This year’s UN Climate Change Conference of the Parties (COP26) will be hosted in Glasgow in November, marking the first time the UK has hosted the historic event.
Ahead of the summit the UK’s export credit agency, UK Export Finance (UKEF), gathered influential industry participants in February to discuss the opportunities emerging for British companies around sustainability, and how the public and private sectors can provide the financing and support to achieve them.
- Richard Simon-Lewis, director & head of business development, marketing & communications, UK Export Finance (Chair)
- Richard Coar, energy & infrastructure partner, Linklaters
- Richard Crossick, public affairs manager, Ørsted
- Clare Francis, regional head client coverage, Europe, Standard Chartered
- Tony Quinn, test and validation director, ORE Catapult
- Anil Vijayachandran, acquisitions & project finance director, ACWA Power
Simon-Lewis: Today, we will look to explore some of the key themes around the financing and support for sustainable growth in the run up to COP26 and beyond.
Export opportunities to new, global markets can cover low-carbon technology such as hydrogen, carbon capture and floating offshore wind, together with services, providing jobs and reinvigorating our industrial heartlands.
UKEF, working alongside colleagues at DIT and embassies around the world, plays a pivotal role in providing financing for sustainable growth projects. This unlocks overseas opportunities for UK exporters with key stakeholders and partners around the world.
We can put the energy into the UK’s green exports by offering favourable financing terms for sustainable projects, including £2bn of clean growth direct lending, helping UK exporters take advantage of opportunities they may otherwise miss.
It is clear there are further challenges ahead, but as we return to normality after the Covid-19 outbreak, opportunities will emerge as countries recommence their plans for sustainable growth.
UKEF was ranked number two among our export credit agency peers in the global sustainable finance league tables last year, providing £2.4bn of support, and we will be seeking to support these changes, whether through investment or technical innovation and collaboration.
Simon-Lewis: How does Standard Chartered, as a leading international banking group, further align its support and services to facilitate sustainable growth in the markets in which it is present?
Francis: Standard Chartered is an emerging market bank, uniquely positioned to unlock capital in the countries that need it most. An example is in Africa, where there is just 10% of the finance needed to make sure the UN Sustainable Development Goals are met.
Emerging markets are most at risk from climate change and wider ESG issues, as well as represent the biggest investment opportunity – but investment is not flowing into these markets, and more needs to be done to support and scale cross-border sustainable investment by the public and private sectors.
Standard Chartered is committed to direct capital into emerging and commonwealth markets, setting up sustainable green deposits in many of our centres – Hong Kong, London, New York, Singapore and Dubai.
By 2024, we are committed to US$40bn of project finance to promote that sustainable development, for example in infrastructure and power projects, and we have also committed to support US$40bn of renewable projects through project finance, M&A, debt structuring and capital markets in the weeks and months ahead.
Simon-Lewis: What are the UK’s opportunities in offshore wind, and what are the challenges going to be in addressing them?
Quinn: The Catapult network was established by UK government to encourage innovation in areas of high potential growth, and where the UK has a global advantage. Clearly offshore wind is one of those areas. That opportunity has been created by spectacular innovation in the last few years, where ever-larger turbines, for example the Haliade X to be deployed at Dogger Bank, have driven significant cost reduction. By 2019 we were already seeing prices that were almost subsidy-free.
In my view we’ve been through the pioneering phase with offshore wind, and are now entering the industrialisation phase. This will see mass deployment of turbines in UK waters, and that’s creating a huge opportunity for the UK, whether in installation, commissioning or maintenance of these turbines.
One challenge is that much of the core technology is currently imported, and it’s not easy to create significant UK content. This can be addressed by attracting foreign direct investment, and colleagues around the table have a role to play in that. It’s also important that we invest in portside infrastructure to enable the manufacture of these large structures.
We also need to invest in world-leading research infrastructure – it’s vital we make the IP ‘stick’ in the UK, to truly generate long-term sustainable jobs – and in turn we need to invest in the necessary skills and offer supply chain support.
