Examination of Witnesses (Question Numbers
36-58)
James Wilde, Sir Rob Margetts and Stuart Cook
27 October 2010
Q36 Chair: Welcome
all three of you to our Environmental Audit Select Committee this
afternoon. I think you've been in for some—if not all—of
the previous session and I think you are just joining us where,
perhaps, we just left off. I think for the Committee's purposes,
it would be really helpful if you could perhaps just briefly introduce
yourselves to us, and tell us what area you're concerned with.
In so doing, perhaps you could just briefly comment on—the
point we reached just now—that there are Government bodies,
and funds, that already provide finance for renewables and for
low carbon technologies. In a way, that's why you're here before
us. What are the risks of merging existing bodies or what are
the opportunities that could come from a Green Investment Bank.
To kick us off, Mr Cook.
Mr Cook: Shall
I start because I'm at the right-hand side of the table? I'm Stuart
Cook. I'm from Ofgem and responsible for network policy, regulatory
policies; so responsibility for leading in the policy of the grids
and the super grids.
I think your question is a very interesting
one. We clearly have, within our control, something that we call
the Low Carbon Network Fund. I'll give you a short answer to the
question and then I think you will want to come back again.
Chair: I only want a short answer.
Mr Cook: Yes. My
short answer to it is that all of the established different funds
are serving slightly different purposes. It's not easy, therefore,
to combine them together without losing some of the essence of
the fund that was originally created. The Low Carbon Network Fund,
for example, is designed to facilitate learning and, ironically,
we're as much interested in failures as we are in successes, because
what we want the industry to do is to discover and learn things
that they didn't already know about the application of new technology.
That's quite a unique feature of the way in which that fund operates
and probably doesn't put it as a suitable bedfellow with some
of the other initiatives.
Chair: Thank you. Sir Rob Margetts.
Sir Rob Margetts:
Rob Margetts; I'm here as Chairman of the Energy Technologies
Institute, of which I was the founding Chairman. Before that,
I've chaired the Natural Environment Research Council and I have
been much involved in the development of the green economy in
other places. I've also just finished 10 years as Chairman of
Legal and General, so I can give some perspective on the fund
management issues that you were talking about a bit earlier.
Energy Technologies Institute is neither a quango
nor a grant provider, or grant giver. It is a partnership currently
formed of six major global companies: BP, Shell, e.on, EDF, Rolls-Royce
and Caterpillar—we're looking to recruit more—with
Government. Its purpose is to develop and demonstrate the next
generation of renewable low carbon technologies. It's run on very
much commercial grounds and it invests in projects. Today we have
about 30 projects underway; £60 million in investment and
£120 million in the pipeline, working with 60 other enterprises—of
which 11 are universities and 30 are major global corporates—to
pool our technical knowledge; pool the financial knowledge, the
financial capability. Each of the partners has to commit to £5
million a year for 10 years, so this is serious play in trying
to invest in development technologies.
Q37 Chair: What are
the Opportunities and risks that might affect you coming
from the Green Investment bank proposal?
Sir Rob Margetts:
A huge opportunity. We think the capability that exists in ETI
can provide very powerful policy advice to the GIB. We have developed
an energy systems model for the whole of the UK, through to 2050,
which looks to optimise the affordability and the economics of
both energy prices and the investment required, and hence which
are the building blocks that you have to get in place, the infrastructure.
We think that would be an essential tool for the GIB to choose
the right projects that are both economic and practical.
Chair: Thank you. Mr Wilde.
Mr Wilde: My name
is James Wilde. I'm Director of Insights at the Carbon Trust.
Insights looks after the strategy of the organisation, and the
mission of the Carbon Trust is to try and help reduce emissions
today and develop new low carbon technologies, working with the
business and public sector in the UK but also internationally
now.
In terms of carbon now, we provide advice to
the market. We provide finance as well, in terms of interest-free
loans for SMEs. We also set standards for the market, so we have
standards for company performance; we have over 400 companies
getting that accreditation at the moment. We also have product
carbon foot-printing, so 70% of households now have a labelled
product in their kitchen at any point in time. That's all around
helping companies reduce emissions today, and to date we've helped
them save over £2.6 billion over the last 10 years and save
over 30 million tonnes of CO2.
We also develop new low carbon technologies.
We look to open new markets, and we've set up collaboration exercises
with key players in key technology areas; we have big demonstration
programmes in eight different technology areas. We also set up
new businesses that show how new business models can unlock different
parts of the low carbon economy.
