Memorandum submitted by the South East
England Development Agency (SEEDA)
SUMMARY POINTS
1. SEEDA fully endorses the joint memorandum
already submitted on behalf of England's Regional development
Agencies. We do however have a few additional issues that we believe
the Committee should consider, and in particular would propose
the following key areas for the Committee to explore and make
recommendations on:
(a) Major economic opportunities for the UK will
come from the supply chain associated with the major expansion
of offshore wind. These will be lost if the critical link with
UK Ports is not made and if the UK's "offer" to international
wind technology companies is not sufficiently attractive and supportive.
(b) We are concerned that the recommendations
of the Commission on Environmental Markets and Economic Performance
(CEMEP), while fully accepted by Government, are not being fully
implemented. In particular, we remain concerned that Government
measures will have a medium term benefit but greater urgency is
needed on measures and incentives that will impact now to bring
low-carbon innovation and market development; such as forward-looking
public procurement.
(c) In addition, the urgent need to avoid dangerous
climate change as well as achieve economic benefit for the UK
demands a more enlightened approach to payback and rates of return.
Companies, especially SMEs, need to secure financial support to
progress innovation from successful R&D and demonstration
to full commercialisation to bridge the so-called "valley
of death"; there is a need for more substantive support and
for new ways of generating it.
(d) We propose a possible solution—a "Green
Bond"—which, for innovative, pre-commercial companies,
most of which are likely to be in an early, loss-making phase,
would monetise all unutilised accumulated corporation tax losses
and give an immediate cash payment which would substantially increase
short-term cash flow and provide bridge financing through to commercialisation.
INTRODUCTION
2. SEEDA welcomes the opportunity to submit
evidence to the Committee on this important topic. SEEDA fully
supports and endorses the joint memorandum submitted by the North
West Development Agency on behalf of England's nine Regional Development
Agencies (RDAs); however, we wish to emphasise a number of key
issues, as follows:
PORTS AND
RENEWABLE ENERGY
SUPPLY CHAIN
OPPORTUNITIES
3. We welcome the Government's recognition
of the importance of UK Ports in the context of marine renewable
energy, particularly offshore wind, and DECC's initiative in producing
a UK Ports Prospectus and in March, bringing together port operators
and energy developers.
4. However, given the major UK supply chain
opportunities associated with the major expansion of offshore
wind envisaged by Government (an additional 25GW by 2020), suitable
UK Port facilities, especially for concrete construction and turbine
assembly, are both a critical anchor and conduit for the involvement
of the UK supply chain.
5. With no indigenous UK-based manufacturer
of large-scale wind turbines, economic benefit to the UK from
offshore wind expansion will derive largely from maximising supply
chain involvement. Construction of an additional 25GW of offshore
wind turbines could cost of the order of £75bn. A study[79]
of the Scroby Sands windfarm found that over 40% of the value
of the scheme accrued to the UK. Even if, by 2020 only 20%
of the value of the additional 25GW was available to UK supply
chain companies, this would represent a highly significant £15
billion market opportunity.
6. However, since it is perfectly possible
(and indeed, there are direct examples) to construct and maintain
a UK offshore wind farm without setting foot in the UK, much,
if not all, of this supply chain opportunity could be lost if
the critical link with UK ports is not made and if the UK "offer"
to international wind technology companies is not sufficiently
attractive and supportive. While Government is in dialogue with
interested Ports, we would wish to see suitable incentives in
place (EIB energy infrastructure support loans, for example) to
encourage Port engagement with offshore renewable energy opportunities
and suitable enhancement of facilities where required; Government
might also require Port owners to address and respond positively
to offshore renewable energy opportunities in their Port Development
plans.
LOW-CARBON
INNOVATION AND
PROCUREMENT
7. Support for low-carbon innovation clearly
has a key role in driving forward the "green economy",
and we welcome the work of the Energy Research Partnership and
the initiative of the Energy Technologies Institute, Technology
Strategy Board and Carbon Trust to produce a joint innovation
strategy to clarify and improve the targeting of their support.
We are however concerned that the recommendations of the Commission
on Environmental Markets and Economic Performance (CEMEP), while
fully accepted by Government in 2008, are not being fully implemented,
nor, it seems, have they fully informed the Government's Low Carbon
Industrial "Vision". The Commission, set up by Gordon
Brown, when Chancellor, sought to identify what was needed for
the UK to maximise benefits from the growing global market opportunities
for low/zero carbon products and services associated with the
imperative to tackle global warming.
