Green finance: mobilising investment in clean energy and sustainable development Contents

1The Investment Challenge

1.We launched our green finance inquiry in November 2017 to examine how the UK could mobilise the investment necessary to meet the challenge of climate change, encourage greater consideration of environmental risks in financial decision-making, and become a world leader in green finance. Green finance policies could bring the following benefits:

2.We held a roundtable event and conducted five days of hearings with investors, asset owners, experts, financial regulators and Government ministers. We would like to thank all of those who contributed to the inquiry, especially our Specialist Adviser, Mike Clark.2

The investment challenge

3.The UK will need to mobilise large volumes of capital investment in clean energy and sustainable infrastructure if we are to meet our obligations under the 2015 UN Sustainable Development Goals and 2015 Paris Climate Change Agreement. The Oxford Sustainable Finance Programme described the challenge as ‘the most capital-intensive transition in human history’ and said that in this process ‘the availability of low cost capital, particularly for low carbon infrastructure and technology, is key.’3

4.Ensuring infrastructure remains resilient to projected increases in the intensity and frequency of extreme weather events will also require many billions of pounds of investment in the UK and around the world in the decades ahead. Christian Aid argued that there was a ‘pressing need for adaptation finance’ as well as investment in climate change mitigation. It cites UN Environment Programme figures suggesting the cost of adaptation could range from $140 billion to $300 billion globally by 2030.4

5.Furthermore, the market is failing adequately to price and protect natural capital, even where it could have material benefits; for example, in reducing the risk of flooding.5 Healthy habitats and the biodiversity they foster are public goods, so do not automatically generate revenue streams or provide obvious investment opportunities.6 We discuss this issue in Chapter 3 and will examine it in more detail in our 25 Year Environment Plan inquiry.

6.While mobilising ‘green finance’ for clean technology and climate-resilient infrastructure is of pressing importance, greening the finance system as a whole must be the ultimate goal if we are to move to a truly sustainable economic system. We will publish a second report shortly focusing on wider systemic changes to ensure that environmental risks, like climate change, are factored into financial decisions across the wider economy. In this report we will concentrate on the specific interventions that Government can use to affect the cost and availability of capital to direct investment with its climate change and sustainability goals.

Meeting the UK’s carbon budgets

7.The Climate Change Act 2008 set the UK’s target to reduce emissions of greenhouse gases by at least 80% from 1990 to 2050 and the framework of five-year carbon budgets provides the trajectory to get there. Each budget places a restriction on the total amount of greenhouse gases the UK can emit over a five-year period.7 The UK has so far set five carbon budgets up to 2032, limiting the UK’s greenhouse gas emissions in each period to:

The Committee on Climate Change (CCC) has estimated that meeting our carbon budgets up to 2032 could require investment of up to 1% of GDP per year9—approximately £22 billion. In a speech at the recent Commonwealth Summit, the Minister for Energy and Clean Growth, Rt Hon Claire Perry MP, announced that she will ask the Committee on Climate Change to formally advise the government on how the UK’s greenhouse gas targets should be strengthened in the light of the 2015 Paris Agreement aspiration to limit the global average temperature rise to 1.5 degrees.10 This would involve tightening our existing carbon budgets further.

8.The UK has made good progress in reducing its greenhouse gas emissions since the Climate Change Act was passed in 2008. By 2016 emissions were down 42% on 1990 levels with the UK reducing the carbon intensity of the economy at a faster average rate than other G7 countries.11 The first and second carbon budgets have been met, and we have already reduced emissions well below the level expected in the third carbon budget.12 It is worth noting, however, that the 2008–09 financial crisis helped the UK meet these carbon budgets as it reduced economic output. As a result, emissions were lower than had been expected when the budgets were set.13

Policies to decarbonise electricity

9.The policies of successive Governments have begun shifting the energy mix from higher to lower carbon sources of power, which the Committee on Climate Change has set out as the crucial first step in decarbonising the economy cost effectively. Policies such as the Renewables Obligation, Feed in Tariffs and Contracts for Difference have driven investment in new renewable energy capacity while the Carbon Price Floor has made the use of coal in power generation more expensive. As a result, coal-fired electricity generation declined by 84% between 2012 and 2017.14 A record 50.4% of the UK’s electricity came from low-carbon sources last year, around double the level achieved in 2010.15 In April 2017, the National Grid reported that the UK had recorded its first full 24 hour period without burning coal for electricity since the first steam-driven public power stations were fired up in the 1880s.16

The Renewables Obligation (RO) was established in 2002, this policy required energy suppliers to present Renewables Obligation Certificates (ROCs) for each megawatt hour (MWh) of electricity they supply to customers, or make up any shortfall through buy-out payments. Renewable electricity generators received ROCs in proportion to the electricity they generated and were able to sell these on to suppliers to offset the costs of building and operating renewable plant, encouraging more investment in renewable generation. The scheme closed to new onshore wind projects in April 2016, and to all new participants on 31 March 2017.

