Examination of Witnesses (Question Numbers
134-189)
Elliott Mannis, Prashant and Richard Wilcox
8 December 2010
Q134 Chair:
May I give you a really warm welcome on a cold day to the Green
Investment Bank inquiry? Thank you all for coming along. We are
one down; we had four witnesses but there are three of you. We
are looking at the smaller scale issues and aspects of this. I
thought it might be helpful, to begin with, to invite each of
you to introduce yourselves and give a very short—and I
do mean short—introduction on why giving evidence to this
inquiry is so important to you in terms of the points that you
wish to raise.
Richard Wilcox:
Thank you very much and thanks for asking us. My name is Richard
Wilcox. I head up the social banking unit within the Co-operative
Bank. That deals with any of our customers who have anything to
do with social or the environmental aspects. Particularly for
today it is renewable energy. We have a team of 20 people financing
onshore UK wind, hydro, AD/CHP biomass schemes, typically in the
sub-£20 million seam, so at the smaller end of the market
but not at the micro end. We have a total lending book of about
£400 million and growing. There is very, very strong interest
at the moment. We have a work-in-progress schedule that is bulging.
My interest in the Green Investment Bank is how you can help to
unblock the blockages to allow us and other banks to do more in
this sector.
Prashant Vaze:
My name is Prashant Vaze. I am the Chief Economist and Head of
Fair Markets for Consumer Focus. We are a statutory organisation.
We were set up to champion customer interests. We get essential
resources from energy customers, postal customers and about a
third of our money is unrestricted so it is just for the general
customer interest. I am also currently writing a book called "Repowering
Communities", which is of some relevance to this inquiry
because it is to do with projects in North America and Europe
to try to reduce emissions from communities. Consumer Focus has
been quite involved with DECC over the last 12 months or so on
the Green Deal and the Pay As You Save model before that. We have
also been working on fuel poverty issues, as I am sure people
here are aware, and doing stuff on affordable warmth and things
like this. Earlier this year we did an investigation into the
cash ISA market, so we have an interest in other retail savings
markets as well.
Q135 Chair:
Thank you. I know the Woodland Trust is keen to give a very brief
introduction as well.
Elliott Mannis:
Thank you. My name is Elliott Mannis. I am a non-executive director
of the Woodland Trust. For my day job I am chief executive of
a firm called London Bridge Capital, which is a corporate finance
adviser to the clean tech and renewable energy sector. We are
here today to share a few thoughts around the possibility of the
Green Investment Bank investing in woodland creation and similar
conservation projects.
Q136 Chair:
Thank you very much. Our first question to each of you is how
the Government should engage with individuals and communities
when designing the Green Investment Bank. It is very easy for
there to be a complete priority on the big investors and on the
large-scale investments. We are particularly interested in terms
of what the design should look like in respect of how it is able
to address the needs of citizens and communities.
Richard Wilcox:
I absolutely agree. To me it is a two-stage process for the Green
Investment Bank. On the one hand there is a real opportunity to
seize change in the structural market for renewable energy, but
that is going to take a long time and a lot of money to deliver.
In the meantime there is an awful lot of short-term quick wins
that can be gained at the community end, some of which are non-financial
and some of which are advisory and enabling in structure. They
can be done pretty quickly. There are others which are financial
but not hugely costly. In doing the big structural changes, I
think it is really important that the Green Investment Bank doesn't
lose sight of the smaller opportunities, particularly at community,
SME and the corporate end.
Q137 Chair:
In terms of the work that you are doing and the long-term plans
that you have, could you perhaps give us some idea of the particular
subjects or projects that would be really suited to what could
come out of the Green Investment Bank?
Richard Wilcox:
Yes. As I said, we are primarily funding energy generation: that
is onshore wind, hydro and anaerobic digestion, and then energy
efficiency, which can include CHP and district heating schemes.
As I said, we have a work-in-progress schedule that is probably
in excess of £1 billion for small-scale sub-£20 million
projects. The problem is that there is probably only us as a bank,
and a couple of smaller social enterprise banks, that are active
in that end of the market. It will take us some time to work through
that work-in-progress list because they are quite complicated
structures to deliver. The essential nature of a £20 million
or a £10 million renewable energy scheme is the same as a
£50 million or £100 million scheme. It takes the same
length of time to deliver. Any relief that the Green Investment
Bank can deliver in terms of capital costs or equity for the small-scale
community to unblock that would be very beneficial. It is really
helping us, and others like us, to lend more.
Q138 Chair:
It occurs to me that I should perhaps declare an interest because
I have an account with the Co-op Bank. In terms of the specific
small-scale projects that you could be working on, do you feel
that there is sufficient opportunity to have a dialogue with those
designing the Bank now to ensure that when we know what it is
going to look like in detail there will have been some real regard
to addressing your side of the market?
Richard Wilcox:
I think so. We are talking regularly to DECC and engaging with
them all the time. As I say, I think there is a real need for
it to be hugely beneficial in the large scale, but I don't want
everybody just running off to try and do carbon capture and storage,
grid infrastructure and all the rest without remembering that
there are support mechanisms that could be put in place to help
finance the smaller scale schemes as well. DECC seem to be on
board with that, and we talk to them regularly.
Q139 Chair:
Do either of you want to come in?
Prashant Vaze:
We have been very supportive of the whole Green Deal enterprise
that the Government are announcing. We are very conscious that
there are very substantial calls for capital from large-scale
infrastructure needs like power stations and power lines. I think
there is an equivalent level of investment needed in the much
more domestic and community level stuff. You see figures of £200
billion bandied around. I would guess there are equivalent figures
on the domestic and community level for things like district heating
systems, which Richard has already mentioned, and some of the
high-cost installation measures like solar installations, internal
insulation. I think there is a real role there for getting that
kind of investment in.
The way we hope Green Deal will develop is that it
is not going to be restricted to just the big six energy companies
being providers. We hope very much that some of the Green Deal
providers that come forward are slightly non-conventional. I was
speaking this morning to a social housing provider. I know very
well that local government is quite interested in this as well.
There might be much smaller players as well who can come in and
not necessarily get access to the capital markets in the way that
big energy companies might do, and to an extent local government
might do too. We are very much hoping that the Green Investment
Bank can provide that capability of talking to small Green Deal
providers who have aggregated a reasonable amount of projects
together. I was talking to one this morning that is responsible
for 30,000 homes in the Newcastle area. Often the kind of investment
needed is quite substantial in the aggregate, but it does rely
on low-cost finance. It is important that the Green Deal can supply
that kind of low-cost finance. Essentially it can borrow from
the money markets at a cheap rate and it passes on that discount.
I hope also it has the kind of skills and in-house knowledge that
understands what a good project is and is not too risk averse,
in the way that some banks might be otherwise.
Chair: Mark, did you want
to come in on that point?
Q140 Mr Spencer:
It was really just trying to draw the line between what is small
scale and what is large scale. I didn't know if you wanted to
have a stab at how you do that. Are we talking sterling or megawatts?
Where do you draw the line? What becomes large scale and what
is small scale?
Richard Wilcox:
We tend to finance primarily above a megawatt at the moment but
are looking to come down in scale with the advent of feed-in tariffs,
because that has made it much more attractive to do slightly smaller
scale. We will come down probably to the 250,000 kilowatt end
or 500,000 kilowatts. There is still that microgeneration area
which is entirely separate. In my opinion, that is more Green
Deal than the Green Investment Bank and I see a difference between
the two.
Elliott Mannis:
At the risk of complicating matters, can I perhaps suggest a slightly
different dimension for looking at things? A lot of the debate
so far—not just today but generally—has been focused
around the scale of projects and perhaps a perceived risk that
a lot of the effort and expenditure that the Green Investment
Bank would devote would be focused on large-scale infrastructure
to the peril of smaller projects, or perhaps even start-up and
technology things. That is a good and worthy debate and one we
should focus on. I think there is also a different dimension.
One could distinguish between what I describe as the built or
the industrial environment, whether that is large scale or smaller
scale, and what I would describe as part of the social infrastructure.
It is fantastic to look at carbon capture and storage mechanisms
or ways to get an efficient grid, but at the same time we all
want green social public spaces. Most people would declare an
affinity for woodland, and woodland can be both a useful asset
from an investment perspective and a very useful way of sequestering
carbon. I would suggest that one of the things that ought to be
in contemplation on the Green Investment Bank's agenda is how
it addresses that additional agenda item; otherwise what we will
end up with is lots of technology but not a lot of green space
or trees. The solution probably lies in addressing all of those
things in the round so that this is still a jolly good place to
live.
Q141 Chair:
How do you think that that might be written into the criteria
at such time as the Green Investment Bank becomes operational
and that it could take account of that difference that you've
just described?
Elliott Mannis:
As a suggestion as to how this might work, one needs to think
about how the Green Investment Bank might be funded, because it
obviously needs to be capitalised in some way, and then how that
money is actually applied and used. One of the things the Green
Investment Bank will be thinking about is what are those different
sources of capital, what are the applications and how does it
match time-wise in terms of assets and liabilities because they
need to be in balance otherwise banks end up with a problem.
