Examination of Witnesses (Question Numbers
Jonny Mulligan, Rupert Steele OBE, Penny Shepherd
MBE and Paul Spence
19 January 2011
Q266 Chair: I think
you all have your papers in front of you. I would like to give
you a warm welcome to our session this afternoon of the Environmental
Audit Select Committee. We realise that there are four of you
from different strands, if you likedifferent organisations.
My first question in welcoming you all here today and thanking
you for giving up your time is simply to give each of you the
opportunity to say what you feel are the main barriers towards
getting the green investment that we need; perhaps give us some
flavour of whether or not you feel that the utility companies
are constrained by their balance sheets; and set out what you
would like the Green Bank, or however it's going to be, to get
organised and what you think the biggest challenges arejust
by way of introduction. My colleagues will then home in on specific
aspects. Mr Mulligan, would you like to go first?
Yes. I would like to say thank you very much for inviting me here
today. I am Jonny Mulligan from the EIC. We represent 264 companies
in the environmental technologies sector. In terms of barriers,
I suppose, put in simple terms, it is access to finance for starter
projects and getting money in. The Green Investment Bank, from
our side, would provide those small pockets of finance. Whether
you are doing land remediation or water work or energy efficiency,
it would start off projects like that, because it then sends a
signal to larger investors that that project is worth getting.
So starting the finance is the first point.
Q267 Chair: And what
would you say are the barriers to low carbon industries? We just
want to have a sense of what you feel are the biggest barriers
to the low carbon industries for investment.
Well, it is purelylet me think about this.
Q268 Chair: The barriers
that you are looking for the Green Investment Bank to overcome.
What do you think the bottom line should be, in terms of the organisations
that you represent, in how the Green Investment Bank, when it
is set up, goes about doing its business?
I think where we would like it to be is to go where other finance
won't go at the moment. One of our companies, MGT Power, is a
biomass company up in Tyneside and Teesside. They found it quite
hard to raise finance for biomass. They have done it via bond
markets at the moment but you would hope in a case like that that
the Green Investment Bank would start the process so they could
then move on to more institutional funders. That is one worked
example that we'd have. You can go further out. There are examples
of some land projects or waste projects, which are small scale,
that big institutions won't look at the moment.
Q269 Chair: It may
well be that there are other witnesses who want it to be only
for the big players, the big boys as it were. This is your chance
to say why it should be important for other smaller enterprises.
Quite simply, if you do it in finance terms, if you have £1
billion on the table you could spend £1 billion on energy
efficiency today, which would save you £3 billion in energy
spend, which could go back into the economy. I think it is great
that we have that £1 billion. I think we have to really think
where we put the money. I think with the other submissions there
are merits in them. For my part, because we are the Environmental
Industries Commission, we would like you to focus on energy efficiency
firstbuildings, land, wastewhich we don't always
get finance for.
Q270 Chair: Thank
you. Mr Steele?
I am Rupert Steele, Director of Regulation at ScottishPower. We
are an integrated utility with interests in distribution, supply
and generation. We are a very large renewables generator and
looking at nuclear as well. From our point of view, I think it
is important to look where the gaps are. There are a large number
of instruments, either in place already or in the pipeline, that
are putting together in place the various parts of the jigsaw
that are needed to get to a low carbon energy economy. For example,
the absolute sine qua non is to make sure that the projects are
viable, so the EMR process that the Government is currently going
through should create a framework in which renewable and nuclear
and CCS projects in the future can be viable. Without that, you
can't make a start.
For renewables, obviously there is an issue about
making sure that there is a grid connection available and there
is work in hand through Connect and Manage to do that. You need
to make sure that the transmission charges are appropriate in
Scotland and so forth. Where we think there is particularly an
issue is probably around construction risk for these major projects.
Fundamentally, the finance community is not very interested in
project financing projects where the technology is novel enough
that somebody isn't going to give you a guarantee. In those kinds
of projects, the risk around the construction basically has to
be taken by the utilities.
Chair: Could you just
speak up a little bit, because I think the acoustics are a little
bit difficult in here?
Sorry. I will speak up. The risk around those kinds of things
has to be taken by the utilities themselves. Obviously, in the
current financial climate, utilities, like all companies, have
to be aware of how much capital they are spending. With the big
hump of investment that is to come through, we think that construction
finance is the area where there is a gap and where the Green Investment
Bank can play a valuable role in delivering the decarbonisation.
Q271 Chair: Thank
you. Ms Shepherd?
Hello, my name is Penny Shepherd. I am the Chief Executive of
the UK Sustainable Investment and Finance Association. We are
the membership network for those involved with sustainable and
responsible financial services. We have about 250 members of whom
about 60 are major financial institutions, particularly investors
but also including some banking institutions. We also include
other parts of the supply chain including NGOs, so we sometimes
describe our membership as running from Barclays to WWF.
We exist to support the UK finance sector to be a
leader in advancing sustainable development through financial
services, so we exist for sustainable development and for the
success of the UK finance sector in advancing that agenda. Basically,
we see a need for a rapid transition to a low carbon, resource-efficient
economy, not only for the economic health of the UK but also so
that investors have opportunities into which they can continue
to invest to protect and grow their wealth. It makes sense for
the savings of the nation as well as the jobs of the nation that
we make that transition. That is what we want the Green Investment
Bank to support.
Q272 Chair: What
I am interested in as well is what the current barriers are to
your members' being able to create this investment.
One barrier at the moment, is clearly the regulatory framework.
A regulatory framework that creates profitable opportunities for
investment is the first requirement, and clearly we recognise
that, within the UK, the Government is taking measures in that
direction. The question then arises as to the barriers once you
have an effective regulatory investment in place. As far as we
can see, barriers remain: barriers around scale, barriers around
speed of decision making within financial institutions, barriers
around knowledge and around understanding risk, and barriers around
mitigating risk. One of those risks is regulatory risk because,
as we know from around the world, even when regulatory frameworks
are put in place, things sometimes happen to the incentives that
were not appreciated at the beginning.
Q273 Chair: I am
assuming that some of your members, and indeed of all the organisations
giving evidence now, are looking to invest in other European countries
as well. Do you feel that there may be more certainty, in terms
of regulation in other European countries, that could be disadvantageous
in terms of long-term investment planning strategies here in the
Our members invest globally. You are right that it is not specifically
in the UK, but it is very much not specifically in Europe either.
