Clean power by 2030
The Prime Minister announced six key milestones in his December “Plan for Change” speech1 which were further outlined in the related document presented to Parliament2, one being to put the UK on track to deliver at least 95% clean power by 2030, a step towards net zero. The 95% figure is in line with advice from the National Energy System Operator in its recently released Clean Power 2030 report (see below). The Government acknowledges that this milestone is “ambitious, requiring significant acceleration of building renewable energy and the transmission network, and of electricity storage deployment”.
The Prime Minister also announced a new target of fast tracking planning decisions on at least 150 major economic infrastructure projects, on top of his plan to build 1.5 million new homes, and repeated the need for major UK planning reform. A new National Planning Policy Framework is promised by the end of 2024 and updates of all National Policy Statements by next summer. The Planning and Infrastructure Bill aims to “create a win-win for development and nature” and streamline processes for critical infrastructure, joining up related strategic decisions across all levels. 10-year strategies for housing and infrastructure are promised next spring, with clear priorities, plans to deliver and a pipeline of projects for investors and supply chains (to reflect the Government’s next steps: “reform, investment and supply”).
UK Budget 2024
In terms of energy and infrastructure, the Budget included the following changes:
- Energy Profits Levy (EPL): The rate will increase from 35% to 38% and the sunset clause will be extended to March 31, 2030; the 29% investment allowance will be removed, and the rate of decarbonisation allowance set at 66%. Changes will take effect from November 1, 2024.
- Carbon capture usage: Relief for payments made by oil and gas companies into decommissioning funds will be included in the Finance Bill 2025.
- Carbon Border Adjustment Mechanism (CBAM): The Government has confirmed it will introduce CBAM with effect from January 1, 2027 – this will place a carbon price on goods at risk of carbon leakage imported to the UK. Legislation will be published in the Finance Bill 2025.
Further details and key changes at a more macro level are set out in our recent article Autumn 2024: A substantial Labour Budget.
One of the key takeaways from the Budget is further evidence that Labour is betting big on infrastructure, with the Chancellor announcing the Treasury’s adoption of a reformed fiscal framework. This is set out in an updated Charter for Budget Responsibility2, which the Government has stated will remain in place for the duration of this Parliament. Outlined in detail in this Government publication, the new fiscal rules are:
- the “stability rule”: to move the current Budget into balance so that day-to-day costs are met by revenues, meaning that the Government will only borrow for investment.
- the “investment rule”: to reduce debt, defined as public sector net financial liabilities or ‘net financial debt’, as a share of the economy.
The change creates capacity for tens of billions in potential extra infrastructure spending. The Government is hoping this extra investment will power the UK’s low-carbon transition whilst also helping to drive up supply and growth.
In good news for low-carbon energy investment, the Government announced in November a new investment exception to the Electricity Generator Levy (EGL), the tax on the extraordinary returns of electricity generators. Where the substantive decision (e.g. the Financial Investment Decision) to proceed with a generating project is made on or after November 22, 2023, receipts from that new generating station or additional capacity will not be subject to the EGL. Generation capacity settled under a Contract for Difference (CfD) with the Low Carbon Contracts Company Ltd are already excluded from the EGL.
National Wealth Fund
The concept of a National Wealth Fund (NWF) to provide low-carbon project funding was first announced by Rachel Reeves when she was Shadow Chancellor in 2022 and formed a significant part of Labour’s 2024 General Election manifesto. One of the first acts of the new Government was to announce the establishment of NWF, with GBP7.3 billion to be allocated to it through the UK Infrastructure Bank (UKIB). We outlined these events in our previous article.
With the preparation of legislation for NWF still being worked on, the Chancellor has upgraded its importance as part of the Government’s overall investment policy with further details set out in an October policy paper3. This affirmed her belief that investment is the solution to the challenge of the UK’s growth and confirms that NWF will be a cornerstone of the Government’s strategy to catalyse (not crowd out) investment into clean energy industries and support the delivery of the new Industrial Strategy, building on the success of UKIB.
Broadly summarising the policy paper:
- Focus: NWF will operate independently at arm’s length from Government, with a focus on additionality and delivering measurable impact. Its investment decisions will be driven by economic value and strategic impact.
- Aims: The Government aims to transform public financial institutions to catalyse wider investment. It plans to do this by increasing overall investment in the UK, by equipping public financial institutions to mobilise greater levels of private capital and improving access to investment support and information for stakeholders.
- UKIB: From October 14, 2024, UKIB will operate as NWF but with a broader mandate, extending beyond infrastructure to support delivery of the wider Industrial Strategy where an undersupply in private finance exists.
- Capital: NWF will have a total capitalisation of GBP27.8bn. It will inherit UKIB’s existing GBN22bn capitalisation and have an additional GBP5.8bn, which will be committed over this Parliament to the five sectors announced in Labour’s manifesto: green hydrogen, carbon capture, ports, gigafactories and green steel. Of the previously announced GBP7.3bn of additional funding, NWF will maintain the balance of GBP1.5bn as a reserve.
- Investment decisions: NWF will have a target portfolio mobilisation ratio of 1:3 and act as an “impact investor” seeking to catalyse investment that would not have otherwise taken place. Compared to UKIB, NWF will have a larger amount of risk capital to free it from previous constraints. It will aim to not crowd out private investment.
