Yesterday, Chancellor of the Exchequer Jeremy Hunt delivered the highly anticipated Spring Budget. This budget is the direct successor to Hunt’s autumn statement, and (almost) everyone throughout Westminster will be happy to see that it showed a significantly better economic outlook than most would have dared to predict a few short months ago.
Forecasts that the UK will avoid a recession and that inflation will fall to 2.9% by the end of this year will have led to sighs of relief from across the government benches. This return to economic stability enables the Treasury to start making real spending decisions without being overly concerned about reigniting inflationary pressures.
Among those vying for those spending decisions is, of course, the energy sector.
The dramatic increase in wholesale energy prices throughout the UK and Europe has been one of the most economically painful aspects of Putin’s war in Ukraine. Because of this, the Government has shifted the focus of its decarbonisation strategy from meeting net zero goals by importing carbon-neutral energy to preserving national energy security with a domestic energy generation system that can entirely meet the UK’s needs.
Great British Nuclear officially launches
Since taking office, the Prime Minister has appeared to view nuclear-generated electricity as an underdeveloped aspect of the UK’s future energy mix with a strong potential.
Hunt first revealed the extent of this belief during the autumn statement, when he announced that the Government would proceed with Sizewell C. This decision represented public investment of £300m and the first time any UK government had invested in a nuclear project in over 30 years.
This commitment to nuclear was reinforced just two weeks later when Great British Nuclear (GBN) was announced at the end of November 2022. GBN was initially billed as a scoping exercise where the government would look to set up a new body to be responsible for enabling nuclear projects and supporting the wider nuclear industry. Supporting the establishment of a pipeline of new nuclear projects with the ultimate aim of having nuclear power contribute 25% of the UK energy mix by 2050.
Yesterday, the Chancellor confirmed that Great British Nuclear has been launched. Critically, he also outlined that – pending consultation – the Government will classify nuclear power as “environmentally sustainable” in the UK’s green taxonomy. This means that nuclear will be subject to the same tax incentives as other renewable energies.
It is worth noting, however, that the Government has not yet finalised exactly what these incentives will be, nor has it released the final Green Taxonomy. However, this decision is expected to make investing in nuclear both easier and more attractive. Politically, it will also make it easier for the Treasury to justify making further investments in nuclear energy as it will align with its core green investment framework.
That said, although this is good news for the nuclear sector and the future of the UK energy mix as a whole, a large-scale nuclear reactor is not going to appear overnight. While Great British Nuclear has been launched, the final details of its remit or who will be leading it are yet to be confirmed.
Hunt announces SMR competition
It may be with this in mind that the Chancellor made one final announcement for the nuclear sector, being the launch of a competition for small modular reactors (SMRs) that will conclude by the end of this year. This competition will be administered by GBN and, significantly – depending on the result of this competition – the Government may be willing to co-fund the development and implementation of this new technology.
SMRs are advanced nuclear reactors that have a power capacity of up to 300 MW(e) per unit, which is about a third of the generating capacity of a traditional nuclear power station. In basic terms, this is enough energy to power 120,000 to 300,000 homes for a year. The attraction of these units is that they are small (compared to a traditional power station) and modular. This means they can be factory-assembled and then transported to a final destination, providing an opportunity for these units to be installed throughout the UK and moved depending on how demand changes. Equally, it limits the need to overbuild nuclear energy capacity as you can incrementally increase the number of SMRs as demand increases.
In this country, Rolls-Royce is the most well-known SMR manufacturer, but by launching a competition they could be pitted against international producers such as General Electric. However, regardless of the outcome of the competition, the Chancellor has provided an exciting opportunity for the government to invest in rapidly scaling up the nuclear energy infrastructure throughout the UK. The biggest challenge will be convincing local communities of the merits of having a reactor with a third of the power of Chornobyl in their backyard.
Carbon capture, utilisation and storage make biggest gains
One of the biggest spending commitments from the budget was Hunt’s commitment to invest £20bn in carbon capture, utilisation and storage technologies (CCUS). CCUS is a term that encompasses a range of technologies and tools, but in short, it is a mechanism of taking carbon out of the atmosphere and storing it somewhere else where it doesn’t impact the climate.
