Examination of Witnesses (Question Numbers
1-35)
Dr Gordon Edge, Chris Hewett, and Philip Wolfe
27 October 2010
Q1 Chair: Thank you
very much indeed for coming along and giving evidence towards
our Select Committee inquiry. I'm not sure if you have a spokesperson
acting on your behalf, so, if it's all right with you, we'll go
straight into the questions.
I wanted to start off by looking at how urgently
action is needed in respect of a Green Investment Bank, and to
try and get some idea from you of what the pressing market failures
and the barriers are to getting the investment into the low carbon
infrastructure that a Green Investment Bank should tackle. That
is our starting point for the inquiry this afternoon. Dr Edge,
do you want to start?
Dr Edge: Just so
you know, my name is Dr Gordon Edge, from RenewableUK. We're very
keen obviously that finance flows quickly into our sectors. Certainly
the technologies I represent are onshore wind, offshore wind,
wave and tidal. Particularly for offshore wind there is a need
to get large amounts of capital into this sector, and we need
it reasonably fast. There will be a massive ramp-up, post 2015,
but certainly up to that point we will need capital into the market.
Mr Hewett: I'll
introduce myself. I'm Chris Hewett. I'm an Associate at Green
Alliance. We're an environmental think tank. We've been working
with a number of organisations on the Green Investment Bank for
the last year and a half.
I suppose, in answer to your question, there
is now a growing set of evidence from different places that there
are a lot of finance gaps, in terms of the private investment
flows we need to deliver low carbon transition. Offshore wind
is part of that gap.
There are other issues in terms of the amount
of risk, which investors face with other newer technologies: the
need to aggregate investment for small scale renewables and energy
efficiency. There is a need for a banking function to be able
to pull in institutional investment money, which can then be dispersed
more widely across smaller investment vehicles. So there are gaps
across the spectrum in the low carbon transition.
Chair: Do you want to
add to that, Mr Wolfe?
Mr Wolfe: Yes,
indeed. I'm Philip Wolfe. Yes, first in terms of the urgency,
I think we would share the views of the Commission that this does
need to be set up with a strong degree of urgency, because the
needs are pressing and the market failures are evident. Those
include some of the ones that my colleagues have mentioned. In
particular, if one is moving in the energy field towards a more
sustainable energy model, you tend to have a far higher number
of far smaller investments. What that means is that, instead of
investing multiple billions for a single nuclear power station,
let's say, you're investing quite often at tens of thousands of
pounds for energy efficiency or for small scale or distributed
renewables, and that's a very different investment model to what
we're used to in the sector.
Q2 Chair: Okay, and
to play devil's advocate, could you help the Committee understand
why it is that the sources of finance, which are around at the
moment, are just not sufficient to deal with the ambitions that
arise out of the ideas for the Green Investment Bank?
Dr Edge: I think
one of the things about the Green Investment Bank is it came from
a position when we had had a major banking crisis. One of the
reasons there is not that much money around is that the banks
are rebuilding their balance sheets. There is an element of us
having to step in to fill that gap. The other thing that is obvious,
particularly for offshore wind, is that while at the moment the
funding for the development going on is coming from the utilities'
balance sheets, they are not infinite. There are a number of things
they need to be doing and offshore wind is one of them, and they
will come up against a barrier. We do need new money. If you're
talking about £3 billion per thousand megawatts of offshore
wind, then that money starts to mount up very quickly.
Q3 Chair: Just playing
devil's advocate again; why can't we wait for things to get right
after the recession for that supply of funding to be there?
Dr Edge: We have
targets on carbon and renewables, which we'll have a real problem
meeting if we have a hiatus right now. The other thing a hiatus
in investment and build will do for offshore wind is prevent us
from building up the demand and develop an industry out of it.
That is one of the key benefits of taking a lead in offshore wind.
If there is a gap, while we work out where the money comes from,
then everybody steps back. If we don't get the investment in the
factories here, they'll go elsewhere where there is more certain
demand, places like Germany.
Chair: Thank you. Caroline.
Mr Hewett: I wonder
if I could just add some figures to amplify that. We spoke to
Ernst & Young, who did an independent report in terms of the
sort of finance that was required to deliver the targets in terms
of the climate change action that the Climate Change Committee
are advising. Their estimates were that, in terms of total private
investment in the infrastructure, we are looking at £450
billion worth of investment over the next 15 years. That's what
we need from the private sector in total.
Their estimate was that the traditional sources
of capital, the ones that are available now in the current market—utility
balance sheets, bank lending, project finance infrastructure funds—would
amount to around about £50 billion to £80 billion under
current market conditions.
If you looked at perhaps bringing in some of
the pension funds investments—the ones which would be willing
to invest in some of the sectors now—again we may be looking
at another £30 billion or £40 billion, but there is
a massive gap, unless we have something to lever in that. The
gap is around £330 billion to £360 billion over that
15-year timescale.
Chair: That is helpful,
thank you.
Mr Wolfe: Could
I just add one more point, and that is if we do delay now, the
natural inclination will be that investment in the short term
goes into the established technologies, the known technologies,
those technologies that have a lower perceived political risk.
That means there is a danger that if we don't have the mechanism
to invest in low carbon technologies we will, as a default in
the short term, be investing in high carbon technologies.
Q4 Chair: When you
say "delay", what do you mean by "delay"?
Could you define it?
Mr Wolfe: Yes,
I think we would like to see the bank up and being effective,
with effect from 2011. So even the timescale that was announced
in last week's spending review we would see as being excessively
slow.
Chair: Zac, did you wish
to come in on that point?
Q5 Zac Goldsmith:
Yes. On this issue of the timetable, which you have mentioned
twice, because of the announcement that there is to be a Green
Investment Bank, do you think that there is a risk that that fact
in itself is going to cause investors to hold off making any investments
in the hope that maybe there's another big subsidy around the
corner? I'm just trying to understand from you how important it
is that this timetable is accelerated.
