5–10GW from nuclear in each of their scenarios.126 Some witnesses doubted that the extra nuclear capacity proposed by the Government was justified from a cost perspective. The Nuclear Consulting Group, an academic research organisation, told us “new nuclear construction is significantly more expensive than renewable energy, even taking into account the cost of grid management tools such as energy storage—and therefore new nuclear is dependent on very large public subsidy”.127 Lord Turner of Ecchinswell said that unless the costs of nuclear fell significantly lower it would be cheaper to have a higher share of renewables, storage and flexible back-up technologies.128

97.The UK has faced challenges in financing nuclear projects. Tom Greatrex, Chief Executive of the Nuclear Industry Association, told us that “a number of projects … have not got to fruition because of the cost of capital and financing issues.”129 Some companies have withdrawn from, or suspended, proposed projects.130 For example, in 2020 Hitachi cancelled a proposed new plant at Wylfa in Wales. It explained it had not been able to reach an agreement with the Government on funding.131

98.Hinkley Point C was financed with a CfD model at a strike price of £89.50 per MWh.132 When the strike price was agreed with EDF in 2012, it was cheaper than the equivalent for new offshore wind. Seven years later the third CfD round for offshore wind cleared at roughly £40/MWh, which is cheaper even when adding systems costs of £10-25/MWh to account for intermittency, but Hinkley Point C is still several years from being completed.133

99.The Nuclear Energy (Financing) Act 2022 will allow the Regulated Asset Base (RAB) model to be used to fund new nuclear.134 The RAB model, which has been used to finance water, gas and electricity infrastructure, aims to bring down the cost of financing by sharing the investment risk with consumers.135

100.The Government said financing nuclear projects via a RAB model would reduce the present value of cost of building and financing by at least £30 billion for each new build compared with a CfD.136 Tom Samson, CEO of Rolls-Royce SMR, estimated costs between £40–75/MWh and explained how the overall cost to the consumer would be lower than previous nuclear projects:

“[the RAB] allows the consumers to fund the build during the construction phase, so you are not having to finance interest to the consumer during construction. The ultimate cost to the consumer relative to another funding model is lower.137

101.The Government said that the RAB model would increase the electricity bills of consumers by £1 a month during the construction of each nuclear project.138 Stop Sizewell C, a campaign group, said that this figure was based on the most optimistic scenario in the Nuclear Energy (Financing) Act’s impact assessment and that medium and worst-case scenarios could be much higher.139 The Nuclear Consulting Group told us: “The RAB is subject to considerable uncertainty … and electricity consumers would carry a very great fiscal burden, especially if construction costs and time-lines over-run.”140

102.Tom Samson welcomed the RAB model for nuclear but suggested that CfDs would also be a good model for small modular reactors. Small modular reactors are advanced nuclear reactors with a power capacity of up to 300MW per unit, which is about one-third of the generating capacity of traditional nuclear power reactors.141 Tom Samson said:

“We want to work with the one that allows us to come to market most quickly. If that is the RAB, we will pursue the RAB … There is a huge amount of interest and appetite from financial institutions to invest in the RAB … but equally, if the Government want us to focus on a CfD model we can do that as well”.142

103.The Energy Minister told us: “The overall cost of a nuclear power plant with the RAB model will be significantly cheaper to deliver than using a CfD.”143 The Department for Business Energy and Industrial Strategy started a consultation on 14 June 2022, which closes on 9 August 2022, about the detail of implementing revenue regulations for the RAB model.144

104.There have been conflicting statements from ministers about whether the Government intends to start the construction process for one nuclear reactor each year so that up to eight are in development at the same time or intends a different sequencing. This is especially important if a RAB model of financing is used because of the costs that would fall on consumer bills, including those of the poorest, during construction. The Government should set out its delivery plan and construction timetable for nuclear reactors. It should also clarify what impact delivering multiple projects simultaneously could have on consumer bills.

105.The Government should explain why it is aiming for a target of 24GW to be supplied by nuclear by 2050 when this is over double the capacity assumed by the Climate Change Committee. The Government should set out its cost analysis of 24GW of nuclear capacity compared to alternative options of providing baseload capacity.

106.While we have heard that the Regulated Asset Base model could unlock private sector investment for nuclear, questions remain about the cost impact on consumers. The Government should ensure that plans for new nuclear power stations are as robust as possible, and credible in terms of cost and timing, and the Government should set out how it will protect energy bill payers in the event of cost overruns and construction delays.

UK Infrastructure Bank and net zero

107.The UK Infrastructure Bank (UKIB) was launched in June 2021, with the objective of financing economic infrastructure that will help to tackle climate change and support regional and local economic growth.145 It will be put on a statutory footing by the UK Infrastructure Bank Bill [HL], which was introduced on 11 May 2022. On 18 March 2022, the Chancellor wrote to John Flint, Chief Executive of the UKIB, to ask the bank to “prioritise opportunities that align with the Government’s renewed focus on energy security.”146 The Bank has £22 billion of financing capacity to deploy: £8 billion in debt and equity, £10 billion in guarantees and £4 billion for Local Authority lending. Partnering with the private sector and local government, it aims to fully commit its £22 billion balance sheet over the next five to eight years.147

108.On 23 June 2022, the UKIB published its first strategic plan. It said it has five priority areas for investment set by HM Treasury: clean energy, transport, digital, waste and water. It explained that it would not invest in each of these areas equally: “We expect clean energy will be the largest sector in our portfolio, reflecting its importance to the UK’s net zero and energy security ambitions. The remainder of our portfolio will be more heavily weighted towards transport and digital.”148

109.Positive Money said the UKIB could be “mission-critical to delivering renewable energy infrastructure as well as efficiency measures such as retrofits”. It said the Government should commit to” significantly increasing UKIB’s paid-in capital.”149

110.Ed Northam, Head of Green Investment Group—Europe & UK at Macquarie Group, questioned the need for the UKIB: “all the capital you need is available in the market and can be mobilised”. He said the Government should focus on setting the market “enablers” that are needed to fund the transition to net zero.150

