Winds of change sweep across UK’s energy sector

As the push for stronger climate action gains ground, the UK has decided to pull out of the Energy Charter Treaty (ECT), putting an end to its membership after efforts to align the ECT with net zero aspirations failed to bear fruit. Britain is also prolonging the windfall tax on oil and gas producers’ profits by an additional year while its flagship renewables scheme is getting a funding boost from the government. 

The UK was mulling over whether to head for the exit from a multilateral energy treaty – known as the Energy Charter Treaty – last year if a much bolder focus on promoting clean, affordable energy, such as carbon capture, utilization, and storage (CCUS) as well as hydrogen and other renewables, were not incorporated within the treaty’s framework. Many, including ClientEarth, believe that this treaty protects fossil fuel companies’ interests and allows them to sue international governments over their climate plans.

Since the European countries have been unable to reach an agreement on the modernization of the Energy Charter Treaty, resulting in a stalemate, the UK has joined nine EU member states, including France, Spain, and the Netherlands in withdrawing from the ECT in a bid to back its transition to net zero and strengthen its energy security.

This multilateral treaty, signed in 1994, was designed to promote international investment in the energy sector, historically providing protections for fossil fuel investors. Ministers will instigate Britain’s withdrawal from the treaty, which is set to take effect after one year, removing protections for new investments after this period.   

Graham Stuart, UK’s Minister of State for Energy Security and Net Zero, commented: “The Energy Charter Treaty is outdated and in urgent need of reform but talks have stalled and sensible renewal looks increasingly unlikely. Remaining a member would not support our transition to cleaner, cheaper energy, and could even penalise us for our world-leading efforts to deliver net zero. 

“With £30 billion invested in the energy sector just since September, we continue to lead the world in cutting emissions, attracting international investment and providing the strongest legal protections for those who invest here.”

Shaun Spiers, Executive Director, of Green Alliance, noted: “Civil society organisations and parliamentarians from all political parties have been clear that the Energy Charter Treaty is an out-of-date agreement and undermines our efforts to tackle climate change. We welcome the UK’s decision to leave, which will strengthen global efforts to roll out cheap, clean renewable energy.”

The climate and environmental activists’ groups have welcomed the UK’s exit from the ECT with open arms, seeing it as a step in the right direction to tackle pressing environmental issues such as pollution, biodiversity loss, and climate change. However, they also want to see bolder climate and environmental policies.

Sam Campbell, ClientEarth team, commented: “With the EU also preparing to leave this damaging agreement, the UK’s exit is another major victory for climate action. This was one of the key actions we wanted to see from the next UK government in our UK Manifesto.”

The Energy Profits Levy (EPL) was introduced in 2022 to ensure that oil and gas producers in the UK pay their share of tax from extraordinary profits, imposing a 75% tax rate on the North Sea energy industry. Since gas prices are forecast to remain very high until at least 2028-29, the UK government is prolonging the EPL by an additional year to 2028-29 while also bringing forward legislation in the Spring Finance Bill to put beyond doubt that the windfall tax will end if oil and gas prices drop below the levels set by the Energy Security Investment Mechanism before then.

Many, including INEOS’ Founder and Chairman, believe that windfall tax on oil and gas producers’ profits in the North Sea could lead to a collapse in investment in the basin. The recent years saw the erosion of energy producers’ investment confidence in the UK, with Offshore Energies UK (OEUK) highlighting the knock-on damaging impact of the Energy Profits Levy and other economic factors. The tax hike is said to have affected decommissioning progress since the cost of shutting down old installations is not treated as an allowable expense.

Furthermore, OEUK sees the latest extension of the windfall tax on North Sea oil and gas producers as “a disappointing blow to the industry which risks jobs, investment and economic growth,” as the price of gas in the UK is almost ten times lower than the peaks seen when the tax was introduced while the price of oil has returned to the level before the Ukraine crisis.

