A GREEN INVESTMENT BANK – FIXING THE HOLES IN THE NEW ENERGY ECONOMY

Could the plan for a Green Investment Bank kick-start a low-carbon UK?; Government will cut nine existing green business quangos to fund the Green Investment Bank
Bryony Worthington, 29 June 2010 (UK Guardian)

THE POINT
In It’s A Wonderful Life, George Bailey – the CEO of investment bank Bailey Savings and Loan – won the hearts and minds of the citizens of Bedford Falls by supplying them with the financial freedom to resist the tyrant Mr. Potter. Such a quaint idea. Yet that’s what advocates in the UK are calling for with an innovative idea to finance New Energy and Energy Efficiency growth in these slow economic times.

The UK New Energy advocates arrived at the conclusion of a Green Investment Bank (GIB) by adding 3 things: (1) The urgent need for action on climate change, (2) the daunting UK targets for New Energy, Energy Efficiency and emissions cuts, and (3) the challenges of an economic crisis requiring severe spending cuts. The answer they get to this addition problem is the need for innovative financing to maximize the leveraging of public spending with buy-in from the private sector.

A Green Investment Bank (GIB) is described in Unlocking investment to deliver Britain’s low carbon future, from the UK's Green Investment Bank Commission. It is one of the more innovative ideas so far proposed and especially worth noting because policymakers in the U.S. and elsewhere are considering it.

The basic idea: A combination lending institution and New Energy ultimate arbiter - something like a cross between the Federal Reserve Bank and the Federal Housing Authority - could channel that portion of the government budget dedicated to New Energy (NE) and Energy Efficiency (EE). It would accomplish 2 simple ends: (1) Streamline spending more efficiently, and (2) create the long-term certainty of supportive investment that would attract private sector buy-in.

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The need for a GIB has emerged with the slowing of returns from the European Union (EU) Emissions Trading Scheme (ETS). A predictable outcome of the recession and the concomitant retarded energy demand, the slowing is not a failure of the ETS marketplace but it is a barrier to the growth of NE and EE.

But the need to fund the growth of NE and EE is urgent. The fight against climate change cannot be hampered by natural gaps in the economy like market fluctuations. The GIB would be an alternative source of capital. With it, private sector investment could be sure of a steadier marketplace for its products and a steadier source of financing.

A GIB is needed, first of all, because of the scale of the investment. To meet the UK’s NE, EE and emissions-cutting targets for the fight against climate change will require more spending than anything since the reconstruction following World War II.

This is where one of the real failures of the marketplace becomes obvious. Trying to build a new NE/EE infrastructure without stable, long-term access to capital is like trying to rebuild the housing sector without having 20-to-30-year mortgages. A GIB is the answer because it expands available capital, reduces regulatory uncertainty, expands marketplace transparency, drives innovation and literally makes NE/EE investment more attractive to private money.

The benefits reach far beyond investment banking. A well-financed NE/EE sector would mean enhanced emissions-free energy capacity and security, paring away at dependence on price-volatile fossil fuels, and realizing an enormous wellspring of jobs and revenues.

A GIB would also be a vehicle for UK folks to buy "green bonds," save in "green savings accounts," and thereby share in the profits reaped by the transition to a New Energy economy.

Just what George Bailey wanted for Bedford Falls.

From bigmoney714 via YouTube

THE DETAILS
Estimates of the investment the UK will require to meet its New Energy (NE), Energy Efficiency (EE) and emissions-reductions targets approach £550 billion to 2020. Nothing even approaching this level of investment has been marshaled before. The UK transition from coal to natural gas in the 1990s (the “dash for gas”), considered unprecedented and transformational at the time, cost £11 billion.

Market failures and investment barriers to achieving the targets begin with the general fact that achieving them will require 40 years of steady and directed investment and include:
(1) Investment capacity is limited as long as (a) policy weaknesses fail to support private sector participation and (b) utilities' balance sheets are delineated by their rate bases;
(2) While government policy sets the course of investment, political winds shift regulatory practices and turn a low risk market into a bad bet or transform high returns into negative equity;
(3) Short-term politics can transform support for promising technology advances into unfulfilled promise and the direction of political change is opaque, while the high level of capital investment required for the research, development and deployment (RD&D) of some NE and EE demands long-term certainty and transparency; and
(4) Other NE and EE, especially pertaining to distributed generation, requires very widespread small investment that is only practical for institutional investors.

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The short-term goal, through 2014, would be financial recovery. The medium-term goal, through perhaps the end of the coming decade, will require the scaling up of the capacity to make the effort. The longer-term goal, through the middle of the next decade, will be the support of mainstream deployment in place of existing infrastructure.

