Written Evidence submitted by Transform
UK and E3G |
1.0 According to E3G analysis,
infrastructure and climate change-related investment of £750 billion
is required across the UK economy to 2025. Building on this, Ernst
and Young in a recent report concluded £450 billion is needed
for energy supply infrastructure and energy efficiency measures
by 2025. However, the traditional sources of capital (utility
companies, project finance and infrastructure funds) are likely
only to provide £50 billion to £80 billion over the
next 15 years, leaving a finance gap for energy assets of £370
to £400 billion to 2025. This means that for energy infrastructure
alone up to 10 times more investment is needed than will be provided
by the market under business as usual. This gap can only be closed
with a well capitalised Green Investment Bank. These findings
mirror those in the Green Investment Bank Commission report,
which found a GIB would be essential to deliver the UK's essential
2.0 To be credible and effective the bank must
fulfil the following key criteria:
1.1 The GIB must be given an over-riding mandate
to support low carbon development.
1.2 The GIB must be given enough capitalisation
to kick start the transition. This should be at least £4
to six billion over the next four years.
1.3 The GIB must be a bank (and not just a fund)
with the ability to raise Green Bonds to access the huge pools
of capital held by the managed funds market.
1.4 The GIB must be set up in statute within
a year to provide full accountability to Parliament, to maximise
its credibility in the market place and to create an enduring
institution that is able to tackle the uncertainties that lie
ahead as the economy is decarbonised.
1.5 The GIB must prioritise both renewable energy
and energy efficiency. Energy efficiency investment, mostly for
the building stock, will require more than £200 billion in
investment over the coming decades.
1.6 The GIB must be used to support the Green
Deal - by assisting with the provision of upfront finance, to
keep costs down for consumers and to provide equity and technical
expertise for community and local authority low carbon investments.
1.7 The GIB must be set up to provide low carbon
investment expertise and advice to both Government, local Government
and the commercial sector.
1.8 If these requirements are met then the Green
Investment Bank can play a truly transformational role in supporting
the development of a highly successful low carbon economy and
act as the catalyst for a green jobs boom.
Q1. What are the significance of any barriers
or "market failures" requiring the establishment of
a Green Investment Bank, and any risks of not getting this done
2.0 Market failure, in the case of climate change,
is the failure of the market to properly value and address the
impact of carbon emissions. Policies such as the Renewables Obligation
are used to address such market failures by increasing the rewards
for investing in low carbon assets or in the case of the European
Emissions Trading Scheme, increase the costs of investing in and
running high carbon assets.
2.1 "Investment barriers" in the low
carbon context include structural problems with the market and
also information gaps. Examples are market capacity limits; the
confidence gap; and the aggregation challenge - all of which the
Green Investment Bank is uniquely positioned to tackle. It should
be the primary role of the Green Investment Bank to share the
risks of low carbon investment with the private sector and to
leverage high levels of private capital by providing financial
products that can link developers of low carbon projects to the
holders of long-term capital - the institutional investors.
3.0 Market capacity limits - The scale
of the investment required in the UK economy is on an unprecedented
scale. According to E3G analysis, the UK needs to see around £750 billion
in infrastructure investment to 2025.
This includes around £516 billion in "supply"
and "demand-side" energy infrastructure investment.
Traditional sources of capital (utility companies, other corporates,
project finance and infrastructure funds) are only likely to
provide a fraction of that. Ernst and Young estimates £50
billion-£80 billion in total. This leaves a funding gap just
on energy infrastructure of upwards of £370 billion between
now and 2025. Traditional investors are not able to provide the
volumes of funds required to cover the high capital costs of building
the low carbon energy infrastructure required.
4.0 The confidence gap - Some of the technologies
that are going to be needed to deliver decarbonisation, including
carbon capture and storage for example, are at the pre-commercial
stage and subject to three very significant barriers to deployment.
4.1 The "valley of death" funding gap
- a gap in the capital markets for funding the demonstration of
unproven technologies that have high capital costs.
4.2 The high returns required by the commercial
sector on early stage low carbon investments. UK-based Venture
Capital Funds often require returns of more than 40% on their
investments and private equity investors require returns of 15-20%.
This reduces the amount of development capital available for companies
to deliver low carbon technologies to a commercial stage. Without
targeted support at the appropriate scale the technologies we
require to come on stream may not be ready in time.
