The Green Investment Bank - Environmental Audit Committee Contents

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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