Do you know how a hydrogen cooker works?
If not, you’re not alone! This is one of the many changes we could see as the whole economy decarbonises over the next 30 years. We’re already seeing the switch from internal combustion cars to electric vehicles, and renewables are set to dominate the power market in the future. But there are lots of other changes across the power sector that will provide opportunities for investors.
The long-awaited publication of the Government’s energy white paper in December 2020 is an important milestone in UK energy policy, as it sets out the framework needed to ensure that investment in the vast number of projects needed to decarbonise the economy can be realised. It was becoming increasingly clear to those in the industry that a Net Zero commitment would result in quite radical reshaping of the energy landscape over coming decades and this was confirmed in the release of the paper. The opportunities include scaling up the deployment of renewable capacity, through to commercialising brand new technologies.
While some changes are already well underway (such as the ambition of deploying 40GW of offshore wind by 2030), others, such as the aim to build a commercially viable fusion power plant by 2040, are a little more ambitious. At LCP, we have estimated that the total level of investment needed for new generation assets alone will be a staggering £350bn by 2050. This would require nearly £12bn to be invested every year between now and 2050. Big numbers, but with c £2trn+ of UK pension assets, not to mention the popularity of UK assets with overseas investors, this ought to be eminently achievable if the assets are attractive.
So what might be some of the new propositions that investors will be looking at over the coming decade?
Growth in renewable generation is already guaranteed to increase – and quite substantially in the case of offshore wind. UK asset owners have already invested billions of pounds in these technologies as they have matured and become recognised asset classes, and so this will remain a sector of interest, although prospective returns have tightened at the same time that risks associated with negative power prices has increased, so care is needed. These assets have even found their way into the hands of some individual investors with some very popular renewable investment trusts having raised multiple billions of pounds in assets.
A Government announcement gives much-needed clarity to the energy sector and lays a foundation for radical change requiring a huge investment.
A range of investible infrastructure assets are set to become available over the next decade. These assets will range from established assets such as offshore wind through to new technologies such as hydrogen production.
Read more in our long-form paper, or get in touch with our energy and investment experts.
How much of a role will there be for hydrogen and Carbon Capture Usage and Storage technologies?
Hydrogen and Carbon Capture Usage and Storage (CCUS) are widely viewed as necessary if we are going to meet our carbon commitments as it can replace a significant amount of carbon-intensive areas that use natural gas today, such as industrial processes, shipping, backup generation and heating. The Government has committed to creating four industrial clusters that will include the deployment of 5GW of low-carbon hydrogen production and at least one power CCUS project, along with the carbon transport and storage facility to remove and store the carbon.
Bio-energy with Carbon Capture and Storage (BECCS) or Direct Air Carbon Capture and Storage (DACCS) are also being given increased prominence due to their ability to deliver negative emissions by actively removing greenhouse gases from the atmosphere. These technologies will allow the power system to be net negative in the 2030s which will be key to the UK in meeting its Net Zero target.
Investors may have the opportunity to invest in some of these projects, although as early-stage unproven technologies, these are likely to remain pretty niche, risky private asset investments until they mature.
"As the economy decarbonises over the next 30 years and renewables are set to dominate the power market there are huge opportunities across the power sector for investors."
Head of Market Insight
The role of storage technologies is to balance the system and provide backup generation during periods of low renewable output. The volume of operational batteries has been rapidly growing as they can operate across a number of markets and have unique characteristics that make them intrinsically useful – as noted in our recent analysis 'Is battery storage a good investment opportunity?'
Investment has poured into “gigafactory” developments in Sweden and Poland and the sheer scale of the requirement here points toward the potential for private investment to partner alongside the Government to deliver the changes needed. Attention is currently focused on batteries with significant deployment already planned in GB, but longer-duration storage is critical to the functioning of a high renewables power system. This is when other technologies such as pumped storage and new technologies (e.g cryogenic storage) will become more important as they can store energy for longer periods of time.
The debate over nuclear energy continues with the building of Hinkley Point C progressing and commercial negations for Sizewell C continuing. The white paper provides a clear answer to this question – nuclear is a much-needed part of the power mix going forward. As a more mature technology, it also offers the prospect of being more immediately investible than nascent technologies.
Successful application of the Regulated Asset Base (RAB) system to nuclear projects could unlock considerable investor appetite in the short to medium term given how attractive other UK infrastructure assets under the RAB regime (such as water) have been to investors. Another focus area for the Government includes modular nuclear reactors with the Government providing £385 million in an Advanced Nuclear Fund for the next generation of nuclear technologies.
The 2020 Energy White Paper will be one of the key documents in moving the UK towards a Net Zero future. It heralds a wealth of future investment opportunities over the next decade – even if many of these remain a few years away for now. However, there will need to be a meeting of minds between asset owners and energy developers to bridge the mismatch in terms of decision-making timelines and the lack of familiarity with the investment properties of some of the new areas being discussed.