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Infrastructure pipeline: high carbon still dominant

Investment in low carbon infrastructure is still overshadowed by high carbon projects in the government's pipeline of key infrastructure schemes, according to the Green Alliance. Analysis revealed by the green charity and think tank into government's latest list of investments, released last week, shows that fossil fuel energy projects continue to dominate. Only 33% of spending will be directed at low carbon projects during this year, the Green Alliance says.

The Alliance has studied the last three iterations of the infrastructure pipeline. Initially, in 2012, spending was geared towards low carbon projects, particularly so in the energy sector, the Alliance says. However, this has reversed due to investment in roads and oil and gas announced in the 2014 and 2016 pipelines.

By 2020, the picture is expected to have switched again. Low carbon will account for 51% of projects, with high carbon taking up 30% of investment. This is mostly due to HS2 taking over as the dominant investment in low carbon transport.

Overall spending on energy infrastructure will decrease 20% during this Parliament. This is due to the private sector exiting high carbon markets and not matching this with increased investment in low carbon energy and transport. Public spending is more mixed and will not make up for the shortfall, the Alliance says, unless government increases private sector confidence in UK energy policy.  Three measures are given for how government can shore up private sector confidence:

• Reinforce the political consensus on the need to largely decarbonise the power sector by 2030 when the government adopts the Fifth Carbon Budget in June

• Provide £2.7bn extra investment to upgrade and decarbonise the electricity system in the 2020’s

• Accelerate the move beyond subsidy by renewables by creating ‘subsidy free’ contracts for solar and onshore wind

Full Analysis:

The government’s infrastructure pipeline sets out its view of large infrastructure investments that are likely to be made over the course of this parliament and beyond. Green Alliance has analysed the last two iterations of the pipeline, which show the changing pattern of investment across low and high carbon sectors of the economy.

Our analysis of the first infrastructure pipeline, in 2012, showed that the majority of investment planned was in low carbon infrastructure, with energy infrastructure in particular being heavily weighted toward low carbon investment.

The picture in 2014’s infrastructure pipeline update was very different: roads spending and oil and gas tax incentives meant that fossil fuel energy investment was projected to be higher than low carbon energy investment.

The most recent update to the pipeline reveals that, in 2015, fossil fuel infrastructure continued to dominate, with 41 per cent of total infrastructure spending directed toward high carbon projects. Just 33 per cent of spending will go to low carbon projects in this year.

However, the balance of infrastructure investment is projected to change dramatically by 2020. By then, 51 per cent of the UK’s infrastructure investment will be in low carbon projects, against just 30 per cent in high carbon. Looking only at those projects the government classes as ‘priority investments’, the picture is even better: 72 per cent of projected total spending in this category is in low carbon infrastructure. Closer analysis of two key sectors, energy and transport, reveals what will drive this: - Oil and gas investment is projected to fall by two thirds, from £12 billion to £4 billion over the course of the parliament.

The last published infrastructure pipeline saw a very large spike in oil and gas investment, and it is significant that the Treasury sees North Sea investment decline as a long term trend. - Low carbon electricity investment is due to peak at £14.1 billion in 2018, driven by private sector investment in offshore wind (£6 billion) and electricity networks (£4.6 billion) in that year.

The rise in investment, which doubles from £7 billion in 2015, shows that low carbon investment can replace oil and gas spending, helping to maintain GDP growth. - By 2020, however, total low carbon electricity investment falls to £8.3 billion, composed mainly of continued investment in regulated network assets (£4.1 billion) and Hinkley Point C (£2 billion).

The fall in spending highlights the importance of private sector investment in low carbon electricity. The Treasury’s disruption of energy policy can be seen in the sharp decline in projected investment: just £238 million across all renewables is projected for 2020, a staggering 96 per cent fall from its peak in 2017.

If this cliff edge in investment is to be avoided, government will need to set out a levy control framework that enables investment to continue up to and beyond 2020. - Roads spending is due to rise 73 per cent between 2015 and 2020, with a sharp rise in the final year of the parliament leading to total investment of just under £7 billion on roads in 2020. - Conventional rail investment is projected to fall by around 30 per cent, from £7.8 billion to £5.6 billion, between 2015 and 2020.

