04 Jan 2021

Will 2021 be the year of the energy transition?

Investec energy experts analyse the government’s Energy White Paper and its Ten Point Plan for a Green Industrial Revolution and what they could mean for UK businesses. Will 2021 be remembered as the ‘year of the energy transition’?

Investec’s head of UK research Harold Hutchinson said the green energy space has never been so alive with innovation and bold imagination. But crucial to achieving the goal of net-zero emissions by 2050 is the Ten Point Plan for a Green Industrial Revolution. Hutchinson was joined by senior energy technology analyst Marc Elliott and senior utilities analyst Martin Young to discuss major developments in the space and what a green energy transition could mean for UK businesses operating in the sector.

What is the Ten Point Plan?

The UK government has set the most ambitious target to curb climate change of any nation. Ahead of the UN Climate Ambition Summit on 12 December, Prime Minister Boris Johnson announced that by the end of 2030, the UK would reduce carbon emissions by 68% of what they were in 1990 and will continue to aim for net-zero emissions by 2050. 

 

Young said the government’s most significant commitment is the Ten Point Plan. The blueprint for the transition to cleaner energy was developed with the goal of rejuvenating the economy by supporting up to 250,000 ‘green’ jobs. It lays out plans to utilise £12bn of government investment, and potentially three times more from the private sector. This would be utilised to achieve progress in ten key areas – the majority of which are related to energy: 

  • Advancing offshore wind 
  • Driving the growth of low carbon hydrogen 
  • Delivering new and advanced nuclear power 
  • Accelerating the shift to zero-emission vehicles 
  • Green public transport, cycling and walking 
  • ‘Jet zero’ and green ships 
  • Greener buildings 
  • Investing in carbon capture, usage and storage 
  • Protecting our natural environment 
  • Green finance and innovation  

Wind energy powers on

Offshore wind energy is one of the key pillars of the Ten Point Plan and the sector stands to benefit greatly. “The ball is well and truly rolling now on offshore wind,” said Young. 

 

The government has planned for the next round of support for renewable energy projects under its flagship “Contracts for Difference” (CfD) scheme. The scheme – which is key to the government’s plan of deploying new low-carbon electricity generation – was created to reduce the capital cost for developers in delivering low-carbon projects. By paying developers a flat rate in the real terms for the electricity they produce over a 15-year period, this protects the generators and consumers from volatile wholesale electricity prices.

 

The scheme also determines the number of projects supported and, consequently, the amount of renewable electricity generated in the UK. In late 2021, the UK aims to contract up to 12 GW of renewable energy capacity, doubling the amount compared to late 2019. Moreover, offshore wind will benefit from its own allocation in this round, offering opportunities for emerging technologies to compete.

This will create significant opportunities for energy companies active in the offshore wind sector. Young also noted the move to an integrated offshore transmission network – as opposed to the radial connection system currently in place – would create opportunities for transmission companies.

 

There is also support in the plan for the development of new offshore wind technologies, such as floating wind turbines, which can access deeper waters where there is more wind capacity. It is estimated that 80% of the world’s offshore wind lies in waters deeper than 60 metres, where winds are more dependable and stronger. This could yield tens of gigawatts of new capacity potential. 

 

We have already seen floating wind turbines embraced in other markets. For example, in South Korea, with a mixture of few shallow-water sites and lofty decarbonisation targets, floating wind represents a long-term energy transition solution. However, to seize the opportunity represented by floating wind through large-scale adoption, cost and development risks will need to be reduced. 

Carbon capture

Young highlighted another focus of the government’s plan, carbon capture, utilisation and storage or CCUS. This aims to capture 10 million tonnes of CO2 a year by 2030. The government has committed £1bn to support the establishment of CCUS in four industrial clusters, such as Scotland, South Wales, Humberside, Merseyside and Teesside.

 

By the mid-2020s, the government hopes to have two CCUS initiatives in place, increasing to four by 2030. Young highlights Net Zero Teesside – a five-member consortium led by BP – and the 12-strong Zero Carbon Humber group – featuring Drax, National Grid, SSE and Centrica – as the highest-profile, most advanced projects to keep an eye on. 

The government has committed £1bn to support the establishment of CCUS in four industrial clusters, such as Scotland, South Wales, Humberside, Merseyside and Teesside.

Pumping up innovation

Heat pumps are set to play a central role in the plan’s focus on making homes and public buildings greener, warmer and more energy efficient. Electric heat pumps work like a fridge in reverse and are vastly more efficient than gas boilers.

