DEPARTMENT FOR BUSINESS, ENERGY & INDUSTRIAL STRATEGY - WRITTEN EVIDENCE ESI0031 – UK ENERGY SUPPLY AND INVESTMENT

Is the Government’s energy strategy delivering investment in an energy supply that is resilient, affordable and in line with achieving net zero emissions? If not, what should be done?

The Prime Minister’s Ten Point Plan for a Green Industrial Revolution and the Net Zero Strategy set out a clear vision for how we will transform the production and use of energy, in a decisive shift away from expensive fossil fuels. The British Energy Security Strategy accelerates this plan, in a series of bold commitments which put Great Britain at the leading edge of the global energy revolution. It will deliver a more independent, more secure energy system and support consumers to manage their energy bills.

Energy is the lifeblood of the global economy. From heating our homes to powering our factories, everything we do depends on a reliable flow of affordable energy. The UK does not face a security of supply issue, but it does face a price issue. We have lots of gas from highly diverse and secure sources, but, as we are part of a global market, the price we pay for gas is set internationally. If we are going to get prices down and keep them there for the long term, we need to maximise home grown energy that is affordable, clean and secure.

• While our strategy marks a decisive shift away from expensive fossil fuels and the transition to a clean energy future, we will continue to need gas to heat our homes and oil to fill up our tanks for many years to come – so the cleanest and most secure way to do this is to source more of it domestically with a second lease of life for our North Sea. Net zero is a smooth transition, not an immediate extinction, for oil and gas.
• Greater energy independence means deploying more renewables more quickly. The growing proportion of our electricity coming from renewables reduces our exposure to volatile fossil fuel prices, but we need to be bolder in removing the red tape that holds back new clean energy developments and exploit the potential of all renewable technologies.  The UK is a world leader in offshore wind. There is 11.3 GW offshore wind already producing electricity in Great Britain, enough to power nearly 10 million homes, with another 8.2 GW in construction. Building on this success, we are increasing our ambition for offshore wind to 50GW by 2030 including up to 5GW of innovative floating wind.
• When we have seen how expensive fossil fuels can hurt British families and businesses, we need to build a British energy system that is much more self-sufficient. So this government will reverse decades of myopia and make the big call to lead again in a technology the UK was the first to pioneer, by investing massively in nuclear power.  The Government’s long-term ambition is to increase our plans for the deployment of civil nuclear power up to 24GW by 2050, around 25% of our projected 2050 electricity demand.  To get us on an up to 24GW deployment pathway, the Government intends to take one project to Final Investment Decision (FID) this Parliament and two projects to FID in the next Parliament, including Small Modular Reactors. As with any Government decision, this will be subject to value for money, relevant approvals and technology readiness.

• Investing in the North Sea, expanding our renewable capacity, and leading in nuclear power will also enable the UK to produce more hydrogen. We will seize this opportunity so that we are not wholly dependent on other countries for this vital superfuel which has vast potential applications - from industrial production to net zero aviation.  We have doubled our ambition to up to 10GW of low carbon hydrogen production capacity by 2030.  This will deliver significant opportunities for UK investment, giving us a secure domestic source of low carbon energy, growing the hydrogen economy and contributing to our legally-binding emissions reduction targets.

• We are making homes and businesses more efficient so they need to use less energy in the first place. Improving the efficiency of our homes could reduce our heating bills by around 20% and reduce our dependency on foreign gas. We are investing over £6 billion on decarbonising the nation’s homes and buildings.

All of these steps will accelerate our progress towards net zero, which is fundamental to energy security. By 2030, 95% of British electricity could be low-carbon; and by 2035, we will have decarbonised our electricity system, subject to security of supply. This is a transition which reduces our dependence on imported oil and gas and delivers a radical long-term shift in our energy with cleaner, cheaper power, lower energy bills and thousands of high wage, high skilled new jobs.

Accelerating our domestic supply of clean and affordable electricity also requires accelerating the connecting network infrastructure to support it. Within this decade, our modern system will prioritise two key features: anticipating need because planning ahead minimises cost and public disruption; and hyper-flexibility in matching supply and demand so that minimal energy is wasted. Electricity networks are a complex system that have been slow in their transformation. We aim to halve the time it takes to get this infrastructure built so we can double the pace.

