Green finance and innovation – point 10 of the UK Government’s Ten Point Plan

In the final limb of its Ten Point Plan (the Plan), the Government acknowledges the significant investment required to achieve net zero through the developments and innovations elsewhere in the Plan. It seeks to leverage public and private sources of financing, increasing investment in research and development (R&D) while cultivating a green finance sector, including through the issue of UK Sovereign Green Bonds from 2021. This builds on the Government’s 2019 Green Finance Strategy and the establishment last year of the Green Finance Institute.

Net Zero Innovation Portfolio

The Government has committed to raising total R&D investment to 2.4% of GDP by 2027 and the first contributor to this is the £1 billion Net Zero Innovation Portfolio, which aims to accelerate the commercialisation of low-carbon technologies, systems and processes in the power, buildings and industrial sectors. The portfolio is designed to focus on priority areas that align with those emphasised in the Plan, including:

  • floating offshore wind;
  • nuclear advanced modular reactors;
  • energy storage and flexibility;
  • bioenergy;
  • hydrogen;
  • homes;
  • direct air capture and advanced carbon capture and storage;
  • industrial fuel switching; and
  • disruptive technologies, including AI for energy.

This builds on recent investments, such as the first phase in November of a £100 million injection in new greenhouse gas removal technologies, including direct air capture, a method of capturing CO2 from the air for storage in geological formations or use in industrial processes. In the Plan, the Government has pledged a further £100 million for energy storage and flexibility innovations, noting the increasing importance of such technologies as the UK more heavily relies on renewable sources of electricity generation and has to counteract their inevitably less predictable generation.

Nuclear fusion

Further to the commitments it makes to large-scale nuclear projects and advanced nuclear technologies in Point 3 of the Plan, the Government has emphasised its continued focus on commercialising nuclear fusion technology. It notes its ongoing £222 million investment in the STEP programme, which aims to build the world’s first commercially viable nuclear fusion power plant in the UK by 2040, as well as £184 million for new fusion facilities, infrastructure and apprenticeships to establish relevant expertise in the UK, creating a so-called “global hub for fusion innovation”.

Transport

In the transport sector, the Government has pledged to invest £3 million in the Tees Valley Hydrogen Transport Hub, which will lead research, development and testing of new hydrogen transport technologies across all modes of transport. This will sit alongside the world’s biggest hydrogen refuelling station in Teesside, plans for which have already been backed by Government. Aiming to address one of the more challenging aspects of decarbonising road transport, the Government has also committed £20 million to trials of zero emission heavy goods vehicles.

Financing – the public and private sectors

In terms of public funding, the Government has indicated that it intends to issue Sovereign Green Bonds in 2021, subject to market conditions, to be followed by subsequent issuances, the proceeds of which will finance sustainable projects and infrastructure. The Government will hope to tap into the exponentially increasing market for environment, social or governance-oriented investments, with around £190 billion of green bonds having been sold last year – 3.5% of global bond issuance.

In the private sector, the Government is continuing to encourage greater private investment in green innovation, building on 2019’s Green Finance Strategy and the corresponding launch of the Green Finance Institute. This organisation, chaired by Sir Roger Gifford, was established to promote collaboration between the public and private sectors, bringing together global experts and practitioners to design new ways of channelling capital into sustainable initiatives. It has since established a Coalition for the Energy Efficiency of Buildings and a Zero Carbon Heating Taskforce, as well as launching a Green Finance Education Charter.

The Plan sets out the Government’s next steps to encourage greener private investment, including introducing mandatory reporting of climate-related financial information across the economy by 2025, with a significant portion of mandatory requirements in place by 2023, aligned to the recommendations of the Taskforce on Climate-related Financial Disclosures. Measures will first be applied to entities such as premium listed companies, with their reach broadening over time, and will allow investors to better understand the impacts of their exposure to climate change, price climate-related risks more accurately and support the greening of the UK economy.

