Insight

How can the UK ensure an energy transition that drives economic and social progress?

Karthik Ponniah

By Karthik Ponniah, Kim McCann

One of the greatest issues facing the UK in this decisive decade is the energy transition – how does the UK accelerate the ongoing shift from fossil fuels to net zero energy system by 2050? How does it take best advantage of the huge opportunities presented? And how do leaders ensure the transition drives economic and social progress?

Fifty-five years ago, the contents of a pickle jar were decanted into an ashtray on a desk in a Great Yarmouth office. Before them lay the output of drilling in the Forties Field. And then the cry went up: “It’s oil”.

In an instant, Aberdeen’s trajectory was altered. In a few short years, it went from isolated fishing town to the oil capital of Europe, a place where Stetson-sporting oil execs enjoyed ‘two martini lunches’ in glitzy cocktail bars. At its peak, the field generated some 3.1 percent of UK GDP.

These local effects have proved both profound and long-lasting: even now, 25 years after oil production peaked, Aberdeen is still home to a disproportionate number of millionaires, has a well-educated population and an average weekly wage of £746.30 – the highest in Scotland and 20 percent above the UK national average.

In contrast, other major industrial towns – who might have benefitted from similar legacies – have experienced contrasting fortunes. These areas, largely dotted around the Midlands, North of England, Wales, and Scotland – towns such as Scunthorpe and Merthyr Tydfil – have experienced skills deficits, economic disconnection, and below-average health outcomes.

These previous energy transitions serve as a cautionary tale of divides between winners and losers. So, while the energy transition ahead is one of the greatest challenges facing the UK, it is also one of the greatest opportunities: a chance to learn the lessons from the past as the country builds a cleaner, greener, fairer, and more prosperous future based on renewable low carbon energy. And a chance to ensure it repeats the success of Aberdeen, while consciously avoiding the perils that befell other industrial towns and cities.

And while Aberdeen was a success story, the UK can still learn lessons from the approach there, which showcased both the best and worst aspects of the UK’s historic approach to energy provision. It was a tale of vision, risk-taking, and technological innovation in terms of finding and extracting the oil, yet with a lack of joined-up strategy and short-term thinking about what to do with the proceeds.

Because while the fruits of investment led to short-term sugar highs such as tax cuts, other countries such as Norway were salting some away for a rainy day with their Ojlefondt (Oil Fund). Despite having a much smaller share of the North Sea bounty than the UK, as of March 2024 this fund is valued at over 17.7tn NOK or US$1.6tn – nearly $300,000 per Norwegian citizen – and is the largest sovereign wealth fund in the world.

So instead of being remembered as a fount of long-term prosperity, the era of North Sea Oil has gone down as a missed opportunity. Any new government will need a different approach to the current energy transition challenge. Making the shift requires not only the kind of innovation in new low carbon technologies that the UK is traditionally good at, but also the kind of national level organisation and industrial strategy across multiple government departments and regions that it is not.

A unique opportunity for the UK

The UK has a global advantage with the transition ahead. Because while the British Isles are not widely envied for their weather, being one of the wettest and windiest places in Europe provides it with plenty of the two key ingredients in the recipe for decarbonising energy.

No less than 25 percent of Europe’s entire renewables capacity is in North Sea wind, while 60 percent of the potential carbon capture, storage and utilisation capacity is under it, thanks to all those emptied-out gas fields. There is also surprising potential for solar energy, which currently provides about 4.3 percent of the UK’s total electricity supply.

Potential requires people. And according to the ONS, over 250,000 green jobs have already been created in the UK, and the Climate Change Committee estimates that the figure could grow to 725,000 in total. Many of these new employment opportunities could be part of the levelling up agenda in areas such as Humberside, the North East, and South Wales – regions which are currently economically deprived but which still have many legacy industrial workers whose skills could transition readily to roles in the net zero workforce.

It’s a virtuous circle, but one that requires greater concerted effort and more co-ordination between public and private sectors to get the wheel turning fast enough.

How to seize the opportunity

Despite the UK’s 20-year history as a world leader in offshore wind power, there is still a tendency to think of renewable energy as a playground for inventors rather than a rapidly commercialising sector that has attracted some £300bn in public and private investment since 2010.

The landscape is now coalescing around a group of renewable technologies that between them look set to provide the combination of viability and scalability that the UK requires for its energy transition: offshore wind; hydrogen production and storage; and carbon capture, storage, and utilisation. Nuclear power and onshore renewables will also appear in supporting roles.

Although at varying stages of maturity, these are all practical technologies, and have longer histories than you might expect. The first hydrogen-powered engine dates back to 1806, while the first hydrogen fuel cell was invented by Welshman William Robert Grove in 1839. Carbon dioxide has been captured and stored by some natural gas processing plants since the early 70s.

The challenge is to iterate them faster – so that, like the shift from 2G to 5G mobile phone technology, the jump from wind 1.0 and hydrogen 0.5 to wind 5.0 and hydrogen 5.0 takes multiples of years rather than decades. In this way, transition tech can leapfrog the UK to the next industrial age.”

