Charging forward – Ofgem’s drive to electrify transport

On Saturday, 4 September 2021, Ofgem (the energy regulator in Great Britain) published its plans to further support the UK’s transition to electric vehicles (EVs) in the deployment of EVs and their integration into the electricity system. Ofgem aims to get the network ready for EVs and ensure there is sufficient network capacity for EV uptake, all while aiming to avoid unnecessary investment into the network and keep consumer costs down.

Phasing out petrol and diesel cars and vans

Ofgem’s latest announcement reinforces its commitment to decarbonising transport which has already seen Ofgem commit £300 million to support the installation of 1,800 ultra-rapid charge points in the UK (announced in May 2021), with this initial support considered only a starting block to the over £40 billion to be invested in Britain’s energy networks in the next seven years.

These building blocks are all part of the bigger plan to phase out all new petrol and diesel cars and vans in the UK by 2030 and have all new cars and vans fully zero emission at the tailpipe by 2035. In so doing, and as announced by the UK Government in November 2020, the UK aims to become the fastest nation in the G7 to decarbonise cars and vans.

Growing demand for EVs

Less than a year after the Government’s announced ambition to decarbonise transport, the plan for EVs appears to be on track with over 500,000 ultra low emission vehicles (ULEVs) currently registered in the UK, along with forecasts that more than one in seven registrations in the UK in 2021 will be plug-in vehicles, and an estimated 14 million EVs will be on UK roads by 2030. ULEVs use low carbon technologies and emit less than 75g of CO2/km from the tailpipe, and include pure EVs, fuel cell EVs, plug-in hybrids and extended range EVs. These ULEV thresholds are also those used for the UK Government’s consumer incentive scheme, the Plug-in Car Grant (PiCG), and are also the thresholds used for zero emission vehicles (ZEVs).

Increasing need for electricity

By 2035, the Climate Change Committee has forecast that about 370,000 public charge points will be needed and Ofgem estimates that up to 19 million home charge points may be required (research has shown that a key factor in 36% of households not getting an EV is the lack of charging points near their homes). By 2050, electric cars and vans are expected to need 65TWh to 100TWh of electricity annually, an increase of 20% to 30% over today’s levels. The Competition and Market Authority (CMA) market study into EV charging completed in July 2021 has also identified areas in the nascent charging industry where greater competition is required (e.g. along motorways).

Getting EV network ready

Ofgem’s strategy is primarily focused on (1) ensuring that EV charge points are able to connect to the grid in a timely and cost efficient manner, (2) enabling further efficiency in the grid through smart charging and vehicle-to-power (V2X) technology, and (3) encouraging consumer participation in the EV transition as EVs become effectively part of the electricity system.

Addressing uncertainty

A major challenge to ensuring sufficient network capacity is that of when and where EV uptake is likely to happen, and having identified EV uptake, the challenge is the time needed and connection charges involved in implementing an EV charging infrastructure. The uncertainty surrounding the location and pace of EV uptake means Ofgem cannot currently approve full five-year programmes of work in advance.

In an effort to address this uncertainty in future EV location uptake, among other issues, distribution network operators (DNOs) will be required to forecast local EV uptake and consumer behaviour through price controls for electricity distribution networks (RIIO-ED2), thereby incentivising improvements to the connection process. DNOs will also be required to engage with local stakeholders and assess local EV investment needs and, under RIIO-ED2 licence obligations, DNOs will be required to publish digitalisation strategies.

Using smart charging

The use of smart charging will be incentivised through the use of special tariffs (e.g. Market-Wide Half-Hourly Settlement and Time of Use), progressing smart charging (e.g. pre-set charging at off-peak times), working with the Government and industry to remove barriers for V2X, and developing data and communication for dynamic smart charging.

Reducing barriers to connection

In an effort to reduce barriers to network connections, Ofgem will remove connection costs associated with reinforcement of shared networks and will publish their Final Access and Forward-Looking Charging Significant Code Review (SCR) decision in 2021, with changes to be implemented from 2023. The SCR looks at proposals for distribution connection charging, definition and choice of access rights, and transmission charging for small distributed generation.

A greener, fairer future

Ofgem will continue to engage with key stakeholders and encourage ongoing engagement and greater consumer participation through supporting product development and extending consumer protections to new products and services.

