The Green Investment Bank

House of Commons Environmental Audit Committee

Second Report of Session 2010–11

Volume II Additional written evidence

Ordered by the House of Commons to be published 20 and 27 October, 3, 10 and 24 November, 1 December 2010, 12 January and 2 February 2011

Published on 11 March 2011 by authority of the House of Commons London: The Stationery Office Limited

Environmental Audit Committee

The Environmental Audit Committee is appointed by the House of Commons to consider to what extent the policies and programmes of government departments and non-departmental public bodies contribute to environmental protection and sustainable development; to audit their performance against such targets as may be set for them by Her Majesty’s Ministers; and to report thereon to the House.

Current membership Joan Walley MP (Labour, Stoke-on-Trent North) (Chair) Peter Aldous MP (Conservative, Waveney) Richard Benyon MP (Conservative, Newbury) [ex-officio] Neil Carmichael MP (Conservative, Stroud) Martin Caton MP (Labour, Gower) Katy Clark MP (Labour, North Ayrshire and Arran) Zac Goldsmith MP (Conservative, Richmond Park) Simon Kirby MP (Conservative, Brighton Kemptown) Mark Lazarowicz MP (Labour/Co-operative, Edinburgh North and Leith) Caroline Lucas MP (Green, Brighton Pavilion) Ian Murray MP (Labour, Edinburgh South) Sheryll Murray MP (Conservative, South East Cornwall) Caroline Nokes MP (Conservative, Romsey and Southampton North) Mr Mark Spencer MP (Conservative, Sherwood) Dr Alan Whitehead MP (Labour, Southampton Test) Simon Wright MP (Liberal Democrat, Norwich South)

Powers The constitution and powers are set out in House of Commons Standing Orders, principally in SO No 152A. These are available on the internet via www.parliament.uk.

Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/eacom. A list of Reports of the Committee in the present Parliament is at the back of this volume.

The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume.

Additional written evidence may be published on the internet only.

Committee staff The current staff of the Committee are Simon Fiander (Clerk), Edward White (Second Clerk), Lee Nicholson (Committee Specialist), Andrew Wallace (Senior Committee Assistant), Susan Ramsay (Committee Assistant), Emily Harrisson (Sandwich Student) and Nicholas Davies (Media Officer).

Contacts All correspondence should be addressed to the Clerk of the Environmental Audit Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6150; the Committee’s email address is [email protected]

List of additional written evidence

(published in Volume II on the Committee’s website www.parliament.uk/eacom)

Page 1 Waterwise Ev w1 2 Stockton-on-Tees Borough Council Ev w3 3 Marchday Group Plc Ev w5 4 Creativity Partnership Ev w7 5 Unite the union Ev w8 6 WWF-UK Ev w11 7 Places for People Ev w12 8 One NorthEast Ev w16 9 Regen SW Ev w19 10 Society of Motor Manufacturers and Traders Ev w21 11 Local Government Association Ev w24 12 TUC Ev w26 13 Energy Services and Technology Association Ev w29 14 Association of Greater Manchester Authorities and the Business Leadership Council Ev w31 15 Centre for Process Innovation Ev w34 16 Scottish and Southern Energy Ev w35 17 Energy Saving Trust Ev w38 18 The Carlyle Group Ev w44 19 British Ceramic Confederation Ev w47 20 World Development Movement Ev w49 21 Sustainable Development Commission Ev w53 22 Association for the Conservation of Energy Ev w56 23 Kirsty Hamilton Ev w58 24 City of London Corporation Ev w61 25 UK Business Council for Sustainable Energy Ev w62 26 Centrica Ev w64 27 EON Ev w66 28 Brazilian Development Bank (BNDES) Ev w67 29 Salix Finance Ev w69 30 Royal Institution of Chartered Surveyors Ev w73 31 BT Pension Scheme Management Ltd Ev w75 32 Peter Jones OBE Ev w77

cobber Pack: U PL: CWE1 [SO] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w1

Written evidence

Written evidence submitted by Waterwise Summary — Water efficiency has an important role to play in tackling and adapting to climate change, and developing the low-carbon and green economy, but is routinely sidelined from programmes and policies in both these areas. — The Green Investment Bank provides a key opportunity to include water efficiency measures in new green financial products through the Green investment Bank, as well as to help stimulate innovative projects and programmes to mainstream water efficiency in homes, buildings and workplaces across the UK, both within the water sector and more widely.

Bulk of Evidence Overview of the importance of water efficiency to the UK economy and society 1. Water efficiency—wasting less water—is an essential part both of adapting to climate change and building resilience into our systems, and tackling climate change. Water efficiency is an economic, social and environmental opportunity—it has an important role to play in the green economy, the big society and safeguarding the environment. It can also help reduce the deficit.

Adapting and building resilience 2. Water efficiency is vital in adapting to the climate change we are already seeing and cannot avoid, despite action now—underpinning the statutory National Adaptation Programme for England. Both hot and cold water efficiency measures are important even once the electricity grid is fully decarbonised, because there can be no such thing as a zero water house, and because gas, on which there is a huge reliance for water heating, cannot be fully decarbonised. 3. In the last few years the UK has seen widespread drought and devastating floods, and both of these have led to water supply challenges in homes. The UK Climate Impact Projections published in 2009 show greater unpredictability in rainfall and longer, drier summers in coming decades. Some areas of England are already classified by the Environment Agency as seriously water-stressed. Even Scotland and Wales have experienced pockets of drought or water stress in recent years. And it is known that in coming decades there will be more people and less water in the UK, so less water will need to go further. There is already an increase in single- person households, which use more water per person, and water companies are predicting increases in outdoor watering and personal washing. Population growth will be larger in already water-stressed areas like South East England. 4. So homes, buildings and people will need to be water-efficient: and not just new homes, but existing homes, because two thirds of the UK’s 2050 homes have already been built. Water efficiency should play a central role in any organisation’s climate change adaptation strategy—alongside flood risk management— because every section of the economy is dependent on water. Drought risk management for homes and communities is essential alongside flood risk management. These measures will build resilience to climate change impacts.

Tackling climate change 5. Wasting less water in homes and businesses can help meet the UK’s legally binding goals of a reduction in greenhouse gas emissions of 34% by 2020 and 80% by 2050. Heating water in homes for cooking, personal washing and cleaning produces 5% of the UK’s greenhouse gas emissions and a quarter of CO2 emissions from homes—it is the second biggest use of energy in homes, after space heating, and before gadgets and appliances. So wasting less hot water in homes—through more efficient fixtures and fittings and more efficient use of hot water from taps and showers by people—can immediately impact on carbon targets. Wasting less hot and cold water will reduce the carbon footprint of the water industry, which would as a result need to pump and treat less water and wastewater (in turn making the sector more resilient to climate change). The water industry produces 1% of total UK greenhouse gas emissions, with Scottish Water Scotland’s largest user of electricity. Wasting less hot and cold water will tie in with the Coalition Government’s commitment to use a wide range of levers to cut carbon emissions, decarbonise the economy and support the creation of new green jobs and technologies.

Opportunity 6. Water efﬁciency is an opportunity—economic, environmental and social. 7. Most UK businesses, schools, hospitals and other public sector buildings are metered for water. This means that if they waste less water— through “domestic” processes such as taps, toilets, urinals and showers, and dishwashers and washing machines, as well as in industrial processes such as cleaning and cooling, they will see immediate reductions in their water bills. For example, many workplaces still have urinals which ﬂush cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w2 Environmental Audit Committee: Evidence

constantly, but there are now UK-manufactured products which ﬂush only when a sensor is triggered, or less frequently, or not at all. Wasting less hot water in workplaces would also cut energy bills.

8. In its most recent annual report on government progress in meeting its SOGE (Sustainable Operations on the Government Estate) targets (between 2006 and 2009), the soon-to-be-abolished Sustainable Development Commission calculates that government saved £25.5 million in water bills through water efficiency measures between 2006 and 2009, including £13 million in 2008–09. It also suggests that a £3 million SALIX (spend- to-save) fund for the public sector would yield 20% water savings and payback within one year, and that a further 10% reduction in water use would yield a further annual £5 million in savings. As the SDC points out, many savings would be enjoyed year-on-year and so the earlier they can be achieved, the earlier savings can start to be made. The document also shows that MOD is by far the biggest water user in government— accounting for 67% of consumption—where financial savings from water efficiency could free up large amounts for frontline spending.

9. The UK produces a wide range of water-efﬁcient equipment for domestic and non-domestic use—these products are innovative and increasingly “aspirational”. Targeted investment and support as part of the green economy, linked with public sector procurement standards, could develop this manufacturing sector through a mass market approach. This could mirror the development of mobile phones which began as an expensive “niche” product but are now cheaper and mainstream. Product standards for homes and businesses, and partnerships with retailers, manufacturers and the third sector would make products which waste less water cheaper for consumers.

10. Including water in energy retrofitting programmes would increase the number of green service jobs. The Coalition Government’s Green Deal will retrofit homes for energy efficiency at an upfront cost of thousands of pounds—a water retrofit of taps, toilets and showers could be included for an additional £40, and for homes metered for both water and energy would payback within one year. Households will save money through wasting less water. Waterwise research shows that the average UK household could save up to £100 a year on their energy bills from wasting less hot water in baths, showers and taps—£76 a year just by replacing a daily bath with a three-minute shower. This would help deliver the Coalition Government’s commitment to increase households’ control over their energy costs. A third of homes in England and a quarter in Wales are already metered for water, and half will be by 2015—through wasting less water those homes will also see an immediate reduction in their water bills.

Opportunity missed

11. To date, programmes and policies undertaken by both the Coalition Government and the previous administration to tackle climate change, adapt to it, and develop the low-carbon and green economies are energy-heavy and do not reﬂect or include the important role of water efﬁciency.

12. UK plans to deliver the low carbon and green economy need to include water. Water efficiency can help make the UK more attractive to investment, reduce carbon emissions and increase green jobs. Water efficiency did not feature in the previous government’s strategy for a low carbon economy, nor is it reflected within the framework of carbon budgeting, and this omission shows signs to date of being repeated by the Coalition Government.

13. Including water efficiency will further stimulate growth and employment. Developing the UK manufacturing base for water-efficient products should be an essential part of the Coalition Government’s sustainable growth and enterprise strategy. There is a strong manufacturing base in the UK for these products, but as they are not included in targeted green growth plans there are already cases of new products going out of the UK to seek investment. Including water efficiency in energy retrofitting programmes will increase the number of green service jobs. This could lead to developing new infrastructures, social innovation, and building on regional and national examples of good practice to deliver water efficiency at the UK level.

14. Within regional sustainability clusters—covering water, energy and waste—businesses, higher education institutions and research organisations across the public or private sector could work together to implement innovative economic development projects. With government support, these could make regional and local economies more competitive, creating jobs and attracting investment.

15. A Green Investment Bank which the Coalition Government intends to “create green financial products to provide individuals with opportunities to invest in the infrastructure needed to support the new green economy” is an important opportunity to mainstream water efficiency in the low carbon and green economy, through linking the green financial products with water efficiency measures in homes and buildings, and stimulating innovation. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w3

Proposal to include water efﬁciency in the remit of a Green Investment Bank

16. Waterwise would therefore like to see the Green Investment Bank include water efficiency measures in the new green financial products it develops from homes and businesses, and for innovation in water efficiency to be named as a recognised, supported activity under other GIB programmes and measures. 8 October 2010

Written evidence submitted by Stockton-on-Tees Borough Council

1.0 Executive Summary

1.1 Stockton-on-Tees Borough Council supports the principle of the Green Investment Bank to enable the adoption of sustainable energy measures. The comments in response to the Environmental Audit Committee request cover the ﬁrst three areas of interest raised by the Committee.

1.2 Regarding barriers the recently released Ofgem data on the uptake of Feed in Tariffs has shown the North East region including the Borough of Stockton-on-Tees significantly trailing the rest of the UK, both in terms of number of installations and installed capacity. This repeats the experience under Low Carbon Buildings Programme and Clear Skies. Financial support in an area of below average household income may therefore go some way to increasing the uptake. In addition the many solid wall and other hard to treat properties requiring much more costly external or internal cladding to improve thermal efficiency may be dealt with under GIB finance.

1.3 It is important that the Green Investment Bank is established without undue delay and with clear operating rules to overcome the current hiatus and uncertainty regarding funded support in this area.

1.4 The objectives of the Green Investment Bank should be to: — Enable reduction in energy demand by providing finance to energy efficiency measures that cannot be financed from any other source. — Enable the development of a low carbon economy by providing finance for the capital cost of sustainable energy installations.

1.5 This should apply to all sectors of the economy other than well resourced, large scale multi-national companies. Lending decisions may need to be supported by securing the loan by a charge on the property concerned. Investment by the GIB should be into the green business sector with investment priorities directed at the UK market.

2.0 Introduction

2.1 Stockton-on-Tees Borough Council is a unitary local authority in the North East of England. The Council is operating a Carbon Management programme with the objective of reducing carbon emissions from Council activities by 25% by 2013, a ﬁve year programme currently just meeting this target. Stockton-on-Tees Borough Council is also a signatory to the EU Covenant of Mayors, one of the twelve local authorities in the North East of England Region who have all signed into the commitment to reduce borough wide carbon savings in excess of 20% over the ten year period to 2020.

2.2 The Borough includes a number of large process industries with associated high levels of carbon emissions and the Council plays a lead role in seeking ways of reducing these. In 2009 the Council adopted a Renewable Energy Strategy and is now identifying routes to achieving a major shift away from grid electricity and natural gas as the only means of meeting Government targets for 2020 and 2050. Local businesses and industry are not ignored in this with the Council’s active participation in the Tees Valley Climate Change Partnership providing links with other sectors.

2.3 The ﬁnancing of the move to low carbon energy supply and increased energy efﬁciency is of concern, for the households within the Borough, the Council itself and the broader private sector. A varied armoury of support is therefore essential and the Green Investment Bank will have a clear role to play in this. Stockton- on-Tees Borough Council therefore needs to see this welcome initiative operating effectively and quickly, particularly given the low uptake of the Feed in Tariff opportunity in the region.

2.4 It is in this context and from experience in carbon management and effective carbon reduction that Stockton-on-Tees Borough Council makes this submission to the Environmental Audit Committee. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w4 Environmental Audit Committee: Evidence

3.0 Factual Submission 3.1 Ofgem data on regional installations of Feed in Tariff registered renewable energy installations: PopulationInstallations MW/ Installed Micro (2001) per millions Region Installations MW Hydro CHP PV Wind millions capita Capita

South West 2,319 6.583 25 2,195 99 4.9 473.27 1.34 South East 2,615 5.955 3 2 2,587 23 8.0 326.88 0.74 Yorkshire and 1,361 4.599 5 1,254 102 4.9 277.76 0.94 Humberside East of England 1,418 4.075 4 1,363 51 5.4 262.59 0.75 East Midlands 1,010 3.067 2 1 962 45 4.2 240.48 0.73 West Midlands 672 2.069 2 1 644 25 5.3 126.79 0.39 North West 551 1.657 7 1 489 54 6.7 82.24 0.25 London 562 1.245 561 1 7.2 78.06 0.17 North East 218 0.635 3 194 21 2.5 87.20 0.25 Total 10,726 29.885 51 5 10,249 421 49.1

3.2 The above data has been taken from the Ofgem supplied data, and conﬁrms a very low uptake of the Feed in Tariff opportunity in the North East region which includes Stockton-on-Tees and mirrors similar statistics from earlier programmes such as Low Carbon Buildings Programme and Clear Skies.

4.0 Council Response 4.1 Stockton-on-Tees Borough Council makes the following response to the Environmental Audit Committee from the perspective of actively pursuing the reduction in carbon emissions from Council activities and across the Borough, the latter to meet both government targets and the Covenant of Mayors requirement for a 20% reduction in CO2 emissions between 2010 and 2020. 4.2 Regarding 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, recent data issued by Ofgem on the impact of the Feed in Tariff scheme on installed capacity of renewable energy technologies, summarised above in section 3.0, has shown the North East of England to have achieved the lowest number of installations and of installed capacity. 4.3 Similar poor performance was evident under the Low Carbon Buildings Programme, Clear Skies and PV programmes. 4.4 It is possible that the lower income levels in the region are a factor and therefore availability of loans under appropriate terms are likely to increase the uptake of renewable energy technologies thus addressing this regional market failure. 4.5 The risk of not establishing the Green Investment Bank quickly is that the low uptake in the region continues thus slowing progress towards the carbon emissions reductions required. 4.6 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 are discussed below: 4.7 The objectives should be to: — Enable reduction in energy demand by providing finance to energy efficiency measures that cannot be financed from any other source. — Enable the development of a low carbon economy by providing finance for the capital cost of sustainable energy installations. 4.9 The Green Investment Bank should operate in the household, small business and public sectors including RSLs. 4.10 The Green Investment Bank should not provide support to large, multi-national organisations. 4.11 Lending decisions should include security of loan by a charge on the property concerned. 4.12 Investment decisions should support green businesses and provide a positive return. 4.13 The Green Investment Bank’s investment priorities, and whether and how the bank should support and foster areas where the UK has emerging green technology strengths; 4.14 Investment priorities should be towards UK green technology developments with an emphasis on local supply where practicable to minimise carbon emissions associated with supply and installation. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w5

5.0 Submission Contact Details 5.1 This submission has been made on behalf of Stockton-on-Tees Borough Council, Municipal Buildings, Church Road, Stockton-on Tees, TS18 1LD in consultation with relevant Heads of Service. 11 October 2010

Written evidence submitted by Marchday Group Plc — The Green Investment Bank should be located in the Tees Valley. — There are good transport links. — There are recycled buildings that would be suitable for the GIB to put its aims into practice from the outset. — The region is embracing the “green” revolution. — The region needs investment to match its facilities and skills. — The North East economy would be stimulated. — Unemployment would be reduced. 1. What is happening in the North East of the country is a green revolution. The region is at the forefront of the low carbon sector and leading the way on the energy efficiency process industry. The Tees Valley is fast becoming the nation’s capital for green energy. There is the prospect of the North East becoming a centre of excellence for the renewable energy industry, with world class facilities from Teesside to Blyth. However, this revolution is one that needs assistance. 2. The biggest hope for bringing Britain out of the recession; the burgeoning renewables industry, is not supported. Commercial funding markets are reluctant to invest, making it paramount that the government moves forward quickly with the Green Investment Bank (GIB). 3. Along with leading figures in business, politics and the media, I am urging the government to strongly consider locating the GIB in the North East, specifically in the Tees Valley. GIB experts should be located near to the industries that it will support; at the heartland of the renewable industry. That heartland is found here in the Tees Valley. 4. The reasons for establishing the GIB in the Tees Valley are manifold and compelling. The area has already begun to play a major, leading role in the efforts to reduce Britain’s carbon footprint and create a sustainable, low carbon economy. It is the ideal location for the manufacture and establishment of the new generation of energy industries. 5. The commitment to, and investment and activity in, the sector is evident throughout the region. The community is working to make Teesside and Tyneside hubs for wind farm development, with successful farms already operational inland, and off the coast of Blyth. Green power stations, due to be active by 2015, are to be constructed at Eston Grange. A £20 million manufacturing hub for wind turbines is taking shape at TAG Energy Solution’s Haverton Hill yard near Billingham. The EDF Teesside/Redcar Wind farm project is due to come on line in the next year. These projects, however, will not come to fruition without further support and investment. 6. Everything that is needed to capitalise on the renewables industry is available in the North East. All that is lacking is the investment. 7. Manufacturing skills are second to none. The Tees Valley has a renowned heritage of industry and manufacture; mining, shipbuilding, steelworks, oil and gas technology. The technology, skills and expertise needed in these industries, for building oil rigs and tankers, are directly transferable to the new sector. 8. There is a ready-made workforce with specialist knowledge, experience of large scale manufacture and a reputation for skilled engineering services to the oil and gas industry, and now the renewable energy sector. In addition, the Tees Valley still retains a major and specialist sub-contractor infrastructure covering all aspects of associated energy industry and renewables work. 9. This workforce is readily available; many skilled engineers are unemployed due to the recession, which caused waves of devastating closures through the North East. The renewables sector is a lifeline for these individuals, their families and the region as a whole. Choosing Tees Valley as the administrative centre for the GIB would provide a much needed injection of public sector jobs to the North East, as well as facilitating employment for engineers and workers at the manufacturing frontline through its investments. 10. The region has already begun to adapt to meet the economic and ecological challenges the globe faces, to deliver high-tech green solutions for the 21st century, using the wealth of knowledge and experience brought from decades of manufacturing. It is leading the field in carbon capture and storage, wind energy, solar power, electric vehicles, and tide and wave technology. 11. The necessary facilities are also already in existence in the Tees Valley, a legacy of the previous industries. Nowhere else in the country can boast such a wealth of yards, hangars, docks and necessary cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w6 Environmental Audit Committee: Evidence

infrastructure. Similarly, there are first class transport links with two airports, the mainline railway, good road networks, two working rivers; the Tyne and Tees, and ports in Redcar, Hartlepool, Sunderland, Blyth and Newcastle. The transport network and location make the Tees Valley very attractive for renewables developments, particularly those planned to be offshore, due to low transport costs and the reduced risk by being in close proximity to North Sea projects. 12. The region also offers facilities directly of interest to the GIB itself, in addition to good transport links. It would be fitting for the bank to be housed in a recycled building or sustainable location. The Tees Valley is pioneering such developments and offers a number of suitable locations, such as Lingfield Point, which is an eco-friendly and sustainable business park recycling the former Paton and Baldwin’s Wool Factory site 13. If anywhere has the expertise, the facilities and the understanding of what is needed for the renewable energy industry and the tenacity to make it happen and so ensure the success of the GIB, it is the North East. It also deserves it. 14. The North East is a pioneer, rising to the challenges of the 21st century and the emerging markets. It is deserving of recognition and support. In rewarding the region, the country as a whole will benefit because a prosperous North East provides more and need less. 15. Locating the GIB in the North East would send several important messages. By supporting the leaders in the field of renewable energy it would show that green activity is supported and valued, and encourage other regions to follow suit. 16. It would also send a message to investors that the government has confidence in the region. In addition to GIB investment, commercial funding markets would potentially open and there would be increased investment in the region leading to increased productivity and employment. 17. The future the Tees Valley is building around the renewables market has the potential to secure the economic future of the entire North East. It could significantly reduce unemployment, reclaim the “lost” generation of young people and stimulate the economy on a long-term scale. The GIB has the opportunity to be a force behind the North East’s regeneration. 18. There is the ambition and capability for the Tees Valley to become the UK leader and preferred manufacturer for renewable energy structures. This would ensure UK plc’s rightful place in the development of the significant renewables market and on the world stage of renewables technology. 19. However, this is not a certainty. Where the Tees Valley is already rising to the challenge, now the government needs to. A dedicated flow of investment to the sector is vital to ensuring environmental targets are met and that the UK break-throughs in the sector do not disappear to Europe or the Far East. 20. Without economic stimulation and support, the industry will look elsewhere and the UK will face the ironic, damaging juxtaposition of transporting millions of tonnes of dirty steel from one side of the world to the other, increasing the carbon footprint in the name of low carbon energy production. We should build British for Britain and we need the GIB to do this. 21. Where else in the country has embraced the green agenda, adapted so quickly and successfully, suffered so much through the recession and fought through? Where else has taken such initiative? The market has been growing for over a decade and our European counterparts are well ahead in taking advantage of it. The North East is the only place in the UK that has endeavoured to catch up. 22. This is the moment for the government to rebalance the economy; to have a real green agency with green institutions. It is also the time to rebalance the country. There are no mature financial institutions in the North. We feel this must be changed. There is a gap, an aching chasm, which the GIB can bridge. More than that, the GIB could herald the joining up of government and the manufacturing and financial sectors, a bridge between government and industry, between North and South. The GIB is an opportunity to make the North a partner in the New Britain, to showcase and harness the potential found in the region and kick-start the UK’s environmental agenda. 23. Those behind the GIB have a great responsibility and a great opportunity. The potential here is to be the force behind the renaissance of the North East and enable the UK to become a major player in this vital industry. This opportunity is the 21st century’s oil and gas boom. That industry began in the 1970s and created employment and prosperity across the supply chain with massive economic benefits. We cannot let the renewable version pass us by. 24. We also cannot diminish this opportunity by locating the GIB somewhere other than the North East. Our local media have supported the initiative. Names of those in business and politics that have been published in support include: James Wharton—MP Stockton South Alex Cunningham—MP Stockton North Jenny Chapman—MP Darlington Ian Swales—MP Redcar The Northern Echo cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w7

Alison Thain—Fabrick Housing Group Cath Purdy—Housing Hartlepool Paul Booth—Sabic Michael O’Connell—EOS Alex Dawson—TAG Energy Solutions Neil Kenley—Tees Valley Unlimited ONE North East Marchday Group George Rafferty—NOF Energy Tom Brennan—GMB Union 12 October 2010

Written evidence submitted by the Creativity Partnership Executive Summary — The concept of a Green Investment Bank is welcome if it helps create and channel new sources of ﬁnance to “green” the UK. — It is vitally important that by consolidating the activities of other funding bodies it does not accidentally divert what little investment ﬁnance there is away from innovation and into infrastructure. Funding for “green innovation” is as important as funding for “green infrastructure”.

The Submitter I am Anne Miller, Director of The Creativity Partnership www.tcp-uk.co.uk where I provide training, workshops and consultancy to help organisations get value from creativity (often this relates to issues such as low carbon, clean tech and sustainability). Clients range from major corporations to SMEs and individual entrepreneurs. I am also a co-founder of TTPGroup, now one of Europe’s leading independent technology innovation organisations www.ttpgroup.com ; founder and coordinator of the Green Enterprise Community www.green- enterprise.org, a community of over 80 early stage “green” entrepreneurs; one of the UK’s most successful female inventors with 39 patents, many of them commercialised; and author of the acclaimed book, How to got your ideas adopted (and change the world) www.anne.miller.info This gives me real expertise and insight into the issues facing the UK’s innovators, and the barriers facing them as they try to develop the ideas and enterprises that will lead the UK to a prosperous and low carbon future.

The Facts The UK has real strength in creativity and innovation: we punch way above our weight in terms of the amount, diversity and significance of UK inventiveness (from the Beatles to the Body Scanner). This is recognised internationally. Our weakness is in the exploitation of that inventiveness: lack of finance for innovation often means that innovations have to go overseas to be exploited, and hence UK plc only gets a small proportion of the value that our innovators create. In today’s climate, what finance is available for small business is poorly suited to entrepreneurial activity. A bank loan to support liquidity secured on assets is of little use to an innovative small business that really needs capital that can be subject to risk.1 Historically, where sources of finance existed that genuinely understood the innovation process, the results were transformational. For example the well known Cambridge Phenomenon took off in 1978 when Matthew Bullock of the Cambridge branch of Barclays Bank persuaded the bank to let him adopt a positive policy towards “high tech” businesses in the locality. This started a process that converted one of the poorest regions in the UK into one of the richest. Whereas 30 years ago there were about 100 people employed in high tech firms in the Cambridge region, today there are over 40,000 people employed in knowledge based business and over 1,500 high tech companies.2 Although currently the investment climate is tough for innovators, two small but useful schemes are the SBRI programme, run by the Technology Strategy Board3 and grants provided through the Carbon Trust’s Entrepreneurs Fast Track scheme.4 1 New Economic Foundation “Where did the money go: building a banking system fit for purpose” p44. 2 http://siteresources.worldbank.org/EXTECAREGTOPKNOECO/Resources/PS_IV_W_Herriot_Replicating_the_Cambridge_ Phenomenon.pdf 3 htp://www.innovateuk.org/deliveringinnovation/smallbusinessresearchinitiative/whatissbri.ashx 4 http://www.carbontrust.co.uk/emerging-technologies/fast-track/pages/default.aspx cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w8 Environmental Audit Committee: Evidence

We hear concerning rumours5 that as part of the spending review, the Carbon Trust and even the Technology Strategy Board may cease. Alternatively we hear that the “green” funds they administer may be rolled into The Green Investment Bank (GIB), but that the GIB will itself focus on ﬁnancing major capital infrastructure projects. As the Utility sector is one of the least innovative sectors in the UK economy (and SME’s tend to be the most innovative), this change would leave the UK’s innovators and green entrepreneurs stranded.

Recommendations I strongly support the general principle of a Green Investment Bank, but urge the committee to ensure that it devotes a substantial proportion of its funding to supporting entrepreneurs and innovative SMEs in the Green Sector. It is vitally important that the creation of the GIB doesn’t divert existing funding away from innovation into infrastructure. If the Carbon Trust and TSB are to be closed, this could be done at its simplest by “relocating” the SBRI programme and the Entrepreneurs Fast Track scheme within the GIB. Preferably however, the creation of the GIB would result in an increase in the availability of informed finance for green entrepreneurs and innovative SMEs. If 5% of the GIB’s lending were allocated for “green innovation” by SMEs it would be transformational. This would also be good for the GIB’s finances because, as Venture Capitalists know, a well managed portfolio of investments in genuinely innovative SMEs delivers a far greater return than the equivalent sum invested in supporting the activities of a major corporation. This “green innovation” investment programme should be designed and run by investment managers that understand the needs of innovators and have the experience to develop an exciting and profitable portfolio. Unlike major corporations, green entrepreneurs and innovative SMEs have limited resources, so are unable to undertake the lobbying activities that are no doubt going on behind the scenes to influence the investment priorities of the Green Investment Bank. We therefore need the Environmental Audit Committee to take care to ensure that the creation of the GIB doesn’t accidentally handicap the UK’s ability to compete in the green innovation race that’s to come. 13 October 2010

Written evidence submitted by Unite the union This response is submitted by Unite the union. Unite is the UK’s largest trade union with over 1.5 million members across the private and public sectors. The union’s members work in a range of industries including manufacturing, ﬁnancial services, print, energy, construction, transport, local government, education, health and not for proﬁt sectors.

Executive Summary — Unite believes government support for investment in low carbon manufacturing is crucial. — Unite is very concerned about proposals to achieve the necessary investment from the public sector will result in other government funded organisations being reduced or disbanded altogether. — Unite would like to see a singular analysis of how the workforce for the green investment bank (GIB) is to be created—it is not acceptable for government to assume that workers made redundant in the Carbon Trust will make up the core workforce in the GIB. — Unite has serious concerns about the proposal for the GIB to be set up as a public private partnership (PPP). — Unite believes the ability to provide the amount of public investment needed to stimulate growth in the industry must be matched with the appropriate level of investment from industry itself. — It is vital that government takes the initiative to ensure that confidence in the UK as a place for green investment is not compromised. — Unite believes one of the most important aspects of the GIB is where value will be added—where jobs will be created, how environmental benefits will be achieved and how much investment will be required to achieve high levels of technological innovation and R&D. — One of the key barriers to investment is that investors cannot see a sure fire return on their investment under the present regulatory framework. — Unite believes the proposal not to include small and medium sized enterprises (SMEs) in this investment process is a serious failure to appreciate the important role which SMEs play in the manufacturing production supply chain. 5 http://www.telegraph.co.uk/finance/newsbysector/energy/7863253/The-Green-Investment-Bank-is-going-down-the-wrong- path.html cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w9

1. Introduction 1.1 Unite welcomes the opportunity to respond to this inquiry. There are clear contradictory elements in what seems to be a worthwhile but nebulous proposal for the implementation of a Green Investment Bank (GIB). However, there is obviously a massive challenge ahead for government regarding meeting the low carbon manufacturing challenge. With an estimated £550 billion of investment required by 2020 to facilitate the investment needed to kick start the UK low carbon emissions programme there clearly needs to be a focus by government on how to achieve this level of investment. 1.2 Unite is clear about the need for investment but is not clear about how this will be achieved successfully in relation to how jobs will be created or retained, how skills and knowledge will be improved with training to meet the new technologies required for low carbon manufacturing and how government is going to achieve all of this while implementing the biggest cuts to public ﬁnances since the second world war.

2. Investment Strategy 2.1 In a report produced for government, by former investment banker Bob Wigley, proposals state that the proposed bank would need three forms of funding to sustain its ongoing operations. This would include consolidating £185 million a year currently spent on low carbon initiatives through government backed organisations. This proposal would mean dissolving the Carbon Trust and directing £100 million of its funding to the bank. £55 million a year would be taken from the Energy Technologies Institute (ETI) and the Technology Strategy Board would lose the £30 million it currently uses for low carbon strategy programmes. 2.2 Unite is very concerned that government proposals to achieve the necessary investment from the public sector results in other government funded organisations being reduced or disbanded altogether. There are suggestions in the Wigley report6 that the workers made redundant in the Carbon Trust and other organisations will make up the core workforce in the GIB.7 Unite has serious reservations about this automatic transfer of staff and whether government has undertaken the necessary skills audit to ensure that the skills of staff in the Carbon Trust whose role is the promotion of carbon neutral manufacturing processes are transferable to those required to work for an investment bank. Unite would also question whether such personnel would necessary want to work for an investment bank. 2.3 There needs to be a singular analysis of what type of workforce is required to manage the bank and how that workforce will be achieved. It is not good enough for government to say that redundant workers will be found new jobs at the GIB when it is clearly not a feasible option. 2.4 Unite acknowledges that all of the organisations mentioned have been undertaking some very worthwhile and successful work in assisting UK companies to achieve their low carbon goals. It is not clear whether this work will be undertaken by any other organisation but seems to be a “rob Peter to pay Paul” scenario—not the best way for government to show its commitment to the low carbon agenda. 2.5 The report has also said that raising public investment income in this way would be coupled with public funding strategies, such as ﬁnancing for ongoing activities which would include green bonds, green ISAs, a GIB debt fund and a levy on domestic energy bills. Unite is bitterly opposed to any raising of investment funds by effectively levying a tax on domestic energy consumption. At present the UK utility users are seen to be a “cash cow” in a way that has not happened in other European Union (EU) countries which have gone through the same process. 2.6 It is also proposed that there could be initial bank capitalisation and funding via the use of a bank levy or bank bonus tax or the proceeds from the sale of government owned assets such as the channel tunnel and the student loans portfolio. As far as Unite is concerned this is all too tenuous and too late. The strategy for raising investment funds to start the GIB must be made clear and must not compromise people’s jobs or organisations that are already making a positive contribution to the low carbon growth economy. It must also not treat the UK public as a bottomless public purse. Unite would prefer to see a levy on the oil companies to contribute to the funding of the GIB.