Mr Wolfe: I don't
think we see the Green Investment Bank as being another subsidy
round the corner. We see an entirely discrete role for the bank
that is nothing to do with the incentive mechanisms that are put
in place, such as the Renewables Obligation and the feed-in tariffs.
We see the bank as being a body that can provide funding against
some of these mechanisms that exist. So I wouldn't say it would
be delayed for that reason, but I think there is certainly the
danger that the announcement, followed by a long hiatus, would
stall investments in the sector.
Chair: Caroline.
Q6 Caroline Lucas:
On the timing issue: I just wonder if you could be any more explicit—you
have all touched on it—about that delay until 2013? What
will that mean in concrete terms, in terms of maybe things that
you can't fund that could have been funded?
Dr Edge: I think
we might struggle a bit on some of the projects that offshore
wind would be looking to build in the 2014 to 2016 period. If
there is a delay in being able to channel new capital into this
sector we may see a slowdown there. That's what I would expect,
if there was that kind of delay.
Mr Hewett: The
damage is probably more to the medium than to the long term, because
the longer it takes to start the bank, the longer it will take
to be able to build up the balance sheet and the capital of this
institution to the sort of numbers that Ernst & Young are
talking about. So, if it's only £1 billion in 2013, we can't
see how you're going to be able to get to the 2020 sort of stage.
It would have to be a very rapid growth in capital. That's why
I think the recommendation, which they came out with and others
have supported, is that, over the spending review, we need something
of the order of £4 billion to £6 billion, in terms of
initial capitalisation for the bank. That gives it a chance to
grow into a significant institution and not be another policy
that is simply tinkering around the edges.
Mr Wolfe: Just
to add some other areas to the ones that Gordon has already mentioned:
energy efficiency is a matter of crucial and pressing importance.
It is a classic example of a market failure in terms of being
able to finance the sector, and that is one we would want to see
brought forward earlier rather than later.
Dr Edge: If I might
amend what I said a little bit, and also in some ways address
Zac Goldsmith's question, the role of the bank should be about
channelling new money into this sector. We have existing players,
and I don't think they're going to be terribly affected by the
Green Bank; I hope not. That would be a rather perverse outcome
of the whole debate and I don't see anybody intentionally doing
that or even doing it by accident.
But if we had a bank that was only there in
2013, and then took time to get that new capital into this sector,
the big ramp-up in offshore wind that we expect and hope for,
post 2015, might be inhibited because you simply don't have the
quantity of capital there to build it up to 3,000 or 4,000 megawatts
a year, which is £10 billion to £12 billion a year of
new capital every year. That would be an issue.
Q7 Caroline Lucas:
You've spoken in general terms; just to push it a little bit more,
are there examples of otherwise viable projects that are stalling
now for the lack of investment?
Dr Edge: In offshore
winds specifically, what we're seeing might be a problem is if
there is any delay in clarity around what happens with the Renewables
Obligation, post 2014. That is more of an issue than the funding
at the moment.
Q8 Zac Goldsmith:
This issue of funding: it's not that there is a lack of money
in the banks; it's a lack of access to that money on the part
of those who are seeking investment. What is it that is preventing
the banks from lending? Is it because they see a greater risk
than is the case or is it something else?
Dr Edge: It's not
so much the banks we're talking about here—it's institutional
investors. Banks are willing to lend into the renewable sector.
They are starting to get comfortable with the risk around offshore
wind. I mean there is a project in the market right now that would
require people to take on construction risk. That has not yet
been built but they're looking to finance it. So I think the banks
are getting more comfortable with it.
It's about getting the institutional investors,
the pension funds, who have very specific risk reward kind of
objectives to come in and be comfortable with those kinds of investments.
That's a longer term issue.
Q9 Chair: Can I just
interject there to ask: if you're talking about the investment
fund, is there anyone that you would particularly suggest should
come before the Committee to give that point of view?
Dr Edge: I would
have to come back to you with some thoughts.
Chair: Okay.
Mr Wolfe: Going
back to a point I made earlier on. One of the areas that is having
trouble raising funding at the moment is that of small and medium
scale investments. The larger funds aren't used to investing at
the level of hundreds of thousands or tens of thousands of pounds,
and what is needed—and an important role that we see for
the bank—is the ability to aggregate, the ability to make
a large number of relatively small investments but to present
that back to the larger investors as a small number of much larger
investments.
Chair: Okay. Caroline.
Q10 Caroline Lucas:
My last question was about the scale of investment by Green Investment
Bank that would be required to re-drive new jobs and make Britain
a world leader, if you like. You talked before about the Ernst
& Young figure of £4 billion to £6 billion, in terms
of capitalisation; is there anything else you want to say about
the issue of the scale of investment by Green Investment Bank
that would be needed?
Dr Edge: Looking
again at offshore wind specifically, out to 2015 we're anticipating
about 1,000 megawatts a year of construction, which is an investment
of about £3 billion.
Caroline Lucas: How many,
sorry?
Dr Edge: £3
billion a year for that build. Post 2015, we see a ramp-up to
maybe 3,000 or 4,000 megawatts a year, in the 2017 timeframe.
That would be again about £10 billion or £12 billion
of investment per year. So that's the kind of scale of investment
we're talking about for offshore wind alone.
Chair: Peter.
Q11 Peter Aldous:
Can I just come back to something Mr Wolfe said. My understanding
of the Commission's report was perhaps, in the first instance,
to go for some of those bigger projects with sizeable investment
and then, in due course, come on to the smaller projects where
you have to tackle the aggregation issue. You're saying there
is a need for those smaller projects right from the beginning,
is that so?
