What role will decarbonisation and sustainable development play in helping the UK amid COVID-19 and Brexit? Daniel Atzori explains.
The global economic crisis sparked by the COVID-19 pandemic had a profound short-term impact on the energy sector, leading to a sharp decrease in energy demand and wholesale electricity prices during the lockdown period.
To slow down the recession worldwide, decarbonisation efforts and sustainable development would need to be at the centre of economic stimulus packages.
Given the UK’s reliance on market-driven strategies towards net zero, the country could become a global laboratory in how to mobilise private capital to fi ght climate change in the aftermath of the COVID-19 crisis.
In June 2019, the UK became the fi rst major economy to enshrine in law a target to bring down to zero all greenhouse gas emissions by 2050, up from the previous objective of an 80% reduction compared to 1990 levels.
As the cradle of the industrial revolution, the UK has had a considerable role in shaping today’s global economy. While our fossil fuel-based economic system has delivered enormous benefi ts in terms of wealth creation in the past two centuries, it is now leading our planet to an unprecedented environmental emergency.
In recent decades, the UK has been pioneering an approach to decarbonisation that has been heavily reliant on private capital, given the overall confidence in the role of market forces that has been characterising the UK ’s energy sector at least since former Energy Secretary Nigel Lawson’s Energy Act of 1983.
In particular, in the aftermath of the 2008 financial crisis, the UK has been especially successful in attracting international investors, which have been deploying significant sums of capital in the country’s renewable generation, notably in offshore wind. However, as the key question in the months and years to come will be how to finance net-zero, the UK will have to encourage a steady flow of investments also in less established technologies, primarily to ensure the decarbonisation of mobility and heat.
THE UK COULD BECOME A GLOBAL LABORATORY IN HOW TO MOBILISE PRIVATE CAPITAL TO FIGHT CLIMATE CHANGE.
A sustainable economic recovery
On a global level, there is increasing awareness of the fact that clean energy needs to play a major role in economic stimulus packages. Coupled with the fact that renewable technologies such as wind and solar are now increasingly cost-competitive with fossil fuels, governments across the globe see there is no longer a trade-off between economic recovery and green growth.
There are already signs that sustainable development will be at the heart of UK economic stimulus packages in the aftermath of the crisis, as it is happening in the European Union.
In the UK, before the COVID-19 pandemic, there was overall confidence in the fact that, by unleashing market forces, the UK would have managed to attract the high levels of investment needed to decarbonise its energy sector.
Today, a crucial concern is whether private capital will be enough to help it reach the net zero target. While technologies such as solar PV as well as onshore and offshore wind are still potentially attractive to investors, the main challenge in the years to come will consist in how to finance the decarbonisation of mobility and heat, where revenue streams are not yet entirely clear.
Even before the pandemic, investors were often struggling to identify viable business models and predictable revenue streams for sectors such as energy efficiency, battery storage, electric mobility, hydrogen for heating and heat pumps. However, the UK has been pioneering breakthrough initiatives, such as the Charging Infrastructure Investment Fund (CIIF) and the Heat Networks Investment Project (HNIP), which mobilise private capital thanks to a catalytic effect.
These programmes are useful to ensure that institutional investors, such as pension funds, insurers and sovereign wealth funds, play a key role in decarbonisation processes.
Arguably, similar schemes could play an even greater role to attract global investors in the aftermath of the crisis.
Policy and markets
The role of the government would be crucial in ensuring the presence of a stable regulatory framework, maintaining a market-friendly environment. For investors to be confidently deploying capital in these new sectors, it would be crucial to provide them with some forms of certainty, especially around a regulatory framework and revenue stability.
In this respect, several consultations are on-going, for example, around a Regulated Asset Base (RAB) model for nuclear and on business models for carbon capture, usage and storage (CCUS). A very interesting example is represented by the Heat Networks: Building a Market Framework consultation issued by the Department for Business, Energy and Industrial Strategy (BEIS) in February.
According to the document, a clear regulatory framework and a visible project pipeline are needed to boost investor confi dence in the sector. However, the consultation does not consider the RAB model – widely used for funding UK infrastructure – appropriate for the heat market because, given the latter’s early stage of development, such a structure could lead to an increase in consumer costs.
Such diffi culty in identifying a funding model that attracts investors without an excessive burden of consumers is not exclusive to the heat market. Still it is a common feature to several other low-carbon sectors.
Another important element concerns the role of private companies in the decarbonisation of the UK industry.
Before the crisis, there used to be a degree of confi dence in the future role of corporate power purchase agreements.
However, as the balance sheets of a sizable number of corporates are under pressure due to the pandemic, a number of companies may postpone decisions about corporate sourcing of renewables. Hence, the critical policy challenges in the months and years ahead will concern the forms of support to help decarbonise industry, without neglecting small and medium enterprises.
While navigating its way out of the COVID-19 crisis, the UK will also have to shape its global role after Brexit.
Brexit is not expected to have a signifi cant impact on the UK decarbonisation, as net zero by 2050 is now legally binding. The UK is widely seen as one of the most attractive global markets for energy and infrastructure, and its reputation as a market-friendly hub is not likely to be tarnished by Brexit.
Hence, with solar and onshore wind hoped to be allowed to participate in the 2021 Contracts for Difference round, these sectors should attract healthy levels of investment.
However, the main challenge will be how to finance emerging technologies. The European Investment Bank played a pivotal role in the growth of the UK’s offshore wind sector, and similar forms of financial backing will be needed to help other, less-established technologies, to take off.
Towards net zero
The current COVID-19 crisis is increasingly demonstrating that new models of thinking will be necessary to ensure the UK’s transition to net zero. The next 12 months will be crucial for the UK to articulate its strategy to decarbonise its energy system by 2050, by ensuring a market-driven energy transition away from fossil fuels and towards renewables within a truly circular economy model.
Policy and regulation will have a critical role in articulating a framework to transition to net zero.
While wind and solar are now increasingly cost-competitive with fossil fuels, it will be essential to find a way to finance other less established technologies, which are set to play a key role in the decarbonisation of mobility and transport. For the transition to be effective, consumers would need not only to be consulted but to play an active part in the decision-making process.
The issue of balancing the needs of market forces with social equity is likely to take more and more centre stage in the aftermath of the COVID-19 crisis, as the economic contraction is already leading to higher levels of unemployment.
Hence, channelling increasing amounts of money from consumer bills to support decarbonisation policies will be less socially and politically feasible in the immediate future. As the Committee on Climate Change recommended in its letter written to the prime minister in May 2020, it will be essential to “embed fairness as a core principle” of the energy transition. Instead of being perceived as a financial burden, the decarbonisation process needs to be understood as a way to preserve the environment, create new jobs and inclusive economic opportunities.
Overall, the next 12 months will be pivotal, as the Energy White Paper, the National Infrastructure Strategy, and the final Brexit agreement are hoped to provide a coherent and consistent framework for the articulation of a long-term net zero strategy.
COP 26, now to be held in Glasgow in November 2021, offers the UK a unique opportunity to secure global leadership in the fight against climate change in the aftermath of the COVID-19 crisis.
About the author
Daniel Atzori is a Research Partner at Cornwall Insight.
Atzori holds a PhD in Government and International Affairs from the University of Durham (UK).