As a suggestion, one could have investment bonds,
be they either corporate investment bonds or ones that members
of the public could participate in. You could use a portion of
your ISA or you could have a top-up element in your ISA. There
are all kinds of things that would quite naturally have an affinity,
both with the corporate world and with individuals, where people
would want to do this type of thing. To be very clear, people
make charitable donations towards woodland today. If one is able
to make a practical investment and actually get a rate of return
as opposed to just the feel-good factor that comes from a charitable
donation, that would be a good thing. Then you could earmark those
funds towards particular social outcomes or purposes.
For example, there are in existence today, through
other institutions types of investments where you can invest in
forestry. One doesn't get a fantastically great rate of return
but one does get great stability in terms of the yield of that
asset. It tends not to be very volatile. You are pretty much assured
of getting your money back because you are investing in land and
trees. It isn't like investing in an industrial concern. At the
same time you are investing not just in a fantastic social environment
but also in the sequestration of carbon. That obviously goes some
very substantial way towards meeting both the social and technical
objectives that this is all about.
Q142 Chair:
What in effect you are suggesting, which was my next question,
is that there should be some kind of a mandate in place to have
regard within the Green Investment Bank to ethical policies—which
is at the forefront of what the Co-op does—and similarly
somehow or another to value those values when decisions are being
made. How do you think that could most easily be done?
Prashant Vaze:
I would phrase that a little bit differently. Returning back to
your question about what the appropriate size of the deal is,
if you look at some of the examples in America, there have been
examples—for instance in Berkeley—where something
called PACE, the Property Assessed Clean Energy financing system,
has been attempted in a number of cities and localities in California
and elsewhere in America. Berkeley had a real problem. I went
and interviewed them and they managed to get about 40 or 50 people
on board. Basically the transaction costs of dealing with such
small sums of finance posed a problem. In the end we are talking
about a bank, so a bank has to make projects that are individually
viable. Obviously I agree with many of the points that Elliott
and Richard are making, but in the end a project has to be viable
and wash its face. Some successful schemes in California have
included ones in Palm Springs, where I think you are looking at
deal sizes of several million dollars. It is important that the
project sponsor comes forward with a reasonable aggregation of
individual projects; otherwise the transaction costs would be
too large.
Q143 Chair:
But how would you balance whether or not what was viable and what
was working was as important to, if you like, the more excluded
or marginalised parts of society or community groups?
Prashant Vaze:
That is a very good question and one that we feel is very important.
At the moment the Government has a number of policies in place
to try to address that. We are very supportive of things like
the Energy Company Obligation, which is essentially trying to
make sure that certain amounts of energy bill money goes towards
the fuel pool. It is very important that the Green Investment
Bank has that in-house capability to understand the various Government
schemes that are out there, so to make sure that when deals come
forward it actually makes full use of those. I am very aware that
in Wales, for instance, there are things like Objective 1 money
being used for projects as well. The Green Investment Bank should
hopefully help the project sponsors to identify particular streams
of money and take full advantage of those. It is also important
that the Green Investment Bank passes on the cheap cost of finance
that it has and isn't prejudiced against particular projects because
the credit ratings and credit records of the individual communities
are not great. They should look at each project in its own right.
Richard Wilcox:
Just coming back to your original question about how you would
make it accountable, transparent and ethical, you could always
try making it a co-op.
Q144 Peter Aldous:
A theme that I picked up from reading the Wigley report is that
we have a very steep mountain to climb in terms of being able
to meet our renewable energy targets by 2020. For the GIB to make
an impact you've got to go for some big projects to start with,
in terms of Smart Grid and offshore wind, for instance. From what
the three of you have said, I get the impression that you may
not agree with that approach.
Richard Wilcox:
From my perspective, I agree with it. I think, absolutely, if
you want scale that is what you are going to have to do, but to
get those things is going to take some time. Why not, in the meantime,
do some things that you can do quickly? As I say, don't lose sight
of the fact that there are huge opportunities at the smaller end
of the commercial scale just by focusing your whole attention
on the long-term picture.
Prashant Vaze:
I agree with that. It is important that the Green Investment Bank
has regard to the profile of spending disbursements and actual
income coming in. I do want us to remember that a lot of individually-sized
projects in aggregate make up huge amounts of carbon. Only yesterday,
the Energy and Climate Change Committee reminded us that something
like half of our emissions are from heat, and about 80% of those
are from houses and commercial premises. In aggregate those are
very large scale.
Richard Wilcox:
Also, small scale tends to get local agendas. It tends to create
jobs in the community. It is embedded generation whereas the large
scales aren't. I think it is important that there is a balance
in all this.
Elliott Mannis:
At the risk of us being unanimous, absolutely we need to do some
very large things to get some quick wins and get some impact.
But we need, also, to be very cognisant of the fact that we are
talking about the use of public monies. Public monies need to
address a whole host of goals, including the environment in which
we want to live and all manner and different forms of sequestering
carbon in all its different ways. In particular, we would suggest
that there need to be some clear objectives in terms of not just
how monies are raised but how monies are focused and deployed.
I am looking at Appendix 3 in the back of the Commission's report
on page 45. It talks about technologies, infrastructure and investments,
but it doesn't talk about the non-built environment, the social
environment. I think in the mandate to the Green Investment Bank,
there must be a very clear statement around the purpose and intent
and how funds ought to be deployed because it is our money. It
is the antithesis of a bank in the traditional sense, capitalised
from private funds. This has to deliver a whole host of goals,
and I would suggest they are much broader than just investing
in large-scale infrastructure projects.
Q145 Peter Aldous:
Just one other supplement, and you have semi-answered this. Wigley
doesn't dismiss the smaller schemes but another theme is that
he says there is work to do in terms of aggregation to make projects
and packages attractive to the market. From the way you are talking
you appear to be ahead of the curve on what he's saying in his
report.
Prashant Vaze:
I am saying that there are opportunities to aggregate projects
at different levels. For instance, local government can be a nucleus
of that aggregation, and social housing providers can be a nucleus
of that aggregation. But it is important there is a clearly identified
project sponsor coming forward with a viable business plan. That
is obviously the important bit. I completely agree with Elliott
that we shouldn't have this entity just to do with narrow carbon
or whatever. It should have a greater central purpose. After all,
it is being supported by BIS, so I am sure they are not going
to be indifferent to creating jobs, economic growth, development
and these kinds of things. Obviously we would argue for fuel poverty
as well, so it does need to have this wider purpose.
Just to remind us, it is like the KfW. When
it was first set up, it was created in order to rebuild Germany
after the Second World War. The EBRD was created for issues to
do with stimulating market economies in the eastern bloc countries.
We must not be too specific about what its purpose and function
is because these things develop over time.
Richard Wilcox:
I would say that one of the key roles for me for the Green Investment
Bank is acting as a facilitator between the banks and the pension
funds, to get a common understanding of what is a fundable deal.
If we can then aggregate them, then 100 deals at £2 million
each becomes a function that the pension funds can invest in.
At the moment they are so disparate and siloed that there is no
room for the pension funds because they can't understand a £1
million deal; but if they can understand all of them done on standard
documentation, with boilerplate facility docs, etc., then it is
going to bring in that part of the funding structure, the capital
market structure, that isn't there now, which is to my mind absolutely
essential to get the scale that we need.
Elliott Mannis:
At the risk of digressing from a woodland agenda for one minute,
I think what the three of us are suggesting is that the scope
of the remit could go further. In particular, with respect to
the point about aggregation, one of the things any Green Investment
Bank would need to be mindful of is where the technology comes
from. It is great to invest in gigantic carbon capture and storage
projects or ways of making a Smart Grid, but where does technology
come from? Technology tends to come from entrepreneurs and innovators.
Just investing in "large-scale stuff", for want of a
better term, doesn't breed the next generation of talent. The
worry about aggregation that I would have, whether you do it by
whatever means, is that there needs to be investment in small-scale
technology and innovation because that's where the bright ideas
come from. Aggregation doesn't directly address that. When the
report talks about market issues or where things can't get done,
I will tell you from bitter experience what can't get done at
the moment, because it doesn't really exist, is small-scale funding—call
it venture capital—for pre-revenue projects: things that
are ideas, proven at a lab scale that you need to take to the
next level. That's where your next wind turbine, your Smart Grid,
your next whatever, is going to come from. The means to finance
that doesn't really exist today.
Q146 Zac Goldsmith:
On this point, I am a big fan of the Woodland Trust and I agree
with what you said about the importance of addressing issues relating
to the non-built environment. That is going to be a big part of
the focus of the work of this Committee and the things we've discussed
since its formation. My concern is that by having too broad a
focus for the bank it will try to become all things to all people
and might end up becoming nothing to anyone. The purpose of the
Green Investment Bank, as I understand it, is to leverage very
large sums of money in order to facilitate a rapid shift towards
a low-carbon economy. That means grabbing the low-hanging fruit.
It means trying to correct market failure in this sector and doing
so within a very short period of time. It just seems to me that,
if we start focusing also on forest bonds, woodland bonds and
these kinds of things, we could find ourselves in a tangle. I
am just wondering whether you share any of those concerns.
Elliott Mannis:
The concerns definitely resonate—absolutely—and it's
been a big subject of discussion in terms of our thinking around
this proposition. Our perspective on it goes as follows. I agree
about the low-hanging fruit. I agree about getting the big wins.
