The Energy Transition | COP28: Transition away from fossil fuels announced for first time

This week we look at the COP28 announcement regarding the transition away from fossil fuels, the latest on hydrogen allocation rounds, the new ESO Open Balancing Platform and more.

COP28: Landmark transition away from fossil fuels announced

The COP28 Climate Summit in Dubai closed last week with a last minute breakthrough regarding the agreement to transition away from fossil fuels.

The final deal on the crucial Global Stocktake text was signed off in a plenary meeting by the COP28 President Dr Sultan Al Jaber, who named the agreement "the UAE Consensus".

The headline agreed under the UAE Consensus announces a call for countries to commit to "transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science".

This text represents the first time that fossil fuel production has been referenced in a UN climate accord and represents a compromise between the differing views and interests of those present at the COP28 summit. The text can be considered a victory for the High Ambition Coalition of nations given that an alliance of petrostates had previously opposed the inclusion of any reference to fossil fuels. However, qualifications to the text that were required in order to reach agreement (such as the fact that the transition applies only in the context of "energy systems") have led to some criticism that it does not go far enough.

Alongside the agreement on fossil fuels, the final text calls on countries to triple renewable energy capacity globally, as well as to double the annual rate of energy efficiency improvements by 2030 alongside accelerating efforts towards the phase down of unabated coal power.

UN Secretary-General, Antonio Guterres, stressed that: "it's important that the outcome of the Global Stocktake clearly reaffirms the need for limiting global temperature rise to 1.5C and that this requires drastic reductions in emissions in this decade. For the first time, there is a recognition of the need to transition away from fossil fuels - after many years in which the discussion of this issue was blocked."

Hydrogen Allocation: Round 1 projects announced and Round 2 launched

The government has announced 11 hydrogen production projects will receive funding under the first hydrogen allocation round. The projects will produce a total of 125MW of capacity and will each receive a share of over £2 billion of support over 15 years. A further £90 million has been allocated from the Net Zero Hydrogen Fund towards the projects' construction.

The successful projects are located across the UK and include the Barrow Green Hydrogen plant in the south west and the Cromarty Hydrogen plant in Scotland. The projects' production capacities range from 5.2MW to 24.5MW. The government expects the first of these projects to be online by 2025, and has agreed a weighted average strike price of £241/MWh.

The government also announced the second hydrogen allocation round, which aims to support up to 875MW of low carbon hydrogen. The UK's target is to have up to 1GW of electrolytic hydrogen production capacity in operation or construction by 2025, and 10GW of low carbon hydrogen by 2030. Applicants must submit an expression of interest by 5 February 2024.

The minister for energy efficiency and green finance, Lord Callanan, stated the announcement "represents a monumental step forward in helping producers to deliver a fuel of the future today, backing businesses to go greener."

ESO launches new Open Balancing Platform

The Electricity System Operator (ESO) has announced the launch of the first stage of its new Open Balancing Platform. The new system is designed to replace the Balancing Mechanism by 2027 and support the move to net zero. A key feature of the first stage of the Open Balancing Platform is Bulk Dispatch, a tool designed to allow engineers to send large numbers of instructions to smaller Balancing Mechanism Units and battery storage units sites quickly and efficiently. ESO control room engineers will be able to choose from a pre-selected and optimised list of units to meet the relevant network requirement, reducing the number of manual instructions required from the control room and thereby cutting the time taken to instruct balancing mechanism units.

The ESO hopes that this new system will result in returned value for consumers through reduced costs as a result of the increased efficiency and optimisation of network balancing. This optimisation of control room instructions will also open up scope for innovative battery storage technologies to play a greater role in balancing the network.

The Open Balancing Platform will be rolled out over 2024 and 2025 in stages in order to integrate a wide range of services into the Bulk Dispatch process. The Open Balancing Platform will replace both the existing Balancing Mechanism and the Ancillary Services Dispatch Platform, the system used to procure the ESO's operational reserves and contingency resources. The existing response and reserve services will also therefore be transferred over to the Open Balancing Platform from the Ancillary Services Dispatch Platform over the next 18 months.

20% VAT scrapped for battery storage

The government has announced that retrofitted battery energy storage systems (BESS) will be exempt from the 20% rate of VAT, from 1 February 2024.

As we have previously reported, in its 2022 Spring Statement the government announced an exemption from the 20% VAT rate for exempted energy-saving equipment such as heat pumps and roof-mounted solar. The exclusion of BESS from the exemption was questioned by industry experts, such as the Association for Renewable Energy & Clean Technology, who campaigned for its inclusion.

The government launched a call for evidence on proposals to extend the exemption to BESS in the Spring Budget 2023. In its response to that call for evidence, the government confirmed that the exemption would be extended on the basis that it aligned with the overarching objectives of improving energy efficiency and reducing carbon emissions, cost effectiveness and alignment with broader VAT principles. As a result of this decision, BESS technology will qualify for VAT relief when either retrofitted to a qualifying energy-saving material, or installed as a standalone technology connected to the grid.

Battery projects account for third of connections queue

An industry action plan published by the Energy Networks Association (ENA) has found that 159GW (29%) of queued capacity in the transmission connection queue can be attributed to battery storage projects. The ENA believes that the high proportion of battery storage projects is due to a boom in battery project applications twinned with these projects being allocated more capacity than they require.

The ENA's analysis shows that applications for battery storage projects grew by an astounding 5,930% between 2019 – 2023, with historic cautious attitudes to storage projects having undergone a significant shift. Network operators have updated their modelling assumptions to more accurately reflect actual usage, which is significantly greater than the initial sceptical view. The ENA expects that this more accurate assessment of battery storage projects will directly release another 3GW of capacity.

The ENA's plan also sets out additional steps that it says should be taken to release sufficient network capacity to decarbonise the grid. The first of these steps is to strengthen and tighten the grid connection application process so that only viable projects are placed into the queue. The second step is to further improve coordination between transmission and distribution network operators in order to improve the experience of distribution customers whose projects affect transmission.

Touching on the significance of the plan, Lawrence Slade, CEO of the ENA said: “We need to pull out all the stops to accelerate and improve grid connections and this plan gets us the capacity we need in just one more year to decarbonise the grid.”  

This week's article was written with the assistance of Johnny Hartrick, Luke Webb, Madeleine Begg and Jack Duffy, Trainee Solicitors.