Another challenge with this industrialisation phase is the electricity grid, which has been set up for centralised power generation and not distributed generation.
Industrialisation also means we have to invest in advanced manufacturing able to produce large volumes of equipment. It will require automation of a lot of manual processes, particularly in blades manufacture. That will provide an opportunity for the development of robotics, autonomous systems, machine learning and artificial intelligence.
Simon-Lewis: What are ACWA Power’s ambitions and strategy over the next five to ten years, and do you see emerging green technologies that are going to have to play a role in these energy transitions?
Vijayachandran: ACWA Power is a Saudi Arabia-based developer, set up in 2004, and in the last decade and a half has built up a portfolio of 62 assets across 38 countries, worth US$60bn-plus in value. That amounts to approximately 38.9GW of power and 5.8 million cubic meters per day of desalinated water capacity.
We continue to remain growth-focused, expanding rapidly in our various core markets and entering new geographies, we also remain focused on supporting the very ambitious plans of our home country and the GCC region. Countries like the KSA and UAE have set out some of the largest, most ambitious utility-scale capacity procurement plans for renewables, and we are committed to supporting these plans and playing a key role in bringing them to fruition.
We also remain committed to our own strategic priorities, like supporting renewable capacity expansion in our target markets and decarbonisation of our portfolio, which includes development of green power solutions and highly efficient gas-fired capacity in Africa as well as South and Southeast Asia.
On the technology side, we are seriously exploring opportunities in green hydrogen. I think a good example is a recently announced joint venture we have set up with Air Products, for a US$5bn green hydrogen project in Neom in Saudi Arabia. This will supply around 650 tonnes per day of zero-carbon hydrogen.
This specific project was developed with export markets in mind, but we also believe that hydrogen will play an increasingly important role in mobility solutions and for dual-fuel solutions within the region as well. We definitely see hydrogen as a key component in the region’s energy transition story over the next decade or so, and remain very excited to participate in that.
Simon-Lewis: Moving in the direction of sustainable finance and clean growth requires the right legal and regulatory frameworks to be in place. What do legislators and regulators need to do to facilitate that, and what are the key features of successful renewable energy strategies?
Coar: There have been a huge number of success stories around the world when it comes to decarbonisation, though the pace of change has not been as rapid as may have been hoped in all jurisdictions and all sectors. With the deployment of next-generation technology, hopefully we’ll be able to accelerate that transition to net zero.
In our experience, the most successful renewable strategies have largely embodied three key principles.
First, they’ve been designed in conjunction with industry, to address specific challenges. A one-size-fits-all strategy has repeatedly shown not to be appropriate, whether that’s looking in terms of treating different technologies in the same way, or different countries seeking to mirror strategies developed elsewhere.
Secondly, the strategies have been stable and certain. Many key players in renewable energy have a global outlook, and their investment decisions are measured over decades; the decision to invest in a country or state needs to be underpinned by a stable and predictable regulatory regime.
Thirdly, the nature and size of the opportunity and the timeframe over which the opportunity will present itself needs to be attractive to crowd in a sufficient quantum of all types of investment. By way of example, in the UK, the two-year drumbeat of CFD auctions is clearly attractive. The industry knows what to expect and when to expect it.
Simon-Lewis: What are the lessons learned from the Changhua offshore wind project in Taiwan, and how can they be applied into new markets in Asia and further afield?
Crossick: The key part of that relationship was the amount of time we spent working together and forming that relationship. UKEF spent a huge amount of time understanding our business and how we make our investment decisions, while at the same time we worked hard to understand how UKEF works.
In particular, with the changes that have come from UKEF in the last couple of years, and the way UKEF now looks to finance and support projects, understanding that and forming the relationship was really key to us.
It means that now, working together will be far easier in future, because we understand each other on both sides.
