The UK’s export credit agency, UK Export Finance (UKEF), gathered together key industry players in December 2019 to discuss the role that finance and technology can play in promoting and developing clean, sustainable growth both in the UK and worldwide.
- Louis Taylor, Chief Executive, UK Export Finance
- Richard Simon-Lewis, Head of Origination, Client Coverage, Marketing and Communications, UK Export Finance (chair)
- Guto Davies, MD, Global ECA & DFI Leader, General Electric Energy Financial Services
- Michelle T Davies, Partner & International Head of Clean Energy & Sustainability, Eversheds-Sutherland
- Neil Davies, Director, Future Funding, Environment Agency
- Yasmine Djeddai, Head of Export Finance UK, Société Générale
- Stephane Le Corre, Director, Strategy & Development, Aggreko Power Solutions
- Martyn Link, Group Head, Strategy & Analysis, Wood
- Amit Puri, MD, Sustainable Finance, Standard Chartered
- Nicholas Wrigley, CEO, Winch Energy
Taylor: As you all know, we are here today to talk about the role that finance and technology can play in promoting and developing clean, sustainable growth in the UK and around the world.
The UK has incredible potential in the renewables sector. In the third quarter of 2019, we generated more electricity from renewable sources than from coal, oil and gas-fired power stations combined for the first time. This is largely thanks to the increase in the UK’s offshore wind capacity. We are home to the world’s largest offshore wind farm and are responsible for over 44% of Europe’s offshore wind output. The UK is not alone in increasing our reliance on renewables. It accounts for around a third of global energy capacity, and that is rising.
This all demonstrates that there is a world of opportunity out there for UK companies in this sector.
But while many companies are already taking advantage of these opportunities, sometimes it can be a challenge to ensure that your bid is competitive or to get appropriate financing or insurance from the private sector.
That is where UK Export Finance can come in. We have been supporting our exporters for 100 years and have a total capacity of £50bn to help companies of all sizes and in all sectors sell internationally. Our award-winning support helps UK companies win orders, fulfil export contracts and get paid. With this support, companies can access the necessary cashflow and invest in innovation, secure in the knowledge that they can compete for business overseas and fulfil their existing contracts.
An example of this in action is our support for the Formosa 2 project in Taiwan, which we announced in November. This new offshore wind farm in the Taiwan Strait involves the construction of 47 new turbines generating 376MW of green energy.
Our support, worth £230mn, will enable more UK companies to be involved in the project, helping to unlock the exporting potential of this growing sector of the UK economy.
Another example is the support that we gave to JDR Cables, a Cambridgeshire-based firm that supplies sub-sea cables to the energy sector, including the London Array in the Thames Estuary.
We issued guarantees for both a bonding facility and for export working capital supplied by the firm’s bank to support their contract to supply to the Meerwind Süd and Meerwind Ost windfarms off the North Sea coast of Germany.
Along with this direct support to UK exporters, we also incentivise overseas buyers to procure from the UK, connecting our supply chain to exporting opportunities through our supplier fair programme. We also have staff based in key markets around the world, working to leverage business opportunities for UK suppliers.
We have been working to adapt our product offering to make it more suitable for companies in the renewable sector, including announcing a new general export facility. This allows us to support exporters’ overall working capital requirements, rather than linking support to specific export contracts. UKEF has the capacity, capability and ambition to take UK renewables to the next level, and I look forward to today’s discussion about how we can work together to help more UK companies get involved in this exciting and important sector.
Simon-Lewis: Nick, UKEF is alongside Winch Energy in the work that you are doing in bringing off-grid solar PV into new markets, particularly across sub-Saharan Africa and Latin America. Can you give us a sense of the opportunities available in markets overseas and how UKEF can assist in the challenges that you face developing this nascent but important sector of renewal energy activity?
Wrigley: Let me assume that not everybody understands what off-grid energy means. Along with renewables, it is the second-largest disrupting factor that has arrived in what is one of the most traditional markets in the world, which is energy and electricity. It is traditionally viewed as connecting those people who today are not connected to the grid, but that is really only the beginning.
