Copy, Compete and Collaborate
The $369 billion Inflation Reduction Act (IRA) passed by the United States Congress last year has sent a strong global signal about the country’s ambition to decarbonise its economy and attract global investment. The scale, breadth and speed of the act has forced countries to devise their own responses, including the EU with its Net Zero Industry Act and Critical Raw Minerals Act.
The United Kingdom has been slow to react to the IRA and now faces the risk of key strategic investments going elsewhere. The government is set to use its own “Green Day” in March to announce a new approach to climate policy. If it is to deliver the decade of electrification, the UK must learn the right lessons from the IRA and respond strategically to attract the scale of investment needed.
The UK cannot match the IRA in its scale or the breadth of subsidies on offer, but the UK does need to invest in critical green technologies of the future. As set out in our recent paper A New National Purpose, the UK needs a more strategic state that thinks radically about how to move at a faster pace, take greater risks and build policy fit for the long term rather than simply throwing money at the problem. Century-defining companies will be built in climate tech, and the UK needs to create the conditions for them to develop and thrive.
The UK should develop its own version of the IRA, based upon a more strategic state. This involves taking a three-pronged approach in its response: copy the ambition and long-termism of the US approach, compete where the country has strategic advantages, and further strengthen collaboration with allies, particularly as China develops its capabilities in key technologies.
The Impact of the IRA
The IRA is the first bipartisan effort in the US to take meaningful action on climate-change mitigation. It includes a $369 billion package of subsidies, with support for clean-energy generation, manufacturing and new technologies and demand-side support for households, individuals and businesses. What makes the IRA unique is that subsidies for business investment are open-ended (so the actual cost could climb significantly) and direct, with payments going quickly to businesses with confirmed investments.
The IRA’s impact has been significant and immediate. The composition of the US electricity system is now projected to increase from 41 per cent renewables in 2022 to 90 per cent renewables in 2030. And the electric-vehicle supply chain has seen more than 36 new major projects add up to a potential $40 billion in capital investment and 30,000 new jobs.
Abroad, the IRA has had an unprecedented impact on the global clean-tech economy, with companies moving investments to the US to take advantage of American subsidies. This includes established brands such as Audi and BMW, which plan to create assembly plants in the US, Hyundai and Panasonic, which plan to build battery plants there, and leading European electricity company Iberdrola, whose main destination for investment is the US, as well as start-ups like Northvolt.
In total, the IRA – along with the Creating Helpful Incentives to Produce Semiconductors and Science Act (CHIPS Act) introduced in July 2022 – will lead to public and private investment in technologies that will be critical to the future totalling an estimated $1.3 trillion by 2032.
How the UK Must Respond
With the IRA, the US has established an example of how to take legislative action on climate change, and any country that wants to remain a key player in the century ahead will need to follow suit. However, the policies implemented in the US will not necessarily be appropriate for every context. As the UK looks to respond to the IRA with its own legislation, it must strategically copy, compete, and collaborate.
What to Copy
The IRA has set the tone for how governments should support clean tech. The extensive tax credits are designed to give companies financial incentives with the predictability of a ten-year time horizon.
If the UK is to remain competitive, the government needs to find a way to quickly get money out the door and provide the predictability of funding and market arrangements businesses need. The EU has shown signs it has learnt this lesson. Its Net-Zero Industry Act aims to speed up both the pace of its funding mechanisms and of member states’ planning and permitting regimes, but for now there are no signs that the UK is following suit. This is against a backdrop of already low levels of investment; in the four years following the Brexit vote, average foreign direct investment as a percentage of GDP fell to its lowest level since the early 1980s.
Adding pace to the UK system involves faster decision-making and delivery. It is not sustainable to take 12 years to build a wind farm, a process widely recognised to be possible to complete in five years or less with the right policy and regulatory framework. It is also not sustainable for the renewable industry to get increased capital-allowance rates for renewable projects that only last three years, far shorter than the timeframes of their projects. The hydrogen and carbon capture, utilisation and storage (CCUS) industries have been waiting for years to get their business cases passed and funding awarded, resulting in good projects being put on hold while the rest of the world races ahead.
To respond to the IRA, the UK should introduce a system that provides support to industry with the speed and predictability it needs to invest, including:
- Shifting to permanent full expensing for investment in grid infrastructure and renewables.
- Accelerating planning reform to allow grid and renewable projects to proceed within months. Specific actions could include fast-tracking large energy infrastructure projects or designating “renewables zones” where planning approval is assumed.
How to Compete
The UK cannot compete with the scale or the breadth of the subsidies in the IRA, but it does have strengths as a country that could be used to its advantage on an international stage. The “strategic advantages” the government appears to have identified, based on the recent budget announcement, are carbon capture and storage and nuclear. While the UK could succeed in these two sectors, the country has additional upstream advantages that could be better utilised to enable success in these sectors and beyond. The UK’s small size, agility and existing science and technology strengths can be used to create a platform for innovation and growth in climate tech and help attract the investment needed to deliver the decade of electrification.