On EV flexibility and interoperability, Ofgem will publish in 2022 a joint BEIS/Ofgem EV Flexibility Policy Statement, which will include reviews of charge point interoperability, driving consumer engagement with smart technology, and improving data flow between charge points, operators and networks.

A Retail Strategy on how best to support consumer participation and ensure consumer protection will also be published, and work with BEIS and the Government will continue in an effort to identify gaps in the current framework of consumer protection and ensure fair pricing in the aim of enabling the transition to EVs and achieving a greener, fairer future.

Key contacts

Reza Dadbakhsh
Reza Dadbakhsh
Partner, London
+44 20 7466 2679
Sarah Pollock
Sarah Pollock
Partner, London
+44 20 7466 2786
Nick Pantlin
Nick Pantlin
Partner, London
+44 20 7466 2570
Steven Dalton
Steven Dalton
Partner, London
+44 20 7466 2537
Barbara McNulty
Barbara McNulty
Associate, London
+44 20 7466 3184

 

 

Fit for 55 – EU recognises the need for a broad alternative fuels infrastructure across Europe

In the context of the ‘fit for 55’ package, published on 14 July 2021, the European Commission proposed the adoption of a new Regulation for the deployment of an alternative fuels infrastructure; the new Regulation will repeal Directive 2014/94/EU (DAFI).

The initiative seeks to ensure the availability and usability of a dense, widespread network of alternative fuels infrastructure throughout the European Union (EU), with the aim that all users of alternative fuel vehicles (including vessels and aircraft) will be able to move through the EU with ease, enabled by key infrastructure such as motorways, ports and airports. The specific objectives of the proposed Regulation are to: (i) ensure minimum infrastructure to support the required uptake of alternative fuel vehicles across all transport modes and in all EU Member States to meet the EU’s climate objectives; (ii) ensure full interoperability of the infrastructure; and (iii) ensure comprehensive user information and adequate payment options.

Background

The Commission’s proposal represents a recognition that mobility brings many socio-economic benefits to the European public and to European businesses, and also has a growing impact on the environment, including in the form of increased greenhouse gas emissions and local air pollution, and that the EU is still missing a complete network of alternative fuels infrastructure.

The Commission carried out an ex post evaluation of the DAFI, which found that it is not sufficient for the purpose of reaching the EU’s increased climate targets for 2030. The main issues include that Member States’ infrastructure planning often lacks the necessary level of ambition, consistency and coherence, leading to insufficient and not-well distributed infrastructure. Further interoperability issues with physical connections persist, while new issues have emerged over communication standards, including data exchange among the different actors in the electro-mobility ecosystem. Additionally, there is a lack of transparent consumer information and common payment systems, which limits user acceptance. Without further action by EU institutions, this lack of interoperability and easy-to use recharging and refuelling infrastructure is likely to become a barrier to growth in the use of low and zero-emission vehicles, vessels and, in the future, aircraft.

By ensuring that the necessary infrastructure for zero and low-emission vehicles and vessels is in place, this initiative will complement a set of other policy initiatives under the ‘fit for 55’ package that stimulate demand for such vehicles by setting price signals that incorporate the climate and environmental externalities of fossil fuels; such initiatives include the revision of the Emissions Trading System (Directive 2003/87/EC), and the revision of the EU Energy Taxation Directive (Directive 2003/96/EC).

Key provisions

Simplification

The review of DAFI increases the overall policy ambition and also includes some important simplification aspects, which primarily affects charge point operators and mobility service providers. The setting of clear and common minimum requirements aims to align business operations, as businesses will face similar minimum requirements in all Member States, and the new requirements will simplify the use of the infrastructure by private and corporate consumers (who currently face a plethora of use approaches) and enable better business service innovation. With these proposed changes, consumer trust in the robustness of a pan-European network of recharging and refuelling infrastructure may increase and thereby support the overall profitability of recharging and refuelling points, and support a stable business case. It is aimed that all market actors and user groups will benefit from lower information costs and, in the case of market actors, lower legal compliance costs in the medium term, as the requirements for infrastructure provisioning under the proposed Regulation will be better harmonised. Public authorities may also benefit from a coherent EU-wide framework that is aimed at making coordination with public and private market actors easier.

Coverage of publicly accessible recharging points

The proposal sets out specific provisions for the rollout of certain recharging and refuelling infrastructure for light- and heavy-duty road transport vehicles, vessels and aircraft.