Simon-Lewis: Given the strong cooperation between UKEF and Standard Chartered, how do you see this cooperation being extended?
Francis: Our core markets overlap – Asia, Africa and the Middle East – we both share a long history and a deep understanding of those local markets. Working with trusted partners in challenging markets is key to unlocking opportunities for investors and corporates.
Importantly, we don’t just do the big deals and move on. There needs to be a sense of loyalty across the entire tenor of the deals. At the moment that has meant we’re supporting our clients through Covid recovery and working with UKEF on some infrastructure projects.
For example, as well as the Taiwan wind farm, we worked with UKEF in securing financing for the construction of a teaching hospital in Ghana to provide maternity care and help reduce mother and child mortality rates.
This project was a great achievement and of course one we’re incredibly proud of.
Simon-Lewis: Tony, can you give us a sense of how innovation is going to respond to meet these challenges, supporting the UK’s ambitions to export expertise globally?
Quinn: We currently have around 10GW of installed capacity of offshore wind; the Climate Change Committee have recommended we aim for 100GW by 2050: a tenfold increase. That’s demanding, but in turn presents a huge opportunity, creating a fertile innovative environment where the UK has the first-mover advantage in a truly global market.
Where will that innovation appear?
For starters, I don’t think that the turbines deployed in 2020 will be the same as those deployed in 2050. I don’t think a 20MW turbine is too far away. The next generation of offshore wind could utilise floating foundations, rather than fixed-bottom structures, allowing exploitation of deeper waters.
Continued innovation in offshore wind is likely to deliver ever lower costs of electricity. Once you have access to cheap renewable electricity, the question becomes what role it plays in the decarbonisation of the rest of the economy – for instance for heat, transport and, in particular, the generation of hydrogen through electrolysis?
So, the challenges of achieving net zero over the next 30 years will be largely technology or engineering-driven, and that in turn creates a huge economic opportunity for our innovative nation.
Simon-Lewis: What are the challenges for developing a global, regional and Saudi supply chain, to construct and operate a clean growth economy based on renewable energy solutions?
Vijayachandran: This is a timely question given the disruptions we all saw over the previous year or so, in addition to the geopolitical challenges. The MENA region has been focused on the rapid scaling up of renewable capacity, and deployment through very large-scale, centralised and largely government-led procurement programmes.
This has been very successful in bringing out several newsworthy outcomes. However, the disruptions caused by this ongoing emergency seem to have made clear to all parties the critical importance of supply chains, and particularly developing resilient supply chains with significant localisation or regionalisation.
This of course involves overcoming a lot of challenges, including early-mover advantages and associated network effects. Here, the Saudi Arabia 2030 Vision plans have made KSA a frontrunner, with their procurement tenders incorporating localisation targets and clearly defined penalties for failing to achieve this.
In parallel, a two-track procurement pipeline, with 70% of the targeted capacity procured through a PIF-led initiative allows for predictable and large-scale demand for local production, along with designated government entities working with investors to set up local clusters, as part of a phased plan with both short-term targets and longer-term localisation objectives across the renewable energy value chain. ACWA Power remains committed to support these plans.
Simon-Lewis: Clearly, changing a country’s energy strategy is going to be a challenge. Richard, could you share some of those challenges you have encountered in different markets?
Coar: It’s a challenging journey, and many countries have had a few false starts or faced bumps in the road. I’d like to highlight the following three challenges.
I certainly agree that addressing technical and engineering challenges is key. If governments don’t invest in, and show the same level of commitment to, supply chains then their decarbonisation will be at best more expensive, and at worst, won’t achieve the desired rate and scale of change. However, localisation requirements need to be carefully designed to build capability whilst not jeopardising the rapid deployment of low carbon generation.
Second, many energy strategies appear to have operated as designed, for instance by delivering lower renewable energy subsidies each year. However, sometimes those outcomes are politically challenging: governments may find it hard to support paying high subsidies in early years compared to lower subsidies in subsequent years.
