The new department
In early February 2023, Prime Minister Rishi Sunak announced a government reshuffle intended to increase the focus of several departments on emerging challenges, including the decarbonization of the United Kingdom’s energy system. The plan is to advance the country’s climate goals via a targeted approach with the help of dedicated departmental teams that would push through low-carbon and clean energy initiatives. While a leaner administrative structure will facilitate a better allocation and use of resources, the challenge with decarbonizing the United Kingdom lies elsewhere.
The Department for Energy Security and Net Zero will take over some functions of the previous Department for Business, Energy, and Industrial Strategy (BEIS), which was created in 2016 and became a product of a merger between two different departments. According to the announcement, there are six main areas of action for the newly created department:
- Ensure security of energy supply, bring down energy bills and reduce inflation;
- Ensure the UK’s compliance with the legally binding Net Zero commitments and speed up the delivery of network infrastructure and domestic energy production;
- Improve energy efficiency;
- Deliver current schemes to support energy consumers and develop options for a long-term reform of the electricity market;
- Seize the economic benefits of Net Zero, including the jobs and growth created through investment in new green industries;
- Pass the Energy Bill to support the emerging CCUS and hydrogen sectors; to update the governance of the energy system; and to reduce the time taken to consent offshore wind.
Alignment with previous goals
The mandate is in line with the earlier policies and strategies of the Conservative Party, particularly the British Energy Security Strategy released in early 2022, and it encompasses the goals of the 2020 Ten Point Plan to Green Industrial Revolution and 2021 Net Zero Strategy. Over the past two years, the government demonstrated relatively steady progress on the implementation of the plans, including the release of business models for carbon capture and hydrogen projects. Moreover, in 2021, the net zero target was incorporated into the Maximizing Economic Recovery (MER) Strategy, which guides the development of oil and gas resources on the UK Continental Shelf (UKCS). However, a major legislative proposal in the energy sector, the 2022 Energy Bill, got stuck in parliament (currently at the committee stage in the House of Lords) as a result of political volatility and rapidly changing prime ministers rather than due to the lack of institutional capacity. The bill is critical to establishing the regulatory framework for CCUS and hydrogen projects, and if the government remains stable over the near-term, the passage of the draft could be expected in 2023. Yet, the success is likely to be credited to the latest reshuffle.
How can the department succeed?
In the meantime, legislative and regulatory frameworks need to be underpinned by incentive structures that bolster the attractiveness of investment in low-carbon developments, especially when commerciality is uncertain. In 2020, the Conservative government established the CCS Infrastructure Fund with a budget of $1.2 billion. In late 2021, the government selected two low-carbon clusters — the East Coast Cluster and HyNet — that will receive support from the fund. Additional projects are yet to be selected as part of Phase 2 cluster-sequencing process, which faced repeated delays in 2022. Moreover, successful bidders in the country’s first offshore carbon storage licensing round, conducted in 2022, are also likely to apply for government support. Can the CCS Infrastructure Fund cover the potential demand? Let’s put it into context.
In 2021, the Norwegian parliament approved a direct investment of over $1 billion in the Northern Lights facility, an offshore CO2 storage segment of the full-scale Longhship CCS project. In the same year, the Netherlands awarded around $2.5 billion in subsidies to the consortium operating the Porthos CCS project. In late 2022, the government of Canada announced the establishment of the Canada Growth Fund potentially offering over $11 billion to clean energy and low-carbon projects, including CCUS and hydrogen. Finally, the 2021 Infrastructure Investment and Jobs Act and the 2022 Inflation Reduction Act unlocked billions of dollars for low-carbon projects in the United States and significantly boosted the attractiveness of existing fiscal incentive schemes. In its current form, the UK’s CCS Infrastructure Fund will likely struggle to compete internationally. The Department for Energy Security and Net Zero will likely need to develop additional support mechanisms, such as carbon contracts for difference, or convince the Treasury to increase the fund’s budget and introduce tax credits for low-carbon projects.
Overall, the new department is a signal to the international community that the United Kingdom is serious about addressing climate change. ‘It’s not about money, it’s about sending a message’, Joker said, when he set a pile of dollars on fire in Christopher Nolan’s Dark Knight. Unfortunately, incentivizing decarbonization is first and foremost about taxpayer money and the government's ability to put it to good use. And we are yet to see if the Conservative government could deliver on its funding promises.
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