I don't feel I can answer that question at that level of detail.
What is certainly so is that investments will flow to where they
can achieve the most attractive risk-adjusted return.
Q274 Chair: I think
Mr Mulligan wanted to come in on that point.
I just want to add one thing on barriers. I suppose a lot of the
time we talk about policy as a barrier. From our point of view
we would say that a lot of the policy framework at the moment
is working quite well. I suppose the most successful in our sector
would be something like the landfill tax in1996. Things like
FITs will work wellbrilliantly if we just stay steady on
itand CRC. Those are all good, but if that policy framework
starts being tampered with, or if we don't have a long view on
the policy framework, that would be a barrier.
Q275 Zac Goldsmith:
I was just going to ask Penny Shepherd, are there specific examples
of where you think there needs to be more regulatory clarity?
I am very much here to talk about the Green Investment Bank and
I certainly would not claim detailed competence in those areas.
The classic example of, a problem area recently has been in relation
to FITs and Spain, for example, where once you have trust, if
that trust is then destroyed you have a much harder job rebuilding
Q276 Chair: Thank
you. Mr Spence, your opportunity.
Paul Spence: Thank
you. I'm Paul Spence. I'm Director of Strategy and Regulation
for EDF Energy. We are the largest generator and supplier of electricity
in the UK today and we are an investor in energy efficiency in
high-efficiency gas generation, in renewables and in new nuclear.
To answer your question about the need and the barriers,
the Committee on Climate Change has made it very clear that we
need to decarbonise the UK's economy and the electricity sector
has a vital role to play as an early mover in providing a route
to decarbonise heat and transport, and therefore we have to move
urgently to decarbonise the electricity sector by 2030. On Ofgem's
numbers, that means an investment of somewhere in the region of
£200 billion in the electricity sector, a large portion of
that in new generating capacity as our existing capacity comes
to the end of its life.
In the context of the scale of the need, the clarity
of the market framework for the electricity sector and the role
and rules around planning are clearly three dimensions of making
sure that we are able to invest in the right projects. The role
that we see the Green Investment Bank playing is to unlock other
potential sources of financing for those investments and for those
projects by being focused on the UK as a market and by being an
expert in the UK regulations and the regulatory regime; and, by
investing on commercial terms, to provide confidence to other
people who might invest as well and therefore unlock the scale
of capital that we think will be needed.
Q277 Katy Clark:
I was going to ask specifically about the energy markets and,
in particular, energy market reform. You'll be aware that the
Government has announced plans for reforming the energy market
and, in particular, introducing a floor price for carbon to increase
the attractiveness of low carbon technologies to investors. How
important do you think the Green Investment Bank will be in this
sector alongside these reforms?
I think that the reforms themselves are fundamental. If the business
case is not there to make the investments in the relevant low
carbon generation, the Green Investment Bank cannot create that
business case. That has to be done through the market framework.
What the Green Investment Bank can do is help increase the speed
with which the industry is able to respond to the opportunities
that are created by the EMR. I would say that the fundamental
element of the EMR will be the feed-in tariff, essentially for
new generation, because that will define, to a large extent, the
commercial case and allow those projects to proceed if it is set
at an appropriate level. Strangely enough, the feed-in tariff
will actually cancel out the impact of the carbon floor price,
so the fundamental thing is the feed-in tariff.
Paul Spence: If
I can pick up Mr Steele's comments, clearly we have argued for
electricity market reform and for a floor on the price of carbon
for a long time now. Fundamentally, if we believe that we want
to decarbonise energy generation, we have to put a value on that
decarbonisation to make the right opportunities for investors.
Then the role of the Green Investment Bank is, as Rupert said,
to make sure that there is capital available to pursue and take
advantage of those opportunities. So the market reform, the early
move on putting in place a carbon floor price and then the longer-term
move to make sure that we have a market that rewards low carbon
available capacity at the scale that we need it is fundamental,
but it is one component. The Bank sits alongside that as a way
to make sure that the capital is then available.
Q278 Katy Clark:
With the current level of the feed-in tariff and with these market
reforms, do you think that if we did not have the Green Investment
Bank we would get the kind of investment we need to get these
Paul Spence: My
fear would be that we don't get the investment we need focussed
on the UK at the pace that we need it in the UK.
The other thing to say is that the Government has not yet defined
what the level of the various feed-in tariffs will be under the
EMR. We await that conversation with them with great interest.
Just on the Green Investment Bank being tied into the big energy
picture, I think when Bob Wigley did his original report the focus
was energy efficiency, smart grids, renewables. I think we should
stick to that because when we look at the energy market as a whole
we are looking at a European market. We are looking at a lot bigger
figures. We are looking at a lot bigger problems. We need more
joined up strategy. If we talk in terms of carbon, we would talk
Europe-wide. We have a lot of energy players that are big European
and global companies. I think the Wigley report was looking quite
narrow to have speed and impact now. So if we have £1 billion
now, we should really focus on what we can do now. Maybe we need
to decouple the Green Investment Bank and the energy market reform
a bit and take them in two sides.
Q279 Dr Whitehead:
I am interested to hear the view that the feed-in tariffby
which I assume we are talking about the contract for difference
mechanism in EMRmight well effectively trump the carbon
floor price because of its operation but the contract for difference
is not exactly a fixed FIT, in as much as it enables or incentivises
companies to try and sell at above the market in order to get
the addition from the contract for difference. In your view, does
it also trump what advantage might be obtained from the Government
rates, as it were, that one might gain from the Green Investment
Bank for investment and how do you think those mechanisms might
work in together?
I don't think that there is an incompatibility between the Government's
feed-in tariff and CFD proposals on the one hand and the Green
Investment Bank on the other. The feed-in tariffs and contracts
for difference will, as I understand, it create a marketplace
for renewable, nuclear and CCS electricity that we will be able
to sell into. If we can do better than the annual average, or
whatever the average period is, then we will make a bit more money.
If we do less well, if our energy management system is not as
good as our competitors', we'll make a bit less. That all seems
fine and I think that the financial support around getting through
the investment cycle that the Green Investment Bank could provide
would simply enable all of us to do more of it quicker. I think
that is a rather different interaction than the interaction with
the carbon floor price, which is simply that if the effect of
the carbon floor price is to increase the price of electricity
but then the CFD substitutes the CFD price for the market price,
then that effectively cancels the carbon floor out once the CFD
is in place.
