Infrastructure update: Can investment in energy security be compatible with net zero?

01 / New forms of secure supply are needed to back up renewables

Over the past two years, energy security in the UK has grabbed the headlines for all the wrong reasons. Instead of planning for a long-term switch to renewables, UK politicians and energy firms have been struggling with petrol shortages and, most recently, sky-high prices for gas and electricity triggered by the war in Ukraine. Even the UK’s own energy security legislation has been put on hold so that the Department for Business, Energy and Industrial Strategy (BEIS) can focus resources on the design and implementation of the energy price guarantee. As a result of all the chaos, energy security and energy self-sufficiency have become mixed up, even if they are not always compatible goals.

This article focuses on current energy investment programmes that provide secure supply as well as capacity. By definition, intermittent renewables including wind and solar cannot provide a secure energy system without backup. As unabated fossil-fuel generation is gradually phased out, new forms of secure supply are expected to come online, including hydrogen. However, in the meantime, secure backup will continue to rely mostly on carbon emitting transition technologies.

The Truss government’s short-lived dalliance with the reintroduction of fracking to the UK not only demonstrated what extreme measures have been considered to protect UK energy markets, but also highlighted the big role that fossil fuels have in underpinning energy security. Managing the long-term transition of the North Sea from an energy source to a carbon sink will be a key aspect of the UK’s energy security agenda. The “dash for gas” also illustrates another tricky aspect of energy security. On the one hand, having an independent source of energy is useful, but interconnectivity is equally valuable – particularly for electricity markets where the UK imports and exports power on a daily basis as renewable energy ebbs and flows.

The government published its energy security strategy in April 2022, building on the 10-point plan published at the height of the pandemic in 2020. The strategy covers a huge amount of ground and has security-specific elements related to nuclear, gas and the operation of systems in addition to other sections dealing with the net zero agenda. Among the most eye-catching of the proposals is the plan to expand UK nuclear to 15% of the power mix, requiring 24GW of capacity by 2050.

Nuclear remains a controversial energy option, partly because of its high cost but also on account of lingering concerns over safety, impacts on water resources and long-term waste storage. A big row and threats of legal action following the inclusion of gas and nuclear as “transition sources” in the EU’s net zero carbon investment taxonomy shows that security concerns alone might not be sufficient to meet the criteria of ESG-driven institutional investment.

Other aspects of energy security also threaten to undermine the case for investment in the UK’s energy transition. With government ministers claiming that the UK’s energy price guarantee is costing as much as the NHS, investors in oil and gas and in electricity have been clobbered with additional windfall taxes amounting to over £30bn levied on excess profits between 2022 and 2028. Achieving the right policy balance between emergency response and long-term resilience is a particular challenge when it comes to matters of energy security.

02 / Oil and gas will continue to play a large role for decades to come

Policy and investment in connection with oil and gas is where the tensions between net-zero goals and energy security are clearest and most difficult to reconcile. Depending on the viewpoint taken, for example, the energy fallout from the Ukraine war either makes the case for increased gas production to diversify supply, or it highlights that Europe is too dependent on gas in the first place and needs to focus more investment on renewables.

Fossil fuel use currently represents 80% of global energy use. The International Energy Association has stated that consumption needs to fall to 20% of total energy use by 2050 if climate change ambitions are to be met. Maintaining sufficient production during this transition requires a delicate balance of investment in production, decommissioning and alternative uses of assets like pipelines and gas reservoirs for carbon capture and hydrogen storage.

The transition of the North Sea basin is a case in point. Some 50% of the UK’s gas is sourced from domestic fields, but the North Sea is a mature asset that requires constant investment in new exploration in order to maintain production levels.

However, there is no doubt that the recent energy crisis has sharpened minds in BEIS. The UK’s most recent oil and gas exploration round prioritised developments that are easy to access and develop, and gas production in 2022 has been 20% higher than in 2021, in part due to new capacity.

