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Inflation: a blow to ‘levelling up’… and Net Zero?

High energy prices can act, contrarily, as a friend to decarbonisation, driving urgent operational cost savings and often shorter payback periods.

However, as the FT highlights this week, the impact of cost inflation on construction is starting to cause stark constraints on the deployment of capital as supply chains understandably seek to limit cost exposure. In real terms, this has seen an almost immediate erosion of ‘levelling up’ funds allocated by the central government, which is a direct hit on both the ‘levelling up’ agenda and the UK’s commitment to decarbonisation.

The other enemy here is price volatility. In our role as commercial-financial advisors, we are seeing some decentralised energy (e.g. ‘off-grid’ heat and power) projects – a key weapon in the battle for decarbonisation – become too risky for investors. Put simply, returns and/or the capacity for stakeholders to manage the risk are simply too unpredictable for investors to take forward in the current environment.

A real-world example where this threat is pertinent is in the North East of England. The North East LEP has identified that the region’s biggest net zero opportunity is a £500m project pipeline of Heat Network investments. Several of these schemes epitomise the region’s history of industrial innovation, including harnessing the legacy of coal workings where minewater can be used as a geothermal heat source for heating the buildings of nearby towns and cities. As these systems also have the potential to integrate with localised renewable power generation and microgrids – enabling/catalysing the region’s nationally important industrial clusters - the threat of inflation also extends to those sectors.

How can these challenges be addressed? Public infrastructure spending can be a strong stimulant for private sector investment. However, it remains to be seen whether the funding gaps arising will be filled or whether the impact of inflation will remove an essential platform for projects going ahead (as highlighted in the article). The question is whether the government can afford not to uprate these funds? Time will tell.

Together with Heat Network Zoning legislation (look out for my future posts on this), these will be key topics for next week’s Association of Decentralised Energy (ADE) Heat Networks Conference in Newcastle (hosted in conjunction with the North East LEP, The Royal Danish Embassy, and with the support of BEIS). I will be attending this alongside my colleague Victoria Johnson from Steer Economic Development’s Net Zero team, who are also supporting the development of the North East LEP’s heat networks strategy and have recently been commissioned to evaluate the North East & Yorkshire Net Zero Hub. (https://www.linkedin.com/feed/update/urn:li:activity:6968133211113586689)

With construction sector inflation running at about 13 per cent, adding millions in extra costs, the entire capital programme is being reviewed.

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amberside, cities & places, energy, economics, strategy & policy, infrastructure

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