Written evidence submitted by EON
OVERVIEW
1. An estimated £200 billion of investment
may be required for energy infrastructure in the UK over the next
10 to 15 years to replace closing power plants, build new low
carbon generation, invest in energy efficiency measures and ensure
we have the networks we need for a low carbon energy sector.
2. A number of factors are limiting future investment
in the electricity market. These include the absence of sufficient,
reliable long-term incentives to reward the value of low carbon
investments, the high capital cost associated with most large
scale low carbon technologies such as nuclear, carbon capture
and storage or offshore wind, cost and performance uncertainties
with relatively new technologies, and the impact on the wider
electricity market and investments of policies to support the
delivery of renewable projects in line with the UK's renewable
targets for 2020 under EU law.
3. These are the key barriers to investment and
are being addressed as part of DECC's electricity market reform
project. If this reform is effective, then we believe the necessary
investment will be attracted to the UK from existing energy companies
and from new sources of funding. In our view, the role of a Green
Investment Bank is primarily to help provide these new sources
of investment, whether from the financial markets or from public
funds if they are available. The Bank's potential role also needs
to be factored in to the electricity market reform process, given
that one of the objectives of reform will be to attract new sources
of funding for UK energy infrastructure. Similarly if the Bank
is in effect a potential source of subsidy through low cost finance,
then this also needs to be factored in to the new market framework.
4. The nature and extent of the Bank's role will
depend on whether the Government will itself be providing it with
funds or be willing to underwrite its funding activities, or whether
the Bank will be responsible for raising its own funds from the
market without Government support, which would suggest a significantly
narrower function, or if it is a combination of the two. We note
the Government's intention announced in the CSR to initially capitalise
the Bank with £1 billion of DEL funding together with additional
significant proceeds from the sale of Government owned assets,
and that it will be able to reinvest the proceeds from its investments.
This is a very welcome development but the announcement as a whole
suggests that the Bank's primary role may not be to invest public
money or to provide Government loan guarantees but to act as a
catalyst, facilitating the entrance of new types of investor into
green infrastructure, although much design work remains to be
done.
ROLE OF
A GREEN
INVESTMENT BANK
5. Where the Green Investment Bank is dispensing
Government money, whether raised from sale of Government assets,
taxpayers or energy customers, or is providing loans on preferential
terms, Government must set some clear criteria governing how that
money is spent to ensure that the Bank operates in a way which
meets the Government's energy and climate change objectives. We
would not favour a model where the Bank is provided with funds
by Government and then has complete discretion over how it is
spent. Not only would this increase uncertainty for market participants,
but, from Government's perspective, it would also appear to be
an inefficient way of relating financial support to Government
policy goals.
6. The Bank should operate in a transparent and
predictable way, given that it may be competing with private sources
of capital or could be favouring one form of investment over another.
Government would need to have regard to EU state aid rules and
to the potential distortive effect on the market and other participants
of the Bank's activities, for example where it provides financing
at below market rates.
7. We would see the Bank focussing on low carbon
investments where private sources of capital were not well placed
to provide all the funding required, for example where the technology
risks are high, or where the investment returns from Government
policy support are perceived by institutional investors to carry
more risk than they are looking for. This seems to be consistent
with the Government's intended approach announced in the CSR which
states that the Bank would have an explicit mandate to tackle
risk that the market cannot adequately finance, although it is
unclear how it can do that without some form of Government support.
Support from the Bank should be available in principle to all
projects within a given category.
8. Depending on the level and type of Government
support, a Green Investment Bank could perform some or all of
the following activities:
providing debt funding at preferential rates or conditions
for major low carbon investments such as offshore wind, offering
loan guarantees or extreme event insurance (where there are no
commercial propositions), or providing the initial capital or
guarantees, where the private capital market may not have the
confidence to invest initially. Some of these forms of support
may be a more effective way of mitigating risks than covering
them through increasing the general level of revenue support under
the renewables obligation or CCS levy to compensate for the risk
in question. Funding would have to be made available equitably
to the market as a whole;
co-investing equity alongside private investment,
where project developers are looking to share their capital commitment
or level of risk exposure. On project completion, the Green Infrastructure
Bank could either seek to unload any equity it retained and recycle
its capital into new development projects, or retain these shares
and take the dividend returns from the project. This type of investment
might also be appropriate where the Government policy framework
does not provide sufficiently stable returns in which case equity
investment by the Bank could provide a means of mitigating this
risk. The terms on which the Bank would invest equity would need
to be clearly set out by the Bank in advance and not applied on
ad hoc basis;
supporting market deployment of emerging technologies
such as marine technologies or CCS. However, consideration would
need to be given to how the Bank could add value in relation to
existing Government funding routes. We do not see the Bank having
a useful role in supporting longer-term technology development
where a number of existing institutions such as the Energy Technology
Institute and research councils are already active; and
providing loans to the public at preferential rates
and conditions for energy efficiency or other low carbon investments
(comparable to the energy efficiency loan schemes operated by
the KfW Banking Group in Germany), providing support to lenders
in the form of guarantees to reduce the risk profile, and by tapping
into markets or investors that utilities have not been able to
access and thus provide supplementary funding to the public.
9. There would be little to be gained from the
Bank simply replacing existing funding sources although, where
this funding is currently provided by a variety of Government
bodies, it could lead to a more effective and focussed direction
of funds, assuming the Bank has the right expertise overall, and
could lead to some savings in administration costs.
10. Where the Green Investment Bank is not making
use of Government funds or benefiting from Government guarantees,
the Bank is likely to have a narrower role and the question arises
as to whether and how it can add value to private sector sources
of finance and services already carried out by private sector
financial institutions. For example in terms of debt funding could
it achieve better terms and conditions and a higher overall funding
volume, compared to the terms that can currently be obtained by
the utilities or other project developers? In terms of equity
could it be more successful in finding and bundling acceptable
investors on acceptable conditions than banks, finance houses
or private equity houses? This remains to be seen but we would
see its role as developing a specific expertise in the energy
market and related Government policy framework on the basis of
which it could:
act as a specialist source of advice on Government
policies and available public sources of funding to financial
institutions considering investments in low carbon technologies;
help to structure, in partnership with the private
sector, the financing of major projects, whether through debt
or equity; or
establish new and innovative ways to finance the
investment needed in partnership with policy makers (eg the Treasury)
and the investment community, consistent with the statement in
the CSR.
26 October 2010
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