Insight

Faster, higher, stronger – together? The new UK Government’s plans for net zero and energy infrastructure

Published Date

Aug 1, 2024

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Following the General Election on 4 July 2024, the newly-elected Labour Government has taken swift action to set out its plans to tackle the UK’s net zero and critical infrastructure challenges.

The King's Speech^[¹^]set out the legislative agenda for the months ahead and, together with moves to create a National Wealth Fund to leverage private finance and an increase in the offshore wind auction budget, four bills and their related announcements command attention in the energy and net zero space. New legislation is planned to establish Great British Energy, expand the Crown Estate's role, foster planning reform and boost sustainable aviation fuel production. With energy security and decarbonisation the ultimate goals, the Olympic motto (Citius Altius Fortius - Communiter) seems to resonate not only with the timing of the announcements but also with the Government’s approach to achieving its aims.

New legislation

Great British Energy

As previously reported in our pre-election bulletin, the centrepiece of Labour’s energy strategy is the establishment of Great British Energy (GBE), a publicly owned company to “drive clean energy deployment to create jobs, boost energy independence, and ensure UK taxpayers, billpayers and communities reap the benefits of clean, secure, home-grown energy”.

The King’s Speech confirmed that GBE will be established via the Great British Energy Bill,and the subsequent publication of GBE’s founding statement on 25 July 2024^[²^] sets out how GBE’s mission will be delivered through five functions:

Project investment and ownership: Consistent with Labour’s pre-election promises, GBE will be more than an investment vehicle – it plans to be a publicly-owned energy company taking a stake in projects it will own, manage and operate throughout the UK.
Project development: GBE aims to generate publicly-owned revenue to reinvest into further energy projects, particularly in less developed technologies like floating offshore wind and carbon capture. Government will explore a role for GBE in the early development of onshore and offshore energy projects, potentially on public land, with GBE performing activities up to securing planning consent and grid connection.
Local Power Plan: Through partnering with, and providing funding and support to, Local and Combined Authorities and Community Energy Groups, GBE will facilitate small to medium-scale renewable projects using established technologies to generate up to 8GW of clean energy. This is to include shared ownership projects in partnership with private developers.
Supply chain: GBE will work with public sector stakeholders to deliver a comprehensive support package for domestic clean energy supply chains. The new National Wealth Fund (see below) has allocated GBP7.3 billion of additional funding to the UK Infrastructure Bank in this regard.
Great British Nuclear (GBN): The Government is determined to “advance the work of GBN” and is exploring how GBE and GBN can best work together including by aligning functions. Further detail is keenly awaited, particularly as Labour was relatively quiet pre-election about how its plans for nuclear may deviate from the previous Government’s, beyond endorsing the civil nuclear sector’s role in the UK’s future energy plans.

In the meantime, GBE will be announcing the location of its Scotland headquarters, starting to recruit key roles, and undertaking a programme of stakeholder engagement in the next few months. The Government has confirmed Labour’s pre-election aim to capitalize GBP8.3bn of public funds to support GBE over the next Parliament, with a view to generating 8GW of electricity within five years (around 12% of peak demand by 2030).

The key question for GBE will be how big it becomes, which in turn will largely be driven by how much development and operation it does in-house (rather than just investing).

The Crown Estate

The Crown Estate is an existing public corporation whose role includes identifying and leasing seabed sites for the development of offshore energy projects. In the GBE founding statement and a separate press release^[³^] the Government announced a partnership between GBE and The Crown Estate and an expansion of The Crown Estate’s role. The Crown Estate Bill will remove restrictions on the corporation’s activities and expand its investment powers and borrowing capability.

Under the partnership with GBE, The Crown Estate will also establish a new division, ‘Great British Energy: The Crown Estate’. This will “bring forward” new offshore wind developments with the potential to deliver up to 20 – 30GW of additional seabed leases by 2030 (not affecting the 2030 offshore capacity target – see below), which the Government estimates could help leverage GBP30bn – 60bn of private sector investment.

Seabed leases for offshore wind are currently granted through a competitive auction process administered by The Crown Estate, which operates as lessor. Round 4 completed in January 2023, enabling around 8GW of offshore wind projects in England and Wales. It will be interesting to see how the Government’s announcements will affect the existing process and potentially the current offshore leasing Round 5 which is in its pre-qualification stage and aimed at establishing new floating wind projects in the Celtic Sea.^[⁴^]

Planning reform

In her first speech as Chancellor, Rachel Reeves announced various changes to fix the country’s “antiquated planning system”.^[⁵^] These include reforming the National Planning Policy Framework and focusing on housing development, alongside measures to facilitate urgently needed energy and critical infrastructure and accelerating planning decisions.

