The Green Investment Bank - Environmental Audit Committee Contents

Supplementary written evidence submitted by the Energy Technologies Institute

Thank you for the opportunity to present to you as a witness at the Committee on 26 October 2010. Following the meeting there are three points we felt it was worth writing to you about.

1.  The GIB should be structured as a "bank" rather than as a "fund" to enable leverage of significant funding from the private sector

The critical area the GIB should seek to address is to enable the financing of widespread roll-out of major infrastructure re-development and new build. Much of this currently has considerable policy related risk and uncertainty attached but is critical to achieving the UK 2020 energy targets.

The primary requirement is the provision of debt (and in some situations equity) to enable these major private sector investments. In turn, the GIB should be able to attract funding by the issuance of long term bonds ("green bonds"), a market for which exists primarily driven by major insurance companies and pension funds.

Creating private sector investor confidence will also require communication of a consistent, coherent and long-term UK energy strategy coupled with a settled long term regulatory and incentive structure.

On this basis it should be possible for the GIB to generate up to 90% of its financing from the private sector giving an ongoing GIB capability of "tens of billions" pounds to support a total long-term infrastructure development programme of "hundreds of billions" pounds.

It is unlikely that a "fund" structure could ever reach this scale of investment and hence could not address the critical issue of financing the widespread roll-out of major infrastructure.

2.  Leveraging public sector funds effectively without creating a potential liability for HMG means the GIB must be structured as an independent body

Investment decisions, whether in the form of credit or equity, should be taken on a sound commercial basis and free from political intervention. These decisions need to have full regard for the investment risks - political, regulatory, technical, market and execution

Assuming the GIB can be structured as an independent body it is important that it can issue bonds carrying an investment grade rating - probably no lower than a single "A". This is necessary in order to secure significant or substantial funds (e.g. In the form of bonds) from institutions such as annuity or pension funds. This rating may also be sufficient to attract funds from overseas investors and, thus, not oversupply the UK corporate bond market (it could also divert UK funds back to the UK). These institutions place emphasis on long dated bonds of an infrastructural nature with secure income streams. To secure this rating, the bank, in turn, will require an ongoing secure income stream and sufficient capital.

3.  Establishing an effectived investment strategy for the GIB can be enabled by using the ETI energy system modelling work and ETI Strategy Development team

Developing UK strategy and ensuring widespread engagement and support will require a robust underpinning knowledge base and that this is used and articulated effectively. ETI has collected such a knowledge base in the partnership's "Energy System Modelling Environment", a strategic modelling approach to options for the UK 2050 energy system which is operated as a complement to an in-house team of technical specialists. This, coupled with the strong industrial engagement of the ETI could provide material support to HMG in its development of policy and to the GIB in its funding decisions.

The ETI's UK energy systems modelling environment has recently been assessed alongside other tools available to HMG and shown to provide a unique viewpoint and associated value for presenting system level choices, uncertainties and eventual economics, together with analysis of the required supply chains.

Ensuring access to appropriately robust and independent knowledge is likely to be a key governance challenge for an independent GIB. Ensuring a balance of views is taken and ensuring these have been adequately challenged will require strong internal management and effective working relationships with key partners. We would expect the ETI to be able to offer a strong support function to the GIB.

As you suggested it would be valuable for the ETI to present to the Environmental Audit Committee members the current findings and strategic issues arising from our analysis. If you would like to suggest some options for when we could do this we will arrange the appropriate attendees.

If you have any other questions or concerns please contact either of us.

18 November 2010

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