UK’s Industrial Decarbonisation Strategy: one step closer to net zero?

On the 17 March 2021, the UK’s Department for Business, Energy and Industrial Strategy (BEIS) published a comprehensive 175 page decarbonisation strategy placing the industrial sector at the core of the UK’s ambition to reach net-zero carbon emissions by 2050.

The strategy, which BEIS describes as the “world’s first” to set a specific vision for a low-carbon industrial sector, builds on the Government’s Ten Point Plan released in November 2020 and builds on previous Government announcements, funding commitments, and decarbonisation policy statements.

Carbon capture utilisation and storage (CCUS) technology, and in particular carbon capture clusters, are a key focus of the strategy, with the Government reiterating the commitment it made in point 8 of the Ten Point Plan to have four low carbon clusters by 2030. Low carbon hydrogen also features as a key aspect of the strategy, in line with the second point of the Ten Point Plan.

The funds supporting the implementation of the strategy are also aligned with previous Government commitments, and include, among others:

• £1 billion to be invested from 2021-2026 as part of the Government’s Net Zero Innovation Portfolio;
• £170 million coming from the Industrial Decarbonisation Challenge to be invested between 2019-2024;
• a total of £1 billion from 2021-2030 through the CCUS Infrastructure Fund; and
• £315 million to be invested through the Industrial Energy Transformation Fund from 2020 to at least 2024.

The measures envisaged by the Government to achieve net-zero have for the most part also been introduced previously, a key example being the Government’s plan to develop an industrial carbon capture contract based on the contracts for difference (CfD) model, which was already alluded to in the Government’s response to the consultation on potential business models for CCUS published in August 2020.

The strategy is divided in three sections each comprising multiple chapters. First, it sets out the measures which will be put in place to make decarbonisation attractive to both investors and consumers. The second part of the strategy is devoted to the development of low carbon infrastructure, the support of the cluster-based system, and investment in low carbon technology. The strategy’s last part lays out the plan for achieving net-zero in a global market while also continuing to promote investment in the UK labour force especially in deprived regions.

Part 1: The Case for Decarbonisation

The first tranche of the strategy proposes measures that will get investors and consumers to choose low carbon. To gain investors’ support, the Government’s proposals mainly rest on three pillars:

• sending clear market signals through an effective carbon-pricing mechanism;
• rolling out funding mechanisms to support CCUS and low hydrogen infrastructure; and
• establishing policy reforms to ensure uptake of fuel switching and mitigating carbon leakage.

The Government’s commitment to efficient carbon pricing will largely be addressed via the UK Emissions Trading System (UK ETS) which was established in January 2021, and which will be subject to further review in 2021. This review will include consulting on a net-zero consistent emissions cap, reviewing the long-term role of free allowances, exploring the expansion of the scheme to cover more sectors, and considering the case for a supply adjustment mechanism. Further, the Government committed by January 2024 to aligning the cap on allowances under the scheme to the UK’s net-zero ambition. For businesses falling outside the scope of the UK ETS, the Government expects to drive energy efficiency improvements through the Climate Change Levy and the Climate Change Agreements scheme, which has been extended by two years.

The Government’s plan to foster investment in CCUS and low hydrogen will also be driven by significant funding initiatives, which include, as mentioned above, the £1 billion commitment to the CCUS Infrastructure Fund, and the £240 million Net Zero Hydrogen Fund to provide capital co-investment for early low carbon hydrogen production projects. The Government also plans to finalise the carbon capture business model based on the CfD model by 2021, and to start implementation by 2022.

Finally, the Government envisages policy reforms in 2021 to ensure an uptake in fuel switching from fossil fuels to low carbon alternatives including hydrogen, electricity and biomass, and expects the publication of a Hydrogen Strategy in 2021 and of a Bioenergy Strategy in 2022. In relation to mitigating carbon leakage, while the current approach rests largely on issuing free allowances under the UK ETS, the long-term strategy will centre on a more holistic range of policies focusing on climate diplomacy, import regulation, and boosting the productivity of UK industry.

The strategy does not examine in detail the question of the EU Carbon Border Adjustment Mechanism (CBAM), stating only that the Government will work with various stakeholders to understand how the CBAM will affect UK industries.