111.We asked John Flint why the UKIB was needed when there was private capital waiting to invest in sustainable projects. He replied that there was “plenty of evidence” that private markets were not mobilising quickly enough to support the transition to net zero and that there was a role for “public money to be deployed in pursuit of market gaps and problems that the private markets, on their own, cannot solve.”151 It was “inevitable” that the UKIB would invest in nascent technologies as it was “implausible that current technologies are going to get us to net zero.”152

112.The then Economic Secretary told us that the UKIB would “crowd in” private money but it was for the bank “to make that judgment about what sort of risk profile to adopt, how to view certain technologies and how to maximise the input from private sector partnerships.” He explained that the bank should make a profit over time but “the exact profile of its investments and the calibration of risk will also depend on how it partners with private providers of capital.”153

113.As there is evidence of substantial private sector-interest in investing in sustainable projects, the UK Infrastructure Bank should ensure that it adds value by focusing investment on innovative and potentially riskier projects with the aim of attracting and enabling additional private-sector funding. It should focus on using its investments to manage, share and reduce risk to enable the private sector to invest where otherwise it would be difficult. We note, however, that the UKIB has limited risk capital.

Oil and gas

114.According to the Government, oil and gas will continue to play an important role as the UK transitions to a low carbon economy.154 The UK is likely to consume a quarter of the natural gas as it does today while meeting the net zero target in 2050.155 Over 85% of households rely on gas for heating and it remains an important raw material and source of heating in industrial processes. It will also be used in the production of blue hydrogen.156

115.In 2021, Offshore Energy UK, the industry body for North Sea energy production, said investment levels in the North Sea are generally in decline and the contraction in investment after the COVID-19 pandemic and the collapse in the oil price has been “larger than that seen across the sector globally.”157 This is against a backdrop of rising demand for oil and gas globally, driven by demand in emerging markets and developing economies.

116.To end their energy dependency on Russia, European countries are seeking alternative sources of oil and gas. Jason Bordoff, co-founding Dean of the Columbia Climate School, explained that even before the Russian invasion of Ukraine there were concerns over underinvestment in oil and gas to meet energy demand.158 He said that new investment was needed elsewhere to replace Russian oil and gas supplies, and that “the North Sea can be one of those places.”159

117.However, as the UK deploys more low carbon and renewable sources of energy, new investment in oil and gas infrastructure risks investors being left with stranded assets. The International Energy Agency (IEA) has defined stranded assets as:

“investments which have already been made but which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return, as a result of changes in the market and regulatory environment brought about by climate policy.”160

118.In May 2021, the IEA set out a net zero transition scenario under which no new oil and gas fields would need to be approved beyond 2021 to meet energy demand.161 Christophe McGlade, Head of the Energy Supply Unit at the IEA, told us that this scenario assumed the world would start to act aggressively on climate change from 1 January 2022:

“In… a scenario where we take action on climate change, we would have a surge in clean energy policies, which leads to a surge in investment in clean energy technologies, and that brings down fossil fuel demand, and brings down emissions in line with net zero in 2050 globally. If you have that decline in demand, you can satisfy that with supplies from existing oil and gas fields, so you do not require investment in new fields.”162

119.The Government’s energy security strategy stated that another licensing round for North Sea oil and gas projects will be launched in autumn 2022, and that “this will mean more domestic gas on the grid sooner.” The strategy added that the Government will introduce ways to accelerate the development of new projects, but new licensing rounds will take place only if projects can pass a ‘climate compatibility checkpoint’ which will assess whether production is aligned with net zero. Details of how this checkpoint will work have not been announced, although a consultation has been published.163

120.Witnesses said the world is deviating further from the IEA’s net zero scenario. Mark Carney, UN Special Envoy for Climate Action and Finance, said that after the Russian invasion of Ukraine, there is a “scramble … for bridging supplies” of oil and gas until sufficient low-carbon alternatives are available. He added, “relative to the IEA’s scenario, some additional investment [in new oil and gas projects] will be required.” It would be crucial to ensure that new investment “is consistent with the transition and the objectives that are marked in law, such as the 1.5 degrees objective.”164

121.On 13 May 2022, Dr Fatih Birol, Executive Director of the IEA, said in a speech that Russia’s invasion of Ukraine had brought major disruptions to the global energy system: “it is clear to us that any immediate shortfalls in fossil fuel production from Russia will need to be replaced by production elsewhere—even in a world working towards net zero emissions by 2050.” He said: “Nobody should imagine that Russia’s invasion can justify a wave of new large-scale fossil fuel infrastructure in a world that wants to limit global warming to 1.5°C.” He said the most suitable projects were those with “short lead times and quick payback periods”, such as “extending production from existing fields and making use of natural gas that is currently flared and vented.”165

122.We heard new oil and gas development in the North Sea would help support the UK’s security of supply but was unlikely to reduce energy prices significantly. Dan Monzani, Managing Director, UK and Ireland at Aurora Energy Research, said: “if you introduce new supply, for example, in the North Sea, it will be at the market price. It will not lower our price.”166

123.As to whether such investment might create stranded assets, Jason Bordoff described the possibility as a “market failure” and said government intervention might be needed to support investment in certain “transition assets”. He explained that even before the Russian invasion of Ukraine there were concerns over underinvestment in oil and gas to meet energy demand. He said:

“the question is whether government policy needs to respond … by preferencing projects that have shorter payback periods, or potentially taking steps to lower the cost of capital so that [investors] get paid back in a shorter period, followed maybe by an agreement to retire them sooner than would otherwise be the case”.167

124.Mark Carney told us that without proper policy frameworks, financial institutions will decide to avoid financing fossil fuel production even though this financing may be needed for an orderly transition. He said common standards were needed for sectoral transition plans, which is the role of the Transition Plan Taskforce, chaired by the Economic Secretary, and ‘sectoral pathways’ should be designed for oil and gas and other high-emitting industries that are consistent with the transition. Finally, he said a more detailed net zero energy strategy is needed.168

