Written evidence submitted by the UK Business
Council for Sustainable Energy
1. The Council works with leading companies in
the energy industry to speed the transition to a low carbon economy
consistent with the delivery of secure and affordable energy.
2. We welcome the opportunity to make this submission
to the Environmental Audit Committee on the important area of
investment in the transition to a low carbon economy.
UK INVESTMENT CONTEXT
3. It is widely acknowledged that significant investments
are required to deliver the low carbon technologies and supporting
infrastructure needed in the UK and a figure of £200 billion
by 2020 has been suggested.
4. Energy companies stand ready and willing to
invest - and they are likely to make a large part of the investments
due to their technical expertise, management strength, balance
sheets and track-record.
5. However, the scale and pace of investment
needed in major low carbon plant, means that even if the economics
are attractive, projects may be impacted by shorter term capital
constraints.
6. In particular, in the long period before revenues
start to flow, additional sources of equity investment may be
required to fund development, construction and early-stage operation.
7. Attracting such equity may be harder in the
current climate. Banks and pension funds may provide debt-funding
for certain "settled-down" operating assets, but are
less likely to take on development or construction risk.
RISK-REWARD
PROFILES
8. A long-term, stable policy framework is essential
to attract investment to the UK.
9. Effective incentive arrangements to support
secure, low carbon generation should predominantly be put in place
through the Government's Electricity Market Reform work.
10. Significant risks posed by planning and transmission
must also be addressed.
11. Some form of Green Investment Institution
could potentially play a role in handling residual risks - particularly
in relation to the development, construction and early operation
phases of projects as well as perceived policy and regulatory
uncertainty.
ROLE OF
A GREEN
INVESTMENT BANK
12. There are three areas where a "Green
Investment Bank" (GIB), or similar institution, could potentially
play a role:
13. Equity co-investment in low carbon technologies—GIB
involvement could help in terms of meeting the volume of sensibly
priced capital required, supporting projects through the more
risky construction phase and investing in new types of asset where
commercial markets are not yet comfortable. Some form of guarantees
by a Government supported GIB might help in reducing policy and
regulatory risks, particularly as Government would then itself
be exposed to the potential upsides and down sides of its decisions.
14. Seed funding for Green Deal—GIB
could also offer support for downstream investments, such as higher
cost measures for households and infrastructure better suited
to long term rewards. In particular, it could provide seed funding
for the Green Deal. This would enable private investors to see
the concept in practice and evaluate the potential scale of opportunity
and risks of investing.
15. Innovative delivery—Some areas
of the low carbon economy, such as district heating infrastructure,
are well suited to attracting forms of "patient capital"
and the GIB could potentially provide an innovative route to market
for such funds which could in turn support the wider deployment
of long term heating infrastructure in the UK. This in turn would
play an important role in decarbonising the UK's heating sector.
Setting up a new institution?
16. Clarity is needed on the governance arrangement
for any "bank" - such as what it can invest in, what
sort of returns it should seek - and how it would be capitalised
- including the extent of public funding and its relationship
to the PSBR (Public Sector Borrowing Requirement).
17. If there is some form of public stake in
schemes, via the GIB, this could help in building investor confidence
and reducing policy and regulatory risks. We hope there will be
announcements on this alongside the Comprehensive Spending Review.
18. A coherent, consistent approach to supporting
low carbon at various stages is needed. Proposals to rationalise
funding streams as set out in the Wigley report (2010) do not
fully reflect the complexity of existing funds and institutions,
and in some cases are significantly inaccurate. Removing or changing
already committed funds will impact on investor confidence.
19. A new financial institution to support the
transition to a low carbon economy will need to be both useful
and credible. It should be ore than "just another player"
but, if established, offer the capacity to "make a difference".
This timely inquiry by the EAC is therefore particularly welcome.
21 October 2010
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