Overview and commentary on the Energy White Paper

13 Jan 2021

The energy sector is undergoing major structural shifts as it reorients towards the 2050 net zero target. On 14 December 2020, the Government published its Energy White Paper (EWP), setting out commitments and policy proposals for accelerating this transformation. Several headline policy commitments were announced in the PM’s ‘10-point plan for a green industrial revolution’, and the white paper provides more details on policies to deliver these.

Headline policy commitments

Energy supply and infrastructure

  • 40GW of offshore wind by 2030, including 1GW floating wind, plus expansion of other low-cost renewables including onshore wind and solar.
  • Deployment of CCUS in four industrial clusters including at least one power CCUS project.
  • Establishing a new UK Emissions Trading System.
  • At least one large-scale nuclear project to Final Investment Decision by the end of this Parliament.
  • Consulting on ending gas grid connections to new homes from 2025.
  • Growing the installation of electric heat pumps, from 30,000 per year to 600,000 per year by 2028.
  • Digitalising the energy system based on the vision set out by the Energy Data Taskforce.

Industrial strategy / green recovery

  • Increasing the Industrial Clusters Mission four-fold, to deliver four low-carbon clusters by 2030 and at least one fully net zero cluster by 2040.
  • Investing £1 billion up to 2025 to facilitate the deployment of CCUS in two industrial clusters by the mid-2020s.
  • Aiming to develop 5GW of low-carbon hydrogen production capacity by 2030.

Domestic consumers and retail markets

  • Consulting on frameworks for switching of suppliers including opt-in, opt-out and auto-renewal arrangements.
  • Assessing market frameworks to facilitate the development of innovative tariffs and products, including the regulation of energy brokers and price comparison websites.
  • Establishing the Future Homes Standard and consulting on regulatory measures to improve the energy performance of homes, including role of mortgage lenders.
  • Requiring that all rented non-domestic buildings will be Energy Performance Certificate (EPC) Band B by 2030.
  • Extending the Energy Company Obligation to 2026 and expanding the Warm Home Discount to £475 million per year.

Commentary on Energy Supply and Infrastructure Commitments

The UK’s first EWP since 2007 reflects recent tectonic shifts in the sector. The aspirational target for 2020 at that time was for renewables to provide up to 20% of power generation (the true figure is probably over 40%). This reminds us to be humble about forecasting, but some peering into future remains important, because much energy infrastructure requires at least a 10-year lead time.

The BEIS 2050 net zero pathways, therefore, provide an important backdrop to the EWP. These assess over 3000 scenarios for different feasible generation mixes, showing that there many different ways to achieve a low-cost, low-carbon electricity system.

One striking feature is the prominent role of wind generation. With wind as the workhorse of the electricity generation, the scenario variations then largely come down to different levels of nuclear and solar for bulk generation, with system flexibility and balancing being provided by different levels of hydrogen, CCUS and interconnectors. This reflects the strong policy backing for wind, both for the 40GW offshore target included in the Conservative Party manifesto, as well as the decisive shift to allow onshore wind and solar into the CfD renewable support mechanism made in March 2020.

Another key feature of this forward-look is the expectation of growth in demand related to electric heating and transport. This is further reflected in the EWP commitment to a massive ramp-up in the rate of installation of heat pumps, and the potential decision to end gas connections for new housing stock post 2025.

Whilst the EWP ambitions reflect the scale of the challenge ahead, there remain significant policy details to be filled. The UK is currently off track for the 4th and 5th carbon budgets (2023-2032). BEIS estimate that the measures outlined in the EWP will reduce emissions by up to 230MtCO2, leaving an estimated gap of around 100 MtCO2 for 2030 to be addressed through further policy details including half a dozen or so consultations and strategies that are promised in the EWP.

A key policy question is how wholesale electricity markets should evolve over the next decade. BEIS has issued a call for evidence on ‘Enabling a High Renewable, Net Zero Electricity System’ (open until 22 February 2021). This debate will determine the terms of companies’ investments in low carbon power, and whether the anticipated levels of renewable energy are delivered. It is clear that for now there will be continued reliance on contracts for difference to incentivise renewables. As variable renewables become the dominant generation source, the wholesale market will need to be redesigned to accommodate the very low marginal costs of production of most low-carbon generation which erodes the usual price signals in the current market design. The key issues and some potential solutions are discussed in this report on electricity markets with a high share of variable renewables.  This theme will also be explored in more detail as part of UKERC Theme 4.2a on investment in infrastructure.

Related to this will be the role of carbon pricing under the new UK Emissions Trading Scheme  (UKETS) which came into effect on 1st January 2021. The UKETS design closely reflects the EUETS in the first instance in order to enable linking of the two schemes which is allowed for under the terms of the Brexit deal (see p202). The UKETS initially tightens the UK emissions cap by 5% relative to its share of the EUETS. However, the EWP acknowledges that this will need to be tightened further to match a net-zero 2050 pathway. The relevance of UKETS to decarbonisation of the power sector will depend on the extent to which cap-setting can get ahead of the curve in relation to the rapid roll-out of renewables. The interactions between carbon pricing and renewables support will further determine the likely carbon price, and the effectiveness of the UKETS in other sectors of the economy as well as the rationale and effectiveness of linking with the EUETS.