2025: What is on the horizon for industrial energy?
David Kipling , CEO of On-site Energy Ltd , examines the Labour Government's ambitious renewable energy targets and the UK’s current progress toward Net Zero.
The Labour Government is targeting a significant step forward in renewable electricity generation. Net Zero is written in stone, but the UK is currently off-track on 22 of its 28 climate commitments.
Solar and onshore wind projects will benefit from reduced planning obstacles and improved grid connections for projects that are deemed ready. Mission Control, led by Chris Stark, will have the mandate to remove these roadblocks.
So, what can we expect in 2025?
1. Renewables and Grid projects. The aspiration is to empower renewable energy generation. Planning is already being reformed. Wind will continue to be a longer and more complicated process in planning, though now with a presumption in favour of support. If on-site or near-site renewable energy is in your strategy, 2025 will be a good time to progress those plans.
2. Grid connection reform. The main obstacle will remain connecting to the grid. Some progress is expected in certain DNO areas as the queue for connections is reorganised – pushing out those with ‘banked’ connection capacity and prioritising those ready to act. However, in many DNO areas, this won’t happen due to the network’s fragility and fault limit constraints. We expect some loosening of the conservative approach that DNOs have traditionally taken when assessing new connections, driven by new Ofgem regulations, which may, in turn, free up connection capacity.
3. Non-commodity costs. These costs, which fund FIT, ROC, CfD, and network charges etc. are likely to rise. The recent ￡1.5 billion AR6 hydrogen CfD increase will likely need to be covered through these charges and additional CfDs for nuclear, hydrogen and carbon capture may also be expected. Non-commodity costs are currently around 9-10p/kWh but may reach 11p-12p/kWh by 2027, potentially rising further if the Government eases costs for residential consumers.
4. Gas Prices. These are expected to remain higher than historic lows. The UK imported 40 per cent of its total energy needs in 2023 (gas and electricity), up from 37 per cent in 2022. With a moratorium on new exploration licences and increased taxes on energy companies to fund Great British Energy, domestic production is likely to decline, leading to higher reliance on more expensive LNG imports. This shift towards LNG is anticipated to drive costs further up.
Currently, there are no announced strategies for gas, other than no new domestic exploration. Industrial gas usage is nearly 50 per cent higher than electricity usage, yet policy focus has been predominantly on electricity, a gap that cannot be ignored in the long-term.
Adding costs to gas really impacts industrial viability. We saw that in 2022 when CF Fertilisers closed its Stanlow operation, disrupting the food sector by eliminating 40 per cent of the UK’s CO2 production. Food prices escalated as a result. Hopefully lessons were learned that the Government should not play with gas prices if it wants to avoid empty supermarket shelves.
5. Energy efficiency mandates and CCA. We’re speculating here, but with no funds in the coffers, it’s unlikely the Industrial Energy Transformation Fund (IETF) will hold another sizeable round in 2025 to subsidise energy efficiency. An extension of the Climate Change Agreement (CCA) has been announced, currently the primary driver for energy efficiency improvements.
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The Government may adopt a more ‘stick than carrot’ approach, widening the scope of the fourth round of the Energy Savings Opportunity Scheme (ESOS) in 2027 and potentially mandating that businesses implement ESOS audit recommendations if the payback period is under five years.
6. Carbon pricing and ETS. There is no specific mention of carbon pricing or the UK Emissions Trading Scheme (ETS) in the Labour manifesto. However, with Net Zero firmly established as a goal and limited funds available, we can expect the Government to push for stronger action through higher carbon pricing. It would also be relatively straightforward for them to bring more businesses into the UK ETS framework. These measures would cost the Government little while helping to reinforce their green credentials.
Science-based targets impact
Separate from government policy, nearly 70 per cent of all major listed companies have committed to Science-Based Targets (SBT) for achieving Net Zero. Most of these commitments were made only recently, with many companies not having taken this step as late as 2022.
For many, 2025 will be the first major ‘test’ of performance against their committed milestones. We see a mixture of businesses that are near certain to hit their 2025 targets but lack firm plans for reaching the 2030 goal, alongside those already off track for their 2025 targets. Few companies have a clear plan for 2030 and beyond.
Achieving SBT goals will rely more on energy efficiency than renewables alone.
Our recent publication, the ‘Guide to Industrial Decarbonisation’ outlines key considerations:
If you would like to discuss decarbonisation strategies, grid connection approaches, general energy savings ideas, or explore zero-capex solutions, please get in touch with [email protected]
This article appears in Buying and Using Utilities Winter 2024 issue
Read more ??https://meucnetwork.co.uk/buu-winter-2024/