Can the government meet clean energy targets?

The Labour Manifesto said: “Labour will make Britain a clean energy superpower. A national mission for clean power by 2030 is achievable and should be prioritised."

It promises to double offshore wind energy generation, triple solar and quadruple offshore wind by 2030. It plans extra investments in carbon capture and storage, hydrogen and marine energy and more long-term storage. It aims to build Sizewell C and smaller modular reactors. It said that the government would extend the windfall tax on oil for the rest of the parliament and increase it by three percentage points.

It noted shortage of grid capacity and has delayed dates for connecting new renewables to the grid. It said: “Labour will work with industry to upgrade our national transmission infrastructure and rewire Britain”. The government propose using regulation and encouragement of financial companies to mobilise more private sector investment for renewables.

Obstacles to net zero by 2030

The Institute for Government think tank believes it will difficult to achieve in the timescale. It says the UK lacks grid capacity to handle a large increase in the use of electrical power, and to handle more variable power from solar and windfarms. There is also a queue of applicants seeking access to the grid for renewables projects, where delays of five years or more have been common.

Current plans by National Grid are to spend substantial sums on grid expansion. There have been past arguments over the price rise Ofgem will allow the grid operators, as the extra investment will need extra revenue from customers to afford the larger system.

There are skills shortages and a general shortage of supply capacity to build the larger grid and complete the renewable projects. Both these supply constraints need addressing if the UK is to make a step change in the rate of renewable and grid build. The government has identified planning delays as another obstacle, where it will need speeded up processes both by local authorities for the smaller projects and by the national system for the large projects.

The government worries about the lack of public support for many of these developments, with local opposition likely to pylons being erected or to nearby wind farms. It proposes better messaging. It also wants education of the public to reduce demand for energy and shift demand to less busy times of the day and night to allow for possible shortages of peak time power.

The policy of National Grid

National Grid has been planning to increase its capacity substantially for some time. The £58bn investment forecast for the next five years is split between £30bn for the UK and £28bn for its US assets. The pre-election plan announced on 23 May included raising £7bn from shareholders to allow more borrowings to finance the big, planned capital investment programme. It was a large issue with seven new shares for every 24 in issue at a 35% discount to the ex-rights price. They also announced the sale of the Grain liquified natural gas (LNG) facility and National Grid Renewables to concentrate on its cable networks and release more capital.

In response to the new government’s wish to speed up decarbonisation, the company has said it needs faster grants of planning permission to put in the new pylons and extra capacity in the UK more quickly. It will want assistance with training and recruiting the extra people needed to do the physical work through contractors and its own team. It is not yet proposing any further expansion of the investment programme which has been recently agreed and set out in the documents for the rights issue.

Bids for renewable power projects

The sixth bidding round delivered more renewable projects than the fifth round, including offshore windfarms which were absent from the results of the previous competition. The higher strike price allowed made the difference, along with more subsidy.

The headline figure of additional power was 9.6 gigawatts (GW), but this is a theoretical number. The government advises that solar only delivers 12% of the rated capacity over the course of a year, day and night. Onshore wind may yield 30% and offshore wind 40% of the maximum capacity.

The total power needed on a cold winter day can be as high as 50GW though more commonly at 45GW. The 3.3GW of additional solar capacity only translates to delivery of 0.4GW across a year given the long periods including all nights when solar does not generate anything.

The wind energy may only produce an average of around 2GW applying average outturns. Of course, there can be periods when wind and solar produce very little or nothing so there still needs to be plenty of standby generation in the UK or import contracts to cover the shortfall.

The bidding round also saw a number of projects in build and already agreed given an uplift in the guaranteed power price they will receive, despite accepting contracts at lower prices in a previous round. The government decided they needed to do this given the escalation of costs in producing this power and the wish to see the companies committed to older projects being able and willing to bid for more.

The risks and rewards

The UK regime is good news for the investing companies in two crucial ways. The contracts typically guarantee purchase of all the power the wind or solar farm can produce. They also usually agree to pay for full output if the grid is unable to take the power owing to insufficient demand. The contract guarantees the price, even for conditions where the price of electricity on the market and generated from gas has plunged. So, this is an unusual investment with little risk on either demand or price

But what can go wrong?

The investor rightly must guarantee to pay back any excess revenue where the market price for the electricity exceeds the guaranteed price. The investor is subject to problems with the equipment, which could lead to a shorter life than originally planned in the business case.

Operating costs and maintenance expenditure could rise more than expected. The original build could be more problematic and could experience cost overrun. There have been problems with Siemen’s large blades leading to changes of assumptions. There has been a blade failure with the GE system being installed on the Dogger bank array, helping to delay the installation.

The main reason some of the funds and shares specialising in green energy haver sold off sharply was their need to adjust to rising interest rates in 2022. Investors expect a higher return or yield when interest rates are higher, as you expect to get a superior return to interest on a deposit by taking more risk. Rising rates also increased the cost of borrowing money to install the generators. As rates come down again as they should do to some extent in the year ahead so the valuations of green energy companies will look better.

The remaining role for gas

The UK remains dependent on its fleet of gas-fired power stations for days and nights of no wind and sun. Last year, gas-fired power accounted for around a third of total power. The government and industry accept that gas has a role to play for the foreseeable future, as the gas stations need to be on standby for wrong weather days and for the many winter days of high demand.

The Department of Energy’s latest summary of UK generating capacity says there is 35GW of available capacity in the gas power stations. On days of low wind or sun they can be contributing more than half the UK’s total electricity. There are issues about whether the UK needs replacement new gas stations for transition or whether with good maintenance and upgrades the existing plants can provide the back-up needed for a renewables-based system.

Nuclear

The government has said it wishes to extend the lives of the current nuclear stations, as all but one are scheduled for closure this decade. They have also expressed a wish to go ahead with Sizewell C and bring Hinkley C on stream as soon as possible.

Hinkley C may not be on stream until 2031. Construction began in 2017, so it has been a problematic build. They wish to continue the work of the previous government on a possible new class of smaller modular reactors, which require decisions on who will build them and what the design will be. The bottom line is that nuclear cannot make an enlarged contribution to decarbonising UK power generation this decade and is likely to make the task more difficult as closures occur.

Can the government hit its target?

It is going to be very difficult for the government to hit its target in 2030. The likely run down in nuclear, and delays in getting sufficient grid capacity to link in enough new wind and solar power are headwinds. There is no doubting the resolve of the government and its aim has been clearly expressed in precise targets.

So far, it has lived with the nuclear and grid plans announced and in development under the previous government. It did increase wind and solar bids by raising the subsidy available in the sixth bidding round. That round was helped both by higher subsidy and the higher strike price proposal it inherited.

To speed the process, the government needs to resolve planning delays for new generation and grid installation, and work with the industry over easing skills shortages. Though the target is very demanding, there will be a considerable expansion of renewables and grid over the next five years given projects already approved and the projects they might be able to speed up.