Mobilising the Necessary Capital to Develop Low Carbon Infrastructure & Energy Projects

LONDON, UNITED KINGDOM – September 2024 – On September 10th, the Energy Council partnered with Howden to deliver a panel discussion focused on Mobilising the Necessary Capital to Develop Low Carbon Infrastructure & Energy Projects which covered some pressing questions facing those operating in this space such as:

• Key barriers and opportunities to financing transition investments.
• Examples where private investment is being crowded in and where private public partnerships are being leveraged successfully.
• Existing de-risking solutions to unlocking capital and accelerating investment for net zero.

The panel featured the following:

• Ian Brown, Head of Banking, UK Infrastructure Bank
• Celia Greaves, CEO, Hydrogen Energy Association
• Dr James Richardson, Interim CEO and Chief Economist, Climate Change Committee
• Julia Pyke, Joint Managing Director, Sizewell C
• Andy Cox, Head of Energy Transition, Howden (Moderator)

This report summarizes the key points discussed during the session and provides though-provoking ideas which are poised to impact how leaders across the energy, financial, and policy sectors might respond to the challenge and opportunity of accelerating the UK’s journey to net zero. Below are the main takeaways:

1. UK's Clean Energy Potential & Policy Clarity

• The UK has significant potential to lead in clean energy, but progress has been hindered by uncertainty.
• Clear, consistent policy is critical to success. Unsurprisingly, without it, it is difficult to attract and maintain investment.
• Hydrogen & nuclear are an important part of the energy mix, but by themselves they are not a silver bullet. Multiple technologies will need to play a role.

2. Ambitious Targets and Political Commitment 

• The UK has a strong track record in reducing emissions, achieving significant progress. The 2030 target is for a 68% emissions reduction, as per the Paris Agreement commitment, and the new government's goal to decarbonize the electricity system by 2030 are ambitious. If achieved, the UK will be a global leader.
• However, the technologies required for this transition haven’t been deployed at a commercial scale, and the timeline for scaling up is short.
• The planning system has historically slowed progress, but recent reforms and approvals are promising signs of change.

3. Investment Landscape: Opportunities and Challenges

• While the US’s Inflation Reduction Act (IRA) has created headlines, the practicalities have fallen short of expectations. The UK needs to focus on stimulating demand and setting clear targets, especially when compared to the EU, which has been more aggressive in home-grown projects.
• The UK excels at structuring financing for projects, but decision-making and deployment remain too slow.
• Support structures, like Contracts for Difference (CfD), should be integrated into projects such as Carbon Capture and Storage (CCS) to enhance their attractiveness.
• While the UK has strong political consensus on net zero and a robust financial centre, it is crucial to recognize the UK is different from the US. The UK’s smaller market means we need to make choices on which technologies we want to deploy here and which we are better off bringing in externally. We must be realistic and accept that the IRA model isn’t applicable here.

4. Barriers to Large-Scale Project Development

• The UK's slow pace in executing large-scale projects like nuclear power plants and wind farms is hindering investment. It took 20 years to get two nuclear plants into construction. This not only has an impact on the attractiveness or financing, but also affects how we train our future workforce. People and capital are intricately linked; without the right skills we won’t be able to deliver on the projects that will achieve growth.
• Policy certainty is vital. Investors need long-term, stable, and predictable policies to maintain trust in the UK market. This hasn’t been the case over the last parliament.
• The new government appears to grasp these challenges, but there’s a need to consider the risk portfolio holistically, not just by individual technology. This mind-shift change is essential.
• Treasury is open to understanding market risk appetite, but it’s unclear how this will translate into actionable policies.

5. Institutional Investment: Risk Appetite and Opportunities

• There isn’t enough appetite for early-stage investments. Most investors prefer projects when they are already operational. To reach net zero, institutional investors must become more involved earlier in the process.
• Institutions can’t invest without clear government direction. The current incentive structure prioritizes the cheapest option, but there is a need for a broader industrial strategy.
• Risks are not evenly shared across the value chain. While some government funding exists, public and private sector collaboration needs improvement.
• Insurance plays a key role in de-risking, but more focus is needed on risk management throughout the project lifecycle.

6. Impact of Phasing Out Oil and Gas

• The decline of the North Sea oil and gas industry will happen, we just need to look at the geological record. Substituting oil and gas with low-carbon energy will enhance UK energy security. High interest rates have an impact, but this is less significant given the long-term nature of the energy transition.
  • Pricing carbon correctly will help businesses and entrepreneurs find solutions to the energy trilemma. Yet it’s not the only solution. The carbon cost of new technologies is inadequate given that by nature new technology is expensive.

7. Capital Alignment: Attracting the Right Investment

• There is a mismatch between available capital and the deployment of clean energy projects. A clearer understanding of risk and reward is needed at the project design stage to attract the right kind of capital.
  • A well-structured approach to clarifying risk and reward early in the project lifecycle would accelerate investment.

Conclusion

The UK has a strong foundation and the potential to lead the world in the clean energy transition. However, to mobilize the necessary capital and realize the full potential of low-carbon infrastructure projects, it is essential to:

• Provide clear, stable, and long-term policy direction.
• Address the barriers in the planning and regulatory systems.
• Foster deeper collaboration between public and private sectors, particularly in sharing risk.
• Accelerate the pace of project deployment and skill development.
• Leverage insurance to de-risk new technologies and further strengthen the case for financing new projects

Next Steps: Join us at the 15th Annual World Energy Capital Assembly to hear what the future of the energy sector will look like, how business models are changing and what makeup of the energy mix will be. Check out the latest agenda for this year's assembly and if you would like to register your place, click here.