Why do large infrastructure projects move at a glacial pace in Britain, even in the best of times? This question lies at the heart of the challenges facing industrial policy and government support for major energy transition investments.

*E-FWD Financing the Energy Transition event at the Assembly Rooms in Edinburgh. Image: Eve Conroy/DC Thomson*

E-FWD members convened in Edinburgh in September to discuss how to remove obstacles to Financing the Energy Transition. The debate in the Industrial Policy & Government Support tent focussed on the various ways in which government can de-risk investment and unlock private capital.

Five themes emerged:

Avoid white elephants: Holistic policy can future-proof supply-side investments
Time is precious: The opportunity cost of waiting for perfection is often insurmountable
Look over the garden wall: The UK can learn from international best practice
Leverage abundance: Industrial investment must be spatially coordinated around areas with structural excess of renewable energy
No skills? No investment: A credible worker transition plan is a prerequisite for creating new industries and infrastructure.

Avoiding white elephants

A perennial obstacle facing energy investments is the temporal mismatch problem: the time horizon for realising returns is almost infinitely longer than the political cycle. The larger the infrastructure, the wider the time delta and the greater the risk to investors.

As a result, large investments in speculative new energy industries face the classic ‘chicken and egg’ problem. Supply-side investment won’t flow without certainty that a market will emerge. But that market won’t emerge without a supply-side push.

Investors are fearful of committing capital to infrastructure that is stranded by a different version of the future prevailing. However, while forecasts are always changing, the fundamental need to provide affordable, secure and clean energy is not.

Therefore, a clear political vision, backed up by robust and holistic policy, has the power to break that Catch-22.

Underpinning confidence in the business case for big-ticket infrastructure often boils down to questions of trust, certainty and predictability. Trust in the overall direction of travel. Certainty that a market will emerge for innovative new products. Predictability that the policy environment will not swing dramatically during the decadal development process.

The absence of these values from British political discourse presents an opportunity to the Labour government. If they can muster the conviction and consensus to back tomorrow’s industries, private capital and investment will flow to where it is needed.

The value of time

One of the most memorable lines of the evening was that “governments under-value the cost of time”.

The phrase speaks to the opportunity cost of indecision. It’s rooted in an institutional risk aversion that has allowed the UK to fall behind in the race to secure global capital.

E-FWD members expressed their frustration at the UK’s culturally cautious approach to planning reform and subsidy control that hinders decisiveness. Only once momentum has been created can delivery be ‘left to the market’, because without timely decisions, there will be no market left.

The upshot is that offshore wind farms take longer to secure planning permission and consents than to build. Meanwhile, supply chains fragment as business drifts off to competing markets. Other countries, meanwhile, are seemingly able to take bold decisions without repercussion and are thriving as a result.

*In the tent: E-FWD members debated the role of Industrial Policy & Government Support in driving investment. Image: Eve Conroy/DC Thomson*

Look over the garden wall

One advantage of falling behind in a global race is the opportunity to learn from international best practice.

The US Inflation Reduction Act (IRA) is a good example. By mapping the investment landscape to identify gaps, the government helped to crowd private investment into energy storage. The IRA also incentivises buying of green hydrogen, providing demand security.

Norway’s approach to taxation is another. Their tax policy effectively connects tax allowances to investments closer to business operations.

E-FWD members explained that both fiscal and physical proximity are crucial for effective energy transition policies and incentives. Clear connectivity between tax benefits and taxable economic activities is key. If the tax benefit is too distant from the investment, the connection will be lost and the investment won’t happen.

For example, imposing a levy on oil and gas operators on the one side, and offering a contract for difference (CfD) mechanism to encourage wind investment on the other, is too siloed for some financiers.

This remains the case even as oil and gas companies transition into energy companies. Different divisions and initiatives are not always aligned internally.

Clustering complementary assets, like carbon storage near emission sources, can help create this proximate connection.

Leveraging abundance

The UK’s early investment in renewable energy is creating structural excesses. This is a nice problem to have, but the industrial opportunity will go squandered without central co-ordination.

Establishing centres of demand closer to areas with structural surpluses necessitates a place-based approach to industrial policy. Simply having negatively priced energy in certain locations is not enough to drive industrial momentum and critical mass.

Government must play a role in this by:

Creating heat networks — it may be more socially acceptable to use excess energy to heat homes rather than curtail renewable generation.
Aggregating energy demand near locations with structural energy surpluses. The market has not yet figured out how to amass demand centres.
Strategically locating energy-intensive industries like data centres in renewables-rich, grid-poor regions such as north-east Scotland to alleviate transmission constraints. Policy is needed to encourage investment in the right areas.
Exploring models like Green Freeports, which offer a template for a place-based, cluster-based approach, not tied to any specific technology. This model could offer a place-based framework for industrial support.

The core challenge is co-ordinating locational supply and demand, and using policy tools to crowd in the right industrial investment in the right places. Government has an important role to play in enabling a place-based industrial policy.

*On the stage, L-R: Daniel Johnson MSP, Jimmy Williamson of Scottish National Investment Bank, and Seb Kennedy of E-FWD during the debate feedback session. Image: Eve Conroy/DC Thomson*

No skills? No investment

It is people that build infrastructure, so the skills gap poses a major impediment to finance. Green Freeports and place-based industrial policy might help here too.

Freeports can cluster industrial activity, creating blue and white collar engineering jobs that are attractive for a cross-section of society.

Government is uniquely placed to oversee the retooling of the British energy workforce for new energy transition industries. The private sector can deliver the training programmes, but effective implementation hinges on strategic central oversight and co-ordination.

Contingency planning is vital, because big infrastructure projects are prone to delays. Enabling infrastructure such as ports can be mothballed in the event of delay, but workers lives cannot.

The North Sea investment climate has a direct bearing on jobs and skills. Oil companies outsourced supply chains over decades. It is those offshoot companies that bear the brunt of every investment hiatus. Fragmentation of supply chains undermines reskilling initiatives, hurting the investability and deliverability of big infrastructure projects.

Supply chain mapping exercises are helpful here. The Scottish Offshore Wind Energy Council’s Strategic Investment Model (SIM) encouraged early engagement between the supply chain and ScotWind project developers. It had a particular focus on ports and manufacturing opportunities.

For finance providers, innovative initiatives like the SIM can provide valuable insight into the pipeline of funded supply chain projects and potential gaps that must be filled, and by when, with targeted investment.

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