Troubling questions over Macquarie’s purchase of the Green Investment Bank

When Macquarie Bank bought the UK’s Green Investment Bank it ignited a storm of opposition. There was doubt the Aussie bankers would uphold the original ambitions of the GIB, because these ambitions are not sufficiently protected. That’s now the conclusion of an investigation by British MPs on the UK House of Commons Public Accounts Committee.

Furthermore, the MPs have not picked up the fact that it is no longer under full government control how the £200m foreign aid is spent that is supposed to support clean energy and climate change mitigation projects in developing countries under Britain's international agreement obligations.

A version of this post was first published on 3 April on The Fifth Estate.

Labelled a “Vampire Kangaroo” in 2013 by the Sunday Times, a view supported by a BBC investigation into Macquarie’s ownership of Thames Water, the sale was widely condemned at the time.

The committee of MPs, supported by the National Audit Office, was charged at looking at whether the controversial sell-off was conducted properly and whether the GIB performed well in the past and would fulfil its intended function to invest in promising new sustainable technologies in the future.

Since it was created in 2012, the UK Green Investment Bank plc (GIB) has been successful in attracting private investment into some sectors of the green economy, such as offshore wind projects, according to its former chief executive Shaun Kingsbury.

However, Alex Chisholm, Permanent Secretary for the Department for Business, Energy & Industrial Strategy (BEIS), the government department which set it up, told the MPS it cannot be sure whether the GIB achieved its intended objectives of “encouraging investment in the green economy and creating an institution that lasts”.

This is because the government chose to sell the bank before fully assessing its impact. The decision was based purely on a desire to reduce public debt and secure cash for the public purse from the sale.

Macquarie bought the bank for £1.6 billion in August 2017 in a deal hailed in The Australian Financial Review as “a potential game changer for Macquarie globally because the assets, skills and connections it brings to the group will give it an edge in two of the biggest investment megatrends over the next several decades – renewable energy and impact investing”

Certain measures were attached to the sale intended to protect the bank’s original Green Purposes, which cover greenhouse gas emissions, efficient use of natural resources, the natural environment, biodiversity and environmental sustainability. However the MPs found that these are not sufficient to ensure that the bank is an enduring institution.

“It is unclear whether Green Investment Group (GIG, as it has been rebranded under Macquarie’s ownership) will continue to support the government’s energy policy, or continue to have an impact on the UK’s climate change goals,” the MPs say, declaring it as “a misjudgement” that the Department has so little assurance over GIG’s future investment in the UK and in emerging technologies, which are crucial to ensuring that the UK’s green commitments are met.

Sir Geoffrey Clifton-Brown MP, the Committee’s Deputy Chair, called the manner of the sale “deeply regrettable”. “The rebranded Green Investment Group is not bound to invest in the UK’s energy policy at all, nor to invest in the kind of technologies that support its climate objectives,” he said.

“Had the government been shrewder it could have secured a better return for taxpayers. It was a mistake to repeal legislation protecting GIB’s green investment obligations without securing firmer commitments from potential buyers.”

Ironically Macquarie actually told the MPs that such commitments did not affect the price it was prepared to pay, and indicated that the government could and should have strengthened these commitments contractually.

How successful was the Green Investment Bank?

The GIB attracted substantial private investment into some sectors of the green economy, such as offshore wind. By March 2017, GIB had committed $6.21 billion to fund or part fund 100 projects, and attracted $15.71 billion of private capital.

These projects were primarily in offshore wind, and waste and bioenergy, with some in energy efficiency and onshore renewables.

Many other technologies, such as tidal power and carbon capture and storage, were judged by the bank’s board to be not sufficiently developed to be suitable commercial investments. But because the BEIS did not give clear criteria, it could not judge whether GIB was addressing failures in the green energy market or only backing projects that would have been winners anyway.

GIB investment activity between October 2012 and March 2017, by sector
Sector	Offshore wind	Waste & bioenergy	Energy efficiency	Onshore renewables	Total
Number of projects	11	37	35	17	100
GIB capital committed (£ millions)	2,211	756	292	150	3,409
Private capital mobilised (£ millions)	4,660	3,479	286	150	8,575
Average total transaction size (£ millions)	625	114	17	18	120

Will Macquarie continue its mission?

When it acquired GIB, Macquarie agreed to retain its five Green Purposes, the protection of which was the aim of the Green Purposes Company, which BEIS had established previously and given its trustees powers to veto any changes.

But this protection relies on Macquarie continuing to fund the Green Purposes Company and the powers of the trustees do not extend to approval of investment decisions.

Macquarie has committed GIG to investing or arranging over £3 billion investment in green energy projects over three years after purchase but these commitments are not legally binding and rely on a number of factors, including market conditions and future government policy decisions.

Mark Dooley, global head of green energy, Macquarie, told the MPs that GIG is not currently required or incentivised to invest in the UK, or innovative technologies, or to focus on any of GIB’s five Green Purposes.

MacBank wants government support to stick to the plan

According to Macquarie, for the majority of potential investments in the UK it would want financial support from the government. These include the proposed world-leading tidal lagoon in Swansea, which, lacking government support based on a high strike price and an environmental impact report, seems unlikely to go ahead.

Since it became the Green Investment Group, it has continued to invest in safe sectors – wind and waste-to energy projects – rather than emerging technologies.

David Fass, head of Macquarie Group’s European operations says Macquarie will use the GIG to channel “billions in renewable energy deals over the next decade”… “unless Macquarie doesn’t meet the expectations of a range of stakeholders”.

A valuable asset in green investment definition

One asset of GIG which is little appreciated, but could be worth a fortune, according to The Australian Financial Review, is its proprietary definition of green investments which is backed up with a unique database, presumably acquired at least in part from the GIB.

“This piece of intellectual property could well be sold or brought to market in partnership with financial information companies, Standard & Poor’s or Moody’s Investors Service. A product that secures investor trust in green investments could be extremely valuable,” it says.

The UK Climate Investments LLP

As a result of taking over the Green Investment Bank Macquarie now owns UK Climate Investments LLP. This was set up three years ago in March 2015 to invest the £200m commitment Britain (like most developed countries) has under international climate change agreements to donate to projects in developing economies that adapt to climate change and promote “green growth” in East Africa, South Africa and India.

