Written evidence submitted by Centrica |
1. Centrica welcomes the opportunity to respond
to the Environmental Audit Committee's Inquiry into the Green
2. Centrica plc is the parent company of British
Gas, the UK's largest energy supplier, with around 16 million
customer contacts in the domestic sector and around one million
in the non-domestic sector. British Gas already enjoys the position
as the energy supplier with the lowest carbon intensity of the
electricity that it produces and supplies to its customers.
3. We also own upstream gas production and power
generation assets through Centrica Energy to support our supply
(i) We own eight gas-fired power stations including
Britain's newest power station in Langage, near Devon.
(ii) We are a leading developer of offshore wind
and were recently awarded exclusive rights to develop the Irish
Sea zone which provides us with the potential to develop up to
an additional 4.2 gigawatts of renewable electricity.
(iii) Centrica also plans to play a role in the
UK's new nuclear renaissance. We own 20% of British Energy, through
our Joint Venture with EDF Energy and are undertaking the pre-development
activities for a planned nuclear new build programme.
4. The threat of climate change demands action
now and the UK has rightly set itself the task of meeting this
challenge. We have demanding greenhouse gas reduction targets
of 34% by 2020 and 80% by 2050. Separately, the UK needs to deliver
15% of all energy from renewable sources by 2020. With concerted
effort and commitment from government and industry, these targets
can be achieved. We support the Green Investment Bank, believing
that if it is correctly designed and implemented, it could play
a substantial role in enabling the UK meet its energy and environment
5. The low carbon investment challenges are significant
and long-term. In order to have a meaningful impact, the GIB institution
must be able to make long-term decisions that sit outside the
political and economic cycle. It must be constituted with a sense
of durability and independence so that investors are confident
that it, and its investment decisions, are for the long-term.
Only in this way can it live up to the vision of a Green Investment
Bank as opposed to another Government grant scheme or fund.
6. The GIB should supplement and not replace
important reforms such as to planning or the electricity market
that are essential for investment in new low carbon infrastructure.
Two areas where we believe the GIB could help accelerate the speed
and scale of finance are offshore wind and energy efficiency.
7. Investment in offshore wind has increased
dramatically but is still not taking place at the scale or speed
needed in order for the Government to meet its targets. This is
being addressed through a range of important reforms including
planning, RO support etc. Getting the framework right for investment
must be the Government's priority.
8. With the right framework the investment will
come forward. However, in the longer term there may be an inherent
shortfall of available capital in the UK acting as a barrier to
deployment of investment at the speed and scale required. This
is because only a few companies have the skills and capacity to
undertake these investments (utilities) and these have limited
balance sheet headroom combined with competing calls on resources.
These balance sheet constraints will require utilities to find
other sources of finance that do not utilise balance sheet capacity.
This is a feasible and tested route. However, there is a risk
that new equity partners may not come forward at the speed and
providing the scale necessary to meet the renewable energy deployment
rates the Government envisages.
9. The GIB could play a role in overcoming this
by providing project equity at key points e.g. pre-construction
offshore wind. The GIB would simply be expanding the pool of available
capital, not providing a subsidy. It would co-invest on pari
passu (equal) terms with the private sector project promoter(s).
On completion of the project, capital can then be released and
then recycled for further projects. A modified version is for
the GIB to co-invest with first loss equity, requiring it to make
a smaller contribution to the project finance.
10. In addition to plugging a funding gap, GIB
co-investment would also provide reassurance to utilities and
the broader investment community that the Government was committed
to providing the support mechanisms necessary to make the investments
required. In doing so, it would enhance investor confidence
and increase the amount of funding coming forward from the
11. For the Green Deal to be successfully implemented
on a large scale it must be readily financeable. Energy suppliers'
balance sheets will not be able to absorb the full costs given
the scale could be as much as £80 billion. Banks would
be the natural lenders but so far they have indicated they are
unwilling to provide the finance, initially at least. This is
because Green Deal finance is new asset class (loans tied to a
meter point not a person) at relatively small levels (~£6,000)
over a long payback time (up to 25 years). In addition, a low
interest rate (approximately the risk-free rate +1%) is required
to achieve the Green Deal "golden rule".
Banks therefore see it as too high-risk for significant investment
until it is more proven and understood, thereby limiting the availability
of debt to finance the Green Deal.
12. The lowest cost of financing would be to
access the capital markets. However, to build up a portfolio of
Green Deal Obligations prior to securitisation, an interim "warehouse"
facility would be needed to aggregate and structure the Obligations.
In its early days, there is a risk that Green Deal uptake will
not be successful and the Government will withdraw support of
the policy which would leave the warehousing banks with a portfolio
of assets they cannot sell. As a result, commercial banks have
shown reluctance to act initially as "warehouse" sponsors.
The GIB is ideally placed to act as a strong and credible sponsor
for a Green Deal Special Purpose Vehicle, warehousing Green Deal
obligations prior to securitisation.
13. In addition, the GIB could act as a short-term
liquidity provider for the period it takes to package up enough
GD loans to securitise into a bond. This could be alongside any
private banks willing to lend to the Green Deal or as an upfront
finance provider until they are more confident in the policy.
The GIB should not be seen as a long-term provider of finance
for the initiative and, once the Green Deal is established as
an investable asset class, it is envisaged that public markets
will take over the role of the GIB.
14. To achieve AAA-rating for the securitised
note, the SPV could create a reserve account to cover default
payments funded by the first year or two of Green Deal payments.
15. The GIB is not essential to developing the
Green Deal but it can be key to speeding up delivery. One option
is to hope that a range of banks will come forward and offer commercial
loans, despite early indications of their caution. They are likely
to be much more willing to participate if this was alongside or
through the Green investment Bank. Another option is to rely on
installers to turn to their own balance sheets, but in capital
constrained times this could discourage Green Deal participation.
Both these options therefore risk slowing down the uptake of the
16. The proposed possible structure is outlined
17. In terms of capitalising the GIB, we believe
this is an issue and decision best left to Government. Instead
our focus has been to look at areas where the GIB can add most
value and what characteristics it would require to do so. However,
we would point out that the energy customer already funds significant
policy and investment through various levies and obligations (eg
the RO, CERT, the CCS Incentive, CESP etc.). Because these levies
and obligations are raised through the energy bill, they are regressive.
Therefore we believe a taxpayer route would be the fairest.
22 October 2010
82 Where the new energy bill including energy savings
and loan repayments is less than the bill before the energy efficiency
measures were installed. Back