4.3 A lack of clarity on business models, some
of which are likely to be based on public-private structures,
or on the source of returns for new and as yet unregulated infrastructure
assets such as a domestic energy efficiency retrofits, CO2
transport network, heat networks and smart grids.
5.0 The aggregation challenge - There
are 26 million homes in the UK and almost all of them need to
be "retro-fitted" to a very high energy efficiency standard
which could cost more than £200 billion between now and 2025.
However, energy efficiency is a low margin/high volume business
and currently there is not the level of demand we need to see
from consumers to drive the retrofit market. Delivering a national
programme will require a very high degree of coordination between
individuals, private companies and public policy to ensure investments
go ahead. One of the key issues will be keeping costs for consumers
down, another will be how to "bundle up investments"
- each of which may only be few £1000s each to a scale of
several £100 millions to interest the holders of vast
pools of long-term capital - the institutional investors.
5.1 While the private sector has an interest
in energy efficiency investments, there is limited willingness
to take on "first of a kind risk" in financing it. If
they do, there will be a substantive risk premium applied - making
it expensive for already very price-sensitive consumers. The
GIB has a key role to play in managing costs for consumers and
in aggregating "deals" to a size where they can be sold
on to institutional investors.
5.2 Another example is community renewable energy
projects: a substantive pipeline of viable projects exists but
financial and legal expertise combined with lack of equity funding
is preventing these deals from going ahead.
5.3 It is argued by some that
good policy design combined with waiting for the market "to
return to normal" will be enough to deliver decarbonisation.
However, we believe that this is not enough. Such an approach
ignores the unprecedented size and nature of the challenge and
hence carries significant risks, not least around the time required
to deliver this infrastructure transformation under a "business
as usual" scenario. Ernst and Young has pointed out that
just to cover our energy infrastructure needs, we will need to
see up to ten times more investment in low carbon energy infrastructure
than business as usual is likely to provide.
5.4 In terms of the risks of "not getting
this done quickly", transformational change in an economy
has rarely been achieved through allowing "the market to
deliver" simply because of the risks, timings and scale involved.
Delivery of the UK's 19th century sewerage system and railways
networks or 20th century motorway network or gas infrastructure
all required significant strategic public involvement. 21st century
decarbonisation will also require such public involvement - this
time not on health or mobility grounds but to ensure the UK remains
a relevant and competitive global economy.
Q2. What are 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?
6.0 A Green Investment Bank (GIB) should have
a mandate to support delivery of the UK's low carbon transition
to 2050 at least cost to the taxpayer and consumer. Within that
mandate the Bank should:
6.1 Identify and address investment barriers
that limit private investment in carbon reduction activities through
the creation and deployment of innovative finance instruments
where such instruments are not available from the private sector
on reasonable terms;
6.2 Not normally grant finance unless other private
sources are also used;
6.3 Align public and private financial interests
on core specific projects, reducing costs through co-investment
and securing greater value for taxpayers and consumers;
6.4 Coordinate UK climate finance investments,
potentially in cooperation with other infrastructure and development
Functionally it could also:
6.5 Consolidate existing government activities
linked to delivering carbon emission reductions, pooling existing
public finance expertise;
6.6 Drive the formulation of "investment
grade" ie "bankable" policy making by acting as
an adviser to government in its policy making;
6.7 Complement its lending activity by providing
technical financial assistance services to facilitate smaller
scale lending and reduce transaction costs. This would be especially
welcome for local authority and community-led projects which suffer
from a lack of expertise in project development or the funds to
support this process.
6.8 There will always be a tension between the
need to be commercial and the need to deliver carbon targets.
This tension should be embraced but also managed through a strong
governance structure and clear accountability to Parliament. In
practical terms, we envisage two separate "pots" of
capital would be required. The first pot would be public funds
used to support un-bankable but strategically significant projects;
the other would be used to provide finance on commercial terms
and to augment private sector lending. So for example, for loans,
the Bank would not grant reduced interest rates. This could only
be provided if funded from the separate pot of capital by a government
grant toward the payment of interest, and where compatible with
State Aid rules, through a blended finance approach. This is
the approach used by the European Investment Bank and KfW Bankengruppe
6.9 Thus the Bank would have a duty to ensure
that its funds are employed as rationally as possible in the interests
of the UK. It would have the right to refuse to invest in a project
if it is deemed to put the creditworthiness of the Bank at risk.
In the event that the risks around initially less-bankable assets
become understood and well managed, private sector refinancing
would occur. In this way the balance sheet is freed up to invest
in further projects.
