It’s time to pick winners to stay competitive in the energy transition.
To achieve our climate commitments and maximise the benefit to the economy in doing so, the UK cannot and will not compete with the US or the EU on the amount we spend. The Inflation Reduction Act (IRA) contains a staggering $390 billion of tax credits and subsidies to drive the energy transition, while €270 billion is available to EU member states through the Recovery and Resilience Facility (RRF) to accelerate progress towards net zero.
Nor will we beat the world’s largest manufacturing economies at their own game, least of all with a protectionist approach. The UK must remain open to the best ideas from around the world. The price of renewable technologies has come down precipitously because of China’s investment in manufacturing, and we have to be realistic about our ability to manufacture at scale and cost competitively.
This is absolutely not to say that the UK should sit back and let the greatest investment opportunity of our lifetime pass us by. But rather than trying to be all things to all people, we need a laser focus on the things we do best. In many cases this will be services rather than manufacturing: pivoting our world-leading expertise in offshore oil and gas to offshore wind construction and maintenance, for example. Or accessing the deep pools of capital in the City to build up London’s role as a hub for innovative green finance. We are also well placed to compete on advanced manufacturing and innovation in future green technologies.
The government’s decision-making must also start from the position that change is imperative, and that speed will maximise the economic benefit of the energy transition. Cost-benefit analyses of individual projects are not helpful when the aim is to transform the entire economy, and where the ultimate prize is a society that has successfully managed the enormous risk associated with climate change.
We also know that targeted government support works – the UK’s leading position in offshore wind is the result of cross-party backing for the sector more than a decade ago, through interventions including financial support from the Green Investment Bank to build large-scale North Sea wind farms and subsidies for renewables.
Investors around the world have also been taken aback by the apparent wavering on our commitment to net zero this summer. Nicolai Tangen, the head of Norway’s sovereign wealth fund (the world’s largest), has made clear the backlash on emissions reduction regulation after the Uxbridge by-election is seen as a negative: “You have a big country in Europe that is slowing down the work on climate at a time when it’s more important than ever,” he told the Financial Times.
So bearing in mind that capital is mobile and that investors prize stability above all, how can the UK show it is serious about tackling climate change – and capture its share of the growth and well-paying jobs that the energy transition is bringing around the world? We believe three areas show great potential.
The first is offshore wind, which is already a massive British success story. It is now the cheapest form of electricity coming into the grid, and wind power contributed 26.8% of Britain’s electricity generation in 2022, according to National Grid. By comparison, in 2011 the proportion was 0.7%. The change has undoubtedly been helped by the falling cost of wind power technologies globally, but in the UK it has also happened because of government backing.
Through legislation, the UK put a price on carbon, offered incentives for renewables, and set up the Green Investment Bank. The bank had £1.5 billion committed to renewables projects when it was privatised in 2017, some 46% of which was in offshore wind. Putting policies, public and private capital together was a potent brew, and one that has largely beaten coal out of the UK’s energy system
With that relatively small amount of public money, the UK has built a globally significant industry, reduced the cost of generating electricity, helped to increase its energy security through less reliance on gas, as well as reducing air pollution and lowering carbon emissions dramatically. The offshore wind sector has created jobs, including within former mining communities. They are good jobs that have some of the elements of community and camaraderie of the past, but are part of the sustainable future.
Now, it’s about following through on that momentum with wind farm assembly jobs, transferring our offshore engineering skills from North Sea oil and gas to wind farms around the coast of Britain. The expertise we already have in cities such as Aberdeen and ports up and down the east coast is highly transferrable. Decarbonising the economy is an engineering-based transition and the opportunity to create exciting jobs offshore, and to export British expertise around the world, is ours for the taking.
The second opportunity is connected – our universities and research facilities are world-class centres of innovation, and they are already working on the batteries and energy storage technologies of the future, for example. We need government policies that specifically reward innovation, including new business models, new technologies emerging from universities via incubators and accelerators, and cutting edge manufacturing, supported by risk capital and scaled up through relationships with larger companies. The government also has a role to play in creating demand, through its procurement choices.
The third area takes another direction. Retrofitting the country’s aging housing stock to improve its energy efficiency will create opportunities for less highly skilled jobs in the green transition, and put money back in consumers’ pockets. Politicians may feel reluctant to go near the subject after failed schemes including the Green Deal, but this is an area that offers a tangible, daily benefit to the public as well as the climate and the economy overall.
To succeed, regulation and incentives should be aimed at improving the overall stock of houses, as well as commercial and industrial buildings, increasing value through better energy efficiency, rather than improvements at the level of individual household bills. Buildings in public ownership, or held by pension funds, institutional investors or listed REITs, should be the focus.
So what is the best way for the government to accelerate growth in these areas? In all three, and in the broader transition including vital sectors such as electric vehicles, the answers are: clarity of purpose, innovation, and reward for measured outcomes that deliver security, prosperity and resilience. Cost-benefit analysis of projects will not provide this because cost and investment are not the same things and what we need is investment in a superior energy system. The system is already being transformed and being bolder will deliver greater rewards for the nation.
We understand the motivation behind campaigns such as Just Stop Oil but we prefer Just Beat Oil. Let’s win the contest with fossil fuels to deliver sustainable energy to buildings, transport and industry, and create a prosperous and secure economy that is fit for the future.
This article was first published in the Aldersgate Group’s Keeping Pace in the Global Race to Net Zero: Responding to the Inflation Reduction Act report.