We look to commercialise new technologies. We
have an entrepreneur's fast track programme. We also have research
acceleration, where we look for strong capabilities in the UK,
bringing research as well as industry together to bring these
new ideas to market, with special purpose vehicles that focus
people on commercialisation rather than just giving them grants.
Finally, we also make venture capital investments in early
stage technology companies.
In terms of risks and opportunities linked to the
bank, there is a lot of opportunity, I have to say. We could work
very closely with the bank around some of the interventions, helping
to facilitate the lending of money, for example, energy efficiency;
we already provide a loan scheme. Access to money could really
make that loan scheme get to the next level of funding. In terms
of innovation as well, we see a lot of strategic opportunity to
strengthen what we're doing, strategically in the UK around innovation.
We could play a delivery partner role for the bank in that space,
if the remit extends to innovation.
Q38 Chair: So we
have this existing architecture that the three of you represent.
Then there are other organisations and bodies as well. The Green
Investment Bank: what do you feel the risks could be? Do you think
we could lose some of what we currently have in the current arrangements?
Sir Rob Margetts:
If I may answer: no, I think it's wholly additive. That is because
I see the role, as does ETI, as a financing vehicle for the transition,
whereas each of the roles we've described is creating the technologies;
in the case of ETI, creating socialisation and the integration
of thinking among the would-be suppliers and for yourself in regulation.
So my answer is that it would be wholly additive and distinctive.
Chair: Martin Caton.
Q39 Martin Caton: Yes,
I think you've all made it very clear that you see a very
positive role for the Green Investment Bank of working alongside.
Can I ask you if you could talk a little bit more about what sort
of projects you see the Green Investment Bank funding? In particular,
do you see it focusing on longer term higher risk for potentially
higher impact projects, or safer investments in established technologies?
Sir Rob Margetts:
I certainly see it entering the former space. We have massive
infrastructural developmental needs over very long timescales.
This needs a patient, long term investor to enable those sorts
of investments to occur; in other words, infrastructure. It doesn't
mean that there shouldn't be shorter term projects so that it
has a diverse portfolio, which enables it to attract leverage
and money from the private markets.
Mr Wilde: There's
quite a range of different asset classes that the bank could invest
in, and each have quite different market failures, and financing
interventions have a role in the solution space, but they're not
necessarily sufficient. We also need to make sure that other policy
is right. We've analysed two areas in detail: energy efficiency
and offshore wind. I can explain a little bit about how we see
the bank could play a role for both those spaces, perhaps starting
with energy efficiency, because I know in the previous session
you spoke about offshore wind a lot. There is a massive opportunity
to unlock energy efficiency in the SME part of the market, where
the finance barrier is the most acute. There is about £1
billion of capital-related opportunity in that part of that market,
across about 50,000 SMEs—50% of that opportunity is building
related, 50% of it is related to kit. Finance is one of the barriers.
The other key barrier for SMEs, in introducing energy
efficiency, is whether it is cost effective. It pays back. These
are all measures that have an IRR over 25%, so they should be
doing them anyway. One barrier is that energy is only 1% of their
cost base, so strategically, it's not something that they're focusing
on, so one needs to create market demand. Secondly, even if they
want to do it, they don't necessarily trust the solutions or the
providers that are coming to the market, so they need that kind
of sense of confidence around accreditation of the kit and the
solution. Then they can't access the finance, because they're
struggling to get money, and if they do get money, they want to
invest it in their core business. So there is an opportunity in
this space, but I think one needs to get the policy triggers right.
So in this space, it might be minimum standards or maybe creating
a new financial incentive that doesn't exist for the SME market.
We have the CRC and ETS for larger organisations. One could start
to link business rates to display energy certificates to create
a much bigger financial incentive. Business rates are about 10%
of an SME's cost base.
One could then expand our existing loan scheme. We
have a mechanism that accredits suppliers to provide kit and also
accredits projects and then provides low cost finance through
the GIB, potentially providing that finance to commercial lenders,
because they already have that lending infrastructure. It's a
big opportunity space and, by providing that low cost capital,
the Green Investment Bank could help unlock some opportunity.
Mr Cook: Perhaps
if I could just answer as well. For me the previous session highlighted
the essence of this, which is that, clearly, it is up to the bank
to decide where its commercial priorities lie. But I think if
you step back from that and look at the overall architecture that
we're confronted with, the direction you have to focus on is what
are the Government trying to achieve at a policy level, and hence
where are the gaps in the architecture that need to be plugged?
