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

The Green Investment Bank - Environmental Audit Committee Contents

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 changing—has 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.[207] 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.[208]

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.[209] 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".[210]

135. The evidence we received strongly supported the need for clear and 'long, loud and legal'[211] 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 clarified—and we'll say offshore wind is an example […]—then 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.[212]

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).[213]

The Energy Technologies Institute went on to suggest three elements that are crucial to a stable policy and regulatory framework:

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 implementation.
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.[214]

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.[215]

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.[216]

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 increases.
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.[217]

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.[218] 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.[219] 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.[220] 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.[221]

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.[222] James Cameron from Climate Change Capital told us that the UK is not very good at connecting public policy making with investment needs:

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.[223]

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.[224] 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.[225] 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.[226]

143. There were also contrary views, however. Paul Spence from EDF energy was against this policy-coordination role:

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.[227]

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 by itself.[228]

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.[229]

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 infrastructure—DECC, BIS, Treasury, DfT, CLG and Defra. Also InfrastructureUK, a unit in the Treasury, is charged with advising Government on long-term infrastructure needs.[230] 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 visions.[231]

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.[232]

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 Bank.

207 Green Investment Bank Commission, Unlocking investment to deliver Britain's low carbon future, June 2010, p 6. Back

208 Q 76 Back

209 Ev 104 Back

210 Q 129 Back

211 Aldersgate Group, Financing the transition: A strategy to deliver carbon targets, October 2009, p 4; Q 18 [Mr Wolfe, Aldersgate Group] Back

212 Q 51 Back

213 Ev 94 Back

214 Ibid. Back

215 Q 18 Back

216 Department of Energy and Climate Change, Electricity Market Reform: Consultation document, Cm 7983, December 2010. Back

217 Ibid. Back

218 HM Treasury and HM Revenue and Customs, Carbon price floor: support and certainty for low-carbon investment, December 2010. Back