The UK’s broader strategy for oil and gas  is a long-term basin-wide transition to low carbon services. Our trajectory to net zero by 2050 assumes fossil fuels will account for 64% of energy requirements between now and 2037, even as the UK progressively reduces emissions.

This plan is to be managed by the North Sea Transition Authority which is responsible for existing and new oil and gas production as well as acting as the regulator for £13bn of investment in carbon capture use and storage (CCUS) and hydrogen production in the basin.

A remarkable £2bn-£3bn investment is also required to electrify oil and gas operations in the North Sea, mainly using power from offshore wind, which should reduce emissions by between 5 millon and 18 million tonnes of CO2e between 2027 and 2050, according to the North Sea Transition Authority.

Now that the revenue model for CCUS has been agreed, contracts are expected to be signed in 2023, paving the way for a start on repurposing the North Sea’s huge asset base into CCUS transport and storage assets. This brings further complexity, as work to convert the existing network of pipelines and storage for CCUS has to be planned to avoid compromising the future exploitation of fossil energy reserves. Ultimately, energy security considerations will continue to trump the planning of CCUS investments while storage remains a nascent technology.

The UK’s gas-related energy security investments also include liquefied natural gas (LNG) importation and storage capacity. LNG accounts for about 17% of total gas consumption in the UK.

The UK closed its Rough North Sea gas storage facility in 2017, in part because supply via its three LNG terminals was so plentiful. It has been reopened in 2022 in response to potential shortages caused by the war in Ukraine.

The UK has about 20% of Europe’s total import capacity, and new investment in Milford Haven will add a further 5 million tonnes to annual imports. Global LNG investment is only forecast to peak in 2024, highlighting that CCUS-abated natural gas is likely have a huge role in energy markets for decades to come.

03 / Nuclear is central

Nuclear energy’s role in the UK’s energy security strategy is to provide dependable, low carbon baseline power. The UK’s ambition for a further 24GW of nuclear power will provide up to 15% of the UK’s long‑term energy mix.

The recent autumn statement confirmed the government’s intention to participate in nuclear energy as an early-stage investor in Sizewell C. However, with each new nuclear power site costing around £30bn, attracting private capital is an essential part of the energy security strategy. Such efforts will be in direct competition with other ambitious nuclear programmes overseas, such as France’s plan to build up to 14 new reactors.

Steps being taken to increase the UK’s competitive leverage include the development of a new, lower-cost finance model based on the regulated asset base (RAB) that will save £10 per household per year during the lifetime of a reactor. The UK is also setting up Great British Nuclear (GBN) to better manage the long-term UK nuclear development pipeline.

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Work on GBN is at an early stage, with initial proposals being considered by BEIS. Early signs suggest that GBN will be pursuing a mixed portfolio of different technologies including small modular reactors, which are currently under development by Rolls-Royce.

Alongside the UK’s fission-based nuclear programme, progress is accelerating in the development of fusion technologies. In October 2022, £220m of funding for fusion development was announced, alongside the confirmation of the location for what will be the UK’s prototype fusion reactor, the Spherical Tokamak for Energy Production (STEP).

Plans are for the prototype to be built by 2040, with a concept design developed by 2024. Clearly, STEP will not be contributing to the nation’s energy security in the short term, but the fusion programme remains an essential hedging strategy should conventional renewables not deliver a pathway to emissions reduction.

04 / Battery storage is a growing market

Energy storage will have a key role in ensuring the secure operation of energy systems with intermittent sources like wind, and battery energy storage systems (BESS) are one of the few areas of the energy security agenda that can be thought to be wholly sustainable. Current installed capacity in the UK is 1.7GW, but the development pipeline exceeds 25GW.

