What will it take to make Britain’s transmission investible?

For National Grid – one of Britain’s network operators – the country’s energy transition is a challenge of formidable scale. Dubbed "The Great Grid Upgrade",  it is, by the company’s own account, its largest overhaul in generations. 

National Grid is not alone in teeing up capital allocation plans for transmission infrastructure. With curtailment and network constraints becoming major barriers to renewables integration, institutional investors are following suit.

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Investor interest in the opportunity may be on the rise, but converting appetite into allocation will require access, delivery and a long-term vision.

Institutional fit

Between now and 2040, the network infrastructure investment opportunity is estimated at £21bn. That is according to research from Standard Life and Santander. The bulk of that investment is expected to target onshore networks, interconnectors and offshore transmission owners.

Manuel Dusina, head of real assets at Standard Life says these projects fit the institutional investor risk-return checklist. “Transmission infrastructure already possesses many of the characteristics institutional investors seek: long-dated assets, relatively predictable cashflows and an essential role in supporting both energy security and the UK's clean power ambitions”, he says.

Charlie Wright, investment manager at Foresight Environmental Infrastructure (FGEN) agrees. “The most investable direct opportunities generally sit alongside the core network: interconnectors, offshore transmission, storage and other grid services, where contracts and regulation can create predictable, infrastructure-style cash flows”, he notes.

Accessing the grid

With scale and appetite on the rise, access has become a focal point of investor discussions.  “The opportunity is substantial, but access remains relatively constrained given that UK transmission is dominated by regulated network owners, where investors have traditionally gained exposure through listed equity or corporate debt rather than directly owning projects”, explains FGEN’s Wright.

Some asset classes offer a way around access constraints. Corporate debt is one such example. Dusina points out that debt might be of particular interest for pension and insurance investors.

“It provides exposure to essential infrastructure assets that typically generate long-term and relatively predictable cashflows. For insurers and pension funds, these characteristics can be particularly attractive as they provide long-duration assets capable of supporting long-term liabilities”, he notes.

The delivery conundrum

When asked about barriers to capital flows, both Wright and Dusina point to delivery.  “Planning and permitting delays, construction risk, supply chain constraints and project complexity can all affect the timing and investability of opportunities”, Dusina says.

Wright adds to the list: “The main barriers are lengthy planning and consenting processes, construction and supply-chain constraints, evolving regulatory frameworks, and uncertainty over how risks are allocated between developers, network owners and investors”.

Steady at the helm

Access and delivery aside, investors seem keen to see leadership steady at the transition helm. Policy uncertainty, the kind political divisions over energy transitions give rise to, is hugely significant to investor calculus.

Dusina points to the Climate Change Act and the legally binding direction of travel it accorded as an example. “Like all institutional investors, our preference is always for policy certainty and stability, and that absolutely applies to the UK's energy transition”, he told Net Zero Investor.

Legally grounded net zero promises could provide investors with comforting signals. “The UK continues to have legally established net-zero commitments, while recent policy has placed increasing emphasis on energy security, grid investment and electrification”, Wright explained. FGEN’s approach is to distinguish between individual policies and the broader consensus around the direction of Britain’s energy transition. The latter is, for now, less of a concern.

“Long-term investors make investment decisions over multi-decade horizons rather than electoral cycles. Predictable policy and regulatory frameworks help investors assess risk, allocate capital efficiently and ultimately support investment at scale”, Dusina concludes.

With prime minister Andy Burnham expected to propose a publicly owned entity focused on grids, the investment case for transmission infrastructure is in the spotlight. A renewed focus on project delivery combined with an expanding opportunity set and a steady policy environment could go a long way.