House of Commons - The Green Investment Bank - Environmental Audit Committee

The Green Investment Bank - Environmental Audit Committee Contents

1 Introduction

The need for government action

1. The Climate Change Act 2008 sets out a legal commitment for the UK to reduce its carbon emissions, relative to a 1990 baseline, by at least 34% by 2020 (reflecting the advice of the Committee on Climate Change), and by at least 80% by 2050. To help meet those targets, an emissions reduction path is set out by a series of quinquennial carbon budgets that place legally binding ceilings on UK emissions. Also, the EU Renewable Energy Directive includes a target of generating 15% of energy from renewable sources by 2020.

2. The previous Government's 2009 'Low Carbon Transition Plan' describes how the UK will meet its carbon budgets up to 2020. It would involve increasing renewable energy generation five-fold, installing smart meters in every home, and new cars being 40% more efficient. The Plan recognised that substantial private sector investment will be needed to deliver the new low carbon infrastructure required, and emphasised the importance of a supportive climate for timely investment in a diverse mix of low carbon technologies.[1]

3. In October 2009, the Committee on Climate Change published its first progress report on the carbon budgets. It found that a 'step change' in the pace of emissions reduction was essential, and recommended that Government consider new rules that would strengthen the investment climate in low-carbon power generation and make a major shift in the strategy on residential energy efficiency.[2] The Committee's second progress report, published in June 2010, found that some progress had been made but new policies were needed to drive the step change required.[3] The previous Environmental Audit Committee's reports on carbon budgets[4] and the EU Emissions Trading Scheme[5] also identified the need for new policy frameworks to ensure the necessary investment decisions are made. The Committee argued that market mechanisms needed to be adjusted to generate a much higher carbon price, to incentivise investment in low-carbon infrastructure.[6]

4. In October 2010, the Treasury and InfrastructureUK published the National Infrastructure Plan. This stated that the UK's approach to infrastructure has been too timid and uncoordinated to support balanced and sustainable economic growth, and that the UK was ranked 33rd for the quality of its infrastructure in 2010. A 'step change' was needed in both the level and type of investment for a number of reasons, including competition from other countries investing heavily in improving their infrastructure and the need to mitigate and adapt to climate change. The Plan noted that 'most infrastructure is carbon intensive and a revolution is needed, particularly in transport and energy, to meet legally binding targets'.[7]

5. It is against this background that we decided to undertake this inquiry. We took oral evidence from RenewableUK, Green Alliance, the Aldersgate Group, the Carbon Trust, the Energy Technologies Institute, Ofgem, Bob Wigley (Chairman of the Green Investment Bank Commission), James Cameron from Climate Change Capital, the National Association of Pension Funds, Ernst and Young, E3G, Consumer Focus, the Co-operative Group, Woodland Trust, the UK Sustainable Investment and Finance Association, the Environmental Industries Commission, Scottish Power, and EDF energy. We also explored the issues with Justine Greening MP, the Economic Secretary to the Treasury, and Vince Cable MP, the Secretary of State for Business, Innovation and Skills (BIS). We received a note on accounting issues affecting the classification of a Green Investment Bank from the House of Commons Scrutiny unit. We are grateful to them, and to the 32 others who submitted written evidence. Three members of the Committee also visited the state-owned German development bank, KfW, to discuss their experiences in promoting green investment (Annex A).

The case for a Green Investment Bank

6. There are various estimates of the amount of investment needed in the UK, over a range of timescales, to meet emissions reduction and renewable energy targets, ranging from £200 billion to £1 trillion (Figure 1 on page 12). Whichever estimate is used, the scale of the challenge is unprecedented. Only £11 billion was invested in the UK's 'dash for gas' in the 1990s, which was considered transformational at the time.[8] Urgent action is needed to help raise the scale of investment.

7. The current Chancellor of the Exchequer, whilst in opposition, tasked an independent group of business experts—the Green Investment Bank Commission—to identify how the UK could accelerate the private sector investment required to deliver the UK's transition to a low carbon economy. The Commission reported in June 2010 and called for a Green Investment Bank to be established quickly to tackle the barriers and market failures limiting private sector investment in green infrastructure:

utility companies' balance sheets being constrained—'Utilities face uncertain energy demand, increased borrowing costs and the need to reduce their [debt] leverage to protect their credit ratings, and other demands for their capital [as][…]most of the UK's large utilities also operate in other European countries';
the scale of investment needed and the short timescale—'pools of capital are neither large nor long enough';
high political and regulatory risk—changing policies and regulations could have adverse impacts on investments returns;
new technologies by their nature carrying additional risks to investors; and
investment opportunities not currently being aggregated in a form suitable for large investors—particularly for energy efficiency improvements where millions of homes will need retrofitting.[9]

The Commission set out a number of models for a Bank that would raise finance from a range of sources, including institutional investors and the general public, and use this to fund different types of low-carbon infrastructure.

