The Big Shift: Making the UK an energy transition powerhouse

With an election on the horizon, growing the economy is the number one priority for any incoming Government.

At the same time, our energy system is changing as we shift away from fossil fuels. The Labour Party is promising to make the UK a clean energy superpower, with the introduction of GB Energy and 100% clean energy by 2030. But that can’t be achieved without a complete rethink of how our energy system works, and how it’s financed.

Growing the economy and becoming a clean energy superpower are two sides of the same coin. The world now invests almost twice as much in clean energy as it does fossil fuels, with a need to further double investments to keep 1.5°C within reach.

By bringing these two elements together and capitalising on the energy revolution, we can; attract some of the $7 trillion of private capital spent on the energy transition until 2040 each year globally; generate £240 billion in economic growth by 2050, giving us the capital we need to deliver a strong economy and better public services; and create new jobs, capturing at least one million of the 10.3 million new jobs in the transition predicted globally this decade.

Rethink energy and economic policy to achieve rapid UK-wide wealth creation

Overdependence on imported fossil fuels is the biggest contributor to inflation and the underlying cause of the economic crisis. Energy shocks, such as the Russian invasion of Ukraine, allow energy producers to drive up the cost of energy.

By rewarding those investing in the energy transition and making it harder to invest in fossil fuels, we can eradicate the main source of inflation, attract foreign capital, and supercharge economic growth, all while accelerating toward net zero targets.

One: Implement selective interest rate cuts

By implementing a selective, targeted reduction in the Base Rate to zero per cent for clean energy sector investors, the UK can stimulate investment and grow the economy in the only sector able to directly reduce inflation. It would also create a competitive advantage in the global market, creating new projects, companies, and jobs. Unlike public grants and subsidies, which cost taxpayers money and take time, this offers an immediate incentive for business, ensuring fast growth.

Two: Offer businesses better returns

Alongside this, the introduction of a government guarantee to lenders’ first loss could attract capital to the country, as the combination of a higher debt-to-equity ratio for energy transition projects alongside lower interest rates will result in higher returns and less risk for business. For government, the guarantee is low risk, can be sold on the insurance market, and generate returns in the form of corporate taxes.

Three: Multiply public money by attracting private capital for the energy transition

To position the UK as an energy transition powerhouse, any incoming government should implement programmes that make it the most attractive place to invest. Joint public and private funds, for anything from clean transport to grid investment, could leverage taxpayer money to attract private investment. “Energy Transition Acceleration Funds” could work in a 1x8x5 equity ratio; if the first 1x was £3bn from the Treasury, followed by 8x in equity from businesses, and an additional 5x in debt with a “first loss guarantee” to reduce risk, this could raise £120bn of investments for innovation, as well as returns for all parties – including £40bn for the taxpayer in VAT and corporate taxes. This mechanism would not only be a fast way to increase investment, but also allow any initial public investment to go further.

Four: Tax increases for polluting sectors

With clean energy investment growing to $3 trillion this year, ensuring the UK capitalises on this is essential. By implementing a windfall tax and selective tax increases on oil and gas, alongside exemptions for energy transition projects, like the current Capital Gains Tax exemption, the UK can raise money from polluting businesses, using this to further invest in the transition. This positive discrimination will shift investment from fossil fuels, attract capital to the city, and decouple economic growth from fossil fuels, giving the UK an advantage when it comes to the growing investment we’re seeing year-on-year in this sector.

Achieving a 100% clean energy system by rewriting the rules of the grid

To make this investment work, we also need to rewrite the rules of our outdated energy system. Our systems are built around continuous, fossil-fuel based power. With renewables, we’re switching to intermittent, decentralised power, coming online on systems built for old, centralised power stations. Our grid networks are struggling to cope – offering to connect some clean energy projects to the grid in the late 2030s! This is well past Labour’s 2030 goal – not to mention the 50% increase in demand from the electrification of transport and heating, and intermittent demand from sectors like shipping.

These issues could lead to blackouts as soon as 2030 without radical action, as recent cases demonstrate. To overcome them, we need to rewrite the rules of the grid. By doing so, we could give the UK the most advanced electricity system in the world, create an ‘Internet of Energy’ – an upgraded and digitally enhanced grid system – and set the global rules of the game in our favour.

One: Accelerate grid development by enabling direct investments into the grid

A key challenge in our transition is the delay in building the right grid, including the substations needed to bring new projects online. Currently, National Grid Energy Transmission (NGET) takes up to 13 years to develop and build a substation, the cost of which is transferred to consumers via bills. By allowing private companies to build, we could take hundreds of millions of pounds off bills every year, providing immediate financial relief to households, while also shortening build times by up to 50%. As offshore wind farms are already permitted to develop substations, this policy would also only require an extension of existing Ofgem regulations, providing a quick fix to a huge problem.

Two: Switch to Nodal Pricing

Currently, supply and demand of electricity across the country determines one price for electricity. Because of this, the pricing mechanism for generators and flexibility providers is managed in 30-minute intervals. As we switch to intermittent energy, we must switch to real time, local management and trading of energy to react to increasing demand – referred to as nodal pricing. Through increased digitisation of our grid, we could not only ensure we are reacting more effectively but incentivise developers to locate and operate assets more efficiently, overcoming grid bottlenecks.

Three: Abolish electricity monopolies and introduce competition in energy networks

Our system is based on regional monopolies, where privately-owned distributed network operators (DNOs) manage the system. This limits investment in the development of a twenty-first century grid. By accelerating and increasing the remit of independent DNOs and TNOs, the UK can incentivise faster development and lower costs – which are passed on to consumers. These companies would become a competitive force, operating interconnected pieces of the network in parallel for specific needs, with less limitations on the investment they can make.

Addressing the system and its financing to bring about huge benefits to the UK

Energy and economic policy must work together if we are to switch to clean energy, with huge gains to be made for the UK economy. While these policy changes may seem small in comparison to broader economic problems, capitalising on the energy revolution is a surefire way to tackle the cost-of-living crisis, ensuring cleaner, cheaper energy for everyone. By looking at the system and its financing together, we can achieve every aim touted in this election – from job and wealth creation, to further investment in public services and achieving net zero goals. Bold action is the only way to achieve long term growth – if Labour is brave enough to take the lead.