InfraBank in Focus

Net zero – the need for exponential change and how the Bank can help get us there

30 November 2023

By Nigel Topping, Climate Change Advisor and Non-Executive Director, UKIB

In the first in a series of guest blogs, climate change advisor and UKIB Non-Executive Director Nigel Topping sets out the role the Bank can play in helping deliver the exponential change the UK needs to get to Net Zero.

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Exponential change doesn’t just happen. It comes about through addressing a series of sequential problems (or seizing a series of sequential opportunities, if you’re a glass-half-full person).

This is important when considering the transition to net zero because exponential change is what is needed to get us there by 2050, whether that be in relation to the vehicles we drive, the power we use to heat our homes and offices, or how we treat and utilise the natural environment around us.

The good news is that this exponential change is already happening globally, so we have a platform upon which to build. For example, forecasts suggest wind and solar will provide a third of all power by 2030, up from 12% currently, while costs will fall and fossil fuel demand for electricity is in steep decline.

But nonetheless, for the UK, cutting emissions by at least 68% by 2030 on 1990 levels, and reaching net zero by 2050 is a significant undertaking, and we don’t have the luxury of time on our side. So, standing back and admiring the problem isn’t an option.

To break this down a bit further, exponential change is always challenging because, in seeking to achieve it, you are always facing the next barrier to scale. Every one of those barriers is a new problem, which potentially has a finance element to it.

That’s where the UK Infrastructure Bank comes in, as a key partner that can help solve these financing problems.

To bring this to life, I will pull out two Net Zero critical sectors that are at different stages in their journey – electric vehicles (EVs) and hydrogen.

EVs first. In many ways this is a classic combination of a series of sequential problems and a chicken and egg conundrum.

EV take up and manufacturing will be driven by consumer demand, but to make the investment in a vehicle, many consumers want assurance the essential infrastructure (public charging points) is in place – we need to get to 800,000 charge points in the UK by 2040, up from around 45,000 now. Layer on top of this the supply of critical minerals such as lithium, graphite and cobalt for the car industry to produce the requisite batteries, and it’s easy to see a potential stand-off between consumers, car manufacturers, charge point operators and the critical minerals supply chain.

While not all of these issues are within the Bank’s gift to solve, there are clear problems related to the financing of charge point infrastructure where we can play a role, helping avoid this stand-off. Sequentially, these problems are: demand risk (uncertainty around future consumer demand for EVs), which has implications for the availability and cost of financing; access to financing itself – particularly debt; and the commercial viability of public charging infrastructure, particularly in rural areas.

The Bank is looking to support the market by offering a combination of senior debt, direct equity, and bespoke solutions between the two, taking on risk the private sector won’t shoulder alone. As our recent provision of £45m senior debt to support charge point operator GRIDSERVE showed, our participation can give an important signal of confidence to the market, which in that case supported the crowding in of an unprecedented quantum of private finance.

Alongside this we want to support local authorities with charging infrastructure for their own electrical vehicle fleet through our preferential lending rates, and we are partnering with the Government’s Local Vehicle Infrastructure (LEVI) fund to make this easier.

Moving further upstream, the Bank’s recent equity investment of approximately £24 million to support Cornish Lithium to help finance the creation of a domestic supply of lithium, will be crucial in the scaling up of battery production for EVs, again providing confidence in a nascent sector which should, in turn, give EV manufacturers confidence around the supply chain.

Moving to hydrogen, Government analysis suggests this could need to make up 20% to 35% of the UK’s total energy consumption by 2050. While it will play an important role in getting to Net Zero, it’s a nascent market, and we need to move away from current ‘grey’ production to cleaner, greener alternatives and scale up demand.

The first step on the pathway is the award of government support contracts. But despite this, there are several sequential financing problems faced by projects: the first step is ensuring there is sufficient demand to provide revenue certainty for projects; then ensuring construction is timely and operational phases are without increased costs, outages or delays; and, finally, ensuring sponsors have a good track record. All of these problems can have knock-on on effects to investor appetite.

The Bank wants to help address these problems and take on greater risk than the markets at this early stage, injecting a shot of much needed confidence. In doing so, we can amplify government policy and contribute to unlocking exponential change by helping to create a sustainable platform for financing green hydrogen projects - opening up debt capacity needed to scale up nascent markets. We want to partner with other lenders to achieve this.

Indeed, the Bank has just completed its first hydrogen transaction – a £32 million equity investment in aviation firm Zero Avia to finance the expansion of the company’s UK-based research and development and accelerate progress towards certification of its first hydrogen fuel cell engine.

These are just two examples of how the Bank can help unlock investment to overcome problems that could stand in the way of exponential change being realised in the UK. The key thing is that it is about identifying problems, and solving them in a clear, sequential, and logical way.

Looking at the bigger picture, as well as the obvious environmental benefits, there are strong economic arguments for being an early mover in these critical Net Zero sectors, otherwise we will be at a competitive disadvantage, as we see other nations grasp the economic opportunity the transition represents.

So, the opportunity is there, and the Bank can play an essential role in overcoming barriers to financing - one of key parts of the puzzle in achieving exponential change. It’s a role we relish.

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Nigel Topping is a Non-Executive Director of the UK Infrastructure Bank.

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