Summary
To make the swift transition to a sustainable, low-carbon economy, billions of pounds of infrastructure investment is needed in clean energy, transport, homes and industry. This will require public and private finance, but given the scale of the challenge, harnessing private sector capital will be crucial.
The UK has made significant progress in redirecting investment towards cleaner sources of power since the Climate Change Act was passed in 2008. We have switched from coal to gas, offshore wind and solar installations have multiplied and the cost of renewable energy is falling rapidly. The proportion of our electricity generated from low-carbon sources has doubled between 2009 and 2017, to reach a record 50% last year. This has helped to put the UK on track to meet our carbon budgets up to 2022.
Despite this progress, there are worrying signs that investment may have stalled in the last two years, threatening our ability to meet our fourth (2023–2027) and fifth (2028–2032) carbon budgets between 2023–2032. Recent figures show that clean energy investment has fallen dramatically since 2015. In cash terms it fell by 10% in 2016 and by a further 56% in 2017. Annual clean energy investment in the UK is now the lowest it has been since 2008 and the rate at which we are installing new renewable capacity is slowing.
The falling cost of generating electricity from wind and solar power means that we can now secure clean energy capacity at lower prices, which to some extent may have cushioned the impact of cash reductions. However, it also looks likely that a series of sudden changes to low-carbon energy policy in 2015 undermined investor confidence and led to a reduction in the number of projects in development. Disruption from the privatisation of the Green Investment Bank and a reduction in European Investment Bank lending following the vote to leave the EU may have also played a part in the investment dip that we are seeing.
We are encouraged by the cross-Departmental ambition of the Government’s Clean Growth Strategy. However, it will still lead to a shortfall in meeting our upcoming carbon budgets, even if all its policies are delivered in full. Ministers must urgently plug this policy gap and publish a delivery plan to secure the investment needed to meet the fourth and fifth carbon budgets. Given that these are now only a few years away, it is imperative that the Government responds to the Green Finance Taskforce recommendations promptly and provides greater clarity on how it intends to deliver the Clean Growth Strategy by the 2018 Budget. The use of fixed-price contracts will be key to ensuring a pipeline of low-carbon energy projects over the coming years and a steadily rising carbon price will be necessary to achieve our carbon budgets in the 2020s and 2030s. Given the disruption and uncertainty of the last three years, the Treasury must ensure its attempts to keep costs down do not exacerbate the recent fall in clean energy investment.
We do not accept the Government’s assertion that the market failures the Green Investment Bank was set up to address have been resolved. While significant progress has been made in decarbonising power, considerable policy and investment challenges remain in decarbonising transport, domestic heating and industry. What is more, the market is failing adequately to price and protect natural capital and is not stemming biodiversity and habitat loss.
We are pleased to have secured protections for the Green Investment Bank’s green purposes with the Special Share we recommended in 2015. Nevertheless, we are concerned that the Green Investment Group’s new international focus may mean less direct investment in the UK. It is too early to say whether the sale of the Bank has left an investment gap in the UK, however, only one of the GIG’s first four investments has been located here so far. The UK Government should negotiate to maintain our relationship with the European Investment Bank, which would allow riskier early-stage green infrastructure projects in the UK continued access to development bank finance.
The UK is lagging behind many of our international competitors in issuing green bonds and we heard calls for financial incentives to encourage greater issuance. Once robust standards are in place, there may be a case for incentives to encourage UK companies and financial institutions to issue green bonds. Ministers must outline a timetable for the introduction of authoritative standards on green financial products that give investors confidence they provide additional green benefits.
The Green Finance Taskforce’s proposal of issuing a Sovereign Green Bond presents a good opportunity for the Government to set a benchmark of good practice for domestic green bonds and could be a useful mechanism to raise the capital necessary to deliver our carbon budgets and achieve other environmental objectives. As it prepares its delivery plan to secure the investment needed to meet the fourth and fifth carbon budgets, the Government should explore how a Sovereign Green Bond could be directly tied to achieving its Clean Growth Strategy.
Published: 16 May 2018