UK fails to fix energy crisis

In early April the UK announced ambitious plans to wean itself off non-domestic energy sources. Are plans to install 17 GW of nuclear capacity over the coming decades realistic? Who will build a new fleet of reactors, and more importantly, where will the cash come from? Listen to a discussion about why the government’s policy will fail to fix an energy crisis that threatens to plunge huge swathes of the country into energy poverty.

 Host: Richard Sverrisson, Editor-in-Chief, Montel
 Guest: Antony Froggatt, Senior Research Fellow, Chatham House

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:04

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. In today's pod, we return to the uk the country's Prime Minister Boris Johnson, is currently under fire for attending parties in downing Streets during the lockdown. But before Easter, he laid out the government's plans to become less dependent on non-domestic energy sources, mainly through a massive rollout of nuclear and offshore wind. Our plans to expand nuclear capacity by 17 gigawatts realistic or even feasible, given the amount of time it takes to bring reactors online, who will build them, and more importantly, who will pay. Joining me Richard Sverrisson in answering these key questions is Antony Froggatt of Chatham House. A warm welcome to you, Antony. Good to have you back on the pod. Great to be here.

Antony Froggatt, Senior Research Fellow, Chatham House: 0:50

Thanks very much for the invitation.

Richard Sverrisson, Editor-in-Chief, Montel: 0:52

So what did you make of the energy strategy unveiled two weeks ago? You had a bit of time to digest it and to gauge the reactions.

Antony Froggatt, Senior Research Fellow, Chatham House: 0:58

Yeah, I think it was odd to be honest, because if you compare it, for example, to the EU where we had a sort of re power announcement that there was a very clear. Delineation between what is needed on the short term and what is needed on the long term. So in terms of reducing the contribution of Russian energy to the EU economy, there was a very clear strategy about what will be done in the next 12 months and then what will be done by the end of the decade. And I really felt that was lacking within the UK publication. In terms of it, it was, it seemed to be much more about the long term than what is needed on the short term. Part of that you can understand because in terms of dependency on Russian energy, the UK is far less dependent. So it's 4% and 8% of oil and gas respectively. While yeah, Europe is 40% of gas consumption. So huge differences, but yet we're framed in the same way. It's about energy security and within the UK it really was about the future. It wasn't about what is needed to be done over the next. Or so, and I do feel that given the cost of living crisis that we are about to face, I think it really misses the point. And I think intellectually it's probably very damaging for the government in the, probably in the medium term.

Richard Sverrisson, Editor-in-Chief, Montel: 2:19

As you say, it does very little to address the, that this energy crisis and these short term issues that are gonna become quite critical, very shortly.

Antony Froggatt, Senior Research Fellow, Chatham House: 2:29

The figures out, as of the beg the end of last year, 12% of households within England were officially fuel poor. They're spending 10% of their income on energy costs. The estimations that I was reading up until this week were that by the end of this year, when we get the next hike in, in the price cap, that might be 30%. Then evidence yesterday, in yesterday, sorry on a Tuesday in the House of Commons from the energy companies were 40%. So 40% of households in this year may be fuel poor, and that is remarkable. And I would've thought from an electoral perspective, this is something that they need to address. And just from a societal perspective, if we have that hike in, in energy costs. Coupled with expected real hikes in food costs. And if I may plug a report that we published last week looking at the energy and food implications of the Ukraine crisis, it is this combination of factors that are gonna have a material impact in countries all over the world. And so it's not if we think it's bad here in the UK and in OECD countries, imagine what that means for many of the developing countries in the poorer parts of the world where they have the same problems in terms of increasing in costs.

Richard Sverrisson, Editor-in-Chief, Montel: 3:46

So what would you have liked to have seen instead then We can go into some of the details a bit late, Antony, but what would you have liked to have seen in the strategy that would've addressed, the short term elements of this crisis?