3. Public Private Partnership. 3.1 The proposal that the bank should be a public private partnership (PPP) is very worrying. As far as Unite is concerned any proposals around PPP immediately ring alarm bells. This concern is not born out of ideological antipathy but out of experience in a number of sectors where PPPs are prevalent and where the process seems to end up being public investment for private proﬁt and has not proved to provide value for money. 3.2 There is a huge amount of money to be made in the green technologies and services market. Conservative estimates say the global market is worth more than $3 trillion per annum and the UK has only a 5% share of this market with Germany and France both having at least twice that of the UK. However, Unite believes the ability to provide the amount of public investment needed to stimulate growth in the industry must be matched with the appropriate investment from industry itself. 6 Unlocking investment to deliver Britain’s low carbon future—Report by the Green Investment Bank Commission. 7 Ibid, executive summary, page XV. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w10 Environmental Audit Committee: Evidence

3.3 It is vital that government takes the initiative to ensure that conﬁdence in the UK as a place for green investment is not compromised. The tangential nature of the GIB, with the former government proposing the bank as a way of stimulating investment into capital projects and the present government clearly seeing it as a way of cutting public sector spending means there is no clear focus and strategy. This must be addressed and a strategic framework produced which outlines to everyone concerned how the GIB will work and what its objectives will be.

3.4 Unite also believes it is the “added value” of the GIB that government should be looking at. Where will the jobs be created? How will the environmental beneﬁts be achieved? And how much investment is going to be needed to achieve high levels of low carbon technological innovation and R&D? What impact will the GIB have on the skills agenda, will there need to be new apprentice and graduate programmes to ensure there are enough highly skilled workers to undertake the jobs in the low carbon economy? All of this must be considered to ensure the bank is ﬁt for purpose and achieves its objectives.

4. Small and Medium Sized Enterprises

4.1 One of the key barriers to investment is that investors cannot see a sure ﬁre return on their investment under the current regulatory framework. The fact that the Wigley report has stated that SMEs will not be included in the investment regime and the GIB will only focus on large energy related capital projects tells Unite all it needs to know about investors looking for a return on their investment, rather than at the “added value” for the UK economy.

4.2 SMEs make up 80% of UK manufacturing and innovation comes predominantly through SMEs as they are in a position to respond quickly and efﬁciently to the big tier 1 companies in the manufacturing sector which require innovative products and services to enable them to meet demand from their customers.

4.3 Unite believes that for the proposal not to include SMEs in this investment process is a serious failure to appreciate the important role which SMEs play in the production supply chain. Unite has, in previous submissions to government referred many times to the problems that SMEs have with accessing investment capital. The recession has proved to be a crisis point for SMEs in the UK and the ﬁnancial situation has not improved very much since late 2009. It does not matter how much the banks are told to help SMEs, they do not respond. In the face of this Unite is very concerned that when the big capital energy projects start to be built the supply chain will not be there to support the tier 1 companies concerned because of this lack of investment.

Unite Recommendations — Unite is in favour of government support for investment in low carbon manufacturing products and systems. — Government must provide a cohesive and strategic investment strategy whereby the private sector can see a long term pipeline of work regarding infrastructure development for the renewable energy sector. — In a global economy the UK is in competition with many other nation states regarding the production of low carbon products and services, government must provide the right economic framework to encourage inward investment in the industry. — Government must acknowledge how important the manufacturing sector is in the decision making process around investment and the creation of the GIB. — Unite would prefer to see a levy on the high proﬁts of energy companies rather than a tax on energy users to fund the GIB. — The proposed closure of the Carbon Trust and the re-direction of funding from the ETI and the Technology Strategy Board must be reviewed and an analysis of how this vital work will continue. — Unite believes that PPPs are not good value for money and are a waste of tax payers money, as such there needs to be a re-think of the investment structure of the GIB. — Government must explain how the GIB will produce the “value added” for the UK manufacturing sector. — The UK economy must be re-balanced, the only way to do this is for government to invest in the manufacturing sector. — Unite believes it is of vital importance that an investment strategy for SMEs is included in the objectives of the GIB. — Unite believes that the proposed levy on banks or a bank bonus tax should be used to part fund the GIB. 13 October 2010 cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w11

Written evidence submitted by WWF-UK Summary — WWF-UK urges the Government to move ahead with the establishment of the Green Investment Bank as soon as possible. — It should have a mandate to invest in energy efﬁciency, including improvements to the domestic housing stock, as well as renewable energy infrastructure. — The Government must ensure the Bank is capitalised by at least £4–6 billion over the next four years, in order to address a series of sources of market failure which threaten to block the achievement of statutory targets on carbon emissions.

General Points 1. WWF believes the Green Investment Bank (GIB) should be set up as a matter of urgency to support energy efficiency and renewable energy development and welcomes the Government’s commitment to establish a GIB. The Bank should have a mandate to invest in energy efficiency and renewable energy infrastructure— both large scale projects and also smaller scale and community-led schemes. 2. The Government must ensure the GIB is capitalised by at least £4–6 billion over the next four years. Over time this could leverage over a hundred billion more in investment from the private sector. This finance is vital in the context of required investment as high as £50 billion per year to deliver a low carbon transition. 3. The overall success of the Bank will largely depend on the establishment of a favourable regulatory and market environment aimed at delivering an efficient, sustainable low-carbon transition and securing a near zero carbon power sector by 2030 as recommended by the Committee on Climate Change. The broader electricity market reform process must explicitly set out to deliver such a framework, with specific interventions such as an emissions performance standard for power plant and mandatory company reporting on carbon emissions. 4. Clarity is required as to which sectors would be eligible for green funding. WWF believes that the many environmental, economic, and security problems surrounding nuclear power disqualify it from inclusion as “green”. Nuclear power is already a mature technology in the marketplace and there is also a risk that the inclusion of nuclear power in the GIB may discourage many private investors who would otherwise want to support and invest in renewable energy. 5. It is also important that the Bank concerns itself not only with energy supply, but also with the demand side—particularly with financing improvements in existing housing stock. The renewable power sector and building renovation and improvement sector includes many small and medium-sized enterprises. In order to support innovation and efficiency, the Bank needs to be structured so as to respond to the needs of businesses of all sizes, rather than restricting itself to funding large infrastructure firms. 6. WWF agrees with the conclusion of the recent report by the Green Investment Bank Commission that the GIB should be “established and become[s] active as soon as possible”.8 While we would support the immediate establishment of a “shadow” institution to move the process forwards, we believe that the GIB must urgently be established as a statutory body. The creation of a specific mechanism to lever initial investment in green enterprise and technology will prove a crucial stimulus to a low carbon economy as part of a sustainable and secure economic recovery in the UK. 7. There is also scope for the GIB to play a catalytic role in encouraging and developing the UK’s role as a global centre for green financing, helping to move our financial system as well as our energy system away from a dependence on fossil fuels.

Barriers and Market Failure 8. There are many barriers and sources of market failure which the Green Investment Bank should address. In particular, we identify the following: — Many renewable energy technologies and other low carbon solutions are perceived to be too risky for big investors. It is far more efficient for Government to focus its resources in reducing risk profiles and assuring secure returns on investment, thereby freeing up massive private investment; rather than simply increasing subsidies. — Utility companies do not themselves have the ability to raise money at the scale and cost needed for a sufficiently rapid transition. — Capital markets are nowhere near to having recovered from the financial crisis, so project and debt finance is difficult and expensive to secure. — New technologies can take a long time to mature and most investors find them too risky. The GIB can help bring new technologies to market and bring them to scale. 8 Unlocking investment to deliver Britain’s low carbon future, Report by the Green Investment Bank Commissions, June 2010. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w12 Environmental Audit Committee: Evidence

— There are numerous renewable projects and energy efﬁciency measures, many of which are small- scale. These types of project are unable to access the capital of very large investors. The GIB can aggregate these opportunities and thereby unlock this ﬁnancing from the biggest investors.

Objectives and Roles 9. WWF supports the Commission Report’s view that the roles and objectives of the Green Investment Bank should include: — Addressing market failure and unlocking private finance—investing alongside the private sector, providing guarantees and mitigating risks, reducing uncertainty of returns and raising rewards. — Adding coherence to policy framework around low carbon transition. — Advising government and helping to align public and private financial interests in key projects. — Helping to co-ordinate UK climate finance investment, including internationally. 10. The GIB should co-invest with the private sector rather than simply funding risky projects with public money. It should seek additionality, seek commercial rates of return for banking operations and ultimately be self-funding. It should operate at arm’s length from government and be off the UK balance sheet.

Investment Priorities 11. The GIB should both support areas where the UK has existing green technology strengths, in order to bring them to scale rapidly and at the least cost; and also provide capital and technical assistance for innovation of new technologies and business models. 12. It is important that the Bank concerns itself not only with energy supply, but also with the demand side—particularly with financing improvements in existing housing stock. The renewable power sector and building renovation and improvement sector includes many small and medium-sized enterprises. In order to support innovation and efficiency, the Bank needs to be structured so as to respond to the needs of businesses of all sizes, rather than restricting itself to funding large infrastructure firms. 13. Investment to improve the housing stock should also include water efficiency measures that lead to a reduction in energy demand through reduced hot water usage.

Green Bonds 14. The UK’s pension funds, insurance companies and other institutional investors have an appetite for long- term investments that deliver a stable return, which means they could channel savings and investments into long-term infrastructure projects—given the right environment and incentives. These investors have had an increasing appetite for bonds recently, and could provide demand for billions of pounds each year of Green Bonds issued by the GIB. 15. Green Bonds could be used both to raise funds for the GIB itself, and also to lower the cost of debt for specific projects. This is particularly important in the current financial environment. Lowering the cost of finance is crucial, for example, in providing a Green Deal delivery mechanism that offers sufficient finance at a cost which is attractive to the consumers—without whose support it will not succeed. 14 October 2010

Written evidence submitted by Places for People 1.0 Introduction 1.1 Places for People is one of the largest property management, development and regeneration companies in the UK. We own and manage more than 62,000 homes and have assets of £3.1 billion. 1.2 Our vision is to create and manage places where people want to live and our approach looks at all aspects of communities rather than focusing solely on the bricks and mortar provision of homes. Places for People’s innovative approach to place management and placemaking allows us to regenerate existing places, create new ones and focus on long-term management. 1.3 Places for People has contributed extensively to research and policy development around the creation of the green economy, specifically around housing. We have been working with other stakeholders to develop the finance mechanisms and business models that will make possible the creation of a multi-billion-pound market for the retrofitting of the UK’s housing stock. This has the potential to deliver thousands of new jobs and big reductions in carbon emissions, as well as cost reductions for householders and the UK economy. It will also make a significant contribution to energy diversity and security. 1.4 We welcome the Environmental Audit Committee’s inquiry into the Government’s plans for a Green Investment Bank, which in our view could play a key role in supporting the development of the UK’s green economy. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w13

1.5 In this response, we set out some background notes and our general views before responding in more detail to the issues raised in the inquiry.

2.0 Executive Summary 2.1 In our response to the Environmental Audit Committee’s inquiry, we set out the following views: — We strongly support the creation of a Green Investment Bank, as without it the development of a new economy of retrofitting homes would be significantly hampered. We see strong benefits not only in terms of carbon reduction, but also in terms of lower energy bills for householders and the creation of a new green supply chain which would have a positive impact on the wider economy. — Financial modelling has demonstrated that investors’ cost of capital has a dramatic effect on the cost-effectiveness of extensive retrofit measures. Pay As You Save (PAYS and now adopted as the basis of the Green Deal) and Feed-in Tariff (FIT) schemes will deliver significant results if finance were to be available at 3%, which underlines the need for a Green Investment Bank. — We see the key investment priority for the new Green Investment Bank as providing the low-cost finance and long-term returns necessary to attract investors into the retrofitting economy. Rising energy prices reinforce the business case for this investment. — In our view, it could do this by providing a pool of capital from which low-rate loans could be made for installation of carbon saving measures. This finance could be provided as a sole source or “blended” with other sources of finance to reduce the overall cost and increase the total amount of finance available.

3.0 Background and General Views 3.1 The UK Government has set a target of reducing emissions from the home by 29% by 2020. It believes that the social housing sector has the potential to make a big contribution to achieving this target, both through reducing carbon emissions from the sector’s homes and in developing the supply chain necessary to deliver domestic emissions reductions more widely. 3.2 Achieving these goals will require a significant increase in the speed, scale and scope of retrofit activity. Most activity to date has focused on basic, cost-effective measures such as energy efficient light bulbs and loft and cavity wall insulation. 3.3 Places for People has so far invested over £5 million in the implementation of most of the basic measures to improve energy efficiency in its homes. We have pioneered the use of innovative technologies including heat pumps, solar thermal, solar photovoltaic and wind. Our long-term commitment to the green economy is evidenced by our investment in a start-up solar manufacturer in 2007, which has now become one of the most successful providers in the UK. 3.4 However, this is not enough to achieve the Government’s 29% reduction target by 2020 and we want to retrofit more extensively thousands of homes to make them energy efficient and affordable in the long term. We are also keen to maximise the opportunities that may be created by the changing landscape of increasing energy costs and the Green Deal. 3.5 We feel that the most crucial carbon reduction measures to install across our housing stock in order to make our homes sustainable in the longer term are: solar thermal; solar photovoltaic; heat pumps; extensive insulation (solid wall); and mechanical ventilation and heat recovery. 3.6 Places for People’s work on housing and the green economy has been based on clear and focused research. We have also worked extensively with Government departments, including the Department for Energy and Climate Change (DECC) and Communities and Local Government (CLG), as well as agencies such as the Energy Efficiency Partnership for Homes. We have been keen to develop both the finance “engine” for this new market, ie establishing how is it going to be paid for, as well as the delivery “vehicle”, ie the regulatory, financial and legal framework that will support the creation of an almost entirely new market. 3.7 In all of this work we have felt that there is substantial role for a Green Investment Bank. In our view, large-scale retrofit (the Green Deal) is possible if low-cost, long-term finance is made available, and if we radically use existing sources of funding such as the supplier obligation.

4.0 Barriers and Market Failures 4.1 The key issues in the green economy debate are cost and finance. Retrofitting existing homes is expensive—in fact we believe the figure quoted in the Conservative Green Deal of £6,500 per home is too low. In our experience, £12,500 is more realistic and in many cases costs can rise to £30,000. Places for People recently completed two retrofit projects funded by the Technology Strategy Board and spent £150,000 on extensive environmental retrofitting in each of the two homes. 4.2 Given the significant costs involved in implementing measures which will have a real impact on carbon reduction in the long term, the most important question is one of finance. The Government has acknowledged that retrofitting homes can either be funded through energy bills (with the energy costs saved being used to cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w14 Environmental Audit Committee: Evidence

fund the measures in a Pay As You Save arrangement) or through the sale of energy to customers (with the Feed-in Tariff paying a premium for the production of renewable energy).

4.3 In general, investors’ cost of capital has a dramatic effect on the cost-effectiveness of extensive retroﬁt measures. Commercial ﬁnance rates of 7% would be prohibitive. A lower rate of 4.5% makes the PAYS and FIT schemes just about viable and a rate of 3% would deliver real results.

4.4 The financial modelling we commissioned (as Chair of one of the Energy Efficiency Partnership for Homes sector groups and Chair of the Social Housing and Finance Task Group) to assess the viability of these funding mechanisms has shown straightforward commercial financing would not make the schemes cost- effective and would therefore prohibit real carbon savings being made in the UK’s existing homes (further details of this modelling can be found in Appendix 1). In our view, this is the most important argument for the creation of a Green Investment Bank. Failure to establish a vehicle which can deliver finance at viable rates would seriously jeopardise the delivery of the Government’s carbon reduction targets both in the short and long term, and we therefore feel that not creating a Green Investment Bank in the short term would represent a significant risk.

4.5 Places for People was also Chair of the Technology Group of the DECC Microgeneration Strategy Consultation, which is due to report to Ministers in the coming weeks. Our view, supported by our Board membership of Viridian Solar, is that there is a need for investment in research and product development as well as commercialisation (and much less in “new” or innovative technologies themselves). The role of the Carbon Trust has been useful, but more needs to be done. The recent lack of credit from banks has made this situation even more critical. Again, we feel that the Green Investment Bank could play a strategic role in providing lower-cost and long-term ﬁnance in order for the UK to create its own manufacturing base for renewable energy.

5.0 Objectives and Role of the Green Investment Bank

5.1 Pending clarification of the role of energy companies in terms of supporting the reduction of CO2 emissions, the Green Investment Bank should aim to deliver both the low-cost finance and the long-term (20 years plus) returns required for investors to undertake large-scale investment in energy saving measures in housing. It could do this by providing a pool of capital from which low-rate loans could be made for installation of carbon saving measures. In our view, there a number of options: — Energy company-managed funds. — White Certificates that buy and sell carbon savings. — National fund(s) created out of existing public funding, combined with contributions from energy companies and other private sector sources.

5.2 Whichever option was chosen, contributions would have to be optional for suppliers, in order to avoid HM Treasury tax and spend concerns. The funds would be established on the basis that the energy supplier contribution would be ﬁxed for an agreed period of time, potentially up to 2020, rather than being revised on an ad-hoc basis. With either option, the supplier can claim the carbon credits.

5.3 The ﬁrst option is simply a revised version of the existing supplier obligation, but with new regulation of the fund management and the carbon reduction outputs. Any organisation then “bids” into the fund using the new funding mechanisms such as PAYS-type funding schemes plus any other funding (for example some of their asset management investment).

5.4 The second option would allow providers such as local authorities, commercial companies and community groups to contract with energy suppliers to deliver carbon savings in return for funding.

5.5 The third option is more ambitious and sets up a single or range of national funds that then allows existing or planned public funding to also go in to the fund, including Warm Front and potentially Winter Fuel Payments. Furthermore, funding from other sources, such as Allowable Solutions,9 could also contribute to the fund. Again anyone could bid into it using whatever funding they want to bring.

5.6 Whatever mechanism is developed, it is clear that the supplier obligation must play a central role in the green economy. Combined with the Green Investment Bank, this could kick start the investment needed in manufacturing, retroﬁtting and innovation.

5.7 We feel that any organisation (for example supermarkets, social housing providers, community groups, charities, etc) should be able to bid competitively to the Green Investment Bank in order to install carbon saving measures in homes. These organisations could then use mechanisms such as PAYS-type ﬁnance schemes, green mortgages and community investment funds at lower interest rates due to Green Investment Bank capital which would drag down the overall rate and moreover de-risk the funds they raise themselves. 9 Part of the 2016 zero carbon homes standard, Allowable Solutions is an “offset” payment made for dealing with any remaining carbon emissions from a development off-site. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w15

6.0 Investment Priorities

6.1 As argued above, providing the finance and long-term returns to enable large-scale investment to take place in retrofitting, enabled through either PAYS or FIT-type schemes, should be the Green Investment Bank’s core priority. There are huge benefits to be achieved from this, including significant carbon reductions, lower energy bills for householders and the creation of a green supply chain which will create thousands of highly skilled, long term jobs which would boost the wider economy.

6.2 Considerable investment is needed in the UK’s energy infrastructure over the next few years in order to ensure secure and sustainable energy supplies, bringing with it increased energy prices. This bolsters the financial business case for taking action on low carbon retrofit, making energy efficiency measures and renewable energy technologies more cost-effective.

7.0 Funding and Governance Structures

7.1 In broad terms, Places for People will not comment on the funding and governance structure for the Green Investment Bank. Our view is that much of this will be determined by the need to address public spending constraints and Treasury “tax and spend” concerns. However, the Bank does need to balance the need to be open, transparent and accountable with the need to take a long-term view on strategy and investment.

8.0 Conclusions

8.1 The case for a Green Investment Bank is abundantly clear when looking at financial modelling, which shows how commercial finance rates would prevent investors from entering into the retrofit market. Creating this new market and new economy would have a positive impact not only in terms of carbon savings, but also in terms of consumer energy bills and the creation of a green supply chain, which would benefit the economy as a whole.

8.2 The Green Investment Bank can play a pivotal role in creating an almost entirely new market by stimulating demand for the Green Deal and micro generation and at the same time delivering the supply chain by investing in research and development and UK manufacturing in retroﬁt and microgeneration.

8.3 The fact that energy prices are set to increase further strengthens the business case for investment in this new market. We therefore feel that providing the low-cost ﬁnance and long-term returns necessary to attract investors into this market should be the Green Investment Bank’s key priority.

8.4 It could do this by providing a pool of capital from which low-rate loans could be made for installation of carbon saving measures, either through energy company-managed funds or through national fund(s) created out of existing public funding, combined with private sector sources.

8.5 We feel that any organisation (for example supermarkets, social housing providers, community groups, charities, etc) should be able to bid competitively to the Green investment Bank in order to install carbon saving measures in homes.

APPENDIX 1

DETAILS OF FINANCIAL MODELLING — Recent modelling showed undertaken with Energy Efficiency Partnership for Homes shows great potential for financially viable investments in low carbon refurbishment. Across UK housing stock, at 6% cost of capital it could be financially viable to deliver emission reductions of 30% by 2020, 50% by 2030 and 80% by 2050 against a 2013 baseline, with 10% of the value passed to the resident. This assumes that grid decarbonisation will take place according to DECC’s projections, and that there is no limit to the number of projects that can be supported by the Feed-in Tariff and the Renewable Heat Incentive. — Opportunities would be enhanced by a lower cost of capital or higher energy price inflation, which would allow a proportion of the benefits to be passed on to the home occupier through lower energy bills. For example, at 3% cost of capital it would be possible for around 20% of the value to pass to the resident. The modelling has shown that long contract lengths are important (typically 25 years) in order for the investor to generate maximum return on their investment. —A medium refurbishment package of measures includes more expensive measures with longer payback periods. With a marginal increase in the cost of capital, from zero to 3%, the amount of carbon saved is reduced by more than 20%, as certain projects are no longer cost effective. The limited range of more expensive measures applied in the medium package means that increasing the cost of capital to 6% only causes a small reduction in the number of projects that are viable. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w16 Environmental Audit Committee: Evidence

—A high refurbishment package includes expensive advanced energy efﬁciency measures, various forms of low carbon heat and also microgeneration technologies such as PV and wind energy on suitable homes. There is a great dependence on a low cost of capital to help deliver carbon savings in the high refurbishment package. A 3% cost of capital lowers the potential carbon saved by more than 80%, as many refurbishment measures are no longer cost effective. The wide range of measures with high capital costs means that an increase in the cost of capital to 6% reduces the amount of potential carbon saved by a further 15%. This clearly shows how a low cost of capital is vital for securing carbon savings through extensive refurbishment packages. 14 October 2010

Written evidence submitted by One NorthEast Introduction This paper is submitted to the Environmental Audit Committee in response to its inquiry into Government plans to establish a Green Investment Bank (“GIB”). It has been prepared by and is submitted on behalf of a number of key stakeholders (“We”) within North East England (“NEE”). Full details of the parties involved in preparing this response are listed below.

1. Contributors to this response — One North East. — Tees Valley Unlimited. — National Renewable Energy Centre (Narec). — Renew@CPI. — Energy Leadership Council for North East England—comprising of private sector, academic and public sector partners (a full membership list is available upon request).

2. Key messages/short summary 2.1 In producing low carbon and affordable energy there are specific challenges. A current and persistent market failure is access to upfront capital costs which can and has led to the delay and cancellation of projects. Better access would fundamentally catalyse the deployment of low carbon technologies. The GIB should thus provide such upfront capital for large low carbon projects such as Offshore Renewables, Smart Grids and Carbon Capture and Storage (CCS). 2.2 We support the recent study produced by the Aldersgate group which called for the GIB to be strong, powerful and effective. Crucially, it must have access to significant financing of up to £6 billion over the next four years if it is to make a significant positive impact. This focus and funding should be protected during the Comprehensive Spending Review. 2.3 The speed of establishment of the GIB is critical. Although the Government has established a Regional Growth Fund, this will not cover the significant shortfall in capital for low carbon projects following wider cuts in public sector spending. The GIB should be operating by March 2011 in order to contribute to projects in the new financial year. 2.4 The location of the GIB should be given careful consideration. It should be based in an area committed to leading the way in low-carbon technology development and deployment. Therefore, locating the GIB in North East England would send a signal that the move towards development of a low carbon economy will benefit the whole of the UK and aligns closely with the Government’s agenda to devolve certain spending and financing functions away from Whitehall and the City of London. Locating the GIB in NEE would also be a positive affirmation that the government is serious about assisting areas hardest hit by public sector cuts and narrowing the gap between the North and the South. Both the affordability and quality of premises and staff on offer in NEE would ensure value for money in a challenging financial climate. 2.5 An advisory panel or Board should be established with a remit to scrutinise GIB spending decisions and priority areas. This will avoid duplication with other financial incentives designed to mitigate market failure such as the Green Deal for energy efficiency and low carbon technologies in homes and businesses. 2.6 The GIB should be open to the potential for investment which focuses upon climate change adaptation, as well as climate change mitigation, provided the commercial case is clearly demonstrated.

3. Why is the GIB necessary? 3.1 There are three key drivers for the UK government supporting the development of a low carbon technological revolution: cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w17

3.2 Reducing UK carbon emissions—In the April 2009 budget, the UK set a legally binding target to reduce carbon emissions by 34% by 2020. A longer term framework has been established to reduce CO2 emissions by 80% by 2050. 3.3 Increasing energy security—A lack of investment in energy infrastructure over the past decade means that an energy gap is forecast over the next ﬁve years. The UK Renewable Energy Strategy of 2009 and the subsequent DECC 2050 Pathway Analysis released in July 2010 under the coalition government outlined the mix of low carbon technologies needed to diversify and decentralise energy production and reduce price volatility linked to world oil trading. 3.4 Social issues—The UK Government has a statutory target to eradicate fuel poverty in all households by 2016. However, there are currently over six million householders in the UK living in fuel poverty. NEE has the highest levels of fuel poverty in the UK with over 300,000 householders (27.3%) affected.

3.5 It is clear that in order to meet a target to reduce CO2 emissions by 80% by 2050, whilst providing affordable and secure energy, innovative ﬁnancial models such as the GIB will be required.

4. What should the GIB deliver and what will success look like?

4.1 It is recommended that outputs relating to CO2 reduction, jobs created and jobs safeguarded, as well as outcomes where opportunities exist for investment to lever multiple benefits (eg mitigation and adaptation), form the foundation of criteria to secure GIB funding for low carbon projects. Other key criteria against which investment propositions should be tested include: — to improve the ability of people, business and organisations to participate in a resilient low carbon economy. This will involve working across a range of technology sectors from marine renewables and CCS to energy efficiency, demand side participation and smart grids; — to establish a number of viable and replicable financial models for project delivery; — to fully engage with local supply chains in delivering interventions; — to build on the platform of existing programmes of activity, utilising established mechanisms for delivery where appropriate; and — to facilitate the best possible solution for each individual, property, street, community or district in terms of both a return on investment, energy efficiency and carbon reduction and the incremental costs of adaptation where appropriate (eg where whole house energy retrofits through the Green Deal could also flood or heat proof a building at marginal cost).

5. The Green Investment Bank’s investment priorities, and whether and how the bank should support and foster areas where the UK has emerging green technology strengths 5.1 The sectors which GIB should seek to fund would include: — Renewable energy (with a particular focus on Offshore Renewables including Offshore Wind and Wave / Tidal developments). — CCS—investing through the project development process. — Smart Grid technologies (for low carbon economy)—including network interconnection with Europe. — Energy Efﬁciency/conservation—including demand side participation. 5.2 Other activities which contribute to the decarbonisation of electricity by 2030, as recommended by Committee on Climate Change should also be within the GIB scope.

5.3 It should be noted that reducing demand is the most cost effective measure in tackling CO2 emissions. Therefore, loans should be available to enable cutting demand as well as supporting new supply infrastructure. 5.4 There is some evidence that the most important area in terms of GIB investment is the initial working capital to allow projects to get through planning and permitting. Typically, large scale FEED studies, for example in developing a viable CCS project, may be in the region of £30 million. Provision of financial assistance utilising the full range of investment products would greatly improve the chances of getting projects established. Clearly this is a high risk area and the loan would necessarily be at higher than normal rates, but it would however result in a project which is considerably de-risked when it does seek capital in the markets. 5.5 The GIB should also be aware of emerging projects connecting key stakeholders throughout Europe. For example the North Sea Offshore Grid Initiative is an example of the potential to jointly support projects with European Institutions. Included within this would be forming a strong relationship with the European Investment Bank with a view to co-investing. http://ec.europa.eu/avservices/services/showShotlist.do?out=PDF&lg=En&filmRef=67310 5.6 At the same time, it is important for the GIB to have sufficient flexibility to also fund smaller community scale enterprises as well as larger companies, where appropriate. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w18 Environmental Audit Committee: Evidence

6. NEE Capabilities 6.1 Energy Technology is of vital importance to the current and future economy of NEE. The emerging capabilities and potential of NEE are gaining significant National and International recognition and are now attracting major investment from both the public and private sectors. It is also highlighting the real potential to generate a sustainable manufacturing and industrial future for the UK as a whole. 6.3 The National Renewable Energy Centre (Narec) is now established as one of Europe’s leading facilities for the development of Offshore Wind technology, and a key UK asset. It is working with most of the international turbine manufacturers and has developed unrivalled capabilities in such areas as blade testing and marine/ tidal device development and testing. We also have a range of companies already operating effectively within the offshore wind supply chain including JDR Cables and Tees Alliance Group. The possible cancellation of the £60 million to upgrade ports in preparation for a rapidly expanding offshore wind sector leaves a major gap which the GIB would need to have capability of responding to. In NEE alone there are five excellent port locations which could play a role in the development of a thriving offshore wind industry. 6.4 As an area of highly energy intensive businesses across the power generation, manufacturing, process and petrochemical industries, all of which are within close proximity to each other and the North Sea, it is well recognised that NEE represents a unique location for the development of CCS. Projects are ongoing in order to strengthen the commercial investment proposition around CCS demonstration projects in NEE. 6.5 NEE is a world leader in the development of Ultra Low Carbon Vehicle solutions, principally Electric and Fuel Cell Vehicles as well as the production of Biofuels. Major new investment in manufacturing and development is being sought to build on the success of attracting companies such as Nissan and Ensus to base vital operations in NEE. 6.6 The Centre for Process Innovation (CPI) is a world leading Research and Development Centre responsible for the development of key UK assets such as the Industrial Biotechnology facility. CPI is vital to enabling a sustainable transition towards a low carbon economy, particularly within the chemical sector, so crucial to the UK economy. CPI also manages the Printable Electronics Technology Centre (Petec), another key national asset. 6.7 NEE is home to five major Universities, each excelling in various strands of developing the low carbon economy. The recent creation of the Newcastle Institute for Research and Sustainability and Durham Energy Institute demonstrate the integrated approach being taken to develop the holistic understanding of a low carbon economy. A range of Colleges are also offering specialist training in key low carbon sectors.

7. NEE approach to investment propositions 7.1 NEE is taking a holistic approach to meeting its ambitions for carbon reduction. This will include measures to improve Energy Efficiency, to promote a step change in the use of Low Carbon Vehicles and to encourage and support the development of Smart Grids. 7.2 Each of the 12 Local Authorities in NEE have now submitted Sustainable Energy Action Plans (SEAPs) to the EU (Covenant of Mayor’s Office), providing detailed quantitative data showing how their 20% reduction commitments will be achieved. Together they provide a complete and robust basis for a coordinated regional action. 7.3 In order to catalyse a major scale up in the demonstration, infrastructure and testing of low carbon technologies, NEE is developing a series of comprehensive business cases to support investment bids. The GIB should be open to receiving collaborative bids from within well defined economic areas which can enable the growth of the private sector.

8. The funding and governance structures required to create an effective and accountable body 8.1 The £1 billion Regional Growth Fund will be provided by the UK government through the Department for Business Innovation and Skills (BIS). Its objective is to support, in particular, those areas and communities that are dependent on the public sector, to make the transition to private sector led growth and prosperity. There is a strong emphasis on the role of the private sector in the development and submission of proposals and whilst it is clear that Local Authorities have a role, bids must have private sector ﬁnancial backing. Proposals are to be linked to priorities, ideally articulated within an agreed vision for sustainable economic development. 8.2 However, it should be made clear that this funding represents a signiﬁcant cut in public sector funding previously available to contribute to economic growth projects. The Regional Development Agencies previously held a budget of between £1.5 billion to £2.4 billion per annum. In comparison, the Regional Growth Fund offers £500 million per annum for the next two years. This reduction in funding comes at a time when OFGEM have reported that up to £200 billion of investment will be required in order to meet ambitious CO2 reduction targets over the next ten years. 8.3 Therefore, it is imperative that the GIB is both well funded and established rapidly in order to support the growth of the private sector required to leverage such massive investment. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w19

8.4 Specifically, we recommend that the GIB is established by March 2011. Initially, this may be a “shadow model” which has the capacity to provide finance, but with a view to increasing its size and capability over the following six month period. Furthermore, we specifically recommend that the GIB should hold funding of at least £6 billion over the next four years, in order to be strong, powerful and effective. This recommendation follows the report by the Aldersgate group, published in September 2010. 8.5 We would also seek clarity on which Institutions may be integrated into the GIB. For example, the role of TSB, ETI and Carbon Trust, as well as other Institutions should be made clear within the GIB framework. This will be important in terms of shaping the scope of the GIB. As an example, should funding for energy efficiency measures in the domestic sector be cut from other Institutions and programmes in order to support the initial financing of the GIB, then it is vital that financial products are quickly made available from the GIB to address the gap (eg financial products to support the deployment of innovative solid wall insulation products). 8.6 We recommend that an advisory panel or Board should be established with a remit to scrutinise GIB spending decisions and priority areas. In the current spending climate it is imperative that available funding is optimised and that duplication is avoided. Key tasks for the advisory panel would include: — Preparation of a roadmap showing prioritisation of technologies and coverage of them through various GIB funding routes. — Provide guidance on coverage and potential for climate change adaptation projects. A recent study into the economic implications of climate change in NEE highlighted that without both adaptation and mitigation projects, the resilience of the economy to withstand shock and grow sustainably is negatively impacted. — Provide some level of technical support to innovative approaches to delivering projects such as joint ventures/Energy Services Companies (ESCOs). — Reassure the investment community by providing a clear commitment to guarantee subsidies/ incentives for schemes that are supported by the GIB. — Provide a very clear communications message to clarify the remit of the GIB. For example, the detail around whether GIB will be offering loans to develop front end feed study work (eg in the development of Carbon Capture and Storage) and how it will interface with other current UK and European funding schemes (eg the JEREMIE fund in NEE). 15 October 2010

Written evidence submitted by Regen SW

Introduction Regen in an independent, not for profit, centre of expertise in sustainable energy. Our mission is to enable business, local authorities, communities and other organisations to deliver ground-breaking renewable energy and energy efficiency projects with thriving local supply chains. Our achievements have included: — Driving the development of a dynamic marine energy industry in the south west including developing the ground-breaking Wave Hub project off Cornwall’s northern coast. — Establishing the South West Bioheat programme which has played a central role in making the south west one of the leading regions for woodfuel technologies and in increasing renewable heat generation capacity by 20% in 2009–10 alone. — Bringing together the partners and providing the technical understanding to enable a ground- breaking district heating and biomass combined heat and power scheme energy centre for a development of over 3,000 homes at the Cranbrook site near Exeter. The Environmental Audit Committee has set out an enquiry to explore how to maximise the Green Invesment Bank’s effectiveness. Based on our experience of financing renewable energy on the ground we consider the essential features of the GIB to be: — An operational structure that is active and integrated within all areas of the UK—not just London- based with a narrow view based on financial markets—so as to engage all parts of the UK, based on the technology, geographical and commercial strengths of areas. — That prioritises investment in both large infrastructure-scale and medium-scale, community level schemes to enable low carbon transition at the large infrastructure and generation level as well as across communities and local authorities at ground level. — That actively seeks to promote local economic development as part of projects and acts as a catalyst to take the general public along with the transition to a low carbon UK economy. — That works with organisations such as Regen that work to support delivery of low carbon projects on the ground and can provide direct engagement with businesses, local authorities, Local Enterprise Partnerships and communities to bring innovative projects together with GIB finance. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w20 Environmental Audit Committee: Evidence

1. The significance of any barriers or “market failures” requiring the establishment of a Green Investment Bank, and risks of not getting this done quickly 1.1 It is to be expected that large scale renewable schemes will provide a strong initial investment focus for policy makers and the GIB. However the analysis done by Regen of renewable energy resources in the south west, funded by DECC, demonstrates much of the resource is in medium and community scale plants that can provide decentralised energy solutions for communities in a much more efficient and appropriate manner. These schemes are more difficult to finance and developers face stronger barriers to delivering such schemes. The GIB should play an integral part in unlocking this medium scale, decentralised generation that is demonstrated so successfully in European countries. 1.2 The “green” market economy is driven by government policy through regulation and fiscal measures which are susceptible to changes in administration. The absence of policy frameworks that have long term stability creates a risk climate that investors find difficult to finance. An example illustrating this is the recent warning of a change to Feed in Tariffs. 1.3 Changes in public administration can also act as a barrier by reducing market confidence in the short to medium term. The removal of local public investment vehicles (such as the Regional Development Agencies) and the impending implementation of Local Economic Partnerships and Regional Growth Funds needs clear articulation quickly as to what powers are and are not inherent, and how new growth funds will work to set out the prioritisation of low carbon energy. This has had destabilising effect on local confidence regarding project development and investor finance which the GIB should seek to resolve. 1.4 There is a clear need to bridge market and investor confidence gaps in technologies and solutions that are far from market or are in pre-commercialisation to de-risk investment and accelerate technologies to market. A good example is the development of marine renewables in which Regen has played a very active part where a clear public strategy is required to develop the sector. The GIB should play a key role in this to reduce barriers to development and encourage more businesses to develop and bring products to the market.

2. The objectives and the 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 2.1 We do not have a comment on the full objectives and roles of the Bank. However, the experience of Regen SW’s low carbon development programme is that there is a key role in tackling carbon emissions from heating for community scale low carbon CHP district heating schemes—as commonly used in Europe. For example we have supported the development of a biomass CHP energy centre to serve the Cranbrook development East of Exeter which has received planning permission. We believe the GIB should support such schemes which are difficult to finance until the market is operating effectively. De-risking investment in such schemes will increase private sector confidence in leading delivery.

3. The Green Investment Bank’s investment priorities, and whether and how the bank should support and foster areas where the uk has emerging green technology strengths 3.1 The GIB should identify clear investment priorities based on a coordinated UK strategy for low carbon economic transition. Whilst this will predominantly focus on the generation, distribution and consumption of energy (electricity and heat) it should also take full account of economic and social objectives to harness opportunities through support for business and entrepreneurial growth, high value activities such as innovative R&D and commercialisation as well as enabling local leadership of initiatives. Therefore the GIB investment priorities should focus on two key areas:

Large Scale — Large infrastructure to accommodate renewable energy generation to include: new electricity grid network; targeted grid reinforcement; increased storage capabilities particularly for off-shore generation; smart grid testing and establishment. — Generation schemes based on established or near-market technologies where the UK has a signiﬁcant geographical, technical or competitive business edge, principally: on and off-shore wind; marine sector (wave & tidal); biomass and bioenergy to include renewable gas generation (to include injection and distribution via the national grid for clean gas using existing infrastructure— “gas to grid”).

Medium Scale — Local and community scale initiatives that bring together local areas (Local Authorities, businesses, utilities and communities) to manage and implement schemes aligned with the technology, geographical and commercial strengths of their area (such as wind or biomass for example). These enable communities to take the lead in transforming their areas through ownership and reward. Regen SW has established Communities for Renewables, to support communities across the south west to take the lead in establishing local wind schemes via partnership with commercial sector specialists. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w21

— Decentralised generation (heat and electricity) to include storage and distribution capabilities for local to medium scale renewable generation that integrates district generation schemes with domestic microgeneration and smart grid capabilities. — Energy efficiency measures for large industrial and commercial sectors that are aligned with renewable generation schemes as part of a “low carbon” package. 3.2 In addition to providing capital finance investment it is crucial that funding is available to build the capacity and skills of people across the UK to support work on the ground and ensure schemes are brought forward that are robust and financeable. This should be a priority as it will drive an increase in skills and entrepreneurialism and leave a lasting legacy for stimulating future economic growth across communities. 3.3 The GIB should seek to establish from the start an operational governance structure that has engagement in areas across the UK. This will enable the GIB to develop understanding and commercial engagement of specific areas of the UK with green technology strengths, for example marine, biomass, solar and wind markets in the South West. Failure to do so will ensure the GIB operates without the operational insights into key markets and strengths across the UK which will reduce the quality of investment decisions and of projects brought forward. 3.4 The GIB should not prioritise investment in domestic energy efficiency or microgeneration as these issues are already supported under a package of policy and taxation measures of the UK government, most notably the Feed in Tariff regime.

4. The funding and governance structures required to create an effective and accountable body, including the role of “green bonds” 4.1 Ensuring the GIB has effective governance, operational and funding structures that balances national objectives with intuitive knowledge of key areas of the UK is critical if the economic rewards of the low carbon transition are to be fully realised across the country. 4.2 The GIB should have an active operational presence and representation across all areas of the UK so as to build knowledge of geographical and technical strengths of areas and relationships with key players to increase innovative ﬁnancing of schemes. 4.3 It is essential that there is representation of the third sector on the GIB Board and Executive Team to ensure that its investment priorities are balanced and achieved across economic, environmental and social spheres. It is essential that maximum economic opportunities are extended to local businesses and communities to enable local wealth creation and leadership through the low carbon transition. 4.4 The operational structure must be developed to ensure the GIB can engage out in the “real world”, providing support to enable organisations to develop their capacity and skills to bring forward ﬁnanceable schemes. 15 October 2010

Written evidence submitted by the Society of Motor Manufacturers and Traders About SMMT and Contact 1. The Society of Motor Manufacturers and Traders (SMMT) is the leading trade association for the UK motor industry, providing expert advice and information to its members as well as to external organisations. It represents companies throughout the automotive sector ranging from vehicle manufacturers, component and material suppliers to power train providers and design engineers. The motor industry is a crucial sector of the UK economy, generating a manufacturing turnover of £51 billion, contributing over 10% of the UK’s total exports and supporting around 800,000 jobs. 2. SMMT welcomes the opportunity to submit evidence to the committee’s inquiry into the Green Investment Bank and also welcomes the principle of the Bank. 3. Summary — SMMT supports the establishment of a Green Investment Bank that looks to drive low carbon growth in the UK, supporting manufacturing, development of low carbon technology to market, as well as infrastructure projects.

— SMMT believes the Green Investment Bank must not only look at UK CO2 emission reductions as a core criterion but look to support low carbon sectors that are building industrial capacity in the UK and exporting products that will ultimately reduce global emissions. — The Bank should be able to utilise substantive capital to ensure access to ﬁnance is eased for both large and small ﬁrms throughout the automotive sector. — The UK automotive industry is well placed to contribute to an export-led growth strategy, and is central to the low carbon agenda and a re-balanced economy. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w22 Environmental Audit Committee: Evidence

A Strategic Approach to Low-carbon Growth 4. The UK automotive industry is a key sector of the economy with signiﬁcant growth potential in the low carbon economy, contributing to an export-led recovery and a re-balancing of the economy. The sector’s reach is substantial, encompassing the design, development, manufacturing, retail, service and repair of motor vehicles, engines and vehicle components. 5. Government should prioritise support for key growth sectors, such as automotive, when it comes to determine the scope of a Green Investment Bank. The Bank’s focus should reﬂect nationally-led sustainable growth policy, paying particular attention to government’s ambitions to re-balance the economy, make the UK an attractive place to do business and stimulate low carbon growth. Automotive is a strategic industry that is dynamic, globally competitive and a strong exporter. 6. Criteria for eligible sectors or companies should encompass the principle of supporting low carbon growth and industrial capability, as well as looking at reducing emissions. Road transport accounts for 18.9% of total UK carbon emissions,10 and the automotive sector is well placed to use Green Investment Bank support to invest in low carbon solutions to reduce emissions and meet climate change goals. Recommendations from the Green Investment Bank Commission11 suggest linking the establishment of the Bank, “to support the delivery of the UK’s emission reduction targets as set by the Climate Change Act 2008”. SMMT urges government and the Committee to consider not only investments that will impact on UK emissions, but also global emissions. As outlined previously, the UK automotive sector is an export-driven industry, vehicles and components designed, developed and manufactured in the UK will have a global reach and global impact in reducing CO2 emissions. Furthermore, successful low carbon investment in the UK will rely substantially on demand from export markets. 7. SMMT outlined in its submission ahead of government’s Comprehensive Spending Review that industry and government must work together to identify priority needs and maximise the effect of limited resources to strengthen economic growth. Government should also work with industry on the Green Investment Bank to ensure it can be of maximum value and contribute to long-term growth. 8. The Automotive Council has been established to bring together government and industry to implement key policies where collaboration is essential in providing the basis for growth within the sector. It seeks to make the UK a leading player in the transition to ultra-low carbon vehicles with particular emphasis on encouraging R&D and rebuilding the UK supply-base for current and emerging technologies. As part of this initiative a Technology Group was established to take forward work that was carried out through the New Automotive Innovation and Growth Team (NAIGT),12 which looks to identify the opportunities for the UK in low carbon technology. SMMT welcomes government’s commitment to the Automotive Council and the work being undertaken on promoting low carbon technologies.

Investment Challenges for UK Automotive 9. SMMT believes the Green Investment Bank should be able to leverage more capital for longer-term investments at lower interest rates to allow for investment in new technology. Previous experience of government loan guarantee schemes demonstrates that government guarantees which underwrite lending are not sufficient unless lenders’ credit committee criteria are modified to recognise the risk mitigation HM Government underwriting brings. In establishing the Green Investment Bank, government should be prepared to take equity risk as low carbon projects require longer term funding, which many commercial banks do not provide. 10. An industry consensus technology roadmap was developed as part of the NAIGT’s work, which looks to outline a broad timescale of the introduction of low carbon technologies within automotive companies’ product development plans (diagram 1, annex). From the roadmap it is evident that a wide range of overlapping technologies will be vital in reducing vehicle emissions. A series of investments will therefore be needed, which may occur simultaneously and have differing delivery dates. SMMT calls on government to utilise the technology roadmap in looking at the prioritisation of funding for R&D, through existing support mechanisms, such as the Technology Strategy Board (TSB); and also the Green Investment Bank. 11. Following the publication of the NAIGT report and technology roadmap, the TSB produced a report13 looking into current UK automotive capabilities. The study represents a first step towards gaining an understanding of current UK strength in each of the key technology areas identified through the NAIGT process. The report also identifies the UK’s likely long-term capabilities where current levels of R&D investment should at least be maintained. The report and the ongoing workstream from the Automotive 10 2008 figures, DfT Climate Change Factsheet, http://www.dft.gov.uk/pgr/statistics/datatablespublications/energyenvironment/climatechangefactsheets.pdf 11 Green Investment Bank Commission report, “Unlocking investment to deliver Britain’s low carbon future”, http://www.climatechangecapital.com/media/108890/ unlocking%20investment%20to%20deliver%20britain’s%20low%20carbon%20future%20- %20green%20investment%20bank%20commission%20report%20-%20final%20-%20june%202010.pdf 12 New Automotive Innovation and Growth Team report, May 2009, http://www.berr.gov.uk/files/file51139.pdf 13 Technology Strategy Board: Automotive Technologies: The UK’s current capability, http://www.innovateuk.org/_assets/pdf/Automotive%20Technologies%20-%20The%20UKs%20Current%20Capabilities.pdf cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w23

Council’s Technology Group should frame areas in which the Green Investment Bank is focused and funding through the TSB is channelled. Particular attention should be paid to the Technology Group’s work on priority technologies in the UK, so called “sticky technologies”, which include: high technology internal combustion engines; energy storage and management; lightweight structures; low cost power electronics; and intelligent transportation systems.

R&D and Finance 12. Encouraging R&D investment, whether inward or from abroad, should be a strategic priority for the UK. SMMT has called on government to support the stable and long-term funding for the TSB. The TSB’s competitions and funding play a critical role in bringing together global companies, academia and SMEs to work on projects. Proposals on the Green Investment Bank and funding allocated to it should complement the work of the TSB, which SMMT sees as a crucial partner in investing in projects that support and sustain long- term growth in the automotive sector. Principally, TSB support is often targeted at projects in the very early stages of research and development through “seed” funding. The Green Investment Bank’s role should therefore enable ﬁrms to access support in the middle to latter stages of development, providing certainty to companies to continue investment in the UK.

13. Low carbon manufacturing and R&D within the motor industry will be a driver for future growth, and as such government should focus resources on high-value added activities such as R&D investment and supporting manufacturing. This would support companies throughout the supply-chain. SMMT recently published a report14 carried out by the Centre for Economic and Business Research (CEBR) which concludes that government support is vital for R&D investment, where the UK lags behind international competitors, and says that improving access to ﬁnance and credit is crucial for the UK to achieve sustained economic recovery.

14. Access to finance has been a priority issue for SMMT and its members throughout the recession and it is imperative that government promotes positive financial conditions to ensure that businesses can access credit to further recovery. The Green Investment Bank should be part of government’s package of measures which recognises the significance and importance of finance being readily available for companies to invest in high value-added projects.

UK Competitiveness and the Wider Impact of Low Carbon Automotive 15. SMMT believes that government support through the Green Investment Bank that is strategically targeted will not only beneﬁt automotive and raise the prospects for future growth in the sector, but will also have a positive impact on the wider economy, supporting employment and creating new business opportunities. The scope of the Bank should enable not only small and medium sized companies access to ﬁnance that is much needed, but ensure larger companies throughout the sector, including the supply chain can be supported.

16. Companies within the UK automotive industry have established links with academia and universities across the country. Proposals around the Green Investment Bank should ensure that such institutions are engaged and that business and academic collaboration is encouraged.

17. The formation of the Green Investment Bank would enhance the UK’s investment offer, promoting the UK and strategic low carbon growth industries. For the automotive industry, encouraging investment should be a strategic priority for the UK. Positive signals of support from government that support R&D investment will increase the attractiveness of the UK to potential investment.

18. As we emerge from recession UK government must recognise the competitiveness of the UK business environment compared to other countries. The UK must be an attractive place to invest and to keep investing in, with long-term certainty for business planning. To guarantee low carbon industrial growth in the UK, government should ensure its offer through the Green Investment Bank is internationally competitive. For example, the US government has instituted a $25 billion automotive investment scheme, the “Advanced Technology Vehicle Manufacturing (ATVM) Loan Program”,15 for OEMs and suppliers, which provides substantial capital to companies investing in low carbon manufacturing and R&D. There is a signiﬁcant opportunity for the Green Investment Bank to spur similar investment in the UK.

19. The aforementioned CEBR report outlines that the UK ranks relatively low in terms of the total stock of R&D capital. Research from the European Investment Bank shows the R&D capital stock in the UK was around 7% of real value added in 2005, below the European Union average of 9% and the United States at 11% and Finland, Japan, Austria and Sweden all above 15%. This highlights the importance and urgency of UK government targeting funds to sectors which could invest in such value-added activities, like automotive. It also reiterates the need for the UK to recognise the competiveness and impacts of its policies on all types and sizes of companies, for example tax credits, and its support compared to other countries. 14 CEBR report, “Challenges for the Coalition Government—Encouraging private investment in R&D and ensuring there is a sufficient flow of credit to consumers and businesses”, http://www.smmt.co.uk/downloads/CEBRreportAugust2010.pdf 15 US Department of Energy, Loans Programs Office, https://lpo.energy.gov/?page_id=43 cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w24 Environmental Audit Committee: Evidence

Annex DIAGRAM 1: UK OEM CONSENSUS TECHNOLOGY ROADMAP

15 October 2010

Written evidence submitted by the Local Government Association Summary — The Local Government Association (LGA) believes that local government is essential for meeting national CO2 reduction targets, national and European Renewables targets, and improving the green infrastructure of the UK. — Through the Local Government Offer on Climate Change,16 the LGA has set out its proposals for a single source of funding for green infrastructure programmes. — The previous system of time-limited and size-limited grants has led to the stop-start of programmes, and the inability for councils to identify local opportunities for reducing carbon and delivering them. — The LGA asserts that access to streamlined external funding and revenue-creation programmes on climate change facilitated by the Green Investment Bank, will enable councils to deliver against their local carbon reduction delivery plans and drive carbon reduction and renewables programmes themselves.

1. 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 1.1 A significant challenge to the local government sector in acting on climate change in the past has been that resources have been spent chasing small pots of time-limited grant funding, administered to meet the targets of central government and its agencies, not the local opportunities available for carbon reduction or the needs of the people they serve. 1.2 The LGA has long advocated that the suite of funding pots for energy efficiency, and other carbon reduction programmes, be brought together into a single pot, originally called by the LGA in its 2009 “Kyoto to Kettering”17 publication a “National Community Energy Fund”. As national policy has developed, we see that there could also be opportunities to raise funds through the Green Investment Bank as a single source of funding. Whilst the scope of the Green Investment Bank is still debated, the LG Group is recommending that 16 For more information on the Local Government Offer on Climate Change go to http://www.lga.gov.uk/lga/core/page.do?pageId=14130080 (last accessed Oct 2010). 17 For more information on the LGA’s Publication “From Kyoto to Kettering” go to: http://www.lga.gov.uk/lga/aio/2400550 (last accessed Sept 2010). cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w25

funding is available to councils through the Green Investment Bank, at the rate it enjoys through prudential borrowing,18 for local evidence-based programmes with a good business case supporting it. 1.3 In 2009, the LGA estimated that there was around £7 billion available for home energy efficiency programmes, but this amount was spread over a myriad of funding pots and grants, making it difficult to councils to access and make the best investment decisions. Table 1 LGA (2009) KYOTO TO KETTERING Home Energy Efficiency Programmes Budget 2008–11

Carbon Emissions Reduction Target* £,2800 million Community Energy Saving Programme* £350 million Warm Front £874 million Decent Homes £2,200 million Social Housing Energy Saving Programme £84 million Additional energy saving obligation* £560 million Total £6,868 million Winter Fuel Payments2 £8,100 million (£2.7 billion per annum * energy supplier/generator obligation 1.4 Past mechanisms for accessing funding has been through applying for grants with strict criteria, looking to achieve a certain set of objectives. This is applicable to Government-led funding, such as the Social Housing Energy Saving Programme19 (SHESP) and private-sector led funding, such as the Community Energy Saving Programme20 (CESP). This has meant that councils have had to fold their projects to meet these national and short-lived objectives, rather than responding to local needs, opportunities, priorities and best value for money. The stop-start nature of CERT funding, as energy suppliers meet their targets early or wait for further direction from Government, has also made it difficult for local programmes to maintain continuity and keep valuable jobs in the insulation sector in place. 1.5 SHESP, whilst providing some funding for social housing energy efficiency improvements, only gave councils four weeks to develop their proposals, over the summer holiday period. This meant that only councils who were prepared, and pre-warned, were able to benefit. 70% of this funding was given to London Boroughs. The Local Low Carbon Transition Programme will help councils develop their local evidence base for future funding, but such ad hoc funding is not helpful to the sector 1.6 Many programmes, such as the CESP, provide private capital for local programmes, but require significant match funding. Leading councils are trying to use of European funding, through programmes such as ELANA21 and the European Investment Bank22 (EIB), to provide this match funding for UK green programmes. A UK-based programme with similar objectives, but routed in national policy direction, would enable councils to have better access to such match funding, ensuring the success of these programmes. 1.7 Finding match funding was cited as a barrier by 60% of respondents to the 2010 LGA Survey of Councils on Climate Change,23 and was reported to be the single biggest barrier to the funding of programmes, with 41% of respondents being concerned that there would be a decrease in internal funding for climate change in the next two years. 1.8 As part of a wider LGA campaign, we want to ensure that, should councils determine that local energy programmes are a good investment for prudential borrowing, or other forms of borrowing, there should be no restrictions on them going ahead with this investment. We understand that the Office of Government Commerce24 (OGC) considers prudential borrowing for carbon reduction programmes as a good use this resource, and it would give confidence to the sector to have a public statement to this effect. 18 For more information on prudential borrowing go to: http://www.lga.gov.uk/lga/publications/publication-display.do?id=22385 (last accessed Sept 2010). 19 The aim of the Social Housing Energy Saving Programme (SHESP) is to provide additional funding to help social landlords insulate hard to treat cavity walls that would not otherwise be filled under the Decent Homes programme. For more information go to: http://www.homesandcommunities.co.uk/energy-saving-programme (last accessed Sept 2010). 20 The Community Energy Saving Programme is an obligation on the energy suppliers and generators to improve the energy efficiency standards, and reduce the fuel bills, of households in hard-to-treat homes in the areas of lowest income in England. CESP promotes a “whole house” approach i.e. a package of energy efficiency measures best suited to the individual property. The programme is delivered through the development of community-based partnerships between Local Authorities (LAs), community groups and energy companies, via a house-by-house, street-by-street approach. For more information on CESP go to: http://www.decc.gov.uk/en/content/cms/what_we_do/consumers/saving_energy/cesp/cesp.aspx (last accessed Sept 2010). 21 For more information on ELENA go to: http://ec.europa.eu/energy/intelligent/ (last accessed Sept 2010). 22 For more information on the European Investment Bank go to: http://www.eib.org/ (last accessed Sept 2010). 23 For more information on the LGA Climate Change Survey go to http://www.lga.gov.uk/lga/aio/12891259 (last accessed Oct 2010). 24 For more information on the Office of Government Commerce, go to: http://www.ogc.gov.uk/ (last accessed 2010). cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w26 Environmental Audit Committee: Evidence

1.9 Crucial to the success of funding carbon reduction programmes from a Green Investment Bank is the ability to raise revenue from these programmes, and hence repay any investment loans. The LGA welcomes the introduction of the Feed-in Tariff (FiT) and the ability of councils to sell electricity, as a way to secure borrowing against an income stream that can be expected from local renewable energy deployment. We also hope that Government will be able to progress the Renewable Heat Incentive (RHI), which will further enable investment in low carbon heat technologies. Securing repayments through the Green Deal ﬁnance package would also allow councils to generate a small income to help repayment of loans.

2. 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 2.1 A key objective of the Green Investment Bank should be to provide a mechanism for councils to access and raise the funds to realise their local carbon reduction opportunities, particularly through infrastructure improvement and development programmes. These programmes can be based on the carbon reductions they will generate, as well as value for money and local support and buy-in. 2.2 These investment opportunities will include energy efficiency improvements of public and private sector buildings in their areas; energy generation and supply, particularly combined heat and power (CHP), heat networks, wind power and solar farms; local sustainable transport initiatives; and reducing waste and energy from waste plants, particularly Anaerobic Digestion plants. Many of these opportunities are likely to be of interest to the private sector and local communities, offering opportunities for local partnerships and bringing in funding from a range of sources. However, due to the perceived immaturity of the technology, or long- investment periods, these projects can be more difficult to raise finance for, or private sector finance requires significant public sector investment and support. The Green Investment Bank provides an opportunity for councils to access capital that supports investment in local green infrastructure that meets national carbon reduction objectives. 2.3 The local government sector also needs a consistent approach to accessing sufficient funds for local carbon reduction programmes that require significant match funding, particularly where there is private sector investment.

3. The Green Investment Bank’s investment priorities, and whether and how the bank should support and foster areas where the UK has emerging green technology strengths; and the funding and governance structures required to create an effective and accountable body, including the role of “green bonds” 3.1 The Green Investment Bank’s priorities should focus on small to medium scale programmes that reduce carbon, and are community-back. It should not only be for large-scale national programmes that national government is struggling to fund. It should also seek to support the carbon reduction and green economy objectives emerging from the Local Enterprise Partnerships. 3.2 For more information on the LG Group’s proposals for the raising of Municipal Bonds to deliver local infrastructure priorities, go to: http://www.lga.gov.uk/lga/aio/13757366 3.3 By focusing the Green Investment Bank’s support on local programmes, that cumulatively deliver signiﬁcant carbon reductions and save people money, the Bank will be delivering tangible improvements for people, in their homes and local spaces. 15 October 2010

Written evidence submitted by the TUC Summary The TUC welcomes the decision of the Environmental Audit Committee to inquire into the role of a Green Investment Bank in securing the UK’s green economic recovery. — The TUC is concerned that the UK Government does not currently have a convincing narrative around economic growth. — The Green Investment Bank has a vital role to play in delivering the massive investment, from infrastructure to company-level finance, needed to secure economic growth, generate employment and cut our CO2 emissions. In this submission, the TUC makes the case for: — Urgent action to establish the Bank as an independent entity. — It must have both independence and accountability to all stakeholders. — Its capitalisation must reflect the scale of the challenge: the GIB may need up to £20 billion in capitalisation by 2020—an average injection of £2 billion pa from 2011. — Its investment priorities should be in energy efficiency and renewable energies. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w27

1. The Case for Green Growth 1.1 The TUC is concerned that the UK Government does not currently have a convincing narrative around economic growth. We are conscious that a White Paper on growth is due to be published shortly after the Comprehensive Spending Review, but since May’s General Election, political discourse has been dominated by the fiscal deficit, leaving many observers (including the TUC) concerned at the risk of very slow growth or even a double-dip recession that this presents. Fears may have been reduced somewhat if a convincing argument had been put forward about how growth will be pursued alongside deficit reduction, especially after the public sector contracts on which many private sector companies rely have been cancelled. But no such argument has been forthcoming and the case for economic growth almost appears to be an afterthought. 1.2 The TUC believes this to be a profound mistake. In our view, growth cannot be taken for granted. In the short term, the path to steady economic recovery will be tough. In the longer term, the UK must take its place in the global economy based on a specialism in high skill, high value industries—industries which must be green. For example, where possible, ever more environmentally conscious commuters will wish to use high- speed rail, providing opportunities for UK-based companies in transport infrastructure. When they use their cars or fly, the will demand cleaner cars and aircraft. To give another example, there are major challenges facing sectors such as energy, discussed below, and construction. Taken together, this is the biggest economic and environmental challenge that we face, but it also has the capacity to be a major opportunity for UK industry if we seize the moment. 1.3 Of course, growth by itself is not enough. The UK must be mindful to ensure that it does not experience a jobless recovery. Growth must provide meaningful, high-skill, high value employment for ordinary people. A focus on the industries described above can bring about large scale employment, but government policy must be designed to ensure that this is the case. The TUC believes that one factor in the remit for loans from a future Green Investment Bank must include the number of quality jobs that any proposal delivers for the UK.

2. The CO2 Challenge

2.1 Meeting our legally-binding targets to cut the UK’s CO2 emissions by one third by 2020 presents a major financing challenge to the UK economy. It will require significant, new and sustained investment in low carbon technologies for energy supply and industry. Estimates of the investment required vary: Dieter Helm25 suggests £434 billion for new or replacement infrastructure by 2020, with Ofgem estimating £200 billion for energy alone. 2.2 If our aspiration is for the UK to be the No. 1 place for low carbon investment in Europe, with opportunities for new jobs and skills, new low carbon financing capability is needed to propel investment.

3. Just Transition

3.1 What is more, in its support for ambitious targets to cut CO2 emissions, the TUC has argued for a “just transition” to a low carbon future. Just transition is about recognising and planning fairly and sustainably for the huge changes that climate change policies will have for our whole economy. In the past, signiﬁcant periods of economic restructuring have often happened in a chaotic fashion, leaving ordinary people, families and communities to bear the brunt of the transition to new ways of producing wealth. The idea of “just transition” seeks to avoid this kind of injustice, so that this crucial transformation can progress with the speed and depth required. Financing a green new deal has to be part of this package. Any new major funding institution must be accountable and transparent in its activities. 3.2 In July 2010, the Committee on Climate Change26 (CCC) set out the UK’s “innovation challenge” to 2020 and beyond, commenting that: — current levels of public expenditure for RD&D should be regarded as a minimum; — cuts would be detrimental to the achievement of our climate goals; — UK energy RD&D funding is low by international standards; and — a two to ﬁvefold increase in innovation investment is required. 3.3 Among the key technologies the CCC recommends include investments in: — Four demonstration CCS plants, key to achieving required early power sector decarbonisation. — Demonstration of gas CCS power generation. — Offshore wind, which may require additional funding. — Increased funding for marine generation demonstration. — Current electric car funding, where £260 million is required to support pilot projects and early stage market development, with further funding likely to be required in the period to 2020. 25 Delivering a 21st Century Infrastructure for Britain, Dieter Helm, James Wardlaw and Ben Caldecott, Policy Exchange, 2009. 26 Building a low-carbon economy—the UK’s innovation challenge, Committee on Climate Change, July 2010. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w28 Environmental Audit Committee: Evidence

4. Green Investment Bank 4.1 Our current political discourse is dominated by tackling the deficit rather than boosting investment, yet there is an urgent and compelling need to get an effective Green Investment Bank up and running. A token gesture from Government will not do. An independent, adequately funded operation must emerge as a genuine driving force powering economic recovery, funding regeneration in the regions, and strengthening our energy security. 4.2 Recent estimates (Ernst & Young27) suggest that the UK needs to see a total of £450 billion in low carbon investment until 2025. This includes £225 billion in energy “supply side” investment and £225 billion in energy efficiency “demand side” investment. Of course, barriers to low carbon investment include the relatively high risk associated with new, low carbon technologies and the diverse business models that need to be developed. Companies and banks alone cannot be expected to shoulder the full burden of the huge investment required. As both the Wrigley Commission and Ernst & Young have suggest, the Green Investment Bank can help tackle these challenges by providing products and services aimed at sharing low carbon investment risk with the private sector and acting as a bridge to tap the vast pools of long-term capital held by the institutional investors. 4.3 The TUC is not the only voice that sees the economic imperative for a new powerful financial institution. We have joined forces with a number of other organisations to call for a Green Investment Bank, including BA, BT, Friends of the Earth, Green Alliance, TransformUK, Greenpeace and Microsoft, and investors such as AXA Investment Managers, Merrill Lynch and the British Venture Capital Association.

