Green Investment Bank

Written evidence submitted by Salix Finance (GIB 44)

Salix Finance is pleased to submit evidence to the Environmental Audit Committee, with a view to assisting the Committee’s deliberations on the Green Investment Bank. In doing so, Salix draws on its extensive experience of funding public sector bodies to deliver energy efficiency projects. Its submission focuses on this potential aspect of the Bank’s future activity.

Executive Summary

Observations on the issues under investigation

· Salix’s experience underlines the importance of including the potential for public sector energy savings in any assessment of the future role for the Green Investment Bank.

· There are potentially still over £500m of valuable, small scale energy saving projects to be done in the public sector, which could yield significant carbon savings, lower energy bills and quickly repay their costs.

· So far there has been both a significant reluctance from public bodies to make such investment (a demand side barrier) and little interest from the private sector in providing such funding (a supply side issue).

· In developing its current funding models, Salix has very successfully addressed some of the key demand side, organisational and process barriers which had hitherto prevented worthwhile public sector energy saving projects from taking place. Salix has helped raise awareness of the value of such projects, provided expertise in managing them successfully, overcome barriers from public sector bodies’ (PSB) finance teams and has supplied zero cost funding in order to make the projects happen. Lifetime energy bill savings from projects which Salix has funded to date amount to £480m.

· We believe that there is potential for private sector finance to be leveraged into public sector energy projects. For this to happen, it will be essential to increase awareness among private sector funders of the value of such small value projects and to address their concerns regarding potentially high transaction costs and uncertain risks. Salix’s work so far in pre-checking the feasibility of public sector projects and providing quality assurance over the level of carbon savings achieved is a useful demonstration of how this could be done.

· One option to be explored for the future would be for Salix, working with the GIB, to aggregate a portfolio of public sector energy projects and package them together, making them more attractive to private sector investors. This could also provide confidence that every loan will have been passed through the Salix project testing and assessment process.

· Even so, it is still uncertain whether public sector bodies would be willing, or be able, to meet the commercial interest rates and fees demanded by private sector funders. More work is needed to explore ways in which public and private sector support could work together in order to make such loans attractive to both parties. Salix is continuing to develop its thinking in this area; however, in the interim, it strongly believes that it has an important continuing role to play during the transition to a full private sector model.

About Salix

· Salix Finance is an independent not-for-profit company set up in 2004 and is funded by DECC in England and by the devolved administrations in Wales and Scotland. It manages £82m of funding allocated to 166 public sector bodies on a match-funded basis and £63.7m of 100% project loans via 3 programmes in England, Scotland and Wales, involving 249 PSBs.

· Projects funded by Salix to date will deliver savings of £480m in energy bills and 3m tonnes of CO2 over their lifetime. With a maximum payback limit of 5 years, the average payback achieved to date is 3.5 years.

· Salix funding programmes deliver energy saving projects which would otherwise not get done.

· Salix is the only organisation operating in the public sector arena which specialises in low-cost, easy to install projects - delivering quick financial returns for the public sector.

· Salix has detailed knowledge of technologies and the energy savings which they deliver, coupled with a rigorous appraisal methodology and proven tools and models, which are all externally accredited and certified.

WHAT DOES SALIX FINANCE DO?

1. Salix Finance is an independent not-for-profit company set up in 2004. It is funded by DECC in England and by the devolved administrations in Wales and Scotland. Its role is to show leadership in tackling climate change by reducing energy costs and CO2 emissions in the UK public sector. To date, funded projects will save £480m in energy bills and 3m tonnes of CO2 over their lifetime.

2. Salix allocates interest-free finance to fund simple energy efficiency projects which work quickly to reduce energy use and continue to operate effectively over the long term. The money saved by client organisations through reduced spending on energy costs is used first to pay back the initial project cost, after which it is available for wider use, including re-investment in new energy saving projects.

3. Salix uses a robust project assessment methodology to ensure that, as best as possible, funded projects deliver their expected savings. It has built up considerable experience of working effectively with Public Sector Bodies (PSBs) and works across the public sector to ensure that knowledge sharing and business case preparation are generally adopted as best practice.

4. Salix demonstrates a proven, cost-effective mechanism for public investment in CO2 reduction which has enormous potential for wider application throughout the public sector.

5. In particular:

· Salix has demonstrated that Government funded invest-to-save schemes, properly and efficiently administered, can deliver long term financial savings within PSBs.

