Deep dive: Infrastructure finance (transmission, storage, water) — the fastest-moving subsegments to watch

The United Kingdom requires an estimated £700 billion in infrastructure investment by 2035 to meet its net-zero commitments, with transmission networks, energy storage, and water infrastructure representing the three fastest-moving subsegments attracting institutional capital. In 2024 alone, UK battery storage capacity under construction exceeded 12 GW, while the regulated asset base for water utilities topped £90 billion—yet interconnection queues now stretch beyond 2030 for many projects, creating a bottleneck that threatens to derail decarbonisation timelines. This deep dive examines what's working, what isn't, and where product and design teams should focus their attention as infrastructure finance evolves at an unprecedented pace.

Why It Matters

Infrastructure finance sits at the intersection of climate action, economic development, and energy security. The UK's legally binding commitment to achieve net-zero emissions by 2050, coupled with interim targets requiring a 78% reduction by 2035 compared to 1990 levels, necessitates a fundamental rewiring of how capital flows into physical assets. The National Grid's Electricity System Operator estimated in late 2024 that transmission investment alone must triple to approximately £54 billion over the next decade to accommodate offshore wind capacity targets of 50 GW by 2030.

The financial stakes are substantial. According to BloombergNEF's 2025 Energy Transition Investment Trends report, the UK attracted £28.7 billion in energy transition investment during 2024, representing a 23% increase year-over-year. Battery energy storage systems (BESS) captured £4.2 billion of this total, with projects increasingly sized at 100 MW or larger. Simultaneously, water infrastructure investment reached £7.8 billion in the 2024-2025 regulatory period, driven by Ofwat's price review requirements and mounting pressure to address sewage discharge incidents.

For product and design teams operating in this space, the implications are threefold. First, the sheer scale of capital deployment creates opportunities for digital solutions that improve asset monitoring, performance optimisation, and regulatory compliance. Second, the complexity of revenue stacking—where storage assets participate in multiple markets simultaneously—demands sophisticated software platforms capable of real-time decision-making. Third, the regulatory environment continues to evolve, with the UK Infrastructure Bank's expanded mandate in 2025 signalling government intent to de-risk private investment through blended finance structures.

The convergence of these factors means that infrastructure finance is no longer a niche concern for specialist investors. It has become central to the UK's industrial strategy, with transmission, storage, and water representing the subsegments where innovation, capital, and policy are moving fastest.

Key Concepts

Understanding infrastructure finance requires familiarity with several interconnected concepts that shape investment decisions, project economics, and regulatory compliance.

Infrastructure Finance refers to the provision of long-term capital for physical assets that deliver essential services—electricity transmission, energy storage, water treatment, and distribution networks. Unlike corporate finance, infrastructure finance typically involves project-specific entities (special purpose vehicles) with ring-fenced cash flows, long asset lives (often 25-40 years), and regulated or contracted revenue streams. The UK market has pioneered several financing structures, including the Regulated Asset Base (RAB) model used for nuclear new build and transmission upgrades, which provides investors with stable returns backed by consumer bills.

Duration in the context of energy storage describes how long a battery or storage system can discharge at its rated power output. A 2-hour duration battery rated at 100 MW can deliver 200 MWh before requiring recharge. Duration economics are shifting rapidly: while 1-2 hour systems dominated UK installations through 2023, 4-hour and longer-duration projects now represent over 40% of the pipeline according to Solar Media's UK Battery Storage Database. Longer duration assets can access additional revenue streams but face higher capital costs and different degradation profiles.

Degradation refers to the gradual loss of capacity or efficiency in storage systems over time. Lithium-ion batteries typically experience 2-3% capacity fade annually under optimal operating conditions, though aggressive cycling can accelerate this to 5% or more. For infrastructure investors, degradation directly impacts project economics: a 20-year battery storage project must model capacity replacement or augmentation costs to maintain contracted performance levels. Advances in battery chemistry and thermal management are reducing degradation rates, but accurate modelling remains critical for financing decisions.

Revenue Stacking describes the practice of generating multiple income streams from a single asset by participating in different markets or providing various grid services. A UK battery storage project might simultaneously earn revenues from wholesale energy arbitrage (buying low, selling high), frequency response services (National Grid's Dynamic Containment programme), capacity market payments, and embedded benefit sharing with distribution network operators. Effective revenue stacking requires sophisticated trading platforms and can improve project IRR by 3-5 percentage points compared to single-revenue strategies.

