Richard Sverrisson, Editor-in-Chief, Montel: 0:19

Hello listeners, and welcome to the Monzo weekly podcast, bring you energy matters in an informal setting. This week, we turn our attention to the UK, the country has set a Clear net zero targets for 2050, but events in recent weeks have raised questions about the current UK government's commitment to its climate objectives. Prime Minister Rishi Sunak has pledged to max out the country's oil and gas reserves, while the expansion of urban low emission zones You let's for short into suburban London has become a divisive issue. In addition, Sweden's Vattenfall has pulled out of a 1. 4 gigawatt offshore wind farm, citing higher costs. The country's nuclear rollout has stalled and local opposition to large scale infrastructure is growing. Helping me, Richard Svarsson. To unravel the country's energy policy is Antony Froggatt of Chatham House. A warm welcome, Antony. Thanks very much. Let's start by talking about the UK's energy policy, or would it be better to call it an energy mess?

Antony Froggatt, Senior Research Fellow, Chatham House: 1:21

We have a policy. It's certainly troubled at the current time, and I think that's for a number of reasons. I mean, what we saw, in particular since the invasion of Ukraine, was much more focus on energy security. And the UK's desire and need to have energy from a wider variety of sources and the impact that that had on consumer prices of government had to step in and give really quite significant subsidies on the one level, you have the whole energy security going up the political agenda, affordability being crucial from an electoral perspective, but also from a societal perspective. But climate change hasn't gone away. And we've seen that over the last months. I mean, the continual and growing impacts of climate change. Uh, but the conservative government have responded to that is seeking to use climate change as a issue, uh, as what's called a wedge issue, trying to show difference between their party and the main opposition, the Labour Party. So climate change has become much more of a political issue at the current time.

Richard Sverrisson, Editor-in-Chief, Montel: 2:21

I mean, I will return to that bit later about the, the opposition, but it would you say that the government. is, is backtracking on its climate goals. I think they're sort of growing groundswell, isn't there, in some parts of the media that, you know, and it seems to be that the current government and the Prime Minister is listening to them. Would that be a fair assessment, Anthony?

Antony Froggatt, Senior Research Fellow, Chatham House: 2:40

I think it's, it's clear that they see this as an important political issue. It is a, it was surprising during the election campaign for the Conservative leadership. So in the UK, they have a strange or the Conservatives have an unusual electoral system whereby Only their members get to choose the next. leader of the party. And when the leader of the party is the current Prime Minister, or the Conservatives are in power, then effectively they're choosing the Prime Minister. And it's quite a small electorate. It's like 60, 000 people, most of which are from a very narrow stream of society. They tend to be older, white, living in outside of major cities. So they elected the prime minister and the prime minister had to appeal to them. So during that election campaign, they basically said we wouldn't do any more onshore renewables, for example. So it becomes a politicized issue in terms of energy policy.

Richard Sverrisson, Editor-in-Chief, Montel: 3:34

And what's the opposition doing? I mean, what's its stance? I see, you know, maybe we could talk about, you know, the ultra low emission zones here. That seemed to be a big factor in a recent by election win for the Conservatives, maybe with a narrow majority. But, uh, the Labour Party, the opposition Labour Party and its leader Kierstein seem to backtrack a little bit on these kind of EULAs or ultra low emission zones.

Antony Froggatt, Senior Research Fellow, Chatham House: 3:56

It was a surprise. So it was very unusual. There were three by elections on the same day. There was sort of the Conservatives expected to lose all three, but they won the one. that they were least expected to win. And so everyone was looking at why was this? And as you said, it was in the outer edges of London. And the mayor of London is, uh, expanding the current, uh, ULES low emission zone from currently it's within a relatively small area of London to expand it to within the sort of the orbital. motorway called the N25. And this affects many conservative held constituencies. So most of central London is, is held by the Labour and the outer ring is held by the Conservatives. And so the, there, the future parliamentarian campaigned very strongly against ULIS. It's very interesting to note that ULIS was introduced by the Conservative. Boris Johnson, who then became Prime Minister, but that's often not talked about. Because they won the seat on the basis of that, many people within the Conservative Party have said, well, look, that shows that environmental stroke climate change issues are a vote loser, and if we loosen the regulations in these areas, then we will win more votes. The Labour Party have said, yeah, a difficult one, and asked the Labour. current mayor of London to think again. He's said, don't really want to change the policy, but have offered more subsidies for consumers in terms of scrappage schemes. So they've reacted to some degree, but it highlights for me, at least the extent to which the conservatives, there is a wing of the conservatives that don't like environmental policy and want to see rolling back on environmental policy and see now is opportunity to do that. So you've seen that in other areas. So, Uh, Michael Gove, who is the Minister for Leveling Up, has said, well, maybe we should be not requiring such high energy efficiency standards. There's another question about gas boilers. Should there be a, the government is, I think it's 2035, saying we won't be allowed to build houses with gas boilers in. Um, and so they're proposing that that potentially be reduced. They've said that they'll stand firm on electric vehicles. And the ban on internal combustion engines, but I suspect that will be the next that will come under significant threat, uh, going forward. But so far, the government hasn't rolled back on it, on many of its sort of longer term pledges. It's some of the policy and implementation measures that they are wavering on.