125.The Energy Minister argued that it made “financial sense” to continue to invest in North Sea oil and gas and that domestic production generated lower carbon emissions than imported hydrocarbons. However, the Minister was unable to set out a timeframe for when any new investment would lead to more production,169 although he explained that some additional investment in 2022 might lead to more production from existing oil and gas fields in the short term.170

126.We asked John Glen MP, the then Economic Secretary to the Treasury, about the IEA’s net zero transition scenario and whether it was HM Treasury’s view that financial institutions should invest in North Sea oil and gas extraction if producers have robust transition plans. He replied, “that is broadly the view, yes. We need to be pragmatic about the fact that we need a transition.”171 He said the UK had made good progress on assessing the risk of stranded assets but there “is not a single intervention that one Government can make” and set out measures the Government and regulators were taking, including climate stress testing, and introducing requirements for disclosures on climate impact by companies.172

127.In the short term, Europe needs alternative sources of oil and gas to replace supply from Russia. Moreover, the UK will continue to require gas during the transition. Enabling more investment in North Sea production can help address this, although it will not provide a significant reduction in energy prices over the next few winters. Over the medium term, the use of oil and gas needs to fall to align with the strategies on climate change. Any extension of oil and gas exploration or investment should focus on projects with short lead times and payback periods to limit the risk of stranded assets. There is uncertainty over how the risk of creating stranded assets will be managed. The Climate Compatibility Checkpoint should ensure that additional investment in oil and gas is focused on production that reflects the UK’s diminishing but continued demand for gas during the transition and not enable substantial levels of long-term production that conflicts with net zero objectives.

Gas storage

128.The UK has little storage capacity for gas. The Rough storage facility, owned by Centrica, the parent company of British Gas, provided 70% of the UK gas storage capacity for more than 30 years before it shut in 2017 following the Government’s decision to accept Centrica’s request to close the facility in view of the possible call on public funds if it were kept open and refurbished. In June 2022 it was reported that Centrica had applied to the North Sea Transition Authority to reopen the Rough storage facility. Centrica said it was in “exploratory discussions” with the Government about the role that the facility could play in the short or medium term in storing gas to support energy security.173

129.Witnesses had mixed views on the role of new gas storage to help manage price spikes in wholesale markets. Professor Michael Bradshaw, Professor of Global Energy at the University of Warwick, said it was “too late … to consider that as part of the solution” to the current geopolitical and affordability crises.174

130.Dr Jack Sharples, Research Fellow at the Oxford Institute for Energy Studies, stressed the UK’s place in the wider European gas market. He said while the UK has no substantial gas storage capacity, the UK makes “extensive” use of gas storage in other European countries via interconnector pipelines with the Netherlands and Belgium. He explained that, in the summer, the UK and Norway tend to export gas to the continent where it is used or injected into storage; in the winter, it is exported back to the UK: “it is market dynamics, supply and demand balances and pricing signals that tell the market where that gas needs to move to.”175

131.Dan Monzani, Managing Director, UK and Ireland at Aurora Energy Research, said that it would be “eye wateringly expensive” to fill up storage while gas prices are so high and that it is unclear there was enough confidence on a return for private investors: “I think it will probably require government intervention at a European level”.176

132.Jason Bordoff thought the UK should invest in additional storage. He said it would make sense to ensure that any additional capacity “is hydrogen-ready and can be used for other fuels.”177

133.The Energy Minister told us that a high level of gas storage capacity was needed in Europe to ensure security of supply but this was not the case in the UK because it can rely on domestic production and imports from Norway. He told us that the UK was cooperating with the European Commission and EU member states, and it was “quite possible” that the UK would export gas to mainland Europe this year to support their supply resilience.178

134.The UK may benefit from additional gas storage capacity which can also be made suitable for hydrogen storage. We welcome the Government and Centrica examining the case for reopening the Rough storage facility. Additional storage could provide more resilience against supply bottlenecks and would provide more security were agreements to import energy from mainland Europe to break down. The Government should examine the case for opening other storage sites which could be adapted for hydrogen.

Implementation

Planning

135.Planning constraints, and uncertainty in the planning process, are one of the most significant barriers to new investment in low carbon energy infrastructure in the timeframe required by the Government’s plans.179

136.There is a substantial number of offshore wind projects that have received planning permission but have not yet moved to the construction phase. The UK Energy Research Centre told us:

“11.8GW of offshore wind capacity had been built in UK waters by the end of 2021. An additional 21.1GW of offshore wind is currently in the development pipeline. This comprises: 2.4GW under construction, 15.8GW with consents approved and 2.9GW awaiting consents.”180

137.Balance Power, a renewable energy company, told us that “only 40% of applications for renewable energy and battery storage projects were approved by local councils.”181

138.We heard that one way to increase public support for new energy projects was to compensate local communities with lower energy bills. Stephen Smith, Head of Group Strategy, Market Fundamentals and Internal Consulting at National Grid, said: “there are interesting things going on with onshore wind, whereby companies are coming up with schemes where local communities benefit directly through lower energy bills; they seem to be proving wildly popular.”182

139.One option for reducing the planning process for nuclear would be to fast track the planning process for nuclear projects at locations that have previously hosted a nuclear reactor. Rolls-Royce SMR told us that “a lengthy multiyear planning process to build a small modular reactor on a site that has had a nuclear asset for the past 50 years is not necessary. The Government should consider accelerating the process for sites such as Trawsfynydd, Anglesey and West Cumbria.”183 Tom Samson, CEO, Rolls-Royce SMR, said:

“Those communities that have hosted a nuclear asset for the last five or six decades … are very comfortable and familiar with what that technology means, its safety and the economic benefits … They are the strongest advocates in this country for bringing nuclear power into those communities.”184

