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Budget Day 2021: Clean Energy Budget Update

  • United Kingdom
  • Tax planning and consultancy - Budget
  • Energy and infrastructure - Clean energy

04-03-2021

In the same way that the Energy White Paper made all the right noises, so does this Budget. What it lacks in detail it makes up for in fanfare. However, detail is required particularly around how the financial and fiscal measures in the Budget and in the various items coming out of it will align with energy transition strategy. The UK is making a lot of promises at the moment. We need a strategic and financial road map to meet them but this budget is very positive nonetheless.

Here are the key points made in yesterday’s budget.

UK Infrastructure Bank

The new UK Infrastructure Bank will provide financing support to the private sector and local authority infrastructure projects across the UK, to help meet government objectives on climate change and regional economic growth. The Bank will:

  • be able to deploy £12 billion of equity and debt capital and be able to issue up to £10 billion of guarantees
  • offer a range of financing tools including debt, hybrid products, equity and guarantees to support private infrastructure projects
  • from the summer, offer loans to local authorities at a rate of gilts + 60 basis points for strategic infrastructure projects
  • establish an advisory function to help with the development and delivery of projects
  • the institution will begin operating in an interim form later in spring 2021

The Bank will be headquartered in Leeds. Further details on the mandate and scope for the Bank are set out in the ‘UK Infrastructure Bank Policy Design’ document, published alongside the Budget.

Eversheds Sutherland comment: "Some lending and investing institutions have asked questions on how the bank will shift the dial – what will it provide in addition to what is already in place. Afterall there is no shortage of capital for building back greener. However, the UK Infrastructure Bank is being set up specifically to bridge the gap between investment appetite and currently unbankable infrastructure. This amounts to a step change from the more general financial framework historically offered by the European Investment Bank and gives hope for infrastructure debt financiers who have struggled to find a home for capital in recent years but who would be willing to lend alongside first-loss debt or as part of a guaranteed financial package. The infrastructure needed to sit behind the energy transition is significant and having a Government led participation in what is fundamental to the UK’s decarbonisation journey will no doubt be enormously helpful in the long run.

Although local authorities are mandated to play a central role in supporting the UK Infrastructure Bank deploy the new finance, it will be interesting to see whether they feel comfortable investing in infrastructure at scale after the challenges of UK PFI, the depletion of internal resource after several years of austerity and also whether the benefits of tapping the UK Infrastructure Bank outweigh the convenience of borrowing 20 bps higher from the Public Works Loan Board.

The devil will be in the detail but today’s announcement provides some encouraging further detail. Across innovative social, digital, transport and energy infrastructure which has to date been unable to attract investment from traditional players, there is new hope and we anticipate that our clients will be looking forward to reviewing the UK Infrastructure Bank’s detailed lending criteria when published in the coming weeks

  • The debt finance market currently sees more capital available than projects to finance in traditional infrastructure sectors. By financing elements of projects which the market would not otherwise take, it is possible that this will enable private financiers to co-invest in new and innovative projects which they are currently unable to do.
  • The UK Infrastructure Bank has the potential to provide a helpful bridge between short-term commercial debt and long-term institutional debt to finance provides which would ideally amortise over that in-between period of 12-18 years.
  • We anticipate a queue of innovative projects will further consider partnering with the UK Infrastructure Bank to finance projects across transport, heat and energy networks and with other key social benefits which until now have not been possible."

Offshore wind ports infrastructure

The Government will make an offer of support, in principle, to the Able Marine Energy Park on Humberside following the conclusion of the competition to upgrade ports infrastructure for the next generation of offshore wind. The Government will also sign a memorandum of understanding with Teesworks Offshore Manufacturing Centre on Teesside to support the development of another offshore wind port hub.

Eversheds Sutherland comment: "Focusing on the infrastructure needed to enable energy transition assets to be deployed within the Government’s ambitious yet welcome timelines is the right thing to do. The infrastructure which sits behind the energy transition is as important as the transition assets themselves and their deployment needs to be aligned with the overall White Paper strategy (when details are fully available)."

Aberdeen Energy Transition Zone, Global Underwater Hub and North Sea Transition Deal

The Government will provide £27 million, subject to business case, for the Aberdeen Energy Transition Zone, helping to support North East Scotland to play a leading role in meeting the UK’s net zero ambitions. The Government will also provide a further £5 million for the Global Underwater Hub, subject to business case, on top of the £1.3 million committed last year, and up to £2 million to further develop industry proposals as part of the government’s support for the North Sea Transition Deal (NSTD). Taken together, these proposals will support areas like Aberdeen transition to a low-carbon future.

Holyhead hydrogen hub

The Government will provide £4.8 million, subject to business case, to support the development of a hydrogen hub in Holyhead which will pilot the creation of hydrogen from renewable energy and its use as a zero emission fuel in HGVs. This could support up to 500 jobs.

Eversheds Sutherland comment: "Creating hubs and zones of focus and expertise is going to be critical if the energy transition and decarbonisation plans are to be delivered. The question is do these go far enough? No doubt there will be an industry response but the recognition that these centres of excellence are needed is a step in the right direction."

Energy innovation

In line with the commitment to double spending on energy innovation, the Government is announcing support for the development of new solutions to cut carbon emissions and accelerate near-to-market low-carbon energy innovations:

  • the launch of a £20 million programme to support the development of floating offshore wind technology across the UK
  • the launch of a new £68 million UK-wide competition to implement several first-of-a-kind energy storage prototypes or technology demonstrators
  • a £4 million UK-wide competition for the first phase of a biomass feedstocks programme, to support the rural economy in making improvements to the production of green energy crops and forestry products.
Eversheds Sutherland comment: "The focus on technology innovation is critical and offers a great opportunity for the UK to be a leader in what emerge as the winners of the energy transition. However there is also significant private capital focusing on these areas and models which allowed public and private capital to better collaborate around this could have shifted the dial further."

Green Gilt

The Government will issue its first sovereign green bond – or green gilt – this summer, with a further issuance to follow later in 2021 as the UK looks to build out a ‘green curve’. The green gilt framework, to be published in June, will detail the types of expenditures that will be financed to help meet the Government’s green objectives. The government also commits to reporting the contributions of green gilt spending towards social benefits such as job creation and levelling up.

Eversheds Sutherland comment: "This will no doubt be welcomed and will put pressure on Government itself to green up its act which in turn could create value enhancing opportunities which could contribute to reducing the increasing debt burden of Covid. We keep hearing about building back better but this could be the opportunity for the Government to make a difference. We look forward to the detail in June."

Green retail National Savings and Investment (NS&I) product

The government will offer a green retail savings product through NS&I in the summer of 2021. This product will be closely linked to the UK’s sovereign green bond framework and will give all UK savers the opportunity to take part in the collective effort to tackle climate change, benefiting from the innovative reporting standards planned for the green gilt programme.

Eversheds Sutherland comment: "The pricing of sustainability funds shows that investing in green does pay and this will be welcomed by many. There are many opportunities for the Government to extend this direction of travel including into ISA and Pension allowances."

Carbon markets working group

Dame Clara Furse will establish a new group with the aim of positioning the UK and the City of London as the leading global market for high quality voluntary carbon offsets, which can play an important role in addition to international efforts to reduce carbon emissions. The working group will draw on the UK’s financial expertise and entrepreneurship and build on the work of crossing-cutting initiatives such as the Taskforce for Scaling Voluntary Carbon Markets

Eversheds Sutherland comment: "This is welcome and necessary and London is well placed to take a leadership role on this particularly with the numerous funds and businesses which are emerging to cater for the increasing demand for credits and offset arrangements. A great initiative."