Richard Sverrisson, Editor-in-Chief, Montel: 6:26

The ULEZ issue is quite interesting as well, because the Labour Mayor of Manchester, for example, has also held back introducing similar measures that the former Conservative Mayor Boris Johnson introduced in London.

Antony Froggatt, Senior Research Fellow, Chatham House: 6:37

Yeah, I mean, it's a difficult issue. Um, I mean, I had to get rid of my car and it cost a lot. Um, so it's, it's, it's not an easy thing. Uh, it affects lots of businesses, but yet it brings air quality benefits as well as helps to speed up the transformation in terms of electric vehicles, which we know are essential if we're going to meet future climate targets. But the other problem is, of course, is, is a budget. She won is the local authorities. So within London or within Manchester may not have. The ability to offer scrappage schemes or to be able to support. Uh, other measures fiscally, because it's not within their powers. It requires central government involvement. So there is a tension that exists also in this space.

Richard Sverrisson, Editor-in-Chief, Montel: 7:21

Absolutely. And it's, uh, you know, it is electric vehicles are not cheap either. And certainly, you know, a lot of people certainly outside of Of the city centers rely on them quite heavily. But let's touch on a few other areas. Offshore wind. I mean, I mentioned in the introduction that Vattenfall pulling out, uh, citing higher costs, basically, you know, inflation, interest rates, the whole environment, financial environment has become very difficult for companies to build such farms on scale they originally planned to do. Do you think that's the first step of many or what's what's going on?

Antony Froggatt, Senior Research Fellow, Chatham House: 7:54

I guess everyone is looking in this space. What we've seen over the last couple of years is the higher energy prices have a positive impact for renewables, because obviously they're not being affected by the price of fossil fuels in terms of their outcome or output. But clearly the materials that they need are affected by the increased material costs, increased construction costs, inflation, interest rates going up. All of these. for capitally expensive bits of equipment are problematic. And so where you have systems, and in particular, as you mentioned, offshore wind. So in terms of the process for offshore wind, uh, at least within the UK, the government opens up the opportunity for companies to bid. They bid and say, we will, we will build this farm of let's say 500 megawatts. We agreed to do it at a set price, and that set price obviously is based on what they thought were the construction costs, profit included. If the construction costs go up significantly, then their their profit margin is squeezed significantly or sometimes disappears. And so that's what they're pushing for, a renegotiation of the price that was agreed in terms of the production costs. Um, so it's difficult. The UK government is. In terms of, I mentioned before, the conservative government is elected by a small band of, a relatively small number of electorate who don't like onshore renewables because it's, they tend to be outside cities in areas in which they fear the renewables will be built. Therefore, the government has become more reliant on offshore wind in order to meet its targets. And so I think this is, will be extremely problematic for the conservatives if they see a slowing down of the renewable development because offshore wind. The costs rise significantly.

Richard Sverrisson, Editor-in-Chief, Montel: 9:42

I mean, can you see that the UK government willing to renegotiate some of these contracts? I mean, they're mainly based on contracts for differences, aren't they?

Antony Froggatt, Senior Research Fellow, Chatham House: 9:49

They've said that they're willing to give a little bit more money, but it's a relatively small amount. And so we're talking tens of millions when these things are costing hundreds of millions, if not billions in terms of the total sector sector costs. So we haven't seen them willing to open up the checkbook. Um, I think it, it also comes back to the question that we discussed previously about their willingness to be seen to be green and seeing that actually they're trying to label Labour Party as the sort of in with the greenie loonies in some ways. There was a ridiculous letter that went from Grant Shapps, who's the minister in charge of business and energy, and he sent a bill to Keir Starmer saying, um, the green protesters have, have painted on the walls of our building. You should pay for this because the Labour Party received money from someone supporting the same groups. I mean, total madness that they spend their time writing letters in such a obscure way. But it's almost quite frivolous. Yeah. But it's about them trying to label the Labour Party. So this is what I mean is they want to say. Labour is going to destroy jobs because they're pro green, uh, and that's what a element that we will see because we have an election at the end of next year, that may well be an issue that is continued to be revisited.

