Ahead of tomorrow’s budget and in the year of COP26, many eyes will be on the Chancellor and what, if any announcements he makes to spurn investment in infrastructure to tackle Net Zero. However, Government is not the only player, a new report launched today by LCP titled Aligning the Stars: Asset owners and energy investment toward Net Zero, reveals the scale of investment opportunities for private capital in helping the UK achieve Net Zero targets.
Releasing untapped private capital, LCP estimates that the energy sector could develop investible assets to the tune of £350bn over the next 30 years as the sector increases its investment in and deployment of technology and assets needed to decarbonise the UK economy. This scale of investment equates to £12bn per year, every year until 2050. Existing renewable technologies such as wind and solar, alongside battery storage will lead the way, as well as creating new opportunities in innovative technologies such as hydrogen.
Analysis by LCP in the report highlights two different scenarios and the scale of investment that could play out in the coming years:
- A ‘business-as-usual’ scenario would see UK asset owners extending their infrastructure investments over the next decade to £70bn, leaving a funding gap of c£100bn by 2030
- A more optimistic scenario sees UK asset owners increasing their exposure alongside global asset owners and the government. With careful design and targeting of investments, up to £125bn could be invested over the next decade and the required £350bn by 2050.
Commenting on the report’s findings, Dan Mikulskis investment partner at, LCP said, “We see something really big coming here – an infrastructure build out that few people have yet grasped the scale of. At the same time the often heard ‘unlocking private capital’ cliché we think frames the whole thing the wrong way. We think there is huge untapped investment potential if the energy industry thinks differently about the assets.”
The doorway between private investment and infrastructure has been wide open for the last decade – with UK asset owners investing c£45 billion in infrastructure assets from offshore wind, to biomass, solar and sewers, alongside asset owners from the Netherlands, Australia, Canada and more (see Fig 1).
Fig 1: UK Invested assets
|Asset Owner Type||Assets (£bn)||Bonds (£bn)||Equity (£bn)||Source|
|Corporate DB Schemes||1,700||1,173||340||PPF Purple Book 2020|
|LGPS DB Schemes||272||68||163||ONS LGPS Funds data
The Investment Association
|DC Pension Schemes||450||135||270||Willis Towers Watson Global Pension Asset Survey 2019|
|Life Insurers||1,700||613||436||The ABI|
The report asserts that asset developers need to better understand that investors have a range of interests and move away from the assumption that equity assets are the only game in town for investors, given that bonds for instance, are by far the largest holding of corporate DB pension funds. Developers should look at divesting projects to make more assets available to end investors over time and utilise different types of financing asset packaging, such as bonds as rather than equity to suit the appetites of different investors. Greater patience is also needed when taking into account investor decision making and diligence timelines.
Kyle Martin, head of market insight at LCP added, “The Government’s Energy White Paper reaffirms that realising Net Zero will require more than a one size fits all approach. There is a broad diversification in both the technologies and assets that will be required, from existing technologies such as wind and solar that will need to be deployed more widely, to emerging technologies such as hydrogen and carbon capture that are still in their infancy. There will be a lot of eyes on the Chancellor tomorrow and whether he signals a kick-start to the boom of investment opportunities that will be needed over the next 30 years.
“The changes needed to reach Net Zero span much further than just the existing energy market and will also rely on large social and lifestyle changes. From the deployment of millions of EV charging points to the heating of homes through heat pumps, the infrastructure investment needed to deliver a Net Zero will be unprecedented. This means there will be investment opportunities across a range of energy infrastructure projects.”