COP27: Energy Day - UK highlights

Since Russia’s invasion of Ukraine in February this year, inflation has been spiralling and energy, food and cost of living crises are unfolding across the globe. These “polycrises” have set a different global backdrop for COP27 than we had all imagined at the end of COP26 last year. It has prompted the realisation that short-term energy costs and energy security will require equal footing with the medium-term goals of achieving net-zero targets. 

There remain concerns on whether the “energy trilemma” (i.e., the competing needs of delivering energy security, affordability and sustainability) will pose a setback for clean energy transitions or catalyse faster action. Despite some indication that countries are seeking a short-term increase in fossil fuels (in particular, coal and LNG) to replace and diversify their supply of oil and gas from Russian sources to meet the immediate energy crisis, there remains optimism that several countries will continue to press ahead and boost investment in renewable and transition technologies. 

Key highlights include:

• COP27 saw the launch of the Global Renewables Alliance combining industry bodies and organisations for wind, solar, hydropower, green hydrogen, energy storage and the geothermal sectors (see here).
• The UAE, Jordan and Israel have signed a key deal to advance clean energy and sustainable water desalination projects (see more here). The UAE and Egypt have agreed to build one of the world’s largest onshore wind projects (see here) while GE is considering deployment of 1.5GW of offshore wind to decarbonise Gulf of Suez oil and gas production under an alliance with Egyptian fossil group EGAS (see here).
• The United States unveiled plans for an “Energy Transition Accelerator”, a carbon offset plan that would allow corporations to fund renewable energy projects in developing countries that are struggling to transition away from fossil fuels, although this plan has been met with significant criticism (see here). Mexico has announced an additional 30 GW of combined wind, solar, geothermal, and hydroelectricity capacity by 2030 (see here).
• The resumption of climate cooperation between the United States and China has provided much optimism for a positive outcome for COP27. We are watching with interest how far they are able to go (see here). 
• OECD countries have reported remaining on track to phase out coal power (see here)  Although China is expected to build some new coal plants in the coming years, it has pledged to bring its own emissions to a peak by 2030 and achieve carbon neutrality by 2060 (see here). 

In the UK, recent political events have resulted in all eyes looking to the Autumn Statement expected on 17 November. The Energy Profits Levy Act imposed a 25% surcharge on the extraordinary profits of the oil and gas sector until the end of 2025 (named the “windfall tax”). It is expected that this will be increased to 35% and continued until 2028 by the Autumn Statement. In addition, it is also expected that a tax of up to 45% will be introduced on renewable energy companies on renewable obligation certificates and on legacy nuclear generators, to be applied on “excess profits” (expected to be defined to include profits in excess of 120% of the annual average profits in the three years prior to the recent energy crisis). Initial reactions from industry suggest concerns that such a tax would force companies to reconsider their investments in the UK in favour of other jurisdictions offering higher returns. A first-time vehicle excise duty on electric vehicles is also expected to be announced, although this may not become effective until 2025-26.

At COP27 a week ago, Prime Minister Sunak announced an expansion of the UK’s Clean Energy Innovation Facility up to £65.5 million. This facility aims to accelerate commercialisation of innovative clean energy technologies in developing countries, building on the initiative from COP26 to scale and speed up the development of clean technologies throughout this decade.

The UK announced its Net Zero Strategy in October 2021 (subsequently subject to a judicial review, on which see more here) and more recently, in April 2022, the British Energy Security Strategy. In light of this and Energy Day at COP27:

• Hydrogen remains at the forefront of COP27 (of particular interest was the signing of eight framework agreements by Egypt for hydrogen projects (see here and here). In the UK, the government announced an ambitious plan for 10GW (doubled from the previous goal of 5GW) of low-carbon hydrogen production capacity by 2030 and £9bn in private investment, with at least half coming from “green hydrogen”. The £240 million Net Zero Hydrogen Fund launched earlier in 2022 is seen as a start, but there are calls for significantly higher investment in order for the UK to be at the forefront of this technology (especially in contrast to European and US counterparts). COP26 highlighted the debate on the value of “blue hydrogen” (derived from natural gas) in the transition to “green hydrogen”. The need for more “green hydrogen” has been precipitated by the conflict in Ukraine and recent rise in gas prices.
• Offshore wind in the UK recently hit a significant milestone after generating a record 21GW of electricity on a particularly blustery day on 2 November (see here).  The UK has said that it is aiming to have up to 5GW of floating offshore wind by 2030 and at COP27, was part of an international alliance announced to develop more offshore wind energy (see here). Increasing wind-power capacity has reduced some pressure on other forms of power production in the UK. However, issues surrounding global supply chains have prompted concerns that the growth of renewable power may slow down next year. Whilst investment continues to increase, the rising costs of components, raw materials and labour may hamper the continued exponential growth of offshore wind both in the UK and globally.
• Historically, nuclear energy has lagged in its quest for investment due to concerns around the huge construction costs of nuclear reactors and the high risks associated with radioactive waste and decommissioning. The energy crisis coupled with nuclear energy’s ability to deliver on baseload power have seen it gain momentum in energy transition discussions. For the first time in the 27-year history of COP, the International Atomic Energy Agency opened an exhibit at COP27 and speakers underscored the role that nuclear energy can play in the energy mix in combating global warming (see here). In the UK, the government recently reaffirmed its support for the proposed Sizewell C nuclear energy plant (see here). The cost of development and speed of construction of large nuclear plants remain open challenges to be resolved before the successful deployment of this technology in the energy transition mix (the UK government is developing a funding model that it seeks to use for such projects). In contrast to large nuclear plants, small modular reactors (SMRs) are less expensive due to their size and modular nature, which offers efficiencies in construction. Last year, the UK government committed £210 million (matched by private sector funding of over £250 million) for Rolls Royce SMR to develop small modular reactors (see here). More recently, Rolls Royce SMR has reported that its design for an SMR will likely receive UK regulatory approval by mid-2024 and be able to produce grid power as early as 2029 (see here).
• Carbon capture was a focal point in the dialogue on Decarbonisation Day at COP27. Whilst environmental commentators are sceptical about whether carbon capture is simply a ruse to continue the use of fossil fuels, most experts agree that carbon capture plays a crucial role in decarbonising “hard to abate” sectors and achieving net zero (for example, see here from the Climate Change Committee). The Energy Bill (previously known as the Energy Security Bill and introduced to Parliament on 6 July 2022) proposed a framework for the licensing and revenue support contracts required to support carbon transport and storage networks. The progress of the Energy Bill has been delayed and no timetable has currently been announced for its passage through Parliament. It is hoped that the UK’s delay in bringing forward the critical piece of legislation required to stimulate near-term investment in this technology will not dampen investor sentiment. In a more favourable update, on 15 November 2022, the UK government published its response to its consultation (which was open from April to June 2022) on the “dispatchable power agreement” (DPA) business model for carbon capture, along with an updated full DPA contract and DPA Business Model summary (see here).

It is clear that COP27 is occurring in the midst of turbulent geo-political climate. Energy security has been catapulted to the front of governmental agendas, with many countries now facing a reality of having to balance short-term energy requirements with a need to invest in medium- and long-term renewable energy. We have highlighted a number of key announcements, a common theme throughout being global co-operation in moving towards decarbonisation and ultimately net-zero policies. In relation to the UK, global events have reinforced the need now more than ever to invest in long-term sustainable energy sources not only to achieve the UK’s net zero targets, but also to strengthen its stability of supply and limit the impact of future oil and gas price shocks.

See our COP27 page for more coverage of this year's summit and to register for our post-COP webinar on 22 November.