Powering Up Britain – the future of UK energy

The intrinsic link between energy security and the quest for net zero is the thread that runs throughout the UK Government‘s series of documents published on Thursday 30 March 2023 outlining its plans for the future of energy in the UK. The lead briefing document, Powering Up Britain, contains an overview of the measures set out in the other two key publications of the day, Powering Up Britain – Energy Security and Powering Up Britain – the Net Zero Growth Plan. The publications were accompanied by a number of energy-related announcements aimed at demonstrating that Government intends to take advantage of the opportunities for economic growth presented by the energy transition by investing in renewables and nuclear to diversify, decarbonise and domesticate energy production. While much of the substance of the publications pulls together in one place policies and commitments which are already known, there are some additional statements of intent which aim to provide even further reassurance for investors looking to put much needed private capital into energy transition projects in the UK.

An update to the Government’s Green Finance Strategy was also published on 30 March 2023 in which it sets out the measures it plans to take to achieve its green finance objectives. Again, much of this is not new but it does provide a welcome update on the Government’s next steps. For further information on the strategy and key points to note for financial investors, see our post here. Our ESG team have also commented on the details of the Net Zero Growth Plan here.

Key features of Powering up Britain of note for the Energy & Infrastructure market

Carbon Capture Usage and Storage (CCUS)

CCUS forms a key part of the Government’s means of achieving net zero and is also seen as a significant opportunity for economic growth in the UK. Government is keen to market the UK as the place for investment in this nascent sector and as a European hub for industry, by highlighting the progress made to date on policies and incentives to reduce upfront infrastructure costs and de-risk investment in early development.

The list of eight projects invited to proceed to negotiations for Track-1 of the CCUS Cluster Sequencing Process were announced as part of the Powering Up Britain package. The list comprises three Industrial Carbon Capture projects, two Energy from Waste projects, one power CCUS project and two blue hydrogen projects. Five of the projects are located in the Hynet Liverpool Bay cluster, whilst the remaining three are located in the East Coast Super Cluster, where there was a notable absence of industrial carbon capture projects shortlisted. The expansion of the Track-1 list is expected later this year and the Track-2 list sometime thereafter. The Government’s aim is to create enough CCUS capacity to store 50 million tonnes a year of CO2 by the mid-2030s. The shortlist announcement follows the £20 billion of funding announced in the Spring Budget for early deployment of CCUS (on which, see our article here).

The Government has also set out to further develop the regulatory framework for CCUS, the foundations for which have been set out in the Energy Bill (which is expected to progress through Parliament soon). It is clear that Government is seeking to invest further in CCUS and the support made public to date is not the full extent of the ambition. Industry can expect the fuller integration of CCUS into the Government’s net zero strategy over time. An updated CCUS Investment Roadmap is anticipated shortly to provide investors with the latest information on Government funding and policy and Government will also set out a vision for CCUS to raise investor confidence and improve visibility.

Hydrogen

The Government has emphasised in the Powering Up Britain report the role it sees hydrogen playing in the future of the UK’s energy mix and has announced its intention to consult in 2023 on the need and design options for the market intervention to support hydrogen to power. The report also briefly addresses the financial risks facing this emerging technology and Government has noted that it is considering what subsidies and support it could offer in the hydrogen value chain, along with any future policy which might encourage investment.

The report also sets out the Government’s plans to have up to 2GW of low-carbon hydrogen production capacity in operation or construction by 2025, with the hope of upscaling to 10GW by 2030, with at least half of this coming from electrolytic hydrogen. It is expected that CCUS-enabled hydrogen will form part of the UK’s hydrogen power.

Following the launch in July 2022 of its electrolytic hydrogen allocation round (HAR1), the Government has published a shortlist of 20 projects to move to the next stage and set out its intention to launch a second allocation in Q4 2023, with the aim of awarding contracts for up to 750MW of capacity in early 2025 and, subject to affordability, to deliver up to 1GW by 2025. The Government has also set out its plans for CCUS-enabled hydrogen projects, which it aims to support through the CCUS Cluster Sequencing process.

15 projects have been successful in their applications for funding under the Net Zero Hydrogen Fund (Strands 1 and 2). For more information on the successful projects see here.

Floating Offshore Wind

Floating offshore wind is an emerging sector but one which Government is seeking to support; as part of Powering Up Britain it has announced a target of generating 5GW of power from floating offshore wind, which will form part of its increased target of generating 50GW from offshore wind by 2030. It has also announced the introduction of the Floating Offshore Wind Manufacturing Investment Scheme, which will provide £160 million of funding to incentivise private investment in port infrastructure projects.

The scheme has been welcomed by industry as an important first step in accelerating much needed port upgrades and stimulating manufacturing but it is clear that significant further funding will be needed to ensure port readiness for mass deployment of floating offshore wind in order to take advantage of the UK’s current leading position in this new technology.

