TUC Briefing: the Green Investment Bank and the Green Economy

The Government's Vision for the Green Investment (24 May 2011)[i] has removed much uncertainty around how the Green Investment Bank would operate and its green priorities, while still capping its funding. The government's insistence on a £3bn funding cap to 2015 means the GIB can only play a minor role in the huge green investment flow required to 2020 and beyond. Keeping the GIB on the government's balance sheet and therefore tied to its fiscal policy appears as more ideology that good green economics. Most other European public infrastructure banks do not appear on their balance sheets. The government should free the GIB to deliver green investment at the scale and pace required for a green recovery.

Nevertheless, there are a number of positives from the Business Secretary's announcement:

Mandate: 'to accelerate private sector investment in the UK's transition to a green economy' is the right one.

Legislation: the GIB will be set up under the Companies Act with legislation to back it up. There is no date on the legislation - so we will need to continue to push for 2012-13 legislative window.

Operational independence: it looks good on day to day operational decisions. A new Corporate Board will be involved in defining the 'strategic priorities'. Predictably, government will have the power to sign these off, supported by a Ministerial Policy Group setting the founding articles, GIB Charter and strategic priorities. No mention so far of an advisory role for the Green Economy Council.

Borrowing: the GIB can borrow from the market and the Treasury, and, reassuringly, 'the GIB will need to determine the borrowing mechanism to use'. However, both the time limit and borrowing cap remain: no new borrowing until at least 2015-16 and still subject to national debt declining as % of GDP.

Priorities: likely priorities include offshore wind, non-domestic energy efficiency, waste and the opening phases of the Green Deal.

How much do we need to invest in a green, low carbon economy?

The government's overriding obligation is to ensure it meets its target to cut carbon emissions by 50% by 2027. The coalition has taken the welcome decision to continue to follow the strategic advice of the Committee on Climate Change (CCC). Its latest report argues that investment costs to meet the fourth carbon budget (2023 to 2027) will be far higher than recently seen in the energy sector, reaching up to £16bn annually in the 2020s. The committee suggests that this compares to £2bn average annual investment in the electricity sector - and £200bn average annual investment across the whole economy - in the early 2000s.

Such is the scale of the green investment challenge in the that we need a Green Investment Bank similar in form and function to the institutions of our main EU competitors, Germany and France. Estimates vary, but the UK needs to invest some £450 billion in low carbon investment until 2025. Ernst & Young splits this evenly between £225 billion in energy 'supply side' investment and £225 billion in energy efficiency 'demand side' investment. Funds are required both for innovative technologies - say, carbon capture & storage - and infrastructure renewal. Dieter Helm contends that 'the state of British infrastructure is widely regarded as poor, and in some cases dire. Few would argue that Britain's infrastructure is fit for the purposes of the twenty-first century'.

Is the government doing enough?

As policy stands, the Chancellor's fiscal strategy is binds the Green Investment Bank to meeting about an £18bn share of this challenge over the next three years, whereby its £3bn capitalisation is deemed to leverage five times that amount of private capital. Although welcome, the GIB's offer is a single year's worth of the total investment envisaged by the CCC to 2027. Put another way, in the next 16 years, the GIB offers one year's finance.

The core of the low carbon investment challenges lies in energy supply. Faced with the challenge of ageing energy assets and challenging climate change targets that require the almost complete decarbonisation of our electricity supply system by 2030, the coalition's electricity market reform (EMR) review estimates that around £110bn of investment in new power generation and transmission assets for electricity is required by 2020. The UK's liberalised energy market therefore faces the challenge of doubling the investment rate it has achieved over the past decade, in renewables, new nuclear and clean coal and gas.

Need, not ideology, should guide the scale and direction of the GIB. It is frustrating that the GIB is caught up in the same policy belief that cutting the public deficit will free the necessary private sector resources for growth. By boxing the bank in, with at present no powers to borrow in its own right, the 'expansionary fiscal contraction' model has the perverse consequence of stifling the necessary private resources needed for a green recovery.

Priorities for the GIB: homes insulation

The Deputy prime Minister suggested in his announcement (23 May 2011) that early funding priorities for the GIB would include offshore wind, waste and non-domestic energy efficiency, while it could also be used to support the early stages of the "Green Deal" to make homes more energy efficient.

The TUC welcomes the decision to bring GIB funds in to kick start the Green Deal. Experience from Germany over the past decade points to the huge environmental and jobs gains from an ambitious home insulation programme.

The Alliance for Employment and Environment in Germany, initiated by the DGB in 1998, and involving a wide range of stakeholders, had several objectives:

- to renovate 300,000 apartments/year;

- to create and/or preserve 200,000 jobs;

- to reduce CO2 emissions by 2 million tonnes per year;

- to drive down energy bills for tenants and landlords;

- to reduce the State debt by a minimum of 4 billion dollars, by reducing the costs of unemployment and increasing tax revenue;

- To reduce the country's dependence on fossil fuel imports.

The federal government invested 1.48 billion Euros into funding this action plan between 2001 and 2005, and 6 billion Euros per year between 2006 and 2009. Moreover, taking into account the total of the realised credits, over 21 billion Euros were made available between 2001 and 2008 to allow this plan to be effective.

The action plan resulted in 71 billion Euros investments over 10 years. The 2009-2010 anti-crisis packages reinforced that plan while the austerity measures taken for 2011 reduced budget made available for it.

This project has had positive effects:

• The development of new technologies allowed for the emergence of new markets.
• Positive effects were observed in cities where neighbourhoods appear as more dynamic, better organized and more sustainable.
• This initiative allowed for the creation of many green jobs, including many skilled jobs in the construction sector, but also in the production of many products (insulating glass, thermal insulation materials).
• Green jobs have emerged in certain activities such as architecture, consulting and engineering.