I also think the big lumps of capital that are going to go into
the bank are likely to be targeted in that direction. They are
likely to come from the larger pension funds and a range of other
"usual" sources.
There is also the very unique opportunity, given
that nothing like this truly exists today, to capitalise on the
public's imagination and create some momentum where investment
products can be offered to the public or offered to corporates
on a very targeted basis where you can match the inbound investment
capital and what it's directed towards. That might be 0.5% of
what the bank does, but it could serve a very good purpose along
the way without distracting from the core. It would make sense
in terms of delivering a balance of outcomes together with making
sure that the large lumps of capital address what truly needs
to be done.
Prashant Vaze:
I very much agree with your point about low-hanging fruits. If
you look at the Ernst & Young report, which is talking about
the kind of scale at which it might operate in the near future,
in the first few years of its life, we are talking about tens
of billions, whereas the challenge is in hundreds of billions.
That kind of mismatch between what's available in the short term
and what's needed is absolutely clear. So I absolutely love low-hanging
fruits. I would argue that quite a lot of these low-hanging opportunities
are at the community level, and certainly the kind of stuff that
we saw from the Energy and Climate Change Committee yesterday
was putting costs at minus £70 per tonne of carbon from high
energy efficiency options. Even the kind of district heating,
which I think you mentioned, came in at quite a low price relatively.
I think it was £10 to £20 per tonne packs. Some insulation
is not so good. There are relatively low-hanging fruits here,
plus they will deliver quite quickly so it doesn't mean that resources
are tied up for many, many years.
Q147 Sheryll Murray:
We have heard that there are lots of different types of projects
that the Green Investment Bank could or should prioritise. Your
evidence suggests that the bank should focus on the medium and
community scale projects where investment barriers are more acute.
Could you tell me if you think these projects would cut enough
CO2 emissions? I know you've mentioned aggregation.
Prashant Vaze:
Yes. As I mentioned earlier on, something like half of our emissions
are from heat and about 80% of these are from the heating of buildings
and the heating of commercial premises. The quantity of energy
that is required for this is very substantial. The issue is then
how much of this can be addressed. With certainly some of the
deep retrofit type projects, for want of a better word, and we
are talking about things like insulation of solid wall homes,
there are something like six million of these. Each of these might
cost about £10,000. I have seen figures that this kind of
intervention could save maybe 30% of emissions from that building.
The numbers are there. It is really working out what the barriers
are and whether the Green Investment Bank or the project sponsors
can bring the deals together in a way that makes it viable. That
is where I am hoping that the community level will work. Some
of the economies of scale you get are really from an area-based,
street-by-street type of approach to energy insulation, especially
to external walls, especially some of the kinds of things on windows
and heating systems.
Richard Wilcox:
I agree. I think it is speed of delivery. A lot of these are ready
projects now. It is also about energy mix and the balance of that
energy mix within the UK.
Q148 Sheryll Murray:
Do you think these investments would provide a worthwhile financial
return for the investments?
Richard Wilcox:
Yes is the short answer.
Q149 Chair:
How?
Richard Wilcox:
They would have to focus on the right sort of technologies in
the right places. There is no point putting solar panels in Aberdeen.
There is no point doing a wind farm in central London. But if
you focus on those areas where they have the strongest natural
resources the financial returns are there. It is acting as the
catalyst to make those happen and widen that market. That is where
I think the Green Investment Bank is not taking non-commercial
risks or non-commercial returns; it is just acting in a way that
others don't to bring in that private sector investment.
Q150 Sheryll Murray:
You have just said there is no point in putting solar panels in
a house in Aberdeen. How would you justify the different projects
in different areas from a national bank?
Richard Wilcox:
Because I think they can focus geographically in the areas that
best suit the resources there. In Aberdeen we are doing an awful
lot of wind turbines: smallish 1 MW and 2 MW schemes that are
perfect for that area. In Cornwall, the same. In London maybe
it is all about retrofitting public buildings. It is not just
energy generation. We shouldn't focus purely on energy generation.
Energy efficiency and heat are just as important.
Q151 Zac Goldsmith:
Just to clarify, relative to the overall portfolio of the Co-operative
Bank, how big is your emphasis on renewable energy and clean technology?
Richard Wilcox:
At the moment it is about 5% of our corporate asset book, but,
as I said, it has grown. We have a work-in-progress schedule in
excess of £1 billion.
Q152 Zac Goldsmith:
How does it perform?
Richard Wilcox:
It performs well.
Q153 Zac Goldsmith:
Can you give us an example? What sort of performance?
Richard Wilcox:
We lend at commercial rates. We don't subsidise it. I sound like
a Heineken beer commercial. We go to places that other banks don't
go but not to achieve sub-market returns. It is because we truly
have a triple bottom line analysis. It is social, environmental
and financial. Other banks don't have that triple bottom line.
It doesn't mean it's not economic to do: it is. We make money,
but it's about more than that. It is about creating the environment
and it's about creating sustainable social benefits.
Q154 Zac Goldsmith:
Can I ask one more question instead of butting in? What has stopped
you at a billion? Is it a lack of capital on your part? How much
demand could you feed if you were an unlimited bank?
Richard Wilcox:
To be honest, that's without even going out and trying the market.
That is just word of mouth from schemes that we've done already.
I think there is a huge untapped market. But you are right: it
is lack of capital. It is not just our lack of capital but lack
of capital from the community groups. That is another area where
we would really like to think we could focus on providing some
pre-development capital for community groups. To get to planning
is going to cost £200,000 or £250,000. That is a difficult
sum of money for community groups to raise. That is pure risk
money. There is nowhere for them to go to get that money. We can
come in after they've got planning because we're a commercial
bank, but before that stage there is nowhere for them to go. To
me that is a perfect role for GIB because it is addressing a market
failure that other people aren't there, and it's really acting
as a catalyst to the market.
Prashant Vaze:
I was going to answer your question of "Will there be money?"
I think our answer is probably a bit more guarded. Yes, it could,
in a way. We are just collating some work at the moment which
hopefully we will be publishing this month, or maybe next, which
is looking at the Green Deal and seeing whether households will
save money at the range of interest rates we think are likely
and the cost of measures that we think are likely. It is very,
very conditional on interest rates, especially for some of the
external insulation measures. It does matter how the Green Deal
is structured, what the interest rate is that is available and
that is where the Green Investment Bank comes in.
In terms of some of the microgeneration options,
the way the Government have designed the feed-in tariff—and
hopefully the renewable heat incentive, when it's tariffs are
announced —is that they are intended to generate returns
of something like 6% to 8%, so that should be reasonably satisfactory.
The devil is in the detail. We have been looking at quite a few
numbers for things like external wall insulation costs, and it
varies from £5,000 up to £14,000. I think I mention
some of the high end costs in there. Those kinds of high extreme
costs will not make very attractive returns. Costs needs to come
down, so that's why you need innovation in delivery.
Elliott Mannis:
I want to put a woodland perspective on these things. Will woodland
generate a return? The answer is simply, yes, it should. For me
it delivers one other particular outcome which relates very closely
to this notion of a triple bottom line, which is that it gets
community engagement and involvement. It is one thing delegating
to large industrials the task of addressing CO2. What
it takes on an inter-generational basis is a change in the mindset,
which means everybody needs to be engaged, which is why you get
children to plant trees and why everybody ought to go for a walk
in the woods. If you can make a bit of money at the same time,
that's a good thing to have achieved. So you could risk carbon
sequestration; you've got public involvement; you've got nice
places to be. There is a chance to achieve all of these things
if the Green Investment Bank targets the uses of its capital in
a broader sense.
Q155 Sheryll Murray:
How could the Green Investment Bank optimise the mix of small
and large-scale investments?
Richard Wilcox:
That's a good question. As I say, I think it's all about the balance.
Small scales aren't going to achieve it on their own and large
scales aren't going to achieve the community benefits on their
own. It's a mixture. We estimate that there are between 10 and
20 jobs created per megawatt of energy.
Q156 Sheryll Murray:
Do you have any ideas on what mix you would have?
Richard Wilcox:
No. I think that is probably for others to answer. I'm not an
expert on energy mix.
Prashant Vaze:
I'm not a banker, but it needs to have regard to financing some
pre-construction stages of a project. There are different phases
to a project. I think the Bank should also have a mix of different
phases, projects are quite high risk pre-construction so find
it quite hard to attract capital. As you were saying, it is appropriate
they have some of those, and maybe they sell those projects on
once they are completed. We think that some of the lowest hanging
fruits are in community energy efficiency and energy. The main
role of the Bank is to develop that kind of expertise so that
it is the expert on making that assessment and making that judgment
call.
Q157 Dr Whitehead:
We have touched on the barriers that prevent the take-up of energy
efficiency arrangements on a large scale, and in particular, Mr
Vaze, you have mentioned the issue of the capital-intensive nature
of a lot of energy efficiency programmes and indeed alternative
energy programmes. Do you see the role of the Green Investment
Bank as essentially being that securitiser of income and the lender
of long term so that it would have a particular role in getting
over those barriers in energy efficiency?
Prashant Vaze:
I think so, but I'm not sure if I understood your question correctly.