Mr Wolfe: That
would certainly be my view, yes. The larger projects, in a way,
do have sources of funding available to them now, as Gordon suggested.
The banks are familiar with that, reasonably comfortable with
that, and prepared to put funding behind large scale projects,
whereas the smaller scale projects have no access to capital at
the moment.
Chair: Alan.
Q12 Dr Whitehead:
You mentioned that the Government should ensure that the Green
Investment Bank should have a capitalisation of perhaps £4
billion to £6 billion. We have heard from the spending review
that there is £1 billion. Bearing in mind that it has also
been stated—although not explicitly set out—that there
may be some additional proceeds from the sale of Government assets
added to that additional £1 billion, is it your view that
that £1 billion is, as it were, below the critical level
to get the Green Investment Bank going? Or would you scale down
your £4 billion to £6 billion initial amount, but nevertheless
consider that a bank could get going significantly on the sort
of level that we now hear from the comprehensive spending review?
Mr Wolfe: I think
certainly £1 billion alone, without being topped up from
any additional proceeds, is in danger of being at the level where
it can scarcely make enough difference to have the impact that
was intended. If it isn't followed, as the Chancellor suggested,
by additional, hopefully, billions—in the form of proceeds
of asset sales, or potentially proceeds of, for example, auction
of allowances under the EU ETS—then, in my personal view,
£1 billion alone is too low.
Q13 Dr Whitehead:
Assuming the Government did invest an initial amount of £4
billion to £6 billion, that's essentially what you might
call "the Government guarantee". You have suggested
that on the basis, essentially, of that guarantee then another
£100 billion could be leveraged in from all sorts of people,
but I presume one would have to go to institutional investors
for that additional leverage. That appears to be quite a high
level of leverage against the initial investment. How did you
arrive at that sort of figure?
Mr Hewett: In a
sense, there are two different issues here. One is: what sort
of equity stake the Government can find in the spending review
period to initially capitalise the bank. The £1 billion is
very welcome. We would prefer that that was slated for 2011 to
2012, rather than 2013 to 2014. I think we would like to see the
Government more specific about what asset sales they are talking
about. If we're talking about High Speed 1, then that could potentially
get £1 billion to £2 billion. If that were all applied
to the Green Investment Bank that would get some way towards the
number we've been advised would make a viable bank. So there is
that initial equity.
I think decisions need to be made now about
what this bank is going to be, what structure it will be, what
remit it will have, and therefore the trajectory it has into the
future. So what we see is something akin to the European Investment
Bank, or KfW (Kreditanstalt fur Wiederaufbau) in Germany, which
is a large state-backed bank, which is an infrastructure development
bank. Over time those institutions are able to get the leverage
in terms of 1: 10 ratios, but you wouldn't get that from day one.
If it's £2 billion in a fund, which is
not an independent bank that can raise Green Bonds, that will
make a small dent in the problem but it won't solve the problem.
It won't have the potential to solve the problem. If it is £4
billion to £6 billion in an independent bank, which then
has the powers to raise its own capital over future years, then
we're talking about something that is a game-changer for the low
carbon transition.
Q14 Dr Whitehead:
KfW, among other things, in terms of its rates, converts the Government
backing to better rates for those people who are lending, essentially
because of the imprimatur, the Government backing, for that bank.
Is that the way in which you might see Government guarantees combined
with initial bank funding, combined with other forms of leverage,
coming into play as far as the Green Investment Bank in the UK
is concerned?
Mr Hewett: In a
sense, the way it grows its balance sheet will, in a way, be up
to the independent bank. The independence is very important here.
It's something that is not seen as—as far as the investment
community is concerned—the plaything of politicians, it
is something that is making genuinely commercial decisions with
taxpayers' money, so the taxpayer has a stake. But the investment
committee on that bank makes its own decisions, in the same way
that the European Investment Bank does, in the same way that KfW
does.
KfW does have a Government guarantee; the European
Investment Bank does not have a Government guarantee. There are
equity stakes from a number of different European Governments
which go into that institution. We, as UK taxpayers have a liability
of that equity stake, and other countries around Europe have a
similar stake, but we are not liable for the whole balance sheet.
Dr Whitehead: This is
the EIB?
Mr Hewett: The
EIB, yes. So there are different ways of constructing these development
banks. It's that sort of model we think is possible to construct
for the GIB in the UK.
Mr Wolfe: I think
the KfW precedent is a very good one to look at. It has been very
successful in creating some real momentums in the sectors that
we're talking about. It's also proved very successful in providing
a transition from the market failure mode into a mainstream mode.
What you're now seeing is that in a lot of the areas where KfW
was the primary finance provider historically—like renewable
installations under the feed-in tariffs, for example—those
are now moving into the mainstream banking sector, and KfW is
progressively financing a lower and lower percentage of that;
because it has made it successful it has made it bankable.
Chair: Martin.
Q15 Martin Caton:
Thank you, Chair. There are already a number of Government bodies
and Government-supported bodies providing finance for research,
development, deployment of low carbon technologies. Do you see
the Green Investment Bank being a bolt on to these, or are you
looking for a completely new model?
Dr Edge: Certainly
there are a number of actors, and mainly grant-giving bodies funding
innovation, putting them together, which is perhaps one of the
functions that might have some benefits for the Green Investment
Bank. We certainly said in the past that we think that the innovation
landscape is terribly crowded and very confusing, but that's not
the game-changing we're talking about. It's going to squeeze a
bit of efficiency out of not having quite so many quangos around.
But we're talking about something else entirely
here, which is: how do we channel new money into the mass build-out
of these technologies? So it is a different institution that we're
talking about here, in terms of being able to raise money on the
private markets, and then use that for implicitly backed usage,
shall we say, that I think gives it the reason for being. If you
didn't have some kind of Government backing then it wouldn't have
the right impact.
