TheUK’senergytransitioninaglobalcontextPartofTheCleanGrowthGap–aseriesofreportsandeconomicanalysisfromEnergyUK,supportedbyOxfordEconomicsFundingtheFutureFundingtheFuture:TheUK’senergytransitioninaglobalcontext2ExecutiveSummary:TheUK’sEnergyTransitioninaGlobalContextNetZeropresentsknottychallengesofglobalcollaborationandcompetition.Thisisespeciallytrueinourworldofgloballyconnectedfinances,whereinvestmentflowsacrossborderstowhereitcanbeputtobestuse.Theseflowsareshapedbythedecisionsofgovernmentsaroundtheworld,andifwearetounderstandhowtoattractinvestmenttotheUK,wemustfirstappreciatehowtheUKcomparestoothercountries.“FundingtheFuture”-thesecondinEnergyUK’s“TheCleanGrowthGap”series-setsoutwhatgovernmentsaroundtheworldhavedonetoattractinvestmentintheircleaneconomiesandwhatthismeansfortheUKasitconsidersitsnextstepsintheenergytransition.InvestmentiskeytotheenergytransitionInvestmentisthewaytheworldwillfundthetransitiontoaNetZeroeconomyandinturnshapeallourfutures.TheUK’senergysecurity,futureprosperityandthepotentialtoachieveourclimategoalsareallreliantontheabilitytoattractinvestment.Aroundtheworld,thisinvestmentmostlycomesfromtheprivatesector(60%in2022accordingtoTheInternationalEnergyAgency(IEA)1),butgovernmentactionandstrongpolicysupportisvitaltounlockingit.TheworldisinvestingChinadominatesglobalactivity,boastingnearlyhalfoftheworld’scleantechnologyinvestmentsin2022.Its$546billionspendinlowcarbontechnologieswasoverthreetimesthespendoftheEuropeanUnionwhichtotalled$180billionin2022(Fig.1).TheUnitedStatescameinthird,with$141billioninvested.Governmentshavemadesignificant,longtermfinancialcommitmentsTherehasbeenarecentflurryinnew,largescaleinvestmentincentiveregimes.The$369billionInflationReductionActintheUnitedStatesandtheEuropeanUnion’sREPowerEUinitiative(€270billion)andRecoveryandResilienceFund(€250billion)arebyfarthelargest.Multi-billiondollarincentivesinotherkeymarketsincludingJapan,ChinaandIndiamakethecompetitionforcleaninvestmentsevenmoreintense.Chinadominatesglobalactivity,boastingnearlyhalfoftheworld’scleantechnologyinvestmentsin2022.Therehasbeenarecentflurryinnew,largescaleinvestmentincentiveregimes.3FundingtheFuture:TheUK’senergytransitioninaglobalcontextThisisalreadyhavinganimpactEventhoughtheseschemesareverynew,signsofasurgeinactivityareemerging.BloombergNEFhasfoundthatsincetheintroductionoftheIRA,automotiveandbatterysectorshaveannounced20timesmorefundsfornewfactoriesthanin20212.EquitypricedatasuggeststhatmarketsviewedthepassageoftheIRAasbeingsomethingthatwouldnotablyboostUScleantechnologycompanies’futureprofits.TheseshiftshavemajorimplicationsfortheUKTheUKhassignificantstrengthsasitfacesthechallengesofdecarbonisation.Theseincludeourworld-leadinguniversitiesandfinancialservices,andourearlysuccessinoffshorewindandestablishedindustries(suchasinthedigitalandoilandgassectors)thatcansupportcleangrowth.However,theUKranks30thoutof38OECDnationsontheaverageproportionofcapitalinvestmentsbusinessesareabletorecover3andisyettoseenewinvestmentincentiveregimesthatcanmeetthescaleofglobalcompetition.TherestofTheCleanGrowthGapserieswillexploreinmoredetailtheimportanceofcleaninvestmentfortheUKandhowtheGovernmentcantakeactiontoaddressit.Fig.1:Energytransitioninvestment,2022($,billion)India17Germany55US141Japan23China546EuropeanUnion180Italy16France29UK28Source:BloombergNEF;OxfordEconomicsSincethepassageoftheIRA,automotiveandbatterysectorshaveannounced20timesmorefundsfornewfactoriesthanin2021.2TheUKisyettoseenewinvestmentincentiveregimesthatcanmeetthescaleofglobalcompetition.FundingtheFuture:TheUK’senergytransitioninaglobalcontext4Fig.2:TechnologieseligibleforInvestmentandProductionTaxCreditsEligibleforITCorPTCEligibleforITCEligibleforPTCTechnologySpecificTaxCredits•Solar•Wind•Tidal•Municipalsolidwaste•Geothermal•Energystoragetechnologies•Microgridcontrollers•Fuelcells•Geothermal(heatpumpanddirectuse)•Combinedheat&power•Microturbines•Interconnectioncosts•Biomass•Landfillgas•Hydroelectric•Marineandhydrokinetic•CleanHydrogen(intensityoflessthan0.45kgCO2e/kgH2)•NuclearHowinvestmentincentiveregimesvaryaroundtheworldGovernmentsinmajoreconomies(US,EU,China,JapanandIndia)areundertakingsignificantprogrammestoattractprivatesectorinvestmentintotheircleantechnologysectors.ItisvitaltounderstandwhatisgoingonintheworldaroundustoappreciatehowtheUKcompares.UnitedStates:AmericaleadingthewayTheUSInflationReductionAct(IRA)wasintroducedinAugust2022,andmostprovisionsbecameeffectivefrom1stJanuary2023.4TheIRAhasatotalbudgetof$369billionfortheperiod2023to2031withthemajorityofthefunding($216billion)intheformoftaxcreditsforcorporations.Thesearedesignedtocatalyseprivateinvestmentincleantechnology,transport,andmanufacturing.However,thesefiguresareonlybudgetsandactualsumsspentmaybelargerorsmallerdependingontheextenttowhichvarioustaxcreditsareused.TheIRAusesarangeofincentivestoencourageprivatesectorinvestment,includingloansandgrants,aswellastaxcredits.CorporateTaxCreditsCorporateTaxCreditsmakeupthemajority(59%)oftotalIRAfunding.InvestmentTaxCredits(ITC)andProductionTaxCredits(PTC)allowbusinessestodeductapercentageofthecostoflow-carbonenergysystemsfromtheirfederaltaxbill.5RenewableenergyprojectsareeligibleforeithertheITCorPTC,butnotboth(Fig.2).Variouslabourrequirementsneedtobemetinordertoqualifyfortaxcreditsandbonuscreditsofanadditional10%areavailablefori)projectsthatmeetdomesticcontentrequirementsandii)arelocatedindeprivedcommunitiesorbrownfieldsites.TheIRAhasatotalbudgetof$369billionfortheperiod2023to2031withthemajorityofthefunding($216billion)intheformoftaxcreditsforcorporations.5FundingtheFuture:TheUK’senergytransitioninaglobalcontextInvestmentTaxCredit:30%taxcreditrelief(from2025therateis6%forprojectsover1MW).ProductionTaxCredit:6Renewabletechnologiesthatbeganafter2021andbefore2025receivebetween1.3and2.6centsperkWhofzerocarbonelectricityproduced.Thisamountmaybeadjustedannuallyforinflation.After2025,projectswillhavetomeetwageandapprenticeshiprequirementstoreceivethiscreditorwillotherwisereceiveacreditof0.5centsperkWh.CleanHydrogenProductionTaxCredit:Ataxcreditofupto$3perkgofhydrogenproducedisavailabletoprojectswithalifecyclegreenhousegasemissionsintensityoflessthan0.45CO2kilogramsperkilogramofhydrogen(kgCO2e/kgH2).Thecreditwillbeadjustedforinflation.Prevailingwageandapprenticeshiprequirementsneedtobemetinordertoqualifyforthefullcredit.NuclearProductionTaxCredit:Upto1.5centsperkWhforpowerproducedataqualifyingnuclearfacility.Thecreditwillbeadjustedforinflation.Prevailingwagerequirementsneedtobemetinordertoqualifyforthefullcredit.GrantsGrantsmakeup21%oftotalIRAspending(Fig.3).Onethird($27billion)ofgrantswillgotowardsthe‘GreenhouseGasReductionFund’.Thiswillbeawardedonacompetitivebasistoindividualcleantechnologyprojectsaswellasprojectsthatreducegreenhousegasemissions.Therewillbeanemphasisonprojectsthatbenefitlow-incomeanddisadvantagedcommunities.Therestofthegrantmoney($55billion)isbeingallocatedbythefederalgovernmenttoprojectsthatwillbecrucialtoenablingNetZero,includinggrantsforthedomesticproductionofelectricvehicles(EVs),zero-emissionhomerenovationandpollutionreductiongrantstoairpollutionagenciesandlocalgovernments.LoansLoansmakeup$40billion(11%)oftotalIRAspending.Technologieseligiblefortheloansincluderenewableenergyprojects,carboncapture,nuclearenergy,criticalmineralsprocessing,manufacturing,andrecycling.Fig.3:EnergyandclimatechangefundingintheInflationReductionActSource:McKinsey;OxfordEconomics3%10%11%21%55%CorporateTaxIncentivesGrantsConsumerTaxIncentivesLoansFederalOperationsFundingtheFuture:TheUK’senergytransitioninaglobalcontext6EuropeanUnion:achangingtunefromBrusselsGreenDealIndustrialPlanLargelyinresponsetotheUSIRA,inFebruary2023theEuropeanCommissionunveileda‘GreenDealIndustrialPlan’.Thisisbasedonfourpillars:apredictableregulatoryenvironment,enhancingskills,opentradeandaccesstofunding.Thefundingpredominatelyconsistsofpreviouslyannouncedmeasures,e.g.,€250billionoftheRecoveryandResilienceFundforthegreentransitionfund,and€270billionthroughREPowerEU(detailedbelow).7Moreover,therearealsofundsavailablethroughotherprogrammessuchasHorizonEurope,InvestEUortheInnovationFund.AlthoughthistotalfundingexceedsthatoftheUSIRA’s,theseprogramsandfundshaveawiderscopethanthegreentransitionmakingithardtocomparethegenerosityofthetworegimes.ComparedtotheUSIRAhowever,alowerleveloffundswillbedirectedtowardsincentivisingprivateinvestmentinlowcarbonenergy.RemovingRedTapeTheNet-ZeroIndustryActisaninitiativestemmingfromtheGreenDealIndustrialPlanwhichaimstoscaleupthemanufacturingofcleantechnologies.Acentralpillarwithinthisisthesimplificationoftheadministrativeandpermit-grantingprocessesforinvestmentinNetZerotechnologies.Permitsmustbeassessedwithin12monthsforprojectswithacapacityofunder1GW,andwithin18monthsforthoseabove.Prioritywillbegivento‘strategicprojects’,i.e.investments,whichcouldboostEUsupplychaincompetitivenessorreduceover-dependenceonsinglecountriesforimports.RelaxationofStateAidRulesTheonlynewmeasureintheGreenIndustrialPlanregardingfundingisthe‘TemporaryCrisisandTransitionFramework’(TCTF)whichrelaxesStateaid8rulesuntilend-2025.However,fundingforthismustcomefromindividualEUmemberstates,ratherthantheEUitself.WiththeTCTF,EUmemberstatesmaygrantaidforinvestmentsrelatingtotheNetZeroeconomy(e.g.batteries,solarpanels,windturbines,heatpumps,electrolysers,CCUS,keycomponentsandcriticalrawmaterialstoproducesuchequipment).Thefollowingaidisnowallowed:•“Anti-relocation”aidworthupto15%ofthefirm’sinvestmentcosts,withacapof€150million.9•Incertaininstances,“Matching”aidonanindividualbasisto“match”asubsidyavailableforanequivalentinvestmentoutsidetheEuropeanEconomicArea(EEA).10ToqualifysomeinvestmentmustbelocatedinanEEAassistedarea(i.e.,aneconomicallydeprivedarea).Forbothtypesofaid,theinvestmentmustlastatleastfiveyears(threeyearsifanSME)andtheaidmustbegrantedbytheendof2025.CompaniesmustdemonstratethattheinvestmentwouldnottakeplaceintheEEAwithouttheaid.11REPowerEULaunchedinMay2022,theREPowerEUPlanisaimedatrapidlydecreasingtheEuropeanUnion’sdependencyonRussianfossilfuelsfollowingtheinvasionofUkraine.ThePlanwillinvolveaninvestmentofapproximately€300billion.Themajorityofthisfunding(95%)willgointospeedingupandscalingupthecleantechnologytransition.12Tosupportthis,€225billioninloanshavebeenmadeavailablethroughthepreviouslyannouncedRecoveryandResilienceFacility(RRF).Furthermore,additionalgrantsof€72billionwillbemadeavailabletofinanceinvestmentsandreforms,someofwhichwillcomefromtheInnovationFundandfrontloadingEmissionTradingScheme(ETS)allowances.China:acentrallyplannedtransitionIn2022,Chinaspent$546billiononcleantechnologyinvestment,thelargestexpenditureintheworld.InJune2023,Chinaunveileda$72.3billionpackageoftaxbreaksoverfouryearsforEVsandothergreencars.13Thepurchasetaxamountstoasmuchas$4,170pervehicle.7FundingtheFuture:TheUK’senergytransitioninaglobalcontextJointventuresbetweenpublicandprivateinvestments(oftenoccurringasaresultgovernmentmandates)havealsohelpedtoincreaseinvestment.Forexample,inMay2020,ChinaEnergysignedacooperationagreementwithDonghuDevelopmentZoneandWuhanITRIofGeo-resourcesandEnvironmentCo.toestablishahydrogenindustryfundinDonghuwithabudgetof$146millionforthefirstphase.14TheChinesegovernmenthasannouncedthatitaimstohave1millionhydrogen-poweredcarsonitsroadsby2030,servedby1,000refuellingstations.15ThecityofBeijingplanstoofferasubsidyofasmuchas$741,405foreachnewhydrogenpowerchargingstationwhichmeetscertainrequirements.Ithasalsopromisedsubsidiestofacilitiesthatgenerateandstorehydrogenpower.16China’scentralisedmodelofgovernmentalsomeansthatanytargetsthatthecountrysetsarelikelytobeaparticularlypowerfulsignalforinvestors.Thelatest5-yearplan(2021-2025)indicatedthatthestatewillbeacceleratingthedevelopmentofnon-fossilfuelenergyandincreasingitsproportionoftotalenergyconsumptiontoabout20%.17Japan:catchingupatpaceIn2021,Japanannouncedits$18billionten-yearGreenInnovationFund.Overthenext10years,thegovernmentaimstorealise$1trillioninpublic-privateinvestmenttofinanceJapan’sgreentransition.18Inordertorealisetheselevelsofinvestmentthegovernmentplanstoraise$144billionthroughissuingsovereignbonds.Theinitialplanforthefundsraisedfromthebondsistotargettechnologiesthatarestillindevelopmentsuchasammonia,hydrogen,CCS/CCUSetc.whereprivatesectorengagementisyettobesubstantial.In2021,Japanesetaxreformintroducedtaxincentivesforproductsthatacceleratedecarbonisation.Projectswheretheinvestmentdoesnotexceed$500millionandthatpassothereligibilityrequirementscanreceivea5%to10%taxcreditor50%specialdepreciation.19India:anewcompetitorIn2023,theIndiangovernmentpromisedtomake$4.3billionininvestmentstowardsthecountry’senergytransition.20Initiativesinclude:•$1billionofcentralgovernmentmoneyinelectricitytransmissionlineswhichcantransport13GWofsolarenergyfromtheHimalayastomorepopulatedregions.•TheNationalGreenHydrogenMissionwhichhasatotalfinancialoutlayof$2.4billion.Electrolysermanufacturingincentiveshavebeenallocated$540millionwhilstgreenhydrogenproductionincentiveshavebeenallocated$1.6billion.21Theprogrammesarescheduledtobeimplementedbetweenfinancialyear(FY)2025-26andFY2029-30.•$455millioninviabilitygapfundingforbatterystoragecompanies.Thisschemeisdesignedtocoverrisksthatprojectswon’tturnouttobeeconomicallyviable.22Howdothesedifferentschemescompare?TaxcreditssuchasthoseprovidedbytheUSIRAtendtobequickertodisperseandarelesscumbersomeforfirmsthanasubsidy-basedschemesuchastheEUprovides.Theadministrativeburdenassociatedwithsubsidiesmeansthatlarge,establishedcompaniesaremorelikelytoapply,ratherthansmallerstart-upcompanieswhichareoftenmoreinnovative.23Moreover,comparedtoEUsubsidies(andIndiaandJapan’sincentives),USIRAfundingislesstechnologicallyselectivewhichcreatesmoreroomfornewtechnologytodevelop.However,manyoftheincentivesprovidedbytheUSIRAareconditionalonlocalcontentrequirements.Forexample,allsteelthatisusedinastructuralfunctionmustbemined,producedormanufacturedintheUS.Thiscanpushupcostsofprojectsandcanunderminetheprice-reducingeffectsofthesubsidy.FundingtheFuture:TheUK’senergytransitioninaglobalcontext8EarlyindicatorsshowthatincentivesarehavinganimpactManycountriesaroundtheworldhavelegallybindingNetZerotargetsandknowthatincreasingtheircleantechnologysupplieswillbecrucialtomeetingthese.Mostwillwanttoattractprivatesectorfundingtopayforthecostoftheinvestment.Theprivatesectorwillisthere,companiesarelookingtoinvestincleantechnologyprojectsastheyknowreturnswillbedeliveredinthelong-term.So,itbecomesamatterofwherethesecompanieschoosetoinvest.Ifgovernmentsaresuccessfulinattractingthisprivateinvestment,thiswillincreasetherateatwhichtheycandeveloptheirowngreenindustriesandachieveNetZero.Totheextentthattheycausecapitaltoleaveotherjurisdictions,theseincentiveswillhinderthedevelopmentofothercountries’(suchastheUK’s)cleantechnologyindustries.Furthermore,bydecreasingthecostofproducingcleantechnologies,incentivescanfurtherunderminethedevelopmentofothercountriescleantechnologyindustries.Therefore,itisimportanttoinvestigatethepreliminaryevidenceonwhethertheschemesaresuccessfulinattractingprivatesectorinvestment.OuranalysisfocussesontheimpactoftheIRAonboostinginvestmentincleantechnologyintheUS.Wehaveselectedthisexamplebecauseitwasoneofthefirst,andbecauseofitssize.ItshouldbestressedthatgiventheActonlycameintooperationinJanuary,itistooearlytohaveadefinitiveanswerabouttheimpactoftheIRA-howeverthefollowingearlyindicatorssuggestthatitisassociatedwithasignificantexpansionofcleaninvestmentintheUS.InAprilofthisyear,BloombergNEFannouncedthatsincethepassageoftheIRA,automotiveandbatterysectorshaveannounced$52billioninplannednewfactories(Fig.4).Itestimatesthisismorethan20timestheamountannouncedin2021.24Thefollowingthreedatasourceshavebeenselectedbecauseoftheirtimeliness:1.ThefirstisakeywordsearchofglobalmediamentionsofnewlowcarbontechnologysitesintheUS.