Q3. What are the funding and governance structures
required to create an effective and accountable body, including
the role of "green bonds"
7.0 Governance structure - the structure must
manage the tension between investing in the public interest and
the need to be commercial. A three-tier structure is recommended,
which is based on the European Investment Bank model:
- An Advisory Council made up of Shareholder representatives
that advise the Bank on sub-sectors to "lean towards"
within the context of the mandate and Statute but does not hold
sway over individual investment decisions.
- The Board of Directors would consist of GIB Executives
and non-Executives with relevant and primarily commercial expertise.
The Board has legal responsibility for the commercial operation
of the Bank, and final say on which investments go ahead.
- The Management team, led by the Chief executive
and with extensive commercial expertise would be responsible for
the day-to-day running of the bank.
8.0 Accountability - The GIB will need
to be accountable to Parliament, producing a comprehensive Annual
Public Report on activities that ensures transparency and full
accountability on the use of public funds in mitigating carbon
target delivery risk. To ensure this accountability the GIB must
be set up in statute via primary legislation.
9.0 Green Bonds - The GIB is needed to
play a key role in connecting long-term holders of capital (pensions
funds, insurance companies etc) with the new generation of low
carbon assets we need to see built. These assets will have long
life-spans of 25 years or more, which are well matched to the
long-dated investment needs of such institutions. The money is
available - institutional investors have assets of around £3.4
trillion in the UK - it just needs to be accessed. One of the
simplest ways to do this is for the Green Investment Bank to issue
When a fund manager looks at buying bonds from an
organisation, the factors they take into account are: credibility
of the organisation, rating, price and so on. The GIB's governance
structures, investment policies and track record will therefore
be critical factors in whether the GIB is even able to raise Green
Bonds. Poor separation of the GIB from Government is likely to
expose it to political short-termism - and risks investments being
made on their political rather than economic merits.
If the GIB is set up as only a fund it would not
be able to raise bonds and there is no question that it would
fail to bridge the huge gap in low carbon energy finance that
the UK is facing.
Q4. What should the Green Investment Bank's
investment priorities be? Should the bank support and foster areas
where the UK has emerging green technology strengths?
10.0 Energy efficiency - The Green Deal
is the centre piece of the Coalition's green agenda. Chris Huhne
stated that as a result of the policy more than £7 billion
would be invested by the private sector in energy efficiency each
year over the coming decades. However, E3G analysis indicates
the Green Deal will struggle to deliver. The barriers can be divided
into three discrete areas. The cost of capital for consumers,
unquantified risk around the untested Green Deal business model,
and reputational risk around securitised asset-backed bonds.
10.1 Cost of capital for consumers - E3G financial
modelling indicates that it will be extremely difficult for the
Pay as you Save "golden rule" to be met beyond the use
of low cost measures such as cavity wall and loft insulation.
Only with 0% finance are "whole house retrofit" packages
likely to break even or begin to reduce consumer bills. This
means that to incentivise large scale take up the Government needs
to achieve as close to 0% finance as possible. This means borrowing
costs need to be minimised and large interest rate subsidies will
10.2 Assuming it has the power to raise green
bonds, the GIB can access low cost financeat a rate of
around 5% over 25 years. If this money is raised by the market
(as the Government is intending to do) it is likely to be at a
rate of more than 9%. A further Government subsidy on the interest
rate can then reduce the cost further.
10.3 In Germany the KfW development bank raises
AAA rated, Government backed bonds for its energy efficiency household
loan programme. It then subsidises these loans which are offered
to the consumer at a rate of 2.65%. This is supported by further
grants and some regulation. As a result the programme is achieving
100,000 retrofits of residential homes a year.
10.4 This is a significant achievement but the
UK's Green Deal needs to be put in perspective. At the moment
DECC expects to see corporate bonds used to finance the programme
with limited subsidy. This means the Green Deal as currently envisaged
will be at a higher interest rate than in Germany which is likely
to lead to far fewer retrofits / year. However, in the UK we have
26 million homes to retrofit. So even if we matched the German
"gold standard" finance package it would take 260 years
to retrofit the all UK's residential properties.
