by the Low Carbon Group|
1. ABOUT LOW
1.1 Low Carbon Group was established in 2010
as a renewable energy developer of solar, wind, hydro and tidal
projects and as an investment management group offering individuals
and pension funds access to long term investments in renewable
1.2 The directors of Low Carbon have developed,
financed and sold over 2500MW of renewable energy projects prior
to forming Low Carbon Group. The directors have managed over £1,850
million of capital dedicated to renewable energy and infrastructure
prior to forming Low Carbon Group.
1.3 The team has a background in wind, biomass,
waste to energy and solar and have developed or financed renewable
energy projects in UK, Germany, France, Spain and Italy.
1.4 Low Carbon Group was established with a vision
of giving individuals and communities the opportunity both to
invest in local large-scale renewable energy developments, including
green field solar projects, and to realise long term revenues
from these opportunities.
1.5 We connect people to renewable energy projects
through small and low risk investments, and over the next 18 months
we hope to invest in 200MW of renewable energy in the UK with
£500 million of funding.
1.6 Based in Cirencester, Low Carbon Group currently
employs 40 people and expects to employ up to 70 by mid-2011.
1.7 Low Carbon Group welcomes
the opportunity to respond to the House of Commons Energy &
Climate Change Committee inquiry on the government's Electricity
Market Reform programme.
1.8 Our primary concern is to
see Government maintain a reputable, consistent and trusted feed-in
tariff policy against which we can spend high risk development
1.9 The Feed in Tariff (FIT) is
the framework by which we offer investors, big and small, certainty
of returns and the confidence that should we get planning permission
on a site, we know what revenues will arise.
1.10 Our position as a large-scale,
leading renewable energy developer and investor and our collective
experience in the sector over the last 9 years means that we are
well placed to comment on the consequences of government policy
on investor confidence in relation to FiTs.
1.11 To that end, in this submission
we will respond to the following questions:
- Should the system of FITs be focused
on particular technologies or maintain a wider technology-based
- Will market reform increase political
risk for investors or create certainty?
- What synergies and conflicts will
there be between proposed mechanisms and policies already in place?
- Will the Government's proposed
package of carbon price floor, EPS, FITs and capacity mechanism
provide sufficient transformation to achieve goals on climate
change, security of supply and affordability?
2.1 In this response to the Committee's call
for written evidence, Low Carbon Group makes the following key
2.1.1 That all renewable energy technologies
should be included in one Feed in Tariff mechanism that builds
from the current FIT for sub-5MW renewables.
2.1.2 That FITs are expanded to include wave
and tidal and energy efficiency. This will allow investors to
make long term investment decisions that allow them to invest
cashflows from one technology (eg green field solar parks) into
tidal, wave and energy efficiency projects.
2.1.3 To attract the investment necessary to
deliver energy infrastructure, the Government must act to provide
transparency, long term tariff delineation, clear timetables,
and a commitment to consistency of policy, in order to minimise
2.1.4 Institutional investors, seeking long-term,
low-risk returns from investment in energy projects, are particularly
susceptible to political risk. Low Carbon's development activity,
such as the launching of our People's Pension fund and our marketing
of renewable energy investments to very large pension funds, all
2.1.5 The Government's overall strategy must
be to build credibility amongst the investors with an interest
in the UK's energy infrastructure. All reform to the electricity
market must trust long term, transparent and clearly defined FIT
policy so that long term investment decisions can be made in stable
3. Should the system
of Feed-in Tariffs be focused on particular technologies or maintain
a wider technology-based view?
3.1 Low Carbon believes that a full system of
FITs should deliver the following:
3.1.1 Sufficient support for ground mounted solar
to enable 3GW of capacity installed.
3.1.2 Sufficient support for onshore wind to
enable 7GW of capacity of onshore wind to come forward.
3.1.3 Continued support for building integrated
or building associated micro renewables.
3.2 An extension of the FiT to cover wave and
tidal such that an initial 500MW of marine renewables can receive
favourable returns in order to kick start the market before a
series of degressions to the tariff.
3.3 As a general comment, the Committee should
note that many investors, including Low Carbon Group, are currently
focussing their support on specific technologies as part of a
wider, long-term business strategy. Low Carbon Group will re-invest
surplus cashflow from current FIT projects into new tidal and
hydroelectric power projects and will widen its fund offerings
to include wind, hydro and eventually tidal. Solar green field
projects are enabling us to drive the take up of the other long
term, necessary renewables that have great potential but require
further development and will require us to take profits from solar
to kick start wave and tidal deployment. Groups such as ours,
seeking to grow the next, but sustainable versions of the large
FTSE petro chemical giants, require the ability to bring enough
capital into the market at an entry risk level to be able to transition
that capital to higher risk renewables.
