Green Investment Bank

Written evidence submitted by Scottish Power (GIB 40)

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 3 million customers, supplies over 5 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 £200bn 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 £200bn. 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 bn 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 bn 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 (i.e. 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