Those depend very much on what the policy direction is, and the
hotspots move, depending upon what the objectives are.
There was some comment earlier—which I listened
to with interest—around smart grid technology, and I just
wanted to say a little bit about that, because my perspective
on smart grid technology is born of quite a lot of research that
Ofgem has done. Our sense is that we are at the very early stages
of an important journey with smart grid. We don't really understand
what the picture needs to look like in the future, so nobody can
draw a defined map of the way in which a smart grid will be rolled
out across the country; we don't know what technology will work
and we don't know what consumers' reaction will be to that technology;
we don't know whether it's going to be commercially viable. So,
at the moment, our efforts in the Low Carbon Networks Fund are
focused on trying to discover that information, which will help
to charter a course. So I think it means, in smart grid terms,
it's probably a bit too early for us to have a major push on funding
at the moment, because we don't know what we'd spend the money
on, but I think it's clearly something we need to look at going
forward.
Martin Caton: Thank
you very much.
Chair: Peter, you
wanted to come in on that point.
Q40 Peter Aldous:
Yes, just to go back to the point you referred to very passionately
about: the role of the Green Investment Bank and the effect of
the SMEs. Is the lending framework in place now to be able to
do that? Isn't there an aggregation problem to address?
Mr Wilde: It's
a good question. We do provide interest free loans to SMEs at
the moment, and we've had a massive ramp up in that scheme over
the last year, as part of the fiscal stimulus package. So last
year, we lent £70 million to about 2,000 SMEs through 800
different suppliers. So there is an aggregation issue, but we
already have a mechanism that can start aggregating that demand
and provide that type of assurance. We're actively negotiating
with commercial banks that have that lending infrastructure. They
already have relationships with SMEs and they want to deepen those
relationships with SMEs, so we're actively negotiating with a
shortlist of commercial banks that could provide that money on
a commercial basis to SMEs. But that's going to be at a higher
rate. It's not necessarily going to make it quite so compelling
as if one could access lower cost capital through the Green Investment
Bank, perhaps, to use those commercial banks as a lending infrastructure,
Carbon Trust assure the technologies and the suppliers.
What's really nice, what we've learnt with the SME
energy efficiency loan scheme, is that those suppliers can act
as a real route to market. We did a big marketing push to make
sure that we created demand for that £70 million loan scheme.
After that initial push, we haven't had to advertise at all because
we created a massive latent demand, and the suppliers get out
there and make it part of their sales proposition, "We're
assured by the Carbon Trust, and you can get an interest free
loan for this".
Zac Goldsmith: What's the payback time
for that?
Mr Wilde: Four years, so they
have to pay it back within four years and it's unsecured as well.
Chair: Sheryll.
Q41 Sheryll Murray:
What happens if the Green Investment Bank has to operate on commercial
terms, though, because the Green Investment Bank Commission recommended
that, I think. So you have just mentioned that you may be able
to help SMEs if lending is at a lower rate, but what happens if
the Green Investment Bank operates on commercial rates anyway?
Mr Wilde: If it
accesses low cost sources of capital, that might help reduce the
end cost to the consumer. Another way of potentially lowering
the cost—if that's going to be the thing that makes the
SME take it up—is using other sources of revenue to cover
the default risk, because the default risk is the big issue. It's
around about 6% when looking at the cost of lending. One could
use CCL revenues to cover that cost and it would be a very small
proportion of overall CCL revenues, something like 3%. So there's
ways of subsidising the lending further. But fundamentally, these
things pay back very quickly, so there are ways of making it commercial.
Chair: Dr Whitehead.
Q42 Dr Whitehead:
I'm interested again in the question of leverage. I think you
may have heard some of the early discussions on potential for
leverage. Firstly, in terms of the level of government underwriting
and investment in the Green Investment Bank, do you think that
level will be able to produce the sort of leverage we've been
talking about? Do you think that there is a lower level of, as
it were, Government guarantee, Government initial investment,
which will produce the sort of leverage ratios that have been
talked about, and how do you think the Green Investment Bank might
be best set up, taking all those into account, to maximise the
leverage that can be achieved?
Sir Rob Margetts:
Shall I comment? Off-balance sheet for Government means that we're
into credit risk space. The structure for Government is to own
the equity, or to supply the equity and then to leverage that.
There is a very big market—and it's a market I'm familiar
with—in corporate bonds, particularly very long dated corporate
bonds, and that's the attractive feature that the Green Investment
Bank can aim for, because that market is currently under-supplied.