Round 5 Contracts for Difference

On 30 March 2023, the Government also launched the Contracts for Difference (“CfD”) Allocation Round 5 (“AR5”), which will now run on an annual basis for the first time. The initial budget for AR5 is set at £205 million, with the ability to increase this later this year once greater certainty about the participating pipeline is achieved. This CfD round will consist of a “two-pot” structure, which the Government has said will support both emerging and established technologies, including offshore wind, onshore wind, solar, tidal, geothermal and floating offshore wind. Our blog post on the changes to the CfD for AR5 is available here.

Nuclear

The Government has reiterated its commitment to developing the UK’s nuclear power capability through the launch of Great British Nuclear (“GBN”), which will be responsible for delivering new nuclear projects, such as Sizewell C and Hinkley Point C. GBN will be launching the first phase of a competitive process to select the best Small Modular Reactors (“SMRs”) this April, after which the second phase will launch this summer, with the final decision expected to be made in autumn.

Alongside the Future Nuclear Enabling Fund, which will provide up to £120 million of support to new nuclear projects, the Government will also be providing co-funding to support the development of the technologies selected by GBN.

The Government has also stated that it aims to take one nuclear project to Final Investment Decision this parliament and two in the next parliament, including SMRs. Both of which will form part of the Government’s aim to deliver up to 24GW of nuclear capacity by 2050.

Electric Vehicle Charging

The Government announced its aim to publish a final consultation on a Zero Emission Vehicle mandate, requiring an increasing percentage of new car and van sales to be zero emission. The mandate is expected to be delivered from 2024 and will build on the Government’s existing Electric Vehicle Infrastructure Strategy action plan which was published in January of this year.

The Government also noted that, following the launch of its Local Electric Vehicle Infrastructure Fund (“LEVI”) pilot which provided £57 million of public and private investment to 25 different local authorities across England, it is committing a further £343 million capital and £37.8 million over the next two financial years through the LEVI fund. More information on the LEVI funding methodology can be found here.

Solar

A new government/industry solar taskforce will be established to focus on developing a solar delivery roadmap to achieve 70GW of solar by 2035, as well as assessing low-cost finance from retail lenders for homes and small business premises.

UK Export Finance

The Government will increase the UK Export Finance’s (“UKEF”) maximum exposure limit from £50 billion to £60 billion, which is intended to provide additional capacity for UKEF to support exporters, including in green industries. The updated Green Finance Strategy, also published on 30 March 2023 (for more on which, see our post and article here), reiterated that UKEF is committed to increasing its support for clean growth and climate adaption investments, although there is no stated commitment for the additional funding announced to be focused on green investments. UKEF, which has previously made a formal commitment to prioritise net zero as part of its portfolio, is seen as an important enabler for mobilising private finance in the energy transition by helping to de-risk projects and financing, thus supporting UK exporters and attracting investment. The Green Finance Strategy reaffirms UKEF’s work to continue to modernise the terms and standards that OECD Export Credit Agencies apply and to continue to champion internationally the COP26 Presidency statement on aligning international public finance with the clean energy transition.

UKEF already has a £2 billion clean growth direct lending facility dedicated to financing clean growth projects overseas that contain UK export content. It also has a domestic product range to help UK exporters and investors who export from, or plan to export from, the UK. It also offers transition finance to support UK companies that are actively working to transition their business away from fossil fuels.

UK Infrastructure Bank

Concurrent with the publication of the Powering Up Britain reports and the updated Green Finance Strategy, the UK Infrastructure Bank (“UKIB”), a Government-owned policy bank with £22 billion of financial capacity across its private and local authority lending arms, announced a partnership with two equity fund managers, Gresham House and Equitix, and a commitment of up to £75m and £125m (respectively) in their new electricity storage funds (subject to matched finance from other sources). With a clear focus on support for energy storage, it also announced, in partnership with Centrica, a £200 million investment across two funds to accelerate the development and deployment of crucial storage technologies.

A new partnership with Government’s Local Electric Vehicle Infrastructure Fund was also unveiled which will allow local authorities to access a preferential lending rate with the aim of increasing investment in local charging infrastructure.

Further, having recently added natural capital to its definition of infrastructure, the bank has also announced a commitment of £12million to support a nature restoration project in the Scottish Highlands and Islands with the aim of stimulating natural capital markets, helping to tackle climate change and boost biodiversity. 

Next steps…continued focus on energy security, sustainability and decarbonisation

While much of the content of the Powering Up Britain package affirms commitments and re-affirms policy direction and intentions, coupled with the various co-ordinated supporting announcements demonstrating where tangible progress is being made, the direction of travel is clear. Increasing focus from Government on crafting the policy framework and investment environment needed to enable the energy transition is evident. It may not matter what weighting is given to the triple purpose of driving economic growth, achieving net zero or securing UK energy supplies; in each case, all UK businesses and individuals have a vested interest in the speed and success of the overall initiative.