How will Sunak respond to Biden's green investment bazooka?
5 things we could see in the UK's austerity net zero plan.
An updated "net zero growth plan" is on its way. Downing Street will set one out by "late Spring or early summer" amidst pressure from the CBI and other business voices for a more robust UK response to the competitiveness issues arising from President Biden's Inflation Reduction Act.
Rishi Sunak has been planning a big clean energy "moment" for months, originally slated for next month to meet a deadline from the courts requiring a beefed up Net Zero Strategy, and the need for a more detailed response to Chris Skidmore’s Net Zero Review.
With the UK economy shrinking by more over the last year than even sanction-hit Russia, and cost concerns front of mind for voters and politicians alike, Downing Street will want to demonstrate that their revised plan aligns with the PM's priorities like reducing the country's debt, shoring up security of energy supplies, and boosting economic growth.
So what can we expect?
The case for increased short-term green investment to lower inflation and cut costs.
"Public First published a report in November last year … It found that a renewables-centered power system would be the cheapest and best system for energy security, without even considering the added benefit of emissions reductions", Joe Tetlow notes in his excellent blog for Green Alliance. He adds, "as it happens, the author of that report is now the prime minister’s energy adviser."
Numerous evidence from the Office for Budget Responsibility, the Committee on Climate Change, the National Infrastructure Commission and Oxford University points in the same direction: increased investment in clean energy and efficiency improvements in the short term offer the cheapest path to net zero. This would also curb reliance on the fossil fuels, which are creating the cost of living crisis.
It is a reality already grasped by China, Germany and the US who are now in a race to seize the economic benefits of the transition, improve their national security, and bring inflation down through major new investment programmes.
Chancellor Scholz is investing more than the US in clean energy as a proportion of Germany's GDP, according to one influential Berlin think tank. Meanwhile, President Macron is pushing for the relaxation of EU state aid rules and allocation of more EU funds to the green transition. EU chief Van Der Leyen announced the bloc will pursue a Net Zero Industry Act for "the scaling up of the EU's manufacturing capacity for net-zero technologies”.
As the economist Dmitri Zhengelis puts it in this blog for Cambridge University, there is a big difference between borrowing for investment and borrowing to fund tax cuts for bankers:
"Provided the investment and growth plan is costed and credible, it should retain the
confidence of the markets, limit policy risks and allow the UK to continue to borrow cheaply. This much needed investment will help increase both energy security and resilience to future shocks, lowering costs and allowing early movers to build the knowledge base and supply lines to exploit some of the world’s fastest growing markets. By focussing on cost-reducing investment, it will curtail expectations of higher future inflation, helping to contain the rise in mortgage costs."
According to ECIU, household bills would have been £1,750 lower this year if the UK Government had insulated more homes and expanded renewable energy faster over the past decade. Onward, the think tank formerly run by Sunak's deputy chief of staff, found similarly. Additional investment would also address a risk, flagged by Chris Skidmore's review, that lower income households miss out on further cost savings available from heat pumps and EVs due to a lack of financial support. (Next year, France will offer grants to help low-income households lease electric cars for as little as 100 euros a month.)
Net Zero without new money?
The signs suggest Hunt and Sunak are likely to diverge from America and Germany's approach of significantly increasing public investment in clean energy.
"This is not a time when it's going to be easy for us to access the GDP equivalent of $369 billion [in reference to the Inflation Reduction Act]", Hunt said yesterday. He hinted the government will instead seek to raise the investment from private markets and pension funds, in particular.
Along similar lines, Grant Shapps used his first interview as Energy & Net Zero Secretary to single out the potential of Middle Eastern Sovereign wealth funds to pay for Britain’s clean energy.
One explanation for Sunak's likely austerity approach to Net Zero is that they are trying to open up a political dividing line with Labour's Keir Starmer and Rachel Reeves (with the side-effect of also opening one up with Boris Johnson) over capital investment in green industries.
Another is that Hunt’s objections are ideological: “We have some concerns about the IRA and the reason is that we believe in free trade. I don’t think subsidy is necessarily the best way.”
Hostility to an investment-led approach from rising Tory star and Trade Secretary Kemi Badenoch has been striking, too. "No, I don't think it's a good idea, not just because it's protectionist", she told Sky's Ed Conway. "We can't always just look at what America is doing and say: ‘well America is doing this, so let's do the same thing’."