Mr Hewett: Yes,
I'd agree with that. I think we are talking about something much
more akin to a European Development Bank than just merging a few
quangos on the innovation front. There has been a slight confusion
of those two issues, and they're both important issues, but you
don't necessarily need a bank to solve the innovation funding
problem. It could be a subset of the Green Investment Bank. We're
open-minded on that.
We are talking about a permanent independent
new player in the financial architecture of the country, which
is there with a statutory role to lever in finance and facilitate
greater product finance into delivering the Climate Change Act
targets. The other thing that I think needs to be written
into its DNA, as well as the mission to deliver the Climate Change
Act targets, is that it is also very clear that it's not about
crowding out private capital. We don't want just to displace capital
that would have come from the private market anyway. So certainly
the Green Investment Bank Commission was strong on this, and others
have been as well. Its intervention should be private sector led.
So if there's clear evidence that a project is not going ahead
because the private sector cannot find sufficient capital for
it, then there's a role for the Green Investment Bank to get involved.
It shouldn't be leading and forcing investments in that way.
Q16 Zac Goldsmith:
Can I just jump in: that makes the job of the Green Investment
Bank very difficult, in the sense that if a project is unable
to access finance from the normal institution, it suggests that
it's not a very attractive investment opportunity. I know not
always, but that is the first assumption you have to make. In
which case it's going to be harder to raise money from the private
sector to fund the Green Investment Bank, or to invest in these
kinds of projects via the Green Investment Bank, because you are
automatically starting from an economic disadvantage. How are
you going to resist the temptation to use the Green Investment
Bank to invest in those projects, which are already attractive
from a commercial point of view?
Dr Edge: This depends,
and comes to some key points about what the bank does. From where
I'm sitting there may be some very interesting things a bank institution
can do, in terms of buying down specific risks. The income is
the same, but what you're doing is reducing the risk side of it,
so you make that risk/reward ratio much more attractive and you
bring more money in. For instance, if you had insurance-type products
that insured against the overrun in costs in building a wind farm
offshore, that could make the whole project much more attractive
to the investor side, whereas previously it might have trouble
raising the money, now it would be able to do so. That is a targeted
use of Green Investment Bank money, which then capitalises a great
big investment from elsewhere. I think we have to be clear what
products this bank is going to offer and target them to maximise
the use of the resource.
Mr Hewett: Can
I just add to that? There are two things: one is it will have
a different view of returns than a private sector bank. So this
is something that will be commercially sensitive. It needs to
make money but it's not there to pay dividends to shareholders,
so it won't be maximising profit in the same way that the commercial
banks will be doing. It is able to take a slightly different view
of returns and also in terms of the length of returns. The European
Investment Bank does co-invest on the grid infrastructure across
Europe, because some of the private sector banks don't want to
be involved in a project for 25 years; they only want to be involved
for five. So there is a role in finance there. The other one is
a different understanding of policy risk and political risk. There
is some genuine policy risk in the investment equation and there
is some perceived risk. The Green Investment Bank will be able
to take onboard some of the perceived risk cost, because it will
be closer to government and understand the certainty of those
policy mechanisms is greater.
Chair: Can you just let
Martin finish?
Q17 Martin Caton:
To go back to my original question, I have to say I'm still not
clear how you see what we call the "innovation funders"
relating to the Green Investment Bank. Could you clarify further?
Mr Wolfe: I think
we share the view that rationalisation of that would be very helpful.
We do not think it is fundamental to the role of the bank that
the rationalisation has to happen by merging it into the bank,
but we feel that would be an approach that is certainly worth
looking at. We don't think the bank should be drawn into doing
some of the other activities that some of those quangos are currently
doing, for example energy advice activities. We do think that
if funding roles are taken from those bodies into the Green Investment
Bank—and certainly prima facie that looks to be worth looking
at—we wouldn't treat that as a reason for merging, let's
say, Carbon Trust and Energy Saving Trust lock, stock and barrel
into the GIB because they have other roles about advising householders
and businesses that wouldn't logically be part of a banking organisation.
So the financial wealth creating aspect, yes; the others we wouldn't
see as being logically part of a bank.
Martin Caton: Thank you,
that's helpful.
Chair: Peter?
Q18 Peter Aldous:
I think at the current time business may seek to avoid risk, unless
they are paid a high price for taking it on. What role do you
think Government have, both in providing certainty and clarity
to investors and to reducing that perception of risk?
Mr Wolfe: First
and foremost, a subject we touched on earlier, this is not to
replace the Government-backed incentive measures that are out
there. Government need to maintain those incentives; they need
to ensure that they are long, loud and legal, if you like, and
they will be the sorts of measures on which projects are built
that the bank could back. The answer to that question is the same
as it always was. Those measures need to be clear, they need to
be well established, they need to be well founded, they need to
be left alone once they're in place and they need to be bankable
at that level. They need to be set up in such a way that the perceived
political risk is low.
Gordon, I'm sure you are going to add to that.
Dr Edge: Absolutely.
For me the Green Investment Bank is a bit of a secondary issue
to the whole policy stability piece. If you do not get that right,
you could put as much money as you like into a bank, it's not
going to help. For me, the Government's first role is to ensure
the stability and dependability of that policy framework. Having
the bank might help in that because people could look at what
the bank does, and it is taking investments on the basis of a
policy as it is now—and that policy will continue to exist—and
then say, "Well if Government messes with the policy, their
own investments will be hit". So it hopefully will increase
confidence that the policy framework is there to stay. I think
that is one of the key subtle benefits of having this institution.
