The UK Energy Balancing Act: Net Zero and Energy Security
The United Kingdom (UK) has had to balance its net-zero ambitions with energy security after suffering from a price shock in 2021 that increased the cost of energy and forced them to stop importing Russian natural gas.
This week, Lord Martin Callanan, the UK’s Parliamentary Under Secretary of State (Minister for Energy Efficiency and Green Finance) at the Department for Energy Security and Net Zero, joins the podcast. His responsibilities include CCUS, hydrogen, green finance, energy efficiency, and emissions trading.
Here are some of the questions Jackie and Peter asked Lord Callanan: How do you respond to those that oppose the licensing of new North Sea oil and gas developments? Has the UK changed its policies or subsidies to compete with the US Inflation Reduction Act (IRA)? How can a carbon-market approach with price volatility compete against the certainty of the IRA-style, subsidy-based policy? How does the UK structure offshore wind, nuclear, CCUS, and hydrogen incentives to attract capital?
Content referenced on this podcast:
- See the live power generation on the UK’s National Grid: https://grid.iamkate.com/
- See the latest carbon clearing prices in the UK Emissions Auctions: https://www.ice.com/marketdata/reports/278
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Episode 208 transcript.
Speaker 1:
The information and opinions presented in this ARC Energy Ideas Podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Speaker 2:
This is the ARC Energy Ideas Podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas Podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. And welcome back. So Jackie, you’re not in studio with me today. Where are you?
Jackie Forrest:
I’m up in Grand Prairie. It’s always a pleasure to be here. Beautiful place.
Peter Tertzakian:
Your hometown. And I understand there’s a special family function, a barn dance.
Jackie Forrest:
Yeah. Yeah. It’s great. I’m going to see people I haven’t seen in a long time. Really looking forward to it.
Peter Tertzakian:
Well, that’s a true Alberta experience. That’s fantastic. So, hey, we had a great podcast last week.
Jackie Forrest:
We sure did. Vittoria Bellissimo, President of CanREA came on the podcast. We had a spicy discussion there, Peter. Generated a lot of conversation, different views. Who won that debate? You or her? I’m still quite a mixed signals on that one.
Peter Tertzakian:
Well, I would argue it’s not a debate, so I’m debating whether or not it was a debate. It was a good conversation and I think that there is a lot of important topics that were covered. If you haven’t listened to that podcast, download it and give us your thoughts.
Well, we’re going to carry on with a theme this week of policy, not policy here, not policy nationally, but policy overseas. And we’re very fortunate to have with us from the United Kingdom, the Minister of Energy Efficiency and Green Finance at the Department for Energy Security and Net Zero, Lord Martin Callanan. So Lord Callanan, welcome.
Lord Martin Callanan:
It’s my pleasure to be with you. Thank you.
Peter Tertzakian:
So as we do with all guests, maybe you can tell us a little bit about yourself, your background and how you came to be the Minister of Energy Efficiency and Green Finance.
Lord Martin Callanan:
Sure. So I come from Newcastle in the north of England. I was started in politics as a local counselor, and while I was doing that, I gained my degree in electrical and electronic engineering. I worked as a project engineer in Scottish and Newcastle breweries. I was in the European Parliament representing the northeast of England for 15 years. Left there in 2014, did some consultancy work for my own company, and then was invited to join the government by Theresa May as prime minister at the time. In 2017. That time I was Minister for Aviation and I did that for a number of months and then moved into the Brexit department and helped with the Brexit negotiations using my European experience for I think it was about three years before taking up my current role.
Peter Tertzakian:
Great. Well, there’s been some interesting news. We always, as Canadians tune in to the UK news from across the pond, as we say over here. Jackie, what are some of the things that we’re hearing?
Jackie Forrest:
Well, one topic we do want to talk to you about is at the end of July, the UK Prime Minister Sunak, announced that he would support the licensing of new North Sea oil and gas developments to bolster UK energy security. He also announced some new CCS projects, and of course there were people that were not happy about that in the UK and some people that saw the merit at it.
But I found it interesting because here in Canada we have these same debates. Should we increase our oil and gas production because we have these domestic greenhouse gas targets and if we continue to increase oil and gas, it will be more difficult to achieve those? But on the other side of the argument is that, “Well, if it’s not us, it’ll be somebody else because the world’s demanding these products regardless.” And then of course, I think probably more hitting at home in the UK, but energy security is bolstered by having your own domestic supply as well as your country has learned over the last year and a half. So maybe you could tell us a little bit about the groups that oppose it and how you would respond to their opposition of the drilling.
