5 The Green Investment Bank in the
Government's wider green landscape |
Political and regulatory risk
133. The Green Investment Bank Commission found
that political and regulatory risk the risk of policies
and regulations changinghas been a barrier to greater investment
in green infrastructure. Since investors cannot control the political
and regulatory risk, this translates into a higher cost of capital.
Bob Wigley, Chairman of the Commission, told us that:
History is littered with examples of people investing
in projects based on a regulatory regime, only to find 10 or 15
years down the track and maybe two or three Governments later
that that regime changes and the economic returns that were promised
were, therefore, not achieved. We've seen, recently, Spain unilaterally
changing its feedin tariff and materially, negatively affecting
the returns of renewable projects there, with a very loud reaction
from the investors as a result.
134. Ofgem's 'Project Discovery' examined whether
the current arrangements in Great Britain are adequate for delivering
secure and sustainable energy supplies over the next 15 years.
It found that any perception of heightened policy and regulatory
uncertainty, given the long-term nature of the investments required,
may push up the costs of financing them. It concluded that the
market's willingness to lend or invest, and the associated cost
of funding, will be determined by the perceived risks in the energy
sector relative to other sectors and markets. Uncertainty surrounding
future carbon prices and subsidy levels, for energy efficiency
or renewables for example, were key risk factors facing investors.
This means that, as Ingrid Holmes from E3G told us, "you
need to provide as much certainty to investors as possible, because
that brings down the cost of capital".
135. The evidence we received strongly supported
the need for clear and 'long, loud and legal'
policy frameworks to tackle political and regulatory risk and
provide investors with certainty. Sir Rob Margetts from the Energy
Technologies Institute told us that investor confidence was not
high at the moment:
Some of that is perception, some of it is changes
that seem to have occurred all too frequently in the last few
years in that investment environment. So where policy has been
clarifiedand we'll say offshore wind is an example [
you're seeing investment. So we do need very clear policy, strategy
and direction, incentives and regulatory framework to reduce this
perception of risk. You have to bear in mind the people that make
these major investments are great global companies [...] they
have plenty of choice as to where they invest in the world, as
do the banks that help fund them. We have to be an attractive
place and that means we have to have manageable risk.
The Energy Technologies Institute set out some of
the difficulties that the Government must overcome in order to
provide that effective policy framework:
The effective articulation of UK energy policy and
the associated strategy for meeting the 2020 and 2050 objectives
is probably the most critical immediate issue for [the Government]
and one where there is currently no agreed consensus. For example,
there is general, widespread agreement across government, industry
and advisory groups that the future energy system should include
new nuclear build, effective deployment of Carbon Capture and
Storage and implementation of energy efficiency approaches in
buildings together with 'smart' networks and distribution systems.
However, there is less agreement on the eventual scale of new
nuclear build and there is no proven technology at scale for CCS.
There is less agreement about the extremely large commitments
required for offshore wind (especially the overall economics and
affordability including storage and back-up systems), the viability
of significant marine energy deployment and the widespread take-up
of all electric cars (as opposed to hybrids).
The Energy Technologies Institute went on to suggest
three elements that are crucial to a stable policy and regulatory
- The Government must offer to
industry, business and consumers, a coherent and consistent strategy,
policy and regulatory framework for low carbon energy system development,
deployment and service support.
- Following initial development of policy and strategy,
a settled long-term regulatory and incentive structure is required
to promote ongoing investment by investors, debt providers, manufacturers
and project developers. These groups are all essential to strategy
- A UK energy strategy must integrate future power,
heat and transport needs together with the associated infrastructure
issues and must address the necessity for private sector groups
to mitigate potential risks (financial, policy, market and technical)
ahead of investment.
136. Underlining the importance of a stable policy
and regulatory framework, witnesses told us that they see the
establishment of a Green Investment Bank as a secondary issue.
Gordon Edge from RenewableUK explained that:
If you do not get [policy stability] right, you could
put as much money as you like into a Bank, it's not going to help.
For me, the Government's first role is to ensure the stability
and dependability of that policy framework.
Electricity Market Reform and
a Carbon Floor Price
137. The Department of Energy and Climate Change
launched a consultation in December on its proposals to reform
the electricity market in the UK, which aims to:
[...] strike a balance between the best possible
deal for consumers and giving existing players and new entrants
in the energy sector the certainty they need to raise investment.
Specifically, they are designed to ensure that low-carbon technologies
become a more attractive choice for investors, and adequately
reward back up capacity to ensure the lights stay on.
