Green Investment Bank
Written evidence submitted by the Aldersgate Group (GIB 30)
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, a roadmap to 2022, 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. 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 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) 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 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-£35bn 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 shows that a purely market-led Green Deal (with a 9% interest rate) would actually increase the average householders fuel bill by 13%. 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 Inves
tment 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 4 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. 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.
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 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.
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;
·
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). 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. 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. 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 i.e. 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."
15 October 2010
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