UK Prime Minister, Boris Johnson, has pledged to make Britain’s power system carbon neutral by 2035. The policy is a key pillar of the UK’s climate strategy ahead of COP26 and will form a key part of the UK’s plan to achieve its Nationally Determined Contribution (NDC) of net zero greenhouse gas (GHG) emissions by 2050 and reducing economy-wide GHG emissions by at least 68% by 2030 compared to 1990 levels. These targets are ambitious and achieving them will be no easy feat.
To achieve the Paris Agreement goals of limiting warming to well below 2°C, and preferably 1.5°C, compared to pre-industrial levels, the composition of the world’s energy supply will need to change drastically. Energy is the most polluting sector, accounting for nearly three quarters of global GHG emissions in 2018. Heavy polluters that rely on predominantly dirty fuels for their electricity, such as China, India and South Africa (as seen in chart below), will need to adopt a higher share of renewables to achieve these goals. But achieving a fossil fuel-free energy mix will be hugely challenging, even for a country such as the UK, which compared to many other advanced economies already has a relatively clean energy mix. While the main contributor to the UK’s electricity mix was renewable energy (mainly onshore and offshore wind) in 2021 Q1, natural gas accounted for about 40%.
The price of renewable electricity has fallen significantly and is now, in some cases, cheaper than fossil fuel-powered electricity (see chart below). But the supply of renewables is inflexible and unpredictable, which, coupled with our current inability to store electricity at scale, makes it impossible for the UK’s electricity requirements to be met solely with renewable energy. Investment into storage solutions — including large-scale batteries and hydrogen — is taking place. But until these storage solutions and other clean on-off sources of energy can be scaled up, fossil fuels such as natural gas or coal are needed. For countries transitioning away from coal, gas is seen as an affordable, and cleaner, alternative.
The UK’s shift away from coal was initiated after the Great Smog of 1952 and gained impetus following the discovery of affordable and scalable natural gas deposits in the North Sea. Although the UK experience illustrates that eradicating coal from the energy mix is possible, this transition happened over decades — far slower than the speed required for emerging markets to do the same if the world is to have a chance at meeting the Paris goals. Meanwhile, the UK will need to substitute the 40% of its electricity mix that comes from gas in a mere 14 years, requiring monumental shifts that present both opportunities and risks.
Huge investment in new supporting infrastructure and technologies will be required. For example, all existing gas boilers will need to either be replaced, with heat pumps or electric heating alternatives, or retrofitted to use hydrogen. Electricity interconnectors will need to be vastly improved to move electricity efficiently from places that are windy/sunny to those that are not, and more wind and solar farms will need to be deployed, quickly. The 2035 policy is also a bet on technological change. New technologies, including scalable and effective renewable energy batteries and hydrogen generated from renewable sources will be necessary. It is also likely that gas power stations with carbon capture and storage (CCS) and nuclear power will play a significant role in the UK’s strategy. In the meantime, bumps along the way are likely, as highlighted by the recent spike in gas prices. Many factors have contributed to the price spike, including the switch from coal to gas, since many see this as a stepping stone on the way to a renewable energy future.
Join a growing community of asset managers and stay up to date with the latest research from Refinitiv and partners to help you inform your investment decisions. Follow our Asset Management LinkedIn showcase page.
Financial time series database which allows you to identify and examine trends, generate and test ideas and develop view points on the market.
Refinitiv offers the world’s most comprehensive historical database for numerical macroeconomic and cross-asset financial data which started in the 1950s and has grown into an indispensable resource for financial professionals. Find out more.
World GDP has surpassed its pre-pandemic level, and Fathom expects output will reach its ...
Supply chains for technology, and those passing through China in particular, were a ...
With the likelihood of the Fed beginning tapering in 2021 and rate hikes seemingly ...
Evidence is mounting that the Chinese authorities may be willing to accept slower growth ...