Iona Capital Ltd Respond to BEIS Select Committee's Enquiry on the Future of UK's Infrastructure Investment
Towards the end of February Rachel Reeves’ BEIS Select Committee launched an inquiry to examine the outlook for future investment in UK energy infrastructure.
The stimulus to this enquiry revolved around whether the Government needs a new approach to encourage investment into the low carbon, low cost energy system whilst securing energy supplies for the long term.
Rachel Reeves MP, Committee Chair, said: "In the wake of investment decisions over nuclear plants at sites such as Moorside and Wylfa, a giant hole has developed in UK energy policy. With coal due to go off-line, and the prospects for nuclear looking unclear, the government needs to set out how it will create the right framework to encourage the investment needed to deliver the secure energy capacity to meet the nations needs. A bigger shifts in our energy infrastructure to a low cost, low carbon energy system is necessary. As a committee, we will want to consider what more the Government needs to do to attract greater investment into financing future energy capacity, including renewables".
Richard Barker submitted the following in response.
28th March 2019
1. Iona Capital (www.ionacapital.co.uk) is a specialist environmental investor that focuses on smaller (£5m-20m) infrastructure investments that can deliver carbon savings. It focuses on the UK renewable energy, waste and energy efficiency markets. To date, the majority of our investments have been made via SPV structures into Anaerobic Digestion (AD) projects, Biomass and Energy from Waste (EfW) projects across the United Kingdom. Iona currently has £270m of assets under management invested across four funds.
2. Iona’s corporate purpose is stated as "By delivering superior investment returns in low carbon businesses, help drive funding to accelerate the transition to a sustainable global economy".
3. With our purpose in mind, and also in order to establish the strategic direction of both our investment and fundraising activities, we have been researching new investment themes in the distributed energy space. As a result of this research, we believe that we have useful insights into the potential funding of distributed energy assets that might assist the Committee’s inquiry.
4. Iona believes that Government has a natural tendency to view energy infrastructure in a traditional sense – i.e. underpinned by large energy generating assets (such as nuclear and CCGT power stations) and companies. Indeed, Iona suspects that much of the evidence submitted to this inquiry will come from traditional funders and companies who dominate the financing and ownership of large energy infrastructure projects. As such, Iona is keen to provide the Select Committee with a counterbalancing view focused on smaller scale, distributed energy infrastructure.
5. Our submission is focused on an active investor’s view of the financing of small-medium sized distributed energy assets. Key take-outs are:
5.1. As part of the transition to a sustainable energy infrastructure (and highlighted in the Government’s Clean Growth Strategy), we expect to see a shift away from larger traditional energy infrastructure assets such as CCGTs and grid scale transmission to a more distributed energy infrastructure, combining local generation, distribution and supply/demand management.
5.2. This will herald a shift away from larger scale traditional ‘project finance’ style investment towards smaller and more innovative financing solutions that can deliver a range of distributed energy assets.
5.3. We are seeing a significant increase in interest from the Commercial & Industrial (C&I) sector and public sector (e.g. schools) in renewable energy and energy efficiency projects. This is related both to CSR considerations (including carbon reduction) but also potential cost savings. This bodes well for the UK’s ability to accelerate the transition to a low carbon distributed energy future.
5.4. However, potential changes in the energy market (e.g. Ofgem’s Targeted Charging Review) will potentially retard progress and innovation in decarbonisation efforts and maintain the positions of the incumbent ‘Big 6’
5.5. In order for cost effective financing to be made available within this smaller, distributed energy market, there are a number of areas which the Government should factor into its policy making:
5.5.1. Be cognisant of the opportunity for significant energy infrastructure to be installed ‘behind the meter’ within the C&I sector, and ensure that policy, taxation, the electricity market and incentives facilitate this.
5.5.2. Whilst ensuring UK energy security, be bold about the innovation and structural change that is required to transition to a low carbon distributed energy future. Scenario analysis here shows that no ‘transition’ path is perfect, but the impact on innovation and carbon reduction varies by chosen path.
5.5.3. Ensure a level playing field, with clear priority for price and carbon efficiency, in the way that the National Grid manages the Balancing Mechanism – in order to signal to financiers of emerging low carbon solutions rather than traditional fossil fuel based solutions. The success of the UK Landfill Tax in affecting change offers an interesting analogue.
5.5.4. Ensure that distributed energy solutions are not penalised in favour of the incumbent ‘Big 6’ energy companies in, for example, Ofgem’s Targeted Charging Review.
5.5.5. Provide greater transparency/access to market information of C&I customers’ energy usage. Such information is controlled in large part by the ‘Big 6’ energy companies through their legacy customer base, and hence is slowing innovation.
5.5.6. Allow funders and developers to establish B2B power supply businesses and subsequently supply ‘excess’ power to the network under simplified structures.
5.5.7. Simplify the structures around PPAs (power purchase agreements) to allow for ‘standardised’ rapid roll out to the C&I mid-market.
5.5.8. Recognise that UK schools have limited expertise, resource and confidence to contract in renewable energy/energy efficiency projects – even with access to Government Funding (e.g. Salix). In order to drive adoption, a new commercial & public partnership approach is required.
5.6. Encourage funders to aggregate distributed energy assets into sufficient scale to access the green bond markets – hence tapping lower costs financing.
6. More detailed evidence is available from Iona Capital should the Committee wish to know more.