Internal Rate of Return (IRR) represents the annualised return that makes the net present value of all project cash flows equal to zero. For UK infrastructure projects, target IRRs vary by risk profile: regulated water utilities might accept 6-8% nominal returns given revenue certainty, while merchant battery storage projects typically require 10-15% to compensate for revenue volatility. The spread between risk-free rates and project IRRs—the infrastructure risk premium—has compressed significantly since 2020, reflecting both abundant capital and growing investor familiarity with the asset class.

Additionality asks whether an investment causes outcomes that would not otherwise occur. In infrastructure finance, additionality concerns whether public or concessional capital genuinely enables projects that commercial finance alone cannot support. The UK Infrastructure Bank assesses additionality through criteria including market failure identification, crowding-in of private capital, and alignment with net-zero objectives. For emerging technologies like long-duration storage or hydrogen infrastructure, demonstrating additionality often unlocks access to preferential financing terms.

What's Working and What Isn't

What's Working

Co-located Solar and Storage Projects have emerged as a particularly bankable configuration in the UK market. By combining solar generation with battery storage at a single site, developers reduce grid connection costs, share balance of plant infrastructure, and optimise land use. Projects like the 350 MW/700 MWh Cleve Hill Solar Park in Kent demonstrate the model's viability, achieving planning consent and securing financing by presenting a compelling combined value proposition. Lenders appreciate the diversified revenue profile: solar provides predictable daytime generation, while storage captures arbitrage opportunities and ancillary service revenues. Co-location has shortened development timelines by 6-12 months compared to standalone storage projects seeking new grid connections.

National Grid's Strategic Innovation Fund has successfully accelerated grid-enabling technologies. The £450 million programme, running from 2021 through 2026, has funded demonstration projects for dynamic line rating, advanced conductors, and digital substations that increase transmission capacity without new infrastructure builds. Projects funded through this mechanism have reduced connection timelines for renewable generators and provided real-world performance data that de-risks subsequent commercial deployments. The fund's structure—combining grant funding with outcomes-based payments—has attracted private co-investment totalling £180 million across the portfolio.

Regulated Asset Base (RAB) Models for Transmission continue to attract institutional capital at scale. The Offshore Transmission Owner (OFTO) regime, which competitively tenders operation and maintenance of completed offshore wind connections, has delivered 30 transmission assets since 2011, attracting over £10 billion in private investment. Winning bidders accept returns in the 6-8% range, reflecting the near-sovereign risk profile of 25-year revenue certainty indexed to inflation. The model's success has informed proposals for extending RAB treatment to hydrogen transport infrastructure and potentially carbon capture networks.

What Isn't Working

Grid Connection Delays represent the most significant obstacle to infrastructure deployment. National Grid's Connection Action Plan, published in late 2024, acknowledged that over 700 GW of generation and storage capacity sits in connection queues, with average wait times exceeding 10 years for new applicants. While queue management reforms—including milestones, deposits, and priority for shovel-ready projects—have reduced speculative applications, the fundamental constraint remains physical transmission capacity. Projects with secured grid dates command premium valuations, distorting the market and creating winners and losers based on queue position rather than project quality.

Merchant Revenue Volatility in battery storage has deterred some institutional investors. The Dynamic Containment market, which provided attractive returns of £17-25/MW/hour in 2021-2022, saw prices collapse to £3-6/MW/hour by late 2024 as installed capacity exceeded National Grid's procurement requirements. Projects underwritten on optimistic frequency response assumptions have underperformed, leading to covenant breaches and forced sales in some cases. The lesson is clear: sustainable storage financing requires conservative base cases, diversified revenue assumptions, and trading capabilities that can pivot between markets as conditions change.

Water Sector Regulatory Uncertainty has complicated investment planning. Ofwat's PR24 final determinations, published in December 2024, allowed water companies to increase bills by an average of 36% over five years to fund £104 billion in capital investment. However, ongoing enforcement actions related to sewage discharges, combined with political debate about ownership structures, have elevated perceived regulatory risk. Several pension funds have reduced water utility allocations, citing concerns about stranded asset risk if environmental requirements tighten further. The sector needs clearer long-term visibility on environmental standards to restore investor confidence.

Key Players

Established Leaders

National Grid plc operates the UK's high-voltage electricity transmission network and is investing £60 billion through 2029 in grid infrastructure upgrades. The company's Great Grid Upgrade programme represents the largest transmission investment in 60 years, focused on connecting offshore wind and enabling regional load balancing.

SSE plc combines renewable generation, transmission ownership, and energy networks across Scotland and southern England. SSE's transmission arm operates under RIIO price controls, providing predictable returns, while its renewables business develops complementary storage projects that leverage existing grid connections.

