The UK is at a crucial political crossroads between state-led investment and market based intervention, argues Aurora Energy Research
The UK must prepare for a “radical transformation” of its electricity system if it is to build a net zero emission economy by 2050, with billions of pounds of annual investment needed to deliver 5GW to 10GW of new renewables capacity each and every year.
Those are the core findings of a new analysis by Aurora Energy Research, which argues the government faces a “stark choice” over which pathway the UK should take to fully decarbonise its electricity system over the next 30 years, between either greater state-led investment and control or a more market-based approach.
The report follows a landmark report by the Committee on Climate Change in April which recommended the UK set in law a target to reach net zero greenhouse gas emissions by 2050, the implications of which would be “radical” for the power sector, according to Aurora.
Although coal power is set to be retured in the UK by 2025 and now accounts for a fraction of the electricity mix, fossil fuels still make up over 40 per cent of UK electricity generation, meaning the country faces a major engineering challenge if gas is to follow coal off the grid.
The new analysis comes amid reports overnight that Prime Minister Theresa May could introduce legislation for a net zero target as early as next week, despite warnings from the Chancellor that reaching the goal could cost the UK £1tr between now and 2050. However, the CCC has said that the costs of achieving a net zero target would be manageable, as long as the transition is accompanied by clear, ambitious long-term policies to spur markets into action.
The UK’s two major political parties have backed setting a net zero target, but both would appear to favour different pathways towards achieving it. The current Conservative government has set aside £557m for renewables technologies through market-based Contracts for Difference auctions. The opposition Labour Party, meanwhile, has signalled it would take a more state-led approach to spur a ‘green industrial revolution’, through nationalising grid operators and setting up a network of national and regional investment banks to mobilise financing for low carbon infrastructure.
But while the UK could choose between different approaches to deliver a net zero electricity system, significant investment in renewables would be key either way, argued Ben Collie, principal at Aurora.
“In any case, bold policy steps will be required if the government wishes to adopt a target of reaching net zero by 2050,” he explained. “Standing still will not be an option.”
Released yesterday, Aurora’s research considers three potential pathways to net zero by 2050: a mix of renewables, nuclear and carbon capture and storage (CCS); high nuclear energy deployment; and high levels of renewables accounting for up to 80 per cent of the UK’s power mix.
However, whichever pathway is taken will require significant investment in scaling up renewables capacity of between 5-10GW per year at an annual cost in today’s money of £4-9bn, according to Aurora. At the same time an overall increase in electricity capacity is likely to be required to meet growing demand for power from electric vehicles and heating.
The government recently set out plans to increase UK offshore wind capacity from around 8GW today to 30GW by 2030, while the CCC has said a net zero target could mean scaling this up further to 75GW by 2050. But with no major CCS projects having gotten off the ground in the UK and the government’s plans for a fleet of new nuclear plants facing serious challenges, some industry insiders think the UK could end up defaulting towards a high renewables scenario – an approach the report predicts would have significant implications for how the grid and the energy market operates.
Excess generation from renewables at times when it is particularly windy or sunny could mean up to 40 per cent of power could go unsold in 2050, it explains, while high levels of renewables could also depress prices to the points that wind farms would only be able to sell power for less than half of today’s prices of around £50 per megawatt hour.
As a result, it could become harder for renewables such as wind and solar to recover their costs in the wholesale and balancing markets, meaning they will need more revenue from other sources to justify the billions of investment they require to be built over the next 30 years.
In order to tackle these issues and scale up investment needed, the government faces key choices over its approach, and investors and developers will need to take a view on how the policy debate is likely to play out and start planning accordingly in order to manage risk, according to the report. “Ultimately, the debate is not whether government should intervene, but in how it should intervene and how much risk it should take from investors,” the study states.
A market-based approach would leave more of the investment risk with developers but provide a financial incentive for them to become more competitive, while a state-led approach – such as through new subsidies, for example – could mean more government risk but also greater control over when, where, and which type of clean energy assets should be built, Collie explained.
“[The government] may decide to try and improve prospects for merchant renewables by moving towards higher carbon prices, ramping up research and development on storage, and investing more in carbon capture development for gas plants,” he explained. “Alternatively it may decide to radically rethink the way electricity is paid for and prepare for a system where most generator revenue comes from centrally-procured contracts instead of the wholesale market.”
In a country already divided by Brexit, whoever takes over as the new PM this summer will face huge political challenges and the prospect of economic and constitutional crisis. Yet decisions over how to reach a net zero goal and decarbonise the electricity system will still need to be taken, and quickly.
As the government reportedly preps a net zero target for 2050 that would provide one of the most ambitious decarbonisation goals of any developed economy in the world, the stark divide in British politics may well go to the very heart of the UK’s decarbonisation policy choices.