We will also establish a Future System Operator as soon as practicable to drive our overall transition and oversee the UK energy system and undertaking a comprehensive Review of Electricity Market Arrangements (REMA) in Great Britain, with high-level options for reform set out this summer.

1. To what extent are the causes of recent rises in energy prices likely to be long-term features of global energy markets?

International energy markets are driven by a multitude of factors. Key drivers for price rises in late 2021 included supply catching-up with demand following the pandemic, weather-related disruptions, shortages of liquefied natural gas and now relate to the significant geopolitical uncertainty following Russia’s invasion of Ukraine. At present market conditions are susceptible to shocks from short-term risks and it will take time before global oil stocks are restored. The consensus amongst global analysts indicates higher price levels than we have seen historically over this period to the mid-2020s, with greater uncertainty around long-term price trends.

1. Are the Government’s policies for reducing the impact of higher energy prices on consumers sustainable and in line with long-term energy objectives? b. If not, what alternatives are there?

Over the past decade, the UK has cut greenhouse gas emissions by more than any similar developed country. The Ten Point plan, Energy White Paper, Net Zero Strategy and the British Energy Security Strategy set out world leading plans for how we move away from fossil fuels as the engine of our economy to one based on a clean energy system. These strategies will drive an unprecedented £100 billion of private sector investment by 2030 into new British industries including offshore wind and support around 480,000 clean jobs by the end of the decade. The green industrial revolution is increasing our prosperity, as well as our energy security.   

We are taking action now to protect households from the worst impacts of high prices.  We already had the energy price cap to protect households and moved quickly to announce a package of support in February worth £9.1 billion, including a £150 non-repayable Council Tax rebate for the majority of households in England from April, with comparable provision in the devolved administrations, and a £200 reduction in energy bills from October for all households in Great Britain through the Energy Bills Support Scheme, to be recovered through energy bills and will spread the cost of the energy price shock over 5 years from 2023.

In the long-term as we produce more of our own electricity, families will be much better protected from energy price spikes caused by volatile international fossil fuel markets. At the same time, by getting ahead of the curve in driving down the costs of the latest clean technology, more consumers will enjoy more efficient cars and heating systems sooner. By accelerating the deployment of cheap renewable power, and rolling out further energy efficiency measures, government decarbonisation policies can help household energy bills by ensuring that consumers are less exposed to international fossil fuel prices than they would otherwise have been.

On the global stage, the UK is committing to phase out the use of Russian oil and coal by the end of 2022, and end imports of Russian liquefied natural gas as soon as possible thereafter. It is crucial we work with international partners to maintain stable energy markets and prices. This will help protect UK consumers and reduce the use of fossil fuels globally. Similar to our domestic strategy, we have a dual approach to reduce global reliance on Russian fossil fuels whilst pivoting towards clean, affordable energy.

Additional commitments include working closely with the US on gas, particularly on how we can leverage UK liquified natural gas (LNG) infrastructure to support European supply, and providing a key EU entry point for non-Russian supplies of gas. We are examining our infrastructure to ensure gas flows efficiently between the UK, Europe and the global market through our interconnectors and LNG terminals and to promote gas infrastructure to be hydrogen-ready.

2. What are the main challenges as regards energy supply and storage which public policy must address over the next decade?

Electricity will be the predominant form of energy in 2050.  By 2030, 95% of British electricity could be low-carbon; and by 2035, we will have decarbonised our electricity system, subject to security of supply. We can expect demand for electricity to rise by as much as 60% by 2035 and double by 2050.  However, this transition cannot happen overnight. We will continue to need oil and gas for years to come as part of a smooth transition to various forms of clean energy.

We are adopting a whole system approach which emphasises the importance of integrating low carbon technologies and optimising the electricity system in the interest of consumers. Through the Smart Systems and Flexibility Plan we are removing regulatory barriers enabling electricity storage technology to enter the market and compete against other energy solutions. We are also ensuring low carbon generation can be connected to growing sources of demand in the most efficient manner.

