Written evidence submitted by EDF Energy |
- EDF Energy recognises the scale of the financing
challenge faced by the UK energy sector in order to deliver decarbonisation,
and intends to take an active role in project development and
- EDF Energy is broadly supportive of measures
to encourage further investment to flow into the sector, including
the creation of a Green Investment Bank (GIB).
- EDF Energy believes that a GIB could fulfil a
useful role if it is established according to the following principles:
- The GIB should be set up to provide equity co-investment
alongside utilities into large scale energy projects that are
in the national interest, and its focus should not be blurred
by at the same time having responsibility for distributing small-scale
grants or the other products and services that have been proposed,
such as low cost loans, R&D funding and insurance products.
- The GIB should make its investment decisions
on a commercial basis, with clearly defined criteria, adhering
to governance arrangements set out in advance by Government.
- The GIB should have within its scope all
low carbon technologies that can make a major contribution to
UK environmental and security of supply objectives. Support for
a subset of technologies would distort the UK energy market.
- The GIB should be capitalised to a sufficiently
high level to enable it to make a genuine impact. Ofgem's Project
Discovery concluded that £200 billion investment in
energy infrastructure would be required between now and 2020 alone.
The Aldersgate Group has recommended that the GIB must provide
at least £4-£6 billion in the next four years,
and EDF Energy supports this as a minimum level.
- EDF Energy believes that the funding of the GIB
is a matter for Government, but supports the principle of Green
Bonds offering stable but low returns to institutional and retail
- Delivering stable returns to bond holders while
investing in projects that are by their nature risky is a critical
challenge that must be carefully considered. GIB must establish
in advance a way of covering the bond repayments should returns
from its equity investments prove insufficient.
GIB OBJECTIVES, ROLE
1. The objective of the GIB should be to support
directly the delivery of energy assets or infrastructure that
are necessary to meet climate change targets and that might otherwise
not be progressed.
2. This objective should be fulfilled through
the provision of funding to individual projects during and around
the construction phase, when developers may face challenges in
raising sufficient finance through existing channels as a result
of the perceived levels of both political and technical risks.
The expectation should be that it will be possible to refinance
the projects once commissioned, returning funds to the GIB for
debt repayment and investment elsewhere.
3. A recent report from Citi
concluded that the utility sector across the EU is constrained,
in its ability to deliver the required investment, by over-stretched
balance sheets, and that new sources of equity finance are needed,
rather than debt finance, in the first instance. EDF Energy therefore
believes the primary focus of the GIB should be on the provision
of additional equity funding.
4. EDF Energy believes that the GIB should not
look to provide debt finance to projects at the development stage.
To do so could be considered to be a subsidy given that commercial
lenders are generally not prepared to finance the riskier large
scale projects during their early stages. The GIB would therefore
not be able to demonstrate that it was behaving commercially and
may therefore be considered to be providing State Aid.
5. The GIB must actively encourage an increase
in private sector investment through its involvement in projects.
Specifically, there is likely to be some level of protection
from regulatory risk implied, which is a significant blocker in
the availability of conventional finance for some technologies.
6. The GIB should limit its activities to low-carbon
project investment, and not blur its focus by taking on responsibility
for other areas such as the provision of capital grants or energy
efficiency advice, or administration of R&D budgets. In particularly,
EDF Energy firmly believes that the Energy Technologies Institute
(ETI) should remain in its present form, as a private/public joint
venture, and as such should not be included in the scope of the
GIB. It is critical that the ETI retains its freedom of action
to fulfil its special role in low carbon energy research, development
GIB INVESTMENT PRIORITIES
7. The GIB should focus initially on investing
in energy production projects and technologies that have the potential
to deliver a positive environmental impact by 2025. This will
allow the GIB to generate a return on a portion of its investments
within a reasonable timeframe, and thereby build confidence in
the GIB as an ongoing financial player.
8. Technologies and projects at an earlier stage
of development may be better suited to alternative forms of financial
support such as government grants. However, we do not believe
that the GIB should be responsible for the distribution of capital
grants or for providing investment support to technologies that
are in the early stages of development before commercial deployment.
There should be no overlap with other organisations working in
the domain of the RD&D, eg the ETI, as noted above.
9. To enable the GIB to select its investments
in a structured manner, it will be important that it has a clear
view of the balance of technologies and measures that will deliver
the required decarbonisation pathway into the long term. It should
avoid favouring specific low carbon technologies, unless there
is clear commercial and environmental justification.
10. Estimates of the total investment required
in the energy sector alone reach £200 billion by 2020.
The GIB must be of a sufficient scale to make a useful contribution
to this figure. An initial capitalisation of £4-£6 billion,
as proposed by the Aldersgate Group, is a reasonable minimum,
but the Government should recognise from the outset that the ultimate
scale is likely to need to be substantially higher if the GIB
is to be a useful building block of the low-carbon economy.
GIB GOVERNANCE AND
11. Investment decisions made by the GIB must
balance commerciality with the reality of the scale of decarbonisation
that is sought. Investment criteria must be transparent, and
the GIB should seek to achieve commercial returns from its investments.
12. In order to encourage private capital markets
to invest in low-carbon technologies through its own involvement,
the GIB should be required to report regularly on the investment
decisions it has made and on how it has addressed or overcome
the underlying obstacles that may have previously suppressed private
capital investment in the project or technology.
13. EDF Energy believes that the means of funding
of the GIB is a matter for Government, but supports the principle
of Green Bonds, structured to deliver low but stable rates of
return, and designed to appeal to institutional investors who
might naturally be wary of investing in the early stages of individual
high risk projects with long construction periods.
14. The GIB must prepare a solution in advance
to reassure investors that bond repayment costs will be covered
even if the equity investments do not provide sufficient returns.
15 October 2010
22 Financing the Future - Aldersgate Group, September
The 1 trillion Euro Decade Revisited - Citi, September 2010. Back