On 30 March 2023, as its wide-ranging Energy Bill continues to undergo parliamentary scrutiny (see our range of previous articles on the Energy Bill e.g. here, here and here), the UK Government released a further package of energy policy publications under the banner “Powering-up Britain”, heralded as the “manifesto” of the new Department for Energy Security and Net Zero (“DESNZ”). As is so often the case in UK energy policy, DESNZ’s stated aims closely align with the three components of the energy trilemma, namely meeting decarbonisation targets, ensuring security of energy supplies (with a particular focus on domestic energy independence in the context of Russia’s invasion of Ukraine) and managing the costs borne by consumers.
DESNZ’s key publications making up the Powering-up Britain package of documents include:
- an “Energy Security Plan”, which builds in particular on the Government’s April 2022 British Energy Security Strategy;
- a “Net Zero Growth Plan”, designed to:
- respond (together with the separate specific Government Response document) to the September 2022 Net Zero Review report (the “Skidmore Report”) and comment on the implementation of some of the recommendations it set out;
- respond (together with the separate specific Government Response document) to the Climate Change Committee’s June 2022 annual report on progress in reducing emissions; and
- satisfy (together with the accompanying Carbon Budget Delivery Plan) the Government’s duties under sections 13 and 14 of the Climate Change Act 2008 to prepare and report on policies for meeting each carbon budget once set for each five-year budgetary period (following the High Court’s finding in July 2022 that some of the considerations required in order to discharge these obligations had not been taken into account in the production of the Government’s October 2021 Net Zero Strategy); and
- a raft of related consultations and announcements.
While these publications largely consolidate existing Government policies, a number of “new” initiatives have been announced across various key vectors in the energy transition, including renewables, nuclear, hydrogen, carbon capture, heat and energy efficiency, as well as indications on the direction of travel with respect to reforms for electricity networks and energy markets. In this article, we focus on some of the newer developments.
Zero carbon electricity generation
Floating Offshore Wind Manufacturing Investment Scheme
Following a similar initiative for offshore wind in early 2021, the Government has launched a Floating Offshore Wind Manufacturing Investment Scheme to support the ambition set out in the British Energy Security Strategy to see 5GW of floating offshore wind capacity delivered by 2030 , providing £160 million in grant funding to encourage investment in the particular kinds of port infrastructure that floating offshore wind projects need (e.g. with substantial water depth and quayside space). DESNZ hopes that this initiative will bolster the supply chain and drive down costs for floating offshore wind projects. The scheme is open to applications until 25 June 2023.
One of the recommendations in the Skidmore Report was the establishment of roadmaps for the acceleration of the development of solar and onshore wind projects and joint Government-industry taskforces to drive them, working towards the Government’s target of a net zero grid, including 70GW of solar capacity by 2035. DESNZ has confirmed that it will be adopting these proposals in the solar context, though the position for onshore wind remains less clear.
The Energy Security Plan provides some further details on the role of Great British Nuclear, the arm’s-length body established in November 2022 to drive new nuclear projects, including the launch of a competitive process for the selection of the best small nuclear reactor technologies in April 2023.
Hydrogen and Carbon Capture
Business models for hydrogen producers and industrial emitters
DESNZ has published a consultation with respect to some of the details of the revenue support contracts regimes for hydrogen producers and industrial CO2 emitters provided for under the Energy Bill. The consultation will remain open for responses until 10 May 2023.
Alongside its Powering-up Britain publications, DESNZ announced the successful applicants in the following hydrogen competitions (see our focussed Law-Now article here for further details):
- The Low Carbon Hydrogen Supply 2 Competition, designed to provide support and funding for projects that can help develop a wide range of innovative low-carbon hydrogen supply solutions. A total of around £38 million was awarded to 5 projects.
- The first round of applications for the Net Zero Hydrogen Fund strands 1 and 2, designed to identify low-carbon hydrogen production projects. 15 successful applicants were collectively awarded around £38 million. DESNZ has stated an intention for a second application round to be launched within Spring 2023.
DESNZ has also shortlisted 20 electrolytic hydrogen production projects for support under the Hydrogen Business Model and Net Zero Hydrogen Fund following the first electrolytic hydrogen allocation round. A second allocation round is targeted before the end of 2023.
CCUS cluster sequencing processes
DESNZ has announced the first group of eight CO2 emitters with whom negotiations will be progressed for joining the “Track-1” CCUS clusters, HyNet (north west England and north Wales) and the East Coast Cluster (Teesside and Humber). Notable by their absence at this stage are the emitters in the Humber area seeking to connect to the East Coast Cluster network. The Government has committed to launch a second selection process for emitters connecting into the Track-1 clusters before the end of 2023.
The process for identifying the “Track-2” CCUS clusters has also commenced, seeking to identify two further clusters with a view to securing the capture, transportation and storage of an additional 10 megatonnes per annum of CO2 by 2030. DESNZ has confirmed that the Acorn (Aberdeenshire) and Viking (Humber) transportation and storage projects are currently favoured for selection.
For more details of these hydrogen and CCUS related announcements and consultations, please see our summary of these here.