As we move towards net zero the demand for natural gas is expected to fall. Uncertainty remains over exactly how much, and in some of the Climate Change Committee future energy scenarios the amount of imported natural gas needed will remain similar to today. The UK will likely have to increasingly compete with a tight global market during the 2020s to procure these gas imports and adhere to developments in global markets. The gas system needs to maintain sufficient flexibility to meet peaks in demand throughout this transition and we are scoping out the future role gas storage will play within this. 

Gas will remain an important foundation as we forge ahead on lower-carbon technologies and the government is firmly committed to domestic production. The North Sea oil and gas sector has been a major British industrial success story. The sector is good for jobs, energy security, tax revenue to fund public services, and kick-starting a hydrogen economy and carbon capture utilisation and storage (CCUS). As a result of our plans, the North Sea will still be a foundation of our energy security but we will have reduced our gas consumption by over 40% by 2030.  There is no contradiction between our commitment to net zero and our commitment to a strong and evolving North Sea industry. Indeed, one depends on the other. 

3. What are the main international and geopolitical factors and risks affecting the security and affordability of the UK’s energy supply?

The UK’s energy market is integrated with global fossil fuel markets. The UK’s energy supply remains secure thanks to a diverse range of sources at home and overseas. Norway met 29% of the UK’s total gas supply in 2020. The same year liquified natural gas made up 22% of our gas supply, from key suppliers Qatar and the US. The UK supports a liquid, transparent and flexible global natural gas market.

Integration with the global market does mean that we are exposed to the volatility of global fossil fuel prices and sustained high prices in the global markets can impact affordability in the UK. Beyond the invasion of Ukraine, other recent factors contributing to high price volatility include weather related closures (e.g. US hurricanes), recovery from the pandemic and shortage of liquified natural gas.

In the long-term, geopolitical tensions (e.g. the extent of European reliance on natural gas from Russia versus other sources), changing energy systems (e.g. switching from coal to gas), and a gradual reduction in European gas production may impact overall affordability. In our British Energy Security Strategy we committed to phasing out imports of Russian oil by the end of the year, in line with the US, EU and other partners, and to end imports of Russian liquefied natural gas as soon as possible thereafter.  Russian oil imports account for 8% of total UK oil demand, but the UK is also a significant producer of both crude oil and petroleum products, in addition to imports from a diverse range of reliable suppliers beyond Russia including the Netherlands, Saudi Arabia, and the US. The UK is not dependent on Russian natural gas, which made up less than 4% of our supply in 2021.  The UK has highly diverse natural gas supply sources - our single largest source of gas is from the UK Continental Shelf and the vast majority of imports come from reliable suppliers such as Norway. 

Phasing out Russian oil imports over the course of the year will allow the UK more than enough time to adjust supply chains, supporting industry and consumers. The government will work with companies through a new Taskforce on Oil to support them to make use of this period in finding alternative supplies.

1. How should the Government work with international partners on energy policy and respond to greater international competition for energy supply?

The world is acting on climate change. Following COP26, 90% of global GDP is covered by net zero commitments. Action through policies, legislation, regulation and investment will be key if we are to tackle the 75% of global emissions that come from the energy sector. It is crucial we work with international partners to maintain stable energy markets and prices. This will help protect UK consumers and reduce the use of fossil fuels globally. Similar to our domestic strategy, we have a dual approach to reduce global reliance on Russian fossil fuels whilst pivoting towards clean, affordable energy.

As set out by the British Energy Security Strategy we are:

• committing to phase out the use of Russian oil and coal by the end of 2022, and end imports of Russian liquefied natural gas as soon as possible thereafter. The US has made similar commitments.
• building international support to reduce Russian energy revenues. Internationally coordinated action, for example, through the G7 and International Energy Agency is key to support stable markets and to help secure the critical minerals we all need to successfully move to clean energy.
• building on our important partnerships with non-Russian OPEC countries, and the US, to promote market stability through the availability of alternative supplies of oil and gas.
• hosting the first UK-Qatar Strategic Energy Dialogue in May to further deepen our existing energy collaboration.
• working closely with the US on gas, particularly on how we can leverage UK LNG infrastructure to support European supply.
• driving our work with European partners for more efficient trading across our electricity interconnectors, lowering costs for UK and EU consumers.
• providing a key EU entry point for non-Russian supplies of gas. We are examining our infrastructure to ensure gas flows efficiently between the UK, Europe and the global market through our interconnectors and LNG terminals and to promote gas infrastructure to be hydrogen-ready.