- Financial instruments: NWF’s tools are to include an expanded suite of financial instruments such as performance guarantees and trialling new “blended finance solutions”. These solutions will see Government departments taking on additional risk to facilitate higher impact in individual deals. The Government intends that NWF will be able to deliver a broad range of financing instruments including loans, first loss and mezzanine debt, guarantees and equity investments, with the ability to expand this toolkit over time.
- Regional focus: NWF will have a strong regional mandate, with cities and regions to be reflected in its statement of strategic priorities. We can assume this will lead to a focus on so called “disadvantaged regions”, perhaps not typically a target for private lenders.
- GBE: NWF will work with Great British Energy (GBE). While GBE is being established, the Government expects GBE’s investment activity to be undertaken by NWF. The Government claims this will enable GBE to invest quickly.
Of note is the Government’s statement that NWF will operate with higher levels of risk appetite against a broad, strategic investment plan (a risk approach which resonates with the outcomes of COP29 – see our related article). This may well assist new green hydrogen and carbon capture projects get off the ground which have technology and/or revenue risks that developers are struggling to finance through more traditional finance. We would also expect to see NWF’s performance as part of its early projects, and the success of those projects overall, to strongly influence its later investment choices and market credibility.
The Government’s approach to the role of NWF and its functions appears to be closely based on the findings of the NWF Taskforce (led by the Green Finance Institute) published4 in July. The Taskforce also noted the importance of a stable, long-term, and competitive policy environment as a necessary requirement to drive growth, as did the recently published Transition Finance Market Review (TMFR) on which we advised the TFMR secretariat – see our article Inside the UK’s Transition Finance Market Review.
The Government will still need to introduce legislation to establish NWF, with this going further than previously indicated to broaden NWF’s legal mandate beyond infrastructure investment. Further detail will be set out in a statement of strategic priorities to be issued by the Chancellor.
National Infrastructure and Service Transformation Authority
Another manifesto promise from Labour was the creation of a new National Infrastructure and Service Transformation Authority (NISTA) to be formed by the merger of the existing Infrastructure and Projects Authority and the National Infrastructure Commission. NISTA will support the development and implementation of a ten-year infrastructure strategy in conjunction with industry, while driving more effective delivery of infrastructure across the country.
Chancellor’s Mansion House speech
In her first Mansion House speech5 as Chancellor, Rachel Reeves touched on several of the announcements and themes referred to above. She also announced a package of future reforms to drive growth and competitiveness in financial services, with potential impacts on energy and infrastructure.
These reforms, covering pensions and sustainable finance regulation, will be undertaken in part with the aim of increasing clean energy investment. A Financial Services Growth and Competitiveness Strategy will be published by the Government in 2025.
The Chancellor also announced plans to launch a Transition Finance Council jointly with the City of London, a recommendation from the TFMR referenced above.
Planning Reform
As we highlighted in our previous article, the Government has flagged the need for substantial planning reform, particularly for major energy and infrastructure projects. Few details have been announced, but it is clear that work is proceeding in the background. For example, the UK and Scottish Governments set out a joint approach to planning reform in November6 aimed at aligning processes to materially reduce delays for relevant projects while retaining rights of public inquiry.
National Energy System Operator and Clean Power 2030 report
On 1 October, the Government announced7 the launch of the National Energy System Operator (NESO), a new public corporation with the responsibility of ensuring reliable, clean and affordable energy. The intention is that NESO will assist on several fronts: connecting new generation projects to the grid more efficiently; working with the new GBE to deploy renewables; improving investor confidence in new energy infrastructure; and otherwise supporting the Government’s net-zero efforts.
NESO’s role as strategic planner has already come into play, with one of its first actions being the publication of the Clean Power 20308 report in early November. Commissioned by Energy Secretary Ed Miliband, The report advises the Government on how the UK can best achieve its clean power ambitions by 2030.
For more information on NESO and the Clean Power 2030 report see our article UK energy: the new National Future System Operator and Clean Power 2030.
Next steps
With the Prime Minister's recent launch of a Global Clean Power Alliance at the Rio de Janeiro G20 Summit and his interventions at COP29, we expect the new Government to continue to press its green commitments on the international stage. Our article How big is the Net Zero financing gap 2024? highlights the challenges faced globally. From a UK perspective, the Clean Power 2030 report supports Labour’s manifesto promise, reiterated in the Prime Minister’s milestone pledge, that clean power by 2030 is achievable – although admittedly “at the limit of what is feasible” according to NESO. We will need to wait and see just how much of the challenge will be taken up by the Government in its promised action plan and related measures to crowd in private sector transition finance.
We will continue to follow these developments. In the meantime, please contact your usual A&O Shearman contact for further discussion, or the named contacts on this article.
For that future pub quiz
September 30, 2024 – In a small village nestled in the heart of England, Ratcliffe-on-Soar, Great Britain’s last coal power station was powered down for good, ending a 142 year chapter of coal-fired power in the UK.
Footnotes
1. Plan for Change Speech
2. Draft Charter for Budget Responsibility: Autumn 2024
3. National Wealth Fund: Mobilising Private Investment
4. National Wealth Fund Taskforce - Executive summary
5. Mansion House 2024 speech
6. Can Labour meet its clean energy targets?
7. National Energy System Operator launches today
8. Clean Power 2030