Transition tech 5.0

Already, 30 percent of the UK’s electricity comes from wind power, with more to come as the development of floating wind farms allows turbine arrays to be set up in deeper and more remote parts of the seas around the country. Yet there are three major limitations. Firstly, transmission losses getting the electricity ashore from windfarms hundreds of kms from the coast (a problem which new HVDC connectors such as those used by the Dogger Bank wind farm helps to minimise). Secondly, demand and supply are not matched – you can’t make the wind blow harder when demand for power increases, or turn it off at night when demand falls. And finally, there are specific high intensity energy uses that electrification simply cannot solve – such as high intensity heat in industrial uses such as glass, ceramics, and cement, and also in the heaviest duty transport such as aviation and shipping.

The latest developments in hydrogen offer a solution to these issues – particularly the inherent spikiness of wind power. By electrolysing water – which the UK tends to have an abundance of – into its component molecules, excess wind energy can be turned into hydrogen. That is part of what makes hydrogen so powerful – being able to control where electricity can be used, which helps with demand surges and national energy security.

Hydrogen is also the first step on what is often referred to as ‘power to X’. This is where you take green hydrogen molecules and combine them with captured carbon to make any range of synthetic replacements for everything that currently comes out of a petro-chemical refinery. This is particularly valuable for powering medium-to-heavy duty transport. And the UK’s hydrogen potential has been recognised with over 200 expressions of interest in the government’s Second Hydrogen Allocation Round, and plans to build 10GW of hydrogen – 5GW of which will be green hydrogen.

Footing the bill

With estimates that the energy transition bill for the UK might run to £10bn a year, it’s perhaps no surprise that affordability is one of the most frequently billed questions. But one person’s cost is another’s investment in the future. The physics of climate change is real and undeniable, and there are many jobs and other significant societal benefits that will result from getting the energy transition right this time. A more pertinent question might be: “Can we afford not to do it?”

It is of course vital to design the transition to ensure a win-win between the decarbonisation approach and consumer bills. Yet it is also crucial to look beyond the headline figures, which disguise some major differences in the cost structure of renewable energy when compared to previous fossil fuel transitions. For one thing, in renewables there is no fuel cost: the wind, sun, and waves are free. So while upfront capital expenditure on the infrastructure required to exploit these natural resources is high, ongoing operating expenditure is substantially lower. Over time the two tend to balance out.

For another, the cost curves are heading in opposite directions, so it is a mistake to assume that what is cheaper today will always be cheaper. Fossil fuel prices – both direct and indirect – are rising. If the full climate impact were built in, oil and gas would be more expensive still. Meanwhile, the renewables cost curve is trending down – as of late 2023 strike prices for offshore wind developments had fallen by 74 percent since 2014, when the successful Contracts for Difference scheme (which guarantees investors revenue certainty via a fixed price for their electricity) was introduced.

What is the government’s role?

The UK has an abundance of natural resources, a solid track record to build on in offshore wind in particular, and the potential to commercialise its more nascent hydrogen and carbon capture, utilisation, and storage (CCSU) capabilities. There is plenty of innovation, but what about the organisation and long-term vision? The future government is going to have multiple calls on its resources, so direct government investment alone is unlikely to be the answer. Instead, legislative and market frameworks are needed that generate private sector involvement in the energy transition. This would be done by providing vision and certainty for capital-intensive long-term projects while de-risking investment in more experimental technology – perhaps by using public sector balance sheets to underwrite preferential loans.

Processes such as planning permission could also be streamlined – via Renewable Energy Zones with dedicated planning controls, for example, or by offering cheaper bills to residents who lend support to local windfarm applications. UK domestic energy provider Octopus Energy already gives discounts of up to 50 percent to customers who live near to wind turbines via its ‘Fan Club’ tariff.

Providing certainty is one way to de-risk private investment for capital intensive long-term projects. Another route is regulatory vision. As an example, the UK government has diverged from the EU approach by allowing ‘recycled carbon’ – anything that originally came from a fossil source – in its fuels and products. And this offers an opportunity for the UK to make lower-cost fuels than its European competitors.

Finally, structural reforms are required to the energy market, which despite the clear need to promote renewable capacity, still allows the price of gas to set the price of electricity. A 2022 study by UCL found that while gas provides less than half the UK’s electricity, the price of gas dictated electricity prices 84 percent of the time. That’s because gas generation is used to ‘top up’ when demand peaks, setting a high ‘marginal price’ for power which other providers then emulate, even when demand is lower.

The report recommends setting up a ‘Green Power Pool’ that would decouple the gas price from the electricity price by providing a lower cost source of renewable top up power. This would enable consumers to benefit as the price of renewable power falls, and also open up the prospect of generating additional revenues from surplus electricity by converting it into hydrogen.

Of course, generating power from renewables is only part of the energy transition.

Truly moving to a net zero UK will require everything from the electrification of our transport network to a renewed effort to insulate our homes and build new greener homes. It will require whole-system, whole-society change, but done well it has the potential to drive a new green industrial revolution.”

Encouraging signs

Already, efforts to use the ongoing renewable energy transition to redress the economic balance and level up several UK regions may be bearing fruit. Scunthorpe is home to England’s largest onshore wind farm. And in South Wales, 2 Energy Europe has secured funding for its 20MW electrolytic hydrogen production facility at the port of Milford Haven.

So, while it’s unlikely that any of the industrial towns will be decanting renewables from a pickle jar, there are signs that these regions once left behind could benefit from a more secure, prosperous, and self-determining future.

About the authors

Karthik Ponniah
Karthik Ponniah PA financial services expert
Kim McCann PA sustainable aviation expert

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