5. Funding and Mandate 5.1 The TUC supports the creation of an organisation with a clear mandate to provide affordable capital for low-carbon projects, from the Green Deal energy efﬁciency, which could create a quarter of a million jobs, to major infrastructure investments. 5.2 If this vision is to become a reality, then we also need to explore the potential of new funding mechanisms, including Green Bond, and to encourage institutional investors such as pension funds—who collectively control over £2 trillion of assets—to use the huge pool of capital at their disposal to support green growth. 5.3 Finally, although securing ﬁnance is certainly a major challenge in building the economy of the future, the fundamental issue is getting our strategy right. As the Stern Review concluded, climate change is the most compelling example of market failure in history. His report underlines the need for a pro-active, interventionist response, which must necessarily include: — an effective price of carbon that will drive low carbon investment and innovation; — a regulatory framework that will support and incentivise investments, especially in key projects such as carbon capture & storage, renewable energy through a feed-in tariff and other mechanisms to support domestic and larger scale renewables, such as offshore wind; — increased investment in our science infrastructure; and — a well funded green skills strategy to equip the UK’s workforce for the challenges ahead.

6. Three TUC Priorities to ensure a successful Green Investment Bank 6.1 Urgency: The Green Investment Bank must be fully operational within a year. Provision for it must therefore feature in the Energy Bill 2010. If this is not feasible, then in a new Bill during the next few months. 6.2 Independence and accountability: We would agree with the Wrigley Commission28 that the GIB should be set up by Act of Parliament as a permanent institution working in the long-term national interest. It must be a bank, not a fund, a key mark of which is that it can raise bonds. Any proﬁts derived from public funds should be reinvested. It should be independent of Parliament for individual investment decisions. It should include a stakeholder board that genuinely represents the wider public interest, including industry, trade union and civil society representatives, to ensure credibility, accountability and transparency in its investment strategy.

6.3 Capitalisation, to finance low carbon energy supply and energy efficiency: As has been widely acknowledged, the GIB Commission estimated that £550 billion in low carbon energy investment was needed in the UK over the next 10 years. In contrast, only £11 billion was invested in Britain’s “dash for gas” during the 1990s. The Commission highlighted the investment priorities of low carbon energy supply and energy efficiency investments, both domestic and business. We believe that, as a minimum, that the GIB may need up to £20 billion in capitalisation by 2020—an average injection of £2 billion per year from 2011. This would unlock many billions more in private capital investment. Obvious sources of revenue would include unlocking pension fund investment for green purposes; capitalising the bank by using revenue from the bank levy; and the auction of EUETS permits. Energy Efficiency must be a major priority. But we are concerned that the 27 Capitalising the Green Investment Bank, Ernst & Young, October 2010. 28 Unlocking investment to deliver Britain’s low carbon future, June 2010. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w29

Green Deal will not be able to raise cheap finance without using the GIB to raise Green Bonds as the prime source of finance. Green Bonds would enable the Bank to raise high levels of capital from the debt markets for both renewables infrastructure projects and a major national energy efficiency programme. 6.4 There is an urgent need to resolve the fundamental issues of what role the GIB must play in a green economic resurgence, its investment priorities and governance. What is not in doubt is that these decisions on the Bank must be made now, for no other reason than whilst we delay, the climate change we are determined to address continues to gather pace. 14 October 2010

Written evidence submitted by the Energy Services and Technology Association Executive Summary (i) Report after report stresses the central importance to our low carbon future of energy efficiency. (ii) Energy efficiency will reduce the size of the “gap” between low carbon supplies and consumer demand. Minimising the gap will reduce the costs of bridging it. (iii) Energy efficiency requires more than just the installation of energy-efficient equipment. The use of all energy-using equipment needs to be optimised and controlled, in order to maximise the savings. (iv) The non-domestic sector represents an undoubted opportunity to make significant and rapid savings. (v) We have over the years learnt that “picking winners” is not a precise task. Putting all the “eggs” of the GIB into just a few “baskets” could be a high cost route to a low carbon future. (vi) The UK has a vibrant, innovative SME sector. It is the area that generates a large share of UK wealth and jobs. The GIB should support the smaller, innovative companies that can deliver real savings. (vii) The Carbon Trust has undoubtedly been very successful in encouraging innovation. However, we feel that the GIB should use a slightly different model—of being a facilitator rather than a market-shaper. (viii) The latest energy management standards, in particular BS EN 16001, need to be promoted to incentivise better energy management. (ix) A robust auditing and compliance regime is essential to ensure that support achieves the savings promised.

ESTA The Energy Services and Technology Association (ESTA) represents nearly 120 major providers of energy management equipment and services across the UK. Members provide smart metering, Heating Ventilating & Air Conditioning (HVAC) control systems, Building Energy Management systems (BEMS), consultancy and many other energy-related services. A number of our members operate as Energy Services Companies (ESCOs) delivering a complete package of energy efficiency investments through performance contracts. Most of our members’ activities are focussed on the non-domestic buildings sector. ESTA has represented the interests of the energy efficiency industry for several decades now and regularly contributes to consultations regarding policy formation and policy implementation. Through its members, it also actively participates in the development of national and international standards relating to energy efficiency. www.esta.org.uk

Energy Efficiency and the Low Carbon Economy 1. The importance of energy efficiency, both in terms of combating climate change and in improving security of energy supply, is acknowledged at both national and European level. The EU has adopted a target of achieving a 20% increase in energy efficiency by 2020 in an attempt to make real inroads into carbon emissions. The UK Energy and Climate Change Secretary, Chris Huhne, speaking to the TUC Annual Climate Change Conference on 11 October, said that the Government’s first priority was to build a low carbon economy that would “help us recover at home and compete abroad”. He noted that saving energy was one of the key principles underlying the low carbon agenda. And he reminded his audience that: “Saving energy is still the cheapest way of closing the gap between supply and demand.” Energy efficiency is a fundamental part of the Green Deal to be included in the Energy Bill. 2. Closing, or at least reducing, the gap between supply and demand will mean that less investment in new generating capacity is needed to replace aging fossil-fired stations. This will help to reduce the overall cost of the transition. An aggressive energy efficiency campaign can also flatten the slope of the rising energy demand curve. 3. However, energy efficiency is about more than just the installation of energy efficient devices and equipment. If these are used inappropriately or needlessly, they will still waste energy: lights burning in an unused room are still wasting energy even if they are low-energy lights. Energy usage needs to be controlled in order to be truly efficient. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w30 Environmental Audit Committee: Evidence

4. Control strategies vary widely, depending on the speciﬁc location and patterns of use. Controls can be simple on-off switches, sensor-controlled switches (occupancy- or light-activated), timed controls, right through to full Building Energy Management Systems (BEMS). Advanced or smart metering systems incorporated into control systems offer a way of monitoring consumption and targeting savings.

5. ESTA would argue that non-domestic buildings offer a more immediate opportunity to improve efficiency and reduce emissions than domestic buildings. By and large they are more modern and are easier to adapt to new energy efficiency strategies. The energy consumption—and potential savings—per building are much higher in the non-domestic sector. Commercial organisations are more accustomed to evaluating the case for financial investment based on likely savings over a period of time. The Government is already targeting this sector through a number of measures such as the CRC Energy Efficiency Scheme. There is also a wealth of information freely available on “best practice” in non-domestic buildings.

6. Businesses and other organisations have experience in planning improvement programmes of all kinds— and of evaluating their impact. The non-domestic sector can therefore generate concrete data about the efficacy of specific energy efficiency measures. Quantified savings figures will inform Government and policy makers about which measures are most effective for reducing carbon emissions. These can inform policy on progress towards statutory climate goals.

7. There are a number of proven technologies available that are very successful in reducing energy consumption in non-domestic buildings. The energy efﬁciency industry has been in existence for several decades and has a track record in delivering real savings. It is continually developing new technologies and processes to bear down further on energy wastage. That process of development can be increased still further if the market expands. This can be through support for new technologies on the one hand and increased demand on the other. How should the Government and its agencies support that process?

8. The process of “picking winners” in any industry is unpopular today. Previous attempts to do so in a range of industrial sectors show indifferent results at best. Choosing a preferred technology at an early stage may not lead to the desired results. It may be the case that, given restricted funding levels, a rigorous ﬁltering is required in the case of large-scale projects. It remains, though, a high-risk strategy.

9. However, many of the developments occurring in energy management have relatively low research and development budgets. The energy efficiency industry consists largely of successful, innovative SMEs. We believe that the most efficient way of moving the industry forward is to support several of the more promising projects in a particular area and then let the market choose which will ultimately succeed. There will inevitably be failures but the successes will reflect the needs and preferences of the market. It is more likely to produce the right results for the market than one where the end product is pre-ordained.

10. The SME sector is the engine of innovation in the UK economy. Support for this sector will drive the transition to the low carbon economy, creating more long-term, sustainable employment.

11. The Carbon Trust has been very successful in moving the industry forward through its support programmes. This is undoubtedly due to its understanding of the private sector and the ways in which it operates. However, the Trust has over the years tended to shape the market through its support mechanisms. ESTA believes that the Green Investment Bank should be more of a facilitator of innovation than a market- shaper. We are pleased to see the statement from the GIB Commission that: “Operationally, the GIB should work under strict principles to ensure it does not crowd out the private sector, with the private sector leading and executing deals wherever activity is viable and the GIB operating only where its actions achieve a result that would not otherwise have been possible and then in partnership with the private sector wherever possible.” We welcome that statement but hope it would also apply to any subsidiaries that might be set up to administer future projects.

12. In order to achieve signiﬁcantly greater take-up of energy efﬁciency measures in the non-domestic sector, the latest international standards and best practice need to be promoted. BS EN 16001 Energy Management Systems (prepared with substantial UK input from ESTA members), the forthcoming international (ISO) standard on energy management and the forthcoming European standard on energy audits, need support in their implementation by Government and bodies like GIB. In this way, the UK can establish a common, high level approach to energy management.

13. Without auditing, investment programmes will fail to make the contribution to a low carbon economy that we are all working towards. Equally, without enforcement procedures, new regulations will be ineffective. Compliance monitoring is an essential part of achieving a green future for the UK. 15 October 2010 cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w31

Written evidence submitted by the Association of Greater Manchester Authorities and the Business Leadership Council Summary — The establishment of the GIB is critical if UK plc is to capture its share of the global market in low carbon goods and services as well as meet legally binding carbon emission targets. — The key aim of the GIB should be to provide public sector finance which will promote the facilitation of private sector finance thereby encouraging institutional investment. — It needs to have a clear remit and focus that simplifies and strengthens low carbon financing in the UK. — It needs to create a clear framework that manages risk and therefore generates opportunity. — Its investments need to be prioritised and structured in a way that maximises cost effectiveness as well as creating jobs and growth. — It will need to be transparent and independent and most importantly be adequately financed to meet the levels and scale of investment required.

1.0 Introduction 1.1 The achievement of carbon targets for 2020 presents a major financing challenge for the UK economy. Whether the current restraints on public sector finance prevail or not it is clear that given the sums involved the majority of this finance will need to come from the private sector. It is widely accepted that the size of investment in the low carbon agenda is likely to reach £550 billion by 2020 with the right level of risk mitigation. Analysis we have undertaken suggests that Greater Manchester’s share could be £10 billion over the next five years. Achieving these levels however is dependent upon mitigating the risk to investors. 1.2 The mechanisms employed for financing investment in this sector have thus far only been able to achieve incremental changes. An approach that uses public sector finance to fund the riskier elements of projects and thereby mitigate private sector risk within a single financial institution has the potential to substantially accelerate the UK’s market share of the low carbon economy. 1.3 Whilst the most striking benefit will be that of generating economic growth the establishment of the GIB will secure a range of additional social, economic and environmental benefits. The investments made will help protect consumers, either businesses or households from energy price shocks as well as help achieve legally binding carbon reduction targets. 1.4 Any decision to establish the GIB must be one based on cost effectiveness. The basis of this should be that an approach to lower the overall capital costs by using public sector finance to “de-risk” private sector investment needs to be set against the traditional approach of raising the rewards to investors through subsidies, which increases the cost of energy to the consumer. 1.5 However, we suggest that further criteria should be added to this in terms of how the GIB can contribute towards meeting legally binding carbon targets, productivity which promotes savings in national and local budgets, local creation of jobs, building a more balanced economy, stimulating growth amongst the sector and delivering a more even distribution of wealth. It could also make a significant contribution towards the Big Society in terms of empowering communities to meet their own energy needs.

2.0 Significance of Barriers Requiring the Establishment of the Green Investment Bank 2.1 The significance and nature of the barriers are such that unless they are removed there is a very high risk that the UK will not capitalise on the economic opportunities presented by the low carbon economy and will fail in its ability to meet legally binding climate change targets. The findings of the GIB Commission set up by the Chancellor identified the following barriers, which make the establishment of the GIB critical: — insufficient capacity in the debt capital markets; — lack of a clear robust policy framework; — barriers around the roll out of new technologies; and — the impractical nature of financing large numbers of smaller projects. 2.2 The Government’s approach to the deficit reduction and the impending rebalancing of fiscal spend which will be outlined in the Comprehensive Spending Review coupled with the sheer scale of investment needed make the need to attract private sector investment clear. However, we should not be put off by these challenges. There are numerous examples from other countries where productive public private sector finance partnerships can work effectively to generate high levels of investment. 2.3 The sheer number of organisations whose remit is to support the development of the low carbon economy and a historical lack of a comprehensive and co-ordinated approach has meant public sector money has been spread thinly across a wide range of initiatives making it increasingly difficult to lever in private sector finance. This has in part been responsible for the UK lagging behind many of its competitors in this sphere. Given the Government’s approach to reducing the number of organisations, the establishment of the GIB would represent cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w32 Environmental Audit Committee: Evidence

a unique opportunity to create a more coherent approach by creating a single entity with a single aim whose objectives would ensure it did not crowd out private sector finance. 2.4 Greater Manchester is well advanced in terms of developing a low carbon investment programme across a wide ranging portfolio of technologies and applications. These range from the development of renewable energy sources, such as deep geothermal heat, installation of a comprehensive district heat network that includes the offtake of heat from a new build power station into the city centre and the retrofitting of large swathes of the residential sector. However, the fundamental barrier that is holding back progress in the development of these programmes is the ability to secure low cost capital at the pace and scale required. Fundamentally, the lack of mezzanine finance, which coupled with the long payback periods, makes investment expensive which reduces investment opportunity. 2.5 The knock-on effect of this for Greater Manchester is that our global comparator cities show greater competitiveness where their national governments have established mechanisms to overcome these barriers, such as in Denmark (wind) and Germany (solar). Without intervention this will over time have an increasing impact on the growth and prosperity of the conurbation. Indeed the UK is already ranked below its competitors such as the US, China, Germany and India in terms of an attractive location for renewable energy investments. 2.6 If Greater Manchester captures its share of this investment, based on its current share of the global economy, investment in the low carbon sector could rise to £870 million per annum. However, without the establishment of the GIB the ability to secure these levels of investment will be severely hampered as investor confidence is eroded away.

3.0 Objectives and Roles 3.1 The primary purpose of the GIB must be to unlock the private sector investment required to finance low carbon technologies and infrastructure projects. This means it needs to be able to deliver investment products that reduce some of the policy and construction risks, but with a clear instruction not to crowd out private capital. 3.2 In achieving this purpose it needs to be clear about its objectives. It should not simply be about pumping more money into the sector overall, this will run the risk of under-deploying its capital. Rather it needs to target resources, which will help mobilise institutional investment. It is clear from our experience in Greater Manchester that there is increasing interest amongst institutional investors in financing low carbon infrastructure, however certain technologies and projects are more capable of being financed than others. 3.3 It is critical that the GIB avoids adding an additional layer to a system of finance and prioritisation that marginalises environmental outcomes. Ultimately, its success should be measured when its existence is no longer required, in other words when the market has corrected itself. The work being undertaken by Greater Manchester to create a single pot of finance where priorities are integrated within an investment framework is we believe the right approach. 3.4 Based upon the purpose outlined above it our view in Greater Manchester that the GIB needs to focus its objectives in the following areas: — Large scale infrastructure projects that are either of national significance or contribute towards the growth and prosperity of our big cities. — Focus investments on sectors which with a little support have the potential to be an important source of jobs, investment and enterprise and in so doing position itself alongside other financial providers to best accelerate these newer, less proven, investment opportunities. — Consolidate the myriad of small, disparate and unco-ordinated sources of public sector funding for low carbon technologies within a single institution, including those offered by the Carbon Trust, Technologies Strategy Board and UK Innovation Investment Fund. This simplifies things from a commercial viewpoint as well improving the overall cost effectiveness of the public sector. — Stimulate and provide support for entreupenership, innovation and enterprise. 3.5 The vast majority of institutional investor interest is coming from overseas as opposed to those in the UK; one objective of the GIB must be to raise the level of activity in this field amongst UK based institutions. 3.6 Given the above the GIB, with its focus on innovative risk mitigation, will send a strong signal to investors that the UK is serious about its low carbon transformation. By unlocking major new streams of investment the GIB will give greater certainty of meeting the UK’s climate change targets and give better value for money to taxpayers and energy consumers

4.0 Investment Priorities 4.1 The GIB needs to establish a transparent and clear investment framework that reflects cost effectiveness but also wealth creation, business growth and an ability to meet legally binding carbon emission targets. 4.2 Low carbon technologies and infrastructure represent profit making opportunities but climate change is a systematic risk that severely threatens the value of their assets across the economy. To mobilise these funds, we must ensure that appropriate public policy mechanisms are in place and are of sufficient scale. Many low cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w33

carbon investments are too small to be of commercial interest to mainstream private sector financial institutions. Above all investments need to be competitive and capable of delivering stable, long term returns. 4.3 Given the context above investment decisions of the GIB should be determined by three priorities sustainable economic growth, reduction of carbon emissions and the likelihood of attracting private sector finance. 4.4 Greater Manchester has been working with government departments on helping to accelerate low carbon growth opportunities in the built environment. This builds upon our unique strengths in terms of research and innovation capabilities, delivering large scale regeneration programmes and an established governance structure between ten local authorities, which has the support, and contribution of high level business. 4.5 Our programme of work, which we have committed seed funding for the next five years aims to build a broad retrofit programme across the residential, non-residential sector (public and private estates) as well as supporting new development and critical infrastructure around energy supply. As well as creating a demand side programme over the next five years worth upto 310 billion our aim is to upskill our workforce and support our business growth in this sector giving them a market advantage and in so doing help foster an increased market share for UK plc. 4.6 The density, volume and scale of our big cities give rise to significant opportunities to achieving economic prosperity and growth whilst contributing cost effectively to carbon reduction. These alongside large infrastructure projects such as mainline rail networks are likely to present the most attractive propositions for investment. Large scale retrofit programmes of the residential and non–residential sector, including that relating to decentralised heat and energy networks as being piloted in London and Manchester are starting to attract the interest of institutional investors. 4.7 Whilst greater Manchester is able to create low carbon infrastructure projects of scale that link to job creation and business growth and in so doing is attracting investor interest, the evidence would suggest that public sector money is needed to help mobilise this investment. Our Evergreen Fund, which is part of the EU JESSICA programme, has been developed along much the same lines albeit on a much smaller scale to the GIB. This approach, whilst in its early stages is showing positive signs of attracting private sector investment.

5.0 Funding and Governance Structures 5.1 The GIB Commission report demonstrated the size and scale of the investment needed—£550 billion by 2020. To meet this investment the Government needs to ensure that the GIB has the capitalisation and funding to match this figure. 5.2 Issuing bonds is a possible way to providing the upfront capital required to support projects that have lengthy but ultimately secure payback periods. Indeed by offering bonds with low but stable rates of return over a 25 year period match the life of the assets into which the funds would be invested in. 5.3 The advantage of specific bonds is that they can be designed to be secured against actual assets and would be a smaller burden on public debt. More generally, bonds are likely to become more attractive as new European regulations on capital finance and risk management standards come into force. 5.4 The World Bank has already issued green bonds to raise additional funding for projects that support low carbon activities in developing countries. In the UK bonds could be linked to specific low carbon projects so they are underpinned by tangible assets, which would pay for the bond and interest. 5.5 Energy efficiency in the residential sector is one area that would particularly benefit from a specialised bond. Energy efficiency generally produces quick and reliable returns. However, take up has been slow due to the high transaction and disruptive costs for residents coupled with the fact that individual projects are generally too small to be commercially viable for investors. Large scale schemes that are financed by bonds tied to dwellings rather than residents could produce stable returns for both investors and householders. This would provide cities like Manchester the opportunity to make more rapid progress on reducing carbon emissions. 5.6 One option proposed for providing the initial capitalisation alongside private sector capital and the amalgamation of existing public sector funds is to utilise revenue from the sale of emission permits under Phase 3 of the EU Emissions Trading Scheme. Whilst this revenue will source will reduce as the economy is decarbonised estimates suggest that it could provide upto £40 billion between 2012 and 2020. 5.7 Green ISAs also represent an effective way of providing finance, indeed surveys would suggest that such a produce would prove popular. Clearly, a Green ISA could take many forms. However, they would broadly invest either in companies innovating in low carbon technologies or in companies seeking to reduce their carbon profile. 5.8 The role that a financial strategy could play should not be ignored in terms of helping to allocate capital efficiently and effectively. The responsibilities of the trustees of pension funds should be strengthened so that they are encouraged to have greater regard to sustainable wealth creation and achievement of carbon targets. Indeed the Greater Manchester Local Authority Pension Scheme, which represents one of the largest of its type in the country, represents a significant financial opportunity. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w34 Environmental Audit Committee: Evidence

5.9 The Bank will need to achieve commercial success but at the same time ensure transparency and confidence especially as public money will be involved. As an independent institution it will require establishment through statute, however, this will take some time to achieve. In the short term therefore it could be established by merging some of the existing organisations as referenced earlier. This may provide some initial finance, however in the longer term it needs to be a fully fledged infrastructure bank. 5.10 The governance structure needs to have consideration to its interaction and fit with the Committee on Climate Change, which advises government on legally binding climate change targets and provides financial advice to Government on climate change-related investment issues. 15 October 2010

Written evidence submitted by the Centre for Process Innovation 1. The Centre for Process Innovation (CPI) 1.1 CPI is the Technology Innovation Centre (TIC) that serves the process and chemistry using industries. It is strongly focused on the “green” or “clean technology” sector in its target markets of sustainable processing and printable electronics. It works with public and private partners to develop processes that drive the more efﬁcient use and reuse of increasingly scarce sustainable natural resources. More information about CPI can be found in section 7 and at www.uk-cpi.com.

2. The signiﬁcance of barriers or market failures requiring the establishment of a Green Investment Bank (GIB) and the risks of not getting this done quickly 2.1 There is a signiﬁcant opportunity for the UK to increase the availability of investment to businesses, particularly start-ups and SMEs, that are developing innovative green technology. Raising funds, both capital and revenue for this type of business is very challenging in the current environment. 2.2 There is an appetite for green investment opportunities, but many opportunities are at an early stage of development and appear risky to the investment community, one of the roles of a Green Investment Bank (GIB) would be to create mechanisms that de-risk these investment opportunities. 2.3 CPI meets, creates and works with many innovative green technology businesses that are seeking investment. If a GIB is not created quickly many of these businesses will fail or will move out of the UK to secure investment.

3. The objectives and roles the Green Investment Bank should assume, the areas it should operate in and how its lending and investment decisions should balance green benefits against financial risks 3.1 CPI feels that a GIB would create benefit if it were to focus on the development and funding of early stage businesses between technology readiness levels 4 and 7. 3.2 A GIB could de-risk and support early stage businesses to ensure that investment opportunities and technology developments are being lost.

4. The Green Investment Bank’s investment priorities and whether and how the bank should support and foster areas where the UK has emerging green technology strengths 4.1 There is an opportunity to create a partnership between open access technology innovation centres (TICs), such as the Centre for Process Innovation (CPI) and a GIB to work together to de-risk early stage opportunities to create investable technical and commercial cases. 4.2 CPI would support a role for a GIB that provides early stage and follow-on finance for UK based technology development businesses that have the technical and business skills to create viable businesses. 4.3 To have greatest benefit a GIB should cover the whole green technology sector with a particular emphasis on technologies and businesses that reduce the use of natural resources, either by using resource more efficiently or by using wastes as part of the process. 4.4 The GIB’s investment priorities should be in sound technology and infrastructure that can economically satisfy the UK’s future needs. These priorities should include the priorities of BIS and the Technology Strategy Board. CPI has a particular interest in supporting industrial biotechnology, anaerobic digestion, sustainable engineering, smart chemistry and printable electronics.

5. The funding and governance structures required to create an effective and accountable body including the role of green bonds 5.1 The most effective role for a GIB would be to offer services and investment products that are not currently available. In CPI’s view support is most needed to cross the funding gap between research and mainstream proﬁtable businesses. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w35

6. Summary

6.1 As the TIC supporting the process industries CPI strongly supports the creation of a GIB and would be very happy to work collaboratively with Government and the Investment Community to create an innovative partnership between the ﬁnance and technology communities that can de-risk early stage investment opportunities to increase the success rates of early stage investments.

6.2 CPI also supports the development of an integrated mechanism for public sector intervention that supports and nurtures invention and the conversion of ideas into viable businesses. This development of the existing mechanism would make funding available to support research and discovery (through the Research Councils), technology development and innovation (through the Technology Strategy Board) and early stage ﬁnance (through a Green Investment Bank). We feel a model of this type would increase the success of public investment and create a public private partnership that brings viable businesses to proﬁtable commercial reality.

7. Introduction to the Centre for Process Innovation

7.1 CPI is the Technology Innovation Centre (TIC) that serves the process and chemistry using industries. It is strongly focused on the “green” or “clean technology” sector in its target markets of sustainable processing and printable electronics. It works with public and private partners to develop processes that drive the more efﬁcient use and reuse of increasingly scarce sustainable natural resources.

7.2 It does this by combining market knowledge and technology understanding to develop and prototype products and processes quickly and efﬁciently with minimal risk to its public and private sector partners. The organisation supplies its advanced manufacturing products and services internationally.

7.3 The company works in the innovation space between the discovery of an idea and the delivery of a product or service to the commercial market. In technology readiness levels (TRL) CPI works from level 4 to level 7. The business model has delivered substantial beneﬁt because it links the needs of business to CPI assets and technology expertise.

7.4 The CPI team has consistently delivered innovation assets and leading edge development programmes on time and to budget. In its six years of existence it has grown at over 60% per year and now serves major clients such as Arup, Corus, Akzo Nobel, Croda International, Ensus, DeLaRue, Dr Reddy’s, Johnson Matthey, Unilever and Thorn Lighting. It has an international reputation in two main technology areas: — Advanced Manufacturing for the Process Industries—Markets served include energy, high value chemicals, carbon capture and pharmaceuticals. This business unit is home to the National Industrial Biotechnology Facility and Anaerobic Digestion Development Centre. — Printable Electronics—CPI targets barrier coatings, advanced material deposition processes, printable electronic materials, printable circuits for high resolution display and smart packaging applications, solid state lighting and organic photovoltaics.

7.5 The CPI model has been developed and tested to serve the process industries. It is currently also developing innovation opportunities for a range of markets from high temperature processing to zero carbon communities. The CPI approach can readily be applied to set-up and grow technology innovation centres for other market sectors that are of strategic importance to the UK. 15 October 2010

Written evidence submitted by Scottish and Southern Energy

It is estimated that the UK’s energy infrastructure will need at least £200 billion29 worth of investment before 2020 if it is to meet its statutory climate change and renewable energy targets, and enable the UK to move to a low carbon economy. This investment is needed in all areas of energy infrastructure from upgrading the electricity grid to become smarter, to making the UK housing stock energy efﬁcient, to demonstrating Carbon Capture and Storage technology and developing more sources of renewable energy.

Some of the areas which require investment are relatively new and the risks involved are judged by the capital markets to be high. Combined with the current economic climate the result is that there is less capital available, and that the cost of this capital is higher. Given the scale and pace of investment required there is a genuine risk of a funding gap between what is required to meet targets, and what it is possible for the industry to raise and spend. This is of concern to both industry and Government and the announcement of the creation of a Green Investment Bank, the aim of which is to partially mitigate these problems, was therefore welcomed on all sides. 29 The future of UK energy (Speech by Charles Hendry to the Fuellers lecture 25th Anniversary), 29 September 2010. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w36 Environmental Audit Committee: Evidence

However six months after the election there is still a great deal of debate as to what a Green Investment Bank (GIB) should look like, and what its role should be. Given its position as the UK’s broadest based utility with a ﬁve year, £6.7 billion investment programme SSE has been heavily involved in these discussions, and has come to a number of conclusions about how a Green Investment Bank could operate, and which areas it should focus on: — The GIB should not attempt to provide ﬁnance to a variety of different areas. Rather it should focus its resources and expertise on a small number of areas, the risks of which are currently not understood, and therefore overpriced, by the capital markets. This will provide best value for money in terms of output. — The area in which the GIB could have the most impact are the pre-construction stages of capital intensive, low carbon electricity generation projects such as CCS, nuclear, and renewables. — It is anticipated that the UK will need 15GW of offshore wind capacity by 2020 if it is to meet its renewable energy target. This represents over 50% of the 27GW of renewable capacity required. Given the need therefore for the UK to expand its offshore wind capacity and to reduce the costs of this technology as much as possible, SSE believes that the GIB should initially prioritise offshore wind projects. — To operate effectively the GIB must have an adequate investment capacity; SSE believes that it would need at least £4–5 billion of initial funding to be effective.

What are the barriers or “market failures” requiring the establishment of a Green Investment Bank?

The major barrier that the energy industry faces is, simply, the scale and pace of the investment required over the next decade. At present companies are investing more than ever before, and this needs to be doubled (at least) if required investment levels are to be met. The concern is that this increased investment will not take place under current market conditions, thereby potentially creating a signiﬁcant funding gap. There are two main reasons for this:

1. There is a limited amount of capital which will be supplied to the energy sector

This is partly a reﬂection of a general scarcity of capital, but more fundamentally it is due to the market failure of the capital markets.

When investors consider whether to invest in a particular project they look at each stage of that project, identify the risks with each, and then set the cost of capital according to these perceived risks; the higher the perceived risk the higher the cost of capital. There are number of different types of risks associated with energy infrastructure projects including: planning—will a project receive planning consent; grid access—will it be given access to the electricity grid in time and at what cost; construction; operational; and price risk—the risk associated with a ﬂuctuating energy price.

At present the capital markets are not fully comfortable with the risks involved with major energy infrastructure projects such as offshore wind, CCS or new nuclear. These are relatively new technologies, with no proven track record and take a number of years to develop and build (long lead times).

As such investors are naturally cautious when it comes to pricing the risk of each stage; this leads to the risk, and therefore the overall cost of capital, being overpriced and discourages development of new infrastructure. It has also become increasingly evident that institutional investors—those providing equity rather than debt—are unwilling to support new investments in new technologies such as offshore wind.

2. Companies balance sheets are already stretched

The companies operating in the UK energy sector are currently investing around £8 billion annually, a signiﬁcant increase from levels in the 1990’s, and this has resulted in the sector becoming very highly leveraged ie it has borrowed a great deal already in order to implement its current investment programme.

In order to ﬁll the funding gap companies would have to increase total investment in the UK to £26 billion a year for the next ten years, an increase of 210%. However, without putting their credit ratings at risk, companies will not be able to raise this level of capital through either debt or equity even if potential investments are sound.30

Therefore, as things stand, the investment required to upgrade existing, and build new, energy infrastructure is extremely unlikely to happen. In order to overcome these barriers to additional investment in the energy sector Government is considering some alternative options; the Green Investment Bank and Electricity Market Reform. It is hoped that one or both of these interventions would enable investment to be delivered more quickly than it would be under a business-as-usual scenario: 30 “The 1trn Euro Decade—Revisited”—Report by Citigroup (29 September 2010); p. 17. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w37

Impact of Electricity Market Reform SSE feels that reforming the electricity market will have a limited impact on the funding gap. This is because most reform options—eg a move to a full feed-in-tariff for renewable electricity generation—focus on price risk: reducing the risks around the price of electricity which generators receive from the project. These price risks only make up a very small proportion of the cost of capital—others, particularly construction risk, make up a much larger percentage; therefore reducing the price risks around a project only slightly reduces the average cost of capital. SSE has calculated that it would reduce the cost of capital by 0.5% for a wind project, and have a number of unintended negative consequences. In addition increasing revenues from generation projects through higher subsidies for different technologies is also unlikely to result in additional investment. Whilst this might seem illogical from the outset (higher returns should result in more interest from investors) it is as a direct result of the problem outlined above: namely that capital markets are not providing the volume of capital needed. As such SSE feels that it is unlikely that electricity market reforms will be able to ﬁll much of the funding gap—indeed, some of the proposed reforms will be ineffective unless the cost of capital is reduced sufﬁciently.

The Green Investment Bank The key question is therefore whether a GIB can fare any better than market reforms in providing the additional ﬁnancing that the energy sector requires. SSE believes that it can if it limits its role and objectives, and clearly prioritises its investment areas.

