Environmental Audit CommitteeWritten evidence submitted by Alan Simpson
A COMPARATIVE ANALYSIS OF THE UK APPROACH TO GREEN FINANCE
(or “How the UK gets most things wrong”)
Alan Simpson (Former Member of Parliament, now an independent advisor on Energy and Climate policy).
1. Overview
The UK has a complex, regressive and inconsistent approach to “Green Finance”. This makes it unlikely that Britain will ever be a leader in the global transformation of energy thinking already taking place around us.
An obsession with outdated financial mechanisms means that Britain more consistently favours the past rather than the future, the unsustainable rather than the sustainable and the anti-competitive rather than the competitive.
It is unclear whether parliament has been consistently lied to (in respect of the range of financial support mechanisms it is legally entitled to use in promoting any transformation to a “Green” economy) but, at the very least, Britain has developed a propensity to self-deceive in order to under-achieve.
A stronger government lead, simpler access to finance, and more ambitious targeting could still transform the UK energy landscape.
1.1 In this submission to the Committee’ Inquiry, I want to focus on specific points that have come out of several visits I have arranged, for politicians and others, looking at the different approach to Green Finance in Germany. There are other examples of more innovative approaches in North America, but I will focus on what other EU Member States are already doing within the single European market.
2. Feed in Tariffs (FITs)
2.1 UK constraints on the financing of FITs are deeply regressive. In 2010, the Treasury “rescued” the FITs programme in the same way that South Africa “rescued” Nelson Mandela to Robben Island. It was turned from a self-financing scheme within the energy sector accounts into a fixed-budget programme that had to be counted against public expenditure limits. Since then, the role of DECC has been to “manage down” expectations within a system that constrains growth and delivers organised underperformance across the sector.
2.2 Parliament has been misled by the claim that, under EU rules, FITs have to count against public expenditure limits. This UK interpretation has been held to despite the existence of a European court ruling (in Germany’s favour) to the contrary. When asked, European Commission officials have consistently said that this is entirely down to UK interpretation rather than European determination.
2.3 In Germany, FITs are an independent element within energy sector accounting. They do not count as public expenditure. The government sets the tariffs and regulates their adjustment. The original UK programme was designed to operate in the same way, until it was put into the Levy Control Framework in 2010.
2.4 The effect of this has been to limit the ability of FITs to turn the existing UK energy cartel into more open and competitive energy market.
2.5 The UK’s narrow approach to “green” financial mechanisms has been reinforced by its decision to pass all the costs of FITs programmes to consumers, but none of the benefits. In Germany there is a duty on the Grid to take “clean” renewable energy (supported by FITs) before “dirty”. This has led to a dramatic fall in their peak (wholesale) electricity prices and promoted substantial private investment in Green energy.
2.6 Under the EU Renewable Energy Directive, Member States are entitled to rule that renewable energy should be given priority access to their energy Grids. The UK has chosen not to do so. It is one of a small number of countries preferring to pursue protectionist policies in respect of “old energy”.
2.7 The effect of this disparity has been economically damaging to the UK. In the European wholesale electricity market, UK “forward power prices” are now 50% higher than Britain’s major European competitors.
3. The Green Investment Bank (GIB) or the KfW?
3.1 Most of the criticism of the Green Investment Bank is really a critique of the constraints the government has imposed on it:
Restricting its ability to borrow on the open market.
Limiting the terms of “State Aid” clearance it has been given, excluding most of the technologies (solar, hydro and onshore wind) that the “community energy” sector could deploy most rapidly.
Requiring it to pursue commercial rates of return.
Precluding it from having a lead role in energy efficiency (or interconnector) financing,
Omitting any specific remit for the active promotion of “community-owned” renewables, and
Limiting its ability to “de-risk” community energy schemes.
3.2 This stands in stark contrast to the remit given to Germany’s KfW Development Bank. The KfW has an approach to Green Finance that includes the following—
It has a “promotional mandate”, defined by government and backed by a formal “Understanding” reached with the EU Commission;
At least 40% of its annual €70bn loans book has to focus on environment and climate protection33;
Its programmes have to be consistent with national commitments to reduce CO2 emissions by 40% by 2020;
Increase the share of renewable energy to 18% by 2020 (and 80% by 2050);
Phase out all nuclear power by 2022;
Reduce primary energy consumption by 20% until 2020 (and by 50% until 2050); and
Reduce the primary energy consumption of buildings by 80% by 2050.
