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House of Commons Business, Energy and Industrial Strategy Committee Decarbonisation of the power sector Eleventh Report of Session 2022–23 Report, together with formal minutes relating to the report Ordered by the House of Commons to be printed 25 April 2023 HC 283 Published on 28 April 2023 by authority of the House of CommonsBusiness, Energy and Industrial Strategy Committee The Business, Energy and Industrial Strategy Committee is appointed by the House of Commons to examine the expenditure, administration and policy of the Department for Business, Energy and Industrial Strategy. Current membership Darren Jones MP (Labour, Bristol North West) (Chair) Bim Afolami MP (Conservative, Hitchin and Harpenden) Alan Brown MP (Scottish National Party, Kilmarnock and Loudoun) Ruth Edwards MP (Conservative, Rushcliffe) Jane Hunt MP (Conservative, Loughborough) Mark Jenkinson MP (Conservative, Workington) Ian Lavery MP (Labour, Wansbeck) Andy McDonald MP (Labour, Middlesbrough) Charlotte Nichols MP (Labour, Warrington North) Mark Pawsey MP (Conservative, Rugby) Alexander Stafford MP (Conservative, Rother Valley) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk. Publication © Parliamentary Copyright House of Commons 2023. This publication may be reproduced under the terms of the Open Parliament Licence, which is published at www.parliament.uk/site-information/copyright-parliament/. Committee reports are published on the Committee’s website at www.parliament.uk/beis and in print by Order of the House. Committee staff The current staff of the Committee are Matthew Chappell (Committee Operations Manager), Kenneth Fox (Clerk), Catherine Kisanji (Committee Specialist), Catherine Meredith (Second Clerk), Jacob Moreton (Media Officer), Ashleigh Morris (Senior Committee Specialist), Lewis Pickett (Committee specialist), Delfina Raka (Committee Support Apprentice), Tim West (Senior Media Officer), Louise Whitley (Senior Committee Specialist) and Sue Wrightman (Committee Operations Officer). Contacts All correspondence should be addressed to the Clerk of the Business, Energy and Industrial Strategy Committee, House of Commons, London SW1A 0AA. The telephone number for general enquiries is 020 7219 8586; the Committee’s email address is beiscom@parliament.uk. You can follow the Committee on Twitter using @CommonsBEIS1 Decarbonisation of the power sector Contents Summary 5 Chapter 1: Introduction 7 Decarbonising the power system by 2035 7 Our inquiry 7 Chapter 2: Background 10 The UK’s power supply 10 The future electricity mix 12 Challenges of operating a decarbonised power system 14 Costs of a decarbonised power supply 15 Chapter 3: Progress to decarbonise power 16 The British Energy Security Strategy 16 Delivering the remaining emissions reductions 17 Powering Up Britain 18 A delivery plan for the power sector 19 2035 target – security of supply 20 Transitioning away from oil and gas 21 Transparency of oil and gas companies 22 Energy Profits Levy 23 Chapter 4: Retaining investment in low-carbon energy 24 A global race for capital 24 Rising costs and Contracts for Difference 25 Electricity Generators Levy and capital allowances 26 Policy stability 27 Chapter 5: Routes to managing electricity supply and demand 28 Offshore wind 28 Floating offshore wind 31 Onshore wind 33 Repowering onshore wind 35 Solar 37 Tidal 39 Nuclear 40 Nuclear capacity in the UK 40 The role of nuclear in the future energy mix 41Delivering on the Government’s ambitions 43 Costs and delays 43 Supply of nuclear fuel 46 Carbon Capture and Storage 48 Policy requirements for CCS 51 Government action to support CCS 51 Bioenergy 53 Unabated bioenergy in the UK power sector 53 Bioenergy with carbon capture and storage (BECCS) 56 Hydrogen 60 Hydrogen production 60 Demand for hydrogen 61 Hydrogen in the power sector 62 Infrastructure to store and transport hydrogen 63 The UK’s position as a global leader 64 Energy storage 65 Demand reduction 68 Chapter 6: Delivery risks to the Government’s 2035 target 71 Planning and consent 71 National Policy Statements for Energy 72 Community benefits 73 Upgrading the electricity network infrastructure 74 Action to deliver a more strategic approach 76 Securing a grid connection 78 Investment in the distribution networks and the performance of network operators 80 Managing the network more efficiently 84 Flexibility markets 85 Improving the control room 88 Minimum visibility standards and ‘Flexibility First’ 88 Retail market reform 89 Review of Electricity Market arrangements 91 Response to the Government’s proposals 92 Chapter 7: The role of institutions 96 Ofgem’s remit 96 Future System Operator 96Chapter 8: Conclusion 98 Conclusions and recommendations 99 Formal minutes 112 Witnesses 113 Published written evidence 114 List of Reports from the Committee during the current Parliament 1175 Decarbonisation of the power sector Summary The