What objectives and roles should the GIB assume, which areas should it operate in, and what should its investment priorities be? In order to effectively encourage additional investment in the energy sector to meet the potential funding gap the GIB must focus its efforts on removing the existing barriers; the overpricing of risk by the private capital markets due to a lack of comfort with the technologies and rates of return; and the impacts of the limited balance sheets of the major developers. As such SSE believes that the role of the GIB should be to fill the knowledge gaps left by the private markets, with its objective being to become a specialist in its chosen areas and to therefore price risk at a reasonable rate. In order to do this effectively the GIB must limit the areas in which it operates, otherwise it runs the risk of spreading itself too thinly and diluting its potential impact—the GIB can not and should not try to fund every facet of green energy. However, although the GIB should be designed to plug the gaps left by the private markets it should have a clear exit strategy that allows it to gradually withdraw its support from an area once the private markets have become comfortable with the risks involved. It should not crowd out this investor, but act as an interim source of funding until this investment is forthcoming. It is also important to note that in order the GIB is to plug the gaps left by the private markets it must employ, and retain, experts who understand technology, construction and policy risks better than the market. If the areas in which the GIB operates are limited then it is crucial that it focuses on the areas in which it can have most effect. Clearly there will be a number of different views as to what these are and all of these should be taken into account when final decisions are made. SSE believes that a GIB could be most effective in one area: — The pre-construction stage of capital intensive low carbon technologies, particularly offshore wind. The main financing constraint for the sector is at the pre-construction stage of capital-intensive low carbon technologies such as offshore wind, CCS, and nuclear. As noted above these technologies have long lead times where there is not yet a track record to allow financial markets to be comfortable with the construction risks— as such these risks are being overpriced. A GIB could provide equity or debt finance at the construction stage of these projects at reasonable rates (which private markets are not currently delivering) and would also allow developers to spread the limited spare capacity on their balance sheets over more projects as a result. This finance would then be recycled with the Green Bank selling its stake once the construction phase is complete. Given the need to both decarbonise and increase renewable generation capacity SSE believes the priority for investment in the first instance should be offshore wind projects. Currently the UK has 1.3GW of offshore wind capacity installed,31 but it is anticipated that the UK will need 15GW of offshore wind by 2020 in order to meet its 27GW renewable targets. This equates to around £5 billion of investment a year for the next decade.32 31 Figures from Renewable UK. 32 Based on a cost of £3 billion to build 1GW of offshore wind. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w38 Environmental Audit Committee: Evidence

An example of how the GIB might help move an offshore wind project forward is illustrated below:

An Equity-Co-Investment Model SSE envisages the Green Bank (GB) providing equity co-investment for offshore wind with the following key features: — Investment would be made alongside sponsor(s) before the start of construction; — The equity would be “passive”—the sponsor would be responsible for project delivery; — The funding would be 50/50 matched funding with the GB facing an identical risk proﬁle to the sponsor(s); and — At commissioning, the GB would sell it’s stake and the capital would be recycled into other projects. At this stage the sponsor(s) would have a call option to buy out the GB that would be used to target a reasonable return for the sponsors. With this type of investment the GIB would be “making markets”, rather than crowding out existing private markets. In this way the bank could help resolve short and medium term ﬁnancing issues and lead to more infrastructure being delivered to meet the Government’s targets.

How should a GIB be funded? This is a key question as the overall effectiveness of the GIB will be limited by the amount of capital it can raise in the first instance. SSE believes that there are three options which are likely to most effective in raising funds for the bank: — Consumer co-investment: this is a model suggested by Rothschild’s and other financial institutions and would have the benefit of taking funds off the public balance sheet. Finance is provided by the private capital markets but is underwritten by future consumer bills—in other words if projects sponsored by the GIB fail and debtors can not be paid from investment returns, a consumer levy could be applied electricity and/ or gas bills to make up the shortfall. — Whilst using consumer bills as collateral may be seen to be problematic, in practice it is extremely unlikely that they would ever be needed if the GIB makes disciplined investment decisions and diversifies the risk across enough projects. In addition, if bills are not used to underwrite risk it is doubtful as to whether investors would be willing to finance the GIB at low enough interest rates. — Green Bonds: the GIB could issue and market green bonds, which could be a way to channel pension and insurance fund money into the sector. The challenge however will be to ensure that these bonds have a high enough rating to attract these typically risk-averse investors—giving bonds a “green” brand will help to attract the growing number of “ethical” investors, but to be fully effective they must also be attractive to the entire market. This is highly likely to require some form of underwriting by either the Government or consumers. — Green ISA’s: allowing tax efficient investment by individuals could be an effective way of raising funds and offers the opportunity for the public to engage directly in the low carbon investment challenge. Whichever funding route(s) are chosen it is important that the amount of capital raised is sufficient for the GIB to be effective. In the Emergency Budget in May the Government suggested that a GIB would have around £2 billion of initial capital but SSE would question whether this figure is enough. An offshore wind farm, for example, costs £3 billion per GW, and therefore 50% of a 500MW project would be around £750 million. Given that the Bank would probably want to spread it’s capital over at least four projects to reduce exposure, the implication is that £2 billion would not be sufficient. SSE therefore believes that, providing the capital is being recycled every two to three years, the GIB would have to be capitalised to at least £4–£5 billion initially. This was also the conclusion of the recent report by the Aldersgate Group, and a recent report by Citigroup suggested that the level would have to be even higher than this if the GIB was to be truly effective. 15 October 2010

Written evidence submitted by the Energy Saving Trust 1. Summary — The use of new financial mechanisms could be instrumental in bringing about a step change in the level of investment in this sector. — Barriers to basic measures of loft insulation and cavity wall insulation are awareness, motivation, and affordability. Low awareness suggests an important role for information and advice provision. — Bill savings from energy efficiency or renewables are typically heavily discounted by consumers. People apply short time frames, three to five years. Even with grant support, high upfront costs are likely to remain a significant barrier, particularly for lower income households. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w39

— Proactive provision of information can help overcome the hassle involved in seeking out advice. Intensive local activity can help motivate residents to get involved. Local authorities, community groups, third sector organisations and charities are typically highly trusted, so their involvement in local schemes can help increase consumer appetite and buy-in. — Levels of interest attached to loans and the source of finance will have a significant impact on the attractiveness of finance packages. Many consumers do not believe they should be exposed to commercial levels of interest when borrowing money to undertake such work. — It could be financially viable to deliver emissions reductions of 30% by 2020 against a 2013 baseline at 6% cost of capital, with 10% of the value passed to the resident. Lower costs of capital or higher energy price inflation would allow a proportion of the benefits to be passed on to the occupier through lower energy bills, for example with 3% cost of capital it would be possible to pass 20% of the value to the resident.

2. Barriers Preventing Greater Take Up of Energy Efficiency Measures 2.1 The Energy Saving Trust has conducted research33 into barriers to the uptake of basic energy efficiency measures; we did this by surveying households that have not taken up basic measures of loft insulation or cavity wall insulation. The barriers fall into three categories: Awareness—residents claim they don’t know about taking the measures, or don’t know how to take them. 15% say they have never thought of installing cavity wall or loft insulation.34 Motivational—they have not taken the measures because they consider it a hassle, or they are “putting it off”. Affordability—installing loft or cavity wall insulation is considered to be too expensive or the payback period too long. 2.2 Once informed of the true costs, benefits, the speed, and simplicity of the process, people are often pleasantly surprised. Low awareness of insulation suggests an important role for information and advice provision.

33 Energy Saving Trust, At Home With Energy: a selection of insights into domestic energy use across the UK, July 2010. 34 Energy Saving Trust, At Home With Energy: a selection of insights into domestic energy use across the UK, July 2010. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w40 Environmental Audit Committee: Evidence

Figure 1 KEY BARRIERS FOR CAVITY WALL INSULATION

Figure 2 KEY BARRIERS FOR LOFT INSULATION 2.3 The greatest challenges relate to the take-up of high cost measures which are least familiar to consumers, such as microgeneration technologies and solid wall insulation. Solid wall insulation faces particular challenges due to consumer concerns over visible impacts and the disruption during installation. Initiatives that provide access to ﬁnance may help make such schemes affordable and more attractive, but the terms of such schemes will be important. 2.4 The Climate Change Committee estimates that 2.3 million homes will need to have solid wall insulation ﬁtted by 2022 to meet climate change targets. On a linear trajectory that suggests 210,000 installations per year between 2011 and 2022. At present it is estimated that there are only 16,000 to 23,000 solid wall insulation refurbishments undertaken per year, with the majority of these, over 65%, being external wall insulation. The vast majority of these jobs are in social housing. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w41

Figure 3 AWARENESS OF MICROGENERATION TECHNOLOGIES

2.5 Although solid wall insulation has a similar cost to a number of microgeneration technologies, the challenges are very different. 42% haven’t heard of or thought about solid wall insulation.35 2.6 The top four barriers to external wall insulation are: “appearance of house”; “too expensive”; “changes the character of my home”; “physical disruption to install”. The top barriers to internal wall insulation are: “physical disruption”; “having to redecorate”; “too expensive”; and “hidden costs”.36 2.7 The understanding of microgeneration technologies is low. Very few have heard of heat pumps. 48% of people would like to know the suitability of their home for renewable energy.37 There is a clear demand for information and advice on microgeneration, people report being confused over the amount of information available and not knowing where to start or who to trust. 2.8 Bill savings from energy efficiency or renewables are typically heavily discounted by consumers. People apply short time frames up to five years and often only up to three years. Willingness to pay is related to socioeconomic circumstances. Our experience of managing the Low Carbon Buildings Programme suggests that, even with grant support, high upfront costs are likely to remain a significant barrier, particularly for lower income households. 71% of households who received the grant were from social groups ABC1 (and over 45 years old).38 2.9 Both microgeneration and solid wall insulation cost thousands of pounds, however stated willingness to pay does not match up to this. Among socioeconomic groups A and B stated willingness to pay is on average £1127, C1 and C2 state £899, and D and E £795.

35 Energy Saving Trust, At Home With Energy: a selection of insights into domestic energy use across the UK, July 2010. 36 Energy Saving Trust, At Home With Energy: a selection of insights into domestic energy use across the UK, July 2010. 37 Energy Saving Trust, Attitude Tracker, 2010. 38 Energy Saving Trust, At Home With Energy: a selection of insights into domestic energy use across the UK, July 2010. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w42 Environmental Audit Committee: Evidence

Figure 4 WILLINGNESS TO PAY

3. Measures Needed for the UK to Improve Domestic Energy Efficiency 3.1 Proactive provision of information can help overcome the hassle involved in seeking out advice. This can help deliver take-up among the sizeable proportion of people who are open to measures but not sufficiently motivated to act on their own and to investigate options. Intensive local activity can help motivate residents to get involved, by tapping into an area’s sense of community and making the process of having measures installed feel more normal and attractive. 25% of people say they would be more likely to install energy efficiency measures if their friends and neighbours were doing it.39 3.2 Local authorities, community groups, third sector organisations and charities are typically highly trusted, so their involvement in local schemes can help increase consumer appetite and buy in. Area based scheme case study Sheffield City Council is running an area based insulation scheme offering cavity wall, loft and water tank insulation. Energy advisors go door-to-door in priority areas to sign up householders to the scheme where they are referred on for installations to be installed. The energy advisor visit helps increase appetite for measures and removes much of the hassle from the perspective of the householder. Funding from CERT (Carbon Emissions Reduction Target) was supplemented with funds from the council to enable measures to be offered free and the scheme to cover additional costs of scaffolding where necessary. A free loft clearance is also offered. Of those contacted 71% have actively participated, 16% have had cavity wall or loft insulation installed, with an additional 5% in the pipeline. 3.3 It is important that ways are found to incentivise the take up of energy efficiency measures, including solid wall insulation. Levels of interest attached to loans and the source of the finance will have a significant impact on the attractiveness of finance packages. Many consumers do not believe they should be exposed to commercial levels of interest when borrowing money to undertake such work. 3.4 Trigger points—The best time to undertake significant improvements to the efficiency of the home is when other work is already planned or underway.

4. Current and Future Financing Options Open to Consumers to Fund Energy Efﬁciency Measures 4.1 The Feed in Tariff (FIT) is projected to support the uptake of 750,000 domestic scale installations (predominantly solar photovoltaics). The impact assessment for the proposed Renewable Heat Incentive (RHI) estimated that it would deliver 1.7 million installations by 2020. 4.2 The Carbon Emissions Reduction Target (CERT) is a statutory obligation on electricity and gas suppliers to reduce CO2 emissions from homes in Britain. CERT commenced in April 2008 and December 2012, and focuses on the installation of cavity wall and loft insulation. The Community Energy Saving Programme (CESP) requires gas and electricity suppliers and electricity generators to deliver energy saving measures to 39 Energy Saving Trust, At Home With Energy: a selection of insights into domestic energy use across the UK, July 2010. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w43

domestic consumers in specific low income areas of Great Britain between October 2009 and December 2012. As all the finance for CERT and CESP is provided by energy suppliers (recovered through customer bills) under statutory obligation this funding will not be affected by the economic downturn. 4.3 Warm Front is a government funded fuel poverty programme that improves energy efficiency of the homes of the fuel poor. Grants are available for a package of insulation and heating improvements up to £3,000 (or £6,000 where oil, low carbon or renewable technologies are recommended). The scheme runs until March 2011. As yet there is no clarity on what happens after this date. 4.4 Scotland Home Insulation Scheme is funded by the Scottish Government. Cavity wall and loft insulation is offered at a special price or free of charge to certain eligible households. Households are targeted as part of an area-wide, door-to-door approach. 4.5 Energy saving materials receive reduced rate VAT if professionally installed. If installed in a new house there will be no VAT at all.40 4.6 The Boiler Scrappage Scheme has been very successful with many householders interested in upgrading their old G rated boilers for a new A rated boiler. The scheme has now closed and all vouchers have been allocated. In total, 133,976 vouchers were allocated under the scheme. 118,249 boilers have been installed, based on the number of claims to date.41 4.7 Our research shows that there is a preference for short rather than long term loans (five compared with 10 years). There is a distrust of 25 year loans as it was stated that they “can’t predict energy bills” or determine saving cost effectiveness for such a long period of time. 37.7% of those surveyed, who claimed that they would invest in a package of energy efficiency measures in the near future, favoured an interest free loan from the Local Authority as a means of financing those measures.42 4.8 We have recently completed research into financing options for low carbon retrofit of homes.43 The study demonstrates how it could be financially viable to deliver emissions reductions of 30% by 2020, against a 2013 baseline. This would be through a comprehensive refurbishment package that includes various energy efficiency measures such as double glazing and heating controls, and selected low carbon technologies such as heat pumps and solar PV. The study examines the value of low carbon housing refurbishment by comparing the capital cost of different levels of intervention against the potential to generate energy savings and revenue from the renewable energy financial support mechanisms. 4.9 The use of new financial mechanisms could be instrumental in bringing about a step change in the level of investment in this sector. The modelling showed great potential for financially viable investments in low carbon refurbishment. 4.10 Across the British housing stock, at 6% cost of capital it could be financially viable to deliver emission reductions of 30% by 2020, 50% by 2030 and 80% by 2050 against a 2013 baseline, with 10% of the value passed to the resident.44 Note, this is dependent on grid decarbonisation taking place according to DECC’s projections. It also assumes there is no limit to the number of projects that can be supported by FIT and RHI. Modelling is based on RHI rates used in the Government’s RHI consultation and are indicative only.45 However, it is encouraging as the reductions are broadly in line with the UK’s targets under the Climate Change Act. The opportunities would be enhanced by a lower cost of capital or higher energy price inflation, which would allow a greater proportion of the benefits to be passed on to the home occupier through lower energy bills. For example, at 3% cost of capital it would be possible for around 20% of the value to pass to the resident.46 The modelling has shown that long contract lengths are important—typically 25 years—in order for the investor to generate maximum return on their investment. 4.11 Pre-capitalising part of the Renewable Heat Incentive tariff to help cover the high up-front cost that investing in renewables represents could make purchase of renewable heat technologies more attractive. This could be combined with a smaller ongoing subsidy to satisfy the Government’s intention to ensure the equipment is maintained and used. Such an approach would ensure that the costs of the scheme are kept down whilst still generating the same amount of renewable heat. 4.12 Further research47 we have completed looks at how a seven million homes programme of large scale eco-refurbishment across Britain might be financed over the next 10 years. The model we present is only one approach to long term financing. We believe it is worth trialling and we are working with local authorities to do so. 40 http://www.hmrc.gov.uk/vat/sectors/consumers/energy-saving.htm 41 http://www.energysavingtrust.org.uk/Home-improvements-and-products/Heating-and-hot-water/node_422772 42 Energy Saving Trust, Green Finance Uptake research, January 2009. 43 Energy Efficiency Partnership for Homes and Energy Saving Trust, New Finance Mechanisms for Housing—stage 2, soon to be published. 44 Energy Efficiency partnership for Homes and Energy Saving Trust, New Finance Mechanisms for Housing—stage 2, soon to be published. 45 DECC, Consultation on Renewable Heat Incentive, February 2010. 46 Energy Efficiency partnership for Homes and Energy Saving Trust, New Finance Mechanisms for Housing—stage 2, soon to be published. 47 Energy Saving Trust, An Approach to Financing Household Eco-refurbishment in the UK, forthcoming. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w44 Environmental Audit Committee: Evidence

4.13 This financing and delivery model is based on current legislation but uses mechanisms—such as Pay as You Save—which will be central to the government’s planned Green Deal. Our report48 suggests that the eco-refurbishment financing programme could be considered in two phases. Phase one signs up householders and deploys the measures and then runs the programme until cash flows are stable. This would be based on a finance mechanism set up by the Local Authority known as a Special Purpose Vehicle. The SPV would consist of a project finance layer using non-recourse debt from private sector banks and a buffer capital layer probably from local authorities to provide some protection to the banks, financed from the Public Works Loan Board. Phase two then packages these cash flows into a refinancing programme that enables capital to be redeployed to bring on more householders. In essence, phase two is the long-term target financing state and phase one provides bridging finance to get there. The fund will enable house owners to have access to low cost finance for an energy efficiency programme supported by additional income through rental payments from the hosting of renewable energy systems where appropriate. 15 October 2010

Written evidence submitted by the Carlyle Group Summary — The Carlyle Group agrees that a Green Investment Bank (GIB) needs to be established. The scale of the investment in new technologies, new infrastructure assets and supply chains required to meet the UK’s legally binding climate change and renewable energy targets is enormous. — There are, however, a number of market failures and investment barriers in ﬁnancing low carbon infrastructure and unless they are addressed, the UK’s emissions targets will not be achieved. A massive injection of private sector investment is a prerequisite for the UK meeting its legal obligations. — The government should move to establish the GIB without delay, in order to provide investors in low carbon technologies with the clarity and certainty about the policy environment that they need. There is a risk that continued delay and uncertainty will deter investment. — The GIB should be self-funding, giving priority to the longest-life projects with the largest carbon savings and the highest speed to market. — The GIB should be established by an Act of Parliament, with ministers setting the overall priorities of the bank and a board of directors setting strategy and investment decisions. The GIB should contain a bank that is regulated by the Financial Services Authority and complies with relevant FSA/Bank of England requirements; and — The GIB would need to raise three forms of funding to ensure that it is able to sustain its operations: government funding for disbursement of grants (ie existing quangos and funds); ﬁnancing for ongoing activities and “commercial” investment; and initial Bank capitalisation and funding.

1. About The Carlyle Group 1.1 The Carlyle Group is one of the world’s largest private equity firms. It has $81.1 billion under management and current investments in more than 200 companies. 1.2 Carlyle was established in Europe in 1997 and today manages€14 billion in dedicated European funds. 1.3 Carlyle portfolio companies have 360,000 employees globally, including over 46,000 across Europe. 1.4 In the UK companies in which we have invested include household names like Britax. Other firms include companies such as Ensus (a bio-refinery in Teeside), Mill Digital Media (post-production and video distribution services for television) and Talaris (a global provider of cash handling technology solutions). 1.5 The Carlyle Group has become one of the world’s most successful private equity firms through its consistent application of: — a conservative investment approach in industries we know; — investing for the medium and long term; — employing the best business management talent in the world to support our portfolio companies; and — aligning our interests with our investors by investing our own money alongside theirs; 1.6 The breadth and depth of our portfolio means Carlyle has valuable insights into the elements that are important for business growth. 1.7 Our international reach also means we have wide-ranging experience of the support and assistance provided to business by governments, and the factors that make a country an attractive place to invest. 48 Energy Saving Trust, An Approach to Financing Household Eco-refurbishment in the UK, forthcoming. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w45

2. 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 2.1 The Climate Change Act 2008 sets a legally binding target to reduce the UK’s greenhouse gas emissions by 80% (off a 1990 baseline) by the year 2050. The carbon budgets established under the Act set, in effect, an interim target for 2020 to reduce emissions by 34%. The UK’s targets for using renewable energy are no less ambitious. Under the EU Renewable Energy Directive, this country is committed to sourcing 15% of all energy from renewable sources by the year 2020. This compares with a figure of 3% in 2009. 2.2 The scale of the investment in new technologies, new infrastructure assets and supply chains required to meet the UK’s climate change and renewable energy targets is enormous. Estimates of the investment needed between now and 2020 range from £200 billion (as suggested by Ofgem) to £550 billion (Dieter Helm, for Policy Exchange). Given the state of the public finances, funding the transition to a low carbon economy vastly exceeds the capability of the public sector. As a result, a massive injection of private sector investment is a prerequisite for the UK meeting its legal obligations. 2.3 There are, however, a number of market failures and investment barriers in financing low carbon infrastructure and unless they are addressed, the UK’s emissions targets will not be achieved. The Green Investment Bank Commission has concluded that the pools of capital available from long-term debt and equity finance are neither large nor long enough. Further, with uncertain energy demand, higher borrowing costs and the need to protect their credit ratings, utilities do not have the balance sheet capacity to fund these investments. 2.4 Markets for low carbon technologies are reliant on various forms of government intervention to drive returns. Where political and regulatory certainty is essential, there has been a history of policy changes. 2.5 Entrepreneurs pursuing the new technologies face a number of challenges: technology risks; difficulties in attracting capital from equity investors because of uncertainties surrounding the policy framework, including the timetable, role and structure of the Green Investment Bank. 2.6 Institutional investors (who could provide a significant proportion of the funds needed) will need to earn adequate risk-adjusted returns from large numbers of small, low carbon investments. The appropriate market structures will need to be in place in order to access this capital. 2.7 The Carlyle Group agrees that a Green Investment Bank needs to be established without delay. The GIB could play a central role in the provision of finance and in mitigating and better managing risk—both political risk and in balancing the risks and rewards in the financing of new technologies and funding public infrastructure. 2.8 The concept of a Green Investment Bank has secured unusually widespread support, including from the three main political parties in their general election manifestos, the Aldersgate Group, a broad-based business and environmental coalition and financing sources, such as The Carlyle Group. Creating such an institution would provide a clear signal that the political will exists to build a low-carbon economy.

3. 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 3.1 The Carlyle Group endorses the recommendation of the Green Investment Bank Commission that a GIB should be established “to support the delivery of the UK’s emission reduction targets as set by the Climate Change Act 2008” and that “the support should be based on a public-private investment model and address specific market failures and investment barriers in a way that will achieve emission reductions at least cost to taxpayers and energy consumers.” 3.2 The GIB should have the following major roles: (a) identifying and addressing market failures limiting private investment in carbon reduction activities: increasing the availability of capital; providing risk mitigation mechanisms for the private sector; and developing standardised financial products/instruments for investment in projects where a specific market failure or funding gaps persists; (b) providing coherence to public efforts to support innovation in relation to climate change by rationalising existing Government-established bodies and funds; and (c) advising on financing issues in central and local government policy making. 3.3 Strict principles would be needed at an operational level to ensure the GIB does not crowd out the private sector. The private sector should lead and execute deals wherever activity is viable; in such cases, the GIB would co-invest in opportunities provided by the private sector. The GIB should operate only where its actions achieve a result that would not otherwise have been possible and then in partnership with the private sector wherever possible. 3.4 The Green Investment Bank should aim for commercial rates of return on its banking operations. The GIB should be self-funding, giving priority to the longest-life projects with the largest carbon savings and the highest speed to market. For early stage projects unable to secure private funding, the GIB should run separate cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w46 Environmental Audit Committee: Evidence

funding operations, potentially on non-commercial terms. There is also a need to consolidate and simplify existing sources of government funding for low-carbon projects.

4. The Green Investment Bank’s investment priorities, and whether and how the bank should support and foster areas where the UK has emerging green technology strengths 4.1 The Carlyle Group submits that in its initial phase, the Green Investment Bank should focus on supporting the areas where the maximum impact on emissions and the fastest speed to implementation can be achieved. For example, the scale up of investment in proven energy efficiency projects that can lower the overall development need of renewable energy sources; investment in enabling technology, such as smart grids, that reduce the cost for other low carbon investments; and support of both proven and high impact third-round offshore wind, should all be priorities. 4.2 The types of product that the GIB could develop include the following: — early stage grants for pre-commercial propositions—aggregating the grant payments that are currently made to a range of quangos for low carbon innovation, to achieve greater private sector leverage and higher rates of deployment; — equity co-investment—most likely, in situations where the availability of private capital is limited; — mezzanine funding—for proven technologies that can secure workable levels of project finance debt but not at gearing levels sufficient to provide equity investors with the necessary rate of return; — offering to buy completed renewables assets; — purchase and securitisation of project finance loans—until an improvement in bank balance sheets can provide the capital needed for green infrastructure like offshore wind; — insurance products—for example extreme events insurance and contingent loan facilities; — long-term carbon price underwriting—given that the EU ETS has limited price visibility beyond 2014 and the EUA price may give insufficient incentives for investments in long-term clean energy assets. 4.3 The GIB should be prepared to underwrite the decisions of investors when they are based on an assumption that particular policies will remain in place. In other words, investors should be compensated in the event that there is a change of policy later on.

5. The funding and governance structures required to create an effective and accountable body, including the role of “green bonds” 5.1 One of the principal challenges in establishing the Green Investment Bank will be to ensure that a body with the power to invest public money and borrow with government guarantee is accountable to parliament and reflects the overall policy priorities of the government, whilst ensuring that the GIB enjoys sufficient operational independence from ministers to be credible with the markets. There is an inherent tension between the position in the public sector and its need to be operated on a commercial basis. 5.2 The Carlyle Group submits that both objectives can be achieved by: — establishing the Green Investment Bank by an Act of Parliament; — charging ministers with setting the overall priorities of the bank and with appointing the non- executive chairman and directors; — ensuring that the bank is not accountable to ministers for individual investment and lending decisions; — having a board of directors to set strategy and approve investment decisions, who would be drawn primarily from the public sector; — having a management team with relevant commercial experience; — ensuring that the Green Investment Bank contains a bank that is regulated by the Financial Services Authority and complies with relevant FSA/Bank of England requirements; and — providing for the non executive chairman to appear before relevant parliamentary select committees on at least an annual basis. 5.3 The Carlyle Group sees green bonds as being essential for funding the Green Investment Bank (where they are issued by the bank), and for the lowering the cost of debt for projects. The UK bond market, including pension funds and insurance companies, valued at around £1.2 trillion, is an essential source of investment for low carbon energy projects. However, at the moment, most of this capital flows to high rather than low carbon projects. 5.4 Green bonds could address current market capacity constraints [see above], enable targeted public co- investment to address confidence gaps and unlock opportunities for new public-private investment. 5.5 In order to persuade pension funds and insurance to shift from gilts, private equity, venture capital or real estate, to the low-carbon energy sector, green bonds should broadly reflect the existing bond offerings, cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w47

carrying similar characteristics—including level of return. Green bonds would also need to be Government- guaranteed and backed by visible, stable and transparent revenue streams to pay coupons. 18 October 2010

Written evidence submitted by the British Ceramic Confederation Executive Summary — It is important that Green Investment Bank funds are available for industrial energy efficiency and emissions reduction projects as these can offer very cost-effective means of reduction in the UK’s emissions, with relatively short payback times compared to other investments. — Many ceramic factories have already made some significant investment in energy efficiency measures—in these firms the next series of projects may have longer payback periods which conventional banks (or other sources of shareholder funds) may be unwilling to finance. — Some of our members have used, successfully, the Carbon Trust interest free loans. Payback out of energy savings made has proved opearable in our members’ experience. Only very limited funding was available, though, and only for SMEs for a limited range of projects. There is therefore real benefit in ensuring all companies can access these funds, with minimum bureaucracy, provided they have a sound case and timing for payback. To ensure value for investors, objective criteria should be used for determining which projects are funded eg: — Tonnes carbon dioxide abated (including imported emissions) per £ loan, with priority to short-term pay back periods. — Products from manufacturing processes that themselves have low lifecycle carbon emissions (for example a highly durable product rather than a disposable/low life one) should also be favoured as these will reduce emissions longer term too and strengthen the UK’s role in rebalancing the economy towards manufacturing. This will also help achieve a change in consumer behaviour. — Potential for wider application of technology across an industry—eg priority for technology demonstrator projects which also meet the above criteria. — Employment of renewable energy generation is acceptable if it also meets all the above criteria (ie efficiency of available funds in abating the UK’s emissions quickly is essential rather than focusing solely on the employment of renewable technologies, many of which are not yet sufficiently developed nor have competitive payback periods compared with other potential investments). — An objective assessment of credit-worthiness is required. These loans must not affect normal borrowing / access to loans to run the day to day business.

Brief Introduction to the British Ceramic Confederation 1. The British Ceramic Confederation (BCC) is the trade association for the UK Ceramic Manufacturing Industry, representing the common and collective interests of all sectors of the Industry. Its 100 member companies cover the full spectrum of products and materials in the supply chain and comprise over 90% of the Industry’s manufacturing capacity. 2. Membership of the Confederation includes manufacturers from the following industry sectors: — Gift and Tableware — Floor and Wall Tiles — Sanitaryware — Bricks — Clay Roof Tiles — Clay Pipes — Refractories — Industrial Ceramics — Material Suppliers 3. The industry is energy-intensive (but not energy inefﬁcient): energy bills / taxes can be up to 30–35% of total production costs. 85% of the energy used is natural gas. BCC is a member of the Energy Intensive Users Group.

Factual Information 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 4. Many ceramic factories have already made some significant investment in energy efficiency measures— in these firms the next series of projects may have longer payback periods and larger investments (eg all possible improvements in an older plant may have been made, the only option for further improvement is a new, state-of-the-art energy-efficient plant) 5. Conventional banks (or other sources of shareholder funds) have been less willing to finance these types of projects—and the recession and reduction of available funds in banks has exacerbated this problem. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w48 Environmental Audit Committee: Evidence

6. Some of our members have used, successfully, the Carbon Trust interest free loans. Payback out of energy bill savings made (as in Carbon Trust loan scheme) has proved operable in our members’ experience. However: (a) Only very limited funding was available, though (maximum loan size currently £100,000). (b) The payback period is limited to four years. (c) Only SMEs were able to apply: larger ﬁrms in a Climate Change Agreement were not eligible. 7. A Green Investment Bank could allow access to these larger loans with slightly longer payback periods. This would help secure investment for capital projects that might otherwise be diverted to other countries— essential in the current economic climate. This investment in more energy-efﬁcient UK factories can also help secure employment. 8. A market failure is emissions in imported goods are currently not assessed under the UK’s Climate Change Act. The Green Investment Bank could help address this oversight—see paragraph 14a.

Recommendations 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 9. It is important that Green Investment Bank funds are available for industrial energy efficiency and emissions reduction projects as these can offer very cost-effective means of reduction in the UK’s emissions, with relatively short payback times compared to other investments. 10. See “funding and governance structures” section. Efficiency of available funds in abating the UK’s emissions quickly is essential rather than focusing solely on the employment of renewable technologies, many of which are not sufficiently developed nor have competitive payback periods compared with other potential investments.

The Green Investment Bank’s investment priorities, and whether and how the bank should support and foster areas where the UK has emerging green technology strengths 11. Products from manufacturing processes that themselves have low lifecycle carbon emissions (for example a highly durable consumer or construction product rather than a disposable / low life one) should be favoured as these will reduce the UK’s emissions (and other countries emissions in the case of exported products) longer term.49 12. This would also strengthen the UK’s role in rebalancing the economy towards manufacturing / improve balance of payments. 13. This will also help achieve a change in consumer behaviour.

