Time to be smart about financing net zero

In the UK, the government’s Net Zero Strategy: Build Back Greener lays out plans to adopt alternative green energy sources in pursuit of lowering emissions. Toby Horne and Ollie Finkill from Siemens Financial Services UK look at how investment in hydrogen and EV infrastructure will be crucial in the realisation of the UK’s net zero goals, and how clean energy alternatives can be intelligently financed.

Included in the UK’s net zero strategy are objectives to cut emissions by a minimum of 68% by 2030, and reach net zero by 2050. To reach these targets, the government seeks to take advantage of new green technologies and initiatives that will offer opportunities for growth and turn the UK into the “birthplace of the Green Industrial Revolution.”

Yet in order to move to new sustainable and clean energy solutions the UK first needs to have the necessary infrastructure in place, and the expected cost of investment to do so is beyond the remit of the public purse. To that end it is clear that private sector finance solutions will be integral to the UK reaching its net zero goals.

Following a pandemic and in a period of political/economic uncertainty, companies are cautious about committing large amounts of capital to new equipment and technology. Hence the importance of leveraging the right mix of financing to navigate times of volatility and crisis. Leading CFOs in industry are already deploying third party capital through a wider use of smart finance structures. They have found, as a result, that they can invest in sustainability initiatives in ways that are financially sustainable, through aligning flexible financing arrangements with the expected rate of benefit gained through those investments.

So, what are the clean energy alternatives vital for net zero success, and how can the investment challenge be overcome through smart finance?

The essential role of hydrogen

The government has laid out its plans to power the whole country entirely by clean electricity by 2035. But while electricity will be the primary source of energy, there remain many sectors where electrification is not suitable, making the supply of low carbon alternatives essential to achieving net zero targets. Hydrogen is high on the list of these alternatives, but with virtually no low carbon hydrogen produced or used currently, particularly to supply energy, this will require rapid and significant scale up from where we are today.

What’s more, some applications for decarbonisation, such as industrial heating, may be virtually impossible without a supply of hydrogen, and many experts have argued that these are the cases where it should be prioritised, at least in the short term.

There is also a significantly less talked about usage for hydrogen, that being as fuel cells in vehicles. In a hydrogen fuel cell, the clean burning compressed gas is converted first to electricity and then powers the bus, train or even aircraft or ship engine. So the likely mainstream solution may be hybrid vehicles that can either take electric power from a direct source, or generate it from hydrogen combustion.

Electric vehicles and how to charge them

Transport is one of the highest emitting industries in the country, and while the exact mix is yet to be determined it is abundantly clear that grid-powered and hydrogen-powered EVs will rapidly replace fossil fuel engines.

Autumn 2022 saw a watershed moment in the UK EV market, with Britain’s millionth plug-in electric car registered (249,575 had joined the roads at that point in 2022 alone). The EV infrastructure investment challenge to meet this rapid growth in demand is considerable. One key analyst reports that with more EVs coming to market, revenues from EV charging of passenger cars alone will surge to about £7 billion in the UK and £43 billion across Europe in 2030. Hardware and related fulfilment services will account for some 45% of this market through 2030 – around £3.15 billion.

However, recent figures from the Department for Transport have revealed that on average only 800 new chargers are being added to the public network per month – a rate that needs to increase to 3,130 a month (roughly 100 per day), if the government is to meet its target of 300,000 devices nationwide by 2030.

Demand for the necessary infrastructure comes from private businesses as well as consumers and the government’s strategy highlights the need for private sector support. Where a local authority lacks the appropriate infrastructure an EV driver may turn to destination charging, using facilities at private enterprises such as supermarkets, gyms, or pubs. With many leading supermarkets now offering chargepoints to customers, it is becoming obvious that private businesses can increase their value proposition by catering to electric vehicles.

Financing techniques for decarbonisation

But how will all this be paid for? The diversification of technology e.g. hydrogen fuel cells, can help make this challenge more surmountable, but it is clear public funds alone will not be sufficient to create the clean and green infrastructure required to transition to net zero. It will require a combination of public and private sector finance – a fact acknowledged in the government’s own strategy.

This is especially important for small to medium-sized manufacturers and the companies that sell technology and equipment to them. They do not have the luxury of being able to raise funds from the capital markets by issuing bonds or equity – tools that are only readily available to larger firms. This is where specialist financiers play a critical role by offering a variety of financing tools to make digitalised, low-energy, sustainable solutions affordable. To become more sustainable, organisations must invest in new, alternative or retrofitted technologies, this might be brand new facilities such as the EV charging systems themselves whereas in the hydrogen space, it will mean both small-scale generation plants, right through to hydrogen-powered vehicles and industrial machinery/processes.

Moving from one production environment to another inevitably involves testing a new system while the old one is running. This can be financially onerous, and specialist financiers provide ‘smoothing’ arrangements to manage that issue. This important tool for financing sustainability can be applied to brand new replacement systems, to retrofit (modernising and digitalising existing production lines), or to single equipment or technology items (such as EV charging stations). Just as importantly, smart finance can embrace all the cost of transition to more sustainable systems – equipment, software, maintenance & service, installation, testing, and training.

Each organisation’s cash flow needs are different – yet most generalist, standard financing arrangements only offer off-the-shelf terms and structures. Specialist financiers, on the other hand, are able to use their technical knowledge of the industry to understand the likely benefits that the new sustainable technology will bring, and, as a consequence, develop an individualised financing package accordingly. Arrangements can be structured to flex over time from low-start payments as revenues and efficiencies ramp up. Equally, payments can be aligned to expected sustainability related outcomes or even varied on a seasonal basis. It is these specialised smart finance packages which really help accelerate the move to sustainable platforms.

The drive for sustainable, decarbonising technologies remains strong despite economic and geopolitical pressures. While investment in electrification is growing in popularity in many industries, it is likely that a hybrid approach, combining electric with hydrogen, will be the most cost effective green strategy. This investment will be difficult for the public purse to bear alone. As a result, the role of specialist financiers is becoming more important for reaching sustainable goals, as they can help make the acquisition of the necessary technology more affordable, efficient and cash-flow friendly.