Road transport

Member States are required to ensure minimum coverage of publicly accessible recharging points dedicated to light- and heavy-duty road transport vehicles on their territory, including on the TEN-T core and comprehensive network. In particular, Member States must install charging and fuelling points at regular intervals on major highways, at every 60 kilometres for electric charging and every 150 kilometres for hydrogen refuelling.

Further provisions are introduced to ensure the user-friendliness of the recharging infrastructure. These include provisions on payment options, price transparency and consumer information, non-discriminatory practices, smart recharging, and signposting rules for electricity supply to recharging points.

Member States are also required to ensure until 1 January 2025 minimum coverage of publicly accessible refuelling points for liquefied natural gas (LNG) dedicated to heavy-duty vehicles on the TEN-T core and comprehensive network.

Vessels

Member States must ensure installation of a minimum shore-side electricity supply for certain seagoing ships in maritime ports and for inland waterway vessels. The proposal also defines the criteria for exempting certain ports and sets requirements to ensure a minimum shore-side electricity supply.

Member States are also required to ensure an appropriate number of LNG refuelling points in maritime TEN-T ports and to identify relevant ports through their national policy frameworks.

Aircraft

The proposed Regulation sets out minimum provisions for electricity supply to all stationary aircraft in TEN-T core and comprehensive network airports.

Provisions for Member States’ national policy frameworks

The provisions for Member States’ national policy frameworks are reformulated under the proposal, which makes provision for an iterative process between Member States and the Commission to develop concise planning to deploy infrastructure and meet the targets as provided in the proposed Regulation. It also includes new provisions on formulating a strategy for the deployment of alternative fuels in other modes of transport together with key sectoral and regional/local stakeholders. This would apply where the Regulation does not set mandatory requirements but where emerging policy requirements connected to the development of alternative fuel technologies need to be considered.

The approach to governance includes reporting obligations corresponding to provisions for Member States on national policy frameworks, and national progress reports in an interactive process with the Commission. It also sets requirements for the Commission to report on Member States’ national policy frameworks and progress reports.

Data provision requirements

Data provision requirements are set out for operators or owners of publicly accessible recharging or refuelling points on the availability and accessibility of certain static and dynamic data types, including the establishing of an identification registration organisation (IDRO) for the issuing of identification (ID) codes. Under this provision, the Commission is also empowered to adopt further delegated acts to specify further elements as required.

Common technical specifications

The existing common technical specifications are integrated with a set of new areas for which the Commission will be entitled to adopt new delegated acts. These will build on, as deemed necessary,  standards developed by the European standardisation organisations (ESOs).

The proposal also includes detailed provisions on national reporting by Member States to support the implementation of the Regulation, and common technical specifications or areas where delegated acts will need to be adopted to define common technical specifications.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Francesca Morra
Francesca Morra
Partner, Milan
+39 02 3602 1412

 

Fit for 55 – EU increases use of energy from renewable sources by 2030 in proposed amendments to the Renewable Energy Directive

Reducing greenhouse gas emissions by 55% by 2030 entails a significant increase in the share of energy production from renewable sources in order to develop an integrated energy system.

In light of the new targets, the 32% share of renewable energy to be developed by 2030 set by the Renewable Energy Directive (RED II) is no longer sufficient and it will have to be increased to 38%-40%, according to the Climate Target Plan forecasts.

At the same time, it will be necessary to implement a series of cross-cutting measures in different sectors, in line with the energy system integration and the strategies for the development of hydrogen, offshore renewable energy and biodiversity.

In a nutshell, the objectives of the revisions proposed for RED II are to increase the use of energy from renewable sources by 2030, to foster a better integration of the energy system and to contribute to climate and environmental objectives, including the protection of biodiversity, also providing a response to the intergenerational concerns associated with global warming and the loss of biodiversity.

The revision of RED II is essential for two reasons: (i) to achieve the climate objective, and to protect the environment and health, and also (ii) to ensure Europe’s energy independence from third countries and contribute to the creation of a strong technological and industrial leadership of the European Union, capable of supporting employment and economic growth.

Background

In the European Commission’s view, acting at a European level, developing renewable energy policies common to all Member States is certainly more efficient and effective than individual actions by Member States and can jointly address the transition of the European energy system in a coordinated manner, avoiding excessive fragmentation of legislation and regulation and providing investors with greater certainty and stability.

