UK too reliant on imported energy

Despite the United Kingdom’s (UK) favourable geography for many energy sources, it is heavily reliant on overseas energy supplies to meet growing domestic demand. This reliance increases the UK general public’s vulnerability to fluctuations in pricing and availability of supply. 

In part, Great British Energy (GB Energy) sets the objective of increasing energy security by investing in UK-based clean power generation to give the UK energy independence, reducing reliance on importing fossil fuels from other countries. How £8.3bn will be funded remains opaque, but it is at least partially drawn from an increased windfall tax on oil and gas companies. 

The UK is a large net importer of energy, having imported 33,000 GWh of electricity in 2023, compared to exports of just 9,000 GWh.

At the end of 2023, a new 1.4 GW interconnector between Denmark and the UK became operational for the first time. The XLinks project, a privately-funded infrastructure project, intends to import vast quantities of solar-generated electricity from Morocco via subsea cables, with transmission expected within a decade. In 2021, the Institute for Government estimated that achieving net zero in the UK by 2050 would cost £321bn. 

The UK government’s strategy is to turbocharge private sector investment. While GB Energy’s funding is modest, there is currently a lack of cohesive planning. Public and private sectors measure returns on capital differently, which may make partnerships difficult. With so little current information on what GB Energy’s KPIs will be, it is unclear how GB Energy will be able to work with the private sector and whether it will create an environment that unlocks capital. 

Impact of windfall tax on energy investment

The increase in windfall tax on oil and gas companies is expected to reduce investment into UK natural resources. One argument for increasing the windfall tax is that it will accelerate the path to net zero, but with the UK decades away from reaching this goal, the adverse impacts of deterring investment in UK oil and gas cannot be ignored. Without sufficient inbound investment into UK-based energy, like domestic natural resources, the UK will become increasingly reliant on securing supply from overseas. This will significantly reduce our energy security and stretch the available funding required to identify alternative energy sources. 

Sheena McGuinness, Co-Head of Energy and Natural Resources, comments:

“GB Energy faces several significant challenges if it is to meet its stated objectives. The government will face some difficult decisions with respect to the nation’s energy policy. For example, it may be forced to choose between the promised reductions in energy bills of £300 per year and meeting their commitment of 100% clean energy by 2030, as the two goals may not be mutually achievable. There is a question mark as to whether government funds would be better spent on unlocking barriers that slow down grid connection for renewables projects. While good progress has been made with removing the de facto ban on onshore wind planning, expediting the planning processes and improving grid flexibility through energy storage would also be a huge step forward in meeting the UK’s legally binding net zero targets.”

Grant Morrison, Head of Oil and Gas, comments:

“There is significant concern across the oil and gas sector that current fiscal policy will lead to a black hole” in the UK’s ability to meet its energy requirements, as well as an adverse impact on jobs and on the supply of many everyday products that are derived from petrochemicals. Furthermore, other nations appear to be taking steps to secure future oil and gas reserves and production to meet energy requirements and provide a bridge for energy transition. To many, this appears to be a logical step and contrary to the direction of travel in the UK.”

Challenges and opportunities for GB Energy

On a more practical note, simply unlocking sufficient capital investment for GB Energy is no simple solution. There is little clarity on whether GB Energy plans to acquire existing renewables assets or build new ones. Acquiring existing renewables is unlikely to have any noticeable impact on the UK’s energy production, supply or security. In contrast, building new ones, despite having a longer-term impact on domestic energy production, is expensive and will require far more than the allocated £8.3bn to achieve. It is imperative to secure private investment. 

As it stands, there remains few genuine incentives to invest in green technology and related infrastructure in the UK. Tax incentives for investment into infrastructure, such as onshore and offshore wind, are critical. Despite facing similar challenges to Europe and other parts of the world, the UK is currently lagging behind other jurisdictions. The absence of an investment-friendly environment means the UK is at risk of becoming a less attractive option for investment, with potential funding being directed elsewhere. 

GB Energy’s July announcement covering its partnership with The Crown Estate is a step in the right direction, but much more will be needed to adequately fund the energy transition and secure the UK’s energy independence for good.

How we can help with your energy business

We have extensive experience in the energy and natural resources industry, working with clients in various sectors, including oil and gas, renewables and cleantech, and mining and metals. We are committed to supporting businesses in the industry.

If you would like to discuss the impact for your energy and natural resources business, please contact David Hough, Sheena McGuinness, Grant Morrison or Graham Ricketts.