Funding challenges on the road to 2050

COP 26

With COP26 very nearly upon us - we’ve taken the opportunity to republish some of the content we produced earlier this year.

Climate change and the UK, and the world’s response to it, is one of the most pressing issues of our time. Bringing together global powerhouses to agree to collaborate on the four main goals of COP26 has never been more important.

Our content provides food for thought, challenges the government’s rhetoric and provides opportunities for practical action.

Members of our energy team will be at COP26 and we look forward to catching up with clients and contacts who also plan to be there. Drop us a line and let’s see if we can connect.

How legal and regulatory frameworks can help create an attractive investment climate and the effect of Brexit on the sector.

Europe and particularly the UK, remains at the forefront of pushing the green agenda. In the UK more electricity is now delivered from clean energy sources than fossil fuels - and with the ambitious emissions targets committed to by the government, this will only increase.   We have seen significant funding provided to green tech, clean tech, renewables, energy efficiency and infrastructure projects over the past 10 years.   Securing funding for anything energy related, renewables or infrastructure, and whether that is equity or debt can be much more challenging particularly where there are complex frameworks and multi-jurisdictional issues.

Achieving the ambitions targets will require the funding levels to continue and increase but it will also require supportive legal and regulatory frameworks to deliver new technologies, new processes, and big structures.

Kavita Patel talks to Gavin Quantock, KPMG, Dan Wells, Foresight Group, Dr. Dörte Fouquet, BBH and poses some questions.

What is the biggest barrier to the development of the sector?  Is it funding or the regulatory landscape?  And does it make a difference whether it is a single or multi-jurisdictional project?

The renewable energy sector is seeing rapid growth, driven by falling costs and global energy demands.  There is a significant pool of capital available that is actively looking for projects, whether that is at the venture capital, private equity or large infrastructure end and this applies from an equity and debt perspective too.  It is fair to say too that this type of capital is now more sophisticated in terms of their views on new technologies - hydrogen and battery storage are a good example of these and people are taking them more seriously and they are attracting real interest.

We don’t see multi-jurisdictional projects as too much of a challenge anymore – the world is a lot smaller than it was and all parties are used to working on a global, cross boarder basis.

From an investor perspective, there is certainly more appetite to invest in these types of projects. As a result, we have seen some re-rating, due to COVID-19, of some of the more traditional infrastructure assets, such as airports, which now have a very different risk profile.

As a result of this ever growing appetite, available capital will not diminish, in fact, anything but.  However, it is likely to be the regulatory environment that will be a bottleneck to projects moving on. More regulatory pathways are needed.   Battery technology is a good example here in the UK and Europe where more frameworks are needed.  There is still further work to do to develop more revenue streams to make it a more attractive option and also longer term contracts – and this at the moment is setting the pace for projects.   It would be great if every part of the jigsaw could adopt a COVID mindset and come together to deliver projects quickly.

What does the appetite for investment look like?

There are a great number of similarities with the investment appetite in both the UK and the EU with all things climate related at the moment.  The same regulatory issues are playing out across the EU and there is the need for some government intervention first to move things along.  There is the added complication of Brexit and with countries who have previously worked so closely together, there are inevitable extra considerations now in play, and if processes appear more complicated than they were then investment does inevitably shy away. it is agreed by all parties that a standardised approach is required to move forward on the delivery of key projects.

The UK has been good at keeping green issues top of the agenda – is the UK a good place to invest and source funding, even post Brexit?

Raising money and capital availability in the UK for green issues continues to be very strong and there seems to have been no slow down in this post Brexit.   Month on month there is greater interest and levels of awareness of green investment strategies, particularly in the local government sector, where pension funds are under pressure from their trustees to invest in the sustainability agenda.    Where there has been some slow down is on some international projects – Projects of Common Interest – for example, interconnectors, where multiple jurisdictions are involved.

Given that the appetite is strong, this is inevitably having an impact on M&A pricing.  There is a lot of capital chasing too few assets and so as a result prices are rising.  All things energy are attractive, it is the hot topic of the moment and continues to be top of the agenda in regards to energy, energy assets and different parts of the energy value chain.

The UK is still considered an important place to the green agenda and whilst the Brexit deal was under negotiation there was definitely uncertainty, but the various parties now know their boundaries.  We know what is possible and what is not. There is still money for research and the UK can still participate in the Horizons Europe programme. With the deal, there is now a way forward. Of course, meeting the ambitious targets the UK and EU has set themselves is for the benefit of everyone, and where there is a will, there is a way.

What other jurisdictions are attractive to the energy investor?

Investors want some certainty and so will assess the general underlying business landscape in countries and will look to identify countries that are on an energy transition – most of all investors are after stability.  At the moment Nordic countries are attracting funding for wind projects, southern Europe for solar projects and the UK gives investors a flexible approach as it still sits at the forefront of renewables technology.

All of the above though needs to be coupled with a sensible regulatory environment – and the UK and most of the European countries have that.  Investors though are keen to cast their nets wider and so projects in the US and Australia are on the radar. Couple that with new and emerging technologies needing funding to meet climate targets and there are ample opportunities out there for investors.

Will traditional funding suffice or do we need new models or ways of funding new technologies targeted at the consumer?

Trying to apply traditional institutional infrastructure finance to anything consumer facing has always been difficult.  Selling an asset to people is tricky at scale.  Heat pumps are a great example and as such have a high risk profile from an investment perspective. Getting these assets to work at scale is not easy and yet to decarbonise our heating to achieve our targets this has to happen.

Technologies are well established though  - and there is confidence in the sector that they will work.  However, there are certain parts of the sector that are underserviced from an investment perspective   - transport and the industrial sectors being examples of this and are currently receiving little interest. This could be because the economic models that demonstrate how this could/will work do not exist at the moment – and unfortunately, it is still cheaper to produce these assets the ‘old way’.

How do we increase interest in these assets?  Perhaps governments need to get involved with legislation to kick start the revolution, which could be through direct government procurement mandates which will certainly get things moving.

What is clear though is that these new technologies and assets are expensive and there is a big question mark as to who pays for these, particularly in the short term and there are many strategies being employed across the world, such as tax based or tax credit based schemes which are proving effective. In the UK the learning rates on new technologies is much quicker than expected, which is a good thing and there is likely to be some government underwriting needed to build the scale initially, but once scale is achieved, costs will start to come down.

The future is most definitely bright in terms of funding opportunities and the future is most definitely green.

Contact us

For further information please contact Kavita Patel in our investment funds team.

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