UK infrastructure investment: the next 30 years

11 Dec 2019

When Macquarie opened its office in London in 1989, the UK was on the cusp of two decades of growth, driven by globalisation and the UK’s well-established global leadership in financial services and trade.

Rather than looking to the past, we have identified three crucial subjects that we believe will shape the UK economy and society over the next decade, determining the UK’s growth, productivity and place in the world: creating world class digital connectivity; building next generation transport infrastructure; and advancing towards net zero carbon emissions.

Creating world class digital infrastructure

When we consider the last 30 years in technology innovation, some extraordinary advancements have been made. In 1985 the first mobile phone went on sale in the UK and it cost $4000USD. Internet access was made possible on mobile devices in 1995 and since then over 200 million iPhones have been sold. Portable GPS technology and Caller ID was released in 1990, email and messaging on mobile devices launched in 1992, Netflix in 1997, and Alexa, the consumer virtual assistant utilising AI, was released in 2014.

These modern devices provide ubiquitous connectivity across a wireless front end, and fibre backhaul, and as we enter 2020 the pace of integration of wireless and wired digital infrastructure will continue to expand rapidly. It is well recognised that connectivity for everyone is a priority for basic quality of life, across the world.

It is evident the UK has a strong digital economy, “with 2019 seeing Europe’s highest penetration of Internet users shopping online, and furthermore a growing level of tech investment from industry” says Nicola Eichorn, a Senior Technology, Media and Telecommunications Specialist at Macquarie.

However, despite extraordinary progress over the last 30 years, the UK’s coverage of full fibre optic broadband today remains behind its peers. “The upfront capex costs associated with building fibre networks are high, particularly if investing in capacity ahead of demand, with revenue (or use) coming in over a longer period, meaning there is a role for innovative financing structures at both the passive and active layers to help manage the cashflow requirement” says Eichorn.

The same can be said for the wireless connectivity landscape. In order for industry and consumers to realise the benefits this technology will offer, operators require expedited roll-out of 5G. However, they are constrained with efforts to balance existing network up-keep, spectrum costs and capital requirements for the new network infrastructure needed.

In order to ensure the country is in the top tier globally in terms of rolling out the next generation of digital infrastructure, a significant level of investment is required. Specialised asset finance structures can see financial intermediaries step-in to support the roll out. Neutral-host and equity sharing models are being considered by industry participants to ringfence risk and share the financial burden.

Building next generation transport infrastructure

It’s not only the UK’s digital infrastructure that requires investment; a growing population is putting pressure on its transport infrastructure. Meanwhile, electrification, micromobility and automation present both opportunities and challenges, and digitalisation holds the potential to substantially increase the efficiency of existing transport capacity.

Perhaps the most pressing issue for those planning the UK’s transport infrastructure is the likely expansion in electric vehicle (EVs) penetration. “Within the next five years, we forecast that mid-sized battery electric vehicles will reach unsubsidised purchase price parity with their internal combustion engine equivalents,” says Peter Durante, Head of Technology and Innovation at MIRA.

This will create an inflection point in demand for EVs and will bring into focus the need for charging infrastructure, he says, particularly for the roughly 30 to 40 per cent of passenger vehicles without access to dedicated off-street parking.

Given that the business models for providing public charging are inherently challenging, some intervention will be required, suggests Durante, although he notes that the impacts on the grid from increased demand for power are likely to be more easily manageable.

The UK is also likely to follow China in its rapid adoption of electrified bus fleets. At the end of last year, around 420,000 electric buses were operating in China, accounting for some 99 per cent of the global total, helping to improve local air quality and reduce fossil fuel demand.1 This expected growth should create demand in the UK to invest in the required charging infrastructure and in supporting fleet operators with new financing products, says Durante.

He adds that micromobility – particularly the provision of shared electric bicycles and scooters – is an often-overlooked part of the transport modernisation theme in urban centres.

“Micromobility can have a considerable impact on air quality and congestion in urban areas. However, municipalities are going to have to determine how they want to regulate providers,” says Durante, who notes that it remains illegal to use electric scooters on public roads or pavements in the UK.

The continuing growth of e-commerce also has implications for transport infrastructure, Durante notes. “As commerce becomes digitised, it requires a lot more warehousing space and delivery fleets, as opposed to big retail centres that people drive to – that’s an area where we’re seeing a lot of investment around the world.”