Richard Sverrisson, Editor-in-Chief, Montel: 11:06

This kind of wedge, uh, politics that you're talking about, uh, to Tories, but, but does that mean... you know, are they continuing with their green policies or are they also rolling back from what they're saying? Are they being, you know, not so open about about their, their renewable or their green policy?

Antony Froggatt, Senior Research Fellow, Chatham House: 11:23

Um, I, I think we're seeing questions being raised about the policies and the targets and maybe we should push back the target by five years, either because things aren't in place or because of COVID, higher costs, et cetera. So I think there is nervousness amongst many people that. Uh, they're not putting in place the policies in order to meet the future targets. And I think that is the question that we, yeah, we will have to see over the next few months. But I think the longer term targets probably won't be addressed, but if you don't put in place the policies to meet them, then effectively you're scrapping them in any case.

Richard Sverrisson, Editor-in-Chief, Montel: 11:57

But it's interesting also to note that the wholesale price of electricity is far higher now, uh, than it was when some of these, these, um, these projects were planned, were launched, were signed off, you know, I think that's also as a factor, but maybe not a big enough factor. Yeah,

Antony Froggatt, Senior Research Fellow, Chatham House: 12:14

I mean, I guess there's a huge, there's a greater degree of uncertainty. about what the price of energy will be looking forward, um, given in some ways what we have seen is the impact of geopolitics on energy price like we haven't seen for a decade or two.

Richard Sverrisson, Editor-in-Chief, Montel: 12:28

You talked about the ban on onshore wind and the opposition to, to onshore wind. Do you think that's ever likely to be revoked or that we will see a rollout of onshore wind again in the UK?

Antony Froggatt, Senior Research Fellow, Chatham House: 12:43

I hope so. I mean, it is. If we want energy security, if we want cheaper energy, if we want cheaper decarbonized energy, then onshore renewables are obviously the way forward, uh, in terms of they can be done quicker, uh, and they are cheaper. It's cheaper to build onshore than offshore. The government keeps talking about reviewing it, but I don't think they'll be in a hurry to review it. So I suspect that what we'll see is, is a fairly similar situation over the next 18 months. Uh, and then. Post election, one way or another, I suspect the policy will change, but I mean, the UK is falling behind. I mean, to give an example in terms of solar, what we've seen in the UK over the last six months in terms of solar deployment was 500 megawatts of new solar being put on the grid. So we've just gone to just over 15 gigawatts. In Germany, over the same period, over 6 gigawatts were put in place, taking them to about 70 gigawatts. So you can see the difference between Germany and the UK. If we then go to China, over the last six months, they've employed over 70 gigawatts in six months alone. So nearly, yeah, I mean, in, in a month in China, they've nearly put in place the same as the UK has in total. I mean, it's, and, and this is interesting because it's, it's both in China, it's both centralized solar, but also they've changed the, the, The planning. So there's much more decentralized. So over half of that is decentralized. Individual shop owners, et cetera, are being able to put in place solar. Um, so there is a, a real pace of change that the UK is missing out of. And even if we compare ourselves to continental Europe, uh, yeah, other countries are moving much, much faster because

Richard Sverrisson, Editor-in-Chief, Montel: 14:30

you would have thought in the current climate and the discussions around energy security, solar is, you know, is a no brainer.

Antony Froggatt, Senior Research Fellow, Chatham House: 14:37

Um, I would agree. I mean, clearly there's problems if you have too much of it, uh, in terms of grid balancing and in particular through, yeah, distribution grids, etc. I mean, we need to plan it, but what we don't need is planning slowing down the deployment. What we don't need is planning, delaying the development. Access to the grid is, is clearly a problem in the UK, in Europe, and in the United States, for example, one of my favorite facts for, from last month in the United States was that there is, uh, two terawatts of renewables and batteries waiting to come on the grid, which is more than the current. total install capacity. And that's planning issues, delaying the development. Not all of them were necessary to go ahead, but you can see that there is a huge number of companies that said, actually, we want to get on and develop these things. And we have, yeah, so it's grid congestion that is, is delaying the deployment.

