The UK is acknowledged as a renewables leader. Heavy transmission investment will help it enhance energy security alongside clean power. But when it comes to the third point of the energy trilemma, affordability, there’s a problem: the country’s electricity demand is just too low. Chris Stark, the UK government’s Head of Mission Control for Clean Power 2030, sets out its strategy in conversation at RBC Capital Markets’ Energy Transition Conference.

Speaker 1

Welcome to Powering Sustainable Ideas, a podcast series from RBC Capital Markets, where we speak with the leaders and companies powering the sustainable future.

The UK has been among the global leaders in cleaning up its energy system. But success in renewables has brought its own challenges, not least in energy affordability.

In today's episode, you'll hear highlights from a session at RBC's Energy Transition Conference in London from this past June.

Now, let’s dive into the conversation.

Dominic Hudson

Chris Stark

Dominic Hudson

Perhaps you can just talk to us about what the mission is, macro scale, and then the risks to the mission would be helpful.

Chris Stark

Dominic Hudson

So, Chris, affordability is something that's high on people's mind. And you've, I think, been on the record talking about delivering cheaper power to the bill payer. Just talk to the tension of this capex program, the speed of delivery, demands of data centers, AI, and the tension with the consumer.

Chris Stark

There was a period when we thought we'd solved the trilemma, so you could achieve energy security, lower costs, and decarbonization all at once. I still think it is possible to push on all three fronts, but the idea that there is a sort of easy answer to that is very much not the case. So we are definitely in a phase now where we are investing in a system that is probably slightly too big for the demand base, and we are seeing now lots of criticism coming from all sorts, but particularly the political criticism that comes with it, that is what is driving consumer costs to be too high. The reality of that is the consumer costs too high for all sorts of reasons. There's a legacy reason, which is the principal one, which is that we have chosen in this country to put the levies and policy costs that have driven the transition to date on the electricity bill. Now we've started the process of moving those costs off the electricity bill onto the exchequer, but these are big numbers, and in a tough fiscal environment, it's not easy just to lift them and shift them. So we have to make sure that we are honest about this. It's not easy to cut bills, but there are some routes through this, and at the core of it is still the case that you can build low-cost energy systems around renewables. The conundrum here is that we've done the first part only, which is to grow the generation and the storage in the grid. What we haven't done successfully in this country, particularly, it's true in most of Europe as well, is we haven't tackled the demand side, so electricity demand is too low. In that fixed cost system, what you want is more demand. The more demand we have for electricity, the more we spread those fixed costs over that demand base, and the quicker the electricity bill will fall. So I think the cleanest route at the moment for that is EVs.

If you saw the EV transition really take hold, got about 3 million vehicles or so on British roads at the moment. If you could get that to 30 million vehicles and alongside it, perhaps, see a fairly kind of unambitious roll out of things like heat pumps that alone might cut a quarter off the unit cost of electricity. If you want to cut bills quickly, doing so by moving costs to the exchequer is one way you can do it, but it's a very expensive thing to do. What you can do with that extra demand, that's our tech-enabled demand, is also have what we call a flexible power system. So the more flex we have on the system, particularly with things like electric vehicles, because you can flex when you charge them, the more you grow the demand overall, and the more that you can shift the demand to when it is best to consume, and those two things together, more demand, more flexibility, is, I think, the quickest route to lower bills, and the flex bit, in particular, does open the opportunity, at least for consumers that want it, to cut their energy bill more quickly.

The other one is data centers. It's not just raw demand, although there's a lot of that, you can potentially match that to when the supply is available. Having something like that well located on that system in those parts of the country where there are spare electrons that would otherwise be constrained off because the grid is not ready. Actually, that's very helpful too. So those two things, EVs and data centers, both things that we want to see in this country that will help accelerate that story. But beyond that, the other thing we can do is pick certain sectors and go hard at making it much cheaper for them. We're trying to do that with heavy industry at least as well. So we've done that largely through rebates, so in particular taking grid costs away from the heaviest energy users, as well as a set of other costs that we see in the levies I spoke about. Sadly, most of that work that we've done to implement those rebates hasn't yet fully manifested, but by the end of this year into next, you'll see that for a small number of large heavy users of energy, it will be much cheaper in this country to plug in. But I want to be realistic with you, these things, these things are not easy for us. The legacy that we inherited is a set of costs in that system that are still, as we speak, being recovered, and we are super cautious about the price of new generation, in particular, that we're signing up now.

Dominic Hudson

So, Chris, we're pretty much at time, but I've got a really burning question. You've got quite a mission ahead of you. Got a government and a degree of flux, the Prime Minister is in the process of changing, and we've got long-term investors, you know, we're looking at 30-year-plus investments. What's the risk to policy change and the risk to the mission, and potentially people making long-term investments when they potentially are going to change policy.

Chris Stark

Two things I'll say about that. Firstly, I don't expect with the change of Prime Minister that there will be a change of agenda when it comes to the things that we've spoken about, and the reason for that is because of the trilemma, like the things that we are doing also address energy security and can address the consumer issues if they're framed in the right way. So I think that the arguments have won on that now, and also I think in the first two years we've largely sort of built up the momentum that we wanted to see, so we will see now instead of a challenge of commissioning more and more and more, it's about making sure that what we've commissioned gets delivered. So I think this agenda is here to stay with the present politicians. And then when it comes to future changes of government, of course, that's harder for me to talk about, but what I will say is that what we've done in the first two years on the power system is largely move a whole set projects onto long-term fixed-revenue contracts, where we, the government, are not the counter party. So, the CFD is designed in that way to have another organization, the LCCC, which is independent of government, as the counterparty. It's actually extremely difficult to unpick those kinds of contract, and that is by design, because we want to give as much clarity and certainty as we can to investors about the safety of the fixed income that comes from those contracts. I think we've done as much as we possibly can to try and build that investor certainty that we want, and the reason that is important, final point for me is that this energy transition overall is a capital-intensive one, and we're moving from a world where it was once the price of commodities that determined the cost for people and consumers in this country. In the future, it will, because it's so capital intensive, it's the cost of finance that will determine the cost overall. So, you know, we need to be as clear as you can about the investment environment, and here's something you don't often hear government say: leave it alone, and let you get on with it.

Dominic Hudson

All right, look, that's a really great place for us to finish. I appreciate it's been fairly punchy session. And thank you so much.

Speaker 1