To support other countries to make the same transition to clean, affordable, secure energy, the UK is:

• leading the Clean Green Initiative, launched by the Prime Minister at COP26.
• committing to double our International Climate Finance to £11.6 billion over 5 years.
• collaborating with partners to reduce reliance on fossil fuels, from the Powering Past Coal Alliance, the Green Grids Initiative, to nuclear. The UK has decades of experience in uranium enrichment and fuel fabrication to support alternatives to Russian fuel. We are working with like-minded partners at the IAEA and other fora to form an alliance that shapes international regulations to drive SMR deployment. Our North Seas collaboration will accelerate the development of offshore windfarms with links to continental power grids, unleashing hundreds of gigawatts of clean energy into North Seas countries’ electricity systems.

4. What level of investment will be needed in the UK’s energy supply to secure an orderly transition, particularly over the next decade?

To maintain the UK’s energy supply and deliver our net zero ambitions, we estimate that additional capital investment averaging £50-60 billion per year is needed through the late-2020s and 2030s across the economy. A substantial portion of this investment will come from the private sector, providing new opportunities for businesses and investors. Over the next 15 years, we will be working with the private sector to facilitate investment of £280-400 billion in the power system in technologies such as offshore wind, hydrogen, storage and nuclear.  The UK’s electricity transmission and distribution networks will also both require significant expenditure, with an additional £20-30 billion required by 2037 to maintain and reinforce the electricity network. A further £20-30 billion of investment is required to 2037 in other forms of fuel supply, including low carbon hydrogen. We could see resource savings of around £180 billion as a result of our reduced use of oil and natural gas.

1. Is sufficient private capital being invested in reliable and affordable energy sources that are in line with climate objectives, including the commitment to net zero (for example, hydrogen and nuclear)?

BNEF estimate around £22.5 billion of new investment committed in the UK in 2021 across low carbon sectors (renewables, hydrogen, carbon capture and storage, nuclear, sustainable materials, energy storage and electrified transport and heat). A combination of public and private investment will be crucial for any path to net zero. As markets mature, we expect most investment to come from the private sector.

However, market failures mean the private sector alone will not deliver emissions reductions and innovation at the pace required. By building on our strengths, including potential for rapid scale up across the domestic value chain, and coupling this with a strategic approach from government on policy and investment, we can create the right conditions to unlock the significant scale of private investment that will be needed.

At all times we will maintain our security of supply. The Capacity Market is the government’s main mechanism for ensuring security of electricity supply. It does this by supporting long-term investment in building new capacity and maintaining existing capacity, including thermal generation, flexible storage, demand side response, and interconnectors. The capacity auctions held to date have contributed to investment in just under 15GW of new, flexible capacity, securing most of the UK’s needs to meet the forecast peak electricity demand out to 2025/26.

The British Energy Security Strategy includes bold new commitments to supercharge clean energy and accelerate deployment. As set out above, we have set ourselves a new ambition of up to 50GW offshore wind by 2030, including 5GW of innovative floating offshore wind in deeper seas. We will look to increase UK’s current solar capacity of 14GW which could grow by up to 5 times in 2035.

The Contract for Difference (CfD) renewable support scheme is the government’s primary method for driving forward investment in renewables and successfully driving down the cost of deployment. A total budget of £285 million a year has been allocated to the upcoming round, with £200 million for offshore wind, £75 million for emerging technologies, such as tidal and floating offshore wind, and £10 million for established technologies, such as solar and onshore wind. The competitive nature of the scheme has been hugely successful in driving forward investment and achieving costs reductions with offshore wind costs dropping by 65% since the first auction round in 2015. The latest round is our largest ever, supporting an expanded number of renewable technologies. From March 2023, rounds will be held annually.  This will accelerate deployment and improve investor certainty.

To maintain system reliability, intermittent renewables need to be complemented by other low carbon technologies, such as nuclear, hydrogen to power, and power CCUS, as well as flexible technologies such as interconnectors, electricity storage and demand-side response.

