Written evidence submitted by Salix Finance
Salix Finance is pleased to submit evidence to the
Environmental Audit Committee, with a view to assisting the Committee's
deliberations on the Green Investment Bank. In doing so, Salix
draws on its extensive experience of funding public sector
bodies to deliver energy efficiency projects. Its submission focuses
on this potential aspect of the Bank's future activity.
EXECUTIVE SUMMARY
Observations on the issues under investigation
Salix's experience underlines the importance of including
the potential for public sector energy savings in any assessment
of the future role for the Green Investment Bank.
There are potentially still over £500 million
of valuable, small scale energy saving projects to be done in
the public sector, which could yield significant carbon savings,
lower energy bills and quickly repay their costs.
So far there has been both a significant reluctance
from public bodies to make such investment (a demand side barrier)
and little interest from the private sector in providing such
funding (a supply side issue).
In developing its current funding models, Salix has
very successfully addressed some of the key demand side, organisational
and process barriers which had hitherto prevented worthwhile public
sector energy saving projects from taking place. Salix has helped
raise awareness of the value of such projects, provided expertise
in managing them successfully, overcome barriers from public sector
bodies' (PSB) finance teams and has supplied zero cost funding
in order to make the projects happen. Lifetime energy bill savings
from projects which Salix has funded to date amount to £480 million.
We believe that there is potential for private sector
finance to be leveraged into public sector energy projects. For
this to happen, it will be essential to increase awareness among
private sector funders of the value of such small value projects
and to address their concerns regarding potentially high transaction
costs and uncertain risks. Salix's work so far in pre-checking
the feasibility of public sector projects and providing quality
assurance over the level of carbon savings achieved is a useful
demonstration of how this could be done.
One option to be explored for the future would be
for Salix, working with the GIB, to aggregate a portfolio of public
sector energy projects and package them together, making them
more attractive to private sector investors. This could also provide
confidence that every loan will have been passed through the Salix
project testing and assessment process.
Even so, it is still uncertain whether public sector
bodies would be willing, or be able, to meet the commercial interest
rates and fees demanded by private sector funders. More work is
needed to explore ways in which public and private sector support
could work together in order to make such loans attractive to
both parties. Salix is continuing to develop its thinking in this
area; however, in the interim, it strongly believes that it has
an important continuing role to play during the transition to
a full private sector model.
About Salix
Salix Finance is an independent not-for-profit company
set up in 2004 and is funded by DECC in England and by the devolved
administrations in Wales and Scotland. It manages £82 million
of funding allocated to 166 public sector bodies on a match-funded
basis and £63.7 million of 100% project loans via three
programmes in England, Scotland and Wales, involving 249 PSBs.
Projects funded by Salix to date will deliver savings
of £480 million in energy bills and 3 million tonnes
of CO2 over their lifetime. With a maximum payback
limit of five years, the average payback achieved to date is 3.5
years.
Salix funding programmes deliver energy saving projects
which would otherwise not get done.
Salix is the only organisation operating in the public
sector arena which specialises in low-cost, easy to install projects
- delivering quick financial returns for the public sector.
Salix has detailed knowledge of technologies and
the energy savings which they deliver, coupled with a rigorous
appraisal methodology and proven tools and models, which are all
externally accredited and certified.
WHAT DOES
SALIX FINANCE
DO?
1. Salix Finance is an independent not-for-profit
company set up in 2004. It is funded by DECC in England and by
the devolved administrations in Wales and Scotland. Its role is
to show leadership in tackling climate change by reducing energy
costs and CO2 emissions in the UK public sector. To
date, funded projects will save £480 million in energy
bills and 3 million tonnes of CO2 over their lifetime.
2. Salix allocates interest-free finance to fund
simple energy efficiency projects which work quickly to reduce
energy use and continue to operate effectively over the long term.
The money saved by client organisations through reduced spending
on energy costs is used first to pay back the initial project
cost, after which it is available for wider use, including re-investment
in new energy saving projects.
3. Salix uses a robust project assessment methodology
to ensure that, as best as possible, funded projects deliver their
expected savings. It has built up considerable experience of working
effectively with Public Sector Bodies (PSBs) and works across
the public sector to ensure that knowledge sharing and business
case preparation are generally adopted as best practice.
4. Salix demonstrates a proven, cost-effective
mechanism for public investment in CO2 reduction which
has enormous potential for wider application throughout the public
sector.
5. In particular:
Salix has demonstrated that Government funded invest-to-save
schemes, properly and efficiently administered, can deliver long
term financial savings within PSBs.
Salix has proved effective in moving energy efficiency
up the agenda within PSBs but our experience has also shown that
further progress will continue to require an external catalyst
like Salix.
