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01 / Introduction

The net zero transition is one of the world鈥檚 greatest shared challenges. The UK鈥檚 energy transition tipping point may still not be crossed until the late 2020s. Despite having made great early progress through the establishment of statutory net zero carbon targets and the phasing out of coal, the UK is still in the foothills of energy transition.

For example, fewer than 2% of UK homes have low carbon heating and around 120 gas boilers are fitted for every low carbon system installed. Inevitably, as more homes install photovoltaics and battery storage, and as more of the UK鈥檚 40 million vehicles use electricity as their power source, systems will become more complex and demand on networks will grow. With 2050 only 28 years away, the full scale of the change required is still difficult to comprehend.

The challenge of scale is neatly illustrated by projections of the volumes of investment needed. The 2021 Arcadis report Supercharging Net Zero estimated that total global investment required by 2030 for generating capacity and networks to meet the 1.5潞C scenario is 拢7.4tn 鈥� equivalent to 10% of annual global GDP.

Furthermore, as the transition accelerates, the effort required to eliminate carbon will increase and systems will become more complex and costly. A good example is the completely new green hydrogen infrastructure that will be needed from the 2030s onwards to store energy generated by the UK鈥檚 vast wind power resources.

The need for storage in a power grid dominated by discontinuous, renewable sources illustrates how energy systems will become more integrated. System thinking is at the heart of the energy transition, from dependencies associated with raw materials and skills, through planning and finance, to system operation and ultimately to the customer and their bills, including customer incentives. This system will need to operate flawlessly if ambitious targets are to be met.

The UK government has been very proactive in publishing strategies and setting ambitious targets. However, the latest Climate Change Committee (CCC) annual report highlights significant risks caused by policy gaps affecting progress on the energy transition.

With the cost-of-living crisis and rising interest rates threatening to stymie progress on retooling the UK鈥檚 energy system, it is a time for strong nerves and quick action. Is there enough momentum behind energy transition to enable us to be confident of real progress?

02 / What鈥檚 the plan?

Given the joined-up nature of the energy transition challenge, a system-wide plan is vital. The UK has its 10-point plan, hurriedly published in November 2020, and a range of supporting strategies for industrial decarbonisation, low-carbon mobility, heat and buildings, carbon capture and nature protection. Each has varying levels of detail and ambition, with a much faster transition planned for low carbon mobility than low carbon heat.

The enabling policy is complex, with a huge range of bodies responsible for different parts of the system contributing to a patchwork of regulation, incentive and management input. For example, both Ofgem and the energy utilities have developed scenario plans for the growth in electricity demand, aimed at enabling long-term planning across control periods. Similarly, detailed work is under way to finalise the business models for carbon capture use and storage (CCUS) and hydrogen 鈥� essential market interventions to make these technologies investable.

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The CCC鈥檚 view is there are credible plans covering 39% of planned emission reductions.  Areas where plans are lagging include flexible low carbon electricity generation and carbon capture and storage.

The UK鈥檚 plan was given a reboot with the publication of the energy security strategy in April 2022. Published during a cost-of-living crisis, it inevitably focuses on short-term affordability as well as energy diversification. Even as sky-high energy prices should favour renewables, the new strategy encapsulates some of the huge challenges in accelerating the pace of change 鈥� not least with respect to planning and manufacturing capacity.

03 / Wind energy

Wind energy is, paradoxically, one of the UK鈥檚 greatest successes and greatest shortcomings. Blessed with over 30% of Europe鈥檚 offshore wind resource, the UK鈥檚 theoretical generating capacity is 2,200GW 鈥� 80 times the current installed capacity of 26.8GW. In practice, constraints associated with shipping lanes, fishing grounds and bird migration paths mean only a fraction of the resource can be developed, but it is still enough to meet 30% of the UK鈥檚 planned energy mix by 2030.

The failure is associated with onshore wind, which is still much cheaper to install. New onshore capacity added in 2021, at only 300MW, was the second lowest amount since 2005. Offshore generation is set to boom, with 33GW of capacity in the long-term pipeline following successful licence auctions in 2021 for England, Wales and Scotland.

Despite the successes, UK wind energy has many challenges. The main ones are slow permission processes, which disrupt a smooth programme of manufacture and installation, and the sheer resource intensity and exposure to increased costs of large offshore schemes, which have risen by 15%-25% since 2021. Increased costs of critical materials like steel, even before the ramping-up of production starts, means assumptions about the progressive reduction in generating costs may need reviewing. Other challenges include the scale and complexity of the future transmission network which, based on current plans, requires over 250 extra connections.

Work is under way to rationalise permitting arrangements. However, given the need for investment in new high-voltage transmission capacity and a delay of six to 10 years for connection to the grid, fast delivery of offshore schemes may hold back ambitions to make the UK the leading nation on wind.