Moreover, joint action ensures a net reduction in greenhouse gas emissions and pollution, protects biodiversity and exploits the advantages of the internal market, economies of scale and technological cooperation. In any case, the achievement of a higher share of energy produced from renewable sources will depend, in a final analysis, on the national contributions of each Member State: the more ambitious and cost-effective these are, the more effective the agreed common legal and political framework will have been.

In particular, the Commission considers it necessary for Member States to take action to simplify the authorisation procedures for the construction of renewable energy plants.

In the context of public consultations that preceded the publication of the ‘Fit for 55’, stakeholders pointed out that the lack of simplification of permits and administrative procedures is still the greatest barrier to the development of renewables. Simplifying administrative procedures would facilitate the phasing out of fossil fuels. In this regard, it should be noted that RED II had already introduced clear deadlines for the conclusion of authorisation procedures (generally two years), a single point of contact for applicants as well as the adoption of clear guidelines procedures. Through these provisions, which represent the political compromise reached in the RED II adoption phase, the aim was to tidy up the complex and time-consuming national procedures, which often bear disproportionate deadlines and rules.

The provisions of RED II, to date, have not been implemented in Member States (the transposition deadline was set for 30 June 2021). Therefore, despite requests from industry, the Commission has deemed premature to amend these specific provisions of RED II before any assessment of national implementing regulations can be carried out.

Key amendments

Definition of renewable fuels of non-biological origin

The first amendment concerns the definition of renewable fuels non-biological origin (advanced biofuels). The proposal also sets out the insertion of new definitions, including those of renewable fuels, bidding zone, smart metering system, recharging point, market participant, electricity market, industrial battery, domestic battery, electrical vehicle battery, state of health, state of charge, power set point, smart charging, regulatory authority, bidirectional charging, normal power recharging point, industry non-energy purposes, plantation forest and planted forest.

Public support schemes

Obligations to minimise the risks of unnecessary market distortions resulting from support schemes and to avoid supporting certain raw materials for energy production in line with the cascading principle are strengthened. It is also introduced the obligation to phase out, with some exceptions, support for electricity production from biomass from 2026.

Calculation of the share

The calculation method of the share of energy from renewable energy sources is amended so that (a) energy from renewable fuels of non-biological origin must be accounted in the sector in which it is consumed (electricity, heating and cooling or transport), and (b) the renewable electricity used to produce renewable fuels of non-biological origin is not included in the calculation of the gross final consumption of electricity from renewable sources in the Member State.

Cross border pilot project

Member States are obliged to implement a cross border pilot project within three years and to cooperate on the amount of offshore renewable generation to be deployed within each sea basin by 2050, with intermediate steps in 2030 and 2040.

Energy system integration

Other proposals regard enhancing energy system integration between district heating and cooling (DHC) systems and other energy networks, by requiring Member States to develop efficient DHC to promote heating and cooling from renewable sources (RES). In order to facilitate system integration of renewable electricity, the following measures are provided:

  • Transmission System Operators (TSOs) and Distribution System Operators (DSOs) are required to make available information on the share of RES and the greenhouse gas content of the electricity they supply – in order to increase transparency and give more information to electricity market players, aggregators, consumers and end-users;
  • battery manufacturers must enable access to information on battery capacity, state of health, state of charge and power set point to battery owners as well as third parties acting on their behalf;
  • Member States must ensure smart charging capability for non-publicly accessible normal power recharging points – due to their relevance to energy system integration; and
  • Member States must ensure that regulatory provisions concerning the use of storage and balancing assets do not discriminate against participation of small and/or mobile storage systems in the flexibility, balancing and storage services market.
Industries

With respect to industries, mainstreaming renewable energy in industry is given an indicative target of an annual average increase of renewable energy of 1.1 percentage points and a binding target of 50% for renewable fuels of non-biological origin used as feedstock or as an energy carrier. It also introduced a requirement that the labelling of green industrial products indicates the percentage of renewable energy used following a common EU-wide methodology.

Energy poverty

The recast of RED II also provided for an extended set of measures to force Member States to ensure the accessibility of measures to all consumers, in particular those in low-income or vulnerable households, who would not otherwise possess sufficient up-front capital to benefit.

Transports

RED II is also amended by increasing the ambition level of renewables in transport by setting a 13% greenhouse gas intensity reduction target, increasing the sub-target for advanced biofuels from at least 0.2% in 2022 to 0.5% in 2025 and 2.2% in 2030, and introducing a 2.6% sub-target for renewable fuels of non-biological origin.

