Written evidence submitted by RenewableUK
- The scale of the low-carbon investment challenge
is large, with wind, wave and tidal stream alone looking for £85-90 billion
of capital in the next ten years.
- This scale and also the speed of mobilisation
required point to the need for new catalysts for action, and a
Green Investment Bank could therefore be a vital new institution.
- Any GIB must be the means of catalysing investment
by others, and must not be in competition with existing finance
and investment.
- The debate around the Bank is confused by the
many different roles it could possibly take; it is difficult to
be definite about how beneficial it could be without knowing more
about Government thinking about its function.
- The extent to which the Bank is capitalised is
key to how effective it can be, but all the routes by which capital
could be channeled into the Bank appear problematic.
- No institution can compensate for bad policy;
Government must ensure that investors see a stable policy landscape
that they can navigate with confidence, which would result in
a new Bank being able to be highly effective with relatively little
resource.
INTRODUCTION
1. RenewableUK is the UK's leading trade association
in the field of renewable energy, representing over 650 companies
in the wind, wave and tidal stream sectors. Together, these technologies
will provide the bulk of the renewable electricity we will need
to meet targets in 2020 and through to 2050, and should be the
motors of new industrial growth, providing thousands of new jobs
and significant export revenue. Ensuring that our members are
able to secure sufficient finance will be key to delivering on
this promise.
THE SCALE
OF THE
RENEWABLE FINANCING
CHALLENGE
2. One of the key challenges in meeting targets
for renewable energy and reduction of carbon emissions is mobilising
the capital required to finance the build of many gigawatts (GW
- 1GW = 1,000MW) of new generating capacity, alongside the need
for funds to support the roll-out of efficiency measures and low-carbon
heating and transport. There are a number of varying estimates
of the total capital required, for instance a recent report by
Ernst & Young[24]
cites a figure of £170-180 billion of investment by
2025 required in the power and gas industries, while a group of
leading low-carbon investors led by Hg Capital and Hudson Clean
Energy estimate £190 billion by 2020, made up of £147 billion
for new generation capacity, £5 billion for supply chain
and £37 billion for efficiency and smart grids/meters.
3. Whatever the overall figure for investment
in the low-carbon transition, it is clear that renewables will
be a significant slice of the pie. RenewableUK estimates that
over the next ten years, approximately 1GW of onshore wind will
be built each year. At a capital cost of £1.3 million/MW,
this implies a need for about £13 billion of investment.
Given the maturity of this technology and the experience already
gained in its use in the UK, this should be easier to secure than
for some other technologies, but it is no trivial task. It pales
next to offshore wind, however.
4. The build-out of the Round Two projects identified
in late 2003 should proceed up to 2015 at the rate of about 1GW
per year. With capital costs running at about £3 million/MW,
this means that approximately £15 billion of investment
will be required over the next five years alone, though much of
this has already been committed for projects being delivered in
the next two to three years. In 2015-20, however, many of the
32GW of Round Three projects awarded in January this year will
be coming out of the consenting process, alongside much of the
Scottish Territorial Waters round from last year, giving an opportunity
to ramp up delivery of offshore wind from about 1GW/year to as
much as 4GW/year from 2017 onwards, at which rate £10-12 billion
per year of capital would be required. If 15GW of offshore wind
capacity is installed in this period, a total of £40-45 billion
would be needed.
5. We believe that delivery of offshore wind
at this scale is necessary to provide the "critical mass"
required to drive the creation of a manufacturing industry for
this technology in the UK. If delivery were to continue at only
1GW per year to 2020, roughly the level in the UK's National Renewable
Energy Action Plan submitted to the European Commission at the
end of June this year, then this would provide insufficient "pull"
to encourage manufacturers away from their existing supply chains
in countries such as Denmark and Germany. If we are successful
in doing so, however, then approximately £1.1 billion
of investment will be required in the UK in factories and other
supply chain investments.
6. If the technologies of wave and tidal stream
successfully emerge from the technology development phase and
are rolled out at scale by 2020, a further £5 billion
might be required to develop projects, while further direct investment
in the companies and technologies involved would increase the
requirement further.