140.When deploying new nuclear power generation, we heard that it could take up to 10 years for the planning phase to complete with a further 10 years for construction. Tom Greatrex, Chief Executive of the Nuclear Industry Association, said “the sense of urgency that people feel about net zero … is not always shared in the regulatory processes, hence the time taken.” He called for a “net zero duty” to be upheld by the regulator to shorten the time it takes to gain planning permission, while maintaining the integrity of the process.185

141.National Grid told us that planning is a barrier to delivering infrastructure necessary to support renewables: “without considerable refresh, current planning policy has the potential to act as a barrier to infrastructure investment at pace.” It recommended revising the National Policy Statements, which set out the Government’s policy for the delivery of energy infrastructure and provide the legal framework for planning decisions. It said they should be revised to make the Government’s commitment to net zero “more explicit and to provide a clear and unambiguous direction to the Secretary of State to prioritise the importance of climate change”.186

142.Zoisa North-Bond told us that the effect of the National Planning Policy Framework is that onshore wind is at a disadvantage over solar power or other projects. Under the National Planning Policy Framework wind turbines can be considered acceptable only if, after consultation, it can be demonstrated that the planning impacts identified by the affected local community have been fully addressed and the proposal has their backing. This is a higher hurdle than other energy projects must clear.187 Planning is a devolved matter; Scotland, Wales and Northern Ireland have separate planning policy frameworks.

143.National Grid Energy Systems Operator told us that planning is a barrier to installing transmission infrastructure. It said, “the Government should continue to focus on reforms to the National Planning Statement that speed up delivery of onshore transmission.”188

144.Balancing national policy with local preferences is challenging but the planning process takes too long for renewables, nuclear and the transmission network.

145.We recommend that the Government encourages schemes to compensate residents for energy projects built in their areas. This already happens for certain onshore wind projects but should be extended to other forms of low-carbon generation, or grid infrastructure.

146.We recommend that energy security objectives be included in the National Planning Policy Framework alongside the existing climate change objectives.

147.We also recommend that the planning process be expedited for nuclear reactors that are sited on locations of former nuclear reactors, while maintaining high health and safety standards. 189

Grid investment

148.The grid network does not have capacity to support the deployment of renewables at sufficient pace. Renewable energy developers face delays of up to a decade to connect new capacity to the electricity grid, threatening the Government’s pledge to shift away from fossil fuels.190 Grid constraints mean that the National Grid Energy Systems Operator must pay generators to switch off when there is a surplus of power supply “to maintain system stability and manage the flows on the network”.191 In 2021, 2.3TWh of potential output was lost and National Grid Energy Systems Operator paid £143 million to compensate the generators affected.192

149.Witnesses suggested that investment in grid infrastructure has been reactive rather than anticipatory of changes to the electricity supply. This means the grid transmission network has not increased capacity at the same rate as renewable energy projects. Stephen Smith told us that Ofgem should enable energy companies to “start investing in networks ahead of need”.193 A March 2022 House of Lords Industry and Regulators Committee report stated:

“We received numerous pieces of evidence, particularly from network companies, arguing that Ofgem is overly cautious when allowing ‘anticipatory’ investment in energy networks that may be needed to enable the transition, especially given the forecast increase in demand for electricity with the electrification of heat and transport, but for which there is not a direct and immediate need now.”194

150.RWE, a renewable energy company, told us, “connecting new renewable generation projects to the networks has been the single biggest issue impacting on the delivery of wind energy projects”. It argued that Ofgem’s remit should be adjusted to allow increased anticipatory investment in grid networks:

“Ofgem’s remit with regards to net zero is restrictive and does not enable the regulator to facilitate the level of anticipatory investment required.” This in turn is causing delays to the granting of grid connections, and consequently the development of projects. Clear guidance to Ofgem in this regard, in the form of an enhanced or changed remit that explicitly includes a responsibility to drive net zero would be useful.”195

151.On 29 June 2022, Ofgem announced a plan to enable investment of £21 billion in grid infrastructure over 5 years.196 Ofgem are also carrying out a consultation on how to improve anticipatory investment and it will publish a response by the end of 2022.197 Ofgem regulate price controls with network companies which determine the levels of investment in the network, company returns and the amount that the companies can charge for operating their networks.198

152.Martin Pibworth, Chief Commercial Officer, SSE plc, told us: “I would also very strongly advocate for transmission investment … If we know that there are 25 gigawatts of potential offshore wind in Scotland, we should be thinking now about how we build the wires to transport and then transmit that to the demand centres.”199

153.Insufficient investment in the transmission network, is delaying the deployment of renewable projects. We support proposals by Ofgem to improve anticipatory investment and deliver sufficient investment in grid capacity to unlock additional investment in renewables and to increase the UK’s energy supply at greater speed provided that the impact on consumer bills can be contained.

Role of the Future Systems Operator

154.We heard the UK’s energy regulatory architecture needs reform to enable sufficient investment in the grid and for the transition to net zero. In 2021, the Department for Business, Energy and Industrial Strategy and Ofgem held a joint consultation on a Future Systems Operator. The Government and Ofgem have defined the Future Systems Operator as, “an expert, impartial body with responsibilities across electricity and gas, to drive progress towards net zero while maintaining security and minimising costs.”200 The Government’s response to the consultation said, “[the energy transition] requires a shift to a more ‘whole system’ approach, coordinating the ever more integrated electricity and gas systems, both onshore and offshore, while looking ahead to the emerging markets of hydrogen and Carbon Capture and Storage”.201

155.National Grid Energy Systems Operator agreed that “the Future Systems Operator will have a statutory supporting duty to consider whole system impacts”.202 It added that “it is expected that heat and transport decarbonisation would be part of its responsibilities in system forecasting, strategic network planning and when advising government or Ofgem.”203

156.The House of Lords Industry and Regulators Committee, in its March 2022 report, called for a “Transformation Taskforce” that reports directly to the Prime Minister, to coordinate strategic planning and delivery of the net zero energy transition. The report welcomed Government and Ofgem’s proposals for an independent Future Systems Operator responsible for the planning and design of the decarbonised energy system, but said the Future Systems Operator will need to be given clear direction by a Transformation Taskforce, to ensure technical experts are not being asked to make political decisions.204