What I would add is that in looking at the range of interventions
that the Green Investment Bank might make, you do need to look
through the lens of any investors in the Bank itself. So if the
Bank, for example, plans to issue bonds to leverage up the resources
that it has available to that, then what sorts of interventions
it makes need to be compatible with a business model that gives
investors confidence that they will receive the projected returns
on those bonds. I think that will be a message from me throughout:
that if the Green Investment Bank is seeking institutional investment
into itself, then its business model needs to be compatible with
those types of investment.
Q280 Dr Whitehead:
If it is the case that a carbon floor price is effectively trumped
by a contract for difference and the proposals for the carbon
floor price appear to be based on an upstream taxation model for
energy-producing companies, that effectively suggests that a carbon
floor price under that sort of basis is a tax. Do you or would
you favour some sort of recycling of such a tax into a resource
for the Green Investment Bank based on the argument of the contract
for difference trumping the carbon price in any event?
I think we would be quite interested in looking at that option.
We are a bit concerned that if the carbon floor price is not going
to be bringing forward a lot of extra investment because of the
fact that it is trumped by the CFD, then there is a bit of a concern
that the impact on consumers in terms of higher electricity prices
may not justify a very high level of that tax, so I think we would
argue for caution in setting the level. Although I recognise that
there are people from the Treasury who might turn a slight shade
of white if I were to suggest anything that might involve hypothecating
anything, it might be a good idea to think about spending some
of those proceeds to put a bit more money in the Green Bank; because
£1 billion is not going to go very far in £200 billion,
to be honest.
Paul Spence: Can
I take issue very slightly with Mr Steele? I'm not sure I agree
with him about the impact and interaction between the carbon floor
price and the contract for difference. By definition, a difference
is a difference against the price, so if the carbon floor moves
the two together, then that is potentially an important contribution.
I think the other observation I would make is that the carbon
floor price can be introduced much earlier than the longer-term
reforms to the electricity market, and while it can start low
and move up over time, it is something that can give investors
in low carbon confidence that we are serious about decarbonising
the UK in the near term and bring forward investment.
Chair: I am always conscious,
when we have four different witnesses, it is sometimes very difficult
to get a balanced view. I would say to each of you that if you
wish to provide us with further written evidence we would very
pleased to receive it, but I think we do need to move on now.
Q281 Sheryll Murray:
Alongside the energy market, the Government has announced a number
of initiatives to cut CO2 emissions and also to help fund green
infrastructure, such as the Green Deal, carbon capture and storage
competition and funding for upgrading port facilities. Should
the Green Investment Bank be given the co-ordinating role for
Paul Spence: I
think our view would be that it should be for the Government departments
setting the policy to take the role in making sure that their
policies are joined up and co-ordinated, and the Bank can focus
on what it should be focusing on, which is investing in the right
Q282 Sheryll Murray:
Is there a need for a single voice guiding Government on green
Just to take a small step back, one thing I've noticedbecause
I've read a lot of statements that have been given to youis
we need to try to work towards a definition of what we're saying
is green, because there have been a lot of various descriptions.
If we take Wigley to start off withenergy, smart grids
and renewablesand then we move into CTS, nuclear and all
the way down there, every technology has a merit. It's all going
to provide solutions in some way or another. But I think for the
Green Investment Bank, if we are going to go down the route of
green ISAs and getting money from consumers, we really have to
think about getting this clear.
So if I'm a consumer going to put £400 a month
into the Green Investment Bank, maybe I want to make sure that
it is going to energy efficiency, so I think, at some stage, we
can't have the Green Investment Bank catching everything. If we're
going to have an infrastructure bank, great; a nuclear bank, great;
a CTS bank, great. But I would be concerned that, going from Wigley's
report and recommendations, we are moving into this very big "catching
everything". So maybe we need to step back, just to see what
definition we've got around that.
Q283 Zac Goldsmith:
Could I just jump in on that? I am assuming that the context in
which you are providing your answers is a belief that this is
going to be a £1 billion fund. It seems that way from what
you are saying. But if instead this thing is a bank that is able
to achieve bonds and potentially stimulate much greater levels
of investment, presumably the answer you have just given would
be different, you'd have much broader range of investment targets
and so on?
No, I would actually be coming at this saying it is a bank, not
a fund. A fund, for me, would be a big chunk of money going into
Q284 Zac Goldsmith:
You keep talking about £1 billion. If this thing is a bank,
if it's able to issue bonds and if it's able to raise a lot of
capital, presumably that would allow it to broaden its investment,
It would do, but I think we need to set out, with very clear direction-setting,
what we mean this is. For me, it's energy efficiency and looking
after resources. We only have £1 billion. We know energy
efficiency would work. There are other debates to be had further
down the line on other technologies that are more expansive.
Sheryll Murray: I think
I've completed my questions.
Q285 Chair: Did you
want to come in, Ms Shepherd?
Can I just add to that? One fundamental question is: is the Green
Investment Bank a long-term institution to support the transition
to a low carbon resource-efficient economy or is a short-term
project? If it is a short-term project, then the questions around
"should it do A or should it do B?" are really important.
If, however, it is an institution, then in its remit it needs
to be given quite a broad scope but, within that, what is very
important from an investor's perspective is that it then has the
freedom to select simple things to do firstthat it isn't
asked to address every possible opportunity originallybecause
it needs to build up the trust of investors by being successful
in its early years, so if it can do a narrow range of functions
to start with and then add others as it develops competence, it
is liable to be the greatest possible asset to the UK.
Q286 Sheryll Murray:
I think what I was trying to ask you was: do you think it should
investing in smaller projects to help the consumers, such as the
Green Deal, where people would perhaps adapt their homes to reduce
their energy consumption, among other things?
I think, in principle, it should have the freedom to do that but,
looking through an investor lens, it needs to look at the range
of possible opportunities and say which of these opportunities
will deliver the greatest financial return, build the greatest
trust for investors and have the greatest impact on the low carbon
transition, and prioritise among those to start with. I wouldn't
wish to say, "Yes, it should do A or B," but it should
look through that lens and decide A or B, not everything, initially.
If I could just come back on some of this. I think we do need
to look for where the gaps are, because that is where I think
the Green Investment Bank should be focusing.