(Technologiesincludesolar,batteries,EVs,nuclearandoffshoreandonshorewind.)Thesehavenearlydoubledsincetheacthascomeintopresence.25Averagemonthlymediamentionsfornewcleantechnologysites/plantsintheU.Swere4,400betweenJanuary2020andJuly2022;monthlymentionsroseto9,700betweenAugust2022andJune2023.2.Thesecondismonthlydataonmanufacturers’shipmentsofpowertransmissionequipmentandbatteries(Fig.5,onpage9).Theuptickinshipments,particularlyevidentinbatteries,maybeindicativeoftheUSIRAfacilitatingaboostinproductionthroughanincreaseininvestment.However,it’snotpossibletodrawstrongconclusionshereasotherfactorssuchasthepostpandemicrecoveryandtheeasingofsupplychainbottleneckscouldalsobeatplay.Fig.4:AnnouncedUSelectricvehicleandbatterymanufacturinginvestmentssincethepassageoftheInflationReductionActOct’22Dec’22Feb’23Mar’23Source:OxfordEconomics;BloombergNEF$13bn$28bn$35bn$52bn9FundingtheFuture:TheUK’senergytransitioninaglobalcontext3.Thethirdisananalysisofshare-pricedataforcompaniesspecialisedinlowcarbontechnologiesbasedintheUS.Aswellasreflectingacompany’scurrentperformance,sharepricesalsoreflecthowprofitableinvestorsbelievethecompanywillbeinthefuture.Therefore,theyareagoodindicatoroftheimpactoftheUSIRAoninvestmentinlowcarbontechnologies.Forthepurposesofthisanalysis,cleanUStechnologycompanieslistedontheNASDAQorNewYorkStockExchangewereselected.26Figure6,below,showstheaveragedailychangeinequitypriceofthesecleantechnologyproducersonkeyannouncementdaysfortheInflationReductionAct.Forthethreekeydatesshownbelow,allthreecleantechnologiesreportedhigherdailychangesinequitypricethantheaverageoftheNASDAQandNYSEIndices.ThisfindingisconsistentwithaBrookingsanalysiswhichfoundthatontheseannouncementdatescleanenergyExchangeTradedFundshadapositiveexcessreturnrelativetotheS&P500.27Allelsebeingequal,thisevidenceindicatesthatmarketsviewedthepassageoftheIRAasbeingsomethingthatwouldsignificantlyboostcleantechnologycompany’sfutureprofits.28Fig.5:Manufacturers’shipmentsofgeneratorsandturbines,andbatteriesintheUnitedStates(IndexJanuary2015=100)Source:CensusBureau;OxfordEconomics15014013012011010090807060Turbines,generators&otherpowertransmissionequipmentBatteries152321192220181716Fig.6:Dailychangeinequityprices,UScleanenergycompaniesagainstNASDAQ/NYSEaverage2.9%1.7%3.5%1.5%4.6%4.2%3.1%3.5%3.7%3.4%4.3%Source:OxfordEconomics;BloombergNEFAverageNASDAQandNYSEAnnouncementofagreementofIRA,27thJuly2022SenatepassageofIRA,7thAugust2022HousePassageofIRA,12thAugust2022HydrogenproducersEVproducersBatteryproducers-0.1%FundingtheFuture:TheUK’senergytransitioninaglobalcontext10HowdoestheUKcompare?Todate,theUKhasenjoyedapositionofleadershipincleantechnology,thankslargelytothesupportofsuccessivegovernments.However,inanincreasinglycompetitiveglobalenvironmentforbusinessinvestmentincleantechnology,alongsideanurgentfocusonacceleratingeffortstoenableNetZero,understandingthestrengthoftheUK’scleantechnologyindustryiscrucial.Oftheworld’slargesteighteconomies,theUKcurrentlyproducesthesecondhighestshareoflowcarbonelectricityoutputbehindFrance(Fig.8).In2023,66%ofBritishelectricityoutputisforecasttobelowcarbon.TheUKhasanexpertiseinlowcarbontechnologiesthatisdifferentfromtheworld’sotherlargesteconomies(Fig.9).Relativetoothercountries,theUKhasthehighestspecialisationinbothoffshorewindandbiofuels.In2022,theUKwashometo22%oftheworld’stotalinstalledoffshorewindcapacity(Fig.9).AlthoughtheUKisstillverymuchadominantplayerinthisarea,itsglobalsharehasmorethanhalvedsince2012,whentheUKhad56%oftheworld’stotalinstalledoffshorewindcapacity(Fig.10).Thisistheresultofothercountries–notleastofallChina–rapidlyincreasingtheiroffshorecapacity,illustratingtheneedfortheUKsectortocontinuallystrivetonotbeleftbehind.Fig.7:KeystrengthsoftheUKcleanenergyindustryTransferableexpertisefromestablishedindustries:TheUK’swellestablishedoilandgassectormeansitiswellplacedtobecomealeaderincarboncaptureusageandstoragetechnologies(CCUS)andfloatingoffshorewindasthereisconsiderablepotentialfortransferofexpertisebetweenthesesectors.SubstantialexpertiseinfixedbottomoffshorewindalsocontributestotheUKbeingwellplacedtobecomeaworldleaderinfloatingoffshorewindtechnologies.Worldleadinguniversities:Driveinnovationandahighlyskilledworkforce.Offshorecapabilities:BeinganislandnationmeanstheUKhasbeenabletopositionitselfasoneoftheleadersinoffshorewind.TheUK’snaturalresourcesalsomeanitiswellplacedtobecomeaworldleaderintidaltechnologies.Financialservices:TheUK’sexpertiseinfinancialservicesmeansithaspositioneditselfasaleaderingreenfinancewithLondonrankingfirstintheGlobalGreenFinanceIndex.Digital:UKdigitalcapabilitiesmeansithaspotentialtobecomealeaderinsmartgrids.TheUKcurrentlyproducesthesecondhighestshareoflowcarbonelectricityoutputbehindFrance).In2023,66%ofBritishelectricityoutputisforecasttobelowcarbon.11FundingtheFuture:TheUK’senergytransitioninaglobalcontextFig.8:Estimatedlowcarbonelectricityoutput,shareoftotal(2023)Fig.9:Makeupofdifferentcountries’installedlowcarbonenergycapacity,2022(%)Source:OxfordEconomicsSource:OxfordEconomicsFrance92%US43%Germany54%Japan35%UK66%China35%Italy46%India27%SolarBiogas-liquid-solidsNuclearOtherHydroOnshorewindOffshorewindGermany42375365264UK24242311143France141716511China322833025111Japan54316233India372528US263216222FundingtheFuture:TheUK’senergytransitioninaglobalcontext12TheautomotivesectorisanotherareawheretheUKhasrelativestrengths,buttheseneedtobecapitalisedontomakeasuccessoutofthetransition.Oftheworld’slargesteighteconomies,theUKrankedfourthin2022forthenumberofelectricandhybridvehiclesitproducedperunitofpopulation(Fig.11).AlthoughthesetechnologiesarenotnecessarilyanobviousUKstrength,outoftheseeighteconomiestheUKistheonlyeconomytoproducemoreelectricandhybridvehiclesthantraditionalcars29(whichrelysolelyoninternalcombustionengines).GiventhattheUKhashadarelativelylowcarmanufacturingbaseinwhichtoswitchproduction,theUKhasperformedreasonablywellindevelopingitsEVandhybridmanufacturingbase.As8outof10carsmadeintheUKareexported,thisindustryisanimportantexportmarketfortheUK.30Moreover,therearesomepromisingfuturedevelopmentsinthisareafortheUK.InJuly2023,aftersecuringStateaidfromtheBritishgovernment,TataGroupannouncedthatitwillbuilda$4billionbatteryfactoryintheUKtosupplyJaguarLandRover’sEVs.31Fig.10:UKinstalledoffshorewindcapacityvsUK’sshareinworldoffshorewindcapacitySource:OxfordEconomicsSource:OxfordEconomics;LMCAutomotive14,00012,00010,0008,0006,0004,0002,0000454035302520151050706050403020100InstalledUKoffshorewindcapacity,MW(LHS)InternalcombustionvehicleElectricvehicleandhybridvehicleUK’sshareinoffshorewindcapacity,%(RHS)2012JapanFranceGermanyChinaUKUSItalyIndia2013201420152016201720182019202020212022Fig.11:Internalcombustionenginevehiclesandelectricandhybridvehicleproduction2012–2022,vehiclesper1,000population13FundingtheFuture:TheUK’senergytransitioninaglobalcontextAlthoughtheUKhasmadeagoodstartontransitioningtoaNetZeroeconomy,itrisksfallingbehindothercountriesinyearstocome.Helpedbygenerousincentiveschemes,othereconomieshavebeenincreasingtheircleantechnologycapacityatafasterratethantheUK.Oftheworld’slargesteighteconomies,theUKisforecasttohavetheslowestgrowthinlowcarbonelectricitygenerationbetweennowand2030(Fig.12).LowexpectedlevelsofinvestmentintheUKareasignificantfactorbehindthisdownbeatforecast.AlthoughtheUKhasmadeagoodstartontransitioningtoaNetZeroeconomy,itrisksfallingbehindothercountriesinyearstocome.Fig.12:Forecastsofaverageannualgrowthinlowcarbonelectricityoutput,2023–2030Source:OxfordEconomicsFranceUSGermanyJapanUKChinaItalyIndia10.6%7.2%6.4%6.0%5.2%3.2%3.1%2.9%FundingtheFuture:TheUK’senergytransitioninaglobalcontext14Whatdoesthismeanforthenextstageoftheenergytransition?Asaresultofincreasingincentivesforcleantechnologyinvestmentinotherjurisdictions,futureinvestmentinUKcleantechnologyislookingincreasinglyunderthreat.Incontrasttoambitiousincentiveschemesbeingprovidedaroundtheworld,thelevelofUKambitionlooksmuted.Forexample,theUK’staxregimemeansthatitdoesnotprovidegloballycompetitivecapitalallowancerates.Excludingtemporaryfullexpensing,itranks30thoutof38OECDnationsontheaverageproportionofcapitalinvestmentsbusinessesareabletorecover.32AlthoughtheUKhasstrengthsinmanylowcarbontechnologies,thelackofincentivesforinvestmentmeanstheUKrisksfallingbehindintheglobalracetodecarbonise.ArecentillustrationofthisisthatinJulyofthisyear,SwedishutilitycompanyVattenfallannouncedthatitwouldhaltthedevelopmentofitsBritishNorfolkBoreasoffshorewindproject.ThecompanywarnedthatBritaincouldstruggletomeetitswindtargetswithoutimprovedincentivesforinvestment.33Theplannedprojecthadacapacityof1,400MWwhichis2.4%oftheUK’scurrentinstalledlowcarbonoperatingcapacity.TheUKmustnotrestonitslaurels,otherwisemoreprojectslikethiswilleitherstopduringdevelopment,orsimplyneverbeconceived.Wehaveagreatpositiontostartfrombutmustconsidertheglobalcontextinhowwecomparetoothercountries,whenboardroomsaroundtheworldaredecidingwheretoinvest.TherestoftheCleanGrowthGapserieswillconsiderwhattheUKcandotoattractinvestmentinthefaceofthestiffglobalcompetitionoutlinedinthisreport,andshowhowthisinvestmenthastobeattheheartofthecountry’sfutureprosperity,supportingjobs,economicactivityandcommunitiesacrossBritain.TheUKranks30thoutof38OECDnationsontheaverageproportionofcapitalinvestmentsbusinessesareabletorecover.Readthefullseriesofreportshere:https://bit.ly/CleanGrowthGapTheCleanGrowthGap15FundingtheFuture:TheUK’senergytransitioninaglobalcontextEndnotes1.IEA,2022,“WorldEnergyInvestment2022”,2022,accessedAugust2023.2.BloombergNEF,“Energytransition’snewindustriallandscape”,5April2023.3.ExcludingtemporaryfullexpensingwhichexpiresinApril2026.TaxFoundation,“CapitalCostRecoveryAcrosstheOECD,2022”,April2023.4.UnitedStatesEnvironmentalProtectionAgency“SummaryofInflationReductionActprovisionsrelatedtorenewableenergy”,updated1June2023,accessedAugust2023.5.UnitedStatesEnvironmentalProtectionAgency“SummaryofInflationReductionActprovisionsrelatedtorenewableenergy”,updated1June2023,accessedAugust2023.6.DSIRE,“RenewableElectricityProductionTaxCredit”,updated9thSeptember2022,AccessedAugust2023.7.Allianz,“AFaustianbargain:Europe’sanswerstotheUSIRA”,07February2023.8.EuropeanCommission:“WithintheEUacompanythatreceivesgovernmentsupportgainsanadvantageoveritscompetitors.Therefore,theTreatygenerallyprohibitsStateaidunlessitisjustifiedbyreasonsofgeneraleconomicdevelopment.”9.CovingtonCompetition,“TheCommissionadoptsitsTCTF”,March2023.10.EEAcountriesincludetheEUplusIceland,LiechtensteinandNorway.TheEEAagreementbringsthesecountriesintotheEU’sinternalmarketwhichmeansthatthesamestateaidrulesapplyinthesecountries.11.UKinaChangingEurope,“UK-EUregulatorydivergencetracker:7thedition”,May2023.12.EuropeanCommission,“HowRepowerisfunded”,accessedAugust202313.Reuters,“Chinaunveils$72billiontaxbreakforEVs,othergreencarstospurdemand”,21June202314.Lynx,“Hydrogenenergy”,December2020.15.SouthChinaMorningPost,“China’slargestfuel-cellproducerSinofuelcellexpectssalestodoubleasgovernmentpromoteshydrogen-poweredvehicles”,25May2023.16.CaixinGlobal,“Chinesecapitaltosubsidizechargingstationsforhydrogen-poweredcars”,23August2023.17.CSET,“OutlineofthePeople’sRepublicofChina14thfive-yearplanfornationaleconomicandsocialdevelopmentandlong-rangeobjectivesfor2035”,13May2021.18.GRJapan,“OverviewofJapan’sGreenTransformation”,January2023,accessedAugust2023.19.EY,“Japan’s2021taxreformintroducestaxincentivesforcarbonneutralityanddigitaltransformation”,15April2021.20.ClimateHomeNews,“Indiaannounces$4.3billioninvestmentincleanenergy”,1February2023.21.Mercom,“Ministryunveils175billionprogramforelectrolyzers,greenhydrogenproduction”,29June2023