8. In July 2010, the new Government published its Annual Energy Statement, which aimed to set out how government would develop a clear, transparent, and long-term policy framework to act as a catalyst for private sector investment. Alongside a Green Investment Bank, the Annual Energy Statement set out a range of other prospective initiatives such as the 'Green Deal' to improve domestic energy efficiency, a review of the electricity market, measures to bolster the carbon price, and publishing a national renewables delivery plan.[10] These initiatives are at early stages, so it is not clear how much of the required investment they will deliver. Rupert Steele from Scottish Power told us that these initiatives were 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 [Electricity Market Reform].[11]

9. Ernst and Young estimate that, in the meantime, traditional sources of capital for investment in green infrastructure (utility companies, project finance and infrastructure funds) can provide £50 to £80 billion of the £450 billion it estimates is needed by 2025, leaving a funding gap running to hundreds of billions of pounds.[12] With the Government's top priority being to tackle the deficit, it is clear that the significant majority of investment to fill this funding gap will have to come from the private sector.

10. The Green Investment Bank must be an integral part of the Government's efforts to deliver on its ambitions: the Prime Minister has committed the Government to being "the greenest ever";[13] and the Government expects green growth to be a major future driver of the economy, as it attempts to build 'a new and more responsible economic model'.[14]

11. Although committed to set up a Green Investment Bank, the Government has not formally responded to the Green Investment Bank Commission's recommendations, but it is carrying out its own work looking at 'the market and institutional failures and constraints that can limit the availability of finance needed to deliver the scale and pace of investment required to deliver the Government's green growth objectives'.[15] A timeline of events in relation to the Green Investment Bank is in Figure 2 on page 13.

Urgency of action

12. The Green Investment Bank Commission reported in June 2010 and found that urgent action was need to help radically increase investment in low-carbon infrastructure and technology. It recommended that a Green Investment Bank be set up by the end of 2010. Bob Wigley, Chairman of the Commission, told us that the Commission set a deliberately challenging timetable to provoke action.[16] However, the Government's current timetable envisages the Bank being operational in September 2012—nearly two years later than recommended by the Commission. Philip Wolfe from the Aldersgate Group called for the Bank to be effective from 2011 and described the Government's timetable as "excessively slow"[17] He saw clear risks from the Green Investment Bank only becoming operational in 2012:

[...] if we do delay now, the natural inclination will be that investment in the short term goes into the established technologies, the known technologies, those technologies that have a lower perceived political risk. That means there is a danger that if we don't have the mechanism to invest in low carbon technologies we will, as a default in the short term, be investing in high carbon technologies.[18]

13. Gordon Edge from RenewableUK told us that the UK will lose out as demand switches to other countries:

[...] a hiatus in investment and build will [...] prevent us from building up the demand and develop an industry out of it. That is one of the key benefits of taking a lead in offshore wind. If there is a gap, while we work out where the money comes from, then everybody steps back. If we don't get the investment in the factories here, they'll go elsewhere where there is more certain demand, places like Germany.[19]

[...] if we had a Bank that was only there in 2013, and then took time to get that new capital into [the offshore wind sector], the big ramp-up in offshore wind that we expect and hope for, post 2015, might be inhibited because you simply don't have the quantity of capital there to build it up to 3,000 or 4,000 megawatts a year, which is £10 billion to £12 billion a year of new capital every year.[20]

James Cameron from Climate Change Capital similarly cautioned against a lengthy internal government process:

[...] if you spend too long waiting to get it all exactly right at day one, you're often too late to really intervene decisively to resolve the problem that you started with. So, I'm all for trying to complete a task so that what you're finished with is fit for the purpose, but delay is not helpful and the more time we spend discussing what could be, the less time we're spending channelling capital into the solution. And, in fact, there is a chilling effect on investment flow as people wait in expectation of something coming through called the Green Investment Bank.[21]

Bob Wigley further explained the potential chilling effect on investment from delays:

[...] investors will naturally say, "Well, if a [Green Investment Bank] is coming, since we don't know what degree of subsidy it might involve, we'd better wait because otherwise we might invest now and there might have been better terms available later, so we'll wait". That's the risk.[22]

14. With funding from the Treasury provided for 2013-14, we asked the Business Secretary about the Bank starting work soon. He told us:

We are not setting it up immediately because you have to have due diligence and you have to have proper feasibility studies, which is what we are doing. Certainly we do want to see this operating quickly. That is why we are talking about staff being appointed by the end of the year and investments beginning to take place next year. There are frictions we can't just assume away, like the need for state aid, and this is going to take time.[23]

15. If a Green Investment Bank only became operational in September 2012 investors may put off investment while there is uncertainty about how the Bank will operate. Investment may go abroad or into high carbon projects. A Green Investment Bank operational in late 2012 may not have the time needed to grow and build its balance sheet sufficiently to provide the level of investment support needed to meet 2020 emission reduction and renewable energy targets. The Bank must to be able to start making investments within 12 months.

