From Climate Scepticism
BY MARK HODGSON
Paul Homewood has a scathing piece about the National Audit Office report dated 1st March 2023, on “Decarbonising the power sector”.
It is difficult to disagree with Paul’s concluding three paragraphs:
The report does briefly mention the necessary upgrading of the grid, the cost of which is not included in the £400 billion mentioned above. But it makes no attempt to put a cost on it, or for that matter the government for its failure to do so.
Given that the NAO’s remit is to ensure value for money, surely they should have demanded that the government produce a fully costed and audited budget for decarbonising the power sector, without which the whole strategy cannot properly be assessed.
A thorough and truly independent report by the NAO would surely have called into question the whole decarbonisation strategy, as being wasteful and poor value for money, poorly thought through, impractical and endangering the UK’s energy security.
However, I see enough criticism in the report regarding the Government’s approach to net zero to make it a worthwhile read. One hopes that politicians might read it and start to worry more than a little about their ludicrously expensive and appallingly impracticable pet project. What follows is simply a cut and paste exercise on my part of paragraphs lifted from the report, with page references given, so that any interested readers can check out the references if so minded. The NAO report may not offer the much-needed hauling over the coals of the net zero project, but I believe there is enough in what follows to make any sane person read it and weep. Everything that follows (save for the conclusion) is a direct quote from the report.
Key facts (page 4):
Up to 50GW: the government’s ambition for offshore wind capacity by 2030. This would mean overseeing the deployment of three times as much offshore wind capacity in eight years as in the last two decades
Up to £62 million a day: constraint costs since 2018, where electricity generators are paid to constrain their output
Seven: teams (directorates) across three top-level groups in DESNZ responsible for decarbonising the power sector
Key findings (page 6):
Transitioning to a secure, affordable and decarbonised supply of power by 2035 requires a step-change in both private investment and the pace at which new generating capacity is built. In its Net Zero Strategy, the government estimated that £280 billion to £400 billion of public and private investment in new generating capacity will be needed by 2037 to decarbonise the power sector. These costs represent the construction costs for power generation only, and do not include the costs for all aspects of decarbonising the power sector, such as network construction or research and innovation on technologies. Total costs will depend on factors including the location of new generation, the impact of any reforms to the electricity market and the effect of efforts to align consumer demand with supply. DESNZ has set stretching ambitions for the expansion of offshore wind, solar and nuclear power, which require much faster deployment rates than have been achieved before
The power system needs to modernise to accommodate different kinds of electricity generation. Renewables have different characteristics from the fossil fuel power sources they are set to replace. Wind and solar can only generate power when the wind is blowing or the sun is shining so generation cannot be controlled, unlike gas-fired power stations that can be turned on or off quickly to meet changes in demand…DESNZ is working on ways to reform the electricity market and is encouraging consumers to use electricity more flexibly so that demand is more aligned to the intermittent nature of renewables, for example through its Smart Metering Implementation Programme [rather more detail appears on page 29 regarding this fundamental problem]
DESNZ has not yet established a delivery plan to decarbonise power because it has prioritised responding to recent energy sector challenges. In April 2021, DESNZ created an energy portfolio office, which is responsible for creating a delivery plan for power decarbonisation and coordinating the work of the DESNZ directorates responsible for different energy programmes including renewables, nuclear power and networks. DESNZ planned internally to prepare a first draft of its delivery plan with key decision points, risks, mitigations and interdependencies by October 2022, in support of a vision of how a fully decarbonised power sector will be achieved by 2035. During 2022, DESNZ prioritised developing and implementing responses to recent record-high energy bills and it therefore scaled back its work on coordinating long-term power sector decarbonisation. It told us it still has more work to do to develop a delivery plan
The lack of a delivery plan means DESNZ cannot be confident its ambition to decarbonise power by 2035 is achievable. [My emphasis]. Many of the changes necessary to achieve decarbonisation rely on technologies that are not yet available or not yet ready to scale up to the level needed. A key example is technology to enable the power system to meet demand at times when there is little wind power. DESNZ is supporting the private sector to develop a range of solutions to this issue, such as hydrogen power and energy storage. However, it has not established a ‘critical path’ to 2035 to understand when it will need to make decisions about which technologies to adopt and roll out to stay on track. For example, DESNZ considers that achieving decarbonisation by 2035 requires new generation, including wind, solar and nuclear, to deploy at, or close to, the maximum level which is technically feasible in that time. However, there are several significant challenges, such as securing investment and identifying locations
There is a risk that without a delivery plan, decarbonising power while maintaining security of supply will cost consumers more. There will be ways of sequencing the different changes required to decarbonise power that help to avoid unnecessary costs. For example, ensuring network capacity keeps pace with expanding generating capacity could avoid the risk of paying wind farms to shut down. If generators cannot access the grid, generation exceeds network capacity, or generation exceeds demand, then costs arise to consumers as generators are paid to constrain their output. While these ‘constraint costs’ typically vary (between £0 and £62 million a day since 2018), the annual total costs have recently increased, alongside the growth in offshore wind capacity.