That's 20-year plus corporate bonds, but they must have a credit
rating—if they are in serious play—in pension funds
or annuity funds, where we are talking about the flow of billions
potentially. They must have a credit rating, in my view, of no
less than a single A. So the key issue is: how do you secure that
credit rating if the Government are not guaranteeing the debt?
It means that you must secure an income flow that looks secure
enough to people, or pension funds and annuity funds to invest
over the very long term. So that's the big question for me with
that type of structure. In the early years, how do you secure
that income flow to pay the coupon on the Green Bonds—I
will call them—which are long term, long dated corporate,
with a credit rating of no less than A? That for me is the big
question. As we put in our submission, clearly there are a number
of means to provide that but it will probably have to be an additional
source of funding, separate from that which is provided for the
capital of the bank.
Q43 Dr Whitehead:
So perhaps you could tell me a little more about the additional
sources of funding. Does that mean additional asset sales? Does
that mean a flow of funding over a period? Does it mean draw-off
guarantees? Does it mean other forms of implied funding, which
would give the sort of credit rating guarantees that you've been
mentioning?
Sir Rob Margetts:
Yes. If we assume that the bank follows the similar capital structure
to that now required for other banks in the regulated environment—in
other words, a tier 1 capital approaching 10%—then potentially
you have available the other 90% to issue bonds. Now, a single
A bond will have a premium over a risk-free rate, so you have
to have a means to secure the income stream and not dip into your
capital. You have to have the income stream to cover that debt
raised through a long dated, single A bond.
I'm not sure what the markets are today, but typically
the single A will be between 150 and 300 basis points over the
risk-free rate, so you need to see that income. Now, in the long
run, one would hope the bank would earn that income from the companies
in which it's either invested as an investor or it's lent to.
But in the shorter run, that may not be practical, and hence it
wouldn't have the credit rating and hence it couldn't raise the
money.
Q44 Dr Whitehead:
Do you think then that the leverage amounts that have been talked
about, £100 billion—from £4 billion to £6
billion initial money on the table—are achievable or is
that rather a fanciful notion?
Sir Rob Margetts:
I agree with one of the previous contributors, that a 5:1 or a
10:1 ratio is possible within the normal bank environment, providing
you can secure that credit rating.
Chair: Thank you. Zac Goldsmith.
Q45 Zac Goldsmith:
Thanks. It's an issue you've just touched on—and it's an
issue that we discussed with the previous panel—but I would
appreciate hearing from each of you your view on this distinction
between the bank versus the fund. How important is it, in your
view, that whatever is created has the ability to issue bonds,
or specifically long term bonds, and what would be the impact
or how useful would this vehicle be if it didn't have that ability,
if it was effectively a fund?
Mr Cook: I'm not
a banker by profession, I'm afraid, so I'm going to struggle a
little bit with the technical nature of your question. But I think
it seems to me that the more options and more flexibility that
the institution has, the more power it will have to effect change.
If it is right that having a banking status confers more legitimacy
on the organisation and a sense of longevity, that has to be good
in terms of raising capital, because the one thing that people
look for when they're looking to create opportunities for capital
raising is stability.
I think the other thing that's important is that
what the bank is seeking to achieve has to resonate with what
the Government are trying to achieve, so there's no mismatch between
expectations, which for me is almost as much a fundamental issue
as the nature of the institution itself.
Sir Rob Margetts:
Bank versus fund, more leverage into a bank structure than probably
into a straightforward fund structure. The key issue for me is
independence, independence of judgment on the investment decisions,
a professionally run bank rather than perhaps a subsidiary of
the Treasury, bringing the proper market professional skills,
the technological skills to make judgments about projects. These
are crucial things.
Can I just say, though, that I've always viewed the
proposition for Green Investment Bank as the secondary vital element
to a clear energy policy, and coherent and consistent regulatory
and incentive structures. It's those bits that have to be put
in place and then the financing capability follows.
Q46 Zac Goldsmith:
Sorry to jump in, but do you believe that if what was created
was a fund, as opposed to a bank, with the various abilities and
flexibilities you've just described, that fund—assuming
the regulatory framework is clear—would provide enough resources
for the kind of investment and shift that we're looking for?
Sir Rob Margetts:
Where would you raise the money from the fund? Is it purely taxpayer
contributed?
Zac Goldsmith: I assume we would be looking
at a fund. So far we have heard that there is a commitment to
£1 billion, but my understanding of the fund—as much
as it is possible to understand it—is that it would not
have the ability to raise any additional funds. It might provide
matched grants; it might be something on that basis.