The real meat of the business is converting away from traditional grids, the people who today have perhaps intermittent supplies of fossil fuel-based energy, and the conversion of the fossil fuels to straight renewables is just too expensive, and it is more economical in fact to take the whole thing off the grid. There are lots of examples in Europe of that, we are not particularly leading the charge in the UK. We have an abundance of offshore wind, and that is probably the right way to go, but in places like Germany and France whole communities are coming off the grid, and the size of the opportunity in money terms is difficult to put a number to.
I have just come back from Nigeria. The view of the World Bank is that off-grid is an around US$1.5bn-a-year market for the next 30 years. I think that is potentially optimistic in the sense that it is probably going to require a lot more money, if the objective is to provide 95% of the population with power. Today there are about 90 million Nigerians off the grid and there are probably another 40 million who are on a grid where they get served about four hours a day, so again, we would see that as an opportunity.
The challenge is it’s a disruptive market, so that requires quite substantial investment on the part of the people who are leading the disruptive drive. It’s potentially a huge market. Probably bigger than renewables, certainly because you have to change everything and not just put up the generation units. It is clearly going to be the way to go. Even Manhattan is talking about coming off the grid for logistical reasons. And all of that implies huge amounts of finance. There’s going to be a mix of renewables and diesel, and the Aggrekos and the Winchs are going to have to work together better to deliver that.
In terms of where UKEF can help, a lot of these markets are emerging markets. In my view, the UK is not very well equipped for emerging markets. Not so much on the export credit side, which is well-equipped and does have the capacity, the willingness and the people who understand those markets. It’s further up the food chain. We are not very good on the funding side, financing businesses like Winch, for example. We’re not very good at it probably because, most of the people who control money today are not financiers, or industrialists, or developers.
So, what we need is more joined up writing within the UK, between the different agencies.
The UK excels in terms of our grant money, for example, but we don’t excel at all in joining the grant money with a prospective business opportunity.
UKEF’s job would be made so much easier if all of that writing was joined up and if there were a plan to go into certain jurisdictions. Even on the pure renewables side, what is left to be done is the hardest bit. I come from the solar and wind world, on grid. We took 10 years to build the first wind farm in Morocco, and Morocco is a middle-income country; it’s not a developing country. New market entrants without support, without real help and money on the table, are going to find it very challenging. We’re going to need some more help to get those contracts.
Simon-Lewis: Michelle, we are aware that you and your colleagues at Eversheds-Sutherland are working across Africa as part of its clean energy and sustainability strategy which spans various RE technologies. Specifically, we understand that you are looking to assist clients in the mining sector in Africa to adopt renewal energy as a power solution for their activities. Given that the African continent is an area of significant activity for UKEF, can you bring your strategy to life in Africa and the collaboration with the mining sector, in particular as we hear much about the oil and gas transition, but not so much about related progress in the mining sector?
M T Davies: Like many advisers in the clean energy space working in emerging markets, we have historically worked with clients who have participated in government procurement opportunities. We’ve done a reasonable amount in North Africa, which has had some success, Morocco and Egypt and other markets, and most recently Tunisia, which is now coming online. South Africa also has had some success. But for the rest of Africa, it has been a real challenge for our clients, for two reasons.
One, because of the bankability of the government itself and therefore the bankability of the income stream. It’s challenging for banks to finance many offtake arrangements in certain countries in Africa.
The other challenge has arisen in connection with what has been the solution to that problem, where the development banks have created bankable programmes such as Get Fit, Scaling Solar, et cetera. But, because they were, in effect, wrapping those projects up in a bow, the pricing became hugely competitive, and it has got to a point now where many of our clients won’t participate in those tenders.
So, what we started to see in Africa – and this was at the same time that we started to see this in other markets, particularly in mature markets – was the whole growth of what we would refer to as private PPAs, including on and off-grid solutions. With the growth of private PPAs in mature markets, it became seen as a solution that could apply to certain opportunities in Africa. However, not to all, because you still need a bankable offtake, and other criteria to be satisfied. But we have seen a significant growth in this area.