For over two years no investment was made, but in autumn last year Macquarie announced £12.4m of the £200m had been pledged to Lightsource to develop and construct up to a total of 300MW of PV projects in rural India.

It’s still unclear who banks (and obtains interest from) the remaining cash.

The UK National Audit Office (who conducted some of the research for the MPs’ report) told me last September following a Freedom of Information request that their remit for this research (and therefore the MPs’ report) did not cover the UKCI. They did say that $22.65m of the total amount had already been spent – on consultants to do market surveys, of no direct benefit to developing countries.

It’s unclear how much say the UK government now has in how this money is spent, but surely it should be spent to the benefit of the poor in developing countries trying to fight climate change rather than the shareholders of a private investment company?

These countries are sick of waiting for the money to come to them.

Sir Geoffrey Clifton-Brown concludes his comment on the House of Commons report on the GIB by saying: “There are broader lessons here—not least for how government evaluates public assets and, when relevant, prepares them for sale.”

And the net benefit to the British taxpayer of all of the sale? Just £126 million.

David Thorpe is a UK based writer. His two new books are Passive Solar Architecture Pocket Reference and Solar Energy Pocket Reference. He’s also the author of Energy Management in Building and Sustainable Home Refurbishment.

The UK's Green Investment Bank should be given an IPO

[Note: This is an updated and partial version of the article published last week on The Fifth Estate website.]

The UK Government’s sale of the Green Investment Bank (GIB) – potentially to Australian financial services group Macquarie Group – is unraveling, with Parliament told the bank has a “dismal and terrible environmental record” and an “appalling track record of asset-stripping”. 

The government is soon expected to announce the winner of a bidding contest to buy the Green Investment Bank. Australian bank Macquarie is understood to be the preferred bidder, although the terms of the arrangement are shrouded in secrecy.

But controversy over the sale has led to reports suggesting it could be abandoned and the bank floated on the Stock Exchange instead.

The Financial Times has quoted an unnamed Whitehall official as admitting that an IPO (initial public offering) was possible but not imminent.

“It’s jumping numerous steps to suggest a decision has already been made,” he is reported as saying. “It’s jumping several hurdles and issues.”

Meanwhile, many others are calling for the sale to be abandonned.

Background

The GIB is a taxpayer-owned “for profit” bank created in 2012 and allocated £3.8 billion of funding from the UK government with a mission to accelerate the UK’s transition to a greener economy. It has done well. The bank invests in a range of renewable energy projects, including energy-to-waste, anaerobic digestion, biomass, offshore wind – and it launched a €100m green bond at COP 22 in Marrakesh in 2015.

The Conservative Chancellor of the Exchequer George Osborne’s plan was always that it should eventually be able to operate independently of Government, although many on the left opposed this. The sale was ordered by Osborne when he held the post of Chancellor in an attempt to reduce government debt.

Controversy

The widely-touted possibility that Macquarie – which has offered £2 billion – could end up winning a competition to buy the bank has raised concerns.

“This preferred bidder, Macquarie, not only has a dismal and terrible environmental record, it also has an appalling track record of asset-stripping,” said Green MP Caroline Lucas during a recent parliamentary debate.

This view was echoed by former Tory Energy Minister Gregory Barker who said on Twitter that he was “increasingly alarmed that sale of #GIB will now see it broken up so much it threatens its future as [an] enduring institution”.

And Labour MP Ian Murray tabled an early day motion calling on the government to halt the proposed sale of the bank.

Furthermore, it has just emerged that Patricia Rodrigues, the former investment banker who helped set up the state-owned bank, is now working for the bidders as managing director at Macquarie Infrastructure and Real Assets.

On Wednesday 25 January the sale was debated in the House of Commons. Business Secretary Nick Hurd tried to reassure MPs the bank would not be sold to an asset stripper but was tight-lipped on the sale procedure.

Macquarie themselves have also fought back against the accusation that they would hollow out the bank but admitted they would dramatically restructure it.

This has not reassured Green MP Caroline Lucas who Tweeted yesterday:

The opposition business secretary, Clive Lewis was quoted by City AM as saying, “The government should never have wasted valuable time and money prepping the GIB for privatisation in the first place.

“With our economy stalling because of the government’s incompetent handling of Brexit, the GIB needs a laser-like focus on developing future low-carbon technologies. Instead it’s had to deal with uncertainty generated by this ideological and ham-fisted privatisation process.”

It has been widely criticised for not being sufficiently visionary or for not backing community energy, but it has been a success all the same, particularly in supporting the difficult-to-finance offshore wind industry.

According to the bank’s chief executive, Shaun Kingsbury, this industry has now “come of age” as a mainstream asset class, driven by rapid improvements (and falling costs) in technology, installation, supply chain, operational maintenance and financing.

Just a few days ago the bank issued a report showing that its Offshore Wind Fund has exceeded its original £1 billion investment target. It has invested in five offshore windfarms with a combined capacity of 1447 megawatts.

Having backed 85 projects to the tune of £2.7 billion, GIB is in need of a capital injection. With the UK government lacking cash even for the ailing National Health Service, those funds are not likely to come from the taxpayer.

Confusion

It is in this context that a previously shortlisted bidder – Jonathan Maxwell, chief executive of Sustainable Development Capital Ltd (SDCL) – threw a spanner in the works two weeks back, offering to match Macquarie’s bid.

He has urged the Tory energy minister Nick Hurd to reject the Macquarie bid, asserting that his consortium – which includes the state-backed Pension Protection Fund (PPF), the US’s Hancock and Japan’s Mitsui – is the “best alternative” to meet the government’s goals for GIB. His move is backed by Caroline Lucas.

Unlike Macquarie, SDCL exclusively provides energy efficiency retrofit project finance, backed by specialist funds in the UK, Ireland and Singapore, with new funds coming on stream from New York and China.

SDCL also provides financial advisory services through an investment banking group that operates in sectors linked to resource efficiency and sustainable development, such as renewable energy, energy efficiency, water and waste management and recycling, sustainable land management and low carbon transport.

Maxwell issued a statement saying: “We believe that an IPO [for the GIB] by 2020 is viable and this has been an important consideration behind our approach to the privatisation. An IPO should be feasible and attractive once the GIB’s portfolio has been built out.

“This government could retain a stake in the GIB in the meantime to benefit from the expected future growth ahead of an IPO and achieve value for money for the UK taxpayer.”

