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The UK has big targets for low carbon energy. Before the end of this decade, we need to build 84GW of additional wind and solar capacity alone; more than tripling our current capacity. A rapid expansion of low-carbon generation provides a route out of the energy crisis by lowering energy bills, reducing emissions, and breaking our reliance on volatile and expensive international energy markets.
Our clean energy future is within reach, but it’ll take billions of pounds of extra investment a year to make it a reality. Yet, at the moment we should be ramping up investment in line with our net zero and energy security targets, the industry is facing economic and political headwinds that threaten to blow the UK off course.
New research from Energy UK shows that the UK is set to fall short of what it needs by 18GW of offshore wind, 11GW of onshore wind and 25GW of solar capacity by 2030. We are on course for a significant shortfall in investment, which will put at risk the additional capital needed to decarbonise the power sector.
Unless we rapidly accelerate the rate at which new low-carbon plants are built, the UK will miss out on £62 billion worth of investment and generation capacity that could make enough electricity a year to power every home in the country. Missing our clean energy targets would have devastating consequences and put at risk the sector’s ability to provide jobs, skills, and economic growth to parts of the country that need it most.
A perfect storm of economic and policy conditions has set the UK on the path for an investment hiatus. Perhaps the biggest issue facing developers has been a significant and sustained increase in costs. Overall costs for building a wind turbine or solar farm have risen by an average 20%-30%, driven by commodity and component price increases far above the rate of inflation and a scarcity of skilled workers and specialist equipment. The cost of capital has also been sent soaring due to rising interest rates, making it more expensive to finance the construction of new assets.
Unfortunately, mixed signals from the government over recent months have sent investors running. A poorly designed windfall tax (EGL) is expected to take away not only the unexpected revenues of existing producers, but also earnings from new plants that would have been built in response to high prices. On top of this, some of the reforms envisaged by the Review of Electricity Market Arrangements compound investor uncertainty. Whilst incremental reform is welcome, investors in low carbon generation currently have little idea how the electricity they produce at the end of this decade will be priced. That’s hardly helpful to a long-term investment case.
Even when the finances make sense and developers have the confidence to build, it is increasingly difficult to get spades in the ground and electricity flowing to our homes. The UK’s byzantine planning system remains a key obstacle to the rapid rollout of new projects, made more difficult by recent uncertainty around onshore wind and solar.
The time, complexity, and cost of getting projects approved mean that new low-carbon generation can often take longer to go from conception to generation than it took NASA to put a man on the moon. Even when projects have permission to build, the networks are so overwhelmed that it is not unusual for developers to wait until well into the 2030s for a connection.
The challenges facing the clean energy sector are serious, but it isn’t too late for the government to intervene and ensure that the UK remains an attractive destination for international investment. This requires a fundamental fiscal rethink. Putting in place enhanced investment incentives through the capital allowance regime or introducing an investment allowance in the EGL, are the best ways to ensure the UK remains competitive against billions of dollars of tax credits in the US’ Inflation Reduction Act. Maximising capacity from future Contracts for Difference (CfD) Allocation Rounds is also key, given added urgency by the EGL, which has effectively redirected projects that may have pursued a merchant route to market towards CfDs.
Beyond immediate actions, the government must also consider how to signal long-term certainty by providing a stable policy landscape, ruling out revolutionary market reforms, and bolstering investor confidence by pursuing Voluntary CfDs.
The UK has proven itself to be a pioneer in renewable technology, but retaining our status as a leader in the energy transition requires that we act quickly. The government cannot afford to miss this opportunity to ensure that the rollout of new capacity can accelerate to meet our ambitions and power a truly net zero economy.
Adam Berman is deputy director of policy and Mark Williams is a policy analyst
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