157.Simon Virley supported the introduction of an independent Future Systems Operator. He said:

“there are two changes that are needed if we are to get our regulatory system fit for delivering net zero at least cost: first, to align Ofgem’s duties to deliver net zero at least cost to consumers while keeping the lights on; and, second, give the system operator in its independent form, the responsibility for developing that national plan for transmission.”205

158.Akshay Kaul, Networks Director at Ofgem, told us that the Future Systems Operator will evolve out of the National Grid Energy Systems Operator (ESO). He said: “the big change in their remit, as they become the future system operator, is to become a kind of system architect—to plan for the development of the energy system in gas as well as electricity and identify the major strategic investments that need to be made across the piece.” His main recommendation was that the Future Systems Operator should be guided by Government policy, but operationally independent so that it could give “genuinely independent expert advice to Government and Ofgem”.206

159.On 6 July 2022 the Government announced the appointment of a new Electricity Networks Commissioner with a remit to “ to accelerate the delivery of crucial electricity network infrastructure”.207 It also announced the appointment of an industry advisor for Great British Nuclear and an Offshore Wind Champion.

160.The Future Systems Operator will have a key role in encouraging anticipatory investment to remove barriers in the grid transmission network and to enable a growing capacity of renewables to connect to the grid. We recommend that the Future Systems Operator be set up in a way that is operationally independent from Government. It should be set up promptly since decisions are needed in the short term to ensure that the grid is capable of transmitting the increased electricity supply needed for the net zero energy transition.

161.The Government should set out clearly what the Future Systems Operator’s relationship will be with BEIS, Treasury, Ofgem and the recently appointed Electricity Networks Commissioner. It is unclear what role the new Energy Networks Commissioner and industry champions will have in relation to the Future Systems Operator, especially since the Future Systems Operator is intended by the Government to take a ‘whole system approach’. Although the Future Systems Operator should be operationally independent, the Government should be responsible for setting its overall policy remit.

Taxation system

Energy Profits Levy

162.On 26 May 2022, the Chancellor of the Exchequer announced an ‘Energy Profits Levy’: a new 25% surcharge on “extraordinary” profits earned by oil and gas companies. The Government said oil and gas prices had risen substantially, “with oil prices nearly doubling since early last year, and gas prices more than doubling” which had resulted in significant increases in profits.

163.The levy includes a ‘super-deduction’ relief to encourage oil and gas companies to reinvest profits in the UK. This 80% investment allowance will mean businesses will receive a 91p tax saving for every £1 they invest. The Chancellor said a sunset clause would be included in the implementing legislation to end the levy when oil and gas prices return to historically more “normal” levels or by December 2025.208

164.The levy has been criticised for not providing tax relief for investment in renewable energy infrastructure. It has also been criticised by the oil and gas industry for creating uncertainty around investment. For example, a spokesperson from Shell said: “the levy creates uncertainty about the investment climate for North Sea oil and gas for the coming years… and, longer term, the proposed tax reliefs for investment don’t extend to the renewable energy system we want to drive forward in the UK and invest in very substantially.”209

165.While the levy does not apply to the electricity generation sector, the Chancellor said certain parts of it have seen extraordinary profits due to record gas prices. He said the Government would evaluate the scale of these profits and the appropriate steps to take.210 Energy generators criticised the prospect of the Energy Profits Levy being extended to their sector. Energy UK said: “a windfall tax on generators could delay and raise the cost of … investments—at the very time that we need to increase spending to meet the government’s own aims.” It said an extension of the Energy Profits Levy risked the collapse of more suppliers, which can be part of the same company as generators.211

166.The then Economic Secretary expected the Energy Profits Levy to increase investment but did not explain the foundation for this expectation. He said the Energy Profits Levy investment allowance “is available to support capital expenditure on decarbonisation of upstream activities, which could include electrification”.212

167.The Government has introduced an Energy Profits Levy to help pay for financial support to domestic energy consumers. It should explain what effect the levy is expected to have on investment decisions in the North Sea and when it says that the levy could end when oil and gas prices are at “normal” levels, it should quantify what “normal” means.

168.The Government’s decision to announce a possible extension of the levy to electricity generators, before having assessed whether it is justified, may risk affecting investor confidence in renewables. The Government should set out whether it intends to move forward with a levy on electricity generators as soon as possible, to avoid damaging investor confidence further.

Carbon pricing

169.We heard that extending carbon pricing could encourage investment in the energy transition. Professor Sir Dieter Helm told us that more extensive carbon pricing will be required in the UK to make the environmental costs of a transaction or activity part of the decision-making for consumers and investors.213 This would act as a disincentive for polluting activities, and implicitly encourage investment in low carbon alternatives. It aligns with the “polluter pays” principle.

170.The UK has implicit taxes on carbon such as diesel and petrol duties, and it has more explicit carbon pricing through its UK Emissions Trading Scheme (UKETS), a replacement for the European Union ETS.214 Julian Critchlow said: “certainly one of the things that will have to change very much in this transition is the fiscal system that supports it”.215 Mike Tholen, Head of Sustainability at Offshore Energies UK, said that improved clarity in carbon pricing would help to reduce investor uncertainty during the transition. He said, “Norway used a carbon tax-like structure in its oil and gas industry, which led to it doing things more quickly and with more surety than we have done in the UK.”216

171.The Government should set out whether it plans to extend carbon pricing and provide detail on pricing levels and timescales. This could give more clarity to investors and could provide incentives to fund projects necessary for the transition.