Sir Rob Margetts:
I think we have to scale up. The Government's resources—sorry,
I don't have to tell you—are limited in the short run and
we have to scale up. When one is facing whether it's £0.5
trillion of investment requirements, then if this is going to
make a significant impact, clearly the opportunity to raise debt
is critical to get the leverage. As I've already identified, there
is a gap in the market for long dated bonds and there are potentially
keen buyers, providing the credit rating is there.
Chair: Mr Spencer.
Q47 Mr Spencer: Stuart,
can I ask you about the Low Carbon Networks Fund? You currently
allow energy producers basically to invest in new technology,
but they pass that cost on to the consumer. How do you work out
what they're allowed to pass on and why is that fund linked to
the £500 million?
Mr Cook: I'm going
to have to give you a little bit of history on my—
Chair: Sorry, can you just speak up a
little bit?
Mr Cook: Yes, of course. Maybe
I'll move a bit closer.
Chair: Thank you.
Mr Cook: Yes, if I can, I will
provide you with a bit of history as to why we created the fund.
Now, periodically we look at the regulatory framework that the
grids operate under, and when we last looked at it a few years
back, we noticed that there was a mild decline in R&D expenditure
that the companies were undertaking. So, even in comparison with
the innovation department's numbers, they were lagging behind
what you'd expect in the industry at the leading edge of change
to be investing in. When we looked at it, we felt that one of
the reasons was partly at our door, in the sense that we had established
a regulatory framework that was grinding costs out of the businesses
and trying to improve efficiency, and that's what the regulatory
framework was trying to do. So what we sought to do with the Low
Carbon Networks Fund was to rebalance that, to create an incentive
for people, the industry, to spend money on the R&D, which
they should have been spending on but weren't already. We set
the fund at £500 million because, on balance, we judged that
that was consistent with the benchmarks that other industries
show in terms of the level of R&D spend that you see. So effectively,
they have an ability to raise an extra £500 million from
their customers, collectively, to go towards the R&D spend
that they would have been doing if they'd been part of a normal
competitive market.
Q48 Mr Spencer: How
do you regulate that the technologies that they're going to research
are worthwhile? If someone came to you and said, "Oh I want
to invest in nuclear fusion" how do you stop—
Mr Cook: We have quite an elaborate
governance process around it, so effectively what happens is that
every year the companies are allowed to bid competitively into
a framework. This year the pot of money is £64 million and
we had 11 nominations from the companies who wanted to get access
to the fund. We established an expert panel of engineers, consumer
representatives, academic economists, who looked at each of the
projects in turn against the criteria that we'd set. They've just
last week had their last meeting and they're writing the report
up at the moment, so I don't know what they've concluded, but
they will make a recommendation to me as to what they think the
projects are that are worthy of being taken forward. The criteria—as
I alluded to right at the start—is about learning, so in
a sense what we are interested in is people to try out novel techniques
that nobody has tried before, which help us to understand whether
the technology or the arrangements around them are effective.
In that sense, bizarrely, we're equally interested
in failures if they help us to avoid failures in the future. So
it's not guaranteed that every project will be a success. What
we're looking to do is make certain that every project creates
learning that can be shared by the industry.
Mr Spencer: Am I allowed one more little
one?
Chair: You are.
Q49 Mr Spencer: What
percentage, then, of the projects that have been funded in that
way have been successful? Are we talking 50:50 or—
Mr Cook: I wish
I knew the answer to that. It's the first year of the fund's operation
so we haven't awarded the first set of money yet, so we don't
know what the success rate is.
Mr Spencer: Right, okay.
Chair: Peter Aldous. Sorry, hold on,
was it on that point?
Peter Aldous: No, no.
Chair: No, okay. Peter, do go ahead.
Q50 Peter Aldous:
Sir Rob Margetts, I was just going to address the question to
yourself. Your energy systems model I think aims to pick technologies
that offer the lowest technical and financial risk, but may have
the greatest impact over the long term. Do you think the GIB should
be looking to have a similar model to pick winners?
Sir Rob Margetts:
It's not so much about picking winners, because one's looking
at a whole system, the energy system, which includes the infrastructure,
the grids, the pipelines as well as power plants, as well as consumers,
community schemes and so on. So it's the whole system that we
look at and the model has been designed to optimise around the
total cost of energy in 2020 and 2050. So naturally, it looks
at supply chain considerations: how fast can you build nuclear
reactors, how many, what's the demand level in the world, for
instance, or on carbon capture and storage, what timeline could
that be on and the options for how much one rolls it out. So it
is a very sophisticated model.