As regards getting consumers to choose low carbon, the Government plans to launch various calls for evidence to develop demand-side policies as well as new product standards to be introduced by 2025. Other policies include new product labelling systems for intermediary industrial products to be implemented by the mid-2020s, and increased resource efficiency for future public procurement projects, as was implemented in the Thames Tideway Tunnel currently under construction.

Part 2: Transforming Industrial Processes

The organisation of industry into clusters and improving industrial efficiency overall are the key focus points of the Government in achieving net-zero emissions by 2050.

As mentioned above, the Government has announced aims to achieve 4 low carbon clusters by 2030 and the first net-zero cluster by 2040. Whether the future endpoint will be a “national networks” or a “cluster networks” scenario, Government investment will be focused on the clusters rather than dispersed industry. Government initiatives involve demonstrating decarbonisation technology and private investment from the clusters outwards. Specific measures include:

• An additional £40 million to be placed into the Industrial Decarbonisation Challenge Fund which supports deployment, cluster plans and research. This month the fund awarded £171 million in funding across nine projects spanning various clusters including three offshore CO₂ storage sites;
• The focusing of the CCUS Infrastructure Fund and Net Zero Hydrogen Fund to cluster networks; and
• Funding mechanisms for CCUS projects will be published later this year and initial business models for low-carbon hydrogen in 2022.

Efficiency is another key method in achieving carbon neutrality by 2050 and measures under this category may account for 13 MtCO₂ of emissions reductions by 2050. Efficiency is especially important for sites outside the clusters or sites with lower emissions where installing hydrogen and CCUS technology would not be economically practicable.

• An obstacle to achieving goals of energy efficiency is planning bottlenecks for decarbonisation infrastructure and the Government is therefore continuing to support the Infrastructure Delivery Taskforce (Project Speed) to determine how efficiency of the planning system can be improved to deploy low carbon infrastructure in the clusters between 2021-2022.
• £315 million of funding will be made available to the Industrial Energy Technology Fund (IETF) by 2024 which will enter its second phase later this year. The IETF focuses on deploying technologies that improve the energy efficiency of the industrial process and providing feasibility or engineering studies to stakeholders.
• £66 million of funding will be made available to the Transforming Foundation Industries Challenge this year. The “Foundation Industries” account for 75% of the materials produced in the UK economy and 10% of total emissions. This money will be invested in projects on a cross-sector basis to reduce waste and improve efficiency as well as the competitiveness of the sector’s companies and supply chains.

Part 3: Maximising the UK’s Potential Nationally and Internationally

With a shift toward renewable energy and carbon pricing there will inevitably be an increase in costs for UK industry especially in the near term. This therefore creates a risk of carbon leakage across international markets as well as competition from high carbon foreign industry.

• Currently the main policy instrument to prevent carbon leakage and unfair competition is the allocation of free allowances under the UK ETS as outlined further above.
• There is also a policy for financial relief targeted at Energy Intensive Industries to set off the risk of losing investment in the UK because of the knock-on effects of rising electricity prices. This would involve £470 million a year, being a mixture of Government spending and bill discounts.
• The deployment of UK Export Finance’s £2 billion Clean Growth Direct Lending Facility to clean growth projects internationally to encourage foreign decarbonisation as well as creating export opportunities for the UK supply chain.

Decarbonisation of industry will also be used by the Government as an opportunity to invest in the more deprived regions of the UK and upskill the labour force in line with the goal of 2 million green jobs to be created by 2030 as outlined in the Ten Point Plan:

• The clusters contain some of the more deprived areas around the UK such as in the North East clusters at Humber and Teesside and therefore investment will create jobs and increase incomes.
• There will be a skills transition for the new jobs and the Green Jobs Taskforce will look into these opportunities. The Institute for Apprenticeships and Technical Education also set up a Green Apprenticeship Advisory Panel last year.
• Investment in the UK is also promoted by the new Office for Investment and the announcement of the “Investment Champions” across the Midlands Engine and Northern Powerhouse.

Next Steps

We continue to review the numerous decarbonisation policy statements and will continue to update this blog, and our HSF Energy Notes blog, as they come forth. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.