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David Thorpe is the author of a number of books on energy and sustainability. See his website here.

Britain ahead of game as ministers approve Energy Efficiency Directive

After lengthy, extremely complicated negotiations, a target of 20% energy savings for the EU as a whole by 2020 has been set, as European ministers formally adopted the Energy Efficiency Directive yesterday.

Member states now have to propose, by April next year, their national indicative targets and how they will achieve them. The Commission then has to calculate whether, together, they will total 20% for the continent as a whole by 2020.

Britain does not currently have any target for reducing energy use, but DECC has said that one will be published by April.

Under the legislation, energy companies will have to reduce their sales to industrial and household customers by 1.5% every year, meaning that they will have to recalibrate their business plans so that selling energy efficiency advice becomes increasingly a part of the services they offer.

The Directive also stipulates that 3% of public buildings that are owned and occupied by central government must be renovated every year, and each member state must draw up a roadmap on how it will make the entire building sector more energy-efficient by 2050.

Britain is already way ahead on this compared to its European counterparts with the establishment of the Green Deal, Zero Carbon Homes and the Green Investment Bank.

There are also requirements for energy audits and energy management by large firms, which are already encouraged here under mandatory carbon reporting.

A formal assessment of the potential for district heating and combined heat and power generation (CHP) throughout the EU must be made by 2015.

The final vote in the Council saw Portugal and Spain opposing and Finland abstaining. The directive enters into force in November. The European Commission will undertake reviews of progress in 2014 and 2016.

Energy Commissioner Günther Oettinger welcomed the news, and said: “I call upon member states and stakeholders for extra efforts to bring its provisions into life. The Commission also remains dedicated and committed to continue its support to the process".

Carbon pricing

The Government's policy for zero carbon new homes by 2016 will help to contribute to energy efficiency targets.

Construction companies have been researching the most cost-efficient means of attaining the target, and this week published a set of ‘Allowable Solutions’ that may be taken by home builders.

E.ON's Marco Marijewycz, who is the utility's Strategic Lead in the discussions, commented that "the most striking insight which emerges from this process is the consensus amongst key stakeholders that Allowable Solutions has the potential to catalyse both cross sector innovation and the economic rejuvenation of our communities via a low carbon trajectory."

This boost for jobs and innovation will be found across the board of all sectors affected by the Directive.

But Marijewycz goes on to point out that the price of carbon would be a crucial factor in attaining any targets. "What is emphatically clear is the desire for clarity now on the mechanisms for pricing carbon within any such framework. This clarity is essential so as to enable key market actors to strategically plan now ahead of 2016.”

Certainty about the price of carbon, however, is not going to come soon. Yesterday, the EU Parliament announced in its legislative timetable on its website that it won't be until February that it will vote on whether the Commission has the legal power to intervene in Europe's $148-billion carbon market.

This delays even further a decision on whether it will press ahead with its controversial plan to prop up the moribund carbon trading prices.

The six Allowable Solutions are certainly in line with the Directive, including investing in social housing retrofitting initiatives and district heating, as well as low carbon lighting, particularly LEDs.

Embodied carbon, which is the fossil-fuelled energy cost of manufacturing products, also figures, and this is covered by the Directive's pressure on energy utility companies.

Pension funds - and Lego owners - go safely offshore – into wind farms

Carsten Krogsgaard Thomsen, Acting CEO of DONG Energy

Pension companies and industrial investors are increasingly finding that investment in renewable energy, particularly wind power, is providing a better rate of return, one guaranteed over a longer period, than elsewhere.

DONG Energy, which is a co-builder of several offshore UK wind farms including the London Array, has secured investment from Danish pension providers PensionDanmark and PKA, Dutch pension group PGGM, the owners of Lego, and Japanese trading house Marubeni, amongst others.

Leaving aside the intriguing idea of Lego building wind farms, Torben Möger Pedersen, managing director of PensionDanmark, which has £13.4 billion in assets, said "I think this will...develop into a standard investment case for many pension funds because the alternative of investing in government bonds provides such bad returns that you are obliged to identify alternative investments".

The company's total investment in DONG's wind projects is £475 million, and Pedersen plans to invest more in the future, as PensionDanmark increases the proportion of its portfolio allocated to energy and infrastructure from 6% to 10%.

"In five years we will have £19 billion under management. So our total budget for these kind of investments will be £1-1.5 billion over the next 10 years," he said.

Yesterday, DONG announced that it is using some of this finance to acquire 100% ownership of three offshore wind development projects in Germany in the North Sea.

These are Gode Wind 1, 2, and 3, previously owned by PNE Wind AG, with a total capacity of up to 900 MW. The first two projects already have permission to construct and operate while the third is still in the application stage, although this is expected to be granted in 2013.

Carsten Krogsgaard Thomsen, Acting CEO of DONG Energy, which is owned by the Danish state, said: “The Gode Wind projects in Germany are very interesting for us. If a positive investment decision is taken, we expect that construction of parts of the projects could begin by 2015, subject to the available grid connection confirmations."

Denmark is a pioneer in wind energy, and is now reaping the dividend of its experience. 25% of Danish electricity comes from wind power, contradicting claims by sceptics in the UK that a national grid cannot handle that proportion of wind power.

Some investors see wind power as an uncertain bet because they are expensive to build and maintain, regulation is uncertain, and the plants can face logistical and technological problems. However, other pension funds and investors clearly think differently; taking a longer view, they realise that such investments will provide a steady cash flow over 20 to 30 years, once the projects are up and running.

Last year, the OECD encouraged institutional investors such as pension funds to take more interest in financing the low carbon revolution. There are plenty of benefits, which offset the risks. Compared to unstable financial markets, the OECD points out that there is a clear advantage for those who team up with reliable partners like DONG.

Amongst the early movers in this field, with over £1 billion of investment in renewable energy, predominantly new wind farms in Germany and France, is Allianz of Germany. David Jones, CEO of Allianz Specialized Investment, observes that returns on wind and solar projects are now around 7%.

“This is much higher than many other asset classes,” he says. Moreover, the returns are "totally decoupled from the ups and downs of the financial markets", and far better than government bonds. 10 year UK government bonds are currently yielding a mere 1.5%, almost half the rate of inflation.