67 House of Commons Library, Support for low carbon power, Number 8891, 8 April 2020

68 Ibid.

69 Carbon Brief, ‘Record-low price for UK offshore wind cheaper than existing gas plants by 2023’ (20 September 2019): https://www.carbonbrief.org/analysis-record-low-uk-offshore-wind-cheaper-than-existing-gas-plants-by-2023 [accessed 29 June 2022]

70 Imperial College London, ‘Offshore wind power now so cheap it could pay money back to consumers’ (27 July 2020): https://www.imperial.ac.uk/news/200353/offshore-wind-power-cheap-could-money/ [accessed 6 July 2022]

71 UK Energy Research Centre, ‘Integrating renewables into electricity systems’ (2 November 2020): https://ukerc.ac.uk/news/integrating-renewables-into-electricity-systems/ [accessed 29 June 2022] and Climate Change Committee, Net Zero: Technical Annex (2019): https://www.theccc.org.uk/wp-content/uploads/2019/05/Net-Zero-Technical-Annex-Integrating-variable-renewables.pdf [accessed 29 June 2022]

72 Imperial College London, ‘Offshore wind power now so cheap it could pay money back to consumers’ (27 July 2020): https://www.imperial.ac.uk/news/200353/offshore-wind-power-cheap-could-money/ [accessed 6 July 2022]

73 Q 161 (Lord Turner of Ecchinswell)

74 Department for Business, Energy and Industrial Strategy, EnergyTrends (March 2022): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1064799/Energy_Trends_March_2022.pdf [accessed 1 July 2022]

75 Q 105 (Ed Northam)

76 Ofgem, Cap and floor regime: unlocking investment in electricity interconnectors (May 2016): https://www.ofgem.gov.uk/sites/default/files/docs/2016/05/cap_and_floor_brochure.pdf [accessed 1 July 2022]

77 Ibid.

78 Ibid .

79 Department for Business, Energy and Industrial Strategy, ‘Future funding for nuclear plants’ (October 2021): https://www.gov.uk/government/news/future-funding-for-nuclear-plants [accessed 1 July 2022]

80 Department for Business, Energy and Industrial Strategy, Facilitating the deployment of large-scale and long-duration electricity storage: call for evidence (July 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1003841/large-scale-long-duration-electricity-storage-cfe.pdf [accessed 1 July 2022]

81 Aurora, ‘Long Duration Energy Storage’ (17 February 2022): https://auroraer.com/media/long-duration-electricity-storage-in-gb/ [accessed 1 July 2022]

82 Written evidence from UK Energy Research Centre (ESI0029)

83 Ibid.

84 Q 97 (Ed Northam)

85 Aurora, ‘Long Duration Energy Storage’ (17 February 2022): https://auroraer.com/media/long-duration-electricity-storage-in-gb/ [accessed 1 July 2022]

86 Written evidence from National Grid Energy Systems Operator (ESI0032)

87 Department for Business, Energy and Industrial Strategy, Facilitating the deployment of large-scale and long-duration electricity storage: call for evidence (July 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1003841/large-scale-long-duration-electricity-storage-cfe.pdf [accessed 1 July 2022]

88 Department for Business, Energy and Industrial Strategy, ‘British energy security strategy’ (7 April 2022): https://www.gov.uk/government/publications/british-energy-security-strategy/british-energy-security-strategy [accessed 29 June 2022]

89 Written evidence from SSE plc (ESI0035)

90 Written evidence from SSE plc (ESI0035) and Aurora, ‘Long Duration Energy Storage’ (17 February 2022): https://auroraer.com/media/long-duration-electricity-storage-in-gb/ [accessed 1 July 2022]

91 The capacity market is the current market model for storage. It involves payments to energy suppliers for having extra reliable capacity in addition to their normal electricity supply to ensure there is back up supply when needed

92 Written evidence from SSE plc (ESI0035)

93 Q 212 (Matt Harper)

94 Q 261 (Greg Hands MP)

95 Department for Business, Energy and Industrial Strategy, UK Hydrogen Strategy, CP 475 (17 August 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1011283/UK-Hydrogen-Strategy_web.pdf [accessed 1 July 2022]

96 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]

97 Engineering & Technology, ‘UK plans ‘twin track’ subsidies for blue and green hydrogen’ (17 August 2022): https://eandt.theiet.org/content/articles/2021/08/uk-plans-twin-track-subsidies-for-blue-and-green-hydrogen/ [accessed 1 July 2022]

98 National Grid, ‘What is Hydrogen?’: https://www.nationalgrid.com/stories/energy-explained/what-is-hydrogen [accessed 1 July 2022]

99 Q 214 (Marco Alvera)

100 Q 93 (Ed Northam), 163 (Lord Turner of Ecchinswell) and Q 210 (Marco Alvera)

101 Q 210 (Marco Alvera)

102 Ibid.

103 Department for Business, Energy and Industrial Strategy, ‘Hydrogen for heat: facilitating a grid conversion hydrogen heating trial’ (August 2021): https://www.gov.uk/government/consultations/hydrogen-for-heat-facilitating-a-grid-conversion-hydrogen-heating-trial [accessed 6 July 2022]

104 Q 212 (Marco Alvera)

105 Q 163 (Lord Turner of Ecchinswell)

106 International Renewable Energy Agency, ‘Green hydrogen cost reduction’ (December 2020): https://www.irena.org/publications/2020/Dec/Green-hydrogen-cost-reduction [accessed 1 July 2022]

107 Written evidence from SSE plc (ESI0035)

108 Q 32 (Catharina Hillenbrand von der Neyen)

109 Q 205 (Martin Pibworth)

110 Q 156 (Simon Virley)

111 Q 262 (Greg Hands MP) The bill was announced in the Queen’s speech on 10 May 2022.

112 Ibid.

113 The Climate Change Committee has said “CCS is essential to achieving Net Zero, at lowest cost, in the UK”. 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]

114 National Grid, ‘What is Carbon Capture and Storage’: https://www.nationalgrid.com/stories/energy-explained/what-is-ccs-how-does-it-work [accessed 1 July 2022]

115 Department for Business, Energy and Industrial Strategy,’ Carbon capture, usage and storage (CCUS): investor roadmap’ (April 2022): https://www.gov.uk/government/publications/carbon-capture-usage-and-storage-ccus-investor-roadmap [accessed 1 July 2022]

