What do recent changes mean for the future of the UK as a net zero economy?
James Smith, manager of the Premier Miton Global Renewables Trust, reviews recent changes to green policy and questions whether the UK will be ready for net zero?
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
UK ban on new petrol and diesel cars pushed back to 2035
Major policy reversals can increase uncertainty and should be avoided where possible. However, it looks unlikely that the UK will be ready for a ban on new petrol and diesel cars in 2030. The public electric vehicle (EV) charging infrastructure is inadequate and at current rates of development, is unlikely to be sufficient in 2030. There seems to have been little thought put into public charging infrastructure. Key questions haven’t been addressed, for example, who will provide it? Will it be competitive or provided as a regulated service by electricity companies or local authorities?
Any regular user of the current EV charging infrastructure will have experienced frustrations around the lack of a standard payment system and often the inconvenient location of charging points, particularly given the lack of space in urban environments. Policy makers need to carefully think about what changes need to be made to the regulation of electricity grids to facilitate the required investments. Questions regarding the provision of high voltage rapid charging infrastructure on motorway and major A roads remain outstanding. Will there be sufficient electrical capacity to facilitate this? At present, the capacity is simply not there.
I would like to see these issues being thought through in advance of hard deadlines for ending the sale of new fossil fuel cars. In addition, the date change to 2035 brings us back in line with the EU. What would have been the barrier to consumers simply buying petrol and diesel cars in the EU, and importing them into the UK? Being in line with the EU on this major change makes sense to me.
Rishi Sunak increases heat pump grants to £7,500
I can see that there is a big problem in retrofitting heat pumps into the UK’s older, poorly insulated housing stock. By and large, the existing housing stock is designed to work with high temperature gas and oil heating systems, rather than low temperature heat pumps. Households, therefore, also face a substantial cost in changing radiators and piping diameter when replacing a boiler with a heat pump. Not least, the substantial insulation required to allow efficient operation, but also the possible switch to under-floor heating. Therefore, even with the increased up-front subsidy of £7,500, many householders will be reluctant or unable to make the change.
Having said that, new houses are still being built with gas heating. I believe Sunak should have considered bringing forward the ban on boiler installations in new-build houses to the end of 2023, currently 2025.
Is the UK now light green?
I believe most investors understand that policy can only be successful if it has broad consent. The changes made last week reflect this, and the fact that the public is not, in the Government’s opinion, ready to make the changes required.
I see the above changes as being relatively minor in importance when compared with the Electricity Generator Levy (“EGL”) or “windfall tax”. The EGL is a 45% windfall tax, scheduled to run to March 2028, on “exceptional” generation receipts realised by corporate groups or stand-alone companies who generate electricity in the UK. This has left owners of renewable energy installations with the prospect of paying additional taxes when prices are high, but being left with low returns or losses when prices are low. Asymmetric risks such as this are a disincentive to investment and act as a barrier to the further development of renewable energy infrastructure in the UK.
In addition, the Government’s most recent contracts for difference (CFD) auction can be seen as a failure in that there were no bidders for the available offshore wind contracts. The Government had set a maximum price at a level at which no companies thought it possible to build and operate an offshore wind farm profitably. I believe this shows a lack of understanding in Government of cost pressures within the power sector and puts into doubt its target of 50 GW of offshore capacity by 2030.
A contract for difference is a private law contract between a low carbon electricity generator and the Low Carbon Contracts Company (LCCC), a government-owned company, whereby the Government guarantees the operator an effective fixed, indexed linked price of electricity.
If I was Prime Minister for a day…..
I have no political aspirations, but if I caught Mr Sunak in an elevator I would suggest the following five changes:
1. Environmental costs are currently charged on electricity bills rather than gas. It would be logical to switch these charges to gas bills, given the higher CO2 footprint of gas consumption as compared to electricity. Over half of UK electricity production is now CO2 free, and electricity demand should therefore be encouraged in preference to gas. This would also encourage households to make the move to electric heating, helping to reduce CO2 emissions.
2. Ensure all government and local authority buildings are heated with heat pumps, and all government and local authority vehicles are electric or hydrogen in advance of requiring households to do likewise.
3. Re-run the offshore CFD auction without an upside price cap to allow for genuine price setting with market forces allowed to work freely.
4. Remove the EGL with immediate effect, in line with the EU.
5. Bring forward the ban on gas and oil boilers in all new housing.
Essentially, the Government needs to lead by example. It is unreasonable to expect households to do the heavy lifting with Government and local authorities lagging.
Above all, the Government needs to understand that capital to develop renewable assets is scarce, and as a result of the increased interest rate environment, increasingly expensive. Opportunistic short-term taxes such as the EGL act as a disincentive and stand in contrast to the investment incentives available in the US for example.