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How UK energy policy is shaping the Net Zero future
Dec 22, 2021
2021 was an important year for energy sustainability, supported by a series of UK energy policies and plans.
In order to deliver on the government's legally binding 2050 net zero commitment, a series of big UK policy headline announcements were made, including:
- Commitment to decarbonise the UK’s electricity system by 2035 – 15 years earlier than originally planned as part of Britain's legally binding 2050 Net Zero promise.
- UK government commitment to a 78% cut in carbon emissions by 2035.
- Ban on sales of new petrol and diesel cars brought forward to 2030.
- New homes and buildings, as well as those undergoing major renovation, will be required to install electric vehicle (EV) charge points from 2022.
- Plans to introduce a Zero Emission Vehicle Mandate that puts thousands of more zero emission cars and vans onto UK roads.
- New mandatory disclosure requirements making it compulsory for large UK firms to disclose climate-related financial information - set to come into force from April 2022
- Intention to align the UK Emissions Trading Scheme (ETS) to the national net-zero target from 2024 onwards(1), which is likely to mean more organisations face higher carbon prices.
Setting the policy direction for net-zero Britain
In October – just ahead of the COP26 Climate Change Conference, the government published its full Net Zero Strategy and its Heat and Buildings Strategy. These announcements were underpinned by billions of pounds of funding to support green innovation and decarbonisation across the power, transport and heat sectors.
The Net Zero Strategy set out the plan to 'lower Britain’s reliance on fossil fuels by investing in sustainable clean energy, while reducing the risk of high and volatile prices in the future, and strengthening energy security'. The government claimed that this will generate up to £90 billion of private investment by 2030, and support 440,000 green jobs in 2030.
Frameworks for a 'green industrial revolution'
October's big policy launches built on commitments made in the Clean Growth Strategy(2) and 2020's Energy White Paper and 10-point plan for a 'green industrial revolution'. These were expanded by 4 key energy strategies announced earlier in the year.
- Industrial Decarbonisation Strategy – Setting out how factories and industrial hubs across the UK should cut emissions by two-thirds over the next 15 years and by at least 90% by 2050, relative to 2018 levels. Pitched as an 'ambitious blueprint to deliver the world’s first low-carbon industrial sector', the document stated that carbon markets are likely to provide the most cost-effective long-term pathway to decarbonisation. Alternative pathways were presented, dependent on the future availability of carbon capture and storage (CCS) and hydrogen
- Transport Decarbonisation Plan – How the UK will reduce emissions from the transport sector, including policies to support the government's existing commitment to ban new petrol and diesel cars from 2030. This included support for EV charging and a proposed zero emission vehicle (ZEV) mandate, which has now been confirmed.
- Hydrogen Strategy – Lays the foundations for the UK’s future hydrogen economy, which the government claims could represent 20-35% of the UK’s future energy consumption. There was proposed support for new low-carbon hydrogen production, including the development of industrial clusters.
- Smart System and Flexibility Plan – A vision to deliver a smart and flexible energy system that will meet the cost of Net Zero at lowest overall cost, reducing costs to consumers by an estimated £10 billion per year. This means using smart technologies to provide flexibility to the system, to help manage supply and demand.
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Balancing planet and profit during unprecedented market volatility
Wholesale energy prices have experienced unprecedented levels of volatility since the end of summer 2021, with both day ahead/spot and future contracts surging to all-time highs. In the last couple of months, prices have decreased but still remain high compared to a year ago. This period of high energy prices is expected to continue for the foreseeable future (see next section). Energy prices have surged for a number of reasons: A global increase in gas demand following the ease or end of Covid-related restrictions throughout 2021. After the pandemic, economies across the world started to recover. Asian countries like China saw their imports of Liquified Natural Gas (LNG) increase. This resulted in lower LNG shipments to the UK and Europe. On the supply side, the Covid-19 lockdowns pushed some maintenance work from 2020 into 2021 at a time when demand was recovering. In 2021, gas production hit a record low of 363TWh, 47TWh below the previous record low in 2013. Low production was the result of an extensive summer maintenance schedule which saw shutdowns at several major terminals, as well as the Forties Pipeline System which serves a significant proportion of UK gas and oil production. A lack of wind in the summer resulted in higher demand for conventional power. European gas storage in 2021 and Q1’22 remained far below previous years and it’s unclear how these are going to be replenished in the summer given the concerns around supply including the potential suspension of Russian gas flows due to sanctions. The 1,234km offshore Nord Stream 2 gas pipeline, which was designed to double the flow of gas between Russia and Germany (and by extension the rest of Europe) has been abandoned following the invasion of Ukraine. Gas storage in the UK is extremely minimal with capacity at less than 2% of the UK’s annual demand, compared with 22% for other European countries. Whilst the UK is not heavily reliant on gas coming from Russia, it sources almost half it’s gas supply from Europe. Hence, wholesale gas and power prices in the UK are now subject to knock-on-effects from the conflict in Ukraine.
Amidst rising energy costs, digitalisation, growing pressure from stakeholders and increasing regulation, organisations may struggle to define their pathway to a low-carbon future. What can you do to protect your business’ net zero plans from the challenges of volatility? Disruption and volatility are putting organisations under pressure. Digitalisation and new technology developments continue to challenge existing business models. Its increasing dependence on energy and encouraging businesses to drive change to secure competitive advantage. And as customers, employees and shareholders look to engage with companies who understand the importance of decarbonisation, pressure is mounting to prioritise sustainability.