The payoff for making the commitment to a GIB, channeling capital and building NE and EE:
(1) A secure supply of domestic, emissions-free energy;
(2) The elimination of dependence on imported, price-volatile fossil fuels;
(3) An array of economic benefits beginning with new jobs and new revenues;
(4) The elimination of a variety of externalities (such as harmful health effects of air pollution) and market failures (such as high costs for solar PV due to the absence of economies of scale).

The GIB would be developed as a public-private partnership to specifically address the gaps left by Renewables Obligations (ROs) and Feed-in Tariffs (FiTs).

A policy-driven GIB would (1) stimulate investment and (2) mitigate risk. This would be in contrast to (and, presumably, in addition to) policies like the ROs and FiTs that work by increasing rewards for investors.

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The GIB’s mandate:
(1) Address limits on investment in NE and EE (high priority);
(2) Drive innovation (high priority);
(3) Influence central and local government policymaking on financial issues.
It would accomplish these things by filling in gaps. It would give neutral evaluations of ventures, coordinate international ventures and find private capital for the opportunities it identifies.

The GIB would draw on the full spectrum of financing instruments, both traditional and innovative, to – first – attract private capital and – second – leverage public capital. These financial instruments would be available:
(1) Early-stage grants would help big projects get beyond planning;
(2) Equity co-investment would attract private capital;
(3) Capital for RD&D could be obtained “wholesale” because of (a) volume activity and (b) reduced risk activity;
(4) The GIB can assign itself Mezzanine debt to attract newer investment;
(5) The purchase of built NE and EE assets to relieve stress;
(6) The purchase and securing of project loans;
(7) Providing project insurance; and
(8) Providing long-term capital on the basis of little short-term ETS value.

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The GIB could raise money through (1) government funding, (2) financing mechanisms and commercial investment, and (3) capitalization funds.

The government funding would be for grants to replace or incorporate quangos and non-governmental funds.

The financing would be through (1) Green bonds, (2) green ISAs, (3) a GIB debt fund, and a levy on energy bills.

The capitalization funds wopulod come from:
(1) a spectrum of public and private contributions and taxes to banks,
(2) proceeds from the sale of government-owned assets, and
(3) ETS emissions allowance auction revenues (estimated at £40 billion from 2012-to-2020).

Green bonds would be an investment tool comparable to war bonds through which institutions and private citizens could invest in the New Energy economy and be invested in its success. They could be issued in a wide variety of forms (single project, asset portfolios, etc.) and for both short- and long-term returns.

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It is estimated green bonds could finance the entire investment needed through 2015 for the UK transition to a New Energy economy. The £265 million could come from 5% of the total present bond investment of pension funds and insurance companies, 1.7% of their overall assets. The payoff would depend entirely on the success of the UK New Energy economy.

A Green Individual Savings Accounts (ISAs), a tax-free UK savings-driver, is a retail mechanism through which the GIB could generate capital for the funding of NE and EE . 18 million UK citizens now hold a cumulative £220 billion in ISAs.

The GIB can be expected to channel its potential into the most urgent and ready sectors of the New Energy economy at its inception. The first thing would be scaling up EE “enabling technology” like the Smart Grid, which would provide returns and cost savings that would be available for investment in mature but under-funded NE infrastructure liked offshore wind.

The first step toward using the GIB to create long-term stability and certainty would be to establish it as a permanent institution by Act of Parliament with a mandate to reinvest all profits for the furtherance of its mission.

It should be independent of reliance on the government for commercial funding or on politicians for decision-making. It should also not, once established, impose liabilities on taxpayers or the government budget.

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As it is being established, quangos and NGO funds should be folded into it to facilitate its efficiency going forward. Their personnel should be an excellent source with which to staff the GIB.

The GIB Board should come from the private sector.

Crucial initial actions:
(1) The report calls for the establishment by the end of 2010;
(2) It calls for a strong Board, with a non-executive Chair in place by August 2010 and a full Board approved or at least nominated by October 2010.
(3) It calls for adequate capitalization in the October 2010 Comprehensive Spending Review;
(4) Savings from the organization of dispersed investment vehicles should be among the first put to work by the GIB;

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QUOTES
- From the report: “The low carbon transition will be a 40-year process requiring unprecedented investment in new technologies, new infrastructure assets and the supply chains to deliver them. Given the state of the public finances, funding this transition vastly exceeds the capability of the public sector.22 Consequently, private sector investment on a much larger scale than hitherto will be essential to deliver the required capital.”

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- From the report: “The Bank would operate independently of Government. As a result, its liabilities should not appear in the National Accounts and it would be able to provide independent advice to Government. By providing coherence to private and public efforts, the Bank would also become a centre of excellence, able to identify and reduce the barriers to private sector investment.”

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- From the report: “We believe that to function most effectively the Green Investment Bank needs commercial independence and should not be accountable to ministers or to Parliament for individual investment and lending decisions. Consequently, the Bank should not, in our view, be an executive agency or non-departmental public body.”