Taking the situation where a project sponsor comes forward, say
a local authority or a social housing provider so they have the
retail contacts with the actual houses where energy efficiencies
will take place, I would expect them to make a request for finances
and the Green Investment Bank would then essentially aggregate
those loans and then present that to the money markets. That is
where pension funds come in. Because you've got this aggregation
it is pooling the risk and therefore if an individual project
is not quite performing aggregation will smear that out. That's
another role I would want to see.
Richard Wilcox:
I agree with that, but over and above that there is the opportunity
for GIB to take first loss or equity pieces in securitised structures
so that, when we do aggregate, although the pension funds will
want to minimise their risk—and the way they can do that
is if GIB can come in and take what they call a first loss of
the equities in these structures—that will lower the overall
credit risk and then attract more of the long-term institutional
market.
Prashant Vaze:
I think that is a very important point actually. If you look at
banks like KfW, they do effectively have the Federal Government
or the State Government acting as lender of last resort. A number
of the international institutions like this either have that or
have a lot of paid-in capital, so I would totally support that,
although I suspect the Treasury might not have quite that view.
Elliott Mannis:
I think there is a very unique opportunity for the Green Investment
Bank to do exactly what you've described, which is to take that
very long-term or almost inter-generational view. Some of the
projects that might be difficult to finance, or something like
woodland, have very significant upfront investment costs in order
to put trees in the ground or to do other things. These projects
do generate returns but they are in the medium to long term. It
takes a long time for a tree to grow, as we all know, but with
patience it pays off. I think there is a role for the Green Investment
Bank, given its broader perspective, and it's use of public monies,
to invest in just those types of infrastructure and to create
the financial model where it would not otherwise exist.
Q158 Dr Whitehead:
The Green Deal, to some extent, works on that assumption, which
is that the capital costs will be defrayed against the bill to
the household for energy supplies and therefore will vault over
the forward capital problem by bringing in the income over a period
of time into that bill for the household and not just the householder.
But in terms of the funding of that, that appears to be likely
to emerge, the companies involved in that would expect perhaps
8% or 9% return. Certainly there is some work that I've seen being
done, by Climate Change Capital, for example, which suggests that
that radically depresses the amount of work you can get done.
How might a Green Investment Bank get over that particular problem?
As we have mentioned, it is not a question of lending at giveaway
rates but there are other features, I guess, of how a Green Investment
Bank might work, including the question of the way it might be
backed and resourced, that would deal with some of those issues.
Prashant Vaze:
I think, as you say and as the evidence we are going to be publishing
later this month demonstrates, the viability of individual measures
is very, very interest rate dependent. Anything that reduces interest
rates from those you suggest down to 5% makes a really, really
big difference. If the UK Government are prepared to underwrite
those kinds of debts, then they can lend at 4.5% or 5%. Those
are the kind of rates the UK Government can lend at, so that is
what is there to play for. I was talking to people at KfW and
they lend out at 2.75% at the moment because the Government are
not just the lender of last resort; they are actually giving a
subsidy which they pass on as a reduction in the interest rate.
I absolutely agree that it is important that we focus on how you
get the Bank to access capital at the lowest cost. The sort of
potential Green Deal providers we are seeing might not be able
to lend at even 7% or 8% because their own creditworthiness is
not worthy of that. So there is a real issue. If you want the
market to bring in novel Green Deal providers, it is important
that they don't have to present to the money markets their creditworthiness
because that will hold it back or prevent them from re-entering
that market.
Q159 Dr Whitehead:
Would it be overstating it to say that perhaps the Green Deal
may have quite a substantial need for the Green Investment Bank
to get off the ground, as opposed to some of the ways in which
finance is at present being looked at?
Prashant Vaze:
We have spoken to DECC on this on a number of occasions. I don't
think we've got great clarity about exactly how the finances are
going to be priced. I have heard figures of 8% and 9% as well.
That is quite a high rate and it is going to hold things back.
I think it is important to try to do things which will reduce
that rate, and also bring in, I would hope, the lower cost Green
Deal providers and not just the established energy companies who
have a certain rate of return that they require for their shareholders.
Q160 Dr Whitehead:
Again, I think this little, shall we say, lack of clarity is,
yes, exactly what this entails, but the Energy Company Obligation
following on from Green Deal, certainly looks as if it could approach
a number of the areas in energy efficiency in hard-to-treat properties,
for example, where an even larger amount of upfront capital is
required and the returns are even less certain. Would a Green
Investment Bank have a particular interest in that, or do you
think that the way the figures might work as far as that is concerned
would put it beyond the level of commercial lending altogether,
assuming you had a real bank which was involved in that?
Prashant Vaze:
Just to take that question in parts, the Energy Company Obligation
as far as I understand it is going to be used for subsidising
measures of the fuel poor, not yet defined, and also for measures
in hard-to-treat homes. It is the right things it is being targeted
at. The challenge there is getting enough money into that through
that mechanism. It is also why the ECO is going to be funded through
energy bills on everybody else. We have worries about it pushing
up the costs for everybody else if it is done at the scale that
is necessary. If we are talking about figures of £50 billion
or £60 billion in insulation measures and district heating
measures, there is no way that could be funded from fuel costs
through an ECO. The money isn't there. That is why you cannot
get away from the fact that you need to have low interest rates
as well. Yes, we need to support the ECO and target it well on
people who are in genuine need and the vulnerable need. Hopefully
it will address the issues in the hard to-treat homes as well,
but ultimately that is going to get paid for by other energy customers
in the way it is being presented to us.
Q161 Neil Carmichael:
Before I start, I am going to tell everybody to take note of my
entry in the Register of Members' Interests, because I have interests
in renewable energy. While you have been talking I've been reflecting
on the energy systems that we have at the moment—coal, nuclear
and mostly oil. I can't think of one that hasn't had significant
Government involvement in this development in the last century
or so. In America, there are tax credits and all the rest for
oil, and the building of the Hoover dam. You can see the drift
I'm heading in. Certainly in this country, there is the nationalisation
of coal, the creation of the Central Electricity Generating Board,
the development of nuclear weapons and the consequences for the
nuclear industry. I want to ask a general question: given that
background and given the criticism of renewable energy, "Oh,
it has to be subsidised," are we doing enough to propel the
market?
Chair: Would any of you
like to answer? Don't feel you have to.
Prashant Vaze:
I will answer very, very briefly. There are a number of problems
that renewable energy faces, of which capital availability is
just one. As people around this table very well know, planning
permission is a big bugbear. I personally think the energy market,
full stop, is a big issue. I hope that DECC will address this
in the electricity market reform. I am sure people here are very
familiar with the way that the electricity market often handicaps
less reliable, smaller scale systems already. There are many things
that renewables need Government to get right. The way that the
feed-in tariff and renewable heat incentive are brought in will,
I hope, address quite a few of the financial things, but all number
of things still need to be done on things like biomass, supply
side issues and air quality issues. There is no single bullet
for renewables, I am afraid.
Richard Wilcox:
I would absolutely be opposed to it. I think feed-in tariffs and
RHI, help, and Prashant mentioned planning. I think planning is
a major thing, so if you can help on anything planning would be
one thing that the Government could do.
Q162 Neil Carmichael:
I often get the feeling that there is possibly more to do. If
you compare the development of electricity in Germany and Britain
at the beginning of the last century, twice as many German households
had access to electricity than we did in Britain. That was just
round about the end of the first world war. If you look at the
drivers behind that, you can see that it was the behaviour of
Government that was doing the trick in Germany and not enabling
the same speed of development in this country. Given that historical
background and existing systems of generation and distribution
and all the rest, it strikes me sometimes that what we are doing
is relatively small scale. I am trying to put my next set of questions
into that context.
Chair: Please answer that,
and then maybe we need to move on to the set of questions.
Elliott Mannis:
I will see if I can answer this in a very concise way. I think
your point is a very good one. I think there is a very important
role for Government in providing economic stimulus towards areas
that need to be moved forward. Quite often markets don't do it
on their own. If one thinks in terms of investment in renewable
technology in the broader sense, quite frankly people won't invest
if it doesn't provide what they deem to be an adequate rate of
return. It's got to compete against the broad range of all the
other asset classes that are out there. People don't do it from
the goodness of their heart because every pension fund needs to
make a good return. There is a very important stimulus role be
it through subsidies or just pointing money in places where it
doesn't otherwise reach. One of the things—this is a digressionary
point, for which I will apologise slightly in advance—
Q163 Chair:
I really want us to just focus, if we can, on whatever is in the
bigger picture but relating to the Green Investment Bank.
Elliott Mannis:
There is an important role for Government to provide the stimulus
towards places it needs to be.
Q164 Neil Carmichael:
The question then is: is the Green Investment Bank the right kind
of mechanism to do exactly that? What other obstacles do you think
are there which we need to smash down to bring about the outcomes
that this is all aimed for?
Richard Wilcox:
Very quickly, yes, I agree that the Green Investment Bank is the
right thing. It is all about building market share and access
to funding, in my opinion. The funding is there: it just may not
be in the right places. There is a big role that you can do to
actually stimulate that big sea change in the capital markets
to get that. Funding is very important. The Green Investment Bank
to me is critical in that. What other things? I will let the experts
talk about that, but planning and grid connection are two major
issues for me.