· Salix has proved effective in moving energy efficiency up the agenda within PSBs but our experience has also shown that further progress will continue to require an external catalyst like Salix.

· Salix has developed a proven, independently assessed methodology for assessing and reporting CO2 savings, which could be applied under the auspices of a GIB.

· To date, Salix has funded over 6,750 projects, undertaken by more than 640 public sector clients, including Local Authorities, Universities and Colleges, Schools, NHS Foundation Trusts and Central Government departments.

6. Salix only funds projects which are ‘additional’ – i.e. for which no other designated source of internal or external funding is available. It has tried and tested software which it uses to assess projects for eligibility, ensuring that the projects which are undertaken provide the best and most efficient level of energy savings. In England, projects must comply with a simple payback of less than 5 years and the cost of achieving the CO2 saving from the project must be less than £100 per tonne over the life of the technology. The average results achieved to date are a 3.5 year payback and £48 per tonne of lifetime CO2 saving achieved.

7. Salix has been awarded independent assurance from KPMG over the methodology which it uses to assess projects and report the resultant savings. At the current time, with a small nucleus of only 24 staff, Salix’s administration costs represent less than 1.6% of funds under management.

Funding models

8. Salix manages two types of funding programmes and is looking to expand one of these:

9. Recycling fund

· An £82m match funded recycling programme, working with 166 separate public sector bodies.

· Funds are provided to PSBs on a matched basis (i.e. a fund generally comprises 50% funding from Salix and 50% from the PSB’s own budget) and are held for the longer term by them and recycled locally to deliver a flow of projects, each of which pay for themselves from the energy savings achieved.

· The funds, which average £250,000 from Salix to each PSB, are only repaid to Salix when the PSB cannot identify new projects or it ceases to use the funds in accordance with the scheme rules.

· As an example of the high financial returns which are currently being achieved from this scheme, £100,000 invested in projects by clients through this fund will save £29,000 per annum based on a 3.5 year payback, and these savings will last over an average project life of 12.5 years, giving lifetime financial savings of just over £360,000, or 360% of the original £100,000 investment.

10. Salix Energy Efficiency Loans Schemes (SEELS)

· 3 loans schemes, with a total value of £63.7m, which have 249 participating public sector bodies.

· Following the 2009 budget, £57.4m has been provided by the UK Government to offer 100% interest free loans to English PSBs to undertake individual energy efficiency projects.

· Similar loans programmes have been funded by the Welsh Assembly Government (£5.3m) and the Scottish Executive (£1.0m).

· This money was committed in 2009/10 and is currently being paid to PSBs on completion of their projects.

· In England the loan funding, which averages £20,000 per loan, will be repaid in 8 equal half yearly instalments, starting in March 2011. Similar repayment schemes operate for the loans in Wales and Scotland. In England the loan repayments are returned to DECC, whilst in Wales and Scotland they are reinvested in further energy saving projects in those regions.

· The lifetime financial savings being achieved from the initial DECC investment into the English scheme are 15.5 times (or 1,550% of) the investment made. This high figure reflects the short term nature of the funding compared to the long term benefits of the related projects.

11. Revolving loans

Following discussions with DECC, Salix is now looking to develop its SEELS programmes further and to operate a revolving loans programme across the public sector. The only difference to the current SEELS England programme is that the loan repayments, once received from the PSBs, will be re-lent by Salix to other PSBs, rather than being returned to DECC. Salix plans to launch this programme in the current financial year, using the limited supply of funding which it has taken back from recycling fund clients who have not been effectively using their funds. The lifetime financial savings from this new programme are expected to be 6.6 times (or 660% of) the initial investment made.

‘Take up’ by the public sector community

12. Salix programmes have been well subscribed by public sector bodies. In particular, the £57.4 million SEELS programme was fully subscribed in less than nine months after the scheme’s launch following the 2009 UK Budget.

13. Salix programmes have attracted the support of Higher Education Funding Council for England (HEFCE), which to date has provided match funding of £10m for projects in higher education institutions in England, and from the Learning and Skills Council, which has funded over £20m of projects in the FE sector.

Driving client performance

14. Salix’s small team of Client Relationship Managers works closely with all fund holders to ensure that money is invested and reinvested in appropriate projects, to agreed timescales and to prescribed performance criteria and systems of reporting. Given the lack of expertise within PSBs, and in the absence of a ‘culture’ of energy efficiency within many public sector bodies, these processes are a crucial element of Salix’s success. In particular, they facilitate a higher internal profile for energy managers and for energy efficiency more generally within PSBs.

