Natural capital, infrastructure banks, and energy system renationalisation?

1. The value of water, air, and other parts of nature are set to become part of infrastructure decision making

The UK's National Infrastructure Commission (NIC) recently published a report on natural capital and environmental net gain. Countries like New Zealand and the UK have been looking over the last few years to capture the value of natural capital so that it can be included in decisions on infrastructure and other economic and social activities.

As the NIC's Discussion Paper sets out, infrastructure development can both positively and negatively affect natural capital assets, with recent decades seeing more negative impacts than positive.

NIC proposals

Despite recent progress in understanding the issue, the infrastructure system's role in addressing this decline is still not set within a clear policy framework. The NIC proposes using the concept of environmental net gain, which would see:

• Developers having to leave the environment in a measurably better state compared to a pre-development baseline;
• The use of natural capital frameworks in infrastructure decision making; and
• Avoidance and minimisation of adverse impacts being prioritised over compensation.

The NIC will be developing a set of natural capital principles for use in infrastructure. These principles will be factored into the development of the second National Infrastructure Assessment that kicks off this year.

2. Infrastructure banks – an evolving actor

Achieving the UN Sustainable Development Goals (SDGs) and the Paris Climate Agreement will require significant infrastructure systems changes and these changes will cost money.

Even before the pandemic, there was a considerable gap between trend infrastructure investment and what was needed, particularly in roads and electricity.

Countries have been looking at how to respond to these and other challenges in infrastructure finance, and in some countries, the answer appears to be setting up or strengthening state-backed infrastructure banks.

What Canada's infrastructure bank is doing

The Canada Infrastructure Bank has recently had its expectations updated by the government with five priority areas for investment: public transit, green infrastructure, trade and transport, broadband, and clean power. The expectations also include a CAD 1 billion target for Indigenous Infrastructure projects across the five areas.

With the UK set to create its own Infrastructure Bank (announced at Spending Review 2020), Canada's focus will be one lesson to learn from on how to set up in a way that adds value to overall infrastructure financing.

3. Renationalisation of the energy system?

Ofgem has recently completed a review of the energy system in Great Britain. The review focused on whether or not the governance framework for energy was fit for purpose to deliver the UK's net-zero emissions targets.

One of its key recommendations in the review was to create an independent body, or systems operator, to help lead the decarbonisation of the electricity system, effectively stripping National Grid of the responsibility.

Reasons behind Ofgem's recommendations

The changes are suggested as Ofgem felt that better strategic planning, and management, of the electricity system, is needed to meet net-zero, particularly as renewable capacity increases and transport and heating sectors begin to electrify.

This effective renationalisation of system operation would see the new body taking a more active role in designing and planning new grid infrastructure and providing independent advice to the UK government on how best to hit the 2050 net-zero target. Ofgem suggests the move could save bill payers up to £4.8bn between 2022 and 2050.

The UK government hasn't backed away from the recommendation, suggesting it may have some government traction.