Private debt and the ‘greening’ of the British energy economy

The green energy revolution is coming but how will it be financed, asks Prestige founder Craig Reeves

As the UK enters its steepest recession since the 1970s, it is tempting to ignore some of the macro trends that were already gaining momentum before the Covid-19 virus arrived on British shores

One of these was the financing of the country’s clean energy infrastructure. Empty skies and cleaner air in April may have reminded many UK residents – and investors – of the potential for a less polluted planet.

We are already seeing evidence of the green energy revolution the length and breadth of the United Kingdom with the wind farms on our skylines and distant horizons being the most obvious evidence of what is happening. The UK has also this year demonstrated its ability to derive over half its electricity from non-fossil fuel sources.

But as the country struggles to come out of lockdown, can the momentum achieved with financing clean energy be maintained?

We all like to talk about the coming green energy revolution, but much of this cannot and will not be financed by the tax payer. A big slice of the financing of the UK’s clean energy infrastructure will come via private investment. With fossil fuels rapidly falling from favour with many investors, it is possible that alternative energy will become a major source of economic and employment growth when we emerge from the current crisis, not just for the UK, but also further afield.

According to the International Renewable Energy Agency (Irena), renewable energy could power a global recovery by providing up to $100trn in GDP gains between now and 2050.

Private debt and clean energy

Private debt finance has been increasing as a component of the overall UK business finance spectrum for the last decade. It has been driven by the retreat of commercial banks from SME lending since the Great Financial Crisis in 2008-09. Smaller enterprises have turned to alternative means of finance to be able to start and run new projects. These have included green energy.

Private debt with its lack of correlation to public markets and bond-like yield profile has become a popular asset class with institutional investors who have seen government bonds threatening to move into negative yield territory. It is also now possible to use private debt to access lending to projects in the clean energy space.

Bio gas and the rural energy challenge

Higher electricity prices in the UK combined with new taxes on waste disposal have been two of the major catalysts in the development of on-farm biogas plants. They represent a classic example of how farm waste can be turned into cleaner and cheaper power, not only for farm operations, but also for the wider community.

Biogas plants funded by private debt funds up and down the country now provide clean power to hundreds of thousands of UK homes. They represent a consistent source of power, not dependent on the sun or wind, which has the double benefit of consuming waste that might otherwise go to landfill.

Lending in this sector requires fund managers to develop a high level of expertise, akin to a specialist investment bank active in the alternative energy space. Experienced consultants are needed to be able to evaluate the viability of projects and monitor them effectively. An advisory role is also needed to help farmers and others to manage their plants and make money from selling excess power back into the grid.

We anticipate that we will see many more projects of this nature in the future as there is higher take up from communities and farms around the country.

The UK is committed to a clean energy future

Despite Brexit, the UK is still committed to international climate agreements and to achieving carbon neutral status by 2050. Prime minister Boris Johnson has committed £2bn in government funding to help the UK to achieve its carbon neutral goals. It will likely require a lot more than this (half the package announced by the government in February was targeted at the motor industry) and private investment will need to play an active role in re-greening the UK.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...