In the fourth sector article of our Net Zero series, our team looks at what the UK’s Net Zero Strategy (“the Strategy”) means for industry stakeholders in the transport sector.
WHAT DOES THE STRATEGY MEAN FOR YOUR SECTOR?
“Further policy clarity will be needed to help stakeholders understand the potential impact of these commitments.”
The Strategy outlines a hefty raft of commitments for the transport sector. Unsurprisingly, the majority of these are for electric vehicle uptake and infrastructure, though a few also relate to maritime and aviation. Further policy clarity will be needed to help stakeholders understand the potential impact of these commitments, but consultations are already under way, with more expected as 2022 progresses.
Key commitment: Introduce a zero emission vehicle mandate setting targets for a percentage of manufacturers’ new car and van sales to be zero emission each year from 2024.
This seems to be another incentive designed to sit alongside the commitment in the Transitioning to zero emission cars and vans: 2035 delivery plan (published July 2021) to “introduce a new road vehicle CO2 emissions regulatory regime in 2024” (page 10). Alongside the various tax breaks and support schemes for consumers also promised in the delivery plan, the new commitment in the Strategy would also apply pressure from the manufacturing side. Addressing both supply and demand is a sound strategy, though we cannot comment on the level of ambition until the targets are proposed. The Strategy promised further consultation in “early 2022” on the design of the ZEV mandate and how and when targets will be set and enforced.
Key commitment: Take forward our pledge to end the sale of all new, non-zero emission road vehicles by 2040, from motorcycles to buses and HGVs, subject to consultation.
This builds on a pledge in the Prime Minister’s Ten Point Plan to consult on a date for phasing out the sale of new diesel HGVs. This deadline is later than that for new cars and vans given that the current thinking is that lithium ion battery systems will be too heavy for HGVs and they will need to rely on hydrogen, either directly as fuel, or in fuel cell batteries. This technology will take time to develop.
Key commitment: Building on the £1.9bn from Spending Review 2020, the government has committed an additional £620m to support the transition to electric vehicles. The funding will support the rollout of charging infrastructure, with a particular focus on local on-street residential charging, and targeted plug-in vehicle grants.
The extra funding commitment is welcome, but the EV infrastructure strategy is crucial to understanding how this will be deployed and consequently encourage EV take-up. It is intended to set out the government’s “vision for infrastructure rollout, and roles for the public and private sectors in achieving it” (paragraph 33). The Strategy promised a charging infrastructure strategy by the end of 2021; though timing slipped, it was published on 25 March 2022. It promises that government will:
- “focus…intervention on two crucial sectors where we most need an accelerated pace of rollout, and where the business cases can be particularly challenging: high powered chargers on the strategic road network and local on-street charging” (page 7);
- “allow thriving sectors to thrive and address barriers to private sector rollout. Certain areas of the charging infrastructure market are already growing at pace. Here, the role of government is simply to remove any existing barriers and step out of the way” (page 8);
- “give people confidence in the public network. We will regulate to ensure charge points are reliable and easy to use. This will include specific requirements on open data, price transparency, payment methods and reliability” (page 8);
- “work with Ofgem to ensure charge points can seamlessly integrate with the energy system” (page 9); and
- “support innovation in business models and technology” (page 9).
Key commitment: Maximise carbon savings from the use of low carbon fuels, including by increasing the main Renewable Transport Fuel Obligation (RTFO) target.
The Strategy, which promises an extension of the RTFO to the maritime sector following a consultation in 2021, states renewable fuels of non-biological origin used in shipping will become eligible for incentives under the RTFO (paragraph 37). Following an announcement in July 2021, and subject to parliamentary approval, the Strategy promised an increase to the RTFO main obligation from 9.6% in 2021 to 14.6% in 2032 (paragraph 49). A 5% increase over 10 years is not ambitious enough to ensure all transport fuel is renewable by 2050; at 5% increase per decade, the obligation would not quite reach 25% by 2050. A change in ambition will be needed to drive real change.
Key commitment: Support decarbonisation by investing more than £12bn in local transport systems over the current Parliament.
This is promised through “existing funding streams” (paragraph 46). Separately, local transport plans “will need to set out how local areas will deliver ambitious carbon reductions in line with carbon budgets and net zero” (paragraph 47).
Key commitment: Plot a course to net zero for the UK domestic maritime sector, phase out the sale of new non-zero emission domestic shipping vessels and accelerate the development of zero emission technology and infrastructure in the UK. We will engage with industry to explore establishing a UK Shipping Office for Reducing Emissions (UK-SHORE) to transform the UK into a global leader in the design and manufacturing of clean maritime technology.
UK-SHORE was launched 10 March 2022 by the Department for Transport. The announcement promised that UK-SHORE will “implement a comprehensive research and development programme”, “work in partnership with industry to tackle supply and demand issues with shipbuilding and help build greener vessels”, and “help develop the infrastructure to enable zero emission technologies and the physical infrastructure needed to power these new-age vessels”.
