Speed limits on the road to net zero

An abridged version of this article appeared in the London newspaper, City AM on 13 October 2023  

The celebrated Scottish poet, Robert Burns, famously said: “the best laid plans of mice and men often go awry”.  Viewed by many as prescient, let’s hope these historic words don’t come back to haunt us.  In the years since the United Nations Paris Agreement on Climate Change of 2015, Governments and companies around the world have been busily laying out their plans to transition our society to net zero carbon by 2050.

The UK, in 2019, was the country that went first in laying out its plans to legislate for net zero.  Many countries have followed since.  But with UK Prime Minister, Rishi Sunak’s recent announcements, it may also have become the first of those countries to start winding the plans back.  Although the overall mission to hit net zero by 2050 is still in place, some of the key near-term goals along the way - the unpopular ones regarding internal combustion engine cars and gas boilers - have been pushed back or scrapped.   

This has served as something of a reality check for those of us working in the investment side of the energy industry.  And it is not an isolated move.  Over the past few months, many of the major energy companies who went early on net zero 2050 have also quietly started to change their tune on the speed and method of their net zero plans in the face of concerns over the true economic returns from renewables.  Germany has started to follow this lead, given its fears of losing its energy-intensive industries to the US and other locations with cheaper and more secure energy. No doubt other Governments will also follow.  These are polarizing moves.

Those of us who work in the energy industry tend to get excited by the eye-watering sums that need to be spent on energy transition.  And why wouldn't we.  In 2022, over 1.3 trillion dollars globally was spent on the energy transition. To get to net zero by 2050, this number needs to rise to around three trillion dollars per year up to 2030 and then to somewhere between seven to nine trillion dollars per year to 2050 (depending on the source).  To put this in context, the total size of the global economy is around 100 trillion dollars per year, so we are talking about up to nine per cent of all the world's money.  It adds up to a lot of zeros chasing net zero and a significant amount of transactional activity for energy investment professionals.    

But who is paying for all of this?  Well, the costs of some renewable energy technologies have fallen dramatically over time as the technology has become more prevalent - particularly solar and onshore wind, which in many cases are cost competitive.  But many of the key energy transition technologies remain stubbornly expensive and their viability has proven to be surprisingly sensitive to tightening supply chains and higher interest rates (eg, the current travails of offshore wind).  As intermittent renewables start to make up more and more of our energy generation mix, and as we look to decarbonise our fuels towards biofuels and hydrogen, we start coming up against some major infrastructure challenges and costs that start to add up to these larger figures.  For example, major grid and network upgrades, major battery storage additions and the deployment of back-up generation such as gas-fired power with carbon capture to cover periods of renewable intermittency (eg, periods of low wind and darkness).  If our push towards renewables happens too quickly and without energy availability and affordability being guaranteed, then we lose industry and jobs to lower cost locations with more secure supplies of energy (and where emissions will not be controlled anyway).  Nuclear power is available as a low carbon baseload power source and is therefore likely to be highly material in a net zero future, but the staggering costs of conventional new nuclear are not covered by their revenues and the pace of progressing the permitting of new nuclear projects in the UK and Europe is glacial.   

For some of the key energy transition power generation sources (eg offshore wind, nuclear, carbon capture and hydrogen) and infrastructure assets to be "investable" they require public subsidy coupled with additional tariffs and the regulation of carbon emissions from competing hydrocarbon sources.  This all adds up to significantly higher energy costs for taxpayers and consumers.  The policy uncertainty in existence for the last few years also causes investment decisions across the energy industry to slow.  We're particularly seeing this in relation to oil & gas investments, where investment activity has dropped in recent years in the UK and other OECD countries.  Of course, we're now seeing this turn the corner in the UK, as clarity has been provided on new North Sea oil & gas licenses and the Rosebank field development plan has been approved.  But the spectre of the 2024 UK General Election looms large, and a spirit of uncertainty and stasis prevails.         