5 things we could see in the UK's austerity net zero plan.
What might they do instead?
First, approvals for wind and solar power are likely to be sped up.
Boris Johnson's former energy adviser, Sam Richards, is leading a dynamic campaign calling on Sunak to unlock new onshore wind projects, highlighting that just two wind turbines have been erected in England over the last year, despite the energy security crisis and the fact it's the cheapest source of energy and shown by every poll to be one of the most popular. Labour have highlighted how planning delays mean offshore wind farms take up to 13 years to build. Just this month a massive new offshore wind project was delayed by planning inspectors.
Gove scotched an early Parliamentary rebellion led by Johnson, Liz Truss and Simon Clarke by promising to look again at the rules for onshore wind. Skidmore's review called for a "rooftop revolution" to unlock more solar energy, something Shapps now says he's looking at with Gove. (The Spanish government temporarily axed environmental impact assessments for all new clean energy projects - something that may offer a suggestion of the sort of thing Ministers here might do.)
Second, Sunak may double-down on the regulation-first approach to phasing out the sales of petrol and diesel cars as well as gas boilers, which avoids large-scale spending. Chief of the Climate Change Committee, Chris Stark, told the Sunday Times it "seems to work". Electric vehicle sales are already ahead of schedule for the 2030 target, making up one in three purchases. Similarly, since Boris Johnson announced his heat strategy, British Gas and Octopus Energy are in a price war over who can offer the cheapest heat pumps. But it is clear that the status quo policy on home heating will not be sufficient to curb energy bills or meet climate targets. In the absence of additional investment in insulation it's hard to see how they'll course correct, yet Hunt's last budget was clear there would be no new money for lagging until well after the general election. Onward calculated that on current trajectories, the target of reaching 600,000 heat pump installations each year by 2028 will not be met until 2057.
Third, the government may need to revisit plans for a hydrogen levy to be added onto household bills in the face of a backlash from MPs. New research by Common Wealth think tank shows that the big gas firms are investing only tiny sums in green tech compared to what they're putting into dividends and even spending on marketing - and despite vast windfall profits. These new levies were designed to charge bill payers to fund handouts to these gas companies to incentivise experimentation with hydrogen technology. Could the government go further and use their Spring budget to shut the loophole that enabled Shell to pay zero additional tax on their giant windfall profits to blunt Labour's attack? Perhaps they'll offer tax incentives to firms for clean investment instead?
Fourth, I hear certain Ministers are considering a much expanded role for the carbon market to crowd in private money for large-scale tree-planting and carbon capture projects, which is likely to prove highly controversial. The Treasury will be mindful it could end up having the perverse effect of reducing pressure for such big carbon cuts from big industrial polluters. It might also lead to Britain's rural communities facing land grabs by hedge funds and energy firms, which could drive up costs for local people whilst transforming their landscapes without their consent. It could also undermine the Foreign Office given the UK's diplomatic positions at the COP26 summit in Glasgow and since have involved Britain arguing against overreliance on dodgy carbon offset schemes.
Finally, perhaps Ministers will extend legal price guarantees - 'Contracts for Difference' - that the UK successfully used to pioneer renewables, to other new clean technologies in other sectors like aviation. This has been a key suggestion of the CBI's chief Tony Danker. They may also update City financial rules to make it cheaper to invest in green projects in the UK.
Careless green talk will cost Britain jobs.
As Sunak looks to private markets to help him deliver without much new money, there's a real risk that the lack of oomph he seems to be giving to Net Zero (compared to the focus put on it from his predecessor) risks making the country's competitiveness problem worse and hitting his ability to deliver the economic promises he made to voters earlier this year.
This graphic highlights the geographical spread of the green industrial opportunities across England's Red Wall. The above average pay on offer from these jobs, which CBI research shows are becoming a welcome reality in Sunak's own patch of Yorkshire, and with a political imperative to win back floating voters there and in places like Teesside, means Net Zero will live on in the government's programme.
But ultimately, when the updated plan arrives in the next few weeks the mood music may matter almost as much as the policies. They can rebadge the energy department to put Net Zero back in the name - but if investors don't truly believe the Prime Minister and Chancellor are committed to real delivery - they will simply take their money to those countries who are putting clean energy at the centre of their economic futures. Careless green talk will cost Britain jobs.