UK Energy Policy - Driving the Transition

UK ENERGY POLICY Driving the Transition

“ Stable and predictable policy frameworks will be needed to realise £50bn per year of energy sector investment, as set out by the CCC ” 6. Delivering a doubling of energy sector investment • To deliver the net-zero objective, energy sector investment will need to double permanently from current levels to around £50billion per annum. Experience demonstrates that stable and predictable regulatory and policy frameworks are required to encourage new investors • OGUK supports the phased implementation of the disclosure framework provided by the Task Force on Climate-related Financial Disclosures.

The CCC report clearly identified the scope of the investment challenge in reaching the net-zero objective. Energy sector investment is likely to roughly double from the current levels of £20- 25bn per annum to around £50bn. This increase in investment will likely be a permanent feature of the economy since, once installed, the additional assets will need to be operated, maintained and eventually decommissioned and replaced. However, the incremental impact will be offset to the extent that some of the new technologies now being made available also may have lower maintenance costs or higher efficiencies, such as electric vehicles. Finally, the cost of financing investment has fallen significantly in real terms since the financial crisis in 2008 and due to other wider long-term trends in the economy. Thesechangeswill alsohaveconsequences

for the wider macro-economic outcomes in terms of taxes and the government balance sheet and also, to the extent that these costs need to be reflected in energy bills, on different groups of consumers. The HM Treasury interim report on net zero identified a number of market failures that could prevent investment from reaching the required levels across a range of different technologies. Many of these are well established themes in standard economic models and are discussed in the Treasury review of the Green Book criteria such as: • Externalities • Uncertainty, including around policy development • Economies of scale and scope • Dynamic market failures and multiple equilibria • Local and regional impacts Although most investment is expected to be from the private sector, this could indicate different types of government intervention in energy markets than has been typical in the UK. The wider range of market failures is particularly relevant to new and emerging sectors such as CCUS, hydrogen and electric vehicles. As a result, it is unlikely that relying on a single aspect of policy, for example carbon prices, will be successful in the early stages of technology development. Instead, as set out in the chart below, different types of intervention will be needed as the adoption cycle for technologies progresses.

Figure 7: UK capital investment 2019

£400bn

Energy Business Government

Residential

Other

Source: OGUK

20

March 2021