The energy transition: A green prize for the UK economy

The UK is not on track to meet its net zero 2050 target or 2030 decarbonization goal.

SHARE:

In fact, our UK Energy Transition Outlook highlights an 85% emissions reduction by 2050 relative to 1990 levels and 55% emissions reduction (not 68% as per NDC) by 2030 relative to 1990 levels.

The UK has made good progress in reducing its emission to date - showing a close to 50% reduction today versus 1990 levels. This has been mainly achieved by decarbonizing electricity generation through the phase-out coal and build out of renewables, but partially also because of outsourcing UK manufacturing to other parts of the world.

In terms of meeting future UK carbon budgets, we forecast that we will be close to meeting our carbon budgets up to 2032 (within 5-10% of targets), but then exceed carbon budget 6 (2033-37) by 37%. This reflects the impact of the more challenging targets beyond 2033 in order to bend our emissions towards Net zero.

In 2050, our forecast shows that the UK's annual emissions will amount to some 125 Mt CO₂. That implies a significant 85% reduction in emissions, but not the 100% reduction by 2050 which the UK legislated for in 2019.

The transport and buildings sectors are the major remaining contributors to the total annual emissions in 2050. In the transport sector, a sizeable proportion of commercial vehicles will continue to be fossil-fuelled, and aviation will continue to have significant emissions due to the slow penetration of low-carbon fuels, such as synthetic e-fuels and hydrogen by 2050.

In the buildings sector, we find that natural gas will still supply three quarters of final energy demand in 2050, primarily for space heating with more than half the homes still using natural gas.

The major shift in energy

There is a significant energy transition from fossil fuels to low-carbon sources, with the latter rising from 20% of primary energy today to 65% by 2050. Associated with ~140 GW of new generation capacity, largely from new wind and solar farms. Even with this expected build-out of renewables, heavy reliance on fossil fuels will remain, only reducing to 70% by 2030, and then 50% by 2040, and 35% by 2050.

Today, close to 80% of all UK primary energy comes from fossil fuels, of which just over half is produced in the UK and the remainder imported. Even with the expected build-out of renewables, this heavy reliance on fossil fuels will remain for the next decade (only reducing to 70% by 2031 and 50% by 2040).

But in 2050, low-carbon supply sources will dominate and meet nearly 65% of the UK energy needs. Half of that will come from variable renewables (wind and solar), the remainder roughly equally split between bioenergy and nuclear.

The electrified energy system

But let's look at the role of electricity in the UK energy system. Electricity demand in the UK will increase by a factor of 2.3 by 2050 compared to today. Electricity demand will increase from around 300 TWh/yr today to close to 700 THh/yr in 2050. And at the same time, the electricity supply will be greening. Today, we see a mix of low-carbon sources providing about 58% of all electricity, but we forecast a fully decarbonized electricity system by 2035, including the effects of 10 Mtonnes/yr of CCS.

The main shift will be caused by the extraordinary growth of variable renewable electricity generation from 90 TWh/yr today to 500 TWh/yr in 2050 - a six-fold increase. They will provide 80% of generation capacity by 2050.

At present, the biggest share (43%) of power generation output in the UK originates from gas-fired power plants but this share is expected to gradually decline to less than 5% by 2050. The remaining use of gas turbine generation in 2050 will be units running on green hydrogen, mainly generated from variable renewables.

The very high penetration of variable renewables will double the electricity variability, requiring equivalent increases in system flexibility - with a significant role for utility scale storage, but also a continued need for dispatchable power and connectors to other grids on the European continent. We also forecast a major shift in system flexibility towards production of H₂ during periods of excess renewable generation - which is stored and then used as back-up power.

Substantial green prize awaits

An electrified energy system comes with a substantial green prize for the UK economy in the form of a cleaner, more efficient, and less expensive energy system.

An electrified energy system is more efficient than a fossil-fuelled energy system. Hence, the predicted shift towards electricity as the key future energy carrier will de-couple UK energy demand growth from GDP and population growth; with energy demand falling by a quarter by 2050.

The decarbonization of the UK economy is affordable and will, by 2050, reduce average household energy expenditure by nearly 40% relative to 2021 levels.

We forecast annual energy infrastructure CAPEX spend to increase from an annual average of GBP 26 billion in previous decades to around GBP 38 billion per year over the next 30 years. While this is a significant increase in absolute terms, the share of GDP devoted to energy CAPEX expenditure remains relatively stable at just above 1% of GDP across the 2000-2050 period.

Continued dependence on oil & gas

Home heating will remain dominated by natural gas. By 2050, only one third of homes will have heat pumps, but over half of the homes will still use natural gas for heating. Heat pumps are the prime option to decarbonize home heating, but large-scale uptake in the UK is hampered by costs and insulation requirements.

In our forecast, CCS plays a key role in the Net Zero by 2050 target. It shows that the outlook for this sector looks promising, reaching 40 Mtonnes capture capacity by 2035. Mainly driven in the short-term through the committed government GBP 20 billion support and in the medium-term through increased carbon prices, making the cost of emitting carbon higher than the cost of capture.

Hydrogen will have a key role to play in decarbonizing the hard-to-abate industrial sectors and, through its derivatives methanol and ammonium, reduce emissions from maritime and aviation transport. However, the commercial model story is less clear for hydrogen, resulting in not achieving the government target of 10 GW low carbon hydrogen by 2030. The UK still needs to develop a clear business plan for the hydrogen market, based on a good understanding of what will be driving hydrogen demand in the UK and determine where it is essential or economical to incentivize hydrogen production capacity. Without a clear business model or market support mechanism, high production costs would make H2 generally uncompetitive for industrial use and domestic heating even by 2050.

What can we do?

What things are the key levers the UK should consider to accelerate the energy transition and close the gap to net zero?

Firstly, strong, consistent and long-term policy support will be required for certain key transition technologies. If we only rely on market forces and competition these technologies will not develop at the necessary pace. We need further support to build-out offshore wind (including floating wind), carbon capture facilities and kick-start the hydrogen economy. All technologies are essential to green our electricity supply and to decarbonize fossil fuels.

Secondly, we see a clear need for whole system thinking across the total energy system. Combining the supply and demand side of the equation, the UK needs a more integrated system approach across all key energy vectors, so we can define and implement the optimum decarbonized energy system for the UK. The new National Energy System Operator (NESO) needs to play a pivotal part in this key system definition.

Finally, it is about societal engagement. Citizens, industry and government need to actively engage and communicate with society at large around the topic of the energy transition for two main reasons:

1. To further drive down demand - lifestyle changes, circular economy, waste reduction
2. To create awareness of the scale of the change that is required and that some of these changes will have a significant impact on communities where projects are built. This could be more wind farms, new pylons, potentially changes to people's homes and importantly, this can impact people's jobs and livelihoods. We need to clearly communicate what these changes and why they are necessary, so we get public acceptance and buy in to this UK energy system transformation challenge.

The energy transition will require the decarbonization of oil & gas and the significant scaling of low-carbon and renewable technologies. But an incredible green prize awaits the UK in the form of skilled jobs, build out of supply chains, lower emissions, cleaner air and better lives for its citizens. Getting policy right now for renewables and low-carbon technologies could propel the UK to become a global clean energy superpower and knowledge leader in the energy industry.

To learn more about the energy mix, supply & demand, or insights on how the energy transition is developing in the UK, download your copy of our UK Energy Transition Outlook.

9/4/2024 7:00:00 AM