Some may say that the public should not be given a choice on the costs that need to be incurred and behaviours that need to be modified to get us all to net zero.  These simply need to be imposed and coerced.  They may also say that the UK needs to show leadership and be demonstrably going first and showing the way by how much we can all suffer with a stiff upper lip.  This is a "climate emergency" after all and the normal democratic processes need to be suspended.  We all need to get used to having less stuff and less freedom.   

But is this the right way to go about it? Will the public bear the costs and the curtailment of their freedoms?  The recent by-election in Uxbridge, in Greater London was decided on the basis of resistance to a £12.50/day tariff for driving higher emission vehicles in the outskirts of London. This suggests that the public has a voice on this subject, and that they will express it when it counts.  In addition, if this is a climate emergency now, does that mean it is a climate emergency from now on?  Unfortunately there is nothing temporary about the changes we are experiencing in our climate.  Are we locking ourselves in to increasingly coercive policies and rules over time, and a less free future?   

I'm not sure all of this is necessary or desirable.  In my view, the fundamental focus of Government should continue to be on promoting a vision of a free and prosperous future society with abundant, secure, affordable, safe and sustainable energy supplies.  Government support should focus on encouraging the development and scaling up of low-carbon technologies, such that the costs fall and they become the natural choice for industry and consumers over time.  The UK is leading the way here in many respects.  It has decoupled economic growth from emission growth and stands out as the fastest decarbonising major economy.  It is a pioneer in creating the regulatory environments and financial instruments necessary to foster innovation and to promote investment in energy transition technologies.  We can be proud of our "contracts for difference" (CFD) regime for offshore wind, our "regulated assets base" (RAB) system for new nuclear.  We are also innovating faster than any other country to create the best investment environment for carbon capture and hydrogen, through the development of clear standards, business models, model contracts and network codes.  Although it is going slowly, we are still pushing ahead with new nuclear to replace the rapidly ageing nuclear fleet in the UK, as well as investing in the beginning of small modular reactors. 

These contributions to the world are seriously impactful (much more so than any emissions reductions in the UK), as other countries follow the lead of the UK in creating free and functioning energy markets and financial instruments which promote innovation and investment in the energy transition.  But at the same time, and during this interim period between the old and the new energy systems, we need to ensure energy security and affordability.  This means we need to also promote sensible investment policies in relation to oil & gas, which still makes up 78 percent of the UK's energy needs and 84 percent of global energy needs.  If we don't produce oil & gas in the UK, we'll simply pay more for it and generate more carbon to import equivalent quantities from elsewhere.  This then challenges the viability of our domestic industrial capacity even more.  Oil & gas will be needed for decades to come both to energize us but also to enable the prosperity to fund the transition and so we need to be careful in demonizing this industry – better to work with it and make it as clean, safe and sustainable as possible.  Yesterday's King's Speech emphasised the intention of the UK Government to continue with annual oil & gas licensing rounds in the North Sea to ensure the UK can continue to maximise its domestic supplies during the transition, rather than relying on imported, higher carbon products. 

So, in conclusion, can we get to net zero by 2050?  To a large extent, this is for the people to decide.  Of course, we should stick to this mission for as long as we can in pursuit of the broader vision of a prosperous society.  We need to continue to be bold and to aim high and to create the environment of innovation necessary to ultimately get us there.  But we’ll need to show true leadership and take the public with us, every step of the way and with a spirit of pragmatic optimism.  We'll need to level with them (as Rishi Sunak has started to do) about what it will take to get there by 2050, what the costs will be, what sacrifices will be required and what might happen to energy-intensive industries (and therefore jobs) if we compromise energy security and affordability.  We'll also need to be clear as to what the consequences will be if we don't get there by 2050 and if net zero comes later.  That is, what are the scale and additional costs of the adaptation measures required in a higher temperature world?  After all, it is the public we are ultimately asking to pay for all of this. 

Electricity may travel at close to the speed of light, but on the road to net zero we can only travel at the speed of democracy.  And that speed limit is one we all need to be mindful of as we load the costs and sacrifices of net zero on to the public.