Energy and Utilities

The Energy Transition | Net Zero Strategy and Heat and Buildings Strategy

Published on 22nd Oct 2021

This week, we look at the government's Net Zero Strategy and Heat and Buildings Strategy, the entry of Octopus' Powerloop into the Balancing Mechanism, Ofgem's decision on reviewing competition for RIIO-ED2, and more.

Government publishes Net Zero Strategy

As the UK prepares to host the COP26 summit, the government has published its long-awaited Net Zero Strategy, which sets out how the UK will reach its target of net zero emissions by 2050. The Strategy was published alongside a host of other documents including the Heat and Buildings Strategy (commented on below) and the HM Treasury Net Zero Review. The Strategy sets out 'indicative delivery pathways' by sector that aim to enable the UK to meet its sixth carbon budget targets for 2033-37.

Key policy areas and associated announcements include:

  • Power: In line with the government's recent pledge to fully decarbonise the UK's power system by 2035, the Strategy reaffirms the 2035 deadline for all electricity to come from "low-carbon sources, subject to security of supply". To achieve this, the government has indicated it will review the frequency of Contracts for Difference auctions and mobilise £150-270bn in public and private investment, of which £120m has been earmarked for a Future Nuclear Enabling Fund.
  • Industry: The government plans to deliver four carbon capture usage and storage clusters to capture 20-30MtCO2 across the economy per year by 2030. The Strategy indicates the government has "kicked off the process to decide the first carbon capture cluster locations in our industrial heartlands".
  • Heat and buildings: By 2035, the Strategy outlines that all new heating appliances installed in homes and workplaces will use low-carbon technologies, such as electric heat pumps or hydrogen boilers. For further details, please see our commentary on the Heat and Buildings Strategy below.
  • Transport: In line with the government's 2030 commitment to end the sale of new petrol and diesel cars, the Strategy commits to introducing a zero emission vehicle mandate which will require a percentage of manufacturers' new car and van sales to be zero emission each year from 2024. Many of the other policies in the strategy are "already underway", though the government has indicated that an additional £220bn of public and private investment will be required to achieve its aims.
  • Natural resources, waste and fluorinated gases: The government plans to treble woodland creation rates in England, as part of its delivery of the UK's overall target of increasing planting rates to 30,000 hectares per year. Low-carbon farming and agricultural innovation will also be supported through Farming Investment Fund and Farming Innovation Programme, and the government has indicated it will "explore options for the near elimination of biodegradable municipal waste to landfill from 2028".
  • Greenhouse gas removals: A target has been set to deploy at least 5 MtCO2 per year of engineered greenhouse gas removals by 2030. Delivery of this target will be aided by £100m of investment in greenhouse as removal innovation, as part of a wider £20bn in public and private investment in this area. Please see our commentary in relation to the latest government report on greenhouse gas removals below.

UK government publishes its Heat and Buildings Strategy

The government has now published its Heat and Buildings Strategy. The Strategy outlines that there are currently about 30 million buildings in the UK, which contribute to around 30% of national emissions, primarily as a result of the energy used to heat these buildings, which amount to 79% of buildings emissions and about 23% of all UK emissions. The Strategy targets the elimination of virtually all emissions arising from heating, cooling and energy use in buildings. The government's plans aim to achieve this in a simple, low cost and green way whilst ensuring this remains affordable and fair for households across the country. 

The Strategy identifies two broad ways of decarbonising the way we heat and cool homes and work-places to near zero: improving the energy efficiency of buildings and switching from high-carbon sources of heat (and cooling) to low carbon alternatives.

To this end, the government has developed five broad principles: 

  • Taking a whole-buildings and whole-system approach to ensure decisions at any level are not made in isolation – it will consider the relevant interdependencies and impacts to create a secure, efficient, cost-effective energy system.
  • Continuing to invest in research and development to drive innovation, improve data collection and inform policies at national, sub-national and local levels.
  • Accelerating ‘no and low-regrets’ actions needed in any scenario to continue to drive down emissions and meet carbon budget targets.
  • Clearly communicating upcoming regulatory changes so that households, businesses and industry can prepare in advance and have flexibility in how they decarbonise. 
  • Targeting its activities and policies to support those in most need to ensure that the decarbonisation of heat and buildings is accessible and affordable to all. 

Other headlines from the Strategy include:

  • The government intends to phase out the installation of new natural gas boilers beyond 2035, once costs of low carbon alternatives have come down. As part of that, the government is setting a clear ambition to work with industry to reduce costs of installing heat pumps by 25-50% by 2025 and towards parity by the end of the decade.
  • A £450m boiler upgrade scheme, set to run from 2022 to 2025, will allow homeowners to claim grants of up to £5,000 per household that switch to air source heat pumps and £6,000 to switch to ground source heat pumps in order to assist with upfront costs. The Department for Business, Energy & Industrial Strategy (BEIS) claims that this will mean that homeowners are paying a similar price for a new heat pump as they would for a new boiler. 
  • Local authorities have been urged to identify suitable locations for low-carbon district heating networks – read more on this story in last week's Energy Transition update. 
  • The Home Upgrade Grant scheme, to be introduced in 2022, will support upgrades to the worst-performing off-gas grid homes in England. £150m in funding was granted for the first phase of the scheme, and a further £950m in funding is available over 2022/23 to 2024/25.

