Written evidence submitted by Greenpeace UK (FEI0082)

Executive Summary

1. The climate emergency, the failure of nuclear power, and dramatic price drops of renewables requires that over the next decade the UK’s energy system must be realigned to deliver approximately 80% power from renewables by 2030. 

2. Significant advances in grid flexibility and energy system efficiency must also be supported.

3. Green investment in the UK has fallen significantly in recent years, largely due to the Government’s policy support being halted for onshore wind and solar. The Government must be required to publicly justify how its block on onshore wind can be squared with the fact that it is the least expensive form of new power generation.

4. Contracts for Difference (CfD) for future renewable projects would unlikely need to add to the cost of power, but merely be a risk mitigation device. Risk mitigation support is vital for renewables as they move towards delivering most of the UK’s power needs, since a stable revenue needs to be guaranteed, even when on average below market price.

5. Ongoing innovation funding for renewables is also required.

6. The Government should urgently rethink providing any further financial or policy support for new nuclear power - including via a Regulated Asset Base model, which increases risks to bill-payers - unless they can provide a clear demonstration of need and value for money, set against the alternatives.

7. The Energy White Paper should thoroughly reappraise the founding assumptions of the UK’s energy policy. The profound changes that have taken place in renewables costs, digitisation, storage and transport technologies, as well as the ever-growing urgency of decarbonisation, must all be properly factored into future decision-making, which would also drive greater investor confidence. The White Paper should not be a ‘quick and dirty’ internal government review but involve wide consultation on the best way forward.

How do recent investment decisions on nuclear and trends in low carbon investment affect the UK investment outlook for energy infrastructure?  Is there a case for changing the Government’s current approach to delivering a low cost, low carbon energy system?

8. The last few years have seen the costs of wind and solar fall precipitately, with a sharp uplift in anticipated levels of delivery. The same pattern has happened with costs of battery storage and digitisation/data management as applied to the power system.

9. In contrast, UK energy policy since 2008 has led on the assumption that cheap nuclear - potentially with carbon capture and storage (CCS) - with renewables added, would be the foundation stone of UK energy security and decarbonisation. The former technologies have failed to deliver, and show little prospect of so doing. Thus the underlying assumptions of UK energy policy have been upended.

10. Under the existing energy policy, the Government has made a number of economically irrational decisions, including giving EDF and CGN a strike price of double the market price for electricity for Hinkley. This deal encouraged other nuclear players, such as Toshiba and Hitachi, but it has since become evident that they are unable to deliver Moorside or Wylfa, despite enhanced financial support on offer. They have now essentially withdrawn from nuclear new build globally. Reactor vendors are now few, their products expensive or controversial. Small modular reactors are at prototype stage, if that.

11. This means that over the next decade - which is very critical for action on climate change - the only available cost-effective pathway is through the rapid and ambitious rollout of renewable power, combined with making the energy system (not just power system) as efficient and effective as possible at using that power. Reports from the National Infrastructure Commission and Climate Change Committee are aligned with this analysis. Not making this shift to a new energy paradigm risks losing growth and associated economic opportunity - as well as risking not delivering on climate commitments.

12. The Government’s approach to energy policy requires a radical and swift change in direction, in line with this new reality. The priorities must be to deliver around 80% UK power through renewable sources by 2030, to make renewables a compelling investment proposition, to maximise UK innovation in low carbon technology, and to boost new markets for flexibility and standards for efficiency in vehicles and appliances. 

How could the ‘nuclear’ gap be filled?

13. See relevant analysis in Greenpeace’s report: Filling the Energy Gap[1]

14. The report outlines what the UK’s 2030 power system should look like. It builds on the most recent Climate Change Committee power sector scenario[2], adjusted to go beyond the Climate Change Act targets for greenhouse gas reduction which are no longer adequate (the process for revising them, likely via a ‘net zero’ target, is already in train). The report also accounts for the low expected levels of CCS, tidal and bioenergy, in addition to the failure of nuclear to deliver. Further the electrification of heat and transport needs to happen at a much faster pace - including a phaseout of new petrol and diesel cars and vans by 2030 - which is also factored in.

15. Using the CCC scenario meant accepting their estimates for power demand. Whilst there will clearly be growth in demand driven by more rapid electrification of heat and transport, the long term trajectory of ‘traditional’ power demand has been downwards for over a decade. This needs to be sustained by adopting high standards for energy efficiency in appliances and air conditioning, and in particular the efficiency of space heating in houses using electricity as a heat source.

16. However, even with best efforts on demand reduction, large volumes of renewables still need to be delivered in the 2020s. This means unlocking onshore wind and solar, whilst boosting offshore wind to a much greater degree than currently planned in the Offshore Wind Sector Deal. These technologies will need to deliver around 80% UK power in 2030 - a tripling from current levels - simply because there are no other plausible options that are not more expensive or more carbon-intensive (alternatives may, indeed, be both).

