Press release

19 Oct 2021 London, GB

Government's net zero strategy - Mats Persson, EY Partner, comments

The strategy demonstrates clear ambition and puts the UK at the forefront of the global race to net zero. However, the documents reveal two critical questions that have to be addressed sooner rather than later, if the UK is to achieve its carbon ambitions

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Commenting on the government’s net zero strategy, Mats Persson, Partner in EY Parthenon, focusing on energy transition and policy-led transformation, said:

“The strategy demonstrates clear ambition and puts the UK at the forefront of the global race to net zero.  However, the documents reveal two critical questions that have to be addressed sooner rather than later, if the UK is to achieve its carbon ambitions.

“Firstly, who pays? The government, businesses and consumers are still largely expecting the others to foot the bill, particularly on the supply side, illustrating the need for more collaboration on innovative public-private commercial models.

“Secondly, declining fossil-fuel production is out of sync with the speed at which low carbon energy alternatives are coming online, risking significant supply constraints. While some uncertainty around delivery and technologies, particularly around homes and heavy industry, is inevitable, there needs to be a clearer sense of the right sequencing to anchor the net zero strategy in sound supply- and demand-side economics.”

Ends

Additional analysis:

DECARBONISING POWER 

Headlines: Re-affirming the target that the UK will be powered entirely by clean electricity by 2035, but “subject to security of supply”. 

Wind

Headline: 40GW of offshore wind by 2030, including 1GW of floating offshore wind by 2030, backed by a £380m funding package.

Is the delivery clear? BEIS and Ofgem are in the process of consulting on and introducing changes designed to make the delivery of and investment into wind more flexible, coordinated and subject to more competition. This will help accelerate new developments, but may come too late to meet 40GW by 2030, absent other changes for offshore and onshore renewables including planning and grid.

Is it clear who pays? In part. There’s still a risk the buck is being passed between the government and wind farms. For example, the strategy suggests the wind farms will pay for oversized cables prior to the actual capacity is being used up, which they may be reluctant to do.

Nuclear

Headline: Commitment to support and make a final investment decision for a new large scale nuclear reactor by end of this Parliament; and a new £120 million fund for Small Modular Reactors

Is the delivery clear? Depends on expectation. 15 UK reactors currently generate 21% of the UK’s electricity but the majority of these will be retired by mid-2030s dropping installed capacity to well below half of current levels. Given the lead-times involved in getting new reactors up and running, there’s therefore a significant delivery mis-match if the Government’s expects nuclear to make up 20-25% of electricity by 2035.

Is it clear who pays? Likely predominantly through a Regulated Asset Base, which may involve consumers paying for a minimum guaranteed return for investors.

HYDROGEN

Headline: 5GW of hydrogen production capacity by 2030; £140m to fund new hydrogen and industrial carbon capture business models, with up to 250MW of electrolytic hydrogen production capacity in 2023 with further allocation in 2024.

Is the delivery clear? Early days. The exact commercial models will need to be worked out over the coming years. 

Is it clear who pays? No, but not surprising given stage of development.   

INDUSTRY – REMOVING CARBON

Carbon Capture, Utilisation and Storage 

Headline: Two schemes – Hynet (in North West) and East Coast Clusters (in Humber and Teeside) - have been selected as the UK’s first CCUS clusters, and will receive government financial support subject to further investment appraisals and value for money assessments. A further scheme in Scotland in reserve. 

Is the delivery clear? Early days, with the schemes aiming to be operational by 2030. The delivery plans and precisely what will be built under these schemes will be firmed up with the clusters over next 12 months. This will also involve selecting the actual emitters (ie fertiliser companies, hydrogen plants) that will form part of the clusters.

Is it clear who pays? The clusters will be done under a Regulated Asset Model and draw on an £1bn pot the Government has already announced in support of CCUS projects, though the exact funding mechanism will be agreed with each cluster. It is likely to be channelled either via consumers (if relating to power generation) or subsidies (if relating to manufacturing). In the long-term, the ambition is to pass the cost on to consumers via a beefed up carbon pricing mechanism. 

Tightening the price of carbon

Headline: The UK Emissions Trading Scheme cap, setting the limit on emissions for sectors covered by it, will be tightened by 2023-2024, to meet net zero objectives. A consultation on levels will be published in next few months. Non-committal on carbon border taxes. 

DECARBONISING HEATING

Homes and buildings

Headline: A £5,000 grant for homeowners in England and Wales to install low-carbon heat pumps, known as the “Boiler Upgrade Scheme” worth £490m overall; and an “ambition” for installations of new gas boilers to end by 2035, stopping short of a ban. £3.4bn to decarbonise social housing and public buildings.  

Is the delivery clear? No, economically and politically one of the most challenging areas for the government, with net zero and cost of living objectives clashing head on. It’s still unclear how the 600,000 new heat pump installations per year by 2028 will be reached and what technology-mix will be used to heat the homes in future. A decision on the role of hydrogen in homes has been delayed until 2026 – with a lot of scepticism whether hydrogen will ever play a major role in heating homes.

Is it clear who pays? No. Even if the full £450m were taken up it would still only be enough to cover 40,000-50,000 installations. The Treasury will likely want to seek a consumer-led redistribution at some point mid-decade by taxing gas more than electricity (via increase in policy cost on energy bills), which will now be subject to a consultation. Making gas more expensive than electricity will be very politically challenging, particularly leading up to the next election.

DECARBONISING TRANSPORT

Electric Vehicles

Headline: A mandate requiring a share of manufacturers’ new car sales to be zero emission from 2024; £620 million for zero emission vehicle grants and EV Infrastructure, including further funding for local EV Infrastructure; a further £350 million to home-grown UK EV supply chains

Is the delivery clear? EVs are expected to start reaching price parity with petrol and diesel vehicles by 2025. On the supply side, the challenge is more whether – and how – battery and auto supply chains stay in the UK as production gravitates to towards battery trading zones in Asia, Europe and the US. On the demand side, the UK is lagging behind on building out charging infrastructure – a very significant hurdle to consumers switching to EVs in numbers. 

Is it clear who pays? Mostly private sector and investors given momentum - there’s significant capital expenditure globally going into EVs and building battery supply chains. However, to keep manufacturing in the UK, continued public support is likely required,  in particular to help firms mid supply chains get over high early stage capital hurdles to give confidence to private investors to come in where the ATF is well placed.