Unlocking a Sustainable Energy Future: Key Insights from the UK

The Council on Economic Policies is convening a series of roundtable discussions to explore the prospects and obstacles of fostering a sustainable energy future. The aim is also to build a global community of experts driving progress and seizing synergies across G20 countries. The first one was held in Paris, with a focus on France’s energy future. The second roundtable held in London in May 2024 identified key insights on fiscal policies and regulatory measures in support of a sustainable energy transformation in the United Kingdom. The following blog provides key takeaways from this roundtable.

A more detailed policy brief is available HERE.

The United Kingdom has made considerable strides in transforming its energy system. Since the early 1970s, the nation has reduced its primary energy consumption by one-fifth, even as its real GDP has nearly tripled. While low-carbon energy sources were once almost non-existent, they now account for a quarter of total consumption, especially wind power. The country’s last coal-fired power plant, located in Ratcliffe-on-Soar, was recently closed, while many other nations still rely on coal in their electricity mix.

This has placed the UK’s greenhouse gas emissions on a firm downward trajectory. The path of decarbonization is in line with the country’s legally binding goal of reaching net zero by 2050. Further transformation is expected under the leadership of Prime Minister Keir Starmer, who has vowed to make the UK a “clean energy superpower” by implementing ambitious policies.

There are significant opportunities for the UK to make its energy system more affordable, secure and clean. While fossil fuels still dominate the country’s energy mix, this could change rapidly by seizing the country’s low-carbon potential.

• Achieving zero-carbon electricity by 2030, as targeted by the government, is possible through expanded wind power deployment, grid upgrades, and strategies to address intermittency.
• The objective that all new cars sold are battery electric vehicles (BEVs) by 2030, as recommended by the Climate Change Council, can be facilitated by increasing the availability of charging infrastructure and offering the right incentives.
• Replacing gas boilers with heat pumps and large-scale retrofitting programmes aimed at improving poorly insulated buildings can lead to significant reductions in home energy use.

The switch to renewable energy will reduce consumers’ exposure to high and volatile energy prices. Replacing natural gas with renewable and other low-carbon sources will decouple electricity and gas prices, which are linked through the ‘merit order’ process. This shift will allow consumers to benefit overtime from the rapidly declining costs of renewable electricity. Additionally, it will reduce the UK’s dependence on imported gas, oil, and fuels, which pose national security risks, as demonstrated by the recent reliance on diesel imports from Russia.

The electricity sector is already undergoing significant transformation and could become carbon neutral by 2030, as planned by the government. A remarkable achievement of the past decades was the rapid elimination of coal in the electricity sector. Consumers are increasingly getting their electricity from wind, solar, and biomass sources — and there is a great potential to deploy many more wind farms, both onshore and offshore. While natural gas is still used for one third of electricity generation — and plays a key role in balancing the UK’s electricity grid – carbon neutrality is achievable.

Solutions to address the intermittency of renewables are key pillars for that:

• Energy storage: batteries, water pumped hydro, thermal storage, green hydrogen.
• Price-induced modulation of generation: wind farms and nuclear plants curtailing their production when needed.
• Demand flexibility: consumers and prosumers shifting their usage.
• Capacity market: generators paid to produce electricity when needed.
• International connections to export and import electricity.
• Investments in the transmission grid to enable these solutions.

The Climate Change Committee has called for all new cars to be zero-emission by 2030, in line with the Labour Party’s pre-election manifesto. Several incentives are currently offered to drivers of BEVs: they are permitted to enter low-emission and ultra-low emission zones without paying a fee, and they are exempt from road and congestion taxes. However, unlike in China, France, Norway, and the United States, the UK does not provide fiscal incentives to buyers of BEVs, making their upfront retail prices unaffordable for many, even though the total cost of ownership becomes competitive over time. While high-income households can afford to buy BEVs without fiscal support, means-tested incentives for low-income drivers will be crucial to achieving mass adoption. The UK can draw lessons from countries like France, which has successfully implemented a ‘BEV social leasing’ programme.

The residential sector relies on natural gas, making it vulnerable to international price fluctuations. The current dependence on natural gas has exposed households to the volatility of international markets, as seen during the 2022 energy crisis triggered by Russia’s invasion of Ukraine. Soaring prices have exacerbated energy poverty, with millions of households struggling to pay their energy bills and to keep their houses warm, especially when their home is “leaky” and needs costly retrofit works. Government programmes were in place to help with the cost of bills, but many have been withdrawn as gas prices have retreated from their 2022 highs whilst households still struggle with higher prices than pre-2022. Support schemes are in place to help with energy efficiency and heat pump installations, but deployment has been weak compared to government targets. A continuous evaluation of such programmes is essential with a view to improving the design of policies and ensuring that they provide value for money, both for the government and homeowners.

Carbon pricing should be considered to help finance low-carbon investments. Constructing new wind farms, extending the grid, increasing storage capacity, replacing the nation’s car fleet, and retrofitting millions of leaky homes will not be cheap. With the UK’s fiscal situation already under strain, concerns are rising about how the costs of this transformation will be distributed. Removing tax breaks currently afforded to aviation and oil companies, while expanding the scope of the UK Emissions Trading System, should be considered to contribute to the revenue needed for these investments. At the same time, support for low-income families will be crucial as many are already struggling with high, and sometimes unpaid, energy bills.

The energy transformation requires an industrial transformation. The UK’s large automobile industry needs to shift from petrol and diesel cars to BEVs. Workers in the oil industry need retraining. And skills for a wide range of new technologies need to be expanded. Without this industrial transformation, the UK risks increasing its dependence on foreign manufacturers of electric vehicles, batteries, photovoltaic panels, and heat pumps, which could raise national security concerns. This industrial transformation will not be easy, but with well-designed incentives, and where necessary anti-dumping duties, it can be achieved.

Equally important is the need for behavioural change. International experience shows that households are often resistant to high carbon pricing and that the uptake of green investment incentives can be underwhelming. Policies must be designed with the aim of shifting these behaviours. Public awareness campaigns can be effective, particularly in promoting energy conservation. Engaging multiple stakeholders and communities can drive grassroots change. The media can also play a crucial role in building awareness and shared knowledge. Above all, consistency in policies over time is essential, as frequent changes can lead to confusion.

Shortly after the 2024 July elections, Prime Minister Keir Starmer’s government announced a swathe of ambitious targets to accelerate the UK’s energy transformation.

These include:

• Decarbonizing the electricity sector by 2030.
• Investing heavily in wind energy and modernizing the transmission grid.
• Reducing energy bills for consumers.
• Modernizing the British railway system.
• Accelerating the adoption of electric vehicles.

Implementing these targets requires bold policy actions, significant public and private investment, and a continued focus on ensuring the transformation is equitable. With well-designed packages of reforms, including adjustments to energy taxes, green tax credits, consumer subsidies, and regulation, the UK has the potential to emerge as a global leader in sustainable energy. Achieving this will not only benefit the economy but will also improve the well-being of its citizens and help secure an affordable, secure and clean energy future for generations to come.

Read the POLICY BRIEF

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