Salix has developed a proven, independently assessed
methodology for assessing and reporting CO2 savings, which could
be applied under the auspices of a GIB.
To date, Salix has funded over 6,750 projects, undertaken
by more than 640 public sector clients, including Local Authorities,
Universities and Colleges, Schools, NHS Foundation Trusts and
Central Government departments.
6. Salix only funds projects which are "additional"
- ie for which no other designated source of internal or external
funding is available. It has tried and tested software which it
uses to assess projects for eligibility, ensuring that the projects
which are undertaken provide the best and most efficient level
of energy savings. In England, projects must comply with a simple
payback of less than five years and the cost of achieving the
CO2 saving from the project must be less than £100
per tonne over the life of the technology. The average results
achieved to date are a 3.5 year payback and £48 per tonne
of lifetime CO2 saving achieved.
7. Salix has been awarded independent assurance
from KPMG over the methodology which it uses to assess projects
and report the resultant savings. At the current time, with a
small nucleus of only 24 staff, Salix's administration costs represent
less than 1.6% of funds under management.
Funding models
8. Salix manages two types of funding programmes
and is looking to expand one of these:
9. Recycling fund
An £82 million match funded recycling programme,
working with 166 separate public sector bodies.
Funds are provided to PSBs on a matched basis (ie
a fund generally comprises 50% funding from Salix and 50% from
the PSB's own budget) and are held for the longer term by them
and recycled locally to deliver a flow of projects, each of which
pay for themselves from the energy savings achieved.
The funds, which average £250,000 from Salix
to each PSB, are only repaid to Salix when the PSB cannot identify
new projects or it ceases to use the funds in accordance with
the scheme rules.
As an example of the high financial returns which
are currently being achieved from this scheme, £100,000 invested
in projects by clients through this fund will save £29,000
per annum based on a 3.5 year payback, and these savings will
last over an average project life of 12.5 years, giving lifetime
financial savings of just over £360,000, or 360% of the original
£100,000 investment.
10. Salix Energy Efficiency Loans Schemes (SEELS)
Three loans schemes, with a total value of £63.7 million,
which have 249 participating public sector bodies.
Following the 2009 budget, £57.4 million
has been provided by the UK Government to offer 100% interest
free loans to English PSBs to undertake individual energy efficiency
projects.
Similar loans programmes have been funded by the
Welsh Assembly Government (£5.3 million) and the Scottish
Executive (£1.0 million).
This money was committed in 2009-10 and is currently
being paid to PSBs on completion of their projects.
In England the loan funding, which averages £20,000
per loan, will be repaid in eight equal half yearly instalments,
starting in March 2011. Similar repayment schemes operate for
the loans in Wales and Scotland. In England the loan repayments
are returned to DECC, whilst in Wales and Scotland they are reinvested
in further energy saving projects in those regions.
The lifetime financial savings being achieved from
the initial DECC investment into the English scheme are 15.5 times
(or 1,550% of) the investment made. This high figure reflects
the short term nature of the funding compared to the long term
benefits of the related projects.
11. Revolving loans
Following discussions with DECC, Salix is now looking
to develop its SEELS programmes further and to operate a revolving
loans programme across the public sector. The only difference
to the current SEELS England programme is that the loan repayments,
once received from the PSBs, will be re-lent by Salix to other
PSBs, rather than being returned to DECC. Salix plans to launch
this programme in the current financial year, using the limited
supply of funding which it has taken back from recycling fund
clients who have not been effectively using their funds. The lifetime
financial savings from this new programme are expected to be 6.6
times (or 660% of) the initial investment made.
"Take up" by the public sector community
12. Salix programmes have been well subscribed
by public sector bodies. In particular, the £57.4 million
SEELS programme was fully subscribed in less than nine months
after the scheme's launch following the 2009 UK Budget.
13. Salix programmes have attracted the support
of Higher Education Funding Council for England (HEFCE), which
to date has provided match funding of £10 million for
projects in higher education institutions in England, and from
the Learning and Skills Council, which has funded over £20 million
of projects in the FE sector.
Driving client performance
14. Salix's small team of Client Relationship
Managers works closely with all fund holders to ensure that money
is invested and reinvested in appropriate projects, to agreed
timescales and to prescribed performance criteria and systems
of reporting. Given the lack of expertise within PSBs, and in
the absence of a "culture" of energy efficiency within
many public sector bodies, these processes are a crucial element
of Salix's success. In particular, they facilitate a higher internal
profile for energy managers and for energy efficiency more generally
within PSBs.
15. Salix also runs regular knowledge sharing
workshops in order to ensure that best practice in managing internal
processes is followed by PSBs, that new applications for specific
technologies are discussed, and that experience and client successes
are spread around the public sector.