We are actively supporting the deployment of these technologies including CCUS-enabled generation through the first phase of the CCUS cluster sequencing process, which is supported through a £1 billion Carbon Capture and Storage Infrastructure Fund and by setting up a £240 million Net Zero Hydrogen Fund. In addition, we have announced the Industrial Decarbonisation and Hydrogen Support scheme to provide £100 million of funding for up to 250MW of initial electrolytic hydrogen projects allocated in 2023, with a further allocation round in 2024. We also have plans to announce a funding envelope for up to 1GW of CCUS-enabled hydrogen in 2022.

The use of hydrogen to generate electricity can reduce reliance on unabated natural gas by providing firm and flexible low carbon generation. It can also provide additional system flexibility if produced through electrolysis enabling electricity demand to be increased or decreased where there is hydrogen storage. Overall, this could contribute to energy security, lowering emissions and system costs. BEIS is currently actioning our Net Zero Strategy commitment to explore the system needs and the case for further market intervention for hydrogen to power.

Nuclear is not just low carbon but also adds critical baseload resilience to our system. The Government’s long-term ambition is to increase our plans for the deployment of civil nuclear power up to 24GW by 2050, around 25% of our projected 2050 electricity demand. The British Energy Security Strategy published in April 2022 sets out measures to put us on this pathway that include:

• The Government will set up ‘Great British Nuclear’, a body tasked with developing a resilient pipeline of new build projects. Government will back GBN with funding to get projects investment-ready and will work with industry to immediately begin scoping its functions. We will announce further details in due course.
• We intend to take one project to Final Investment Decision (FID) this Parliament and two projects to FID in the next Parliament, including Small Modular Reactors, subject to value for money and relevant approvals.
• We will launch the £120m Future Nuclear Enabling Fund in April to award funding to projects which have the potential to be part of our next decisions.
• We will consider the role UK government financing can play in supporting new projects.

We are pushing ahead with the UK’s new nuclear agenda, including building Hinkley Point C, Britain’s first new nuclear plant in 30 years. The Nuclear Energy (Financing) Act that recently received royal assent enables use of the tried and tested regulated asset base (RAB) model for new nuclear projects. Using RAB could support the development of new nuclear by unblocking obstacles to financing projects, and lowering the costs of financing projects compared to the Contracts for Difference model, thereby facilitating investment from pension funds, insurers and other institutional investors and reducing reliance on project developers for finance. Through the Advanced Nuclear Fund, we have committed up to £385 million to develop the next generation of reactor technologies, including up to £210 million to Rolls-Royce SMR Ltd to develop a small modular reactor design that can be made and manufactured in the UK. We have also committed up to £1.7 billion towards a new large-scale power station, whilst progressing negotiations with the developer on the Sizewell C project in Suffolk. In January we entered a Combined Option agreement with EDF on Sizewell C, providing £100m that must be invested in the project to help bring it to maturity, attract investors, and advance to the next phase in negotiations. The Sizewell C project is also subject to an ongoing application for development consent that is entirely separate to the commercial negotiations. 

A reliable power system is not only about having a balanced mix of generation technologies. We also need to ensure that the networks can transport electricity to where it is required in a cost‑effective manner, and to enable crucial system services such as frequency response. Our whole system approach set out in the Net Zero Strategy puts more emphasis on addressing critical system enablers for the power sector.

5. What effect is financial services regulation, and the commitments made by financial services providers to achieve net zero in 2050, having on energy investment?

Investment in line with Environment, Social and Governance (ESG) criteria, including investment in renewable energy and our transition to net zero, has been driven forward by market participants. The demand for sustainable products is high, 70% of the UK public want their money to go towards making a positive difference to people or planet. Global ESG assets surpassed $35 trillion in 2020 and are expected to exceed $41 trillion by close 2022 and $50 trillion by 2025 – covering one third of the projected $140 trillion in total assets under management globally.[1]

At a domestic level, data from the Investment Association finds that 49% of the £9.4 trillion in UK assets were integrating ESG in their investment processes in 2020, up from 37% in 2019[2]. As the market for ESG-related products and services grows, government is taking regulatory steps to facilitate market growth. Regulations are developed in close collaboration with financial services stakeholders, and for the most part are intended to address information gaps to facilitate investment risk assessments and company valuations.

