According to analysis from champions of sustainable development E3G, infrastructure and climate change-related investment of £750 billion is required across the UK economy up to 2025.
But traditional sources of capital – from utility companies, project finance and infrastructure funds – were estimated as likely only to provide £50 billion to £80 billion over the next 15 years.
Stimulating investment from the private sector demands predictable and sufficient return. That means there is a requirement for transparency, longevity and certainty in policy regimes to effectively mobilise capital. Part of the challenge the Government faces is market concern about inconsistency in policy, due in part to political differences within the Coalition and between departments.
The Green Investment Bank (GIB) was initially hailed as the centrepiece of the Coalition Government’s green agenda. It was intended to provide certainty and the mitigation of risk to private capital, rather than simply funds from the public sector.
Following a series of negotiations, however, the Treasury ensured that the GIB would not be allowed to raise debt capital until at least 2015. Unable to use its £3-billion capitalisation to leverage private funds on the capital markets, the purpose of the bank has largely been undercut.
In late-2011, for example, following a battle between the Department of Energy and Climate Change (DECC) and the Treasury, the Government suddenly decided to reduce the solar PV feed-in tariff from 43p to 21p per kWh (kilowatt-hour) to reflect the falling cost of solar panels.
There is a requirement for transparency, longevity and certainty in policy regimes to effectively mobilise capital
Dr Harald Heubaum, lecturer in global energy and climate policy at London University’s School of Oriental and African Studies, says: “Unexpectedly pulling the change forward by several months had a disastrous effect on investment planning and, despite a later High Court ruling reversing the decision, undermined confidence in the Government’s ability to provide a reliable regulatory framework within which the low-carbon sector can thrive.”
The Government is attempting to achieve its goals through Electricity Market Reform (EMR) in its forthcoming Energy Bill. There are four key mechanisms: the emissions performance standard (EPS); the carbon price floor; feed-in tariffs (FiT); and the capacity mechanism. Yet, in July, the Energy and Climate Change Select Committee released a scathing report claiming that compromises between the DECC and the Treasury had resulted in a framework which is likely to support neither climate nor renewable energy targets.
If the Government is going to be successful in achieving its targets, says James Close, sustainability and cleantech services partner at Ernst & Young , EMR needs to be more clearly communicated, targets need to be clear and investors need to understand the rationale behind decisions. “Investors need transparency in policy-making – they need to understand the choices and the trade-offs that are being made,” he says.
The Government has introduced a series of green initiatives, ranging from the GIB, the Green Deal, EMR and mandatory carbon reporting. The challenge is that the private sector requires a long-term stable investment environment, with clear statements about targets, compliance and enforcement. While there has been action on a number of fronts, on its current trajectory, the Energy Bill seems set to deliver more confusion and uncertainty.
