Written evidence submitted by the Institute for Public Policy Research (IPO0062)

Introduction

1. Net zero is a huge structural shift for the UK and the global economy, one that could create winners and losers. The transition requires an advanced economy such as the UK to leverage its existing productive strengths in new ways, especially when it comes to the manufacturing and energy sectors. It is also a significant growth opportunity - the International Energy Agency estimates that global race to net zero is worth $4.7 trillion per year by 2050. Truly capturing the potential jobs and export benefits in the UK requires policy makers to move beyond the bare minimum, away from correcting the occasional market failure and toward actively shaping the new markets that are emerging in products needed for net zero value chains (‘green products’).
2. A green industrial strategy can leverage the UK’s existing strengths in manufacturing and services towards new specialisations in green products. The ultimate aim of achieving energy security cannot be pursued with a shortsighted approach that takes existing specialisation as given and focus simply on importing technologies. Energy dependency is just another aspect of technological and manufacturing dependency. A green industrial strategy should look at reducing the risks associated with relying on imported net zero products. This can be done through an upgrade of current economic specialisations together with an expansion of existing manufacturing capacity in net zero technologies. This approach can bring a significant series of long-term socio-economic benefits. It can ensure that growth in these specialisations is shared fairly between workers and businesses and that regions across the UK can benefit.

The UK’s strengths and competitive advantages

1. A comprehensive green industrial strategy should look at areas where the UK could develop new strengths in response to the existing path dependencies created by net zero targets. Countries often develop new competitive strengths, and this usually happens in products or industries that are related to existing strengths[1]. Often new specialisations emerge in products that are used as inputs by established industries within an economy. Specialisation in innovation and technology development in related industries is another important factor in developing new strengths[2]. There is also the “home market effect” – countries develop export specialisms in products for which a strong domestic market exists, an effect that has been demonstrated in the UK[3].
2. Trade-related revealed comparative advantage (RCA) metrics, which show an economy’s productive strengths at the product level, suggest that the UK is relatively more specialised in services than manufacturing. However, this does not mean that UK manufacturing is insignificant. In 2023, the UK’s manufacturing sector was the 8th largest in the world in terms of gross value added and the 14th largest exporter of goods[4]. 
3. Researchers at LSE have developed the Green Transition Navigator[5], a set of metrics that show an economy’s competitiveness in green products based on import and export data. By analysing this data for the UK, IPPR has found that the UK is competitive at exporting 49 out of 143 products (34%) within the dataset that could be identified as relevant to net zero supply chains[6]. 26 of these products are equipment used in energy and environmental monitoring, measurement, and analysis. These have applications in the electricity grid, industrial decarbonisation, and energy efficiency in a domestic and non-domestic context. Other strengths include electric rail locomotives and turbines that can be used in geothermal and hydroelectric power plants.
4. Current UK manufacturing specialisations include automotive and aerospace, which gives the UK an edge in developing domestic capacity in zero-emissions transport. This existing specialisation has paved the way for recent investments in battery manufacturing for electric vehicles across the country. For renewable energy, there is potential for a domestic supply chain expansion in wind turbine manufacturing given the UK’s forthcoming demand for offshore wind power, together with previously cumulated experience in installation and advanced port infrastructure.
5. Heat pumps are another area of potential strength. According to the government’s own analysis, the UK already has a significant presence of manufacturers of air conditioning units which are built with the same technology used for heat pumps. With a target of 600,000 heat pump installations, there is potentially a large domestic market and an opportunity to innovate in order to produce heat pumps that are tailor-made for easy installation in the UK’s housing stock.
6. Existing comparative advantage in the production of equipment used in energy and environmental monitoring, measurement, and analysis could be nurtured through policies that coordinate the development of these activities with the UK’s specialisation in digital services, to develop advanced energy and emissions monitoring and management systems for households, energy producers or heavy industry.

Net Zero supply chains

1. Domestic manufacturing capacity in green products is often underplayed when discussing net zero policies. Without a reliable supply of wind turbines, solar panels, storage batteries and electric cables, the objective of decarbonising the energy sector would be severely impaired. Electrification via renewables is the key enabling factor for the decarbonisation of the rest of the economy. As the global demand for these products increases, developing solid domestic supply chains for net zero technologies becomes a matter of energy security.
2. A cost-saving strategy based on importing net-zero products is destined to fail, due to global supply-chain shortages and competition for scarce wind equipment, which could further increase with current geopolitical tensions affecting global trade. The case for relying on imported goods encompasses other hidden costs such as a structural technological and energy dependency from abroad – becoming a matter of national security – and a reduced exchange rate stability due to the further deterioration of the UK’s current account balance.
3. Manufactured technologies are also essential for reducing emissions in other harder-to-abate sectors. In residential thermoregulation and heavy industry, the availability of heat pumps and electrolysers is essential to decarbonise heating processes. Reducing emissions in the transport sector fundamentally depends on the substitution of internal combustion engine vehicles with electric vehicles.
4. The International Energy Agency (IEA) shows (figure 1) a global lack of manufacturing capacity – including announced projects – for wind turbines and heat pumps (a manufacturing gap towards achieving the 2030 NZE scenario of 66 per cent). Global supply of solar PV and batteries are expected to be sufficient but remains highly concentrated in Asia.

