Written evidence submitted by Scottish
Power Limited and ScottishPower Renewable Energy Limited
INTRODUCTION
1. This evidence is provided on behalf of Scottish
Power Limited (a major UK energy supply, networks and generation
business), and ScottishPower Renewable Energy Limited (the UK's
leading renewables developer). Both companies are subsidiaries
of Iberdrola S.A. and references to "ScottishPower"
and "we" are to either or both companies as the context
requires.
2. Scottish Power Limited is an energy business
that provides electricity transmission and distribution services
to more than three million customers, supplies over five million
electricity and gas services to homes and businesses across Great
Britain (GB), and operates electricity generation, gas storage
facilities and associated energy management activities in the
UK.
3. ScottishPower Renewable Energy Limited is
part of Iberdrola Renovables, which is 80% owned by Iberdrola
SA. Iberdrola Renovables is the largest developer of renewables
globally. Among our projects is the Whitelee wind farm which,
at 322MW, is the largest onshore wind farm in Europe.
4. ScottishPower is also at the forefront of
research into and investment in Carbon Capture and Storage (CCS)
and we leading a consortium proposing to build and operate a commercial
scale post combustion CCS plant at our Longannet Power Station.
That project is the sole remaining entry in the Government's
competition, which has been allocated a budget of up to £1 billion
in the Comprehensive Spending Review.
5. Iberdrola is also a major producer of nuclear
power in Spain and is partnering with GDF Suez and SSE with a
view to undertaking new nuclear build in the UK, including a proposed
power station of up to 3.6GW on land adjacent to the existing
nuclear complex at Sellafield.
6. This memorandum provides a summary of our
view of the establishment of a Green Investment Bank (GIB) in
the UK.
SCOPE AND
OBJECTIVES
7. We strongly support the establishment of a
GIB to accelerate the development of a clean, low carbon energy
system within the United Kingdom. We believe that the GIB has
a genuine potential to stimulate private sector investment by
addressing risk that the market is not sufficiently financing.
This should enable further funding to be levered in, and so make
a valuable contribution to the £200 billion plus that
is needed for the energy and utility infrastructure between now
and 2025.
8. Whilst there are many projects across the
energy sector that can benefit from GIB supported investment,
the focus of the GIB should be on large scale infrastructure provision
including carbon capture and storage, major power line development
and large scale renewable deployment (especially offshore wind).
Emphasis should be placed on addressing risks that the market
has difficulty in supporting.
9. We are not persuaded that the scope of the
GIB should be directed towards lower technology readiness activities.
As we state above, it should focus on the material deployment
of technology rather than research & development. There
may be a case, in exceptional circumstances, for some demonstration
activity to be overseen by the GIB. This should only be the case
where it is a clear prelude to widespread technology deployment.
10. Our broad view is that current institutions
(e.g. the Technology Strategy Board, Low Carbon Network Fund,
parts of the Carbon Trust, elements of the Energy Technologies
Institute) support R&D reasonably effectively and present
a strong bridge between academic, business and commercial activity.
However these are organised in the future (and there is some
scope for rationalisation), there is a danger that the GIB could
stifle innovation if some R&D activities were made to compete
for limited funds against projects with stronger and more predicable
financial return.
11. Some discussion has mentioned an advisory
role for the GIB. In itself, this poses no problem but any such
role needs to be carefully set out. There are already a number
of statutory and non statutory advisors that Government rely upon
to help form energy and environmental policy. The executive and
advisory functions of all Government sponsored organisations may
need to be rationalised rather than expanded.
INVESTMENT PRIORITIES
12. Studies undertaken by Ofgem, CBI, CCC and
others suggest that the level of investment in energy and associated
infrastructure in the UK by around 2025 will need to be up to
and beyond £200 billion. All these estimates suggest
a significant acceleration of investment against current rates.
13. In our view, the following areas offer the
best opportunity for the GIB to increase the market investment
capacity.
- Offshore wind deployment.
The UK will require a massive increase in offshore wind capability
in a relatively short period of time. It is estimated that the
rate of deployment from 2014 onwards will require to be at the
level of between £3-4.5 billion per annum.
- Marine renewable development,
including wave and tidal, could have a significant role to play
in the future UK energy mix. Post demonstration, the GIB has
a role in supporting wider deployment in UK waters. This is
likely to occur post 2017.
- Carbon Capture and Storage.
The deployment of CCS is likely to have strong support from
the GIB for both new and existing fossil fuel power plant. As
demonstration is proven, the GIB could provide funding for capture
plant, infrastructure development and improving storage capability.
- Transmission line development.
This includes onshore transmission upgrades, offshore HVDC links,
inter-connector capacity with other EU member states and the development
of offshore grid capability to connect wind and marine activities
to mainland UK. This is likely to be an early priority for the
GIB.
14. We welcome the Government's announcement
of more than £200 million to be spent for the development
of low carbon technologies including offshore wind technology
and manufacturing at ports sites. To the extent that additional
support is needed for infrastructure associated with green energy,
including Port and Harbour developments, the GIB could play a
role.
