Green Finance Green Investment Bank & Green Deal. James Wardlaw 24 th March 2011

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1 Green Finance Green Investment Bank & Green Deal James Wardlaw 24 th March 2011

2 Green Investment Bank What is it going to do? Facilitator / catalyst for private sector investment Crowding in rather than crowding out private sector investment Aspiration is c. 18bn of total investment into green projects by 2014/5 Timing? Final proposals & design by May 2011 Recruitment may start then Staff and back office systems by end 2011 Operational in 2012/13 (Sept 2012?) Capitalisation? Initial equity capitalisation of 3bn now (not 1bn) already committed but not until 2013/4 aiming for the additional 2bn to come from asset sales such as Urenco stake Borrowing powers but only in 2015/16 and subject to HMG meeting debt reduction targets as an unspecified % of GDP

3 Financing the Green Deal What is it trying to achieve? How will it work? Which products? What is DECC contributing? Where will finance come from? Targeting energy efficiency in property not just owner occupiers, but also private rental, social rental, SMEs UK households produce 23% of our GHG emissions Mechanism to recoup capital outlays through instalments on one s energy bill Golden Rule expected financial savings must be equal to or greater than the costs attached to the energy bill (Pay as you Save concept) If consumer moves out and ceases to be the bill payer, the financial obligation passes to the next bill payer i.e. obligation attaches to the meter Loft insulation Cavity wall insulation Solid wall A legislative framework and an accreditation regime Budget: The Government.will act to encourage and incentivise take-up so that the Green Deal will appeal to households, businesses and proposective providers alike, before it is introduced in 2012 Private sector DECC s illustrative figures based on m domestic installations ( ), are bn

4 Don t forget the Microgeneration Strategy! What is it? Decarbonisation of way we heat homes & businesses majority of which currently done by gas Microgeneration technologies include: Ground and air source heat pumps Solar thermal Small scale biomass boilers Anaerobic digestion/biogas Focus on heat generating technologies less than 300kW Timing? Consultation closed on 16-March Final Microgeneration Strategy to be published in Spring 2011 Opportunity? Renewable Heat Incentive payments Extension of Green Deal financing solutions England only/microgeneration is a devolved matter

5 The Aggregation Challenge How does it arise? From the aspiration to make this happen at a household/community level Origination of energy efficiency measures likely to be focused on Big 6 Utilities balance sheets have too many competing demands on them to fund extensive installations Role of Green Investment Bank? To provide a mechanism for qualifying investments which assembles sufficient volume of projects to interest low carbon/renewable funds and debt issuance into capital markets Commercial banks should be interested in a warehousing role. If not, role for GIB?

6 The Recycling challenge largely a debt issue How does it arise? From difference in perception of risk between Greenfield and Brownfield or between construction and operational phases of a project Banks need to reduce overall RWAs (Risk Weighted Assets) New lending for Green Energy purposes is constrained by current loans on balance sheet e.g % of renewable energy lending by UK banks is to onshare wind Bank balance sheets therefore need to be freed up to reinvest in new green lending Institutional investors generally want operational, post construction loan assets once they are producing cash flow So need for mechanisms that recycle operational loan assets out of banks and into institutional investors, either directly or indirectly via funds Role of Green Investment Bank? To set up an industry-wide conduit vehicle which issues bonds backed by Green Deal loans or indeed other renewable energy loans Examples in other sectors: THFC (social housing), Artesian (water) Conduit vehicle would need some first loss, equity capitalisation which GIB could provide?

7 Not 3 distinct Silos

8 Europe 2020 Project Bond Initiative What is it? Initiative of European Commission in conjunction with European Investment Bank How will it work? Filling void created by demise of monolines Consultation Paper issued 28-Feb Aim is to have fully fledged proposal ready in Jun-2011 in context of next Multiannual Financial Framework European Commission will risk share with EIB to enable it to provide guarantees or loans to support project companies issuing bonds Form of credit enhancement designed to ensure investment grade senior project debt can be issued in capital markets EU backed EIB support could take form of debt service guarantee or subordinated loan, depending on characteristics of project Neither would substitute for shareholder equity or loans