Investment in UK infrastructure has tended to be dominated by acquisitions of chunky stakes in existing airports and utilities. Recent years have seen state-owned investor (SOIs) interest collapse with a dearth of opportunities, uncertainties surrounding Brexit and better opportunities elsewhere. Yet, the British government’s bid to “build back better” from the economic crisis sparked by the pandemic has prompted it to adopt ambitious targets for carbon reduction that will entice SOIs to participate in an expected surge of renewables projects.
Renewables hit several sweet spots for long-term investors with lots of capital to deploy: they are revenue-generating real assets with potential for growth in value and scale and they fit neatly into environmental sustainability goals.
In recent years, emerging markets have received significant attention as they utilize renewables in the growth of their power generation, but while there are potential high rewards on offer there are also significant operational risks. In developed markets like the UK, opportunities are largely in energy transition.
SOI interest in UK infrastructure has focused on industries associated with high carbon emissions, such as investment in existing pipeline networks and airports. Opportunities to invest at the start of an infrastructure project are few and far between, although green infrastructure is increasingly getting into its stride.
This month, the UK set out its target to reduce carbon emissions by 78% of 1990 levels by 2035, ahead of the net zero emissions targets by 2050. The aggressive climate action, backed by a consensus of political parties, will drive the decarbonization of the power sector with non-hydro generation set to take off. The target puts rocket boosters under the National Infrastructure Strategy unveiled in November 2020.
SOIs are on the hunt for co-investors, including operators, as well as funneling money into green infra funds. They are also seeking exposure to cleaner energy through venture capital in pioneering tech and industrial firms involved in a range of segments, including improved battery efficiency, AI applications in power networks and improved engineering and materials.
Who are likely to be the main investors in the UK's drive towards energy transition?
Existing investors in the UK’s renewables sector include the Netherland’s PGGM and Canada’s CDPQ, PSP and OTPP. These public pension funds have focused on wind power projects in the UK, but are also among the renewables investment leaders in the SOI sector. With the UK enjoying significant offshore potential, they are likely to be studying opportunities provided by the seabed auction rounds which the government is hoping will help quadruple offshore wind to 40GW by 2030. The latest Offshore Wind Lease Round 4 allocated areas for nearly 8GW of capacity, although this is significantly lower than the 32GW secured in the third lease round in 2010. More auction rounds are likely, providing the basis for further growth.
Abu Dhabi’s Mubadala’s plans to invest up to GBP5 billion in the UK is set to include clean energy and infrastructure components and its Masdar subsidiary is likely to step in, as it stamps its mark on renewables investment across the world. Masdar’s interest in the hydrogen economy chimes well with the UK’s carbon capture, utilization and storage (CCUS) drive, which could provide blue hydrogen as a low carbon energy source. This is already being advanced in the UK by Norway’s Equinor with its 600MW Hydrogen to Humber Saltend project announced last year, producing hydrogen from natural gas, using CCUS facilities to eliminate carbon dioxide emissions.
Norway’s NBIM is seeking to redeploy 1% of its AUM into renewables over the next two years, focusing on developed markets. While this will represent around US$14 billion of capital, it may struggle to get immediate opportunities and its risk aversion would suggest it is focused on buying existing assets – such as the acquisition earlier this month of a stake in Borssele 1 and 2 wind farm off the Netherlands for US$1.63 billion - rather than supporting new developments.