17. Specific policy requirements are as follows:

●        Offshore renewables funding - Money should be made available to guarantee contracts equating to at least 2.5-3GW of offshore wind power per year, compared to Government expectations of only 2GW per year. This will ensure the pipeline is established for the rapid expansion required over the second half of the next decade. If the additional money released for the spring auction pot is ultimately not required because of price drops, it would not be a problem. In the following CfD auction, ideally earlier than spring 2021 as currently expected, installation rates must be expanded further to reach around 4.5GW per year by 2030.

●        Offshore wind target - A target of around 45GW by 2030 is needed. The current Government target of 30GW by 2030 is wholly inadequate given the failure of the new nuclear power programme. Clear priority should be given to offshore wind as a use of seabed, ahead of oil and gas, aggregates or fishing, and the Crown Estate and Crown Estate Scotland should seek to designate substantially more seabed than currently proposed in its next licence round. The Ministry of Defence should be mandated to procure offshore wind-compatible radar technology in their new purchases. A strategic approach to grid infrastructure at this level of deployment would save costs and should reduce planning delays. Extensive innovation funding should also be made available for floating offshore wind, potentially from the £557m pot. This would assist with reducing environmental impacts, made possible through floating turbines located further away from the shore and seabird feeding grounds. The Westminster and Scottish Governments should also take a more proactive approach in assessing any environmental impacts of offshore wind, and ensuring siting takes place appropriately to minimise risks to nature, including birds and marine life.

●        Solar - A target of at least 40GW by 2030 is required. Money should be made available, as necessary, from the £557m to enable larger scale solar projects to bid for auctions this year. Clearly many places will be inappropriate for large scale solar development given protection of the landscape is also a priority. Rooftop solar should therefore be significantly expanded. This would benefit UK smart grid capability as well as decarbonisation. Expansion should be achieved through sufficient incentives to generate private investment, including mandating a floor price for the new export guarantee, equivalent to or greater than the average annual spill price paid to large generators. The original export guarantee and Feed in Tariff scheme should also run until the new scheme begins.

●        Onshore wind - A target of at least 30GW by 2030 is required. This can be delivered through giving the immediate go-ahead to the 4GW of onshore wind that is ready to build, and confirming repowering of all existing sites. Beyond that, the Government must allow onshore wind to bid in CfD auctions where planning permissions are obtained, and alter planning law to enable small scale onshore wind projects to continue in England where there is community acceptance.

18. Some commentators argue for increased reliance on gas power to fill the gap to 2030. However, this approach is both incompatible with the UK’s climate goals and would deliver poor value for money compared to increased supply from renewables and flexible grid technologies.

19. Technologies like storage and interconnection that accommodate variable renewables are coming through strongly, ensuring that renewable power can contribute to UK energy security.

20. Key flexible technologies are:

●        Interconnection – sharing power with the European mainland when we have excess, and receiving some in exchange when we’re short

●        Storage – as the name suggests, storing power for use at another time. Batteries are becoming a popular form of storage, although there are others

●        Demand response or DSR – shifting usage from locations where there is a shortage of power to times where there is an abundance, and iron out peaks

21. By 2030, Imperial and Poyry estimate deployment may, in a scenario of high levels of renewables output, need to be as high as 15GW for interconnection, 38GW of storage and 18GW of DSR[3]. Imperial suggest that levels of DSR and storage may in practice need to be only a quarter of these levels, since high levels of deployment in one technology would mean less of others is required. A 15GW interconnection level looks more or less on track, as Crown Estate anticipate around 16GW by 2025 so could clearly be even greater by 2030 with a concerted push[4]. Storage will require a significant lift compared to business as usual, although it is expanding rapidly with 7GW of battery storage alone already in the pipeline[5]. This is 3,500 times more than was deployed just six years ago - which gives an indication of the pace of technological growth and expansion. DSR level deployment to this high level of 18GW looks challenging, although the Association for Decentralised Energy identified the potential for nearly 10GW from the business sector alone[6]. More will come from greater use of electric vehicles, through vehicle to grid technology, and also from smart technology in the domestic sector.

22. Therefore, there are strong grounds to think that even the highest required level of deployment of these flexibility technologies is achievable. Notably National Grid have just announced that they intend that the grid will be able to operate a zero carbon power system by 2025, whenever there is sufficient renewable generation[7].

Are there particular technologies which are more – or less – attractive to investors under current arrangements?

23. The technology that has fared best is offshore wind, as a result of Government deciding to back it at an early stage of development, and thus support higher initial costs that have subsequently facilitated a dramatic price drop.

24. In general, green investment in the UK has fallen. According to Bloomberg it fell by over 50% in 2017 and was lower than any year since 2008. This was a result of Government policy support being halted for onshore wind and solar notwithstanding their falling prices.[8] Onshore wind is now the cheapest form of new power generation.

25. Although the current government’s manifesto was clear regarding the fact that onshore wind would be excluded from CFD auctions, many disagree with the policy, from the Committee on Climate Change, to a range of backbench MPs, investors (e.g. Richard Nourse) and constituents. The Government must be required to publicly account for the tradeoff between this onshore wind block vs lowest cost decarbonisation.

