UK energy department faces GBP2 billion cut to fund defense spending

The UK's Department for Energy Security and Net Zero is facing a GBP2 billion ($2.7 billion) spending cut as the government redirects resources to boost defense spending, potentially putting some energy projects at risk.

DESNZ received a large boost from the government's 2025 spending review, but has now been asked to find savings of GBP2 billion through to 2030.

"Some capital projects -- for example, on roads and energy, which are important, but not immediately vital -- will no longer go ahead as planned," Prime Minister Keir Starmer said June 30.

However, the government reiterated its commitment to cutting fossil fuel consumption.

"Getting off fossil fuels is vital to our national security, safeguarding household, business, and government finances," the government said in a statement on June 30, setting out the defense spending plans. "DESNZ will reshape its capital budget in a way that continues to protect the clean power mission, drive renewable and nuclear build-out, and insulate us from future gas price spikes on the path to energy independence."

A source close to the matter said DESNZ would find most of the savings through efficiency measures, capital underspend and delays to some projects.

While there was some risk to capital spending on energy projects, DESNZ would try to ensure projects went ahead, the source told Platts, part of S&P Global Energy, on July 1.

This could mean scaling back or delaying some infrastructure spending.

DESNZ funding will be cut by GBP100 million in 2026-27, rising to GBP600 million in 2027-28, GBP700 million in 2028-29 and GBP600 million in 2029-30.

The energy department declined to comment on where the cuts would be made. The government is to set out further details of the spending reallocation in the autumn, by which time there will be a new prime minister, after Starmer resigned in June.

Starmer's resignation has created further uncertainty for the country's hydrogen and carbon capture sectors, bringing the prospect of further delays to key funding and policy decisions.

CCS projects

In the 2025 spending review, the government allocated GBP9.4 billion to carbon capture, usage and storage over the period to 2030.

The UK's first two CCUS clusters -- the East Coast Cluster around Teesside and HyNet in the northwest of England -- reached positive final investment decisions in 2024 and 2025, and are now under construction.

ECC will capture and store 4 million metric tons/year of CO2 from 2029, while HyNet has an initial capacity of 4.5 million mt/year, starting around the same time.

The government has also pledged support to fund a second round of CCUS clusters by the end of the current parliament, encompassing the Acorn and Viking stores, though industry leaders have said the timelines for these projects are in doubt.

Platts assessed nearest December UK ETS carbon allowances at GBP56.85/mt on June 30.

The UK's nascent hydrogen sector is also awaiting a delayed policy update, originally due by the end of 2025, as well as the results of the second electrolytic hydrogen allocation round and details of future rounds.

Nuclear commitments

On nuclear power, the government allocated GBP14.2 billion for Sizewell C over the spending review period. The 3.4-GW Sizewell C plant is under construction and due to start operations in the late 2030s.

The UK will proceed with its next renewable energy auction as planned despite Starmer's resignation as prime minister and rumors of a potential promotion for Energy Secretary Ed Miliband, the government confirmed June 24.

The indicative timeline for Allocation Round 8 of the UK's contracts for difference auction regime still stands, a DESNZ spokesperson told Platts.

The government's spending review also committed GBP2.6 billion in capital investment to decarbonize transport, including GBP1.4 billion to support electric vehicle uptake.

In addition, the spending review extended the Advanced Fuels Fund to 2029-30 to support sustainable aviation fuel production.