It is estimated that replacing and upgrading the electricity infrastructure to meet the UK’s energy and climate change targets will require approximately £100bn to £110bn of capital investment.
That’s £75bn for generation, and around £35bn for electricity transmission and distribution between now and 2020.
Over recent years, City analysts have raised doubts over the capacity of current energy players (utilities and other developers) to raise such funds on time.
Policy uncertainty, first around Electricity Market Reform and more recently around potential shifts to deal with affordability and pricing, have made gaining project investment even more difficult.
In the face of such challenges, it is encouraging to see the government offering a degree of support for much-needed infrastructure projects.
In fact, more than half of the 40 large-scale infrastructure projects to have been prequalified for the Treasury’s GBP £40bn UK Guarantee scheme are energy projects, meaning more than £20bn of investment in the energy sector could now be supported by the scheme.
This comes at the same time as an announcement from the European Commission qualifying 248 projects as strategically important at European level.
Carrying the label “projects of common interest”, these gas storage and gas and electricity transmission projects will benefit from faster and more efficient permit granting procedures and improved regulatory treatment.
“UK Guarantees is a government initiative on infrastructure with real teeth”
They may also have access to financial support from the Connecting Europe Facility, to which a €5.85bn budget has been allocated to trans-European energy infrastructure for the period 2014-20.
Of the 248 projects, 26 are located in the UK (or connecting the UK to neighbouring countries).
The Treasury’s announcement therefore presents a marked step in the right direction; one towards a more supportive environment for investment in energy infrastructure.
It is one of the government’s initiatives on infrastructure with real teeth and, providing it does not suffer from a lengthy or cumbersome approval process, it has the potential to get vital projects off the ground quickly.
“What would really make the infrastructure sector confident is reassurance that those already prequalified will progress towards final approval”
In covering the financing mechanism of the Northern line extension to Nine Elms, for example, the guarantee acts as a catalyst for the broader development of the area.
The mechanism is also an efficient way of using the public sector’s capacity to underwrite projects. This is because rather than the whole capital amount for a project becoming a public sector liability, it is the shortfall that may end up on the government’s books.
While the initiative represents progress, what would really make the infrastructure sector confident is clarity on further opportunities for investment and reassurance that those already prequalified will progress towards final approval.
There is also an enormous opportunity to get infrastructure built by harnessing local government’s capacity and enthusiasm to deliver – as recommended by the London Finance Commission.
Easing prudential borrowing limits for the Greater London Authority and Transport for London would be an excellent first step.
If all goes according to plan, the updated National Infrastructure Plan, expected alongside the autumn statement in December, should go some way towards boosting UK growth, competitiveness and employment, providing investors with an attractive blueprint for investing in Britain’s future economic growth.
It would be a missed opportunity if the vital role of city governments in kick-starting investment is overlooked.
Alexander Jan is head of transport, strategy and economics in transaction advice and Filippo Gaddo is energy economist in transaction advice at Arup