Mr Hewett: There's
two other things the Government could do in terms of the way the
bank works and is set up. One is it needs to be independent from
the word go. It needs to be clearly a creature in its own right,
and not subject to the whims of politics. It needs to be a longer
term institution, and it needs to be permanent. So it needs to
be something that is in there in statute, has a clear remit, ideally
linked specifically to the Climate Change Act. That will give
investors greater confidence. The final thing is also having the
Green Investment Bank in the policy mix. If it is given a small
role to advise government on policy, I think it will bring closer
to policy making the views of investors and the impact on investment
of certain policy regulation decisions. The investment community
has been saying this for decades, long, loud and legal. It doesn't
seem to have got through, so maybe we need something a little
bit closer to the policy machine that integrates that certainty
back into the policy framework so the two work hand-in-hand.
Q19 Peter Aldous:
That is very helpful. Moving on, there are a number of initiatives
and policies aimed at increasing investment in renewables and
low carbon technologies at the moment. Wouldn't we perhaps have
been best to have extended or reformed those rather than trying
something completely new?
Dr Edge: This is
an addition rather than an "either/or". You have the
policy and it's about making sure that we unlock all the benefit
of having those policies by giving a new channel to new investment.
Q20 Peter Aldous:
Are there any dangers associated with adding a new initiative
to the mix?
Dr Edge: I don't
see too much in the way of danger. Certainly we need to have a
conduit, particularly the institutional investors, to be able
to come into this market, particularly if you want them quickly.
So I don't see why it should be a particularly dangerous adventure.
Chair: Ian, did you want
to come in on that point?
Q21 Ian Murray:
Yes, I just wanted to follow up on Peter's question, and also
what Zac was touching on slightly earlier, because the key to
all this would be the spreading of that risk essentially. Obviously
the legislative framework and governmental policies are going
to play a huge role in creating that stability; of making sure
the risk does stay stable. But obviously there has to be a commercial
viability here as well and the confidence of that leverage has
to come from commercial viability over a longer term. How do you
initially assess at the Green Investment Bank level what projects
will make it financially viable in order to create that stability
and the confidence for levering in the additional funds that are
required? Because obviously if the Government do put in £1
billion or £4 billion to £6 billion, as has been suggested,
it could potentially disappear rather quickly.
Mr Wolfe: Yes,
I don't think we would see the bank investing in projects for
which the returns are so low that it doesn't make a sensible return.
I think what we're looking at are projects where the return is
a good commercial return, but ones that might not get taken up
by traditional commercial banks, because of their view of the
perceived political risk. It is a way of taking what are good
investment propositions, but ones that wouldn't get taken up by
the traditional commercial banks because of the lack of familiarity
with the technologies or the perceived regulatory risk.
Chair: Moving on to priorities
for investment, Simon.
Q22 Simon Wright:
There have been lots of ideas floated about the areas that the
GIB could invest in. How do you think that in the early days the
GIB should prioritise its investments, and do you see it focusing
more on the near-term quick wins to help achieve emission targets
up to 2020? Or do you see it in its early stages looking more
rlonger term and at projects such as CCS and smart grids?
Dr Edge: Do you
want to start this one?
Chair: Which of you?
Mr Hewett: From
the outset the bank has to be given a remit, which will give it
the right to intervene and the framework to intervene in lots
of different parts of the low carbon transition. So from networks,
the smart grids, the carbon capture pipelines—if we have
them—through some of the transport network, potentially,
all the way through large energy supply project, like offshore
wind, through to smaller scale decentralised energy and energy
efficiency. That needs to be part of its long term job. I don't
think anyone is advocating that it needs to be doing do all that
from the word go, because it would be too steep a learning curve
and not correct. In a way, it would be up to the bank to make
those commercial judgments about what is the best use of its capital,
given its remit to reduce emissions and deliver a return to the
taxpayer.
Offshore wind—and I'm sure Gordon will say
more—is clearly one of the areas where we need that acceleration
of capital quite soon. That's an obvious area to get involved
with. I think getting involved at a small level on energy efficiency
with an eye to being part of the Green Deal and part of finding
large amounts of capital to go into energy efficiency retrofitting
would be, for me, the next big area for prioritisation.
Q23 Simon Wright:
On the Green Deal, do you feel that it is quite important for
the GIB to be involved in that? Or are the Green Deal levels of
availability of capital going to be sufficient anyway, irrespective
of the GIB?
Mr Hewett: It depends
how ambitious your Green Deal is going to be. If we want the Green
Deal mechanism to genuinely retrofit a large amount of houses
in this country and to improve energy efficiency in a stepped
way, we're not going to be doing that in year one or year two.
We will want to be heading towards that in years three, four and
five. That is when you will need some larger pools of low cost
capital to get involved.
The example to look at here is what KfW have done
in Germany. Essentially the German retrofitting programme, which
has reached an awful lot of homes, could probably not have delivered
anywhere near the amount of retrofitting without KfW involvement
on the financing. They don't lend directly to the projects; they
lend through the banks, but they are the source of the low cost
capital that drives a lot of that, so I think it is important
but it wouldn't be the first thing they do.
Dr Edge: If I might
add to that one. Certainly with the amount of capital that it
will have in the first instance, there will have to focus—that's
quite clear. But I'd support Chris in saying that it shouldn't
be limited to those initial focuses just because that's all we
have money for in the first instance. There will be an ongoing
job for the bank in the long term to be doing lots of things,
but we will need to focus in the shorter term, given the capital
that's being put towards particular things that we need in that
time. Yes, offshore wind is very prime among those. Maybe we could
start talking about investment in the development of wave and
tidal technology—it is another one—if we are having
the innovation funding coming into the bank. That's an early stage
one that has a longer term payoff, but would need to happen now
if we're to get the industrial benefits of that technology in
the short term.
Chair: On that point I
have—
Mr Wolfe: While
we accept that there has to be priorities, it would be dangerous
to answer your question with either one or the other. It isn't
binary, it isn't one or the other, and it will have to be doing
some of both from day one. There will be important enabling investments
in things like smart grids and things like heat networks, which
will be necessary early on to enable other technologies to come
through at the requisite speed later.