Richard Sverrisson, Editor-in-Chief, Montel: 15:34

I mean, as you mentioned that, you know, solar does have issues around when there's too much of it. And I think the Netherlands is seeing that quite clearly in terms of negative pricing. Um, and they've trying some in some areas trying to cope with that with different mechanisms, but You know, in the UK, I see, you know, celebrities come out to who, who live near proposed big solar farms coming out very strongly against, um, is that a problem here that, you know, it's, it's, it is NIMBYism, but it's, it's also, you know, very prominent people coming out, whether they're TV personalities or actors or, you know, uh, in opposition to the solar, solar farms. Is that an issue in the UK?

Antony Froggatt, Senior Research Fellow, Chatham House: 16:13

I mean, I think it is everywhere and, and develop needs to be done. uh, with care and respect for the environment. I mean, yeah, we don't want to concrete everything and put solar panels on, but yeah, and it, it delays costs or delays projects, increases costs, et cetera. We've bashing the government a bit over the last couple of minutes. I mean, they have just, yeah, authorized the UK's largest solar plant. So I think it's 400 gigawatts, sorry, 400 megawatts. Um, so some things are taking place, uh, and yeah, it has to be done with care, but the, as I said, the UK is. falling very much behind. And you talk about the Netherlands. I mean, they have, I think it's around 22 gigawatts of solar on the grid. So the UK has 14. So we have, yeah, we're a lot smaller in terms of we're a lot larger in terms of population, lots larger in terms of landmass, but significantly behind in terms of solar deployment.

Richard Sverrisson, Editor-in-Chief, Montel: 17:06

Absolutely. I think countries like Poland as well have made rapid advances in solar. I mentioned an introduction as well, uh, Anthony, about, you know, Rishi Sunak maxing out the oil and gas reserves. I mean, does that send out mixed signals?

Antony Froggatt, Senior Research Fellow, Chatham House: 17:19

Yes. I mean, it's interesting from a number of factors. One is the fact we talked about before in terms of the wedge issue. So the Labour Party have said that they wouldn't stop any existing projects that have been licensed, but they wouldn't license any more. Once they come to power. So in some ways, what that does is if you're an oil and gas company, you're gonna go, well, we've got a year in order to guarantee that we can get, we can carry on. So there, that's probably sped up an increased concern. But the Conservative Party have identified this as an issue that again, that they can highlight it. we're different from the Labour Party. So, um, I think that's part of what they're doing. I think it's also part of the narrative that they have is it's better that we develop our own resources than import fossil fuels from other parts of the world. Clearly, that goes against some international consensus. Actually, we should stop exploring. We have enough, uh, fossil fuel reserves that we know are not currently exploiting without doing more. And so, and that's, yeah, a problem. And it, so on, uh, and it's also a signaling issue. is as you talk about in the climate negotiations, trying to change language around, stop it, uh, phasing down the use of coal or phasing down the use of oil or gas. Other countries are turning around saying, well, UK wants to exploit more. And it also comes in some of the questions, uh, this year's United Nations Framework Convention on Climate Change, the Conference of the Parties, so the big annual event is taking place in the UAE. And many people are concerned, well UAE, you're a big gas exporter, you're a big fossil fuel company. And they turn around and say, well look, the UK held the COP two years ago. They're now expanding their oil and gas development. So don't turn around and point the finger at us. It's other countries as well. So it is a definitely sends mixed signals.

Richard Sverrisson, Editor-in-Chief, Montel: 19:15

Do you expect this kind of say narrative to be ratcheted up in the in the coming months ahead of an election as in driving this wedge? Look at you know, the Labour Party are green loonies. We're the sensible guys here. We're we're using our uh, fossil fuel reserves. We're not relying on foreign unstable powers, but also we're, you know, slowly dealing with, you know, building out, rolling out renewables.

