2 FTSE 100 stocks to watch as the National Energy Strategy unfurls

After much political wrangling, with PM Boris Johnson’s penchant for White Elephants at odds with Chancellor Rishi Sunak’s budgetary problems, the UK’s National Energy Strategy was at last published yesterday.

As a medium-to-long-term strategy, the document offers little by way of relief from the current cost-of-living crisis.

But with the UK cutting off Russian petroleum imports at the end of the year, and in wake of the COP26 climate summit, the political impetus is now firmly on increased energy security by way of a green expansion.

Of course, this isn’t the first, and will not be the last, energy strategy. In 2009, the then Labour government produced its ‘UK Renewable Energy Strategy,’ to source ‘15% of its energy from renewable sources by 2020 – an increase in the share of renewables by almost a factor of seven from about 2.25% in 2008, in scarcely more than a decade.’

At the time, this felt an implausible ambition. But in 2021, 39.3% of UK energy generation came from renewables. Technological advancement can happen faster than many presuppose.

Conversely, the Johnson government released the ‘Build Back Greener’ strategy in October 2020, and the ‘Industrial Decarbonisation Strategy’ in March 2021. Politics can change faster than technology advances.

And with yesterday’s announcement a thrashed out political compromise, investors may be wise to take its long-term future with a spoonful of salt.

FTSE 100 National Energy Strategy stocks

Nuclear: Rolls-Royce shares (LON: RR)

The new strategy calls for up to eight nuclear reactors to be built by 2030, a build rate increase of one a year instead of one a decade. This includes the two traditional plants at Sizewell in Suffolk.

The government plans for nuclear to supply 24GW of electricity by 2050, around 25% of predicted demand. And it promises that ‘Small Modular Reactors (SMR) will form a key part of the nuclear project pipeline.’

A new body, Great British Nuclear, is being set up, to be backed by ‘substantial funding,’ while the £120 million Future Nuclear Enabling fund is being launched this month to make entering the nuclear market easier.

Meanwhile, the Nuclear Financing Act includes provision for the Advanced Nuclear Fund, with £210 already made available to Rolls-Royce to design one of the first SMRs in the world. The UK’s engineering crown jewel plans to deploy its designs from 2029 ‘to turbocharge UK nuclear capacity.’

Rolls-Royce’s SMR initial designs envisage plants the size of about two football pitches, which can power 500,000 homes each, and are factory produced, so much cheaper to manufacture than traditional plants.

In addition to the government’s £210 contribution, Rolls-Royce is backed with £290 million from the Qatar Investment Authority, Perenco, and Exelon Generation.

SMR CEO Tom Samson, who recently spoke with Johnson about the company’s potential, believes ‘The Rolls-Royce SMR remains the fastest route to market for new nuclear deployment in the UK and we welcome this government’s clear commitment to turbocharging nuclear deployment.’ Speaking in Parliament, he argued that the first could be online in 2029, with hundreds deployed by 2050.

On the other hand, the government is in talks with US-based Last Energy, which argues that its own designs are half the size of Rolls-Royce’s. Moreover, it believes its first SMR could open in 2025, four years earlier than its competitor. And it would spend £1.4 billion on 10 reactors by 2030, also envisioning hundreds of plants over the next three decades.

And Last Energy is backed by venture capital firm Gigafund, which also backs Elon Musk’s SpaceX, The Boring Company, and Neuralink. But it’s also worth noting that the UK government has a golden share in Rolls-Royce. The mildly nationalistic tendencies of the current PM could give it an advantage with Great British Nuclear.

Wind, Solar, and Hydrogen: SSE shares (LON: SSE)

Offshore wind is key to the new strategy, with the government targeting 50GW of electricity generation from this source by 2030. Moreover, 5GW of this will come from turbines on floating structures invisible from the shoreline.

Accordingly, it’s relaxing planning rules from four years to one, and setting up fast-track approval for high priority projects.

The government also wants to increase the UK’s current 14GW solar capacity fivefold by 2035, and double UK hydrogen production to 10GW by 2030. Half of the hydrogen production is planned to be electrolytic hydrogen, ‘subject to affordability and value for money.’

This is all good news for FTSE 100 operator SSE, which is currently building Seagreen, the world's deepest fixed-bottom wind farm, and Dogger Bank, the largest offshore wind farm in the world.

The UK’s ‘national clean energy champion’ has already earmarked £12.5 billion for green investments by 2026, planning to double its renewable generation capacity to 8GW. It’s also increased EPS guidance twice to between 92-97p for FY22.

In an apparently coordinated release, CEO Alistair-Philips Davies said he was ‘proud to be announcing that we’re creating 1,000 jobs a year until 2025 in support of delivering net zero,’ while the PM enthused it was ‘hugely welcome to see SSE demonstrating the commitment needed from industry.’

Davies highlighted the ‘commitment to accelerate delivery of offshore wind as the backbone of a cleaner, more secure energy system – but also critically the acknowledgement that accelerating investments into network infrastructure and flexible technologies like pumped storage, alongside a developing hydrogen economy, will be essential.’

In January, SSE began its first solar project at Littleton Pastures in Evesham. Aiming to begin electricity generation next year, the 77-acre site will power 9,400 homes. Director for Distributed Generation and Storage Richard Cave-Bigley called it a ’significant milestone,’ arguing SSE sees ‘solar as a key complementary technology to SSE’s existing portfolio of low carbon infrastructure such as wind and hydro.’

Then on Monday, the company unveiled its 100MW green hydrogen electrolysis plans for its Gordonbush wind farm in the Scottish Highlands.

Green hydrogen is seen by many experts as the holy grail of renewable energy, because unlike fossil fuels hydrogen only emits water vapour. And green hydrogen, produced by splitting water atoms via electrolysis using electricity from renewable resources, is even more environmentally friendly.

SSE thinks its Gordonbush facility could soon produce 2,000 tonnes of green hydrogen a year and is even planning a battery energy storage system to maintain production even on windless days.

Annant Shah, Director of Strategy and Route to Market believes green hydrogen could play a ‘revolutionary role in decarbonising power production,’ and that ‘combining electrolyser and battery technology with wind farms could be a game changer.’

As the UK National Energy Strategy unfurls amid high political winds, SSE and Rolls-Royce shares will almost certainly be two of the best FTSE 100 stocks to watch this decade.

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