The Green Investment Bank - Environmental Audit Committee Contents

Examination of Witnesses (Question Numbers 266-330)

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 like—different 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 are—just by way of introduction. My colleagues will then home in on specific aspects. Mr Mulligan, would you like to go first?

Jonny Mulligan: 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.

Jonny Mulligan: Well, it is purely—let 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?

Jonny Mulligan: 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.

Jonny Mulligan: 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 first—buildings, land, waste—which we don't always get finance for.

Q270   Chair: Thank you. Mr Steele?

Rupert 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?

Rupert Steele: 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?

Penny 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.

Penny Shepherd: 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 UK?

Penny Shepherd: 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.

Jonny Mulligan: 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 well—brilliantly if we just stay steady on it—and 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?

Penny Shepherd: 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 it.

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?

Rupert Steele: 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 initiatives going?

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.

Rupert Steele: 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.

Jonny Mulligan: 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 tariff—by which I assume we are talking about the contract for difference mechanism in EMR—might 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?

Rupert Steele: 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.

Penny Shepherd: 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?

Rupert Steele: 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 these initiatives?

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 opportunities.

Q282   Sheryll Murray: Is there a need for a single voice guiding Government on green infrastructure investment?

Jonny Mulligan: Just to take a small step back, one thing I've noticed—because I've read a lot of statements that have been given to you—is 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 with—energy, smart grids and renewables—and 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?

Jonny Mulligan: 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, its scope.

Jonny Mulligan: 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?

Penny 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 first—that it isn't asked to address every possible opportunity originally—because 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?

Penny Shepherd: 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.

Rupert Steele: 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?

Rupert Steele: 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 saying—that it was up to the individual Government departments to agree what that should be—presumably 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.

Rupert Steele: 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 investments?

Jonny Mulligan: 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 very good.

Rupert Steele: I would think that guiding and prioritising that is fundamentally DECC's job. We have a Secretary of State to lead the decarbonisation effort and—

Q290   Chair: You would not see that as being a role for the Green Investment Bank?

Rupert Steele: 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?

Rupert Steele: 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?

Penny Shepherd: I have nothing on that.

Rupert Steele: I think Paul has expressed it very well.

Jonny Mulligan: 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 Committee.

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.

  Neil Carmichael: You are all nodding to that? You're all saying "yes".

Paul Spence: Yes.

Penny Shepherd: Yes.

  Rupert Steele: Yes.

Jonny Mulligan: 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?

Penny Shepherd: 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 its investment.

Q296   Neil Carmichael: You are obviously applying fairly high, rightly so, ethical standards for the performance of the Green Investment Bank.

Penny Shepherd: 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?

Penny Shepherd: 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.

Penny Shepherd: 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 before—about 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?

Penny Shepherd: 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 Investment Bank.

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.

Jonny Mulligan: 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 them.

Jonny Mulligan: 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 comment.

Rupert Steele: 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?

Penny Shepherd: 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 spending.

Q303   Sheryll Murray: So were you envisaging the Green Investment Bank as being a proper bank or a fund?

Penny Shepherd: 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.

Rupert Steele: 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 focus on—

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 that way.

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?

Penny Shepherd: 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.

Jonny Mulligan: 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.

Jonny Mulligan: 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.

Rupert Steele: 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.

Penny Shepherd: This is the nuclear question, isn't it?

Chair: I think we will be coming on to that later.

Penny Shepherd: 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 time?

Paul Spence: I'd like to see it all in place.

Rupert Steele: 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.

Jonny Mulligan: 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?

Rupert Steele: 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.

Penny Shepherd: 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 countries—for example through the Capital Markets Climate Initiative—and 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.

Jonny Mulligan: 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 stations.

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.

Rupert Steele: 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 moment.

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, yes.

Jonny Mulligan: 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 easily rebutted.

Rupert Steele: 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, too.

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 like?

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.

Penny Shepherd: 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?

Penny Shepherd: 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.

Jonny Mulligan: 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.

Penny Shepherd: 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?

Rupert Steele: 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 and expertise.

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 proposals.

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.

Jonny Mulligan: 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 issue?

Jonny Mulligan: Pace and race; there are a lot of opportunities now that need small parts of funding that will make the Green Investment Bank work.

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.

Rupert Steele: 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.

Penny Shepherd: 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?

Penny Shepherd: 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.

Penny Shepherd: 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?

Penny Shepherd: 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?

Penny Shepherd: 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.

Penny Shepherd: Yes. Our research is specifically about private investors rather than large, institutional investors.

Neil Carmichael: Yes, I gathered that.

Penny Shepherd: 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 crisis.

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.

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