The UK’s financial services are thriving, but the impact on supporting new energy companies has been muted
Despite higher interest rates, companies can still move forward with new financing models
Government mandates can help make the case for companies to investors
University innovation is valuable but underutilised by financiers

The future of the UK’s energy sector hinges on financing, not on technological breakthroughs.

Can the UK provide the investment needed for energy system change? The evolution of funding options will determine whether the UK leads or follows.

There are positive signs. Policy is increasingly supportive of a new energy system.

Chancellor Rachel Reeves, visiting North America recently, linked clean energy plans with economic growth opportunities.

She said financial services are the “jewel in the crown of the UK economy”. And this financial ability can and should drive new energy companies.

Making this point, the Capital Markets of Tomorrow report, published in early September, established the link between energy plans and investment.

The energy transition is a “hugely ambitious project for the UK, but one that is backed by policy certainty for the next five years and one that our capital markets are well placed to support,” it said. “The UK’s financial services industry already has a range of tools it can put at the UK government’s disposal.”

It noted a number of factors that the UK offers to support energy and innovation. These include “a hugely experienced asset management community, a large cohort of publicly listed companies that invest in the green economy (as evidenced by the recipients of the Green Economy Mark), one of the fastest growing green bond markets, one of the world’s largest Closed-End Fund Markets (that are excellently placed to make long-term infrastructure investments), and a Voluntary Carbon Market in London.”

Public vs private

Companies on the London Stock Exchange that derive over 50% of their revenues from positive environmental benefits hold the Green Economy Mark.

Stock exchanges are competitive. Many growth companies have moved to the US for access to greater liquidity.

Recently, competition from the European Union has grown. And more may come if the group acts on the recent report on competitiveness from Mario Draghi.

Traditionally, public markets have been the preferred option. In recent years, these have seen some struggles, particularly in the UK.

Hometree is a UK company working to decarbonise homes. Founder and CEO Simon Phelan said there were indications of a potential IPO market recovery.

“If there is no clear route to an IPO, there are other ways to secure financing, from venture capital to venture debt or financing linked to customer acquisition.”

US-based Splight’s CEO Fernando Llaver said global public capital markets have been falling, “but private capital markets have grown fast over the last decades. Today, for companies like ours, there are many options among private capital providers.”

Llaver said that for public markets to improve, they need to cut costs and regulations.

Showing interest

Venture capital has been Splight’s primary financing source, but there are alternative options.

“Another phenomenon we see is big, traditional public market players entering private capital markets. As a startup in the energy sector, we are now receiving startup/scaleup-friendly funding offers from large financial institutions with big names in public markets. That is amazing and lets us operate and grow, developing new technologies without the time-consuming, costly and effort-demanding public market regulations.”

Such support helps keep the company’s “IP safe for longer”.

Higher interest rates have hit private equity plans. The drought has “proved to be an edge for us. In times of exuberant abundance, it is difficult to differentiate a good company from a PowerPoint,” Llaver said.

“When things get complicated regarding funding, funds have to be more picky, do their homework properly and understand better the business they are investing in.”

Hometree’s Phelan said the venture market had “largely bounced back” from 2022. “However, interest rates are still very high and some investors are still reluctant to back smaller, riskier companies.”

He explained that Hometree had debt from BlackRock “to finance strategic acquisitions. For larger companies, exits to private equity are also possible as a way of enabling growth.”

Phelan said that derisking innovation takes time. Hometree took nearly nine years to reach this point. As a result, though, the company secured over £85 million in equity funding, including from Legal & General Capital, the BlackRock debt facility and a £250mn asset-backed debt facility from Barclays.

Rethinking debt

The Barclays debt facility is notable. The CEO explained the debt was the UK’s “first residential renewable securitisation”. The bank provided this to support domestic installations of solar panels, heat pumps and batteries.

“This has become a routine tool to fund residential renewable loans and leases in the US, but we’ll be the first company to do it in the UK. Securitisation has grown in popularity as a means of financing renewable energy installation as banks and capital market investors are better placed to manage the risk surrounding renewable loans and leases.”

Hometree aims to “undertake the first UK residential renewables public market transaction within two years,” he continued.

Phelan said companies hadn’t previously provided a large enough loan package for a bank to securitise.

Showing the need

Financing can be nervous around innovation owing to a lack of track record. Government can help bridge this gap by providing mandates for sectors.

Johann Franke, a director at Marakon, discussing sustainable aviation fuel (SAF), said the government had established a clear path for the sector. The UK requires SAF to make up 10% of airline fuel demand by 2030.

Franke said, “it’s going to be a huge business. We’re talking billions, possibly hundreds of billions, in investment globally to make the transition happen. And we know it’s a relatively safe bet because hydrogen and batteries will not be able to support air travel in its entirety.”

Phelan of Hometree made a similar point. To attract investors, “you need to demonstrate how you have the best solution and a clear strategy to tackle a larger, widespread challenge”.

The executive said Hometree was the “leading UK challenger brand in residential home energy services and are the key partner for homeowners looking to transition to renewable forms of home energy and decarbonise their homes”.

The UK needs to invest £4-8 billion per year to decarbonise buildings, according to Teneo’s report.

The UK government will focus on strategic areas, not picking corporate winners, Hometree’s Phelan noted. The National Wealth Fund aims to mobilise “public and private investment in critical areas such as carbon capture and green hydrogen”.

Home advantage

Franke noted the network of related UK industries that can help nurture new companies.

“This is not a bet similar to, let’s say, supporting AI,” he said, where the UK lacks a particular edge. In aviation, the Marakon director said, there are related industries and offtakers.

UK universities are pioneering innovation and fostering companies. An area for improvement is in “connecting the city with these [innovative] ventures in an efficient way.”

Ceres Power is one such company. It spun out of Imperial College in 2004, initially listing on AIM before moving to the main market in 2023.

The US has a natural advantage over the UK and EU with a bigger market and a single language. One step, Franke said, was the ability to “bring in talent from wherever it comes”.

“There are some real green shoots”, he continued. “Let’s not always just beat ourselves up. The UK is excellent at beating itself up. We’ve got to look at the positives and support those positives.”

To share your thoughts on finance and the UK’s energy sector opportunities, make sure you’re registered for the E-FWD event. Taking place on September 19, “Financing the energy transition” will be held in Edinburgh.

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