The war in Iran has brought into sharp focus a central challenge for UK energy policy: how to deliver the green transition while maintaining energy security and ensuring that costs remain affordable for households and businesses. Getting this balance right is now critical not just for energy policy but for the UK’s economic performance.
In the early 2000s, UK electricity prices were among the lowest in Europe. Now they are among the highest and far above levels in the US. This is adding to costs across the economy, undermining competitiveness and hitting key energy-intensive sectors hard. Also, although the energy price cap fell in April, it looks set to rise sharply this summer and winter, adding further pressure to the cost-of-living crisis.
Ed Miliband, the Secretary of State for Energy Security and Net Zero, wants the UK to showcase its green credentials to the rest of the world. The UK has been a leader in reducing greenhouse gas emissions. However, it’s a policy aim that is now seriously in danger of backfiring if the energy transition is seen as imposing persistently high costs on the economy.
The UK is legally committed to reaching Net Zero by 2050, with the path mapped out through a series of Carbon Budgets designed to embed this in long-term policy decisions.
UK greenhouse gas emissions have already fallen to around half their 1990 level, meeting the Fourth Carbon Budget for 2023–27. But far more demanding targets lie ahead, embedded in the Fifth and Sixth Carbon Budgets covering 2028–37.
By the end of June, Parliament is set to approve the Seventh Carbon Budget, covering 2038–42 and targeting an 87% reduction in emissions from 1990 levels. Given the current uproar about energy policy, it is striking that previous Budgets met with little opposition in Parliament. It may be different this year as the costs, distributional impact and effect on industrial competitiveness are now clearer.
High energy costs make strong economic growth more difficult to achieve and risk deterring investment in energy-intensive and growth-critical sectors such as tech, AI, data centres and robotics.
So, what’s the answer?
The solution is not to abandon the green agenda, as some may wish. Far from it. The science and the evidence from extreme weather events make clear that the transition must be taken seriously.
Nor is it to proceed as if nothing has changed, which appears to be the current policy approach. Instead, the priority is to strike the right balance between expanding renewables, ensuring energy security and addressing the factors driving high prices, thereby delivering a more affordable transition and easing the acute pressure on business.
A diversified and balanced energy mix is necessary, including renewables, nuclear and fossil fuels. Domestic resources should be used where they enhance resilience and support the national interest. Given the continued importance of gas, greater investment in storage is essential, alongside a stronger focus on reducing the cost of technologies such as batteries and carbon capture and storage.
The focus should be on energy addition, not energy substitution, as is the case in many other countries also moving towards renewables. As the cost of renewables continues to fall and technology advances, notably in storage, their reliability will improve and they will increasingly displace fossil fuels.
By contrast, the UK is moving towards substitution now, ahead of system readiness and when renewables are unable to provide consistent baseload, and at the expense of higher energy costs. It takes time, and may not be fully possible, to move away from a fossil-fuel-based system while still meeting domestic energy needs.
Moreover, the cost of transition can be high. This makes it essential to identify and address the underlying drivers of high energy costs.
The way the transition is financed is part of the problem. Levies and policy costs of transition are loaded onto current electricity bills. That’s wrong. They should not be moved onto general tax, either, as some have suggested, as that just shifts the burden without improving incentives. A better approach is to treat the transition as long-term infrastructure, financed through government borrowing and repaid over time. That allows costs to be smoothed across generations, lowers the immediate price impact and aligns financing with the long-lived nature of the assets being built. Alongside long-term pricing contracts, the aim would be to help spread the cost over many years.
Poor policy execution is further compounded by a flawed market design. UK electricity prices are set by the marginal cost of gas. Even when renewable generation is cheap, the price paid across the system reflects expensive imported gas. This weakens the benefit of lower-cost generation and needs to be addressed. Electricity is just one, albeit critical, part of the UK energy system.
Even when gas prices have fallen at times over the last year, this has not been fully reflected in UK energy bills, in part due to high system costs associated with intermittent renewables. There is a strong case for continuing to invest in renewables, but the energy mix needs to be broad based and supply increased.
There is no credible path to affordable, secure energy without a major expansion of nuclear power. There is a need to add immediately to our nuclear capability via smaller and faster-constructed reactor models.
Investment in the North Sea has been subject to erratic tax policy and now to legal challenge. We cannot move away from a fossil fuel economy overnight and the North Sea cannot be ignored. As Norway demonstrates, it still has a role to play. Expanding North Sea production will not reduce global prices, and it takes time for new output to come onstream. But it would strengthen the balance of payments, improve resilience and reduce exposure to external shocks. A more stable and predictable tax regime would support the long-term investment required.
Finally, the UK has a big advantage in the ability of the City of London to establish itself as the centre for global green finance. This could help reduce the cost of capital for the green transition across emerging economies, while supporting the UK economy.
We must protect the environment and ecology and cannot ignore the risks of not doing so. The immediate challenge is not whether to pursue the green transition, but how to do so in a way that delivers energy security while ensuring that the transition supports economic growth. At present the UK risks not getting that balance right.
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