The significance of any barriers or "market
failures" requiring the establishment of a Green Investment
Bank, and any risks of not getting this done quickly
16. To date, public sector progress in achieving
energy savings has been patchy, with most projects publicly funded
through grants and interest free loans. Across the public sector
there are still thousands of fast payback, low risk projects to
be done. Both DECC and Salix have assessed that, using Salix's
current compliancy criteria of a maximum five year payback and
a cost of less than £100 per tonne of lifetime CO2
saved, there is near term demand for over £500 million
of such energy efficiency projects.
17. There are a number of issues which could
impede progress towards meeting this challenge and this therefore
calls for a more structured response from Government. Problems
occur both on the supply side (private investors may not recognise
the commercial value of funding such projects in the public sector)
and on the demand side (public bodies may not always sufficiently
prioritise investment in energy saving projects).
On the supply side
18. The nature of energy savings projects - which
tend to be small and numerous - may mean that they initially appear
unattractive to the private sector; Salix's current average loan
value is £20,000. Few private sector funders are prepared
to incur the transactions costs associated with such a large number
of small projects, and there is little track record of lending
to public sector bodies in this way. By way of contrast, higher
value renewables projects - which are more "PR friendly"
but less cost effective - are more appealing to investors.
19. To help overcome this, working with the GIB,
Salix could aggregate a portfolio of loans and package them together,
making them more attractive to private sector investors. Salix
can add the confidence that every loan will have been passed through
Salix's project testing and assessment processes, which have now
been certified by KPMG's independent assurance process, and that
Salix has an internal audit function which reviews projects and
client capability, and also undertakes on-site audits of client
project delivery.
On the demand side
20. There are barriers facing public sector bodies,
including Central Government departments not being able to seek
third party funding.
21. Internal accounting rules mean that it is
often difficult for budgets to cross over either a financial year
end or a spending review end;
22. There is reluctance within finance departments
to commit to repayments when future funding levels are uncertain,
despite their knowledge that the projects will generate the energy
bill savings to fund the repayments;
23. There are often insufficient staff with the
requisite additional skills within PSB energy or property departments
to be able to implement or manage the projects.
24. There are also cultural barriers within the
public sector itself. Despite targets for the public sector to
implement energy saving projects and reduce energy costs, action
on this is still not a priority for PSBs. Generating demand for
interest free loans took considerable effort by Salix and there
has been considerable churn of both projects and applicants during
the life of the Salix funds to date. It is therefore crucial to
ensure that all parts of the public sector are engaged with any
energy saving programme.
25. If funding in the public sector is tight,
reducing costs should be a priority - but convincing finance departments
to pay a market rate of interest may be difficult, especially
outside Central Government where PSBs face multiple targets which
all require investment from their limited resources.
26. Unless energy efficiency can be made a sufficiently
high priority over other investments which are needed to deliver
services effectively and efficiently, incentives may be necessary.
The objectives and roles the Green Investment
Bank should assume, the areas it should operate (and not operate)
in, and how its lending and investment decisions should balance
green benefits against financial risks
27. Salix believes there is a clear need for
additional, co-ordinated investment in energy efficiency projects
throughout the public sector.
28. In times of severe financial pressure across
the public sector, energy efficiency is often de-prioritised.
The type of low profile yet high impact projects which Salix supports
are often cut in favour of more immediate front line services.
Any borrowing allowed from the private sector is also directed
at maintaining front line services. There is therefore a need
for both a carrot and stick to deliver the energy efficiency outcomes.
29. Salix believes therefore that its loan programmes
offer a foundation upon which GIB investment in low tech, high
return projects within the public sector could be built.
The Green Investment Bank's investment priorities,
and whether and how the bank should support and foster areas where
the UK has emerging green technology strengths
30. Salix's expertise is in delivering simple,
proven technologies which guarantee fast paybacks; we do not fund
renewable energy technologies, which tend to have far longer payback
periods. In essence, for these new and more innovative technologies
to work at their best, existing buildings and systems need first
to be made energy efficient - this often demands the installation
of basic technologies such as insulation, energy efficient lighting
or heating or lighting controls. A GIB would deliver maximum return
on investment by building on Salix's work in this area.
31. The top 10 technologies supported by Salix
are:
| Technology Type |
Total invested
£m |
| 1 | Lighting | £20.1
|
| 2 | Voltage Reduction | £14.9
|
| 3 | Combined Heat and Power |
£7.9 |
| 4 | Boilers | £7.1
|
| 5 | Insulation | £6.6
|
| 6 | Heating | £5.4
|
| 7 | Building Energy Management Systems
| £5.1 |
| 8 | Computers & IT solutions
| £2.7 |
| 9 | Motor Controls | £2.7
|
| 10 | Cooling | £1.9
|
| | £74.4
|
29 October 2010
| 