Q287 Neil Carmichael:
Can I just ask who do you think should be looking for where the
gaps are: the Green Investment Bank or the Government?
The Government initially, in setting their remit, and then within
whatever remit they set, the Green Investment Bank, focusing more
narrowly, I think.
Q288 Chair: To go
back to what Mr Spence was sayingthat it was up to the
individual Government departments to agree what that should bepresumably
what you are saying is the important thing is that it is between
now and when the details of it are made known that we have time
to influence it. So what we are trying to do is identify what
absolutely needs to be addressed at this formative stage of the
Green Investment Bank.
I think that was the point I was trying to make. What I was thinking
was that, for example, the Green Deal has been structured by the
Government so as to enable financiers to come in and provide the
finance for energy efficiency on a commercial basis; they should
be able to provide that finance at a low interest rate and then
the utilities will collect the payments. If that system works,
there should be a tick in that box without the need to trouble
the Green Bank hugely, although there is an issue around default
risk that we might like to look at.
Obviously there is a huge CERT programme, billions
of pounds per year being spent on energy efficiency and a mechanism
for funding that. That doesn't mean to say that there isn't more
that we could do but there are mechanisms in place. I think we
should be looking for the areas where there are not mechanisms
in place or where we know that there is a problem with the mechanisms.
It's perhaps not the most exciting thing but it's getting the
big ticket items: offshore wind, grid enhancements, possibly nuclear,
marine renewables and CCS. Those are the big ticket items that
are going to move the numbers on the dial by a huge amount and
where there is a big gap at the moment.
Q289 Sheryll Murray:
Could I ask you all a question? A short answer will suffice. Is
there a need for a single voice guiding Government on green infrastructure
I would say yes. I think we need one single voice, joined-up thinking,
getting the departments really focused all together and getting
Treasury behind the financing of this. So, yes, that would be
I would think that guiding and prioritising that is fundamentally
DECC's job. We have a Secretary of State to lead the decarbonisation
Q290 Chair: You would
not see that as being a role for the Green Investment Bank?
I think the Secretary of State is the person who should do it.
Q291 Chair: And you
would choose the DECC Secretary of State rather than BIS or Treasury?
For decarbonisation, yes.
Q292 Neil Carmichael:
Apart from the obvious financial aspects and viability, what do
you think should be guiding the Green Investment Bank in deciding
between large or small-scale schemes in the world of energy?
Paul Spence: We
would expect that the Bank would be set up with a number of clear
principles about the scope of what it should do, making sure that
is done on commercial terms, the sectors that it is working to
and, within that, the risk profile that it is willing to take.
Then it can assess individual projects against that and construct
its own portfolio within those clear and publicly understood guidelines.
We would expect the consultation and design work during this phase
to identify those, consult on those, set those up and then they
become the guiding principles for the operation of the Bank.
Neil Carmichael: Anyone
else want to say something?
I have nothing on that.
I think Paul has expressed it very well.
I think, from our end, the Green Investment Bank is about reconciling
the markets with the environment. It's about creating that confidence
and looking for the opportunities where we can make the transition
to low carbon and where we can look after resources. So it's a
commercial bank with a twist.
Q293 Neil Carmichael:
Mr Spence, you mentioned before, quite rightly, the importance
of Government to set the policy and allow the Green Investment
Bank to operate with a relatively free hand, but do any of you
think that Government should also be setting targets? That is
different to policy.
Chair: In relation to
the Green Investment Bank, not in relation to the Climate Change
Paul Spence: If
that means that the Bank is then forced to compromise on its commercial
principles in service of the targets I would be concerned because,
as Ms Shepherd said, you start to worry about whether it is then
giving other investors the confidence either to invest alongside
or invest in it.
Q294 Neil Carmichael:
So, in summary, you would say that it has to be an independent
structure, some distance from Government?
Paul Spence: Yes.
You are all nodding to that? You're all saying "yes".
Paul Spence: Yes.
Q295 Neil Carmichael:
Good. Last but not least, nearly all of you focused on energy
but do you think the Green Investment Bank should be looking at
other issues in connection with the environment?
I think there are several dimensions to that question. One is:
over what time scale? Because, if you look at the issue of the
UK's transition to a sustainable economy, part of that is a transition
to a low carbon economy, but part of that is a transition to a
resource-efficient economy in a much broader sense. Issues like
biodiversity, for example, are rapidly rising up the agenda, and
it wouldn't be surprising if the Green Investment Bank was asked
to address issues like biodiversity in the future. From where
I sit, it would seem foolish to create an institution to address
one issue and then have to rebuild institutional capital as other
issues came up the agenda. That's one dimension.
The second dimension is: to what degree should investments
made in the Green Investment Bank address a broader range of issues
initially? The third dimension is: if it was decided that the
Green Investment Bank was predominantly focusing on low carbon
initially, to what degree should it take account of a broader
range of issues in its investment strategies? I certainly think
there is an argument there that, even if it is decided that it
addresses low carbon, society will expect a certain performance
of it on other social and environmental issues. So a simplistic
way of looking at that is to say that, if it is discovered that
the Green Investment Bank has invested in an energy project with
various unfortunate labour practices in its supply chain, that
is liable to be something that society would have expected the
Green Investment Bank to have considered before it was making
Q296 Neil Carmichael:
You are obviously applying fairly high, rightly so, ethical standards
for the performance of the Green Investment Bank.
I am saying this is an institution that needs to be trusted by
society and, therefore, it needs to look at what sort of standards
it should be taking for its investment. Now, in that respect,
it has common interests with other reputable banks and it shouldn't
need to reinvent the wheel for itself.
Q297 Neil Carmichael:
Taking that metaphor slightly forward; you wouldn't be surprised,
therefore, if it went into transport, for example; say, electrification
of railway lines or whatever?
I wouldn't be surprised if it invested in electrification of railway
lines. I do think there are some debates to be had: where are
the barriers where something stops becoming a low carbon investment?
The classic example that people quote is: if you upgrade the road
network so that there are less traffic jams and cars run more
efficiently, is that a green investment? Some people anticipate
that some people will seek to make the case that it is, if as
a result they can attract investment more easily.
Q298 Neil Carmichael:
You are moving into judgement territory there, because someone
else could equally say, "Look, great, the road system is
so that electric cars can perform better", then obviously
that is a different focus.