Heat and Energy Efficiency
The Powering-up Britain package refers to a number of measures intended to help to achieve the building emission reductions required by the UK’s carbon budgets, including by (i) refining existing energy efficiency support; and (ii) seeking to galvanise the substantial heat pump installation volumes required in this regard (e.g. 600,000 installations per year by 2028) by bolstering the supply chain and reducing installation and maintenance costs.
Great British Insulation Scheme (ECO)
The Energy Company Obligation scheme requires large energy suppliers to deliver bill savings to households by installing energy efficiency measures, primarily insulation. The scheme is currently in its fourth iteration, “ECO4”, running from 1 April 2022 to 31 March 2026. The Government issued a consultation on enhancements to the ECO4 scheme, initially referred to as “ECO+”, in November 2022. The Government response to this consultation has been issued alongside the Powering-up Britain papers.
In this latest update, DESNZ has rebranded ECO+ as “The Great British Insulation Scheme” to “help with consumer awareness, and recognition of the support available”. The rebranded scheme is designed to deliver £1 billion in additional investment by March 2026 to upgrade 300,000 of the country’s least energy efficient home. While ECO4 applies to only a “low-income group” of households, on means-tested benefits or living in social housing (with an EPC rating of D-G), the Great British Insulation Scheme will be extended to a “general group” of households within Council Tax bands A-D (with an EPC rating of D-G). Energy suppliers will still need to show that at least 20% of its targets are delivered to the low-income group.
Among the updates, DESNZ has confirmed its intention to design the regime on the basis that the general group will themselves contribute 10% of the cost of the relevant energy efficiency measures, citing research commissioned by the Government regarding willingness of owner-occupiers to co-fund.
Clean Heat Market Mechanism
Following its initial consultation in October 2021, DESNZ has published a second consultation on the design of the Clean Heat Market Mechanism envisaged under the Energy Bill. The scheme will require larger manufacturers of heating appliances to ensure that heat pumps represent a stipulated proportion of the appliances they sell, with the proportion to increase on an annual basis. For example, it is envisaged that the proportions in the first and second years of the scheme will be 4% and 6% respectively. The proposed structure of the scheme is “market-based” in that tradable “heat pump credits” will be issued with respect to the qualifying manufacture of heat pumps, and manufacturers will be required to surrender the appropriate quantity of credits at the end of the relevant year or pay £5,000 for each credit by which they fall short.
Heat Pump Investment Accelerator
DESNZ has announced that it will be running a new £30 million Heat Pump Investment Accelerator competition, designed to leverage £270 million of private investment to accelerate the manufacturing and supply of heat pumps. The competition will be open to only UK-registered businesses in recognition of the fact that, at present, around 70% of heat pumps installed in the UK are imported (whereas most oil and gas boilers installed in the UK are manufactured in the UK). Such manufacturers will be able to apply for grant funding of up to £15 million per project for investments into the manufacturing of heat pumps and related components. DESNZ has published draft guidance (subject to review by the CMA) for interested parties in readiness for when the application window for the competition opens. In the meantime, until 28 April 2023, prospective participants can submit an expression of interest form to outline their projects and help officials to gauge interest in the competition.
Extended capital support for heat networks
As recommended in the Skidmore Report, DESNZ has committed to extend the expiry of the existing Boiler Upgrade scheme, which offers grants of up to £6,000 grant to owners of domestic property replacing fossil fuel heating systems with a heat pump or biomass boiler, from 2025 to 2028.
Energy networks and flexibility
Electricity network reform
The scale of the challenge posed to electricity networks by the energy transition is a very significant factor in net zero policy (see our previous Law-Now articles here and here regarding these challenges and some of the existing measures envisaged to start to address them). In recognition of this, the Government has taken steps including the launch of the Offshore Transmission Network Review in 2020, the creation of the new role of “Electricity Networks Commissioner” in July 2022, and the publication (jointly with Ofgem) of an Electricity Networks Strategic Framework in August 2022. Building on the recommendations of the Electricity Networks Commissioner and some of the themes set out in the Strategic Framework, DESNZ has committed to issue a number of further publications this year:
- an action plan for halving the time required to develop electricity transmission projects;
- an action plan for the acceleration of connections to electricity networks, including by means of reform of the connections process;
- a draft Strategy and Policy Statement, providing a “clear direction of travel on the regulatory framework for networks”, for consultation; and
- a consultation on the role of the Future System Operator (the operator, introduced under the Energy Bill, combining multiple functions including electricity transmission system operation and gas planning with a view to taking a whole energy system approach) with respect to energy security.
In parallel, DESNZ has also opened a consultation on draft revised National Policy Statements with respect to planning for new energy infrastructure, including amendments intended to facilitate strategic planning for energy networks based on whole-system needs. See our separate Law-Now article here for further details on the NPSs.
