The UK will need at least £511bn of investment between 2026 and 2040 to deliver the infrastructure required for its clean energy transition, new analysis finds.
The figure equates to around £40bn a year on average and covers investment across renewable generation, electricity networks, energy storage and emerging low-carbon technologies.
However, the analysis highlights a potential gap between the scale and long-term nature of the investment required and the way clean energy infrastructure is currently financed.
Greater role for long-term investment
Banks currently provide more than 90% of project finance debt for UK clean energy infrastructure. They are expected to remain important, particularly for construction and other stages where project risks are highest.
However, bank lending is typically provided over shorter periods, while clean energy assets can operate for decades.
The analysis suggests that greater involvement from pension funds, insurers and other institutional investors could help provide longer-term capital once construction and technology risks have reduced.
It identifies around £120bn of potential financing opportunities for institutional investors. Greater participation could also allow banks to recycle around £137bn of capital into new projects and generate around £3bn in financing savings over project lifetimes.
Where could investment be needed?
The analysis identifies six areas offering potential opportunities for institutional investment:
- Large offshore wind syndication: £33bn
- Greenfield financing of mid-sized renewables: £24bn
- Network infrastructure: £21bn
- Emerging technologies: £19bn
- Refinancing operational renewable assets: £17bn
- Smaller renewable projects: £6bn
The financing model could vary between different types of project.
For example, institutional investors could provide longer-term capital for large offshore wind projects once construction risks have fallen. For mid-sized onshore wind and large solar projects, banks could provide shorter-term finance during construction before institutional investors take on longer-term exposure.
Smaller renewable projects could potentially be grouped into portfolios to make them suitable for institutional investment.
Electricity networks could also attract long-term investment because of their regulated revenues, predictable cash flows and long asset lives.
For technologies including hydrogen, nuclear and carbon capture, utilisation and storage, the analysis suggests institutional investment may be more appropriate once projects have been built and construction and technology risks have reduced.
Barriers to investment
The analysis identifies four main barriers to greater institutional participation: credit risk, project scale, inconsistent financing structures and industry inertia.
Many clean energy projects are too small to meet the minimum investment size required by institutional investors. Bespoke financing structures can also increase transaction costs and make it harder to deploy capital efficiently.
Potential solutions identified include credit guarantees, blended finance, aggregation of smaller projects, greater standardisation of financing structures and closer collaboration between banks, investors, developers and public finance institutions.
Standardising areas such as term sheets, eligibility criteria, reporting and due diligence could make projects easier to compare and finance, while reducing transaction costs.
Financing needs to evolve alongside the energy transition
The scale of investment required means the way clean energy projects are financed could become increasingly important.
The analysis recommends that developers consider future financing and refinancing requirements from the earliest stages of project design. Banks could focus on construction and higher-risk stages before creating routes for institutional investors to take on longer-term exposure.
Public finance institutions could also help reduce specific risks and attract private investment, particularly for emerging technologies and projects that do not yet meet institutional investment criteria.
With at least £511bn of investment required by 2040, expanding access to different sources of finance could be an important part of delivering the UK’s clean energy infrastructure.
