Net zero requires £400bn spend this decade

Green infrastructure investment must double from current levels, to £40 billion per annum over the next decade, to reach the UK’s decarbonisation target.

This is the conclusion of research by PwC, which has also warned that half of the investment opportunities identified would currently be unable to access low-cost capital because they would be considered too high risk. It has called for government to urgently identify mechanisms to ensure this funding is forthcoming.

In a report commissioned by the Global Infrastructure Investor Association (GIIA), PwC estimates that an average of £15 billion every year will need to be invested in the UK’s power system in the next 10 years (£8.9 billion on power grids; £4.3 billion for low-carbon generation and £1.7 billion in flexible power).

It also predicts an annual £18.5 billion cost to decarbonise buildings and industry, £1.5 billion for transport and £6 billion on digital infrastructure.

The report points out that while there is a “deep pool of low-cost, patient, private capital already primed to accelerate investment”, the revenue models for less mature technologies are not clear.

It says that while the government’s role should primarily be to create the frameworks to incentivise private investment, it should also consider ways to provide targeted public financing support for early stage projects that could end up playing a vital role in reaching net zero.

This would require the government to work with industry, the report says, to identify which technologies require development phase support through a combination of private and public finance. It suggests institutional structures, such as a development bank, should be created and that each technology be assessed to identify the optimum quantum of funding.

The report also cautions that recent regulatory trends and negativity towards the private sector are having an adverse impact on global investors’ view of the UK. However, it says the Competition & Markets Authority’s attitude towards cost of capital in the water sector “should help secure a supply of foreign capital into UK regulated infrastructure”.

It calls for guidance for regulators to reflect the net-zero goal and to ensure the right balance between the interests of current consumers and those of the future. The energy minister has said this is something he is “looking at”.

The report, which was published before the announcement of Boris Johnson’s 10-point plan for decarbonisation, calls for a detailed net-zero infrastructure road map, including targeted levels of financing and the pace of development required for each technology.

Janine Freeman, energy transition leader at PwC UK and report co-author, said: “It is vital that we keep the cost of net zero investment down so the UK must attract low-cost capital which can be deployed at the scale and pace required to meet the 2050 target.

“The good news is that there is an abundance of this kind of long term, patient capital within a growing number of UK and international institutional investment funds such as pension funds, infrastructure funds and sovereign wealth funds.”

Lawrence Slade, chief executive of the GIIA, said: “Private capital stands ready to help turn the UK’s ambitious net zero agenda into reality through the delivery of environmentally and socially responsible infrastructure, but investors need additional clarity from government around the policy and regulatory framework that will cover these investments.”

“The delivery of a clear and compelling net zero infrastructure roadmap is a crucial first step in unlocking the investment needed to decarbonise our economy and ensure a cleaner, greener future.”

What do investors think?

In compiling the report, PwC spoke to a range of infrastructure investors about their views of specific segments and whether the business models and policy frameworks are attractive.

Power systems

Many of the investors surveyed are active in the low-carbon generation space and view the market for subsidised renewables as mature. However, there are differing opinions on the developing market for merchant projects with some considering it should be left to grow through the strength of revenues and tools such as power purchase agreements. Others consider government intervention necessary to keep the cost of capital down in this area.

Several investors highlight the need for government to enable more industry-friendly planning rules and grid connection processes to aid faster development.

When it comes to flexible power, assets such as batteries, peaking plants and demand side response are seen as emerging areas where the certainty around revenue streams is insufficient to invest. Again, there is a view that further revenue-based policy interventions by government may be needed.

Investment in energy networks continues to be attractive although concerns remain around the approaches taken in current price control discussions.

Buildings and industry

Both carbon capture usage & storage and hydrogen are currently seen as at too early a stage for investment capital, with a lack of clarity around the revenue models key to the scepticism.

Most investors share the view that a revenue model, such as the regulated asset base, would be effective at bringing forward private, lower-cost capital and that support from government in the form of grants is required for the early development phases.

An alternative model mentioned is a Contract for Difference for hydrogen to enable it to compete with natural gas as an energy source.

On energy efficiency, investors cite a “policy black hole” around decarbonisation of heat as a deterrent.

Transport

Electric vehicle (EV) charging is another area where uncertainty and the immaturity of the technology presents a barrier to low-cost financing. A dual concern is the risk of overbuild in London (where the situation is described by one investor as “similar to the Wild West”) and underbuild in rural areas. The possibility of stranded assets and scepticism over whether EVs really are the technology of the future are also holding back investment.

Many funds point to a regional concession or utility style model being required to drive fast and effective rollout in both urban and rural settings.