Pedersen says that PensionDanmark expects "a return with a spread of between 300 and 500 basis points above a government bond," that is “very much less risky than listed equities".

Walney wind farm in the Irish Sea near Cumbria, is co-funded with direct investment by Dutch pension group PGGM, which has allocated 15-20% of its infrastructure portfolio to renewable energy. Henk Huizing, its head of infrastructure investment, agreed with the OECD assessment: "If you have a good partner, then the risk for joining in the development phase can be acceptable, and you get a premium for going in earlier".

"I hope this will be a model that catches on," says Morten Buchgreitz, DONG Energy's acting deputy CEO for wind power, "because, just looking at the northern European offshore market, we expect that the capacity will have to go from 4 gigawatts now to 37 by 2020".

That is a factor of 10 increase, which will require about £80 billion. Although this sounds a lot, it is less than 1000th (0.08%) of the £18 trillion assets held by pension funds worldwide.

Some of the funding may come from the consortium of 80 of the world’s largest pension funds, that has signalled its readiness to provide funding for infrastructure projects under the Government’s £40 billion infrastructure guarantee initiative. More will come from the Green Investment Bank, when it is finally allowed to borrow.

Doubts over Green Investment Bank's future borrowing power

Serious doubts have arisen over whether the Treasury will allow the Green Investment Bank to begin borrowing money, as scheduled, in 2015/16.

The Department for Business, Investment and Skills, which is driving the setting up of the GIB, has told EaEM that the bank "will be given borrowing powers at this time subject to the targets for reduction in national debt being met and further state aid approval being granted".

The BIS spokesperson added that "GIB borrowing will score against the national debt".

The Aldersgate group, which represents big companies like BT, M&S and Microsoft, has been secretly lobbying for the government to remove this condition, which it says will curtail their ambitions.

She said: "We will need to ensure that the necessary controls are in place so that borrowing is transparent and liabilities can be managed effectively. The decision on the level of borrowing cannot be taken now.

"When considering it in the future, both investment requirements and wider fiscal affordability will be taken into account."

The question is: will the fiscal targets will be met, since the Chancellor George Osborne admitted last Autumn that it would take two years longer to pay off the country's debts than he had originally estimated when he set up the Bank?

The Treasury's target was, before the Autumn Statement, that by 2015-16, public sector net debt as a percentage of GDP must be falling.

The chances of this were then estimated by the independent Office of Budget Responsibility as only "greater than 50%".

Then, the Treasury said that by 2014-15 there would be additional reductions in current spending totals of ￡30 billion a year (these were fixed in the Chancellor's June 2010 Budget).

80% of the further reduction in the deficit at this time was already supposed to come from reductions in public spending.

Autumn Statement

But then came the Autumn Statement, and the OBR revised its fiscal portrait of the UK.

They said Britain has the highest structural budget deficit of any major economy in the world.

They forecast that the current structural deficit will fall from 4.6% of GDP this year to a current structural surplus of 0.5% in five years' time - not three years as previously thought.

The debt-to-GDP ratio – which is forecast to stand at 67% this year – would peak at 78% in 2014-15 and be falling by the end of the Parliament.

As a result, the Chancellor set revised expenditure totals for the two years following the end of the Spending Review period: 2015-16 and 2016-17, i.e., the point at which the Green Investment Bank is supposed to be able to borrow.

He said that Total Managed Expenditure would now fall during that period by 0.9% a year in real terms, but with a baseline that excludes all the additional investments in infrastructure he announced at the time; expenditure which excludes that of the GIB.

The consequence must be that there is now less than a 50% chance of the Treasury's target being met, of public sector net debt as a percentage of GDP falling by 2015-16.

In the same speech George Osborne infamously uttered the words "I am worried about the combined impact of the green policies adopted not just in Britain, but also by the European Union".

To borrow or not to borrow?

When the Green Investment Bank was set up, it was strongly advised that it be constituted as a proper bank, and there was even a call to permit anyone to invest in it, with ordinary people being able to buy Green Bonds in order to finance the green industrial revolution.

The Treasury decided this was too risky and unwieldy, and that it could not be seen to borrow more money at a time when the rest of Government borrowing was being cut.

Chris Huhne, the Secretary of State for Energy and Climate Change, fought, and lost, the battle for the Bank to be able to borrow from Day One and therefore to have more funds at its disposal.

Instead, the Treasury set the date at 2015/16, subject to the above target being met, which now seems increasingly unlikely.

￡100 billion by 2020 is a conservative estimate of the cost of the required upgrading of the National Grid, new renewable energy generation like energy-from-waste, the Green Deal, FITs, the Renewable Heat Incentive, ECO, and other measures to decarbonise and future-proof the UK economy and energy sector from the risks of fossil fuel price volatility and climate change.

The Green Investment Bank and the carbon price floor are the Treasury's key means of meeting this bill.

BIS' spokesperson told EaEM that "Our key priority at present is to ensure the establishment of the bank for 2013 and we are on target to achieve this. The GIB is being capitalised to an extent that it will not need to borrow before 2015/16."

The capitalisation is coming partly from the sale of government assets.

￡1 billion stems from standard departmental allocations, and ￡775 million has already been received from the net proceeds from the sale of the high speed rail link.

"The remaining ￡1.225 billion is expected to come from future asset sales," the spokesperson said, adding that "The Chancellor has said if these sales are not completed in time, this sum will be underwritten by the Treasury".

CBI slams Treasury interference

The Confederation of British Industry has long called for the Bank to be made effective, and today criticised the way the Green Deal and ECO are being set up, saying the Green Deal won't meet its targets as it is currently designed.

John Cridland, its Director-General, has warned that the Bank "certainly won't work if it needs the Treasury's permission to blow its nose.

"The bank needs to be able to get into the markets itself and do what it's intended to do."

If the date by which the Treasury is to permit it to do this is put off even further this will severely curtail its already reduced effectiveness.

Yet Mr Cridland has said it is crucial that the "Green Investment Bank deliver certainty for investors if it is to generate the scale and pace of investment needed to shift the UK to a low-carbon economy.

"I want it delivering growth - large-scale, mainstream economic growth. I want it delivering the low-carbon infrastructure, leveraging the ￡450bn we need by 2025, that'll bring jobs and opportunities to the UK," Mr Cridland added.

But unless it is released from the Treasury's tether, this can only happen later rather than sooner.

