Market Update 25th November 2024

UK Clean Power Targets

In the wake of Trump’s recent re-election, the title of a daily email I receive said “Trump will bury ESG, but it was already dead”.

I of course do not know what Trump will do or the US more generally. Here in the UK though the government paid £630m to bring the National Energy System Operator (NESO) into public ownership last month. It used to be part of National Grid.

NESO’s role is to make sure we all get electricity, whether at home or at work. They balance supply and demand on the national grid, while trying to maintain energy efficiency.

Energy security has always been an issue, but the Russian invasion of Ukraine has made it more prominent and this is also part of NESO’s role. Renewable energy is a key part of the UK’s energy security plan, since it reduces our dependence on oil and gas from Russia and others.

The current government has a target to operate a clean power system for Great Britain by 2030, while maintaining security of supply, and NESO have published a report outlining how this might happen.

Clean power includes nuclear and biomass, and already accounts for 62% of demand. Power sector emissions have fallen 65% since 2010. These numbers have been increased by the relatively recent closure of the UK’s remaining coal fired power stations.

Renewable energy and “ESG” more widely has had a difficult few years from an investment point of view, but it confuses me when people refer to it as some sort of passing phase, or something we don’t really need. Well over half our energy already comes from clean sources and there is a credible state level plan to increase this further. These are observable facts.

The UK is a global leader in renewable energy – specifically wind. Scotland is one of the windiest countries in the world, so it’s curious that adding to onshore wind capacity was banned until quite recently. It is not as if many people live up in north-west Scotland either, where the wind comes off the Atlantic. I have been to a pub up there called the Old Forge where it’s a two day hike just to get a pint. It wasn’t busy when we arrived.

Europe more broadly has invested heavily in clean energy of different kinds. Europe generally lacks natural resources compared to other parts of the world. We have North Sea oil, but there isn’t much oil under say France or Germany, or off their coastlines. We can agree or disagree whether it is a good idea, but it’s not surprising that France has seized on nuclear power, for example.

The “clean power by 2030” target is defined as clean sources producing at least as much power as we consume and gas providing less than 5% in a typical weather year. Some gas is likely to remain on standby to take up demand at certain times.

They estimate it will cost £40bn annually up to 2030. This would be financed by the private sector, but for context is the equivalent of about 3.5% of the government budget.

Offshore wind is the key element and would provide over half our power. Onshore wind and solar would provide another 29%. They are looking for newer technologies such as carbon capture and hydrogen to contribute. They also see battery storage as a key component.

Batteries help to balance demand from wind and solar when it is famously not windy or sunny. Their capacity is expected to rise more than 4x from 5GW to 22GW. The increased use of renewable energy increases the need for batteries.

Currently batteries operate between a few minutes and a few hours, but there are longer term plans to increase battery storage capacity to days and weeks.

The UK government reports installed power capacity was just under 75GW in 2023. 15GW currently comes from offshore and NESO thinks this needs to increase to 43-50GW in 2030, onshore is 14GW increasing to 27GW, solar is 15GW increasing to 47GW.

These targets are challenging but achievable, based on current projects in the pipeline and comparable lead times. Many of these projects are subject to delays and cancellations. The NESO report suggests that the rate of delays and cancellations would need to improve over historical averages in order to meet the targets, but the investment and capacity is there to make it possible.

Demand is forecast to rise by 11% by 2030, but NESO believe energy efficiency and demand flexibility can reduce consumer bills. A greater reliance on renewables ought to avoid the Ukraine driven price shocks we all saw recently. The UK is forecast to become a net exporter of power under this scenario – we currently import a small amount.

Robert Fullerton – Senior Research Analyst

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