Prashant Vaze:
I will echo Richard's point about the necessity of the Green Investment
Bank. There is a huge quantity of investment needed. An institution
that is intelligent in terms of appraisal of projects, that's
got access to low-cost capital and that has this role of aggregation
is absolutely crucial. I have been researching the history of
American and European systems quite a lot for this book, so I
am happy to talk to you at some later stage about this.
Chair: But not now; please
not now.
Prashant Vaze:
There is quite a lot of difference in systems in other countries.
Q165 Neil Carmichael:
Yes, but they all boil down to the same thing, don't they? That's
the interesting point.
Prashant Vaze:
In the US most of the rural electrification took place as a result
of the New Deal. It was a very, very deliberate act on the part
of—Government
Neil Carmichael: Exactly.
Prashant Vaze:
In Denmark, as people like Dr Whitehead will know, the Heat Supply
Law has been instrumental in creating regulations which essentially
creates a forcible demand for heat. All of these things are different
in different countries. The feed-in tariff, when Germany first
operated it 20 years ago, was very deliberately to break the oligopoly
of the big energy companies there because of the fear Government
had of what used to be a public sector company and became privatised
in the 1950s. So there are very, very different systems in different
countries.
I don't want to go too much into the history
of different countries, but in terms of barriers I have already
mentioned that the electricity market is a big issue. I think
we will be presenting evidence in different fora on that, so you
will get an opportunity to hear our views on that. We know about
the issues to do with technologies being at different stages.
For instance, a feed-in tariff is of no use at all to wave technology.
It is not there yet. You need different types of support for different
levels of technological maturity. I have nothing to add on planning.
This is not a Consumer Focus view, but there is a role for more
regulation, especially on some of the demand side of things. A
certain proportion of people will respond to the stimuli of economic
type; other people won't. If it is an important and genuinely
low-cost solution, I think regulation with the appropriate phasing
and nudges is likely to be effective.
Elliott Mannis:
I agree that potentially the Green Investment Bank could be just
the right thing, but it depends very much on what objectives or
remit it is given. If it is given a very narrow remit in one sense,
it will deliver to that purpose. If it is given a broader remit,
then it will deliver to that. It boils down to the specification.
I think with regard to stimulus, incentives or subsidies, one
needs to look at both carrots and sticks. One of the issues that
could be for contemplation, for example, is if we think about
our extractive industries—whether they are oil and gas or
mining or variously others. When we think about paying the price
of a litre of diesel at the pump, does that really put a price
on carbon or the impact on biodiversity or a host of other things?
I would argue at a high level that one needs to think about how
you incentivise the right things to be done and how one properly
puts a social price on extractive industries and other things
that are not necessarily delivering to the wider objective. We
only price things today that we can definitely put a pound sign
against. What we can't price or what we don't have the tools to
price yet, because it is emerging, is the value of biodiversity
or the value of other things that are arguably destroyed by other
means. Both tools, together with a very clear remit to the Green
Investment Bank, could deliver precisely what we want if it is
well crafted.
Q166 Chair:
Can I ask Mr Mannis as well, for the record, in terms of the Green
Investment Bank funding green investments such as tree planting,
if it is a question of having to find that financial return in
the Bank, how would you account for that?
Elliott Mannis:
There are several points in this. If I have misunderstood the
question, please help me. Do I believe that woodland creation—an
investment in woodland—would deliver a pure financial return?
Yes, I do. I believe that return is modest: i.e. in the range
of probably 2% to 3% per annum. How would that be accounted for?
The return is generated in the long run over a portfolio of assets.
If one invested immediately in woodland today, it is not likely
to generate a great return in the early years because young trees
need to grow and emerge, but as they do there is the opportunity
to take benefit from that woodland through harvesting it, as one
would with any other agricultural crop. Over a 30, 40, 50-year
term one will see cash returns and delivery of a running yield
as one would with any other asset class. I don't know if that
answers the question for you.
Q167 Mr Spencer:
Just on that point, as a nation how strategically bright would
that be, given the pressure on land, in terms of our food security
and our energy security? How strategically right would that be
to take an enormous amount of land out of food and energy production
and put it into woodland?
Elliott Mannis:
I think there are several parts of this. First of all, I will
qualify my answer by saying I am not an agricultural expert. On
what I do know, first of all, the UK has, by comparison to its
European peers, one of the lowest rates of woodland as a function
of the extension of farming and intensive agricultural use over
time. If one looks at where one can expand, I think you can see
that one could easily expand the area of woodland cover by putting
it in places where there isn't natural agricultural production.
You could think of hilly areas in Wales or in Scotland, etcetera,
that aren't necessarily the most productive hectare of land so
it wouldn't infringe. Therefore you could have the benefit of
the carbon sequestration and all the other biodiversity and social
benefits without having to put pressure on peak arable farmland.
There is more than enough land to achieve both goals that I would
sacrifice.
Q168 Zac Goldsmith:
Just very quickly on that point. I am going to sound like a philistine
now and I apologise in advance. The point about the Green Investment
Bank is to trade this shift to a low-carbon economy. If it were
to invest in woodland related projects, it would be on the basis
of its contribution to carbon reduction. That is the only way
you can justify the Green Investment Bank, as we all understand
it at the moment. I know you would like a broader remit, but that
is within the context of most people's understanding in the Bank.
If that was the rationale, the Green Investment Bank would get
a much better return for its investment by investing in woodland-related
schemes in other countries, not this country, where land is less
expensive, where labour is less expensive and so on. If you are
only looking at this in terms of carbon, which I think the Green
Investment Bank will do, the way I see it, it is very unlikely
the Green Investment Bank would ever find itself investing in
these kinds of schemes. I am not suggesting they are not important,
but it is hard for me to understand how the Green Investment Bank
is the vehicle that you would look to to deliver that kind of
funding. Maybe there are other sources of funding—I'm not
sure where—but it is hard to understand and hard to imagine
how the Green Investment Bank would be the vehicle that you are
looking for.
Elliott Mannis:
Can I provide a different point of view? It is ultimately not
for me to judge; I am not setting the remit for the Bank. I imagine
it in two ways. First of all, I think the Green Investment Bank
will quite naturally look at a hierarchy or a list of competing
projects. It will look at the aggregate amount that can be saved,
and then on the margin of what is the cost per tonne of CO2
saved it will see where woodland features in that list. We would
argue—we would say this, wouldn't we?—that the price
of saving a tonne of carbon invested in woodland is competitive
against a range of other alternates, but that judgment needs to
be—
Q169 Zac Goldsmith:
Even in this country?
Elliott Mannis:
Even in this country. There is a secondary point above and beyond
just the broad mix, which will depend on the remit given to the
Bank, and I will make it retail investors. Let's say retail investors
are allowed to participate and are able to determine how their
monies are utilised, and I will use examples of either a green
ISA or a woodland bond, Say I wanted to invest £100 in a
woodland bond and I target that money, and the Green Investment
Bank has that product, then that money would go directly to the
purpose. I agree it wouldn't necessarily have featured in their
hierarchy. It is doing it because I want it to. Therefore the
Green Investment Bank is not just for tackling the carbon problem:
it is serving a broader social purpose at the same time. That
is why I think it comes back to what people want that Bank to
be and what purpose it is going to serve. Is it just about carbon
reduction or is it about getting the population involved in targeting
money towards purposes it wants to be seen achieved at the same
time?
Q170 Zac Goldsmith:
I have a final question. If what you said is true, and I think
it is—I have resonance with it—do you need the Green
Investment Bank in order to facilitate those investments? If the
demand is there, if you were to create the financial opportunities
for people to invest in, why do you then need the Green Investment
Bank?
Elliott Mannis:
I think there is an opportunity that the Green Investment Bank
provides by the nature of its scale and the momentum it will necessarily
have, where it can address not just woodland—I am here arguing
that point today—but you could make the point about community
scale projects or a whole host of different things where, in and
of themselves, it is quite difficult for them to attract sufficient
attention. We make the case, for example, about wanting to double
woodland cover over the next 50 years. Numerous organisations
have lauded that as being a great and worthy thing to do. If we
are going to create public momentum around objectives like that,
it does need a means of packaging the investment and making it
available to the general population. An individual organisation
like the Woodland Trust would struggle to do that on its own account,
but if it is able to work in co-operation with the Green Investment
Bank or the Co-op Bank or some other body that has the broad reach
and the ability to use financial instruments—the Woodland
Trust is not a bank—then there is ability to create something
that we don't have today in terms of momentum, targeted investment,
greater public involvement and carbon reduction at the same time.
Chair: We can see all
kinds of partnerships coming out of our evidence session this
afternoon.
Q171 Neil Carmichael:
On that point, are you sure you are going to get the return from
investment in woodland, which would be necessary to make the Green
Investment Bank grow itself? That is one of the objectives of
the £1 billion put in as seed funding for other investments
to plough back into the Green Investment Bank so that it becomes
bigger and bigger. Would it not be easier to just turn your attention
to, for example, the Forestry Commission or whatever? They are
currently giving out grants to plant trees effectively free of
charge, when you extrapolate it out.
Elliott Mannis:
There are a number of different aspects here. One of the things
the Woodland Trust espouses is the restoration of planted ancient
woodland sites and the planting of native broadleaf trees. When
the Forestry Commission was created, it was about creating a strategic
stock of woodland and that was principally through conifers. Again,
one gets back to objectives and how one wants to see money utilised.