In some limited circumstances, that has even led to retrospective tariff adjustments and a consequent reduction in private sector confidence and that can be significant and prolonged. The key question is whether year-on-year subsidy reductions are due to the success of policy design or simply overpayment in early years. Given the increasing pace of rollout of new technology, this topic is likely to be a key focus for industry and governments alike.
Finally, energy policy is clearly not an isolated policy goal – it touches on, and potentially conflicts with, many other areas of policy. In some cases, green projects have been materially delayed or even had to be abandoned where the relevant host government hasn’t been able to resolve conflicting policy objectives.
Thankfully that’s been relatively rare and government and industry have generally successfully worked together to find a suitable and timely solutions.
Simon-Lewis: We recognise many markets are undergoing energy transition, and there is impetus towards lower carbon technologies. Can you give us a sense of regionally where you see the next opportunities for these technologies?
Crossick: It’s the export market that is key for UK companies: we think at least half of the jobs here are going to be export-related. That means the support coming from the Offshore Wind Industry Council and DIT – making UK companies more competitive globally – is going to make the difference.
That could be port infrastructure, increased R&D support, or that missing piece between early-stage R&D and actual commercialisation. Ultimately, all of that is going to give UKEF an easier job in supporting UK companies globally.
Looking at where that opportunity is, there is huge interest in offshore wind in Asia. As well as Taiwan, companies are looking at Japan, South Korea and Vietnam; they’re all interesting markets with strong interest already. India has huge ambition, and is showing a lot of action already on solar. If it can match that on offshore wind that’s an enormous market with a lot of potential.
Of course, we can’t ignore the European market. We’re seeing countries such as Poland moving towards auctions, France hugely increasing its ambition, alongside the other usual suspects.
And then the other series of markets are in the US, either within individual states or groups of states together.
This started on the eastern seaboard, but now California and others along the west coast are showing a lot more interest. We’re starting to see significant construction going ahead, a lot of deployment already happening now, and interest growing across the whole coastline.
So what are the priorities in those markets? There’s always an interplay between how quickly they want to build up their own domestic markets and supply chains, and the extent to which they want to bring costs down as quickly as possible. You can’t do both of those instantly, so you have a trade-off there in the early stages.
Crucially, though, we’ve seen that ambitious countries can have a cheap source of electricity relatively soon – in most markets a lot cheaper than through gas and other resources – and develop their domestic supply chains.
I should add, that doesn’t mean there’s a conflict there, between domestic supply chains and opportunities for UK companies. The global market is going to be huge, and the UK doesn’t actually need to have a large piece of that pie for it to be a very significant opportunity for UK companies.
Simon-Lewis: Clare, can you give us a sense, and send a message to the UK government, of what Standard Chartered would like to see emerge from COP26 this year?
Francis: With COP26, we see this as the opportunity for the UK to host what is one of the most important diplomatic meetings since the NATO London summit in 1990. As was the case then, COP26 will provide the opportunity to rewrite history, and we would expect our leaders globally to harness the collective power of businesses and local communities to deliver lasting change.
In the private sector, commitments to align with the Paris Agreement are driving the agenda. At COP25 we heard a lot about companies taking a science-based approach, rather than a policy-based approach, which means they can be consistent with the Paris Agreement aims without waiting for policy changes to take effect.
60% of our footprint markets do not have the equivalent governmental net zero targets that the UK does, even if they’re moving at pace, but we have the ability to enable this transition. We know the investment required is substantial, and there’s a lot we need to do together, so business needs to lead this.
We have made public commitments to achieve net zero in financing by 2050. We’ve also made a commitment not to fund new coal mines or coal-fired power plants, to reduce the full range of financed emissions, and we have a roadmap to net zero.
Our hope is that both government and business will work together and increase their climate-related ambition in support of the Paris Agreement goals.
To find out more about how UKEF is supporting the low carbon transition and how they can help you on your export journey, please contact firstname.lastname@example.org.