DESNZ has more to do to manage portfolio performance, costs and risks of transitioning to a decarbonised, secure and affordable power system. While DESNZ has been reporting internally on its progress to decarbonise the power sector, it has not yet established a set of system-wide measures to track progress and costs, which could enable it to identify when it is off-track against expectations. It is also developing its end-to-end portfolio risk management framework. Risk management processes exist for programmes within the portfolio, and some significant risks are escalated for review by the energy portfolio office, energy board or net zero boards. However, not all risks are aggregated across the portfolio and there is no portfolio-wide view of the top risks to decarbonising the power sector
The government intends to create a new organisation to coordinate the power system but has not clarified what its roles and responsibilities will be. DESNZ intends that the Future System Operator will advise government on policy decisions that balance decarbonisation with maintaining a secure supply of electricity and ensuring the system runs efficiently. This might include, for example, advice on the best location to build new wind farms. Government’s ambition is for the Future System Operator to be established in 2024. DESNZ has not yet set out how it would work with the Future System Operator, and the extent to which the new organisation assumes responsibility for some coordinating activities
Decarbonising power is the backbone of the government’s plan to achieve net zero. Although power sector emissions have reduced significantly over the past three decades, DESNZ cannot be complacent about the challenges involved in decarbonising further while continuing to ensure a secure supply that meets the predicted electricity demand increases. This will require substantial investment in new capacity, alongside system-wide modernisation, and needs a joined-up approach to ensure changes happen in sequence and with coherence. The longer DESNZ goes without a critical path bringing together different aspects of power decarbonisation, the higher the risk that it does not achieve its ambitions, or it does so at greater than necessary cost to taxpayers and consumers.
To accommodate more geographically dispersed electricity generation, and greater flows of electricity as demand increases, networks that transmit electricity from generating sources to homes and businesses will need to expand. For example, in Electricity networks, we reported that network companies have a crucial role to play to support carbon emissions reductions in the energy sector and the wider economy. Growth in the overall demand for electricity, and displacement of carbon-emitting fuels by renewables, mean that new investment is needed to expand and upgrade electricity networks
Increasing the proportion of electricity generated by renewable technologies will have a profound impact on how the system operates. This is because renewables have different characteristics from the technologies they are replacing, particularly gas-fired power stations. Renewables are intermittent: they only produce electricity in certain conditions, such as wind and solar which generate when it is windy or sunny (see Figure 9). Gas-fired power stations are flexible: they can produce energy quickly on demand and currently provide most of the flexibility that ensures peaks in demand are met. Gas-fired power stations produced approximately 41% of the UK’s electricity in 2021 but the government has set an ambition to reduce gas consumption by 40% by 2030 in its British Energy Security Strategy, and would need to phase out unabated gas-fired generation altogether to decarbonise power fully by 2035.