I am in danger of repeating a point I made previously, so I apologise.
Woodland creation does deliver a modest return. It is exemplified
by numerous financial instruments you can see through other institutions
today. It is going to deliver probably modest single-digit returns
over the long term and great stability at the same time. We make
the point simply: do we think this is the only thing an individual,
a Green Investment Bank or anybody should invest in? Absolutely
not. But is it one of a number of things one could and should
do? Absolutely, yes. More importantly, what it does provide is
that social environment to complement the built-in infrastructure
environment so that there is a balance in broad society terms.
Q172 Caroline Lucas:
I wanted to come back to the community scale. I have a question
primarily for Richard Wilcox. In your evidence you suggested that
the Bank had an "enabling role" that encourages communities
to come forward with their own energy solutions. For example,
in Brighton we have the Brighton Energy Co-op of which I am a
member. In Oxfordshire they have something similar. These things
are, as you know, springing up all over the country. I wondered
how, in particular, you see the Green Investment Bank going about
providing that "enabling role" to those community-based
energy initiatives, whether or not it is primarily a financial
thing or whether it is also all of the kind of business advice
and hand-holding, because these are usually people that don't
necessarily have any experience in this at all. They just have
a great deal of commitment and willingness to try to make it happen.
Richard Wilcox:
I am glad you have made that point because I absolutely agree.
Just by way of example, we funded a community scheme on Tiree,
which is one of the Hebridean Islands, which was about a megawatt
of installed onshore wind. It was the first community scheme that
was funded commercially and also with the lottery. It took four
years to get through all the planning and environmental matters,
but at the end of that the people who did it were the UK's expert
on delivering small community schemes. They got inundated with
calls from every community group wanting to talk to them. Bless
them, they did that, but it just shows that there is a real lack
of somewhere to go for community groups to get sound, impartial
advice as to how to deliver these schemes. For me, it's a really
crucial role for the Green Investment Bank and something that
doesn't cost too much money either. We are not talking hundreds
of millions of pounds to set up an advice centre for community
groups. It is really important, so I absolutely agree with you.
Prashant Vaze:
Can I just endorse that and say that there are probably two or
three specific things it can do. If you think about the kind of
challenges that face community groups trying to bring their projects
forward, one is lack of knowledge or understanding of the electricity
markets. At the moment there are only one or two companies who
will enter into long-term contracts with smallish scale providers.
It is important that an institution has that kind of knowledge
of how the system works and they can quickly direct people to
the one or two suppliers that will buy their electricity. The
second thing, as you mentioned earlier, is the contracts sort
of stuff. Often in very, very small deals, there is the cost of
getting the legals sorted out, the cost of making sure you are
getting a correct deal from your point of view, that the risk
has been correctly allocated and all those kind of things. It
is very boring and very tedious, but unfortunately somebody has
to do it and quite a lot depends on that. It would be helpful
if the Green Investment Bank had that kind of in-house team skilled
at structuring these kinds of contracts, to make sure that if
it is a wind-based project it is not unduly jeopardised because
of the nature of wind projects.
Richard Wilcox:
I was involved in the early stages of the PFI market. That was
very similar in the sense that one school project would get done
in Bolton and another school project would get done in Rochdale,
and they wouldn't talk to each other. There would be different
funders and different structures. It was taking ages to get these
things done. Then the Treasury task force came in, and PFUK, PPP
and all sorts of different organisations came in. What came out
of that was standard documentation and a clear understanding of
exactly how these schemes work; and the market took off from that.
It enabled what was four years to get to financial close to come
down to 12 months to get to financial close.
Q173 Caroline Lucas:
Can I just check out that you don't see any tension between the
different scales that it sounds as if we envisage this bank operating
at? On the one hand Zac was talking earlier about the low-hanging
fruit, the big buck that needs to be done very quickly, versus
something that sounds a lot more like hand-holding at a very local
level with maybe 30 people who don't know one end of a balance
sheet from another necessarily. I am speaking for myself rather
than being rude about them, but people who are starting without
any experience necessarily at all.
Richard Wilcox:
That is why I say I think the Green Investment Bank is a two-stage
process. It absolutely is about the large scale, but that is capital
market people looking at structural changes in the economy. That
is going to take 10 years. Outside that there are an awful lot
of things that they can do, such as the advice; such as bringing
the banks and the pension funds together; such as the issue about
aggregation. All these things which are non-capital intensive
can still get done, but they require people with expertise.
Q174 Caroline Lucas:
Are you confident that Treasury and others recognise the potential
for this smaller scale stuff as well as the big scale stuff?
Richard Wilcox:
I can't speak for Treasury.
Q175 Peter Aldous:
I think all three of you have given some very good examples of
what can be done in a community at the micro level. How is the
Green Investment Bank going to engage with those communities?
I am assuming that we are not going to have the Green Investment
Bank popping up in the High street with a branch, as it were.
How do you envisage that problem being tackled?
Richard Wilcox:
I hope not too, but I do think there is a requirement for regional
representation or sub-national, or however many people you are
going to do. Going back to the point I made before about different
energy needs in different areas, it is important that you have
people in north-east Scotland who understand those local needs,
and people in the south-west of England and in Wales. All the
different areas will have different needs, and you can't control
that from London, Edinburgh or anywhere else. Yes, control in
one central place but regional representation absolutely.
Prashant Vaze:
I would possibly take a different view. You can have all different
types of projects out there. Often a small wind project is a small
wind project; a hydro project is a hydro project. I do wonder
whether we do need regional representation. It would certainly
significantly increase the costs. If you look at examples in other
countries, again I talk about GfK. I think that was pretty much
Frankfurt based. As regards the EBRD, my understanding is that
they work quite closely with the retail banks in countries they
lend to. In a way it has a slightly different function and is
trying to develop that from the skilled capability in those countries.
I am not sure I agree there is a necessity of having regional
representation. Certainly it would push up the costs. With regard
to the way it would interact, if it is a competent bank it would
be looking at the admin costs in doing the different deals and
work out for itself if it is a sensible cut-off. I don't know
what that number is. I suspect it is not at an individual house
level. I hope it is not £10 million either. It is somewhere
in between. I think that could possibly make sense, but it is
really for the bank to assess that, minimise the administrative
costs and get the genuine participation of communities.
Elliott Mannis:
I will give a slightly different take on that. I think there are
two or possibly three distinct points for the bank. If you think
of capitalising the bank and where that money is going to come
from, that can be done in quite a compact and concise fashion.
I am not a banker; I am not an expert. But I would imagine getting
the money from Treasury, getting the money from pensions and other
institutions, can be done fairly easily and centrally. I can imagine,
to the extent the bank wants to engage with the greater public,
that could be done in an online fashion. If one wanted to buy
a woodland bond or a green bond or whatever it is, that is easily
facilitated in the same way as one does other similar online instruments
now. That is one side of the balance sheet of the bank. The other
piece is about the distribution and the application of capital.
It is a personal view, but like a lot of institutions it needs
a mind of management in one central place. I am suspicious that
that would be London, but it does need to have people who are
accessible where they need to be. I think the example of having
offices in Scotland and Wales, or where particular areas of excellence
or activity are focused, would make eminent sense, but one needs
to think about how the capital is going to be deployed. It is
hard to answer the question without knowing precisely what it
is that is going to be done and what the remit is.
Q176 Peter Aldous:
Would it be a stand-alone office, do you think, or a Government
office for that particular region or—I don't know—in
one of the High Street banks, which, after all, we do own?
Elliott Mannis:
Personally I think it needs to be a stand-alone institution, but
however that is physically deployed it needs to be done in a cost-efficient
fashion. I think there are perils if it was seen to be associated
too closely with any other institution, be it a High Street bank
or Government, for that matter. It should be charged and given
a remit to do something on its own two feet, and should be seen
to be independent as such.
Q177 Zac Goldsmith:
I wanted to ask Richard, as I understand it, the EBRD has quite
a strict cap around the 30% mark, but I may be wrong, on how much
of a project they can invest in; so they necessarily need to have
partners. The reason they do that is to avoid having to have a
local presence throughout Europe. It means that they can rely
on the due diligence of the partners that they are working with.
As I understand it, most of the people you have spoken to seem
to suggest that that is the kind of model that the Green Investment
Bank will also pursue. It wouldn't want to be the sole investor.
If that is the case, would you still believe there would be a
need for that regional or local presence?
Richard Wilcox:
Yes, but I am not talking about a huge presence in the regions.
I think it is important that there be some representation. I am
not talking about replicating teams in different parts of the
country, but I think, especially when you are talking about community
groups, unfortunately there is a bit of hand-holding needed. Yes,
they can access online; yes, they can talk to a central team,
wherever it is; but I do think to go out and see the local conditions
is important. I do tend to disagree with Prashad. A wind deal
is not a wind deal; a hydro deal is not a hydro deal. They have
shared common characteristics, but they are different wherever
they are. Have a central point of excellence but with some regional
representation.
Prashant Vaze:
I think this does get at the nub of "What is it there for?"
If you see it as primarily a bank—which is essentially to
do things like contract with the money markets, a Treasury function,
do risk profiling—for that kind of stuff I don't think you
would want it to have regional representation. Bear in mind that
the EBRD is based in London. The last time I looked it's not anywhere
near its field of operation. It is possible to do these things
remotely. I think the EIB is established in Luxembourg, so again
it is quite normal for these kinds of operations to take place
in a centralised fashion.
