Read this article to understand:
- Why the transition to net zero represents a significant growth opportunity for the UK economy, and for private investors and their clients
- The current barriers to increased investment in low-carbon infrastructure and other projects, and how these could be addressed
- Our policy recommendations across eight key sectors: Power, buildings, heavy industry, surface transport, aviation, shipping, nature restoration and engineered carbon removals
The Climate Change Act requires the UK economy to achieve net-zero emissions by 2050, with successive governments and official oppositions sharing the ambition to make the UK one of the most competitive low-carbon economies in the world.
The Mission Zero Review, commissioned by HM Government, concluded that with 90 per cent of world GDP covered by some form of net-zero target, the net-zero transition was “the growth opportunity of the 21st century”. The Confederation of British Industry’s (CBI’s) 2023 Green Growth Report highlights the potential to increase the size of UK GDP by £37 billion to £57 billion annually by 2030 (a 1.6 per cent to 2.4 per cent increase) through further investment in 27 low-carbon growth areas.
The UK has had a strong start in transitioning to a low-carbon economy: It reduced its emissions by 48 per cent between 1990 and 2021, while growing its economy by 65 per cent over that same period. Significant investment has been committed in areas such as offshore wind – where the UK will soon be host to the five largest offshore wind farms in the world – and electric-vehicle (EV) manufacturing and charging infrastructure. Low-carbon innovation projects are taking place across a wide range of sectors including aerospace, green hydrogen production and heavy industry.
To keep the UK on track for net-zero emissions, the Government’s Green Finance Strategy estimates that “through the late 2020s and 2030s, an additional £50-60 billion capital investment will be required each year”. In addition, the delivery of the UK’s nature-restoration goals could require between £44 billion and £97 billion of investment over the next ten years. While targeted public investment will have an important role to play in the transition to net zero, a significant share of this investment will need to come from the private sector. Private investors will therefore have a critical role to play in delivering a timely, affordable and economically successful transition to net-zero emissions for the UK economy and society.
Clear, ambitious and long-term public policy measures will be essential to Aviva Investors’ ability – and that of our financial sector peers – to commit further investment into the decarbonisation of our portfolios. They will also be key to satisfy growing client demand for opportunities to invest in sustainable businesses and projects able to deliver an appropriate level of risk-adjusted returns. Based on the UK’s welcome progress to date, this Roadmap therefore aims to help policymakers identify some of the key policy priorities that can unlock the private investment needed over the next five years to achieve the UK’s 2050 target and deliver an economically successful and socially equitable transition to net-zero emissions.
The aim of this Roadmap: Tackling barriers to investment
Aviva Investors has had exposure to businesses and infrastructure across a wide range of low-carbon sectors, from renewable electricity, offshore power networks and EV charging infrastructure, through to energy efficient buildings and nature restoration projects. Important levels of investment have been committed in low-carbon power and the EV supply chain over the last ten years. Yet our experience shows that, in most sectors of the economy, there is an insufficient pipeline of commercially viable low-carbon projects to meet investor demand for investments in low-carbon infrastructure and businesses that can deliver an appropriate level of risk-adjusted returns.
In the power sector, this has been partly due to a mix of planning delays for grid infrastructure and a mismatch between rising project costs and limited revenues provided by market mechanisms such as Contracts for Differences (CfD), as was seen in the AR5 auction round for new offshore wind projects in September 2023. In other areas, the policy framework is either yet to be fully finalised (energy efficiency in existing buildings; Carbon Capture, Usage and Storage [CCUS]) or at a relatively early stage of development (low-carbon hydrogen, low-carbon shipping and aviation), thereby creating uncertainty around the specific investment and infrastructure needs for each sector, and limiting the pipeline of commercially viable projects that developers – and subsequently investors – can support and scale up.
Based on our experience to date, and given our clients’ growing interest in low-carbon investment opportunities, this Roadmap puts forward a range of public policy solutions for the next five years to address some of these issues and further improve market conditions to unlock low-carbon investment at greater pace and scale. The focus of these recommendations is to unlock private investment in low-carbon infrastructure, goods, services, supply chains and businesses across the UK economy, in a way that delivers both an appropriate level of risk-adjusted returns for investors and an affordable cost of finance for developers, businesses and society. This work builds on recommendations put forward by a range of businesses, trade associations, public bodies and academic institutions, to which we have applied our investment expertise and sectoral insights.