This proposal also introduces a credit mechanism to promote electro-mobility, under which economic operators that supply renewable electricity to electric vehicles via public charging stations will receive credits they can sell to fuel suppliers who can use them to satisfy the fuel supplier obligation.

European Union database

The scope of the European Union database is extended so that it can cover other fuels, and not only those in the transport sector. This will enable the tracing of liquid and gaseous renewable fuels and recycled carbon fuels as well as their life-cycle greenhouse gas emissions. The database is the monitoring and reporting tool where fuel suppliers must enter the information necessary to verify their compliance with the fuel suppliers’ obligation.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Lorenzo Parola
Lorenzo Parola
Partner, Milan
+39 02 3602 1405
Andrea Leonforte
Andrea Leonforte
Senior Associate, Milan
+39 02 3602 1379

Leading the legal sector on climate change with Net Zero Lawyers Alliance

Herbert Smith Freehills is joining forces with other legal sector leaders to fight climate change through the Net Zero Lawyers Alliance (NZLA) – a coalition of commercial law firms committed to helping the world achieve net-zero carbon emissions by 2050. Justin D’Agostino joined leaders from a number of international law firms and corporates to launch the Net Zero Lawyers Alliance as part of London Climate Action Week.

Through their own actions and the legal services they provide to clients, NZLA members aim to act as ‘connective tissue’ in helping transition energy, infrastructure, transport, industry and land-use systems to align with – and accelerate delivery of – climate change mitigation, adaptation and resilience. As part of this, the alliance will help reinforce, and support implementation of, internationally coherent legal frameworks and guidelines for transitioning to net zero by 2050.

Member firms commit to reducing their own operational emissions by at least 50% (from 2019 levels) by 2030, through robust science-based targets. They will also:

  • engage with their clients’ transition and decarbonisation objectives
  • implement dedicated climate change-related training and pro bono targets
  • help clients align their net-zero ambitions within their contracts, terms, and enforcement.

Herbert Smith Freehills has committed to achieving net-zero carbon emissions by 2030, in line with global efforts to limit global warming to 1.5C.

Key contacts

Lewis McDonald
Lewis McDonald
Global Head of Energy, London
+44 20 7466 2257
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612

London Climate Action Week – 26 June to 4 July 2021

We are proud to be a part of London Climate Action Week 2021 (LCAW), the annual event bringing together world-leading climate professionals and communities across London and beyond to find practical solutions to climate change.

Founded in 2019, LCAW is the largest independent climate change event in Europe, helping to shape our future into one that is net-zero, equitable and resilient. Rooted in London, our diverse, international city, LCAW uses its global perspective to spark climate action around the world.

We will be participating in sessions throughout the week which we hope you will be able to join us at:


How can corporates manage the climate transition

Monday, 28 June 2021, 4.00pm GMT

This event looks at the context in which corporates are responding the climate transition, how to develop strategy and seize opportunities and how to manage uncertainties in relation to climate disclosure and reporting.

Silke Goldberg and Lewis McDonald will be joined by Vanessa Havard-Williams and Rachel Barrett from Linklaters for this discussion.

REGISTER >


Climate Change Disputes: Public International Law – too hot to handle

Tuesday, 29 June 2021, 2.00pm GMT

The Paris Agreement signed by 195 countries in 2015 enshrines a commitment to limit the increase in global temperature to well below 2°C compared to pre-industrial levels, in order to avoid the worst effects of climate change. The upcoming COP26 summit will urgently address measures to be taken by States to meet this commitment in light of the continued rapid rise in global temperatures. But the scale of regulatory change and commitment required will test state policy-making and impact across business communities. This session will address the issue of climate change disputes from the perspective of public international law and specifically cover recent and potential climate change-related claims against states, including investor-State disputes, and the prospect of reform of investment treaties, such as the ECT, to accommodate climate change objectives.

Andrew Cannon will be joined by panellists from Jones Day, Clifford Chance, Twenty Essex and Queen Mary University of London.

REGISTER >


Key contacts

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Lewis McDonald
Lewis McDonald
Global Head of Energy, London
+44 20 7466 2257
Andrew Cannon
Andrew Cannon
Partner, London
+44 20 7466 2852

 

 

FUTURE CITIES – THE PODCAST SERIES

Building on our series exploring the prospects of the modern city, our new podcast brings you interviews, commentary and fresh perspectives on one of the defining social and economic forces of modern life. Tune in and hear from our leading figures across a range of disciplines as they join industry experts to share insights and bring you real-life perspectives on how cities are evolving before our eyes.