116 Professor Sir Dieter Helm, ‘The first net zero energy crisis: someone has to pay’ (7 January 2022): http://www.dieterhelm.co.uk/energy/energy/the-first-net-zero-energy-crisis-someone-has-to-pay-2/ [accessed 1 July 2022]

117 59 (Professor Sir Dieter Helm)

118 Q 132 (Ian Simm)

119 Q 132 (Michael Liebreich)

120 Q 166 (Lord Turner of Ecchinswell)

121 Q 104 (Ed Northam)

122 Q 12 (Julian Critchlow)

123 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]

124 HC Deb 19 April 2022, col 49

125 Q 258 (Greg Hands MP)

126 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]

127 Written evidence from the Nuclear Consulting Group (ESI0033)

128 Q 161 (Lord Turner of Ecchinswell)

129 Q 170 (Tom Greatrex)

130 House of Lords Library, ‘Nuclear Power in the UK’ (December 2021): https://lordslibrary.parliament.uk/nuclear-power-in-the-uk/ [accessed 1 July 2022]

132 Investment Monitor, ‘A history of radioactive decay: Who really messed up the UK’s nuclear industry?’ (25 May 2022): https://www.investmentmonitor.ai/sectors/energy/uk-nuclear-industry-blame-power-reactor [accessed 1 July 2022] This price assumes that Sizewell C goes ahead; otherwise, the price would be £92.50/MWh.

133 Sources for intermittency costs as follows: UK Energy Research Centre, Integrating renewables into electricity systems (2 November 2020): https://ukerc.ac.uk/news/integrating-renewables-into-electricity-systems/, [accessed 29 June 2022]. The strike prices for Hinckley and offshore wind are both in 2012 prices (they would both be higher in todays prices). Climate Change Committee, Net Zero - Technical Annex: https://www.theccc.org.uk/wp-content/uploads/2019/05/Net-Zero-Technical-Annex-Integrating-variable-renewables.pdf [accessed 15 July 2022]

135 Department for Business, Energy and Industrial Strategy, ‘Future funding for nuclear plants’ (October 2021): https://www.gov.uk/government/news/future-funding-for-nuclear-plants [accessed 1 July 2022]

136 Ibid.

137 Q 170 (Tom Samson)

138 Department for Business, Energy and Industrial Strategy, New finance model to cut cost of new nuclear power stations (26 October 2021): https://www.gov.uk/government/news/new-finance-model-to-cut-cost-of-new-nuclear-power-stations [accessed 1 July 2022]

139 ‘UK must ‘come clean’ on cost of nuclear to consumers, says infrastructure chief’, Financial Times (23 May 2022): https://www.ft.com/content/945d8b79-ba82-4ebc-894e-73eec3892e46 [accessed 1 July 2022]

140 Written evidence from the Nuclear Consulting Group (ESI0033)

141 International Atomic Energy Agency, ‘What are Small Modular Reactors (SMRs)?’: https://www.iaea.org/newscenter/news/what-are-small-modular-reactors-smrs [accessed 01 July 2022]

142 Q 175 (Tom Samson)

143 Q 258 (Greg Hands MP)

144 Department for Business, Energy and Industrial Strategy, ‘Revenue stream for the nuclear regulated asset base (RAB) model’ (June 2022): https://www.gov.uk/government/consultations/revenue-stream-for-the-nuclear-regulated-asset-base-rab-model [accessed 6 July 2022]

145 HM Treasury, UK Infrastructure Bank: Policy Design (3 March 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966131/UKIB_Policy_Design.pdf [accessed 29 June 2022]

146 HM Treasury, ‘Strategic steer to the UK Infrastructure Bank’ (18 March 2022): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1061776/Strategic_steer_to_the_UK_Infrastructure_Bank_180322.pdf [accessed 29 June 2022]. The Chancellor said examples of relevant opportunities may include “helping to bring forward low carbon energy projects that accelerate the UK’s transition to clean energy and improve the energy efficiency of buildings and homes.”

147 HM Treasury, UK Infrastructure Bank: Policy Design (3 March 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966131/UKIB_Policy_Design.pdf [accessed 29 June 2022]

148 UK Infrastructure Bank, Strategic Plan (23 June 2022): https://www.ukib.org.uk/sites/default/files/2022–06/UKIB%20Strategic%20Plan%202022%20-%20Full_1.pdf [accessed 29 June 2022]

149 Written evidence from Positive Money (ESI0016)

150 Q 104 (Ed Northam)

151 Q 239 (John Flint)

152 Q 242 (John Flint)

153 Q 280 (John Glen MP)

154 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]

155 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]

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

157 Offshore Energy UK, Economic Report 2021: https://oeuk.org.uk/wp-content/uploads/2021/08/OGUK-Economic-Report-2021.pdf [accessed 29 June 2022]

158 223 (Jason Bordoff)

159 Ibid.

162 Q 30 (Christophe McGlade)

163 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]. See also, written evidence from the Department for Business, Energy and Industrial Strategy (ESI0031)

164 Q 179 (Mark Carney)

165 IEA , ‘What does the current global energy crisis mean for energy investment?’ (13 May 2022): https://www.iea.org/commentaries/what-does-the-current-global-energy-crisis-mean-for-energy-investment [accessed 29 June 2022]

166 Q 79 (Dan Monzani)

167 Q 223 (Jason Bordoff)

168 186 (Mark Carney)

169 Q 248 (Greg Hands MP)

170 Q 252 (Greg Hands MP)

171 Q 272 (John Glen MP)

172 Q 274 (John Glen MP). Climate impact disclosures and climate stress testing are explored in more detail in chapter four.