Chair: I have Peter, Alan
and then Zac, if that's okay.
Q24 Peter Aldous:
I think I'm right in saying the Government are putting £1
billion towards the Carbon Capture Project. In your opinion, would
that money have been better spent in putting into the Green Investment
Bank from the outset?
Dr Edge: I can't
answer that one.
Chair: Anybody else want
to have a go?
Mr Hewett: No,
carbon capture and storage is so strategically important to not
just the UK and Europe's battle against climate change, but the
world's that it is very important that we get those demonstration
projects up and running. Certainly Green Alliance would have preferred
that there was a stronger commitment to the full four and not
just to the first ones. It may be that the Green Investment Bank
becomes the conduit for where that £1 billion is invested.
Q25 Chair:
How do you balance the short, medium and long term, in terms of
where investment decisions need to be made?
Mr Hewett: Without
seeming to duck the question, I think that's partly what the role
of the bank is to do—to make those hard-nosed commercial
judgments. It needs to be given a remit, through an Act of Parliament,
for facilitating and accelerating the investments from the private
sector to deliver the infrastructure that is needed to achieve
the Climate Change Act targets. Yes, small amounts of money will
be needed in some of the new technologies early in order to wrap
it up early, and large amounts of capital will be needed in some
of the ones that are nearer to market and about to be built. So
that will be its job; to work out how you profile those investments.
What it needs to be able to do that job is to
be given that remit; it needs to be made independent and permanent
so that it can think long term and not just think it's a fund
controlled by the Treasury that may disappear in the next spending
review. No one would be able to make those judgments if that was
its remit.
Mr Wolfe: I think
by definition, it's likely to have to lean a little towards the
longer term, if only because that is likely to be the area where
there is the greatest market failure. Short-term investments are
likely to find it easier to get normal mainstream commercial funding,
and it's therefore the longer term ones in particular that probably
only the GIB will be able to support initially.
Chair: Alan and then Zac and then Neil.
Q26 Dr Whitehead:
On the distinction between long term investments and short term
requirement, I was interested in Chris's reflections on the Green
Deal and the Green Investment Bank. In terms of the Green Deal,
the extent to which one can place a charge on the household electricity
bill, at a rate that actually means that any serious retrofitting
will take place on a property, depends on the interest rate that
the company that is investing in that thinks it's going to get
back from that charge. A crucial difference might be made in that
interest rate between whether it is a Government rate or a market
rate. Isn't that the sort of exact point at which the Green Investment
Bank could make that difference in the short term, even though
those investments themselves are long term? If it doesn't make
that difference, would that window be lost as far as that form
of investment might be concerned?
Mr Hewett: Without
going into the detail of how the returns are coming back and the
timescale and all the rest, I think you're right—we definitely
need to have some involvement of the Green Investment Bank in
the Green Deal. At the moment, we're a little bit unsighted as
to when the Green Deal will be ramped up and how that's going
to play out, but I think it's important that the Green Investment
Bank has a role in finance, so that it can make those judgments
when we know what the Green Deal actually is—it's a little
bit opaque at the moment.
If I can add one more point on this issue. At
the moment we can tell you about the current finance barriers
and the current investment problems. If you'd been asking that
question five years ago, we'd have been giving you a completely
different answer. So that's another reason why the Green Investment
Bank and its permanence is important because you will have a financial
expertise within, if you like, the public sector, within government
circles, who can start to anticipate some of those investment
barriers and be a little bit nimble of foot to arrest some of
those. So we don't know what the answer is yet. The Green Investment
Bank will hopefully give us some of those answers when it's up
and running.
Chair: Zac; you wanted to come in.
Q27 Zac Goldsmith: My
question has been answered already but I'm going to take this
opportunity in any case. A lot of these investments are already
cost-effective; energy efficiency is probably the best example.
You know you're going to get your money back at some point. The
question is how long it will take and that depends on various
other factors, but there's not a lot of risk there. The difficulty
is this is relatively new and you're looking at something that
is relatively long term. Would it not make sense strategically
for the bank almost to design itself initially to be attractive
to the pension funds, which are hugely resourced but almost to
the exclusion of everything else? You have an enormous amount
of money there, where there is a demand for long term, low risk,
medium term investment, which we all know that green technologies
can provide. But because they're new, the assurance that Government
can provide would—one would have thought—make it possible
for the pension fund managers to put a lot of emphasis on this.
Would that not be the most obvious focus for the bank, initially
at least?
Mr Wolfe: Absolutely
so, yes. We would see the bank as being a second tier bank, one
of whose main purposes is to leverage long term funds, particularly
from pension funds that have very deep pockets, into this area.
Part of the way of doing that will be this aggregation role we
talked about earlier on.
Q28 Zac Goldsmith: Realistically,
how far could you push that with the pension funds? I don't know
what the current post-crunch figures are, but how much investment
do you think the bank could attract via the pension funds in this
country?
Dr Edge: I believe
that infrastructure funds raise about £10 billion a year
from the pension funds to invest in infrastructure as it is, so
I don't see why we shouldn't be looking at figures of that order
to come; whether it's through the investment bank or through other
routes. I think one of the things about the bank is that if we
had all the time in the world, we could probably do that investment,
find vehicles for the investment and the institutional investors
to come into the market. They'd get used to the risks; they'd
work it out; they'd find the right structures, but we don't have
the time. It is because we need to be building this stuff at the
pace, certainly according to the timeframes of the institutional
investors, of a sprint that we need that aid, that buying down
of the risk through a governmental or quasi governmental institution.
That's why we need it.
Mr Hewett: The
way to engage those pension funds is through fixed income investments.