Severn Trent Water stands out among water utilities for its operational performance and stakeholder engagement. The Midlands-based company has secured £12.9 billion in PR24 investment allowances while maintaining relatively strong credit metrics, demonstrating that ambitious capital programmes and financial discipline can coexist.

Octopus Energy Group has expanded beyond retail supply into generation and flexibility services. Octopus Generation manages over £6 billion in renewable and storage assets, while the Kraken platform provides trading and optimisation services that enable sophisticated revenue stacking for third-party asset owners.

EDF Energy operates the UK's nuclear fleet while developing new low-carbon generation, including the Hinkley Point C project financed under a Contract for Difference structure. EDF's acquisition of Pivot Power brought battery storage development capabilities, enabling integration across the generation portfolio.

Emerging Startups

Zenobe has established itself as the UK's largest independent owner-operator of battery storage, with over 1 GW of assets in operation or construction. The company's vertically integrated model—developing, building, operating, and trading—provides end-to-end control over project economics.

Field Energy focuses on grid-scale battery storage with an emphasis on long-duration systems. The company's projects typically exceed 100 MW in size, targeting locations where duration assets can provide transmission constraint relief alongside merchant trading.

Habitat Energy provides AI-driven trading and optimisation services for battery storage assets. The platform's machine learning algorithms analyse market conditions to maximise revenue capture, claiming 10-15% outperformance versus benchmark trading strategies.

Modo Energy offers data and analytics tools that bring transparency to UK battery storage markets. The company's benchmarking services help developers, investors, and operators understand performance patterns, revenue distributions, and competitive dynamics.

Current (formerly known as Pivot Power before EDF acquisition) pioneered the development of "superhub" projects combining grid connections, battery storage, and electric vehicle charging infrastructure. The model demonstrates how infrastructure convergence can create value beyond individual asset classes.

Key Investors & Funders

UK Infrastructure Bank provides debt and equity to support private investment in infrastructure aligned with net-zero and regional development objectives. The bank has committed over £4.3 billion since launch in 2021, with clean energy projects representing the largest category.

Gresham House Energy Storage Fund was the UK's first publicly listed fund dedicated to utility-scale battery storage. The fund manages approximately £1.1 billion in assets across 42 operating projects, providing investors with liquid exposure to the storage sector.

GLIL Infrastructure represents collaboration among Greater Manchester, Merseyside, and West Yorkshire pension funds to invest directly in UK infrastructure. The £3.7 billion platform has backed transmission, renewable, and water assets, demonstrating local authority appetite for long-term infrastructure returns.

Macquarie Asset Management operates globally but maintains significant UK infrastructure exposure through funds that hold stakes in water utilities, transmission assets, and renewable generation. Macquarie's infrastructure experience across cycles provides deal structuring expertise valued by co-investors.

Schroders Greencoat manages over £9 billion in renewable and storage infrastructure through listed and private vehicles. The firm's UK-focused strategy has delivered consistent dividend yields while reinvesting in growth, establishing a track record that attracts institutional allocators.

Examples

Cottam Solar Project, Lincolnshire: This 600 MW solar farm with 600 MWh of battery storage achieved development consent in 2024, representing one of the largest co-located projects in UK history. The developer, Island Green Power, structured the project to connect at 400 kV, avoiding distribution network constraints that limit smaller projects. Financial close occurred in early 2025 with a consortium including Santander, NatWest, and ING providing £480 million in construction finance. The project demonstrates that scale can overcome connection challenges while achieving competitive levelised costs below £40/MWh for the solar component.

Thames Tideway Tunnel, London: This £4.3 billion "super sewer" reached substantial completion in 2024, utilising a RAB model that allowed construction financing at investment-grade rates despite project risks. The 25-kilometre tunnel intercepts combined sewer overflows that previously discharged raw sewage into the Thames, addressing over 150 years of infrastructure deficit. Bazalgette Tunnel Limited, the special purpose company delivering the project, attracted equity from Allianz, Amber Infrastructure, and Dalmore Capital, demonstrating investor appetite for large-scale water infrastructure with long-term regulated returns averaging 2.5% real.

Ferrybridge Battery Storage, West Yorkshire: SSE's 150 MW/300 MWh battery installation at the former coal power station site achieved commercial operation in 2024, representing adaptive reuse of industrial brownfield land. The project leverages the existing grid connection that previously served coal-fired generation, avoiding the multi-year connection delays facing greenfield developments. Revenue stacking across wholesale trading, Dynamic Containment, and capacity market payments delivers blended returns exceeding initial underwriting assumptions, with quarterly revenue disclosures providing market transparency.