Government is also taking regulatory steps to provide market participants with more of the information they need to feed into ESG-related decision-making processes. This has largely been in response to growing calls from stakeholders, especially financial services stakeholders, and is intended to address data and information gaps and the impact these gaps may have on proper assessment of risk, opportunity and company valuations.

1. Specifically, is regulation getting the right balance between encouraging investment in renewable energy and supporting the green transition, while also ensuring security of supply?

The UK is a leader in bringing greater transparency to green finance and financial regulations. The UK will be the first G20 country to make disclosures aligned to the Taskforce for Climate-Related Financial Disclosures (TCFD) mandatory across the UK economy. Upcoming announcements on UK Green Taxonomy will provide a framework that defines activities that are environmentally sustainable. Ensuring the largest companies, financial institutions and pension schemes are assessing and disclosing their climate-related risks and opportunities will facilitate the flow of capital to low-carbon companies and projects.

According to Wind Europe, nearly £50 billion of investment was leveraged into UK offshore wind sector over 2010-2020, almost half of all European investment in the sector[3]. The North Sea Transition deal is expected to deliver £14–16 billion of additional investment into driving decarbonisation through the UKCS, on top of that required to meet ongoing oil and gas demand. Overall, the high investment levels and increase in the UK’s renewable energy generation capacity have led to a more diversified generation mix in the UK. This directly reduces the UK’s exposure to fuel price volatility and fuel import dependency. 

6. What should the Government do to incentivise and enable investment in, and financing of, reliable and affordable energy that is in line with its climate objectives, including net zero by 2050?

The government’s Ten Point Plan for a Green Industrial Revolution, together with the Net Zero Strategy and the British Energy Security Strategy, is driving an unprecedented £100 billion of private sector investment by 2030 into new British industries including offshore wind and supporting around 480,000 clean jobs by the end of the decade. The UK Government has an important role to play in ensuring a comprehensive financing offer, long-term investment signalling and fit-for-purpose business models coupled with investment from numerous private sources. We need to create an attractive environment to secure the right investment in UK projects, with benefits to UK business and communities.

While we expect most investment to come from the private sector, there is a role for government to incentivise markets and set the long-term signals to enable industries to invest in lower carbon processes and cost-effective solutions at the pace required. Mechanisms such as the UK Emissions Trading System (UK ETS) incentivises and controls the reduction of emissions in a cost-effective way. A cap is set on the total amount of certain greenhouse gases that can be emitted by the sectors covered by the scheme over a given period. This enables the market to drive abatement and incentivise industries to develop lower carbon processes. Examples of other mechanisms have been set out above such as in the answer to 4a.

To deliver the economic transition and support sectors government policy levers are needed throughout the full funding cycle, from emerging technologies through to infrastructure and project finance. Public funds are targeted strategically, with each green technology and infrastructure requiring different types of financial support depending on its maturity.

Early-stage R&D is supported by various government grants.  For example, our portfolio of net zero innovation will provide at least £1.5 billion of government funding to help commercialise clean technologies. The UK Government also has a history of kick-starting the deployment of low carbon solutions. The Contracts for Difference (CfD) renewable support scheme (together with the bespoke CfD contracts signed in the early days of the scheme) have supported 16GW of new low-carbon electricity capacity across all technologies, including around 13GW of offshore wind. Later-stage technologies can reach commercialisation and benefit from investment through the support from the British Business Bank (BBB) and the UK Infrastructure Bank (UKIB) to crowd-in private finance and pull through low carbon technologies and sectors to maturity and scale.

7. What role will oil and gas play in the UK’s energy mix as it transitions to net zero?

Around three quarters of the UK’s primary energy currently comes from oil and gas. Whilst the UK is working to drive down demand for fossil fuels in order to deliver our net zero targets, there will continue to be UK demand for oil and gas for decades. Under the Climate Change Committee’s Balanced Net Zero Pathway, the demand for oil and gas is forecast to reduce from approximately 72 million tonnes of oil equivalent per year (Mtoe/y) and 77 Mtoe/y today to approximately 16 Mtoe/y and 17 Mtoe/y in 2050, respectively. 