Antony Froggatt, Senior Research Fellow, Chatham House: 19:40

I guess we'll have to see. It's very clear that it's been tested. I guess the question is, does it change the polls? And they must be doing their focus groups to assess. Is this working? Does this attract the right voters that we need to. The current indications are it's not working in terms of that the polling hasn't shifted. Labour are significantly ahead and remain significantly ahead. So it hasn't changed the dial, but that doesn't mean that they don't think the strategy is right. They may just think we need to do it harder. Um, so I, I don't know, but it is, the Conservative Party was very much seen as the, the economically responsible party and the confidence in their. It's sort of economic competence has diminished. And so this may well be a way in which also they're trying to do this thing. We're not going to throw away the economy for green issues. So, um, it's a way in which that will potentially feed into it. But yeah, we'll have to see

Richard Sverrisson, Editor-in-Chief, Montel: 20:31

in terms of new nuclear, what's happening here. I mean, we've had, you know, Hinkley point C we were supposed to, you know, the Britons were supposed to be, uh, cooking their Christmas turkeys on it by 2017, uh, as was famously said, I think, by the previous head of the UK's EDF subsidiary. What's going on here? What's the situation?

Antony Froggatt, Senior Research Fellow, Chatham House: 20:52

Yeah. Complex question. I mean, in terms of Hinkley, costs have risen again, which again is probably not surprising. I mean, if we talked before about the cost for the offshore wind, um, these material costs, inflation costs, et cetera, are affecting the final production price. Similar with Hinkley. So it's delayed probably the latest figure now is maybe September, 2028. The total cost is now 32 billion. If you take 2021, I mean, that's partly an inflation question, uh, but it's also increased construction costs. So monetary inflation and, and increased costs, but significant. I mean, huge, I mean, uh, for a, a single power plant, it's a lot of money. The government has, remains committed to making a final investment decision on a similar design. Um, at Sizeworld C. So it's two 1. 6 gigawatt each EDF, uh, built reactors. Problem is that EDF and the UK government don't want to finance it. So they've come up with a new means of financing it, or a new means in which they can increase the, effectively, the subsidy from consumers for it. Uh, which sort of makes sense. Uh, the contracts for difference at Hinkley are eye wateringly expensive. Um, in 2013, it was 92 pounds a megawatt hour. It's an index linked. So probably by the time it comes online, it's going to be 120, 130, 140 pounds a megawatt hour. Offshore wind was at 50. So you're talking two to three times the cost of offshore wind. Uh, so they probably can't repeat that. Um, but. They need to guarantee some sort of income because the government has said it would take 20% share. EDF says it doesn't want to have more than 20% share. So you've still got 60% that has to come from somewhere. And if you're talking construction costs in the tens of billions, that's quite a lot to raise. So there needs to be investor certainty in terms of a, some sort of fixed price that is above what they, yeah, will give them a good rate of return. Plus they need to attract a significant amount of money. So it's going to be tough to make a final investment decision. All of those ducks need to be lined up over the next 18 months. So we'll see if they make that. So that's one element of nuclear. And then the other thing that the government is, they've launched a thing called Great British Nuclear. So a new vehicle to, they say, to help develop the small modular reactors and potentially sometime in the future build other large reactors. It was delayed for a long time. It has been launched. We'll have to see. Rolls Royce is very keen to build small modular reactors in the UK. Technically, they're not small. They're 400 megawatts, uh, under. internet, other definitions, you must be below 400 megawatts is still a large project. So they're probably less modular than others might be. But we'll see whether or not again, it's a government gives relatively large amounts of money in the hundreds of millions. But if you're talking building lots of these reactors, you need a lot more than that. So how much the private sector comes in on this is, Yeah, it's questionable.

Richard Sverrisson, Editor-in-Chief, Montel: 24:10

And providing that investor certainty is the model there. Is it the RAB, the regulated asset basis?

Antony Froggatt, Senior Research Fellow, Chatham House: 24:15

Yeah, exactly. Yes. Yeah. So it's, it's an, it enables them to start raising income during construction. So if, as we have with Hinkley, for example, EDF is bankrolling it along with the Chinese. The Chinese is one of the reasons also that China has pulled out because they're no longer offer the opportunity to build in the UK. So therefore they're not investing. If you have a 10 year construction period and it has to be all paid for by the companies, then obviously that's quite expensive over that period of time. So being able to charge future users during construction period makes a big financial difference. And so that's one of the things that will be within the regulatory asset base.

Richard Sverrisson, Editor-in-Chief, Montel: 24:56

Yeah, I think, I think it's a, it's a fascinating discussion and I'm sure one would look forward to returning to discuss with you Anthony, but thank you very much for being a guest on the Montel weekly podcast.

Antony Froggatt, Senior Research Fellow, Chatham House: 25:06

Thanks very much. Great conversation.