Energy projects in the system will be given priority to progress swiftly, and the Strategic Spatial Energy Plan (SSEP) – launched by the previous Government to define the optimal location of energy infrastructure to meet future demand – will be expanded to other infrastructure sectors. Ministers will be expected to use their powers of direct intervention where the benefit of a development warrants it, with two data centre planning appeals reportedly already to be recovered by the Deputy PM. New policy intentions are anticipated for critical infrastructure in advance of relevant National Policy Statements being updated.

Notably, the Chancellor also announced the official end of the “absurd” effective ban on new onshore wind in England (see below).^[⁶^]

In support of these ambitions, the King’s Speech also announced the introduction of the Planning and Infrastructure Bill which will seek to accelerate the delivery of high-quality infrastructure, as well as encourage sustainable growth through industry and new technologies. How such plans will be implemented in law and in practice will be keenly monitored by business and civil societies and environmental bodies alike.

Sustainable aviation fuel (SAF)

Decarbonising air travel was another key feature of the King’s Speech with the introduction this Parliament of the Sustainable Aviation Fuel (Revenue Support Mechanism) Bill. The Bill aims to drive SAF production in tandem with measures to drive SAF demand through the subsequently announced new “SAF mandate”.^[⁷^]

The Bill will introduce a revenue certainty mechanism (RCM) aimed at giving greater confidence to biofuel producers wishing to strengthen their business case for financing SAF production facilities in the UK. The previous Government had held a public consultation on developing an RCM and it remains to be seen whether the Bill will reflect the mechanism options put forward in that consultation.

The SAF mandate will take effect from 1 January 2025 (subject to Parliamentary approval). It will require 2% of UK jet fuel demand to be SAF, increasing on a linear basis to 10% in 2030 and then to 22% in 2040, remaining at that proportion until there is greater certainty regarding SAF supply. There will be a buy-out mechanism for both the main and power to liquid obligations to incentivise SAF supply while protecting consumers where suppliers are unable to secure such supply.

The Government’s intention is that this will encourage the innovation of advanced fuels that can generate greater emission reductions and the diversification of feedstocks to reduce dependencies on scarce resources, by including (i) staged caps on the feedstocks used in the hydro processed esters and fatty acids (HEFA) process and (ii) a separate obligation on power to liquid fuels from 2028.

If this sounds familiar, then that is because the UK’s SAF mandate follows the EU’s ReFuelEU Aviation Regulation (Regulation (EU) 2023/2405) which also applies from 1 January 2025 and requires all aviation fuel supplies to aircraft operators in EU airports to contain a minimum 2% SAF in 2025, 6% in 2030 and 70% in 2050.^[⁸^] Our previous article on How the European SAF mandate impacts market dynamics explores the expected revision of the Regulation and its impact on SAF producers, fuel suppliers, airlines and airports.

Other initiatives

National Wealth Fund

One of the first acts of the new Government was to announce a new National Wealth Fund,^[⁹^] with the goal of bringing together key institutions and deploying public funds to mobilise private capital to fund the UK’s transition to a low carbon economy. In preparation for this, the National Wealth Fund Taskforce had prepared a Report for the Labour Party^[¹⁰^] focusing on five priority sectors: green steel, green hydrogen, industrial decarbonisation, gigafactories, and ports. The message was clear – significant private sector investment was needed to deliver the annual GBP50bn investment a year between 2030 and 2050 called for by the Climate Change Committee in its Sixth Carbon Budget^[¹¹^] (December 2020), clear government policy was a “key enabler”, and appropriate public sector co-investment (i.e. risk allocation) was essential.

The Taskforce has now begun work to align the UK Infrastructure Bank and the British Business Bank under the fund’s auspices, with the aims of enabling public funding to crowd in private investment at deal level in the UK’s green and growth industries and also generating a return for taxpayers. Initially, GBP7.3bn will be allocated through the UK Infrastructure Bank so investments can commence immediately. Reforms will be made to the British Business Bank to enable it to mobilise the UK’s rich levels of institutional capital.

The Government plans to lay new legislation, when parliamentary time allows, to “cement” the fund in statute as a permanent institution. How this plays out remains to be seen, particularly given the previous Government’s record as regards the speed and eventual scope of legislation for bodies such as the UK Infrastructure Bank and the National Infrastructure Commission.

Mission Control

As part of its mission agenda, the Government has launched the “Mission Control for Clean Power 2030”, led by Chris Stark (a former Chief Executive of the Climate Change Committee).^[¹²^] Mission Control will focus on accelerating the transition away from fossil fuels to clean UK-generated power and work with key energy companies and organisations (including Ofgem, the National Grid and the Electricity System Operator) to speed up the connection of new power infrastructure to the grid.

The previous Government had already announced the Connections Action Plan in November 2023 (alongside the Transmission Acceleration Action Plan).^[¹³^] This set out plans to release over 100GW of capacity from the total connection queue of 500GW and to cut down the average wait time for connection from 5 years to 6 months. We await to see if Mission Control will build on or diverge from this plan.

