The decision to launch a consultation aimed at radically changing the Solvency II rulebook governing British insurers could see billions of pounds invested into Britain's energy security.

In a post-Brexit overhaul of EU rules, Chancellor Rishi Sunak’s reforms could see FTSE 100 listed insurance firms increase the volume of money they direct at the economy, including into assets such as green energy infrastructure, by relaxing the sums they have been required to hold to date on their balance sheets.

Solvency II was introduced by the EU in 2016. Its current structure is administration intensive and geared away from long-term assets, that include infrastructure, which have hitherto been viewed as carrying too high a degree of risk to meet the risk margin requirements of Solvency II. The EU announced its own proposed changes to its own solvency regime in September 2021.

Changes to the law are aimed at boosting investment in areas such as off-shore wind farms and follows swiftly behind the UK Government’s new energy security strategy announced in April 2022 to support the development of home-grown green energy. Removing the capital requirements to support liabilities should allow further investment activity in energy and Infrastructure sectors and is good news for associated industries, pushing forward developments that have struggled to get off the ground until now. 

We could see insurance firms investing directly in projects, alongside an uptick in activity generated by indirect lending and/or through indirect exposure to other specialists in the sectors and opportunities that arise.

To date these companies have preferred investments perceived as low risk, and therefore following a relaxation of Solvency II, we typically envisage them acquiring operational renewable energy projects rather than taking on any development risk, but time will tell. However this move is significant in itself. These projects have often had a low cost of capital and growing interest in them could see more projects moving from being ‘on paper’ to operational.

One of the reasons for the lack of projects entering construction has been a relative lack of debt in the market owing to concerns regarding certainty of future income streams. More money in the market will certainly act as a boost of confidence, whether that is in established technologies such as wind and solar or the new nuclear and hydrogen sectors.

If the sums are to be ESG focused and given the secure returns from real estate, we could also see the released funds directed at increasingly popular retrofitting projects on established property stock, whether it be affordable housing or commercial property.

Further information

Contact Nick Green or Nick Penny

First reactions to the UK government's energy security strategy