Does the private sector have the appetite for an energy overhaul?


Tuesday, April 19, 2022 5:35 p.m.

The government finally unveiled its long-awaited and long-delayed energy security strategy this month, with ambitious targets to increase national energy production over the next few decades.

Prime Minister Boris Johnson is keen for the UK to be both more resilient to future market shocks and less dependent on overseas suppliers to meet its energy needs.

If that hadn’t been a political priority before, the Russian invasion of Ukraine – and the inability of European powers to respond as they might due to their dependence on Russian gas – certainly made it one.

This includes a five-fold increase in offshore wind generation from 11 GW to 50 GW by 2030 and solar power from 14 GW to 70 GW by 2035, as well as a near quadrupling of nuclear power generation from 7 GW to 25 GW by 2050.

While it hasn’t announced onshore wind targets or reopened fracking under pressure from NIMBY, those targets reflect Downing Street’s determination to bolster supply,

However, such a radical overhaul of the UK’s energy industry requires more than goodwill, it also needs funding – with a growing focus on the private sector to achieve government goals.

Renewable generation surge already in motion

Trade association RenewableUK has revealed that the national offshore wind pipeline has reached 86GW, more than eight times the UK’s current operational capacity.

Its director of electrical systems of the future, Barnaby Wharton, tells AM City private companies are now investing £10 billion a year in new offshore wind projects in the UK.

Offshore wind turbine costs have fallen by two-thirds in the space of four years, and Wharton says the sector is now “subsidy-free”.

Meanwhile, Tom Williams, partner and head of energy and infrastructure at Downing Investment Group, describes the government’s goals as a ‘very big challenge’, but which he thinks ‘the private sector can meet’. .

Downing plans to raise and invest over £1bn in baseload renewables and other infrastructure in the UK and Northern Europe over the next five years, with a pipeline of over 2 GW.

Currently, the investment group manages less than £2bn of assets, while its renewables-focused investment trust has a market capitalization of £141.8m.

Although smaller than venture capital groups, Williams says trusts “showed the way to the much deeper pockets of larger private markets.”

He explained, “I believe investment trusts are the most direct and impactful way individuals can use their savings to make a difference and earn a reasonable return.”

Reforms are key to boosting private sector financing

Some would-be financiers have warned that there will be limits to the willingness of the private sector to pour money into building energy security.

“Onshore wind appears to be heavily discounted, which will limit the enthusiasm of developers to get heavily involved in time-consuming developments,” says Richard Crawford, director of infrastructure at InfraRed Capital Partners.

“Rooftop solar is also relatively expensive and resource-intensive per MW deployment. And the offshore industry may already be operating at near capacity.

Paul Jackson, global head of asset allocation research at Invesco, similarly suggests that the focus on nuclear could complicate private sector financing, as it remains a largely unexplored area from a from an economic point of view.

The nuclear element of the plans could require “significant government support”, he says, most likely delivered through public investment or by allowing power companies to impose charges on customers which can be funneled into the project costs.

Solvency too

The potential private sector funding pool could get a boost in the second half of this year.

Britain’s insurance giants have been forced to sit on huge cash reserves due to European-era Solvency II rules, and City Minister John Glen has announced plans to ax the rules last month in a bid to unlock cash to inject into projects such as renewable infrastructure. .

It will all depend on the details, with Glen yet to flesh out the plans, but the insurance industry’s mood music has been positive about his clout behind the changes.

“Effective reform of Solvency II rules will allow UK insurers like Aviva to play an even bigger role in supporting the UK economy, by investing more in the country’s critical infrastructure – colleges, hospitals, transport and renewable energies that are essential to our future,” said Amanda White, chief executive of insurance giant Aviva.

Now that the government’s plans are firmly in place, such reforms could be crucial to the success of its energy strategy, with investors in the asset management sector key to realizing the UK’s ambitions.


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