The role of the new National Wealth Fund in the energy transition

One of the new UK Government's eye-catching announcements – after lifting the onshore wind ban in England and updating the National Planning and Policy Framework (discussed here and here) – is to launch a National Wealth Fund (NWF). But what is this fund and what role can we expect it to play in the journey towards net zero?

The headlines

The NWF has been formed to "invest in the new industries of the future". £7.3bn of new funding has been made available for the fund which will principally be invested in green industries – including £2.5bn for clean steel, £1.8bn to ports, and £500m for green hydrogen.

The Government's intention is to mobilise £3 of private funding for every £1 of public funding, with the intended outcome of securing additional investment in Britain's industry of almost £30bn per year.

The institutions

The NWF is not like the sovereign wealth funds set up by a number of other countries, the funds for which are mainly sourced from commodity export revenues or foreign exchange reserves held by that country's central bank. Instead, the NWF will in part be funded by UK Government borrowing and looks set to be part development bank, part risk capital provider encouraging private, domestic and foreign investment into the UK.

The official statement sets out the Government's intention to align two publicly owned entities under the NWF umbrella to lead the management of the NWF's funds: the UK Infrastructure Bank and the British Business Bank. 

UK Infrastructure Bank (UKIB)

The UKIB is wholly owned and backed by HM Treasury but is operationally independent from the Government. It specialises in infrastructure finance and all investments must comply with the bank's three objectives:

1. tackling climate change and driving regional and local economic growth;
2. generating a positive financial return; and
3. mobilising private finance

The UKIB has been selected to deploy the NWF's capital because of its expertise as a green lending venture and because this route is quicker than setting up a new body.

British Business Bank (BBB)

The BBB is owned by the Department for Business and Trade but again operationally independent from the Government. It does not lend or invest directly but taps into a network of partners in banking and venture capital to fund high-growth, small UK businesses and is best known for managing the Covid business loans. The Government's official NWF statement teases BBB reforms, but there is no indication that it will deviate too far from the model that has provided the bank success in the past.

Although the two institutions will continue to work separately, it appears that the NWF will attempt to combine them to harness the BBB's flexibility, diverse network and identification of small business opportunities with the UKIB's direct public financing and green investment focus to provide backing to newer, riskier green technologies, support a broad variety of enterprises, and deploy a range of financial products and instruments.

The challenge

The policy announcement indicates that the NWF has been formed to respond to the challenge of raising finance for a successful net zero surge. The Climate Change Committee (CCC), the Government's independent adviser, calls for £50bn investment annually between 2030 and 2050. This is significantly more than the £7.3bn of new funding provided by the Government, and even than the total £28bn it hopes to invest with help from the private sector. The NWF will have to quickly develop a pipeline of successful projects to build confidence in the UK as a green investment destination in order to accelerate towards the CCC's £50bn target. The good news there is that there are many projects in the pipeline – if grid constraints can be overcome.

While the UK suffers from under-investment, access to finance is rarely the principal culprit. More pressing challenges are set out in the Green Finance Institute's NWF Taskforce report, which cites investment viability, demand certainty, and supply chain readiness. While the NWF is in a good position to address some of these barriers, the global nature of these challenges means that the NWF will have to be innovative to help encourage supply chain investment in the UK, for example.

The precise focus of the NWF is yet to become clear but we believe that it can be helpful in two or three particular areas.

1. First, fixed bottom offshore wind alone will not be sufficient to enable the UK to meet the net zero challenge and floating offshore wind will be needed. This technology has not yet been financed at scale and the NWF can assist in de-risking investment in the first few projects, in particular by funding the upfront design development costs both in relation to designing compatible turbines and bases, as well as the funding required to develop port infrastructure to enable their assembly and installation.
2. Second, in addition to port infrastructure, other supply chain infrastructure, like vessels and floating turbine base manufacture could benefit from the NWF supporting funding of these activities.
3. Third, other new technologies, such as hydrogen production, electrolyser production, carbon capture and tidal stream technologies could benefit from NWF involvement.

Conclusion

In spite of the global challenges, the NWF is widely regarded as a positive step towards combatting the uncertainty that has plagued the UK in recent years, in particular in green investment. Establishing a single body to provide backing to "new industries of the future" is a promising move for developing the green technologies and new infrastructure Britain needs to meet the challenges of our times.