Overall, this program has helped renovate more than 2.4 million apartments, inducing a reduction in CO2 emissions of 1 million tons in 2006 and 1.5 million tons in 2009. It also helped create 221,000 jobs in 2008 and 340,000 jobs in 2010

The GIB announcement is also a welcome counter to recent decisions that have not helped industrial investment. According to the Local Government Chronicle, Freedom of Information requests reveal that that, across eight Regional Development Agency (RDA) regions, 2,841 separate regeneration, economic development and business support projects have ended in the past twelve months as a result of £1.36 budget cuts. In addition, over 1,800 RDA staff have lost their jobs.

This represents a reduction in economic development activity of 73% from 2010. In place of this, the Government has announced 50 projects worth £450m as part of the first round of the Regional Growth Fund, with a further £1bn available over the next three years.

The Green Investment Bank (GIB) is required to help secure this investment.

How will the GIB contribute to the Green Economy Roadmap?

Financing the green economy is certain to become a central issue for the Green Economy Council, established by the government to 'look at how government and industry can work together to help business rise to the low carbon challenge.' The council is currently overseeing the development of Green Economy Roadmap, due in early summer 2011. This will set out the Government's long term strategy on climate change and the environment. The Business Secretary commented as chair of the inaugural meeting (February 2011), 'The transition to a green economy brings both opportunities and challenges that we need to tackle now to achieve sustainable growth and meet climate change targets. We need ...to create the necessary conditions for green growth and investment in the green economy.'

A wide range of energy, industrial and transport sector investments will require interventions at different times in the period to 2030, including:

• Off-shore wind and transmission.
• Smart and super grid infrastructure.
• Smart meters.
• Marine energy.
• Fossil fuel power installations.
• Carbon capture & Storage for coal and gas units.
• Household energy efficiency and community energy.
• Technology innovation for energy intensive industries.
• Rolling stock.
• Electric vehicles.
• Water infrastructure.
• Waste management.
• Flood defences.
• New civil nuclear power installations.

The roadmap will need to address some investment fundamentals, including that the transition to a green economy will require investment at a very large scale for an extended period of time. Access to finance for green investments will be difficult, especially for innovative but crucial infrastructure, such as CCS) and taking technologies from demonstration to commercialisation.

The GIB is expected to be given a 'green mandate' to tackle risk (construction, technology, operational) that the market currently cannot adequately finance, and will aim to catalyse further private sector investment. Current Government commitments, with leverage of private finance, should mean that there is in the region of an additional £18bn of investment in green infrastructure by 2014-15 as a result of GIB. The Government will also enable GIB to have borrowing powers from 2015-16 and once the target for debt to be falling as a percentage of GDP has been met.

As the government's consultation on its Energy Market Reforms (EMR) acknowledged, the Big 6 utilities 'may struggle to invest in low-carbon generation at the scale and pace required to meet the UK's targets'. But about a third of the new investment is needed for offshore wind, with developments expected from companies outside the 'Big 6', like DONG Energy, Vattenfall and Statoil. Meanwhile, CCS projects are held up for want of certainty and effective decisions on public funding and a CCS levy.

The consultation calls for at least £110bn in new generation and transmission assets in electricity - over double the rate of the last decade. But the scale of the investment challenge supports the case for a government-led, coordinated and large scale initiative to 2020, underpinned both the resources of a well funded Green Investment Bank, and by other Government instruments, such as funding for four CCS projects. As a matter of high priority, details of the GIB should be published in Budget 2011.

How much private sector capital should the GIB leverage?

The Government announced in the Budget that with capitalisation of £3 billion the GIB would be able to leverage in £15 billion from the private sector into the green economy - a total of £18 billion. Transform UK calculates that if the GIB is allowed to borrow just £10 billion then it would be able to leverage in another £50 billion of private capital, an addition of another £60 billion of investment in the UK low carbon economy.

Why does the GIB need to borrow and so issue its own bonds?

Bonds are an efficient way for the GIB to access the vast pools of lower cost institutional investor capital; other European public banks regularly use such bond issuances to back their investment plans. To help close the low carbon investment gap the GIB must have the power to issue its own bonds directly from the capital markets. UK institutional investors alone hold £4.1 trillion of assets. They are keen to invest in low carbon energy infrastructure but need a vehicle to enable them to do so. Green bonds issued by the GIB can provide that vehicle.

Nevertheless, the TUC welcomes the decision of the coalition to underpin the GIB with new legislation and providing for full, independent borrowing powers. This will give investors confidence, as the CBI has pointed out, that the bank will play a key role in mitigating some of the risks of investors planning major low carbon investments. This will enable it to maximise its leverage from the capital markets.

We also welcome the policy shift allowing the GIB to support the Green Deal home energy efficiency programme. The TUC has joined a number of campaigning organisations, through the Transform UK alliance, is supporting this demand. Low cost finance such as the GIB will be able to assemble is essential to kick start the programme.

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A vision for the Green Investment Bank, BIS: http://www.bis.gov.uk/news/topstories/2011/May/green-investment-bank; and Green Investment Bank could be used to fund Green Deal retrofits, DPM, 23 May 2011.

www.transformuk.org Press release 24 May 2011.

The Fourth Carbon Budget, Reducing emissions through the 2020s, Committee on Climate Change, 2011.

Ernst & Young Report - 'Capitalising the Green Investment Bank', 2010.

Time to invest: infrastructure, the credit crunch and the recession, Dieter Helm, 2008

European Social Partners dialogue on Climate change, 13 May 2011, European TUC submission.

Regions lose 3,000 projects after RDA cuts, Local Government Chronicle, 19 May 201

http://www.bis.gov.uk/news/topstories/2011/Feb/green-economy-council-fo…