The purpose of this report

16. The Government informed us that it plans to include an update on its work developing the Bank in the Budget later this month, and to announce the proposed business model in May.[24] Our aim in this inquiry is to contribute to those deliberations and, we hope, to encourage their quicker conclusion and to prompt action.

17. This report sets out our findings in five parts:

Part 2 examines the differences between a government 'fund' and a 'bank', explores the rationale for setting up a 'bank', and its possible sources of finance.
Part 3 explores governance issues to be considered by Government and looks at the various options for the role and remit of the Bank, and different areas the Bank could invest in including the Green Deal.
Part 4 considers the Government's current work designing and testing models for the Green Investment Bank.
Part 5 explores the need for a clear policy framework for low carbon infrastructure, and the relationship between the Green Investment Bank and other Government green initiatives.
Part 6 explores the potential impact of a Green Investment Bank on the public finances.Figure 1: Different assessments of capitalisation required for a Green Investment Bank

Amount of investment required	Over what period	Level of capitalisation suggested	For what purposes	Source	Date of assessment
£234 bn	By 2025	£7 bn of additional income to fund equity share of investment	Clean energy investment to meet UK's existing energy goals	Securing the UK's Energy Future: Meeting the finance challenge, Ernst and Young	February 2009
£500 bn, up to £50 bn per year	Over next ten years	No estimate given	Infrastructure, not just low carbon (not smart grid)	Delivering a 21st Century Infrastructure for Britain, Dieter Helm, James Wardlaw & Ben Caldicott, Policy exchange	June 2009
Between £160 bn to £500 bn		£3-5 bn	Accelerate the transition towards a low carbon economy	The case for a Green Investment Bank, Green Alliance	October 2009
£200 bn	2020	Does not specify	Energy investment — secure and sustainable electricity and gas	Project Discovery, Ofgem	February 2010
Between £40 bn and £50 bn per year (up to £1 trillion)	Up to 2030	£2 bn	UK's economic infrastructure, low-carbon sector and new energy and transport	Strategy for National Infrastructure, HM Treasury	March 2010
At least £750 bn	over the next two to three decades	£2 bn	UK's low carbon transition	Accelerating the transition to a low carbon economy; the case for a green investment bank, E3G	May 2010
£550 bn	To 2020	Does not specify — calls for further analysis before Spending Review	To meet UK climate change and renewable energy targets	Unlocking investment to deliver Britain's low carbon future, Green Investment Bank Commission	June 2010
£550 bn	to 2020	£4-6 bn over next four years	Infrastructure, power generation, new and existing buildings, and new manufacturing industries	Financing the Future, Aldersgate Group	September 2010
£450 bn	2025	£4-6 bn	UK's low carbon agenda, including all the energy efficiency programme capital requirements	Capitalising the Green Investment Bank, Ernst and Young	October 2010

Figure 2: Timeline of significant events in relation to the Green Investment Bank

Late 2009	Green Investment Bank Commission set up by the then shadow Chancellor of the Exchequer and shadow Minister for Climate Change.
May 2010	Creation of Green Investment Bank included in the 'Coalition Agreement '.
June 2010	Green Investment Bank Commission published its report— Unlocking investment to deliver Britain's low carbon future.
July 2010	Department for Business Innovation and Skills' Structural Reform Plan included an action to 'develop proposals for a Green Investment Bank to support private investment in clean energy and green technologies' by April 2011.
October 2010	Spending Review 2010 detailed funding commitment for a Green Investment Bank: £1 billion in 2013-14, plus proceeds from the sale of government assets.
November 2010	Department for Business Innovation and Skills published its Business Plan 2011-2015, which set out the timetable for the creation of a Green Investment Bank: May 2011—Design complete and published; May to December 2011—Continuation of market testing; December 2011—Staff and back office systems in place; September 2012—Green Investment Bank operational; and May 2013—First annual data released on the funds in, and size of, investments made by the Green Investment Bank.