The new Energy Security and Net Zero Secretary, Ed Miliband, has also asked the Electricity System Operator to advise on the pathway towards the 2030 ambition, with expert analysis of the location and type of new investment and infrastructure needed to deliver it.

Onshore wind

As referenced above, the Chancellor has confirmed that onshore wind will now be on the same footing as other energy developments in the National Planning Policy Framework. Tests requiring developments to be located only in certain areas and to have proven “community support” are now removed.

While steps were made by the previous Government last year to soften the de-facto ban, this did not result in a significant increase in projects, so the new Government will be hoping that a combination of measures kickstarts this sector without alienating local communities. To that end, it will update the protocol on how communities in England should benefit from hosting local renewable energy infrastructure, whilst also consulting on bringing onshore wind farms into the Nationally Significant Infrastructure Projects regime so that decisions on large developments can be taken swiftly and at national rather than local level.

Onshore wind has also received an uplift in the recently announced new AR6 auction budget (see below), and a new Onshore Wind Taskforce^[¹⁴^] has been established to accelerate development across England.

Offshore wind – Contracts for Difference (CfD): Allocation Round 6 (AR6)

The General Election was held after applications for CfD Allocation Round 6 were submitted by developers but before announcement of any results. The former Government had approved a total budget for offshore wind of GBP800 million in this allocation round, likely to procure at most about 5GW of new capacity according to EnergyUK.^[¹⁵^] In a February 2024 briefing,^[¹⁶^] EnergyUK had warned that without a step change in the renewable capacity procured this year, there were serious risks that the Government would be unable to achieve its target of 50GW of offshore wind by 2030. Despite this (and without a clear promise to increase procured capacity), the Labour Party pledged in its manifesto to increase the target to 55GW, with an additional 5GW of floating offshore wind.

What happened in AR4 and AR5?

The last two allocation rounds (AR4 and AR5) resulted in underperformance in terms of achieving the offshore wind capacity required to meet the UK’s target. AR4 led to the collapse of a major 1.4GW offshore wind project,^[17] and AR5 failed to attract any offshore wind bids. These results were largely due to the strike prices failing to adequately account for increased project costs resulting from supply chain issues and commodity price increases, impacts that affected renewables generally but which were felt particularly acutely in offshore wind.

Since the election, Britain’s renewables industry has been calling on the new Government to increase the CfD auction budget for offshore wind projects in England and Wales to at least GBP1.5bn.^[18] EnergyUK’s previous analysis indicated that such an increase had the potential to deliver a total of 10GW, doubling the expected capacity under the original AR6 budget.

The new Government has responded swiftly with a new renewable energy auction budget for AR6 announced on 31 July 2024, increasing the overall budget to GBP1.5bn (a more than 50% increase), including a total of GBP1.1bn for offshore wind (a £300m uplift), as well as additional amounts for floating offshore wind and tidal.^[19] How this will play out in AR6 remains to be seen over the next few months, with the auction taking place in August and successful projects to be announced in September.

It will also be interesting to see how the Government approaches AR7 next year. For context, EnergyUK’s analysis showed that c.29GW of offshore wind is currently in operation, under construction or otherwise in train; AR6 and AR7 would need to award at least 10GW of offshore wind in each round to meet the original 50GW target by 2030 as only new projects receiving CfDs in AR6 and AR7 are likely to be capable of coming online by 2030. Given supply chain and vessel availability, it would be unrealistic to wait until AR7 to award significantly increased capacity and expect all projects to be completed and brought online in time for the 2030 target to be met, so the Government’s changes to the AR6 budget are timely.

Solar

The Labour Party manifesto pledged to triple the amount of solar power by 2030.^[²⁰^] The Energy Security and Net Zero Secretary has wasted no time in making moves towards this goal by granting long-stalled approval under the Nationally Significant Infrastructure Projects regime of plans for three solar farms capable of providing 1.3GW of photovoltaic capacity (Gate Burton Energy Park in Lincolnshire, Sunnica Energy Farm on the Suffolk-Cambridgeshire border and Mallard Pass Solar Project on the border of Lincolnshire and Rutland). The recent increase in AR6 budget also includes an uplift for solar. Given the new impetus towards direct ministerial intervention in planning processes, what this means for other renewable energy projects that have been rejected or held up by the outgoing Government will be keenly watched.

Next steps

A new Government programme (particularly following 14 years in opposition) is always exciting and promises much. Even though resources are heavily constrained, the focus on unlocking development (low cost) and co-investing (with a multiplier effect) is an obvious attempt to get more “bang” for a limited buck.

We will continue to update you on how the markets develop and on new policy developments in these areas as the new Government tackles the UK’s net zero and critical infrastructure challenges. In the meantime, please contact your usual A&O Shearman contact for further discussion, or the named contacts on this bulletin.