You mentioned whether it has a retail presence
in terms of getting in savings. In our submission we suggested
NS&I might be a mechanism for doing this. That already has
an internet presence and it also uses the Post Office networks.
In a way it is the most distributed banking network out there
already, but that is quite a separate function to the disbursement
function.
Chair: I think we wanted
to move on to what other things need to be rationalised. I am
going to bring in Neil Carmichael on that.
Q178 Neil Carmichael:
I have been looking at micro hydro schemes and so forth because
I do think that is quite an interesting area. It is certainly
the sort of thing in which two of you would be interested. One
of the obstructions is the attitude sometimes of the Environment
Agency, for example, not least because they are worrying about
fish, water flow and so forth. That is one of the obstructions
that I see generally which don't help renewable energy. You can
see straightaway that there is a conflict within the world of
the environment because, clearly, damaging rivers and fish prospects
is not constructive either. How do you see that argument and discussion
unfolding?
Richard Wilcox:
Hydro schemes do have to balance the environmental aspects, but
I do agree that sometimes the Environmental Agency could be seen
to be going over the top slightly. We funded a scheme where they
had to push a fish ladder in at enormous cost and, six months
in, nobody has seen a fish. Nobody had seen a fish downstream
before that either, but they had to do it. It's balance. Absolutely
it shouldn't damage the environment, but I think sometimes people
lose perspective and go completely over the top.
Prashant Vaze:
I agree with the point you are making. I am not sure if it is
an issue for the Green Investment Bank to necessarily be concerned
with. In the end there is a project sponsor, and the project sponsor
is responsible for securing the kind of permissions and authorisations
for this. I completely agree with you. I have looked at a number
of micro hydro schemes that seemed interesting. I was just staggered
at the amount of cost and bureaucracy it takes for really very,
very small projects of a few tens of kilowatts. It is quite outrageous,
but that is not a problem for the bank. It is a problem for our
planning system and interaction between agencies.
Q179 Neil Carmichael:
Are there any areas of infrastructure development or specific
priorities that the Green Investment Bank should be working towards?
If you are going to have a list of priorities, what would they
be essentially?
Chair: Mr Wilcox? Perhaps
you could include in that as well, if you are going to try and
get the small-scale community-led initiatives off the ground,
what Government could do to assist not just on the finances but
the other bits that need to be all lined up to get that coming
forward.
Richard Wilcox:
There are three key things for me. I know this is the boring bank
bit, but enabling standard documentation, so really encouraging
the banks to get together, maybe through the BBA, to standardise
documentation. That will reduce costs enormously. Part of the
big problem, as you recognise, is that, if you do each separate
facility on new documentation, a new set of lawyers come in and
reinvent the wheel every five minutes, it adds huge cost to the
project. The economics of the community deals are difficult to
do. As I say, it is a bit of a boring technical point but it would
be hugely beneficial: standard documentation and a central advice
point, going back to Caroline Lucas's point, so somewhere the
community can go to talk about how these things get done.
There is the other bit about facilitating it—the
holistic approach between the banks and the pension funds—so
that we end up, hopefully, with a position where the banks are
funding short-term development risk, which is what we should be
doing, and the pension funds are taking the long-term income,
which is what they want to do. But we have never managed to get
together on a holistic basis so far. Even within the PFI market,
we never quite managed that, but if GIB can play a part as a catalyst
to make that happen that will have quite a beneficial impact.
Prashant Vaze:
I agree with those points, but if you don't mind I will answer
that question in terms of the technologies because that is another
way of interpreting it. The kind of analysis I've seen suggests
that some of the lowest hanging fruit—and I think that's
the way the thing should be targeted—is on the energy efficiency
side of things. I think some of the community level microgeneration
schemes are quite attractive as well. There is a particular problem
with some of the community level microgeneration, especially on
the heat side if they need heat networks. I think that is very,
very hard to get funding for at the moment. I know your colleague
from Southampton is very aware of that. That is particularly where
there are market failure problems and huge capital outlay is necessary.
I am not close enough, or at least my organisation
is not close enough, to know about the electricity investment
to have a view on that. My sense is that conventional banking
is already pretty good at financing big wind farms, but if they
tell you otherwise I'm sure they know better. I would have thought
some of the Green Deal behind-the-scenes work for instance on
boilerplate wording for unconventional Green Deal providers is
very important and financing some of the new heat networks, since
they aren't currently regulated.
Q180 Neil Carmichael:
Do you see the Green Investment Bank dealing with the smaller-scale
things more than the larger-scale things, from what you have just
said about the success of the larger corporations getting funding
anyway for their schemes?
Prashant Vaze:
I think it needs to have a balance on its portfolio. I think it
does need to do innovative stuff. There are other market failings
other than the aggregation issue we've been talking about. I know
some of the earlier stage technologies like carbon capture and
storage do have genuine challenges. They are quite hard to balance.
I personally don't think it should be solely in community energy
or anything like that, but I think it should certainly be for
the Bank to make those decisions with an eye to bringing on technologies
and also delivering carbon.
Q181 Neil Carmichael:
Most people who are in favour of the Green Investment Bank make
two or three points. One is that you have to have the expertise
in a Green Investment Bank. One or two of you have alluded to
that by reference, for example, to the EIB and EBRD, which actually
has the same sort of functions and capacities. Secondly, there
is the creation of a secure market so investors look around and
say, "Actually it's worth investing in this because people
will be buying the output"—security of market, essentially.
A third area is the need to upscale or improve research and development.
You have also, to some extent, touched upon that because at the
end of the day there are certain sectors that we just don't have
in this country now.
Earlier this week
we were talking about—in a completely different venue and
subject area—where is the electronic sector if we are going
to start having electric cars and so forth? Does the Green Investment
Bank have a role to play there? You can apply the same logic to
the technologies that you're talking about. Do you agree with
that, and do you think that the Green Investment Bank looks as
though it's going to be able to do those three things?
Richard Wilcox:
I will comment on a couple of those. Skills shortages I absolutely
agree with. There is a real need for specialist bankers, lawyers
and engineers. There are not enough of them in the sector; so
I agree with that. There is the issue about raising funds. Going
back to the small scale—and I know I keep talking about
aggregation—if you do that, then it's proof of concept so
that when you go to the point at which the Green Investment Bank
is looking to raise public bonds there is a track record there
of having done them, albeit smaller. But at least there is a track
record there, and the more track record you've got, the lower
the cost of funds. It goes back to this point about not waiting
10 years for carbon capture and storage or tidal or whatever to
be commercially fundable. There are lots of things you can do
in the meantime.
Prashant Vaze:
On the skills, I absolutely agree. I used to work in central Government
and it's always been a frustration that people move around, and
as soon as you have a group of people who actually know what they're
talking about they seem to move job. I think something with a
bit more permanence and a genuine career structure in an institution
basically that has that kind of skill is very desirable.
The second point I want to rephrase a little
bit. Rather than the size, I think there are some technologies
or some kinds of interventions that don't have a very spectacular
return but are quite low risk. Things like solar installation
might be one of those. It is important that at least in the early
stages somebody makes those kinds of investments early on. The
venture capitalist is never going to come in because the rate
of return is just not there. You are not going to get people on
"Dragon's Den" saying, "Let's go for this one."
I think it's important that somebody needs to look a bit more
strategically and say, "This is a big carbon opportunity;
no great risk; no great return; we need to develop this."
I have forgotten what the third point you made
was; I am sorry.
Q182 Neil Carmichael:
A secure market; market security, basically. It is putting that
platform down where investors think, "Look, I can go into
this market because there is going to be something there for my
customers."
Prashant Vaze:
Yes. I had a very, very depressing meeting once with Goldman Sachs,
where it was telling us to "all pile into biofuels".
I thought, "I can't believe you are so naive to think that's
a good idea. This was four years ago," but that's what it
was telling its investors. It is important that somebody does
have that kind of credibility, not just with the market—which
is important because they needed to refinance it every time they
issued bonds—but also with the community who care about
the outcomes. My slight fear is that some of the standard banks
are much more interested in the bottom line and much less interested
in the outcome. In a way the Green Investment Bank can straddle
that and have knowledge of the markets, make sure that these are
viable projects in their own right but also think about the outcomes
too.
Q183 Mr Spencer:
It doesn't matter whatever project you come forward with, at some
point you meet a planner—the planning department. I just
wondered whether you thought the Green Investment Bank had a role
in advising the planning system. I know Government is looking
to reform that. Should the Green Investment Bank be helping to
assist that reform of the planning system?
Richard Wilcox:
Anybody who could help—that would be gratefully received.
Yes, I do, because it is a major blockage. It can take an awful
lot of money and an awful lot of time to get schemes through.
When they are smaller schemes, that has a disproportionate effect
on the marginal cost of those schemes. Maybe there is something
there about saying that you assume a positive response for smaller-scale
community schemes, or where you can see community benefit there
is a useful position to support them. There may be something that
could be done there.