Lord Martin Callanan:
Sure. You’re absolutely right in saying that these matters are the subjective great debate on both sides of the Atlantic, but we’re very clear in the UK and the prime minister was very clear that licensing of new oil and gas in the North Sea is completely compatible with our climate goals. We have a legally binding target of net zero by 2050. That’s now in UK domestic law. The government has a duty to meet that and we will. The point that the Prime Minister was making is that the North Sea is a declining resource. The amount of oil and gas that we can get out of it is falling every year and will continue to decline even if we issue new licenses. In the context where now the UK only gets about 40% of its gas from the North Sea, we are importing increasing amounts of gas from other jurisdictions.
We import a lot of LNG. The very simple point is that by using resources from our own North Sea: A, it employs our own workers. It brings revenues into our own treasury, but it’s also less greenhouse gas intensive than importing liquid natural gas from other parts of the world. To me, this is a fairly simple equation. We have a continuing use that we are transitioning slowly away from fossil fuels, but over the next 10 to 15 years, we will still have a need for domestic supplies. 80% of space heating in the UK continues to be from gas. Therefore, it makes sense from a carbon perspective to use that from our own resources rather than importing it. Albeit we are part of a transition, we are transitioning away from it. 48% of the UK’s electricity supplies were from renewable sources in the first quarter of this year. So it’s important to look at the context as a whole that we’re slowly transitioning away, but in the short term, we still have a requirement. Makes sense from a carbon intensive perspective to get that from our own resources.
Jackie Forrest:
Right. I think a lot of Canadians would agree with you and wish that some of our politicians would sort of see it the same way.
Peter Tertzakian:
Mm-hmm. Yeah, that is the carbon equation. And for conventional oil and gas production in many of the Western countries, the production in some of the mature basins are declining. They’re effectively going to net-zero production, which means net-zero carbon anyway. And the regulations around these sorts of things in our countries are much more stringent. But I noticed that the department that you represent is also called Energy Security and Net Zero.
Lord Martin Callanan:
Yep.
Peter Tertzakian:
So the energy security part of the equation has presumably come about as a consequence of the Russian invasion of Ukraine. So maybe in a broader sense, how did the Russian invasion of Ukraine affect the thinking and the conversation in the UK around this whole thing?
Lord Martin Callanan:
Sure. Energy security and net zero we see very much as two sides of the same coin. It goes back to the previous question, we want to power up Britain from Britain. So we want to generate as much of our own power from within our own shores as we can. And as I said earlier, our oil and gas supplies are declining. We do our legal commitments to net zero. So we need alternative forms of power, of energy. And the reality is that offshore wind, small amount of onshore wind, solar power, are now the cheapest forms of generation. They are intermittent. So we need backup and we need storage, but we want to get as much of power as possible from these sources. And we have some very ambitious targets.
We have a target of 50 gigawatts from offshore wind. We’re now the second leading country in the world for offshore wind. We have the world’s first largest offshore wind farm, the world’s second-largest offshore wind farm, and the third and the fourth. We’ve been on this trajectory now for the last 10 years, and the costs of it are coming down exponentially. It’s now a very cheap form of power, allied to solar, allied to nuclear. We want to have the UK electricity system decarbonized by 2035, and that’s an eminently attainable goal as part of our trajectory towards net zero. So energy security, net zero, we look at them as two sides of the same coin.
Jackie Forrest:
Well, I had the pleasure of visiting Brighton not far from London, and they have, I think it’s fairly small offshore wind development there, but it was big for me. It was really exciting to learn about that. And I think that day I was there, something like 30% of the electricity was coming from wind. They had a live feed of all the wind in the UK so…
Lord Martin Callanan:
I have the website on my phone all the time. We can look at it constantly. It’s the National Grid website and you can look at what the carbon price is, electricity price is. You can look at what the percentage of generation is from every one of our sources. It’s a really good resource.
Peter Tertzakian:
In real time?
Lord Martin Callanan:
In real time.
Jackie Forrest:
Yeah, we’ll put a link to that because I found that fascinating. Well, hey, let’s back up a little bit. I want to ask you a lot more about what’s going on in the UK, but before we dive too far into that, I want to know why are you in Canada? You’re visiting Calgary today and Peter’s in studio with you, and what are your reflections on your trip to Canada so far?
Lord Martin Callanan:
Sure. I mean, of course the UK and Canada are close allies. I like to think we’re part of the same family and there’s a lot that we can learn from each other. I’ve done some fascinating visits with some of your hydrogen projects, CCUS projects, talked to a number of Canadian companies involved in all of these areas, talked to Canadian investors who are investing in the UK and have been hugely impressed with some of the innovative thinking, some of the great clean industries that you are developing. And I think there’s a lot that we can learn from each other. It’s been a really interesting visit. I got a chance to talk to your Albertan energy minister as well from a public policy point of view. Met the mayor of Edmonton to talk about city decarbonization, looked at hydrogen buses, a whole range of energy projects, and it’s been a really fascinating time here in Canada and I’ve been really enjoying it.
