Green Investment Bank

Written evidence submitted by EON (GIB 42)


1. An estimated £200bn of investment may be required for energy infrastructure in the UK over the next 10 to 15 years to replace closing power plants, build new low carbon generation, invest in energy efficiency measures and ensure we have the networks we need for a low carbon energy sector.

2. A number of factors are limiting future investment in the electricity market. These include the absence of sufficient, reliable long-term incentives to reward the value of low carbon investments, the high capital cost associated with most large scale low carbon technologies such as nuclear, carbon capture and storage or offshore wind, cost and performance uncertainties with relatively new technologies, and the impact on the wider electricity market and investments of policies to support the delivery of renewable projects in line with the UK’s renewable targets for 2020 under EU law.

3. These are the key barriers to investment and are being addressed as part of DECC’s electricity market reform project. If this reform is effective, then we believe the necessary investment will be attracted to the UK from existing energy companies and from new sources of funding. In our view, the role of a Green Investment Bank is primarily to help provide these new sources of investment, whether from the financial markets or from public funds if they are available. The Bank’s potential role also needs to be factored in to the electricity market reform process, given that one of the objectives of reform will be to attract new sources of funding for UK energy infrastructure. Similarly if the Bank is in effect a potential source of subsidy through low cost finance, then this also needs to be factored in to the new market framework.

4. The nature and extent of the Bank’s role will depend on whether the Government will itself be providing it with funds or be willing to underwrite its funding activities, or whether the Bank will be responsible for raising its own funds from the market without Government support, which would suggest a significantly narrower function, or if it is a combination of the two. We note the Government’s intention announced in the CSR to initially capitalise the Bank with £1 billion of DEL funding together with additional significant proceeds from the sale of Government owned assets, and that it will be able to reinvest the proceeds from its investments. This is a very welcome development but the announcement as a whole suggests that the Bank’s primary role may not be to invest public money or to provide Government loan guarantees but to act as a catalyst, facilitating the entrance of new types of investor into green infrastructure, although much design work remains to be done.

Role of a Green Investment Bank

5. Where the Green Investment Bank is dispensing Government money, whether raised from sale of Government assets, taxpayers or energy customers, or is providing loans on preferential terms, Government must set some clear criteria governing how that money is spent to ensure that the Bank operates in a way which meets the Government’s energy and climate change objectives. We would not favour a model where the Bank is provided with funds by Government and then has complete discretion over how it is spent. Not only would this increase uncertainty for market participants, but, from Government’s perspective, it would also appear to be an inefficient way of relating financial support to Government policy goals.

6. The Bank should operate in a transparent and predictable way, given that it may be competing with private sources of capital or could be favouring one form of investment over another. Government would need to have regard to EU state aid rules and to the potential distortive effect on the market and other participants of the Bank’s activities, for example where it provides financing at below market rates.

7. We would see the Bank focussing on low carbon investments where private sources of capital were not well placed to provide all the funding required, for example where the technology risks are high, or where the investment returns from Government policy support are perceived by institutional investors to carry more risk than they are looking for. This seems to be consistent with the Government’s intended approach announced in the CSR which states that the Bank would have an explicit mandate to tackle risk that the market cannot adequately finance, although it is unclear how it can do that without some form of Government support. Support from the Bank should be available in principle to all projects within a given category.

8. Depending on the level and type of Government support, a Green Investment Bank could perform some or all of the following activities:

· providing debt funding at preferential rates or conditions for major low carbon investments such as offshore wind, offering loan guarantees or extreme event insurance (where there are no commercial propositions), or providing the initial capital or guarantees, where the private capital market may not have the confidence to invest initially. Some of these forms of support may be a more effective way of mitigating risks than covering them through increasing the general level of revenue support under the renewables obligation or CCS levy to compensate for the risk in question. Funding would have to be made available equitably to the market as a whole;

· co-investing equity alongside private investment, where project developers are looking to share their capital commitment or level of risk exposure. On project completion, the Green Infrastructure Bank could either seek to unload any equity it retained and recycle its capital into new development projects, or retain these shares and take the dividend returns from the project. This type of investment might also be appropriate where the Government policy framework does not provide sufficiently stable returns in which case equity investment by the Bank could provide a means of mitigating this risk. The terms on which the Bank would invest equity would need to be clearly set out by the Bank in advance and not applied on ad hoc basis;

· supporting market deployment of emerging technologies such as marine technologies or CCS. However, consideration would need to be given to how the Bank could add value in relation to existing Government funding routes. We do not see the Bank having a useful role in supporting longer-term technology development where a number of existing institutions such as the Energy Technology Institute and research councils are already active;

· providing loans to the public at preferential rates and conditions for energy efficiency or other low carbon investments (comparable to the energy efficiency loan schemes operated by the KfW Banking Group in Germany), providing support to lenders in the form of guarantees to reduce the risk profile, and by tapping into markets or investors that utilities have not been able to access and thus provide supplementary funding to the public.

9. There would be little to be gained from the Bank simply replacing existing funding sources although, where this funding is currently provided by a variety of Government bodies, it could lead to a more effective and focussed direction of funds, assuming the Bank has the right expertise overall, and could lead to some savings in administration costs.

10. Where the Green Investment Bank is not making use of Government funds or benefiting from Government guarantees, the Bank is likely to have a narrower role and the question arises as to whether and how it can add value to private sector sources of finance and services already carried out by private sector financial institutions. For example in terms of debt funding could it achieve better terms and conditions and a higher overall funding volume, compared to the terms that can currently be obtained by the utilities or other project developers? In terms of equity could it be more successful in finding and bundling acceptable investors on acceptable conditions than banks, finance houses or private equity houses? This remains to be seen but we would see its role as developing a specific expertise in the energy market and related Government policy framework on the basis of which it could:

· act as a specialist source of advice on Government policies and available public sources of funding to financial institutions considering investments in low carbon technologies;

· help to structure, in partnership with the private sector, the financing of major projects, whether through debt or equity; or

· establish new and innovative ways to finance the investment needed in partnership with policy makers (e.g. the Treasury) and the investment community, consistent with the statement in the CSR.

26 October 2010