International lessons for investable STPs in the UK

EXECUTIVE SUMMARY

The UK has a legally binding target to reach net zero by 2050 and a commitment to cut emissions by at least 81% by 2035. Sector Transition Plans (STPs) being developed under the Net Zero Council translate these targets into sector-specific delivery pathways, and could be pivotal for channelling investment towards decarbonisation.

Achieving these targets is central to the mission to deliver good growth in every postcode. Transitioning will unlock huge benefits for households in every region, including stable bills, thriving high streets, and good jobs. For the UK as a whole, it is also foundational to sustained growth, energy security, and resilience to extreme weather.

Capitalising on these opportunities will involve a net additional cost of £4 billion yearly investment (0.2% of GDP) from 2025-2050. The good news is that the benefits of investing far outweigh the upfront costs, with every £1 invested into Net Zero, generating between £2.20 and £4.10 of benefits, largely in avoided damages. The UK’s entire net cost of reaching Net Zero by 2050 is roughly the same as the economic cost of a single major fossil fuel price shock, such as that experienced in 2022 after Russia’s invasion of Ukraine.

The private sector is expected to be responsible for between 40-90% of these investments each year, if the government creates the right conditions for investment. Unlocking private capital at scale is therefore key to delivering the transition at pace. While the UK lags behind G7 competitors in terms of private investment, the issue is not a lack of potential capital availability. This report demonstrates that there is a clear opportunity to strengthen the conditions that turn this potential into deployed capital to deliver the transition, focusing on the financing and institutional arrangements that support the mobilisation of private capital into transition-critical sectors.

Drawing on international case studies from Australia, Japan and Singapore, as well as a global interview series with nineteen investors and industry leaders, this report examines how other governments have used coordinated financing mechanisms to mobilise private capital into transition-critical sectors. It also explores whether and how these lessons can be applied in the UK context.

Across the case studies, there are three recurrent patterns. Institutions struggled where long-term policy and carbon pricing signals lacked credibility, capital could be deployed more effectively when public institutions worked together, and financing mechanisms were most successful when used to build investable pipelines where they did not yet exist.

Australia demonstrates how connected pipelines can work through the linking of the Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation (CEFC). This created one pathway for projects to follow to achieve deployment, avoiding them becoming too mature grants but not attractive to mainstream investors. The model also highlighted the importance of enabling conditions backed by government programmes or demand signals, as a ceiling can be hit if this is not strong from the outset.

Japan is an example of government commitment mobilising capital at scale. Its Green Transformation (GX) programme means that Japan has deployed the majority of the world’s sovereign transition bonds to date and these had with strong demand across its first auctions. Accompanying sector roadmaps provided confidence and clarity to financial institutions. However, Japan’s experience also showed how carbon prices can impact the cost of transition borrowing, and the importance of undertaking robust and varied industry engagement.

Lastly, the Singaporean case study demonstrates how existing capital and institutions can be combined to sequence different types of capital to each stage of a project’s maturity. This mechanism is newer than the others, so there is less evidence to review for possible pitfalls. However, the UK is already a participant in this model through British International Investment (BII), suggesting that this structure can work for UK institutions in practice, even before a UK equivalent is formally identified.

The UK already has strong foundations in the National Wealth Fund (NWF) and BII, providing comparable institutional settings to those referenced in case study countries. This report sets out recommendations for how government can bring these foundations together and strengthen the enabling conditions around them to crowd investment into the net zero transition at the necessary speed and scale.