Bursting the UK’s Energy Thought Bubble
The UK's ambitious new Labour government will need to think and act differently to get further faster …
The UK has a great opportunity under a new government to transform its approach to energy by thinking differently and unlocking opportunities for economic growth.
Labour is right that clean and efficient energy is key to, not in conflict with, growth. In its first week, its new government was quick to announce the creation of new legislation and institutions, as highlighted in this week’s King’s Speech, that seek to redefine the UK’s energy landscape and to put the country on a pathway to energy independence, energy security, energy affordability and decarbonisation.
There can be little question that it’s time to revitalise the UK’s energy policy. Indeed, in many ways, it has stagnated since 2016. Market incentives and planning for new energy capacity have been fewer and more unpredictable. Excess supply over demand for energy, and particularly electricity (the reserve margin), has remained far too tight. Storage capacity has been reduced. Inadequate investment has been made in the grid to accommodate renewables at the greater scale or faster pace necessary. While this has reduced energy security, and added to vulnerability to price shocks and the cost-of-living crisis, as the Committee on Climate Change has repeatedly pointed out, the country has also been falling behind on its decarbonisation targets.
But the UK’s energy system demands a more fundamental change of approach than feeding more of it into a broken system. There is an established green groupthink bubble that needs to burst. And an imperative that we don’t make new ones and wrong turns over the next exciting new things such as hydrogen, CCUS, and the like. It’s staggering, but rarely discussed, that some 58% of the primary energy, whether brown or green, that is used to make electricity in the UK is lost through conversion, generation (mostly as waste heat from gas and nuclear), transmission and distribution processes before even reaching the end user, where more is wasted. Just as staggering is what a small proportion of the UK’s energy mix is electricity, for all the headlines about how much of it comes from renewable sources. Gas still dominates the household market, and out-paces electricity in other industrial and commercial uses. Electricity has yet to make any material dent at all on the transport sector, despite EVs, where oil still reigns. At the end of this month, the Department for Energy Security and Net Zero is due to release its latest Digest of UK Energy Statistics (DUKES), but the energy flow charts it produces each year tell important stories. One of them is this: less than 20% of the UK’s energy system is electric. Most of the rest is oil for transport, and gas for industry, buildings and households.
The energy ‘polycrisis’ facing the UK is characterised by the trilemma of cost, climate and security. High energy costs and supply constraints make the UK uncompetitive, particularly for industries favoured by Labour, such as steel, as well as for growing sectors such as data centres. But it’s worse than that. The carbon and financial costs of an ageing, centralised and inefficient energy system compound the already immense pressure on public services and finances. To put this into context, just the conversion, generation, transmission and distribution losses are costing the country over £20 billion a year, or nearly £60 million a day. Given that the public sector represents some 15% of energy use, this implies that it loses at least £3 billion a year on the supply side alone. Add in transport losses (internal combustion engines are only 15-30% efficient) and losses in the built environment (buildings typically waste around 30% of the energy they use due to inefficient heating, cooling, lighting and controls) and you get the picture.
Labour’s proposed Energy Independence Act identifies some positive and ambitious objectives, including many that might be funded by the newly formed, state-owned ‘Great British Energy’ and ‘National Wealth Fund’. Indeed, it could be the UK’s answer to the USA’s historic Inflation Reduction Act and Europe’s National Energy and Climate Plans. But policymakers will need to be careful to ensure that they don’t commit themselves to pathways that lock in underperformance and failure.
Like the USA’s Inflation Reduction Act, energy and decarbonisation policy is being packaged in legislation that purports to something else. But unlike the USA, the world’s largest oil and gas producing nation (now surpassing Saudi Arabia and Russia) and an energy exporter, the UK is not actually energy independent. The UK imports most of its oil and gas, as well as much electricity from Europe via interconnectors. Specifically, the UK imports oil and gas from Norway, the Middle East, the USA (which has doubled oil and tripled gas exports to the UK since 2018), Europe, and directly or indirectly, from Russia. Also, unlike the USA’s Inflation Reduction Act, it risks losing sight of a core objective - to deliver an enduring reduction in costs.