04 / Nuclear power

Interest in nuclear power as a net zero energy source is growing. When Hinckley Point 3 reached final investment decision stage in 2016, Europe鈥檚 nuclear pipeline was dwindling. Now with many European countries dusting off their investment plans, including an eight-reactor programme in France, the market for nuclear capability will be much more contested.

Crucially, nuclear power has been included in the EU鈥檚 green investment taxonomy, further incentivising support for the technology. The UK has a new target for 24GW capacity by 2050, equivalent to eight Hinkley Points.

Nuclear power has two key roles in the energy system. First, it provides uninterrupted baseline energy. Second, the inertia provided by giant turbines helps to stabilise the network.

Nuclear power is hugely expensive. Bids for offshore wind licences in round three were at a strike price that requires very little financial support. By comparison, even when set at 2012 prices, electricity from Hinckley Point will cost roughly double that of renewables. The government鈥檚 拢1.7bn direct support for developing new projects such as Sizewell C and the introduction of a regulated asset base (RAB) model to provide investors with an income during construction should help reduce costs.

The ultimate constraint of the UK鈥檚 ambition to deliver eight new power stations is industry capacity. With parallel programmes running across many countries, the danger is that bottlenecks will emerge in critical supply chains.

With only one reactor type currently in the running, the EDF PWR, it is essential that the UK programme diversifies. One potential route to diversification is the small modular reactor (SMR). SMR describes a variety of small-scale nuclear reactor technologies. UK proposals are hardly small and would have capacity of 470MWe, costing around 拢1.8bn each. Globally, there are dozens of experimental prototypes, but only a handful of schemes have been developed, mostly in Russia.

The UK鈥檚 programme is led by Rolls-Royce, and the regulatory generic design assessment began in 2022. SMRs will be built on existing nuclear sites. Rolls鈥慠oyce is at present shortlisting manufacturing sites for SMR production.

05 / Hydrogen and carbon capture use and storage

If nuclear is the established but difficult-to-deliver technology, then hydrogen and CCUS are novel solutions where big unknowns still need to be resolved. Nevertheless, these technologies will play a key role in decarbonising industrial processes, and in stitching together other parts of the energy transition system.

Hydrogen and CCUS are linked through their complementary roles in the hydrogen hubs planned for the Humber, Liverpool and Teesside. Hydrogen will provide clean energy for industrial processes in the hub and CCUS will capture emissions from the industrial processes and from the generation of gas-fired blue hydrogen. At some point, up to 40GW of offshore wind power will be used to generate green hydrogen, although this investment is not likely to take place until the 2030s.

Targets for implementation are bold. By 2030, the West Coast Hynet programme plans to capture 1 million tonnes of industrial CO2 per annum and to produce 30TWh of hydrogen. However, there is still a huge amount of enabling work required to make the programme investable, including the development of commercial models.

As a truly green technology, hydrogen is attracting massive interest and investment across Europe. France, for example, has committed 鈧�7bn over 10 years. By comparison, the UK鈥檚 initial 拢240m has a very short-term horizon. Fixing the market mechanisms before 2025 to leverage private sector investment is a critical policy priority.

Hydrogen鈥檚 long-term future in the UK is likely to include use for heating and for transport, including HGVs and ships. However, no decision on heat applications is due until 2025.

One proposal under serious consideration is to blend 20% hydrogen with natural gas to reduce the overall carbon intensity of domestic heat. However, even a blended approach to the use of hydrogen involves huge levels of complexity, including changes to metering.

The role of CCUS will be complementary, including a critical role in enabling the continuing use of natural gas, thus enabling early investment in blue hydrogen generation and enabling the continued net zero operation of the UK鈥檚 legacy gas-fired generator fleet.

06 / Transmission, distribution and energy storage

Rewiring the UK economy for a net-zero future is a massive challenge. Thanks to the UK鈥檚 industrial legacy, the country has plenty of transmission capacity, as demand has been falling since the early 2000s. However, this capacity is not always in the right place, particularly with respect to new sources of production such as the planned 50GW increase in offshore wind capacity. Investments include transformer upgrades, circuit duplication for resilience and innovations such as Smart Wires, a power flow control technology that increases the capacity and stability of the network. Looking forward, transmission and distribution assets will be developed and operated more as a single system. This will ensure that available capacity is used effectively and connections are delivered as quickly and economically as possible.

Energy transition provides the utilities with an unprecedented opportunity to build their regulated asset base but is also creating a huge level of demand in the unregulated connections business. This threatens bottlenecks for other elements of the transition. National Grid, for example, is managing over 400 connections applications, 10 times the usual volume. Similarly, 10 major transmission investments are required over the next decade. One solution to the capacity problem is to attract more participants to the project market using market mechanisms, including the well-established CATO framework (competitively acquired transmission owner). However, for CATO and other market mechanisms to work, there needs to be plenty of time to run the competitions and plenty of capacity in the market.