Prashant Vaze:
I agree with the sentiments but I'm not entirely sure what the
Green Investment Bank could do. I can think of many, many projects—waste
incineration plants—where there is a lot of heavy duty capital
behind it, so it is not lack of capital that is the issue; it's
the planner. I don't really know what you had in mind, but anything
that can unblock it would be a good idea.
Q184 Mr Spencer:
It is whether the Green Investment Bank, I suppose, had a role
in shaping the Government legislation as it moves forward, in
changing the planning system into the new planning system we're
going to end up with, or do you just carry on as you are and not
get involved in that process?
Richard Wilcox:
Just picking up Mr Goldsmith's point before, there is a danger
that it becomes all things to all men and we are looking to the
Green Investment Bank to solve every possible problem that we
have. I think there is a link between planning and renewable energy
generation because it's clearly a problem, but whether that's
the role of GIB or whether it's the role of Government to support
GIB in that is perhaps a moot point.
Prashant Vaze:
I think the announcement that Chris Huhne made a few months ago
was basically saying that local government can retain or keep
the first few years of business rates. Having that kind of direct
financial incentive for local governments to give planning permission
is probably more important than anything that some planner in
a nice suit in London can do; I don't know.
Mr Spencer: Am I allowed
to digress, Chair, like everyone else?
Chair: I think the Committee
will forgive you if it is a short digression.
Q185 Mr Spencer:
One of you made a comment, I think, in response to one of Neil's
questions that you wouldn't allow something that damaged the environment.
The one that came to mind immediately for me was the Severn barrier,
and whether that benefits the environment all comes down to interpretation,
doesn't it, and how difficult those debates become? That is more
of a comment than a question.
Elliott Mannis:
It probably is. I'm not sure the Green Investment Bank does have
a locus in the planning system, but I think the inevitable balancing
that needs to be done through the planning process is that people
want to deliver a net good through the various projects that the
Green Investment Bank will be facilitating or enabling. Inevitably,
there are environmental and other issues that need to be balanced
in the equation. One is going to have to take a view in the round.
Putting up a wind project could be a great thing to do, and if
it was to tear up hectares of woodland at the same time there
might be a good debate round this little table. The planning system
is there for a reason and I think it needs to weigh up those various
interests.
Q186 Neil Carmichael:
Do you think local government, local authorities, should be given
the green light to invest more in small-scale energy and energy
efficiency? Of course, they have prudential borrowing powers under
the 2000 Local Government Act and they may well want to develop
those through the Green Investment Bank.
Richard Wilcox:
A very quick answer: yes. Picking up Prashant's comment before,
there is a big role for the public sector and local authority
generally in terms of heat and energy efficiency. The more you
can get the public sector brought into that, the better. Whether
that is direct investment or whether that's supporting as a keystone
user in some district heating schemes or combined heat and power
boilers retrofitting into public sector buildings, there's a huge
part for the public sector to play.
Prashant Vaze:
My answer is yes as well, but with a proviso. I have talked to
a number of local authorities about why they don't make greater
use of prudential borrowing in order to do the kind of stuff we
all care about. The answer that we typically get back is that
they, too, are under quite a lot of capital pressures and they
have to prioritise where they spend their scarce capital too.
In the end they have to justify it to their principal finance
officer. Local authorities, in common with some of the social
housing providers, tend to prioritise capital spend on things
that they absolutely must do, and it is hard to get those through
as well. A social housing provider will first do things like decent
homes, and then probably do stuff like addressing the kind of
people that are currently unhoused in that area. Each of these
will have quite good rates of return on them as well in terms
of their function. I think local government is in the same position.
Chair: I want to focus
our attention on the final aspects of maximising the beneficial
impacts of the Green Investment Bank. If we could return to that,
it would be helpful.
Neil Carmichael: My question,
alas, was a digression. I sometimes do that, to be honest. I think
this Committee has noticed that.
Chair: I think we are
learning.
Q187 Neil Carmichael:
You've already mentioned the question that it's not just investment
and return for investment but the impact it has on the environment
and on the people around the environment—the communities
and so forth. I have one last question to you all. If we expect
the Green Investment Bank to measure such things and effectively
put that as a part of the investment, how do we expect them to
measure it and how do we expect them to deliver the outcomes that
they then actively create for themselves?
Elliott Mannis:
There is probably a piece that is outwith the Green Investment
Bank in terms of direction. It probably needs to come from Government
overall, but it seems to me that in the broader remit that needs
to be delivered there is a series of outcomes. Those might be
around woodland, they might be around renewable energy sources,
but there is this once-in-a-lifetime opportunity for a step change
in how we want to see things done in the UK and how we want it
to be. It seems to me that it's almost impossible to deliver a
remit to the Green Investment Bank without having some policy
directive at the same time in terms of broad outcomes, because
the Green Investment Bank is an implementation tool. It is an
instrument of policy but it's not policy itself. The interweaving
of those two things is very important. One could do something
as simple as saying, "We're not going to have any cars other
than hydrogen or fuel cell or electric cars by 2025." You
can deliver those hierarchical top-down objectives and then it
is down to the Bank and a bunch of others as to how they get that
done.
In terms of weighing up the balance and how
you measure it, I go back to my point before about extractive
industries. There are tools to account for things in a broader
social context other than the way we just do traditional accounting
today. I think one of the things a Green Investment Bank can very
usefully look at is how one prices projects in the round, not
just using the accounting and financial instruments we have today
but how you value biodiversity in that broader community and social
interest. There are tools to do so and I think the Green Investment
Bank, in my view, ought to encompass that broader objective.
Prashant Vaze:
Earlier in my career I used to work in developing green national
accounts" and I also worked in DEFRA on ecosystem services.
I am very, very sensitive to the points you are making, but we
are trying to create a bank here. I do slightly worry that you
are trying to get too much out of it. At the moment the Government
has already set incentives through things like the feed-in tariff
and renewable heat incentives to adjust prices to exactly that,
to get a better alignment between the returns a banker might make
and the broader kind of concerns that we have. I think you are
right: we need to specify a list of things that the Green Investment
Bank is concerned about. In the end, if it is a bank, it needs
to make sure it's viable and got credibility with the markets
out there. It is going to fail that if it is diverted too much
with other things. Obviously it should be cognisant, aware and
make use of all the incentives out there, including structural
funds, including capital subsidies, which might help on the forestry
side of things. It should do all that, but if you spend too much
time trying to micro manage it, it's losing its way a little bit.
That's my feeling.
Q188 Neil Carmichael:
Surely the alternative view would be for a community to come up
with a project, tick all the boxes—like, for example, community
involvement and looking after the environment—and the Green
Investment Bank coming along and saying, "Yes, that looks
a good project." It is a bit like a glorified 106 arrangement
with planning permission, for instance. That would be a good way
of achieving the same things without the bank itself having to
measure and, as you say, effectively depart from or even basically
being a bank.
Richard Wilcox:
At the end of the day it is a bank. It shouldn't go too far away
from that model, but it doesn't mean that it can't have a balanced
approach. I am bound to say this, but we are a mutual organisation.
We are a co-operative bank. We are about financial sustainability
but we operate to a balanced scorecard. That means we are more
than just that. There is no reason why the Green Investment Bank
can't do the same. It is just important that you get the mandate
right at the outset and then you have very transparent and clear
guidelines.
Chair: Finally, one last
question from Dr Whitehead.
Q189 Dr Whitehead:
This is perhaps a rather naive question. The fact that it is a
bank, it will be a bank and it therefore will have to take decisions
in order to ensure its own survival—and it will be an independent
bank and therefore it will not be directed in the sense that,
say, an investment fund or a grant-making body might be—would
mean that you may well have a number of proposals which will come
before it which will be good investments but not very green. Then
there will be other proposals that are pretty green but are not
very good investments. Is there a case that the bank may say to
itself, "Well, in order to aggregate out our own investment
portfolio so that we survive as a bank, we'll have some pretty
un-green things that we will put our money into, and then we will
be able to help the much more green things on the back of the
not very green things that we put the money into in the first
place", and thereby carry out its remit? Is that a conceivable
model that you would see going forward for the Bank?
Richard Wilcox:
Just because it is a bank doesn't mean you can't trust it entirely.
The two things don't have to go hand-in-hand. Seriously though,
I think it's just all about getting the mandate right at the outset
and then monitoring it. There always will be those tensions, but
that's down to whoever manages the Bank to manage those tensions.
Prashant Vaze:
If you get the mandate right at the outset, as Richard suggests,
with things like social equity, concern about rural areas—you
get those kinds of things right and I think those are important—that
should be the main way the controls exist. If you are trying to
get money off retail investors, which is something we suggest
in our submission, I think it is important that we don't divert
too far away from what a retail investor would expect a bank to
invest in. We did a report—this one here—called "Green
Expectations", and there is a confusion that people have
about what the term "Green" means. If you are expecting
consumers to put money into this in any way or form, you do need
to be very, very specific about what kind of things will be invested
into. So controversial ones like carbon capture and storage or
potentially nuclear might jar against people's expectations.
Chair: I am afraid there
we must leave it. The aim of this session was to try and see what
evidence we could get that would help us to make sure that when
there is a Green Investment Bank it can actually reach out and
be valued by people right the way across the UK and not just looking
at the big investment decisions. Thank you very much indeed. I
know there has been a lot of detailed evidence, but thank you
very much indeed for your contribution.
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