People may well say that. But the underlying issue is that we
are already seeing, for example, civil society groups and investors
coming together to set standards in that sort of area, and certainly
the Green Investment Bank should be aware of the debates on standards
that are going on. It should have an objective, I would suggest,
of operating to high industry standards and participating in the
debate around what those standards should be.
Q299 Neil Carmichael:
Can I just ask about those two things, what you said and what
Mr Spence was saying beforeabout independence from the
Government, getting on with the investment because it is the right
thing and all the factors I asked you about before? You're talking
more about how the Green Investment Bank needs to be looking at
certain parameters of activity and so forth. Who is going to monitor
the performance of the Green Investment Bank in your world, as
opposed to Mr Spence's world?
That is a very interesting question. Any bank has internal functions
to monitor its performance. The finance sector generally needs
a strong civil society around it to monitor its performance and
some would argue that that civil society monitoring should be
strengthened. I think there is a legitimate question about what
sort of oversight the Green Investment Bank itself should have.
I think there are some interesting models out there. What seems
to me as one interesting model that you might look at is the model
of what's happened with the London Olympics, where you have a
"Commission for a Sustainable London 2012".
Q300 Neil Carmichael:
I am going to be told off for asking another question but I'm
going to ask it. Could you both, quickly and briefly, describe
the kind of models that you envisage being the appropriate ones?
Because last we heard, the Treasury was considering all models
but wouldn't tell us which one was being focused on. I would like
to hear from you the type of model you envisage for the Green
Paul Spence: I'm
slightly struggling to see that there's a huge difference between
myself and Ms Shepherd because my model would be an independent
bank with some clear governing principles, and I would then expect
it to have a governance arrangement that included reporting to
the public and to its funder against those principles and confirming
that it had kept within the boundaries that had been set for it.
That's a relatively normal framework for the private sector as
well as public-private partnerships.
I think the original idea behind the Green Investment Bank was
that it would go around aggregating projects. It would take the
projects that larger funders wouldn't do. I think, from our side,
we would definitely go to transport. We'd also like to see brownfield
sites be used for social housing, water being cleaned up, local
community groups getting feed-in tariffs from solar panels. All
of that could be within our vision of Green Investment Bank.
Q301 Mr Spencer:
I'm confused a little bit because we talked about the Green Investment
Bank being a commercial bank, in effect, and funding projects
that had a direct revenue stream and then you seem to have all
drifted off into talking about schemes. I can't seem to understand
how they have that revenue stream to pay that capital back. So
something like improving a road network, I don't understand where
that revenue stream would come from unless you are talking about
investing in private roads that charge a toll fee to drive on
Roads isn't my strong area but if you take transport and you say,
"We want to improve air quality; so we want to remove X amount
of diesel particles from air", you are then going to have
a set of companies that put in diesel filters. The diesel filter
company will need some finance to get going to address that market.
So the diesel filter company should be able to go to the Green
Investment Bank saying, "We are cleaning up air in this market.
There you go". If you talk about land remediation, where
the opportunities are, the Green Investment Bank should be open
to companies in that sector. Road transport, I am afraid I can't
I think you put your finger on an important point there. There
are, as far as I can see it, two broad models of the Green Investment
Bank. One is where, if you like, it is dispensing money, with
not a particularly strong hope of a return for things that are
deemed to be socially or environmentally desirable. One could
envisage, for example, insurance products insuring against construction
cost risk or things like that. Obviously the capital would be
whittled down over time, but that kind of bank wouldn't be able
to raise funds from investors because it wouldn't be making a
profit. Or you could have a bank that is lending, essentially
profitably, to projects that have a return on commercial principles.
Some people, I think, have muddled the two up. I don't think you
can have a bank that lends less profitably than you need it to,
to make a commercial return, and expect people to invest in it.
Q302 Mr Spencer:
That's fundamentally the question, isn't it: who makes the decision
as to which of those investments is the right investment?
Perhaps I could just clarify my example; I was talking about profitable
investment opportunities. Taking roads as an example, I was talking
about PFI-type investments in roads. I was not talking about public
Q303 Sheryll Murray:
So were you envisaging the Green Investment Bank as being a proper
bank or a fund?
As a proper bank.
Q304 Zac Goldsmith:
Would you all agree with that last one? It sounds like you all
very much believe this should be a bank as opposed to a fund,
as a way of having it regulated?
Paul Spence: I
think we should have a bank.
I think I would be prepared to look at both models because if
it's a bank and has to be profitable, that may restrict it from
providing support to certain kinds of project because, by definition,
we are looking for things that the private sector by itself will
not support, and that is where I have a slight question. I don't
have a firm view either way. I would like to really have more
Chair: That comes back
to our original question, which was: where are the barriers that
would make the private sector unable to support the investment
that is needed on the green environmental issues? Anyway, go on.
Q305 Zac Goldsmith:
Before I ask the question I wanted to ask, I would love to hear
from you also, Mr Spence.
Paul Spence: I
am less bothered about the semantics than I am about the reality.
What I envisage is equity investment in projects by the Bank and
Q306 Zac Goldsmith:
But do you think a £1 billion fund would generate enough
Paul Spence: If
it's able to be credible and convince other of its credibility,
either to invest through it or alongside it, so it can multiply
Q307 Zac Goldsmith:
Can I just come back to my question? We've had lots of evidence
specifically in relation to the Green Investment Bank. I think
it was Chris Huhne who said, "We expect the Bank to have
an explicit mandate to tackle risk that the market currently cannot
adequately finance". If it wasn't him, it was Vince Cable.
My question is: where do you think the balance should lie between
investment in established, safer projects and technologies that
are more likely to provide a certain return and less tried, perhaps
riskier initiatives that could be much more transformative in
terms of environmental impact? Where do you think that balance
should lie? How should they resolve that conflict?
On one hand, I think there is general agreement that the Green
Investment Bank should only invest when that stimulates the market.
It should not invest if the private sector alone will make the
investments satisfactorily without it. So its role is about speeding
up investments and the like: building confidence, building scale
and so on. But the other dimension is that if it invests in a
way where it makes too high a level of losses and it doesn't have
a way of replenishing its equity, then it is not going to attract
investments and it is not going to have a long-term systemic impact
because, it won't be there to have this. And the danger is that
if it doesn't get its risk management right, it may damage confidence
in investing in low carbon solutions in a way that goes beyond
the positive impact it's had.
