Market News

 April 01, 2009
How to finance the UK's green deal


The UK government will need to think big, bold and fast if its "green new deal" is to get beyond the rhetoric stage, industrial and financial analysts say

The UK government will need to think big, bold and fast if its "green new deal" is to get beyond the rhetoric stage, industrial and financial analysts say.

At a London summit last month, prime minister Gordon Brown, business secretary Lord Mandelson and climate change secretary Ed Miliband all talked of the danger that Britain would get left behind in the "global race" towards a low-carbon economy.

The flipside, they said, was an opportunity to create hundreds of thousands of jobs in renewable energy and other areas of carbon reduction at a time when unemployment is surging in the wider economy.

A final strategy, based on responses from the summit and a consultation, is due to be drawn up this summer. However, scepticism about the government's resolve and ability to pay runs deep, not least in view of recent funding decisions.

"They keep talking about this new green deal but there's nothing concrete to grab hold of," said Jemma Robinson of the Renewable Energy Association (REA).

She cited a decision by the government -- announced just four days after the summit -- to suspend funding for solar power schemes under its Low Carbon Building Programme. The LCBP provides grants of up to 2,500 for the installation of microgeneration technologies in homes, community organisations and other public and private buildings, with PV the most popular type of application.

The Department of Energy and Climate Change has said Phase 2 will not be extended and remaining funds, thought to total about 8 million, will be returned to the Treasury when the LCBP ends this June.

In contrast, the association is demanding 625 million be spent immediately to safeguard the UK's existing renewables industry and to ensure 2020 targets on carbon cuts are met. It says 10 billion is needed in the long term to match the sums spent by other countries including Germany, France, the US and China -- proportionate to GDP -- and to meet investment levels recommended in the Stern report.

However, Britain has committed just 1.5 billion of its 25bn reflationary measures to green stimulus, according to HSBC.

How to bridge that gap? James Cameron, executive director of Climate Change Capital, a London based investment and consultancy firm specialising in the low carbon industry, said the government should issue "carbon bonds" along the lines of war bonds in the Second World War. The REA also backs the idea.

The recession will increasingly spur people to save, and the bonds would appeal as other financial instruments are viewed as risky or discredited, the reasoning goes. Also, returns on cash are at historic lows. Above all, the bonds would appeal to people's sense of duty and pride.

"We've taken some detailed plans to government and hope over the next few months they can be thrashed out," Cameron says.

"But in broad terms you either create a government bond for, say, a specific renewable energy project. Or you put a bunch of assets together linked to renewable energy, and the government provides some underwriting for that."

Instead of the 'bad asset banks' proposed as a way of ridding the US and UK economies of toxic debt, this would be a good asset bank, he said, with returns for investors subject to increase in line with any extra subsidy from government.

Is the war bonds analogy not a bit far fetched?

"It [climate change] isn't the same as an army at your doorstep but there is a need for the same sort of leadership capable of pulling people together in a common cause."

Martin Berg, vice president, carbon emissions originator at Merrill Lynch in London, said the sums required to develop the UK's renewables infrastructure were too large to rely only on public borrowing.

"My view is that the UK has to unleash private sector money into this market but also get entrepreneurial money flowing in."

Carbon bonds could take two forms, he says. They could either operate in exactly the same way as gilts (UK government bonds), but with different branding. In theory investors would be content with slightly lower returns because they would have the satisfaction of knowing the money was ring-fenced for green development.

An alternative would be bonds linked to specific projects. Here the returns for investors would depend on the success of the revenue steam in question -- often via carbon credits in the emissions market -- but also on the level of risk associated with a particular project. As always, a higher-risk project would need to pay a higher return.

"Pension funds would love to have exposure to some green projects but the risks are taking away that appetite," Berg says. He suggests some form of government underwriting might therefore be necessary to lure private investment.

Berg forsees some combination of the two models but plenty of detail needs to be worked out to lure those vital private funds. "The general principle for project-linked bonds is compelling but investors have to wait and see what the government really have in mind. There's no suggestion yet of a solution but I don't get the impression they're stalling -- there's just a lot to work out."

Barclays and KPMG declined to comment until they had seen more details from government this summer.


The Renewable Energy Association believes a government 'carbon' bond could raise 2 billion. It is calling for 625 million to be spent in the short term (next two years):

  • 230 million to deliver 70,000 installations, creating 10,000 jobs. This would be done via refinancing the LCBP and making the 2020 target of 7 million sustainable homes realistic.
  • 130 million in bioenergy capital grants for new biomass heat projects.
  • 55 million for demonstration heat networks, biogas injection into the national grid and bioenergy vehicles for the 2012 Olympics.
  • 165 million for systematic smart metering roll-out trials and development of intelligent distributionnetworks.
  • 45 million for skills training for workers in energy and construction sectors and for installations on show homes around the country.

Renewable Energy Association: www.r-e-a.net
Climate Change Capital: www.climatechangecapital.com