10.5 The obvious conclusion is that to incentivise
a very high uptake of energy efficiency home loans the UK has
to ensure the Green Investment Bank is given the power to raise
green bonds. It should then provide a subsidy to reduce the finance
rate to 0%. It must then support the programme with an effective
delivery model (including using the support of local authorities)
and appropriate regulation. The economic benefits of such a programme
could be huge for the UK. Between 2006 and 2009 in Germany, the
KfW energy efficiency programme generated 200,000 jobs every year.
11.0 Unquantified risk around the Green Deal
- there is a saying "banks will be first in line to finance
the second project". The Green Deal carries unquantified
risks around demand, default rates on loans, and the performance
of assets in the home. Because of this, it is unlikely banks will
provide any finance to the first tranche of green deal projects.
The GIB could help by providing capital to the first tranche of
those projects and facilitate "proof of concept" and
generate a dataset from which risk can be priced by the banks.
12.0 Securitisation - the GIB can provide a critical
role in kick-starting the market for good quality securitised
asset-backed bonds. This step is key to aggregating and recycling
the initial investments to the long-term holders of capital -
the institutional investors.
13.0 Offshore wind: £33 billion-42
will be required to finance offshore wind over the next 10 years.
To date the construction of all offshore wind projects has been
funded from developer balance sheets. This is because offshore
wind projects are perceived as highly risky (see Table 1), so
insurance is not available.
Because of this, banks are in the main not interested in financing
offshore wind projects until they are operational.
14.0 Going forward the UK utilities have significant
balance sheet constraints
and face vast competition for limited capital both across technologies
and across geographies (four of six are foreign-owned). On an
ongoing basis, capital for offshore wind will be limited and is
likely to be available only sequentially - through recycling capital
via refinancing after each project becomes operational. This creates
OFFSHORE WIND: KEY RISKS
|Resource risk||Will the wind blow enough to generate a power output sufficient to service the debt and provide adequate equity returns to investors?
|Technology risk||Offshore wind is considered "near commercial" but has a limited track record so there are questions over how long the kit will last and what required levels of maintenance will be - all exacerbated by the hostile deep offshore environment and the fact that new 5MW turbines (up from 3.6MW) are now coming through.
|Construction risk||Will projects get built on time and to budget? Work can only be carried out during the most clement 6-months of the year; bad weather and accident risk can therefore have a substantive impact on project over-run risk.
|Operation and maintenance risk||Is as much power generated as expected at outset? Is the kit reliable? Are the specialised cranes/shipping/ports available to facilitate maintenance?
|Distribution risk||Is the relevant infrastructure in place and accessible?
Solutions and the role of the GIB
15.0 We can learn lessons from the onshore wind market. Initially
the energy utilities took on much of the risk (driven by the returns
from the Renewables Obligation). As the track record developed
turbine manufacturers took on the risk (driven by the desire to
see market share expand). And finally banks have stepped in (because
returns compared to risk are very attractive). So onshore moved
from on to off balance sheet financing, accelerating the scale
of deployment significantly.
16.0 There are a range of views from the market on what solutions
the GIB could deliver for accelerating offshore wind deployment
17.0 The view from energy utilities and some project financiers
has been that further ROC uplifts are needed. We do not believe
this will accelerate the deployment rate because the problem is
not returns but risk. There is a strong consensus that any further
market interventions should focus on risk management to enable
more capital to flow into offshore wind construction.
18.0 Another suggestion has been that more equity is needed.
We believe the issue is not available capital - there is plenty
available for the "well understood" projects - the issue
is risk, particularly around the construction phase, but also
residual risk in the operational phase (i.e. will the wind blow
as much as expected).
19.0 GIB products to target risk
19.1 The "cautious" end of the finance spectrum
suggests the GIB should focus on construction risk management
tools. PWC has suggested that the GIB should underwrite generic
project cost over-run risk, paid for by a levy on consumers.
The Carbon Trust suggested that, for a charge to developers, more
targeted products such as Extreme Events Insurance for project
cost over-runs or contingent loan facilities, to be drawn down
in the event of cost over-runs, or contractor default letters
of credit could be provided.
19.2 Once construction risks are managed, whether by the market
or by the GIB, there will still be a need to refinance projects.
Institutional investors, who are the most obvious long-term holders
of operational assets, are wary of asset-backed bonds because
of their poor experience with securities such as collateralised
debt obligations. But these are decent products, if backed by
the right projects. A role for the GIB could be to act as purchasers
of asset-backed offshore wind bonds, again to demonstrate a "proof
of concept" for such products. A further and final role
for the GIB that is worth exploring is whether it should provide
a long-term insurance policy for wind resource. For a charge,
the GIB would insure a portfolio of UK offshore wind projects
and pay out to policy holders if the wind resource is lower than
expected in any one year, keeping the upside if wind loads are
as expected. In this way returns to institutional investors from
such asset-backed bonds are "smoothed" over time and
geographies, delivering the required returns.