Key commitment: Become a leader in zero emission flight kick-starting commercialisation of UK sustainable aviation fuels (SAF), and developing a UK SAF mandate, to enable the delivery of 10% SAF by 2030, and we will be supporting UK industry with a £180m funding to support the development of SAF plants.
This commitment follows a consultation on mandating SAF in 2021, with a summary of consultation responses published 7 March 2022. A follow up consultation is expected later in 2022 (paragraph 43).
WHAT ARE THE RISKS AND OPPORTUNITIES?
The opportunities in relation to decarbonising transportation are huge. The roll-out of Electric Vehicle Charging Infrastructure (EVCI) remains a high priority and a further push for development paves the way for projects large enough to attract institutional investors and traditional lenders. With manufacturers required to meet EV targets from 2024, a ban on new petrol and diesel car sales from 2030, and all new cars and vans required to be zero emissions by 2035, there is a huge impetus for car manufacturers to partner with EVCI developers, or to become EVCI developers themselves. With enough EVCI in place, EV take-up will be set to accelerate rapidly.
On the fuel front, R&D firms and their investors are set to profit if they can crack clean fuel for shipping and aviation. The extension of the RTFO can provide a bit of a boost , with extra savings potential by way of tax breaks and extra revenue potential for by way of exceeding required targets.
The Strategy confirms the wide-ranging impact of decarbonising transport (paragraph 13):
- It will improve health by removing a source of air pollution. There will still be particulate emissions associated with road, rail, tyre, and brake wear, and we are working to tackle those too, but the toxic by-products of burning hydrocarbon fuels will be eliminated from the roadside and rail;
- Physical inactivity costs the NHS up to £1bn per annum, with further indirect costs of £8.2bn – active travel can reduce that; and
- Over half the UK population is exposed to daytime noise levels above recommended limits. Zero emission vehicles – extremely quiet at low, urban speeds – will help address this. This will support levelling-up and help reinvent high streets as enjoyable places to live, work, visit and spend leisure time.
WHAT DOES THIS MEAN FOR:
- Lenders to projects?
There is not a lot in the Strategy to excite lenders. Whilst lenders have been interested in EVCI for some time, and many have invested time into understanding the nascent sector and potential revenue streams, the projects have not had the scale (either individually or as portfolios) to convince investment committees that they are worth taking a risk on.
The Strategy will not immediately deliver on the scale of EVCI needed, and therefore lenders will have to continue to watch and wait.
In maritime and aviation, there is even less to interest lenders. The focus is on R&D and lenders are likely to only get involved once new technologies and products are proven, or at least more established.
- Investors/shareholders in projects (including borrowers)?
As has always been the case with renewable and other innovative technology, projects with investors and shareholders who have larger risk appetites are likely to push forward, taking advantage of innovation opportunities and banking on a common-sense approach from government.
Risk committees may need to adjust to any new requirements and regulations. Further consultations are sure to come on infrastructure strategy, renewable fuel mandates and targets, and potentially local transport plans. While consultations always bring about an element of uncertainty, the emerging EVCI market is demonstrably nimble with investors well-versed in fast paced change.
- Project developers?
The focus for project developers will not change – they will continue to strive to develop projects on time, to budget and at the required quality, to ensure that equity returns are met and loans can be repaid.
The impact of the Strategy will not affect these core objectives. However, developers may wish to partner with innovators taking part in the various R&D initiatives, considering how to combine infrastructure and new fuels to round out revenue streams and eventually draw in further investment. Developers should be keeping a very close eye on how the supply chain develops, keeping their options open as much as possible.
WHAT DOES THIS MEAN IF YOU’RE NOT IN THE UK?
The UK is aiming to lead the way in R&D, particularly around aviation and maritime fuels and solutions. For investors in jurisdictions that are further behind, partnering with UK companies and investors may allow them to develop crucial expertise in nascent technologies and markets. All of this can be taken home by international investors or exported by UK plc – a win-win situation for those with the resources to take the plunge into untested waters.
The Strategy also demonstrates the political will to invest not only in road transport, but in rail, maritime and aviation. This commitment may give international investors confidence that regulation will continue to be permissive, encouraging investment. This is positive news for investors, particularly with lenders still hesitant to lend to small projects in a developing asset class. There is a huge opportunity to step in, invest, and lead the way, as has been demonstrated through Hitachi’s partnership with Gridserve on their Electric Forecourt initiative.
HOW WILL PROGRESS BE MEASURED OR DEMONSTRATED?
Obvious measures of success in the roll-out of EVs and EVCI will be sheer numbers. EVCI has been increasing exponentially over the last few years; progress and statistics can be helpfully tracked through Zap Map’s range of online tools.
Measuring success in the maritime, rail and aviation sectors will be more difficult, particularly for the lay person. The availability of renewable fuels for shipping by sea, air and rail, and the consequential impact on carbon consumption will take longer to trickle into the public consciousness, more obvious by news stories of successful pilot projects compared to the immediacy of being able to purchase and easily charge a new electric vehicle.
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