.22.IndustryOutlook,“IndiaToOffer$455MillionInIncentivesForBatteryStorageProjects”,6June2023.23.TheEconomist,“WhatEuropeanbusinessmakesofthegreen-subsidyrace”,14February2023.24.BloombergNEF,“Energytransition’snewindustriallandscape”,5April2023.25.MeltwaterPresssearch.SearchfromJan2020toJuly2022,comparedagainstAugust2022toJune2023.26.Companieswereselectedonthebasisthati)asubstantialpartoftheirbusinesswasinvolvedinthemanufactureofcleantechnologies(i.e.,hydrogen,batteriesandelectricvehicles)ii)theyhadamanufacturingpresenceintheUS.27.BrookingsPapers,“EconomicImplicationsoftheClimateProvisionsoftheInflationReductionAct”,March2023.28.Tonote,thisanalysisisasimplecomparisonandnoadditionalstatisticalmethodshavebeenincorporatedtobetteridentifywhethertheIRAhadacausalimpactontheequitypricesofcleantechnologycompanies.Iftheseannouncementswerealreadyfullyexpected,thepricemovementsonthedaymayjustbeacoincidence,astheinformationwouldhavebeenincorporatedintotheequitypricesearlier.29.ProductionfiguresformLMCAutomotive,aGlobalDatacompany.AlternativeproductionfiguresmaydifferduetodifferentdefinitionsofEVs/hybrids/internalcombustionengines.30.SMMTNewsUKManufacturing,“UKcarproductiondownbutelectricvehicleoutputsurgestonewrecord”,26Jan2023,AccessedAugust2023.31.GovUK,“TataGrouptoinvestover£4billioninUKgigafactorycreatingthousandsofjobs”,19July2023.32.TaxFoundation,“CapitalCostRecoveryAcrosstheOECD,2022”,April2023.33.Reuters,“Vattenfallhaltsproject,warnsUKoffshorewindtargetsindoubt”,20July2023.EnergyUKisthetradeassociationfortheenergyindustrywithover100members-fromestablishedFTSE100companiesrightthroughtonew,growingsuppliers,generatorsandserviceprovidersacrossenergy,transport,heatandtechnology.Ourmembersdelivernearly80%oftheUK’spowergenerationandover95%oftheenergysupplyfor28millionUKhomesaswellasbusinesses.Thesectorinvests£13billionannuallyanddeliversnearly£30billioningrossvalue-ontopofthenearly£100billionineconomicactivitythroughitssupplychainandinteractionwithothersectors.Theenergyindustryiskeytodeliveringgrowthandplanstoinvest£100billionoverthecourseofthisdecadeinnewenergysources.Theenergysectorsupports700,000jobsineverycornerofthecountry.EnergyUKplaysakeyroleinensuringweattractandretainadiverseworkforce.InadditiontoourYoungEnergyProfessionalsForum,weareafoundingmemberofTIDE,anindustry-widetaskforcetotackleInclusionandDiversityacrossenergy.OxfordEconomicswasfoundedin1981asacommercialventurewithOxfordUniversity’sbusinesscollegetoprovideeconomicforecastingandmodellingtoUKcompaniesandfinancialinstitutionsexpandingabroad.Sincethen,wehavebecomeoneoftheworld’sforemostindependentglobaladvisoryfirms,providingreports,forecastsandanalyticaltoolsonmorethan200countries,100industries,and8,000citiesandregions.Ourbest-in-classglobaleconomicandindustrymodelsandanalyticaltoolsgiveusanunparalleledabilitytoforecastexternalmarkettrendsandassesstheireconomic,socialandbusinessimpact.Weemploy450staff,includingmorethan300professionaleconomists,industryexperts,andbusinesseditors—oneofthelargestteamsofmacroeconomistsandthoughtleadershipspecialists.Ourglobalteamishighlyskilledinafullrangeofresearchtechniquesandthoughtleadershipcapabilitiesfromeconometricmodelling,scenarioframing,andeconomicimpactanalysistomarketsurveys,casestudies,expertpanels,andwebanalytics.OxfordEconomicsisakeyadvisertocorporate,financialandgovernmentdecision-makersandthoughtleaders.Ourworldwideclientbasenowcomprisesover2,000internationalorganisations,includingleadingmultinationalcompaniesandfinancialinstitutions;keygovernmentbodiesandtradeassociations;andtopuniversities,consultancies,andthinktanks.www.energy-uk.org.uk@energyukcommsEnergyUKTodiscussthefindingsofthisreportpleasecontactmark.williams@energy-uk.org.ukwww.oxfordeconomics.com@OxfordEconomicsoxford-economicsTodiscussthefindingsofthisreportpleasecontactalogan@oxfordeconomics.comJuly2023
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