Figure 1: Projected throughput from existing and announced manufacturing capacity relative to Net Zero Emissions by 2050 Scenario deployment needs in 2030. Source: IEA (2023), The State of Clean Technology Manufacturing – November 2023 Update.

5. China has established itself as the leading manufacturing nation for most of these technologies, with a predominant concentration in solar PV, wind and electric batteries (which is turning into a competitive advantage in the electric automotive industry, as the recent rise of BYD testifies). The IEA estimates that, on a global scale, China accounts for 79 per cent of solar PV manufacturing, 64 per cent of wind manufacturing and 76 per cent of batteries manufacturing. Relying on Chinese imports for the supply of these products is a shortsighted approach that does not take into account limitations deriving from transportation costs, potential geopolitical tensions and trade-restricting measures, abuse of dominant position with its implied risk in price increases. For wind turbines in particular, China has very little penetration in UK markets due to the extremely high transportation costs associated with moving ever larger blades and turbines over land and sea.
6. In recent years, the US and the EU have reacted to the risk of being completely dependent on China for the availability of such green products. In 2022, the US launched its Inflation Reduction Act (IRA), a set of policy measures (mostly tax credits) aimed at spurring domestic manufacturing in clean-energy technologies. In 2023, the EU released its Net Zero Industry Act (NZIA), targeting a series of green products (wind, solar, batteries, electrolysers, grid technologies) with direct supply measures (grants and subsidised loans) from both EU financing institutions (EU Innovation Fund, European Investment Bank) and national sources, following the relaxation of state aid rules for net zero-related investments. At the same time, by failing to develop its own green industrial strategy for net zero supply chains, the UK is left out of this ‘global green race’, as highlighted by IPPR.
7. The UK has achieved substantial success in lowering domestic emissions – since 1990 they have fallen by 46 per cent, the most in the G7. However, it has not managed to match these environmental achievements with corresponding economic advancements. IPPR research shows that the environmental goods and services sector’s contribution to the UK’s GDP (3.9 per cent) is roughly two-thirds the sector’s contribution to the EU’s GDP (5.8 per cent). Furthermore, the UK employs fewer people in renewable energy as a proportion of its working age population than most other European countries. Finally, UK public investment commitments into low-carbon technologies are among the lowest in the G7.
8. The UK has ambitious plans for the installation of renewable energy, aiming to fully decarbonise electricity generation by 2035. The UK government set a 50 GW target of offshore wind installed capacity by 2030 (up from the current 14 GW). At the same time, in September 2023 government seemed willing to lift its de facto ban on onshore wind introduced in 2015, but barriers for onshore projects remain still very high. Potential for onshore wind installation is underexploited, with industry associations such as Renewable UK making recommendations for a 30 GW target by 2030 (an extra 15 GW compared to the 2022 level). Moreover, the UK government has set the objective of reaching 70 GW of solar installation by 2035, up from the 15.5 GW currently installed (Q3 2023). These targets require an abundant availability of wind and solar equipment.
9. The UK’s weak specialisation in solar and wind manufacturing technologies translates into a situation of significant foreign dependency. It currently lacks any relevant manufacturing capacity in the solar PV supply chain. One example is the case of Oxford PV, an Oxford University spin-off pioneering perovskite photovoltaics and funded by public entities, which nonetheless established its manufacturing site in Germany. Even in the wind sector, where the UK leads the world (outside China) in offshore installation, it displays weak specialisation and insufficient manufacturing capacity, with the modest exceptions of blades (ranking 5th in Europe), offshore foundations and cables (ranking 4th in Europe). At the moment, no single manufacturing facility of wind turbine nacelles exists in the UK. As illustrated in figure 2, this is peculiar to the UK, whose manufacturing capacity in the key components of the wind supply chain is lower than in other European competitors (Germany, Denmark, Spain and France). With such lower manufacturing capacity – both actual and expected – the UK domestic supply chain is far from adequate to support the country’s ambitious deployment targets.

Figure 2: Distribution of manufacturing capacity among European nations for the five most important components of the wind supply chain. Source: Forthcoming IPPR publication.