Peter Tertzakian:
Yeah, there’s a lot going on for sure here, and we know where you hail from. One of the things that we’re curious about is carbon capture and storage. We have a budding industry, some debate about who’s going to pay for it or actually big debates about who’s going to pay for it. Our understanding is that there’s two CCS projects announced in July and others are in development. How does the UK think about the share split of who pays for CCS between say, public financing and private financing?
Lord Martin Callanan:
Sure. Well, you do have some great innovative CCUS and CCS projects here in Alberta, and I’ve viewed some of them. It’s a tremendous resource that you have here, and indeed some of your companies are working with us in the UK. You’re right, we have a cluster approach in the UK and we are clustering hydrogen production use and CCUS in different parts of the country. The two leading clusters, what’s
called the high net cluster, the East Coast cluster that’s in the northwest of England, and Teesside East Coast. Then earlier this month, the prime minister announced two more clusters. One, the Viking cluster of the Humber and Acorn cluster in the north of Scotland. Chancellor announced 20 billion pounds worth of investment over 10 years into CCS in the UK. We think the opportunities are tremendous. These are all offshore storage in old depleted oil and gas wells, in saline aquifers. So licenses have been issued for many of these, to companies, and we want to get the industry started with some initial public financing for transport and storage for a business model to hopefully progress the industry to make it viable and eventually remove it from public subsidy.
Your question is a good one. There is no absolute answer. We have some public funding announced upfront, but we’re in negotiations with the particular companies putting in the particular transport and storage mechanisms and some of the offtakers at the moment. And obviously we want to negotiate the best possible value for money for the taxpayer, but we want to get the first ones starting to operate towards the end of next year and 2025 with the target of many of them being online in the four clusters by 2030.
Peter Tertzakian:
Right. So the allocation though from the public sector is 20 billion pounds, and is that in the form-
Lord Martin Callanan:
Over 10 years.
Peter Tertzakian:
Over 10 years. Is that in the form of tax credits as we are doing here in Canada or is it more of the United States model where it’s more like paying for the carbon directly?
Lord Martin Callanan:
It’ll be in a mixed form of public funding, some initial upfront grant funding, and then a long-term business model in terms of subsidizing the transportation and storage.
Jackie Forrest:
I have a follow-up question. I mean, are you relying on the carbon price for these developments to go forward? And I bring that up because as you’re well aware, the UK carbon prices has fallen substantially. It’s I think about down about 40% compared to earlier this year at 60 British pounds per ton. And that volatility is something that we’ve been struggling with here in Canada as well because the government wants us to go forward with these market-based carbon pricing regimes. Now, there’s some efficiencies in that it’s not paid by the taxpayer, it’s a market-based price paid by polluters, but it creates volatility in price if there’s an oversupply or undersupply in the market. And these very large investments that are 20 plus year investments need a minimum carbon price to get a return. So the US, one thing they’ve done is guaranteed price. They’re saying $85 a ton for the time of the IRA. Is that a debate in the UK that they need more stability to carbon price to be able to go forward with the CCS projects and how are you dealing with that?
Lord Martin Callanan:
In the longer term, yeah, we want to see this as a market-based mechanism. We want to wean the industry off public subsidy. No industry can survive in the longer term with the taxpayer paying for it, so it needs to be a market-based mechanism. So ultimately, in the longer term, yes, the idea is that it will be driven by carbon price. And not just in the UK of course, we also have ambitions to potentially create an export market with Europe as well. The UK has such vast resources in our section of the North Sea that we can store considerable amounts of carbon, and ultimately if we can get the regulatory structures right, then there’s certainly a possibility of us selling those resources to the rest of the EU as well because they all are all going to be in the same boat.
With regard to the ETS carbon price, you probably saw that we announced some reforms earlier this year, and we are going to be reducing the amount of permits that are in the markets, but we’ll do it gradually over time to provide that long-term certainty. And the new allocations and the new number of permits available in the market reflects our long-term de-carbonization goal. So ultimately the carbon price will, I suspect, go up and it will reflect where the market is and ultimately reflect the market mechanisms are the best way of driving this.
Peter Tertzakian:
I was intrigued by your comment at the front end of the interview that you can pick up your phone and look at the price of carbon. So-
Lord Martin Callanan:
Sorry, the price of electricity, not the price of carbon.
Peter Tertzakian:
Oh, you can’t see the price of carbon?
Lord Martin Callanan:
I probably can, but on that particular app it’s the price of electricity-
Peter Tertzakian:
It would be nice here if we could see the price of carbon. I mean, that’s a shout out-
Lord Martin Callanan:
Yeah, I mean it is available in the carbon markets.
