Xlinks: financing a nationally significant infrastructure project

• 8 months ago (2024-04-15)
• Junior Isles

Transmission 195

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Kirk Glenn , senior associate at Browne Jacobson

If the UK is to successfully deliver on its ambition of achieving net zero by 2050, significant and sustained investment in its energy infrastructure, across a number of clean technologies, is required. The National Infrastructure Commission recommended, in its Second National Infrastructure Assessment, that overall investment in the UK’s infrastructure needs to increase from an average of around £55 billion per year over the last decade to around £70-80 billion per year in the 2030s. Increased investment can only be achieved, and crucially maintained, if the UK can cement itself as a jurisdiction that is attractive to investors, in a space that is increasingly competitive, as we seek to transition to a net zero world.

Recent suggestions that Xlinks, the company behind a $25 billion project to deliver electricity from solar and wind farms in Morocco to the UK, is also considering Germany as a potential alternative, shines a light on the global competition for investment. Xlinks overlooking the UK for such a project in favour of Europe (which has been classified as a Nationally Significant Infrastructure Project (NSIP) would not only be embarrassing but would be a significant blow to the UK’s clean energy transition, noting the Xlinks project is hoped to provide electricity to power 7 million UK homes.

Large energy infrastructure projects such as Xlinks are usually funded by the private sector through typical project finance structures, such as via special purpose vehicles (SPVs). These SPVs are set up to secure the required investment, often from large corporates and pension funds. Xlinks for example has received investment from TotalEnergies and Octopus Energy. Such large-scale projects only develop a return once in operation and require a significant upfront cost to design and construct before becoming operational.

If the UK’s infrastructure ambitions are to be realised, a considerable increase in investment is required from private sector investors over the next couple of decades and beyond. The potential for Xlinks to look to Europe also demonstrates how important it is for the UK authorities to do all they can to ensure that NSIPs achieve the required backing to realise their investment needs. Key to success will undoubtedly be underpinned by a combination of effective government policy and decision making, stable and predictable regulation, planning reform that drives speed and efficiency and better infrastructure design, all of which ultimately delivers better rates of return for investors.

Slow planning decisions, administrative red tape and uncertain or long consent times significantly inflate development costs and make investment unattractive and so it is hoped that recently proposed reforms to the NSIP system will go some way to addressing these issues. Projects classed as NSIPs will hopefully be able to take advantage of a more efficient and flexible system with reduced consent times.

Contracts that underpin these projects, such as contracts for difference (CfDs) – contracts that are effectively backed by the government to ensure developers receive a guaranteed price for the energy produced – will have a significant part to play in attracting investment from the private sector. Such contracts incentivise and de-risk investment opportunities by guaranteeing long term revenues for projects; this increases confidence, making projects both investable and bankable. Lowering risk in this way also helps reduce project costs, which further enhances the attractiveness of investment through more profitable returns.

Risk allocation is set by negotiation of the parties and the structure of the main contracts (and how the complex network of contracts required for any major project interface with each other). These risks are then mitigated via a plethora of different ways depending on the risk, but can include stress-testing, price hedging, volume firming agreements, aggregation/bundling and much more. There are various insurance solutions in the renewable energy arena dealing with unproven technologies, contractor insolvency, ground risk, buildability, accessibility, structural loadings during/after construction. However, it is good news that more innovative insurance products are delving further into potential major project risk areas such as insurance of underground plant & materials and abortive project costs (especially due to huge lead-in times, and up-front resource/equipment/grid connection commitments that are required in the current market). Insurance is absolutely key to funding and delivery of large energy infrastructure projects and can also help to ensure compliance with regulatory requirements and contractual obligations, providing investors and lenders with greater confidence in the project’s ability to manage risks.