Some of the most valuable lessons of the IRA lay in what isn’t included rather than what is: addressing the US’s slow and localised planning system.
Foremost among these is the lack of planning reforms to quickly build out grid capacity (an attempt to introduce reform measures was blocked in the Senate in December 2022). Grid capacity is now the biggest barrier to the IRA’s success, with 1,280 gigawatts of clean power waiting to connect to the grid across the US at the end of 2022. The UK is currently facing similarly huge connection delays with some offshore wind farms not getting connection dates until well into the 2030s.
The UK can turn its small size into an advantage for building electricity grid infrastructure. The Climate Change Committee has set out that the country will need to double the capacity of the transmission grid by 2035. With radical reform of the way it manages and builds the grid, the UK government could create a system where connections on the transmission and distribution grid are available ahead of need and deliver faster grid connections than its peers. The UK will become an attractive destination for investment if industries know they can quickly get connected to the grid. Options for reform include:
- Reforming our planning system to ensure nationally significant grid development is not held up by lengthy consenting processes.
- Building on the prime minister’s recent announcements regarding focused research organisations (FROs), create an FRO that develops next-generation materials to improve grid-transmission efficiency.
- Digitise the grid and improve grid-management techniques, for example through digital-twin technology. An improved grid should also be more flexible at the home, building, local and national level.
- Review the current role of the Office of Gas and Electricity Markets (Ofgem) and consider how a regulator can work to enable rather than hinder quick and modern grid-infrastructure build and connection.
- Allow companies to build their own transmission lines, as Octopus Energy CEO Greg Jackson recently suggested.
The UK’s competitive advantages also extend beyond the grid. There may be other opportunities for the UK to be agile and forward-leaning through adapting regulation to changing contexts. One option would be to redesign our energy market to align more with the decentralised physics of emerging technologies and a more flexible demand side, as suggested by the Energy Systems Catapult CEO Guy Newey. This would help drive UK competitiveness for demand-side energy innovation. Similarly, there may be opportunities for the UK to capitalise on the opportunities presented by agritech and sustainable proteins. The UK faces an opportunity to create a world-leading regulatory system – one that prioritises an open dialogue with innovators and allows for iteration.
We can also compete by investing in other upstream capabilities that can help drive investment. In our recent paper A New National Purpose, we set out a number of measures to invest in upstream capabilities and drive investment, such as making data available to companies and innovators, expanding the Catapult Network, and enabling the establishment of more “Living Lab” projects. The UK should become a testing ground for new technologies and climate-tech start-ups and help scale technologies quickly – encouraging them to remain in the UK. Investment in R&D could help nurture the UK’s advantage in areas like energy-management systems. If we are going to be the home of the next generation of climate-tech companies, growth equity is going to be essential and radical reforms to pensions are necessary, including changing the pension capital-gains tax exemption and combining UK Pension Protection Fund and the National Employment Savings Trust to create a single investment vehicle.
When to Collaborate
The IRA is deeply protectionist in its nature. While a large country such as the US can go down a protectionist route (even if the made-in-America provisions of the Act are slowing the roll-out of solar), this cannot and should not be the approach adopted in the UK. Instead, the government should seek to build stronger global partnerships on climate tech with the US and other countries, particularly as China continues to strengthen its capabilities in key clean technologies like electric vehicles. As we set out in A New National Purpose, it is not possible for the UK to develop its own strategic advantage in every area of technology, so it must work with allies to boost international innovation and set global standards for technology. The increased ambition from the United States in the clean-tech space is likely to create opportunities for the UK’s own decarbonisation efforts.
The UK should build upon existing collaboration and build further relationships in a number of areas:
- Build on the “critical minerals buyers club” to address wider supply-chain vulnerabilities in the clean tech sector.
- Continue building stronger transatlantic ties on areas of mutual interest. An example is fusion, where there are opportunities to build upon the agreement with the US company Commonwealth Fusion Systems to advance commercial fusion energy, including everything from joint authorship of fusion research to cooperative intellectual-property licensing terms.
- Ensure quick association with EU research programmes like Horizon Europe, Euratom and Copernicus.
- The UK should seek a UK-EU framework on green aviation fuel, given the UK’s position as a major European aviation hub.
- The UK should build a new informal “T3 coalition” between the UK, EU and US to find common ground on technology standards, including in climate tech.
The UK needs to learn the right lessons from the IRA. It should seek to copy the IRA’s ambition, long-termism and simplicity, but learn lessons from its shortfalls on planning and the transmission grid.
The UK can devise a more strategic approach and compete in areas where it has a strategic advantage, such as using its small size to reform the planning and consenting system to unlock the infrastructure required for a green transition. And it should collaborate with allies to build international innovation, particularly with the EU, its closest trading partner. If the UK government learns the right lessons, it will be able to set the country up for success within the key technologies of the future and deliver on the next decade of electrification. But if it fails to act, the UK will fall further behind our trading partners.
If the country wants to not only make the transition towards clean energy and deliver the decade of electrification, but also build a vibrant sector that exports technologies around the world, reform is needed. This is a generational issue. We need to be home to some of the next era of century-defining companies.