The Government's proposals have four main elements:
- Carbon price support:
Separately consulted proposals to support the carbon price directly
(see below). By strengthening the carbon price for electricity
generators, it will increase the cost of fossil fuel generation,
making lower-carbon power more attractive.
- Feed-in tariffs: the
Government will guarantee greater revenue certainty for low carbon
in the form of a top-up payment if the wholesale price is below
the feed in tariff, and a potential clawback for consumers if
wholesale prices are above the contracted tariff. The Government
expects this to control costs for consumers, provide stable returns
for investors, and maintain the market incentives to generate
when electricity demand is high.
- Capacity payments:
additional payments to encourage the construction of reserve plants
or demand reduction measures. The Government expects capacity
payments will create an adequate safety cushion of capacity as
the amount of intermittent and inflexible low-carbon generation
- Emissions Performance Standard:
To limit how much carbon any new coal-fired power stations emit
to reinforce the existing requirement that no new coal power stations
are built without demonstrating Carbon Capture and Storage technology.
The consultation period ends in March 2011 and legislative
proposals to implement new electricity market arrangements will
be launched in a White Paper, due in 'late spring' 2011.
138. Alongside these reforms, the Treasury and
HM Revenue and Customs launched a consultation in December 2010
on proposals to support the price of carbon in the UK.
Our predecessor Committee's reports on the EU Emissions Trading
Scheme found that the scheme had so far not delivered a stable
and effective price of carbon because the allocations of allowances
to emit carbon were too generous, and the market price of allowances
consequently too low to drive low-carbon investment.
The current proposals aim to tackle this, by changing the Climate
Change Levy and Fuel Duty to act as a floor price of carbon, supplementing
the Scheme and providing greater long term certainty for investors.
At present, low-carbon generation technologies are typically more
expensive than conventional fossil fuel energy generation, at
least in the short term. The Government expects that introducing
a floor price of carbon will make generating electricity from
fossil fuels more expensive.
139. Rupert Steele from Scottish Power told us
that these reforms are fundamental for making the business case
for investment in low carbon energy generation. The Green Investment
Bank's role alongside these reforms will be to help increase the
speed at which industry is able to respond to the investment opportunities
driven by the reforms.
Paul Spence from EDF energy echoed those views:
The [electricity] 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 a fundamental,
but it is one component. The Bank sits alongside that as a way
to make sure that the capital is then available.
140. We would hope that the Bank will be able
to provide sources of finance needed to unlock the investment
opportunities afforded by the reforms. The
Government should therefore give the Bank a remit to monitor the
Electricity Market Reform and Carbon Floor Price proposals, and
other low carbon targeted initiatives to come, and to advise the
Government on the need for any further policy and regulatory reforms
to continue to provide a clear and long term framework for investors.
141. The Government has not yet estimated the
investment that will be facilitated by the Electricity Market
Reform project and the Carbon Floor Price initiative, and therefore
cannot estimate the residual investment gap that a Green Investment
Bank is expected to fill. In designing the Bank, the Government
will need to assess the level of investment it expects the Bank
to facilitate, on top of what other initiatives can deliver, so
as to be able to make any appropriate further contribution to
the Green Investment Bank's capitalisation.
A role for the Green Investment
Bank to advise on policy
142. RenewableUK worried that government made
policy in the electricity sector partly on the basis of perceived
needs of the investment community that did not reflect reality.
James Cameron from Climate Change Capital told us that the UK
is not very good at connecting public policy making with investment
We tend not to understand each other's language and
often think [
] that we can do things without each other
when, in fact, this kind of transformation is not possible without
a very close association and alignment of interest between public
policy making and private finance.
He suggested that it would be useful to have a Green
Investment Bank that was skilled at deploying capital and, therefore,
skilled at understanding what works, able to take experiences
back into the policy making process.
Similarly, Transform UK and E3G wanted the Bank to be able to
drive the formulation of 'investment grade' policy by being an
adviser to Government.
The Aldersgate Group suggested that the Bank could adopt a wider
role, as a facilitator to help create a co-ordinated approach
to policy and regulation across the energy sector.
143. There were also contrary views, however.
Paul Spence from EDF energy was against this policy-coordination
our view [is] [
] 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.
144. Bringing investors closer
to policy appears to us to be a fundamental role of a Green Investment
Bank. By providing advice to the Government on the risks investors
face and the impact on investors of policy decisions, the Bank
could provide further help in bringing investment in. The Bank
should be given an explicit continuing role to advise the Government
on low carbon and green infrastructure policy, from the perspective
of current and prospective investors. Also, being outside of government,
the Bank could perform an important cross-cutting role by advising
government on whether its low carbon and green investment policies
are joined up across departments.