15. Salix also runs regular knowledge sharing workshops in order to ensure that best practice in managing internal processes is followed by PSBs, that new applications for specific technologies are discussed, and that experience and client successes are spread around the public sector.

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

16. To date, public sector progress in achieving energy savings has been patchy, with most projects publicly funded through grants and interest free loans. Across the public sector there are still thousands of fast payback, low risk projects to be done. Both DECC and Salix have assessed that, using Salix’s current compliancy criteria of a maximum 5 year payback and a cost of less than £100 per tonne of lifetime CO2 saved, there is near term demand for over £500m of such energy efficiency projects.

17. There are a number of issues which could impede progress towards meeting this challenge and this therefore calls for a more structured response from Government. Problems occur both on the supply side (private investors may not recognise the commercial value of funding such projects in the public sector) and on the demand side (public bodies may not always sufficiently prioritise investment in energy saving projects).

On the supply side:

18. The nature of energy savings projects - which tend to be small and numerous - may mean that they initially appear unattractive to the private sector; Salix’s current average loan value is £20,000. Few private sector funders are prepared to incur the transactions costs associated with such a large number of small projects, and there is little track record of lending to public sector bodies in this way. By way of contrast, higher value renewables projects - which are more ‘PR friendly’ but less cost effective – are more appealing to investors.

19. To help overcome this, working with the GIB, Salix could aggregate a portfolio of loans and package them together, making them more attractive to private sector investors. Salix can add the confidence that every loan will have been passed through Salix’s project testing and assessment processes, which have now been certified by KPMG’s independent assurance process, and that Salix has an internal audit function which reviews projects and client capability, and also undertakes on-site audits of client project delivery.

On the demand side:

20. There are barriers facing public sector bodies, including Central Government departments not being able to seek third party funding.

21. Internal accounting rules mean that it is often difficult for budgets to cross over either a financial year end or a spending review end;

22. There is reluctance within finance departments to commit to repayments when future funding levels are uncertain, despite their knowledge that the projects will generate the energy bill savings to fund the repayments;

23. There are often insufficient staff with the requisite additional skills within PSB energy or property departments to be able to implement or manage the projects.

24. There are also cultural barriers within the public sector itself. Despite targets for the public sector to implement energy saving projects and reduce energy costs, action on this is still not a priority for PSBs. Generating demand for interest free loans took considerable effort by Salix and there has been considerable churn of both projects and applicants during the life of the Salix funds to date. It is therefore crucial to ensure that all parts of the public sector are engaged with any energy saving programme.

25. If funding in the public sector is tight, reducing costs should be a priority - but convincing finance departments to pay a market rate of interest may be difficult, especially outside Central Government where PSBs face multiple targets which all require investment from their limited resources.

26. Unless energy efficiency can be made a sufficiently high priority over other investments which are needed to deliver services effectively and efficiently, incentives may be necessary.

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

27. Salix believes there is a clear need for additional, co-ordinated investment in energy efficiency projects throughout the public sector.

28. In times of severe financial pressure across the public sector, energy efficiency is often de-prioritised. The type of low profile yet high impact projects which Salix supports are often cut in favour of more immediate front line services. Any borrowing allowed from the private sector is also directed at maintaining front line services. There is therefore a need for both a carrot and stick to deliver the energy efficiency outcomes.

29. Salix believes therefore that its loan programmes offer a foundation upon which GIB investment in low tech, high return projects within the public sector could be built.

THE GREEN INVESTMENT BANK’S INVESTMENT PRIORITIES, AND WHETHER AND HOW THE BANK SHOULD SUPPORT AND FOSTER AREAS WHERE THE UK HAS EMER GING GREEN TECHNOLOGY STRENGTHS

30. Salix’s expertise is in delivering simple, proven technologies which guarantee fast paybacks; we do not fund renewable energy technologies, which tend to have far longer payback periods. In essence, for these new and more innovative technologies to work at their best, existing buildings and systems need first to be made energy efficient – this often demands the installation of basic technologies such as insulation, energy efficient lighting or heating or lighting controls. A GIB would deliver maximum return on investment by building on Salix’s work in this area.

31. The top 10 technologies supported by Salix are:

29 October 2010