Part 3: Is Net Zero the right choice for the UK? The Good, the Bad and the Ugly.
Part 3, Act 1: The Good
I
In the 20th Century the UK was, without doubt, a powerhouse of energy and industry. At the beginning of the industrial revolution, there was as much coal in Britain as oil in Saudi Arabia (by carbon equivalence) and by the 1970s, one of the world's great geologic basins was discovered in the North Sea.
Combined, these industries fueled a significant growth of wealth in the UK.
But off the back of those geologic riches, the coal industry is behind us and over 90% of our North Sea reserves have been depleted - the UK is now a victim of its own success.
Following over 20 years of fraught energy policy, the UK has the most expensive blended electricity prices in the G20 and in Europe.
There is no more room for luxury subsidy & support schemes, industrial policy decisions must be ruthlessly driven by economics, and energy technologies entering the market have to be pragmatic and robust.
Unfortunately, that is a far-cry from many of the decarbonisation policies currently in place and technologies touted to receive financial support.
Let’s dig into the good net-zero technologies, the not so good ones and the outright appalling.
The Good
Renewables in Flourishing Markets
In Part 2, we covered at length how the system as a whole must be considered holistically when incorporating high penetrations of intermittent generation, from batteries and interconnectors, to flexible demand-side response.
However, the economic and strategic merits of intermittent renewables are critical and should be analysed closely. In order to do so, let’s take a look at two very different, but globally leading electricity markets:
ERCOT, Texas.
The Bitcoin mining capital of the world, it’s not surprising that ERCOT is a titan of electricity markets and of energy more broadly
From its prolific Permian Basin, Texas pumps out 2.1 Billion barrels of crude oil per year, if it were a Country, it would be the 4th largest producer in the world. Natural gas is not far behind, Texas produces 368 Billion cubic meters of gas, accounting for 30% of US liquified natural gas (LNG) which is shipped around the world, a proportion set to increase as 3 mega-project LNG terminals are set to finish construction.
Texas originally set a Renewable Portfolio Standard (RPS) in 2005, that was hit 16 years early and since 2009, the State has had no renewables incentive or mandate. In fact, the Texas Energy Fund was set-up specifically to help natural gas power stations compete in the market. The fund offers developers a 3% cost of capital, far below the national cost of borrowing, and yet despite this generous incentive, the interconnection queue is still dominated by solar and batteries, with wind turbines on par with gas both in the queue and installed capacity.
Texas has complete fossil dominance, an electorate completely uninterested in carbon or climate targets and a dedicated fund to accelerate gas generation, and yet, Texas has emerged as a State-leader of renewables, ahead of democratic States with focussed renewable policies such as New York, Illinois and California (it has more installed capacity than all 3 combined).
It is also a global leader, with an installed capacity of 53 GW of solar and 41 GW of wind (remember 1 GW is equivalent to a standard nuclear reactor). Texas comes in 8th globally, ahead of major economies such as the UK, France and Australia.
Its growth-rate is even more staggering, only China and India are adding solar faster than Texas.
It is unequivocal that solar, wind and batteries are winning in Texas simply because they are superior, economic solutions.
The question really is, how has Texas achieved this?
Frankly, the UK’s entire energy policy should be designed to try and emulate this success!
It’s a question that deserves it’s own blog, but the short version is, Texas is a place that is open for business, encourages development via planning, allows generators to connect quickly at their own risk of curtailment, with that cost not borne by consumers, and a highly granular and intelligent nodal electricity market that changes every 5 minutes. The UK has a long way to go, unfortunately.
China
Ideologically, Texas and China could not be more different; one the wild west of markets, an energy-only liberalised capitalist utopia of electricity. The other, State-owned, State-directed and centrally planned.Spread across the State Grid Corporation of China (SGCP) and the China Southern Power Grid (CSPG), this is a behemoth with over thirty electricity markets.
What they have in common; China prioritises cost over carbon, and we see a similar picture emerging. Newspaper headlines fixate on China building new coal plants and its carbon emissions, but China’s colossal renewables roll out and manufacturing capacity is often swept under the rug.In the past 5 years, China has deployed 1,310 GW of solar & wind combined, vs ~200 GW of coal and only 13 GW of nuclear.
The manufacturing capacity is completely dominant:
Solar - 9 of the top 10 global manufacturers
Wind turbines - 8 of the top 10
Batteries - 6 of the top 10
In the current pipeline, China is on course to have the manufacturing capacity to build an entire US worth of electricity generation (all sources), from solar & storage alone, every single year by 2030.
