One might be forgiven for not finding the positives in the UK government’s recent mini-budget. While issues around tax continued to make headlines long after the former Chancellor’s announcement, there were some positives regarding energy efficiency.
HM Treasury’s ‘Growth Plan 2022’ announced the opening of applications for £2.1 billion of funding over the next two years to support local authorities, housing associations, schools and hospitals to invest in energy efficiency and renewable heating. Such news is welcome if the UK is to achieve a decarbonised energy system in the next decade or so and total net zero by 2050. But more needs to be done to keep the nation on track.
The United Kingdom emitted 424.5 million tonnes of CO2 in 2021, up by 4.7% on the previous year. The nation’s overall greenhouse gas (GHG) emissions have decreased significantly over the past thirty years. However, by 2050, it is predicted that our demand for energy, notably electricity, will triple.
According to the International Energy Agency (IEA), a major restructuring of the world’s energy systems is necessary to attain net zero carbon dioxide emissions. It notes the need for a “major expansion in the volume of investment and a major pivot in where that investment is deployed.” Having clean and energy-efficient technologies as its primary focus.
The British Government has stated that the energy industry is to be decarbonized by 2035, fifteen years ahead of the whole economy, for the UK to achieve net zero in a matter of decades. To accomplish this and reach the goals established at COP26, significant, consistent, and balanced investment is required across all facets of the energy system.
The IEA’s recent roadmap for the global energy sector concluded that reaching net zero by 2050 relied on an unprecedented push towards clean technologies by 2030, requiring an immediate and large deployment of all available clean and efficient energy technologies. The investment and ingenuity required to move this forward will mostly fall to the private sector.
Whole-scale capital investment is the path to net zero
According to current projections, annual investment in energy production alone will need to increase from the average $2 trillion invested over the last five years to about $5 trillion in 2030. It will then slightly decline to about $4.5 trillion in 2050. Total capital investment in net zero emissions will also need to increase from an average of 2.5% to as high as 4.5% of GDP in 2030.
The numbers required to be on track to net zero are significant. According to the UN’s Net Zero Financing Roadmap, which was created in conjunction with COP26 and is in line with the IEA’s decarbonisation roadmap, the world needs to invest roughly $32 trillion between 2021 and 2030. In addition, the private sector will need to provide 70% of the funding through direct net zero investments and investments in corporate decarbonisation projects.
Comprehensive, multifaceted methodology
Not merely the trillions of dollars in capital required, but also the location of the investment made and the developments that subsequently follow, which are of utmost significance when it comes to energy transition. To guarantee a seamless transition and manage energy security in the medium to long term, a balanced, comprehensive approach is essential, as demonstrated by TENT’s investment plan.
If we concentrate our efforts on just one component of the energy system, we cannot achieve net zero. Even with the low carbon benefits of cutting-edge solar technology and massive offshore wind farms, we won’t be able to meet our energy needs without effective transmission to minimise energy loss and sufficient storage to account for weather variability. Our electricity demands will continue to be too high if efficiency measures and carbon capture technology aren’t used to reduce consumption requirements in residential, commercial, and industrial settings.
It is broadly divided in the IEA’s roadmap into several key pillars:
- The generation of renewable and low-carbon energy
- Energy efficiency through enhanced storage and transmission
- Decreased consumption through on-site efficiencies, societal change, and carbon capture and usage.
Any energy transition strategy, like our own and reflected in our portfolio, should take this into account.
We have the theory, but how does it look in practice? Firstly, we need to quickly advance decentralised, low-carbon energy production that is entirely based on renewable sources and is ideally situated as close as possible to centres of demand, like solar, hydroelectric power, and wind.
In addition, between generation and consumption, we must invest in enough distribution and storage to balance the supply, which is frequently unstable and unpredictable. Wind-generated energy that might have powered nearly a million homes for a year was simply wasted last year. That cost £507 million, according to consulting firm LCP.
Furthermore, whether in a home, commercial, or industrial setting, we must lessen consumer demand on the grid network. Energy-saving techniques, such as low-energy LED lighting systems, carbon capture utilization, heat and waste recovery, or Combined Heat and Power (CHP), can be used to achieve this.
This comprehensive spread is reflected in TENT’s portfolio, which includes assets from each of the three pillars. The trust now operates nine hydroelectric units throughout the Scottish Highlands under the distributed generation pillar. The trust’s investment in four geographically diversified battery energy storage systems (BESS) exemplifies the second pillar of energy storage.
The investment in three Combined Heat and Electricity (CHP) assets, which supply heat, power, and carbon dioxide to one of the leading produce wholesalers in the UK, serves as the final example of the demand side reduction component. To achieve net zero in a balanced, measured manner and to provide our investors with stable, long-term returns, we feel this diverse portfolio is essential.
Targeting returns for the long term
Investing in these kinds of assets could not be more timely given the former Chancellor’s support for decarbonising our energy system, which is necessary for the government to meet its net zero obligations and manage the security of our energy supply.
There is also less exposure to market volatility and greater security of returns with TENT’s diversified investment strategy, which avoids relying on a single market that may be impacted by, for example, climatic conditions. Additionally, TENT invests in projects with predictable, frequently RPI inflation-linked cash flows and long-term contracts.
Investors will have more opportunities as the effort to achieve net zero and the transition to a decarbonized energy system gains momentum. Given the current $2,600 billion annual capital investment requirement and the fast-improving economics of low-carbon energy investment, returns for investors have already begun to climb exponentially and will do so in the future.
Triple Point is the place where people, purpose, and profit meet. Since 2004, we’ve been targeting this Triple Point in areas like infrastructure, energy efficiency and social housing, unlocking investment opportunities that make a difference. We manage over £2.9 billion of private, institutional and public capital across five distinct investment strategies: Social Housing, Energy, Digital Infrastructure, Private Credit, and Venture. Each of these strategies helps to solve a problem society faces, and each one creates opportunities for investors. Our investments transform public services, get businesses off the ground, and even kickstart whole markets.