The UK and City of London will also be promoted as a leader in the global voluntary carbon markets, including in response to the recommendations of the Taskforce on Scaling Voluntary Carbon Markets. In relation to compliance markets, the Government wants to formulate a clear carbon price as the UK leaves the EU Emissions Trading System, and has since begun implementation of a replacement, domestic Emissions Trading System.

In order to facilitate informed investment, the Government will implement a green taxonomy that defines which economic activities are environmentally sustainable. The UK taxonomy will take the scientific measures in the EU taxonomy as its basis and a UK Green Technical Advisory Group will be established to review these to ensure their suitability for the UK market.

Together, the Government feels that these measures will provide investors a clear framework in which to deliver the low-carbon finance needed to achieve net zero by 2050. The Government predicts that enhancing green finance overall could attract £1 billion of matched funding and potentially £2.5 billion of follow-on private sector funding to supplement the Government’s own £1 billion investment.

Further measures directed at consumers and taxpayers, including on tax and regulations, are expected as part of HM Treasury’s Net Zero Review.

Matthew Job

Matthew Job
Partner, London
+44 20 7466 2137

Amy Geddes

Amy Geddes
Partner, London
+44 20 7466 2541

Jake Jackaman

Jake Jackaman
Partner, London
+44 20 7466 2883

Delivering new and advanced nuclear power – point 3 of the UK Government’s Ten Point Plan

The UK government has announced its support for new nuclear power generation as a reliable, low-carbon source of electricity to help meet increasing demand due to the electrification of sectors such as heat and transport.

The government recognises nuclear as having a key role in the decarbonisation of the electricity sector by providing firm low-carbon power alongside intermittent renewable generation and (in the future) power stations that burn hydrogen or gas with carbon capture and storage. It also recognises the importance of the sector in supporting UK jobs and supply chains.

The Ten Point Plan sets out the government’s support for large-scale new nuclear projects as well as investment in small and advanced modular reactors.  It also confirms support to commercialise nuclear fusion technology.

Large-scale nuclear

Nuclear power has played an important role in the UK’s current energy mix since the first full-scale nuclear power station was built more than sixty years ago.  There is currently only one new nuclear power station being constructed in the UK, Hinkley Point C, and the Ten Point Plan paves the way for the construction of further large-scale nuclear power stations such as Sizewell C in Suffolk.

The full details on how new large-scale nuclear will be financed are not set out in the Ten Point Plan or the National Infrastructure Strategy published on 25 November. Last year, the government consulted on a nuclear regulated asset base (“RAB“) model and reports that it is still considering responses to this consultation. Alongside considering the RAB model, the government has said that it will continue to consider the potential role of government finance during construction.

The RAB model first emerged in the UK and is associated with the successful privatisation and sustained investment in network and other utility businesses. More recently, the RAB model has been successfully adapted for the Thames Tideway Tunnel project and it is expected to have an important role in encouraging investment in other complex infrastructure projects including carbon capture utilisation and storage.

The RAB model differs from many other private finance models, such as the now retired PFI and PF2 models, as it allows for the project to earn revenue during the construction period which enables debt to be serviced (rather than being rolled up and capitalised) during construction and allows equity investors to earn a return from day one.  The model also allows for the sharing of construction risk between the project and its contractors, on the one hand, and consumers, on the other. Together with a government support package to address low probability, high impact risks, these features resulted in Thames Tideway Tunnel attracting private investment with a very low cost of capital.

Large-scale nuclear projects are very capital-intensive and have a long construction period (with relatively low operating costs once constructed). This means that financing costs make up a large proportion of the overall cost of delivering new nuclear projects making them a good candidate to potentially benefit from a RAB-based model to bring down the cost of financing.

Advanced nuclear fund

The government has also announced up to £385 million of investment in emerging nuclear technologies as part of an Advanced Nuclear Fund. This includes:

  • up to £215 million to be invested in small modular reactors (“SMRs“) to help develop a domestic smaller-scale power plant technology;
  • up to £170 million for a research and development programme on advanced modular reactors to help unlock efficient production of hydrogen and synthetic fuels; and
  • an additional £40 million to develop the regulatory frameworks and support UK supply chains in order to bring these technologies to market.

