In this first in a series of articles looking at Financing the Quest for Net Zero, Michael Stoneham (Banking Partner in Brodies LLP's Energy and Infrastructure team) looks at the opportunities and challenges appearing for the financing now or in the near future of new renewable assets.
Financing is available for proven technologies
The Climate Change Committee (the CCC) is now reporting that a reliable, resilient decarbonised energy supply system can be delivered by 2035. That suggests a recognition that there may be some difficulty in meeting various 2030 targets on the Quest for Net Zero.
But financing is available today to support a range of proven technologies, principally onshore wind, solar and hydro. Where are the investible projects, the funders cry! The House of Commons Environmental Audit Committee (the EAC) reported last December that the UK Government had not set an ambition for delivering a major increase in onshore wind and is instead focussing heavily on offshore wind. This is seen as a missed opportunity to accelerate the rollout of one of the cheapest forms of renewable energy.
Scotland, to its credit, has identified a target of 12GW of new onshore capacity, more than doubling the existing built capacity, to be delivered from a mix of new build, extensions and repowering. This sits alongside its major programmes of offshore development. And so there is a flood presently of land options being granted in preparation for this expansion. It's a similar story, though on a smaller scale, in Wales.
But there remain barriers to development
So how realistic are these ambitions? What are the barriers and are they capable of being overcome? There are potentially three, two of which are well known, namely grid connection, planning and consenting and, more recently, development capacity.
Grid connection: those projects that already have connection date offers are the lucky ones. But, as these will range between 2027 and 2032 in most cases, the projects may only be coming to the financing markets from 2025 onwards. National Grid is looking to free up some capacity where offers may not be actively utilised by developing queue management rules, but any significant change to the conditions of offer may well be challenged.
The strategic issue is that a massive expansion of grid capacity is needed over the next 10 years to cope with expected increased use of electricity. A 50% increase in demand is expected by 2035, requiring the installation of five times the scale of that achieved over the last 30 years. No doubt National Grid is developing delivery plans, but it does feel as if connection availability could be constrained well past 2030.
Planning & Consenting: planning rules are the price we pay for being a liberal democracy. The process, however, can be very challenging, with the prospect of public inquiries if the planning committee objects, and of local councillors overriding (no doubt for good political reasons) any positive recommendation proposed by officials. Conditions specified in any approval can be obscure and introduce further delays. There does not seem to be any prospect of the introduction of a central government override that would shorten the process.
The strong antipathy to onshore wind in England can perhaps be explained by population and traffic density, compared to the more open spaces of country across Scotland and Wales. Community benefits for localities can be formally established and can be significant, with innovative ideas such as providing ongoing contributions to energy bills. But there will always be an irreconcilable group of objectors in principle that will not be persuaded by any cash benefits offered.
Expansion of the power grid is also subject to planning rules, though in this case it might be possible to characterise the overall grid development programme as a project of national significant interest, so that it can be fast-tracked. Bearing in mind the HS2 experience to date this does not look likely to result in a swifter delivery of the necessary work.
Development Capacity: it has simply got more difficult to deliver projects. Quite apart from construction cost inflation, a lack of land surveyors to assist with planning, and an apparent lack of police personnel to provide transport escorts for large kit movements, a disrupted supply chain and border barriers can add to the challenges of project delivery.
The financial commitments of the process are also a burden for developers. The whole of the planning exercise needs to be financed – is there a role for the development banks such as the Scottish National Investment Bank here? And can it be expected that the expansion of the grid will lead to higher and more frequent contributions being required as a part of a connection offer?
Will developer investors be expecting to compete for a new round of CfD awards for onshore wind – all the onshore wind awards in the last round were for Scottish projects. If so, be aware that a new round of awards could lead to a tightening of prices putting further pressure on business models. The alternative, a subsidy-free or fully merchant project will bring its own financial challenges, though these may have been successfully overcome in some cases.
Where can progress be made?
Quick onshore wind wins, then, may be fewer than could otherwise have been the case. A trickle initially, building to a reasonable flow before 2030 and perhaps a flood by around 2035.
What other options for quick progress towards Net Zero are there? Currently it is the development of battery storage facilities, either standalone or linked to a generating project, which is a very active market. Many of these projects are in industrial areas, which can assist with a quick planning result, and there have been recent supportive rule changes made by National Grid. Yet the overall effect of these projects on scaled-up targets may well be incremental. Solar and Hydro projects can make a small contribution as well but not as impactful, unless pump storage hydro can be delivered at scale. Hydro development has in the past been reliant on tax incentives, and so the UK Government would need to bring forward new specific provisions to underpin fresh development.
Another proven technology, ironically, is offshore oil & gas development. CCC accepts that a small amount of offshore gas production, providing a balancing of the system and a measure of energy security, would be compatible with the Net Zero targets. There are North Sea fields which could be brought forward to production stage, and a new round of licensing is in course, which together could provide valuable short-term cover to enable the barriers to the green transition to be fully overcome.
The EAC has stated that, during the transition from polluting fossil fuels, The UK must continue to be able to access oil and gas for heating, transport and power, though the speed of phasing out in the medium term remains a contentious issue. The technology remains capable of being financed, though funders are now having to ensure that they, and the groups they fund, are at the same time delivering on the developing ESG requirements of their investors. And the adverse impact on commitments to development expenditure of the increased UK windfall tax has been extensively reported recently.
The Quest for Net Zero can sometimes feel like the search for the Holy Grail, a mysterious object which is the source of the ultimate mystical, or even physical, experience. But the practical starting point must be, what can be achieved and financed most swiftly at an economical cost and in volume. Scotland is proposing an Onshore Wind Sector Deal for 2023, aiming at maximising the supply chain and community benefit opportunities, which presumably may aim to draw in matched UK Government funding, but we await news of the details. In time, no doubt, new technologies may ride to the rescue, but that's a story for another day.
