Powering the revolution: Does the private sector have the appetite for an energy overhaul?

The government finally unveiled its long-awaited and much-delayed energy security strategy this month, featuring ambitious targets to ramp up domestic energy production over the coming decades.

Prime Minister Boris Johnson is keen to ensure the UK is both more resilient to future market shocks and less dependent on overseas suppliers to meet its energy needs.

Had that not been a political priority before, the Russian invasion of Ukraine – and the failure of European powers to react as they might due to reliance on Russian gas – certainly made it one.

This includes quintupling offshore wind generation from 11GW to 50GW by 2030 and solar power from 14GW to 70GW by 2035, alongside a near quadrupling of nuclear power generation from 7GW to 25GW by 2050.

While it has failed to announce onshore wind targets or re-open fracking amid NIMBY pressure, these objectives reflect Downing Street’s determination to bolster supplies,

However, such a dramatic overhaul of the UK’s energy industry requires more than goodwill, it also needs funding – with growing emphasis on the private sector to meet the government’s goals.

Renewable production push already in motion

Trade association RenewableUK has revealed the domestic offshore wind pipeline has surged to an eye-watering 86GW, more than eight times the UK’s current operational capacity.

Its director of future electricity systems, Barnaby Wharton, tells Morning Wire private companies are now investing £10bn a year in new UK offshore wind projects.

Costs for offshore wind turbines have fallen two-thirds in the space of four years, and Wharton argues the sector is now “subsidy-free.”

Meanwhile, Tom Williams, partner and head of energy and infrastructure at investment group Downing, describes the government’s targets as a “very significant challenge,” but one he thinks “the private sector can step up to.”

Downing plans to raise and invest more than £1bn into core renewables and other infrastructure in the UK and Northern Europe over the next five years, with a pipeline in excess of 2GW.

Currently, the investment group manages less than £2bn in assets, while its renewable-focused investment trust has a market cap of £141.8m.

Despite being smaller than venture capital groups, Williams argues trusts “have shown the way for the much deeper pockets of the wider private markets.”

He explained: “I feel that investment trusts are the most direct and impactful way in which individuals can use their savings to make a difference and make a sensible return.” 

Reforms key to boosting private sector funding

Some potential financiers have warned there will be limits to the private sector’s willingness to pump cash into bolstering energy security.

“Onshore wind looks to be heavily caveated so this will limit developers’ enthusiasm to get heavily involved in the time-consuming developments,” says Richard Crawford, infrastructure director at InfraRed Capital Partners.

“Rooftop solar is also relatively expensive and resource hungry per MW deployment. And the offshore industry may already be operating at close to capacity.”

Paul Jackson, global head of asset allocation research at Invesco similarly suggests the emphasis on nuclear could complicate private sector financing, as it remains largely untrodden turf from an economic perspective.

The nuclear element of the plans could require a “large degree of government support”, he says, most likely offered up through public investment or by allowing electricity companies to impose charges on clients that can be channelled into project costs.

Solvency, too

The potential funding pool of private sector funding could receive a boost in the second half of this year.

UK insurance giants have been forced to sit on huge cash reserves as a result of EU-era Solvency II rules, and city minister John Glen announced plans to scrap the rules last month in an attempt to unlock cash to be pumped into projects like renewable infrastructure.

Much will depend on the detail, with Glen still yet to provide flesh on the bone for the plans, but the mood music from the insurance industry has been positive about throwing their weight behind the changes.

“Effective reform of Solvency II rules will enable UK insurers like Aviva to play an even bigger role in supporting the UK economy, investing more in the country’s essential infrastructure – the colleges, hospitals, transport and renewable energy which are critical to our future,” says Amanda Blanc, chief of insurance giant Aviva.

Now that the government’s plans are firmly established, such reforms could be crucial to the success of its energy strategy, with investors across the asset management industry key to delivering the UK’s ambitions.