As war rages and energy bills continue to soar, the Prime Minister has promised a UK Energy Supply Strategy in the coming days that sets out how the UK will reduce financial flows to Russia, the UK’s exposure to volatile energy markets and the spiralling costs faced by UK billpayers.
Debate around this strategy has seen the customary split between those who argue that decarbonisation is the problem, and those who say it’s the solution. But when we look at the options, it’s clear that – while the transition to Net Zero will not be the primary objective of the approach – the solutions which meet these objectives will also accelerate our journey to net zero.
What are the options and how do they stack up?
The challenge for Ministers is to ignore the rhetoric and focus on practical choices and actions. While they will rightly prioritise action to secure and diversify supply of fossil fuels and avoid further price escalation, the current energy crisis also means considering a wide range of technology and behavioural options. Assessing those options means comparing their ability to improve energy security and cut bills, the cost of investment required to attain them and the political risk of doing so.
Scoring these options with and without consideration of their alignment to a Net Zero transition clearly shows that choices should be the same irrespective of climate targets, as the green options are now also the biggest, quickest, and cheapest.
*Assumes existing policy remains in place.
Renewables should be central to plans for the medium-term, but do not present an immediate fix.
At around £50/MWh for new projects, renewables could be at least four times cheaper than wholesale electricity prices, and a secure UK source. It’s true that intermittency means they cannot be the sole solution, but electrification of transport and heating, interconnection, and energy storage mean they can play a much bigger role in the future in reducing gas dependence. Construction lead times mean they will not have a substantial impact next winter. But expediting the rollout of renewables means accelerating short-term actions such as easing planning requirements and capacity constraints on auctions and would have little or no cost. In the medium term more wholesale reform of energy markets will be needed, and the thinking on that needs to start urgently.
New UK sources of fossil fuels will be slow, risky and will not significantly reduce prices.
Fossil fuels continue to be essential for energy security, but the opportunities for increased production in the short- to medium-term – even if we leave climate considerations to one side – are limited. Under any plausible scenario UK supplies will be too small to allow the UK to cut itself off from global markets and new offshore supplies would take years to come online. Removing the moratorium on fracking may hold some political attraction. It might please some parts of the Conservative backbenches, and help circumvent a manufactured furore around Net Zero, but it would come with high political cost – and the very different circumstances of the UK compared to the US mean it will never produce enough gas to have any meaningful impact on prices or protect the UK from volatility of global markets. So, while there may be political attraction in removing constraints to fossil fuel production, Ministers should do so in full awareness that it won’t have much impact on their objectives.
Nuclear is essential to the long-term energy mix but won’t help this decade –
Although it can’t compete with renewables on cost, nuclear can provide the baseload power requirements without any intermittency complications. New gigawatt scale nuclear plants are infamously slow to deliver, but Small Modular Reactors have the potential to disrupt the market and have been queueing up to be tested as part of the UK’s energy policy for years. Both need to be backed through approving new sites and getting existing plans to financial close – but won’t make a difference before 2030.
Hydrogen is an important for storage and industry, but is a long-term play and must be green, not blue.
Hydrogen will be a critical substitute for natural gas, at least in industry. But what matters in this new context is not the emissions hydrogen could save, but its role in supporting a more secure, affordable energy system. Here the options are limited. Green hydrogen, made through electrolysis, offers an expensive (for now), but useful way of utilising surplus electricity from renewables, offsetting some of the issues of intermittency. Conversely, Blue Hydrogen, which is created by splitting natural gas into hydrogen (which is burnt for energy) and carbon dioxide (which is stored underground) looks increasingly unviable as it uses more gas less efficiently.
Demand reduction is the cheapest and fastest route off Russian gas and towards lower bills.
Reducing demand is often the overlooked and under-favoured alternative to securing new sources of energy, but it is also the only option for impact at scale in time for next winter. Ministers have long been reluctant to encourage behaviour change – but the simple fact is that the most impactful measures in the short-term are to turn down thermostats (1 degree saves 10% of gas demand), reduce boiler flow temperatures (7-8%), and lag lofts. A focused government and industry campaign on behaviour change can cut bills, cut imports, and cut emissions. In the medium-term, the insulation of our homes and the conversion to high efficiency heat pumps offer transformational change – investing more now in skills, green finance, information and incentives will pay dividends.
To be successful, the Prime Minister’s strategy will need an immediate focus on demand reduction and securing and diversifying supply of energy imports, followed by a big push on insulating and electrifying homes, a rapid acceleration of renewables and paving the way to new nuclear and green hydrogen for the 2030s. Large parts of the strategy will take years to bite, but immediate action to accelerate them is critical. With few levers to pull in the short-term apart from demand reduction, further financial support for low-income households is going to be unavoidable. The Chancellor will need to look again at affordability of such support in the context of unprecedented windfall profits and the impacts of economic war.