What do the CCC’s recommendations mean for utilities?

The Climate Change Committee (CCC) last month released its latest annual report to the Parliament – the first since the emergence of the energy price crisis that has left many households struggling to pay their bills. Maria Connolly, head of future energy at the law firm TLT, gives a rundown of some of the committee’s main recommendations and the implications for utilities and the energy sector.

Zero-carbon generation has already taken centre stage in securing the UK’s future energy security following the publication of the British Energy Security Strategy earlier this year. The CCC report provides a number of recommendations to enable the levels of zero-carbon generation needed to achieve both energy security and the UK’s wider net zero goals.

One of the CCC report recommendations is that “actions to address the rising cost of living should be aligned to net zero”. It also notes that there is a need for urgent equivalent action to “reduce the demand for fossil fuels to reduce emission and limit energy bills.” To achieve this, the CCC report highlights “the need for widespread deployment of zero-carbon generation and electrification of end-uses, complemented by use of hydrogen, bioenergy and CCS”.

For those operating in the energy and utilities sector, the CCC recommendations give another boost to an already buoyant market. But how will the specific recommendations support the sector in overcoming the barriers to deployment such as the need to upscale grid infrastructure, uncertainty around the role of hydrogen in the energy mix and the integration of carbon capture and storage (CCS)?

Harnessing wind power

The energy security strategy had already focused attention on offshore wind, however questions remained around supply chain, securing funding and the development of the infrastructure needed to support deployment. The CCC recommendations look to address these issues. The recommendation to “identify and address potential key supply chain bottlenecks for delivering up to 50GW of offshore wind by 2030, including for investment in ports, adequate vessel capacity, manufacturing capability and floating wind” will be welcomed by investors and developers alike particularly as the report also suggests linking supply chain actions to key decisions points in offshore leasing and Contracts for Difference (CfD) auctions.

Consideration is also given to the development of supporting infrastructure, with the CCC recommending a strategy that will “coordinate the development of interconnectors and connections for offshore wind farms to the onshore network”. The CCC additionally recognises the need “for prompt action to ensure efficient implementation of the detailed regulatory and legislative changes necessary for their timely delivery” is published.

We would expect these recommendations to support further investment in offshore and floating wind, and the trend for developer/investor consortiums, which bring together expertise and different levels of debt and equity funding to manage the high capex costs of building out these projects to continue.

However, while the CCC recommendations look to also address the skills shortage in a number of way including by publishing an “Action Plan for Net Zero skills,” the sector is already feeling the knock on effect that Brexit has had on the UK’s ability to access specialist workers from the EU. Offshore wind developers are facing new challenges as they may now need to understand complex immigration law. This is an area where many developers are looking to seek external advice from experts like TLT’s immigration team, in order to support them with hiring offshore specialists.

Resilient infrastructure

One of the challenges of adding more zero-carbon generation, such as the 70GW of solar expected as a result of the energy security strategy target to increase deployment of solar power by five times, is creating a network which can accommodate this increased demand. The CCC recommends publishing “a strategic framework identifying the network requirements for net zero”.

Creating a resilient infrastructure doesn’t just require significant investment, any upgrades need to be identified and built to a timeframe that is directly linked to increases in demand as more zero-carbon generation comes on line. Energy storage is already playing a vital role in supporting network demand, and we would expect to see further innovative projects such as the 100MW Capenhurst project – the world’s first battery storage to receive reactive power direct from the locality’s distribution network operator – and Santander’s £60 million non-recourse funding to Zenobe which will support the construction and operation of the first transmission-connected battery in Scotland.

However, there is also the need to develop new energy storage technologies particular for long-duration storage. As investors have become more comfortable with the revenue streams associated with energy storage, new players are entering what is already a very competitive market – looking for large-scale grid projects or those back by developer pedigree. This is opening up the market to new technologies and we’d expect to see pathfinder energy storage projects delivered in the coming months.

Bioenergy

Bioenergy is an area of interest for investors. For example, Macquaries’ BioCow acquisition made headlines by being the UK’s first biomethane injection point into the national transmission grid as part of a pilot project with National Grid. However, the relatively new nature of the technology and the need for a secure fuel supply are key considerations when looking at getting scale in this space.

Now the role that bioenergy can have as a low-carbon alternative to fossil fuels is being supported by CCC recommendations including that the UK continues to “take a global lead on further developing and improving UK and international biomass governance and sustainability criteria.”

In addition, the CCC recommends that “the Biomass Strategy should set out the role that sustainable domestic production of perennial energy crops and short rotation coppice will play to contribute towards net zero”. It suggests specific targets which will increase UK energy crops to 6,000 hectares a year by 2025, and 30,000 hectares by 2035.

There has already been a significant increase in the number of national grid injection point bioenergy projects which are securing land rights in recent months, and these recommendations could see further investment in and the upscaling of bioenergy as a low-carbon technology.

Defining the role of hydrogen

One of the questions that was not answered in the energy security strategy was the role that hydrogen will have in the UK’s energy mix. The CCC recommendation to “publish a plan for distribution and storage of hydrogen and other low-carbon infrastructure outside of clusters” by Q1 2023 could give the industry the direction needed, especially when aligned with the CCS recommendation to “finalise the design of the hydrogen business model and Industrial Decarbonisation and Hydrogen Revenue Scheme (IDHRS) in 2022 to deliver funding to the first hydrogen production projects in 2023”.

The report goes on to comment that those first hydrogen projects need to be compatible with electrification and other decarbonisation options in the medium term, and states that the barriers to enable hydrogen use in industry need to be removed. This would indicate that hydrogen will have a dual role in the UK energy strategy and it will be interesting to see how this shapes project development.

In addition, the report recommends the establishment of “funding mechanisms to support the development of 10GW of low-carbon hydrogen production by 2030”. We have already seen some initial funding, on an equity basis, into green hydrogen projects but the lack of direction has hampered deployment. If support for these projects was delivered via a mechanism similar to CfDs or even going a step further, the Feed-in Tariff/Renewables Obligation Certificate subsidies enjoyed by wind and solar projects, then that could unlock the large-scale funding needed to boost this technology and encourage further innovations.

Powering the UK

Low-carbon generation is set to increase considerably in coming months, and alongside solar and offshore wind, the industry will be innovating in areas such as energy storage, hydrogen and CCS. As the investor market remains competitive, funding will be channelled into more nascent technologies which will drive further development of new technologies. And as long as there is continued support from the government to implement the CCC recommendations – creating the policies and market conditions to reach net zero – it is going to be a buoyant time for the sector as it supports the UK’s goals in reaching its net zero targets.