Decarbonised Energy: Net Zero implications for the construction industry

12 months on from the government’s Net Zero 2050 pledge for the UK, we consider the emerging trends within the energy sector’s construction industry

21 July 2020

In recent years there has been a significant shift in public opinion and the government’s approach in tackling climate change culminating in 2019 with the introduction of a Net Zero target for the UK. Consequently, many companies have also now started to incorporate their Net Zero target in their day-to-day operations, including in some cases the way in which they interact with other companies. 12 months on from the government’s pledge for the UK to achieve the Net Zero target by 2050, we consider the emerging trends within the energy sector’s construction industry following the introduction of the Net Zero target. 

What does 'Net Zero' actually mean?

In June 2019, the government extended the UK’s existing commitment to an 80 per cent reduction on 1990 UK emissions levels by legislating for a Net Zero emissions target by 2050. 'Net Zero' refers to achieving an overall balance between emissions produced and emission taken out of the atmosphere. The key message coming from government is that we all have our part to play in achieving that target, be that both personally or professionally. 

Echoing the government’s announcement, Ofgem published the Ofgem Decarbonisation Action Plan, which sets out Ofgem’s drive to play its role in achieving Net Zero by 2050.

The main takeaway from the Ofgem Decarbonisation Action Plan is that although the UK has decarbonised faster than any other major economy, the UK must now go further and faster in decarbonising transport, heating and other industrial use of energy. There will need to be a huge increase in renewable and low carbon electricity, especially to meet new sources of demand. We expect to see more detailed proposals from Ofgem over the coming months as to how they will adhere to the government policy and implement the action plan they have set out.

It is clear that the increased focus on Net Zero will have a pronounced impact on companies operating within the energy sector and particularly the sector’s construction industry which traditionally has a high environmental impact. We are already seeing that this will shift the way in which we both use and generate energy, with housing and other developments and other aspects of the build environment looking to incorporate renewable and energy efficient assets such as rooftop solar and district heating into building design. Understandably, these regulations and further governmental policy will influence how projects are procured, funded, administered and managed, but what could achieving 'Net Zero' mean for the construction industry within the energy sector.

Impact on the construction industry

To date there has been a broad response from within the construction industry to the Net Zero target, including developers looking to set requirements for their broader supply chain, the work-up of designs and materials used, and funders indicating they will consider Net Zero implications when looking at the funding and procurement of projects. More practically, a more immediate impact is the consideration on how travel and transportation of both materials and workers to and from construction sites is implemented. In the following sections we consider in more detail recent developments within the energy sector’s construction industry arising from the requirement to achieve Net Zero.

Government backing for Net Zero energy projects

One of the impacts of the government’s Net Zero ambitions is the return of support for onshore wind and solar projects. It has recently been confirmed that Westminster is considering allowing these projects back in to compete in the next Contract for Difference (CfD) rounds, which will take place in 2021. Climate advisers have suggested than in order for the UK to achieve Net Zero within the mandated time frames, the country will need to triple its onshore wind capacity in the next 15 years. Thought will also need to be given to how large scale offshore wind projects will be developed in the future to meet increased demand, including whether it is possible for multiple projects to share transmission assets such as onshore substations as the number of developments increase offshore.

With the renewed focus on onshore wind, developments in offshore wind and with that floating wind and other Net Zero projects such as hydrogen and carbon capture, there will be significant opportunities for those within the construction industry. Following the announcement Hugh McNeal, the chief executive of Renewable UK, said the inclusion of onshore wind in the next CfD rounds would help to accelerate the UK’s transition to a Net Zero economy and provide a 'huge boost for jobs and investment in local economies across the UK'. 

Pressure on supply chain innovation

What achieving Net Zero looks like for a company is open to interpretation. A number of leading corporates have taken Net Zero to mean much more than simply looking at the company’s output and are in turn looking for companies in their supply chain to implement Net Zero policies.

Ørsted’s recent announcement that it is seeking to decarbonise its entire supply chain by 2040 further shows that companies are not only looking at how their business can operate at Net Zero, but how they can also influence other businesses that they work with to also become Net Zero. 

In order to achieve a Net Zero supply chain it is anticipated that Ørsted’s strategic suppliers will be asked a number of questions, including disclosure of their own emissions, set science-based carbon reduction targets and use 100 per cent renewable electricity in the manufacture of turbines, foundations, cables, substations and components, optimise their current vessel fleet and develop a roadmap to power vessels with renewable energy. 

BP is also tackling reaching its own Net Zero target by setting out its five aims to become a Net Zero company. It has also set out a further five aims as to how it will help the world to reach Net Zero. These keys aims include getting to Net Zero across its entire operations and Upstream services (although, it is unclear whether this extends to its supply chain contractor's operations or just BP facing operations) on an absolute basis by 2050 or sooner and to reduce the carbon intensity of products sold by BP by 2050 or sooner.

Decarbonising the supply chain will be a significant challenge for the construction industry and will require innovative thinking from companies. Modern construction materials and methods (such as steel, aluminium, copper and concrete) tend to have a large carbon footprint due to the intensive extraction, manufacture and transportation of materials at the outset, the construction process itself and any decommissioning required. For example, it has recently been highlighted that wind turbine blades are difficult to recycle (due to the composite materials used to manufacture them), with many blades from early developments that are reaching the end of their lifetime being sent to landfill.

As we see more large scale developers and companies imposing Net Zero requirements on the supply chain, those that are able to quickly adapt to such requirements will be best placed to benefit from the wider move towards renewables based projects we expect to see.

Financial backing for Net Zero construction

The drive to overhaul the industry’s approach to Net Zero is likely to be incentivised as financial institutions look to offer funding to projects with Net Zero credentials as a preference.

Barclays has recently announced that it has set its Net Zero target for 2050, with the bank pledging that it will align all of its financing activities with the goals and timelines of the Paris agreement. It has been reported that the bank will start by focusing on the energy and power sectors, and the bank will publish 'transparent targets' to track its progress. 

It is currently unclear how lenders and developers seeking to pass Net Zero requirements to their clients and supply chain may look contractually but it is possible that new auditing, reporting and subcontracting thresholds could be included in contracts to allow counterparties to be confident that such requirements are being met.

Considerations

This is an exciting time for the construction and energy sector. Achieving Net Zero by 2050 is clearly starting to become a focus for many companies across the UK, with government and regulator policy clearly starting to support this. On a global platform, it is interesting to see major companies including the Net Zero target onto their own visions and goals, and it is likely that many more will start to embody this into their supply chains and their use of new technologies which will only increase the speed of a transition to Net Zero within the construction industry.

Key contact

Lloyd James

Lloyd James Partner

  • Construction and Engineering
  • Energy, Power and Utilities 
  • Infrastructure

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