UK Energy and Net Zero Transitions

The UK government is not set to meet its next Climate Change Act target or achieve Net Zero by 2050. Fully decarbonising economies involves phasing out fossil fuels across all sectors and introducing affordable and accessible clean alternatives. Incumbent oil and gas companies and countries reliant on fossil fuel revenues and the jobs they provide thus stand to lose substantially. These powerful incumbents have also influenced UK climate mitigation public policy to suit their private interests.

Much entanglement exists between the UK government and private actors in meeting public policy objectives – and this relationship has proved problematic – not least as the UK seeks to phase out imports of Russian fossil fuels in response to Russia’s invasion of the Ukraine. Indeed, the politics of meeting binding decarbonisation targets whilst maintaining energy affordability is extremely difficult, but the politics of not doing so is likely to be disastrous. Why have government-business relations and government (in)capacity to act meant that the UK is not on track to achieve Net Zero by 2050?

UK energy landscape

The UK’s annual energy consumption is still 76.5 per cent fossil fuel based. Thirty-six percent of the UK’s electricity is generated by gas and 85 per cent of homes have gas-fired central heating and this is not net zero compliant. New licences are being granted for oil and gas drilling in the North Sea, with political and corporate actors framing this as ‘home grown’ energy as part of the current crisis.

Subsidies for fossil fuels still significantly outweigh those for renewables, whilst government spending on climate change is estimated to rise to just £7.7billion (0.4 per cent of GDP) in 2021/22. Much of energy policy, then, still favours incumbent energy interests as too little is spent by government on climate change in relation to the scale of decarbonising the economy.

The role of government policy in driving sustainable and managed change is significant. For example, new, sustainable technologies and businesses often start off very small. They need support initially to compete within embedded energy markets, and public financing is key to doing this – both in terms of research and development spending in early-stage clean innovations, and to bring down the cost of clean technologies and business models. At the same time, government needs to ensure energy affordability – something that it is also currently failing in.

Policymaking for (un)sustainable change

As a result of privatisation, in the 1980s and 1990s, responsibility for energy provision was passed to the private sector. This has since included a system of ‘supplier obligation’ to hold gas and electricity supplier companies responsible for implementing energy efficiency. That is, private corporations are responsible for implementing policy that would erode demand for their product.

Privatisation resulted in a centralised energy system, dominated by the ‘Big 6’ energy companies. The government’s main source of expertise on energy in 1992, the Department of Energy, was dissolved. Responsibility for energy has changed hands in government several times since. These changes, combined with high staff turnover and fewer civil servants devoted to energy policy, have greatly affected government capacity to decarbonise. Ofgem, the energy regulator, has much expertise, but is explicitly not a policymaking body. It is also funded by the firms it regulates.

Large energy companies, meanwhile, have maintained policy, analysis, and market research teams. Civil servants responsible for energy policymaking are sent to these companies to ‘learn’ as part of a ‘revolving door’ relationship. Government has also created funds to pay energy companies for data. Covid and Brexit, meanwhile, have only worsened government energy policymaking capacity due to the additional strains they have created. The Clean Growth Strategy was delayed by the EU referendum and 2017 general election. The Net Zero Strategy, too, was delayed from 2019 until late 2021. Without the capacity to ‘do it themselves’, civil servants have relied upon firms when making energy policy.

Government relations with business

Working with incumbent energy business interests is unsurprising given ideological preferences to prioritise market actors. But incumbents have been supported over smaller-scale actors. The Contracts for Difference (CfD) auction process, for example, supported huge growth in offshore wind. But this has been at the cost of cheaper renewables: onshore wind and solar were kept out of the market. This has negatively affected prospects for small-scale renewable companies and cooperatives.

Gas companies, too, have maintained considerable policy influence via lobbying, consultation responses, public statements, and informal senior level meetings with ministers and civil servants. Successful lobbying led to the Capacity Market, another auction process paying energy companies to generate electricity when it is most needed. It privileges gas generation over demand-side response, which would be sustainable and cheaper alternatives.

Embedded regulatory relationships also constrain sustainable market reform. A recent report critiques UK regulatory fixation with competition and consumer switching to resolve affordability issues. Neither approach comes close to the regulatory innovation that could result in markets opening to sustainable energy innovations. While Ofgem’s switching strategy resulted in new market entrants, many new entrants have since gone out of business because they were not resilient to recent gas price rises.

Conclusions

Government reliance on incumbent market actors to in effect carry out government work is problematic. But it is not a simple idea about states versus markets. Action by both is vital to sustainable and just transitions. However, reliance on incumbent energy businesses has placed emphasis on private actors to enact policies that are not in their interests. Large-scale, incumbent actors are rewarded over more innovative smaller enterprises that can offer alternative, sustainable solutions. This has slowed the green transition.

It has also de-emphasised the more politically tricky aspects of sustainable change, such as how to phase out North Sea oil and gas production and reduce dependence on gas. This is not just about meeting crucial, legally binding UK and global climate targets. It is about doing so in a manner that better balances business and social interests. If Net Zero 2050 is to become a reality, these thorny decisions must be faced sooner rather than later.