Antony Froggatt, Senior Research Fellow, Chatham House: 3:57

The UK government is in a difficult position. It doesn't really run the energy industry does it? It's run by the private sector. So it has to cajole, encourage, regulate the companies, but also encourage society to change in terms of behavioral shifts. I think. Again, if we compare to the EU in the EUS proposal, they said, for example, that they would encourage, or part of their energy saving strategy was to get households to turn down their heating by one degree and that would save. Yeah, they said 10 billion cubic meters of gas every year. Obviously. Saying that and then doing it is different things, but the intent is that in the next 12 months, that's what they will do. So you'll have to have a mass publicity campaign, et cetera, to ensure that happens. So there wasn't anything like that, that in terms of we need to encourage behavioral shifts. There was some expectation there'd be a reduction in VAT on insulation and heat pumps, but again, needs to be more specific so you can do issues such as that to reduce the cost of insulating homes. Obviously, insulating homes and insulating buildings. It's the real win-win. We're talking about energy security, we're talking about the cost of living. We can't forget the sort of the third pillar of the trimmer in terms of climate change and environmental protection and demand side measures are the one action that addresses all of those three things simultaneously. And so absolutely should be the priority, but there isn't. Yeah, we need money behind it and it really isn't one of these issues that has a high upfront costs. And then. A relatively long payback time, but obviously with higher energy prices, that payback time is significantly reduced. So we have seen the, this government, and to be fair all governments really failing in this area. There's schemes to encourage efficiency and green home schemes, et cetera, et cetera, and these just aren't learned from, and we're not seeing these being deployed at the scale necessary.

Richard Sverrisson, Editor-in-Chief, Montel: 5:55

And of course, by the time a lot of these policies have been implemented or in the current energy strategy, the energy crisis will to, to many, to a large extent, be over, or at least the current one, potentially. There may be others on the way, but if I can just go through the details of the strategy. There incredibly ambitious in terms of nuclear rollout. Antony, do you think this is a feasible and b, possible to pay for this? Financially viable?

Antony Froggatt, Senior Research Fellow, Chatham House: 6:19

Try not to be too cynical on you, Claire. But we have been here before. We can look back five years. Cameron was talking about rolling out. We can look back. Tony Blair, the two thousands was what was the phrase? The New Dawn or of the nuclear industry. You can look back to Thatcher. She was saying, we're gonna have a whole fleet of new reactors. So there is a historic. Set of announcements by prime ministers of labor and conservatives that says we want to support the expansion of the nuclear industry in the uk. And it doesn't happen. And again, I think that's partly comes back to the point that I made before in terms of it isn't the government that controls these sectors, it is the private sector. And so I do find it a bit odd when the government says we haven't had consistent support for nuclear, which is why we're in this situation today. Governments have been supportive of it, but the support that industry needs, treasuries aren't tending to be willing to do. So maybe that will shift, but yeah, it is a economic question. Obviously the issue with nuclear power is the very large upfront costs. And long construction times and lengthening construction times. So every one of the reactors, Hinkley. Now, what was the quote wasn't it by the head of EDF at one point, that we'd be cooking turkeys at Christmas in 2017 or 18. I can't remember which year it was, but I mean it, we're, yeah, a decade late again and yeah, it's, the costs have gone up, so yeah, it isn't very good. And if you are a. Investor, you are looking at that and going, that's not a very good bet, and in particular when the costs of the alternatives are falling. And for me that's the, again, the question about what we're seeing from the energy security strategy is onshore wind. It's known how to do it. We know that it's cheap. It is the cheapest form of renewables, probably along with solar on your solar. Yet it's not really being encouraged, and that's for local political reasons and I think that's a real shame. Again, if you wanted to reduce dependency on imported energy over this decade, what you do is onshore wind, solar, and you will deliver gigawatts worth of power. What you don't do is say, we're gonna invest in offshore wind and nuclear, both of which have much longer lead time, I just do think they got the balance wrong in terms of horizons,

Richard Sverrisson, Editor-in-Chief, Montel: 8:46

and this is due to some internal politics within the conservative party and local potential local opposition to wind farms. Is that what you're saying here, Antony?

Antony Froggatt, Senior Research Fellow, Chatham House: 8:53

Yeah, I think it's a combination of things. Is there, is the conservative party are much more the party of rural areas. There is some vocal opposition. I don't think it's large vocal opposition, but there is opposition to wind turbines and large scale solar, and I think that scares the conservatives. And in terms of the security strategy says we will not review the planning issues in this area and. Clearly there have been occasions that winter's gone wrong and it has been done in a bad way and locals have been affected by it, but it, yeah, you have to change the way in which you approach the planning necessary than stopping the technology being deployed. Just to say also offshore wind is a good thing and what we are seeing is a very ambitious strategy to significantly increase offshore wind. The UK does have a great opportunity in terms of offshore wind. I think there is, yeah, real opportunities for the UK to work with neighboring countries in particular in the North Sea, in terms of helping to develop that as a regional. Development that can help energy security here and on the continent, which I think yeah. Helps to reduce costs. So I think it also has benefits in that way.

