The BEIS Select Committee recently launched an important inquiry into finance and investment in the UK’s future energy infrastructure. It raises some important issues that need to be debated and decided on urgently but to do so successfully requires an understanding of a number of connected considerations. We have set out in this note a summary of the Key Questions, the Climate Change context and the connected issues for Heat De-carbonisation, E-mobility, and Electricity Generation.
The Key Questions
There are just a few questions raised by the Committee, and they want written submissions by 3 April. What is interesting is the breadth of coverage. There are some questions so seemingly obvious that many may not bother responding (e.g. how do recent investment decisions on nuclear affect the outlook for energy infrastructure?) and others that may be too difficult (how has policy improved UK energy investment over the last 3 years?) but, as always, they save the best for last. Reflect on the following:
What role should the Government play in providing financial support and sharing risks for new energy infrastructure?
Are existing financing mechanisms, fit for purpose?
Are there any practical issues, or potential unintended consequences, that could affect the feasibility of implementing alternative support models (such as a Regulated Asset Base)?
What further steps should the Government take to increase investor confidence in the UK energy sector?
Where to start?
These are questions with complex answers that will vary greatly depending on the perspective of the each respondent and a meaningful debate on the issues is to be encouraged. However, there is now an urgent need to resolve these issues and to implement the new strategy at pace.
The Intergovernmental Panel on Climate Change (IPCC) published its latest report in October 2018. That report laid out a stark (but conservative) warning on the consequences for the planet if we allow global warming to rise 2 degrees instead of 1.5 degrees. The IPCC also included a short summary for policymakers in which it stated that we need to cut CO2 emissions by about 45% by 2030 and to zero by 2050 if we are to hit or get close to a rise in temperatures of ‘only’ 1.5 degrees. Unfortunately, the Nationally Determined Contributions (NDCs) made to support the Paris Agreement fall a long way short of the reductions needed to do this, and at present no signatory is on target to fulfil those NDGs.
The UK can rightly be regarded as a global leader in the fight against climate change, being instrumental in the diplomacy that led to the Kyoto Protocol in 1992 and then the Paris Agreement in 2016 as well as providing a significant part of the innovation, engineering and finance skills that have helped deliver the recent renewable energy boom. The UK was rightly praised for being the first country to set legally binding targets to reduce greenhouse gas emissions with the Climate Change Act in 2008; however, it now appears that the UK may struggle to play its full part whether in or out of the EU.
Although the UK met its first carbon budget (2008-12) and is currently on track to outperform the second (2013-17) and third (2018-22) carbon budgets, the UK’s Committee on Climate Change noted that we are not on track to meet the fourth, which covers the period 2023-27 and, in their Progress Report in 2018, raised a number of concerns that needed attention to get the UK back on track. They noted that, although the Clean Growth Strategy set out some good policy ambition, there was little detail to give confidence that this would be put into effect and 2019 will be a key year for the Government to put its Paris Agreement commitments into effect.
At that stage, they noted good progress on de-carbonising electricity generation but were worried that heat and transport were lagging seriously behind. BCLP have a long history advising on district heating schemes and have followed the government’s approach to this sub-sector with interest. So far it seems that the Government will regulate the subsector (see here) and is exploring a number of options to de-carbonise (see e.g. BEIS’s review of the evidence so far in Clean Growth – Transforming Heating).
The HNIP scheme has made available £320m to help develop the UK’s heat networks. This is a meaningful amount of funding, but it remains to be seen whether this will be sufficient to unlock the widespread capital investment needed (the Government is hoping for £1bn) to move from a piecemeal approach to an holistic solution. One of the key issues will be identifying eligible projects, with private sector schemes facing some important challenges that may be difficult to overcome. The alternative to upgrade the hard infrastructure is to change the inputs into the existing infrastructure, moving to sustainable gas supplies, BEIS are due to consult later in 2019 on plans to increase the proportion of green gas in the grid.
E-mobility and Charging Networks
Transport makes up over 30% of the UKs carbon emissions and electrifying mobility will not only be a key tool in the fight against climate change but it will also have a profound impact on our way of life. In January of this year, Reuters published a study identifying around USD$300bn in global investment in electric mobility manufacture/design/build and the figure is likely to be far higher when charging infrastructure upgrades.
The Government in the UK has recognised the opportunity but, to date, has not delivered policy changes that are likely to accelerate investment in this sector. In July 2018 Chris Grailing published the Road to Zero setting out the Government’s strategy for cleaner transport, a summary of which you can find here.