15. Some reports have suggested that the GIB
has a potential role in smart grid development. This is not something
that we see as a pressing priority at this stage. The deployment
of smart metering is likely to be undertaken within existing resources
for most energy companies. The development of new grid technology
is being funded mostly at this stage via the Low Carbon Network
Fund and will be deployed over time via the regulatory price reviews.
These are both likely to be relatively predictable and low risk
investment programmes.
16. One of the more difficult areas of investment
is the much needed upgrade of the built environment in order to
achieve higher energy efficiency performance. It is not yet clear
whether the GIB can, or should, have a role in supporting this
area as an early priority. This, however, should be kept under
active review, as the Green Deal is rolled out and the new supplier
obligation is developed. It is possible that the GIB can offer
some funding for the set up phase of Green Deal finance or to
cover some of the default risk from customers. It may also be
necessary to consider involvement of the GIB if the demand from
households for the Green Deal is larger than the available market
investment capacity for that opportunity.
FUNDING
17. Sources of funding for the GIB should ideally
come from both public and private sectors. We welcome the proposed
setting aside by Government of £1 billion of funding for
the GIB in 2013-14. This is a helpful start, but it will be important
that the Government follows through on the intention to augment
this with significant proceeds from asset sales. In addition
to these sources of funds, the following should be considered:
- The NFFO surplus in England and Wales. This
now stands at several hundred million pounds and primary legislation
to allow it to be used should be considered;
- A proportion of the receipts from the EU ETS
auctions from 2012 onwards. It is assumed that much of the receipts
from the EU ETS will need to be set aside for general expenditure.
We believe, however, that some receipts from 2014 onwards could
be used to extend the capitalisation and funding for the GIB;
and
- Some, but not all, of the existing funding for
the Carbon Trust, ETI and TSB. Following the formal review of
these organisations, we anticipate a small proportion of the current
expenditure should be set aside for the GIB. As we state above,
we do not believe that the GIB should have a focus on R&D
activities for technologies that are some way from being market
ready, and we think that the R&D funding should continue to
be separate.
18. There is also a possibility that private
sector funding could be attracted to the GIB, subject to an appropriate
pipeline of projects, tax benefits for investors and appropriate
underwriting by Government. As the GIB model develops, a further
examination of this source of finance may be helpful. It is possible
that this source of funds could be significant and it is likely
that institutional green bonds may be able to form a large component
of long term GIB financing. Should market conditions prove right,
we also anticipate a lesser, albeit important, role for retail
investors via ISA type investments, providing that the investment
risk profile is appropriate for retail.
19. It may be helpful for the GIB to make available
a mixture of green bonds for investors, so as to leverage additional
funds into projects. These bonds should include those offered
in respect of single asset classes, bundled asset classes and
single projects. As with all investments, it is important that
investors have full and transparent information
20. We are not supportive of direct regulatory
funding (levies, charges, etc) being used for the GIB. These
are already used efficiently to stimulate investment in low carbon
energy plants and infrastructure. Such funds work with the grain
of energy markets and are helping re-engineer a new lower carbon
energy model for the UK.
PROJECT SELECTION
21. Projects must clearly demonstrate cost effective
carbon reduction, but this is unlikely to be the sole criterion.
The GIB needs to establish well understood strategic and financial
criteria for projects that need support:
- Strategic needs.
Government need to establish clear strategic criteria for the
GIB. These include, but are not limited to, guidance on cost
effectiveness of carbon reduction, project risk, explicit links
to the UK low carbon strategy and climate budgets, support for
subsidiary renewables targets, methodology for carbon reduction
assessment, the extent to which supporting infrastructure for
low carbon transition is applicable, location of projects (including
to extent to which some may be trans-boundary in nature), project
technology readiness and the materiality of the project.
- Financial needs.
The GIB obviously needs to identify projects that meet minimum
financial criteria consistent with its risk appetite. It must
also identify where the funding will be used best, as an accelerant
or catalyst, so as to increase overall market investment capacity
for relevant projects. Clear guidance needs to be established
by the GIB on the types of projects (ie risk profile) that it
feels to be reasonable and the financial rating strength of organisations
with whom it will offer project funding. The credit assessment
of projects needs to be based on clear and transparent principles,
though it is understandable that much discretion will exist due
to the individual circumstances of those seeking project funding.
GOVERNANCE
22. We broadly agree with the findings of the
Report by the Green Investment Bank Commission in regard to the
legal form, governance and reporting structure for the GIB. It
is important that the Board of Directors has strong representation
from industry. The role of the Advisory Council needs to be more
clearly set out in order that the GIB receives clear direction
on priorities for investment.
23. The key capabilities for the GIB should
be project selection, project appraisal and raising funding.
The GIB should be seen as a facilitator to assist, support and
engage investors keen to fund long term, secure, low carbon infrastructure
in the UK.
24. Thought should also be given to the location
of the Green Investment Bank. There are a number of viable locations
outside the City of London that would be able to service the skills,
expertise and required capabilities to support the GIB in a cost
effective manner. Scotland, especially Edinburgh, should be considered
as an ideal location due to the presence of a financial and professional
services base together with a high level of international expertise
that exists due to the recent rapid expansion of renewable, grid
and low carbon technologies.
25 October, 2010
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