A collaborative report by some of the UK and Australia’s largest pension fund managers is calling on the UK government to improve its renewable energy development policies.
The authors of the report, titled Mobilising pension capital for net zero: a policy blueprint for the UK, asks that the UK government take “an active and coordinated approach across fiscal, planning, climate, renewables and industrial decarbonisation policy to give investors of pension capital greater clarity and confidence in the UK market.”
It is a first-time collaboration between IFM Investors, UK and Australian pension funds, and the UK Pensions and Lifetime Savings Association (PLSA).
Globally, pension funds are some of the largest pools of investment capital; the signatories to this report collectively manage £1.7 trillion in pension savings invested on behalf of more than 30 million workers in the UK and more than 10 million workers in Australia.
The report makes several key recommendations for how the UK government can improve policy to encourage pension fund investment in UK renewable energy development. These key recommendations include focusing the National Wealth Fund on supporting the commercial development of higher-risk net zero industries and projects, setting clearly defined commercial objectives for Great British Energy, extending Contract for Difference (CfD) terms beyond 15 years, and streamlining the permitting process for onshore wind developments.
The National Wealth Fund
The creation of the National Wealth Fund was one of the UK government’s first actions following the 4 July generation election, formed by aligning the UK Infrastructure Bank and the British Business Bank. Around £7.3 billion of new capital for investment into the green economy was immediately made available with its launch.
The report’s authors are asking the government to focus the attention of the National Wealth Fund on new renewable developments that are considered too risky for private investors, including through bespoke financing options for developers. The report also notes that investors should be provided with clarity on how the National Wealth Fund will interact with other funding sources.
Great British Energy
As explored in a previous Current± blog, the creation of Great British Energy has left some gaps in clarity and understanding as it has gone through several major changes in purpose and scope. To help mobilise investment from pension funds, it is being recommended that the government should “move quickly to set clearly defined commercial objectives for the company and provide the market with clarity through its business plan and framework document”, and set out how Great British Energy will work with private investors, participate in commercial financing structures, and assess value for money and return on investment. This will provide pension fund managers with clarity and thus encourage investment.
Streamlining onshore wind permitting
Almost immediately after taking office, the new government reversed the previous government’s de facto ban on onshore wind developments, which has led to a mini-boom in the sector. While the report praises this decision, it notes that the UK’s first-generation wind turbines are approaching the end of their operational lifespan and thus recommends that the government update the planning policy to streamline the repurposing and recommission of existing wind turbine developments. The report adds that “updated guidelines should clearly reflect the importance of maintaining existing onshore wind capacity and should offer sufficient direction to decisionmakers to ensure consistency in planning decisions.”
Extend CfD terms beyond 15 years
The UK CfD scheme, which serves to incentivise renewable energy development by stabilising wholesale prices, currently supplies 15-year contracts for permitted developments. However, it has been noted that this term generally only covers around half of the expected 25 to 35-year average operational lifespan of wind and solar projects. As such, it is being recommended that new CfD terms should be extended beyond 15 years to provide security and stability for these projects, as well as helping to facilitate the acquisition of lower-cost financing options once the CfD term expires.