Action Checklist

FAQ

Q: How do grid connection delays affect infrastructure project financing in the UK? A: Grid connection delays have become the primary determinant of project viability for transmission-connected assets. Projects with secured connection dates command 15-25% valuation premiums compared to queue-dependent alternatives. Lenders now require connection certainty before providing construction finance, meaning developers must either acquire projects with existing agreements or accept multi-year holding costs while awaiting queue progression. The National Grid's queue reforms, implemented through 2024-2025, prioritise projects demonstrating genuine development progress, but fundamental capacity constraints mean that physical transmission investment remains the binding constraint through 2030.

Q: What revenue stacking strategies are UK battery storage projects currently employing? A: Sophisticated UK storage operators typically pursue three to four revenue streams simultaneously. Wholesale energy arbitrage—buying during low-price periods and selling during peaks—provides the base case, with spreads averaging £40-60/MWh in 2024. Frequency response services, particularly Dynamic Containment, Dynamic Moderation, and Dynamic Regulation, offer contracted revenues but at rates that have declined 60-70% from 2021 peaks due to market saturation. Capacity market payments, awarded through annual auctions, provide 15-year revenue certainty at approximately £25-35/kW/year. Finally, embedded benefits shared with distribution network operators can add £3-8/kW/year for strategically located assets. Successful stacking requires algorithmic trading platforms that optimise asset dispatch across markets in real-time.

Q: How does the Regulated Asset Base model differ from merchant infrastructure investment? A: RAB models transfer revenue risk from investors to consumers or taxpayers, providing near-sovereign return profiles in exchange for regulatory oversight of costs and returns. Investors accept lower IRRs (typically 6-9% nominal for UK utilities) but gain revenue certainty, inflation indexation, and protection from demand or price volatility. Merchant infrastructure investment, by contrast, exposes investors to market prices and volumes, requiring higher target returns (12-18% for storage, 8-12% for uncontracted renewables) to compensate for uncertainty. The UK is experimenting with hybrid models, such as the cap-and-floor regime for interconnectors, that blend RAB stability with merchant upside participation.

Q: What role does the UK Infrastructure Bank play in accelerating infrastructure deployment? A: The UK Infrastructure Bank provides additionality by offering financing terms that commercial lenders cannot match, thereby crowding in private capital. The bank can accept longer tenors (30+ years versus typical 15-18 year project finance), provide construction-stage financing at reduced margins, and take subordinated positions that improve senior debt coverage ratios. For emerging technologies like long-duration storage or hydrogen infrastructure, the bank's willingness to absorb technology risk has proven catalytic. Since launch, UKIB has committed capital at a 4:1 leverage ratio, meaning £1 of public investment has mobilised £4 of private capital on average.

Q: How should investors think about degradation risk in battery storage projects? A: Degradation should be modelled conservatively, with capacity fade assumptions of 2.5-3% annually for lithium-ion systems under typical cycling regimes. Project economics must include provisions for augmentation—adding additional battery capacity during the asset life to maintain contracted output levels—or accept declining performance. Augmentation costs have fallen significantly, from approximately $200/kWh in 2020 to under $100/kWh in 2025, improving lifecycle economics. Investors should scrutinise manufacturer warranties, which typically guarantee 60-70% of nameplate capacity at year 15, and ensure that operating strategies balance revenue maximisation against accelerated degradation from aggressive cycling.

Sources

National Grid ESO, "Future Energy Scenarios 2024," published July 2024, projecting transmission investment requirements and capacity pathways to 2050.
BloombergNEF, "Energy Transition Investment Trends 2025," published January 2025, providing comprehensive UK and global investment data across transition sectors.
Ofwat, "PR24 Final Determinations," published December 2024, setting investment allowances and return parameters for England and Wales water companies 2025-2030.
Solar Media, "UK Battery Storage Market Intelligence Report Q4 2024," providing pipeline analysis, revenue benchmarking, and market structure insights.
UK Infrastructure Bank, "Annual Report and Accounts 2023-2024," detailing investment activity, additionality assessment methodology, and portfolio performance.
Cornwall Insight, "Frequency Response Market Analysis 2024," tracking price evolution and saturation dynamics in National Grid ancillary services markets.
Infrastructure and Projects Authority, "National Infrastructure and Construction Pipeline 2024," cataloguing committed and planned UK infrastructure investment across sectors.