 

The government recently targeted 600,000 heat pump installations a year in the UK by 2028. This is a considerable jump from the 30,000 currently installed annually. There are currently 1.7 million fossil fuel boiler installations every year and only about 30,000 heat pump installations.

 

However, Young remarked this ambition does not commit the UK to a wholly electrified heating system, and a mixture of hydrogen and electric heating could be adopted to decarbonise heat. The government is expected to release a clearer strategy for heat in buildings in 2021.

 

If policy is the driving force behind the energy transition, business innovation is making it a reality. Young said: “Importantly, this opens up opportunities for energy service companies. It also creates a market for energy suppliers to be innovative in tariff offerings. Alternative tariffs will help customers take advantage of cheaper rates at periods when the grid is experiencing surplus supply or low demand. Indeed, this could reduce energy bills for many households and businesses.” 

Heat pumps
Martin Young, senior utilities analyst

The government recently targeted 600,000 heat pump installations a year in the UK by 2028. A considerable jump from 30,000 average currently installed annually. 

Clear direction of travel

Integral to the Ten Point Plan is the role of transport in decarbonisation. The UK is committed to banning the sale of internal combustion engines by 2030, with more detail on the phasing out of petrol and diesel vehicles expected in 2021. 

 

Marc Elliott highlighted the example of Volkswagen. It has talked about scaling back the engines it has in the market to redeploy investment into EVs. Ultimately, it wants to have each plant producing one electric automobile variant. 

 

Elliott stated: “Electrified transport is the direction of travel and investing heavily into industries that are in decline does not make economic sense.”

 

“With battery demand surging as a result of the Covid-19 crisis, the pace of electrification is picking up, and we are in for an exciting few years ahead,” Elliott said. 

Hydrogen future

Elliott also remarked on the importance of hydrogen for the transport industry. By using electrolysers to convert water into energy, this technology leaves no emissions and has a high fuel economy.  

 

Electrolysers operate by harnessing an electrochemical reaction to split water into its components of hydrogen and oxygen – and using renewable electricity. Crucially, this process emits zero CO2 in the process.

 

The ten-point blueprint clearly backs hydrogen, with proposals to generate 5GW of ‘low-carbon hydrogen’ by 2030 – enough to power about 1.5 million homes – for industry, transport, power and homes. However, the cost is high and this still at an early stage of development.

 

Elliott noted: “While we do not have the capacity today to manufacture these demands, the battery industry’s response to rising demands and EVs shows this can be developed quickly.”

 

“Key nations across Europe are setting out hydrogen targets, with industry expected to fulfil them. The EU Green Deal targets 40GW electrolyser capacity by 2030. In Germany, Siemens Mobility and Deutsche Bahn have already announced plans to trial a hydrogen fuel-cell train by 2024, with Cummins opening a fuel cell plant in the area to service the operation.” 

 

The UK government will articulate its hydrogen strategy more clearly in 2021, and Elliott expects to hear more on the topic from the US once the Biden administration re-joins the Paris Agreement. 

Electric Vehicle
Marc Elliott, senior energy technology analyst

Electrified transport is the direction of travel and investing heavily into industries that are in decline does not make economic sense.

More changes to come

The government’s recently announced National Infrastructure Strategy is supportive of the Ten Point Plan and demonstrates the transformation many industries are about to experience. It sets out to transform UK infrastructure in order to level up the country and achieve net-zero emissions by 2050.

 

This is fundamental to achieving net-zero emissions, as more than 80% of the UK’s emissions come from infrastructure sectors -the vital systems that power the UK such as energy, transport and utilities.

 

The infrastructure strategy aims to unlock private sector investment to accelerate the deployment of existing green technology, such as retrofitting buildings and vehicle electrification, while advancing newer technologies, such as carbon capture and hydrogen, to meet the objectives of the Ten Point Plan. 

 

Under the strategy, there will be significant investment in offshore wind, modern ports and also manufacturing infrastructure to expand the share of energy generation from renewables. The government will also seek to invest £1.3bn in charging infrastructure to accelerate the mass adoption of electric vehicles ahead of ending the sale of new petrol and diesel cars by 2030.

As the highest contributing sector to UK emissions, transport is seen as a key frontier in the realisation of net-zero by 2050. 

The infrastructure plan also commits to supporting the Ten Point Plan's investment into carbon capture and storage and also earmarks £5.2bn to protect properties and communities subject to increased risk of flooding and coastal erosion. This could have direct implications for transport or industrial businesses or those with assets able to benefit from retrofitting or flood protection.