Simultaneously, we started to see, as part of this whole sustainability and decarbonisation agenda, increasing pressure coming on corporates from their business customers, their institutional investors, and their business partners, to decarbonise. And so, what we have started to see within the mining sector, not just in Africa, is an increase in pressure from the customers of those mines to be sourcing their power from renewables.
But this is not without its challenges for the mining sector, because, of course, the term of the offtake which a bank would require will not necessarily match the remaining life of the mine, nor will what the mine requires in other areas match what the developer needs for the project to be economically viable and bankable. Because of these challenges, this mismatch between what a mining company wants and what a renewable energy developer wants, we have seen the emergence of other models.
A model that is being developed by clients in Norway and France is modular leasing, where they can provide moveable kit as a project and they can lease this to the offtaker, be it a mine or anybody else for the period of time which fits the solution required by the mine. So, for example, they can lease for as short as one year, right up to 15 years, from kilowatt projects right up to 10-15 megawatt projects, because it is a modular system. The shorter the term of the lease, the more expensive it is. But that creates an entirely different model and an altogether different financing model for the company which is providing the lease.
Now, we have seen the lease model emerge previously in a number of markets around the world, most notably where governments do not permit a separation of generation and offtake. That is often the case in Africa, because the government will be looking to protect the government-owned utility and the utility’s income stream. It doesn’t want companies setting up as independent generators. But we are starting to see the lease model utilised even where there isn’t that regulatory prohibition, because it makes sense for the offtaker, as it is often cheaper.
The point is that in the last 12 to 18 months, we have seen more change in innovation, in new structures emerging, and in this increasing shift away from centralised grid systems, and towards decentralised and private offtake than we ever have before. It now represents a significant proportion of the work that we do.
Simon-Lewis: Yasmine, positive impact finance calls for a new paradigm – turning Sustainable Development Goals into business opportunities for Société Générale’s (SG’s) clients. Can you provide an illustration of what this looks like in reality and whether you see export credit agencies (ECAs), like UKEF, moving into this area given the close co-working with commercial banks like SG and the strong in-house capability that UKEF has in E&S in particular?
Djeddai: Within SG’s export finance division, sustainable financing has been a large part of our growth strategy for the last few years. In practice, we have designed and implemented action plans per countries and regions of import and export, based on their respective SDGs as per the countries’ Voluntary National Reviews so as to make sure that we are aligned with their targets. We have decided to have a specific focus on three main sectors with high impact and high financing needs: food security, such as agribusiness projects; renewables, notably off-grid solar projects; and sustainable cities, such as mobility and infrastructure.
Historically, SG has been evaluating projects for associated E&S risks to ensure they are properly mitigated. Progressively, we have ‘augmented’ our E&S risk analysis with an impact assessment approach where the bank is looking for positive impact projects.
We have also put in place an R&D ‘impact based finance’ team within the sustainable financing division where we are looking for disruptive innovation. Indeed, disruptive innovation is needed in order to reduce the SDG funding gap estimated at US$2.6tn per year: we want to look at different ways of financing and, more importantly, designing new business models focused on impacts. We have co-written with the UNEP FI a research paper on this disruptive impact-driven approach.
Clearly, we see an increasing willingness from ECAs to diversify their business and to support more projects that contribute to the SDGs. Some of them, like the Japanese ECA, have created dedicated products. Others have intensified their marketing and their resources, as we can see with UKEF putting in place a clear strategy towards sustainable financing.
We are working very closely with UKEF on these topics. Earlier in 2019 we successfully closed the financing of three hospital projects in the Middle East where SG acted as MLA, as well as in the recent closing of NT$62.4bn (US$2bn) project financing for the 376MW Formosa 2 offshore wind project, where SG acted as both financial advisor and MLA. And we look forward to doing more as we believe ECA financing will be critical.
Simon-Lewis: Amit, Standard Chartered is already a market leader in providing sustainable finance to emerging market countries, mobilising over US$5bn of blended finance for public sector and development organisation clients, raising more than US$10bn in green bonds over the last two years and actively advising regulators on matters relating to sustainable finance and green bond guidelines. How do you see this market developing over the coming years and what role do you see ECAs playing?