EPISODE 1: SHAPING OUR POST-COVID GLOBAL CITIES

In episode one, partners Matthew White and Nicholas Carney, are joined by special guests Amy Brown from the New South Wales Department of Premier and Cabinet and Alex Williams from Transport for London to bring you real life perspectives on how two of our global cities, London and Sydney, are responding to the Covid-19 pandemic.

EPISODE 2: CAN CITIES LEAD US TO NET ZERO?

In episode two, infrastructure partner Nicholas Carney is joined by Lewis McDonald (Global Head of Energy) and Matthew White (Head of Planning, London), to discuss the pressing need to make our energy consumption more efficient and cut emissions as our cities continue to grow.

EPISODE 3: EMBRACING ESG TO BUILD BACK BETTER

In episode three, infrastructure partner Nicholas Carney is joined by partners Silke Goldberg and Timothy Stutt from our global ESG leadership team, to discuss why ESG is a core element of city planning and to bring you examples of how different cities from across the world are embracing ESG to build back better.

Subscribe

Our podcast is available on iTunesSpotify and SoundCloud and can be accessed on all devices. You can subscribe and be notified of all future episodes.

Green finance and innovation – point 10 of the UK Government’s Ten Point Plan

In the final limb of its Ten Point Plan (the Plan), the Government acknowledges the significant investment required to achieve net zero through the developments and innovations elsewhere in the Plan. It seeks to leverage public and private sources of financing, increasing investment in research and development (R&D) while cultivating a green finance sector, including through the issue of UK Sovereign Green Bonds from 2021. This builds on the Government’s 2019 Green Finance Strategy and the establishment last year of the Green Finance Institute.

Net Zero Innovation Portfolio

The Government has committed to raising total R&D investment to 2.4% of GDP by 2027 and the first contributor to this is the £1 billion Net Zero Innovation Portfolio, which aims to accelerate the commercialisation of low-carbon technologies, systems and processes in the power, buildings and industrial sectors. The portfolio is designed to focus on priority areas that align with those emphasised in the Plan, including:

  • floating offshore wind;
  • nuclear advanced modular reactors;
  • energy storage and flexibility;
  • bioenergy;
  • hydrogen;
  • homes;
  • direct air capture and advanced carbon capture and storage;
  • industrial fuel switching; and
  • disruptive technologies, including AI for energy.

This builds on recent investments, such as the first phase in November of a £100 million injection in new greenhouse gas removal technologies, including direct air capture, a method of capturing CO2 from the air for storage in geological formations or use in industrial processes. In the Plan, the Government has pledged a further £100 million for energy storage and flexibility innovations, noting the increasing importance of such technologies as the UK more heavily relies on renewable sources of electricity generation and has to counteract their inevitably less predictable generation.

Nuclear fusion

Further to the commitments it makes to large-scale nuclear projects and advanced nuclear technologies in Point 3 of the Plan, the Government has emphasised its continued focus on commercialising nuclear fusion technology. It notes its ongoing £222 million investment in the STEP programme, which aims to build the world’s first commercially viable nuclear fusion power plant in the UK by 2040, as well as £184 million for new fusion facilities, infrastructure and apprenticeships to establish relevant expertise in the UK, creating a so-called “global hub for fusion innovation”.

Transport

In the transport sector, the Government has pledged to invest £3 million in the Tees Valley Hydrogen Transport Hub, which will lead research, development and testing of new hydrogen transport technologies across all modes of transport. This will sit alongside the world’s biggest hydrogen refuelling station in Teesside, plans for which have already been backed by Government. Aiming to address one of the more challenging aspects of decarbonising road transport, the Government has also committed £20 million to trials of zero emission heavy goods vehicles.

Financing – the public and private sectors

In terms of public funding, the Government has indicated that it intends to issue Sovereign Green Bonds in 2021, subject to market conditions, to be followed by subsequent issuances, the proceeds of which will finance sustainable projects and infrastructure. The Government will hope to tap into the exponentially increasing market for environment, social or governance-oriented investments, with around £190 billion of green bonds having been sold last year – 3.5% of global bond issuance.

