The Chancellor’s emergency budget speech made it clear. George Osborne will, “take forward our plans to create a Green Investment Bank, bringing forward private investment in clean energy and green technologies. “ Cited as a specific commitment in the Coalition Agreement, sitting under the LibDem run Department for Energy and Climate Change, this is one of the few new quangos to be created amidst a rush to rationalise many others onto bonfires.
But what should a Green Investment Bank (GIB) look like? The government-appointed Commission, led by former Merrill Lynch chairman Bob Wigley today (29th June 2010) urged the rapid establishment of such an institution within six months.
Their report, “Unlocking investment to deliver Britain’s low carbon future” indicates that a staggering £550bn is needed to decarbonise the UK energy infrastructure over the next ten years, to meet existing legal targets. All this in the age of austerity.
All parties clamoured to own and announce the concept of a Green Investment Bank before the election, but now the Coalition will hope to take the credit for creating it.
Under Ed Milliband’s Department for Energy and Climate Change, the policy work for delivering new energy infrastructure was largely done, and planning reform is well underway. Despite promising to scrap the Infrastructure Planning Commission, the new government intends to ratify the National Policy Statements that outline the strategic position on major infrastructure projects. The next barrier to overcome is securing the skills, supply chain and the investment for the delivery phase.
A key recommendation in the report today is for the GIB to identify and address market failures in the delivery of low carbon infrastructure. This is critical because it takes the responsibility for market reform out of the hands of government and into the hands of the delivery body. The proposed consolidation of expertise from a range of existing carbon quangos into the GIB, coupled with a close engagement with the City, could result in credible long-term solutions.
Whilst this is welcome in many ways, the challenge for the government will be to strike a balance between commercial independence and public accountability. The Commission argues that the Bank should not be accountable to Ministers. In this case a clear governance structure must be in place that will protect the public interest. Public trust is a key consideration. Perhaps the Bank of England itself could be a useful role model.
All parties had recently already started to work out various levers and incentives to stimulate low carbon investment (for example the Treasury’s Energy Market Assessment published alongside Labour’s last Budget). Side-stepping party politics in favour of good economic sense could allow the GIB to provide more certainty that these incentives can be in place over the long term, giving confidence that there will be a return on the investment over a decades-long timescale.
The context for the Green Investment Bank is defined by the low carbon agenda, but may also be set within the wider agenda of banking reform. A range of initiatives are proposed, including giving local authorities the powers to set up banks to help fund new services, a social infrastructure bank to enable housing growth and the Big Society bank proposing to use dormant bank accounts to fund social projects.
This reform may lead to a new era of privately-run investment targeted at meeting public policy outcomes. The climate agenda must now urgently move into the delivery phase. In the wake of the credit crunch and recession, there is no money left in the public purse. The issue for government is therefore how best to mobilise private finance to deliver decarbonisation for the public good.
Key passages from the report include:
“The Commission has identified a number of market failures and investment barriers in financing low carbon infrastructure, which have led it to conclude that, without intervention, the UK’s low carbon targets will not be achieved:
• Market investment capacity limits and limited utility balance sheet capacity;
• Political and regulatory risks stemming from the fact that government policy determines expected returns and the history of policy changes;
• Confidence gaps among investors given technology risks, lack of transparency in government policy and high capital requirements for commercialisation;
• The challenge of making large numbers of small, low carbon investments attractive to institutional investors.
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In addition to ensuring the UK meets its legal decarbonisation targets, the case for intervention is supported by a number of arguments including:
• Ensuring energy security and future growth;
• Reduction of exposure to high and volatile fossil fuel prices;
• Creation of a large number of new businesses and jobs;
• Underlying externalities and market failures.
On this basis, the Commission argues for the establishment of the Green Investment Bank to work as part of overall Government policy to open up flows of investment by mitigating and better managing risk (rather than simply increasing rewards to investors).
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The GIB will need to raise three forms of funding to sustain its ongoing operations, leveraging the institutional appetite for long-dated sterling bonds and existing Government grants:
A Government funding for disbursement of grants (ie existing quangos and funds).
B Financing for ongoing activities and “commercial” investments, with options for Government consideration, including:
i Green bonds
ii Green ISAs
iii Green Investment Bank debt fund
iv Levy on energy bills, eg new levy or CERT replacement.
The Commission recommends that:
The Bank should be commercially independent and therefore not accountable to ministers or to Parliament for individual investment and lending decisions. This is a prerequisite for building credibility with the markets. It also should limit direct public liabilities by placing GIB liabilities off the Government balance sheet.
[and]
The GIB’s governance structure should clearly manage the tension between investing in the public interest and the need to be commercial. The board of directors should be drawn primarily from the private sector and employees should have commercial expertise.
In preparation for the Comprehensive Spending Review in October 2010, immediate further analysis will be required to ensure that the GIB is adequately capitalised and to determine the Government’s exact requirements before October.
In light of the recent National Audit Office report entitled, Government funding for developing renewable energy technologies, the GIB should use the potential rationalisation of quangos and their funds to radically improve Government support for low carbon innovation and the commercialisation of new technologies.
-- The process of bringing together and rationalising these quangos and funds should happen quickly, with the savings secured being reinvested in the new institution.
-- The rationalisation process should ensure value for the taxpayer, while improving service delivery and simultaneously freeing up money to support Britain’s transition to a low carbon economy.
-- The high quality of people and skills in some of the existing quangos should form the core of the GIB.