The need for a coherent energy policy

Voters care about stopping climate change—but they aren’t always prepared to pay for it

December 12, 2023
The Sizewell B nuclear reactor. Image: David Calvert / Alamy
The Sizewell B nuclear reactor. Image: David Calvert / Alamy

Both of Britain’s main political parties have spent the last few months backing away from their previous commitments on energy policy. Rishi Sunak gives the impression of thinking Britain is doing enough on climate change and should now consolidate and let others catch up. Plans to phase out gas boilers and petrol driven cars will be delayed. Labour, meanwhile, has scaled back its plans to devote £28bn a year to advance the energy transition agenda.

The moves reflect not just the economic realities any new government elected in 2024 will face, but also the limited public understanding and acceptance of the upfront costs of the transition. There is little or no room for additional borrowing and the public, while wanting to see climate change solved, are clearly not prepared to pay more for the energy they use or to see their taxes increased.

The result, known but not yet explicitly spelt out by either party, is that the transition to a low-carbon economy will be slower and that commitments to a 78 per cent reduction in emissions from a 1990 baseline by 2035 (made by Boris Johnson in 2021), as well as Labour’s pledge to deliver 100 per cent zero carbon electricity by 2030, look unattainable. The major investments needed—in everything from the upgrading of infrastructure to electrification of key sectors of the economy to the development of the next generation of energy supplies—are on hold. Private sector funding will only be available when public policy is clear.

Climate, however, is only one dimension of energy policy. Security and affordability matter as well and after the volatility of the last few years are equally important to voters and consumers. Both are at risk because of the absence of clear public policy.

By the end of 2024 the next government, whatever its colour, will need to take decisions on a range of key issues. 

1. Funding new nuclear. At the moment, nuclear power provides 15 per cent of the electricity we use—from a range of plants, most of which began producing in the 1980s. The plants are ageing, requiring extended closures to allow for maintenance work. By 2030 all but one are likely to have closed. Nuclear power generation will fall sharply before any new capacity comes online. Hinkley Point, EDF’s jinxed project in Somerset, is nine years behind schedule and billions over budget. Beyond that there is no clear funding model in place to cover the extensive capital costs of the next planned project—Sizewell C—which is hampered by serious challenges in securing the water supplies needed to run the plant safely. The long search for the capital required—now focused on the Abu Dhabi’s Mubadala fund—shows no sign of ending. A new government will have to choose whether to fund the project itself, to impose a substantial levy on consumer bills or to write off the whole thing. It will also need to decide whether to support the development of small modular reactors—one of the few areas where the UK, through Rolls Royce, has the potential to be an industrial leader. Indecision on that project is already giving US companies a material competitive advantage.

2. With nuclear capacity falling over the next few years, power generation will depend on increased use of natural gas or wind power. Wind is the low-carbon option but overblown targets—50 GW by 2030, according to Boris Johnson—are now beyond reach. Existing wind projects cannot secure links to a grid which does not have the capacity to absorb the power involved. The development of new projects has been frozen because the contract price which the government offered to the companies investing was too low. The industry did not believe that the minimum floor price offered would cover the rising costs of a stretched supply chain at a time of global inflation. The last licensing round for new wind attracted no bidders. A higher price is now being offered but the connection delays continue to deter investors who can see better prospects elsewhere. A new government will have to fund a significant upgrading of the grid if wind is to achieve its full potential.

3. The limits of wind capacity will drive us back to natural gas. The volume of gas supplies from the UK side of the North Sea is already falling and will fall further and faster if new projects are ruled out. Imports are set to grow—with the most likely source being Qatar, a trade creating extensive emissions because of the liquefaction and regasification process involved, as well as the long-distance transportation. As the last two years have shown, natural gas prices are highly volatile. As the UK’s reliance on imported gas grows, so too will the UK’s vulnerability to a combination of circumstances—cold weather, reluctance to increase exports on the part of the United States, heightened tensions with Russia—which limit supply and force competition between importers. A reserve of stocks is recognised as essential by most other importing countries. Germany has 89 days of stocks in hand, France 103, Holland 123. Even after Centrica’s increase in stocks at the Rough field, situated off the Humberside coast (where production of gas ended in 2017 allowing the field to be turned into a gas storage facility), announced earlier this year, the UK will hold stocks capable of covering just 12 days of peak winter demand. A new government in Britain will have to judge whether such complacency is justified.

4. The fourth issue concerns the rundown of the North Sea. Whatever the approach to new licences and further exploration, the reality is that production will decline. The resources that remain lie in smaller fields which are reliant for viability on relatively high prices. The pattern of ownership of North Sea activity has already changed, with major international companies giving way to more short-term players keen to extract an attractive margin when times are good. Any new government will have to find a careful balance which takes a fair share of profits when prices are high but sustains activity when they fall. Signals of decline are already evident with the rundown of Grangemouth in Scotland, which was announced in November by its current owner Petroineos, and the very evident risks to the industrial base which North Sea activity has created around Aberdeen. The next decade will see more decommissioning than new developments. That will create some jobs but will also trigger major payments from both the industry and government under the North Sea taxation system introduced when development began in the 1970s. That system allows the operating companies to claim back against previous paid tax part of the costs of decommissioning the fields. Those costs can run into billions of pounds and the payments by government which will be required could absorb much of any public funds available to support the transition. The potential exists for a new generation of activity—transforming the North Sea into a hub of activity around renewables—including new interconnectors for electricity supply, more floating wind projects and new pipelines to enable carbon capture and hydrogen projects. A new government will need to embrace this activity before the opportunity is taken up by other countries.

5. Finally, the system of energy regulation must be reformed to restore trust. Trust in the main energy regulator Ofgem has evaporated after the failure of the organisation to test the financial strength of retail suppliers. Thirty suppliers went broke because they could not cope with the price volatility following Russia’s invasion of Ukraine, adding billions to consumer bills. Ofgem’s failure was strongly criticised by parliament’s public accounts committee. More unjustifiable costs were imposed by a flawed pricing mechanism. Misuse of prepayment meters added to the misery of energy poverty. A new government will need to redefine the purpose and structure of Ofgem to create a body independent of government capable of protecting the interests of consumers in a market where volatility is inevitable.

For any new government, dealing with these issues will not be optional. Further delay will only add to costs and risks. The greatest immediate danger is that underinvestment and growing import dependence—especially for gas—will trigger another supply crisis in the mid to late 2020s. Though volatility is unavoidable, another destructive crisis can and should be pre-empted before another unnecessary period of insecurity distracts attention and undermines public support for any serious attempt to deal with climate change.