Peter Tertzakian:
Yeah. Well that’s good because that’s one thing we can learn from you. You can’t even see the price of carbon or know it here in Canada. And not only that, there’s multiple non-fungible markets for carbon credits. Is there one sort of unified harmonized carbon market in the UK?
Lord Martin Callanan:
Yes, there is. It’s the Emissions Trading System is what it’s called. We were part of the European Emissions Trading System, but when we left the EU, we created our own separate ETS. But obviously it takes many of the similar forms to the EU one.
Peter Tertzakian:
Yeah. I mean there again, we can learn from you because, Jackie, we have multiple carbon markets that are non-fungible and completely opaque. In other words, I can’t even know what the last trade for the carbon price is, which is absolutely absurd in my opinion.
Lord Martin Callanan:
You can absolutely see what the carbon price is in the UK and in Europe, and the permits are tradable on the market.
Jackie Forrest:
I mean, our system would be the equivalent of there’s a carbon price in Scotland, which is different than the carbon price in Wales and it’s different than the one in England. Our markets are a lot smaller than yours even in each of those jurisdictions.
Lord Martin Callanan:
The one thing that has surprised me in your wonderful country is the extent to which different policies vary so much between the provinces. And I was genuinely surprised to discover that there isn’t even much electricity trading between the different provinces. I found that very surprising, I have to say.
Peter Tertzakian:
It is surprising, but it is an artifact of a confederation, which this country is.
Lord Martin Callanan:
Well, but we are not part of the EU, we’re separate countries, but there is extensive both electricity and gas trading across the board as we have interlinking pipeworks, we have lost count of the number of electricity interconnectors we now have with Continental Europe, probably about six or seven. Again on that app that I referred to earlier, you can see how much electricity is being traded over the interconnectors in real time.
Peter Tertzakian:
Okay.
Jackie Forrest:
And you have to go under an ocean to accomplish that, and here we just have land and that’s too hard to do. Well, hey, let’s talk a little bit about the IRA, you’re responsible for hydrogen and CCS and the US a year ago announced that they would have these very generous incentives for energy projects and also for clean energy manufacturing, like the technology. Has that impacted the appetite for investing in these projects in the UK? And have you had to respond by making your projects competitive with what they’re doing in the US?
Lord Martin Callanan:
Well, firstly, we welcome what the US are doing. We’ve been on the de-carbonization agenda for a number of years now, and it’s good to see that the US are certainly making some progress on that. But the approach that we’ve taken is very much one of providing long-term revenue certainty or long-term regulatory certainty to provide the right market signals to provide the right market mechanism to enable investments that will take place over a number of years. The example I would point you to is the so-called contracts for difference model that we’ve used for offshore wind, which has been widely successful over the last decade really in terms of it provides a secure, long-term guaranteed return for investors. And all of the UK system is all private generators, private operators that trades electricity in the market, but they’re all commercial companies at the end of the day.
So the idea is to provide them a guaranteed return for investors to invest those sums over 10 to 15 years and provide a guaranteed return. And of course, if the market price is higher than the strike price, they have to pay it back into the system. If the market price is lower than they get a subsidy for it. System that’s worked well, we will roll out something pretty similar for hydrogen, and that’s a mechanism that’s worked well for us. Clearly, we’ll keep an eye on the US system, but I think the difficulty of the US system that it’s of course always subject to the vagaries of another president coming in and deciding he doesn’t want to the same levels of subsidy as the Biden administration.
So both models can work. And so far, I don’t think we’ve seen too many signs of any investments being diverted. We still have plenty of interest in investing in offshore wind. We have plenty of interest in investing in our hydrogen targets. We want to get up to 10 gigawatts of low carbon hydrogen by 2030, and we have almost doubled that number of projects expressing an interest. We’ll continue to monitor it obviously, but so far we don’t see any sign of disinvestment.
Jackie Forrest:
I have just a question on hydrogen then, because talking a lot about contracts for differences here in Canada, so I just want to understand that a little bit better. Are you securing a floor price for hydrogen or is it like I’ll guarantee $2 a kilogram?
Lord Martin Callanan:
So yeah, it would be more the latter. First of all, hydrogen that would be eligible for subsidy would be subject to something we call the low carbon hydrogen standard. We’re not going to get into all the different colors of hydrogen at the moment. I’ve discovered a new one today, turquoise hydrogen, which I hadn’t come across before. But we’re not going to get into that. So as long as your production meets the low carbon hydrogen standard, whether it’s blue, whether it’s green or indeed whether it’s turquoise, it qualifies. And it’s slightly more complicated than this, but in essence, we will give you a guaranteed strike price. You will get certainty of that price over the length of the contract, 10 or 15 years. And if the market price is above that, then you pay it back into the contracting company. If it’s below that, then you get a subsidy. That’s the model that works for offshore wind. And they’re slightly more complicated because we want to provide guaranteed supplies and make sure there’s enough capacity there in the market. But in essence, that’s how the system will work.
