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UK Government must play a role in ensuring the UK’s energy transition post-Covid

  • Global
  • United Kingdom

    07-07-2020

    83% of fund managers think Government must play an important role

    A survey of UK fund managers investing in the energy transition has found that 83% of respondents consider that Government action is required to shape the recovery of the energy transition, including the renewables sector, to ensure investment does not stall or pause post-pandemic.

    Respondents identified that the Government should do this through greater clarity on a commitment to decarbonisation, regulatory actions to accelerate the energy transition, and linking the success of the sector to wider post-Covid economic development.

    When asked about key factors impacting investment and market dynamics over the next three years, respondents considered Government regulation and route to market as most important. Respondents also identified electricity demand and power price uncertainty as a significant challenge, both of which have been negatively affected due to Covid-19.  

    Overall, investors see the Covid-19 recovery as a fantastic opportunity to “grow green”, with funds ready to invest in shovel ready projects like electric vehicle infrastructure, energy efficient housing and tree planting, provided they are tied to the government’s economic recovery package over the next two to three years.

    Michelle T Davies, International Head of Clean Energy and Sustainability at Eversheds Sutherland, said:

    “The upshot of our survey is that the energy transition in the UK is still seen as a significant investment opportunity – if not the most important. Existing projects and investments are managing due to the fact that their cashflows are backed by government contracts or long-term offtake arrangements. However, banks and funds are telling UK Government that they will not be able to fund the future energy transition without something changing.

    “It is not so much as a result of Covid, many of the challenges existed before the pandemic. What the pandemic has done is accentuate the issue. There is significant capital looking for a green home but the dynamics of the UK power market and the impact of our currency devaluation are making investment and financing difficult.”

    Fund managers are also worried about the speed with which power prices will return to pre-Covid levels. Some consider that prices will take over two years to stabilise at a time when the Government wants to hit the ground running to achieve decarbonisation targets. It will also mean that many financial institutions and corporates subject to regulatory scrutiny will struggle to comply with targets, if they are not able to access energy transition solutions.

    Michelle concluded:

    “The sector is not looking for subsidy. It is looking for a route to market via long-term contracts, and this applies across renewable power and heat, energy efficiency and eMobility. The dynamics of the UK power market makes funding the transition on the basis of a merchant power price almost impossible in today’s market.”

    “Anyone who thinks that, as we come out of the pandemic, the energy transition will be funded at pace, are mistaken. Funds and banks have identified a hiatus in investment and financing, which is at odds with the huge decarbonisation targets the Government has in place.” 

    “It is going to be important that the Government and investors work together to monitor prevailing market conditions to ensure that risks being identified now do not result in a stalled development pipeline, due to financing and funding constraints”.

    Eversheds Sutherland surveyed the views of 25 UK’s most active and prominent funds and banks financing the energy transition assets to understand their views of the how the UK’s energy transition will fare post-Covid. . Eversheds Sutherland worked on collaboration with Kirsty Hamilton and Nick Gardiner of Energy Transition Investment (UKERC).

    Full data from the survey can be accessed here.

    Disclaimer

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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