How has Government policy improved the UK energy investment environment over the last three years?

26. The only power source that has seen improved investment prospects appears to be offshore wind. Nuclear projects have been offered far better terms than other projects but still cannot deliver. CCS is bound up in uncertainty. Onshore wind and field-scale solar are effectively blocked.

27. Policy support, e.g. the capacity market, has enabled the growth of some small scale gas generation. There is no case for bigger incentives bearing in mind the need to move away from fossil fuels almost entirely over the next decade.

What role should the Government play in providing financial support and sharing risks for new energy infrastructure?

28. After a difficult formation period, CfD contracts are starting to work for large scale renewables. They were implemented when there was a need for large-scale delivery of renewables under EU law, and a climate need for new technologies to deliver emissions reduction.

29. The expectation is that CfDs for future renewable projects would not need to add to the cost of power but merely be a risk mitigation device. Such risk mitigation support is vital for renewables as they move towards delivering 100% of the UK’s power needs, since a stable revenue needs to be guaranteed, even when on average below market price.

Ongoing innovation funding for renewables is also required.

30. The Government is clearly thinking about a Regulated Asset Base (RAB) approach for new nuclear. This approach would place consumers at significant financial risk, is difficult to cost and implement, potentially undermines the incentive on developers to deliver projects on time or to budget, and would undermine a competitive market framework for UK power delivery (a logic being applied to renewable power generation).

31. Given existing cost, reliability and deliverability issues of nuclear, such an approach does not appear in any way to be justified. There is even less justification given the viability of large scale, reliable renewable power generation that does not entail these risks. Unsurprisingly, the idea of a RAB approach has already proven popular with the nuclear industry. EDF boss Humphrey Cadoux-Hudson told the Financial Times that he is in talks with dozens of private investors over financing Sizewell C, the French giant’s post-Hinkley nuclear project in Suffolk – and that the RAB model could be pivotal[9].

32. The Government should therefore urgently rethink providing any further financial or policy support for new nuclear power - including via a RAB model - unless they can provide a clear demonstration of need and value for money, set against the alternatives. So far, the Government have refused to produce this for proposed new nuclear projects. Meanwhile the supposed value for money assessment at the time of approval of Hinkley was weak on detail and now contains completely outdated costs for renewable power to compare to Hinkley’s cost.

33. Some of the problems with the RAB model are outlined further below:

●        Place consumers at financial risk: The RAB approach has been described as an “open cheque book” for developers[10], as consumers could be locked into paying the costs of a project going wrong – like construction taking longer than planned, or prices spiraling – indefinitely until it’s complete. Nuclear power project costs are notoriously unpredictable. Construction schedules often overrun while construction costs are often higher than originally budgeted for[11]. Under most RAB models these over-runs would be passed on to consumers. In South Carolina, the abandonment of nuclear reactor construction at Summer left consumers having to pay $9 billion without any resulting power, and the abandoned plant was responsible for 18% of their electricity bills[12].

●        Difficult to cost and implement: Economics Professor Jon Stern at City University said he has “no idea” how the approach would be applied to nuclear projects reported to cost in the region of £20bn[13], over four times more than the controversial Thames Tideway Tunnel. Further, implementation is complex[14]. The rate of return on the investment is generally recouped by charging consumers from the start. Whether a fair rate of return is paid out from people’s pockets relies heavily on the regulator correctly estimating some fairly opaque future scenarios, such as construction length, supply chain costs and prevailing economic conditions. Dieter Helm highlighted a number of open issues including the “very severe lobbying pressures” any regulator would come under when making its RAB evaluations[15]. Helm concludes that the RAB doesn’t address fundamental issues about its cost competitiveness with other technology like wind and solar, or what do with all its radioactive waste.

What further steps should the Government take to increase investor confidence in the UK energy sector?

34. The government has the opportunity in the upcoming Energy White Paper to make decisions that are based on current costs, technological developments and the imperative flowing from climate science. It is critical government bases its policy on a transparent and rational approach that gives confidence in the underlying thinking (e.g. cost-effective decarbonisation and system security) as well as the specific policy instruments (e.g. CfDs) so that risks of sharp policy change are seen to be minimal.

35. The Energy White Paper should be an opportunity to thoroughly reappraise the founding assumptions of energy policy which have not been revisited since 2008. The profound changes that have taken place in renewables costs, digitisation, storage and transport technologies, as well as the ever-growing urgency of decarbonisation, must all be properly factored into future decision-making, which would also drive greater investor confidence.

36. Thus, to be robust enough, the White Paper should draw upon advice, from experts beyond Whitehall, of the latest low-carbon, smart and storage developments, their accompanying cost reduction curves, and broader global market trends. The paper’s scope should extend across the heat, transport and heavy industry sectors, as well as power - and taking an overview of how the system works together as a whole, particularly in terms of flexibility and security. The goals of delivering ‘net zero’ emissions before 2050 and maintaining cost-effective energy security must be front and centre.

April 2019