Green Investment Bank

Written Evid ence submitted by Transform UK and E3G (GIB 35)

Key Points

1.0 According to E3G analysis [1] , infrastructure and climate change-related investment of £750bn is required across the UK economy to 2025. Building on this, Ernst and Yo ung 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 £ 3 70 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. T his gap can only be closed with a well capitalised Green Investment Bank. These findings mirror those in the Green Investment Bank Commission report [2] , which found a G IB w ould be essential to deliver the UK ’s essential infrastructure investment .

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 6 billion over the next 4 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 i nstitution that is able to tackle the uncertainties that lie ahead as the economy is de carbonised .

1.5 The GIB must prioritise both renewable energy and energy efficiency. Energy efficiency investment, mostly for the building stock, will require more than £2 00bn in investment over the coming decades [3] .

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 Gover nment 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 quickly?

2.0 Market f ailure , in th e case of climate change , is the failure of the market to properly value and address the impact of carbon emissions. P olicies su ch 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, increas e 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 £750bn in infrastructure investment to 2025 [4] . This includes around £516 billion in "supply" and "demand-side" energy infrastructure investment [5] . 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 c onfidence gap − Some of the technologies that are going to be needed to deliver decarbonisation , including carbon capture and s t orage for example, are at the pre-commercial stage and subject to three very significant barriers to deployment. [1]

4.1 The ‘valley of death’ funding gap [2] − a gap in the capital markets for fund ing 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 return s of more than 40% on their investment s and private equity investors requir e 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 [1] . 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 £100ms to interest the holders of vast pools of long-term capital − the institutional investors .

5.1 While the private sec tor 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 [1] .

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. W hat 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 b enefits 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 banks.

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’ i.e. ‘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 in Germany.

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 B onds 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 a ssets will have long life-spans of 25 years or mo r e, 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 − i t just needs to be accessed. One of the simplest ways to do this is for the Green Investment Bank to issue Green Bonds .

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 G reen Bo nds. 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.

Q 4 . 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 be needed.

10.2 Assuming it has the power to raise green bonds, the GIB can access low cost finance - at 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 billion [2] 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 [3] . 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 [4] 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 a bottleneck.

Table 1. 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 should be.

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 [5] . 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 [6] .

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 wind.

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.

Innovation

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 − e.g. Environmental Transformation Fund (£400m: 2008−2011) − and organisations − e.g. NESTA (£400m), Carbon Trust (£90m/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 [7] ) 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 [8] .

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.

23. Conclusion

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 hel d by the institutional investors. If set up in this way the Green Investment Bank could play a tra nsformational role in building a highly competitive low carbon economy and catalyse a green jobs boom.

Authors:

Ingrid Holmes – E3G

Ed Matthew – Transform UK

E3G

E3G is an independent, non-profit European organisation o p erating in t h e public interest to a ccelerate t h e global tra n sition to sus t ainable development. E3G builds cross-s e cto r al coali t ions to achieve carefully defined outcomes, chosen f or their capaci t y to levera g e 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 s t aff have unique experience at the high e st levels of Government and from the private and NGO sectors. In its first five years E3G has:

· Played a critical role in Russian ratification of the Kyoto Protocol.

· Gained agreement to cooperation on a full-scale EU-China CCS demo plant.

· Delivered €6-8 billion for 10 CCS power plant demos in the EU.

· Developed the concept of Low Carbon Zones and gained agreement from the Chinese government to five LCZ pilot projects in areas of 5-15 million people.

· Proposed a public UK Green Investment Bank to support low carbon infrastructure, and played a critical role in delivering UK government agr eement to establish it .

· Initiated and supported the first UN Security Council debate on climate security.

Transform UK

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.

Annex 1 : Transform UK & Aldersgate Joint Statement on the GIB

Green Investment Bank Joint Position Statement – September 2010

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 he l p 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 4 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.

Annex 2 – 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 Investment Bank"

Key Findings

· 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


[1] Accelerating the transition to a low carbon economy: the case for a Green Investment Bank, Ingrid Holmes & Nick Mabey - E3G, 2010.

[2] Green Investment Bank Commission (2010) Unlocking investment to deliver Britain ’s l ow carbon future.

[3] http://www.e3g.org/images/uploads/E3G_Financing_energy_efficiency_Bringing_together_the_Green_Infrastructure_Bank,_Green_Bonds_and_Policy.pdf

[3]

[4] See http://www.e3g.org/images/uploads/Accelerating_the_transition_to_a_low_carbon_economy_The_case_for_a_Green_Infrastructure_Bank.pdf

[4]

[5] For comparison, E rnst and Young estimate in their report around £450bn will be needed to 2025.

[1] This is discussed in http://www.e3g.org/images/uploads/Accelerating_the_transition_to_a_low_carbon_economy_The_case_for_a_Green_Infrastructure_Bank.pdf

[1]

[2] Technologies 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 widening http://www.commodities-now.com/news/environmental-markets/190-valley-of-death-for-low-carbon-technologies-is-widening.html

[2]

[1] Ernst & Young, 2010, Capitalising the Green Investment Bank

[1] E3G discussions with the Cooperative Bank

[2] Range of estimates from the market provided during discussions

[3] EPC 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.

[4] Moody’s (2010) The quest for debt capacity

[5] PWC (July 2010) Filling the offshore wind financing gap.

[6] Green Investment Bank Commission (2010) Unlocking Investment to Deliver Britain’s Low Carbon Future

[7] 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 $260m to companies developing this single conversion pathway and provided and complementary policy framework to drive demand.

[8] Discussion with Hugh Parnell, Envirotech