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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