Richard Sverrisson, Editor-in-Chief, Montel: 10:10

If we return to nuclear and the financing issue Antony, with Ley point C, they had the contracts for different model. Now I think they've gone to the regulated asset base model. Is that gonna change anything, do you think? Is that gonna provide these huge upfront costs To some extent anyway.

Antony Froggatt, Senior Research Fellow, Chatham House: 10:27

Yeah, I mean it's the interest rates, obviously if you are, if you have a construction cost of tens of billions of euros or pounds and yeah, you then have a relatively long construction period, I mean from the large hinckley's at sort of 10 years. So yeah if you can have an approach in which you are getting income during that time. Yeah, it, there is a real advantage for you in terms of the financing of the nuclear power plants and that's what they are proposing. So I can see that makes economic sense if you are the nuclear builder. But it should be something that is available to all different energy supply options. It shouldn't be just a special case for nuclear, but we have seen it in other places. But obviously the, it is one of those issues that. Who bears the economic risks of construction?'cause obviously if current energy consumers are paying for something that they haven't, there is a levy paste on their bills for something that will be built in the future, then there is a certain additional risk for them compared to a model where the construc is just paying for the construction costs.

Richard Sverrisson, Editor-in-Chief, Montel: 11:38

We've talked about Brexit before on the pod, Antony, but does this. Give the government more opportunities to directly subsidize some of these projects? Free from sort of state aid rules?

Antony Froggatt, Senior Research Fellow, Chatham House: 11:49

I guess in theory, my belief has been that the state aid rules from the EU are somewhat legal, but also political. And you can see, in terms of the UK's record with state aid rules in nuclear, things that they've wanted to do have been done. For example, Hinkley is granting. Significantly more in terms of the contracts for difference that you're talking about than say offshore wind is now being proposed. Obviously the cost of shore wind has fallen considerably while Hinkley has been constructed, but they still got through that approach that enabled them to get Hinkley off the ground and it's being built under EU state aid rules. So sizewell. Maybe built under the rab. And again, if the UK had remained within the eu, then I do not think the state aid rules would've stopped them doing what they want in terms of the RAB or an any other future build.

Richard Sverrisson, Editor-in-Chief, Montel: 12:45

But then it also begs who's gonna build these plants. Okay, EDF, but EDF doesn't have a lot of money spare. And then there's the Chinese probably pretty out of favor at the moment as well. Who else is left? The Japanese pulled out, quite a number of years ago.

Antony Froggatt, Senior Research Fellow, Chatham House: 12:59

No, I think this it's who will build and who will finance, are the two questions. So Sewell C in terms of what may or may not be built there. There are indications that, as you mentioned, the Chinese were potentially going to be partners in that they're fallen out of favor and are unlikely to invest, or unlikely to be wanted to invest. And so there is talking about the EDF putting up 20%, the UK government putting up 20% so that it still leaves 60% that need, finance needs to come from somewhere. So there needs to be a. A very clear mechanism by which those people that are investing do not feel that they are running an undue risk. And I guess that's a financial risk and a sort of increased guarantee of rates of return on their investment. So that's where the treasury comes in. And it is interesting in terms of the language, within the energy strategy, there is still the sort of caveat is we will build all of these nuclear as long as the economics are favorable. In some ways that is the language that we have seen up until now. And again the proposal is that there be in this parliament, the completes or the final investment decision on a new project. So that's Sewell. That is what was intended in any case. So I don't see that there's anything different in terms of that more rapid deployment. I thought what was interesting is Rolls-Royce have been saying that they will. To have a decision on the regulatory framework by 2025 and that there could be operation by the end of the decade, so by 2029. Now, I hadn't, I've just seen that in the press. I think that's very fast. Obviously these are different reactors. These are small modular reactors. They're not, these are 200 megawatts as opposed to 1600 megawatts for Hinkley, so they are smaller. I would argue that they're probably not small in, in the true sense. It used to be that when we're talking about small modular reactors, they were gonna be 50 megawatts and that you would, not quite, but effectively you put 'em on the back of a lorry, drive'em somewhere, put them down, plug 'em in, and then they go. So you have all of the. The construction is the serialization of the construction is done in factories so that you can then roll 'em out much quicker. So this is a bit of a halfway house, but this is what Rolls-Royce are building. Yeah, we'll have to see whether or not that timetable is stuck to, but they need to have. Roll Royce and other constructors. So who else will build, as you said, we, we had Hitachi we've had Eon, we've had RWE. Yeah, we've had, yeah, Japanese, Germans, all of which have proposed building here and have then pulled out. So maybe, yeah, one of those projects will be dusted off and start being developed again.