Therefore, while the headlines on the supply side are eye-catching, they need to be more than eye-candy. Doubling onshore wind, tripling solar, and quadrupling offshore wind could help to increase the share of renewable energy in the UK’s electricity supply. But it will take billions, and planning reform, and grid upgrades, and resources and supply chains for which the UK will compete internationally. And, if we are honest, it will take time. It takes years to design and build a new power plant onshore let alone offshore. 2030 might or might not be a credible target date, but energy security demands solutions in the meantime, focussed on the end user. A new ‘Local Power Plan’ to promote distributed and decentralised energy is potentially promising, provided that the capacity to deliver it is developed locally too, perhaps with the support of proposed legislation such as the English Devolution Bill and the Planning and Infrastructure Bill.
Similarly, investing in clean technology, as the proposed legislation suggests, is exactly what the UK should be doing – after all, we have the much of the world’s best financial, education and engineering resources to do so and we need more R&D. The UK lags behind other major players in the G7. The US$2.7 billion it invested in 2023 was dwarfed 5x by the USA, 4x by Japan and 2x by Germany. The new legislation could provide for more, but it will take time, and in the meantime, the good news is that we have the technologies available today to make an enormous difference.
On the demand side, there is a welcome focus on energy and housing. This needs a lot of work and, apart from anything else, the costs of decarbonisation are still levied as taxes on electricity bills rather than the gas that we are told that we need to wean off. Subsidies and market incentives still tend to back equipment (like heat pumps) rather than solutions (like reducing gas or consumption). From a cost-of-living perspective, energy costs need to be brought down. But from an energy system perspective, the truth is that housing is the minority of energy use in the UK. The large majority is in public sector, commercial and industrial, and transport. On-site energy generation solutions such as solar, renewable heat and clean cogeneration (often paired with storage) can deliver lower cost energy with lower carbon footprint, without the same level of reliance on, or waiting for, the grid. A wide range of energy efficiency solutions such as lighting, heating and cooling can pay back within 5 or 6 years, as well as reduce carbon and improve quality of infrastructure. The UK Parliament’s Business, Energy and Industrial Strategy Committee itself published a report in 2019 that identified around £100 billion in potential savings from energy efficiency, and that was at the cost of energy then, which was lower than it is now. The overall impact of improving efficiency and reliance on the grid could help cut household energy bills by some or all of the £300 a year targeted by Great British Energy.
And as concerns government policy, it would do better to start in its own home than others’. The public sector is the UK’s largest user of energy. It’s hard to disagree with Labour that the NHS should be ‘fit for the future’, but it won’t be if it most of the energy it needs continues to be wasted either on the way to hospitals or at the point of use. Just changing the out-dated lightbulbs to LED could save £1 billion over 10 years. Meanwhile, around half of the central government’s greenhouse gas emissions (mostly energy) reported under the ‘Greening Government Commitments’ (GGCs) relates to the ministry of defence. While a large part of this is military hardware, a large part of it is building stock - in fact 115,000 buildings. The ministry controls 1% of the entire UK land mass. At the last count, a lot less than half of the department’s new buildings or major refurbishment projects undertaken since 2016 had low or zero carbon (for which read energy) technologies included in the design. Around the same amount of greenhouse gas (or energy use) comes from Transport for London, which is also one of the largest single users of electricity in the UK. This energy is almost entirely sourced directly from the grid. There are expensive and lethal side effects adjacent to energy too. According to a study by the European Public Health Alliance, London has the highest health care costs from air pollution of any city in Europe. Air pollution from London traffic is estimated to be causing 4,000 premature deaths a year and is forecast to cost the NHS and social care systems a total of £10.4 billion over the next 30 years.