That's why the bank needs the powers to issue Green Bonds, give
the institutional investors a vehicle by which to invest in the
low carbon economy. At the moment, it's very easy for pension
funds to invest in the high carbon economy. They are just listed
equities—buy a slug of BP and you're away. It's very hard
for those large pools of capital to access the low carbon market
at the moment. There's plenty of anecdotal evidence of institutional
investors who are interested and are trying to find ways of getting
into this market, and harder evidence is gained when you look
at all of the climate change awareness: for example the Green
Bonds that have been issued by the World Bank, the European Investment
Bank and other institutions. They've pretty much all been bought
up by pension funds, large pension funds like the California State
Pension Fund and the New York State Pension Fund and the European
ones. They've all been buying Green Bonds, so I think there is
a market out there.
Mr Wolfe: The Ernst
& Young report estimated that the managed funds are currently
worth £3.4 trillion. In that context, they felt that the
£450 billion that was necessary should be achievable.
Chair: Neil, you wanted to come in as
well.
Q29 Neil Carmichael: Yes.
I apologise for being late, so some of these questions may already
have been answered. One of the strengths of the EIB and the EBRD
is that they lend credibility to any project. My first question
is: how do you think the Green Investment Bank is going to replicate
that kind of service here in Britain?
My second question is: mindful that we have
big infrastructure issues across Europe, can GIB play a part in
helping there? It seems to me that if we're going to be effective
about addressing climate change, we need to be in a position where
we can specialise; the kind of argument that says wind here and
solar in Spain. How do we get that transfer? Can the GIB play
its part?
Thirdly, how big does it have to be?
Chair: Three questions there.
Mr Wolfe: I think
an important part of your first question, which we haven't touched
on, is that, amongst other things, the bank should represent a
pool of expertise within the green economy. A lot of the large
scale investors that we were talking about, in response to the
previous question, don't have specific expertise on the environmental
markets. We would expect the bank soon to build up a recognised
pool of expertise in this area and, therefore, to be the sort
of investors that one would naturally follow because they have
an understanding of that market.
In terms of its role outside these shores, in
Europe, I'm not sure we had imagined that it would necessarily
be investing outside the UK. I think it will have an important
role, bearing in mind that a lot of the other investors who we
would like to see investing alongside it are looking at investments
around the world and it, therefore, has a role in making the UK
look like a more attractive place to be investing in the green
economy.
Finally, I think, in terms of the quantum, we
are inclined to accept the Ernst & Young figure that the initial,
if you like, seed funding of the bank needs to be £4 billion
to £6 billion over the first spending period.
Dr Edge: If I could
address that first question, about credibility, I refer to an
earlier answer I gave, which is: having the bank making investments
on Government's behalf gives more credibility to policies, which
those projects depend on to make a decent return. So it's about
giving credibility to the policy framework because the Government
have some skin in the game—to use a colloquialism—that
they say, "Well, if that goes wrong, then Government lose",
therefore, they won't do that.
Mr Hewett: Just
to answer on the European point; in a sense, we're playing catch
up with the rest of Europe here. The rest of the developed world,
apart from the United States, has some form of development bank.
In the rest of Europe, most of these banks are already quite big
players in the low carbon economy. KfW is the biggest example.
The EIB is investing in this market quite strongly. So possibly
the GIB could be involved in areas that link our renewable resources
to the rest of Europe, perhaps the super grid idea—that's
something with which certainly the UK bank could be involved—but
we're about catching ourselves up with the rest of Europe on this
one.
Chair: Sheryll.
Q30 Sheryll Murray: Thank
you. Should the bank be able to invest in projects to protect
the natural environment, as well as concentrating on cutting emissions?
For such investments, how would you be able to secure an economic
return for green benefits?
Mr Hewett: The
proposal we have for the Green Investment Bank is that its focus
should be the low carbon transition and delivering the Climate
Change Act targets. That's a huge job in itself, so we're not
proposing that it should be involved in investment in the natural
environment; ecosystem services, those sorts of things. I think
there's a whole set of different areas of how we get that sort
of investment into the natural environment. I don't think it should
be the job of the Green Investment Bank because I think the job
is big enough.
Potentially, you should probably have some guidelines
for making sure that the investments it makes are sustainable
and don't take us in the wrong direction on the natural environment,
so I think there would have to be some safeguards there. But I
wouldn't say we should be getting into the wider environmental
issues. I think low carbon is probably a big enough challenge
for it.
Dr Edge: I think
I would add to that. I think another focus of this is the development
of the green economy and it's a bank, it's about developing us
economically and, while building up flood defences is a very good
thing to do and might save us money in the long term, it's very
difficult to see how you get an income stream back to pay for
that as an economic investment. But yes, certainly—as Chris
says—it's a big enough agenda as it is. I think we should
focus on that.
Q31 Chair: Sorry,
could I just come in on that? Isn't that just a function of the
way in which we measure the economy in that we don't actually
put a value on environmental values and gains?
Dr Edge: Yes but
how do you generate the income stream to pay it back as an economic
investment? It might make economic sense using natural accounting
measures, but if you're a bank investing money in that how do
you see the investment coming back to you to use for future investments?
I think that would be the problem.
Q32 Sheryll Murray: If
I can come back to you and just ask: how can a Green Investment
Bank ensure that its investment strategy does not have an adverse
effect on stocks of natural capital? I'm thinking, in particular,
if you're investing in offshore wind farms, for example, we cannot
have a coastline that is completely surrounded by offshore wind
farms just because it's good to invest in that sort of renewable
energy, so the two do go hand in hand.
Dr Edge: What I'd
say to that is the development of offshore wind is very heavily
regulated and channelled. We are sent to particular zones by Crown
Estates and there is no talk of a complete surrounding. It just
wouldn't be practical in any case. But it does strike me that
if we are going to protect ourselves from climate change, and
the impact that would have on the natural world, we will have
to have some development in the sea and it is being carefully
regulated, so I'm not quite sure what it is that you're fearful
of.