Maybe I am a lot more optimistic, but we just launched NECA Finance
Group, which is looking at this area. With low carbon and managing
resources, there are a lot of opportunities. Big institution banks
won't go to it yet for the risk, so where we see the Green Investment
Bank is starting the process. I think we have a lot of clever
people who know what to invest in and I've got confidence in a
lot of people we have in the UK to do that. So I think we should
be more positive and forward-looking on what we can do.
Q308 Zac Goldsmith:
One question for all of you again; a brief answer will do. Within
the context of, broadly speaking, what people might regard to
be green investments, are there any areas that you regard to be
no-go for the Green Investment Bank? I suspect I know what your
answer is going to be.
Let's say, every technology has its merits. Obviously, coming
from the EIC, we have a different approach to it. I think we must
start with the basics and move with what we know. We must go through
energy efficiency and resource management. Energy efficiency is
so untapped. It could be the golden goose that keeps on giving.
I have given the figures for what stacks up. Then we have to go
renewables. We do have problems with fossil fuels and the cost
and everything like that. So I'm not ruling anything out but I
think we have to go through all technologies as we go along.
For my part, I come back to this question of where the gaps are
and keeping the focus on what is going to be difficult to fund
on the low carbon transition. That, I think, pushes you towards
the major projects on renewables: CCS and nuclear.
This is the nuclear question, isn't it?
Chair: I think we will
be coming on to that later.
You are coming on to the nuclear question later? In that case
I will answer that later.
Paul Spence: I
think I would echo Mr Steele's answer; the big technologies that
make a difference.
Q309 Peter Aldous:
Britain does lag behind in terms of green infrastructure and production
of renewable energy. In your views, what other barriers are there
that we need to overcome to get greater green investment?
Paul Spence: I
think we have argued for a clearer planning system that allows
us to set out a national need and then take decisions on specific
local projects against that national need and then the local impacts.
We've seen progress on that with the changes that the previous
Government have made and with the changes that are coming, provided
those are enacted.
Q310 Peter Aldous:
You're happy with what is in the Localism Bill at the present
Paul Spence: I'd
like to see it all in place.
I would like to add to this, perhaps. We think that there are
a number of barriers that are holding back renewables. Clearly,
we have an existing subsidy regime: the Renewables Obligation.
That works. That is not a barrier. There is a bit of uncertainty
about what EMR will look like and that needs to be resolved very
quickly to make sure that doesn't become a barrier, but we are
optimistic about that. Planning is important, not just for the
renewable projects themselves but for the grid-wires to connect
them. We're still sorting out the final details of the Beauly-Denny
line, which has been holding up renewables in the north of Scotland
for some time. Related to that, there is the issue of grid charging.
We commissioned a study recently that showed that an amount of
renewables equal to the total installed in 2006 could be freed
up additionally if we went to a uniform level of charging rather
than the higher charges in Scotland. There is a whole raft of
technical issues as we move forward in terms of integrating the
renewable power into the grid. So all those things, I think, we
need to work on.
I would just say for a lot of these issues a lot of thinking has
been done. Successive Governments have given good direction. I
think we just have to focus on moving on and delivering.
Q311 Peter Aldous:
Going back to the Green Investment Bank, should it consider overseas
investments if that may cut more emissions than the equivalent
investments in the UK?
Hoping that I don't contravene any EU law in answering, I would
say definitely not. We have an issue about wanting domestic action
in the UK to get ourselves on the path to a low carbon economy.
I think the Green Investment Bank should be supporting that.
Paul Spence: I
absolutely echo that.
I think a decision needs to be made on the purpose of the Green
Investment Bank. If the purpose of the Green Investment Bank is
to support the low carbon transition in the UK, clearly it should
not invest overseas. The Government also has agendas around supporting
emissions reductions in developing countriesfor example
through the Capital Markets Climate Initiativeand it is
possible that it makes sense for the Green Investment Bank to
have additional responsibilities related to that agenda. But those
are two separate priorities.
The Green Investment Bank should be focused on the UK.
Chair: This is the stage
where we are going to move to nuclear.
Q312 Dr Whitehead:
Mr Steele, your company is part of a consortium looking at Sellafield.
Mr Spence, your company has ambitions to build eight nuclear power
Paul Spence: Four.
Dr Whitehead: Sorry, four.
Low carbon technology: I imagine you would want to access the
Green Investment Bank to assist with that programme.
From our point of view, we wouldn't rule it out. The area I have
mentioned before is construction risk. Clearly, the sums of money
involved around construction risk in the nuclear industry are
such that £1 billion might not go very far and I think that
if the Bank was going to play a realistic part in investing in
nuclear it would need more substantial funding than the £1
billion. But we think that it could play a valuable role as an
investor in that sector, along with the others that I have mentioned.
Paul Spence: I
think, from our perspective, we have said that our aim is to build,
as I said, four reactors at two sites: two at Hinkley Point and
two at Sizewell. We already have Centrica as a 20% co-investor
in that project with an option to take a similar stake in the
stations as they are built. But, both for ourselves and as we
look more broadly at the UK sector, it is very clear from the
work of DECC and of the Committee on Climate Change that if we
are going to meet our objective to decarbonise, we need nuclear
to play a significant role. For that to happen, the investments
are very large and we need to find some creative ways to obtain
that financing and I wouldn't rule out the Green Investment Bank
having a role to play in that.
Q313 Dr Whitehead:
Yes. I am sorry; I confused the eight you are running at the moment
with the four that you are intending to build. Of the eight that
you are running at the moment, presumably you will benefit substantially
from existing long-term contracts being considerably uprated as
a result of a contract for difference. Is that an investment vehicle?
Paul Spence: I
hadn't understood that the contract for difference would apply
for the existing stations that are running. I had understood that
was for new investment in new capacity.
Q314 Dr Whitehead:
So they would be excluded from CFD deals and will continue to
run, for the present?
Paul Spence: They
would be running under the existing market, as they do at the
Q315 Dr Whitehead:
Even when the new market comes in?
Paul Spence: As
I understand the way that the CFD is designed to run against it,
I just think, about nuclear, a lot of things are said about the
energy gap and energy security. I think what we need to be looking
at is diversification, localism and energy efficiency first. I
think we have a very big European energy market with some very
big European players. We have an interconnector. So I think you
need to have a look at a European approach as to where we make
these big investments in Europe and is it a European fund that
needs to fund those sorts of projects. If it's a Green Investment
Bank in the UK, let's go for diversity and energy efficiency first.