3.4 A full FIT system should offer clear consistent
transparent and long term support for all renewable energy technologies.
We believe each technology has its procurement, environmental
impact, planning and financing challenges, but that in driving
investment towards developing these technologies FITs have the
capability to resolve them. As a result of the Government's existing
FIT scheme, high calibre management teams are now starting to
enter the renewable energy arena, as a result of investment attracted
by the certainty that FIT provides. That transformative human
capital needs to be allowed to migrate to whichever renewable
it finds most attractive.
3.5 RECOMMENDATION: Low Carbon strongly supports
the inclusion of all technologies, including nuclear, under FITs,
so long as all associated costs are made transparent. We strongly
support this inclusion as a means of providing a level of transparency
that will enable both investors and the public to understand the
benefits and costs of renewable energy and nuclear technology.
We believe that through a wider system of FITs, the Electricity
Market Reform should create platforms but not pick winners.
3.6 Low Carbon is currently at a critical stage
in the convincing of institutional investors to allocate to renewable
energy as part of their investment strategy. This comes at a time
when European Governments will have to attract about £870
billion of investment to meet targets for developing renewable
energy and cutting greenhouse gas emissions over the next 10 years,
while also replacing ageing infrastructure. As a result, we believe
that it is imperative that all technologies have their FIT banding
to suit different investor tastes and the opportunity for their
market take up to be as large as possible, such that costs come
down and nascent economic sectors made robust.
3.7 FIT tariff banding needs to be sufficient
to offer long term pension and individual investors the ability
to achieve project level returns of 8.5-9% which is the market
level return offered by other infrastructure assets such as ports,
airports and toll roads. We strongly believe that the next three
years are critical to the re setting of asset allocations within
pension funds and insurance groups. We also believe that Government
must maintain clarity for investors during this period of transition
from allocations to equities, gilts, bonds, property to a significant
allocation from institutions to renewable energy.
3.8 RECOMMENDATION: That FIT tariff banding levels
are varied to suit the range of investor interests, with new,
higher-risk technologies attracting a better tariff level to reward
the risk taken on by the investor. At the same time, lower-risk,
proven technologies should aim a return of c. 8.5%-9% to mirror
other similar infrastructure projects.
4. Will market reform
increase political risk for investors or create certainty?
4.1 Low Carbon believes that the EMR project
has the potential to do either of the above, but that it needs
to achieve the latter. The use of FITs to drive investment into
energy infrastructure is the first and essential step to bringing
investors on the journey of trust into UK Government, trust into
the energy sector and trust into those few organisations, such
as Low Carbon, who have managed money for some time in this area.
4.2 Low Carbon would like to draw the Committee's
attention to the recommendations of the Stern Review of the Economics
of Climate Change, which is still regarded as the single most
in-depth, authoritative piece of work on this matter. In that
report, Stern concluded:
"Investors need a predictable carbon policy.
Businesses always have to take uncertainties into account when
making investment decisions. Factors such as the future oil price,
changes in consumer demand, and even the weather can affect the
future profitability of an investment. Business decision-makers
make judgements on how these factors are likely to evolve over
"But unlike many other uncertainties that firms
face, climate change policy is created solely by governments...Serious
doubt over the future viability of a policy, or its stringency,
risks imposing costs without having a significant impact on behaviour,
so increasing the cost of mitigation. Creating an expectation
that a policy is very likely to be sustained over a long period
is critical to its effectiveness.
4.3 FITs, if implemented in a long-term, transparent
fashion that provide investor certainty, are more than capable
of helping the UK meet its future energy needs. FIT schemes are
purposely designed to attract institutional investors, such as
pension fund and insurance companies, who seek long term, guaranteed
returns from their portfolios. It is for this reason that the
Government's existing FiT scheme has been designed to deliver
a return on investment rate of between 6% and 8%; which can be
finessed up to 8.5%, an ideal rate for institutional investors.
As well as leveraging finance, this helps reduce capital costs,
which will inevitably be passed on to the consumer, and the EMR
consultation document recognises this, outlining how FITs can
reduce the Weighted Average Cost of Capital for energy projects.
4.4 The Government believes that a transparent
approach to its energy strategy will help minimise the political
risk attached to projects, and whilst this is welcome, this alone
is not enough for the investment community. If the Government
is intent on using FITs as the key vehicle for its plans, then
it needs to understand that those investors with an interest in
them are more likely than any other part of the finance industry
to be deterred by any element of additional risk. Political risk
is often hard to quantify and highly unpredictable but Low Carbon
Group believes the Government should do more to address it.
