How the UK’s high interest rate environment could re-price infrastructure

High interest rates and investor backlash risk missing capital goals if government can’t lock in stability and new financing mechanisms

Long-dated gilt yields are back at levels last seen in the late 1990s. Thirty-year yields briefly touched ~5.7% last week --- marks consistent with a 27-year high (opens in a new tab) --- and the move has ricocheted across project models, utility balance sheets and procurement timetables. Higher sovereign yields are not just an abstract benchmark. They flow directly into public borrowing costs, raise discount rates used by private capital, and complicated value-for-money tests. Even with BoE now in an easing phase (opens in a new tab), the path of cuts is uncertain, keeping risk premia sticky and delaying final investment decisions across the infrastructure sector.

The UK’s infrastructure ambitions, ranging from new nuclear to Great British Railways and Energy, increasingly clash with an economic backdrop defined by higher borrowing costs and fiscal constraint. For institutional investors and pension funds expected to fuel this next wave of development, the cost of capital has fundamentally changed. And unless public and private sector actors adapt together, the risk is a prolonged investment freeze.

High Yields = High Infra Risk

Elevated sovereign yields transmit directly into higher public borrowing costs (which impact PPP-style guarantees and fiscal commitments) and higher private hurdle rates (which are influenced by everything from weighted average cost of capital to liquidity buffers). The result is a larger infrastructure execution gap: more projects fall short at procurement, and shovel-ready schemes wait on the sidelines for rate clarity, all of which cause the UK to miss its infrastructure targets. At a recent private Vallorii roundtable of UK investors, regulators, and utilities, market sentiment and interest rates ranked as the top two macro risks driving fund prices and NAV discounts – an inversion of the pre-2022 regime (see Figure 2).

This is not theoretical: large-scale UK infrastructure projects are already slowing under the weight of elevated costs and planning friction. In a country already facing a significant investment gap (opens in a new tab), the consequence of delay is not just postponement—its erosion of competitiveness.

Investors backlash, returns reprice

The financial calculus for long-term infrastructure capital has fundamentally shifted. As safer, rate-linked alternatives like gilts and corporate bonds offer 5-6% returns, infrastructure investors are demanding higher risk premia. A July 2025 polling of market participants by Vallorii found that the real cost of equity to fund new UK projects now requires 8-10% – well above the assumptions embedded in many pre-2022 business cases.

This is a material jump from the 5-6% thresholds that underpinned investment decisions in previous low-rate era. Without new mechanisms to manage volatility, it’s likely that capital will flow away from greenfield projects toward shorter-duration, less capital-intensive assets.

Even in a higher-rate world, many institutional investors continue to view infrastructure as a durable inflation hedge- particularly when projects offer regulate returns or inflation-linked revenues. This duality—rising capital cots vs inflation projection – has created a split in investor appetite: greenfield projects with delayed payoffs face caution while core infrastructure assets with inflation linkage remain in demand.

The chart below, based on Vallorii’s analysis of market expectations, shows the evolution of inflation expectations across asset maturities between 2022 and 2025, underscoring how infrastructure’s appeal persists – even in higher-for-longer environment.

Market credibility is essential to UK's build

Infrastructure capital does not just chase returns --- it requires stability and credibility over decades. This makes fiscal and policy stability as important as cost of capital. The newly launched NISTA 10-year infrastructure pipeline (opens in a new tab) is a critical anchor step which now must be maintained as an annual, binding signal to capital. Clear phasing, standardized procurement and quarterly transparency would compress uncertainty premia and accelerate infrastructure tendering cycles. Publishing longer horizon pipelines with credible delivery timelines and cost-sharing structures will also reduce investors’ risk premia requirements.

A dedicated infrastructure gilt programme could also reduce exposure to reinvest risk and duration mismatch for pensions and insurers, while lowering the public sector’s all-in funding cost versus ad-hoc project guarantees. With long-dated market yield elevated, terming out at scale with instrument designs aligned to RAB cash flows would crowd-in private capital rather than crowd it out.

Exploring new financing mechanisms for a high-rate world

To restore investor confidence and reduce the cost of capital, financing structures must evolve. Modern financing mechanisms like the Regulated Asset Base (RAB) model help to derisk complex infrastructure projects and become more crucial during high-interest rate periods. Using the RAB model when the project duration is long, or build is complex encourages better risk sharing, which can lower the WACC. RAB-style allowances match long asset lives with regulated remuneration, link delivery outcomes to allowances, allow partial pass-through of rate moves with cap/floors, and allow for government to anchor loans without over-subsidizing assets. Crucially, they enable regulated cash flows during construction, as opposed to the current standard- Contracts for Differences – which defer remuneration until the asset is operational. In a high-rate world, user bills also reflect an allowed return profile that can be smoothed via tariffs and reopeners, whereas CfDs can cause back-loaded recovery and longevity risks if projects slip.

Recent Vallorii analysis highlights the importance of financing mechanisms in reducing costs. We looked at CfDs vs RAB models in nuclear and found that using RAB in the Sizewell C (SZC) nuclear project can decrease CoE by 400bps relative to Hinkley Point C’s CfD mechanism—despite a challenging macro backdrop and increased risks like construction delays.

A high-rate world doesn't have to mean no-build

The UK’s high-interest rate environment is not going away overnight. But infrastructure investment doesn’t need to grind to a halt. With renewed fiscal and policy stability, and modern financing mechanisms, the UK can still build at scale – and do so competitively. This is a make-or-break moment, not just for the pipeline, but for the UK’s ability to fund its infrastructure.

With renewed fiscal and policy stability, and modern financing mechanisms, the UK can still build at scale – and do so competitively.