Puri: Standard Chartered is an emerging markets bank – it is headquartered in the UK but generates over 90% of its operating income from Asia, Africa and the Middle East. So, when we talk about meeting the SDG gap of US$2.6tn that Yasmine just mentioned, the point is that it is a big number. That is the number that the UN estimates that needs to be financed between now and 2030 in order to meet the SDGs.
In developed markets like the UK, 90% of the SDGs are funded. In emerging markets it is 60%, and in Africa it is about 10%. In terms of the financing, you can see that there is a huge gap.
To deal with this, Standard Chartered has brought together two teams at the start of 2019: a ‘do no harm’ team, which is our environmental and social risk management team, and a ‘do some good’ team, which is focused primarily on looking at sustainable finance opportunities. Not just green opportunities, but sustainable finance opportunities around the world. They work with our bankers and our DCM team, and our private banking team and our projects and export finance team, and all sorts of other product partners, essentially where we are saying, how can we use our balance sheet to help achieve the SDGs? It is underpinned by extremely strong environmental and social risk management in order to bring these two things together.
We have got a track record in doing this over the last few years, and that is just by necessity. Sustainable finance has become quite fashionable in the last couple of years, but when you are an emerging markets-focused bank, this has been your bread and butter for a number of years, so it is really part of our DNA. And some of the work that we have done over the last few months organisationally is just about sharpening the focus that we have on sustainable finance and setting some targets, et cetera.
We interact very closely with a number of regulators in emerging markets, the Asian regulators in particular. Across Southeast Asia, Indonesia, Malaysia, Singapore and Thailand in particular have really seized the challenge of how their countries are going to be exposed to climate change and are therefore trying to develop sustainable finance opportunities. We have not seen it in a large scale across Africa yet. That said, in a number of African nations – Nigeria in particular is a member of the sustainable banking network which sits in the auspices of the IFC – there has been a lot of work done to develop the frameworks. We see them expanding rapidly and exponentially. We don’t see a slowdown, specifically if we are going to try and meet the SDGs by 2030.
In terms of ECA support and the work that we do with UKEF, we are very familiar with the two projects that Louis mentioned at the start, particularly with Jaguar Land Rover. We do a lot of work with UKEF and in particular their E&S team. Why do we do that? UKEF is going to Africa from an export perspective, and we are already there, so I think there is a synergy there. In addition, from a commercial and regulatory capital perspective, it helps crowd in our capital. Banks have agreements with their home regulators in terms of how they treat ECA capital, and ECA capital helps our returns. So, there is a great opportunity for us to continue to partner with the likes of UKEF and other ECAs as well, specifically because we have the regulatory capital treatment.
To the extent our interests are aligned to go into these footprint markets of ours, where you are trying to push your clients, your products, your services, you can essentially bring your concessionary capital from the UK government, and we can provide the top up from private capital. We should be able to achieve the US$2.6tn a year.
Simon-Lewis: Martyn, we have seen Wood lead the way in terms of energy transition amongst the UK oil and gas community building significant cross-sector diversity in offshore wind and CCUS. What were the lessons that Wood learnt along the way, and what do you see as the key opportunities and challenges that lie ahead?
Link: Since I joined in 2011, Wood has been transformed. It has been quite an exciting time. One of the big things was the 2014 oil price crash. When that happened, it really forced the leadership to sit up and say, is this a structural change, or is it just regular volatility? And I think one of the lessons is to be brutally honest with yourselves as leaders of companies, when you see that markets have changed, when you see that the environment has shifted, to recognise that and adapt to that as quickly as possible.
Working closely with the leadership, I saw leaders who were willing to embrace that and make some really tough choices. Part of that was cost-cutting. Part of it was acquiring another company to broaden the portfolio.