Planning is also likely to be a major blocker. Only two 400kVA overhead lines have been developed in the UK since privatisation, and in the past the consent programme has taken up to eight years. As part of the energy security strategy, government has declared an intention to strengthen national policy statements (NPSs) for energy assets and to revise environmental permitting processes such as the Environmental Permitting Regulations. Such changes are unlikely to be made without serious opposition.

In addition to investment in capacity, networks that rely on discontinuous sources of generation like renewables also need investment in system storage and inertia to avoid system blackouts. Electricity must be used instantaneously so, as generation becomes less controllable at source, storage will have a greater role. Storage provides an alternative to 鈥渉ot鈥� flexible generating assets such as gas-fired turbines running on standby. A wide range of storage assets, including pumped water and compressed air storage and batteries, are under development, stimulated by demand-based pricing models, albeit without the guarantee of a 鈥渃ontract for difference鈥� (CfD) to stabilise revenues. Different types of storage are needed to meet the requirements of instantaneous response (pumped storage) and duration (molecules such as hydrogen). Storage assets are not cheap. Even typical home battery storage systems cost between 拢6,000 and 拢8,000, and the 1,500MW Coire Glas pumped storage scheme in Scotland is expected to cost over 拢1bn.

Although storage adds to network cost, it will help enable the full exploitation of wind power. A recent report highlighted that in 2020 and 2021 some 5.8TWh of contracted wind generation was switched off because of transmission capacity constraints between Scotland and England. The shortfall in generation was met using gas鈥慺ired power, meaning not only that the energy was paid for twice but also that the carbon footprint was much higher than necessary. The development of diverse storage capacity will help to ensure that all the UK鈥檚 renewable energy assets are fully utilised when needed.

07 / Enablers of the energy transition

The energy transition system relies on a set of moving parts that extend beyond the network of generation, transmission and distribution assets. Investment in energy efficiency and the EV transition are but two examples of the wholesale shifts that are taking place in the system. Unfortunately, one bottleneck in one part of the system, such as a shortage of capacity for EV chargers, might slow down progress elsewhere.

Energy efficiency is a case in point. The current heat and buildings strategy has been widely criticised for its timid, incremental approach. However, with no decision due on hydrogen until 2025, and an energy system that currently heaps the cost of transition onto electricity consumers, playing the long game might turn out to be the best approach. Fortunately, energy efficiency is a no鈥憆egrets choice, and with over 19 million homes needing improvement and new EPC鈥慴ased efficiency incentives coming into force in the late 2020s, sooner or later workload will start to ramp up.

The planning system is being exposed to an explosion in workload, and it is arguable that progress in this area is more urgent because of the potential for delay in developing system-wide capacity. Progress is promised in 2023, with the government suggesting that permitting durations will be cut by 75%. This may be achieved on remotely located offshore wind farms, but for land-based assets including transmission lines, solar farms and nuclear power stations, the development consent order process will still be contentious 鈥� even in the face of the climate emergency.

Other essential enablers include finance and a supply chain. The UK has performed very well in attracting private finance through the RAB and CfD models, and by extending the use of the RAB model to the funding of nuclear power it is likely that the long-term costs of funding and operation will fall. As the system becomes more complex with storage and stability assets needing private finance in addition to generation, transmission and distribution, the role of CfD as well as institutions including the UK Investment Bank in crowding in investment through an attractive pricing and risk structure will grow.

08 / Conclusions

The UK is reaching the end of the first phase of its energy transition. While great progress has been made through the replacement of coal-powered generation with wind and solar, the wider retooling of the energy economy has yet to accelerate. A wide range of investments to the system aimed at increasing capacity, controllability and resilience are required, which are far more ambitious than anything undertaken since privatisation. 

Many of the core technologies for decarbonisation are still at an early stage of development, including small modular reactors, CCUS and hydrogen as a heat source.

Progress with the development of business models, front-end design and planning and permitting will provide early evidence that the transition is under way, although based on current progress, nearly 40% of the UK鈥檚 carbon emissions reduction is exposed to significant risk.

The current cost-of-living crisis can be addressed by sourcing oil and gas for Europe from new providers, but we cannot be certain that future energy systems will be able to deliver low-cost heat and power.

While most attention is focused on large鈥憇cale investments such as offshore wind and nuclear, in practice a system-based response to energy transition will equally rely on localised and decentralised generation, storage and control.

Only once individual consumers are properly equipped and incentivised to manage their own use of grid resources can we be confident that a system-wide energy transition is under way.