19.3 The GIB, once established, will need to work with the
market to establish the most appropriate interventions to mitigate
construction risk and facilitate faster build out of offshore
19.4 There is a fairly clear consensus that once the first
few GW of deep offshore wind are operational, and a track record
for offshore wind is established, banks will become more comfortable
with the risks involved in construction and the operational performance
of these assets (wind load in particular) so that early stage
finance becomes more easily accessible - as it did for onshore
wind. Banks may then also, as they did for onshore wind, start
to take more risk, thus enabling the GIB to step back and the
private sector to step forward.
19.5 Addressing pre-construction financing bottlenecks will
unleash substantive capital flows, driving confidence in the supply
chain and provide a strong signal to the market that the offshore
wind market is an attractive market to be operating in.
20.0 In the cleantech space, the Government has put substantive
funds into low carbon initiatives but this has been spread thin.
There have been too many funding experiments and policy initiatives.
Much of the financial decision-making on which projects should
be funded has been outsourced to various funds - eg Environmental
Transformation Fund (£400 million: 2008-11) - and organisations
- eg NESTA (£400 million), Carbon Trust (£90 million/pa).
21.0 There has been little appetite for a more targeted funding
approach with poor coordination between Government departments
in part to blame. "White elephant" projects from the
1960s and 1970s such as Concorde prey on the minds of Government
officials. But in reality, selective use of limited capital will
be key to delivering success - but with a focus on backing technologies
(as the US has done with second generation biofuels)
rather than single companies. The result is the UK has a thriving
innovation base and is long on ideas but very short of technology
commercialisation and sustainable wealth creation.
22.0 A more coordinated approach is needed - one that could
be delivered via the GIB. Public funds targeted to projects and
technologies that are in the UK's strategic interests. With a
combination of this targeted funding and smart policy design,
scale and risk issues can be overcome.
The Green Investment Bank could play a central role in filling
the huge investment gap in low carbon infrastructure investment
that the UK is facing. But it will only achieve this if it is
set up as a well capitalised public bank that can share investment
risk with the private sector and issue bonds to access the vast
pools of capital held by the institutional investors. If set
up in this way the Green Investment Bank could play a transformational
role in building a highly competitive low carbon economy and catalyse
a green jobs boom.
E3G is an independent, non-profit European organisation operating
in the public interest to accelerate the global transition to
sustainable development. E3G builds cross-sectoral coalitions
to achieve carefully defined outcomes, chosen for their capacity
to leverage change. E3G is not a campaigning NGO, a thinktank
or a consultancy, although its activities overlap with all of
these models. E3G is an attempt to build a new type of organisation
which can help drive change inside existing global frameworks
at a rate consistent with preserving critical ecological limits.
E3G aims to creatively reconcile the conflicting imperatives of
day-to-day politics and long term climate change risks, and E3G
senior staff have unique experience at the highest levels of Government
and from the private and NGO sectors. In its first five years
- Played a critical role in Russian ratification of the Kyoto
- Gained agreement to cooperation on a full-scale EU-China CCS
- Delivered 6-8 billion for 10 CCS power plant demos in
- Developed the concept of Low Carbon Zones and gained agreement
from the Chinese government to five LCZ pilot projects in areas
of five to 15 million people.
- Proposed a public UK Green Investment Bank to support low
carbon infrastructure, and played a critical role in delivering
UK government agreement to establish it.
- Initiated and supported the first UN Security Council debate
on climate security.
Transform UK is an alliance of business, finance, union and charity
organisations that campaigns together to accelerate investment
into the low carbon economy.
Transform UK founded the campaign for the Green Investment Bank
in January 2009. It seeks to build consensus among key stakeholders
on the most effective model for the GIB to support the rapid transition
to a low carbon energy system and co-ordinates the alliance campaign
for its delivery.
TRANSFORM UK & ALDERSGATE JOINT STATEMENT ON THE GIB
Green Investment Bank Joint Position Statement - September
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 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. 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. Supporting the development of low carbon
and environmental industry, R&D, manufacturing, services and
exports will stimulate economic growth, jobs and competitiveness.
