Green Investment Bank needs to plug UK’s £370 billion low carbon funding gap Ernst & Young launches new study – Capitalising the Green Investment Bank
London 13 October 2010: Only a fully capitalised Green Investment Bank (GIB) can facilitate the large scale investment needed for the UK to become a low carbon economy by 2025, according to Capitalising the Green Investment Bank, a new study by Ernst & Young.
With UK Plc needing to fund an estimated £450bn¹ of low carbon investments and only £50 - £80bn of funds available from traditional sources of capital - such as utility companies, project finance and infrastructure funds - a dedicated investment vehicle is needed to plug the estimated £370bn shortfall.
This figure, calculated by Ernst & Young, not only includes investment in power and gas infrastructure, but significant investment to encourage measures such as renewable heat and gas technologies and the adoption of energy efficient measures across the UK.
Bridging the investment gap
Ben Warren, partner and head of Ernst & Young’s Energy and Environmental Infrastructure Advisory team, says that the time frame and scale of the necessary low carbon investments represent an enormous challenge, especially at a time of austerity and deficit reduction.
“With investment in green business essential for delivering jobs and future economic growth, the UK’s developing low carbon industry needs every last penny of government support,” he says.
“If we allow the financing structures to evolve organically, access to capital is likely to take longer, be less efficient and less cost effective. The upcoming Comprehensive Spending Review is therefore an opportunity for the Chancellor to deliver a GIB that is backed by between £4bn and £6bn of capital up until 2015.”
Priorities for the GIB
Offshore wind generation, Carbon Capture & Storage (CCS), micro generation and energy efficiency measures, have been highlighted in the study as being investment priorities.
Warren explains, “There are significant barriers to investing in these sub-sectors, including a shortage of capital and financial products that can attract capital providers. These are also the sub-sectors that could significantly impact the UK’s low carbon agenda, if appropriately supported.
“A number of properly targeted financial products tailored to each sub-sector could mitigate these investment barriers more efficiently than on a single project by project basis. These structured products could be provided by a GIB.”
What are the options?
The report has considered three potential structural options for the GIB. These options include:
- GIB providing all the funding and risk products within itself;
- GIB providing limited credit guarantees to funders to cover specific risks up to a pre-agreed amount overall risk capital products; and
- GIB set up with three or more vehicles that perform separate functions and activities with these separate vehicles providing different products.
The road ahead
Warren adds, “A number of institutional capital providers should be engaged to implement the next phase of the GIB, in terms of product and structure design, and its policy and governance framework. This needs to be undertaken in conjunction with the relevant UK government departments.
“Government must also now seek to reduce red tape and make it easier and quicker for institutions, the private sector and individuals to invest in the clean technology and infrastructure projects that will accelerate the transition to a low carbon economy.”