Smart & Secure Electricity System Consultation
The Government has now issued its response to its July 2022 consultation on the interoperability and cyber security of energy smart appliances and remote load control. The response confirms a number of the proposals consulted on, e.g. to introduce a licensing framework for persons providing demand-side response, to class entities that remotely control electrical load over a 300MW threshold as “Operators of Essential Services” for the purposes of the Network and Information Systems Regulations (subject to parliamentary approval), to put in place smart appliance interoperability standards via legislation and to require energy suppliers to make time-of-use data publicly available in a standardised format. DESNZ has resolved to consult further on some of the finer details of these proposals.
Gas storage and flexibility
DESNZ has committed to a programme of activities on security of gas supply, including the issue of an update by Autumn 2023 on the future use of gas storage and other flexibility options.
Energy markets and affordability
DESNZ has accepted the recommendation in the Skidmore Report that it should set out a clear approach on the “rebalancing” of electricity and gas prices in order to encourage consumers towards electrification and low-carbon technologies such as heat pumps, with a view to seeing a significant shift in the price differential by the end of 2024. The measures that could be taken to effect such rebalancing include moving final consumption levies (funding Government generator revenue support regimes such as Contracts for Difference and the Capacity Market) from electricity bills to gas bills, to fossil fuel operators or to general taxation.
The Skidmore Report urged the Government to use its review of electricity market arrangements (“REMA”) as an opportunity to drive forward this rebalancing. DESNZ has resolved to consult further on REMA in Autumn 2023. For further detail on REMA, see our previous Law-Now article here.
DESNZ has also set out an intention to consult in Summer 2023 on a new approach to consumer protection in the energy markets, with a view to replacing universal support with more targeted interventions from April 2024 onwards.
Climate regulation, investment and leadership
UK ETS and carbon leakage
The Government has committed to publish a long-term pathway for the UK Emissions Trading Scheme within 2023. Anticipated measures include expanding the scope of the scheme to cover further emitters, extending the duration of the scheme to at least 2050 and providing support to agricultural emitters with the calculation and reduction of emissions.
One of the consultations published alongside the Powering-up Britain papers, “Addressing carbon leakage risk to support decarbonisation”, relates to a range of potential policy measures to mitigate the risk of future movement of CO2-producing activities to other jurisdictions with lower carbon pricing or less stringent climate regulations. These include a “carbon border adjustment mechanism” (a levy on certain imports to level the carbon price playing field with comparable items produced in the UK), mandatory product standards (prohibiting the sale of certain products if the COs emissions associated with their production exceed stipulated thresholds), measures to grow the low carbon product market and emissions reporting requirements. A key aim of such measures would be to ensure that they are consistent with the Government’s commitment to free and open trade. The consultation also acknowledges the EU’s carbon border adjustment mechanism being implemented this year, and asks stakeholders to have regard to possible interactions between the two regimes in their responses. The consultation is open, to both domestic and international stakeholders, until 22 June 2023.
2030 Strategic Framework for International Climate and Nature Action
This publication seeks to set out an integrated approach on climate and nature, building on discussions at the latest UNFCCC conferences and setting out the scale of the challenges to be addressed at an international level. It sets out the UK’s vision to limit global temperature increases to 1.5°C by halving global emissions, build resilience and adaptation to current and future climate impacts and end the trend of losses in biodiversity.
UK International Climate Finance Strategy
A number of developed nations have together committed via the UNFCCC to mobilise $100 billion per year in finance for climate projects in developing nations. The UK committed to contribute £11.6 million of this finance in the period from 2021/22 to 2025/26. The UK International Climate Finance Strategy supplements the Strategic Framework for International Climate and Nature Action by outlining how this finance will be targeted, including by way of investments in clean energy, reversing biodiversity losses, adaptation and resilience, sustainable cities, infrastructure and transport.
Mobilising Green Investment: 2023 Green Finance Strategy
The Government has announced an update to its 2019 Green Finance Strategy which seeks to galvanise the £50-60 billion a year in capital investment estimated to be required to facilitate the net zero transition, reinforce the UK’s position as a world leader in green finance and aligning the market with newer aspects of the green investment landscape such as biodiversity and climate adaptation. The strategy also sets out how the government wishes to pursue its ambition to become the world’s first Net Zero-aligned financial centre.
Building on its Environmental Improvement Plan published in January 2023, The Government has in parallel published a paper on its vision to introduce “nature markets”, in which entities carrying out “ecosystem services” would be awarded tradable credits.
Net Zero Research & Innovation Framework: Delivery Plan 2022 to 2025
DESNZ has published a delivery plan outlining its £4.2 billion portfolio of investments in research and innovation projects to respond to the priorities set out in the Net Zero Research and Innovation Framework, endeavouring to catalyse private investment in areas where factors such as high up-front costs, long asset lifecycles and regulatory barriers might otherwise deter it. The plan identifies research projects across the CO2 spectrum including power generation, industry, buildings, transport and carbon capture.
While some early reactions have highlighted a desire for the Government to push further and faster (in particular from a climate perspective), there is no doubt that the latest publications collate and showcase the breadth and depth of policy initiatives that are underway in support of the energy transition. In many cases however the devil will remain in the detail of consultations and decisions yet to come.
Article co-authored by Shriya Lakhani, Trainee Solicitor at CMS.