.jpg)
The mandate of the National Infrastructure Commission (NIC) is to provide the UK government with independent expertise in the area of infrastructure investment and management, including by assessment and making recommendations on the government’s strategy.
Its second assessment report focuses specifically on both the climate resilience of infrastructure and its contribution to the decarbonised economy: these are high stakes for the infrastructure sector given the threat posed by climate change.
Given these objectives, the EDHEC Infrastructure & Private Asset Research Institute considers that the analyses and recommendations in the second assessment report published on October 18, 2023 are insufficient and unrealistic: they fail to integrate many of the aspects of the question at hand.
Regarding the decarbonisation of the economy, while the EDHEC Infrastructure & Private Asset Research Institute agrees with the NIC on the importance of the electrification of the economy, it expresses serious doubts on the assumptions and recommendations made to achieve this.
Specifically, it appears clearly that the report does not provide any overall view on the consequences in terms of carbon emissions of the acceleration in the use of electricity, notably through the incentives on the use of electric vehicles, when the capacity to produce decarbonised electricity remains limited. In addition, with regard to renewable electricity, the development of which is described as being a good share of the solution, it does not guarantee security of supply. In particular, the imperative sequencing between the development of electricity storage and the increase in renewable energy, notably wind, is clearly not taken into account. On this subject, the EDHEC Infrastructure & Private Asset Research Institute published a report in 2022 that shows that the conditions for a sustained expansion of investment in renewable energy in the UK are not met anymore and that regulation is increasingly failing to support the price stability that the sector needs.
The case of electric vehicles is fairly emblematic of the NIC’s lack of holistic vision. No real consideration of the risks to the climate and the environment posed by the acceleration in thermal energy obsolescence, and therefore the carbon-intense manufacture of electric vehicles, is highlighted in the report. Rather than establishing the basis for arbitrage between the development of collective means of transport and incentivisation for the use of electric vehicles, the NIC leads one to believe that net-zero alignment can occur without calling modes of transport and lifestyles into question. In this sense, it may be misleading the policy maker.
Concerning the decarbonisation of power generation and the economy more generally, the NIC highlights technological solutions such as hydrogen and carbon capture that are not available today and the real impact of which on the environment, and more specifically the climate, is therefore still being debated. De facto, the NIC’s infrastructure alignment proposals are not based on any consensus-based alignment technology taxonomy. The NIC is showing itself to be technologically optimistic, like most of the climate scenarios used by financial institutions and investors. To handle these limitations, in 2024 the EDHEC Infrastructure & Private Asset Research Institute and the EDHEC-Risk Climate Impact Institute will publish the first public taxonomy on the technologies that favour the climate alignment of infrastructure.
On the questions of resilience, the NIC report underscores the importance of climate risks, notably flooding. Unfortunately, here again the report does not provide sufficient information on the consequences of physical climate risk. Specifically, it does not provide a financial assessment of these risks in different climate scenarios. This lack of financial assessment does not help in decision making and in particular does not provide a precise incentive for investment in infrastructure resilience. The EDHEC Infrastructure & Private Asset Research Institute recently carried out the first evaluation of the impact of physical risks on the value of private infrastructure. This evaluation was strongly endorsed by the private infrastructure investment community and justifies investments in both the alignment of the economy and the resilience of infrastructure. It is a shame that an analysis of this kind is not available for public infrastructure in the UK. An understanding of the financial benefits of investing in resilience in different sectors, including but not exclusively with public funds, would be much more valuable.
On the need to fund the evolution in infrastructure towards better resilience and net-zero alignment the report underlines their importance but shows a lack of realism, in particular when it involves private investment. The commission stresses that private sector investment will need to increase from around £30 to £40 billion over the last decade to £40 to £50 billion in the 2030s and 2040s. As the EDHEC Infrastructure & Private Asset Research Institute recently underscored in its response to the UK Department of Work and Pensions’ Call for Evidence on investment in productive finance, the conditions are not being met for institutional investors to increase their investment in UK infrastructure without putting at risk pensions, the payment of which is their primary objective. The NIC seems to overlook the reasons for the Thames Water fiasco, which are due as much to poor appreciation of the risks of the investment by pension funds as to their magnification by the sector regulator through ill-designed tariff regulation that fails to capture the risks taken by investors in its cost of capital calculations.
Specifically, the NIC chooses to use vague formulas that are intended to please all stakeholders, praising the virtues of competition over the direct regulation of prices, before insisting on their limitations. The report fails to highlight that the climate transition, the improvement of the resilience of infrastructure, and the preservation of natural resources will involve considerable destruction of capital and reorientation of investments that can only increase the cost of capital of investors. As a result, not underlining that the private sector will only invest massively in infrastructure if the prices of the services rendered by the infrastructure take account of these cost increases does not make sense. Here again, like for modes of transport, the NIC abstains from highlighting that the alignment of the UK economy, and of infrastructure in particular, will have negative financial consequences on households, whether it involves financing infrastructure through public taxes or indirectly through the tariffs of infrastructure services. These considerations, which should be at the heart of any public policy on the topic, are notably absent and make for poor advice to the British government.