Feed-in Tariffs (FiTs) were introduced in 2010 to incentivise the uptake of small-scale renewable and low-carbon electricity generation technologies. FiTs requires electricity suppliers to pay people with small-scale renewable generation equipment, such as solar PV panels, a fixed price per MWh for the electricity they generate, and an additional premium for any electricity they do not use and export to the Grid.

The Carbon Price Floor (CPF) was introduced in April 2013 to create a carbon price high enough to stimulate low carbon investment in the power sector, which the EU Emissions Trading System (EU ETS) had not achieved. The price floor consists of two components: (i) The EU ETS allowance price; and (ii) Carbon Price Support (CPS), which is a tax on carbon emissions paid by electricity generators.17

Contracts for Difference (CfD) were introduced through the Energy Act 2013 to replace the Renewables Obligation. CfDs operate through a system of auctions which guarantee generators a fixed ‘strike price’ for low-carbon electricity generated over a contracted period. When the wholesale price of electricity is lower than the strike price, the Government pays the difference to the generator. If the wholesale price is higher than the strike price, the generator pays the difference to the Government. This reduces the risk for investors and guarantees returns.18 The costs of the CfD subsidies are funded by a statutory levy on all UK-based licensed electricity suppliers and are passed on to consumers via their bills.19

10.The Government highlighted the UK’s successes in securing investment and driving down cost in its submission:

Private investment in renewable energy in the UK continues to be the highest in Europe. Since the referendum the UK has re-entered the top 10 countries in EY’s Renewable Energy Country Attractiveness Index (May 2017). The UK was the 3rd highest global investor in renewable energy in 2016, behind only China and the United States, whilst 2016 saw a record investment of nearly £11 billion in offshore wind. Most recently, the second Contracts for Difference round secured 3.3 gigawatts of new generating capacity, enough to power 3.6 million homes. The Government has offered 11 generators contracts, and the capacity this has delivered costs consumers £528 million per year less than it would have in the absence of competition. This competitive approach is continuing to drive cost reductions in the renewable energy industry.20

11.The cost of generating electricity from renewables has fallen rapidly in recent years. For example, offshore wind reached record low prices of £57.50 per megawatt hour in the second round of CfD auctions in September 2017 (for delivery in 2022/23). This is less than half the cost of the average strike prices of £117.14/MWh awarded for offshore wind in the first CfD auctions in 2015.21 Other mature renewable energy technologies, such as onshore wind and solar, may soon not require any form of subsidy.22 Indeed, solar investor NextEnergy Capital told us in its submission that it is has ‘accelerated its timeline for developing subsidy-free solar in the UK, committing to completing four such projects during 2018.’23

Reduction in clean energy investment

12.Despite the progress that has been made, there are worrying signs that investment may have stalled in the last two years, threatening our ability to meet our fourth and fifth carbon budgets between 2023 and 2032. Analysis of the UK’s Infrastructure Pipeline published by the Green Alliance in December 2016 warned that renewables spending had fallen by £1.1 billion in six months and that that this was ‘not due to falling renewables costs; it is due to a shrinking pipeline of projects.’24 According to its analysis of the infrastructure pipeline there will be a 95 per cent reduction in investment between 2017 and 2020.

13.On 16 January 2018, Bloomberg New Energy Finance released figures showing that, in cash terms, clean energy investment in the UK had fallen by 56% in 2017—following a 10% fall in 2016 (see graph below).25 Annual clean energy investment in the UK is now the lowest it has been since 2008.

14.Witnesses to the inquiry provided several explanations for the fall in clean energy investment:

We will consider these explanations in turn.

