- The UK Government has published an ambitious ‘10 Point Plan’ for a ‘Green Industrial Revolution’
- Much of the detail remains outstanding and we expect this to come in a series of white papers and policy announcements in coming months
- The green recovery is now seen by the Government as a way to stimulate jobs and investment around the country and thereby play a big part in the ‘levelling up’ agenda
- Renewables and electric vehicles reaching cost parity with fossil fuel alternatives means that ‘going green’ is no longer seen as an expensive option; this was not the case 10 years ago after the financial crash
- Investor and consumer pressure means the energy transition and the switch to low carbon now has momentum of its own. Delivery of these commitments still requires clear long-term policy frameworks and new delivery mechanisms, but progress is less dependent on government action than it was 10 years ago.
The UK Government has published an ambitious ‘10 Point Plan’ for a ‘green industrial revolution’. Delivering Net Zero by 2050 is no longer just about honouring a self-imposed legally binding decarbonisation target and instead has clearly emerged as a core strategic pillar for this Government in its response to COVID19 (“Build Back Greener”) and delivering on the ‘levelling up’ agenda. 10 years ago, after the financial crash, ‘green’ technologies were often seen as an expensive luxury. Now, with renewables reaching cost parity with fossil fuels and electric vehicles becoming comparable with petrol and diesel cars (on a lifetime cost basis), going ‘green’ is seen as a way to create jobs and investment around the country.
Around the world we have seen the EU, China, Japan and South Korea all commit to Net Zero in recent months. The new US administration is set to rejoin the Paris Agreement in January. Whilst the UK can’t be world leaders in all Net Zero industries, our success in offshore wind shows that we can, and should, be leading the way in some areas. Climate Change and COP26 provides a great opportunity for the UK to demonstrate global leadership post-Brexit and forge common ground with the new Biden administration in the US.
The challenge now is all about delivery. The Government needs to follow through and put in place the regulatory and policy frameworks and new delivery mechanisms needed to achieve the ambitious targets they have set. Below we give a view on each element of the plan.
Point 1: Offshore Wind
Announcement: 40GW target by 2030 of which 1GW will be floating offshore wind. Double the capacity target in the next Contract for Difference (CfD) auction due to take place in late 2021.
KPMG view: this is not a new target but based on current pipeline projects, 40GW by 2030 is very ambitious indeed (see chart). However, upcoming leasing rounds in Scotland and England & Wales could deliver significantly more capacity to the market in the near future. Irrespective, to deliver on this ambition in a zero-subsidy environment, many of the non-financial barriers to delivery will need to be removed. These include grid connections, the consenting process and competing interests for the seabed. New market frameworks will be needed to remove the barriers to integrating effective storage technologies, such as batteries or green hydrogen into future offshore wind farms. The Government needs to start these reforms now if it is to have a chance of meeting the 2030 target.
Point 2: Hydrogen
Announcement: a new hydrogen production target of 5GW by 2030. £500 million for hydrogen of which £240 million is earmarked for production facilities. A commitment to trialling hydrogen in residential heat; delivering a hydrogen village by 2025 and hydrogen town by 2030.
KPMG view: hydrogen is critical to the delivery of Net Zero and production targets along with a commitment to explore the use of hydrogen in residential heat are a welcome first step. However, if the Government is serious about delivering a hydrogen economy to the UK, then it is critical that we see further detail in the Energy White Paper and the much-anticipated Hydrogen Strategy in early 2021. This will need to spell out, in detail, the plan to stimulate investment across the value chain, including stimulating investment in networks and storage, defining hydrogen’s role in power generation and supporting that role with investable frameworks. Equally, it’s important that there is a long-term transition plan focussed on how we move from hydrogen production and utilisation within industrial clusters to blending in existing networks and evolution towards a discreet national hydrogen network, allowing hydrogen to play a role across all sectors including residential heat. Coordinating production targets with a plan to blend hydrogen up to 20 percent in the existing gas networks represents an immediate opportunity to reduce emissions in the typically hard to decarbonise residential heat sector. There has already been considerable work by the gas networks in this area and boiler manufacturers such as Baxi and Worchester Bosch have made clear they stand ready to replace natural gas boilers with hydrogen ready alternatives in order to facilitate this transition.
Point 3: Nuclear
Announcement: £525 million to help develop large and smaller-scale nuclear plants, and research & develop new advanced modular reactors.
KPMG view: the nuclear sector will welcome this support from Government but the case for new nuclear has moved on from a straight shoot out on cost and now rests upon the expected demand for large volumes of low carbon electricity required to electrify larges swathes of the heat and transport sectors, alongside the industrial strategy case for the creation of new jobs and investment in coastal regions of the UK. The challenge for SMRs and nuclear more broadly will be to demonstrate the reductions in cost required to show that they can compete in the same ballpark as renewables, factoring in the costs of intermittency. The upcoming Energy White Paper should provide some further indication of what policy framework the Government intends to put in place to deliver on its new nuclear commitments.