The funding and governance structures required to create an effective and accountable body, including the role of “green bonds” 14. To ensure value for investors and the maximum efficiency of available funds in abating the UK’s emissions, objective criteria should be used to determine which projects are funded eg: (a) Tonnes carbon dioxide abated per £ loaned, with priority to short-term pay back periods. Short payback periods ensure that if funds are limited they can be recycled quickly to other projects. The amount abated should include the abatement of imported emissions—eg if products can be made in the UK for local consumption with significantly lower emissions than importing the same product.50 (b) Products from manufacturing processes that themselves have long life and therefore very low lifecycle carbon emissions (for example a highly durable consumer or construction product that may indeed use more energy in production, but uses this energy efficiently, rather than a disposable/low life product) should also be favoured as these will reduce global emissions longer term. (c) Potential for wider application of technology across an industry—eg priority for technology demonstrator projects which also meet the above criteria. 15. An objective assessment of credit-worthiness is required. 49 Some ceramics examples: The UK has several world-leading companies manufacturing very long long-life durable catering tableware. These products are widely exported, improving the UK’s balance of trade. Bricks and other ceramic construction materials have a much longer life than many other construction materials (bricks have a life of over 100 years). The UK has a niche in some refractory materials—these technologically advanced materials enable a considerable reduction of energy use in production of other essential materials needed in the low carbon transition (eg glass and steel). Again, these products are widely exported, improving the UK’s balance of trade. 50 A ceramics example: Investment in a highly automated energy efficient ceramics sanitaryware UK plant reduces the net global emissions from firstly, a more energy efficient production process and secondly, from the large amount of emissions in transport if the heavy and bulky product were made in a distant continent and then shipped to the UK. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w49

16. These Green Investment Bank loans must not adversely affect normal bank borrowing / access to loans to run the day to day business (eg “you already have £500,000 of green bank loan for a heat recovery project therefore you can’t have £10,000 of overdraft to buy materials for a new large sales order”) Please feel free to contact us if you require any more information or would like oral evidence. 15 October 2010

Written evidence submitted by the World Development Movement The World Development Movement (WDM) campaigns to tackle the root causes of poverty. With our partners around the world, we win positive change for the world’s poorest people. We believe that charity is not enough. We lobby governments and companies to change policies that keep people poor. WDM is a democratic membership organisation of 15,000 individuals and 60 local volunteer groups, with ofﬁces in London and Edinburgh.

Summary of Key Points in Response — The financial crisis cost the UK £129 billion in annual GDP and increased the structural deficit by £93 billon. — The UK can’t afford another meltdown, yet short term, high risk, carbon intensive investments are still business as usual for the banks. — The coalition government has an opportunity to redefine the role of banks in society, rather than allow the sector to return to the short-termist approach which contributed to the financial crisis— and a Green Investment Bank (GIB) should form a key part of this. — If adequately resourced and managed, the new GIB can provide a number of crucial functions to kick-start low-carbon growth, including enabling risk-sharing, providing a benchmark standard for green investments, supporting research and development, attracting global expertise, leveraging additional capital and offering a focal point for UK government policy coherency on green financing. — The bailed-out banks should be brought within the policy framework of the GIB. The largest public recapitalisation of a UK bank occurred at the Royal Bank of Scotland, with the UK government currently having an 83% stake in the bank. With the government shareholding in RBS, there is an opportunity to use this bank to set an example to its peers. In order to protect its shareholding and demonstrate its commitment to a low carbon future, the new Government should utilise RBS as a way of delivering the GIB. — The GIB needs to drive the development of zero-carbon energy in order for the UK to achieve its goal of cutting greenhouse gas emissions by 80% by 2050. The GIB should support innovators and small businesses that are developing the low carbon and energy efficient technologies of the future. — GIB must have clear accountability and strong active management to deliver the investment required, and a single government department should have responsibility for its success. — The GIB will need to apply a longer investment horizon than the short-termism that drives much of the behaviour within the City and be in a position to provide enough certainty for investors and share enough risk to leverage funding from the private sector. — The GIB has an opportunity to use the credit rating of the government to securitize debt and guarantee loans, without increasing the national debt. — The establishment of a GIB provides significant opportunities to develop a market framework that could help the financial sector play a more active role the urgently needed transition to a low carbon economy and, in so doing, rediscover a socially useful purpose. — By creating a GIB with sufficient scale and momentum, the UK will benefit from improved energy security, stabilised energy costs, the creation of green jobs, greater efficiency and improved international competitiveness.

Answers to Questions Outlined by the Environmental Audit Committee 1. Barriers or market failures requiring the establishment of a GIB; and risks of not getting this done quickly There has been extensive analysis of the causes of the financial crisis, with a complex range of factors cited including US sub-prime mortgages, regulatory failure, excessive consumer debt levels, short-term funding markets, and international trade imbalances. There has also been a major spotlight on the banking sector after what were thought to be “invincible” banks failed. The financial crisis cost the UK £129 billion in annual GDP and increased the structural deficit by £93 billon (see appendix for details of calculations). The initial budget cuts announced by the coalition government demonstrate the pain this is causing to public services. The UK can’t afford another meltdown, yet short term, high risk, carbon intensive investments are still business as usual for the banks. Allowing this to continue cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w50 Environmental Audit Committee: Evidence

presents an unacceptable ﬁnancial and environmental risk, for example banks such as RBS continue to ﬁnance companies opening up new sources of fossil fuels, despite the warnings of the Stern Review on the economics of climate change and the predictions of the IPCC about the impacts of further rises in global average temperatures.

The cost of the financial crisis to the UK There are three main ways in which the financial crisis has impacted the UK economy: — the cost of bailing out insolvent UK banks; — the loss of productive capacity in the UK economy arising from the economic crisis; and — the impact on the public finances through lower productivity capacity leading to lower tax receipts and higher public expenditure. Unless the financial sector changes the way it does business, the UK risks being exposed to further meltdowns in the future, with a weakened economy even less able to deal with the subsequent stress. The problems at Northern Rock, Bear Sterns, Lehman Brothers, RBS and HBOS indicate the need for a change from the focus on profit at the expense of vulnerable customers and small businesses. At present there is a risk that the big investment banks are just returning to business as usual, ie short-termism. The largest public recapitalisation of a UK bank occurred at the Royal Bank of Scotland, with the UK government currently having an 83% stake in the bank. With the government shareholding in RBS, there is an opportunity to use this bank to set an example to its peers. The £45 billion RBS shareholding sits with UKFI.51 At the time of investment it was indicated that UKFI would seek to divest from the banks at an appropriate time in the future. The new government may be taking a more long-term view however, which Vince Cable MP, expressed just prior to the May 2010 election that: “These banks should remain effectively under public control for something in the order of a decade.”52 This approach provides the new government with the opportunity to direct RBS as a force for good, rather than use the excuse of potential divestment to avoid responsibility as the previous government did. The Office for Budget Responsibility has recalculated the deficit for 2010–11 at £114 billion.53 The government spent a total of £117 billion recapitalising the banks.54 With the coalition government under severe pressure to reduce the deficit and cut expenditure, it is even more imperative that they demonstrate some value from this investment. If the regulatory framework is not set up to deliver more responsible financial products, then the GIB will not flourish, which will send the wrong signal to other banks. Those banks, such as RBS, which the government has an interest in need to be aligned with a low carbon banking agenda, otherwise taxpayers’ interest in them will be at risk. If the government is serious about meeting its greenhouse gas targets then it needs to entrain financial institutions to deliver the required infrastructure. The new government is promoting mutuals, setting lending targets for banks, and establishing a committee to review separating the retail and investment banking divisions of large banks.55 This agenda, combined with the establishment of a GIB, provides significant opportunities to develop a market framework that could help the financial sector play a far more active role in supporting viable entities to contribute to a low carbon economy, and in so doing, rediscover a socially useful purpose.

2. Objectives and roles the GIB should assume; areas it should and should not operate in; how its lending and investment decisions should balance green benefits against financial risks. The GIB’s investment priorities; whether and how the bank should support and foster areas where the UK has emerging green technology strengths The Stern Review on the Economics of Climate Change in 2006 for HM Treasury outlined the case for early action on climate change:56 Stern observed that; “climate change is a result of the greatest market failure that the world has seen.”57 The financial crisis also serves as a warning that relying on unfettered markets to solve climate change is a very high risk strategy, and the framework established by governments needs to significantly improve. History shows us that without a clear mandate to initiate a transition to a low carbon economy, financial institutions have limited interest or incentive to address this issue. The longest standing example of this is perhaps the UK Export Credit Guarantee Department (ECGD), which for years has chosen to interpret its mandate to merely respond to the demands of existing fossil-fuel 51 http://www.ukfi.co.uk/releases/115_2%20FW%20Update%20Jan%202010_10_AW_LR.pdf 52 http://www.businessweek.com/news/2010–04–27/cable-wants-lloyds-rbs-to-stay-under-u-k-control-for-decade.html 53 http://budgetresponsibility.independent.gov.uk/d/pre_budget_forecast_140610.pdf 54 http://www.nao.org.uk/idoc.ashx?docId=e19e64bd-0f13–4f9f-a412–592cbf6ef00f&version=-1 55 http://www.timesonline.co.uk/tol/news/environment/article3666273.ece 56 http://www.hm-treasury.gov.uk/sternreview_index.htm 57 http://www.guardian.co.uk/environment/2007/nov/29/climatechange.carbonemissionsx http://news.bbc.co.uk/1/hi/8694327.stm cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w51

based energy companies, rather than drive development of a new clean-tech UK industrial base.58 The coalition government has accepted the need to change this situation which could complement the work of a GIB by supporting exports of UK-based renewables manufacturers. It is estimated that at least £200 billion needs to be invested in UK energy infrastructure over the next 10–15 years. The proposed GIB must be clearly aimed at financing renewables and energy efficiency, in order to deliver the rapid emissions cuts the UK has committed to. If adequately resourced and managed, the new GIB can provide a number of crucial functions to kick-start low-carbon growth. These include enabling risk-sharing, providing a benchmark standard for green investments, supporting research and development, attracting global expertise, leveraging additional capital and offering a focal point for UK government policy coherency on green financing. The “green” standards need to be at the core of all investments promoted by the GIB. This should be defined so that it drives investment to the leading edge of low carbon energy. The GIB needs to ensure it is only financing projects or technologies that will reduce the carbon intensity of energy production. The GIB needs to be driving the development of zero-carbon energy in order for the UK to achieve its goal of cutting greenhouse gas emissions by 80% by 2050. A significant level of investment in research and development and new infrastructure is needed in order to advance the renewable industry even further and make it the global norm, rather than a novelty. Whatever the industry, it has always been necessary to invest in development to deliver fundamental change. The limited sums invested by the oil majors in renewables compared to the amounts ploughed back into deepwater technology (eg Gulf of Mexico), and unconventional oil exploitation (eg Canadian tar sands) have restricted the growth of renewables. The negative externalities of this focus for local communities and the global environment are now clear for all to see. The GIB needs to support innovators and small businesses that are developing the energy technologies of the future. The GIB will need renewables expertise, in order to understand the markets it is trying to promote, and how to overcome the barriers currently faced by the sector. Other regulatory environments have historically been more favourable than the UK, although following the offshore wind regime developments, the UK became joint 6th most attractive regulatory climate for renewable according to Ernst & Young’s analysis in February 2010.59

3. Funding and governance structures required to create an effective and accountable body, including the role of green bonds We believe it will be important for the GIB to have clear accountability and strong active management to deliver the investment required. It would therefore be preferable for a single government department to have responsibility for the success of the GIB, and to report against both investment targets and carbon emissions reductions and renewable targets. These climate change related targets should also be a major part of any incentive package for those employed by, contracted to or partnering with the GIB. The GIB will need to apply a longer investment horizon than the short-termism that drives much of the behaviour within the City. There are already approaches emerging which exemplify this. Venture capitalists typically own companies for at least ﬁve years, giving them a strong interest in the viability of a company over several years. It is also vital for them to demonstrate a healthy future for their companies in order to realise an exit strategy. For example Vantage Venture Capital focuses on groups of clean-tech companies that complement each other.60 It has holdings in electric vehicle manufacturers, battery manufacturers, infrastructure providers and zero carbon power generators that together form a value chain for the roll-out of electric cars. In a departure from its fossil fuel activities, the World Bank has issued a series of green bonds (totalling $1.5 billion), in partnership with commercial banks such as SEB (Sweden) and Daiwa Securities (Japan), which have attracted investment from a range of US and Scandinavian Pension Funds.61 All projects meet low carbon criteria developed by the World Bank and consist of a range of climate change mitigation and adaptation activities from around the world. The Labour government’s proposal was that half of the initial £2 billion in equity is to be provided by the sale of state assets, such as the channel tunnel rail link, with the other half coming from the private sector. There are a range of other revenue streams which could be earmarked to provide ready capital for lending. These include: — The Committee on Climate Change has indicated that it expects revenues from the auctioning of EU Emissions Trading Scheme permits to raise £40 billion by 2020, (estimate only). The government’s platform for banking reform also indicates new a banking levy and social responsibility levy for the sector which could be used to ensure a ready ﬂow of capital into the GIB. 58 http://www.timesonline.co.uk/tol/news/environment/article3666273.ece 59 http://www.ukinvest.gov.uk/United-Kingdom/105844/es-ES.html 60 http://www.vpvp.com/portfolio_cleantech 61 http://treasury.worldbank.org/cmd/htm/WorldBankGreenBonds.html cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w52 Environmental Audit Committee: Evidence

— The UK government has averaged £9 billion per annum in oil and gas revenues over the last five years62 (Norway used its petroleum revenues to establish an investment fund in 1990 which now stands at US$ 838 billion).63 The government could also learn from its Scandinavian counterparts and establish a sovereign fund that seeks to finance a sustainable future for the country, rather than continuing the policy of exploiting finite resources such as coal and oil, with no investment plan for a viable low carbon economy beyond this. — The GIB could also go to the markets to raise capital, using mechanisms such as green bonds or venture capital funds. This would be a way of bringing in private capital to augment the funds provided by the government purse. The GIB should not be reliant on a significant state funding stream, especially in the context of the huge budget deficit facing the UK. However it must be accepted that some investment is needed in order to deliver the green growth that is needed to drive the UK out of recession. It is more important however that the GIB is in a position to provide enough certainty for investors and shares enough risk to leverage funding from the private sector. The different funding needs of initially capital-intensive renewable projects which have low operating costs need to be met by the products offered by a GIB. Risks faced by the renewable sector need to be addressed so that it is more attractive to investors. For example, guarantees covering regulatory risk or insurance for offshore wind construction risk could remove current barriers for investors. The bank will therefore need to be managed by people with expertise in these target sectors, as well as in finance. International experience of raising finance and structuring deals will be required to get UK projects moving. The GIB could provide a range of different types of financial services to the green sector over time. These could include: — Risk guarantees and insurance pools. — Securitization funds. — Bond issuance. — Venture capital. — Research loans. It is also interesting to note that the new government is keen to promote green retail products such as green Individual Savings Accounts (ISAs), which will provide greater tax benefits. These retail products will also need a green economy to invest in, which links to the role of the GIB. There is also scope for working with institutional investors, including the government pension funds, and fund managers, who apply responsible investment criteria to produce a range of investment products. If the GIB is set up with an initial £2 billion in equity it is clear it will need to leverage private capital many times that amount each year in order to deliver the clean energy infrastructure required by the UK. Since the credit crunch, the primary challenge to the banking sector has been to start lending again, in order to facilitate the flow of capital. The GIB has an opportunity to use the credit rating of the government to securitize debt and guarantee loans. Critically, these forms of support will not increase the national debt, as the GIB would not be providing the actual finance. The GIB can also play a crucial brokering role between the renewable energy industry and private financial institutions, to help overcome any existing barriers to finance. As well as working with private finance, the GIB will also be expected to identify international sources of funding, from the European Union for example. The GIB needs to part of an overall policy framework of tax incentives, market mechanisms and regulations which drive green investment. The UK has been hedging its bets for too long, not providing certainty over the direction our energy future should take. This has resulted in a perpetuation of the status quo—a dependence on fossil fuels. A GIB will only be successful is there are no more mixed messages, and a clear path is agreed, with all government departments and interests aligned. The Royal Bank of Scotland is ideally placed to deliver GIB’s required functions, with its existing experience in financing renewables. In particular, RBS has been active in the offshore wind sector, which Infrastructure UK indicates as a likely first priority for finance. The government must establish a policy framework to support the objectives of the GIB, and then ensure that RBS is aligned to this strategy to ensure it makes the most of investment opportunities in the green energy sector. In order to protect its shareholding and demonstrate its commitment to a low carbon future, the new Government should therefore utilise RBS as a way of delivering the GIB.

The Benefits of Financial Sector Reform to the UK An effective GIB at the heart of a more sustainable financial system should bring the following benefits: Improving energy security, by easing initial costs of paying for the new infrastructure to deliver long-term energy security for the UK, so it can become an energy exporter. 62 http://www.hmrc.gov.uk/stats/corporate_tax/table11_11.pdf 63 http://www.regjeringen.no/upload/FIN/Statens%20pensjonsfond/PF-summary-aug08.pdf cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w53

Stabilising energy costs, by ensuring the scaling up of renewables and so reducing the financial costs of the energy supplied in the long term. Creating green jobs, by delivering growth in the low carbon economy. The environmental goods and services sector is predicted to create around 50,000 jobs per year, if the GIB delivers the necessary growth. Supporting international competitiveness by increasing the UK’s market share in environmental industries. Increasing government efficiency by providing a focus for its green finance interests which are currently dispersed and lacking overall coherence. This submission is based on the report “A Bank for the future; maximising public investment in a low carbon economy”, June 2010. It was commissioned by the World Development Movement and Platform, and written by James Leaton.

APPENDIX The Treasury’s total net cash outlay for purchases of shares in banks and lending to the banking sector, including Northern Rock, amounted to around £117 billion by 2010. The Treasury’s additional potential exposure to banking losses (through insurance of bank assets and Bank of England lending) totals over £1 trillion. The Treasury estimated in April 2009 that there may be a one-off loss to the taxpayer of between £20 and £50 billion. The March 2010 Budget assumed that by 2015, the reduction in output was 6.5% of GDP. The June 2010 Pre-Budget forecast from the Office of Budget Responsibility produced revised estimates which suggest a greater reduction in output—8.75%. This means that, on the most recent government estimates, the financial crisis permanently reduced UK output by almost 9% per year. The latest ONS projections suggest that in the current tax year, GDP will be valued at £1.476 trillion. 8.75% of this figure equals around £129 billion in lost GDP. In the 2007–08 tax year HM Treasury calculated the structural deficit to be 2.5% of GDP. The recent forecasts from the OBR estimate that the structural deficit increased to 8.8% of GDP in the year 2009–10.64 The correct measure of the effect that the financial crisis has had on the structural deficit can be arrived at by subtracting the 2007–08 deficit (pre-crisis) from the 2009–10 deficit (post-crisis). This gives a figure of (8.8–2.5) = 6.3% of GDP. This suggests that the financial crisis had an overall impact on the public finances equal to around £93 billion. The estimates presented here, although substantial, should be viewed very much as lower bounds on the cost of carrying on with “business as usual”. It has become clear that complex risk transfer products only provide short-term profits for the few, at huge cost to the overall economy. Similarly the externalities of fossil fuels, in terms of both local pollution and global climate change, bring negative consequences for our societies which are not acceptable. 18 October 2010

Written evidence submitted by the Sustainable Development Commission Introduction 1. The Sustainable Development Commission is the Government’s independent adviser on sustainable development, reporting to the Prime Minister, the First Ministers of Scotland and Wales and the First Minister and Deputy First Minister of Northern Ireland. Through advocacy, advice and appraisal, we help put sustainable development at the heart of Government policy. 2. The Commission, as well as publishing several reports on the technical and economic issues around energy technologies has also examined the scale and speed of the low-carbon investment required in the UK (see http://www.sd-commission.org.uk/publications/downloads/SND_booklet_w.pdf). The Commission also put forward proposals for a Green Investment Bank in the 2009 “Breakthroughs” Report (see http://www.sd- commission.org.uk/pages/breakthroughs.html) and examined what role a Green Investment Bank could play in effecting a step-change in neighbourhood energy efﬁciency and renewable investment and wider community retroﬁt programmes (see http://www.sd-commission.org.uk/publications/downloads/SDC_TFiL_report_w.pdf)

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 3. We identify five barriers to low-carbon investment that requires the establishment of a Green Investment Bank: the scale of investment required to stay within the UK’s carbon budgets and meet international agreed targets; the speed with which investments must be made for the same aim; the inability of the market to respond to the uncertainty (as distinct from probabilistic risk) of climate change; the need for aggregation of 64 The structural deficit is forecast to fall in future years, reaching 2.8% by 2014–15; because of planned tax rises and spending cuts which will reduce the deficit, rather than due to any underlying improvement in the UK’s economic outlook. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w54 Environmental Audit Committee: Evidence

smaller projects to attract investment; and current institutional structures that are not designed for a low- carbon future. 4. Assessments of the scale of investment required to meet target reductions in carbon emissions vary but all of them represent an immense challenge. Economist Dieter Helm and others65 provide an “extremely conservative” estimate of £264 billion for the required UK low carbon energy infrastructure spend by 2020. Ernst and Young’s assessment that £450 billion in low carbon investment is required until 2025 includes £225 billion in energy “supply side” investment and £225 billion in energy efficiency “demand side” investment.66 5. These figures are made more difficult both by current lending conditions, as the economy emerges from the financial crisis, and the inability of traditional sources of capital (utility companies, project finance and infrastructure funds) to provide a small percentage of the total required. Ernst and Young’s analysis identifies an investment gap of between £370 and £400 billion between now and 2025. A Green Investment Bank could be structured to appeal to the widest and deepest sources of capital such as the managed funds market in the UK (which is worth £3.4 trillion) by raising bonds in the capital markets and co-investing in low carbon assets with the private sector on behalf of the UK. A fund structure, for example, does not offer this opportunity to achieve the appropriate scale. 6. The speed at which investment needs to occur is both crucial and daunting. Globally, low carbon industries would have to grow immediately at 24% a year, which is near the upper limit of what can be feasibily achieved given constraints in resources, labour, skills, capital and equipment.67 Although challenging, the transition is achievable, and experience in other countries have shown that industry can rapidly scale up if the appropriate policy and finance is in place, leading to widespread job and wealth creation. Incremental improvements under current government policies and structures will not be sufficient to deliver such accelerated growth and the Government cannot rely on price signals alone. We share the concern of the Committee on Climate Change that the impact of the recession on carbon emissions may lead to a temporary slowing down of the low-carbon investment that is required now in order to meet what will be far more challenging carbon budgets beyond 2020. 7. Uncertainty, as opposed to probabilistic risk, and the potential for significant, irreversible and non-linear impacts that characterises climate change cannot be addressed in existing risk assessment and cost benefit analysis. The Green Investment Bank can begin to move investment decisions toward addressing these threats by developing a number of risk-sharing and other financial products. In the absence of an institution such as the GIB, the UK low carbon sector will not be able to access institutional capital on the speed or scale required. 8. Aggregation is also a barrier. Energy Efficiency “upgrade” investments in millions of UK buildings amounting to more than £100 billion68 in the residential sector alone require a very high degree of coordination between individuals, private companies and public policy. The challenges of aggregation, distribution and payback of funds as well as deal execution and transaction cost management are surmountable, but it is difficult to see how the current institutional framework and capital markets can deliver. There are numerous SME energy projects, both commercial and community based, which have been consented but cannot move forward due to lack of credit finance. Small projects have struggled to get engagement from the banks, let alone raise necessary finance. Each project may be relatively modest in output, but with a far higher number of potential developers and project sites, the aggregate results can plug a vital gap in our energy supplies—at a far quicker pace—than the larger, slower projects favoured by utility developers. 9. Current institutional structures also form a barrier that the Green Investment Bank can help overcome. Public sector finance is shrinking and private sector finance continues to de-risk. The relationship between the two needs to be renegotiated. This means that the Government must, in addition to strong climate change policies, use limited public funds effectively and mobilise private sector capital flows at scale to ensure value for money. Policies directed at easing the cost of capital will significantly lessen the overall cost of the transition to society. A Green Investment Bank has the ability not only to engage with managed fund finance but also build a new relationship with private sector finance more broadly. A conventional fund model would not be able to do this.

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 10. The GIB must be designed to provide the greatest financial leverage and maximise the macro economic benefits to the UK, the Bank should not be designed in isolation but in the context of a range of policies aimed at removing barriers to a low-carbon, resource efficient economy. Within this framework we identify the following key roles for the GIB: — Helping to structure, in partnership with the private sector, the financing of major projects to deliver the energy, transport and other infrastructure investment necessary to achieve a sustainable low-carbon transition; 65 Dieter Helm, James Wardlaw and Ben Caldecott (2009) Delivering a 21st Century Infrastructure for Britain (Policy Exchange). 66 Capitalising the Green Investment Bank (Ernest and Young) (2010). 67 Climate Risk (October 2009) Climate Solutions II: Low carbon re-industrialisation. 68 SDC (2009) A sustainable new deal. http://www.sd-commission.org.uk/publications/downloads/SND_booklet_w.pdf cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w55

— Providing some initial capital or guarantees, as part of multi-bank project financing for major renewable energy, if it is clear that the private capital markets are unwilling to take on the whole risk; — Helping Deliver the Green Deal by providing low cost capital to minimise the costs to consumers as this remains a significant barrier to its potential uptake; — Working in partnership to bundle small projects to a scale that attracts wider investment interest; — Raising capital from government and investors; — Working closely with both Government policy makers and the investment community to come up with innovative ways to finance the major investment in energy efficiency, renewables, grid improvements and public transport links that will be required to deliver the Low Carbon Transition; — Providing loans, equity or venture capital to companies seeking to bring a proven and demonstrated low carbon technology, project or service to full commercialisation; and — Act as a central point of technical expertise and advice to central and local Government on low carbon finance. It should act in an advisory capacity to Government to ensure new policy frameworks being developed are “bankable” and should also have the ability to provide specialist assistance and advice to the private sector on developing first of a kind products to grow new low carbon markets.

The Green Investment Bank’s investment priorities, and whether and how the bank should support and foster areas where the UK has emerging green technology strengths

11. As a priority it must unlock investment in energy efﬁciency and renewable energy infrastructure—both large scale projects but also smaller scale and community led schemes.

12. If developed effectively, a GIB could also provide a supportive framework for many of the mechanisms for ensuring low-carbon investment at a local level. For example, with the Pay As You Save (PAYS) concept, the idea is that the cash from PAYS flows to the intermediary funding vehicle which then issues bonds (to institutions and other purchasers) or borrows (from a bank). There would be potential for a GIB to loan money to the intermediary funding vehicle in the early stage of the project, which the vehicle would subsequently refinance in the capital markets. Some of the investment could be longer-term and be retained by the GIB. The GIB could also play a role in setting up and managing the intermediary vehicle. Given the amount of time required to establish a GIB, the European Investment Bank (EIB) could provide immediate support in these roles. Joint European Support for Sustainable Investment in City Areas (JESSICA ) could also be utilised differently by funding pilots. Based on PAYS, it could sell these cash flows to an intermediary funding vehicle or GIB, which would then refinance in the capital markets.

13. In turn, the GIB could be useful in disbursing Green Bonds that can unlock the long-term “patient capital” required by pension funds for investment in low carbon projects with a high upfront cost, but a long and steady payback period. These would be conventional bonds (to attract a wide range of interest), but with funds ring-fenced to deliver sustainable outcomes. Climate Change Capital and E3G recommend that a GIB would be the most effective way to disburse funds from these in a direct, controlled way.69

14. Neighbourhood partnerships could also seek development debt from a GIB, who would bundle the mature revenue producing assets and sell these to institutional investors, recycling the proceeds into new developments and providing a return to communities.

The funding and governance structures required to create an effective and accountable body, including the role of “green bonds”

15. UK institutional investors, such as pension funds and life insurance companies, hold assets worth over £2 trillion. The low carbon energy transition will only be achieved if some of this large pool of capital is used to support it. To achieve this the Bank must be given the powers to issue a range of Green Bonds. Such products should be designed to meet institutional investors’ needs, including their ﬁduciary duty to achieve the best possible risk adjusted returns for their clients and beneﬁciaries.

16. Ring-fencing the proceeds from long-term, asset-backed bonds that are issued at sufficient scale will not only attract a range of significant investors but also provide significant flows of capital for low-carbon investment. 18 October 2010

69 Climate Change Capital and E3G (as before), 2009. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w56 Environmental Audit Committee: Evidence

Written evidence submitted by the Association for the Conservation of Energy Introduction The Association for the Conservation of Energy was formed in 1981 by major companies active within the energy conservation industry, in order to encourage a positive national awareness of the needs for and beneﬁts of energy conservation, to help establish a sensible and consistent national policy and programme, and to increase investment in all appropriate energy-saving measures. We welcome this opportunity to comment upon the proposed Green Investment Bank.

Summary — The new Coalition Government should make a clear and early statement that it remains committed to the creation of a Green Investment Bank (GIB) with a full range of powers. Although this was promised in the Coalition Agreement, no concrete proposals have subsequently been forthcoming. Furthermore, at the time of the Queen’s Speech on 25 May, the Government stated that the forthcoming Energy Security and Green Economy Bill might be used as the legislative vehicle “to set up a Green Investment Bank”. We are concerned that the latest pronouncements from the Department of Energy & Climate Change make no mention of the Bill being used for this purpose. — The GIB should have a clear mandate to tackle the low carbon investment needs of the UK. The scale of the required investment is such that traditional sources of capital will fall well short of the sums required. Without such intervention, the UK’s low carbon targets will not be achieved. Adequate levels of initial capitalisation—around £4–6 billion—will be required to ensure the Bank’s success. — Investment in energy efficiency should be a key feature of the Bank’s activities. In particular, energy efficiency should be given the highest priority in the Bank’s initial phase, as investment in demand reduction measures will reduce the level of total infrastructure required and enable the scaling-up of existing, proven technologies. Approximately £225 billion will be required to finance the requisite energy efficiency improvements until 2025—this represents around half of the total low carbon investment required. — Retrofitting the UK’s building stock is a vital component in the delivery of our low carbon future. However, this involves large numbers of individual investments and small scale projects. The GIB can play a key role in aggregating these investment opportunities and providing upfront finance to householders and SMEs. — Part of the GIB’s remit should be to support the proposed Green Deal financing scheme. This will be especially important in the Green Deal’s early market stage before significant scale of demand has been achieved. The support should take the form of upfront loans to able-to-pay householders, complemented by subsidies for households unable to pay.

Responses to Individual Questions N.B. We have conﬁned ourselves to responding to questions of relevance to the Association.

What is the significance of any barriers or “market failures” requiring the establishment of a Green Investment Bank, and what are the risks of not getting this done quickly? 1. As identified by the Green Investment Bank Commission in its recent report,70 there are four key market failures and investment barriers which deter investment in low carbon infrastructure: market investment capacity limits, political and regulatory risk, the confidence gap, and the aggregation challenge. 2. Of these, the aggregation challenge is the most significant in relation to investment in energy efficiency, particularly as regards the buildings sector. This is because household retrofitting consists by definition of a multitude of individual investments and small scale projects. The GIB can play a key role in aggregating these investment opportunities. 3. The potential for energy efficiency refurbishment in the UK is enormous. A recent report by Ernst & Young71 identified that the cost of retrofitting the UK’s 26 million homes to a high energy efficiency standard would cost up to £225 billion between now and 2025. This broadly equates to the findings of the UK Green Building Council (UKGBC), which concluded in its August 2009 report72 that in order to finance a comprehensive package of home energy improvements (as envisaged by the last Government in its Home Energy Management Strategy), investment of between £5 billion and £15 billion a year would be required through to 2020. 4. Despite this huge investment potential—and the short payback times of many energy saving measures— householder demand for energy efficiency improvements has failed to respond to over 15 years of subsidy through successive supplier obligations. A combination of factors is responsible for this. By and large, 70 Green Investment Bank Commission, Unlocking investment to deliver Britain’s low carbon future, June 2010, pp. 5–6. 71 Ernst & Young LLP, Capitalising the Green Investment Bank, Key issues and next steps, October 2010. 72 UK Green Building Council, Pay As You Save: Financing low energy refurbishment in housing, August 2009. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w57

householders lack high quality information on their energy usage or about the potential for energy efficiency packages to save them money; they also have limited access to appropriate sources of capital. The situation in the UK compares poorly with that in Germany, where the KfW Banking Group offers loans (backed by Government bonds) to householders at a rate of 2.65%. The resulting energy efficiency household loan programme is a resounding success story—delivering 100,000 household retrofits every year.

5. Following on from the previous Government’s “Pay as You Save” proposals, the new Government has announced its intention to use the forthcoming Energy Security and Green Economy Bill to introduce a new Green Deal ﬁnancing framework, designed to incentivise householders and businesses to invest in energy saving measures that “pay as they save”.

6. However, a low interest rate will be essential to the success of the Green Deal in delivering packages that pay back in energy savings in their lifetimes. As the UKGBC report on PAYS outlined, the ability of a package of measures to pay back is very sensitive to the interest rate.73 The Government insists that all Green Deal energy saving packages must meet the “Golden Rule”—in other words, that the charge should be exceeded by the value of the fuel bill savings over the lifetime of the charge. However, at commercial interest rates it is unlikely that higher-cost measures (beyond cavity wall and loft insulation) will be able to meet the Golden Rule. If the Green Deal is to deliver “whole house” packages of the kind that we need to meet our carbon reduction targets, then the GIB must be enabled to play a signiﬁcant role in maintaining Green Deal interest rates at the lowest possible level.

7. Significant market barriers also exist for SMEs wishing to invest in energy efficiency measures. The Green Investment Bank Commission correctly identified the main barriers as follows: — Energy is a relatively low cost or low priority for most businesses; — Financing is not available to SMEs on terms that make uptake attractive; — SMEs do not have the necessary technical knowledge and confidence to invest.74

8. As identiﬁed by Ernst & Young,75 the sheer scale of the investment required in securing our low carbon future is such that traditional sources of capital will be able to provide only a tiny fraction of what is required. Their analysis reveals that the UK needs a total of £450 billion of investment in both supply-side and demand- side measures until 2025. Traditional sources of capital (utility companies, other corporates, project ﬁnance and infrastructure funds) can only provide approximately £50–80 billion over the same period. This leaves an estimated funding gap for energy infrastructure of around £370–400 billion over the next 15 years. The role for the Green Investment Bank in plugging this gap is therefore huge.

