Decarbonising power is essential to provide affordable, clean energy and deliver net zero ambitions. It also brings significant investment opportunities. We convened a range of industry experts to discuss the barriers and how to overcome them.
Read this article to understand:
- The importance of decarbonising the power sector
- The five key barriers to unlocking investment into decarbonising power
- The solutions that could transform power generation, storage and distribution
Significant progress has been made in transforming the UK’s power system. There has been a vast expansion of clean energy generation and substantial investments in electricity networks. A government plan announced in December 2024 should further accelerate the decarbonisation of the power grid.1
However, power was responsible for 11.5 per cent of the UK’s emissions in 2023.2 Demand for electricity is also expected to rise by 50 per cent by 2035 and to double by 2050, driven by the electrification of parts of the transport, heating and industrial sectors and the emergence of new sectors, such as artificial intelligence.3
Meeting growing demand while decarbonising power could therefore require additional capital expenditure of between £275 billion and £375 billion by 2035.4 This presents a significant opportunity for private investors but relies on the delivery of commercially viable low-carbon projects, supported by regulatory and commercial business models.
As part of our holistic approach to stewardship, we brought together experts from across the power sector value chain to explore the barriers to decarbonisation and identify actionable solutions.5,6 In October 2024, we convened 11 industry leaders, spanning renewable energy developers, grid operators, utilities, and storage providers (see Figure 1).7
Although the discussion primarily focused on the UK, the insights have wider relevance for efforts to decarbonise power in other markets, especially in the EU. This article looks at five key barriers and potential solutions the industry leaders identified to decarbonising power, also taking into account key policy developments, such as the UK Government’s Clean Power Action Plan published in December 2024. 8
Figure 1: Value-chain roundtable – represented sectors
Source: Aviva Investors, as of February 18, 2025.
Regulatory and policy barriers
The roundtable participants acknowledged the success of the Contracts for Difference (CfD) scheme and annual renewable energy allocation rounds (ARs), which have been instrumental in scaling up the UK’s offshore wind capacity.9
However, the current rate of offshore wind deployment must be scaled up (see Figure 2). While successful, the most recent allocation round, in September 2024, delivered five gigawatts of offshore wind capacity.10 The government estimates that, to meet its clean power ambition, the next two to three rounds must deliver at least six gigawatts each.
For developers, the CfD scheme is often perceived to favour large-scale projects, leaving smaller companies struggling to access funding due to unclear guidelines.
Moreover, some value-chain industries, such as offshore wind manufacturing and maintenance, have been historically under-supported and are not ready to meet demand. And while participants celebrated technological advancements, constant innovations prevent economies of scale. This creates a perception of risk for investors, and therefore higher capital costs.
The lack of clarity on future policies also adds uncertainty for investors.
Figure 2: Forecast 2030 installed capacity versus government target (gigawatts)
Source: Cornwall Insight Benchmark Power Curve Q4 2024.11
Proposed solutions
- For the 2025 and 2026 auction rounds, ensure ceiling strike prices and overall funding pots remain in line with evolving costs to deliver commercially viable projects that meet government targets, with the auction process more closely monitoring supply chain developments than past auctions.
- In allocation rounds, enable windfarms and batteries to be treated as a single asset under a CfD, to boost the financial viability of the co-location of assets. Consider shifting the existing wind constraint payment model to incentivise investment in battery storage, rather than stopping generation.
- Pursue a more unified cross-sectoral energy policy to complement the current policy focus on offshore wind, including grid expansion, energy storage and alternative fuels. Align energy policies with broader industrial strategies to provide clear long-term pathways.
- Ensure that, while providing the desired price signals to the future electricity system, the summer 2025 reform of electricity market arrangements (REMA) does not affect the economic integrity of existing and future projects and is understandable and accessible to investors.
- Target public investment – and leverage private investment – to boost innovation and growth in domestic supply-chain capabilities.
- Encourage value-chain collaboration to standardise components, drive economies of scale and reduce investors’ perceptions of risk.
Transmission infrastructure and grid development
To achieve its clean power ambitions, the government needs to build twice as much new transmission infrastructure by 2030 than has been built in the last decade.12 The integration of smart grid technologies is also crucial to ensure the grid remains resilient, and responsive to renewable sources.
Yet planning delays and supply-chain bottlenecks are holding up the building of essential infrastructure, while outdated connection rules are slowing the integration of new energy generation and storage projects to the grid.13
Participants flagged these delays as major barriers to decarbonising the sector. They pointed to growing congestion in the grid connection queue, where some projects face wait-times of up to 15 years.14
It also creates significant uncertainty for investors and developers, and threatens the timely deployment of projects.
Proposed solutions
- Implement the Transmission Acceleration Action Plan, which could reduce the development time of new transmission infrastructure in the UK from 14 years to seven.15
- Implement the connections action plan to prioritise projects that are “connection ready” over those blocking the pipeline, as was outlined in the government’s Clean Power Action Plan.16
- Invest in EV charging infrastructure and smart meters.
- Support the rollout of infrastructure with a comprehensive campaign to improve information sharing with communities and a standardised approach to community benefits and engagement.
- Continue to incentivise new interconnection links with EU grids, remove barriers to trading electricity between the UK and EU, and align their emissions trading schemes.