David Whitehouse, Chief Executive of Offshore Energies UK, highlighted: “The industry is being taxed on windfall profits which no longer exist and facing a fourth round of fiscal change and turmoil in less than two years, making it impossible to plan investment for the energy transition and the path to net zero.”

Moreover, OEUK is adamant that the Chancellor’s plan to continue the tax undermines its manifesto proposals for a homegrown energy transition intended to boost domestic energy investment and drive the shift to greater production of wind and hydrogen energy, alongside the introduction of large-scale UK carbon capture and storage facilities.

Thanks to the windfall tax extension, OEUK is convinced that the UK is more likely to rely on imported energy and other countries to deal with the associated carbon emissions. For Whitehouse, this move shows that the government continues to ignore “clear evidence” about the need for investment in offshore energy production to grow the economy and achieve net zero.

“We have identified £200 billion of investment in oil and gas and the UK’s wider energy transition awaiting the green light which will not happen with such globally uncompetitive taxation in place. Thousands of jobs and billions of pounds in national revenue are at risk because of the destabilising impact of these tax decisions. A homegrown energy transition will simply not move forward unless business confidence for long term investment in the UK is restored,” added OEUK’s Chief Executive.

In the aftermath of the 2024 Spring Budget, announced by Chancellor of the Exchequer, Jeremy Hunt, ADE’s Industrial Energy Policy Officer, Oz Russell, pointed out: “We commend the focus on connections reform in this budget given its centrality to increasing growth and decarbonising industry.

“However, with an election around the corner and a report published this week using the International Energy Agency’s (IEA) figures that shows the UK is spending the least among the top five major European economies on low-carbon energy policy, this budget represents a missed opportunity to provide much-needed support to industry on issues like electrification and decarbonisation infrastructure outside of the industrial clusters.” 

Meanwhile, the UK government underlines its intention to keep supporting investment in the North Sea oil and gas as part of the transition to net zero, alongside the drive towards renewables, such as wind power and hydrogen. Aiming to bolster renewables, the government has disclosed the budget for the upcoming Contracts for Difference (CfD) auction round, which is said to be the largest budget ever for Britain’s flagship renewables scheme, with more than £1 billion aimed at fortifying energy security.

The budget for the sixth CfD allocation round aims to boost renewables investment and help the UK replace fossil fuels with cleaner, domestic energy in the transition to net zero. With this at the forefront, the government has earmarked £800 million for offshore wind, which has been given a separate funding pot, four times bigger than in the previous round.

The decision, which comes in the wake of the jump in the maximum price for offshore wind and floating offshore wind in November 2023, is expected to ensure Britain remains “a global pioneer” in wind power and home to five of the world’s largest offshore wind farm projects while helping to deliver the UK’s target of up to 50 GW of offshore wind by 2030, along with up to 5 GW of floating offshore wind, according to the government.

Aside from £800 million for offshore wind, the CfD allocation round entails £120 million for established technologies such as onshore wind and solar and £105 million for emerging technologies such as floating offshore wind and geothermal, including a ringfenced £10 million budget for tidal for a second consecutive year.

Claire Coutinho, UK’s Energy Security Secretary, outlined: “When it comes to renewables, we have a record to be proud of. In 2010, just 7% of our electricity came from renewables, this is now up to over 40% today. We have the second largest renewables capacity in Europe, which is backed by £300 billion of investment since 2010, with £24 billion since September alone.

“We are sticking to the plan to deliver the long-term change our country needs to deliver a brighter future for Britain – securing more homegrown, green energy we can protect billpayers from volatile gas prices.”

The UK has got a hold of £300 billion of public and private low-carbon investment since 2010 while a further £100 billion of private investment is anticipated for the country’s energy transition by 2030, having the potential to support up to 480,000 jobs, including 90,000 jobs in the offshore wind sector. 

Last but not least, the British government is making inroads on the network reforms, such as offering earlier grid connection dates to projects worth £40 billion, together with transmission network companies announcing investment plans worth up to £85 billion.

From next January, a new process is expected to ensure that only projects, which can show progress will be offered a connection date to join the grid.