The UK BESS market has two market drivers. On the one hand, investors supply the National Grid’s dynamic containment requirement. This is an energy security requirement for an always‑on, instant response to deal with frequency fluctuations on the grid. Dynamic containment pays a fixed hourly income based on availability, not use. The other market is in market arbitrage – delivering dispatchable energy when prices are high – such as when the sun is not shining or wind speeds are low. The arbitrage market highlights how financial incentives support energy security. In this instance, the revenue opportunity comes from the shortage of low-cost energy such as offshore wind.

As the arbitrage market grows, BESS investments will get larger because their ability to generate revenue depends on being able to supply the market for as long as prices are high. Schemes of up to 500MW with a two-hour storage duration are being proposed now that planning rules have been relaxed. Ironically, the BESS market will grow even faster as wind expands, as the cost of offshore wind falls and other sources of generation go up.

As a result of growth in demand for BESS, EVs and other battery markets, the total size of the global lithium-ion battery market is forecast to be 9TWh by 2030 – that is 10 times current levels. Such demand highlights that security of supply for key materials like lithium will also need to be a part of the UK’s energy security strategy.

05 / Interconnectivity is key

The final piece in the energy security jigsaw is interconnectivity. The objective of interconnectivity runs counter to the logic of energy independence, but ultimately a well-diversified network is more resilient than a set of isolated systems and is also cheaper to run. The UK’s plan to install 18GW of interconnectors by 2030 will save £20bn in generating costs by 2045. Europe plans to have interconnector coverage of 15% of total installed capacity by 2030.

The contrast between Europe’s fragmented gas transmission network and a more integrated electricity market demonstrates the security case for interconnectors. Major European gas users like Germany have struggled to adjust to the loss of access to Russian gas in part because of limited interconnector capacity with markets that have surplus LNG, such as Spain, Portugal and the UK. By contrast, electricity markets in Europe coped with the loss of hydroelectric capacity during summer 2022 in Norway, Italy and Switzerland in part because of plentiful transmission capacity.

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Interconnects run on an arbitrage model rather like BESS. Operators make money by being able to transmit energy from a low-cost source to a high-price destination. Investment has been incentivised by regulatory mechanisms such cap and floor, which guarantee a minimum level of income. However, as intermittent energy sources like wind comprise a greater market share, interconnector flows are expected to increase and a new generation of less regulated, merchant operators to enter the market.

Any commentary on interconnectors is incomplete without a reference to plans to link the UK to huge wind, solar and battery storage resources in Morocco. Morocco is well on the way to becoming a solar and wind energy superpower due to the reliability and intensity of sunlight and trade winds. Xlinks proposals aim to access 10.5GW of capacity providing 3.6GW of power per hour to the UK, 20 hours a day – equivalent to 8% of the UK’s needs. It will require a 3,800km-long HVDC interconnector comprising two circuits each with a capacity of 1.8GW. Interconnects are evolving into more than a means of diversifying energy supplies.

06 / Conclusions

Energy security has become one of the biggest challenges facing governments across the world. The measures that need to be taken to ensure security span across the full spectrum of the energy market – from reduced consumption and energy efficiency at one end to the reform of energy price mechanisms at the other.

Current solutions to energy security rely mostly on legacy technologies. Even coal-fired power stations are likely to reopen across Europe this winter, in response to shortages of cleaner natural gas.

More investment in legacy fossil-fuel resources rather than low carbon technologies could slow down the net zero transition and will certainly bake in future emissions unless CCUS technologies can come on stream soon.

However, until future energy storage technologies such as hydrogen are developed at scale, the risks of system failure associated with intermittent sources such as offshore wind mean that the case for investment in energy security is strong, creating arbitrage opportunities that will crowd in investment.

Getting the right balance of investment, ranging from nuclear-powered baseload to CCUS-abated natural gas, will need support from government; and the resurrection of elements of the cancelled Energy Security Bill will be a vital step in making progress. In the meantime, all players – government, energy companies, investors and consumers – need to be aware of the full implications of choices made in the name of short-term and long-term energy security.