Policy changes

15.In the last Parliament, both the Energy and Climate Change Committee and our predecessor Environmental Audit Committee warned that a series of sudden changes to low-carbon energy policies in 2015 had undermined investor confidence. During the summer and autumn of 2015 the then Government:

16.In its 2016 report on Sustainability and HM Treasury our predecessor committee was critical of the Treasury’s role in these decisions, stating that:

… the Treasury had ridden roughshod over other department’s objectives, changing and cancelling long-established environmental policies and projects at short notice with little or no consultation with relevant businesses and industries. These decisions caused ‘shock’ and ‘uproar’ among sectors affected, with some businesses describing them as ‘devastating’. All these changes taken together, have had a damaging effect on investor confidence.27

17.In its report, the Energy and Climate Change Committee noted:

… there is no shortage of money available for projects that have advanced to the late construction or operation phase. Institutional investors in particular favour these kinds of investments. However, the problem occurs earlier in the project pipeline where there is some anecdotal evidence of a pause in investment in the supply chain and development of new projects. If investment in these activities has indeed dried up, it may not become apparent until the end of the decade.28

18.We asked Angus McCrone from Bloomberg New Energy Finance about the reasons for the fall in investment. In his view, policy changes were a significant factor:

Angus McCrone: There has been a big fall between 2016 and 2017 and a somewhat smaller one previously between 2015 and 2016, so some of this is the lumpiness of when big offshore wind projects get financed in one year and not in another. I think the changes in policy have had a big impact. […]it has certainly been the case that the sudden drop off in the support for onshore wind and solar did have a big impact on confidence and the number of projects going ahead in those sectors in 2016 onwards.29

19.The former Chair of the Committee on Climate Change, Lord Turner of Ecchinswell, suggested that the fall in investment could be a temporary dip brought about by the change in policies from the Renewables Obligation to Contracts for Difference:

… through the renewables obligation certificate regime, which was essentially simply an add-on to whatever the variable price was, we unleashed a big flow of investment in the early twenty-teens. There was then a concern that the total cost of that was ending up higher than the Government had originally anticipated, partly because more investment came forward, stimulated by that ROC regime.

We therefore changed the regime—and I think it was a good regime—to contracts for difference, but we then also limited the amount of money through the control cap. That then produced a period of a year or so in which there was a falling level of investment. In 2015 and 2016, we had investment coming through stimulated by the previous regime. It had made the contracts and was then spending the money.

We have had what I hope is a temporary dip. The danger of that, of course, is that you are not developing your supply chain; you’re not developing the scale that gets the costs down. But the good news from the contracts last year for offshore wind was that the costs are still coming down.30

Cost of renewables

20.The Head of the Green Investment Group (GIG), Edward Northam, suggested that the completion of large offshore wind developments in particular years could be distorting the annual investment figures. He explained:

We have seen an enormous uptake in delivering new green infrastructure but the reality is that the projects and the numbers that contribute to that statistic are still relatively modest and they are, therefore, distorted by the movement of one or two large offshore windfarms, for example. If you look at the 2016 numbers where in the UK we committed to what I think is the world’s largest renewable energy project—the Hornsea offshore windfarm—that is going to distort the figures and then next year we do not contribute to a Hornsea-like project and you are potentially going to see a fall in those numbers. That is the other sort of contributing factor.31

The Minister for Energy and Clean Growth, Rt Hon Claire Perry MP, echoed the point, saying that big ‘capital-intensive’ offshore wind projects had created a ‘lumpy’ investment profile.32

21.The Head of the GIG added that the fall in the cost of renewable technologies could be a contributing factor and may mean that the UK is delivering similar levels of installed capacity for less:

Edward Northam: The last significant contributing factor to all of these things is that we have significant cost reduction in the underlying technologies, so it is not as simple as saying we are seeing a reduction in investment, therefore a reduction in capacity. In actual fact, we are getting more pound for pound or dollar for dollar out of our investment because we have seen a 50% reduction in installation costs in some of these technologies.33

22.Figures published in March by the Department for Business Energy and Industrial Strategy (BEIS),34 show that, after year-on-year increases in installed renewable energy capacity since 2011, there was less capacity installed in 2016 and 2017 than in the previous two years respectively (see graph below).35 The Department’s figures also show that the annual percentage rate of increase in installed capacity has slowed to 13% in 2017—the slowest it has been since the late 2000s (see the second graph below).36

23.The fact that these figures do not reflect the dramatic fall in cash investment in 2017 reported by Bloomberg New Energy Finance, at first appears to give some weight to the arguments that we may now be delivering more installed capacity with less cash investment. However, the full effects of the current fall in investment on the amount of renewable energy being installed and becoming operational may not be seen for several years. Some renewable energy projects have lengthy lead times, taking as long as 8–12 years to develop and complete. For instance, the world’s biggest offshore wind farm currently in construction in the North Sea—the 1,200 MW Hornsea Project One—boosted the UK’s investment figures in early 2016 when developer DONG took its final investment decision, but will not produce electricity until 2019 at the earliest.37 The project has already been in development for ten years38 and its Contract for Difference was awarded in 2014 guaranteeing a fifteen-year fixed-price of £140/MWh for its power.39 Likewise, Contracts for Difference awarded in the last round of auctions in 2017 will not result in electricity being delivered until 2022/23. This means that the full effects of 2017’s fall in investment may not be seen in capacity additions figures until the early 2020s.