4.5 Low Carbon's recent experience of the Government's
handling of existing FITs provides a vivid example of our concern
about the political risks in the energy arena. The recent Comprehensive
Spending Review (CSR) was ambiguous in the news that the Government,
for the first time, had decided to place cost constraints on FiTs.
Then followed a period of uncertainty and it was only sometime
after the CSR announcement that it emerged that the Government
had decided to do so. This news came without any formal, public
announcement and challenged investor confidence.
4.6 Recent Ministerial comments about the use
of FITs to finance solar greenfield sites have posed a further
threat to investor interest
in the UK's energy infrastructure. Initiating an early review
of FIT tariffs could threaten the revenues necessary to get the
business operational and significantly hinder the ability of companies
like Low Carbon's to attract investment. Low Carbon Group would
like to see a greater understanding at all levels of Government
of the real and serious impact that this type of uncertainty creates.
4.7 Banks are reluctant to finance projects for
15 years or more without a certainty that the cash flows are valid.
These judgements are supported by Government statements on policy.
In other jurisdictions where Government policy on renewables has
wavered, the investment community as a whole has downgraded their
assessment of the countries robustness in the face of discontinuity,
elevating the cost of funding for all government enterprise. To
meet the need for £200 billion of investment by 2020, the
Government will rely on major institutional investors (such as
pension fund backers) for the funding for all technologies, including
offshore wind and the green deal bonds. Those same investors have
given us commitments for the first time via investment in UK solar
under the sub 5 MW FIT scheme that current exists. Through this
scheme, FIT supported solar is the perfect low risk entry level
renewable for new investors just starting to show an interest
in renewable energy investment who can then transition through
to fund the other renewables.
4.8 As investors are buying cashflows to match
against long term liabilities, they by necessity begin with the
most well understood and least risky renewable. Once comfortable
with it, they will move allocations from equities and property
into renewable energy. Low Carbon has held conversations with
two of the largest pension funds in the UK who cannot deploy less
than £100 million into this sector and need to know that
the sector is big enough, certain enough of receiving returns
above an agreed hurdle rate and not subject to any political risk.
4.9 To address these concerns, Low Carbon believes
that the Government should return to the recommendations of the
Stern Review, which concluded:
"Three essential elements for an effective policy
framework are credibility (belief that the policy will endure,
and be enforced); flexibility (the ability to change the policy
in response to new information and changing circumstances); and
predictability (setting out the circumstances and procedures under
which the policy will change)."
4.10 RECOMMENDATION: If the Government is determined
to provide transparency, longevity and certainty for investors,
then it should consider what legislative means it has at its disposal
to do so. Low Carbon believes that enshrining FIT policy objectives
(size, scope and characteristics of projects supported), the review
process and that process's timescales in primary legislation would
be one effective way of doing this. Tariff levels would understandably
need to be dealt with under secondary legislation, to provide
Ministers with the flexibility to amend them in line with technology
development, but clearly setting out the full process by which
they are determined would significantly decrease levels of political
5. What synergies
and conflicts will there be between proposed mechanisms and policies
already in place?
5.1 The Government's lead option to replace the
Renewables Obligation is a new FIT scheme, called "Contract
for Difference". Whilst this mechanism differs from the UK's
existing FIT scheme in that it accounts for larger generators
who sell electricity to the wholesale markets, it nevertheless
seeks to create greater long-term price certainty by guaranteeing
a tariff payment to a certain level. As the Government recognises:
"With a FIT contract the investor gets certainty
about the level of support when the contract is signed. This is
better than currently under the RO where an investor will not
be sure of the number of ROCs they will receive until their installation
is built and connected to the grid (accredited)."
5.2 With this certainty at the heart of this
mechanism, it is absolutely vital that a degree of trust exists
between investment community and the Government so that large,
low-risk investors are provided with the certainty they feel they
need to support schemes. At present, many investors are considering
investing in projects, but are closely watching Government behaviour
before doing so. We are currently in a period when it is absolutely
vital that the Government builds its credibility amongst the investment
5.3 Existing FIT policy will be viewed by many
in the investment community as a litmus test for this credibility.
A failure to provide that certainty risks undermining investor
confidence, which the Government will need to instil to generate
investment in energy projects via the Contract for Difference.