One of the other big lessons was around understanding our ability to influence and shape the market. At the end of 2019 we did our first scenario planning work, where we looked at two big questions to help chart a path for our business over the medium term. The first one in May focused on the energy transition. A lot of the things we are talking about today are uncertain, so we built scenarios around what we believe are the two biggest uncertainties. Firstly, will society, governments and the private sector pull together? Will they coalesce and pull in a common direction or will they fragment? We are a bit in the middle at the moment. Things could get worse, but they can also get better. We built that as one big uncertainty.
The other area was technology. Will technology give us the answers? Will the costs come down? Will deployment make these solutions work fast or will it be slow and incremental? We created four scenarios which I presented at Offshore Europe and the depressing thing was that in three of the scenarios we really don’t touch greenhouse emissions at all. It was only really in the one where you got high social, government and private sector cohesion and fast technology deployment that we saw that we achieved any of the real impacts that we needed to.
For us, another lesson is think for yourselves. Don’t just read a report or outsource it to a consultant, but wrestle with it yourself. Take responsibility as a leadership team to think, what is our responsibility?
What I see now from Wood is we are not just trying to be part of the market and make money; we are trying to shape the market. That is why these forums are so important, because you have got to link the technical ability with the financial channels, and then with the commercial models as well. All of these things need to be aligned. The government is part of that, the private sector is part of that, society is part of that, because what will they pay for and what will they not pay for? That is all shifting.
If we can take something away about how we connect emotionally with society and tell a different story for the oil and gas community, and tell it about energy rather than just oil and gas, that would be my recommendation.
Simon-Lewis: We have clearly seen GE active as an OEM and active user of ECA finance in the aviation, healthcare and conventional power sectors across the world. Over the last few years, we’ve noted the advances and investment made by the company in the offshore wind sector; specifically, in relation to the development and future deployment of the 12MW Haliade-X WTG. We are aware that this class-leading WTG is due to be deployed in the UK at Dogger Bank. Can you provide an insight in relation to the other markets where you expect to see this WTG enter service and the role that ECAs are likely to play in underpinning the finance?
Davies: Picking up a couple of points you made before: Louis mentioned that this is a transition, and it really is. We are seeing renewables accelerate, but it is a long-term transition that the energy industry has to go through. And yes, some people will still use diesel and some people will still use gas even in 20 years’ time, because that conventional power will always be needed to supply baseload electricity for places where wind and solar are not efficient. So, conventional power will remain part of that whole energy mix.
We have been supporting and financing our onshore wind technology for many years through a facility in Germany, and deploying Hermes financing to support those projects as well as our hydro platform, which has been more DFI-related funding rather than ECA. With respect to our offshore platform, everybody is talking about it, this is a long-cycle business and manufacturing decisions are taken well in advance of these contracts being awarded. For us, our manufacturing base for our offshore platform is primarily in France today, but we are looking at where we can bring that supply chain into the UK, where it makes sense logistically whilst maintaining a position of competitiveness. This could also create a UK export platform for tomorrow.
Onto your question, we do see this as a continuing trend. On the Northern European and UK continental shelf, it is said that there is enough scale of seabed to provide sufficient power for Europe twice over in terms of broad capacity if it is fully developed.
UKEF is one part of the story that supports the UK-based supply chain. The product suite that UKEF provides supports manufacturers looking to invest in the UK by not only providing solutions to fund additional capital expenditure or expansion activities, but also by deploying its ability and expertise to underwrite these projects, allowing it to support the financing of the exports that these facilities could generate.
The renewables sector has been blessed with an abundance of green funding for quite some time. What we are seeing, not only in the wind sector, but also in solar, is that as tariffs decline, investors are increasingly seeing a need to bring long-term, efficient debt into the projects to enhance their yields to sufficient levels, allowing them to continue to invest into the projects.
We do see a much larger role for ECAs in the renewables sector going forward than we have historically seen, due to its ability to enhance returns but also due to the sheer scale of some of these projects, particularly in the offshore space.