While further details about the policy will be released over the coming weeks, what is reassuring is that the newly formed Department for Energy Security and Net Zero is expected to release a shortlist of eligible projects by the end of this month, with a further two tracks of investment becoming available later this year that organisations can submit bids for.
What remains unclear is how the funding will be allocated. Pre-budget reports indicated that the funding will be spread over a 20-year period, which in essence means that they intend to spend this much – but who knows how the future will change? Yet the Treasury releases and the Chancellor’s speech today tend to indicate a faster timeline. The CCUS sector is still in its infancy and investment at this stage could provide a valuable lifeline to the development of these emergent technologies.
In his speech, Hunt said that his goal is for CCUS to store 20-30 million tonnes of CO2 per year by 2030, which is the equivalent of taking 10m-15m cars off the road. There also seems to be a clear levelling-up lens to this policy. Hunt outlined that this investment is expected to create 50,000 jobs and that the initial projects will likely take place in the north Midlands.
Energy and environmental groups criticise offsetting policy, and the possibility for hydrogen
This policy has already attracted a large amount of criticism from the energy sector and environmental groups alike. While CCUS can support the UK’s efforts to net zero, in essence, this policy is aimed at buying the UK time to continue using high-polluting technologies, with CCUS acting as an offset. To make a simple comparison, it is the same as an airline planting a few trees to offset the carbon emitted from their aircraft.
Another possibility is that the government is investing in CCUS so they can double down on the investment of ‘blue’ hydrogen. A common complaint about the production of blue hydrogen is that, while it is a low-carbon fuel, there is still a carbon emissions aspect to its production. If the government is going to use this funding to offset the carbon emissions of blue hydrogen, then there is a significant opportunity for the private sector to start the journey of decarbonising many of the industrial clusters and districts throughout the UK.
The natural gas sector has been quick to welcome this policy as an investment in blue hydrogen, with the CEO of National Gas, Jon Butterworth, saying that this investment will “kick-start low-carbon hydrogen infrastructure, priming the UK’s hydrogen economy and accelerating the clean-up of our biggest industrial areas.” Similarly, the Director of Gas at the Energy Networks Association, James Earl, said that this investment “represents a major milestone for the development of low carbon hydrogen in the UK. The first production sites will get the hydrogen economy up and running, providing clean energy to industrial sites and taking the first steps towards hydrogen becoming a real-life choice for consumers.”
So far, despite providing considerable funding, the government is yet to commit to the hydrogen sector. It will be interesting to see how this plays out over the coming months, especially with green hydrogen becoming the accepted choice.
Traditional renewables and energy storage lose out
The traditional renewable energy industry is by far the biggest loser from yesterday’s budget. There were no announcements about boosting the ability to build solar farms throughout the UK, nor was there a turnaround of the de-facto ban on on-shore wind farms. The Chancellor was aware of this, however, and attempted to subvert it by outlining that in his view the UK is a world leader in offshore wind, and by noting that 90% of the UK’s current solar power was installed in the past 13 years of a Conservative government.
The missed opportunity in my view is the lack of funding for energy transmission or storage. Regarding energy transmission, without fault, every single energy company that I have spoken to over the last few months has expressed their frustration at the inability to transmit the energy that they generate. Similarly, as households electrify more of their utilities (cars, ovens, etc), demand for electricity will also increase exponentially over the coming years. As such, this budget represents a missed opportunity to support National Grid scaling up its network throughout the UK.
Energy storage is also a critical piece of the Net Zero puzzle that is missing. While Hunt is correct that “the wind doesn’t always blow and the sun doesn’t always shine”, through investing in a strong energy storage network – be it battery- or hydrogen-operated – we can use these generation types to smooth over times where electricity demand outstrips supply. Unfortunately, no form of a decarbonised electricity network can deliver the same level of flexibility that traditional fossil fuel electricity sources can, and as such Government should be investing now to deliver a strong network of energy storage.
Grahame Woods, Senior Account Executive
Grahame Woods is a London based public affairs consultant at the leading public relations and public affairs company JBP Associates. Originally from New Zealand, his fields of interest include the energy sector, rural connectivity, political campaigns, and economic development.