Point 4: Electric Vehicles
Announcement: end sale of all new petrol and diesel cars and vans by 2030, and hybrids by 2035. £1.3 billion for chargepoints, £582 million in grants for those buying EVs, and £500 million over the next 4 years for development of mass-scale batteries for EVs.
KPMG view: The Government has brought forward the date for a ban on the sale of petrol and diesel cars to 2030. What it now clear yet is how it intends to deliver on that goal. This will require clarity on long-term financial incentives for vehicles, aligned with a clear EV charging infrastructure plan to overcome range anxiety. Despite several positive Government initiatives, we remain some way from the system-wide charging solution required to underpin mass uptake of EVs. Rural and less prosperous areas remain particularly underserved, whilst on-street charging roll-out remains limited. In order to finance this infrastructure, there is a need to mobilise private capital more effectively. Further investment and policy clarity are similarly required to support nascent zero emission technologies for heavy and niche vehicles. This announcement also has the potential to provide a much-needed fillip to the UK’s ailing automotive sector. However, the growing importance of localisation means that for UK gigafactories to be competitive, scaling of the UK’s entire battery supply chain will be vital. Brexit uncertainty and a lack of meaningful Government intervention have resulted in the UK playing catch-up with the EU, where projects have already moved forward backed by generous state support. There remains a window for the UK automotive sector to grasp this opportunity, but Government must act quickly and decisively to maximise the supply chain benefits.
Point 5: Public transport, cycling and walking
Announcement: making cycling and walking more attractive ways to travel and investing in zero-emission public transport for the future
KPMG view: with patronage down over 80 percent in the April-June 2020 quarter, COVID-19 has significantly diluted what was to be the “golden age” of the bus and had a worse effect on rail, which saw a 93 percent decline in the same period. It will take some time for patronage to be re-established, and it may never return to pre-COVID levels. Government’s announcement earlier this year of funding for 4,000 zero emission buses was enthusiastically welcomed, but not a single bus has been purchased using this pot to date. Not only are many bus operators in financial jeopardy: our globally regarded bus manufacturers are in a similarly precarious position with significantly reduced order books in 2021 and beyond. R&D funding is being provided for development of electric bus powertrains but where we are manufacturing buses, the components are sourced from China and other territories.
Government must turn ambition for buses into action at pace, ensuring it connects the domestic value chain in-so-doing. Walking and cycling are key but one element notably missing from the 10-point plan is personal e-mobility – namely eScooters. With TfL launching its procurement and expectations for eScooters to be legalised through the Future of Transport Regulatory Review, we expect – and welcome – their inclusion as a core attribute of a de-carbonised transport ecosystem.
Point 6: Aviation and Maritime
Announcement: Jet Zero – supporting difficult to decarbonise industries to become green through research projects for zero-emission planes and ships
KPMG view: the announcement of the 10-point plan stands us in good stead for the expected tightening in international regulations on emissions from ships. With domestic shipping accounting for 5 percent of the UK’s ~124 million tonnes of CO2 equivalents created by the transport sector, and our attributable international maritime and aviation emissions adding a further 45 milliontCO2e (36 percent) to this baseline, it’s critical that we decarbonise these key economic arteries for the UK. In-so-doing we have a once-in-a-lifetime opportunity to position the UK’s revered R&D and advanced manufacturing capabilities as world-leaders, re-energising our (aero)nautical industries and creating long-term economic growth opportunities. Government’s establishment of the Jet Zero Council, Maritime Future Technologies Team (along with the Maritime Emissions Regulation Advisory Service) are welcome interventions; however they need to work quickly to identify the key elements of the value chain where the UK should build versus buy, enabling investment to be focused on what can create the greatest benefit from both and economic and policy perspective.
Point 7: Decarbonising Homes and Public Buildings
Announcement: extending the Green Homes Grant by 1 year, commitment to install 600,000 heat pumps every year by 2028, bringing forward the Future Homes Standard from 2025 to 2023.
KPMG view: energy efficiency is key to achieving Net Zero and the extension to the Green Homes Grant (GHG) was a sensible move, as the previous deadline of 11 March 2021 was at risk of creating a boom and bust in the home insulation sector. We believe that in order to see the supply chain benefit, there is a need for a clearer longer-term framework for Energy Efficiency beyond the one-year extension to the GHG offered here.