Peter Tertzakian:
Right. So it’s fairly simple in terms of-
Lord Martin Callanan:
Simplicity is always better in terms of regulation.
Peter Tertzakian:
Well, yes, we definitely agree with that. Let’s go back to offshore wind. You mentioned that many times, and I know the many times that I go in and out of the UK in different directions, whether it’s the North Sea, Irish Sea or English Channel, you always see the wind farms. What fraction of the grid on average is now surfaced by offshore wind?
Lord Martin Callanan:
Well, obviously it varies quite a lot depending on whether the wind is blowing or not, but it can be quite considerable. Our overall share of renewables was about 48% in the first quarter of this year. The majority of that was offshore wind. We do have considerable amounts of solar, relatively small amounts of hydro and some biomass. But we have about, I think last figures are about 13 gigawatts of offshore wind capacity at the moment, and our target for 2030 is 50 gigawatts of offshore wind. Now that’s obviously installed capacity. You won’t always have that generating depending on the climatic conditions.
The next development that we see on this is what’s called floating offshore wind, and in the latest CFD round, we’re making a special allocation for floating offshore wind because, of course, that can operate in much deeper waters than fixed-bed offshore wind, which has to be in relatively shallow waters. So again, some very innovative companies working in that area, and we see that will be the next major growth area of the offshore wind. But we see this huge potential. As I said, last year, the strike price for offshore wind under the CFD system came in at about £37 per megawatt hour, which we think is extremely good value for the taxpayer.
Peter Tertzakian:
That is good.
Jackie Forrest:
We have a debate here in Alberta, if you didn’t hear, about the developments of renewables. There’s been a moratorium put on new wind and solar permits right now. I have a few questions, 13 gigawatts going to 50, do you have concerns about people that don’t want those developments because they think that’s too much and that we should protect the ocean area? And then second, are you concerned about volatility of the intermittent sources that are growing so much and how that might affect your stability of your grid?
Lord Martin Callanan:
Yeah, two very good questions. Of course, we have very strict environmental regulations, and so all of these schemes, before they’re permitted, have to abide by the appropriate environmental regulations. But of course, by the very nature of the fact that they are offshore, we don’t get huge amounts of opposition. Actually, we get much more opposition for the infrastructure that’s required on shore, as well, which is the power lines and the converter stations in order to handle the offshore production. That’s much more politically controversial. But all of these developments, we don’t just sling them in there, they have to be appropriately studied and the marine environments have to be protected at the same time.
Peter Tertzakian:
Yeah, I imagine you can chime in on all that, being an electrical engineer by background.
Jackie Forrest:
What about the volatility piece? Are you concerned about the…
Lord Martin Callanan:
Well, yes. By the very nature, as I said, solar and wind are great. They’re cheap, but they’re intermittent, and so therefore we need baseload capacity. In the UK, that has traditionally been nuclear and we’re currently building two more nuclear stations to replace the stations that are going offline.
But we think there’s also going to be a role in the future for long-term energy storage. We will get times when we have excess, vastly excess, amounts of generating capacity when the wind is blowing a gale in the middle of the night in the North Sea. And what do we do with all that spare power? We very much have a vision that we could use hydrogen as a long-term energy vector, perhaps stored in large quantities in salt caverns, which we have a number available in the UK to provide that backup for what you correctly observed, when the wind is not blowing and the sun is not shining, which does happen occasionally in the UK.
Peter Tertzakian:
Yeah, notwithstanding geographic size differences between Canada and the UK, you already pointed out one of the major issues in this country, which is the lack of interconnects and interties and just general interconnects of energy infrastructure period. And so, the ability to be able to move North Sea wind that’s from a gale and move that energy to another part of the country and store it and use it later, it’s just huge. This is something that we’re wrestling with and we need to figure out the geopolitics of Canadian inter-provincial relations to be able to accomplish that same sort of thing.
I want to talk about nuclear. You already mentioned it. You’re building, is it one or two? There’s Hinkley Point. Are they both in Hinkley Point?
Lord Martin Callanan:
No. Hinkley Point’s under construction at the moment and we’re currently looking at taking a final investment decision shortly on Sizewell, which is another large nuclear plant.
Peter Tertzakian:
You said they’re replacements for existing sort of ones that were built?
Lord Martin Callanan:
Yeah, there are existing plants at both Sizewell and Hinkley Point. It’s very difficult, I think, in current environments. The bizarre thing about nuclear is that it’s actually very popular in the areas where it already exists. And I think if you’re right, if you were to put it in a new area, you would run into quite a lot of public opposition.
