The newly elected UK Labour government has set delivering a clean 2030 power system as one of their key 5 policy missions. They are aiming for a massive expansion in renewables to deliver this objective, but have pragmatically accepted that unabated gas fired generation will be needed as backup. They are defining clean power as less than 5% of power generated is from unabated gas, and as a consequence the average carbon intensity is well below 50 grams/kWh (down from 171 gms/kWh in 2023).
The UK system operator, NESO, has developed two scenarios to test what would be required to deliver the ambition. See table below.
| Fuel/technology type (GW) | 2023 | 2030 Further flex and Renewables | 2030 New Dispatch | |
| Variable | Offshore Wind | 14.7 | 50.6 | 43.1 |
| Onshore Wind | 13.7 | 27.3 | 27.3 | |
| Solar | 15.1 | 47.4 | 47.4 | |
| Firm | Nuclear | 6.1 | 3.5 | 4.1 |
| Dispatchable | Biomass/BECCS | 4.3 | 4.0 | 3.8 |
| Gas CCS/Hydrogen | 0 | 0.3 | 2.7 | |
| Unabated gas | 37.4 | 35.0 | 35.0 | |
| Flexibility | LDES | 2.8 | 7.9 | 4.6 |
| Batteries | 4.7 | 27.4 | 22.6 | |
| Interconnectors | 8.4 | 12.5 | 12.5 | |
| Demand-side flexibility (excl. storage heaters) | 2.5 | 11.7 | 10.4 | |
| Annual demand (TWh) | 258 | 287 | 287 | |
The core of both scenarios rely on a 2-3 fold increase in renewables from current levels, and requires installed battery capacity to increase 5 fold. To achieve this by 2030, the UK will need to install renewable capacity at 2-3 times recent rates, with obvious challenges for the supply chain and investors to scale up to meet this demand. This is now one of, if not the most, aggressive decarbonization plans in the world. 2030 is not far away in asset development terms, and realistically this will be difficult to achieve. However the ambition is to be applauded clean power will still be a major achievement even if it takes until 2035.
The modelling of this new clean 2030 world raises some interesting questions for the UK and more widely for other markets. NESO model that around 50 TWh or 17% of annual demand will need to be constrained off the system during high renewable periods, despite all the investment in battery storage, demand response and interconnectors. Furthermore on 15% of hours NESO believe that gas fired generation will still be required as back up. Our view is that this market will evolve towards a two-tier pricing world, with very low prices on strong renewable days and high prices when gas is required to provide material backup for parts of a day.
In parallel to this massive build out in renewables, a major reform in the structure of the UK market is under evaluation by the regulator, Ofgem, in particular a shift to zonal pricing. This reform has the potential to make the energy market work better in the long term, but will create uncertainty in the short-term, just as the government needs investors to increase investment levels. This is particularly true for the areas of the market not materially underpinned by subsidy mechanisms such as batteries and rooftop solar.
The UK battery pipeline is more than sufficient to deliver the 25GW of batteries set our as required by NESO. Renewable UK identify 42 GW of projects with planning consent and 53GW in planning at the end of last year. However the rapid fall off in battery revenues this year has illustrated the inherent risks in investing in batteries, e.g the share price of pure play UK player Gresham House has fallen by over 60% in the last 12 months . Some investors are currently looking at the UK market and seeing greater attraction and certainty in other European markets. We foresee a period of consolidation and re-evaluation within the UK market in 2025, as developers seek to answer a series of questions:
- What is the underlying value case for batteries in the UK. Ancillary services and balancing markets are not large enough to support large scale battery roll out. When and how will commodity markets fill the gap?
- What will be the implications of the REMA decisions on these revenue streams?
- Who should take the inherent commodity risk in batteries. Investors or customers through some type of tolling/floor payment structure ( or will the government eventually need to underpin more of the risk?)
- Who are the natural investors in batteries? The infrastructure funds that have increasingly supported renewable markets are likely to be wary of battery merchant risk. Will utilities, traders and pure play funds such as Gresham House and Gore Street be able to step up?
- HowWhat portfolio strategy do you adopt to manage the inherent cashflow risk, e.g. geographic diversification, market diversification, or transfer of risk to other parties through tolls/floor payments.
Turing to rooftop solar, the current commercial retail electricity prices of around 23 p/kWh is creating an exciting opportunity for rooftop PPAs which can deliver for less than 15 p/kWh. With relatively short lead times and highly competitive economics, we foresee rapid growth here with new entrants coming back to the market after the solar market crash in 2016. There is significant capital appetite for long-term revenues underpinned by customer PPAs. However, this will raise some longer terms questions:
- What long-term price capture risk are PPA purchases signing up to. Will 15 p/kWh still look good value in 2035, with the risk of very low summer midday prices once we reach a clean 2030 world.
- How and when should solar be integrated with batteries to help manage the price capture risk?
- Which solar markets should be prioritised. Our view is that grid scale and commercial rooftop should be prioritised, while residential rooftop should be less of a priority for government and industry (higher installation cost and poor fit with UK customers’ demand profile)