Five areas of action to unlock private investment to deliver net zero
Our recommendations can be grouped under five core areas of action:
1. Overcoming systemic hurdles to investment
The Roadmap identifies a range of key actions to overcome systemic issues currently slowing or preventing private investment, including:
a. Delivering a net-zero-aligned planning system to cut planning delays and accelerate investment in low-carbon infrastructure projects
As called for by the National Infrastructure Commission, and energy sector companies and trade groups, this should include:
- Embedding the net-zero target in the National Planning Policy Framework.
- Providing local authorities, planning bodies and regulators with additional resourcing to efficiently process applications, building on the five-year industry programme to increase skills and capacity in Local Planning Authorities recently launched by the British Chamber of Commerce and supported by Aviva.
- Implementing at pace the positive reforms set out in the Government’s Transmission Acceleration Action Plan and Connections Action Plan to speed up the construction of – and connections to – new power transmission and distribution lines. A more efficient planning system is essential in allowing Aviva to increase investments in UK sustainable infrastructure.
b. Tackling existing skills gaps through implementing a detailed Green Skills Action Plan
As recognised by the Government’s Green Jobs Taskforce, a cross-economy and sector-specific plan is required to overcome the significant skills gaps which are slowing down low-carbon investment in sectors such as power grids, renewable power, heating, construction, heavy industry and nature restoration. Such a plan should put forward measures to increase the accessibility of STEM skills and broader low-carbon skills in schools and further/higher education. It should also be focused on delivering a “Just Transition”, by introducing measures to deliver skills provision and corresponding financial support to workers in high-carbon sectors who are adjusting to changes in their sector or looking for employment opportunities in low-carbon sectors.
c. Deliver a stronger, gradually increasing and more predictable UK carbon price
This could be achieved through either further reforms to the UK Emissions Trading Scheme (UK ETS) or a linkage agreement with the EU Emissions Trading Scheme (EU ETS) as already contemplated in the UK – EU Trade and Cooperation Agreement.
A more efficient planning system is essential to deliver sustainable infrastructure ambitions
As highlighted by trade group Energy UK, the UK’s low carbon price – which fell to around £35 per tonne of CO2 in December 2023, compared to a price of just over €70 under the EU ETS at that time – undermines the investment signal in low-carbon infrastructure and could result in UK businesses facing high carbon costs when exporting to the EU under the EU’s newly set up Carbon Border Adjustment Mechanism.
Many business groups support a linkage between the UK and EU Emissions Trading Schemes such as the CBI, Energy UK, the British Chambers of Commerce, the UK Emissions Trading Group, the Energy Intensive Users Group and the Carbon Capture and Storage Association. It would improve liquidity, price discovery and predictability of the future carbon-price trajectory and would deliver greater alignment between the EU and UK Carbon Border Adjustment Mechanisms. It could follow the precedent set by the Swiss – EU Emission Trading Schemes Linkage Agreement, in a way which does not undermine the sovereignty of either party.
d. Implementing at pace the 2018 Resources and Waste Strategy to improve access to high-quality secondary materials and commodities across supply chains
Strategies to decarbonise business operations in sectors such as heavy industries, construction, automotive, energy, electronics and retail often require access to high volumes of affordable and high-quality secondary materials. These include recycled materials such as steel, glass and aluminium, and rare earth materials as well as wastes suitable for sustainable fuel production. To deliver these materials at scale, a comprehensive policy framework including product standards, green public procurement, fiscal incentives and consumer engagement is required to drive resource-efficient product design across sectors, retain secondary materials in the economy and unlock investment in material recovery, sorting, recycling and remanufacturing facilities.
