Written evidence submitted by the Aldersgate
Group
INTRODUCTION
1. The Aldersgate Group (AG) is a coalition of
businesses, NGOs, professional bodies, MPs and others that provide
leadership on vital sustainability issues. We promote the case
that strong environmental policies are essential for economic
competitiveness and seek to be a catalyst for fast and effective
change. The AG engages actively with key decision makers in government,
business and civil society to contribute to the future development
of UK economic and environmental policies.
2. The creation of a GIB was a key recommendation
from the AG's report Financing the Transition (October
2009) that examined the financial barriers to building low carbon
infrastructure at the scale and pace required to meet the UK's
low carbon and energy needs. Since publication, the AG has been
one of the leading proponents for the creation of a GIB, hosting
high level events, debates and meetings with senior representatives
from finance, business and Government.
3. In September 2010, the AG published a report
Financing the Future which is a collection of articles
from leading commentators on the scope, barriers and capitalisation
for the GIB. This coincided with a joint position statement with
Transform UK on key recommendations for the GIB that is reprinted
in this response.
4. Please note that the views expressed in this
document can only be attributed to the AG and not to individual
members.
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
5. There is cross-party consensus on the need
for the UK to drive major changes in energy supply, delivery and
usage. The UK Low Carbon Transition Plan[29],
a roadmap to 2022[30],
sets a range of challenging targets which necessitate urgent and
extensive investment in low carbon technologies. These include
an approximate ten year timeframe to reduce greenhouse gas emissions
by at least 18%, a five fold increase in renewable energy generation,
smart meters to be installed in every home and new cars to be
40% more efficient. If action falls short, expensive offsets must
be purchased, delaying action, losing competitive advantage and
reducing the economic benefits that a swift transition could bring.
6. A Climate Risk report for WWF demonstrates
that the low carbon transition would be "greater than any
other industrial transformation witnessed in our history".
Globally, low carbon industries would have to grow immediately
at 24% a year, which is near the upper limit of what can be feasibility
achieved given constraints in resources, labour, skills, capital
and equipment[31].
Although challenging, the transition is achievable, and experience
in other countries have shown that industry can rapidly scale
up if the appropriate policy and finance is in place, leading
to widespread job and wealth creation.
7. Incremental improvements under current government
policies and structures will not be sufficient to deliver such
accelerated growth and the Government cannot rely on price signals
alone. Radical reform is required to significantly shift the UK's
carbon emissions trajectory to meet its 2020 targets. To succeed,
regulatory and legislative drivers must be competitive with global
markets and supported with investments in the supply chain, skills
and new technologies.
8. The UK Low Carbon Transition Plan is capital
intensive and requires large scale capital over long timescales.
Economist Dieter Helm and others[32]
provide an "extremely conservative"
estimate of £264 billion for the required UK low carbon energy
infrastructure spend by 2020 (which includes renewable energy
generation, energy efficiency and the roll out of smart meters).
This is an immensely challenging target (approximately 16% of
GDP[33])
and is impeded by current lending conditions as the economy emerges
from the financial crisis and global recession.
9. It is clear that the bulk of the investment
will need to be delivered by the private sector. Public spending
must be reduced over the next Parliament to restore finances to
sustainable levels and there is currently little political appetite
for an additional economic stimulus. This means that the Government
must in addition to strong climate change policies use limited
public funds effectively and mobilise private sector capital flows
at scale to ensure value for money. Policies directed at easing
the cost of capital will significantly lessen the overall cost
of the transition to society.
10. New analysis by Ernst & Young[34]
estimate that the total funding requirement for the UK low carbon
sector is estimated to be approximately £450 billion until
2025 including all energy efficiency programme capital requirements.
It estimates that traditional sources of capital (including utilities,
other corporate, project finance and infrastructure funds) can
only provide approximately £50-£80 billion over the
same period. Even with the active participation from institutional
investors such as pension funds and insurance funds, the estimated
funding gap is approximately £330-£360 billion. The
timeframe and scale of the low carbon investments and their risk
profile imply an enormous challenge, especially in the aftermath
of the recent economic crisis.
11. The AG's Financing the Future report
has a specific section on the barriers and solutions that the
GIB should address.
12. This includes an article by Ronan O'Regan
from PricewaterhouseCoopers on options for the GIB in offshore
wind financing. He writes that:
"To date, the investment in offshore wind
has been funded largely through utilities' balance sheets. But
the UK's power utilities sector are now facing a funding challenge
across a wide range of energy infrastructure assets, of which
offshore wind is only one. The demand for capital in many UK utilities'
overseas operations is also increasing and they are faced with
pan European capital allocation decisions across multiple asset
types.