7. In total, therefore, the technologies that
RenewableUK champions could need a total of £85-90 billion
of investment. The result of this investment would be approximately
15GW of onshore wind, over 20GW of offshore wind and 1-2GW of
marine renewables, in total generating about 25% of this country's
power. We would also have world-leading industries in offshore
wind and marine, which would be starting to earn significant export
revenues from about 2020 onwards.
A GREEN INVESTMENT
BANK
8. Given this need for capital in the coming
decade, and the continuing fallout from the banking crisis of
2008, it is therefore welcome that the Coalition programme includes
the establishment of a "green bank". It is vital, however,
not to lose sight of the fact that strong and stable policy is
the most important factor in inducing banks and institutional
investors to direct the required investment into low-carbon sectors.
Without confidence that the policy underpinning investments is
secure, private capital will be inhibited, and no public-backed
bank will be able to make up the shortfall.
9. In our view, the key features that any institution
in this area must have are:
- It must encourage and invest alongside private
capital, and not be in place of or in competition with such capital;
- It should seek to correct market failures including
those resulting from the credit crisis; and
- It should advise the Government on the financial
impact of policy changes.
10. It is also important to note areas in which
there exists a need for an investing institution and those areas
where such a need does not exist. While we welcome the suggestion
of bringing together the various forms of support for new technology
development under a single roof, we do not see venture capital
as being an issue for wind power. The deployment of wind on and
offshore over the next decade will require in the order of £75 billion
of capital: this dwarfs into insignificance the amounts that will
be needed to develop technologies and the companies that produce
them. This is not to say that VC-type funding will not be helpful:
firms in the marine renewable and small wind sectors may well
benefit greatly. Innovation funds to bring forward cost-reducing
techniques for offshore wind are also needed. But these other
needs are orders of magnitude less than the requirement for mass
deployment.
11. Ideally we would like to see the private
sector bringing forward the capital needed for mass deployment
of renewable generation capacity. With suitable financing structures,
a situation is imaginable where banks could provide construction
finance, exiting once projects are operating successfully through
sales to institutional investors; the banks would be able to recycle
limited capital after a 3-4 year commitment, while pension funds
would have access to lower-risk, long-term investments that would
fit their needs. It may take some time for such structures to
develop, however, and there may well be a role for a "green
bank" to play in de-risking key parts of such a solution
to speed its implementation.
12. When bringing forward a new institution in
this area, we would emphasise strongly that public-backed funds
alone will not be sufficient to ensure the investment required,
and that care should therefore be taken to ensure that any "green
bank" does not compete directly against private banks. Given
the better terms that an institution with the Government behind
it would be able to offer, this would be unfair competition and
result in a reduction of capital put into the market by the non-Government
backed banks.
POSSIBLE ROLES
FOR A
GREEN INVESTMENT
BANK
13. There are many different roles that a public
or quasi-public financial institution could perform in the low-carbon
investment area, and indeed that multitude of possible roles has
led to much confusion as to the impact a GIB could have. We discuss
some of these roles below.
14. At the start of the value chain, one suggestion
for the Bank would be to consolidate and make more coherent the
landscape of low-carbon innovation funding, making it easier to
navigate and presumably making some efficiency savings in the
process. RenewableUK has argued for some time that such rationalisation
would be helpful, though it would not in itself make much more
money available to the area, and additional funds are necessary
if we are to have the technologies required. Investment in innovation
will also be vital in attracting manufacturing industry. There
is also a risk of hiatus in innovation investment as the different
funding bodies such as the Energy Technologies Institute, the
Carbon Trust and some of the work of the Technology Strategy Board,
with their different staff and funding models, are brought together
under one roof. We are also unsure whether a "Bank"
is necessarily the right type of institution to play this role,
in that awarding grants for technology development is different
from taking equity stakes or lending money - there may be a clash
of culture if this role is combined with some of the others suggested.
15. The previous administration made a proposal
for an institution capitalised with £2 billion, which would
take equity stakes in projects, with an initial focus on offshore
wind. This could be a very useful function, "stretching"
the capital that offshore developers have available and leveraging
in debt. If the GIB were to make such investments and then sell
to other investors once the projects were operating, then its
capital could be "recycled" effectively, and relatively
little money could have quite a large impact. There could also
be a significant confidence boost through this model, as other
investors could see that the Government had a direct stake in
the success of projects part-owned by the Bank, and thus could
be better relied upon to ensure the policy environment was stable.
