Forget the cuts to the RHI. Ignore halving ECO. The biggest change to the UK's energy strategy didn't appear in yesterday's autumn statement. Instead, a two line note snuck out an hour or so after George Osborne finished his speech confirms that carbon capture and storage (CCS) in the UK is effectivelydead.
By comparison, Amber Rudd's speech last week, which announced a coal phase out and large scale offshore wind commercialisation, did not 'reset' energy policy as expected. Her announcements advanced the UK's decarbonisation strategy. But yesterday's withdrawal of the £1 billion capital grant for CCS, a Conservative manifesto commitment, fundamentally changes it. The decision will have seismic implications for the power sector, for industry, and for the ways in which the UK meets its carbon budgets.
The prospects of decarbonising without CCS
It is entirely possible to decarbonise electricity without CCS. However, it would require five times more interconnection; a sea change in demand response to match demand with renewables output; much greater energy efficiency; and a huge building programme of other low carbon power.
Despite the rhetoric about nuclear, the reality is that the only low carbon electricity technology for the next decade will be renewable. New nuclear power at Hinkley C won't happen until 2025 (if ever) and, although other reactors could conceivably be built a year or two before Hinkley, it would require deep optimism and huge policy effort. Small modular reactors are even further from commercial service.
In effect the government has, at a stroke, adopted Germany's decarbonisation approach - renewables only - without the benefit of a strategy. We now need offshore wind to be a UK success story. Solar and onshore wind look vital too.
Forget low carbon industry and gas
Unlike power, we can forget about low carbon industry in the UK. The government's own analysis shows that you can't decarbonise sectors like steel, cement, chemicals and oil refining without CCS. We will now have to raise taxes to compensate industry permanently for their emissions, or hope that we can afford to buy in CCS from abroad, if it is commercialised elsewhere. For industries looking to invest in the UK, the prospect of needing two decades of government subsidy to offset their pollution costs might seem like a good reason not to come here. For industries that are here already, the best strategy will be one of resource productivity and servitisation: make fewer products, and find ways of making money by keeping those products in use for longer. The UK will need a very different industrial strategy to help companies do this.
Finally, a second dash for gas is now much more threatening to carbon targets. The shale gas industry has admitted as much, linking its low carbon future to the deployment of CCS. Without CCS, gas plants in the power sector will only be able to operate for a small fraction of the year, making investment in them much less attractive without expensive government support in the form of capacity market payments. Thus, a £1 billion saving in capital spending on CCS may be undone by new, and higher, capacity market payments.
Of course, CCS may be developed by other countries, and the Treasury is probably hoping that it will prove cheaper for someone else to develop the technology and then buy it in. But, until then, policy will need to deploy renewables at much greater scale, and push industry to transform to become much more resource productive. This will be the real energy reset.Suggest a correction