Osborne exposes Tory split on low carbon investment

George Osborne has pledged that if he has his way in the Coalition Government, the UK will cut "carbon emissions no slower but also no faster than our fellow countries in Europe", causing dismay in the green business sector.

Yet most of his own colleagues in government disagree with him.

Speaking to the main body of the Conservative Party Conference he said "we’re not going to save the planet by putting our country out of business" and expressed his scepticism that investment in the low carbon sector could be a strong engine of recovery for the economy, arguing instead that it would thereby increase energy prices and hamper the recovery.

His reasoning is that "Britain makes up less than 2% of the world’s carbon emissions, compared to China and America’s 40%".

But this figure is wrong. In negotiations on climate emissions, the UK's responsibility is not for its current emissions alone but also for its historical emissions - as birthplace of the industrial revolution to which Osborne paid tribute in his speech and which has led to man-made global warming.

The UK's real responsibility is therefore proportionally higher than developing countries like China's current emissions: 5.11% of total global emissions up to 2005 (source: WRI, last date available).

Osborne added that "a decade of environmental laws and regulations are piling costs on the energy bills of households and companies", apparently ignoring his government's own evidence that by far the largest factor in high prices is volatility in gas and oil markets.

Events in Manchester are revealing a split in government on green policies that is more along traditional grounds than to do with differences between the Tories and their LibDem coalition partners.

At a fringe meeting about renewable energy yesterday, the Energy Minister, Charles Hendry, Conservative MP for Wealden, Sussex, said of the green revolution: "This is an incredible opportunity, and if we follow we will export jobs and import equipment."

Hendry also tried to calm worries on high energy prices by saying that the reform of the energy market, which the UK is currently planning (although it is over six months late in ratifying the EC Directive on energy market reform), will be done "at the lowest possible costs to consumers, because we never forget who pays the bills".

The Conservative Climate Minister Greg Barker also extolled DECC's policies to the audience of party faithful, talking up the Green Deal and Renewable Heat Incentive.

He called the Green Deal "world-leading" and said it will help bring down costs to consumers because "after all, the cheapest energy is the energy we don't use".

Osborne's opposition to carbon targets has been curtailed before, by David Cameron, who over-ruled him when the decision on approving the Climate Change Committee's fourth carbon budget was being made, but Osborne did manage to secure a review of the budget in 2014.

The Treasury is historically sceptical about green issues and has been criticised many times, most notably by Jonathan Porritt, former head of the Sustainable Development Commission, who has written: "The Treasury has in fact been the biggest single block on Sustainable Development in the UK, going right back to the UK’s first SD Strategy in 1994. It pursues its own agenda (regardless of who is in power), has no interest or expertise in SD, and (unless reformed) would make mincemeat of any new SD Minister."

Osborne's about-turn

But Osborne has previously expressed enormous enthusiasm for the idea of the Treasury leading the way on climate change.

Less than two years ago in this piece in the Independent Newspaper, he wrote: "I want a Conservative Treasury to lead the development of the low carbon economy and finance a green recovery."

He went on to explain in some detail how this could happen, including vowing that if government departments failed to take action to save energy, "a Conservative Treasury will simply give them less money to spend on energy bills. This isn't just good for the environment. It will save up to £300m a year. That's good for taxpayers too."

He then discussed how "a Conservative Treasury will drive green growth is by financing a green recovery" and spoke favourably about "how a Green Investment Bank can help kickstart our green recovery by providing green companies with the investment they need".

It's entirely possible that since then Osborne has been influenced by the Treasury mandarins, because in the same piece he says he will introduce "Green ISAs, a new tax-free savings product in which all the funds invested would help green our economy," an idea which was dropped under pressure from officials.

He has also been lobbied by the energy-intensive industries, such as metals and ceramics, and the CBI to reduce their costs from high energy prices.

To be fair, Osborne did argue for "investment in greener energy. And that’s why I gave the go ahead to the world’s first Green Investment Bank".

Tim Yeo, Conservative Chair of the cross-party Select Committee on Energy and Climate Change, speaking privately at the conference, also disagreed with Osborne's speech, saying, "I believe it is Britain's interests in the medium term to be a leader. Those countries will be the most competitive, not the least."

But Charles Hendry qualified his earlier enthusiasm and signified some sympathy with Osborne's view: "We should not go out on a limb," he said. "European capitals are not saying 'the Brits are doing this, so we will too'. They will rub their hands and say 'that's just making British Industry less competitive'."

However, he did say: "There is nothing in what George said today that would mean we want to pull back from a roll out of renewables."

This would be difficult, because the UK now has a legally binding commitment to rein in carbon emissions. Under the Climate Change Act 2008, there must be a reduction of at least 34% in greenhouse gas emissions by 2020 and at least 80% by 2050.

Paul Foote, the Managing Director of the Conservative Environment Network, a group within the party that argues for government policy to support private enterprise in tackling "critically important" environmental issues, said: "Osborne has betrayed a fundamental misunderstanding about how to make our recovery secure and sustainable".

DECC, a successful department which is demonstrating how LibDems and Tories can work together on a common platform, has to operate within the Treasury cap on spending and policy development.

Osborne's speech makes it clear that it has a continuing battle on its hands to fight its pitch, but it has plenty of support from within Tory ranks too.

What remains to be seen is which side David Cameron will choose to support in his next speech on the topic. Any sign of wavering on his previous commitment to be the "greenest government ever" will have clean energy investors walking away from the table to invest in other countries.

The Green Deal will fail under current arrangements

The Green Deal, flagship of the Government's Energy Bill and intended to help the housing sector contribute to cutting UK carbon emissions by 80% by 2050, is likely to be underfinanced and will fail by not attracting enough support from residents.

That was the message from MPs as the House of Commons debated the Energy Bill again on Wednesday, before it moves back for the final time to the Lords.

But they were unable to obtain any guarantees from Energy Minster Charles Hendry, of the value or interest charged on loans to residents or the degree of support that may come from the Green Investment Bank, factors that will have a massive effect on the degree of take-up of the scheme.

The green deal is the “pay as you save” scheme for retrofitting energy efficiency measures to every one of the 28m homes in the country.

A new amendment was passed to force the Secretary of State submit proposals on the ways in which the Green Investment Bank could maximise its take-up and to enable the consumer to compare recommendations and estimated costs and savings.

