Powering up?

Yesterday’s Powering Up Britain announcement had been trailed as a gamechanger for the country’s energy transition: the UK’s response to IRA in the battle for green investment. But to what extent does it shift the dial on the government’s priorities and give confidence to investors? WA’s energy team reflects on what it means and looks ahead to what’s coming next.

1. Yesterday’s announcements mark an important albeit incremental drive to ‘power up Britain’

Much of the commentary following yesterday’s package has focused on the relatively limited nature of the announcements: there was very little in the way of new funding announced, many policies from existing strategies and publications repurposed, significant reforms that are urgently needed – for example on planning reform for onshore wind – pushed into the future, and the number of specific projects backed on the low scale of expectations.

All this is true, but the fact that ‘Powering up Britain’ was neither radical or fast enough to meet key national ambitions, doesn’t mean it’s not welcome or important. Industry repeatedly calls for a renewed focus on ‘delivery’, with key targets and objectives already agreed. Yesterday’s announcement represents movement on ‘delivery’ – the hard policy grind that is necessary to move progress to targets forward.

Upcoming announcements on grid connections and onshore wind will also be critical to increase the pace of renewables deployment.

2. Picking winners (and losers)

Governments – particularly this one – dislike being seen to be ‘picking winners’ and choosing which businesses thrive. However, it’s a core theme of yesterday’s package, particularly picking the early leaders within technologies. Yesterday showed that government is committed to backing a broad range of technologies – as the Energy Minister Andrew Bowie reiterated at a dinner hosted by WA earlier this week. However, not every project within those technology types will progress – there will be winners and losers.

Across different sectors – from new nuclear to CCUS and hydrogen – government is using competitions between projects and firms to identify which they will back. This isn’t new – in effect this has happened with the CfD regime within renewables for some time – but it’s now been embedded across the sector. This very starkly exposes that within the UK energy market, project developers and investors are dependent on government permission and support to progress. There are clear commercial consequences – the impact on the share price of both the winners and losers of CCUS and hydrogen competitions yesterday neatly demonstrates this.

One critical consequence of this is that it makes it even more essential for those wishing to progress projects to make a strong case for their individual investment and to be able to differentiate it from competitors. As well as having a strong technical case, this means telling a story. How will this specific project or technology tangibly improve the local community by delivering economic growth jobs and a strong supply chain? How will it meet the government’s ambition for low cost, homegrown power more effectively than other solutions? Do you have influential champions for your project? It’s no coincidence that Teesside was a big winner on CCUS and hydrogen yesterday, with a Mayor in Ben Houchen who has made this a priority. In an election year, showing the political ‘win’ as well as technical competence is critical.

3. Home decarbonisation is the piece of the puzzle policymakers still struggle to solve

The one part of the decarbonisation challenge that arguably lost out yesterday was home decarbonisation and domestic heat. It’s a problem that successive policymakers have struggled to grapple with, but the measures announced yesterday will not yet do enough to fundamentally address the scale of the problem.

Take the government’s announcement on the establishment of a Great British Insulation Scheme. The 300,000 homes this will focus on are just a drop in the ocean of the number that need to be improved. Unlikely power decarbonisation, addressing this is much more piecemeal and requires significant consumer engagement and behavioural change.

The second big challenge is the choice of technology to heat those homes. This is one area where the government is – perhaps understandably – less keen to pick winners, worried about the political consequences of mandating higher cost solutions that will require significant disruption to consumers.

However, yesterday’s announcement conceivably gave the biggest steer yet that the government is leaning towards electrification over hydrogen as the primary solution for homes (albeit ultimately there will need to be a mix of technologies) with an extension to the Boiler Upgrade Scheme and a vision that in the future, “people’s homes will be heated by British electricity, not imported gas”.

4. Bigger things to come?

This package of announcements is important, but not enough. It is a critical step in providing clarity on the competitions, policy frameworks and future schemes required to encourage external investment but it won’t be a gamechanger.

Industry will be looking ahead to see what’s beyond this that might fundamentally shift the dial, and there’s two things to consider:

Greater financial firepower at the Autumn Statement?

The Chancellor has promised that the government’s full response to IRA will come in the Autumn, arguing that it will be ‘different – and better’. Those looking for a game changing moment – matching the simplicity the IRA mechanism – have the next six months to make the case for what this looks like.

While we’re currently in a fiscally constrained environment, the government has signalled that it will turn the spending and tax cutting taps on ahead of the next election. The argument needs to be made – partly through Lord Harrington’s review into foreign investment – as to how deploying it to support the green transition will give the government the greatest political impact. However, the delay in getting this full response to IRA and the Chancellor’s insistence that the UK isn’t about to enter a subsidy race, should constrain confidence amongst the industry.

A future Labour government?

In stark contrast to the incrementalism of this government, is the radicalism of Labour’s plans on energy. In his speech earlier this week, Ed Miliband highlighted the differing approach a Labour government would take – more ambitious targets, greater public spending (£28bn in borrowing per year and a new national wealth fund),and a much more muscular and interventionist role for the state (including a public sector energy company, Great British Energy). The ambition and pace can’t be doubted, but there remain questions over the deliverability and the solidity of this level of public spending in a challenging financial context.

WA’s upcoming report into Labour’s energy plans will delve much deeper into this, looking at the outstanding questions that remain.