600,000 Heat Pumps a year by 2028 is an ambitious target and we expect that a significant proportion of this target will be met through deployment in new homes. Whilst Heat Pump technology will play an important role in decarbonising some residential properties, our analysis shows that many properties are not suitable for heat pumps due to their poor thermal insulation levels and/or lack of external space. There also remains a question mark, given the experience with smart meters, over consumer appetite for heat pumps given the extensive reconfiguration required within the home.
Point 8: Carbon Capture Utilisation and Storage (CCUS)
Announcement: A carbon capture target of 10 milliont/yr by 2030. An increase in funding of £200 million to £1 billion in total to support two carbon capture clusters by the mid-2020’s, with a further two coming in 2030. Help to support 50,000 jobs in areas such as Humber, Teesside, Merseyside, Grangemouth and Port Talbot.
KPMG view: there’s no realistic scenario whereby the UK can deliver Net Zero without CCUS, it is critical for decarbonising industry but also a key facilitator for the UK’s hydrogen ambitions, particularly if recent reports of a more prominent role for Blue hydrogen in the upcoming Hydrogen Strategy are true. The industry has seen two previous competitions for CCS fail. So the Government has to ensure it is third time lucky. Increasing the funding alongside a commitment to four clusters by 2030 demonstrates the Government’s ambition in this area, they must now quickly determine where this initial investment in to the first two clusters will be deployed and what the enduring regime will be which will ensure projects will be delivered (see chart for the main industrial clusters). Rapid progress will be required in flushing out the business models that came out of the BEIS consultation earlier this year, particularly providing specific details around the rollout of industrial CfDs and the potential use of capital grants to initial infrastructure investments off the ground.
Point 9: Nature
Announcement: protect and restore our natural environment, planting 30,000 hectares of trees every year
KPMG view: Protecting and restoring our environment is a critical – and natural – step in removing carbon from the atmosphere. While many other parts of the Government’s 10 Point Plan contribute to reducing emissions, nature-based solutions can provide opportunities to remove and offset carbon produced in other hard-to-decarbonise parts of the economy.
The UK Government has for the last decade backed the development of domestic carbon offset markets and developed the Woodland Carbon Guarantee to provide some revenue certainty to English Woodland projects. However, as projects are required to commit to permanent land-use change to be certified under these standards, much greater regulatory and financial support is required to facilitate further growth of this nascent industry. This includes setting clear guidance on the future of carbon prices in the UK and demonstrating opportunities for positive financial returns compared to alternative natural capital uses across the UK.
Point 10: Innovation and Finance
Announcement: invest in the development of new technologies required to hit net zero and make the City of London the global centre of green finance
KPMG view: innovation has a key role to play if the UK are to fulfil its green ambitions and provide global leadership in this area. Defining the role for government is important and we believe innovation is best delivered by the private sector against the backdrop of a clear regulatory framework as seen with renewable technologies such as Offshore Wind.
Positioning London as a global centre of green finance: UK government have focused heavily on three keen means to ‘green’ the financial system, the most material of which is mandating greater disclosure from UK corporates to ensure that investors have the transparency to understand who is resilient to the physical and transition risks and opportunities that could beset their business, as well as how they are seeking to mitigate and adapt to the risks and opportunities that climate change creates for them. Recent statements indicate an expansion of recent FCA consultations on mandating TCFD compliance for premium listed companies from 2021, to include other listed and large companies, banks, insurers, pension funds and asset managers by 2025.
This is a very ambitious set of commitments aimed at both stimulating jobs and investment across the country and delivering Net Zero. However, the plan commits to £12 billion investment, anticipating up to three times as much investment in the private sector. This still falls £30 billion per annum short of the £75 billion per annum the Government estimated it will take to reach net zero by 2050. Investors will want to see the details of the policies and delivery mechanisms in the upcoming Energy White Paper and other policy statements to back up the grand ambitions set out by the Prime Minister.
Some points were noticeable by their absence such as biomass with carbon capture (BECCs) which is seen by many as an important solution to the UK’s need for negative emissions technology. Equally, there was no reference to addressing emissions through imports and consumption, through the introduction of some form of net zero carbon consumption target – it is one thing to get to Net Zero on emissions we produce but if we want to be taken seriously as a global leader in the fight to reduce global carbon emissions and slow the warming of the planet, we also need to address our consumption of carbon be it through a carbon border adjustment or alternative measures.
Whilst clear policy and investable frameworks will be critical to success, the ability to deliver these ambitious targets will depend on Government’s delivery mechanisms. It remains to be seen if the muted Net Zero Task Force has the remit and capability to do this. Franklin D Roosevelt changed the apparatus of government to deliver his New Deal. We will need new delivery mechanisms if this country is to reach Net Zero.
Please do get in touch. Contacts are below:
Simon Virley, Jaymes Mackay, Eddie Ataii, Ben Foulser, Bridget Beals, Wafa Jafri.