This is in effect limited by the 'golden rule' that the cumulative cost of the rate of interest and the cost of the installation should not exceed the amount that people are currently paying on their energy bills.

The percentage game

It's the interest rate of the loan repayments that is one of the crucial factors.

The Great British Refurb campaign's survey of about 2,000 people found that whereas 56% saw the green deal as attractive, only 7% said that they would be prepared to take it up if a 6% interest rate applied; if it were set at 2% per annum, they would be “very” or “fairly” likely to take it up.

MPs said they wanted the scheme to have a single interest rate in order to provide clarity, fairness, stimulate mass demand and, crucially, force green deal providers to "compete for customers on the cost and quality of the energy efficiency measures and installation, rather than on the headline interest rate of the finance".

Green MP Caroline Lucas (this week voted MP of the Year in the Scottish Widows & Dods Women in Public Life Awards) wanted the Green Investment Bank to be able to ensure a common and low interest rate - below 2% if possible - pointing out that a (very) different scheme in Germany offers publicly subsidised interest rates of 2.65% and has achieved 100,000 residential retrofits in a year - and the Government must achieve 145,000 every month to have a hope of meeting the required targets.

But Barker said the legislation will not place restrictions on the level of interest charged, instead relying on the market to decide.

Nor could he guarantee that the Green Investment Bank could support the interest rate, although its priorities are to address market failure.

Barker said that it is up to the market to set the interest rate, however, although there will be some protection for the fuel poor, and in order to prevent subsequent owners of a property being penalised for the fact that the previous residents were not considered credit-worthy.

The Government has yet to undertake consultation on the secondary legislation that will bring in the regulations, and this is what will determine the degree of willingness of financial backers to climb on board.

Barker added that the Government's own consumer research showed that the biggest factor in their taking up the green deal would be "a desire to make their home nicer".

The Energy Company Obligation and fuel poverty

The Energy Company Obligation (ECO) for energy companies is supposed to target the needs of vulnerable consumers, and the green deal is supposed to tackle the issue of fuel poverty, but with an unprecedented 1.9 million people in arrears with their energy bills in this country and 5.5 million living in fuel poverty - both numbers rising by the day - it is unclear whether any financier is going to want to touch them.

Barker admitted as much, saying "I cannot give a universal commitment" that they will all have access to the deal.

Barker tried to provide reassurance by saying "Many of the families and individuals [in arrears or fuel poverty] will be captured by community roll-out and street-by-street roll-out of energy efficiency improvement schemes."

ECO is expected to offer insulation and home improvements to whole streets, regardless of income, to ensure improvements are made at scale - which is far more cost-effective than house-to-house, especially where external insulation is required.

But the crucial question is how much finance it will have available.

Lucas certainly doesn't believe that as things stand there will be enough cash available to make the green deal work.

"Yes, we have the ECO £1 - 2bn," she said, "but this is a small proportion of what will be required".

In fact, as MP Barry Gardiner pointed out, the Committee on Climate Change estimates that up to £17 billion of support will be required through the ECO to insulate 2.3 million solid walls alone by 2022.

Similarly, he said "we cannot keep pushing up the ECO" because of its impact on every energy bill payer.

In addition, it is unclear whether the Treasury levy cap on DECC's spending will cover the ECO, and limit the support it can give to tackle fuel poverty still further. The two departments are still locked in negotiations over that one.

All Barker would say at this point is that DECC will publish in the autumn its expectations of how DECC policies, taken together, will impact on consumers through to 2020.

Regulation

The green deal, as MP Andrea Leadsom pointed out is, essentially, a financial services product. As such it is regulated by the Office of Fair Trading, which will be expected to ensure that any mis-selling is stamped out at the outset and full compensation is paid to any victims.

However, MPs raised concerns over whether the OFT will have sufficient resources to undertake this extra work, which could be considerable.

Market research has shown that customers would welcome and are therefore more likely to trust the involvement of local authorities, community groups and third sector organisations when thinking about entering into a green deal.

The legislation will allow for this and contain "a clear enforceable framework within the green deal code of practice" to ensure impartiality of advice and prohibit high-pressure sales tactics, as used infamously by energy companies recently.

Greg Barker said, "one of the most exciting things about the green deal is its potential to give rise to new third sector involvement in delivering energy efficiency services."

DECC is now setting up a new workshop to look specifically at how the provisions can best work with older buildings and for service family accommodation, particularly older historic buildings.

Contrary to MPs demands that it makes more sense for repayments of the loans to come from a gas bill (used more for heating than electricity), Barker said it will not be possible to specify whether the instalments will be paid via the customer's electricity bill or gas bill, as this would double the cost of administering the scheme.

He also said that liability for green deal payments should sit on the balance sheet not of energy companies, but of the green deal provider, such as B & Q, Marks & Spencer or John Lewis.

The amendments include one, brought by Luciana Berger, Lab/Co-op MP for Wavertree, Liverpool, to clarify and encourage green deal installation apprenticeships to create the necessary skilled workforce.

However, there was no discussion of standards of insulation and energy efficiency that will be required. That, too, will have to wait until the secondary legislation.

With the implementation date 12 months away for the green deal, there is still plenty of work to do before stakeholders will even be able to estimate how effective it may turn out to be, but there is certainly much concern that it will not be as attractive as it needs to be.

Solar PV and marine energy may be avoided by Green Investment Bank

Marine energy developers will have to wait until after 2015 before they can take advantage of finance from the Green Investment Bank, and solar power developers are currently confused about whether they will be able to use it at all.

The Department of Business, Innovation and Skills (BIS) has released a progress report on the principles under which the bank will be able to lend, citing a wide range of sectors including especially offshore wind, non-domestic energy efficiency and waste, but not mentioning solar PV.

The priorities are still being worked out, including whether domestic energy efficiency measures under the Green Deal will be eligible, since the Government wishes this to be primarily a private-sector led scheme.

But reading between the lines, it seems that the bank will be cautious, not proactive, in its lending, regarding itself not as a source of capital funding for projects whose profitability is some way into the future, but as venture capital for market-ready technologies.

BIS’s Vince Cable has been in disagreement with Chris Huhne at DECC over what the bank should finance, with Huhne arguing that horizon technologies such as marine and anaerobic digestion should be favoured.