The government hopes that its investment in SMRs will unlock up to £300 million private sector match-funding.

Looking ahead

The Ten Point Plan demonstrates that the government views nuclear power as an important contributor to low-carbon electricity and an essential component in the UK’s energy generation mix into the 2050s and beyond. The highly anticipated and much-delayed Energy White Paper that is expected to be published before the end of 2020 should provide further details on the future role of nuclear, and may include further details on how new large-scale projects will be financed and the government’s role in this.

Tom Marshall

Tom Marshall
Partner, London
+44 20 7466 7470

Patrick Mitchell

Patrick Mitchell
Partner, London
+44 20 7466 2157

Silke Goldberg

Silke Goldberg
Partner, London
+44 20 7466 2612

 

 

 

Hydrogen – point 2 of the UK Government’s Ten Point Plan

Hydrogen is one of the ten points in the UK Government’s new plan for a “green industrial revolution” revealed on 18 November 2020.

In 2021, the Government’s hydrogen strategy will be published which will set out business models and the revenue mechanism for private sector investment. There will also be a consultation on the Government’s preferred business models for hydrogen in 2021 with the aim to finalise hydrogen business models in 2022.

While we await further detail in next year’s hydrogen strategy, the Government has outlined various ambitions and aims regarding hydrogen. This includes the aim for the production capacity of low carbon hydrogen to be 1GW by 2025 and 5GW by 2030. This will be supported by a Net Zero Hydrogen Fund of £240 million for new hydrogen production facilities. By 2030, the Government expects that there will be up to £4 billion of private investment expected in this area.

Hydrogen and heat

The intention is to shift towards lower carbon heating with no change in experience for domestic consumers through hydrogen blends. The Government states that this will still reduce emissions of gas used by up to 7%.

In 2023, there will be industry testing to allow for 20% blending of hydrogen into the gas distribution grid for all homes on the grid. In the same year, the first “Hydrogen Neighbourhood” will be trialled where all home heating and cooking will be by hydrogen. This will be followed by a trial of hydrogen heating in a large village in 2025 and a pilot “Hydrogen Town”, heated entirely by hydrogen, before the end of the decade.

At the end of November 2020, Ofgem announced their approval of a proposed network demonstration in Levenmouth, Fife which is intended to provide hydrogen to 300 homes over four years from the end of 2022. The hydrogen will be produced by an electrolysis plant powered by offshore wind. The energy regulator will award up to £18 million to the project.

Combination with other aspects of the ten point plan

There is a cross-over between hydrogen and other elements of the Government’s Ten Point Plan. Low carbon hydrogen production growth will be possible through the expansion and increase of carbon capture and storage (“CCS”) infrastructure to support blue hydrogen. Zero carbon hydrogen will be made possible in the UK through the growth of offshore wind and other renewables. For zero carbon hydrogen, the hydrogen is produced by electrolysis which separates water into hydrogen and oxygen using electricity from renewable sources.

Looking ahead

The Government is calling for hubs that include renewable energy, CCS and hydrogen which will create industrial “SuperPlaces”.

In addition to domestic heat, hydrogen can be used for industrial heat, power, shipping and trucking. Hydrogen is thought to be particularly important for heavy transport where long distances are covered and electric vehicles are much less suitable. Hydrogen is also being considered for the decarbonisation of industrial processes such as chemical refinery and steel production with hydrogen being substituted for natural gas.

Overall, the growth of low carbon hydrogen could deliver savings of 41MT CO2 between 2023 and 2032 which is equivalent to 9% of 2018 UK emissions, the Government states.

Steven Dalton

Steven Dalton
Partner, London
+44 20 7466 2537

Lewis McDonald

Lewis McDonald
Partner, Global Head of Energy, London
+44 20 7466 2257

Silke Goldberg

Silke Goldberg
Partner, London
+44 20 7466 2612