Let's work on those big problems and see if we can bin that in
as we go along.
Q316 Dr Whitehead:
One of the issues that certainly was raised by this Committee
when we spoke to the Treasury Minister last week was the issue
of the extent to which the statements relating to investment in
nuclear required there to be no public subsidy for nuclear investments.
Would you see that an ambition to obtain some funding for nuclear
development from the Green Investment Bank might be regarded as
some form of public subsidy, were it to be a bank? It may not
be the case were it to be a fund, but were it to be a bank.
Paul Spence: I
think it's possible that there will be those who level that accusation
but we are very clear that if the Bank operates as we have advocated,
which is on commercial principles, investing alongside utilities,
then that is not a subsidy and, therefore, the argument can be
Yes, we would not be investing in a nuclear power plant if we
did not consider it to be a profitable opportunity and if the
Bank were investing alongside us on pari passu terms, then presumably
it would be because they considered it to be a profitable opportunity,
Q317 Dr Whitehead:
One question for everybody. Do you think that, were it explicitly
to be stated that new nuclear investments, whether or not it might
be regarded as a subsidy, were to be potentially included within
the Green Investment Bank's portfolio, that might, shall we say,
deter other potential investors from investing in what they might
see as a more narrow definition of what a green bank might look
Paul Spence: I
don't think we would expect it to deter investors. We're expecting,
as Mr Steele said, that our project will be a good investment
and, therefore, a good investment for the Bank to make. Polling
tells us that there is growing support for nuclear to play a substantial
role in a balanced energy mix and, just to pick up Mr Mulligan's
point, alongside action on energy efficiency and building renewables
as well, in an energy picture for the future. On those terms,
we wouldn't expect it to have a material effect of deterring investors.
From an investor perspective, I think you need to look at the
motivations and interests of large, institutional investors on
the one hand and also, which we haven't talked about yet, the
potential for the Green Investment Bank to attract investment
from private individuals. Institutional investors, will look at
the overall risk-adjusted return that they can get from the Green
Investment Bank and will, therefore, take a view on the risks
associated with nuclear as part of that mix.
Certainly, to endorse a point that Rupert Steele
made back at the beginning, there is a concern about construction
risk across the range of technologies. So that is one factor.
If you look at the private investors, the position is more mixed
in that there are some private investors who will be more than
happy to invest in nuclear; whereas for others, if the Green Investment
Bank is investing in nuclear, that will put it outside the sphere
of opportunities they are interested in. It seems to me that in
that environment the Green Investment Bank might wish to look
seriously at being able to offer hypothecated investments that
are, for want of a better phrase, nuclear-free. But I think that's
probably the way the debate would go.
Q318 Dr Whitehead:
Within the overall investment portfolio?
Yes. So if the Green Investment Bank was offering particularly
bond investment opportunities to the general public, it might
wish to offer both mixed bond opportunities and also bond opportunities
that didn't include nuclear.
I think the answer to your question would be "yes" and
that's why we have to be very careful about this "green".
I think if we are going to go to consumers and go for green ISAs
and stuff like that, we have to be very clear what we're investing
in. I think consumers these days are quite savvy and want to have
a clear line of where the money is going. So I think we could
be missing a trick if we broaden out too much.
I think the key thing there is transparency and, within that,
it is fair to say there are a range of issues on which private
investors would generally agree as to what was desirable. There
are a small number of issues on which there are significant divergences
of opinion. I think it is fair to say that nuclear is one of those
small number of issues on which there are two camps.
Q319 Sheryll Murray:
Mr Steele, can I just take you back for a minute to when you first
answered that question? You referred again to £1 billion.
I just want to be clear. Do you envisage this as just being a
£1 billion pot that would be distributed by Grant Aid?
No, not necessarily. There are two factors relevant to that. One
is the extent to which the Government is successful in adding
to the capital base of the Green Investment Bank through asset
sales, and we've made it clear that we would encourage them to
do that and to do that generously. I recognise that they may feel
there are one or two other calls on the money, but they have said
that they will be looking to supplement it with asset sales and
I think it's important to encourage the Government to do that.
The second point comes down to whether the Bank is
modelled in a way where people will be able to invest in it or
whether it will be using its money to catalyse other investments.
So if the Bank is investing on a pari passu basis with utilities
in projects then, in principle, people will be happy to buy its
bonds because they will effectively be buying into the projects
that utilities are running and into the utilities' experience
The other way you could structure it is that the
Bank would essentially be writing deliberately loss-making products
that would, themselves, catalyse other people to invest. So, for
example, the Bank might take construction risk on an offshore
wind farm up to a certain amount of money and that would then
enable the proprietor of the wind farm to go out and get commercial
finance for the balance of the project. But in that model the
Bank would find it rather difficult to sell its bonds to people
because the business would be fundamentally loss-making. So that's
a different structure. I'm not quite clear that the Government
has a view as to which structure they want to do. In our view,
both are potentially viable and we wait to see their considered
Q320 Zac Goldsmith:
Just very quickly for Mr Spence: EDF has consistently said that
nuclear doesn't require any subsidy, that it is competitive and
requires no real Government support. I think you also said that
if investment had flowed to nuclear via the Green Investment Bank,
that would not constitute a subsidy. If that is the case, why
would EDF need the investment of the Green Investment Bank? Secondly,
could the use of Green Investment Bank resources be justified
in a sector that will exhaust the funds because of the scale of
it? We are talking enormous sums of money in a sector that you
believe is already perfectly competitive and in no need of Government
support of any sort. There are two parts to the question, if you
could answer them both.
Paul Spence: To
pick up your first part, yes; we have consistently said and I
have consistently said that we believe nuclear is viable, is a
good investment without subsidy, providing we see the changes
that the Government is proposing in terms of the market reform.
That's the basis that we, and Centrica as our co-investor, are
working on at the moment. The four reactors that I've talked about
would constitute an investment in the order of £20 billion.
That's a substantial investment, even for a company the size of
ours, and if the UK needs us to go beyond that and have the other
utilities and potentially us go further as we go beyond 2025 and
invest in more new nuclear projects, then at some point our funding
capacity will be exhausted. So I wouldn't rule out, at this point,
the option for the Green Investment Bank to invest some of its
capital alongside us.