Peter Tertzakian:
Yeah. Well, I think the UK had the first commercial nuclear power plant I believe in, was it ’57 or ’59?
Lord Martin Callanan:
Calder Hall, I think, wasn’t it?
Peter Tertzakian:
Yeah. I can’t remember what it was. You were the first.
Lord Martin Callanan:
Yeah, we were. We let our nuclear industry decline a bit in the late 1990s, early 2000s. I think the decision was taken that the world had lots of gas, the UK had lots of gas, climate change wasn’t such an issue, nuclear was expensive, so we didn’t continue with the renewal of our nuclear plants, which, I think, in retrospect, was a mistake.
But we’re very much rectifying that now. We’ve just set up a new organization called Great British Nuclear to drive forward the nuclear expansion, both those existing plants that I mentioned, but also taking forward the next generation, which is small modular reactors. And currently, one of the first jobs of Great British Nuclear will be to look at the various designs and offerings of small modular reactors that are coming forward and take a decision about those in the longer term.
Jackie Forrest:
Now, my understanding is with the Hinkley Point project, it’s been more money than maybe initially thought, and I understand there’s been some government money that’s had to go into that. So, talk to that a little bit. How much of that is supported by the government? I think one of the issues with large nuclear is just the costs and the cost overruns.
Lord Martin Callanan:
Yeah. Well, the good thing is that none of the cost overrun comes to the governments. They are all commercial companies that EDF, in the case of Hinkley Point. The way it works in the UK is that we agree a long-term price, and when you produce your electricity, we’ll pay you that much for it. But the risk of the building falls to the commercial private companies that are building it and not onto the taxpayer.
Peter Tertzakian:
I want to go back to hydrogen and talk about that. You mentioned all the different colors and you mentioned that there was substantial investment coming into the UK. Are those for all the different types, green hydrogen, also carbon capture-sequestered hydrogen from natural gas? But also, we’d be interested in understanding if there’s importation of ammonia and other modalities of importing hydrogen, because we have some companies that are developing green hydrogen export facilities on the East Coast.
Lord Martin Callanan:
The approach that we’re taking is very much to support the domestic production of hydrogen. As I said, our approach is we have, with a low carbon hydrogen standard, nodding again into all the different colors, but we expect probably about half of the 10 gigawatt target that we have for 2030 will be electrolytic hydrogen. The rest can be from other different sources, and there are some really exciting developments from a number of companies producing the hydrogen in different ways, traditionally from reformation of gas with CCS, but also techniques now which will convert the natural gas into hydrogen and develop solid carbon as a waste product. There are, again, some great innovations that I’ve seen here in Canada and in the UK. We’re not getting into all the different colors. If it’s low-carbon hydrogen, it meets the standard, then it will be eligible for support within the UK.
With regard to exports, clearly people are free to import it if they wish, but we’re certainly not going to subsidize imports. I think we’ll have to wait and see how an export market develops. Hydrogen is much less energy dense than natural gas. Converting it from hydrogen to ammonia, back to hydrogen again, it adds a lot of cost into the system and we’ll have to see how the market develops on that.
So we’re very clear. In the short term, we’re supporting domestic production and we’re supporting it in local areas. I think pipeline trading is much more viable than trading via ammonia or ships or compressed hydrogen or the various organic solvents and everything that I’ve seen. Some great technological development going on, a lot of different business models being looked at. I think we’ll have to wait and see how the market develops.
Peter Tertzakian:
Let’s talk about the consuming end a little bit, and also the notion that this is very much a policy-driven energy transition. Whether it’s in the UK, US, or a lot of places, it’s very heavily policy-dependent, and we can look back to the Clean Air Act of 1956 in the UK, which effectively converted the coal-fired fireplaces into central heating fired by natural gas and other modalities. So, very much at the consuming end there were subsidies for a lot of the flats that are in many of the UK cities to convert to natural gas boiler-based central heating systems. Now those are wanting to be swapped out. What is the next stage and how will that be funded and implemented?
Lord Martin Callanan:
Okay, so you’ve hit upon one of the great policy challenges that we have, of course, if we’re to move gradually away from gas heating, at the moment, something like 80% of space heating in the UK is gas heating, then it gives us some real policy challenges. If we think that the most efficient use of energy sources is electrification, we have to try and move heating over gradually over a number of years, over to the likes of heat pumps, et cetera. So we have a direct grant subsidy scheme. If you install a heat pump in the UK at the moment, you can get a direct grant of about £5,000 for an air-source heat pump, £6,000 for a ground-source heat pump, and a considerable budget has been allocated, a couple of hundred million, over 3 years for that.