Octopus' Vehicle-to-Grid project Powerloop 

Octopus Electric Vehicles has announced that it is preparing for 135 cars to enter into the Balancing Mechanism as part of its Powerloop vehicle-to-grid (V2G) charging project. Launched in 2018, Powerloop is funded by BEIS and the Office for Zero Emission Vehicles, with Innovate UK acting as delivery partner. Energy Saving Trust, Open Energi, CPS and Guidehouse are also partners on the project.

The project combines a bi-directional charger and Nissan LEAF's electric battery to export power from unused batteries when cars are parked to the grid during times of peak demand. Powerloop enables customers to use their EVs as an integrated energy asset that can support grid stability. 

Isabelle Haigh, head of national control for National Grid ESO, said:

"Electric vehicles are playing a key role in helping the transport and power sectors decarbonise, with EV smart charging and vehicle-to-grid technology set to bring significant flexibility to the grid as Britain transitions to net zero."

Our Future Energy Scenarios forecasts up to 45% of households engaging with V2G services by 2050, potentially unlocking significant additional capacity on consumers’ driveways."

Alex Schoch, head of flexibility at Octopus Energy Group, commented: 

We are so excited to be one of the first small-scale energy resources to lay the foundations to participate in the Balancing Mechanism. Our Powerloop project has gone from strength to strength as our customers have got stuck in becoming part of the local energy supply chain."

The Balancing Mechanism offers a lot of possibilities for a project like Powerloop to show the real benefits of small-scale flexibility and domestic demand-side response. By involving everyone in the future grid system we can clean it up quicker and easier than ever before.

Ofgem decides to review competition in the electricity connections market for RIIO-ED2

Following a consultation in June 2021, Ofgem has announced its decision to instigate a review of the level of competition in the electricity distribution connections market.

Where competition exists between Distribution Network Operators (DNOs), such as in the provision of new connections, Ofgem favours that competition over direct regulation as a mechanism for delivering improvements in customer service and efficiency. Accordingly, it limits the application of direct regulation in the form of price control incentives on service provision.

Ahead of the next round of price controls for electricity, RIIO-ED2, which will run from April 2023 to March 2028, Ofgem will decide on the outputs and financial incentives on the service that DNOs provide. The result of its review into the level of competition in the electricity distribution connections market will inform the extent to which financial incentives are applied to DNO performance.

DNOs have been invited by Ofgem to complete submissions before the deadline of 12 November 2021.

Ofgem consults on including a Green Gas Levy allowance in the default tariff cap for gas customers

Ofgem has opened a consultation on changes to 'Annex 4 – Policy cost allowance of methodology' of standard licence condition 28AD to include a Green Gas Levy allowance in the default tariff cap for gas customers.

The Green Gas Levy will place an obligation on licenced gas suppliers in Great Britain to pay a quarterly levy determined according to the number of gas meter points they serve. The payments would go towards funding the Green Gas Support Scheme, which is being introduced to support the decarbonisation of the UK's energy system by deploying biomethane production plants to inject bio-methane produced by anaerobic digestion into the gas grid.

There is currently no allowance in the price cap methodology for the costs associated with the Green Gas Levy. In the consultation paper, Ofgem anticipates that the introduction of the Green Gas Levy "will lead to a systematic cost that suppliers will be exposed to on a regular basis, which over time would mean the cap would provide lower funding to suppliers than their efficient costs".

The consultation is seeking views on amending the price cap methodology to account for these additional systematic costs. Stakeholders are invited to contribute before the deadline of 9 November 2021.

Bill Gates and UK government's £400m partnership to increase green technology 

Prime Minister Boris Johnson and Bill Gates have announced a new partnership between Break-through Energy Catalyst and the UK government in order to boost investment into the next generation of clean energy technologies. The partnership will leverage £200m of private sector investment in the UK to accelerate the development of climate technologies needed to achieve net zero emissions by 2050.

Catalyst, a program within the Breakthrough Energy network, is a public-private sector partnership that focusses on four green technology areas: green hydrogen, long term energy storage, sustainable aviation fuels and direct air capture.
Prime Minister Boris Johnson said:

"We will only achieve our ambitious climate goals if we rapidly scale up new technologies in areas like green hydrogen and sustainable aviation fuels – technologies that seemed impossible just a few years ago."

"Ahead of COP26, this new partnership with Catalyst is a boost to the UK’s vision for a green industrial revolution. It will help to bring innovative technologies to market globally, while building new skills and creating high-quality jobs across the UK."

Bill Gates, Founder, Breakthrough Energy, said:

"Our partnership with the United Kingdom will accelerate the deployment of these critical climate solutions, helping to make them more affordable and accessible."

Government publishes report on greenhouse gas removal methods

BEIS has published a report that assesses and compares deployment pathways, costs, impacts on the energy system and barriers to deployment of different greenhouse gas removals (GGRs).

GGRs vary from engineered removals, such as direct air carbon capture and storage, to land-based removals, such as afforestation and habitat restoration. As emissions from some activities, such as aviation and agriculture, are likely to remain very difficult to abate, GGRs can be used to limit the impact of such emissions by lowering future atmospheric CO2 concentrations.

The report concludes that further work is needed to update and refine the evidence base of GGRs. As it stands, significant uncertainties surround the costs, resource needs and potential timelines for initial deployment of most GGRs. The report also highlights that whilst land-based GGRs have significant potential, they may not be sufficient on their own to reach the 2050 net zero target. Perhaps most importantly, the report stresses that to achieve this target and build a GGR portfolio by 2050, uptake of GGRs should begin in the 2020s.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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