The ambition is there – now it’s time for delivery
The UK Government has published an ambitious 10 Point Plan for a ‘Green Industrial Revolution’. The plan commits to £12 billion investment, anticipating up to three times as much investment from the private sector. This still falls c£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 series of white papers and policy announcements due over the next few months.
What does this mean for business?
- The Government sees the green recovery as a way to stimulate jobs and investment around the country as part of the ‘levelling up’ agenda.
- Renewables and electric vehicles reaching cost parity with fossil fuel options means that ‘going green’ is no longer seen as an expensive option, which was the case 10 years ago after the financial crash.
- Investor and consumer pressure mean the energy transition and the switch to low carbon 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.
Delivering Net Zero by 2050 – can the UK stay ahead?
Delivering Net Zero by 2050 is no longer just about honouring a self-imposed legally binding decarbonisation target. Instead it has emerged as a core strategic pillar for this Government in its response to COVID-19 (“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 a way to create jobs and investment around the country.
The EU, China, Japan and South Korea have all committed to Net Zero in recent months. The new US administration is set to rejoin the Paris Agreement in January 2021. The UK can’t be world leaders in all Net Zero industries but 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 delivery. The Government needs to follow through with the regulatory and policy frameworks, and new delivery mechanisms needed to achieve these ambitious targets.
Our summary of the main areas covered by the plan, along with a perspective on what this will mean for businesses, is detailed below.
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 (see chart). However, upcoming leasing rounds in Scotland, England & Wales could deliver significantly more capacity to the market soon. To deliver on this ambition in a zero-subsidy environment, many of the non-financial barriers 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. Production targets coupled with a commitment to explore the use of hydrogen in residential heat are a welcome first step. If the Government is serious about delivering a hydrogen economy to the UK, 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 include a detailed plan to stimulate investment across the value chain, including; 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 the evolution of a discreet national hydrogen network. This would allow hydrogen to play a role across all sectors - including residential heat.
Coordinating production targets with a plan to blend hydrogen in 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 both large and smaller-scale nuclear plants, and to 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 large 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 the 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 electric vehicles (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. Delivering on this goal 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 boost to the UK’s 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 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 time to reverse this, and we may never see a return to pre-COVID-19 levels. The 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 precarious position with significantly reduced order books in 2021 and beyond. R&D funding has been allocated for development of electric bus powertrains in the UK but components for buses built in the UK are still being sourced from China and other territories. Government must turn its ambition for zero emission buses into action at pace, ensuring it connects the domestic value chain in-so-doing.
Beyond buses, walking and cycling are key but one element notably missing from the 10-point plan is personal e-mobility - for example, eScooters. Joining other UK cities, TfL has recently launched its eScooter operator procurement, and the market has an expectation of eScooters being legalised through the Future of Transport Regulatory Review. We expect – and welcome – their inclusion as a core attribute of a de-carbonised transport ecosystem. Acceleration of rail decarbonisation should also feature prominently – building on Network Rail’s Traction Decarbonisation Network Strategy.
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, the Maritime Future Technologies Team and the Maritime Emissions Regulation Advisory Service are welcome interventions. Rapid identification of the key elements of the value chain, and understanding where the UK should build versus buy, will enable 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 to see the supply chain benefit, a clearer longer-term framework is needed 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 will be met through deployment in new homes. Heat Pump technology will play an important role in decarbonising some residential properties but our analysis shows that many properties are not suitable for heat pumps due to poor thermal insulation levels and/or lack of external space. There also remains a question, given the experience with smart meters, over consumer appetite for heat pumps which could involve extensive reconfiguration within homes.
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 and 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 CCUS fail. It is important that the third attempt is successful. Increasing the funding, alongside a commitment to four clusters by 2030, demonstrates Government ambition in this area. Now it is important to quickly determine where this initial investment for the first two clusters will be deployed and what the plan will be to ensure projects will be delivered (see chart for the main industrial clusters). Rapid progress will be required in developing the business models that came out of the BEIS consultation earlier this year. Specific details around the rollout of industrial CfDs and the potential use of capital grants to support initial infrastructure investments will be key.
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. Greater regulatory and financial support will be required to support further growth of this promising industry. 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 will be key.
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 an important role to play if the UK is to fulfil its green ambitions and provide global leadership in this area. Defining the role for Government is important. 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.
The Government have focused heavily on three ways to ‘green’ the financial system. Mandating greater disclosure from UK corporates means that investors have the transparency to understand which businesses are resilient to the physical and transition risks and opportunities created by climate change. Also, how they are seeking to address and adapt to these risks and opportunities accordingly. Recent statements indicate it is likely that the recent Financial Conduct Authority consultations on mandating the Task Force on Climate-related Financial Disclosures (TCFD) compliance for premium listed companies from 2021 will expand to include other listed and large companies, banks, insurers, pension funds and asset managers by 2025.
What was missing?
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. There was also 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. 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 through a carbon border adjustment or alternative measures.
Clear policy and investable frameworks will be critical to success but 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 a new approach to delivery if we are to reach Net Zero and meet our targets.