PwC estimates that offshore wind alone will require
£30-£35 billion of capital to deliver the 2020
targets and a significant proportion of this will need to come
from new equity and project finance debt. While there are a number
of challenges to delivering significant volumes of offshore wind,
the most significant is likely to be the availability of finance
to support the construction phase of projects, given the constraints
on utility finances described above.
There are a number of areas where the GIB can
play a role including:
- Facilitating a co-ordinated approach to policy
and regulation across the energy sector which will help unlock
access to capital,
- Acting as a single point of public funding to
the clean tech sector and aligning this with private sector capital,
and,
- Bridging the early stage financing 'valley of
death' for pre-commercialised clean technologies.
The most obvious role the GIB could play would
be to provide development capital to support the construction
cost of offshore wind projects. The recent refinancing by Centrica
of its Lynn and Inner Dowsing offshore wind farms demonstrated
that there is appetite for new equity and project finance in operational
assets, thus the priority should be to focus on the construction
stage financing."
13. In terms of energy efficiency, Ingrid
Holmes from E3G writes that:
"As the source of over a quarter of UK carbon
emissions, the UK's housing stock is a very significant important
source of rising energy demand. Tackling energy efficiency is
also the cheapest way of delivering carbon emission reductions
and energy security. Yet despite the supposed short payback times
for householders, many cost-effective opportunities to improve
household efficiency are not being taken…
There is still no 'joined up story' of how energy
efficiency will be delivered attractively to the consumer to create
demand for products. The presumption currently is that the market
will deliver but illustrative E3G analysis[35]
shows that a purely market-led Green Deal (with a 9% interest
rate) would actually increase the average householders
fuel bill by 13%[36].
There is therefore a significant risk that the Green Deal appears
as a product offering on company websites, but shows very limited
actual uptake."
14. Jo Butlin from Smartest Energy writes that:
"In putting forward detailed proposals for
a Green Investment Bank, the Government has a real opportunity
to provide the framework to accelerate the development of small
and medium scale renewable plants as well as large scale projects.
There are numerous SME energy projects, both commercial
and community based, which have been consented but cannot move
forward due to lack of credit finance. Small projects have struggled
to get engagement from the banks, let alone raise necessary finance.
The banks continually steer clear of complex technologies at the
small end of the market and where they do engage charge prohibitively
high due diligence costs.
Each project may be relatively modest in output,
but with a far higher number of potential developers and project
sites, the aggregate results can plug a vital gap in our energy
supplies - at a far quicker pace - than the larger, slower projects
favoured by utility developers."
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
15. The following text is a joint position statement
with Transform UK signed by a large number of companies, financial
institutions, NGOs and MPs that was published in September 2010.
GREEN INVESTMENT
BANK POSITION
STATEMENT
The UK is facing a time of considerable economic
stress. Restoring growth and re-balancing the economy are urgent
priorities. Focusing our recovery effort on low carbon growth
can re-power the economy, increase our energy security and help
tackle climate change.
Rapidly accelerating investment in low carbon and
environmental technologies will also increase the long-term competitiveness
of Britain's businesses in the global market, protect consumers
from fossil fuel price shocks and stimulate growth, especially
in the regions. But fulfilling this low carbon vision for Britain
will require financial as well as technological innovation.
For this reason we fully support the Government's
commitment to set up a Green Investment Bank. This crucial institution
can help tackle the significant investment barriers standing in
the way of delivering this vital investment in our future. By
directly reducing the risks to investors the cost of the energy
transition will be significantly reduced for taxpayers and consumers.
Following the publication of the report by the Green
Investment Bank Commission, it is essential that the Government
builds on this bold vision by swiftly putting forward credible
proposals for a strong, powerful and effective institution. This
will only be achieved if the plans meet the following key criteria:
1. Context: The GIB must be designed with
a clear picture of the low carbon economy that we want to achieve
and over what time frame. To provide the greatest financial leverage
and maximise the macro economic benefits to the UK in terms of
growth and jobs, the Bank should not be designed in isolation
but in the context of a range of policies (such as energy market
reform, effective renewable subsidies, carbon pricing and skills
development) aimed at removing barriers to a low-carbon, resource
efficient economy.
2. Urgent Legislation: A fully
independent, accountable and enduring institution must be established
in statute in 2011 with a clear low carbon investment mandate.
The will also ensure the option is retained to set up the institution
"off balance sheet". To maintain momentum and inspire
confidence, a "shadow" Board should be set up without
delay to lay the foundations for the new Bank. The Bank must be
set up in a way which inspires confidence in its expertise, future
growth and longevity. Delays in setting up the Green Investment
Bank will hold up current investments in low carbon technologies.
