The demand for renewable energy investment will survive the cost crunch
Earlier this month, Ofgem announced they would raise their consumer price cap by 54 per cent as global gas prices continued to jump. Against this backdrop, it’s easy to dismiss the strength of the appetite for investment in UK renewables. The value of “green” energy projects started in 2021 and was on track to exceed £5bn – up to six times the comparable 2019 figure – according to data from Glenigan.
UK group Octopus Energy, advised by KPMG, last year secured a combined $900m in investment from Generation Investment Management, which was co-founded by Al Gore, and Canada-based CPP Investments, as it seeks to consolidate its position in the renewables market.
What, then, is in store for investment in the UK renewables sector, which includes onshore and offshore wind, solar, storage and flexibility, and technology enabling the energy transition? The high activity levels are likely to continue, with capital provided by the likes of energy companies, infrastructure and pension funds, private equity, UK and foreign utilities and even tech giants.
The factors driving the demand for funding from operators outstretch the current energy crisis. The relative success of Cop26 is debatable, but it did undoubtedly raise consumer awareness of the shifting attitudes towards renewable energy. All businesses now operate within a very different environment to even just a few years ago.
We must accept this is a long road. In July to October 2021, the last quarter for which data is available, renewables accounted for 36 per cent of the UK’s electricity generation, a lower share than fossil fuels, according to the Department for Business, Energy & Industrial Strategy.
There is also the shifting regulatory environment, designed both to increase transparency and “nudge” businesses towards operating more sustainably. From April, large UK firms must disclose emissions data consistent with the task force for Climate-Related Financial Disclosures, with these rules set to cover all businesses by 2025. Meanwhile, larger firms will also need to submit plans for reaching net zero from 2023 onwards and all renewables businesses face lower subsidies in the future.
Fom investors’ perspectives there has undoubtedly been a culture shift in recent years, with corporate leaders accepting it is incumbent on them to play their part in tackling climate change – witness the rhetoric from CEOs as diverse as BlackRock’s Larry Fink, BP’s Bernard Looney and Citigroup’s Jane Fraser.
Funds must show that they are diversifying their portfolios and putting capital – and there are huge amounts of this globally – to work in a sustainable way. It is also true that renewable assets often provide very good returns, reflected in the high demand for assets, as we saw time and again last year.
The UK remains an attractive place in which to invest in renewables. London’s world-class financial markets, legislation that enshrines a commitment to net zero in law and Britain’s geography as an island nation with a propensity for wind generation are all part of the recipe for continuing investment. The government’s announcement that it is moving to more frequent, annual “contract for difference” auctions is in part designed to boost capital flowing into renewables.
It is impossible to create a fully-fledged carbon-neutral economy without huge investment and the boom in capital will likely outlast as this comes to fruition.