Decarbonising the Grid: Challenges and Opportunities in the US and UK
May 3, 2023
As the world grapples with climate change, the need for decarbonising electricity generation has become increasingly urgent for the United States and the United Kingdom. Despite the significant progress made in renewable energy, both countries still rely heavily on fossil fuels in 2023. This has serious implications for their climate targets and poses a significant challenge for policymakers. The geopolitical and climatic events of 2022 demonstrated that the US and UK can no longer delay investment in transitioning to a renewable future, however, this is easier said than done with historical under-investment in electricity grids delaying renewable projects for potentially years.
Whilst US and UK policymakers have the same set of policy levers in front of them, each country is unique and must choose its own assortment of policies applicable to its geographic, financial and political environment.
Comparing the US and UK Markets
Before we get into the difference in decarbonisation strategy it’s important to understand how different the US and UK markets are and how these differences influence investment and policy decisions.
Demand per Capita and Population Density
Firstly (and most obviously), there are huge differences between the UK and the US in population density and electricity demand. Quite simply, the US has five times the population of the UK (332 million compared to 68 Million), with that larger US population also having a far more expensive taste for electricity than the UK; in 2019, the US consumed 12,826 kWh per capita, while the UK consumed 4,407 kWh per capita.
Overall electricity demand in the US is therefore 13.6x larger than in the UK in absolute terms. A difference in scale that arguably requires a very different approach to policymaking.
Secondly, their population densities and variation in densities are also wildly different. For example, New Jersey has a population density of 1,263 people per square mile, whilst Alaska has a population density of just 1.3 people per square mile. Partly because of these variations, the US has three separate electricity grids - the Eastern Interconnection, Western Interconnection, and Texas Interconnection with only limited transmission connection between them. In contrast, the UK has a single electricity grid, which allows for greater flexibility and efficiency in managing the electricity system at the national level.
Current Energy Mix and Domestic Fossil Fuel Production
What has the UK replaced coal with, we hear you ask? Overwhelmingly wind power is the answer with 29% of electricity generated by on and offshore wind in 2022 compared to only 10% in the US. With such a low baseline and its geographic abundance on both coasts as well as in-land, expansion in wind power holds huge promise for the US energy mix as coal is phased out.
As with most topics in the US, the energy mix is a political football in Congress and the Senate, with the Republican party traditionally favouring fossil fuel industries and states over the expansion of renewables. In recent years however this has begun to change with the growth in renewables in right-leaning states such as Texas starting to challenge the status quo within the Republican party. The general trend as of 2023 is for gradual alignment between the Democrats and Republicans on a long-term energy mix strategy, however, there is a long way to go.
The UK is ahead of the US in its political alignment on renewables, whilst fringe parties may lobby for faster progress, both the Conservatives and Labour are dedicated to decarbonising the grid. There will always be a debate on specific investments and timeframes, but the arguments are expected to focus on the ‘how’ rather than the ‘why’ of investing in net-zero power generation.
The process for obtaining planning permission and permitting for electricity projects differs significantly between the US and the UK.
In the US, planning permission and permitting for electricity projects is generally a decentralised process, with individual states responsible for approving projects within their borders. This means that developers must navigate a complex regulatory landscape, with different requirements and processes in each state, especially challenging for linear schemes such as transmission lines crossing state boundaries.
The NEPA process is often time-consuming and expensive, with some projects taking several years to complete. However, it is seen as a necessary step to ensure that projects are developed in an environmentally responsible manner.
In the UK, planning permission and permitting for electricity projects is generally a centralised process, with the government responsible for approving projects. The Department for Business, Energy, and Industrial Strategy (BEIS) oversees the electricity market and is responsible for setting energy policy and issuing permits for major projects.
Similar to NEPA the UK also has regulations in place to ensure that projects are developed in an environmentally responsible manner, including the Environmental Protection Act and the Climate Change Act. Similar to NEPA, criticism abounds of the cost and time commitment required to complete and authorise Environmental Impact Assessments, especially when they relate to projects critical to the UK’s response to climate change.
The US and UK governments generally have the same policy levers to pull when it comes to decarbonising their grids, however, due to the differences between the economies discussed earlier they tend to use them in slightly different ways, these levers are:
Carbon Pricing Policy
In the UK, a carbon pricing scheme has been in place since 2013, known as the UK Emissions Trading Scheme (ETS). The ETS applies a tax on fossil fuels used in electricity generation and is intended to encourage a shift to low-carbon sources of energy. Until Brexit this was integrated with the EU ETS allowing the trading of credits and off-sets across borders, as of 2023 the UK scheme is now restricted to the UK, a subject for another day.
Overall, the use of carbon pricing is seen as an effective policy tool in the UK with gradual increases in carbon credit cost incentivising local action by electricity producers and users. In the US it’s difficult to forecast national adoption of a carbon pricing policy in the short term, although integration of state and regional schemes may in time drive de-facto adoption for a large segment of the population.
Both the UK and the US have a mix of regional, national, and international regulations that impact the decarbonisation of their electricity grids. In the UK, the government has set a target of achieving net-zero emissions by 2050 and has implemented various policies and regulations to help achieve this goal through various government and NGO departments. The challenge with this approach is its hands-off nature with significant accountability delegated to bodies which don’t necessarily have the financial and/or technical means to deliver.
In the USA, there remains no national-level overarching legislation regarding the country's response to climate change. The ‘IRA’ bill of 2022 does provide significant financial incentives towards decarbonisation, however, these currently exist in a policy vacuum with limited alignment to a broader strategy. As with carbon credits, there is a patchwork of regulations at the regional and state level that impact the electricity sector, with varying levels of maturity and target end-states.
Contrasting the UK and the US is essentially a story of the UK having aligned policy and strategy in its response to decarbonisation but often lacking in financial investments whilst the US overcomes its lack of political/policy alignment through overwhelming financial incentives.
In the US on the other hand, at the federal level incentives are primarily through tax credits. The Production Tax Credit (PTC) provides a tax credit for wind energy generation, while the Investment Tax Credit (ITC) provides a tax credit for solar energy generation. These allow projects to effectively write off a significant part of new projects’ capital costs in the first few years of operation, encouraging private investment through the relatively fast return on capital.
Several states also provide more localised incentives such as Renewable Portfolio Standards (RPS) adopted by many, which incentives utilities to generate a certain percentage of their electricity from renewable sources through target-driven bonuses.
In general not only does the US depend far more on financial incentives to drive decarbonisation, but their implementations of incentives are frequently far more financially lucrative for scheme developers in the short term vs. the comparatively low-cost UK approach using CfDs.
The US and UK have approached Direct Investment rather than market incentives in their respective markets very differently.
In the UK targeted direct investment in strategic projects remains a key policy lever with projects such as the Sizewell C nuclear station depending on significant direct transfers. In part, such investments represent continued operational control of such strategically important assets rather than relying on regulatory control. There is growing awareness and research of the need for public investment in schemes and assets which enable greater network resilience and strategic risk management which cannot be captured or incentivised by market incentives.
In the US at the federal level such investments are now rare, however, there are examples at the state level of direct intervention in the markets. Across the political spectrum public ownership of such assets which can be provided by the private sector remains unconventional with issues of network resilience being far more likely to be managed through market incentives encouraging investment in capacity rather than public suppliers of last resort.
Both the UK and the US are facing significant challenges in decarbonising their electricity grids. While there are some similarities in the approaches being taken, there are also significant differences, particularly in the areas of carbon pricing policy, incentives for renewable energy generation, and strategic power supply investment.
Both have opportunities to learn from the other and engagement at political, business and technical levels should be encouraged. In the end, a country's choice of levers to pull is dependent on their specific circumstances, the UK and the US will continue to use the same set of policies but expect re-balancing over the coming years as priorities, technologies and politics change.