2 March 2021
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 Government to achieve its Net Zero targets and those outlined in the energy white paper.
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 U.K. 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.
To increase this appeal, the energy sector will need to work with investors to bring forward enough of the right assets at the right risk/return levels and quantity to interest global asset owners. The current levels of investment are often framed as a lack of demand from investors, but the problem has in fact been a lack of supply, with assets at the right risk return levels. 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.
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 next week 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.”
In assessing the future appetite and opportunities for investors and pension funds, the report identifies a number of key considerations:
- the combination of political will, emerging technologies and a need for capital will offer a tremendous investment opportunity to investors able to embrace the vision and complexity of new assets needed for a greener future.
- The more familiar renewable energy technologies such as wind and solar will continue to represent the biggest investment opportunity over the medium term, and the re-admission of onshore wind and solar to the next round of contract-for-difference auctions could stimulate greater supply of projects
- The newest technologies such as battery storage or carbon capture may take years to become investible, but over time may become legitimate asset classes.
The report also highlights that there is a huge amount of private capital seeking good long-term investments which is likely to be open to investing in UK energy infrastructure and explores how the industry can attract visitors. This includes developers divesting projects to make more assets available to end investors over time and looking as 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.
And finally, the report calls for government action around policy and financial mechanisms to encourage investment in energy infrastructure.
The mandate of the National Infrastructure Bank should avoid crowding out private sector lending and should also not be at risk of being sold off. Finally, the government needs to be open to new approaches for private / public partnership particularly those put forward by investors with good experience of making these work
|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||
The Investment Association
|DC Pension Schemes||450||135||270|
|Life Insurers||1,700||613||436||The ABI|