UK must rapidly increase the generation of fossil fuel-free electricity. If we fail, there will be a physical limit to the volume of electric vehicles, electric heat pumps and other newly electrified processes that can be powered through low-carbon electricity. At the current pace of change, the UK is set to fail to hit its target of decarbonising the power sector by 2035. This in turn will fundamentally undermine our ability to hit net zero by 2050, reduce our dependence on imported fossil fuels and harness the cheapest form of electricity generation—renewables. T o be clear, a secure, decarbonised and cost- effective electricity system can be delivered by 2035, with the political will to do it. For too long, policies for the power sector have been designed in silos, without adequate consideration of how they all interrelate and fit together. One consequence of this is that low-carbon projects are now facing delays of up to fifteen years to connect to the electricity network. The creation of a new Department for Energy Security and Net Zero, which we support, must provide the impetus for turning this around. The Government must become more involved in co-ordinating delivery, including the provision of an overarching delivery plan, reporting on national progress, and unlocking problems more quickly. Alongside this need for enhanced political leadership, we recommend that the energy regulator Ofgem be given a net zero mandate. The extensive nature of this report illustrates the amount of work that has to be done and the significant amount of investment that is required. While the UK is ahead of most of the western world when it comes to decarbonisation of power and has a reputation for designing world-leading low-carbon systems, the UK investment proposition for the electricity sector has deteriorated since the launch of our inquiry. The global race for capital in low-carbon projects has intensified, and large subsidies have increased the attractiveness of the UK’s competitors. The US Inflation Reduction Act and international responses to it are leading to a significant market shift. Meanwhile developers of renewable energy projects in the UK are facing substantial cost inflation and windfall tax exemptions less generous than those given to the oil and gas sector. These factors risk putting the viability of many renewable projects in danger. The key test for the Government will be how it creates an investment offer that dramatically increases and speeds up the delivery of financeable projects across the country. To unlock this investment, not only will the Government need to provide a response to competition from overseas for investment in low-carbon energy, but also play a more active role in co-ordinating and pushing through the required upgrades to transmission and distribution networks and speeding up the process for planning consents and grid connections. There will need to be improved oversight of network owners to ensure they deliver on their business plans as well as increased competition in the sector. The Government’s strategy to decarbonise the power sector includes some gaps and risks that must be addressed. Most notably, the Government must overturn the de facto ban on one of the cheapest forms of renewable electricity—onshore wind—in England and create a policy framework that supports the deployment of this technology. The Government must ensure that the UK’s ports have the capacity to support its offshore wind ambitions, must prioritise work to support long-duration energy storage, decide Decarbonisation of the power sector 6 on the use of hydrogen across the economy, and clarify where private finance for nuclear energy projects will come from. It must phase out the use of unabated bioenergy and ensure that public subsidies for bioenergy with carbon, capture and storage (BECCS) are contingent on sustainable supply chains and value for money. Demand reduction and flexibility must be treated as an equal partner to supply, not as an afterthought. Customers must be placed front and centre of the transition. Without doing so, decarbonising the power sector simply will not happen. The Government should bring forward its additional £6 billion funding for energy efficiency measures which it has allocated for 2025–2028 to now. It should improve market signals to reward flexible services, allowing customers to harness cheap energy when supply is abundant. Reform of the energy retail sector should be a key focus for the Department for Energy Security and Net Zero, allowing suppliers to innovate and build sophisticated relationships with customers through the provision of a broader set of energy services. We ask that the Government remembers that when deciding how to fund policies to deliver the transition to a decarbonised power sector, the tax system has been designed to be progressive, while levies on bills are not.7 Decarbonisation of the power sector Chapter 1: Introduction Decarbonising the power system by 2035 1. In October 2021, the Government set an ambition for all electricity generation to be decarbonised by 2035, subject to security of supply.1 Today, around 60% of electricity comes from low-carbon sources, such as renewables and nuclear, with gas accounting for the remaining 40%.2 T o meet its target, the Government must replace this gas-fired supply with a new mix of low-carbon generation technologies, including offshore and onshore wind, solar, nuclear, hydrogen, gas with Carbon Capture and Storage (CCS) and energy storage.3 Meanwhile, electricity demand is expected to be around 50% higher by 2035 and 100% higher by 2050, following the roll-out of heat pumps and electric vehicles.4 Achieving the Government’s ambition to decarbonise the power sector, whilst meeting increased demand, will require: • far-reaching change in how the power system is operated; • significant reduction in energy demand and changes to how energy is consumed; • sustained investment in technology and infrastructure; • appropriate planning arrangements; • strong supply chains; and • innovation in business models and markets. 2. In response to the international gas crisis that followed Russia’s illegal invasion of Ukraine, the Government, in April 2022, published the British Energy Security Strategy,5 which outlined plans to accelerate progress towards a decarbonised power sector. By doing so, the Strategy aimed to reduce reliance on imported gas and deliver a more secure and sovereign supply of electricity, as well as affordable energy bills in the longer term. Most notably, the Strategy set out substantially increased ambitions for offshore wind, solar, nuclear power and hydrogen. The future energy mix is explored in Chapter 2. 3. In February 2023, the Government established the Department for Energy Security and Net Zero (DESNZ), which has principal responsibility for delivering the Government’s power sector ambitions. On 30 March 2023, in response to the High Court’s ruling in July 2022 that the Government’s existing plans to meet net zero were insufficient, the Government published a revised strategy—Powering Up Britain—setting out its blueprint for energy in the UK.6 1 HM Government, Net Zero Strategy: Build Back Greener, October 2021 2 Climate Change Committee, 2022 Progress Report to Parliament, June 2022 3 Carbon, Capture and Storage (CCS) involves the capture of carbon dioxide (CO2) emissions from industrial processes, such as steel and cement production, or from the burning of fossil fuels in power generation. This carbon is then transported from where it was produced, via a pipeline, and stored deep underground in geological formations. 4 Climate Change Committee, Sixth Carbon Budget, December 2020 5 HM Government, British Energy Security Strategy, April 2022 6 HM Government, Powering up Britain, 30 March 2023; see also: HM Government, Carbon Budget Delivery Plan, 30 March 2023 Decarbonisation of the power sector 8 The Government also published its responses to the recommendations made in the Independent Review of Net Zero, chaired by the Rt Hon. Chris Skidmore MP, and to the Climate Change Committee’s (CCC) Annual Progress Report in 2022.7 It should be noted that evidence submitted to this inquiry was received prior to the publication of these documents. Our inquiry 4. We launched our inquiry on 20 May 2022. Our objective was to assess: • whether the Government is making sufficient progress towards its target to decarbonise the power system by 2035; • whether its intended approach will deliver value for money for taxpayers; • how key barriers to deploying the necessary infrastructure and technology can be overcome; and • the policy and regulation required to ensure the future decarbonised power system can be run securely and efficiently. 5. We held five oral evidence sessions between 1 November 2022 and 21 March 2023. We heard evidence from representatives across the energy sector, including academics, think-tanks, non-departmental public bodies, independent centres of expertise, energy generators and suppliers, network operators and the regulator, Ofgem. We also held a range of private briefings with consumer groups and advisory bodies as well as a roundtable with low-carbon investors. We received over 100 submissions of written evidence. A full list of all those who provided evidence to our inquiry is included at the end of this report, and we are grateful to all who made contributions. 6. The Minister for Energy Security and Net Zero, Rt Hon Graham Stuart MP , was due to appear before the Committee on 21 March 2023 but had to withdraw due to commitments overseas. Because of the restructuring of select committees following changes to the machinery of Government, and the imminent change to this Committee’s remit, it has not been possible to schedule an alternative time for the hearing. We therefore encourage the Minister to make himsel