Legislate and regulate for net zero investment

Lawrence Slade, chief executive of the Global Infrastructure Investor Association (GIIA), highlights a gap in the policies and regulations needed to attract the tens of billions of pounds of investment required to meet the government’s 2050 net-zero emissions target. This article is part of Utility Week's Countdown to COP series.

Earlier this month, the Intergovernmental Panel on Climate Change (IPCC) published its sixth assessment report on climate change. The report is not comfortable reading, with 1.5 degrees C warming expected by 2040.

The need to accelerate climate mitigation, adaptation and resilience work has never been higher. Previous research both by PwC in partnership with the Global Infrastructure Investor Association and separately by the Committee on Climate Change (CCC) have indicated that the UK needs to spend an additional £40-50 billion per annum through the 2020’s to meet net zero.

Back in June 2019, the UK parliament passed the first legally binding net zero commitment among advanced economies – an act viewed by many as a hugely positive step forward. At that point there were 122 quarters left before 2050. Depressingly 7 per cent of that time has passed, and arguably, at least in terms of hard policies and clear net zero project pipelines, we are not really any further forward in terms of decarbonising the whole of the economy.

However, there are positives. The UK water sector upped the ante and committed to net zero operations by 2030. In the energy sector, there has been huge decarbonisation in areas such as power generation, where, over the last decade, great strides and tremendous investment has been put into clean generation – from onshore wind, solar and offshore wind – to the extent that more than 43 per cent of the UK’s electricity came from renewable sources last year.

Likewise in terms of private transport, 9 per cent of new cars sold are now electric, and at the latest count there are over 40,000 public charging points in the UK with hundreds of new ones being installed every month. Huge developments are being made in hydrogen technology with new tidal turbines able to generate green hydrogen from fast flowing waters, as in Orkney, for example.

Since the 1990s, we have also been trying to improve the efficiency of the UK’s housing stock.  Countless government programmes have come and gone – some more successful than others – and yet we still have more than 66 per cent of houses in England with an Energy Performance Certificate below band C. More clearly needs to be done, given that 22 per cent of the UK’s emissions are from housing.  But multiple questions remain around how we will manage our heating in the future and, of course, off the back of that uncertainty sits billions in investment waiting for a home.

Our digital communications infrastructure has also improved vastly over the last few years with miles of fibre optic cable bringing ultra-fast broadband to homes and businesses across the country. The roll-out of 5G will not just enable faster downloads but most importantly allow millions of different datapoints to be monitored and remotely adjusted, leading to increased efficiencies in everything from manufacturing to your local energy or water network. Incredible innovations are taking place such as the recently announced £4 million trial to run fibre optic broadband cables through water pipes to help connect hard-to-reach homes without digging up roads.

What links this together is that in the UK, many of our electricity, gas, water and communications networks are owned by private investors – often pension funds with long-term investment horizons – which also bring innovation and project management expertise to bear.

Over the past couple of decades, the UK has had a reputation as a gold standard destination for inward investment. These investors represent long term patient capital and across these sectors, the existing regulatory frameworks have mobilised on average £25 billion of investment per annum since privatisation. There is clear recognition that much more will need to be invested over the coming decades as we increase electrification, green the gas grid, continue building clean generation and investing in our future water supplies. There is also the question of how we can best invest in nature-based solutions and, with the UK’s utilities being significant landowners, this represents a huge opportunity vis-a-vis carbon savings.

We estimate that out of the required additional capital spend of £40-50 billion per annum, some 50 per cent is not covered by existing policy or regulation. Conservatively that represents investment of some £250 billion in the 2020s.  Given that time is not on our side, this policy lacuna is very concerning.  What is of equal concern is that this investment requires a stable regulatory framework – that same framework that has delivered tens of billions of investment over the preceding decades.

This isn’t an idle comment made as an excuse not to invest. It is a comment made in clear recognition of the need to invest and to do so in the fastest, most responsible manner possible.  At GIIA, our investor members have infrastructure holdings of around $1 trillion, and we estimate that at any given point in time they have in excess of $200 billion ready to deploy.  But of course, the UK is not the only market competing for this investment.  Both the European Union with its Fit for 55 programme and the USA with the recently passed Infrastructure Bill, have huge infrastructure investment programmes, which, while expecting significant investment from governments, will also require high levels of investment from the private sector – particularly into the energy sector.

So, there is no lack of appetite or shortage of money looking for long-term stable homes. Indeed, recent multibillion-pound deals illustrate the ongoing interest in the UK sector. But investor confidence in the UK has been shaken over the last few years. This can be illustrated with the fall in foreign direct investment (FDI) having peaked at a high of £192.6 billion in 2016 to just £35.6 billion in 2019 – at the same time global flows of FDI increased by 3 per cent to over £1 trillion. There are a number of reasons for this – political uncertainty from 2015 onwards around the security of utility investments, a regulatory pendulum that had swung too far towards short term bill reductions at the expense of long-term investment, and a regulatory environment that, to many, appeared out of step with overall policy direction given the huge levels of investment needed in coming years.

While the introduction of the National Security and Investment Act is clearly well intentioned, it is important that the regime receives the right level of support by government to ensure that it doesn’t negatively impact deal flow by acting as an obstacle or burden to new or existing investment in the UK. On the positive side of the equation, the Office for Investment is certainly a very welcome move spanning several government departments and able to “bang heads” across Whitehall as and when needed. While there is scepticism from some investors over the role of the UK Infrastructure Bank, it also can make a positive contribution to helping deliver the UK’s climate targets – helping local authorities raise funding and get nascent technologies up and running, acting, in other words, in areas of market failure and helping to crowd in private capital reducing national government’s budgetary pressures.

So, while we have seen some positive indications and indeed, some deals happen over the past few months, the volume of transactions and investment needs to be massively dialled up – and quickly.

Ultimately net zero will touch every part of our economy and society. Yes, utilities will bear the brunt of the change by facilitating much greater electrification and climate friendly fuels, but so will families and businesses across the country. Perhaps most pertinently from this article’s perspective, it will require huge coordination across government.  Policies cannot be developed in isolation but must be co-ordinated at each stage of their development, clearly setting out how the transition will be fairly delivered and with binding sectoral milestones flowing down from the carbon budgets.

This co-ordination must also include the regulators who must be given very clear strategic direction to allow them to independently shape their regulatory approach.  The coming years will require great levels of innovation and investment, regulation must help encourage this.

So anyone for an office for net zero delivery?

We know that net zero and all the associated topics are the number one issue for investors.  If, in the coming months, the UK can create a robust policy environment that shows a clear net zero delivery path across the economy supported by a regulatory framework that balances the needs of the investor with those of the consumer, we can be confident that investment will flow. It is to be hoped that in the run up to COP26 we will see a raft of government publications to build on the recently published Hydrogen Strategy that will begin to fill the policy gap.

To conclude, it really is quite simple – there is no shortage of money and investors need a clear long term project pipeline to invest in. What we need urgently is robust legislation supported by a clear strategic regulatory framework – the combination of the two equals increased investor confidence, and then the investment will flow.