UK: Green Purposes: Green Powers?

Last Updated: 15 June 2012
Article by Malcolm Dowden

Creation of the Green Investment Bank (GIB) is among the Coalition Government's flagship policies. Its mission will be to provide financial solutions to accelerate private sector investment in the green economy. Initially capitalised with £3 billion, the Government hopes that GIB will play a vital role in addressing market failures affecting green infrastructure projects in order to stimulate a step up in private investment. As an initial measure, and a precursor to the GIB's eventual role, UK Green Investments (UKGI), a specialist team within the department for Business, Industry and Skills (BIS) confirmed the decision, to pump £80 million into small scale waste infrastructure projects.

However, the complex legal and regulatory issues involved in setting up this wholly new institution means that there is a long way to go before even the initial £3 billion can be fully deployed. The Government envisages three phases:

  • incubation: until state aid approval has been obtained, GIB will remain in its 'incubation' phase. Investments, including the initial £80 million, will be made either (i) directly by Government on fully commercial terms so that no state aid issues arise, or (ii) within existing state aid approvals
  • establishment: once state aid approval is in place, the GIB will be fully established as a provider of financial support and investment to the green economy
  • borrowing powers: unless and until the Treasury is satisfied that the public finance deficit has been dealt with the GIB will have no commercial borrowing powers. Latest indications are that borrowing powers are unlikely until at least 2016

Green purposes

The Enterprise and Regulatory Reform Bill, due to receive its second reading on 11 June 2012, sets out the legislative provisions required to bring the GIB into full operation. Once in force, they would allow the Secretary of State to move away from direct Government investment and instead to channel funds through the GIB. To reach that stage, full state aid approval is required and the Secretary of State must:

  • give an undertaking to guarantee the GIB's operational independence, and
  • be satisfied that the GIB will "engage only in activities that involve, or are incidental or conducive to, making, facilitating or encouraging investments that it considers likely to contribute to the achievement of one or more of the green purposes in the United Kingdom"

The express guarantee of operational independence is required to reduce the risk of state aid clearance being refused by the European Commission – a recurring difficulty for the Government's energy and environmental policies. For example delays in implementing the Renewable Heat Initiative in 2011 were directly attributable to state aid concerns as the Commission considered that the large biomass tariff had been set too high.

The "green purposes", defined by clause 1 of the Bill, are:

  • reduction of greenhouse gas emissions
  • advancement of efficiency in the use of natural resources
  • protection or enhancement of the natural environment
  • protection or enhancement of biodiversity " promotion of environmental sustainability

New company, new location

Alongside the legislative process, Government has established a new corporate entity, UK Green Investment Bank PLC. Following a competition involving 32 bids, its headquarters are in Edinburgh, with an additional team based in London. Lord Smith of Kelvin and Adrian Montague have been appointed to lead the new company.

Funding

Once the enabling legislation is in force, and the Secretary of State has issued the order to 'designate' the GIB, Government will have the powers necessary to provide financial assistance to the GIB. It may be provided as:

  • Grants
  • Loans
  • Guarantees
  • the purchase of share capital, or
  • the transfer of assets or rights to the GIB

However, the Secretary of State is subject to Treasury control. This creates a potentially significant tension in the GIB's role. Current indications are that both the Secretary of State and the GIB will be instructed to operate on a fully commercial basis. This is reflected in the legislative provisions, which state that financial assistance "may be provided subject to such terms and conditions as the Secretary of State, with the consent of the Treasury, considers appropriate (including, in the case of a grant or loan, conditions requiring repayment or, in the case of guarantee, conditions requiring reimbursement of any sums paid under it)".

Critics suggest that the twin factors of (i) Treasury control, and (ii) the requirement for fully commercial terms may severely impair the GIB's ability to meet its objectives. At root, the widely-reported disagreements between BIS, the Department for Energy and Climate Change (DECC) and the Treasury reflect divergent, and possibly irreconcilable views as to the GIB's true function.

DECC has emphasised the need for funding to support early-stage or higher risk technologies, with GIB playing a venture capital role. DECC presents this more explicitly risk-sharing approach as the key to innovation and to accelerating the transition to a cleantech-based and low carbon economy. That vision finds little echo in the Treasury which, as a recent Parliamentary briefing paper confirmed, would prefer the GIB to act as a limited fund fed by asset sales and with little or no Government-backed borrowing. BIS, the department responsible for piloting the GIB's creation and legislative basis, has sought to reconcile those opposing views by focusing on areas perceived as likely to offer "quick wins":

  • waste processing and recycling
  • energy from waste
  • offshore wind, and
  • non-domestic energy efficiency

The GIB may also have a role in the Green Deal, designed to improve energy efficiency in the domestic sector. However, that scheme is currently under review following a series of delays in implementation.

In selecting the initial sectors for GIB investment, BIS aims to boost areas with proven technology or (in the case of energy efficiency) likely to make an early and discernible contribution to the UK's greenhouse gas reduction targets. However, critics leaning more towards DECC's views argue that investment in those areas, where the GIB would be engaging with projects already likely to meet the lending criteria for private sector banks, would risk both distorting the commercial lending market and missing the opportunity to promote innovation in other areas, such as early-stage marine renewable energy devices.

Next steps

The Enterprise and Regulatory Reform Bill is due to receive its second reading on 11 June. A positive vote at second reading approves the principle of a Bill, with subsequent stages being limited to amendment rather than outright opposition. Royal assent is highly unlikely before the summer recess, so the Bill is likely to be carried into the autumn session.

State aid clearance is hoped for within a similar timescale. In the meantime, recipients of funds channelled through UKGI must satisfy themselves that they do not infringe state aid rules. This is particularly significant, as the key sanction for infringement is a requirement on the recipient to repay the aid it has received. While the Government has stated that provision by way of direct investment, and on fully commercial terms, ought to ensure that there are no state aid issues a recipient must satisfy itself that the Government's analysis is correct.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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