Within transport logistics, there is likely to be a role within the next decade for autonomous vehicles in certain controlled operational environments, such as within ports or airports, although “in terms of passenger vehicles on public roads, we’d be more sceptical of significant deployment over that same timeframe,” says Durante.

Meanwhile, the application of digitalisation to physical transport infrastructure, using sensors and the Internet of Things, has potential to improve how that infrastructure is used.

“Operators can create a ‘digital copy’ of a physical asset,” says Durante, “allowing them to better understand the physical health of an asset, its operation and traffic usage. Infrastructure managers are thinking about the digital aspects of infrastructure to get better use out of the asset.”

Longer term, the UK faces questions about marrying the growth in aviation, and the economic and social benefits it brings, with its decarbonisation objectives, says Durante. He predicts a growing role for high-speed rail and, eventually, for autonomous vehicles to reduce demand for domestic and some intra-Europe flights.

“In the long-term, there are ways to decarbonise aviation at its source, using sustainable biofuels and synthetic fuels, but they will have significant costs,” says Durante. “In the interim, carbon offsets will have a role to play.”

Advancing towards net-zero

Transport is just one element of the decarbonisation challenge that the UK faces as it puts in place the measures necessary to meet its legally binding target of reaching net-zero emissions by 2050 – the first such target, globally, when the legislation was passed in June. The Committee on Climate Change, a UK government advisory body, described the UK’s target as “necessary, cost-effective and feasible”, but added that it represents “just the first step” in the path to net zero.

“We can be optimistic about meeting that target, but it’s not going to be easy,” says Ed Northam, Head of GIG Europe at Macquarie’s Green Investment Group. “If we’re going to hit net zero, we need to continue the pace of decarbonisation we’ve seen in the electricity sector while accelerating our progress in other areas such as heat, transport and the hydrogen economy.”

The UK has taken great strides in reducing emissions from its power sector: in the third quarter of 2019, renewables provided more power to the UK grid than fossil fuel sources. In the same quarter in 2009, fossil fuels generated 10 times the volume of renewables.2

That success story needs to be replicated in more challenging sectors, such as transport and the provision of low-carbon heat – where decarbonisation could require investment of up to £450 billion, according to the National Infrastructure Commission.

“The technology itself is relatively straightforward,” says Northam, “but structurally it will be quite hard to overhaul heating networks, particularly in urban parts of the UK. We will need to see collaboration between government, the commercial sector and capital providers to develop an investible proposition.”

The UK is also likely to need to develop a hydrogen economy to displace fossil fuels from certain industrial processes and heavy goods transportation, among other things. “We’re a believer in the long-term potential of hydrogen in the UK,” says Northam. “We’re already seeing evidence of the significant cost-reductions underway in producing hydrogen.”

Given the substantial investment that will be required in developing hydrogen infrastructure, substantial policy, regulatory and fiscal support from government is likely to be necessary. Here, offshore wind offers an encouraging template, says Northam.

“There’s no better example of the sort of impact that government policy can have in driving a sector and technology forward than what the UK government has done with offshore wind,” says Northam. In auctions in 2014, offshore wind farms bid to supply power at prices up to almost £120/MegaWatt hour (MWh)3; by the third auction, in 2019, prices had dropped to around £40/MWh.4

“A support regime that helps underpin initial investment in hydrogen technology … would help to bring capital costs down,” he says.

As a first step, adds Northam, investors might explore adding small-scale hydrogen electrolysis to renewable energy projects, which would allow them to produce hydrogen when, for example, low demand and excess wind supply drives power prices to zero. “We need to move our mindset beyond simply selling electrons,” says Northam, “and begin thinking about how best to use electricity when we’re not getting full value from the wholesale market.”

So, three huge challenges and opportunities where the UK could be a world leader and in doing so create the conditions for its continued growth and prosperity. We look forward to working alongside the government, our clients and UK communities to provide the expertise and solutions the country will need.

  1. “The U.S. Has a Fleet of 300 Electric Buses. China Has 421,000”, Bloomberg News, 15/5/19
  2. “Analysis: UK renewables generate more electricity than fossil fuels for first time”, Carbon Brief, 14/10/19
  3. Department for Business, Energy & Industrial Strategy, “Contracts for Difference (CFD) Allocation Round One Outcome”
  4. Department for Business, Energy & Industrial Strategy, “Contracts for Difference (CFD) Allocation Round 3: results”

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