Comment by Ben Shafran, Head of Business Model & Policy Innovation, at Energy Systems Catapult.

In this short blog I’ve focused on the two big energy policy stories from the past month, and set out what they mean for decarbonisation and low carbon energy innovation.

Spending Review’s impact on the energy sector

The Spending Review came and went with little by way of surprise – not least because all the major spending plans were leaked or briefed to the media in the run up to the day itself. The Department for Energy Security and Net Zero (DESNZ) came out with a strong capital investment settlement, including £14.2 billion of public money for Sizewell C over the next decade and £9.4 billion for the East Coast and HyNet clusters (out of a total of £22 billion funding announced last year).

The Review also saw £13.2 billion allocated for the Warm Homes Plan between 2025‑26 and 2029‑30, and £8.3 billion over this Parliament for Great British Energy. The latter includes £2.5 billion for nuclear Small Modular Reactors, funnelled through the rebranded GB Energy – Nuclear (previously, Great British Nuclear), which reiterates the focus of this Review on funding large infrastructure projects.

Every Spending Review includes difficult trade-offs. This one is no different, with the Public Sector Decarbonisation Scheme – which helps schools, hospitals and the like cut their carbon footprint and energy costs – amongst the casualties. The scheme is now closed for new applications.

There’s also a lot of the picture to be filled in – an Industrial Strategy is expected by the end of the month (it will be the twelfth such document in the last 15 years!), with further details on industrial decarbonisation due in October as part of a Carbon Budget and Growth Delivery Plan. October is also when we’ll get more details on how Warm Home Plan funds will be spent.

Alongside the Spending Review, HM Treasury announced that it will update the Green Book, the ‘Bible’ for assessing public spending options. The biggest change will be an introduction of ’place-based business cases’, to bring together the projects needed to achieve the objectives of a particular place. As long-standing champions of place-based approaches to decarbonisation, we at the Catapult can only cheer this much needed change.

Cooperation with the EU

Following a summit on 19 May, the UK government and representatives of the European Union agreed to proceed with closer cooperation that could have significant implications for the UK energy system.

Talks will begin on the UK rejoining the EU’s internal electricity market – that is, trade across interconnectors between Britain and European nations would be part of a market-clearing algorithm that optimises power flows throughout the continent. This won’t address the need for better locational pricing in the GB wholesale electricity market – a national price means we’d be exporting power to France and Belgium when it’s needed to keep the lights on in the South East of England. But market coupling will at least address the situation that emerged since Brexit, in which trading across the interconnectors appears to follow a random pattern bearing no resemblance to system needs.

Talks will also begin on aligning the Emissions Trading Schemes of the UK and EU. This would be a welcome sight for British electricity generators and interconnector owners, who have been growing increasingly concerned about the risk that electricity exported from GB to the EU would have faced punitive charges under the EU’s incoming Carbon Border Adjustment Mechanism (CBAM). This would have raised the cost of British-produced electricity sold on the continent, making it less competitive.

Linking the two ETS schemes would make for a larger market, with a wider variety of participants and more dynamic trading – all desirable outcomes. But it may come at a cost of constraining how the UK ETS evolves. On the other hand, the EU scheme is due to be extended to cover heating from 2027 (strictly speaking, a parallel scheme known as EU ETS2 will be created, although it is expected to eventually be merged with the main scheme) – a move that we think the UK should also make, to encourage the switch to low carbon heating.