Supporting the energy transition: a win-win for the energy sector, banks, investors and society

The need to move faster to decarbonise our energy usage and reduce our reliance on fossil fuels to meet net-zero and address the climate emergency not only requires new approaches to meeting our energy needs but will also involve unlocking significant new investment from the private sector.

What’s happening in the energy sector?

Transitioning to net-zero will involve new business models and the birth of new technologies in the energy sector – all of which are requiring substantial funding. Some examples: 

  • A variety of technologies are being explored to reduce the reliance on gas for heating across domestic and commercial buildings. The solution is likely to involve a mix of technologies and fuels, including electric heat pumps, hydrogen, biogas, and use of local renewable sources such as district heating or rooftop solar, as well as improvements to insulation and energy efficiency.
  • As we move towards the use of hydrogen for applications that are hard to electrify – such as industrial processes, heavy transport and flexible power generation – a new range of assets and service businesses will need financing, such as electrolysers for generating green hydrogen or hydrogen distribution infrastructure.
  • Decarbonisation of transport will involve the phasing out of internal combustion engine vehicles and the development of electric vehicle manufacturing capability in the UK, which will need to involve investment in ‘Gigafactories’ to manufacture batteries, but also the supply chain to support that manufacturing capability. Electric vehicles will also create a significant investment opportunity in charging infrastructure across the country.
  • New renewable power generation technologies, such as those that access tidal or wave energy, will need investment. The intermittency that arises from greater use of renewable generation will also create a need and opportunity to invest in more energy storage. We may also need to be innovative in developing localised generation and energy storage to reduce the costs of transmitting energy through the grid.
  • Carbon capture technologies and projects are now receiving significant attention as they will be vital for meeting the UK’s net zero targets. These projects provide the ability to ensure carbon emissions from industries such as cement and waste management, which are otherwise very difficult to decarbonise, can be captured and stored, with storage involving use of aquifers and depleted North Sea reservoirs. Using geological storage provides a durable and permanent solution for hard to decarbonise industries now, and for carbon removal potentially in the future. 
  • The development of the voluntary carbon market may have a significant role to play. Sectors such as energy from waste or biomass that utilise carbon capture technology may be able to secure carbon credits that provide an additional revenue stream that can fund the required investment.

Opportunity for Investors and lenders to support the entire energy supply chain offers exciting opportunities

NatWest has been at the forefront of the development of financing for renewable energy assets – such as solar and wind – since the inception of the market*. This has involved developing a model for sizing appropriate debt levels based on power production levels and forecasts for power market revenues. Over that period, the ‘renewables’ asset class has moved from being perceived as a highly risky new technology, where sponsors were largely utilities or specialist investors, to a mainstream asset class, sought-out by institutional investors and infrastructure funds. 

Equally, lenders have changed their perception of the credit risks relating to those assets, particularly for offshore wind: these are now seen as relatively low risk. Furthermore, the use of government support through subsidies and contract for differences, as well as the development of the corporate power purchase agreement (PPA) market, has provided stable revenues. The availability of debt and equity for this asset class will now help further boost the growth of renewables and ultimately help achieve zero carbon energy production. 

However, banks and investors now have a new challenge. With the energy sector transforming and as a result new business, new markets and new technologies emerging, they will need to assess and analyse the new credit risks arising from such lending and structure the debt offering to meet client needs but also protect against new and different risks. Risks can include the viability of new technologies, particularly those that have little track record of being scaled-up for use on a commercial scale. There may also be the risk of some technologies having a limited life span as they could become obsolete due to the speed of technology advances. Furthermore, banks and investors will need to develop an understanding of new markets and how demand and pricing for new products will evolve, such as the hydrogen market or the market for voluntary carbon credits. 

The opportunity is not limited to large scale projects sponsored by large corporates – energy transition involves the growth of small and medium-sized businesses, technology start-ups, as well as other supply chain and services businesses. Banks will need to assess how they can support the full breadth of customers across the economy.

NatWest bundles energy infrastructure financing expertise in new team to support UK’s energy transition

To address these challenges NatWest has set up a new team to better support and finance the transition of the energy sector in the UK. Led by Bruce Riley, who has been responsible for NatWest’s Project Finance team over the last seven years, our new Energy Transition team will build on its energy sector expertise to support customers with financing on their journey to decarbonise their energy usage. 

Whilst most of NatWest’s lending to the renewable sector in the past has been through project finance facilities provided to standalone generation projects, we recognise that the energy transition will involve investment across the whole of the economy, through large corporates through to technology start-ups – the new team’s role will be to ensure the Bank is delivering finance and financial services to support energy transition across the UK, for the full spectrum of its clients. 

Ultimately energy transition represents an opportunity for UK businesses to lead in the development of new energy technologies and applications to address the climate challenge. NatWest aims to support its customers to take that opportunity.

Bruce Riley, Head of NatWest’s Energy Transition team: “We are excited to play an active role in the UK’s energy transition and our goal is to support the development of the solutions we need to get to Net Zero, and the businesses involved in delivering those. We have the suite of financing products, skills and expertise across the bank and in our regional teams to help accelerate decarbonisation.”

James Close, NatWest’s Head of Climate: “Our adviser, Lord Nicholas Stern, reminds us that the path to net zero is the growth story of the 21st Century. We want to ensure that we can use our ambition to halve the climate impact of our financing, our leadership position in green energy and the analytical work we’ve done on our Climate Transition Plan to identify and finance the energy solutions that will arise from the transition.”

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* We have been a leading lender to the UK power and renewables sector over the last 10 years – by total number of transactions over that period (Source: Inframation Deals (Acuris). Based on the aggregated totals for the United Kingdom for the 10yr period 09/2012-08/2022).

The information provided in this article has been prepared by National Westminster Bank Plc (NatWest) for information purposes only and is subject to change from time to time. The information and views expressed should not be treated as advice or a recommendation of any kind. NatWest makes no representation, warranty, undertaking or assurance of any kind (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided and disclaims all liability for any use you, your affiliates, connected companies, employees, or your advisers make of it. NatWest accepts no liability whatsoever for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

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