While unabated gas-fired electricity generation, in particular, currently plays an important role in maintaining a stable and secure energy supply, the development of clean energy technologies means it will be used less frequently in the future. The government is supporting existing and forthcoming unabated gas plants to decarbonise in the future through conversion to either hydrogen firing or CCUS. Last year, the government (in partnership with the Welsh Government) published a Decarbonisation Readiness Call for Evidence on requirements to ensure all new build combustion power plants, including unabated gas plants, are ‘decarbonisation ready’, such that they have a viable decarbonisation plan through retrofitting either carbon capture or low carbon hydrogen generation technology. BEIS is currently analysing stakeholder submissions and intends to publish a summary response and consultation on further proposals by summer 2022.

The British Energy Security Strategy sets out various actions to support the role of gas in the transition:

• the North Sea Transition Authority plans to launch another licensing round in the autumn, taking into account the forthcoming climate compatibility checkpoint and the need for energy security. This will mean more domestic gas on the grid sooner.
• establishing Gas and Oil New Project Regulatory Accelerators to provide dedicated, named project support to facilitate the rapid development of projects – which could take years off the development of the most complex new opportunities.
• reducing the emissions of our offshore oil and gas further, by driving rapid industry investment in electrifying offshore production, to ensure our gas remains the low-carbon choice.
• remaining open-minded about our onshore reserves. We have commissioned an impartial technical review on shale gas by the British Geological Society to consider any further scientific updates on seismicity that the govt ought to consider. The pause continues to remain in place unless new evidence emerges. Any exploration or development of shale gas would need to meet rigorous safety and environmental protection both above ground and sub-surface.

We will ensure a new lease of life for the North Sea in low-carbon technologies:

• delivering on our £1 billion commitment to CCUS clusters by 2030, with the first 2 sites selected in the North East and North West currently proceeding through Track 1, with the Scottish Cluster in reserve.
• the industrial clusters will be the starting point for a new carbon capture industry with a sizeable export potential, helping to create industrial ‘SuperPlaces’ in the UK.
• in April publishing delivery roadmaps for CCUS and hydrogen to provide clear signals to industry to invest.[4]

1. How should we ensure that these sectors receive sufficient investment to guarantee supply, while not slowing the move to renewable energy sources?

The offshore oil and gas industry is important in terms of its contribution to the economy, jobs, and tax revenues. It supports around 120,000 (direct and indirect FTE) jobs and contributed about 0.9% to the UK’s GVA in 2019.

While the demand for oil and gas in the UK remains, it makes sense to meet our domestic requirements using domestic supply. The UK Continental Shelf is a mature oil and gas basin where production will decline even with continued development. However, as we recognise the importance of the sector to the UK, we intend to continue to support this sector and provide sufficient confidence to investors, in line with the framework of the North Sea Transition Deal[5] announced last year.

The North Sea Transition Deal outlines how the government and sector will work in partnership as it transforms along the road to net zero, including working to reduce emissions associated with oil and gas production, and harnessing the industry’s existing capabilities and infrastructure to aid the development of low-carbon technologies such as CCUS and hydrogen production. Industry recognise the potential and have committed up to £16 billion of investment to drive these technologies forward.             

As part of this work, the government is also developing a Climate Compatibility Checkpoint, which will be applied before any future licensing rounds, to ensure we only license new fields that are compatible with our net zero targets. A public consultation of the design of the Checkpoint was recently concluded and responses are under review.

2. What level of investment will be needed?

Since 2010, over £100 billion has been invested in the UK Continental Shelf; however, investment in oil and gas has generally been in decline. Trade association Offshore Energies UK (OEUK)[6] has reported visibility of £21 billion of potential capital expenditure in company forecasts from 2021-2025 with three-quarters of this total concerning brownfield projects. OEUK also estimates around £2 billion of operating expenditure. Most of these investments are not yet fully committed.

8. What incentives could the Government provide to households and businesses to reduce demand for energy or to improve energy efficiency?

The best way to keep energy bills down is through energy efficiency upgrades so we use less gas. In 2008, just 9% of homes were rated EPC C or above, now it’s 46% - but there is more to do, which is why we have zero-rated VAT for the next five years on the installation of energy saving materials, including insulation and low carbon heating, saving between £1000-£2000 on the cost of an air source heat pump. We will also double innovation funding for the development and piloting of new green finance products for consumers and introduce a scheme under which lenders will work to improve the energy performance of the properties against which they lend. We want to continue making UK homes more comfortable and cheaper to run. Every therm of gas saved grows our energy security and brings jobs to the UK.

