What the UK’s green plan means for renewable energy investors
Government backing for offshore wind has put the focus on a sector able to offer investors secure revenue streams
More renewable energy infrastructure is essential if the UK is to hit its 2050 sustainability goals.
The UK government is well aware of the need to scale up, unveiling a 10-point, £12 billion green plan, which among other targets, aims to quadruple the size of the UK’s offshore wind industry.
Yet big questions around feasibility and funding remain. Dane Wilkins, head of renewable energy capital markets at JLL Energy & Infrastructure Advisory, explains more about what the government announcement means for the fast-growing sector and the opportunities for investors.
The plan sounds bold; it’s estimated that the goal to boost offshore wind may require as much as $58 billion of new investment. Can it be achieved?
There’s every reason to hope so. The aim is to have new offshore turbines with the capacity to produce 40 GW of electricity by 2030, compared with 11.2 GW today. However, with the cost of developing offshore rising as windfarms go further out to sea and in some cases float, deeper pockets of capital will be needed.
Government backing is a step in the right direction and always reassures both existing and prospective investors. Institutional investors and large investment managers are searching for secure income streams, which renewable energy infrastructure can provide. The door is open to them - and needs to remain so if the UK stands a chance of achieving those targets.
Where is the UK’s wind industry right now and how does it compare to its European peers?
In terms of offshore wind, the UK is top of the pile in Europe. Last year, it installed the most wind power capacity in Europe at 2.4GW; some 74 percent of that was offshore wind. The UK and Germany are unlikely to lose their position as two of Europe’s largest offshore wind markets in the near future.
Onshore, is, however, a different story. Despite progress by Scotland and Wales, the UK lags many of its European peers due to tight planning restrictions. Three quarters of all new wind installations in Europe last year were onshore, while the UK has a stronger reputation as an offshore wind opportunity.
While wind seems to have grabbed the attention this week, what about other renewable energy technologies? Boris Johnson also mentioned more backing for hydrogen and carbon capture and storage.
If the UK is to successfully stimulate its renewable energy sector, other green energy forms will also be needed. Hydrogen has had much stronger backing from the German government, for example. In June it committed €9 billion to creating a hydrogen industry.
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In the UK, investors have already been turning their attention to large-scale solar – it’s one of the most economical clean power sources available, helped by the decreasing cost of panels as well as technological advances. There’s a reason the UK’s green plan made little mention of solar; investors are already very active, so the sector is deemed less in need of stimulus. The UK’s total solar capacity is expected to increase to 15,674 MW by 2023, up by around a quarter since June 2019.
The City of London Corporation is buying more than half of the electricity powering buildings in the Square Mile from a subsidy-free UK solar farm over the next 15 years. What do such long-term commitments and other similar power purchase agreements (PPAs) from major corporates mean?
We’ve seen many this year, following on from a record year globally for PPAs in 2019; they’re music to the ears of institutional investors who prefer long-term income.
They’ve ranged from beer brewery Anheuser-Busch InBev getting power for its operations from Spanish solar energy to SNCF and hypermarket chain Auchan powering up from solar in France. As PPAs become more popular among corporates, more investment in new and existing solar farms will be needed.
What would give investors further confidence in the UK’s renewable energy sector?
Anticipation is building for the government’s Energy White Paper – the last was published over a decade ago so it’s long overdue.
Equally, clarity on the next round of Contracts for Difference (CfD) auctions - contracts guaranteeing a pre-agreed price for the clean electricity they generate - would help reassure investors. CfDs have encouraged investment in renewable energy, providing projects with secure, fixed price and index linked, bankable revenues with investment grade covenant strength. These qualities have made CfDs particularly investor-friendly.
The last CfD round in 2019 supported some 6GW of renewable energy – enough to power more than 3.3 million homes.
Finally, while governments are keen to put renewable energy in the spotlight, how strong is investor appetite?
Both in the UK and across Europe, renewable energy infrastructure remains a highly attractive asset class for those seeking secure income with predictable cash flows. A recent Alpha Real Capital survey of UK pension fund investors found that 68 percent want to increase investment in renewable energy infrastructure over the next five years. The appetite is definitely there – but the UK must continue to give the sector its full backing.
Contact Dane WilkinsHead of renewable energy capital markets at JLL Energy & Infrastructure Advisory
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