The UK needs to invest £50 billion per year to deliver net zero, according to the Climate Change Committee. It is not just a cost, though, it is also an investment opportunity for private capital to kickstart much-needed growth in the country.

But to attract this level of investment, the UK needs to determine what it wants in the energy sector and when. This needs to happen on an holistic basis for different investors to feel confident that they are providing capital into a robust, integrated energy plan.

While much has been written about the gaps between the status quo and such a plan, it should be recognised that the UK has had a good share of successes – and an established, globally-competitive energy industry to build upon.

But there is uncertainty around numerous areas, including sector development, such as speed and capacity to shift to electrification, and in policy evolution, such as support for oil and gas. This threatens to complicate broader energy sector plans and make the landscape for attracting diverse pools of capital more challenging.

Effective financing

Three themes emerged from the discussion on attracting capital to the UK energy sector at the EY-facilitated E-FWD workshop in Edinburgh:

The UK should establish a coherent energy transition narrative to attract global investment. The narrative should explain what is needed and why on a holistic basis – diverse providers of capital will then be able to target the opportunities most aligned to their objectives
Clarify the government’s role and its agencies. Does GB Energy support or compete with industry? The hope in the room was that GB Energy would support rather than compete with industry
A balanced view of energy sources and their evolution would help the UK build on its hydrocarbon industry while supporting growth in newer technologies

One thing that the many competing energy narratives agree on is that infrastructure and clean energy plans require financial support to progress. Securing the right financing conditions is essential to capture the upside.

Chancellor Rachel Reeves acknowledged this in a recent speech at the Financial Conduct Authority (FCA). The government is eager to support growth – at least broadly – by pledging support for capital markets and easing IPO conditions.

Reeves linked financial markets with the energy sector. Infrastructure plans require unlocking “with the support of effective financial markets”, she said.

Ranking risks

How much money does the UK’s energy industry need and what would it go on? Different answers to this question complicate investment decisions: there is not an aligned view on the opportunity set.

A coherent narrative around the energy transition would allow capital providers to contrast the UK with other investment opportunities. The narrative is far too often simplified to be a story of renewables vs oil and gas. The reality is much more complex and includes an investment decision between UK energy vs something else or somewhere else.

Clarity on funding needs, opportunities and quite how government and industry will intersect would allow the country to secure the investment required.

There are diverse capital providers, each with different risk and return objectives. For instance, Pension funds, infrastructure investors, venture capital and internal capital from existing energy companies may invest in the UK’s opportunities. But they will not all be attracted to invest in the same things, or in the same way.

This diversity of capital can be a positive. But the UK can only succeed with a clearly articulated, integrated energy plan that enables the matching of opportunities to potential investors.

The CfD success case

The UK has clear successes. The recent Allocation Round (AR) 6 secured significant wins for new solar and offshore wind projects.

Reallocating awards for vintage offshore wind contracts helps support projects that would have stalled at the agreed prices.

The AR process has attracted investors to the UK market. Adjustments to the CfD process could be made with little immediate government commitment.

Increasing the CfD contract length to 20 years from 15 would have an impact. Reducing the revenue risk would lower financing costs and reduce the agreed strike price.

The government could make other tweaks, like including the repowering of wind assets in CfDs.

While offshore wind has been a success, the UK is not on track to meet its goals. Setting capacity targets for ARs – to meet 2030 targets – would help clarify.

Government’s challenge

A key challenge is in the successful delivery of large and innovative infrastructure projects. In early October, Prime Minister Keir Starmer clarified plans for carbon capture and storage (CCS) projects.

The government will provide £22 billion for the first two projects, Track 1. The funding will run for 25 years, marking a slight reduction from the previous government’s commitment of £20bn over 20 years.

Progress on the first two projects is a welcome development. Despite past missteps, the UK has a chance to lead in the CCS sector.

The government’s desire to achieve its targets has led it to set out plans to invest in industry. The new National Wealth Fund will oversee the existing UK Investment Bank (UKIB) and British Business Bank (BBB). This move will provide more state-backed funding for companies to grow.

GB Energy is another government arm to pursue its net zero power policies by 2030. Here, there is less clarity about its intentions, with scant details in its establishing bill.

There has been talk of supporting community energy investments, taking pre-CfD risks – with Crown Estate – and pursuing more developed opportunities. Some in the industry are worried about investments in areas such as offshore wind.

Will it co-invest or compete? What’s the GB Energy appetite for risk? A business plan is promised, but its role is uncertain. The company will be independent, with its own board and executives, but the government holds the purse strings – and sets the aims.

Changing the rules

Risk does not deter investors, it informs pricing. Higher risk indicates an expectation for higher reward.

Uncertainty, however, can be fatal. Changing the rules deters investors as it undermines attempts to price risk. This is particularly true for the energy sector, given its need for long-term investments.

The government’s decision to increase the Energy Profits Levy (EPL) and remove investment allowances is such a move. The oil and gas industry was struggling under the original EPL, but tightening this noose further will deter investors. Many plans are in limbo ahead of the upcoming Budget.

The government said North Sea oil and gas will be a “key component” of the energy mix for decades. However, such talk is contradicted by the EPL increases, and companies have warned that investment plans are at risk.

If the government believes domestic oil and gas has a part to play in meeting demand, it should prove it.

Despite the gloom about the UK’s energy sector, there is also much to celebrate.

There are challenges in the oil and gas sector, but there are bright spots in the wider energy sector. The allocation rounds, and resulting contracts for difference (CfD), have successfully attracted global capital.

The UK has the resources to deliver the energy transition, with aligned industry, supply chain, financiers and government. Connecting these areas should allow capital – new and old – to implement the necessary changes.

Related Content

Where the windfall blows: building a better system for the North Sea

Shell-­Equinor venture opens door for new North Sea model

Financing divided as gas finds a home, but minerals struggle

Shell-Equinor venture opens door for new North Sea model