The potential solutions to managing with more intermittent generation could come from:
flexible technologies: there are some technologies that provide flexibility and are potentially zero or low-carbon, such as burning hydrogen and using carbon capture with natural gas-fired power stations. In 2020, the system had a maximum of around 10GW of low-carbon flexible technologies.14 DESNZ considers that by 2030 it may need around 30GW to cost-effectively integrate high levels of renewables. In the British Energy Security Strategy, DESNZ sets out its intentions for flexible technologies, including up to 10GW of low-carbon hydrogen production capacity by 2030, subject to affordability and value for money. DESNZ expects at least 5GW of this to be green hydrogen, that is produced using electrolysis powered by renewable energy. Producing zero and low-carbon hydrogen could be an enabler for hydrogen-powered electricity generation. DESNZ has also indicated that it could need more than 10GW of gas with carbon capture, utilisation and storage by 2035 to meet the Sixth Carbon Budget;
innovating to benefit from new technologies: some of the technologies that the UK is likely to rely on in future (such as hydrogen, and carbon capture, utilisation and storage) are nascent and untested at scale. In its 2021 Net Zero Research and Innovation Framework, the government set out the importance of also developing renewable, bioenergy and nuclear power (small and advanced modular reactors); and of energy system integration and flexibility
Financing power sector decarbonisation
In its 2021 Net Zero Strategy, DESNZ estimated that £280 billion to £400 billion of public and private investment in generating capacity and flexible assets will be required by 2037 to achieve power sector decarbonisation. This cost range is based on two possible pathways to net zero (one with higher demand levels, and one with lower demand) identified using DESNZ modelling, which relies on, and is sensitive to, a wide range of assumptions such as the costs and characteristics of generating technologies. These costs represent the construction costs for power generation only, and do not include the costs for all aspects of decarbonising the power sector, such as network construction or research and innovation on technologies.
The Climate Change Committee (CCC), which advises the government on progress towards net zero, estimates that £233 billion of additional capital investment into electricity supply, compared to a no-action counterfactual, will be required between 2021 and 2037. This includes upfront costs for building capital-intensive low-carbon generating capacity such as wind farms. It estimates that capital investment in generating capacity should decline from 2035 onwards as the required build rate begins to fall and costs of low-carbon technologies decrease. The CCC’s Balanced Pathway model also estimates £48 billion of additional capital investment in wider infrastructure will be required between 2021 and 2037. This is mostly for electricity transmission and distribution networks, but it also includes investment in the wider economy such as for industrial carbon capture, utilisation and storage. The CCC’s cost estimates are also produced using a DESNZ model, but are based on different baselines and the CCC model has additional assumptions and inputs relating to demand, flexibility, capacity ranges, costs and carbon values
…recent energy sector crises mean DESNZ has made less progress on establishing its delivery plan than it initially envisaged. While prioritising rapid work on support to consumers through the Energy Price Guarantee and the Energy Bill Relief schemes, DESNZ scaled back its work on coordinating long-term power decarbonisation. For example, DESNZ planned internally to prepare a first draft of its delivery plan by October 2022. It told us it still has more work to do to develop a delivery plan… Industry stakeholders are increasingly concerned about the lack of a government delivery plan that brings different aspects of power together
We expect government programmes to have a clear vision of objectives and an articulation of what success will look like. This is important for effective oversight, assessment of progress and value for money, early identification of problems, and to provide certainty to stakeholders. In decarbonising power there is some unavoidable uncertainty, which means it is not yet possible for DESNZ to define precisely what the decarbonised power system should look like. This is because some technologies are nascent or untested at scale, and others may emerge. As technologies develop, such as new ways to store energy, the most cost-effective pathway towards decarbonisation might change. There is also uncertainty as to how costs of existing technologies will change, and how receptive consumers will be to new ways of flexibly using power.
DESNZ does not yet have a plan for how it will ensure flexible technologies develop quickly enough. DESNZ told us it has chosen not to target a particular generating mix, rather it will develop a range of flexible zero and low-carbon technologies.
The government’s ambition is to decarbonise the power sector by 2035, subject to security of supply. However, DESNZ has not defined security of supply, including what residual emissions from fossil fuels it may tolerate if electricity from renewable sources is insufficient to meet demand
The effects of poor sequencing are already visible in the relationship between new generating capacity and expansion of electricity networks that connect them to the grid. If generators cannot access the grid, generation exceeds network capacity, or generation exceeds demand, then costs arise to consumers as generators are paid to constrain their output. While constraint costs typically vary (between £0 and £62 million a day since 2018), total annual costs have recently increased, alongside growth in offshore wind capacity… These costs could increase further if network capacity does not keep pace with electricity generation expansion.