It seems that Cable has largely won this tussle, especially since BIC will be the only shareholder of the bank - leaving DECC out of the picture in decisions over what will be financed.

Various groups immediately criticised this narrow remit, expressing, like regional renewable energy trade body Regen SW, that “for the bank to be truly effective it's important it doesn't take the simple option of investing in safe projects that would simply compete with bank finance."

Its chief executive Merlin Hyman added, "It must focus on leveraging the required private capital by financing commercially-viable projects at the earliest stages, where the highest risks are inherent."

Manufacturers’ organisation EEF demanded more detail on the type of projects that would be eligible for funding from the bank. Tony Sarginson, its North-east regional manager, said: “The big question of what will be its funding priorities is yet to be answered."

But BIS says the bank's operating principles will include making a significant environmental impact as well as financial returns; operational independence from Government; partnership with the private sector, and the minimisation of market distortions.

The bank will evolve as follows: from April next year, subject to state aid approval, the Government will be able to make direct financial investments is self to priority projects. After this, when the bank is a stand-alone institution, it will lend according to the criteria in the document published by BIS this week.

Following April 2015, it will be able to borrow money, assuming public sector net debt is falling as a percentage of GDP, and therefore radically increase its activity. But what if it is not?

Wind power, particularly offshore wind, nuclear, transmission networks, energy efficiency and waste are cited as being particularly urgent, although nuclear is not seen as particularly relevant to the remit of the bank, whereas the provision of rolling stock and marine energy are.

If the bank does lend to nuclear operators then a close watch has to be kept that there are no further liabilities for taxpayers.

In the area of waste management, novel technologies such as anaerobic digestion could be an opportunity for the bank.

BIS does to its credit point up the importance of energy efficiency, saying “many users are unaware of the potential savings or how to capture them and therefore invest less than the optimal amount in upgrades or building fabric, fittings, plant and machinery", so sees a role for the bank in promoting this.

Energy Bill will fail to deliver Green Deal - MPs

The Government's Energy Bill came under attack at its second reading in the House of Commons on Tuesday for being great on rhetoric but short on the kind of detail which will get the job done on time.

Fifty pieces of secondary legislation are expected to provide the detail needed, MPs said, which is currently missing in the draft and will delay its implementation.

The Bill, which contains measures to introduce the Green Deal, offshore oil and gas and energy reform, nuclear power and more, has strong cross-party support in principle.

Chris Huhne called the Green Deal - the centrepiece of the Bill but not now due to be introduced until October 2012 - ″the most comprehensive energy saving plan in the world".

The UK has oldest and least efficient buildings in Europe and they are responsible for 27% percent of the country's greenhouse gas emissions.

Huhne said that so far energy efficiency has passed under the radar, resulting in ｣2-｣3 billion being wasted every year. "That is gas and oil imports, so the Bill is good for energy security as well."

For the first time, Huhne put a figure on the amount that could be offered under the Green Deal - up to ｣10,000. He said that British Gas pilot schemes have shown that householders who do take the measures can cut bills by up to 45% or save ｣400 a year.

"Homes and businesses will be included," he said, ″backed up with a watertight legal framework. Householders will pay nothing up front. It will be paid for by savings on the bills. The energy suppliers must support consumers in doing this.

The private rented sector is the hardest to change. But Huhne said that with the Green Deal, "landlords will face no upfront costs and their properties will be improved. They have welcomed the Bill. From 2016 any tenant asking for landlord's consent to make a reasonable improvement in energy efficiency cannot be refused."

From 2018 renting of the very worst homes with an energy rating of E or F will be banned. 680,000 homes will be affected by this.

But, as Alan Whitehead, the Labour MP for Southampton, pointed out, the landlords register has been abolished by the Government, which could have helped them to monitor the sector.

All councils will play a role in delivery of the programme and the Local Government Association and DECC have an Memorandum of Agreement on the subject recently.

Huhne said that he wants to see the maximum possible range of measures included in the Bill.

The success of the Green Deal will depend upon how it works in the new market that will be created in energy savings. Huhne asserted that "The City is practically chomping at the bit to help finance the Green Deal", and cited the fact that Eaga has gone to the market already to secure bonds. "The securitisation market is opening up," he said.

The interest rate level will be key

But speaker after speaker said that success will really depend upon how low the interest rate offered will be. This figure is not in the current draft legislation, although Huhne mentioned 8-10% over 25 years.

Former Environment Secretary Michael Meacher said that the precise rate "is the fundamental issue - without a low interest rate, the Bill won't succeed as householders will be worse off than they are now.

"The WWF estimates that at 8-10% over 25 years then the likely effect of the Bill will be minimal," he said. ″Even if it is 6% only 1 in 14 households will take up the offer. The fuel poor certainly won't take it up. Why can't the energy suppliers meet the cost of helping the fuel poor in this case?"

Green MP Caroline Lucas took up this point, observing that not even Germany could obtain the level of refurbishment required, of over 4,000 houses a day. There they only manage 100,000 homes a year even with a Government-supported 2.6% interest rate.

"Besides," she added ″It is a whole house refit that is required to reach 80% reductions not a minimum level of refurbishment". At this rate, Government targets will be missed by a factor of 100.

Then there is the problem of competition. In the Warm Front scheme large companies hoovered up much of the work but smaller companies can often do it more cheaply. But Huhne promised the Green Deal will be open to small companies as well as large.

Huhne said that the legislation will create thousands of jobs. "The number of jobs will vary by area, but nationally is estimated at around 27k-100k by 2015 in insulation alone - there will also be unskilled jobs in the supply line." Costs will come because of the scale of the Green Deal.

More detail needed

The Shadow Secretary of State for Energy and Climate Change, Meg Hillier, called the Bill "a flaccid lettuce leaf, laden with missed opportunities", and promised in committee stage to seek to improve it.

She said that there have been no evidence sessions on the Bill, as is normal with the progression of a bill through parliament. "There are 27 million homes - how can all of them be tackled in the time available?"

"Why has the Government commitment to zero carbon homes ended?" she asked. ″Why won't the Green Investment Bank be up and running for two more years? This is a dog's breakfast of a Bill. We want it to succeed, but we need more detail. Climate change is too big to leave to the market."

