The government have been quick out of the blocks publishing their plans for the National Wealth Fund (“NWF”). From the outset the NWF targets the £50bln annual investment the Climate Change Committee (“CCC”) estimate is required for the UK to reach Net Zero.
The fund has initial capital of £7.3bln and would like to crowd-in private investment at a ratio of 3:1 – a total investment of almost £30bln. The three biggest beneficiaries to the CCC’s £50bln p.a. are electricity supply (32%), surface transport (electrifying cars and HGVs) (24%) and decarbonising residential buildings (19%).
The focus for the NWF are green steel, green hydrogen, industrial decarbonisation, gigafactories and ports – suggesting priorities may be elsewhere.
The stated objectives of the fund are:
1) Driving the UK’s transition to a low carbon economy
Front and central to the NWF is the energy transition, but this is not solely about the UK getting to Net Zero, it is having the wherewithal to deliver the UK’s solutions domestically and export those solutions to others. The CCC’s £50bln is to get the UK to Net Zero which may explain the difference between the Fund’s priority sectors and those of the CCC.
2) Crowd-in private capital
A perennial favourite of development finance institutions is seeking to leverage their own funds with private sector money. You have to admire the proposed flexibility here which includes pretty much everything but grant funding: first loss equity, debt, guarantees and revenue support mechanisms. Thankfully there is no talk of matched funding which has always seemed slightly at odds with solving market failures. Initially crowding-in will be at the asset level, but with a clear aspiration to add to this at the fund or organisational level in the medium term (Green Investment Bank?). We hope the initial investment decision considers crowding-in through time and not just at the time of the investment – getting future rounds of private investment into a company they have successfully seeded would be a success for the NWF.
3) Create growth and new jobs across the UK
The third objective expands on the first: the fund is as much about growth as it is about the energy transition. This is likely to create interesting conflicts when making investments. How much priority should a proposition using UK made electrolysers, for example, be given over one using imported technology which may be commercially more attractive. You can also see some conflict with the second objective.
In summary, there are lots of very sensible proposals being put forward, not least combining this organization with an already established DFI and simplifying the landscape. However we think references to the CCC’s £50bln may be a red herring. The CCC’s focus is on established technology and getting the UK to Net Zero. The NWF is about developing a low carbon economy which can serve Britain and the world.
The aim of providing initial funding for nascent technologies will be difficult for the fund, however if it can provide the capital to scale these technologies as well as providing early support for organisations looking to roll out or manufacture the new technologies, the NWF should contribute to both growing the UK economy and tackling climate change.