As set out in the Prime Minister’s Ten Point Plan, the Energy White Paper, the Heat and Buildings Strategy, the Net Zero Strategy and the British Energy Security Strategy, the government is implementing a suite of policy levers with the objective of improving the energy performance of UK homes and reducing energy demand overall.  To deliver on these commitments we are investing over £6.6 billion over this parliament, including an additional £3.9 billion of new funding for decarbonising heat and buildings, to improve energy efficiency and decarbonise heating.

We will deliver upgrades to over half a million homes in the coming years through our Social Housing Decarbonisation Fund, Energy Company Obligation Scheme and Home Upgrade Grant Scheme, delivering average bill savings of £300.  The Energy Company Obligation has been extended from 2022 to 2026, boosting its value from £640 million to £1 billion a year. This will help an extra 450,000 families with green measures such as insulation.

We are committed to decarbonising heating by 2050 and have set a 2035 date by which we intend to phase out the sale of new and replacement gas boilers, as well as introducing a package of measures to increase deployment of heat pumps to 600,000 installations per year by 2028, and expanding heat networks through the Green Heat Networks Fund and zoning. We are also engaged in incentivising businesses to improve energy efficiency and choose greener options. Some of the government levers include financial levers, such as the Climate Change Agreements Scheme (£200-300 million annually in reduced tax rates) and the Industrial Energy Transformation Fund (£315 million over 4 years between 2021-2025) that supports industrial sites with high energy use to transition to a low carbon future.

Further policy and measures are being considered and include driving greater transparency for larger businesses through mechanisms such as the Streamline Energy and Carbon Reporting and mandatory reporting of climate-related financial disclosures. The Energy Savings Opportunity Scheme encourages further thinking on action that businesses could take. We are also considering setting minimum energy efficiency standards in rented non-domestic buildings that raise the standard of the worst performing buildings, with plans to raise the standards over time and extend to owner-occupier properties. BEIS has sponsored 100,000 free copies of the BS ISO 50005 to support SMEs to adopt a voluntary Energy Management System. This standard provides SMEs with a means to develop a practical, low-cost approach to energy management and therefore reducing industry’s energy usage. Additional support for industry includes an energy advice offering for smaller businesses that will provide trusted advice on improving energy efficiency and decarbonisation, as recently announced in the British Energy Security Strategy (2022).

9. What lessons are there for the UK from comparable countries in terms of securing investment in reliable and affordable energy?

There is a lot of international interest in areas of the government’s Ten Point Plan and the broader Net Zero Strategy. The UK positioning itself as a world-leader on the clean energy transition has delivered results. Examples include: the United Arab Emirates (UAE) launching its £10 billion Sovereign Investment Partnership with the UK and Abu Dhabi’s Mudabala Investment Company, which will support the UK’s clean energy; the Qatar Investment Authority’s £85 million investment in Rolls-Royce Small Modular Reactor; and the Saudi Arabian Basic Industrial Corporation (SABIC) plans to invest £850m to reopen their hydrocarbon cracker at Teesside and explore converting the cracker to run on electricity.[7]

We are taking steps to ensure the UK is at the forefront in implementing the most innovative solutions. For example, through our Memorandum of Understanding with Norway on CCUS we have agreed to share technical knowledge, advice, skills and expertise. Similarly, we will partner with Saudi Arabia on how we can most effectively become leading carbon importers, a shared goal, in a bid to reduce emissions in Europe and the Middle East. This will require collaboration on logistics, shipping, ports and technologies. As the race is on to establish a global hydrogen market, we are deepening partnerships with other likely producing nations in Europe, the Gulf and US, and those that will have high demand such as in Asia. We will use our membership in the Clean Energy Ministerial (CEM) and Mission Innovation (MI) to collaborate on accelerating CCUS technologies and hydrogen. The UK co-leads the MI Clean Hydrogen Mission that aims to enable clean hydrogen end-to-end costs of $2/kg in the most competitive regions by 2030. In 2021, we also joined the CEM’s Hydrogen Initiative as a full member and are increasing engagement in its public-private policy and regulatory working groups.

26 April 2022

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