3. Focus: The Bank must have a clear
mandate to leverage low carbon investment and support the development
of low carbon and environmental industry, R&D, manufacturing,
services and exports. This will stimulate economic growth, jobs
and competitiveness. As a priority it must unlock investment in
energy efficiency and renewable energy infrastructure - both large
scale projects but also smaller scale and community led schemes.
4. Green Bonds & Green ISAs: UK Institutional
investors such as pension funds and life insurance companies hold
assets worth over £2 trillion. The low carbon energy transition
will only be achieved if some of this large pool of capital is
used to support it. To achieve this the Bank must be given the
powers to issue a range of Green Bonds. Such products should be
designed to meet institutional investors' needs, including their
fiduciary duty to achieve the best possible risk adjusted returns
for their clients and beneficiaries.
The Bank must also design other innovative financial
products such as Green ISAs which could be a source of significant
additional capital funding to drive forward low carbon infrastructure
investment.
5. Helping Deliver the Green Deal: To
ensure that the Government's plans for Green Deal energy efficiency
loans for homes are successful the Green Investment Bank must
be used to help provide low cost capital, financed by Green Bonds.
6. Capitalisation: The Government
must ensure the Green Investment Bank is sufficiently capitalised
by at least £4-6 billion over the next four years. Over time
this could leverage over a hundred billion more in investment
from the private sector. It is the minimum required to ensure
the Bank fulfils its potential to help make the UK a world leader
in the supply and deployment of low carbon technology and the
catalyst for a green jobs boom.
7. Expertise & Advice: The Green
Investment Bank should act as a central point of technical expertise
and advice to central and local Government on low carbon finance.
It should act in an advisory capacity to Government to ensure
new policy frameworks being developed are 'bankable' and should
also have the ability to provide specialist assistance and advice
to the private sector on developing first of a kind products to
grow new low carbon markets.
At a critical time for our country we call on the
Government to lead by advancing an ambitious and effective vision
for the Green Investment Bank, putting it at the heart of our
economic recovery and opening the road to a low carbon future.
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
16. There is strong cross-party support for the
UK transition to a low carbon economy with a secure, safe and
affordable energy system. As the AG has demonstrated since its
inception, this is not only an environmental imperative to meet
the global challenges of climate change, energy security and sustainable
development but also an economic imperative to secure jobs and
prosperity in the future.
17. The UK market for environmental goods and
services is valued at over £100 billion and employs more
than 900,000 people[37].
While this is significant, the UK must do more to leverage fully
its industrial and business strengths. For example, the UK's environmental
sector represents less than 5% of a global market that will be
one of key determining factors of economic success in the 21st
century. Furthermore, the UK is ranked below competitors such
as the US, China, Germany and India in terms of an attractive
location for renewable energy investments[38].
18. A fundamental barrier that is holding back
progress is the ability of companies to secure low-cost capital
at the pace and scale required. The AG's Financing the Transition[39]
report published in October 2009 finds
that the achievement of low carbon targets for 2020 and beyond
presents a major financing challenge for the UK economy. It recommends
the creation of a GIB that would seek to reduce political and
regulatory risks for low carbon investments and mobilise capital
from institutional investors at scale[40].
19. The GIB's potential role must include analysis
of how the institution can help accelerate:
- Meeting legally binding low carbon and renewable
energy targets for 2020 as a step change in the pace of emissions
reduction is required, despite the fall in output due to the recession[41];
- Creating jobs, stimulating growth and making
the UK a more competitive location for green investment;
- Building a more balanced economy with a growing
high-tech manufacturing sector;
- Delivering a more even distribution of wealth,
supporting growth in the regions and rural areas; and
- Growing the Big Society, empowering local communities
to meet their energy needs and share the proceeds of profitable
energy projects.
20. The GIB could also have a significant role
in supporting green manufacturing technologies in the medium to
long term. This is unlikely to be part of the GIB's initial focus.
However, the bank's remit should ensure that it can undertake
this role in the future. Helping successful low carbon companies
access finance as they grow will help to maximise economic opportunities
and unlock competitive potential for British based firms, particularly
in sectors where the UK is well placed to be a global leader (such
as low carbon vehicles, buildings and construction, aerospace,
chemicals and industrial biotechnology and information and communications
technology)[42].
The potential role for the GIB to support manufacturing should
be incorporated into the Government's wider review that will address
market failures to accelerate the UK's economic success in environmental
sectors.
21. Above all, the GIB must be assessed in terms
of cost-effectiveness. A recent report by Policy Exchange demonstrates
that a more holistic policy approach could lead to cost reductions
for renewable energy subsidies[43].
In many cases, the GIB would help to lower overall costs by reducing
perceived political risks. The alternative is to raise the rewards
for investors, such as increasing subsidy levels for renewable
technologies, to compensate for these risks, increasing the overall
cost to energy consumers.