Q321 Zac Goldsmith:
To make a meaningful difference, the Green Investment Bank would
have to commit a huge proportion at whatever scale it is. If it
is a £1 billion fund or if it is issuing £10 billion
worth of bonds, it still would have to commit a substantial proportion
of its funds in order to make a difference and that, in turn,
would take funds away from the other projects that are much riskier
and really do need the kind of support that we're talking about.
Paul Spence: I
think it depends on your model of how the leverage of the Bank
works. If by knowing the UK regulation, understanding the projects
and understanding the market framework, the Bank can send a signal
to other sources of funding, other investors, that this is good
project to invest in, their impact isn't what they put in; it
is the multiplication of that by providing confidence for other
investors, and that then doesn't use up the funding.
Q322 Zac Goldsmith:
I have always been sceptical. I believe nuclear power cannot exist
without subsidies in one form or another. That's my view and I
think a lot of people would share that view. It strikes me that
if it is as attractive an investment opportunity as EDF has constantly
maintained, why would you need to come to the Green Investment
Bank and not to investors within the private sector?
Paul Spence: All
I am saying at this stage is don't rule out, from the options
available to the Bank, nuclear as an option.
I just think that's a key concern of ours: exhausting the fund
and exhausting the resource. I think we've got a great opportunity
here if we really just pick the technologies right. I don't want
to be boring you all but go with energy efficiency and let's move
along; then we will find our way. In time, nuclear might be a
great option, further down the line.
Q323 Chair: So are
you saying that timing and sequential timing are relevant to this
Pace and race; there are a lot of opportunities now that need
small parts of funding that will make the Green Investment Bank
Q324 Simon Wright:
I think that Zac sort of made the point that I wanted to make:
simply that Mr Steele said earlier the Bank needs to focus on
where the gaps are and, given that we are talking about a long-established
industry that has been around for decades and we've got this market
reform coming through, the access to finance must surely be there
without the Green Investment Bank.
The only question that you have to bear in mind on that position
is simply the quantum. We are talking about an investment programme
of £200 billion-ish sterling between now and 2020. You have
a number of very substantial utility companies, most of which
are part of international groups, but they have to allocate their
capital. These days, people have to allocate capital with a degree
of caution and they have to allocate capital competitively, looking
at all the worldwide opportunities they have. £200 billion
is a lot of money to find.
Q325 Peter Aldous:
Part of the role of the Bank is to leverage in other funds. Are
there potential funds out there who are looking exclusively for
green investment? And if nuclear was put into the mix, it might
undermine the whole integrity of the Green Investment Bank.
I think I have answered that question already.
Q326 Martin Caton:
Ms Shepherd, your organisation is all about sustainable investments.
Can you define sustainable investments for us?
Sustainable investments are investments that look at the wider
impact of the investments on society and the environment when
seeking financial returns. So the important point is that they
take account of social and/or environmental criteria in addition
to conventional financial criteria, which may be for financial
reasons or to achieve non-financial objectives as well. The important
thing to say about sustainable investment is that it's a philosophy
or an approach. It's not a specific set of rules or prohibitions.
It's a lens through which you look at investments.
Q327 Martin Caton:
I think you gave us quite a good example of the danger of not
having some sort of criteria when you mentioned that some people
might argue that investment in a road programme was a green investment
or a sustainable investment.
I would agree that it makes sense for the Green Investment Bank
to have a means of scrutinising its investments from that wider
perspective. The sort of common standards that are now being looked
at are likely to be an important part of that.
Q328 Martin Caton:
Forgive me if I am putting words into your mouth, but you would
like to see the Green Investment Bank have something more of a
tighter definition of what it would be liable to invest in?
As I said before, it is a philosophy or technique. It's not a
set of rules or prohibitions. So I would like the Green Investment
Bank to have a robust process for evaluating the broader social
and environmental risks and the broader social and environmental
benefits associated with the investments that it's making. That
is very different from having an exclusion list, if you like.
The general direction of sustainable investments now is very much
towards the positive.
Q329 Martin Caton:
Are you aware of any international principles or guidelines about
what is sustainable investment that the Green Investment Bank
could look to?
There are a number of initiatives that it could look to. One is
an initiative called the Climate Bonds Initiative, which has recently
started work seeking to develop standards for climate bonds. A
second area is the much longer-established Equator Principles,
which look at social and environmental criteria in project finance,
and I think there is certainly a question about how investments
made by the Green Investment Bank relate to the Equator Principles
criteria. Although, having said that, the Equator Principles criteria
are particularly focused on markets outside the UK. A third initiative
to look at is the UN-backed Principles for Responsible Investment,
which are a set of principles that long-term responsible investors
sign up to, including working with others to advance responsible
investment practice. So there's a range of opportunities for co-operation.
Q330 Neil Carmichael:
Ms Shepherd, your organisation has done some research on investors'
interest in investing in the green sector. I was wondering how
you could capitalise on that interest and also encourage new investors
to get involved in this and deliver that promise.
Yes. Our research is specifically about private investors rather
than large, institutional investors.
Neil Carmichael: Yes,
I gathered that.
If you look at the history of fair trade, which is the easiest
analogy, some people will remember that 20 years ago you could
only get fair trade coffee in the back of the church hall and
every time you took a sip, you knew you were doing good because
it tasted so disgusting. Now you can find it everywhere. It's
a huge market and part of what makes it a huge market is that
they good products, which then have a social and environmental
impact. Similarly, there is a potential for the UK public to be
saving and investing in a way that makes them money and makes
a difference for society as well. In opinion polls when we say
to those of the general public that have investments, "Do
you want to make money and make a difference", nearly half
of them say, "No, we just want to make money". But
just over half of them say, "No, we want to make money and
make a difference; so long as we can do both at the same time".
It seems to us that that is a huge opportunity for the Green Investment
Bank to attract in investments from the general public and, as
part of that, therefore, help to rebuild trust in savings and
investment and address the savings crisis as well as the low carbon
Chair: I think, on that
optimistic note, I know it's not easy to have four separate witnesses
giving evidence, so thank you very much indeed for your patience.
We hope that we can make a difference with our report and that
it will come out in a timely fashion. Thank you very much indeed.