Green Investment Bank

Written evidence submitted by EDF Energy (GIB 26)

Summary

· 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 funding.

· 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:

o 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.

o 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.

o 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 £200bn 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 [1] , 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 investors.

· 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 and scope

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 [2] 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 and demonstration.

GIB investment priorities and scale

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, e.g. 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 £200bn by 2020. The GIB must be of a sufficient scale to make a useful contribution to this figure. An initial capitalisation of £4-£6bn, 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 funding

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