On the solar side, we have seen this impact on falling technology prices and tariffs, driving customers to ask us to find efficient financial solutions to help them build these projects. The solar example I have is a market of one gigawatt where the sponsors are telling us that we need to bring financing in order to make this work. In many geographies, local markets don’t provide the required liquidity at an efficient enough scale, tenor and price for investment decisions to be taken. In this case, between UKEF and the DIT, we have been able to find the requisite supply chain in the UK to make the project eligible for UKEF support so that we can now bid for this project. We can make a very clear statement that we have the eligibility story solved, which moves the dialogue on to project bankability. This platform, if successful, will allow us to replicate for future projects as well.
To Michelle’s point earlier, when looking at the solar market, many of these emerging geographies don’t have either bankable governments behind them or indeed bankable documentation from a PPA perspective and they do need some advice and guidance to get them there. But I think it is a process of evolution. We will get there in time. Historically, they have relied on investors’ willingness to the risk/reward equation in terms of investing, but as we look to leverage and bring international financing into these projects, documentation will come under greater scrutiny and there will need to be some more discipline around the front end documentation. But I think it is certainly an area that will continue to develop positively.
Touching back briefly on the offshore wind space, the vast majority of the major offshore wind farms have all tapped ECAs. This is likely to continue not only because tariffs are coming down, but also because the sheer scale of the debt requirement for these projects is so large. ECAs coming in at scale allows the sponsor to get the right sweet/sour relationship for the commercial banks that wish to participate. It brings a more efficient solution for the sponsor with fewer banks required in the club in order to make it work. So, ECAs coming in with large tickets of guarantees insurances, or indeed direct lending will be a significant advantage to any project sponsor.
Simon-Lewis: Stephane, a question in two parts. The first encompassing Aggreko’s activities in offshore wind in the UK and the second around your work in the Permian Basin in the US with oil and gas clients. Given UKEF’s recent support for the UK offshore wind sector supply chain through our support for Formosa 2 in Taiwan, we are interested to hear about your work with Hywind (the UK’s first floating offshore wind farm) and specifically the battery storage element. Secondly, we understand that you have been recognised for excellence in environmental stewardship in the US Permian Basin – can you give us a sense of the changes that you are seeing amongst your oil and gas clients in this area and in this market in particular?
Le Corre: Just to clarify, we don’t offer energy from wind turbines in Aggreko but we provide services to the wind industry, for example, commissioning services for wind farms. The market for offshore wind worldwide is massive, but foundations are required so you need to be in shallow water. We expect now a wave of development with floating wind turbines in deep water. There is a lot of knowledge in the UK for this emerging industry, especially in Scotland with the offshore wind and the oil and gas industry, and there are a couple of companies that we are working with in this industry. We have been involved in this project of floating wind turbines with Hywind; there was a first pilot test, and we are now involved in the second work which is more commercially viable in Stavanger, Norway. Hywind will install five floating wind turbines for 7MW offshore, and we install one battery for 1MW onshore. Wind, as with solar, is an intermittent energy, so the battery is great because it helps store, or optimise the load and improve the quality of the electricity produced. This is a small project but there is a massive potential worldwide.
The battery we provide is engineered and manufactured in Scotland, where we’ve got our own facility close to Glasgow.
We think the biggest role of UKEF is to help create the winning team. Partnerships are clearly what the whole industry will favour, and at Aggreko we clearly believe in partnerships. It is always difficult to find the right partners to build the consortium, so I think there is a clear role to help create this team and find the right place for development.
On your question about oil, we all know about the shale oil revolution. If the Permian Basin was a state, it would be the fourth-largest oil producer in the world. It has massive production, between 4 to 5 million barrels a day. We have the technology to help the oil producers in this area, notably because there is no grid and they need a lot of power to extract oil. Most electricity produced there is using diesel or gas. There are regulations to reduce NOx emissions, and the last target of the regulation is 75% reduction. We are very proud to have received an award from the environmental authorities in Texas for our innovative ‘SCR’ to reduce these emissions by 90%, well beyond the regulation. We are investing a lot in new technologies to reduce the impact of power generation on the environment.
There are four areas driving the oil and gas industry, I would say. The first one is the regulation. The industry is putting in a lot of effort based on the regulations around emissions and on flaring, because there are very strict regulations on that.
