Get networking

Read this article to understand: 

• How infrastructure could contribute to the UK’s growth and climate objectives
• The challenges to boosting investment
• Potential opportunities for investors in energy, transport and social infrastructure

The new UK government has declared a “national mission” to lift economic growth, making it clear that boosting infrastructure spending will be a central plank of those efforts. It also has an ambition to make Britain a “clean energy superpower”. The government has already removed a de facto ban on onshore wind in England, and plans to build 1.5 million homes over the next five years with its growth targets in mind.

However, lifting levels of investment will not be straightforward. As the chart below shows, UK investment as a share of economic output has historically lagged behind that recorded by other leading economies.

Complicating the UK government’s task, national debt stands at 98 per cent of GDP and more than £100 billion a year is being spent on servicing that debt. With little scope for new borrowing, the government plans to boost investment through forging new partnerships with the private sector.

This means infrastructure investors could soon be able to play a major role in the infrastructure delivery necessary for economic growth and the pathway to net zero. There is no shortage of private capital waiting to be unlocked. But for that to happen, a number of obstacles will have to be overcome. 

Partnering up

In July, Aviva Investors published its policy roadmap: Boosting Low Carbon Investment in the UK, which set out our view on the long-term measures that are necessary to enable investors to deliver their share of the capital investment required to reach net zero.¹  These are not all “quick wins”, and will need to form part of a long-term sustainable plan that extends well into the 2030s. 

In infrastructure, there are some areas that need immediate attention. The National Infrastructure Commission, in its National Infrastructure Assessment of November 2023, emphasised delivery of green energy projects had to be speeded up if the government was to reach its net-zero ambitions. That echoed a 2020 government report entitled a New Deal for Britain, in which Whitehall said there was a need to build better, greener and faster. 

Among the main obstacles here are challenges in planning, consenting and grid connections. We set out in our roadmap some clear measures which should help to navigate these hurdles and anticipate the new government will implement the previous administration’s Transmission Acceleration Action Plan and Connections Action Plan. A 2023 report from Nick Winser, the UK's Electricity Networks Commissioner, argued the measures outlined in these plans could reduce the time it takes to deliver onshore transmission network infrastructure from up to 14 years to seven years.² 

Shifting gear

Government, industry and investors need to change gear if we are to meet the goal to decarbonise the energy system faster and boost economic growth in the process. Meeting the objectives of net zero will not happen by accident and will take the largest capital investment programme we are likely to witness in our lifetime.

To achieve its goals, the government has set up a number of new bodies. For instance, it is to establish a publicly owned company, Great British Energy. This will invest in new technologies such as floating offshore wind, tidal power and hydrogen; in doing so, it aims to crowd in private sector investment. It also aims to speed up the roll-out of mature technologies like wind, solar and nuclear by partnering with the private sector. 

While industry has broadly welcomed the plan for a new body to co-invest in capital-intensive projects with a view to speeding up their delivery, more detail is needed on how the entity will work on specific projects and how it will interact with other institutions such as the newly created National Wealth Fund.

The government wants the latter, a £7.3 billion fund, to become the main vehicle for public investment in infrastructure with an initial focus on the development of ports, green hydrogen, green steel, industrial clusters and the automotive industry. The aim is to reduce the investment risk for private funding or institutional capital. The target is to attract £3 of private cash for every £1 of public funding.

The entity is likely to be set up to work within or above two existing state-owned development banks, the UK Infrastructure Bank and the British Business Bank. It makes sense for the government to use public capital to help crowd in private capital, but this needs to be very targeted and the government must be willing to take risks that private investors are unable to. 

Contracts for Difference

In order to deliver the objective of clean power by 2030, the government is also aiming to double onshore wind output, treble solar power and quadruple offshore wind output. This will require a step-change in investment into these sources of generation.

There is no shortage of private capital for these tried-and-trusted technologies, but investors need to see significant investment into supply chains and supporting electricity transmission infrastructure. 

The failure of the 2023 Contract for Difference (CfD) auction to achieve any offshore wind investment has been rectified through increased pricing in this year’s auction. The recent announcement of a £1.5 billion budget for the AR6 CfD, which is seven times the allocation for the previous auction, sets the tone towards delivering against the 2030 target. The result of AR6 has delivered 131 projects which offers a strong future opportunity for investors. Onshore wind and solar investment have been particularly affected by delays in consenting and grid connections along with local objections to planning permission, so finding a solution here will be crucial. 

As for nuclear energy, the new government’s attitude is positive. We expect the Sizewell C plant to be built, along with progress on a longer-term plan to deliver Small Modular Reactors (SMRs). The latter technology remains at a relatively early stage of development so will need early-stage development capital from industry and possibly the public sector. 

Financial investors remain interested in this area, and there could be opportunities should the slow pace of development accelerate. As well as supporting baseload energy production, SMR technology offers the UK an opportunity to build an industrial strategy around the sector and create an exportable product.

Transport and social infrastructure

Other areas of infrastructure investment could be set for change over the coming years. Whilst there has been a slowdown in the adoption of electric vehicles (EVs) over recent months, it is only a matter of time until the pace picks up again. However, the charging-point network will need to grow at a faster rate to support the expansion of the sector. 

Lessons could be learnt from the development of fibre broadband, where a “laissez faire” approach to the market arguably led to an inefficient use of capital, with excess capacity in many areas of the country. 

EV charging needs to be based on the long-term goal of creating a large network available to all consumers, at home, at the workplace or on the road network. It may be more efficient to consider how concession options could lead to a more efficient outcome which could more easily support longer-term financing models.

Rail is another sector that could be of interest to investors. The government is setting up Great British Railways, a state-owned company, to try to consolidate what is a fragmented sector, and to align rail infrastructure and operating services. It is worth noting that at present rolling stock is the only part of the industry making use of private capital. It appears the model of privately owned rolling stock will not be affected by the creation of the new entity, but investors are keen to see how private capital could be used to improve rail infrastructure for the good of taxpayers and the customer.

There is little doubt the schools and hospital estate is also in need of investment, as highlighted in 2023 when it was found more than 200 British schools had buildings containing a faulty form of concrete. There is also a desire to make schools and hospitals more energy efficient.

However, given the limitations on public finances, the government may want to call on private sector capital in this area, too. If so, a new financing model may be required. The Private Finance Initiative and Public-Private Partnership models that were used to fund social infrastructure in the past have been heavily criticised for not delivering value for money for taxpayers.

The challenges set out above will not all be addressed overnight, but investors are hoping the new government’s growth and net-zero objectives could lead to a step-change in the delivery of new infrastructure projects. If it succeeds in unlocking the opportunities for new investment and partnerships, we might be able to look back in a decade’s time and label this moment as the start of a golden age for UK infrastructure.