The Green Investment Bank - Environmental Audit Committee Contents

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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