The second driver is their own targets. We have many customers in the US and in other geographies who set themselves tighter targets than the regulation. Even if they can flare and pay a fine, they decide not to flare, so they restrict their own pollution, and they are looking for solutions to solve the problem. We work with them to use the flare gas to produce electricity and reduce the use of diesel on site.
The third driver is the cost of electricity, as we were saying before. Today by combining thermal and renewables, the electricity produced is cheaper, in addition to being cleaner, that is where the industry is very interested because then there is a real accelerator for growth.
The last driver is the technology provider, us, as we bridge the technologies and propose a solution to the customer. Customers are coming to us and asking how ambitious they can be, what can we offer? We are helping them to define the right targets.
There is a big potential around flare to power. Most of the oil companies are flaring the associated gas from their oil production. The flaring of gas is massive, and if we were able to displace this flaring into power, it would have a massive impact on the environment and it would be more effective in terms of financing. The industry and the states have to choose the right approach and the most efficient ones, not only financing of renewables.
Simon-Lewis: Neil, at the UN’s climate summit in September 2019, the UK government took the lead on climate resilience. Some of the objectives being targeted include a systemic shift in the way the public and private sectors think about investment and better capacity to manage climate shocks around the world. This includes better targeting of investments and building human and physical capacity to cope with current and future climate risks. Can you give us an insight into the work that the Environmental Agency is doing in setting world-leading ambition, and showing that we can ‘walk the walk’ both at home and abroad? Do you see potential for the UK supply chain overseas in this area and other key stakeholders such as the Met Office?
Davies: It is really interesting to hear about the journey so far around renewables. I’ve been here long enough to have worked on one of the energy policy documents for the government back in 2001/02. And at that stage, security of supply was the big issue. Renewables were still very much a thing of the future. It is interesting to see 18 or 19 years on that we are still looking at the role of renewables in developing the market internationally. And I say that just to make the point about the time it takes in order to bring these sorts of new things to market.
Now, if we look at the other side of the climate change coin around adaptation, it feels like the poor cousin to the whole energy side and the whole mitigation side of the debate. The big difference is, we haven’t got 18 years to deal with that. And the reason that is the case is because most of the decisions that we take either as the UK government or any other government internationally around infrastructure is going to be around for 50 to 100 years. So, you have to start looking at what the implications of climate change will be on your infrastructure. That is a major challenge for us.
Even if you look at just flood risk globally, we have seen about 2 billion people affected, just over the last couple of decades, by flood disasters. That is the size of the challenge you have. If we do not adapt to climate change, the estimates are that it could be 4% in global GDP affected by damage from floods. You have got around 800 million people who are vulnerable to sea-level rise by 2050. So, there are significant consequences of not addressing the adaptation side of the coin.
The Environment Agency operates in England, and we do a lot of things. We look at flood risk, but we also look at making sure the nation has got enough water, both for human consumption and for industry, but also for maintaining the environment. We do all of that, as well as making sure that the nation is resilient to climate change. We also do a lot of regulation.
In terms of a lot of the technology you are talking about here within England, we work with the industries to make sure that they are regulated and operate sustainably. One of the things we are really concentrating on within the Environment Agency now, is the extent to which the way we manage flood risk in England can be used internationally. The lessons that we have learned within this country, we are now looking at exploring that internationally, bearing in mind the size of the challenge and the scale of the possible consequences that we face globally if adaptation to the future is part of that action.
We feel, within the UK at least, that we have quite a unique offering, because we are an island, so we suffer from all implications of flood risk, whether they be coastal, from a river, or surface water.
We have world-leading expertise around modelling what flood risk might look like. So, what we are doing with UKEF is trying to understand what the size of that market is. And at the moment, if you look at what the estimated global costs are around adaptation by 2030, it is about US$140-300bn. So, it has massive potential consequences. For us, it is the extent to which we can as a nation both do the right thing, but also how we can work with those other governments and the supply chain, the UK supply chain, to make sure that we can deliver that ambition.
We are also looking at the financing side of that, not depending exclusively on government funding. How do you attract private financing into delivering that level of investment? That is a significant issue.