We welcome the fact that the government is taking many of these solutions forward through its Clean Power Action Plan, its connection queue reforms and the Planning and Infrastructure Bill that is now before Parliament.
Energy storage and flexibility
The roundtable emphasised the critical role of long-duration storage in decarbonising the UK’s energy grid, given the intermittency of wind and solar power (see Figure 3).17
Figure 3: Modelled annual difference between wind plus solar supply and electricity demand
Source: The Royal Society, September 7, 2023.
Compressed-air energy storage and pumped storage hydro are two technologies worth noticing for investors. The latter also exists at commercial scale, whereas questions remain around compressed-air energy storage and hydrogen due to technical challenges currently preventing commercial viability.
Battery storage faces its own challenges, with “skip rates” – instances where available energy is not dispatched – sometimes exceeding 70 per cent. This underutilisation makes it harder to justify further investments.18
Participants also noted the UK’s slow progress in developing small-scale test-and-learn projects in hydrogen and battery storage.
Proposed solutions
- Introduce a coordinated strategy for energy storage that addresses the economic and policy challenges facing the sector.
- Develop business models to incentivise investment in long-duration storage solutions, such as pumped hydro and large-scale battery systems.
- Develop a strategy to clarify the role of low-carbon hydrogen in decarbonising specific parts of the economy, complete the regulatory framework and revenue stability mechanisms to incentivise investment in the production, transport, and storage of low-carbon hydrogen.
- Address the issue of skip rates and enable a more proactive use of batteries to balance the power system. Encourage industry-wide engagement on this front.
- The forthcoming cap-and-floor scheme for long-duration electricity storage may be due as early as the second quarter of 2025. Ensure it works for a range of technologies, including batteries and pumped hydro. Focus on rewarding the ability to store energy for longer durations.
Demand management and usage optimisation
The UK faces significant challenges in managing future energy consumption, especially with the projected surge in demand. By 2040, electricity demand from electric vehicles is expected to rise 31-fold compared to 2021 levels.19
There is potential to manage demand, but participants acknowledged encouraging households to change their consumption patterns remained a challenge.
Proposed solutions
- Consider how to reward off-peak energy usage by commercial users and consumers more effectively.
- Improve vehicle-to-grid technology to support the grid during peak times. Consider how to maximise power-sharing by ensuring regulatory pricing models reflect battery degradation and by obtaining consumer consent to build trust.
- Strengthen incentives and regulatory targets to improve energy efficiency in buildings and industrial processes.
- Consider investment opportunities in demand-side management technologies such as smart homes, vehicle-to-grid infrastructure, and internet-of-things. These will be critical in reducing demand peaks, lowering costs, and enhancing efficiency.
Supply chain and workforce development
Participants expressed concerns that the CfD scheme had not been effective in nurturing a robust wind sector value chain, including manufacturing and supply chains. Critical minerals like copper and lithium are primarily imported, making the supply chain vulnerable to global market fluctuations and geopolitical risks.
Many UK regions also lack the necessary infrastructure to support the construction and maintenance of offshore wind farms. Upgrading existing port facilities and grid systems is essential but can be slow and costly.
In addition, the UK’s renewable energy workforce faces a significant shortfall. The sector is projected to need 200,000 additional workers to reach 2050 targets, spanning engineering, project management, and site management roles.20 Recruitment challenges are exacerbated by competition for these skills across multiple sectors (such as construction) and reliance on a limited pool of contractors for grid infrastructure projects.
Proposed solutions
- Invest in STEM education and targeted low-carbon skills programs, including for people already in work. Identify specific skill shortages across the power sector through the Skills England body and implement targeted measures to remedy them.
- Strengthen domestic supply chains for critical materials to mitigate risks, ensure energy security and maintain cost-effectiveness.
- Prioritise investment in critical infrastructure, such as ports that can support the growth of key low-carbon supply chains in areas like floating wind and heavy industry.
Investment insights
Given the long-term return profiles of renewable energy companies, private investors typically seek predictable cash flows and minimal risk of financial shortfalls. Additionally, the evolving interest rate and inflationary environment presents uncertainty around the cost of capital and development. Therefore, regulatory measures that align financial and production mechanisms with increased cost and revenue predictability in renewable energy production and electricity pricing are beneficial. Such measures could boost investor confidence in expected profitability, capital protection, and debt obligations, subsequently catalysing private investment.
The clean energy transition extends beyond pure-play renewable companies. Sectors like semiconductors, artificial intelligence, power grid management, electric vehicles, and heating, ventilation, and air conditioning (HVAC) also play key roles and stand to benefit from the energy transition. Proposed solutions aimed at accelerating the integration of renewable energy by streamlining transmission and connection processes can have a positive multiplier effect on these sectors.
We look forward to the developments in the renewable energy sector overtime as we believe that regulatory, production, supply chain, storage and transmission improvements can unlock both environmental benefits and investment opportunities in the transition to a lower-carbon economy.
Further expanding cross-sector collaboration will also be essential for the successful transition to a net-zero economy. This means ensuring the energy, transport, agriculture, and manufacturing sectors work together to meet climate targets. By encouraging these collaborations, we can unlock new investment opportunities and drive sustainable change (see Building bridges to net zero).
