Balancing act

Has the UK government found the formula to harness the private sector to meet NetZero targets, asks Partnerships Bulletin’s Jonathan Davies

Since the UK became the first major economy to pass NetZero ambitions into law, the eyes of the world have been closely watching whether the country which set in motion the industrial revolution 250 years ago can become a carbon-neutral in mere 30.

This challenge has fallen largely on the shoulders of the Department of Business, Energy and Industrial Strategy (BEIS) and while the energy and industrial strategy elements of the department’s remit are undoubtedly important, getting the right policy to encourage green business may be the key to hitting the target.

In the transport sector, which contributes 33% of the UK’s emissions and will see diesel and petrol car sales banned by 2035, the need to harness the private sector’s ability to scale up infrastructure efforts has been at the forefront of the minds of decision-makers.

George Freeman MP, former minister for the future of transport, said: “This government sees private investment as a key driver of the EV transition and our role is to create the right policy environment to attract that investment.

“Our grant schemes and the £400m Charging Infrastructure Investment Fund will see thousands more electric vehicle charge-points installed across the UK.”

Co-funding arrangements, like the Charging Infrastructure Investment Fund (CIIF), is an example of the government’s strategy to involve business while still maintaining control.

Massimo Resta, partner at Zouk Capital’s, the private equity firm selected as preferred bidder for the CIIF fund, believes that inter-sector relationships are essential in facilitating change.

“The private sector is already leading the way in innovation and development of affordable and convenient charging infrastructure, but it is the partnership between government, local councils, landowners and private companies which will ultimately lead to the UK's readiness for the electric vehicle revolution,” she said. 

Heating up

Similar government-led investment programmes aimed at removing hydrocarbon reliance are also being trialled in the other areas at the forefront of Netzero such as the heating sector, which contributes 31% of household emissions, the largest domestic share.

With inefficient gas boilers still in widespread use across domestic residences, the government is looking to increasing the market share of district heating systems (networks of pipes which deliver hot water from centralised decarbonised source, removing the need for individual boilers) from 2% to 18% - a target recommended by the Committee on Climate Change.

These changes are gathering pace. In the latest budget, Chancellor Rishi Sunak announced district heating projects are set to see funding increased to over half a billion pounds; with £270m for the Green Heat Network Initiative to be added on top of  the £320m already invested in the Heat Network Investment Project (HNIP).

Led by Triple Point Heat Networks, a consortium of heat network specialist firms, the government-funded HNIP programme has been building up steam since its pilot in 2016.

This year, the initiative announced funding for its first set of heat projects, four sites across Bristol, Leeds, London and Liverpool valued at £17m each, with four more funding rounds are expected in 2020.

HNIP project director Ken Hunnisett commented: “This is only the beginning of the story. We know that there is a substantial pipeline of projects out there and as such this announcement today will be the first of many.”

HNIP’s biggest contribution to NetZero might actually lay not in its projects but in its pioneering behind the scenes work.

Beyond increasing the number of heat networks in the UK and delivering carbon savings, the final part of the initiative’s mission statement is for the programme to create the conditions necessary to stimulate a self-sustaining market – and that means finding the private/public sector balance.

Paul Davies, independent infrastructure advisor, explains the need for Government to be clear about likely project pipeline and acceptable business models to stimulate demand.

“If the public and private sector co-fund projects, this aligns incentives.  However, for the private sector to invest it will still need to understand the underlying business model; how will performance be rewarded and what is the source of the long term funding (as opposed to the immediate financing) of the scheme?”

Harnessing the competitive nature of the private sector has precedents in driving eco-friendly industries; the prime example being wind power, which following strong government backing, using consistent, proven business models, has resulted in a huge reduction in the price of renewable electricity and the UK being the largest off-shore wind power generator in world.

Davies continues: “It is clear that where government is able to commit to a number of schemes using consistent and understood business models, the more competitive and innovative the private sector can be in response, with inevitable benefits for price and costs over time.”

Giant steps 

Last month, TP Heat Network, in conjunction with eco-law firm Lux Nova Partners, took a giant step forward in this direction as it unveiled its Sales Operation and Maintenance Set (SOMS) to the market.

Commissioned, but not endorsed, by BEIS, SOMS are a set of business model templates to give some standardisation to the heat network market, and bridge the gap between private and public sectors. James Higgins spokesperson on behalf of Triple Point Heat Networks, explains the thought behind the move:

“The idea is, over time, rather than each heat network projects having its own unique set of contracts covering all the different sources of demand, operation, customers and so on and going into the market, projects will start to use these templates and by doing that make it a lot easier for funders to go and assess that project.”

In conjunction to SOMS, BEIS announced a series of consultations aimed at devising regulation for the future heat network market, as well as releasing a PIN looking to set up a framework for local authorities to access funders.

Higgins says: “Our objective is to deliver a self-sustaining market. A self-sustaining market is driven by templates,  standard due diligence, creating a panel of funders and enough deal flow early on to get the wheels turning. Our short term objective is to create just that, to create a self-sustaining marking through the investment that’s going in, then that market itself should hopefully drive us towards the society goal of NetZero 2050 and hopefully 18% coming through heat networks.”

Time will tell whether the UK achieves NetZero 2050, and history will judge accordingly, but as the district heating scene hots up, and emobility charges ahead, finding the right balance between the public and private sector will be essential in creating the right climate for business to make the right business for the climate.