What are the objectives and roles the Green Investment Bank should assume, what areas should it operate (and not operate) in, and how should its lending and investment decisions balance green beneﬁts against ﬁnancial risks?

9. Investment in energy efﬁciency should be a key feature of the Bank’s activities. In particular, we agree with the Green Investment Bank Commission’s conclusion that energy efﬁciency should be given the highest priority in the Bank’s initial phase, as investment in demand reduction measures will reduce the total infrastructure investment required and enable the scaling-up of existing, proven technologies.

10. To deliver on our carbon reduction targets, energy efﬁciency investment will be needed to ﬁnance not only large-scale projects in the industrial and commercial sectors, but also small-scale community projects and individual household packages.

11. The Green Investment Bank Commission helpfully outlined the ways in which the GIB might operate to overcome the market barriers—for both households and SMEs—identiﬁed above.

12. For households, the main role of the GIB should be to aggregate the multitude of small investment opportunities that characterise the UK’s retrofitting needs. But the GIB must also be able to provide readily available upfront finance to householders wishing to make significant energy efficiency improvements to their home. We are attracted to the proposals put forward by the Green Investment Bank Commission that this finance should come from a public/private blended capital programme (funded in part by green bonds raised by the GIB). This money would then be used to provide upfront loans (as near 100% as possible) for the able- to-pay, alongside near 100% subsidies for those unable to pay. A portion of the publicly sourced funds would then be held by the GIB in a “guarantee fund” and would be used to provide security for loans taken out under the Green Deal financing system.

13. As outlined in paragraph 6, the GIB will also have a key role to play in subsidising Green Deal interest rates in such a way as to allow meaningful “whole house” retroﬁts that include higher-cost measures such as solid wall and under-ﬂoor insulation, and replacement windows. 73 UK Green Building Council, op cit. 74 Green Investment Bank Commission, op. cit. 75 Ernst & Young LLP, op. cit. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w58 Environmental Audit Committee: Evidence

14. As regards the SME sector, once again we commend the Green Investment Bank Commission’s suggestion that the GIB should adopt a three-pronged approach towards addressing the market barriers identified in paragraph 7: — Incentivising business investment via a graded variation to business rates that ranges from a significant cut for the most efficient buildings to a significant increase for the least efficient buildings; — Building on the existing Carbon Trust SME loan scheme to provide low-cost (6%) loans to SMEs for investment in energy efficiency measures; — Providing independent guidance and assurance to SMEs around the technology solutions that they implement.

What are the funding and governance structures required to create an effective and accountable body, including the role of “green bonds”? 15. It is vital that the GIB be given all the tools necessary to enable it to drive forward the UK’s successful transition to a low-carbon economy. There are four key elements that will be crucial to its success: — It must have a sufficiently wide mandate to enable it to finance any measure that will reduce carbon emissions; — It must be established by statute in order to ensure independence from the Government of the day. By the same token, it should be accountable to Parliament, perhaps via an annual report on its activities; — It should be adequately capitalised: Ernst & Young76 recommend an initial capitalisation level of £4–6 billion in the period to 2015; — It should have a full set of powers, including the ability to issue green bonds, that will enable it to leverage the required levels of finance from the private capital markets. In other words, the GIB must have the full powers of a bank, rather than simply be an agglomeration of existing Government “green funds”. 16. Finally, we believe that the new Coalition Government should make a clear and early statement that it remains committed to the creation of a Green Investment Bank (GIB). Although this was promised in the Coalition Agreement, no concrete proposals have subsequently been forthcoming. Furthermore, at the time of the Queen’s Speech on 25 May, the Government stated that the forthcoming Energy Security and Green Economy Bill might be used as the legislative vehicle “to set up a Green Investment Bank”. We are concerned that the latest pronouncements from the Department of Energy & Climate Change make no mention of the Bill being used for this purpose. 17. We are also concerned that a flurry of recent media reports has pointed at significant Treasury resistance to the establishment of a fully-fledged bank of the kind described in paragraph 15. A limited fund designed merely to support a limited range of projects (and unable to raise bonds) would be wholly inadequate to deliver the levels of investment necessary to achieve our low carbon future. 18 October 2010

Written evidence submitted by Kirsty Hamilton RE FINANCE PROJECT SUBMISSION ON A GREEN INVESTMENT BANK Summary — Background on the RE Finance Project: relevance of its work for the Inquiry. — The importance and relevance of: — Objectives and role: a GIB should solve actual problems in the marketplace that private financiers cannot overcome at present. General phrases like “low carbon”, or “green” infrastructure will need defined, and understood with precision; — The centrality of understanding the interaction between energy policy developments and the GIB, and how government clarifies its expectations over what each “piece” is expected to deliver in terms of investor behaviour, any GIB entity may be less effective if considered in isolation from tackling overall sources of risk in projects; — Timing and timeline: this is a critical factor and needs fully understood in the context of a realistic timeframe for the establishment of a GIB; and also when its resources would need to be deployed. This is key for any role linked to Round 3 offshore wind, should that become a focus of the GIB; — Building confidence and momentum: an announcement of any GIB and the timeline until its establishment must not undermine existing investment momentum; 76 Op. cit. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w59

— RE infrastructure and speciﬁc areas of activity (“products”): two areas in particular have come up as those that could assist round 3 offshore wind; — Brief comment on simplicity: governance and structure.

1. Background 1.1 By way of background, I am an Associate Fellow at Chatham House, and have 20 years background in the UNFCCC climate process, as well as climate and energy policy across that period (many years outside the UK). I have been running the Renewable Energy Finance Project for the last five years at Chatham House, working with leading, mainstream renewable energy (RE) financiers on policy conditions for investment. 1.2 The resolution of this work has been at the level of actual policy debates that affect investment decisions: the first finance roundtable on the UK was in 2005, during the first review of the Renewables Obligation (RO), by way of example. 1.3 Financiers have primarily been those that have led investment in the RE market (UK, EU) from project or structured finance within banking, and specialised private equity. Synthesised, this work led to a view on the importance and characteristics of “investment grade” policy.77 1.4 Financial crisis and the Green Investment Bank: following the financial crisis, the significantly changed investment conditions were explored in some detail, to contribute to accurate, early input to policymakers (Q1 2009) focusing on the role of government in the context of financial conditions (rather than simply resolving policy-related factors). 1.5 During Q4 2009 and Q1 2010 more detailed work was done looking ahead to 2020, examining investment issues in the context of the UK’s 2020 commitments under the EU Renewable Energy Directive. The Green Investment Bank (GIB) was discussed in that context, ie understanding the underlying issues/problems that exist (a range of views) and therefore what pieces need to be or can be put in place by government, including public finance tools (the summary of these discussions is appended to this submission). Towards the end of this period, February/March, the Wigley Commission got underway, and financiers were brought into the debate in a slightly more structured way, including those that had been also providing views in this area, eg through the Energy, Environment and Technology Board of the British Venture Capital Association (BVCA). 1.6 The purpose of this submission is to pass on to the Committee two relevant outputs of this work, reflecting the perspectives of financiers involved in RE transactions: — “Starting point on the ‘Green Investment Bank’ discussion, Working Summary, March 2010. — “Offshore Wind: RO/FIT Finance Survey, October 2010, this reflects the view on capital requirements/constraints for the offshore wind sector, as well as a question on the GIB. It also reflects the importance of the policy debate in investment decisions. It may be useful to state that both of these outputs have been re-circulated to financiers and therefore can be seen as an accurate, indicative range of views from a cross section of financial institutions. The Committee is interested in receiving written evidence that looks at: — 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; — 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; — the Green Investment Bank’s investment priorities, and whether and how the bank should support and foster areas where the UK has emerging green technology strengths; and — the funding and governance structures required to create an effective and accountable body, including the role of “green bonds”.

2. Objectives and roles of a GIB 2.1 The focus of any GIB or public finance intervention should be based on identifying first and tackling actual financing problems in the marketplace; specifically those that are currently an obstacle for private finance, and linked to delivering public policy goals. The UK’s obligations under the EU Renewable Energy Directive is a case in point and the focus of this submission and the two supporting documents is on the RE sector, with particular attention to the offshore wind. 2.2 This means that the scope of the GIB must be clearly defined in order to analyse the above accurately. Terms like “green investment” or “low carbon infrastructure” could include very different infrastructure or technology areas (including within power generation, or within the various renewable energy sub-sectors) that face different market barriers, and have different financing characteristics and needs, and therefore implications 77 “Unlocking Finance For Clean Energy: the Need for ‘Investment Grade’ Policy”, Chatham House Programme Paper, December 2009; in addition a very short guide to the basics of private finance of renewable energy was produced, published with Bloomberg New Energy Finance and UNEP. Both of these are available from: http://www.chathamhouse.org.uk/research/eedp/current_projects/renewable_energy_finance_policy/ cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w60 Environmental Audit Committee: Evidence

for capitalisation of the entity. Offshore wind has specific issues relating to a range of risks particularly construction and technology risk at present, and return expectations, that would not be the same in other RE sectors, or indeed for energy efficiency. 2.3 Questions that may arise linked to objectives include: is it to ensure that a tranche of specific infrastructure projects get through to construction (e.g. to secure public policy obligations/goals); or is it to facilitate any projects that come forward from the private sector, if so will this be capped. Both of these have implications for capitalisation. The recent announcement in Germany that public finance institution KfW will provide Euro five billion in credit for the first 10 offshore wind projects78 is very simple, clearly focused and aimed at targeting a specific financing challenge. 2.4 The development of a GIB must have an explicit intention to retain and build on current momentum in the existing RE market. This means as much clarity as possible for private financiers, early on, as to the functions and role of any entity and the timetable of its rollout. This must including government announcements: to avoid what was described one financier as “tragedy by announcement” (in relation to another set of public finance interventions following the financial crisis in the US) where investment delays occur as further detail and operation is awaited. “Crowding out” of private financial institutions is a key issue, even if unintended. One might imagine being in a financial institution negotiating an RE deal when a GIB is announced and being asked to explain, eg to a credit committee, what impact this new institution may have on the specific investment, existing investments, or in terms of the investment environment going forward. 2.5 Finally, there are several “moving pieces” in the policy debate intended to influence investment: not only the GIB, but also Electricity Market Reform, and the question of a shift from the Renewables Obligation (RO) to a feed-in tariff (FIT) for offshore wind. It will be very important to clarify what each of these tools is expected to deliver in terms of influencing financing decisions, to ensure more detailed input from the finance sector. 2.6 In both work on the Green Investment Bank and the survey on finance views of the RO-FIT issue (October 2010) financiers reinforce the importance and priority of tackling policy-related risks directly through policy improvements (eg OFTO, planning) given that this is the simplest solution to reducing many of the risks impacting investment, which are policy-related. Indeed in the RO-FIT survey, a GIB, while potentially useful, was described as a “second order” issue, compared to tackling the policy framework by some.

3. Timing and timeline: significance of any barriers or “market failures” requiring the establishment of a GIB; any risks of not getting this done quickly 3.1 Critical timing issues for capital deployment in order to deliver public policy goals need to be identified in detail. This would also have relevance if a “staged” approach was intended in terms of the capitalisation of the entity. 3.2 The survey of financiers on RO-FIT for offshore wind indicates very clearly that capital requirements (and therefore constraint) will be most acute in the next two to five years, linked to financing Round 3. The GIB as an intervention would therefore have to be established, complete a detailed analysis of the market in which it will operate, and be operational within a timeframe mapped against this period. 3.3 There are mixed views on the nature of any shortfall, with views ranging from the fact that project finance can indeed supply UK offshore wind capital requirements, to various well publicised estimates of very large capital requirements (often for overall energy infrastructure) and therefore a substantial shortfall compared to today’s investment volumes. The large overall figures need broken down into specific sectors, with detailed “reverse engineering” to understand both the policy and financing pieces that need to be in place, in what timeframe, to secure investment. 3.4 For offshore wind supply chain issues, port infrastructure, planning related factors and critically offshore grid-related matters are consistently raised as key areas for offshore wind. Any shift in support mechanism would also impact investment decisions; reinforcing the fact these elements need understood as a package.

From the Offshore Wind: RO/FIT Finance Survey, Question on the GIB Key issues for GIB — Objective: the basic issue of what the institution will do remains the up front question from financiers; there is a sense that the institutional should be run by commercially experienced staff, with direct RE financing experience. — Need for focus: limited capital should be used very carefully, eg “on a few strategic sectors” rather than spreading limited money too thinly. There is general support for a focus on the offshore wind sector and means to pull in larger sources of capital. 78 Euro 5 billion credit programme “Offshore Wind Power”, www.bmu.de, 28 September 2010. This states that this facility is “To allow investors to gain the necessary experience for the competent management of the technical risks of offshore technology, support must be granted for the speedy construction of the first ten offshore wind farms. To this end the Kreditanstalt für Wiederaufbau (KfW) will launch a special programme “Offshore Wind Power” with a total credit volume of five billion euros. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w61

— Avoid competing with private ﬁnance ie crowding out. Unsurprisingly this is a central issue (“only where there is no ﬁnancing availability, and only once this has been proved….otherwise it will be a disincentive”). The unintended consequence of the EIB intermediated loan framework is highlighted in this regard (the three banks channeling the EIB monies are able to offer preferable rates). — Adequate capitalisation: “Key is credible level of capitalisation if we are talking guarantees provided by GIB. Otherwise those guarantees have no real value. Distribution of loans originated by banks a more realistic option for GIB if thinly-capitalised, as acting as a conduit wouldn’t require GIB to have substantive capital.”

4. Green Investment Bank’s investment priorities

4.1 Two particular areas have been raised by ﬁnanciers in relation to offshore wind that may beneﬁt from public intervention: mitigating risk linked to the construction period and the technology; and secondly providing a distribution channel to reduce the amount of debt held on banks’ books for the long-term. The latter would free up that capital for further investment, as well as potentially provide a conduit for larger pools of institutional capital to enter the market. In addition there is a view that equity co-investment is required if it is assumed the utilities will play a dominant role in delivering Round 3 offshore wind investment.

4.2 These areas, or others, need properly assessed by ﬁnanciers that are practitioners in the sector, bearing in mind the need for clarity over the objective and to avoid unintended consequences. Both the GIB Working Summary, and the RO/FIT survey provide additional detail.

4.3 This debate is occurring as a key Round 2 offshore wind transaction is under negotiation in the latter part of 2010. This is regarded in the market as a “benchmark deal” given its size, the quality of the sponsors and the fact it introduces construction risk and will therefore test the appetite of both debt and equity providers. This will provide some important lessons for the construction period, and the role of any GIB entity. In the RO-FIT survey where this issue was raised there was a clear view that the government will be able to learn from this in relation to Round 3.

5. Funding and governance structures

5.1 In the context of how ambitious this entity may be, or its future evolution, it might be useful to think about simplicity and confidence building. In other words establishing something that is relatively straightforward, facilitates projects getting to completion that otherwise would not, is linked to the achievement of clearly outlined public policy goals where this may require a public finance intervention, and the inclusion of a specified review period (and clearly defined review scope).

5.2 Lessons. There is now experience with both PFI and Infrastructure-UK in the UK, as well as private financiers working with EIB, and deals that involve EU export credit agencies or other national public finance institutions. Some financiers highlight the importance of capturing lessons from both the public and private experience of these entities, in relation to both structure, governance and operation. This may be drawn out through submissions to this Inquiry, but is outside the scope of this submission. 18 October 2010

Written evidence submitted by the City of London Corporation

HOUSE OF COMMONS ENVIRONMENTAL AUDIT COMMITTEE: INQUIRY INTO A GREEN INVESTMENT BANK

This letter responds to the recent invitation to submit written evidence to the above inquiry. The City of London Corporation welcomes the Government’s investment into clean technology (cleantech) and fully supports the benefits which cleantech will bring to the country now and for future generations. The City Corporation has previously reported on the role financial services play in delivering green investment, which may be of interest to the Committee. In 2007 the City Corporation published research examining the financing of cleantech in the UK, in 2008 it established the London Accord a collaborative research project which provides open access to financial research by some of the worlds leading financial service providers into the low carbon economy. These reports will form the basis of the information for this submission.

It is important to note that the UK will face strong global competition from established European firms, the USA and from the emerging cleantech players in China and India. Currently none of the top ten global cleantech firms are based in the UK and most activity is retained within business units of major energy corporations. The City Corporation in collaboration with the think tank, Forum for the Future examined the UK financing landscape for cleantech firms, basing its findings on a series of consultations with financial services. It found that the Government has played a crucial role in the UK’s cleantech industry and in order to cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w62 Environmental Audit Committee: Evidence

sustain the development of the industry, in the face of such competition, it must maintain a joined-up approach to policy and provide consistency for the private sector to develop and invest in new technologies. The report recommended that in order to sustain private sector investment in the cleantech sector there is a need for the Government to: — Set concrete mid- to long-term sustainability targets to provide financiers and developers with a stable platform for innovation. — Target mechanisms to increase commercialisation and address early stage financing gaps and improve scaleable funding models. — Leverage public procurement to drive innovation and create additional demand. — Address wider barriers to investment including testing and certification procedures and fine-tune fiscal incentives. The report also found that UK cleantech finance has grown significantly in recent years. The growth can be attributed to increased venture capital investment and stock exchange listings for cleantech firms, as well as a consequence of growing social, political and corporate concerns over the environment. In Europe the UK is a lead investor in the share and spread of cleantech venture capital. According to figures from the cleantech Venture Network, the UK accounted for almost a third (€603 million) of the total€1.9 billion invested across Europe between 2003 and 2006. Prior to 2008 the Alternative Investment Market (AIM) was becoming home to smaller cleantech firms from around the globe. However, the AIM as a whole suffered in the financial crisis, and although the AIM’s cleantech sector recovered well in 2009, it did not outperform the AIM as a whole, which rose more than twice as much. Therefore, current indications imply the Government should be aware of the Green Investment Bank pushing out the more sensitive private sector, especially at a time when a broader range of investors, as highlighted in the report, are looking at cleantech opportunities. Recent interest has emerged from small to mid cap listed equity funds from mainstream asset managers, dedicated investment vehicles and hedge funds. In 2009 the City Corporation and London Accord79 commissioned the Consilience Energy Advisory Group to analyse the role of financial services in supporting action on climate change. The report proposed the use of “Carbon bonds” as an “innovative finance structure which could be harnessed in order to assist in the fight against climate change”.80 The London Accord’s model for index-linked carbon bonds would underwrite the risk associated with investment in a new policy area. Unlike other bonds, the index-linked carbon bond is a Government issued bond where the base rate is fixed, but actual interest payments vary depending on whether or not the issuer keeps an environmental promise. This in effect relinquishes the regulatory risk from other project risks, including base rate risk, and is managed separately. This will mean that those who invest in an index-linked carbon bond would receive a better return if the targets are not met. Such a model of investment would gives the investor a high degree of certainty over the regulatory environment and therefore gives greater confidence and motivation to invest. In turn the Government is incentivised to meet its targets for carbon reductions in order to pay out a lower interest rate on the bond. If they fail to meet the green targets, they have to pay out the higher interest rate. However, as the report into cleantech financing suggested, funding from the private sector should not be overlooked. The involvement of a broad range of financial institutions from banks and venture capitalists through to insurers and a range of investors, as mentioned earlier, would also be required to ensure the success of the Government’s investment. The reports also indicate that a strong commercial skills base should be accompanied by the Green Investment Bank having a sound knowledge base of the cleantech market. Green Investment Bank analysts will, therefore, need to boost “sell side coverage of cleantech stocks to provide the necessary information for investor decision making”.81 20 October 2010

Written evidence submitted by the UK Business Council for Sustainable Energy 1. The Council works with leading companies in the energy industry to speed the transition to a low carbon economy consistent with the delivery of secure and affordable energy. 2. We welcome the opportunity to make this submission to the Environmental Audit Committee on the important area of investment in the transition to a low carbon economy.

UK Investment Context 3. It is widely acknowledged that significant investments are required to deliver the low carbon technologies and supporting infrastructure needed in the UK and a figure of £200 billion by 2020 has been suggested. 79 The London Accord is an open source collaborative research project, which allows free access to reports written by a range of financial services firms, providing insight into environmental, social and governance issues ranging from renewable energy to the price of carbon to microfinance to governance (see www.London-accord.co.uk). 80 “Delivering Copenhagen: The Role of the City’s Financial Services Sector in Supporting Action on Climate Change”, City of London Corporation, December 2009. 81 “Clean Capital: financing technology firms in the UK”, Forum for the Future, February 2007. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w63

4. Energy companies stand ready and willing to invest—and they are likely to make a large part of the investments due to their technical expertise, management strength, balance sheets and track-record.

5. However, the scale and pace of investment needed in major low carbon plant, means that even if the economics are attractive, projects may be impacted by shorter term capital constraints.

6. In particular, in the long period before revenues start to ﬂow, additional sources of equity investment may be required to fund development, construction and early-stage operation.

7. Attracting such equity may be harder in the current climate. Banks and pension funds may provide debt- funding for certain “settled-down” operating assets, but are less likely to take on development or construction risk.

Risk-Reward Proﬁles

8. A long-term, stable policy framework is essential to attract investment to the UK.

9. Effective incentive arrangements to support secure, low carbon generation should predominantly be put in place through the Government’s Electricity Market Reform work.

10. Signiﬁcant risks posed by planning and transmission must also be addressed.

11. Some form of Green Investment Institution could potentially play a role in handling residual risks— particularly in relation to the development, construction and early operation phases of projects as well as perceived policy and regulatory uncertainty.

Role of a Green Investment Bank

12. There are three areas where a “Green Investment Bank” (GIB), or similar institution, could potentially play a role:

13. Equity co-investment in low carbon technologies—GIB involvement could help in terms of meeting the volume of sensibly priced capital required, supporting projects through the more risky construction phase and investing in new types of asset where commercial markets are not yet comfortable. Some form of guarantees by a Government supported GIB might help in reducing policy and regulatory risks, particularly as Government would then itself be exposed to the potential upsides and down sides of its decisions.

14. Seed funding for Green Deal—GIB could also offer support for downstream investments, such as higher cost measures for households and infrastructure better suited to long term rewards. In particular, it could provide seed funding for the Green Deal. This would enable private investors to see the concept in practice and evaluate the potential scale of opportunity and risks of investing.

15. Innovative delivery—Some areas of the low carbon economy, such as district heating infrastructure, are well suited to attracting forms of “patient capital” and the GIB could potentially provide an innovative route to market for such funds which could in turn support the wider deployment of long term heating infrastructure in the UK. This in turn would play an important role in decarbonising the UK’s heating sector.

Setting up a new institution?

16. Clarity is needed on the governance arrangement for any “bank”—such as what it can invest in, what sort of returns it should seek—and how it would be capitalised—including the extent of public funding and its relationship to the PSBR (Public Sector Borrowing Requirement).

17. If there is some form of public stake in schemes, via the GIB, this could help in building investor conﬁdence and reducing policy and regulatory risks. We hope there will be announcements on this alongside the Comprehensive Spending Review.

18. A coherent, consistent approach to supporting low carbon at various stages is needed. Proposals to rationalise funding streams as set out in the Wigley report (2010) do not fully reflect the complexity of existing funds and institutions, and in some cases are significantly inaccurate. Removing or changing already committed funds will impact on investor confidence.

19. A new ﬁnancial institution to support the transition to a low carbon economy will need to be both useful and credible. It should be ore than “just another player” but, if established, offer the capacity to “make a difference”. This timely inquiry by the EAC is therefore particularly welcome. 21 October 2010 cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w64 Environmental Audit Committee: Evidence

Written evidence submitted by Centrica 1. Centrica welcomes the opportunity to respond to the Environmental Audit Committee’s Inquiry into the Green Investment Bank. 2. Centrica plc is the parent company of British Gas, the UK’s largest energy supplier, with around 16 million customer contacts in the domestic sector and around one million in the non-domestic sector. British Gas already enjoys the position as the energy supplier with the lowest carbon intensity of the electricity that it produces and supplies to its customers. 3. We also own upstream gas production and power generation assets through Centrica Energy to support our supply businesses: (i) We own eight gas-fired power stations including Britain’s newest power station in Langage, near Devon. (ii) We are a leading developer of offshore wind and were recently awarded exclusive rights to develop the Irish Sea zone which provides us with the potential to develop up to an additional 4.2 gigawatts of renewable electricity. (iii) Centrica also plans to play a role in the UK’s new nuclear renaissance. We own 20% of British Energy, through our Joint Venture with EDF Energy and are undertaking the pre-development activities for a planned nuclear new build programme. 4. The threat of climate change demands action now and the UK has rightly set itself the task of meeting this challenge. We have demanding greenhouse gas reduction targets of 34% by 2020 and 80% by 2050. Separately, the UK needs to deliver 15% of all energy from renewable sources by 2020. With concerted effort and commitment from government and industry, these targets can be achieved. We support the Green Investment Bank, believing that if it is correctly designed and implemented, it could play a substantial role in enabling the UK meet its energy and environment challenges. 5. The low carbon investment challenges are significant and long-term. In order to have a meaningful impact, the GIB institution must be able to make long-term decisions that sit outside the political and economic cycle. It must be constituted with a sense of durability and independence so that investors are confident that it, and its investment decisions, are for the long-term. Only in this way can it live up to the vision of a Green Investment Bank as opposed to another Government grant scheme or fund. 6. The GIB should supplement and not replace important reforms such as to planning or the electricity market that are essential for investment in new low carbon infrastructure. Two areas where we believe the GIB could help accelerate the speed and scale of finance are offshore wind and energy efficiency.

Pre-construction Equity for Offshore Wind 7. Investment in offshore wind has increased dramatically but is still not taking place at the scale or speed needed in order for the Government to meet its targets. This is being addressed through a range of important reforms including planning, RO support etc. Getting the framework right for investment must be the Government’s priority. 8. With the right framework the investment will come forward. However, in the longer term there may be an inherent shortfall of available capital in the UK acting as a barrier to deployment of investment at the speed and scale required. This is because only a few companies have the skills and capacity to undertake these investments (utilities) and these have limited balance sheet headroom combined with competing calls on resources. These balance sheet constraints will require utilities to find other sources of finance that do not utilise balance sheet capacity. This is a feasible and tested route. However, there is a risk that new equity partners may not come forward at the speed and providing the scale necessary to meet the renewable energy deployment rates the Government envisages. 9. The GIB could play a role in overcoming this by providing project equity at key points e.g. pre- construction offshore wind. The GIB would simply be expanding the pool of available capital, not providing a subsidy. It would co-invest on pari passu (equal) terms with the private sector project promoter(s). On completion of the project, capital can then be released and then recycled for further projects. A modified version is for the GIB to co-invest with first loss equity, requiring it to make a smaller contribution to the project finance. 10. In addition to plugging a funding gap, GIB co-investment would also provide reassurance to utilities and the broader investment community that the Government was committed to providing the support mechanisms necessary to make the investments required. In doing so, it would enhance investor confidence and increase the amount of funding coming forward from the market.

Initial Debt Provision to Kick-start the Green Deal 11. For the Green Deal to be successfully implemented on a large scale it must be readily ﬁnanceable. Energy suppliers’ balance sheets will not be able to absorb the full costs given the scale could be as much as £80 billion. Banks would be the natural lenders but so far they have indicated they are unwilling to provide cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w65

the finance, initially at least. This is because Green Deal finance is new asset class (loans tied to a meter point not a person) at relatively small levels (~£6,000) over a long payback time (up to 25 years). In addition, a low interest rate (approximately the risk-free rate +1%) is required to achieve the Green Deal “golden rule”.82 Banks therefore see it as too high-risk for significant investment until it is more proven and understood, thereby limiting the availability of debt to finance the Green Deal. 12. The lowest cost of financing would be to access the capital markets. However, to build up a portfolio of Green Deal Obligations prior to securitisation, an interim “warehouse” facility would be needed to aggregate and structure the Obligations. In its early days, there is a risk that Green Deal uptake will not be successful and the Government will withdraw support of the policy which would leave the warehousing banks with a portfolio of assets they cannot sell. As a result, commercial banks have shown reluctance to act initially as “warehouse” sponsors. The GIB is ideally placed to act as a strong and credible sponsor for a Green Deal Special Purpose Vehicle, warehousing Green Deal obligations prior to securitisation. 13. In addition, the GIB could act as a short-term liquidity provider for the period it takes to package up enough GD loans to securitise into a bond. This could be alongside any private banks willing to lend to the Green Deal or as an upfront finance provider until they are more confident in the policy. The GIB should not be seen as a long-term provider of finance for the initiative and, once the Green Deal is established as an investable asset class, it is envisaged that public markets will take over the role of the GIB. 14. To achieve AAA-rating for the securitised note, the SPV could create a reserve account to cover default payments funded by the first year or two of Green Deal payments. 15. The GIB is not essential to developing the Green Deal but it can be key to speeding up delivery. One option is to hope that a range of banks will come forward and offer commercial loans, despite early indications of their caution. They are likely to be much more willing to participate if this was alongside or through the Green investment Bank. Another option is to rely on installers to turn to their own balance sheets, but in capital constrained times this could discourage Green Deal participation. Both these options therefore risk slowing down the uptake of the Green Deal 16. The proposed possible structure is outlined below.

Installation service Householders 2 1 Energy bill 3 payments

Accredited Energy Suppliers Installers

Index-linked 25yr Installers reclaim 4 Green Deal customer funding for surcharge net of energy measures default losses and small service charge

Green Deal SPV Liquidity line GIB and ‘sponsor’ role

Commercial banks Regular index-linked payments for 25 years

5 Capital Markets

17. In terms of capitalising the GIB, we believe this is an issue and decision best left to Government. Instead our focus has been to look at areas where the GIB can add most value and what characteristics it would require to do so. However, we would point out that the energy customer already funds signiﬁcant policy and investment through various levies and obligations (eg the RO, CERT, the CCS Incentive, CESP etc.). Because these levies and obligations are raised through the energy bill, they are regressive. Therefore we believe a taxpayer route would be the fairest. 22 October 2010

82 Where the new energy bill including energy savings and loan repayments is less than the bill before the energy efﬁciency measures were installed. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w66 Environmental Audit Committee: Evidence

Written evidence submitted by EON

Overview

1. An estimated £200 billion of investment may be required for energy infrastructure in the UK over the next 10 to 15 years to replace closing power plants, build new low carbon generation, invest in energy efﬁciency measures and ensure we have the networks we need for a low carbon energy sector.

2. A number of factors are limiting future investment in the electricity market. These include the absence of sufﬁcient, reliable long-term incentives to reward the value of low carbon investments, the high capital cost associated with most large scale low carbon technologies such as nuclear, carbon capture and storage or offshore wind, cost and performance uncertainties with relatively new technologies, and the impact on the wider electricity market and investments of policies to support the delivery of renewable projects in line with the UK’s renewable targets for 2020 under EU law.

3. These are the key barriers to investment and are being addressed as part of DECC’s electricity market reform project. If this reform is effective, then we believe the necessary investment will be attracted to the UK from existing energy companies and from new sources of funding. In our view, the role of a Green Investment Bank is primarily to help provide these new sources of investment, whether from the ﬁnancial markets or from public funds if they are available. The Bank’s potential role also needs to be factored in to the electricity market reform process, given that one of the objectives of reform will be to attract new sources of funding for UK energy infrastructure. Similarly if the Bank is in effect a potential source of subsidy through low cost ﬁnance, then this also needs to be factored in to the new market framework.

4. The nature and extent of the Bank’s role will depend on whether the Government will itself be providing it with funds or be willing to underwrite its funding activities, or whether the Bank will be responsible for raising its own funds from the market without Government support, which would suggest a signiﬁcantly narrower function, or if it is a combination of the two. We note the Government’s intention announced in the CSR to initially capitalise the Bank with £1 billion of DEL funding together with additional signiﬁcant proceeds from the sale of Government owned assets, and that it will be able to reinvest the proceeds from its investments. This is a very welcome development but the announcement as a whole suggests that the Bank’s primary role may not be to invest public money or to provide Government loan guarantees but to act as a catalyst, facilitating the entrance of new types of investor into green infrastructure, although much design work remains to be done.

Role of a Green Investment Bank

5. Where the Green Investment Bank is dispensing Government money, whether raised from sale of Government assets, taxpayers or energy customers, or is providing loans on preferential terms, Government must set some clear criteria governing how that money is spent to ensure that the Bank operates in a way which meets the Government’s energy and climate change objectives. We would not favour a model where the Bank is provided with funds by Government and then has complete discretion over how it is spent. Not only would this increase uncertainty for market participants, but, from Government’s perspective, it would also appear to be an inefﬁcient way of relating ﬁnancial support to Government policy goals.

6. The Bank should operate in a transparent and predictable way, given that it may be competing with private sources of capital or could be favouring one form of investment over another. Government would need to have regard to EU state aid rules and to the potential distortive effect on the market and other participants of the Bank’s activities, for example where it provides ﬁnancing at below market rates.

7. We would see the Bank focussing on low carbon investments where private sources of capital were not well placed to provide all the funding required, for example where the technology risks are high, or where the investment returns from Government policy support are perceived by institutional investors to carry more risk than they are looking for. This seems to be consistent with the Government’s intended approach announced in the CSR which states that the Bank would have an explicit mandate to tackle risk that the market cannot adequately ﬁnance, although it is unclear how it can do that without some form of Government support. Support from the Bank should be available in principle to all projects within a given category.