Sheryll Murray: But the two do go hand
in hand. We should be looking after our natural environment as
well.
Dr Edge: I would
counter that my members are very responsible developers. They
very carefully examine the impacts of any project that they have
and work to minimise those impacts and mitigate them where they
cannot.
Mr Hewett: I think
what you hope is that a bank, such as this, would have a state
of the art sustainability policy. That would be something we would
expect. You could have a line in the Act of Parliament that would
guarantee that there were some safeguards put in place in the
policy, so that these questions were looked into in the investment
decision process. We're not going to design any particular ones
right now, but I think those questions have to be asked; I agree.
All I'm saying is that I don't think it should be about proactively
investing in the natural environment but it should protect the
natural environment at the same time.
Chair: Okay. Mark Lazarowicz.
Q33 Mark Lazarowicz: If
I could ask a question. I was waiting until the end of these questions
because I was hoping it might have been answered earlier on. It's
back to this question of the level of capitalisation of the bank
at the start. The figure you have come up with, again and again,
has been £4 billion to £6 billion as being what is required
at start up. The CSR—as we heard—provides for £1
billion, plus funding from asset sales. In RenewableUK's evidence,
you said asset sales would have only provided limited capital
in any case. That was what I think you said in your evidence.
There has been a suggestion about using the auction receipts for
the ETS licences. But again, you will know that, given the number
of times people have tried to earmark the auction receipts for
different purposes, they would have been spent six times over
by now if they had all been met. So, are you concerned about the
apparent level of funding? Presumably the CSR will have quite
a serious effect on the strategy the bank can follow. £1
billion is a lot of money, but there is a difference between £1
billion and £6 billion, and would that have an effect, for
example, on restricting the bank's ability to get involved in
big projects and, therefore, mean it would miss some opportunities?
Dr Edge: I think
this comes back to the point about targeting activities and products,
with a relatively limited amount of money that the £1 billion
represents. It may still have a suitable impact over the next
few years, so long as it is focused effectively. So choosing the
right sectors—offshore wind is obviously a very good one.
It is a question of what it does with that money. Does it take
strategic equity stakes in the projects? Does it offer insurance
products, which could be an extremely good way of using limited
amounts of money very effectively? Those are the questions that
need to be answered. If they are answered effectively, the amount
of money that is being put on the table over this spending review
period could be effective over that period. But you definitely
would need to be thinking about what comes after and ramping it
up, in order to have the kind of ramp in delivery that we need
in the five years after that.
Chair: I think one last question from
you, Mr Carmichael.
Q34 Neil Carmichael: Just
a short one. How important do you think it is that it's called
"a bank" and structured as a bank as opposed to say
a fund or something else?
Mr Hewett: Very
important.
Mr Wolfe: Fundamentally
important.
Mr Hewett: I touched
on it in answering other questions, but the difference is that
if it's a fund, which is still controlled by Government, by the
Treasury, which has a commitment over the spending review period,
between now and 2015, the private sector investors will see that
finite bit of money and they'll think, "Okay, well, that
will help a bit". But they won't see any long term commitment
at all and they'll fear that that money will be taken away again
in the next spending review. Until there is a commitment from
the Treasury that it's not going to happen, that's what the assumption
will be.
What we are talking about is setting up an independent
institution, which is a bank, which can do what banks do: it can
lend money; it can raise money on the private markets; it can
create different financial products and intervene, whether it's
a co-investor in equity or lends money on a project finance style,
or whatever it might be. It can intervene at different parts of
the finance chain, and it has an independent board that judges
whether those decisions are good value for money for the taxpayer.
We also think it should come back to Parliament and be as transparent
as possible, as well, within that framework.
So, unless it's a bank, it won't be able to
raise the sort of capital that is required to deliver the sort
of leverage that is necessary to deliver the private investment
that not just Ernst & Young, but plenty of other commentators
say is required in the hundreds of billions. So if it's not a
bank, it's a missed opportunity. In a sense, this is a big idea
for a big problem. Whitehall is very capable of watering down
that big idea into a small one, which would completely miss the
point.
Mr Wolfe: There
is the question of leverage. If it isn't a bank, it's very unlikely
it will be able to leverage the sort of 9:1 ratios we were talking
about earlier, to attract investment from the pension funds in
the way that we described. So it needs to have that independence,
it needs to have that remit to be able to leverage the relatively
small amounts that Government are able to afford to put into it
at this stage.
Q35 Chair: I think
we have just reached the end. Did you want to come in, Alan?
Dr Whitehead: No.
Chair: Finally on this; you just mentioned
Whitehall and the Treasury and at some stage—either verbally
or by written evidence—we will obviously be getting some
response, hopefully, from the Treasury. Do you have any words
of wisdom or, if not words of wisdom, any areas of perhaps further
discussion and conversations that still need to be had with the
Treasury that would assist us in looking at the best ways of taking
the proposals for the Green Investment Bank further forward?
Mr Hewett: In terms
of our understanding of where the debate internally in Government
has gone, the critical question is whether it is a fund or a bank.
So, in a sense, I refer you to the answer I gave to Mr Carmichael.
If we end up with a fund with £1 billion or £2 billion
in it, that will be useful but it will be tinkering around the
edges, compared with the problem of infrastructure investment
that we are facing. So it's partly the money but it's more about
the independence, its status as a bank and its ability to raise
its own capital and then ramp up its balance sheet. If we don't
get that, then it will be a missed opportunity and those decisions
are not yet made in Government, so I would urge you to ask those
questions of the Treasury if they come before you.
Chair: On that very clear note, thank
you very much indeed; it has been most helpful. Thank you.
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