 

As the highest contributing sector to UK emissions, transport is seen as a key frontier in the realisation of net-zero by 2050. The government reiterated support for the £27bn roads programme and the HS2 project – which it believes can assist with the net-zero transition.

 

The government’s newly released energy white paper also builds on the Ten Point Plan by outlining measures to achieve a greener energy sector – including power, buildings, industry, upstream oil and gas. While renewables currently account for more than a third of electricity generation in the UK, power is responsible for 15% of UK emissions. Manufacturing and refineries also account for about 16% of greenhouse gas emissions.

 

The paper specifies the targets outlined in the Ten Point Plan for offshore wind generation, the deployment of CCUS projects, the installation of heat pumps and hydrogen production. In addition, it lays out plans for nuclear energy projects, digital infrastructure and establishing a UK Emissions Trading System (ETS).

 

The UK ETS, which replaced the UK’s participation in the EU ETS on the 1 January 2021, placed a cap on the total amount of greenhouse gases that can be emitted by energy-intensive industries – including aviation, power generation and steel manufacturing. Emitters will be able to purchase or trade emission allowances, or ‘carbon credits’, through a government auction or secondary market. By aligning the caps with the UK’s net-zero commitment, this system will be crucial to achieving the UK’s decarbonisation goal.

Policy developments will continue into 2021 and beyond. As the first major economy to legislate to end its contribution to global warming by 2050, the UK has a lot of work to do, and businesses will need to keep up with the evolving policy landscape. This could have significant implications for how businesses operate – including additional expenses, as well as opportunities to reduce energy costs.

 

By taking action, businesses will not only benefit from the raft of government initiatives, but the direction of capital shows that businesses will also be rewarded by consumers voting for a greener planet with their wallets.

Get in touch with the experts

  • Harold Hutchinson

    Harold Hutchinson

    Head of Research

    I have enjoyed over 25 years’ experience as an investment analyst. During that time, I have covered a range of sectors from utilities to leisure. I currently head up Investec’s UK research department and am a member of the global financial markets management team. I also hold an M.A. Hons degree from the University of St. Andrews and an M.Phil (Economics) from St Antony’s College, University of Oxford.

  • Martin Young

    Martin Young

    Equity Analyst, Utilities

    I joined Investec in February 2019 to cover the European Utilities sector. After qualifying as a an ACA with Ernst & Young, I spent 20 year as an analyst at Dresdner Kleinwort Benson, Citi, Lehman Brothers, Nomura and the Royal Bank of Canada (RBC). I headed the team at Nomura. After leaving RBC I joined Ofgem, the GB energy regulator, to head up Investor Relations, before returning to the sell-side with Investec. I hold an BA (Hons) degree in Mathematics from Cambridge University.

  • Marc Elliott

    Marc Elliott

    Equity Analyst - Energy

    I joined Investec in 2012, initially covering the mining sector where I have over 10 years’ experience. I am now focused on Resources, Industrials and Utilities across the whole market cap range, aiming to capture disruptive thematics. I have a Master’s degree in Chemical Engineering from the University of Sheffield.

     

Get in touch with the experts

Harold Hutchinson

Head of Research

I have enjoyed over 25 years’ experience as an investment analyst. During that time, I have covered a range of sectors from utilities to leisure. I currently head up Investec’s UK research department and am a member of the global financial markets management team. I also hold an M.A. Hons degree from the University of St. Andrews and an M.Phil (Economics) from St Antony’s College, University of Oxford.

Martin Young

Equity Analyst, Utilities

I joined Investec in February 2019 to cover the European Utilities sector. After qualifying as a an ACA with Ernst & Young, I spent 20 year as an analyst at Dresdner Kleinwort Benson, Citi, Lehman Brothers, Nomura and the Royal Bank of Canada (RBC). I headed the team at Nomura. After leaving RBC I joined Ofgem, the GB energy regulator, to head up Investor Relations, before returning to the sell-side with Investec. I hold an BA (Hons) degree in Mathematics from Cambridge University.

Marc Elliott

Equity Analyst - Energy

I joined Investec in 2012, initially covering the mining sector where I have over 10 years’ experience. I am now focused on Resources, Industrials and Utilities across the whole market cap range, aiming to capture disruptive thematics. I have a Master’s degree in Chemical Engineering from the University of Sheffield.

 

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