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Market News

 June 30, 2010
Financing the Low-Carbon Future -- UK Commission Proposes Radical Changes

 GLOBE-Net - A ground-breaking report released this week by a commission established by Britain's new government has recommended a massive overhaul of financing mechanisms needed to achieve the UK's transition to a low carbon economy.

Citing numerous market failures and other barriers to investment and innovation, the Green Investment Bank (GIB) Commission has recommended the establishment of the Green Investment Bank (GIB) to tackle the low carbon investment needs of the UK, working as a key part of overall Government policy.

It recommends public money be taken from nine different funds and quasi-non-governmental agencies, including the Carbon Trust, and be managed by a single body in order to cut inefficiency and to reduce bureaucracy.

"We are totally committed to working towards a low carbon economy in a way that underpins the global competitiveness of the UK," Gregory Barker, minister of state for climate change.

The commission, led by former European chairman of Merrill Lynch Bob Wigley, proposes the GIB would include a banking division to encourage retail investment in low-carbon technology through green bonds and other financial incentives.

Firms developing high-risk technology would receive more money than through current funding models under its proposals, the Commission argues.

"We are totally committed to working towards a low carbon economy in a way that underpins the global competitiveness of the UK," said Gregory Barker, minister of state for climate change. "We see a Green Investment Bank as a very important part of a transition that puts the UK at the forefront of green technology," he added.

It is the scale of the investment required to meet UK climate change and renewable energy targets that is a shocker. The Commission estimates investment reaching 550 billion between now and 2020 will be required. By contrast, only 11 billion was invested in Britain's "dash for gas" initiative during the 1990s, which was considered transformational at the time.

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 commercialization;

 The challenge of making large numbers of small, low carbon investments attractive to institutional investors.

In addition to ensuring the UK meets its legal de-carbonization 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 establishment of the Green Investment Bank to work as part of overall government policy will open up flows of investment by mitigating and better managing risk (rather than simply increasing rewards to investors).

While the Green Investment Bank should be established by an Act of Parliament as a permanent institution working over the long term in the national interest, the Commission recommends that the Bank 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 argues. It also should limit direct public liabilities by placing GIB liabilities off the Government balance sheet. However, any profits derived from public funds should be reinvested to further its mission.

Based on consultations with stakeholders in the market, the Commission has proposed that over time the GIB could develop the following types of products:

 Early stage grants
 Equity co-investment
 Wholesale capital
 Mezzanine debt
 Offering to buy completed renewables assets
 Purchase and securitization of project finance loans
 Insurance products
 Long-term carbon price underwriting

The Commission suggests that in its initial phase, the Green Investment Bank should focus on supporting the areas where maximum impact and speed to implementation can be achieved.

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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.

Market reactions to the sweeping proposals have been generally favourable. Penny Shepherd MBE, chief executive of UK Sustainable Investment and Finance Association (UKSIF), said "A Green Investment Bank should do much to leverage private sector investment from international and UK pension funds and from private individuals.

Hugh Savill, acting Director of Investment Affairs at the Association of British Insurers, said a Green Investment Bank could help direct long-term funding into eco projects.

"As investors, insurers have an appetite for long term instruments to match their liabilities. Provided the details are right, targeting bond issues at insurers' long term investment horizons will encourage more partnership between insurers and government," said Savill."

Friends of the Earth's Senior Economy Campaigner Simon Bullock said:  "A Green Investment Bank is urgently needed to help finance the development of a low-carbon economy and create new jobs and businesses - but it should be independent, funded by auctioning EU emissions trading permits, and focused on developing the UK's vast renewable energy potential and slashing energy waste.

Danny Stevens, policy director at the Environmental Industries Commission, suggested the green bank should not focus solely on energy, but also on other aspects of environmental and low-carbon technologies, including water and waste."

Establishing the GIB could mean dissolving the not-for-profit Carbon Trust and directing its 100m of annual funds to the bank. Approximately 55m a year would be steered away from the Energy Technologies Institute and the Technology Strategy Board would be stripped of its 30m annual remit for low-carbon technology programs.

Some in the green-tech community were concerned by the suggestion that the Carbon Trust may be dissolved. The Carbon Trust has been praised as particularly adept in its advisory role to businesses that want to reduce utility bills and greenhouse gas emissions. 'I don't see the Carbon Trust as broken,' said Robert Hokin, chief executive of green energy trade association ecoConnect. "I question why someone would want to scrap it."

The Commission's full report is available here.