8. Depending on the level and type of Government support, a Green Investment Bank could perform some or all of the following activities: — providing debt funding at preferential rates or conditions for major low carbon investments such as offshore wind, offering loan guarantees or extreme event insurance (where there are no commercial propositions), or providing the initial capital or guarantees, where the private capital market may not have the conﬁdence to invest initially. Some of these forms of support may be a more effective way of mitigating risks than covering them through increasing the general level of revenue support under the renewables obligation or CCS levy to compensate for the risk in question. Funding would have to be made available equitably to the market as a whole; cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w67

— co-investing equity alongside private investment, where project developers are looking to share their capital commitment or level of risk exposure. On project completion, the Green Infrastructure Bank could either seek to unload any equity it retained and recycle its capital into new development projects, or retain these shares and take the dividend returns from the project. This type of investment might also be appropriate where the Government policy framework does not provide sufficiently stable returns in which case equity investment by the Bank could provide a means of mitigating this risk. The terms on which the Bank would invest equity would need to be clearly set out by the Bank in advance and not applied on ad hoc basis; — supporting market deployment of emerging technologies such as marine technologies or CCS. However, consideration would need to be given to how the Bank could add value in relation to existing Government funding routes. We do not see the Bank having a useful role in supporting longer-term technology development where a number of existing institutions such as the Energy Technology Institute and research councils are already active; and — providing loans to the public at preferential rates and conditions for energy efficiency or other low carbon investments (comparable to the energy efficiency loan schemes operated by the KfW Banking Group in Germany), providing support to lenders in the form of guarantees to reduce the risk profile, and by tapping into markets or investors that utilities have not been able to access and thus provide supplementary funding to the public. 9. There would be little to be gained from the Bank simply replacing existing funding sources although, where this funding is currently provided by a variety of Government bodies, it could lead to a more effective and focussed direction of funds, assuming the Bank has the right expertise overall, and could lead to some savings in administration costs. 10. Where the Green Investment Bank is not making use of Government funds or benefiting from Government guarantees, the Bank is likely to have a narrower role and the question arises as to whether and how it can add value to private sector sources of finance and services already carried out by private sector financial institutions. For example in terms of debt funding could it achieve better terms and conditions and a higher overall funding volume, compared to the terms that can currently be obtained by the utilities or other project developers? In terms of equity could it be more successful in finding and bundling acceptable investors on acceptable conditions than banks, finance houses or private equity houses? This remains to be seen but we would see its role as developing a specific expertise in the energy market and related Government policy framework on the basis of which it could: — act as a specialist source of advice on Government policies and available public sources of funding to financial institutions considering investments in low carbon technologies; — help to structure, in partnership with the private sector, the financing of major projects, whether through debt or equity; or — establish new and innovative ways to finance the investment needed in partnership with policy makers (eg the Treasury) and the investment community, consistent with the statement in the CSR. 26 October 2010

Written evidence submitted by the Brazilian Development Bank Introduction Since its establishment in 1952, the Brazilian Development Bank (BNDES) has been a key source of long- term financing for Brazil’s development. In 2009, the BNDES had total assets of USD 270 billion and net income of USD 3.7 billion. In the early 1990’s environmental issues gained importance with the classification of the environmental risk of projects. In 2002, this process became anchored in specific environmental guidelines differentiated by industrial sector (mining, infrastructure, commerce and services, processing industry and agribusiness). Based on general characteristics of the respective sector or type of activity, there are recommendations to prevent or mitigate potential impacts. In 2005, the BNDES expanded its capacity to address socio-environmental issues through the creation of an Environmental Department and the establishment of an Environmental Policy. The BNDES’ Environmental Policy is a set of standards and guidelines that guide the institution to fulfilling its role as a public development institution, while maximizing the positive environmental and social impacts on the surrounding areas of the projects it finances.

The BNDES and Environmental Issues 1. The BNDES believes that companies that seek to improve the environmental performance of production activities and infrastructure are the driving force behind the economic and social development. Therefore, this is a strategic guideline reﬂected in the Bank’s ﬁnancing policy. In addition, the BNDES reinforces its cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w68 Environmental Audit Committee: Evidence

environmental policy through internal efforts aimed at involving the staff and the protocols in which the institution takes a public commitment to promote development in harmony with the ecological balance.

2. The BNDES has been accomplishing the safeguards regarded as essential by most international institutions, evolving side by side with international standards ruling environmental practices.

3. The Bank has been steadily seeking to improve both the environmental analysis criteria of projects that require credit as financial support for companies that contribute to sustainable development. In order to apply for financing from the BNDES, the client is expected to meet a list of minimum requirements. Among these, it is worth mentioning that the project must: (i) comply with environmental legislation and (ii) comply with fiscal and social obligations.

4. Investment in environmentally friendly infrastructure projects and green technologies, such as energy efﬁciency and solid waste management, has always played a major role at the BNDES’s lending. For example, the BNDES has already invested US$ 609 million in 17 wind farms, US$ 262 million in 10 biodiesel projects with capacity of 1.1 billion litres/year and US$ 12 billion in 114 ethanol projects with capacity of 8 billion litres/year. Besides, the institution is also starting to play an important role in green lines of business that promote the sustainable use of natural resources. Examples of key activities are: planted forests for paper, pulp, charcoal, and timber, native forest management for timber and non-timber products, CDM (clean development management) projects, power efﬁciency, and rehabilitation of degraded areas.

5. The BNDES’ Environmental Policy guidelines are as follows: encouragement of the use of cleaner technologies and the increase of power efficiency; development and permanent improvement of tools to assess environmental credit risk and for environmental analysis of projects; efforts to prevent and mitigate environmental damage; incentives to implement environmental friendly products and processes throughout the production chain; promotion of the continuous development of the environmental awareness at the BNDES; strengthening of information on the energy and environmental profile of economic sectors and the evolution of technological development; consideration of Ecologic-Economic Zoning in procedures related to the BNDES’ project financing and support for farming and forestry projects related to the opening of new areas only when in compliance with those criteria.

6. The most common types of ﬁnancial support are: (i) ﬁnancing lines (refundable and non-refundable), which are permanent in nature and which can be granted at any time; (ii) programs, which have resource allocation and/or expiry dates and (iii) equity funds managed by the BNDES.

7. Two examples of credit lines are BNDES Forestry—a credit line aimed at the reforestation, conservation and forest recovery of degraded or converted areas and sustainable use of native areas through forestry development—and PROESCO—aimed at projects that contribute to power efﬁciency. Two examples of programs, in turn, are BNDES Forestry Compensation—that provides support for the regularization of damage to the legal reserves on rural properties earmarked for agribusiness, as well as for preservation and appreciation of native forests and remaining ecosystems—and BNDES Proplastic—which consists in support for investments entailing rationing of natural resources, clean development mechanisms, management systems and the recovery of environmental damage, as well as ﬁnance projects and programs for social investments carried out by companies in the plastic production sector.

8. The BNDES is the manager of the Amazon Fund, created in 2008 to raise donations earmarked for non- refundable investments in preventing, monitoring and combating deforestation, in addition to the conservation and sustainable use of the Amazon biome forests, one of the richest areas on the planet in biodiversity and natural resources. The Amazon Fund’s main purpose is to promote the protection of this heritage and the sustainable development of the area. In addition to raising funds and selecting projects, the Bank monitors progress after they have been contracted, in areas such as: public forest management and protected areas; controlling, monitoring and environmental inspection; sustainable forestry management; and economic activities developed from the sustainable use of the forest. Finally, not only donations, but also net gains from investments add to the Fund’s pool of resources.

9. The BNDES’ Rainforest Initiative also comprises a selection of projects to allocate non-refundable financial resources from the Social Fund for the reforesting of areas with native species. The BNDES’ Clean Development Fund, in turn, offers support for companies and projects that potentially generate Certified Carbon Reductions, through stakes in companies’ capital. Finally, the Investments and Participations Fund Forestry consists in an investment fund for stakes in companies and/or projects focused on forestry assets. By the way, these funds embody a rather new perspective according to which the environmental matter is at the hub of the Bank’s financial activity, being the very source of return within the project.

10. When it comes to environmental protocols, the BNDES is signatory of the International Declaration, made by Financial Institutions on the Environment and Sustainable Development, and a member of the United Nations Environmental Program—Financial Initiative (UNEP-FI), keeping itself up-to-date on modern environmental and sustainability practices within banking operations. In 2008 in Brazil, the BNDES signed the Protocol of Intentions for Social-Environmental Responsibility—Green Protocol—also signed by other public cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w69

Brazilian bank institutions and the Ministry of Environment. In that document, the signatory banks recognize their role in the pursuit for sustainable development and plan to employ exemplary bank policies and practices that promote the type of development that does not undercut future generations’ needs. Additionally, in order to disseminate knowledge on the environment and reinforce the commitment of the technical body to environmental issues, the BNDES set up a permanent Working Group, the Social-Environmental Working Group, as a discussion forum for the issue. Participants work as links between several sectors of the Bank and the social-environmental units, and are attributed with the task of formulating and monitoring the BNDES’ Environmental Policy. 1 November 2010

Written evidence submitted by Salix Finance

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 £500 million 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 £480 million. — 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 £82 million of funding allocated to 166 public sector bodies on a match-funded basis and £63.7 million of 100% project loans via three programmes in England, Scotland and Wales, involving 249 PSBs. — Projects funded by Salix to date will deliver savings of £480 million in energy bills and 3 million tonnes of CO2 over their lifetime. With a maximum payback limit of ﬁve years, the average payback achieved to date is 3.5 years. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w70 Environmental Audit Committee: Evidence

— 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 £480 million in energy bills and 3 million 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”—ie 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 five 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 £82 million match funded recycling programme, working with 166 separate public sector bodies. — Funds are provided to PSBs on a matched basis (ie 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. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w71

10. Salix Energy Efficiency Loans Schemes (SEELS) — Three loans schemes, with a total value of £63.7 million, which have 249 participating public sector bodies. — Following the 2009 budget, £57.4 million 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 (£5.3 million) and the Scottish Executive (£1.0 million). — 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 eight 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 £10 million for projects in higher education institutions in England, and from the Learning and Skills Council, which has funded over £20 million 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 ﬁve year payback and a cost of less than £100 per tonne of lifetime CO2 saved, there is near term demand for over £500 million 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). cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w72 Environmental Audit Committee: Evidence

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.

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 emerging 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. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w73

31. The top 10 technologies supported by Salix are: Total invested Technology Type £m

1 Lighting £20.1 2 Voltage Reduction £14.9 3 Combined Heat and Power £7.9 4 Boilers £7.1 5 Insulation £6.6 6 Heating £5.4 Building Energy Management 7 Systems £5.1 8 Computers & IT solutions £2.7 9 Motor Controls £2.7 10 Cooling £1.9 £74.4

29 October 2010

Written evidence submitted by The Royal Institution of Chartered Surveyors The Royal Institution of Chartered Surveyors (RICS) welcomes the opportunity to submit its response to the Environmental Audit Committee’s call for evidence for its Green Investment Bank Inquiry.

About RICS RICS is the leading organisation of its kind in the world for professionals in property, construction, land and related environmental issues. As an independent and chartered organisation, RICS regulates and maintains the professional standards of over 91,000 qualiﬁed members (FRICS, MRICS and AssocRICS) and over 50,000 trainee and student members. It regulates and promotes the work of these property professionals throughout 146 countries and is governed by a Royal Charter which requires it to act in the public interest. At global, national and local level RICS and its members are committed to creating and maintaining a healthy environment not only for today but also for future generations by adhering to the following principles: — Protection of the environment through the preservation of natural capital. — Promotion of social justice by ensuring access to services for the beneﬁt of all. — Support of a healthy local economy, including high levels of employment.

Background to a Green Investment Bank (GIB) The Wigley Commission has recommended the GIB be established “to support the delivery of the UK’s emission reduction targets… The support should be based on a public-private investment model and address specific market failures and investment barriers …” It has also said that the GIB mandate should include “providing coherence … by rationalising existing Government-established bodies and funds (high priority)”. The 2009 Pre-Budget Report established Infrastructure UK to improve the planning, finance and delivery of UK infrastructure and the GIB was to be mandated to invest in the “low-carbon sector”, in particular to consider new energy and transport projects. A £40–£50 billion annual investment requirement was identified and has been carried forward by the Commission. The task of addressing specific market failures and investment barriers has also led the Commission to high-level market investment capacity limitations and funding gaps. At the other extreme, the Commission has met “the aggregation challenge”—the institutional framework and capital market problems that make it unlikely that £100 billion of low carbon investment will be achieved in homes and commercial buildings in the way required even if the necessary supply-side coordination existed. The need for a nationally coordinated response is therefore required. This challenge has led the Commission to a number of suggested capital funding market interventions “to facilitate private investment in low carbon assets at the scale and speed needed to meet our legally binding emission reduction targets until such time as the market can do this alone.” In short, the role of the GIB, it has been said, is to make these interventions.

Major Challenges within the UK Built Environment Carbon emissions in the UK stem mostly from homes, businesses and transport. Buildings alone are estimated to be responsible for around 50% of total emissions. RICS strongly supports the focus on tackling carbon emissions from the existing building stock and views that further step changes are required for the UK to meet its legislated emissions reductions. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w74 Environmental Audit Committee: Evidence

Engagement with the Public RICS maintains that public engagement and support is vital to the success of the green, target-driven investment agenda, particularly post-banking crisis. RICS is keen that this support is demonstrated for the GIB. RICS is concerned that the £1 billion made available for the GIB in October 2010’s Comprehensive Spending Review falls well short of what is required to leverage the necessary finance to support the ambition of the Wigley Commission’s Report. RICS urges the Government to provide sufficient financial and political support to the GIB.

Use of Incentives to Support Green Financing The responses of a number of key European countries including Germany and France have included the use of low or zero-interest loans to meet carbon reduction ambitions. Many countries also use a combination of grants and taxation to drive the move to low carbon. RICS maintains that any funding approaches may need other forms of incentives and regulation to get consumers and businesses on board. Recent polling conducted for RICS by Comres showed that the British public believed tax incentives (31%), government grants (27%) and the prospect of reduced energy or water bills (25%) are the three factors that would be most effective at persuading the take up of new energy saving measures. Low interest loans were supported by only 5% of respondents. RICS believes that the property sector and governments will need to identify how to use tax levers at key green touch points. Any changes to tax need to work with the market. RICS maintains that: — Council tax and business rates is the best way to target all properties. This measure is already transforming the sector in Northern Ireland following work by RICS Northern Ireland. — Any future stamp duty changes should be introduced through a reformed graded system. — VAT should be reduced for sustainable repair and refurbishment. — Direct carbon taxes be considered. — Careful consideration needs to be given to impacts associated with both geographic and demographic factors as certain measures could impact unfairly. — The role of direct grants for improvements should be considered in mitigating against any unintended consequences.

Scope of a Green Investment Bank There may be a role for the GIB in helping to refine the design of the financing system for environmental retrofitting to minimise the cost of funds and therefore maximise the effectiveness of the policy. For example, this may involve the use of insurance, guarantees or liquidity facilities both in the mainstream market and also in social housing. The GIB should also provide seed corn funding to build up sufficient scale of receivables to be attractive to bond markets. RICS urges the government to ensure sufficient resource is allocated within a Green Investment Bank and to invest beyond those resources contained within existing Government-established bodies and funds. RICS is concerned that, in practice, the GIB will largely focus on capital market interventions in support of low carbon energy generation (high-level, fast-track, focused) and that the range of supply-side interventions needed at the local and individual building level, as well as integrated development solutions at above-local levels, may not receive the necessary focus and reform. In light of the present funding market failure of sustainable mixed use urban development, RICS believes that the GIB should include this as an area of operation in addition to environmental retrofitting, renewable energy and its other areas of focus. RICS is keen to ensure that other key projects that underpin sustainability may also be funded. For example, trees, woodlands and forests can play an important role in assisting the move towards a green and low carbon economy. A proportion of available funding should also be dedicated to business process improvements for small enterprises enabling them to work more efficiently and become more sustainable.

Protecting Consumers: Ensuring a Professional Approach to Green Investment Decisions RICS has issued many pieces of guidance on sustainability to its members. In September 2009, RICS released a Valuation Information Paper in relation to sustainability considerations in commercial property and is currently working on a residential sector version. Similar guidance on sustainability has been issued to other key groups such as building surveyors and rural surveyors. cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w75

For green improvements under any financing scheme, RICS seeks to ensure: — That professional advice be included within funding mechanisms, without cost to the consumer. — That those providing the advice on measures are independent of those offering the products/ solutions. — The benefits both tangible and intangible need to be sold effectively to consumers, and consumers need to be able to trust the advice that they are given. — Because properties are not all uniform, like for like properties need to be benchmarked. BCIS may have some capability in this arena to assist. — Data related to property level energy use and other measures of sustainability must be made more transparent and accessible. — The financial sector will need to play its part to ensure that standards are met by providers thus helping to ensure confidence by consumers.

RICS believes that there is a need for robust standards that protect the public interest. We would welcome dialogue with Government as any new bank is formed to ensure that effective property standards are met and that a professional and trusted approach is applied to the provision of green property advice.

Energy Performance and Value

RICS has worked with DCLG to produce a policy report on this topic as part of the Heat and Energy Savings Strategy, with a focus on existing homes.83

RICS’ research programme has also concentrated efforts on capturing evidence relating to the Energy Performance of Buildings. Evidence from the US84 is demonstrating a price and rental differential for commercial buildings, research about to be released from the Netherlands shows a similar picture on value for the domestic sector. In the UK, lack of suitable data is hampering research on this topic.85

Further Contact and Support

RICS is keen to explore ways to assist the Committee. It is able to ﬁeld expert members to speak to the Committee formally or informally about how the Green Investment Bank can be delivered. 1 November 2010

Written evidence submitted by BT Pension Scheme Management Ltd

BTPS welcomes the opportunity to submit evidence as part of the Environmental Audit Committee’s inquiry into the Green Investment Bank (GIB). By way of background, BTPS is the largest corporate pension fund in the UK with £34 billion of assets.

1. How has the Government engaged BT Pension Fund in relation to proposals for a Green Investment Bank?

The British Telecom Pension Scheme first became aware of the proposal to set up the GIB when it was announced in the March 2010 budget. However we were not formally engaged by the Government in relation to specific proposals for a GIB until we were invited to, and subsequently participated in, the first GIB stakeholder meeting at the Department of Business Innovation and Skills on 3 December 2010.

In the absence of Government engagement from the period March 2010 to December 2010, we proactively participated in several roundtables hosted by the Aldersgate group, which key Government ofﬁcials also attended. We have also fed our thoughts into E3G who have acted as somewhat of an interlocutor between Government and the BT Pension Scheme. We have seen a number of structure charts for the GIB where a signiﬁcant investment by pension funds is factored in, we are concerned by this as we have not been as integral part of the development process.

While we understand that the National Association of Pension Funds has presented evidence to the Environmental Audit Select Committee, we would strongly urge policymakers to gain a better understanding of the differing and specific requirements of the UK’s largest institutional investors in terms of investing in infrastructure, including renewable energy, directly. 83 http://www.rics.org/site/scripts/news_article.aspx?newsID=1347 84 http://www.rics.org/site/scripts/download_info.aspx?fileID=5763&categoryID=523 85 http://www.rics.org/site/scripts/download_info.aspx?fileID=7258&categoryID=523 cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w76 Environmental Audit Committee: Evidence

2. What is your view of how well Government has engaged with your organisation on this? How well in your view is the process actually “market testing” the way the Green Investment bank will work? Is there anything about the process th&t you would have changed? While we understand the Government needs to consider the design of a GIB to meet public sector spending requirements and rules, we feel that there should be more focus on designing a GIB which could unlock significant long-term private sector investment, including from pension funds, from the outset. In the absence of this, simple assertions from investment bankers that the funding will be available may not be reflected in reality. We would encourage an iterative process for designing the GIB which includes all significant potential consumers of its products or services rather than one which is created in a silo by Whitehall officials and their advisers and then announced in May 2011. Although we are the UK’s largest corporate pension scheme, the executive arm is a small team with limited resource. While we are happy to devote resource to engage Government at this critical time in terms of designing the GIB, we would encourage one department to take the lead rather than risk us having to repeat the key messages across all the departments which are stakeholders in this subject. This would be time well spent as getting the structure right from the start will be critical in terms of encouraging pension funds to invest directly in UK infrastructure as an asset class which is attractive to us due to long-term, inflation-linked, stable cash flows. It should be clear to the design process of the GIB, that if the structure is not right the level of support that pension funds are able to give will be significantly reduced; we may want the underlying exposure but the wrong structure will restrict our ability to invest in size.

3. What are the key factors that the Government should keep in mind when designing ways for pension funds to invest in green infrastructure and the Green Investment Bank? BTPS acknowledges the scale of funding required to renew and replace the UK’s energy infrastructure in order to meet stretching climate change targets and ensure energy security. We support the principle of setting up a GIB to drive new forms of co-investment including direct investment and risk-sharing including first loss, partial provision of subordinated debt (the model adopted by the European Investment Bank), credit and policy guarantees for long-term capital providers such as insurance and pension funds and sovereign wealth funds. The Government should bear in mind that pension funds have long-term inflationary-linked liabilities, strict regulatory requirements as well as fiduciary duties to manage the assets to maximise the long term risk adjusted returns. Hence they do not borrow cash, do not encourage leverage, and, post-crisis, are relatively liquid. Pension funds are risk averse, consider sustainable factors and are currently looking to increase investments with low risk, stable and positive cash flows with a contractual link to UK RPI(orCPI). Along with other major long-term investors, the BT Pension Scheme is reaching the realisation that currently available infrastructure funds, the traditional method for investors to gain exposure to infrastructure, are based on the private equity structure and are inappropriate to meet our need for bond like, inflation linked returns. The private equity structure incentivises the manager to maximise leverage and remove the desired inflation risk. These funds typically have a 15 year maturity, so managers will tend to sell investments before the end of their economic life in order to crystallise a performance fee. This realisation is driving some of the world’s large pension schemes, including the Canadian and Dutch schemes, to invest directly in infrastructure with a structure more aligned to their needs. Indeed the BT Pension Scheme is considering increasing its allocation to direct infrastructure in line with the planned de-risking of the Scheme. The disadvantages of pension funds investing directly in infrastructure are that they need to support larger teams of people and absorb deal costs if a bid were to fail. It is also worth bearing in mind that pension funds are unlikely to have sufficient expertise to identify winners among renewable technologies, and we will therefore look to the GIB to supply expertise and guidance on this. We are also concerned on avoiding a concentration of risk in a particular technology, in particular one with significant operational challenges such as large-scale offshore wind. We would also highlight that the process that the government follows in selling its assets must be a clear one. In an ideal world, the GIB would be a catalyst for reshaping the infrastructure investment framework such that it moves away from the current private-equity-like structure to something much more attractive for pension funds. We would be pleased to work with the GIB on this.

4. Are there any specific types of “products” that it would be helpful for a Green Investment Bank to offer to reduce the risk to pension funds directly investing in potential Green Investment Bank projects? We have been vocal about the importance of designing products to meet the needs of pension funds. For example, based on current proposals for the issuance of green bonds, we would struggle to place them within our existing asset allocation and hence convince our Trustees to buy these. We have a fiduciary duty to invest in the most commercially competitive bonds after considering price, credit risk and liquidity. This means that any reduction in liquidity (inevitable given the small issue sizes envisaged) needs to be compensated by higher yields. Our approved asset classes for bonds include UK government inflation linked and global credit and any cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w77

UK issued “green bonds” that we or any of our managers purchase need to fit into one of these mandates. We have a number of outstanding questions on the issue of green bonds including: — If we invest in green bonds, will there be liquidity in the market if we need to alter our duration to match changes in our scheme’s liabilities? — Will the bonds yield R/CPI plus? — Will the bonds have a long tenor (+15 years)? — How easy will they be to value? — How can the Government assure investors that the bonds will not linked to volatile carbon prices or individual projects whose economics is based on policy which is subject to change? — Will the bond look like any other UK government AAA bond? In addition to the GIB providing specific products to stimulate investment in the UK’s energy infrastructure, pension funds will need to get comfortable with the degree of policy risk we are taking with such direct investments. Investments in renewable energy projects are very long-term and only possible if assisted by policies that support a relatively safe long-term assessment of expected risks and returns. These policies need to be affordable by government and designed to last longer than a term of parliament. Where the credibility of support mechanisms for existing investments is called into question, future private investment in renewable energy will be severely curtailed and/or the price of raising capital for these investments will increase. Therefore, retroactive changes (such as were recently considered in Spain) seriously hamper the wider prospects of attracting large-scale private investment to the renewable energy sector. The experience outlined here has caused many investors to put on hold, in some cases indefinitely, their review of renewable investment opportunities not just in Spain but globally. If we are not able to get comfortable on this issue as a key concern of our trustees, then we will struggle to support this initiative. Please do not hesitate to contact us if you would like to discuss any aspect of our response in more detail. 7 January 2011

Written evidence submitted by Peter Jones OBE 1. Synopsis — Funding Sources to supplement State injections. — The role of Inheritance tax breaks. — Competing with existing dealﬂows in a global context. — Target investment projects—Low hanging fruit and Aggregation. — Planning and land issues—waste sector exemplars. — The criticality of carbon evaluation and measurement. — Links to the Electricity Market Reform. — Extant models—the London case.

2. The Respondent 2.1 My environmental background is that of a main Board Director with one of the top three UK Waste management companies in the UK for 20 years. Since the sale of that Plc in 2008 and my retirement I have been contacted to assist in the acceleration of the low carbon Agenda with specific reference to the 60 plus million tonnes of “scrap” carbon based material which flows from domestic and business sources into recycling, energy and landfill each year. This work is undertaken for… — A major European Bank which has created a £300 million Pension Fund investment vehicle targeted at delivering low carbon solutions for co-located waste conversion processes. — The same Bank which is interested in the use of its Property portfolio of industrial sites to lease to waste, energy and technology companies for the materials diverted from landfill. — A “virtual” Committee under the supervision of the WRAP (Waste and Resources Action Programme) examining the blockages faces the application of large scale anaerobic digestion gas to grid. — The London Waste and Recycling Board as the Mayor’s advisor. — Technology companies operating in the fields of plasma gasification, hydrogen fuel cell storage, anaerobic digestion, carbon dioxide sequestration from waste incinerator thermal oxidation and waste logistics. — A now superceded Regional body which has produced a Planning location analysis tool for evaluating infrastructure projects in waste and renewable energy under my Chairmanship. — As a recent Pensioner I have acquired a working knowledge of pension tax structures. cobber Pack: U PL: CWE1 [E] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Ev w78 Environmental Audit Committee: Evidence

— I am a Board member of our Village not for proﬁt Community Interest Company which is seeking to fund a small scale anaerobic digestion gas plant and low cost community housing to the tune of £3 million. 2.2 All these entities share a common interest in the realisation of very real projects associated with the diversion of organic material from landﬁll to soils, gas, electricity, combined heat and power,synthetic transport fuels or hydrogen. These amount to over 60 million tonnes (compared to the 60 million tonnes of coal and 70 million tonnes of fossil gas) burned in the economy each year. Peer reviewed studies suggest that waste can divert around 6% of the electrical load and a similar amount of heat from fossil sources at a cost of between £10 and £15 billion investment.

3. Funding Sources and Tax Breaks 3.1 Whilst the Treasury does not accept hypothecation the sourcing of the base capital of the GIB should be linked to the flow of funds triggered by the recent changes in the regime for Carbon Reduction Certificates to that of a de facto tax and the yields from the Landfill Tax net of the refunds via the credit scheme. On an annualised basis these are currently estimated at a combined £2.5 billion and would thus support a total Bank capital base of the order of £40 billion every year. It has to be conceded that landfill input tonnages are now highly elastic however. 3.2 A point which seems to have been ignored on which I commented over two years ago relates to Pension Funds. The latter urge, rightly perhaps, the facilitation of a bond type programme backed by State guarantees, mutuality structures, the advantages of leveraging in a Bank rather than a Treasury State borrowing model and the importance or relevance of Utility type return structures to guard against future legislative changes (aka the Spanish example). 3.2 My submission is that the attractiveness of the whole vehicle could more simply be tackled via inheritance tax changes with the decision left firmly in the hands of individual investors with their IFAs. Pension Fund Trustees of companies may be differently incentivised but they appear to control around £800 billion (within the NAPF) compared to the estimated £2 trillion or more in all pension funds. 3.3 Upon retirement I was presented with a choice of leaving funds in a corporate scheme or resigning that and creating a SIPP. The former option would result in all funds reverting to the scheme on the death of myself and my spouse. In the event of that happening with a SIPP the previous Government would have imposed a one off tax of 82%. The current Coalition have reduced that to 55% tax. 3.4 My point is that if the death tax on SIPPs ( or the proportion of them invested in qualifying Green investments as equity, project loans, bonds or securitised debt) is reduced further to levels of the order of 25% the necessary investment levels of at least £600 billion to convert to a low carbon economy would rapidly materialise from decisions by individual investors. This is a reasonable assumption because a £1 million pension SIPP invested to a Treasury defined maximum in UK Green Bonds of, say 50%, would permit an additional £125,000 to remain in the Estate when the SIPP crystallises on the death of the last remaining spouse( at a 25% rate). Initiating such changes in 2012 will create an immediate flow of investment of £500,000 as a portfolio in approved schemes spread across water, transport, energy and waste but the tax impact will not be experienced until 2030 or more in the case of a 60 year old at current mortality predictions. In this way an ageing population in well funded SIPPS becomes a benefit to the UK rather than overseas funds where a devaluing Sterling may accelerate reduced returns. 3.5 As the desired funding gap is filled the Treasury can simply amend the qualifying rules for later SIPPs. The annualised income impacts for the Treasury are not as significant as might be imagined because the tax yield ( 55% 0n over £2 trillion of SIPPS) will be staggered over many decades as holders AND THEIR SPOUSES die. They can regulate their exposure as the gap fill at each Budget Review. I have no data but if my portfolio is typical of the whole UK the bulk of SIPPS are invested in overseas schemes anyway so historic earnings are not being currently utilised to the benefit of the UK. The role of the Bank would be to regulate qualifying schemes ( on the Landfill Tax Entrust model perhaps) and issue Bonds, possibly as a one stop shop provider.

4. Low Hanging Fruit and Aggregation 4.1 In the UK waste sector there are considerable opportunities for co-located resource recovery Parks alongside large single point energy users such as airports, docks, industrial estates, data processing centres, food chain processing centres, prisons, hospitals and so forth. There is no single entity capable of accepting the common risks of… Feedstock Guarantees Sites Funding Technology End output markets cobber Pack: U PL: CWE1 [O] Processed: [09-03-2011 09:22] Job: 008747 Unit: PG01

Environmental Audit Committee: Evidence Ev w79

Thus there is considerable appetite for the estimated £15 billion needed for around 1,000 new low carbon transition sites based on utilising the WRAP Planning tool and increasingly proven low carbon advanced waste technologies. These are targeted at two to 10 Mw load nodes. At the other extreme my experience with our village CIC conﬁrms a market for large numbers of village based renewable energy projects which are probably best managed by aggregation within Branded portfolio products for Pension fund investment.

5. Planning and Land 5.1 The Advantage West Midlands/ WRAP Planning Tool is a software based programme which evaluates prospect sites on the basis of socio-political impacts, biodiversity, communications links, the site characteristics and the veracity of the exit product markets. This enables a transparent, quantitative based site assessment to be undertaken in conjunction with local residents. 5.2 Information on the tool has been circulated to Commercial Land Agents such as Savills, BNP Paribas, Quintain, St. Modwen and Fisher German so that they can consider the application of it to sites in their commercial portfolio. The Tool is short-listed for an RITP Award.

6. Carbon Evaluation and the Electricity Market Reform 6.1 It is essential that in order to apply a coherent set of parameters for fossil carbon dioxide displacement the GIB has access to coherent, academically peer reviewed standards for “footprinting” candidate schemes as part of the qualifying process. Given the diversity of that displacement in terms of watts, therms, gigajoules, tonnes of recyclate of litres of transport fuel the Bank needs to participate on the basis of common standards which measure benefits by a single measure. The absence of such coherence will lead to inconsistencies in the regimes of internalised externality costs in the form of Obligation Certificates, feed in tariffs, tradeable packaging permits and offsets in gas, electricity, transport and materials markets These will in turn impact the overall integrated commercial rate of return and dividend flow to bond, equity or loan holders.

7. The London Model 7.1 This response is in a personal capacity but I commend to the Committee the template of the two year old London Waste and Recycling Board, of which I am a Member. Whilst funding is derived notionally from the allocation of Landfill Tax Credits this has been leveraged to a point where around £60 million has enabled over seven times that level in terms of initiated schemes by ensuring that LWARB funds have first accessed EU match funds and secondly provided the de-risking of early mover projects by sacrificing guaranteed returns on high risk loans or equity to “top out” base funding provided from commercial lenders in the form of equity, bonds, secured and unsecured loans. 7.2 In closing I commend to the Committee the need for extreme urgency. The push for these measures in terms of supply side pressures from rising concentrations of carbon dioxide are well evidenced, practically as well as scientifically. However the demand side opportunities in terms of National competitive advantage, job creation, export potential and other practical market factors offer a rare opportunity for substantial financial, technical and commercial growth in the UK at a time when the doors are closing on consumer focussed production industries. 18 January 2011

Printed in the United Kingdom by The Stationery Ofﬁce Limited 03/2011 008747 19585