In the private sector, the Government is continuing to encourage greater private investment in green innovation, building on 2019’s Green Finance Strategy and the corresponding launch of the Green Finance Institute. This organisation, chaired by Sir Roger Gifford, was established to promote collaboration between the public and private sectors, bringing together global experts and practitioners to design new ways of channelling capital into sustainable initiatives. It has since established a Coalition for the Energy Efficiency of Buildings and a Zero Carbon Heating Taskforce, as well as launching a Green Finance Education Charter.

The Plan sets out the Government’s next steps to encourage greener private investment, including introducing mandatory reporting of climate-related financial information across the economy by 2025, with a significant portion of mandatory requirements in place by 2023, aligned to the recommendations of the Taskforce on Climate-related Financial Disclosures. Measures will first be applied to entities such as premium listed companies, with their reach broadening over time, and will allow investors to better understand the impacts of their exposure to climate change, price climate-related risks more accurately and support the greening of the UK economy.

The UK and City of London will also be promoted as a leader in the global voluntary carbon markets, including in response to the recommendations of the Taskforce on Scaling Voluntary Carbon Markets. In relation to compliance markets, the Government wants to formulate a clear carbon price as the UK leaves the EU Emissions Trading System, and has since begun implementation of a replacement, domestic Emissions Trading System.

In order to facilitate informed investment, the Government will implement a green taxonomy that defines which economic activities are environmentally sustainable. The UK taxonomy will take the scientific measures in the EU taxonomy as its basis and a UK Green Technical Advisory Group will be established to review these to ensure their suitability for the UK market.

Together, the Government feels that these measures will provide investors a clear framework in which to deliver the low-carbon finance needed to achieve net zero by 2050. The Government predicts that enhancing green finance overall could attract £1 billion of matched funding and potentially £2.5 billion of follow-on private sector funding to supplement the Government’s own £1 billion investment.

Further measures directed at consumers and taxpayers, including on tax and regulations, are expected as part of HM Treasury’s Net Zero Review.

Matthew Job
Matthew Job
Partner, London
+44 20 7466 2137
Amy Geddes
Amy Geddes
Partner, London
+44 20 7466 2541
Jake Jackaman
Jake Jackaman
Partner, London
+44 20 7466 2883

Delivering new and advanced nuclear power – point 3 of the UK Government’s Ten Point Plan

The UK government has announced its support for new nuclear power generation as a reliable, low-carbon source of electricity to help meet increasing demand due to the electrification of sectors such as heat and transport.

The government recognises nuclear as having a key role in the decarbonisation of the electricity sector by providing firm low-carbon power alongside intermittent renewable generation and (in the future) power stations that burn hydrogen or gas with carbon capture and storage. It also recognises the importance of the sector in supporting UK jobs and supply chains.

The Ten Point Plan sets out the government’s support for large-scale new nuclear projects as well as investment in small and advanced modular reactors.  It also confirms support to commercialise nuclear fusion technology.

Large-scale nuclear

Nuclear power has played an important role in the UK’s current energy mix since the first full-scale nuclear power station was built more than sixty years ago.  There is currently only one new nuclear power station being constructed in the UK, Hinkley Point C, and the Ten Point Plan paves the way for the construction of further large-scale nuclear power stations such as Sizewell C in Suffolk.

The full details on how new large-scale nuclear will be financed are not set out in the Ten Point Plan or the National Infrastructure Strategy published on 25 November. Last year, the government consulted on a nuclear regulated asset base (“RAB“) model and reports that it is still considering responses to this consultation. Alongside considering the RAB model, the government has said that it will continue to consider the potential role of government finance during construction.

The RAB model first emerged in the UK and is associated with the successful privatisation and sustained investment in network and other utility businesses. More recently, the RAB model has been successfully adapted for the Thames Tideway Tunnel project and it is expected to have an important role in encouraging investment in other complex infrastructure projects including carbon capture utilisation and storage.

The RAB model differs from many other private finance models, such as the now retired PFI and PF2 models, as it allows for the project to earn revenue during the construction period which enables debt to be serviced (rather than being rolled up and capitalised) during construction and allows equity investors to earn a return from day one.  The model also allows for the sharing of construction risk between the project and its contractors, on the one hand, and consumers, on the other. Together with a government support package to address low probability, high impact risks, these features resulted in Thames Tideway Tunnel attracting private investment with a very low cost of capital.