2. Using limited public investment to de-risk and crowd in private low-carbon investment
Public investment has a targeted, but important, role to play in stimulating low-carbon investment across the economy. Recognising the Government’s limited ability to deploy new public funding in the current economic context, public investment needs to be carefully focused on accelerating low-carbon innovation and on crowding in private investment in areas where market barriers subsist, and where private investment is not yet flowing at the necessary pace and scale. Public funding – which could be delivered through bodies such as the UK Infrastructure Bank and other similar institutions – could be most effective if targeted towards:
a. Areas involving emerging technology risk
This could include public investment towards first-of-a-kind projects involving the electrification of heavy industrial plants (building on the Government’s proposed support for the development of new electric arc furnaces in the steel sector), low-carbon hydrogen production and CCUS technology. As highlighted by the impact on the workforce from the closure of coal blast furnaces at the Port Talbot steelworks, this direct investment should form part of a coherent industrial strategy, with a particular focus on delivering positive outcomes for the workforce.
Public investment has a targeted but important role to play in stimulating private low-carbon investment across the economy
b. Areas where projects are logistically very complex for private investors
This could include targeted public intervention to attract private investment to support the mass energy-efficiency and low-carbon-heat retrofit of the UK’s housing and building stock, with all 28 million homes and two million commercial buildings needing to be low carbon by the mid-2030s.
c. Critical infrastructure that is strategic to economy-wide decarbonisation and the growth of essential supply chains
This could include investment in port infrastructure and battery factories to support the growth of the floating offshore wind and EV supply chains.
3. Accelerating the deployment of clean electricity and low-carbon fuels
In several sectors of the economy – such as surface transport, heating, heavy industry, aviation and shipping – investment in low-carbon solutions and infrastructure will only be possible if plentiful supplies of affordable zero-emission electricity and other low-carbon fuels are available in the near to medium term. Key recommendations for the next five years include:
a. Strengthening policies to ensure that the power sector is fully decarbonised by 2035 or sooner
As recommended by bodies such as Renewable UK and Energy UK, this includes:
- A full implementation of the power-grid planning reforms highlighted above.
- A regular review of the maximum CfD strike prices and size of the annual auction funding pot for offshore wind and other renewables to ensure annual auctions deliver a high volume of commercially viable projects each year.
- The completion of the Review of Electricity Market Arrangements and other related policy reforms to further increase investment in low-carbon generation, grid, storage and flexibility infrastructure, and reduce the price of electricity.
b. Accelerating the delivery of low-carbon hydrogen production and the first storage and transport projects
Eleven green hydrogen projects (renewable-energy based) were given the go ahead, backed by £2 billion of Government funding, under Hydrogen Allocation Round 1.
Economy-wide, low-carbon investment relies on plentiful supplies of affordable zero-emission electricity and low-carbon fuels
The Government has produced a Hydrogen Production Delivery Roadmap, setting out how green, blue (gas + carbon capture) and other types of hydrogen-production projects meeting the UK’s Low Carbon Hydrogen Standard will receive funding support through the newly developed Hydrogen Production Business Model and the Net Zero Hydrogen Fund.
A Hydrogen Transport and Storage Networks Pathway has also been developed, setting out next steps for the deployment of hydrogen transport and storage infrastructure. Priorities going forward should be to:
- Rapidly grow the pipeline of green hydrogen production projects through annual allocation rounds through to 2030.
- Grow the pipeline of blue hydrogen projects (gas + carbon capture) by moving ahead with contract allocations under the CCUS Cluster Sequencing Programme.
- By 2025, complete the business models and contract allocation for the first hydrogen transport and storage infrastructure projects.
c. Delivering market deployment policies to accelerate the roll out of low-carbon aviation and shipping fuels
On aviation, this should include delivering an effective implementation of the Sustainable Aviation Fuel (SAF) Mandate set to come into force in January 2025. This will require a two per cent share of SAF in the UK aviation fuel mix by 2025, increasing to ten per cent in 2030 and eventually 22 per cent in 2040, to grow the supply of SAFs. It should be underpinned by a revenue certainty mechanism and focused guarantees to support the construction of the first SAF plants as recommended by expert advice commissioned by the Government and in line with its ambition for five plants to be under construction by 2025. On shipping, this should include introducing a mandate and revenue-guarantee mechanisms to grow the supply of low-carbon fuels such as hydrogen, ammonia and methanol as envisaged in the Government’s 2022 Course to Zero consultation.