These two systems and markets could not be further from each other, geographically, politically, ideologically - neither are driven by net zero or climate change, and yet both are deploying renewables and batteries at a pace and scale that is hard to comprehend. The reason, very simply; value accretive economics and energy security.
How can the UK Emulate this Success?
The UK has its own highly ambitious renewables and battery targets published last year by the National Energy System Operator (NESO) in their Clean Power 2030 report.
Flexibility is singularly critical in creating an efficient and cost-effective energy system built on intermittent renewables. To roll out flexibility at scale, price signals are singularly critical in achieving that, not convoluted and complex ‘flexibility markets’ that consumers don’t understand and businesses don't have the time for.
How can the UK build an electricity market built on price signals?
Let’s start by understanding the origin of our electricity bills which, particularly for businesses, are dominated by the ‘non-commodity’ costs.
Drax produced the latest breakdown in their recent ‘Electricity Prices Explained’ report last month, represented as a pie chart below:
1/3rd of the bill is wholesale energy (commodity costs), leaving 2/3rds comprising the non-commodity stack; a variety of network costs, taxes and levies.
Network costs are to be expected, electricity needs to be transported to where it is useful afterall, and the UK has 12m of wires for every person in the Country that needs to be operated and maintained.
Taxes and levies are different; the reality is that these costs, making up 38% of a businesses electricity bill, are entirely optional and could simply be removed or shifted to the treasury.
Let’s take a look at one in particular, the Climate Change levy (CCL).
Starting in 2001 at 0.43p/kWh, the tax was originally intended to incentivise businesses to be more efficient with their electricity use with an overall target in the UK of a 20% CO2 reduction by 2010. At the time, electricity was cheap and getting cheaper and the evidence was that energy efficiency measures were declining. On top of that, over 70% of electricity was generated from fossil fuels, mostly coal and gas, and so the CCL had its origins in fairly sensible policy.
This was a tax to lower emissions as part of the kyoto protocol by incentivising energy efficiency, not to tax businesses more, and so the revenue raised was paid back via a cut in employers’ National Insurance and energy efficiency support. Of course, renewables, biomass and small hydro were exempt from CCL, as you would expect.
By 2010, the NI cut had been reversed and energy efficiency support ended. This was now a revenue generating tax.
In 2015, the exemption for low and zero-carbon generation ended.
In 2019, the rate was hiked to 0.847p/kWh.
Following a brief cut in 2021 under Theresa May, the rate was hiked twice more to today's 0.827p/kWh.
There have been 3 significant changes in the UK since 2001:
The UKs grid being amongst the cleanest of the big developed economies with a 3rd lower emissions intensity than the G7 average, and coal generation was ended in 2025. Electricity is no longer associated with carbon emissions in nearly the same way.
In 2001, evidence heard by MPs detailed that electricity was such a low % of business’ overheads, it was frequently overlooked. Hence CCL was designed to raise the price of electricity to provide the stick for business owners to engage with energy efficiency.Today, Business electricity in the UK is the highest in the developed world, 3 times higher than in 2001, adjusted for inflation
Electrification is the critical path to decarbonisation, they are essentially synonymous. Consumers & businesses alike need price incentives to electrify their transport and heating.
I think this is a fascinating example of the Ratchet effect. A tax that was at first sensible, with good intentions, initially evolved into a tax that had served its purpose and wasn't required anymore, before finally becoming a grotesque drag on businesses struggling with unprecedented electricity costs and actively working against our decarbonisation goals.
Finally, let’s return to the original question. In order to build an electricity market on price signals, the wholesale market must be the main driver of pricing. At times of scarcity, electricity is expensive, and at times of abundance it is cheap. This is how the wholesale market functions.
The problem, as is often the case, is with Government intervention. Taxes and levies are indiscriminately added onto every kWh consumed. It doesn’t matter if electricity was generated on a windy night at 3am or on a still Winter evening at 5pm, they are the same price lumped onto bills. This scattergun approach blunts price signals, harming flexibility and ultimately harming the economic case for renewables. Renewables need price signals for both time and location to function efficiently.
The incredibly simple solution to our problems, stop lumping distortive policy costs onto electricity, move them into general taxation.
Then if you want intelligent policy, costs such as CfDs which arguably do belong on electricity bills are indexed to the wholesale price of electricity, so that they support flexibility, not hinder it.
In my opinion, the problems we face are not complex and the solutions, whilst not being easy, are genuinely simple to deploy. The Country needs a Government that understands the harm it is doing to our energy system and to get out of its own way.
Comments