The funding and governance structures required
to create an effective and accountable body, including the role
of "green bonds"
22. Writing in the AG's Finance the Future
report, James Cameron and Ben Caldecott from Climate Change
Capital argue that:
"One way the GIB would raise new additional
finance for low carbon projects is by structuring the issuance
of long-dated and asset-backed bonds, with their proceeds ring-fenced
for investment in tangible low carbon infrastructure. These would
be issued at sufficient scale, so as to ensure that they were
liquid and properly rated. As a result, they would be attractive
to a range of investors, especially large pension funds, who are
looking to diversify but still need good financial returns over
the longer term.
By offering low but stable rates of return over
15-25 years, the bonds would match the life of the assets into
which the funds would be flowing. These 'green' bonds would be
a sensible way to finance the needed long-term investment in tangible
assets that society should have to improve the quality of our
lives. Without these instruments, the UK will be unable to deliver
the scale of investment required to transition successfully to
a low carbon economy.
There is a broader point too - the recession and
the BP deepwater horizon crisis have highlighted the fact that
our pension funds (and pensions) are now addicted to the dividends
paid out by high carbon sectors, especially oil and gas. In a
carbon constrained world, this is an unsustainable and undesirable
model. To re-balance investment portfolios, we need to improve
the attractiveness of low carbon investments relative to high
carbon ones. The creation of a GIB and new products, such as green
bonds, are critically important steps towards a resolving the
current undesirable imbalance."
23. In addition, Jason Langley from AXA Investment
Managers writes:
"By forming liquid bonds the GIB would enable
fixed income investors to purchase these bonds within their regulatory
framework[44].
Decarbonisation plans call for small scale as well as large scale
projects. An aggregator would group the debt from multiple projects
to produce large bonds with significant liquidity. The GIB would
be a conduit to enable institutional investors to finance renewable
energy projects in a way that fits their mainstream business ie
though an asset allocation to green investment bank liquid bonds
rather than through private equity or project financing investments.
Aggregation like this means very large issuances
of bonds can be created leading to liquid bonds listed on the
major bond benchmarks. As circa 85% of fixed income investors
are benchmark investors, 'green bonds' created in this way and
included on major bond benchmarks will result not in niche instruments
but mainstream bond investments."
24. In terms of Green ISAs, Emma Howard Boyd
from Jupiter Asset Management writes:
"Institutional investors may provide the
majority of funds for the GIB, but retail investors could also
prove an important source of funding. Indeed, the public's ability
to participate in a GIB is in many ways as important as any funding
they may bring.
The Green Individual Savings Account (ISA), first
proposed in a speech by George Osborne in February 2008, is
a new savings product in which all the funds invested would be
used to help make our economy greener. Introducing a Green ISA
could be a cost effective way to give everyone a chance to be
an investor in our low carbon future. Based on Treasury figures,
a £3,000 increase in the tax-free saving limit would cost
less than £50 million, and a £5,000 increase in the
tax-free saving limit would cost less than £70 million[45]."
15 October 2010
29 HM Government (June 2009) The UK Low Carbon Transition
Plan. Back
30
2022 is the end of the third carbon budget period. Back
31
Climate Risk (October 2009) Climate Solutions II: Low carbon re-industrialisation. Back
32
Dieter Helm, James Wardlaw and Ben Caldecott (2009) Delivering
a 21st Century Infrastructure for Britain (Policy Exchange). Back
33
Calculation based on World Bank's 2008 estimate for UK GDP at
£1,644 billion. Back
34
Ernst & Young (October 2010) Capitalising the Green Investment
Bank
Key issues and next steps Back
35
Forthcoming E3G paper on energy efficiency financing. Back
36
By way of comparison, a GIB-led Green Deal financed at 5.2% could
see consumers save 18% on their fuel bills. Back
37
Innovas (March 2010) Low Carbon and Environmental Goods and Services:
an industry analysis.
Update for 2008-09. Back
38
Ernst & Young (May 2010) Renewable Energy Country Attractiveness
Indices. Back
39
Aldersgate Group (October 2009) Financing the Transition: A
strategy to deliver carbon targets. Back
40
Such as the UK's commitments under the Climate Change Act and
the EU Renewable Energy Directive. Back
41
Climate Change Committee (June 2010) Meeting Carbon Budgets
- ensuring a low-carbon recovery. Back
42
These sectors are highlighted as UK competitive strengths in HM
Government (June 2009) The UK Low Carbon Industrial Strategy.
Back
43
Policy Exchange (July 2010) Greener, Cheaper. Back
44
Solvency 2 is the new regulator framework being introduced for
European institutional investors. Back
45
Green Investment Bank Commission (June 2010) Unlocking investment
to deliver Britain's low carbon future. Back
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