Since then, the BEIS Committee published its report “Electric Vehicles: driving the transition” and then earlier this year the Government published its response.
The reaction from the BEIS Committee was withering, with Rachel Reeves MP, Chair of the BEIS Committee, saying:
"If the Government is serious in its commitment to ensuring the UK is a world-leader in electric vehicles, then it needs to give a clear and unambiguous target to help industry and the consumer make the switch to EVs. To ensure the UK seizes the opportunities to develop a globally-competitive EV industry, and takes a lead on decarbonising our transport, the Government must come forward with a target of new sales of cars and vans to be truly zero emission by 2032.
It’s also vitally important that the Government comes forward with detailed policies and actions to help make electric vehicles an attractive option, not least by ensuring that consumers across the UK have access to convenient and reliable charging points for their EVs.”
There is clearly strong appetite for this sector amongst investors to take part in this generation-defining opportunity but which business models are likely to succeed and which cities will play a leading role? To address these issues and many more, BCLP will be hosting an invite-only event with Green.TV where we will be joined by panellists from Oxford City Council, World Bank, BlackRock and EDF Energy. We are also delighted to be sponsoring the 2019 Oxford EV Summit (26th to 27th June @ Said Business School, Oxford) – accelerating the shift to electric vehicles: www.oxfordevsummit.org
The recent investment decisions by Hitachi and Toshiba to withdraw from nuclear new build in the UK were made for a variety of reasons but the results are simple: the Government’s preferred approach to de-carbonising electricity generation is not going to deliver the results needed in the required timeframe. There are alternative strategies available.
Off shore wind has delivered results on a scale that few could have anticipated 10 years ago. The Government continues to support this industry with the Offshore Wind Sector Deal announced last week. That deal includes the following key provisions and aims:
30GW of offshore wind by 2030;
create 20,000 new skilled jobs and to more than double the number of women by 2030;
increase global exports fivefold to £2.6bn per year by 2030;
by 2030, 70% of the UK energy mix will come from low carbon sources with offshore wind constituting about 30% of the total (whereas in 2017 it comprised just 6.2%).
Nevertheless, there are still those who say this is not enough, in particular with the diminished role that nuclear is likely to play in the energy mix and that the target for offshore wind should be at least 45GW or half as much again (see here).
There has been widespread hope for the possibilities of battery storage whether as a grid support, behind-the-meter management of demand or co-located with renewable generation. BCLP have been advising on battery storage projects for a number of years and regularly help our clients understand the challenges and opportunities that come with this asset class (see here). It has been difficult for lenders to provide project finance solutions due to the uncertain and short-term revenue streams available but successful subsidy free projects are starting to emerge (see e.g. Gridserve and Warrington Borough Council’s co-located solar plus battery storage project). Will that mean the door remains closed to Government support or should the Government see this as an opportunity for relatively light policy levers to generate significant momentum?
Historically, the UK has had an enviable global reputation for legal stability and consistency in policy-making. Investors are wary of turbulence and the now prevailing uncertainty around the UK’s position within or without Europe is exacerbating an already difficult policy landscape. Whilst some risks can be priced and/or mitigated, many potential investors have taken the view that the uncertainty on the UK regulatory position is such that the prudent approach is to wait until a clear direction of travel emerges. According to the EY renewable energy index, this policy uncertainty has been a significant factor in the slowdown in clean energy investment in the UK.
It is clear that there remains significant potential investor appetite for UK renewable energy projects but that to unlock that potential will take pro-active steps from Government and regulators. Much discussion has focused on the direct incentives such as Contracts for Difference, Capacity Market Agreements and changes to use of system charges. These have a material impact but there are other structural obstacles for certain types of investors. For example, there are regulatory constraints on insurers and bank lenders that do not fully recognise the long-term nature of many renewable energy investments.
The UK’s insurers alone hold over £1.8 trillion in invested assets and, of course, there are many trillions more managed by investment firms and banks. According to the DfT only around 1.2% of all assets under management in the UK are invested in greener projects such as renewable energy, collectively known as ESG (Environmental, Social and Governance) Assets (see here). The Association of British Insurers (ABI), announced this week that this was, in part, due to insufficient data and in part because the Solvency II rules effectively disincentivise insurers from investing in the kind of long-term, sustainable projects that could help mitigate the impacts of climate change.
If the UK is to get back on track, it needs to establish a clear and stable policy framework that will encourage the private sector to invest in and finance the energy transition to a low (and then zero) carbon solution. If we don’t do that, then most of the answers sought by the Select Committee will become irrelevant very quickly.