10. Without expanding domestic manufacturing capacity, the government’s ambitious plans for decarbonising electricity generation could at best become a missed opportunity for reinvigorating the UK industrial sector. At worse, they could fail altogether, if critical supply-chain shortages materialise at the global level (as the recent shipping issues in the Suez Canal are demonstrating), compromising the UK’s energy security in the long term.
11. The UK cannot just rely on “buying” green products without a significant dose of domestic “making”. It should exploit the challenges related to climate change and energy insecurity to build dynamic comparative advantages in activities that bring long-term strategic autonomy as well as socio-economic benefits, often overshadowed by the emphasis on short-term financial costs.
12. On-shoring strategic segments of net zero manufacturing supply chains allows the possibility of localising investments in less affluent areas to reduce regional imbalances, creating qualified and well-paid jobs. Particularly in offshore wind manufacturing, investment by major OEMs brings positive economic spillovers through induced complementary activities (e.g. business services, specialised suppliers, etc.) – the Offshore Wind Industry Council estimates that with an adequate development the wind manufacturing supply chain can generate £92 billion of gross value added by 2040.

Industrial policy and green industrial strategy

13. What is needed is a comprehensive green industrial strategy that goes beyond the piecemeal approach adopted so far. A green industrial strategy can be defined as “an economy-wide plan that brings together specific industrial policies to achieve net zero objectives”. IPPR has recently elaborated a conceptual framework through which it is possible to conceive and design policies supporting the development of strategic supply chains (see figure 3).

Figure 3: A conceptual framework for a new industrial strategy for policymakers elaborated by IPPR. Source: Alvis S, Dibb G, Gasperin S and Murphy L (2023) Market making in practice, IPPR.

In particular, IPPR’s industrial strategy toolkit distinguishes between industrial policies affecting how goods enter the market (‘production’) and industrial policies influencing how and for how much goods are demanded (‘purchasing’). Among the first we have cost measures (such as subsidies on operating and capital expenditure, low-cost financing and tax credits) or rules measures (such as product standards and competition policies). Among the second we can list again cost measures (such as procurement, tariffs, price controls) or rules measures (such as procurement standards). Within a comprehensive industrial strategy, those ‘vertical’ measures need to be coordinated with horizontal ones (‘Economic Conditions’) pertaining to skills, infrastructure and research.

14. IPRR’s framework can be applied to different sectoral green industrial strategies. Here we provide an application of this approach to the UK wind sector. Contracts for Differences (CfDs) for the development of wind farms can be conceived as both cost and ‘rules purchasing policies’, while OWMIS and FLOWMIS grants to encourage investment in wind manufacturing become ‘cost product policies’. Investment in port infrastructures and installation vessels are equivalent to ‘economic conditions’. However, only when they designed and coordinated within a comprehensive industrial strategy, these policy measures can maximise their impact towards achieving net zero and economic objectives. For instance, CfDs have mostly focused on deployment objectives to be achieved via price incentives. Instead the UK should be considering conditional CfDs where bonus or top-up payments could be offered to developers who were able to guarantee non-price benefits such as UK manufactured content, local employment, fair pay and access to unions. At the same time, the effectiveness of OWMIS and FLOWMIS schemes falls short of their actual potential due to their temporary duration and lack of coordination with CfDs and other financing instruments offered through the UK Infrastructure Bank (UKIB) or the British Business Bank (BBB).
15. An effective green industrial strategy should also imply a symbiotic collaboration between public entities and private industrial players, co-investing to establish and expand net zero supply-chains in the UK. For instance, IPPR has proposed the introduction of a National Investment Fund (NIF) that would provide equity financing for investments aimed at establishing or expanding manufacturing capacity in key net-zero technologies. In addition, the introduction of a state-owned energy company could facilitate the coordination of investments across the entire supply-chain of net-zero products, ensuring original equipment manufacturers rely as much as possible on British Tier-2 and Tier-3 suppliers. The state-owned energy company could be given the mandate to secure a long-term supply of critical materials that are essential composing elements of most green manufacturing products such as batteries, wind turbines and solar cells.

About IPPR

IPPR is an independent charity working towards a fairer, greener, and more prosperous society. We are researchers, communicators, and policy experts creating tangible progressive change, and turning bold ideas into common sense realities. Working across the UK, IPPR, IPPR North, and IPPR Scotland are deeply connected to the people of our nations and regions, and the issues our communities face.

We have helped shape national conversations and progressive policy change for more than 30 years. From making the early case for the minimum wage and tackling regional inequality, to proposing a windfall tax on energy companies, IPPR’s research and policy work has put forward practical solutions for the crises facing society.

Today, our work drives social, democratic, environmental and economic progress by securing:

• well-funded and reformed public services (health, care, housing, education) and social security that ensures everyone has access to the basics they need to flourish.
• a renewed democracy which gives everyone a voice in society and passes power down to people, places, and communities, alongside a fair and compassionate immigration system which supports social integration.
• a modern, green economy that delivers prosperity and justice to all people and places through actively shaping markets for social good and tackling concentrations of wealth and power.