Richard Sverrisson, Editor-in-Chief, Montel: 15:37

But yeah, if we come back to Rolls Royce though, I think that's quite interesting. To go from 50 megawatts for SMRs as small modular reactors as was proposed many years ago. I remember there being talk of this now to 200, that's, as you mentioned, an that's quite a sizable jump. You can't fit 200 megawatts on the back of a lorry. And where would you build those and which sites would they be the standard nuclear sites that, the bradwell, the size wells Henderson's or wherever. In the uk, but these would be the established nuclear sites, or would it be fresh brownfield areas in the country?

Antony Froggatt, Senior Research Fellow, Chatham House: 16:09

What's your view here? I think initially you'd see them on the existing sites. And it makes sense in terms of you have the workforce locally with experience. You have the interconnectors Yeah. You have the local public support. So all of those reasons, it would be logical to, to have them close to the existing sites. And I guess if in their vision of a successful future, they would demonstrate those in these existing sites and then be able to more quickly put them into new, to new areas and new regions. But yeah, I mean I think that's some way off.

Richard Sverrisson, Editor-in-Chief, Montel: 16:43

I just wanna touch on what you were talking about with offshore wind as well, Antony. I think, the UK and several other countries across Europe, if not the globe, will be looking to roll out offshore wind quite dramatically in the coming years. What would this do to supply chains and costs more generally? Could this add to a huge increase in costs or even potentially delays to several, several projects.

Antony Froggatt, Senior Research Fellow, Chatham House: 17:06

Yeah, it's a it always is a challenging thing, isn't it, in terms of if you accelerate your deployment rate and a, again, if we look at this in, within the EU context, they're fit for 55. Package has a massive increase in the use of renewables, and that was prior to the situation, Ukraine. And then their new energy strategy has a further acceleration of that. So yeah, the uk as it's doing wind, as it's doing solar insulation and as you said in particular offshore wind where we have a, the UK has a greater focus, then as other countries also seek to do these technologies in an accelerated way, then there is pinch points in terms of the supply chain. My feeling is that is to some degree, inevitable what we need to have. Is confidence from the sector and from investors that this isn't a boom and bust approach, and that what they're seeing is okay, it's an acceleration now, but that acceleration continues, or that rate of deployment continues over the next years and decades. Therefore, we should invest in our supply chain. To enable us to meet that demand because yeah, it's gonna be there and we can profit from that. In some ways that's what we have seen to some degree in the past. If you look at the history of solar power is. Germany in the early part of this century. So the 2002, 2003 put in place the feedin tariff for the first time, and that saw the boom in deployment of solar so that it went from hundreds of megawatts to gigawatts to seven gigawatts, I think deployment in 2005. Six and seven. So those years, and then Italy picked up the bat on and was doing seven gigawatts. So within five years you were going from tens to hundreds of megawatts to tens of gigawatts, and the supply chains in Europe were insufficient. So then China. Started increasing its production and it increased it very rapidly and was able to meet that. And then you had a slow down of demand in Europe because of the 2008 price crash. And China then had a massive capacity for solar. And then it started deploying it domestically and selling it to other parts of the world. And then that supply chain has now continued to build. So to some degree, that's an example of boom and bust. But it's also an example of. The extent to which global supply chains can manage this ebb and flow and can find new markets. At the moment, everyone is focused on energy security, or at least in Europe, we're focused on energy security. But it's only six months ago that we had the Glasgow Climate Change Conference in which the world re pledged to meet the Paris Agreement objectives of and that requires a radical shift in energy use and significant increase in renewables. If you look at what's needed by 2030 to meet those Paris objectives, there needs to be a significant reduction in the use of oil and gas globally. And that far exceeds the production coming from Russia by 2030. So in some ways, we have to be moving this path. In any case to meet if we want to address climate change in the way that international leaders have agreed we, we should. So in some ways it's just speeding up in certain regions. And just one final point on it. You talk about yeah the sort of pinch of supply chains. It's also true in terms of the fossil fuels. It's interesting in, again, Europe is saying, we want to reduce our dependency on Russian gas. So as I said at the beginning, like 40% of the EU and gas consumption comes from Russia. They say that we want to reduce our dependency a hundred percent by the end of the decade and 60% this year. And part of that is the mechanisms efficiency, greater renewable deployment, et cetera, behavioral change, but some of that is also increasing import of LNG. President Biden has pledged 15 BCM, et cetera. But also that is then EU competing on a global market in a way that they haven't, in terms of LNG, they've been much less using much less LNG, more pipeline gas, and that is already having a knock on implication in other parts of the world. So these rapid shifts in terms of supply, it's not just our locality, we need to think about it, is what does that mean in other parts of the world?