3.3 The effect of this has been to make the KfW a much more dynamic player in the German Energiewende programme than the GIB is allowed to be within the UK.
3.4 Most specifically, the Committee needs to look at the role given to the KfW in de-risking the German transformation process and in promoting it.
4. Simplicity
4.1 Germany directs the bulk of its transformation programmes through the KfW rather than Energy Utilities. It also cuts through much of the red tape that constrains UK access to Green Finance.
4.2 The KfW simplifies the process of applying for finance and then the trains high street/regional banks (Sparkassen) to deliver their finance programmes. In 2011, they delivered 5,400 consulting services supporting this delivery mechanism. These covered energy efficiency measures as well as renewable energy investment.
4.3 The German government channels its EU-ETS receipts (approximately €1.5 billion p.a.) through the KfW in order to de-risk investment in energy and climate work.
4.4 Standardised application forms/procedures mean that loan applications are expected to be completed in a single visit to the local bank, once compliance conditions have been met.
4.5 Loans are normally at the rate of 1%-1.5% and can be for up to 15–20 years.
5. Energy Efficiency
5.1 Unlike the confused UK debate over ECO funding (through Utilities) or Green Deal (through its finance company), the KfW drives Germany’s energy efficiency programme -
5.2 This streamlined access system, and 1.0%-1.5% interest rates, meant that in 2011 the KfW delivered 360,000 whole house upgrades (and supported 370,000 jobs).
5.3 Moreover, the €10 billion of public investment delivered €27 billion of private investment in the programme.
5.4 In addition to a general availability of low-interest loans, the KfW offers additional support tied to the level of energy efficiency reached—
5.5 In addition to a 1% loan rate, the KfW offers to write off up to 17.5% (now 20%) of the loan, if refurbishment reaches their “near-zero” carbon homes standard.
5.6 No less important is a recognition that single measures attract no repayment bonus/debt relief.
5.7 The alternative choice of “grants” towards investment is subject to a maximum refurbishment cost of €75,000.
6. Critical lessons for the UK
6.1 The most consistent questions that arise in all the Anglo-German discussions I have been involved in are “Why does there seem to be one set of EU rules for the Germans and another for Britain?”, or “Why is something that we are told would be a breach of State Aid rules in the UK, not count as one in Germany?”.
6.2 The most consistent answer is that (with the exception of attempts to get new nuclear counted as “Green” energy) British Ministers and officials usually go to the European Commission looking for a “No”. A progressive and imaginative approach to financing the Green economy falls exactly into this category.
“The trouble with the British is that you can’t take “Yes” for an answer”.
6.3 From the insanely complex (and costly) structure of Green Deal, to the reliance on energy companies to deliver (over-priced) ECO refurbishment, to the retreat from national energy efficiency standards and the fixed-budget (and ever changing) constraints on renewable energy generation, UK policies on Green Finance seem designed to marginalise its role and to prop up the powers of the UK’s existing energy cartel.
6.4 The UK government has placed itself, and the GIB, in a secondary role in the energy transformation process.
Treasury interests in non-renewable energy usually trump DECC interests in renewables.
Programmes to radically reduce energy consumption get displaced in favour of lower regulatory requirements.
A race to the bottom has replaced the race to the top.
6.5 In Denmark, the Netherlands, Scandinavia, France, Italy and Spain, as well as Germany, there are abundant examples of clearer, simpler frameworks that deliver Green Finance, on a transformational scale, against more ambitious national “renewable energy” targets.
6.6 The EU Is neither the source of confusion in the UK’s approach to “Green Finance”, nor the straight jacket that the UK is currently tied into. This appears to be Britain’s unique contribution to Europe’s energy transformation debate. It need not be so.
6.7 A wider financial and policy remit given to the Green Investment Bank, a more authoritative lead from government (in setting higher standards of energy performance, in direct procurement of additional inter-connectors, and in driving “community ownership” models of Green investment) and a simpler, unified system of access to low-cost finance are all needed to deliver a coherent framework of Green Finance in the UK.
10 December 2013