The UK’s energy transition will stall without policy action

London: The energy transition is not just a dispassionate assessment of electric vehicles versus combustion engines, or heat pumps versus gas powered boilers.

The pace of the transition is dependent on policy, and in the UK, like many countries, the decision-making process of politicians is dictated by election cycles and government budgets. Households have been buffeted by high energy prices for two years and the political parties are keen not to add to that burden.

With an election on the horizon, Prime Minister Rishi Sunak has reaffirmed the UK’s net zero commitment but with an additional qualification that it must be “fairer” to families. Leader of the opposition, Keir Starmer, recently announced that his own party’s decarbonization plans will have to be scaled back because of a lack of cash in government coffers. Whilst Reform UK is hoping to upset the consensus with its populist agenda and has put net zero ambitions firmly in its anti-woke sights.

The UK is set to follow the mega-trends that are defining the energy transition in most developed economies. Today, 80% of the UK’s primary energy comes from fossil fuels and according to our new UK Energy Transition Outlook, low carbon supply will account for 65% of demand by 2050. But this rapid shift away from fossil fuels is only impressive if ignoring the government’s net zero commitment. We forecast a significant 85% reduction of energy related CO2 emissions relative to 1990 levels, but not the 100% reduction by 2050 which the UK legislated for in 2019. Similarly, the UK will also not meet its Nationally Determined Commitment of reducing emissions by 68% by 2030 compared with 1990; we expect an emissions reduction of around 55%.

The UK’s early ambition and action to champion the energy transition did result in a strong start for greening electricity production and today it boasts the largest offshore wind market in the world. But the recent disappointing wind auctions show that even here the progress is stalling. In addition, there is uncertainty around decarbonizing home heating and the role of hydrogen.

Accelerating the energy transition requires big ideas and bold policies.

If the UK is to meet its net zero commitments it is imperative the UK delivers the necessary step-change to treble the historical electricity investment levels to ensure the grid will be the enabler, not a blocker to the energy transition. To meet the investment challenge, the way networks are planned, built, operated and financed needs to adopt a fundamentally different approach. On the demand side, heat pumps are a more energy efficient method of heating houses than gas powered boilers, but their roll out in the UK will be held back by structural challenges. The high cost of electricity compared to gas makes them expensive whilst their efficiency is hindered by the poor level of insulation in many UK homes. This is why we forecast 60% of houses will still be using natural gas by mid-century.

Taking a holistic systems approach – looking at demand and supply across all energy vectors – is essential if the UK is to deliver the optimal energy system . Currently we see competition between industrial clusters for allocation of hydrogen and CCS capacity, consumer choice driving the domestic heating decarbonization and general uncertainty about the future of gas. The new National Energy System Operator (NESO) needs to play a pivotal part in this key system definition, but they must be supported by a strong vision from central government.

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For politicians and taxpayers concerned about their budgets, is the transition affordable? According to our report, UK household energy bills will be 40% lower in 2050 compared to today. The decline in household energy expenditure is driven by increased electrification of both household heating and passenger transport, leading to an overall reduction in energy demand. On a national scale, the share of GDP devoted to energy CAPEX expenditure will remain relatively stable at just above 1% of GDP across the 2000-2050 period. So, there is room to do more.

Developing a comprehensive and bold energy plan is also important on a global scale. The EU, US and China are implementing decarbonization plans which will expand their own hydrogen or electric vehicle industries. And if the UK is to maintain and replicate the success of its offshore wind market, policymakers must take a more ambitious, holistic approach.