91探花

The UK is a net importer of energy: this a reality from which we cannot shy away. In 2023, the UK’s net import dependency was 40.8%, 3.8 percentage points higher than in 2022, as reported in the . To simplify, this country’s energy needs far outweigh our ability to produce sufficient energy to meet demand. This problem is not going to go away as energy needs, both nationally and globally, are on the rise. If the UK wants to meet the government’s commitment of energy independence and avoid vulnerabilities to external geopolitical pressures, then we need to see meaningful investment in the UK’s energy production resources and reduce dependency on imported energy. 

To achieve energy independence, the government has committed to doubling onshore wind, tripling solar power, and quadrupling offshore wind by 2030. In July, it approved three new major solar farm projects in England, a clear indication of its commitment to drive investment in new renewable energy infrastructure. In the onshore wind sector, shortly after assuming power, the new government announced the removal of the de facto ban on onshore wind farms, which had been in place since 2015. We have seen a positive response to these announcements among our client base, and an uptick in interest in the UK from inbound investors.

The challenges of energy import dependency

Despite recent announcements showing all the good intentions and knock-on positive impact to investment in the UK renewable sector, we seem to be taking a backward step in addressing the UK’s import/export imbalance. It appears that there is a desire to replicate the (yet to be determined) success of the new 1.4 GW interconnector between Denmark and the United Kingdom, which became operational at the end of 2023. The UK is increasing its reliance on imported electricity through the XLinks project, a privately-funded infrastructure project, which intends to import vast quantities of solar-generated electricity from Morocco via subsea cables. Once complete, it will be capable of supplying 8% of Britain’s electricity needs. 

Perpetuating our heavy reliance on imported electricity, with no long-term plan for energy independence, is concerning. This will not help to fund GB Energy or raise fiscal revenues from UK-generated energy to support the new publicly owned clean energy company. Additionally, it doesn’t stand on equal footing with UK electricity providers, who have to deal with grid connection issues and the possibility of additional taxes compared to other sectors, such as the Electricity Generator Levy (EGL) and the windfall tax. While projects like this have the potential benefit of securing future supply, they are at odds with the government’s stated aim to reduce the UK’s heavy reliance on imported electricity and present a significant risk to the UK’s long-term energy security, as we continue to be exposed to geopolitical changes. 

Tom Pugh, 91探花’s Economist, comments: 

“The news that OFGEM will increase the energy price rate by 9.5% in October and likely by another 5% in January shows just how vulnerable the UK still is to energy price shocks. The reliance on imports, as well as a severe lack of storage capacity, makes the UK particularly vulnerable to energy price shocks compared to other countries with more domestic generation. Indeed, another surge in energy prices is the number one risk to the economic outlook over the next two years.”

Benefits of domestic energy production and grid investment

The UK government has a vested interest for encouraging the growth of UK energy production for various reasons:

• It creates UK jobs.
• It creates tax revenues once the project starts supplying energy to the grid.
• It bolsters the UK money markets, assuming UK lending.
• It meets the stated aim of energy independence. 

The new government recognised the importance of investment in the National Grid in its manifesto. It highlighted that the grid has become a significant obstacle for power generation and decarbonisation of the energy sector, with no grid connection dates available until the late 2030s. Additionally, since the start of this year, 232 renewables projects, accounting for roughly 45 GW of capacity, are hoping for grid connection by 2025. 

This problem is not surprising news, with the previous government reporting in its final 2023 Autumn Statement that there could be an eight-year time lag in grid connection, and an action plan to cut grid delays by 90%. These delays can have devastating impacts on the project economics (eg interest payments on loans used to fund the capex but no source of income to support the borrowing) and is a clear deterrent for choosing the UK as the location for a renewables project. As seen recently, with buyers exercising their option to quit because grid connections were not met within the agreed transaction timeframes, evidencing the impact of the grid connection problem on UK deals. 

In addition, there is a nuance in the UK tax legislation regarding expenditure incurred prior to commencement of the trade. Provided this is incurred within seven years of starting to trade, the allowable costs are treated as incurred on the day of commencement for tax purposes. However, if the costs are incurred outside that timeframe, that potential tax asset is permanently disallowed. Compare this with the Moroccan government, which recently undertook a wide-ranging reform of the legal framework governing the renewable energy sector. The incentives offered in other jurisdictions to encourage investment in the domestic renewables market make for a far more attractive investment environment. 

The announcements in July have been well received by the market, but more is required to ensure a successful energy transition and the stated desire for energy independence. While any specific tax breaks to stimulate investment and expedite the road to net zero and energy security are considered unlikely in the forthcoming autumn budget, this would be very helpful in meeting the government’s energy objectives.

How we can help with your renewables business

We have extensive experience working with clients in the renewables and cleantech sectors and are committed to supporting businesses in the industry. 

We understand the challenges of working in this dynamic environment and how we can help you react to the challenges and opportunities it presents. 

Our renewable energy team is made up of industry specialists, renewable energy consultants and other experts who offer maximum insight and value throughout the project lifecycle of your renewables business. 

If you would like to discuss the impact for your renewables business, please contact Sheena McGuinness.