It's undergoing a peer review at the moment and has
been extensively trialled already, and potential users within
the Government have been impressed with the capabilities. We think
that's a vital tool in order to optimise our path, quite crudely.
We did it for ourselves, for the major companies and for HMG,
our partners in the Energy Technologies Institute, because we
wanted to pick the big issues on which technology development
had to occur to make a more affordable, a more economic route
forward. So we developed it for ourselves, but we will certainly
make that available to the GIB or any subsequent developments,
because we think it's a vital selection tool.
Q51 Peter Aldous:
If the GIB is going to pursue a similar model, one probably needs
a clear articulation of energy policy for meeting our 2020 and
2050 targets. Is that policy sufficiently clear at the moment,
do you think?
Sir Rob Margetts:
I hesitate to suggest this: no is the answer. It's not just a
policy. The question is: what are some of the components that
will be vital for the future. What is then required is a very
clear, consistent and coherent regulatory and incentive structure
that will give investor confidence. Investor confidence is not
high at the moment. Some of that is perception, some of it is
changes that seem to have occurred all too frequently in the last
few years in that investment environment. So where policy has
been clarified—and we'll say offshore wind is an example
that was in the previous witness session—then you're seeing
investment. So we do need very clear policy, strategy and direction,
incentives and regulatory framework to reduce this perception
of risk. You have to bear in mind the people that make these major
investments are great global companies. We're talking about the
big ones, anyway, and they have plenty of choice as to where they
invest in the world, as do the banks that help fund them. We have
to be an attractive place and that means we have to have manageable
risk.
Q52 Chair: But given
that your answer just now was no, where do you feel the key priorities
should be in order to have that certainty that will enable you
to go on that trajectory of where the investment needs to be?
Sir Rob Margetts:
Yes. Well, I think it's for Government to propose an energy—
Chair: Do you have any advice for Government?
Sir Rob Margetts:
Yes. The Government are members of our board, several components
of Government, and so they've received this advice and of course
it is evolving, but we do need to go down a level from the general
principle to—
Mr Wilde: Sorry,
can I—
Sir Rob Margetts:
Yes, please, James.
Mr Wilde: If I
could add to this, I would completely concur with the need for
a strategy, particularly if one is talking about specifically
the world of innovation, and again, I agree with the conclusions
of the Committee on Climate Change in this area. They said there
was, "A need for a very clear innovation strategy in the
UK, highlighting the technologies that we want to either: develop
and deploy, deploy or research and then deploy". I think
the ETI model is fantastic, as well as all of the other models
that exist out there, the DECC's 2050 calculator and there's other
models.
What we're excited about at the moment is working
with the rest of the Low Carbon Innovation Group. We have set
up a co-ordination group where we work in with ETI, TSB, the research
councils, DECC and BIS, to start understanding from using all
these models, which technologies are absolutely required from
the carbon perspective, then layer on top of that: well, which
technologies are required from an economic benefit perspective?
Where do we have comparative advantage in technologies that we
might need, or that we might just develop to export and create
significant economic gain out of our IP? Having then whittled
down the 50 technology families out there to 20 or so technologies,
where the UK could take a leadership position— because if
we have limited innovation funding, we need to prioritise where
we put that funding, and have a coherent policy and innovation
support framework behind the priorities—we will take those
20 technology areas, and then do detailed analysis of the innovation
needs of those technologies and where policy can play a role and
where innovation can play a role.
So we're very excited about currently doing that
kind of analysis, working with the key players in the innovation
space to understand what those innovative needs are and then how
we can co-ordinate, as a set of delivery bodies, to bring on very
different and complementary capabilities to unlocking those key
areas. They are the 16-odd technologies that the Committee on
Climate Change identified, as well as some others that we've realised
we shouldn't put out of the mix straight away. So we're actively
working in that space and I think it's very exciting to get that
focus.
Chair: Sheryll Murray.
Q53 Sheryll Murray:
That leads me quite nicely into my question, Mr Wilde, because
I want to refer to the partnerships for renewables between the
Carbon Trust and HSBC. What I want to ask you, specifically, looking
at the way that they helped to make use of under-utilised land
with a partnership with local authorities, or public bodies, is:
should the Green Investment Bank purely provide finance or is
there a role for it in helping to shape and form projects as well?