145. For the Bank to adopt this advisory role,
it will require (as will the Government) good quality and timely
data on investment levels, the impact of new policies or regulations,
and any signs of the crowding out of other investment. The Bank
could be tasked with collecting that data and reporting them.
Such data, along with the Bank's advice, would allow the Government
to monitor the impact of policies and regulations and, if needed,
amend the Green Investment Bank's remit and operating principles
to ensure it maintains its impact.
146. The Green Investment Bank could collect
data on the costs and effectiveness of different types of investment.
Once the Bank has developed a track record of experience in supporting
different types of investment, the Government could routinely
use that data to shape its energy efficiency schemes.
147. The Green Investment Bank will be just one
part of the green economy, and one of many mechanisms to help
provide clean and secure energy supplies and help cut emissions.
Ministers told us that policy measures are needed alongside a
Green Investment Bank to help get private sector investment in
green infrastructure flowing. They told us that market failures:
[...] can be addressed, at least in part, by policy
measures, such as reforms to the electricity market; reforms to
the climate change levy which provide more certainty and support
to the carbon price; changes to the planning consents regime;
and so on. In other cases, the [Green Investment Bank] may have
a role in supporting these policy interventions. And, together,
the policy measures and financial interventions can provide a
more efficient and effective package than either is able to do
148. Transform UK and E3G outlined the importance
of the Green Investment Bank being developed in concert with the
Government's other reforms:
To provide the greatest financial leverage and maximise
the macro-economic benefits to the UK in terms of growth and jobs,
the Bank should not be designed in isolation but in the context
of a range of policies (such as electricity market reform, effective
renewable subsidies, carbon pricing and skills development) aimed
at removing barriers to a low-carbon, resource efficient economy.
149. To provide the greatest
financial leverage and maximise the economic benefits to the UK
in terms of growth and jobs, the Bank should not be designed in
isolation, but in the context of the range of policies the Government
is developing. As work developing the Green Investment Bank continues,
there is a role for a small 'set up' team within the Bank to start
creating and coordinating the linkages between the Bank's role
and other government initiatives.
150. There are many departments with a role in
infrastructureDECC, BIS, Treasury, DfT, CLG and Defra.
Also InfrastructureUK, a unit in the Treasury, is charged with
advising Government on long-term infrastructure needs.
Vince Cable assured us that the Government is working "as
one" when developing the Green Investment Bank:
[...] we do not see this in terms of different departmental
silos and different standpoints. It is an integrated initiative.
We are obviously working very closely with the Treasury, because
it is public money. We are working very closely with DECC, because
we envisage that the main market for de-risking projects, which
would be the first stage of the operation of the bank, are predominantly
energy projects, things like wind power. But DEFRA are involved
because they have an interest in waste and the Department for
Transport, because of transport projects. So there is a collective
interest in this and we work as a team, there aren't separate
The BT Pension Scheme, which has taken part in stakeholder
meetings led by BIS, wanted to see one department take the lead
rather than risk having to repeat key messages across all the
departments which are stakeholders in the Bank.
151. We believe that there is
a role for a Cabinet Committee or Minister, perhaps in the Cabinet
Office, to ensure co-ordination across the relevant departments
on initiatives that will impact on the remit of the Green Investment
207 Green Investment Bank Commission, Unlocking
investment to deliver Britain's low carbon future, June 2010,
p 6. Back
Q 76 Back
Ev 104 Back
Q 129 Back
Aldersgate Group, Financing the transition: A strategy to deliver
carbon targets, October 2009, p 4; Q 18 [Mr Wolfe, Aldersgate
Q 51 Back
Ev 94 Back
Q 18 Back
Department of Energy and Climate Change, Electricity Market
Reform: Consultation document, Cm 7983, December 2010. Back
HM Treasury and HM Revenue and Customs, Carbon price floor:
support and certainty for low-carbon investment, December
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
Q 277 Back
Ev 110 Back
Q 76 Back
Ev 120 Back
Ev 115 Back
Q 281 Back
Ev 133 Back
Ev 120 Back
In October 2010, the Treasury and InfrastructureUK published the
National Infrastructure Plan 2010, which set out a new hierarchy
for infrastructure investment: prioritising the maintenance and
smarter use of assets; followed by targeted action to tackle network
stress points and network development; and, finally, delivering
transformational, large scale projects that are part of a clear,
long term strategy. Back
Q 362 Back
Ev w75 Back