16. In theory the Bank could provide debt finance
to the low-carbon sector, but it appears unlikely that it could
provide enough debt to make a difference. If it were lending,
it would also inevitably end up competing to a greater or lesser
extent with existing lenders. Were this to result in a withdrawal
of lending by the private sector, then the whole initiative would
have backfired spectacularly. We do not think this is a risk that
should be taken.
17. While providing sufficient returns on investment
is of course key, also vital is ensuring those returns are commensurate
with the risks. One way of bringing new capital into the renewables
market is to improve the risk/reward balance by reducing risks.
The GIB could do this by providing targeted risk reduction products,
such as insurance against weather risk in constructing offshore
wind farms. We believe this would be a very beneficial role for
the Bank to play, providing a significant impact for relatively
low outlay of capital.
18. A further beneficial role for the Bank would
be to provide a conduit for particularly institutional investors
to channel funds to the renewable sector with the right level
of risk and reward. This could be through Green Bonds or otherwise
structuring portfolios of projects so that they can attain investment
grade. While these kinds of structures might emerge organically,
as noted above this may take too long for the needs of renewable
developers, and the Bank could provide the impetus to make it
happen sooner.
19. It is important that Government has good
advice about how its policy measures will impact on the finance
and investment communities, and this is a role that the GIB could
very usefully play. We fear that the Government is currently making
policy in the electricity sector partly on the basis of perceived
needs of the investment community that we are not convinced reflect
the reality. While a new institution will not be in place quickly
enough to affect the current policy process, it could make a big
difference in the future by dispassionately reflecting the position
of the finance sector in its totality.
CAPITALISING THE
BANK
20. If a new institution is to make a significant
difference, then it will have to have sufficient capital to work
with. The previous administration's proposal for £2 billion,
made up of £1 billion of public money contingent on
certain asset sales plus £1 billion of private co-investment,
would have been useful but to a certain extent just scratching
at the surface. The Ernst & Young report referred to above
gives a figure of £4-6 billion in the period to 2015,
and this would of course be better, but also much more challenging
in these stringent times. All the possible routes to provide funding
look problematic.
21. Treasury officials appear to have ruled out
using the proceeds of asset sales to fund the Bank, given the
need to reduce the deficit, and as the previous administration
showed, these sales would have only provided limited capital in
any case.
22. The sale of Green Bonds, or Green ISAs to
the general public, is another key option. But if there is any
explicit or implicit Government guarantee then at least some of
the value will reside on Government's balance sheet - again, something
the Treasury will be keen to avoid. Without such guarantees, then
what would make such a Bank different from any other? There is
also an issue in that, as it stands, low-carbon is a higher-risk,
lower-return kind of investment: will institutional or retail
investors buy bonds or ISAs in such technologies?
23. It is possible that the GIB could borrow
wholesale, using its credit rating to get lower interest rates,
and then lend it on to its low-carbon customers. The European
Investment Bank uses such a model. However, there would be no
question of using such borrowing for anything less than fully
commercial business, and thus the GIB would be restricted in its
activities. How the GIB would achieve such a high credit rating
without a Government guarantee is also not clear.
24. There will have to be a certain amount of
direct Government subvention if the Bank is to perform an innovation
funding role. It is possible that this could come from EU Emission
Trading System auction receipts, or simply from general Government
funds. This line of capital would be relatively limited given
the severe limits on Government spending, and would be limited
to grant-type funding.
CONCLUSION
25. There is a strong prima facie case
for a Green Investment Bank, given the scale and speed of the
transformation in our energy economy that we require. A "paradigm
shift" is required, and other countries already have such
institutions, which are increasingly taking on the roles being
talked about for a UK GIB. The scope and function of such a Bank
must be carefully defined, however, if it is to catalyse investment
and not compete with the private sector, which must provide the
large majority of the investment. How the Bank is capitalised,
and to what extent, will clearly be key to its effectiveness,
but however much money it is given, it must be regarded as secondary
to the job of ensuring that the policy that underpins low-carbon
investment is right. If the mechanisms in place are effective,
then even a Bank with limited funds can have a significant impact;
if the policy is wrong, no amount of capital can compensate.
18 October 2010
24 Capitalising the Green Investment Bank: Key issues
and next steps, Ernst & Young, October 2010. Back
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