173 ‘Centrica applies to reopen Britain’s biggest gas storage site’ Financial Times (9 June 2022): https://www.ft.com/content/950c866f-434e-4ecd-8cb3-b83f0ecba58c [accessed 29 June 2022]. The North Sea Transition Authority was called the Oil and Gas Authority until March 2022. North Sea Transition Authority, ‘Applications for Gas Storage Licences’ (8 June 2022): https://www.nstauthority.co.uk/news-publications/news/2022/applications-for-gas-storage-licences/ [accessed 29 June 2022]

174 Q 143 (Professor Michael Bradshaw)

175 Q 144 (Dr Jack Sharples)

176 Q 87 (Dan Monzani)

177 Q 225 (Jason Bordoff)

178 Q 253 (Greg Hands MP)

179 Q 92 (Ed Northam)

180 Written evidence from UK Energy Research Centre (ESI0029)

181 Written evidence from Balance Power (ESI0008)

182 Q 156 (Stephen Smith). See also, Q 156 (Simon Virley).

183 Written evidence Roll Royce (ESI0021)

184 Q 169 (Tom Samon)

185 Q 173 (Tom Greatrex)

186 Written evidence from National Grid (ESI0026)

187 Q 199 (Zoisa North-Bond). See also Regen, ‘Onshore wind in England - a chink of light?’ (29 April 2022): https://www.regen.co.uk/onshore-wind-in-england-a-chink-of-light/ [accessed 7 July 2022]

188 Written evidence from National Grid Energy Systems Operator (ESI0032)

189 Health and Safety standards are covered by the Office for Nuclear Regulation rather than the planning system.

190 ‘Renewables projects face 10-year wait to connect to electricity grid’, Financial Times (8 May 2022): https://www.ft.com/content/7c674f56-9028–48a3-8cbf-c1c8b10868ba [accessed 29 June 2022]

191 National Grid Energy Systems Operator, ‘What are constraint payments?’: https://www.nationalgrideso.com/electricity-explained/how-do-we-balance-grid/what-are-constraints-payments [accessed 7 July 2022]

192 Renewable Energy Foundation, ‘Balancing Mechanism Wind Farm Constraint Payments’: https://www.ref.org.uk/constraints/indextotals.php [accessed 7 July 2022]

193 Q 155 Stephen Smith

194 Industry and Regulators Committee, The net zero transformation: delivery, regulation and the consumer, (1st Report, Session 2021–22, HL Paper 162)

195 Written evidence from RWE (ESI0038)

196 Ofgem, ‘Ofgem reveals landmark five-year programme to deliver reliable sustainable energy at lowest cost to consumers’ (29 June 2022): https://www.ofgem.gov.uk/publications/ofgem-reveals-landmark-five-year-programme-deliver-reliable-sustainable-energy-lowest-cost-consumers [accessed 7 July 2022]

197 Ofgem, ‘Consultation on our Minded-to Decision on Anticipatory Investment and Implementation of Policy Changes’ (April 2022): https://www.ofgem.gov.uk/publications/offshore-coordination-early-opportunities-consultation-our-minded-decision-anticipatory-investment-and-implementation-policy-changes [accessed 7 July 2022]

199 Q 201 (Martin Pibworth)

200 Department for Business, Energy and Industrial Strategy, ‘Joint Statement on the Future System Operator’ (6 April 2022): https://www.gov.uk/government/consultations/proposals-for-a-future-system-operator-role/outcome/joint-statement-on-the-future-system-operator [accessed 29 June 2022] The Future Systems Operator would cover Great Britain (England, Scotland and Wales, but not Northern Ireland) since Northern Ireland has a separate electricity regulator and systems operator.

201 Department for Business, Energy and Industrial Strategy and Ofgem, Future Systems Operator Government and Ofgem’s response to consultation (April 2022): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1066720/future-system-operator-consultation-govt-response.pdf [July 2022]

202 Written evidence from National Grid ESO (ESI0032)

203 Ibid.

204 Industry and Regulators Committee, The net zero transformation: delivery, regulation and the consumer (1st Report, Session 2021–22, HL Paper 162)

205 155 (Simon Virley)

206 Q 268 (Akshay Kaul)

207 Department for Business, Energy and Industrial Strategy, ‘New Electricity Networks Commissioner appointed to help ensure home-grown energy for Britain’ (6 July 2022 ) https://www.gov.uk/government/news/new-electricity-networks-commissioner-appointed-to-help-ensure-home-grown-energy-for-britain [accessed 13 July 2022]

208 HC Deb, 26 May 2022, col 451. Also see, HM Treasury, Energy Profits Levy Factsheet (26 May 2022): https://www.gov.uk/government/publications/cost-of-living-support/energy-profits-levy-factsheet-26-may-2022 [accessed 29 June 2022]. According to HM Treasury, before the Energy Profits Levy was introduced, the oil and gas sector paid a 40% headline rate tax on profits consisting of 30% Ring Fence Corporation Tax and 10% Supplementary Charge. The Energy Profits Levy is an additional 25% tax on UK oil and gas profits on top of the existing 40% headline rate of tax, taking the combined rate of tax on profits to 65%.

209 ‘Shell says windfall tax threatens North Sea oil and gas investment’, Guardian (27 May 2022): https://www.theguardian.com/business/2022/may/27/shell-windfall-tax-north-sea-oil-gas-investment [accessed 29 June 2022]

210 HM Treasury, ‘Energy Profits Levy Factsheet’ (26 May 2022): https://www.gov.uk/government/publications/cost-of-living-support/energy-profits-levy-factsheet-26-may-2022 [accessed 29 June 2022]

211 ‘UK generators warn windfall tax threatens green investment’, Financial Times (8 June 2022): https://www.ft.com/content/63c29b10-2aba-45d6-9c53-73f6ae15ebfc [accessed 29 June 2022]

212 Q 275 (John Glen MP)

213 Q 65 (Professor Sir Dieter Helm)

214 ‘Carbon tax would be popular with UK voters poll suggests’, The Guardian (February 2021) https://www.theguardian.com/environment/2021/feb/24/carbon-tax-would-be-popular-with-uk-voters-poll-suggests [accessed July 2021]

215 Q 12 (Julian Critchlow)

216 Q 48 (Mike Tholen)




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