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 expertsthe
Green Investment Bank Commissionto 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 riskchanging
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 investorsparticularly
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 2012nearly 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 2011Design complete and published;
- May to December 2011Continuation of market testing;
- December 2011Staff and back office systems in place;
- September 2012Green Investment Bank operational; and
- May 2013First annual data released on the funds in, and size of, investments made by the Green Investment Bank.
|
1 HM Government, The UK Low Carbon Transition Plan:
National strategy for climate and energy, July 2009. Back
2
Committee on Climate Change, Meeting Carbon Budgets - the
need for a step change: Progress report to Parliament, October
2009. Back
3
Committee on Climate Change, Meeting Carbon Budgets - ensuring
a low-carbon recovery: 2nd Progress report to Parliament,
June 2010. Back
4
Environmental Audit Committee, Third Report of Session 2009-10,
Carbon budgets, HC 228. Back
5
Environmental Audit Committee, Second Report of Session 2006-07,
The EU Emissions Trading Scheme: Lessons for the Future,
HC 70; Environmental Audit Committee, Fourth Report of Session
2009-10, The role of carbon markets in preventing dangerous
climate change, HC 290. Back
6
Environmental Audit Committee, The role of carbon markets in
preventing dangerous climate change, paragraph 77. Back
7
HM Treasury and InfrastructureUK, National Infrastructure Plan
2010, October 2010. Back
8
Green Investment Bank Commission, Unlocking investment to
deliver Britain's low carbon future, June 2010, p xiii. Back
9
Green Investment Bank Commission, Unlocking investment to deliver
Britain's low carbon future, June 2010, p 5 & 6. Back
10
DECC, Annual Energy Statement: DECC Departmental Memorandum,
July 2010. Back
11
Q 277 Back
12
Ernst and Young, Capitalising the Green Investment Bank: key
issues and next steps, October 2010. Back
13
www.number10.gov.uk/news/speeches-and-transcripts/2010/05/pms-speech-at-decc-50113 Back
14
HM Government, The Coalition: our programme for government,
May 2010, p 9. Back
15
Ev 133 Back
16
Q 59 Back
17
Q 4 Back
18
Q 3 Back
19
Ibid. Back
20
Q 6 Back
21
Q 60 Back
22
Q 64 Back
23
Q 387 Back
24
Q 331 Back
|