Richard Sverrisson, Editor-in-Chief, Montel: 21:17

A final question, Antony and if, if we're talking a little bit to about the obstacles to renewables deployment and one in the UK and in other parts of Europe and the world are permitting processes now. There's been talk even, for offshore projects that, onshore resistance to because either eyesore or the amount of infrastructure that needs to be built on the shore to allow for that to happen. Do you see that in the UK as being an issue? And is the government dealing with that?

Antony Froggatt, Senior Research Fellow, Chatham House: 21:44

Again, within the strategy, they talk about accelerating the deployment the reducing the licensing rate for offshore wind, I think they're talking about halving it. So clearly there are non tariff barriers citing issues. Regulatory issues, et cetera, that affect the deployment of all technologies, and quite rightly, people need to question. Whether or not this is the appropriate place to put the kit. The logic of offshore wind is in part because it is becoming less visible to people. So people see it as less damaging to the sort of the visual environment, but yet it still has to come on shore somewhere. But we also have gas pipelines coming on shore. We have electricity cables coming on. Yeah, it is part of the issue that needs to be done sensitively, but there needs to be a balance in terms of, okay, if we don't do that, what else do we do? And then that's, again, if we accept that we have to decarbonize and we have to move off fossil fuels, then we need to change the way in which we operate the gas system and the power system. And that is, is going to change the infrastructure that we have.

Richard Sverrisson, Editor-in-Chief, Montel: 22:45

If I were to summarize your views here, Antony, would it be. The UK's energy strategy, to some extent satisfactory, but could do so much better.

Antony Froggatt, Senior Research Fellow, Chatham House: 22:53

I'm not sure it's satisfactory. I really don't understand the why there isn't more focus on the short term issues and what is going to concern people over the next two years. That is rising energy prices for households. And if what, as I said earlier, 40% of households are energy poor within the next year or so. Four times what we currently have, or we had it in November. That is a huge social. Burden. And so why the strategy hasn't done more to say We recognize this problem. We need to do things that not only help us address the social costs that higher energy prices will bring, but we will also do more to help reduce energy prices on the short term. Not looking for the construction of nuclear power, offshore wind 10 years from now. It's about what can happen now, and I think that. It's a real, yeah, as I said I think it's a real problem in terms of society, but I don't understand it from the politics of it. If I'm honest. We have local elections in May, unless that by the time we come round to the next national elections, they're able to bring out more legislation to help people in terms of their energy bills. Then I think it, intellectually it's gonna be a real problem for them.

Richard Sverrisson, Editor-in-Chief, Montel: 24:10

So the energy crisis, as it deepens, it may force their hands.

Antony Froggatt, Senior Research Fellow, Chatham House: 24:13

From a society, they shouldn't have to force the hand. In some ways it is obvious what we are seeing. And again, the evidence in the House of Commons on Tuesday, a united front from the energy company saying, this is coming down. This is the natural the natural consequences of what we are now seeing. And I don't think anyone believes that the crisis in Ukraine is gonna go away soon, even if, yeah. By some miracle war stops immediately. I think there has been a seismic shift in terms of European views of the, depend, the willingness to be dependent on Russian gas and the willingness to pay for Russian gas in the same way, and Russian oil. I think it, it's interesting just that the shift for a long time the narrative has been in terms of dependency on Russian energy. We're mutually dependent. We are dependent in Europe on their gas, but they're dependent on our revenues. Russia's dependent on the revenues, but I think there is a new view now that we don't want to be giving money to Russia in the degree, the same degrees, and I think. What, it's a billion, billion euros a day is now going to Russia. So I think that shift is significant and I think permanent. And I do think that the EU will continue in its desire to move away from Russian dependency. And I think that will affect us to this in terms of fuel prices done. Even though we're not part of the eu, we are part of. The European price zone for energy, and so I think that is higher. Prices are probably here for a considerable period of time.

Richard Sverrisson, Editor-in-Chief, Montel: 25:43

Antony, thank you very much for joining the Montel Weekly podcast.

Antony Froggatt, Senior Research Fellow, Chatham House: 25:46

Thanks for the interesting discussion.

Richard Sverrisson, Editor-in-Chief, Montel: 25:47

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