DESNZ considers that achieving its 2035 ambition requires all currently known technologies, including offshore wind and nuclear power, to deploy at or close to the maximum level technically feasible in that time. This approach does not build resilience into the portfolio to take account of potential setbacks, disruption and future uncertainty. DESNZ would need to find alternative ways of achieving its ambition if the deployment of offshore wind or nuclear power began to fall short. This might require, for example, further investment in innovative technologies such as energy storage or greater reliance on reductions in demand. Optimism bias is a concept that is well-recognised in government. HM Treasury has published guidance aimed at redressing the tendency for project appraisers to be overly optimistic, by adjusting estimates of costs and benefits using data from previous or similar projects. Establishing an overall delivery plan is an opportunity for DESNZ to test the resilience of its approach, challenge any potential optimism bias, and identify alternative pathways to deploy if its current approach proves unfeasible.
While DESNZ has estimated what decarbonising the power sector will cost, it has not yet assessed when there may be periods of higher spending and how this will be paid for, particularly if consumer bills remain high due to wholesale prices. The British Energy Security Strategy highlights the importance of energy that is secure, clean and affordable. DESNZ intends to achieve secure and clean energy in the most cost-effective way, and so there is uncertainty in how much achieving these objectives will cost and it will depend on future policy arrangements. It noted that cost-effectiveness must consider the costs to decarbonising the whole economy and not just the power sector.
DESNZ updates the models and their underpinning assumptions as more is learnt about emerging low-carbon technologies; DDM is updated once a year, UK TIMES is continuously being updated. However, since DDM is only updated annually, there is a risk that its results could quickly become out of date if external conditions change. Economic conditions, such as increasing interest rates, could mean that investors’ required rate of return on projects, such as offshore wind farms, could be higher than the DDM currently estimates
Each of the directorates provides monthly updates to the board, including on how well programmes are delivering against their milestones and intended benefits. However, complete information on progress is only collected for some programmes related to the power sector, such as offshore wind and Sizewell C. It does not currently include, for example, detailed information on progress with networks or Hinkley Point C
We would also expect DESNZ to have processes to monitor spend against expectations. Modelling, assessing and managing costs is important, particularly given recent inflation, energy and macroeconomic policy and political turmoil impacting on investor confidence. We found that DESNZ is not tracking total costs incurred and whether these are in line with its expectations for the overall costs to decarbonise. Without cost data, it is more challenging to consider trade-offs and assess pathways to decarbonise that offer superior value for money, and to take decisions to change course in response.
DESNZ is developing and maturing its end-to-end portfolio risk management framework. Risk management processes exist for each programme within the portfolio, and information on each project’s most significant risks (that satisfy certain criteria) is escalated for review by the energy portfolio office. Risks can also be escalated for discussion at directorate or group level through other channels, such as via the energy board or net zero boards. For example, if there are too few nuclear technicians to meet the required build rate, the nuclear projects and development directorate is responsible for escalating the risk within DESNZ and proposing possible solutions. However, not all risks are aggregated across the portfolio and there is no portfolio-wide view of the top risks to decarbonising the power sector
DESNZ told us that the recent energy crisis had made it hard to reach complement on long-term activities as hiring staff for short-term activities was prioritised. For example, in February 2023 there were around 75 roles being recruited to the seven directorates working across power sector decarbonisation, as they aimed to grow to meet DESNZ’s increased ambitions. In addition, the Government Internal Audit Agency noted that over 2021-22, DESNZ was shifting towards doing more delivery work, compared to policy. This was adding to the pressures on its capability and capacity.
There are also potential capacity gaps in other government organisations that could hamper progress. For example, DESNZ and other stakeholders told us the Planning Inspectorate, which is responsible for considering wind farm applications and recommending to its Secretary of State whether they should proceed, has capacity constraints that can delay its engagement with applications, increasing the time for projects to come online. This problem may be exacerbated as the number of wind farm applications increases.
Let’s conclude with the key finding on page 8:
DESNZ cannot be confident its ambition to decarbonise power by 2035 is achievable.
As a correspondent put it to me in a private e-mail on this topic:
To proceed with what is arguably the biggest single project ever undertaken by a British government without a fully costed delivery plan – particularly in view of successive government’s repeated project failures – is, I believe, totally irresponsible.