Disruption of the GIB sale and fall in EIB funding

24.The protracted privatisation process for the Green Investment Bank (now Green Investment Group) may have also played a role in the fall in investment. The Green Investment Group (GIG) provided us with the table below showing the number of annual investments since it was established in 2012.40 The Green Purposes Company—trustees of the GIG—said that disruption because of the 18 month sale may have been responsible for the fall in the number of investments it made in 2017.41

Green Investment Bank transactions





























25.It has also been reported that new lending to the UK by the European Investment Bank (EIB) has fallen since 2016 ‘as uncertainties over Brexit made applicants wary and the bank imposed extra precautions.’42 According to the FT, the EIB’s new contracts with the UK totalled £1.89bn last year, down from £5.54bn in 2016. It has also been reported that the EIB has suspended new loans to public projects in the UK.43

26.The UK has made impressive progress in reducing the carbon intensity of the UK power sector and driving investment in clean energy. But our predecessor committee warned in 2016 that sudden changes to policy had undermined investor confidence and could have an impact on the pipeline of projects in development. Recent figures for cash investment confirm that there has been a dramatic and worrying collapse in clean energy investment since 2015. Sudden policy changes have clearly played a significant part. We hope that this proves to be a temporary dip, but the fall in clean energy investment in 2017 is concerning because of the potential implications for our longer-term carbon reduction plans: we are only five years away from the start of the fourth carbon budget period (2023) and ten years away from the fifth (2028 to 2032).

27.To meet these targets, low-carbon energy projects need to be in development now, given the long lead-in times involved. The rapidly falling cost of generating electricity from renewables, like wind and solar, should mean that the UK is able to deliver greater clean energy capacity at lower prices. However, policy changes have dented investor confidence and curtailed the support available to new low carbon projects. The Government needs to restore confidence and provide a stable policy environment to deliver a pipeline of projects.

1 Oxford Sustainable Finance Programme (GFI0034)

2 Michael John Clark: Declaration of Interests: Ario Advisory, Founder Director and Owner; Brunel Pension Partnership Ltd (“Brunel”), Non-Executive Director; Institute and Faculty of Actuaries, Fellow; Rype Office Limited, Shareholder, Provider of sustainable office furniture; WHEB Asset Management, Member of independent Investment Advisory Committee

3 Oxford Sustainable Finance Programme (GFI0034)

4 Christian Aid (GFI0015)

5 Confor (GFI0032), Green Purposes Company (GFI0006), RSPB (GFI0017)

6 RSPB (GFI0017)

7 The Committee on Climate Change, An Independent Assessment of the UK’s Clean Growth Strategy (January 2018)

8 The Committee on Climate Change, An Independent Assessment of the UK’s Clean Growth Strategy (January 2018)

9 The Committee on Climate Change, The Fifth Carbon Budget (November 2015)

12 The Committee on Climate Change, An Independent Assessment of the UK’s Clean Growth Strategy (January 2018)

13 The Committee on Climate Change, An Independent Assessment of the UK’s Clean Growth Strategy (January 2018)

15 Department for Business Energy and Industrial Strategy, Energy Trends (March 2018)

17 House of Commons Library briefing, Carbon Price Floor and the price support mechanism (January 2018)

18 House of Commons Library briefing, Control for low carbon levies (December 2017)

19 House of Commons Library briefing, Control for low carbon levies (December 2017)

20 HM Treasury and the Department for Business Energy and Industrial Strategy, (GFI0027)

22 House of Commons Library briefing, Control for low carbon levies (December 2017)

23 NextEnergy Capital (GFI0031)

24 Green Alliance, the UK’s Infrastructure Pipeline (December 2016)

26 House of Commons Library, Briefing Paper: Energy Policy Overview (June 2016)

27 Environmental Audit Committee, Sustainability and HM Treasury (November 2016)

28 Energy and Climate Change Committee, Investor Confidence in the UK Energy Sector (March 2016)

29 Q64

30 Q286

31 Q131

32 Q386

33 Q132

34 Department for Business Energy and Industrial Strategy, Energy Trends (March 2018)

35, National Statistics Energy Trends: renewables (updated March 2018)

36 Department for Business Energy and Industrial Strategy, Energy Trends (March 2018)

40 Letter from GIG to the Committee, 8 February 2018

41 Q112

Published: 16 May 2018