8. CEMEP identified four key themes to take
forward: setting a long term policy framework to encourage confidence
for business to invest; creating the conditions to allow innovation
to flourish; ensuring the economy has the skills needed to be
successful; and delivering this agenda through collaboration between
government, business, trade unions, educational institutions and
others. Public procurement has a key role in stimulating market
development for low-carbon products and services, and CEMEP highlighted
the importance of "forward procurement" (ie committing,
at some future date, to purchase a product which does not yet
exist) in generating 'innovation pull'. Wider application of forward
procurement across the public sector would help to accelerate
progress towards the low-carbon economy.
9. In our view, that acceleration is critical
to securing the economic benefits from a low-carbon economy. CEMEP
was particularly concerned at the Government's lack of urgency
in supporting and delivering measures and incentives for low-carbon
innovation and market development. The Commission drew attention
to the risks involved, in terms of losing benefit of first-mover
advantage, along with opportunities lost to faster-moving competitors
in global markets. We remain concerned at the apparent lack of
urgency and the real risk of missed opportunities, taken up instead
by the UK's foreign competitors.
COMMERCIALISATION
OF LOW-CARBON
SOLUTIONS: BRIDGING
THE "VALLEY
OF DEATH"
10. Progressive regulation governing performance
and technology clearly has a key role in stimulating product/process
innovation; the rapid adoption of condensing boilers in the UK
is a recent case in point. In our view, Government could do more
through regulation to accelerate innovation to achieve low or
zero-carbon solutions; the urgent need to avoid dangerous climate
change demands a greater focus on outcomes, with a correspondingly
more enlightened approach to payback and rates of return.
11. SEEDA works with a range of partners
to support research and demonstration of innovative technologies,
products and services. Drawing on our direct experience, we would
wish to draw the Committee's attention to the important need,
particularly acute in the economic downturn, for companies, especially
SMEs, to secure financial support to progress innovation from
successful R&D and demonstration to full commercialisation,
to bridge what has been termed the "valley of death",
where many worthwhile innovations perish. This is clearly another
significant contributor—notwithstanding a wealth of innovative
ideas—to the UK potentially losing out to international
competition in growing global markets for low-carbon goods and
services.
12. There is a clear need, therefore, for
more substantive support for commercialisation of low-carbon technologies
and a corresponding need to explore new ways of generating that
support. We wish to bring to the Committee's attention a novel
approach—a tradeable "Green Bond"—proposed
by a key low-carbon technology company in the South East region.
In our view, this initiative, if adopted, would offer the potential
to generate up-front capital to support the commercialisation
phase for the company's micro-CHP product.
13. The Green Bond would be designed to
assist innovative, pre-commercial companies, most of which are
likely to be loss-making, simply because of their position in
the both the business and product development cycles. As a result
of their loss-making performance, these companies will have accumulated
unutilised corporation tax losses. These losses can be carried
forward by the company and used to reduce corporation tax liabilities
arising from future profits generated (when their product is in
the market). The accumulated tax losses have a future cash value.
14. While the current R&D tax credit
system allows companies to claim a tax repayment in cash based
upon a percentage of losses incurred due to "approved"
R&D expenditure, these tax losses would normally only be recoverable
as a reduction in taxes payable on future profits generated by
the firm. While useful to increase cash inflow from losses, the
amount that can be recovered is restricted to only a small percentage
of the total losses incurred by companies involved in new product
development—typically 5% of losses incurred.
15. However, the "Green Bond"
would involve an immediate cash payment based on 100% of the unutilised
accumulated tax losses, which would substantially increase the
short term cash flow of the business and serve as a bridge financing
through to commercialisation.
— The Bond is secured on accumulated tax
losses and the repayment term is based on the future expected
profitability of the company (a maximum of five years, say).
— The Bond is a liability on the company's
balance sheet.
— The Bond pays an annual coupon at a level
in line with long term yields of UK Government gilts.
— The company would receive cash in exchange
for Bonds by selling them to the Bank of England or possibly to
the Treasury. The Bond could also be guaranteed by the government
and sold to private investors.
— The bond is repaid by the company, either
by refinancing through the debt/equity markets or using payments
it would have made by way of tax on future taxable profits.
16. The key aspect of this scheme is that
it monetises an existing deferred tax asset of the company, but
at a much earlier stage than the company would have achieved through
the reduction of taxes payable on future profits generated by
the company. The downside is that the government would have to
accept "equity type" risk (as it does currently with
the R&D tax credit system) by lending against current tax
losses which could only be recovered against taxable profits to
be earned in the future. This "equity type" risk could
be reduced by requiring the company to raise some money from shareholders
at the same time as the bond is issued.
June 2009
79 A Report to Renewables East by Douglas-Westwood
Limited and ODE Limited. Commissioned by the DTI. DWL Report Number
334-04. July 2005. Back
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