How our power grid is choking UK green growth
This piece by Bradshaw Advisory associate director Amy Norman was originally published in The Times.
The UK is in gridlock over its green growth. After years of a chronic productivity problem, politicians, industry, and the public all point towards a low-carbon economy as a beaming light at the end of a dark tunnel. Where investment grows, energy is clean, and well-paid jobs are dispersed across the regions.
This mission is not a silver bullet for solving the UK’s deep economic inequalities, but it is a critical part of a more prosperous future. One that is now slipping from reach.
This is a recent familiar narrative. The US Inflation Reduction Act (IRA) and the EU’s response in the race for green energy subsidies have unsettled UK industry leaders and senior politicians. The threat of key developers lured away to more attractive investment environments consumes headlines. The warning to government goes: follow suit or risk losing the UK’s competitive advantage in renewable energy and missing net zero goals. How the government chooses to respond to this is a bigger question for another day.
Meanwhile, the UK’s chances of achieving green growth hang in the balance of something less eye-catching but much closer to home — grid capacity.
A recent National Audit Office report found that the government lacks a long-term plan for decarbonising the power sector, putting government targets, security of supply, and affordability for households at risk. One crucial aspect of this (non-existent) plan is ensuring that the grid can keep pace with growing electricity generation.
The government’s ambition is that by 2035 all electricity should be generated using clean sources alongside a 60 per cent uptick in demand as people switch to electric vehicles and heat pumps. In the next eight years, offshore wind alone will need to nearly triple what has been achieved in the past two decades. Labour promises to move even faster with zero-carbon power by 2030. But the grid can barely cope as it is.
First, getting new projects connected to the grid is fraught with painful waiting times of up to 15 years and perverse incentives around project viability. This is partly due to planning delays and a queuing process that is not fit for purpose. But what captures fewer headlines is the poor quality of the grid that keeps our answers to growth, net zero, and energy security waiting in line.
Insufficient capacity within the grid means that it cannot transmit all the power from where it is generated to where it needs to be. The most common case of this is when the network overheats and generators are paid by the National Grid electricity system operator (ESO) to “switch off”. Last year, these payments (“constraint costs”) totalled £1.94 billion, up from £0.51 billion in 2018, partly inflated by wholesale energy prices.
This presents an urgent catch-22 for policymakers to resolve, particularly in an era of volatile prices. That is because constraint costs are ultimately paid for by households via a levy on their bills. As more power (slowly) comes online, continued underinvestment in upgrading the network’s capacity will only lead to higher constraint costs for billpayers.
Modelling from the the Department for Energy Security and Net Zero estimates that to get to net zero by 2050, network costs could increase to £270-£350 billion. Meanwhile, Ofgem’s “landmark” £20.9 billion five-year plan commits less than 7 per cent upfront to boost grid capacity — a drop in the ocean of what is needed.
Between the central government, Ofgem, National Grid ESO, UK Infrastructure Bank and the private sector, key investors seem to be at a standstill — looking to each other to step up. Ofgem’s hesitancy in particular comes from this concern over increasing energy bills — network costs for upgrades are also passed onto households via levies. But ultimately, investing in expanding capacity is the only route to harnessing the benefits of lower-cost renewables for higher growth and cheaper bills.
This is not just a UK problem. Investors now looking fondly at the US should also consider the potential grid constraints associated with the IRA-induced dash for generation. Globally, an estimated 50 per cent rise in grid spending is needed this decade to meet long-term sustainability goals, according to the International Energy Agency.
The UK needs a step change in the pace of renewable generation. While leaders and commentators look abroad for solutions on becoming a green super-power, policymakers should be reminded to keep an eye closer to home. Investing in the grid may not make for breaking headlines or ministerial photo ops but it is necessary to meet net zero goals and boost growth.
Significant progress has already been made with natural gas on average producing a minority of electricity. The vast economic benefits of green energy are still ripe for the UK’s taking. But first, it must break the gridlock for a clean, secure network.