The other great problem that we have in the UK is, of course, just the sheer age of our housing stock. We have as a product of the Industrial Revolution, the oldest housing stock in Europe, 6 million properties were built before the First World War, many of them very poorly insulated, built at a time before people were conscious of such things. So we do have a great retrofitting challenge, whatever type of we use.
Peter Tertzakian:
Even Shakespeare’s house.
Lord Martin Callanan:
The listed buildings and historic buildings are a particular challenge, but even the general massive properties that are not listed, many of them are 17th and 18th century. It requires an awful lot of expense in terms of retrofitting, because whatever kind of heating you use, it makes sense to use less of it, and energy efficiency is something that we should be supporting. So we’re spending about £6.5 billion pounds over this parliament on a number of energy efficiency projects, retrofitting primarily lower income households, both in private housing and public housing. I actually want to get back to the UK, next month we are going to be launching a new project called the Great British Insulation Scheme, which is another billion pounds over three years. Again, helping people to install basic insulation measures just to use less of very expensive energy. But again, it’ll be something that will take place over a number of years.
Jackie Forrest:
Well, and visiting the UK and seeing the buildings, I expected you had a great opportunity with efficiency, but those dollar amounts, although they sound large, when you think of your population, it’s kind of a drop in the bucket.
I wanted to bring up; there was an article about how much money the UK government paid in energy subsidies to help households last year, something like 40 billion pounds, much bigger than the numbers you’re talking about with efficiency. If that money had gone into efficiency, it would’ve had a long-term impact to your energy consumption, but now it’s sort of just helped people get by for the last winter. How do you look at that and what do you think for this upcoming winter? Are you going to be requiring subsidies again?
Lord Martin Callanan:
Yeah, of course you’re right, and hindsight is a wonderful thing in politics, of course, and it would’ve been better to spend that money years ago, but we are where we are in politics. Nobody predicted that Putin would invade Ukraine and cause an energy crisis across the world. But you’re right, over the last winter, we did step in with substantial levels of direct support of people’s energy bills. There was a massive spike and the government paid about half of people’s energy bills in the UK over the last winter, extremely expensive. We do still have an energy price guarantee in place so that if the price gets above a certain level, then the government will step in to help. Thankfully, at the moment, it’s below that price. I’m hopeful that it will stay below that price over the coming winter. People’s bills have come down by an average of about 400 pounds over the last couple of price cycles. We have an energy price cap in place in the UK set by the regulator, and at the moment, as I say, people’s bills have been coming down. And given the investment in renewables, given the steps that many other parts of Europe are taken to wean themselves off Putin’s gas, then I’m optimistic that we should be okay this winter as well. But we’re certainly not complacent and we’re keeping a close eye in the situation.
Jackie Forrest:
And definitely coming back to the start of the conversation about why are you allowing more drilling in the UK, well, it will allow you to get off Putin’s gas as well, right?
Lord Martin Callanan:
That answers part of your question. Yes, of course.
Jackie Forrest:
So another area of responsibility is green finance under your ministry, and I wanted to ask you a little bit, is green financing growing in the UK and is there enough private capital to back many of these projects that you’re talking about? And as you’ve probably been watching over here in North America, there has been an ESG backlash and has that impacted the funds flow when it comes to green financing in the UK?
Lord Martin Callanan:
Green finance is an increasingly important component of the transition. As I said earlier, most of our infrastructure in the UK is privately financed. So we do need large amounts of investment in CCUS in hydrogen, in heat networks or district heating systems. And I find that that money is available across the world. There are many funds that want to invest in long-term sustainable green infrastructure that will provide a good rate of return on the investment.
Our job as policy makers is to make sure that the right environment is there in place to attract that finance to make sure that the right business models are there to guarantee that people can make a return on their investment. And so far we see plenty of evidence of that. We were the first country in the world to produce a green finance strategy. We’ve recently updated it and we produce a number of guides for investors across the world on how they can access things like heat pump investments, heat network investments, or hydrogen investments because we pride ourselves on being an open economy and we pride ourselves on the amount of inward green investment. We’re one of the largest destinations for inward green investment in Europe, and we’re very proud of that.
Peter Tertzakian:
Well, as we come to the end of the interview, I guess I look at the numbers that the UK has achieved, the metrics, whether it’s by substitution of joules, whether renewables or reduction in emissions and everything that you’re doing, and it’s quite impressive. And so as I sit here from the other side of the Atlantic from afar and observe and listen to you speak, my sense is that the approach your government is taking is one that’s quite holistic with all energy systems, that there’s a sense of making the policies work with each other. In other words, a harmony. And you yourself said, “Simplicity of policy is very important.” And so all wrapped together, I think that’s a big part of the formula for achieving what you’ve achieved. Now, I guess I’m almost asking a rhetorical question, but would you agree with that? And if so, what can you add to that and what can you tell us about how we should approach some of the things that you’re seeing when you come here?