Mr Wilde: Yes,
very good question. It's something that we've deliberately set
up. We have a part of the Carbon Trust that sets up new enterprises.
When we do that analysis of the market failures for a particular
technology area, we might find, "This should be attractive.
What's stopping it happening?" This is a commercial model.
If we set up a business from the offset, jointly with the private
sector, we can bring in a lot of private sector capital. The moment
we're sure it makes commercial sense, we'll exit and then the
private sector take it on. PFR is a lovely example that we launched
in 2006. We have a leverage ratio on that one of 50:1. So we put
in £10 million of seed capital, the plan is to invest £500
million in onshore wind across the public sector estate, where
there is less capacity compared to the rest of the UK's land bank.
It's a partnership with HSBC where we're developing those opportunities,
they're accessing the funds. We've had a great response from the
market, the public sector organisations we're talking to: the
Forestry Commission, the Environment Agency, British Waterways,
the prisons, and we're ahead of target. We're well on track to
get that £500 million out there.
We have other fledgling enterprises that we
serve on that basis. InSource is one where it's a joint venture
with Scottish and Southern, which is all about a waste to energy
business. We have invested £3 million and we expect it to
be of a similar kind of leverage ratio, stimulating over 10 times
as much private sector investment in the near term. We have Low
Carbon Workplace as well, which is an exciting new development,
which is a joint venture with Threadneedle, which is a big property
fund—they're going to raise a £350 million property
fund—as well as Stanhope who is a major property developer.
The plan is to develop new low-carbon workplaces,
which we will accredit as low-carbon workplaces, and then attract
private sector tenants who want to have the reputational gain,
as well as the cost reduction, of being in a low-carbon workplace.
It's showing that developers can bring new low-carbon refurbishments
to the marketplace. If we can do it with those two players, the
rest of the market will follow. That is the logic. So absolutely,
it is about creating new enterprises and it is a big opportunity
space.
Sheryll Murray: I take it from that your
answer is yes then, the Green Investment Bank should not purely
provide finance but there is a role for it in helping to form
projects and invest in them later.
Mr Wilde: Absolutely, and hence
it's an opportunity space for us to partner with the Green Investment
Bank, because we have a lot of capabilities in looking for these
opportunities and then creating those new commercial structures
in the private sector.
Chair: On that point, Peter Aldous?
Q54 Peter Aldous:
Yes, you speak with great passion again, James, and of course
I commend you. You talk about your role in leveraging in money
on commercial property investments: Stanhope and Threadneedle.
What about building homes and houses, have you had similar success?
Mr Wilde: We tend to work with
the business and public sector, so the EST does the equivalent
work with the domestic sector. We haven't focused so much on the
domestic sector with that kind of business initiative.
Sir Rob Margetts: We have a project
in that zone that is one of the priority areas, so I could answer
your earlier question. We are invested quite heavily in a number
of zones already, but we have a significant buildings programme,
and it's all about existing domestic housing. The turnover of
housing stock is so low that the 2050 position will have 70% of
what we have already today, maybe even more. But the real challenge,
we think, is around existing domestic housing. It's not just a
technological issue—it's technological if you include the
social aspects—it is about the interaction between individuals,
often landlords and the user environment, as well as the technology
that's installed. We're trying to understand that a bit better
because this has not been a great success area in the UK historically,
possibly because of not counting social aspects strongly enough
within the work that has been done so far. We need a break if
we're going to hit the 2050 targets.
Mr Cook: I think, in terms of
the Low Carbon Network Fund, it doesn't reach into the housing
stock as such, but there are some of the projects in front of
us now that we're looking at the way in which the domestic consumers
interact with the energy system via smart meters and demand-side
management. It is very much on that agenda as well.
Chair: Is this on this point, Zac?
Q55 Zac Goldsmith:
Yes, on the point Sir Rob made. Based on the research you have
done into domestic homes and energy efficiency, and so on, how
promising do you think the plans are for the Green Deal? It is
relevant, in the sense that the Green Deal may well end up being
a big component—a by component—of the Green Investment
Bank, so it's an excuse for raising this question.
Sir Rob Margetts: I think it could
be very important. We clearly have not cracked this issue. The
incentives have been there. Arguably, most of the technologies
are there—not all—we think heat pumps could play a
future role.
Zac Goldsmith: What do you think is the
main reason people do not, either landlords or users, retrofit?