However, the planned spending on High Speed Two (HS2) means that overall spending on rail will rise by around 18 per cent over the same period. Overall, by 2020, the construction of HS2 means that investment in low carbon transport will be two thirds higher than investment in high carbon.

Without it, falling rail investment would mean infrastructure spending would be evenly balanced between roads and rail. - Around 85 per cent of infrastructure investment in airports (£5.1 billion over course of the parliament) is projected to be spent on London’s airports. Overall, there’s a striking difference between how private and public investment in infrastructure is moving in relation to carbon.

The private sector is exiting high carbon infrastructure quickly: its spending on high carbon is projected to fall by over half by 2020. In contrast, public investment is more mixed. Public funding of high carbon infrastructure rises from £4.8 billion in 2015 to £6.4 billion in 2020, meaning public investment in high carbon assets is slightly increasing as a share of total public investment.

The main challenge to the overall investment picture is that the private sector’s retreat from high carbon is not being matched by an advance into low carbon investment: overall, private sector investment will be down by around a third, or £10 billion per year by 2020. Increased public spending will not make up the difference.

The National Infrastructure Commission can help to fill this gap if it restates the case for stable policy, but investor confidence will only return if the government sets out a coherent low carbon energy plan and sticks to it. 

Oil and gas investment is projected to fall by two thirds, from £12 billion to £4 billion over the course of the parliament.1 The last published infrastructure pipeline saw a very large spike in oil and gas investment, and it is significant that the Treasury sees North Sea investment decline as a long term trend. - Low carbon electricity investment is due to peak at £14.1 billion in 2018, driven by private sector investment in offshore wind (£6 billion) and electricity networks (£4.6 billion) in that year. The rise in investment, which doubles from £7 billion in 2015, shows that low carbon investment can replace oil and gas spending, helping to maintain GDP growth. -

By 2020, however, total low carbon electricity investment falls to £8.3 billion, composed mainly of continued investment in regulated network assets (£4.1 billion) and Hinkley Point C (£2 billion). The fall in spending highlights the importance of private sector investment in low carbon electricity.

The Treasury’s disruption of energy policy can be seen in the sharp decline in projected investment: just £238 million across all renewables is projected for 2020, a staggering 96 per cent fall from its peak in 2017.

If this cliff edge in investment is to be avoided, government will need to set out a levy control framework that enables investment to continue up to and beyond 2020.

Transport

- Roads spending is due to rise 73 per cent between 2015 and 2020, with a sharp rise in the final year of the parliament leading to total investment of just under £7 billion on roads in 2020. - Conventional rail investment is projected to fall by around 30 per cent, from £7.8 billion to £5.6 billion, between 2015 and 2020.

However, the planned spending on High Speed Two (HS2) means that overall spending on rail will rise by around 18 per cent over the same period.

Overall, by 2020, the construction of HS2 means that investment in low carbon transport will be two thirds higher than investment in high carbon.

Without it, falling rail investment would mean infrastructure spending would be evenly balanced between roads and rail. - Around 85 per cent of infrastructure investment in airports (£5.1 billion over course of the parliament) is projected to be spent on London’s airports. Overall, there’s a striking difference between how private and public investment in infrastructure is moving in relation to carbon.

The private sector is exiting high carbon infrastructure quickly: its spending on high carbon is projected to fall by over half by 2020. In contrast, public investment is more mixed. Public funding of high carbon infrastructure rises from £4.8 billion in 2015 to £6.4 billion in 2020, meaning public investment in high carbon assets is slightly increasing as a share of total public investment.

The main challenge to the overall investment picture is that the private sector’s retreat from high carbon is not being matched by an advance into low carbon investment: overall, private sector investment will be down by around a third, or £10 billion per year by 2020. Increased public spending will not make up the difference. The National Infrastructure Commission can help to fill this gap if it restates the case for stable policy, but investor confidence will only return if the government sets out a coherent low carbon energy plan and sticks to it.

If you would like to contact Jon Masters about this, or any other story, please email jmasters@infrastructure-intelligence.com.