A State or Market-led UK Energy System

           Energy Markets

Aurora Energy Research has released a new report on the future of UK energy policy. The UK currently finds itself at a crossroads following its declaration of a climate emergency. Political uncertainty makes it unclear what the policy response to this declaration, and the path to net-zero emissions by 2050, will be. Energy policy will either be state-led or market-based. The current Conservative government favours market-based policies, as evidenced by the ongoing Electricity Market Reform (EMR). It has set aside £557 million for the Contracts for Difference (CfD) mechanism, the main policy that supports low-carbon generation. It is also finalising the market-based successor to the Feed-in Tariff (FiT) subsidy for small-scale low-carbon generation. In contrast, the Labour party favours re-nationalisation of energy infrastructure and the development of investment banks to mobilise finance for decarbonisation.

What emerges from Aurora’s analysis is that while state-led and market-based approaches to decarbonisation look very different, each requires government effort. Aurora sees a high reliance on renewables in the UK’s future, constituting up to 80% of the UK’s primary energy. This contrasts with high nuclear capacity or carbon capture and storage (CCS). Renewable energy will need 5-10 GW in capacity additions per year, or £4-9 billion per year in investment. Aurora views carbon capture and storage (CCS) and nuclear power as having highly uncertain futures because of a current lack of commercial viability (in the case of CCS) and high costs and unpopularity (in the case of nuclear). The most significant challenge for a highly renewable energy system will be in addressing its inherent capacity excess when resources are abundant. Up to 40% of electricity would not be able to be sold or would be sold at less than half the cost of today’s energy. This threatens the return on capital investment. Because the investment needed in renewables is a foregone conclusion, the policy decisions necessary are in how to manage this financial risk, lower the capital costs of renewables, and support electricity prices or grid operator revenue. These challenges have state-led or market-based solutions, which each require bold policy action and political resolve.

Nick Fedson MEng MSc

Nick is an analyst with an interest in energy, climate, and sustainability. Nick maintains both technical and policy interest in these areas, with an undergraduate background in mechanical engineering from the University of Bristol and a recently completed Master’s degree in Global Energy and Climate Policy from SOAS, University of London. He has completed internships in a solar energy consultancy in Brighton, a not-for-profit independent think tank in New Delhi, and in data analysis at a software company in Cambridge.