4. Creating enduring markets for low-carbon supply chains
There are a range of sectors where low-carbon technologies and business models are either well established or rapidly progressing through the innovation cycle, but where private investment is not yet being deployed at the necessary pace and scale due to a lack of regulatory measures, fiscal incentives and /or market mechanisms. To address this, this Roadmap highlights a range of sector-specific recommendations to plug outstanding policy gaps and deliver enduring market frameworks for low-carbon supply chains. Recommendations include:
a. Buildings
Introduce minimum regulatory standards and corresponding fiscal incentives to drive investment in energy efficiency in the housing stock and deliver an effective implementation of the Clean Heat Market Mechanism scheduled to start in April 2025, to gradually grow the supply – and cut the cost of – low-carbon heating systems and drive job creation across these supply chains.
b. Surface transport
Deliver a robust implementation – and, subject to market trends, a potential tightening – of the Zero Emission Vehicle (ZEV) mandate for cars and vans to grow the supply of zero-emission vehicles. Consider their use in other parts of the transport sector such as heavy goods vehicles (HGVs) and buses.
c. Heavy industry
Complete all business models for CCUS projects, allocate part of the £20 billion of Government funding announced in the 2023 Budget to allow the first four shortlisted CCUS cluster projects to go ahead, finalise a strategy to facilitate industrial electrification (including through more competitive power prices), and develop a plan for dispersed industrial sites (i.e., sites not located in industrial clusters) in sectors such as glass and cement to help them connect to carbon capture, hydrogen and grid infrastructure.
d. Nature restoration
Introduce a land-use framework overseen by a coordinating body setting out England’s strategy to restore nature through more sustainable land use across different economic activities (e.g., food production, biomass production, afforestation etc), with tangible nature restoration commitments set for – and tailored to – different economic sectors; complete the policy detail, option design and payment rates for agri-environment schemes in England, Wales and Scotland; and complete the different guidelines and investment standards required to create a framework for world-leading nature markets in the UK.
5. Delivering a fair transition and growing the market demand for low-carbon solutions
Unlocking private investment at scale in low-carbon infrastructure and businesses is only possible if investors can identify long-term market demand for a range of low-carbon goods and services. This in turn can only be delivered if policies are in place across the economy to make low-carbon products and services affordable, practical and easily accessible for households, citizens and businesses around the country. This Roadmap puts forward a range of “demand side” measures to this effect, including:
a. Buildings
Low-carbon products and services must be affordable, practical and easily accessible for households, citizens and businesses
Ensure effective financial support is in place to support the take-up of insulation and low carbon heat systems for low-income households and social housing, through improvements to schemes such as ECO4. Provide tailored support for other households through fiscal incentives such as VAT and Stamp Duty rebates and by keeping the overall size of the Boiler Upgrade Scheme under review to support a growing uptake of affordable heat pumps, building on the recent £1.5 billion funding increase.
b. Transport
Introduce targeted grants to support consumers with the purchase of affordable EV models until they reach upfront cost parity with petrol and diesel vehicles, explore the possibility of applying the same rate of VAT to public and private EV charging to provide affordable EV charging for all groups of consumers, run an awareness raising campaign to address concerns around range anxiety, and increase the affordability and accessibility of low-carbon transport alternatives such as rail by undertaking a coordinated review of fare pricing and taxation across all transport modes.
c. Heavy industry
Introduce green public-procurement criteria and mandatory low-carbon product standards on intermediate goods (steel, cement) and finished goods (vehicles) to grow the market demand and cut the cost of low-carbon industrial goods for businesses and retail consumers. Complementing these tools by implementing Government plans for a UK Carbon Border Adjustment Mechanism by 2027 will also help provide a level playing field for UK heavy industries investing in decarbonising their assets and operations (see points on carbon pricing above).
Recommendations in a timeline
The Roadmap’s recommendations in a timeline:
Figure 1: Cross economy
Source: Aviva Investors, April 2024.
Figure 2: Sector-specific
Source: Aviva Investors, April 2024.
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