Given that a combination of more efficient (or decentralised) supply and demand reduction can save billions for the public sector, for business and for industry, as well as households, it demands much more urgent attention. Not only can the country not afford the waste, but it is also a major opportunity to improve productivity and competitiveness, helping to keep taxes lower and at the same time cutting carbon and improving security of supply. The UK can certainly reduce reliance on imports, even if ‘energy independence’ is at least decades off in practice. Well-designed policy can attract project development and private investment at scale to deliver large and measurable results in the short term. Combining estimates from the Energy Efficiency Infrastructure Group, Green Alliance, Renewable UK and the Institute for Public Policy Research, energy efficiency could deliver up to 150,000 jobs a year, while on-site generation could create up to 50,000 jobs a year. If this were sustained annually, this could result in approximately a million job years by 2030.
Three big approaches that the new government can take to move further faster are:
1. Mandating energy efficiency targets: The government must mandate progressive annual reductions in energy consumption per unit of GDP output across public and private sectors. At minimum this should match China’s initiative to improve efficiency and productivity by at least 4% a year, or 20% every five years. The UK should beat Europe’s mandate to reduce gas use by 15% and electricity use by 5%, which member states delivered with aplomb in the wake of the Russia-Ukraine crisis. This is not nice to have, it is a ‘must-have’, if the UK is going to be commercially competitive on the world stage.
2. Government leading by example: Given its extensive footprint as the UK’s largest institutional energy user, the government should lead by example in its own energy consumption practices. The NHS, a significant energy consumer, is rife with energy inefficiencies. A comprehensive overhaul of energy supply and use across sectors like health, education, transport, and defence could unlock substantial monetary as well as carbon savings from cutting energy waste, and lead by example.
3. Encouraging private sector investment: The government should coordinate key departments such as the Treasury, the Cabinet Office, Health Education, Transport and Defence to clarify accounting treatment and to streamline procurement rules so that energy can be delivered by the market as a lower cost service. The market, in conjunction with private sector investment, can and will develop, finance and deliver solutions, taking capital and risk off the table for the public sector. Public sector capital should be reserved for problems that the capital markets are not best placed to solve, such as funding to stimulate feasibility studies and the provision of credit guarantees. Public sector investment capital should also be used to attract co-investment from the private sector on market terms.
This is why we have created the London Edge Fund, a brand new £100 million collaboration with the Mayor of London and the Greater London Authority (GLA). This will seek to decarbonize London by developing and investing in efficient and decentralised generation of energy (‘Edge’) projects in public buildings such as hospitals and universities, as well as private sector buildings such as hotels, and sustainable transport solutions. £50 million is being invested by the GLA and £50 million by SDCL’s Green Energy Solutions Fund. The projects are designed to cut costs and carbon and improve reliability for public and private sector clients, while generating sustainable investment returns for investors. It is an exemplar of a public private partnership with investors participating on the same terms at the same time. The largely operational portfolio that we have built in the SDCL Energy Efficiency Income Trust, contains thousands of examples of projects that cut costs and carbon and improve resilience every day.
The London Edge Fund will seek to build on our experience of investing over £2 billion in energy efficiency projects connected to over 50,000 properties in 10 countries to deliver financial and carbon benefits for London’s public and private sector. But it will also seek to strengthen London’s resilience and reliability at a crucial time, addressing risks and opportunity costs. This week, the London Climate Resilience Review estimated that global warming could cost the city 2-3% a year of its GDP by the middle of the century, and that the impact of heat and humidity on labour productivity in London was already valued at £577 million a year. Protecting London, the report says, is a matter of ‘national security’. Investing in the built environment and infrastructure is key to this. As examples, rooftop solar installations can help to reduce the urban heat island effect, as well as generating energy on site (although local planning rules will need to do a lot better, as they currently impede on-site generation and improvements as simple as insulation and double-glazed windows for heritage properties). Trees positioned next to buildings can help to reduce internal temperatures in the summer and raise them in the winter, lowering energy consumption for cooling and heating, while also diverting storm water run-off. Beyond the Review and looking at opportunity costs and the potential for economic growth, if we can generate and supply more power in London, we may be able to secure more of the economic benefits of major new industrial growth markets such as data centres, as potential clients are currently deterred by waiting lists from the grid that extend to 2037.