We believe that within this context the Government should tread
very carefully when approaching the FiT scheme that is currently
in place and not hold an early review for the scheme, as it has
5.4 To date, the political risk around FITs stems
from Treasury concerns around the level of costs passed through
to consumers and the impact on their ability to pay tax rather
than recognising the large scale upfront investment that provides
an instant fillip to the national economy and the various tax
takes it then benefits from in future years.
5.5 RECOMMENDATION: The Government has yet to
clarify how the costs of a new Contract for Difference, if introduced
as intended in 2013-14, would be viewed by the Treasury. We believe
it should move to do so at the earliest opportunity, The recent
uncertainty around the current FiT scheme originated from that
Department's decision to place a cost constraint on the scheme
for the first time despite the fact that the ROC system has worked
well for years with no constraint on it The Government has not
clarified whether the Contract for Difference would have a similar
constraint placed on it and, if it did, how those costs would
be accounted for. Introducing a new cost constraint after launching
the scheme would severely undermine the Government's investment
agenda and wider EMR programme.
6. Will the Government's
proposed package of carbon price floor, EPS, FITs and capacity
mechanism provide sufficient transformation to achieve goals on
climate change, security of supply and affordability?
6.1 Low Carbon will restrict its comments to
the role of capacity mechanism in this section of its response.
6.2 Within the context of capacity payments,
the Electricity Market Reform project proposes the use of "negawatts"
to help improve energy efficiency through demand side management.
The cheapest renewable energy by far is energy efficiency at a
cost of £60,000-£300,000 per permanent MW removed. This
can take the form of lighting management control, building management
control, motor replacement, waste heat recovery and the like.
It is simple to baseline and report against ongoing performance.
Performance will need to be monitored annually and metered just
like the production of power. It is important that energy efficiency
gets a weighting via the Electricity Market Reform. This will
enable investors to unlock the impediment to the deployment of
energy efficiency initiatives which is the low priority energy
costs have in any corporate organisation.
6.3 The investment community is able to remove
this obstacle by the creation of infrastructure financial products.
Energy Efficiency Infrastructure Funds can own capital items that
reduce energy use and can take the benefits from a negawatts payment
and from electricity savings to deliver their 12% IRR hurdle rate.
Low Carbon is able to offer the Committee examples of potential
6.4 RECOMMENDATION: We believe the above use
of negawatts is an essential part of the EMR. Investors need a
clear year one baseline to invest in negawatt projects, and then
a negawatts pay out for negawatts decrease in a buildings output.
7.1 Low Carbon Group has made 230 presentations
to pension funds and institutions in the last three years raising
capital for renewable energy technology and projects. Our CFO
has financed over £1 billion of renewable energy projects.
Based on this experience, our Group is very clear on the levels
of certainty that investors require. We believe that the investment
community requires the UK government to adopt a clear, transparent
pricing table for renewable energy generators per technology per
annum for the investment community to choose to invest in UK projects.
Critical in this regard is to build in rolling three year reviews
of tariff levels and also to have in primary legislation an absolute
commitment to the uptake of renewable energy and energy efficiency.
With such legislation, we are confident that each company such
as ours will be able to bring £billions of new capital into
7.2 Low Carbon would like to see the EMR embrace
all renewables, including allowing the large take up of solar
power. We would like to see it envisage a well rewarded initial
pricing for wave and tidal technology in order to kick start what
can become a homegrown and large export industry. Low Carbon would
like to see the EMR advocate the transparency of tariff levels
for all energy sources and clear and long term pricing for the
various renewable power choices.
7.3 Low Carbon believes that as long as incentives
for the various renewables can deliver a return to investors of
in excess of 12% post tax equity IRR in the next three years to
then track down to 11% and on down to commercial property rental
levels once the sector is large and accepted that the EMR will
have met its objectives.
7.4 Finally, Low Carbon believes the EMR has
the real potential to deliver the radical change to electricity
markets that the Government has said that it wishes to see. The
various policy streams have the ability to be transformational
for society, enabling individuals to make investment choices into
renewables at a local and national level that will really mean
society can make a choice about what power it wants at what price.
7.5 We would be delighted to give oral evidence
on the challenges of raising finance for our sector and the challenges
of development in our sector.
14 Chapter 15, Stern Review of the Economics of Climate
Change, 2006. Back
"Clampdown pulls plug on march of solar farm speculators",
Daily Mail, 12.11.10. See:
"Energising the Big Society - the role of industry in
the local energy revolution", Greg Barker speech to the
Micropower Council, 23.11.10. See:
P. 48, Electricity Market Reform Consultation, 16.12.10. Back