Lord Martin Callanan:
Well, I think we have a good record in the UK. We have the fastest rate of decarbonization in the G7. We’ve managed to grow our economy whilst reducing our emissions by… I think we forget about 48% since 1990. So we’re very proud of that. But of course, we’ve still got a lot more to do. I mentioned the challenges about building stock, et cetera. We need to bring in a lot more finance. We need to take people along with us in the energy transition, and there’ll be some difficult conversations that we’ll need to have with the public in the future. If you forgive me, probably a good idea for me not to get into lecturing our Canadian friends on how they should manage their transition because it’s different in every country. The scale is vast in your nation, it’s much bigger place. You have much colder temperatures in winter, different policy, environment, et cetera. I’m very happy with what we’ve been doing.
Peter Tertzakian:
Yeah. Well, I guess I’m looking for validation of an approach that certainly we espouse, Jackie and I, and that is that you need to make all of the policies work together. You need to make them simple. We need to be paddling in the same direction, everyone.
Lord Martin Callanan:
Singing from the same hymn sheet.
Peter Tertzakian:
Singing from the same hymn sheet. Is that true that the ministry and the other ministries that you have, finance and other ministries are actually thinking about this problem holistically, collectively so that the policies work together?
Lord Martin Callanan:
Yeah, I mean, it kind of sounds as though everything’s perfect. Of course it isn’t. Everything’s much more complicated than that. And as always, as every government, we have to have lots of difficult conversations with our colleagues in the treasury who have the hardest job in government, which is to raise the money that many of us like to spend. But we believe that we have a long-term policy environment. You can’t do the change overnight. One of the factors that I think was particularly prevalent during the energy crisis over the winter was the demand for everybody for a quick solution.
Is there an easy solution? What can we do now to solve the problem? Actually, there isn’t anything. It takes many years to roll out new infrastructure. It takes many years to put the business models in place. So we will continue on the same path, continue on the same trajectory. It’s not going to be easy. It’s not going to be simple. There are some difficult decisions ahead on both sides of the Atlantic. The challenges that you face here are equally great in a different policy environment. We are one government in the United Kingdom. You are a number of different governments in a confederal structure, which of course poses a number of different challenges.
Peter Tertzakian:
Yeah, yeah, yeah. But maybe based on experience, can you give us a sense of what we shouldn’t do? Are there some mistakes that you can sort of point to that, “Oh, we shouldn’t have done that, avoid this route”?
Lord Martin Callanan:
I mean, I think fundamentally we’re all on the same route, the same road. We might perhaps get there at different speeds or in different directions, but I think we all clear on the end goal of where we want to get to. I think concentrate on what works, avoid ideology. As I said, even if you don’t believe in net zero or you don’t believe in climate change, I believe in installing renewables because they’re cheap and they’re accessible. They’re the cheapest form of generation. I’m a fiscal conservative. I want the cheapest form for my population. So concentrate on trying to keep things as simple as possible. Of course, an energy system is always going to be, in essence complicated, but long-term policy certainty provide secure long-term signals for investors and our ingenuity, our great companies, our great businesses, our great entrepreneurs will help us to make it happen.
Jackie Forrest:
And I just want to highlight one thing you’ve said through this interview, which I think we can learn from is the price certainty. You talked about the thing that the nuclear plant at Hinkley Point, how it had a guaranteed price. You talked about that in your hydrogen. Even though you have a carbon market, you are recognizing that in order to finance these projects, you need to create some certainty for investors. I think that’s one thing that we need to learn from here because that’s something that’s holding back some of these projects from moving forward. Thanks for sharing that. I think we can take a learning there, and I hope Canada adopts some of that.
Lord Martin Callanan:
If you’re asking people to invest billions of pounds in infrastructure, you have to provide the long-term signals that they can get a return for their investors and people are prepared, people will risk their money. That’s the essence of capitalism. But you’ve got to give them a rate of return for that and let them think that the policy will still be the same in 15 years’ time and that they’ll get a long-term contract.
Peter Tertzakian:
Well, Jackie, I think we’re out of time. Lord Callanan, Minister for Energy Efficiency and Green Finance for the UK government, thanks so much for joining us and imparting some of your wisdom and above all, thanks for taking time out of your busy schedule in Canada. We hope you have a good trip home and look forward to listening to more news releases and success stories from your side of the ocean.
Lord Martin Callanan:
Thank you very much indeed. It’s my pleasure to be with you.
Jackie Forrest:
Well, thank you very much for joining us, and thank you to our listeners. If you enjoyed this podcast, please write us on the app that you listen to and tell someone else about us.
Speaker Two:
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