Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://read.utilityweek.co.uk/i/726810
The Topic: Funding decarbonisation UTILITY WEEK | 16TH - 22ND SEPTEMBER 2016 | 11 The purpose of the UK's Green Investment Bank (GIB) is "to accelerate the UK's transition to a greener, stronger economy". Created by the government, which is the bank's sole share- holder and initial capital inves- tor, the organisation backs green projects on commercial terms. The projects it invests in have to be commercially viable and help to mobilise wider private sec- tor capital into the UK's green economy. The GIB has backed large pro- jects with a capital expenditure of more than £1 billion and small projects of £2 million. It has set up five funds to specifically tar- get smaller projects. Its business model is as follows: • invest in UK-based green infrastructure projects; • invest primarily in energy effi- ciency, waste and bioenergy, offshore wind, and onshore renewables; • each investment must offer financial and environmental returns; • it invests on terms equiva- lent to others in the market – it does not offer low-cost finance or grants; • it works to mobilise other pri- vate sector capital, crowding- in additional finance rather than displacing other inves- tors; and is committed to being innovative by building and strengthening the UK market, not simply serving it. Since it was formed in 2012, the GIB has backed 81 green infrastructure projects and com- mitted £2.7 billion to the UK's green economy. In March, the government launched the process to move the GIB into the private sector. The aim is that this will enable it to raise and lend more money. THE GIB A catalyst for private sector investment THE EIB The European muscle behind large-scale energy infrastructure The European Investment Bank (EIB) is the European Union's bank and aims to help imple- ment EU policy and represent the interests of member states – of which the UK is currently still a member. It is the largest multilateral borrower and lender by volume, and provides finance and exper- tise for sustainable investment projects, similar to the UK GIB. The EIB is a large investor in UK low-carbon projects, and again in a similar vein to the UK GIB, helps to mobilise private capital. One of the most recent pro- jects the EIB has invested in is the Humber Gateway offshore transmission link. It has agreed to provide £82 million for the purchase, operation and main- tenance of the electricity trans- mission connection between the offshore windfarm and the National Grid. "Offshore transmission con- nections are a key part of the UK's future energy infrastructure and the European Investment Bank is pleased to support signif- icant new investment to connect the Humber Gateway windfarm to the national network. This new scheme represents the tenth UK offshore transmission link supported by Europe's long-term lending institution over the past five years," said Jonathan Taylor, European Investment Bank vice president. Lending by the EIB in the UK last year totalled £5.6 bil- lion and represented the largest annual engagement since the start of EIB lending in the UK in 1973. This supported nearly £16 billion of overall investment in 40 projects across the UK. renewables". The addition of more CfD pro- jects with access to a guaranteed price, what- ever they get paid on the market, will only make this worse. While many people are focused on reforming the mechanisms, some are call- ing for a more fundamental change. Oxford economist Dieter Helm recently urged new business and energy secretary Greg Clark to "reset the balance between the market and the state" and avoid "more patching up of what he has inherited". Helm said "the one thing that British elec- tricity policy is not is technologically neu- tral", adding that without the subsidy regime there would be "no offshore wind and no Hinkley". The most obvious way to achieve this, according to Helm, would be to merge the CfD mechanism, the capacity market and feed-in tariffs into "a single unified auction for firm power, incorporating full locational costs". To ensure investment in low-carbon power, he said the carbon price should be allowed to rise to whatever price is necessary to meet the UK's emissions targets. Alternatively, the government could run a two-stage auction: "Stage one uncon- strained by carbon (other than existing car- bon prices) and stage two taking account, in the light of stage one bids, of the carbon constraints." Falling prices can significantly increase the cost of CfDs, blowing the LCF budget, despite having little effect on the ultimate price paid by British consumers. down coal plants before sufficient replacement capacity is available. Policy initiative: Closure of the Renewables Obligation scheme early, restricting the feed- in tariff scheme Issue: The precursor to the CfD arrangements was cumbersome to react to reductions in equipment cost and resulted in rapid build-outs of solar and large windfall profits for landown- ers. Combined with the government essentially killing onshore wind via planning has le many projects stranded. Lots of investment uncertainty. GIB investments in the UK Number Direct investments Fund investments Locations of projects GIB Total GIB Total investment transaction size investment transaction size 2016/17 3 80.0 337.4 29.0 65.1 5 2015/16 30 769.9 3,697.9 128.0 279.8 952 2014/15 22 723.1 2,470.6 66.9 274.3 51 2013/14 17 616.6 2,331.9 39.8 124.3 185 2012/13 7 460.4 2,096.5 9.8 36.9 7 Total to date 79 2,650.0 10,934.3 273.5 780.4 1,200 EIB KEY PRIORITIES EDUCATION WATER DIGITAL URBAN JOBS TRANSPORT ENERGY HEALTH Environment €19.6bn Infrastructure €19.1bn Innovation €18.7bn SME €28.4bn