Investors are getting out of high carbon, but will government help them get into low carbon?
Reading the news, it’s hard to know what to make of the UK’s low carbon progress. On Christmas Day we were running on 40 per cent renewable power, and earlier last year we switched all our coal fired power stations off for the first time in 130 years.
So, are we on track to meet our carbon targets? Are we building the right assets for a low carbon future? And is all this just government or is the private sector on board?
Looking at future plans for infrastructure investment helps to answer these questions and the government publishes a list of major infrastructure projects in the pipeline from time to time. We’ve been tracking the progress of these plans over the past few years and the numbers from the latest iteration, published in December, shows three trends worth noting:
1. After half a decade of rising high carbon investment, it’s now finally falling
Despite the UK’s world leading carbon budgets, the story of the early 2010s was one of declining expectations for low carbon infrastructure, and a retrenchment into high carbon infrastructure like oil and gas, roads and airports. But 2016 was the turning point.
2. Private sector divestment from high carbon is being replaced by investment in low carbon, for now
The private sector is the biggest spender on infrastructure, and it’s behind the big fall in high carbon investment: it will be down by more than half over the course of this parliament. Even better, private investors are backing low carbon assets – until 2018 at least. The reason for the big fall after 2018 is because of what’s happening in energy infrastructure.
3. Renewables investment will fall by 95 per cent between 2017 and 2020
Renewables have been the UK’s big low carbon success story. They’ve benefited from a reasonably long term subsidy regime from 2013-2020, under the so-called levy control framework (LCF). The auctions held under this framework have seen costs fall rapidly. But the LCF ends in three years, and the last auctions two years ago haven’t been followed up with a commitment to new auctions, leaving most renewables (offshore wind excepted) with no route to market. Unsurprisingly, investment is now falling off a cliff.
Beyond these big trends, there are other interesting tidbits for infrastructure geeks. The UK managed to find £2 billion nuclear clean up cost savings over the course of last year. These were the single largest item in DECC’s budget, and a massive drag on what was a relatively small department with a big job to do. So this is good news as long as it doesn’t mean safety is compromised.
The pipeline also shows just how significant offshore wind has become to UK decarbonisation. It makes up 66 per cent of renewables investment, followed by 13 per cent for energy from waste, 11 per cent biomass, ten per cent onshore wind (all permitted before 2015), and 0.03 per cent solar, although rooftop solar isn’t included as the Treasury doesn’t consider it to be major infrastructure.
The final thing worth noting is that the chancellor’s relaxation of infrastructure spending limits has benefited sustainable transport more than road building: around £2 billion more will be spent on low carbon transport over this parliament than was expected a year ago. This said, excluding HS2, rail spending is still projected to fall by a third by 2020.
Overall, the takeaway is that the private sector has seen which way the wind is blowing and wants to invest in low carbon assets that will deliver sustainable returns over the next few decades. Public policy has been critical to this change, but the policies this government inherited have now run out of steam.
So, in a message that’s (almost) perfectly timed for new year’s resolutions, now’s the time to back low carbon infrastructure: to give renewable energy the last boost it needs to become subsidy free, to keep backing the strong start the UK’s made on electric vehicles and to recommit to zero carbon buildings.
Read our full analysis of the latest infrastructure pipeline