The UK General Election: A Crucial Inflection Point for Energy and Industry

Whoever wins the election on 4 July will inherit an energy industry where implementation is deteriorating and the UK is at risk of falling behind its peers, despite significant progress in decarbonising the electricity sector. The failure of the fifth annual contracts-for-difference auction to attract any bids for offshore wind (a linchpin of UK energy security of supply for the future), weak rollout of heat pumps combined with poor performance in household energy efficiency, uncertainty about industrial decarbonisation pathways, and the timorous rollout of low-carbon hydrogen and carbon capture and storage infrastructure are contributing to the current difficulties. The Climate Change Committee (CCC) – an independent non-departmental public body, formed under the Climate Change Act to advise the UK and its devolved governments and parliaments on tackling and preparing for climate change – has issued increasingly stark warnings about the UK being off target in meeting its legally binding commitments, and the challenges extend beyond climate change mitigation to long-term energy security and economic relevance in the 21st century.

To meet demand projections set out in the National Grid’s Consumer Transformation Future Energy Scenario – which are already tempered in the scenario by assumed extensive flexible demand – requires an average of 6 GW of net new wind generation every year from 2024 to 2030. Only 2.7 GW was added in 2023. Battery demand could be as high as 105 GWh/yr according to the Faraday Institution, a research outfit aiming to advance battery science and technology. Meeting rising demand for electricity – even if overall energy demand falls – requires difficult decisions on technologies, the future of the North Sea oil and gas industry, and planning. A determination is also needed on who will bear the cost of the huge infrastructure upgrades which must happen not only to meet climate targets but to prevent constraints within the energy system from spilling into the wider economy.

Geostrategic Implications

At the same time, the UK is behind its peers in recognising the strategic importance of the energy transition for geopolitics. Huge industrial programmes in China, the EU and the US are driving a transformation of global industrial power, forcing responses from each other and from countries outside these blocs. These will be examined in detail in a forthcoming RUSI research paper. These programmes reflect a wider appreciation from respective governments that countries must compete now to maintain economic and geopolitical relevance in the coming decades. These programmes predate the Russian invasion of Ukraine, although the war has concentrated minds on the potential security benefits of reducing dependence on oil and gas and the potential risks of increasing dependence on China. In parallel, large-scale investments are being made in the decarbonisation of traditional industries, notably steel, and the UK has been substantially outpaced by its neighbours in terms of vision and implementation. This gap is made more glaring by the fact that the structure of UK industry is already less well suited to rapid scaling of clean energy industries than the industrial backbones of Germany or the US, for example.

The energy transition is binding industrial questions ever closer to energy and national security challenges. Critical minerals supply is one of the highest-profile concerns. Both the EU and US are imposing increasingly stringent criteria on the sourcing of minerals for clean energy technologies, coupled with financial inducements. The US’s Inflation Reduction Act (IRA) offers a 10% production cost credit on critical minerals mining and electrode active materials production, while setting a minimum on the proportion of minerals and battery components which can be sourced outside of the US or a free-trade agreement partner to be eligible for a $7,500 electric vehicle credit. Furthermore, vehicles must be manufactured in North American Free Trade Agreement countries to qualify for the credit and cannot contain any battery part sourced from a ‘foreign entity of concern’. From later in 2024 this will extend to any mineral extraction, processing or recycling. Similarly, the EU has set targets for domestic mineral extraction and restrictions on sourcing: no more than 65% of consumption of any mineral can be from any individual country outside the Union. The EU is also beefing up its requirements for mineral production and processing standards through the 2023 EU Battery Regulation Amendment, which will make supply chain tracking easier and include information on carbon footprint and recycling. These policies are already changing behaviours in the market, with many Chinese companies, for example, reportedly establishing environmental sustainability teams to address new reporting requirements.

A Fast-Developing Landscape

Such programmes are embedding security requirements within industrial strategies whose primary objective is to spur investment in domestic industries. In 2023, around $34 billion of US federal government money was spent on clean energy incentives, mostly tax credits, while $239 billion was invested in clean energy overall. In the first year of IRA implementation, 280 clean energy projects were announced in the US worth around $282 billion collectively, according to Goldman Sachs. Around $110 billion was earmarked for manufacturing, including $70 billion in electric vehicle supply chains and $10 billion in solar, where competition with China is most intense.

More decision points are coming. While debate rages about the likely extent of future hydrogen consumption, it is already clear that the gas will be a national security consideration because of its likely role in heavy industry, fertilisers, chemicals, seasonal electricity storage and the production of fuels for shipping and aviation. The CCC expects manufacturing, shipping and electricity generation to be the largest consumers of hydrogen. Change might come more quickly than anticipated. In shipping, for example, the EU extended its Emissions Trading System to maritime fuel in January, and from 2026 this will include methane and nitrous oxide emissions as well as carbon dioxide, increasing the cost of conventional fuels.

Work to commercialise ammonia or methanol engines is well underway, and countries such as the Gulf states in particular are targeting maritime fuels to anchor hydrogen investments. The International Maritime Organisation, which will ultimately drive decarbonisation of shipping, aims to ensure uptake of low-carbon fuels by 2030 with an ‘ambition’ to reach net zero ‘close to 2050’. Unsurprisingly, countries with the largest heavy industries and fewest alternatives are moving first to secure supplies, with Germany and Japan particularly active internationally. RUSI will be publishing a paper on low-carbon hydrogen international engagements shortly.

Decisions, Decisions…

The basis for the UK response to such a fast-evolving global industrial energy landscape will be shaped in large part during the forthcoming Parliament. Global industry is changing and creating new economic fundamentals for industries critical to the UK’s security and economic future.

Barriers to entry for countries aiming to break into new industries will only grow as incumbents deepen their new emerging industrial ecosystems and build comparative advantage. Decarbonisation of the electricity sector and industry is intended to be largely achieved during the 2030s in Europe and North America, meaning that investment decisions on supply chain locations will have been made.

The window for action is, to an extent, limited. Consequently, a clear political vision and much-improved implementation will be necessary if the UK is to avoid drifting into obscurity in one of the most foundational global industries.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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