Large-scale nuclear projects are very capital-intensive and have a long construction period (with relatively low operating costs once constructed). This means that financing costs make up a large proportion of the overall cost of delivering new nuclear projects making them a good candidate to potentially benefit from a RAB-based model to bring down the cost of financing.

Advanced nuclear fund

The government has also announced up to £385 million of investment in emerging nuclear technologies as part of an Advanced Nuclear Fund. This includes:

  • up to £215 million to be invested in small modular reactors (“SMRs“) to help develop a domestic smaller-scale power plant technology;
  • up to £170 million for a research and development programme on advanced modular reactors to help unlock efficient production of hydrogen and synthetic fuels; and
  • an additional £40 million to develop the regulatory frameworks and support UK supply chains in order to bring these technologies to market.

The government hopes that its investment in SMRs will unlock up to £300 million private sector match-funding.

Looking ahead

The Ten Point Plan demonstrates that the government views nuclear power as an important contributor to low-carbon electricity and an essential component in the UK’s energy generation mix into the 2050s and beyond. The highly anticipated and much-delayed Energy White Paper that is expected to be published before the end of 2020 should provide further details on the future role of nuclear, and may include further details on how new large-scale projects will be financed and the government’s role in this.

Tom Marshall
Tom Marshall
Partner, London
+44 20 7466 7470
Patrick Mitchell
Patrick Mitchell
Partner, London
+44 20 7466 2157
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612

 

 

 

Hydrogen – point 2 of the UK Government’s Ten Point Plan

Hydrogen is one of the ten points in the UK Government’s new plan for a “green industrial revolution” revealed on 18 November 2020.

In 2021, the Government’s hydrogen strategy will be published which will set out business models and the revenue mechanism for private sector investment. There will also be a consultation on the Government’s preferred business models for hydrogen in 2021 with the aim to finalise hydrogen business models in 2022.

While we await further detail in next year’s hydrogen strategy, the Government has outlined various ambitions and aims regarding hydrogen. This includes the aim for the production capacity of low carbon hydrogen to be 1GW by 2025 and 5GW by 2030. This will be supported by a Net Zero Hydrogen Fund of £240 million for new hydrogen production facilities. By 2030, the Government expects that there will be up to £4 billion of private investment expected in this area.

Hydrogen and heat

The intention is to shift towards lower carbon heating with no change in experience for domestic consumers through hydrogen blends. The Government states that this will still reduce emissions of gas used by up to 7%.

In 2023, there will be industry testing to allow for 20% blending of hydrogen into the gas distribution grid for all homes on the grid. In the same year, the first “Hydrogen Neighbourhood” will be trialled where all home heating and cooking will be by hydrogen. This will be followed by a trial of hydrogen heating in a large village in 2025 and a pilot “Hydrogen Town”, heated entirely by hydrogen, before the end of the decade.

At the end of November 2020, Ofgem announced their approval of a proposed network demonstration in Levenmouth, Fife which is intended to provide hydrogen to 300 homes over four years from the end of 2022. The hydrogen will be produced by an electrolysis plant powered by offshore wind. The energy regulator will award up to £18 million to the project.

Combination with other aspects of the ten point plan

There is a cross-over between hydrogen and other elements of the Government’s Ten Point Plan. Low carbon hydrogen production growth will be possible through the expansion and increase of carbon capture and storage (“CCS”) infrastructure to support blue hydrogen. Zero carbon hydrogen will be made possible in the UK through the growth of offshore wind and other renewables. For zero carbon hydrogen, the hydrogen is produced by electrolysis which separates water into hydrogen and oxygen using electricity from renewable sources.

Looking ahead

The Government is calling for hubs that include renewable energy, CCS and hydrogen which will create industrial “SuperPlaces”.

In addition to domestic heat, hydrogen can be used for industrial heat, power, shipping and trucking. Hydrogen is thought to be particularly important for heavy transport where long distances are covered and electric vehicles are much less suitable. Hydrogen is also being considered for the decarbonisation of industrial processes such as chemical refinery and steel production with hydrogen being substituted for natural gas.

Overall, the growth of low carbon hydrogen could deliver savings of 41MT CO2 between 2023 and 2032 which is equivalent to 9% of 2018 UK emissions, the Government states.

Steven Dalton
Steven Dalton
Partner, London
+44 20 7466 2537
Lewis McDonald
Lewis McDonald
Partner, Global Head of Energy, London
+44 20 7466 2257
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612