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 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 according to preliminary
independent analysis. 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.
KEY FINDINGS FROM ERNST & YOUNG REPORT - "CAPITALISING
THE GREEN INVESTMENT REPORT" AS SUMMARISED BY TRANSFORM UK,
E3G & GREEN ALLIANCE
Ernst & Young Report - "Capitalising the Green
- There are significant barriers standing in the way of low
carbon investment - including high levels of risk in terms of
new technologies that need to be deployed and the new business
models that need to be developed. It is also clear that with the
increase in the scale of low carbon investment we need to see,
companies and banks cannot be expected to be the long-term holders
of low carbon assets. The Green Investment Bank can help tackle
these challenges by providing products and services aimed at sharing
low carbon investment risk with the private sector and acting
as a bridge to tap the vast pools of long-term capital held by
the institutional investors.
- The UK needs to see a total of £450 billion in low carbon
investment until 2025. This includes £225 billion in energy
"supply side" investment and £225 billion in energy
efficiency "demand side" investment.
- Traditional sources of capital (utility companies, other corporates,
project finance and infrastructure funds) are only likely to provide
approximately £50 to 80 billion to 2025 for energy investment.
- This creates an energy investment gap of between £370
and £400 billion between now and 2025. To meet this investment
gap, average investment needs to increase from the £3 to
5 billion pa available from traditional sources to £30 billion
pa - a six to tenfold increase.
- GIB should be structured to appeal to the widest and deepest
sources of capital. The managed funds market in the UK is worth
£3.4 trillion - the GIB could effectively tap this source
of capital by raising GIB bonds in the capital markets and co-investing
in low carbon assets with the private sector on behalf of the
UK. A fund structure does not offer this opportunity to achieve
the appropriate scale.
- There are particularly strong opportunities for the GIB to
develop a number of risk-sharing and other financial products
in the offshore wind generation, carbon capture and storage and
energy efficiency sectors.
- At least £4 to 6 billion in tier 1 credit risk capitalization
is required for the Green Investment Bank over the spending review
period to 2015.
- In the absence of an institution such as the GIB, the UK low
carbon sector will not be able to access institutional capital
on the scale required. Without it significant competitive advantage
in the low carbon economy may be lost.
19 October 2010
Accelerating the transition to a low carbon economy: the case
for a Green Investment Bank, Ingrid Holmes & Nick Mabey -
E3G, 2010. Back
Green Investment Bank Commission (2010) Unlocking investment to
deliver Britain's low carbon future. Back
48 http://www.e3g.org/images/uploads/E3G_Financing_energy_efficiency_Bringing_together_the_Green_Infrastructure_Bank,_Green_Bonds_and_Policy.pdf Back
See http://www.e3g.org/images/uploads/Accelerating_the_transition_to_a_low_carbon_economy_The_case_for_a_Green_Infrastructure_Bank.pdf Back
For comparison, Ernst and Young estimate in their report around
£450 billion will be needed to 2025. Back
This is discussed in
get caught in the "valley of death", where later stage
low carbon investments are often considered too capital intensive
for a venture capitalist (who finance development), but the technological
or execution risk is too high for private equity and project finance
investors (who finance diffusion). For example, carbon capture
and storage, energy efficiency finance and second generation biomass
are traditionally indentified as sitting in this space. It is
arguable that the same could be said for the first few GW of UK
deep offshore wind projects. See discussion in Commodities Now
(23 June 2009) Valley of death for low carbon technologies is
Ernst & Young, 2010, Capitalising the Green Investment Bank. Back
E3G discussions with the Cooperative Bank. Back
Range of estimates from the market provided during discussions. Back
stands for engineering, procurement and construction-under such
a contract the contractor carried the project risk for schedule
as well as budget in return for a fixed price. Back
Moody's (2010) The quest for debt capacity. Back
PWC (July 2010) Filling the offshore wind financing gap. Back
Green Investment Bank Commission (2010) Unlocking Investment to
Deliver Britain's Low Carbon Future. Back
New Energy Finance (2007) Hitting a Home Run with Cellulosic Biofuels.
In 2005 the US made a commitment to the advancement of cellulosic
biofuels and the enzymatic hydrolysis pathway. In 2007 alone the
US government committed over $260 million to companies developing
this single conversion pathway and provided and complementary
policy framework to drive demand. Back
Discussion with Hugh Parnell, Envirotech. Back