Sir Rob Margetts: That is what
we're trying to uncover so we can solve this, and we are working
in conjunction with a major building firm in order to gain their
experience. Unquestionably, the social and user habits are crucial
in this. They have to be integrated into the solution mode.
Chair: I think Dr Whitehead wants to
come in and then we will close with Neil Carmichael.
Q56 Dr Whitehead:
Since Zac has mentioned the Green Deal and investment in it, we
understand that one of the mechanisms of the Green Deal will be
to place a charge on the household bill—the household and
not the individual. In your view, does that constitute a form
of long-term payment guarantee? If so, does that in itself then
cause the likely interest on whatever is the initial investments
to go down accordingly along the lines of the long term bonds
that you have previously mentioned?
Sir Rob Margetts: It's an interesting
thought. I am on notice about it so I had better think about it.
Chair: Neil?
Q57 Neil Carmichael:
Thank you. Could I ask Sir Rob, roughly how you would set up one
of your PPP deals, so to speak. It was to do with the structures.
Then all of you, the question about new technologies versus existing
technologies, because how do we ensure that the Green Investment
Bank is thinking about new technologies rather than just taking
the risk-averse route of investing in existing technologies, because
your PPP structure is probably more comfortable with taking a
risk?
Sir Rob Margetts: Sorry, what
was the PPP?
Neil Carmichael: Public Private Partnerships.
Sir Rob Margetts: All right, so
the formation of the Energy Technologies Institute?
Neil Carmichael: Yes, how you structure
them basically.
Sir Rob Margetts: Yes, the six
companies have been recruited against a prospectus of working
together with Government; it's a 12-times leverage on the finance.
Potentially we can recruit up to 10. They make a commitment of
£5 million a year and we run the process right the way from
a board, which has them each represented, a technical committee
in which they are all represented—in which we really discuss
the fundamental technical issues to be solved—and then programme
managements across the zones.
It was not easy to establish. These companies
are not used to working together, let alone with Government in
a partnership. But I have to say 2½ to 3 years on, the degree
of mutuality is extraordinary and the technical collaboration
effective. The financial leverage is one thing but the technical
leverage is huge from these companies. They bring their strategic
capabilities and their technical capabilities, which are complementary
in unlocking some of the challenges.
Our aim is to identify what those road blocks
are to major cost reduction or major roll out, and to aim our
projects very specifically at those road blocks, so that we can
demonstrate a solution mode. The big projects we have today include
the next stage of offshore wind economics, which, currently, are
not good. They need to be dramatically improved and there are
some quite fundamental issues that have to be solved there. We
have three projects in that zone and we will probably do a big
demonstrator. Carbon capture and storage is a vital the building
block in all the futures. All futures in our model say, "Carbon
capture and storage is a necessary component as is nuclear",
and so on.
Q58 Neil Carmichael:
My second question is: how do we ensure the Green Investment Bank
can do that kind of thing as well, rather than just take the risk-averse
option of investing in existing technologies?
Sir Rob Margetts: I think it should
use the capabilities of some of the existing developmental innovation
networks. They should be available to it to inform its judgments,
and those key judgments that it has to make are a risk—
Neil Carmichael: Yes, absolutely.
Sir Rob Margetts:, From ETI's
point of view, we will make those capabilities freely available
to the GIB to inform its judgments.
Mr Cook: To answer your question,
it feels to me that they are two quite different businesses actually.
The business of investing in new technology is all about collaborating.
It is all about discovering. It is all about maximising learning
and maximising the sharing of learning—making mistakes and
learning from it—whereas existing technology is all about
getting it done quickly, slickly and as efficiently as possible.
I suppose the question in my mind is whether these things naturally
co-exist in the same organisation, or whether there are different
models that help to address the different challenges of both of
them.
Chair: I think on that note—did
you want to add to this?
Mr Wilde: I was just going to
agree with that last point, that innovation and investing as a
bank are two quite different activities with different sets of
capabilities.
Neil Carmichael: That's what I am driving
at here.
Mr Wilde: On the innovation side
of it, a lot of it you won't make a market return on at all, because
you are investing in public good activities to overcome market
failures to innovation. You are not going to make any money out
of it. It's a very different activity and different capabilities
as well; that is the issue and it is a question of remit.
Sir Rob Margetts: Assessment of
technical risk is a key function in the GIB.
Neil Carmichael: Yes, thank you.
Chair: Okay, well I am afraid we must
leave it but I think we have covered a lot of ground on quite
a technical issue. Thank you again to all three of you for coming
before the Committee this afternoon.
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