Zooming back out to the national picture, while it has been a big week for policy ideas and announcements in the UK, there is a real risk that too many of them follow the same old thought bubble. The big headlines and power politics remain focussed on utility scale, centralised grid connected renewable power plants on land or in the sea, together with the apparent glamour (if that’s your thing) of hydrogen (however green), carbon capture (rather than heat capture) and the like. Many of these are important but incremental solutions that will help to reduce the carbon footprint of the electricity system, but they will take time, money and resources. None of them are zero carbon. And they do not address the reality of the energy system, which is that while our electricity is not yet green and that while we can and should do a lot better as soon as practicable, most energy isn’t electricity and most of it is lost somewhere in the conversion, generation, transmission, distribution and end use processes. At the same time as we try to produce more energy, we need to focus on using less to do the same or more. There are abundantly proven solutions that are cheaper, cleaner and more reliable. We need to focus on efficient and decentralised generation of energy, or ‘Edge’. Reducing the amount of energy that we use to the same job or more is the largest, fastest, cheapest and cleanest source of greenhouse gas emission reductions, energy productivity and sustainable growth. As the International Energy Agency has pointed out repeatedly, we will absolutely not reach net zero with it.
And only economically and commercially sustainable solutions will mobilise the billions needed to finance it.
A big new idea for the new government to burst the energy thought bubble and secure the investment needed for the UK’s clean energy revolution would be to focus on the language of productivity, competitiveness and sustainable growth, through more efficient use of resources.
For more, please read the ‘The Edge: How competition for resources is pushing the world, and its climate to the brink – and what we can do about it’.
To learn more about investing in energy efficiency, visit the website of the SDCL Energy Efficiency Income Trust plc, or SDCL Group.
Picture credit: ChatGPT 4o
SDCL was named ‘ESG Investor of the Year’ 2024 by Business Green
SDCL Energy Efficiency Income Trust plc was named ‘Renewables Fund of the Year’ 2024 by Environmental Finance
Andy -- Google "...Scott McKie -- POD MOD..." The article is the first one to come up.
It's on the "Rex Research website, along with my US Patent.
As usual -- "... people are entitled to their opinions -- but they are not entitled to their own facts.
Yours might be an "uninformed opinion".
It is indeed good the read about the London Edge Fund Mr. Maxwell -- but there is a "fly in the ointment" that you might not like.
A US invented / US developed / and US Patented / solid-state electric power supply - called the POD MOD - already exists -- and it can be fitted into the power utility connection box in each home in London.
It has the ability to cleanly / "electronically produce" / all of the 230 VAC / 50 Hz electricity each home will every need - up tp 100 Amps per unit.
The rules that are presently in place - throughout the UK - is that the home owner "has the say" on which power source is to be used to power the location - not the utility.
How to I know this?
I've had a London based "silent partner" in the POD MOD Project -- since 2009 -- and he will remain unknown.
But he was the one that demonstrated - over Zoom -- that a standard POD MOD power unit, set to 230 VAC / 50 Hz power can easily fit inside the cabinet.
If your program is truly serious about making things better in London - then you might want to think about joining the process of getting POD MOD units placed into London homes and office spaces:
--- because the long-term lease price - will be at an equivalent to the proposed $0.10 "per hour / $72 per 30 day month - instead of the ever-increasing "per kW/Hr. rate presently in place.
The POD MOD, being small / lightweight / inexpensive to produce - and modular -- can be connected in multiples - to "collectively power", or retrofit-repower anything "stationary" up to existing high voltage electric power plants - to retrofitting-repowering any battery or internal combustion engine powered vehicle - of any size, shape, or weight - "movable" vehicles - including up to hi-bypass jet powered private or commercial aircraft.
The information on the POD MOD is being sent - by request - to Mr. Stark - for his consideration, for the new GB Energy company.