UK Green Investment Bank Update
By Julie Scotto
The UK chancellor, George Osborne, revealed more information about the UK government’s plans for a green investment bank in the comprehensive spending review in late October.
The government is putting forward £1 billion for the green investment bank, half of the £2 billion that was previously anticipated. This £1 billion is massively lower than the £4 to £6 billion for which some in the industry had called.
It was also revealed in the Treasury’s national infrastructure plan that £250 million of the allocated £1 billion funding for the green investment bank is dependent on the Scottish government agreeing to a drawdown of funds from the Scottish fossil fuel levy surplus. Should the Scottish government refuse, the £1 billion funding will be reduced to just £750 million.
The spending review said that the government hopes that more funds will be raised from the private sector and the proceeds of future government asset sales.
The spending review has, in the main, been rather supportive of the renewable energy sector, setting aside £1 billion for the creation of one of the world’s first commercial-scale carbon capture and storage demonstration plants, over £200 million for the development of low carbon technologies and creation of a renewable heat incentive, and grants to promote use of electric vehicles. The government will provide more than £200 million for development of low carbon technologies, which will include offshore wind technology, and £860 million over the period to 2014-15 to encourage households and businesses to invest in renewable heat measures through the introduction of a renewable heat incentive from 2011 providing long-term support for renewable heat technologies.
Aim of the Green Bank
The chancellor said that the aim of the green investment bank is to ensure that Britain is at the forefront of the “new green economy.” He said it will create jobs, save energy costs and reduce carbon emissions. The hope is that all of this will incentivize the population to reduce their energy bills, promote greater home energy efficiency and allow the government to “phase out the warm front program,” a government-funded initiative that provides insulation and heating improvements up to a value of £3,500 (or £6,000 where oil, low carbon or renewable technologies are recommended).
The UK government has set low carbon emission goals that will require great investment, but this may not be possible at present, as only a third of the investment could be available from commercially-funded sources, so the government views the green investment bank as a way to fill the funding gap.
Reaction in the UK to the reduction in the amount of funding for renewables from the previously anticipated level is that the reduction is likely to exacerbate the difficulties that the renewables sector is already facing raising financing for its projects. Doubt also remains as to whether the green investment bank will have sufficient funds to leverage capital from any potential private investors and instigate projects on a large enough scale to have any sort of credible impact.
The spending review failed to give more details relating to the green investment bank, such as how the bank would make grants and whether it would possess the capacity to issue bonds and credit guarantees. However, a few more details were laid out in the Treasury’s national infrastructure plan. The government aims to complete the design and testing work of the green investment bank by spring 2011 and the initial time frame for implementation is 2013-14. Until further information is released relating to the exact structure of the bank, it will remain to be seen whether the proposed bank will live up to expectation.
Although the chancellor did not reveal in the spending review what government assets will be sold to fund the bank, and the Treasury has since declined to specify how much funding would come from asset sales, it is believed that there are plans to sell the High Speed 1 (Channel Tunnel) rail link, portions of the student loan book, the radio spectrum released by the switchover to digital television, and the UK’s one-third stake in Urenco, a company that produces enriched uranium for nuclear power. Urenco has been valued recently at £3 billion, which could add much needed investment to the green investment bank. The previous attempt of the Labour government to sell the UK’s share in Urenco proved unsuccessful when the sale was blocked by other shareholders in 2006.
This lack of clarity in where the funding will come from for the bank and the reduction in its initial capitalization have provoked comments that there is a lack of real commitment on the government’s part to the initiative. Some have even suggested that, due to the far lower amount of funding than was expected, the green investment bank will function more as a “guarantee department” than a senior lender.
Given that experts in the industry, such as Ernst & Young (which was commissioned by the Green Alliance, E3G and Transform UK to provide a report on the possible role of the green investment bank and its likely capitalization requirements) recommended the green investment bank start with an initial capitalization of £4 to £6 billion, the £1 billion that has been allotted is causing many to question how the bank is supposed to be fit for its purpose.
Ernst & Young published in October an independent report on the green investment bank that gives a view of the potential role of the green investment bank and its likely capitalization requirements. The report gives recommendations for potential products.
The consultancy suggested that the bank might provide short-term construction equity to bridge the funding gap in the construction equity segment, long-term debt for offshore, carbon capture and storage and energy efficiency projects in the form of bonds, and medium-term secured subordinated debt (subordinated to senior secured debt provided by commercial banks) for offshore and carbon capture and storage projects. It also thought the bank should provide multi-year wind insurance for offshore wind projects (as presently no commercial insurer provides this type of product)and a default risk guarantee product for energy efficiency projects. The green investment bank’s provision of this product over the long term to the institutional lenders would be an alternative to providing long-term debt to small-scale energy efficiency, micro-generation and smart grid projects, and given the correct legal security, there should be the possibility for such projects to achieve an underlying credit rating of BBB- or above.