Michael Meacher also criticised the Bill for using assumptions provided by energy companies of the level of energy supply in the future and then presuming measures to reduce it. "This is putting cart before the horse," he said, ″as it would make sense to assume that due to energy efficiency there will be a reduced level and then make measures to reduce that.

"Why is there no proper assessment of energy demand?" he demanded. "The power generators obviously want to sell more energy."

Iain Wright, the MP for Hartlepool, an area which hopes to benefit greatly from the green industrial revolution, lamented the pace at which the government expects to proceed.

He pointed out that the UK has already fallen from 3rd to 13th place in global ranking in this area and complained of rhetoric that is not backed up by certainty and commitment affecting investment.

Will ECO be capped?

The Energy Company Obligation (ECO), which will replace the Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP) schemes at the end of 2012, will oblige energy companies to make sure that solid wall insulation is included in the Green Deal and will target the coldest homes.

But Huhne was unable to say whether it will be covered by the Treasury's Levy cap on DECC spending - if it is, it will be severely hobbled, said Alan Whitehead.

Whitehead also criticised the lack of assurances over who will accredit the contractors and doubted that there will be enough skilled people to do the job required.

Most shamefully, he said, the Green Deal fails the basic test of fairness - the poorest households will get the least help and left till last. "Who will pay the shortfall if the savings don't add up? What will happen to homeowners who buy a house that is saddled with debt?" Currently there are no answers to these questions, and the Government has abolished Consumer Focus, the body that tackles unfair practices by the energy companies.

Support for nuclear power

In other areas covered by the Bill, Martin Horwood (LibDem MP for Cheltenham) charged that Section 102 of the Bill gives away the Secretary of State's negotiating power over decommissioning costs for nuclear power stations, potentially leaving the door open for the taxpayer to pick up the bill.

“This means that the Government has effectively abandoned its commitment that the taxpayer should not support the nuclear industry", he observed, pointing out the ｣61bn compensation that is being given by the Japanese government for the 800,000 people who have been evacuated as a result of the Fukushima disaster.

He said the Japanese are now reconsidering their energy policy with more emphasis on renewables and energy efficiency.

Huhne also said that an announcement on the fourth carbon budget, published by the Committee for Climate Change last December, will be made soon.

The Bill will now go to committee stage.

Pale green budget tomorrow will cancel CCS levy and forbid Green Investment Bank from borrowing

George Osborne's first budget tomorrow will say that the Green Investment Bank will not be allowed to raise its own finance for some time.

And the levy on electricity bills which had been proposed to raise finance for carbon capture and storage (CCS) plants is to be dropped.

The levy was touted in last autumn's Spending Review as a means of raising billions of pounds for flagship CCS projects. In the review, Osborne said £1 billion was set aside for at least one CCS pilot, with a further three projects to be financed either by the levy or by public money.

But the levy is no longer on the cards following lobbying from industry. This argued that effectively there will already be four carbon taxes, which is complicated enough, and the levy would be a fifth - just too much. The four taxes are:

• the Climate Change Levy (CCL) - since 2001, taxing fossil fuel energy supply to those businesses without a climate change agreement (CCA) with DECC (which gives 80% - reducing to 65% from next month - reduction on this tax)


• the CRC Energy Efficiency Scheme - beginning in 2012, which will raise £1 billion a year by 2014-15 from businesses who consumed over 6,000 MWh in 2008


• the EU Emissions Trading Scheme (affecting generators and the metals, mineral, and pulp and paper industries) - now, most permits are given away free, but the proportion will reduce significantly in 2013


• the new carbon price support mechanism (CPSM), designed to tax fossil fuels used in electricity generation (by removing CCL exemptions from 2013) to make generators' investment in CCS, renewable and nuclear generation more favourable.

The carbon price support mechanism, currently the subject of a consultation, is also to be further described in tomorrow's budget.

City accountancy firm PricewaterhouseCoopers was amongst those arguing against the CCS levy. Its partner Mark Schofield has written: “The introduction of a floor price would be a significant change for many companies with high emissions, particularly if the Government decides to set this higher than the EU ETS traded permit price. It is likely that the Government will set a lower price initially, rising over time, but they can’t be too generous.

“One of the main criticisms from the industry is that the carbon floor price will add another layer of policy complexity to an already overcrowded energy supply chain policy mix. It may be difficult for potential investors in low carbon generation to distil from these overlapping policy measures a reliable carbon price signal to guide investment decisions, and for users of energy to understand the overall policy objective.”

This raises questions over how or whether the three further CCS projects will be built. Scottish and Southern Energy, Powerfuel Power Limited, Alstom UK and Ayrshire Power are amongst the companies competing to build them.

The prospect of being able to capture carbon from fossil fuel burning power stations has become key to many policies about tackling climate change while keeping business as usual. This is despite the fact that there is no large-scale commercial demonstration that the technology works anywhere in the world.

The EU will be part subsidising the projects. CCS supporters are hoping that the floor price for carbon will be set high enough to raise sufficient funding for CCS. But then so will renewable energy generators and nuclear newbuild supporters.

The Treasury itself says (in the CPSM consultation document) that around £110 billion in new generation and grid connections alone is required by 2020. The same amount again will be required for further upgrades.

The Green Investment Bank

Where will this investment come from? Great hopes have been pinned on the Green Investment Bank.

Osborne is expected to pledge tomorrow that £3 billion will be given to kickstart the Bank. He will say that he believes this will be enough to raise £18 billion of investment into green projects by 2014-15, with the rest coming from the private sector.

This is still a fraction of what is required, which has raised criticism of the Treasury for blocking Energy Secretary Chris Huhne's demand that the new Bank be able to borrow money itself.

Osborne will say tomorrow that the Bank will be able to issue bonds once the nation's debt is falling as a poor portion of grass domestic product–anticipated after April 2015. But for many this will not be soon enough.

Huhne has been locking horns with the Treasury, demanding that it be created as a fully fledged bank. The Treasury's line has been that allowing small investors to take part in the bank's investments would be too complicated, and any borrowing liabilities would be on the government balance sheet, thereby making the deficit appear worse.

“This throws into doubt Britain’s chances of building a low carbon economy and means we will now lose jobs and industries to places like China, Germany and Silicon Valley in California,” said John Sauven, Greenpeace executive director.

The bank is expected to be funded by sales of assets, such as the government one third share in Urenco, the company which enriches uranium for nuclear power stations.