Has the Spending Review delivered a coherent approach to energy innovation?

26 Nov 2015

One of the prominent themes within Amber Rudd’s long-awaited energy policy speech and the Spending Review is the need for innovation in energy technologies and systems. It is also an essential part of the Committee on Climate Change’s proposals for the 5th carbon budget. Innovation is required to meet our energy policy goals: not only to develop new technologies, but more importantly to demonstrate and commercialise those technologies that already exist.

Whilst this emphasis on innovation is welcome, the announcements raise serious questions about some of the choices that are being made, and the coherence of the government’s overall energy policy. The news that the UK’s CCS commercialisation programme is being cancelled, which was not mentioned in the Spending Review, is particularly hard to understand.

Taken at face value, the Chancellor’s commitment to double energy innovation spending over the next five years is positive. It remains to be seen what this means in practice. As the Secretary of State argued in her speech last week, there is a strong rationale for governments to support innovation: ‘new technologies at the scale we need don’t appear out of thin air. Nuclear power, gas-fired power stations and even shale gas emerged after years, sometimes decades of public support’.

There are some good examples of this approach in action. Amber Rudd has now committed to further public funding for offshore wind. The rationales for supporting offshore wind have been documented in government assessments. Offshore wind can help reduce our emissions. Furthermore, the UK is currently a world leader in terms of deployment and there are real economic opportunities to be had. Quite rightly, she emphasised that further funding from consumer bills is conditional on the industry delivering significant cost reductions. Offshore wind costs are beginning to fall, and further deployment is needed if this is to continue.

If the prospect of cost reductions is a good argument for supporting offshore wind, should the same not also be true for other technologies? Onshore wind and solar PV are now the cheapest low carbon technologies in the UK. Yet, the government has proposed that support should be stopped or severely reduced at the point where cost reductions have almost brought them to a competitive position. As the Committee on Climate Change have noted, this is the case even if developers are asked to pay the costs of integrating them into the electricity system. These policy changes have damaged investor confidence and risk pushing up the costs of meeting our climate targets.

The cancellation of the £1bn CCS demonstration programme also contrasts sharply with the approach to offshore wind. CCS technologies have also been prioritised in by government due to the potential for emissions reductions and economic opportunities. Granted, this programme had some flaws. It didn’t cover industrial emissions, for example. But this third version of the UK demonstration programme was an improvement on previous policies. It would have made a significant contribution to international efforts to commercialise technologies that many see as crucial for global decarbonisation efforts.

Cutting the demonstration programme carries large risks. In the absence of a new plan for CCS, the UK is effectively outsourcing demonstration and commercialisation to other countries.  Of course, outsourcing CCS innovation might work. The UK cannot be a leader in all technologies, and has arguably tried to fund too many options within limited resources. But there are many reasons to be cautious of this argument.

First, this was the only significant demonstration programme in the EU. The UK was one of a dwindling group of countries that have active ambitions in this area. Second, some of the purpose of CCS demonstration was to test it out in UK geological conditions, and to kick start the development of CO2 pipeline infrastructure which could also connect industrial sites. 

Third, the lack of an active CCS programme makes energy policy look incoherent, and it could weaken the UK’s climate diplomacy efforts. If the government wishes to use gas as a ‘bridging fuel’ that replaces coal and reduces UK emissions further, significant CCS deployment will be increasingly essential. Otherwise, the ‘gas bridge’ will be an increasingly narrow one from the mid-2020s onwards, and gas use will need to fall sharply soon after that.

Returning to more fundamental R&D, a new priority was emphasised in the Spending Review: small modular nuclear reactors will receive £250m of innovation funding over five years. This priority was not considered in detail by the most recent government assessment of innovation needs. Whilst such new reactor technologies have potential, it will be a long time before they make a significant contribution. As nuclear economist Gordon MacKerron has argued, the economics of small reactors are unknown, and public acceptance of siting nuclear plants close to centres of demand is very unlikely to be straightforward.

As usual in energy policy debates, most of the attention has focused on electricity generation. The innovation portfolio that seems to be emerging is no exception. It this emphasis is confirmed, it would be a step backwards. The UK has started to support some important demonstrations of smarter electricity systems, heating technologies and demand side technologies. Furthermore, industry and government have begun to explore the social and institutional innovation that often accompanies technological development. It is essential that support for these innovations remains part of the portfolio, and that deployment policies for energy efficiency and heat are significantly strengthened to match.